White Collar Crimes and Money Laundering: Threat to Banking Sector

Prof.V.Balakista Reddy Professor of International Law & Head,Centre for Air and Space Law, NALSAR University of Law, Hyderabad: 500078, Email: balakista@gmail.com, balakistareddy@yahoo.com

Definition of White Collar Crime

White-collar crime has been defined as an illegal act or
series of illegal acts committed by non-physical means to obtain money or property, to avoid the payment or loss of money or property, or to obtain business or personal advantage In broad sense White collar crimes would include; public corruption; obstruction of justice; fraud; tax crime; securities crimes against financial institutions; environmental crimes and money laundering. Each crime also includes, inter alia, securities and commodities futures crimes; customs and trade crimes; crimes against export control and economic sanctions; trade in endangered species; alien smuggling; and trafficking in human begins.

Continued
White-collar crime has been defined as an illegal act or
series of illegal acts committed by nonphysical means to obtain money or property, to avoid the payment or loss of money or property, or to obtain business or personal advantage In broad sense White collar crimes would include; public corruption; obstruction of justice; fraud; tax crime; securities crimes against financial institutions; environmental crimes and money laundering. Each crime also includes, inter alia, securities and commodities futures crimes; customs and trade crimes; crimes against export control and economic sanctions; trade in endangered species; alien smuggling; and trafficking in human begins.

Types and Schemes of White Collar Crime

Bank Fraud, Blackmail, Bribery, Cellular Phone Fraud, Computer fraud, Counterfeiting, Credit Card Fraud, Investment Schemes , Kickback, Larceny/Theft , Money Laundering, Racketeering , Telemarketing Fraud Currency Schemes, Environmental Crimes , Securities Fraud, Tax Evasion , Weights and Measures Extortion, Extortion, Health Care Fraud, Insider Trading, Insurance Fraud etc

Economic Crimes in India

Economic or white-collar crime is a crime committed by
a person of a certain social status in the course of his occupation.

The economic crime occurs as a deviation from the

violators occupational role.

Also, most of the laws involved or violated are not part

of the traditional criminal code.

Such crimes are corruption, corporate fraud, public

fraud, tax evasion, goods smuggling, stock manipulation, currencies forgery, credit card fraud, environmental crime, intellectual property infringement and the more recent phenomenon of cyber crime.

Economic Crimes in India

Economic crime in India are mainly divided into three
groups viz.:

(i) Traditional economic crime such as corruption,

smuggling, invoice manipulation, bogus imports; credit card frauds, counterfeiting, cyber crime; proceeds of transnational organized crime are transmitted abroad.

(ii) Emerging technological economic crime such as

(iii) Money laundering and hawala through which

ECONOMIC CRIMES UNDER THE IPC

The Indian Penal Code contains provisions to

check economic crimes such as Bank Fraud, Insurance fraud, Credit card fraud, stock market manipulation, etc under the broad categories of Cheating (Section 415-424) 263A and Currency Section 489A-489E)

The local police deal with the IPC crimes falling Counterfeiting (Coins & Stamps Section 230-

Criminal Breach of Trust (Section 405-409).

MONEY LAUNDERING
Money laundering is the process of cleaning dirty money
with the objective of hiding its source and enabling it to be used later in a legal form

This process creates a web to hide the origin/true nature

of these funds

Prior to the enactment of the Prevention of Money

Laundering Act, 2002 this crime was covered under the violation of foreign exchange rules under the Foreign Exchange Regulation Act (FERA)

Under the Foreign Exchange Management Act (FEMA)

Concept of Money Laundering:

The goal of a large number of criminal acts is to

generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

How does it happen:

Illegal arms sales, smuggling, and the activities of
organized crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to legitimize the ill-gotten gains through money laundering.

Legal frame work to curb Money Laundering:

In response to mounting concern over money laundering, the
Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, 40 in all, which set out the measures national governments should take to implement effective antimoney laundering programmes. IMF for example, stated in 1996 that the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product.

How money is laundered?

In the initial/placement stage of money laundering, the
launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location. After the funds have entered the financial system, the second or layering stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe.

