Blackmoney issue: SIT recommends steps to curb money laundering

04/09/2015

NEW DELHI, Sep 3: The Supreme Court-appointed SIT on black money has come out with a slew of recommendations to curb various ways of money laundering, including misuse of exemption on long-term capital gains tax, Participatory Notes and creation of shell companies.
The Special Investigating Team (SIT) has advocated action under anti-money laundering law for trade-based money laundering, putting a cap on huge cash transactions as these mostly take place in illegal activities like drug trade and betting deals.
In its report submitted to the apex court, the SIT said there was a need to check the generation of black money in the education sector and through donations to religious institutions and charities.
The SIT has emphasised the need for establishing additional courts to decide the pending cases under the Income Tax Act, establishment of Central KYC Registry and empowering the Directorate of Revenue Intelligence under the Special Economic Zone Act.
A specific recommendation has been made to check generation of black money through cricket betting.
While dealing with the misuse of exemption on Long Term Capital gains tax for money laundering, the SIT has recommended that SEBI needs to have an effective monitoring mechanism to study the unusual rise in stock prices of companies when such an increase takes place.
"We understand that SEBI has a strong IT infrastructure which can generate red flags for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume, financial background of firms through their annual returns and any other indicators SEBI may develop.
"We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time," it said, adding that when such instances are detected, SEBI must share the information with CBDT and FIU.
It said Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences.
While deliberating on the misuse of Participatory notes for money laundering, the panel said it is clear that obtaining information on "beneficial ownership" of P-notes is of crucial importance to prevent their misuse.
"SEBI needs to examine the issue raised above and come up with regulations where the 'final beneficial owner' of P-notes /ODIs are known," it said adding that the information of "beneficial owner" with SEBI should be in form of individual whose KYC information is known to it.
"In no case should the KYC information end with name of a company. In case a company is the holder of P-notes/ODIs, SEBI should have information of its promoters/directors who exercise effective control over the company.
"In case of Companies/Trusts represented by service providers like lawyers/accountants SEBI should have information on the real owners/effective controllers of those Companies/Trusts not end with name," the SIT said.
Maintaining that P-notes are transferable in nature which makes tracing their "true beneficial owner" even more difficult since layering of transactions can be made so complex so as to make it impossible to track the "true beneficial owner", there is a need for SEBI to "examine if this provision of allowing transferring of P-notes is in any way beneficial for easing foreign investment."
"Any investor wanting to invest through P notes can always invest afresh through an Foreign Portfolio Investor (FPI) instead of buying from a P-note holder," the SIT said.
The SIT in its third report dealt with the issue of shell companies and beneficial ownership and said the strategy to curb this menace has to be two-fold.
Firstly, there should be proactive detection of creation of shell companies which would involve intelligence gathering through regular data mining and dissemination of information to various law enforcement agencies for active surveillance.
Secondly, there should be deterrent penal action against persons involved in the creation of shell companies and providing accommodation entries.
SIT's recommendation said Serious Frauds Investigation Office (SFIO) needs to "actively and regularly mine the MCA 21 database for certain red flag indicators."
Further there is need for sharing of information on such high risk companies with law enforcement agencies, it said.
SIT recommended action under PMLA for trade-based money laundering detected by DRI where violation of section 132 of Customs Act has been found "must be shared by DRI with the Enforcement Directorate to enable ED to take action under Prevention of Money Laundering Act."
Calling for putting a cap on huge cash transactions which is a source of black economy, the panel said it was awaiting the response of the concerned departments on the matter.
It said the large cash amounts are normally used in illegal transactions such as those involving payment for drugs/narcotics deals, corruption/bribery, cricket betting and use of huge cash during elections etc.
"According to SIT, if holding of cash is restricted and regulated, to a large extent, it would control circulation of black money within the country and discourage stashing of money abroad."
Generation of black money in education sector and through donations to religious institutions and charities is a major concern, SIT said, adding that the person who accepts the donation and the donor requires to be prosecuted under Prevention of Corruption Act. "This would go long way in curbing the generation and circulation of black money."
It said reports suggest that in number of cases, assessment is not finalised and "hence, CBDT should take appropriate action for expeditious finalization of the assessment, and if required, punitive action may be taken."
"CBDT shall also share the aforesaid report/information with the concerned agencies so that other agencies can also take appropriate action under the relevant law," the SIT said.
Involvement of huge illegal, unaccounted money in cricket betting has been noticed by ED, where betting was being done over internet or using electronic gadgets. It is also stated that some websites, may be outside the country, were providing online betting facilities for various sport events like cricket and football.
The SIT further said that the illegal activity of cricket betting requires to be controlled by some provisions which are deterrent to all the concerned.
"It is true that betting in gambling is a subject on which State Governments have to pass appropriate law, as it is a State subject in the State List (Entry 34).
"However, considering the fact that large amount of black money is generated and used in this sector, it is suggested that some appropriate legislative directions or rules or regulations are required to be put in place to curb the menace of such betting," it said.

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