A recent trend is to use international debit or credit cards issued by offshore banks. This enables easy usage.
STEP 1: A group of individuals float a multi-level marketing scheme or investment scheme promising extraordinary returns to investors.
STEP 2: Investors deposit cash or cheques in bank accounts floated by the firm. The firm, in turn, issues them post-dated cheques.
STEP 3: The firm transfers the money to personal bank accounts of the promoters.
STEP 4: The promoters wire transfer the money to an offshore bank account in a tax haven. They wire transfer it again to another offshore bank account, in another tax haven, to widen the trail.
STEP 5: The offshore bank issues a credit or debit card valid anywhere in the world, which a promoter can use for transactions.
In 2009, India's Financial Intelligence Unit (FIU) received suspicious transactions report from banks that a large number of deposits had been made in a few accounts. Further investigation revealed these accounts had a common permanent account number (PAN), address and contact numbers, and that it was a multi-level marketing scheme promising extraordinary returns. As explained above, the firm transferred the money collected to personal bank accounts of its directors.
Fifteen operators floated 10 firms, which in turn opened 35 bank accounts in 11 different banks. One operator alone received Rs 130 crore in his accounts over a period of 16 months, and the state police have attached Rs 190 crore of assets in various locations.
Lifestyle beyond known sources of income
Ownership of assets abroad, but not declared in tax returns
Large inter-account transfers with no economic rationale
Cash transactions with unknown persons
Withdrawal of large foreign remittance in cash
Increasingly, criminals want to own legitimate business. It could be to earn a return or to convert black money into white. A typical example of how this is done:
STEP 1: Criminal X generates Rs 10 crore in cash from illegal activities in India, and wants to 'launder' it abroad. He uses the 'hawala' route to transfer the money: he gives the Rs 10 crore cash to a local hawala operator. The operator, for a fee, arranges to deposit the sum in an offshore bank account belonging to a company floated by X.
STEP 2: The offshore company buys shares in a domestic company promoted by X, that too at steep valuations
STEP 3: The domestic company pays a high salary and dividends to X. Black becomes white, and X can show the money as income.
International corporate structure with no visible benefits
Shares of domestic companies sold at higher valuations
Tax returns don't support capital contribution by investors
Offshore companies will do business outside the country where it is formed. Such companies can be run by a nominee director and are often not required to publish annual accounts.
Mixing illicit money sources with legit ones is a popular method because it's hard to detect, especially if there is a large cash component in the legal business.
STEP 1: Illegal money is mixed with actual sales, by depositing in the company's bank account. The cash deposit will be justified as legitimate business income, say, cash receipts in restaurant.
STEP 2: The company projects the fabricated sales as total income and files an income-tax return. However, it avoids paying tax on the total income by showing losses in other business lines or by showing fictitious deductions.
STEP 3: Black has become white, and promoters can use it to buy assets.
Large increase in cash turnover and sales
No commercial reasons for money inflows
Promoter has poor knowledge of business
Transactions don't have supporting documents, and don't fit the company's profile
Costs incurred but no corresponding increase in turnover
This type of transaction is usually done to evade notice by authorities monitoring transactions above a certain threshold.
STEP 1: X deposits illegal proceeds into many bank accounts. The amount transferred is below the threshold level for reporting suspicious transactions. If Rs 10 lakh is the threshold level, deposits will be for Rs 9 lakh. This is called 'smurfing'.
STEP 2: The money is transferred from these multiple accounts to an offshore bank account to take the trail away from the source.
STEP 3: A loan agreement is signed between the holder of the offshore bank account and X.
STEP 4: Once he receives the money, X can spend the money to purchase assets.
A suspicious report was raised against a securities market firm that a large number of cash deposits were made into the company's account and that it was subsequently transferred to another entity in the same business. It was found that both companies had a common address and a common person was operating both accounts.
FIU found 78 bank accounts related to the two entities where there was a substantial cash transaction. FIU passed on the information to the Central Board of Direct Taxes (CBDT), which unearthed an all-India network of money laundering through 236 bank accounts. The companies were set up by a chartered accountant to conduct share-broking activities, but many firms were neither brokers nor sub-brokers.
The modus operandi was to move cash between different companies, showing non-existent share trading to claim a speculative loss or gain for customers. Software used by legal brokers was installed to generate bills so that it looks genuine.
Traditionally, goods exported and imported were either priced lower or higher to enable money laundering. Or, goods exported were different from the description. Below is a description of an actual case investigated by FIU, which got a suspicious report that a cab rental firm received Rs 100 crore as advance payment for export obligations that did not relate to its line of business. The company had also issued cheques of small value (less than Rs 10,000) to various people.
During investigation, it was found the chairman of the firm had several international bank cards. Fake invoices to show diamond purchases of Rs 188 crore were also recovered during the searches. No purchases were made. The company received Rs 300 crore from buyers in three overseas locations: Singapore, Dubai and Hong Kong. Interestingly, receivers of export shipments were different from people who sent advance payments.
With current technology, the Organisation for Economic Cooperation and Development (OECD) says it's easy to modify invoices or produce fictitious invoices. And corporations are easy to set up to show that they have received goods.
Discrepancies between customs filings and invoices
A country is not known for import and export of goods
Large difference between declared and market value
Payments made by an offshore company
Commission paid to third parties with no supporting documentation
This case was outlined by the Karnataka Lokayukta while probing illegal mining in the state. With demand for iron ore skyrocketing, Eagle Traders & Logistics (ETL), a company owned by sitting Karnataka MLA B Nagendra, devised an ingenious route to source and export iron ore illegally through a network of companies.
STEP 1: ETL agrees to source from associates like Swastik Nagaraj and Karapudi Mahesh, whose job was to illegally mine iron ore from mines. The job of these associates was to create layers to mask the actual source, for which, they were paid "risk money".
STEP 2: Iron ore sold to exporters, who deposit the money in one of the five bank accounts of ETL.
STEP 3: ETL transfers money to Swastik and Karapudi. In one of the five ETL bank accounts alone, there was a combined credit and debit of Rs 649 crore between September 2007 and February 2011.
STEP 4: Swastik and Karapudi issue cheques to persons who may be either fake or under benami names or unregistered dealers of iron ore. These individuals make withdrawals on the same date, in most cases in denominations of Rs 9 lakh. The same happens on the credit side.
Tracing black money is a task made difficult by intricacies employed by offenders, as this case involving Janardhana Reddy-promoted Obulapuram Mining Company (OMC) documented by the Karnataka Lokayukta shows
OMC exports 852,000 tonnes of iron ore at below market price to GLA Trading International, a Singapore-registered company
JANARDHANA Reddy is the director of GLA, which is owned by GJR Holdings International, a company registered in Isle of Man. GJR is, in turn, owned by Interlink Services Group, which is registered in Virgin Islands. Both Isle of Man and Virgin Islands are tax havens. GJR refers to Gali Janardhana Reddy and GLA to Gali Lakshmi Aruna, Reddy's wife.
GLA sells iron ore to outside party at market price. It pockets the profit, that too inflated, instead of Indian entity OMC. It can move the profit to its companies in tax havens, which are owned by Reddy family members. The under-invoicing in India in two years when Reddy was the director of GLA is estimated at Rs 215 crore. Due to underinvoicing, OMC under-paid customs duty and corporate tax.
IF the IT department failed to detect the under-invoiced portion, it would have returned to India as a foreign investment—black becomes white. tax impact will be lower.”