With its growing financial strength, India is vulnerable to money laundering activities even though the country's strict foreign exchange laws make it difficult for criminals to launder money, the US State Department has said.
India, along with Pakistan, figure in a list of 77 countries, large and small, developed and developing, which are of "primary concern" in terms of "major money-lundering" activities.
"As a growing regional financial centre, India is vulnerable to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and Income-Tax evasion," the State Department said in its International Narcotics Strategy report released on Monday.
However, India's historically strict foreign-exchange laws, transaction reporting requirements, and banking industry's 'know-your-customer' policy make it difficult for criminals to use banks or other financial institutions to launder money, the report said.
Rather, large portions of illegal proceeds are laundered through the alternative remittance system called "hawala" or "hundi" (estimated to account for up to 30 per cent of India's GNP), it said.
Under this system, individuals transfer funds or other items of value from one country to another, often without the actual movement of currency. The system provides anonymity and security; permits individuals to convert currency into other currencies; and lets them convert narcotics, gold, or trade items into currency, the report pointed out.
In addition, many individuals are suspicious of banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution, the report said, adding that hawala dealers can provide the same service with little or no documentation and at rates less than that charged by banks.
Historically, gold has been one of the most important instruments involved in Indian hawala transactions. There is a widespread cultural demand for gold in the region.
In recent years, it is believed that the growing Indian diamond trade has also been increasingly important in providing countervaluation or a method of "balancing the books" in external hawala transactions, according to the annual report on the state of war on drugs, terrorist financing and money-laundering.
Invoice manipulation, for example, inaccurately reflecting the value of a good sold on the invoice, is also pervasive and is used extensively to both avoid customs duties and taxes and launder illicit proceeds through trade-based money laundering, the report said.
Changes in the tax system are gradually being implemented, as the Government of India now requires individuals to use a personal identification number to pay taxes, purchase foreign exchange, and apply for passports.
However, tax evasion still remains widespread, it said.
The Criminal Law Amendment Ordinance allows for the attachment and forfeiture of money or property obtained through bribery, criminal breach of trust, corruption, or theft and of assets that are disproportionate to an individual's known sources of income.
The Narcotic Drugs and Psychotropic Substances Act of 1985, as amended in 2000, calls for the tracing and forfeiture of assets that have been acquired through narcotics trafficking, and prohibits attempts to transfer and conceal those assets.
However, the report pointed out that punishment under NDPS is minimal and no cases have been prosecuted to date.
In 2002, the last year for which statistics are available, the Narcotics Control Bureau froze assets of about $104,000. Aabout $262,000 was forfeited pursuant to the NDPS, although there still have not been any prosecutions, it said.