Money laundering affecting Business:

If funds from criminal activity can be easily
processed through a particular institution either because its employees or directors have been bribed or because the institution turns a blind eye to the criminal nature of such funds the institution could be drawn into active complicity with criminals and become part of the criminal network itself. Evidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers.

Influence of money laundering on economic development:

Differences between national anti-money laundering
systems will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective counter measure

Some might argue that developing economies cannot

afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organised crime can become.

Money laundering and International Law:

UN Convention against illicit trafficking of narcotics and

psychotropic substances passed in 1988 in Vienna Convention on laundering, search and confiscation of criminally gained profit dated November 8, 1990, Strasbourg, Directive for prevention of use of financial system for money laundering in 1991, UN Convention against transnational organized crime passed on December 12-15, 2000, in Palermo. These international acts establish a legal basis for governing incriminated behavior related to money laundering in national criminal legislation and regulation of criminal sanctions.

Activities responsible for money laundering:

Conversion or transfer of property knowing that the property is

the result of a committed crime in order to conceal the illicit origin of the property; Assistance to any person involved in committing of such a crime in order to avoid legal consequences of these activities; Hiding or concealing the true nature, source, location, availability and movement of derived ownership rights or property knowing that the property is the result of a committed crime; Gaining, possession or use of goods or things or values knowing at the time of their receipt that they are the result of illicit trafficking of narcotics; Collusion in order to commit, attempt, assist, instigate, facilitate or advise to commit crime of trafficking of narcotics including money laundering.

Article 6 of the EU Convention 1990:

It defines the concept and characteristics of the crime of money laundering

which consists of intentional undertaking of one or more of the following activities: Conversion or transfer of property knowing that the property is the result of a committed crime in order to conceal or present falsely the origin of property or assisting an individual involved in committing the mentioned crime in order to avoid legal consequences for their acts; Concealing or false representation of legal nature, source, location, use, movement of rights or property in relation to the property knowing that the property is the result of a committed crime; Gaining, possession or use of property knowing at the time of receipt that it is the result of criminal activities; Participation, collusion or conspiracy in order to commit, try to commit and assist, instigate or facilitate and advise any crime. Repression of money laundering was also included in the UN Convention against transnational organized crime with two additional protocols: the Protocol about the problems of undertaking efficient measures for prevention and for prevention, repression and punishment of people trafficking, especially women and children and the Protocol against smuggling of migrants by land, sea or air..

Anti-Money Laundering (AML):

The Bank Secrecy Act (Currency and Foreign Transactions Reporting Act

of 1970); The Money Laundering Control Act of 1986 The Anti-Drug Abuse Act of 1988; Section 2532 of the Crime Control Act of 1990; Section 206 of the Federal Deposit Insurance Corporation Improvement Act of 1991 The Annunzio-Wylie Anti-Money Laundering Act (Title XV of the Housing and Community Development Act of 1992); The Money Laundering Suppression Act of 1994 (Title IV of the RiegleNeal Community Development and Regulatory Improvement Act of 1994) The Money Laundering and Financial Crimes Strategy Act of 1998 The USA PATRIOT Act (Title III, International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001).

Prevention of Money Laundering Act, 2002

The PML Act seeks to combat money laundering in India and has three

main objectives: To prevent, combat and control money laundering To confiscate and seize the property obtained from the laundered money; and To deal with any other issue connected with money laundering in India. There is a Schedule annexed to the Act which carries a list of the offences, the proceeds derived from the commission of which can be treated as the proceeds of crime. This list is exhaustive in nature and any property derived from an offence other than these activities cannot be brought under this Statute. The Schedule includes offences under: The Indian Penal Code The Narcotic Drugs and Psychotropic Substances Act, 1985 The Arms Act, 1959 The Wild Life (Protection) Act, 1972 The Immoral Traffic (Prevention) Act, 1956 The Prevention of Corruption Act, 1988

Satyams Case
Satyams problems are a wake-up call to improve corporate Crimes and governance. Does India have the capacity to prevent large-scale white-collar crime? Does it have the systems needed to assign responsibility in cases where such crimes are committed? Does it have the ability to prosecute the accused in a court when the charges and evidence relate to complex financial trickery? Are the likely fines and jail terms significant deterrents? The Government has established a Serious Fraud Investigation Office (SFIO) under the Ministry of Corporate Affairs. What is the SFIOs role in a criminal court? The magistrate denied SFIOs request, stating that the latter needed to specify the correct legal provisions to question the accused. These police and court actions imply that SFIO may not fit in well within a criminal proceeding. What is SEBIs responsibility?

