Trade Based Money Laundering in India

More articles

CA Mayur Joshi
CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.

The money laundering scandal in the Bank of Baroda shocked the banking system in India. Trade-based money laundering technique was used in which pecuniary gains were made through illegal receipt of duty drawback.

Duty drawback is a legitimate mechanism used in international trade, where exporters receive a refund of certain duties or taxes paid on imported goods. However, in this scandal, the process was manipulated by criminals to launder money.

Trade-Based Money Laundering

A few employees from the banks in the National Capital of India, in connivance with Bank officials, created a fraudulent trade circuit where exporters claimed duty drawback on inflated export bills or non-existent imports and the bank generated massive business.

The accused floated shell companies in India and Hong Kong. The Indian companies exported overvalued products by generating fake bills and the Hong Kong companies submitted fake import bills to claim duty drawback. The difference in the bills and actual value was moved through banking channels.

In general, there are three main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it back into the formal economy.

  • The first involves the movement of value through the financial system using methods such as cheques and wire transfers;
  • The second involves the physical movement of banknotes using methods such as cash couriers and bulk cash smuggling; and
  • The third involves the movement of value using methods such as false documentation and declaration of traded goods and services.

Steps in Trade Based Money Laundering Using Duty Drawback

Typically there are six important steps in trade based money laundering where the duty drawback scheme is misused.

Over-Invoicing of Imports

The criminals started bringing goods into the country from other places. But instead of telling the truth about how much these goods were worth on the paper, they intentionally said they were worth more than they actually were. This made them pay more money than they should have for those goods. So, they had extra money left over.

False Duty Drawback Claims

After completing the imports, the criminals submitted false duty drawback claims to the government authorities. They presented inflated invoices and manipulated documentation to claim a higher refund on the duties paid during the import process.

Receipt of Illicit Funds

The criminals tricked the government by making false claims about the duties they paid while importing goods. Because of these false claims, the government gave them a bigger refund than what they actually paid. This extra money they received illegally became the profit for the criminals involved in money laundering.

Integration of Illicit Funds

To hide where the illegal money came from, the criminals mixed it with regular money in normal business transactions. They made it look like the money was earned legally, so no one would suspect anything was wrong. This way, they tried to keep the illegal origin of the funds a secret and avoid getting caught.

Circulation of Clean Money

Once the money from illegal activities was mixed with regular business transactions, it became difficult for anyone to figure out where it originally came from. The criminals successfully made the money look like it was earned through legal ways, and now they could use it for different things without making people suspicious. In simple terms, they made the dirty money seem clean and usable without raising any doubts.

Red Flags of Trade-Based Money Laundering

  1. Significant discrepancies appear between the description of the commodity on the bill of lading and the invoice;
  2. Significant discrepancies appear between the description of the goods on the bill of lading (or invoice) and the actual goods shipped;
  3. Significant discrepancies appear between the value of the commodity reported on the invoice and the commodity’s fair market value
  4. Unusual shipping routes or transshipment points

In the case of the Bank of Baroda Money Laundering case, nobody was a loser except the Government exchequer. Bank had no credit exposure, but the bank lost its reputation because of this incident. Hence this episode calls for action by the financial institutions. In addition to monitoring in accordance with domestic anti-money laundering and counter-terrorist financing regulations, the levels of scrutiny and information available on the underlying transaction should depend on the bank’s reputational risk associated with the lending of the bank’s name to the transaction.

Certified Trade Based Money Laundering Expert

The CTBMLE program by Indiaforensic is all about trade-based money laundering, a complex way criminals hide illegal money. This program teaches people everything about this technique. By joining, you can learn how these criminals misuse international trade to disguise their illicit funds. The training is detailed, and experts will guide you to become certified in stopping trade-based money laundering.

- Featured Certification-spot_img