As a professional compliance solution provider to corporations, we interact with numerous clients and resolve a variety of issues related to questionable workplace practices. One major pain point that persists among most corporations is bribery and corruption, specifically the issue of money laundering. This issue has steadily risen in prominence over the years and now holds a significant position of concern (Beer Baron of India, take a bow). The problem of money laundering by corporations and their employees is a significant concern and it is imperative that companies take proactive measures to prevent and address this illegal activity as soon as possible. 

Clear the basics: 

Before delving further, it is essential to comprehend the concept of money laundering. It is the process of transforming illegally-acquired proceeds (commonly referred to as "dirty money") to appear legitimate (or "clean"). This is typically achieved through disguising the proceeds as legitimate business transactions, creating shell companies to transfer funds through, and utilising complex financial transactions to conceal the origin of the funds. Some prevalent methods employed by Indian corporates for money laundering include: 

• 1) Over-invoicing: This involves artificially inflating the value of goods or services in invoices, enabling the company to transfer funds to offshore accounts or shell companies.
• 2) Under-invoicing: This involves artificially understating the value of goods or services in invoices, enabling the company to transfer funds to offshore accounts or shell companies.
• 3) Mis-invoicing: This involves fabricating invoices for goods or services that were never actually provided or received, enabling the company to transfer funds to offshore accounts or shell companies.
• 4) Round-tripping: This involves transferring funds to an offshore account and then repatriating it as foreign investment, creating the illusion that the money was obtained legally.
• 5) Hawala: This is an alternative remittance system that facilitates money transfers through a network of intermediaries, making it difficult to trace the origin of the funds.
• 6) Misuse of trade-based money laundering: This method employs trade and commerce activities as a disguise to illicitly move funds out of the country. 

Modus Operandi:

The cases of Amrapali and Unitech offer a unique insight into the tactics used by some Indian companies to engage in money laundering. According to records, a significant sum of around INR 14,270 crore (USD 2.2 billion) was deposited by 29,800 homebuyers with Unitech, and the company also took a loan of INR 1,805.86 crore (USD 3 billion) from six financial institutions for the construction of 74 housing projects. [1] 

Between 2007 and 2010, three subsidiaries of Unitech invested INR 1,745.81 crore (USD 3 billion) in ten companies based in Cyprus. However, between 2016-2018, 80% of that investment, an amount of INR 1,406.33 crore, was written off, while the remaining INR 339 crore was recorded as equity investments in the company’s financial records.  

Furthermore, it was discovered that in 2007-2008, Unitech Global Limited, a subsidiary of Nuwell Limited, a registered company in Jersey, advanced a loan of INR 294.47 crore to Kortel Limited, which is another subsidiary of Unitech. Kortel subsequently invested INR 292.99 crore in three foreign entities based in Cyprus during 2015-2016. The investigation revealed that the entire amount of the investment, INR 294.47 crore, was written off in the financial records of Kortel. 

The promoters of the Unitech Group allegedly incorporated and controlled more than 52 shell companies through their employees to launder money from real estate development. 

As for Amrapali, a real estate group based in Noida, in July 2019, the Supreme Court ordered an investigation by the federal anti-money laundering agency for alleged violations of foreign investment norms, paying dividends without generating profits, setting up shell companies in tax havens, and overvaluing shares. [2]  

The Supreme Court order read - 

“It is apparent from the report of the forensic audit submitted by Forensic Auditors that there is a serious kind of fraud played upon the buyers in active connivance with government officials and that of the banks. The money of the home buyers has been diverted. The Directors diverted the money by the creation of dummy companies, realising professional fees, creating bogus bills, selling flats at undervalued prices, payment of excessive brokerage, etc. They have obtained investment from J.P. Morgan in violation of the Foreign Exchange Management Act and Foreign Direct Investment norms. The shares were overvalued for making payments to J.P. Morgan. It was adopted as a device for siphoning off the money of home buyers to foreign countries. In view of the huge money collected from the buyers and comparable investments made in the projects, there was no necessity to obtain a loan from banks. The amount so obtained was not used in the projects.” [3]  

Another recent case is that of AGB Shipyard, a Gujarat-based company that was found to have engaged in fraudulent activities resulting in the defrauding of Indian banks of an estimated INR 22,842 crores (USD 3.3 billion). The company allegedly used a network of transactions to cheat a banking consortium of nearly 28 banks, including State Bank of India and ICICI Bank. In January 2019, a forensic audit conducted by State Bank of India under the guidance of Ernst and Young revealed that the company had been involved in money laundering for over five years, from April 2012 to July 2017. 

The Central Bureau of Investigation (CBI) reported that the company had taken out loans from various banks and used the funds for other purposes, such as fraudulently investing in several foreign subsidiaries, purchasing assets under different affiliated company names, and transferring money to various related parties. This illegal activity allowed the company to divert funds from the loans taken out from the banks and use them for other purposes. 

The legislation in place:

The Indian government also has several agencies and organisations responsible for enforcing these laws and investigating money laundering cases. The Enforcement Directorate (ED) is the primary agency responsible for enforcing the Prevention of Money Laundering Act (PMLA) and Foreign Exchange Management (FEMA), and it has the power to investigate, arrest, and prosecute individuals and corporations involved in money laundering. The ED also works closely with other agencies such as the CBI and the Reserve Bank of India (RBI) to detect and prevent money laundering. 

The Financial Intelligence Unit (FIU) is another important agency responsible for detecting and preventing money laundering in India. The FIU is responsible for receiving, analysing, and disseminating financial intelligence related to money laundering and terrorist financing. It also works closely with other agencies, such as the ED, to investigate and prosecute money laundering cases. 

In search of a cure

Preventing money laundering in companies requires a comprehensive approach that covers various aspects of the organisation. One crucial step is conducting thorough due diligence on all employees, vendors, and business partners, including background and reference checks, as well as ongoing monitoring. This helps ensure that the company is not engaging with individuals or entities with a history of illegal activities. 

It's also essential to have regular audits and reviews of financial transactions and records to identify any unusual or suspicious activities. This allows the company to quickly address any issues. An effective reporting system for employees to report suspicious or illegal activities is also important, ensuring that they feel secure and comfortable doing so. 

To effectively prevent money laundering, companies must adopt a holistic approach that includes a robust Anti-Bribery and Anti-Corruption (ABAC) policy, thorough due diligence, regular financial monitoring, and fostering a culture of compliance throughout the organisation. By following these measures, companies can effectively identify and prevent money laundering activities, protecting themselves from the significant legal and reputational risks associated with such activities. 

References: 

1. Unitech board working on resolution plan: Niranjan Hiranandani | Ankit Sharma
2. JP Morgan helped Amrapali divert funds overseas, Supreme Court says & orders probe | Upmanyu Trivedi
3. Bikram Chatterji vs Union of India on 23 July, 2019 

Author: Sagnik Mukherjee, Legal Associate, Rainmaker Directions and Contributions: Akanksha Arora, AVP-Legal, Rainmaker

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