Lessons to learn
Initial investigation of the scam was handled by the Andhra Pradesh

polices crime branch. Later five Central government agencies CBI, SFIO, ROC, SEBI, IT department and the professional regulatory agency, the ICAI investigated the scam. Without meaningful actions to redress these fundamental weaknesses, corporate governance in India will remain weak. In turn, this would make the public hesitant to invest their money in the shares of any company. Potential clients would wonder whether they should do business with the firm, notwithstanding its technical expertise. Our country has a poor record of punishing white collar criminals Its time to imitate the success of West in pursuit of corporate criminals and Satyam Computer founders could be a good start.

Will the perpetrators of the biggest corporate fraud in India be punished in a way that fits the crime? Only time will tell. The message is clear: India, get serious about fighting white-collar crime

MEASURES TO COMBAT COMPUTER RELATED CRIMES in India

During the last decade, India has faced a new challenge
tackling a new and sophisticated form of crime in the form of cyber crime.

The most common forms of computer crimes reported

are: Intrusions/Hacking in computer networks for the purpose of defacing a web site, theft of password to gain an unauthorized access, theft of personal information like credit card numbers, etc.

Espionage Frauds/cheating

Model Law on Electronic Commerce by the UNCITRAL and enacted the IT Act, 2000.
The main focus of this Act is on the following areas:

I. Legal recognition of: (a) Digital signatures, which include - Acceptance in lieu of hand written signatures - Authentication - Security (b) Electronic Records, which includes - Retention - Attribution, Acknowledgment and Dispatch - Security Creation of an infrastructure for issuance and regulation of digital signature certificates. Creation of a cyber regulations appellate tribunal. Amendments in existing laws to give recognition to electronic documents.

Civil Liabilities
This Act defines two kinds of liabilities, civil and criminal,

for various cyber crimes. The Civil liabilities are in the form of penalties for example: Section 43 & 44 of this Act prescribes the penalty for the following offences: Unauthorized copying of an extract from any data/database. Unauthorised access and downloading of files. Introduction of viruses/malicious programmes. Damage to a computer system and computer network. Denial of access to an authorised person to a computer system. Providing assistance to any person to facilitate unauthorised access to a computer. Charging the service availed by a person to an account of another person by tampering and manipulation of a

Criminal Liabilities
The criminal liabilities are dealt with in a separate chapter under
offences. Section 65 to 75 of this Act provide for different forms of imprisonment according to the offence, so far as criminal liabilities are concerned. They cover: Tempering with computer source documents AND Hacking of computer systems. Electronic forgery i.e. preparing of false electronic records, affixing of false digital signatures, etc. Electronic forgery for the purpose of cheating. Electronic forgery for the purpose of harming reputation. Using as genuine a forged electronic record. Publication of digital signature certificate for a fraudulent purpose. Unauthorised access to protected systems. Publication of information in an electronic form, which is obscene in nature. With the amendment of the definition of document by providing authenticity to electronic documents in the existing Indian Penal Code, Indian Evidence Act, Bankers Book of Evidence, etc. the Act has also facilitated use of the existing criminal laws for tackling the conventional crimes committed using computer technology like

Conclusion
So far int. community witnessed three industrial revolutions
First Industrial revolution from 1760-1840 developments include
new methods of manufacturing, invention of new products, scientific & applied research, development in transport and specialized labor as electricity, telephone, automobiles, modern business system, growing middle class and leisure time

Second Industrial Revolution from 1875-1930 new inventions such Third Industrial Revolution or Internet revolution made computers,
advances in computer technology and telecommunications have created free flow of Information.
discussed .

Positives and Negative of these technologies which we have already