Money Laundering - A serious threat to the Indian economy.

One Mr. Joseph Smith gave Karan US$ 50,000 cash at some Middle east country. Karan operates a retail business (and also performs remittance services for others). He will deposit his chunk regularly with his banker as the proceeds of his business in shape of cash and checks. He will justify these deposits to Bank/Tax officials as the proceeds of his legitimate business. Even though, he might prefer it if reports were not filed, he will not object to this as it would arouse suspicion at the bank (and his business provides more than adequate justification). He may also use some of the cash received to meet business expenses, reducing need to deposit that cash into the bank account. In the layering stage, the money launderer manipulates the illicit funds to make them appear as though they were derived from a legitimate source. A component of many layering schemes have been seen to be the transfer of money from one account to another. Such activity is called Hawala. Hawala transfers leave a sparse or confusing paper trail if any. Even when invoice manipulation is used, the mixture of legal goods and illegal money, confusion about `valid' prices and a possibly complex international shipping network create a trail much more complicated than a simple wire transfer. Thereafter, Karan has easily transferred the money from the Middle east country to India  and then drew it at the United States, apparently as part of an investment in a business there. Such sham transactions are rampant and thus eating into the sinews of the Indian economy.

In recent past, India has emerged as an important regional financial center. It is facing an acute problem of large informal cross-border money flows against the fictitious exports and under invoiced imports resulting into tax avoidance. The large amount of FDI from tax heavens has also come under suspicion. The situation exposes the country’s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, human trafficking, corruption, and income tax evasion. 

Historically, due to its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit country. Money Laundering - An Organized Crime: Money Laundering has a close nexus with organized crime. Money Launderers accumulate enormous profits through drug trafficking, international frauds, arms dealing etc. Cash transactions are predominantly used for Money Laundering as the launderers facilitate the concealment of the true ownership and origin of money. It is well recognized that through the huge profits, the criminals earn from drug trafficking and other illegal means, by way of money laundering could contaminate and corrupt the structure of the State at all levels. This situation definitely leads to corruption. Further, this adds to constant pursuit of profits and the expansion into new areas of criminal activity. Through money laundering, organized crime diversifies its sources of income and enlarges its sphere of action. The social danger of money laundering consists in the consolidation of the economic power of criminal organizations, enabling them to penetrate the legitimate economy. In advanced societies, crime is increasingly economic in character. Criminal associations now tend to be organized like business enterprises and to follow the same tendencies as legitimate firms; specialization, growth, expansion in international markets and linkage with other enterprises. The holders of capital of illegal origin are prepared to bear considerable cost in order to legalize its use.

Causes of increase in Money Laundering activities and inability to Control.

There are various causes for increase in Money Laundering and the few of them can be enlisted as follows which is popularly known as ‘Features of an Ideal Financial Haven’: 

•  Misuse of corporate vehicles.
• No deals for sharing tax information with other countries.
• Availability of instant corporations.
• Corporate Secrecy Laws – as the corporate law of certain countries enables  launderers to hide behind shell companies. 
•  Excellent Electronic Communication 
•  Tight Bank Secrecy Laws.
•  A Government that is Relatively invulnerable to Outside Pressures 
•  A high degree of Economic Dependence on the Financial Services Sector.
• A Geographical Location that Facilitates Business Travel to and from rich neighbors.
• Increase in sophistication and employment of professional people for doing the task and their willingness to participate in money laundering activities. 

In Indian and Pakistani parlance, hawala is dissected into two parts viz. white and black. The term 'white hawala' is used to refer to legitimate transactions whereas the term 'black hawala' refers to the illegitimate transactions, specifically hawala.  This distinction is valuable for money laundering enforcement. Many 'white' hawala transactions are essentially remittances, though they are illegal under Indian and Pakistani law however they are not illegal in other jurisdictions. `Black' hawala transactions, however, are almost always associated with some serious offense (e.g. narcotics trafficking, fraud), that is illegal in most jurisdictions. Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase. In placement, money derived from criminal activities is introduced into the financial system. In many money laundering schemes, the biggest 'problem' here is handling cash. 

      The money laundering involves a foreign ground for washing – laundering the dirty money – proceeds of crime  so that it moves in consonance with elaborating the international developments and control mechanisms.  The situation gives birth to muti jurisdictional investigation, which hardly yields any result. Some of the recent high profile case are the paradigm of such investigation failure whereby it was difficult for govt. of India to sustain the charge what to talk of ferreting out of the evidence. There is hardly any persuasion of letter rogatory by the Investigating agencies, which is sent to other countries.

      Money Laundering is a largely a secretive phenomenon. The exact number of launders that operate every year, how much money they launder in which countries and sectors, and which money laundering techniques they use is not known. 'Sadar Bazar, Chandni Chowk are of Delhi and Mumbai's old markets are few of the notorious hubs of circulation of such money in India. The inflation of indian real estate market and cash transaction by the corrupt politicians and real estate developers is known to all. They remain at large unless  assailed by wrath of influential politicos of ruler class. The history of cases investigated by Enforcement Directorate shall indicate it all. 

       Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug Lord Jose Santacruz-Londono. Unfortunately, the finance professionals like him are the part of the Indian financial system. People with a whole lot of dirty money typically hire such financial experts to handle the laundering process, who are happily willing to do it. This is an alarming situation for the economic health of the country. Their whole idea is to make it impossible for authorities to trace the dirty money while it's cleaned. It is next to impossible to estimate actually amount of laundered money.  This very fact shows inaction of the enforcement agencies due to lack of public pressure and political will. The KYC norms and other global standards are mere eyewash and applicable to the general public only. Fraudulent practices resorted by HSBC, Standard Chartered Bank and Bank of America are now well known to the world. Other banks are not clean as well. This is an alarming situation and poses serious threat to the Indian economy.

      The Indian media has played a vital role to create public pressure though the political will is missing. It impacts the day to day life of general public. Homes have become expensive. Smuggling has ruined the native manufacturing and even the legitimate imports. Profiteering has caused inflation in prices of goods of daily usage. We're thus facing threats from illicit money and its launderers, who are beyond the clutches of law. 

ODR : - Ironing the differences..

Disputes are conflicts or clash of interests which are wrapped in the cocoon of legal rights and duties. Many a time, we tend to impress the need of enforcing the cocoon that is the right and obviate the protection of what lays inside it that is our interest.

With increase in high stakes and interconnected business transactions, it has been found continually difficult to be able to raise a dispute with a party, fight it in court halls, and after the final settlement, walk away never to see him again. There has been inter - dependency between various business entities which necessitates continued business relationships for a smooth flow of work. A singular dispute can no more be a reason for completely serving commercial relationships for smooth flow of work. However, in case of a dispute, any approach to the courts causes such severance which both parties wish to avoid. At the same times there is a need of ironing out the differences. This dual requirement above all led the parties to look for great pastures for resolving disputes and found solace in certain internet based solutions collectively known as alternative dispute resolution. Of course, there were other concerns like time lag before the courts, the opportunity costs, and alike which prompted the business world to adopt the ADR.

The use of ADR found favor in furtherance of business interests rather than enforcing legal rights stricto sensu. ADR indicates a conceptual change in the dispute resolution mechanism. It shows a movement from the jurisdictional theory to the party autonomy concept. As the concept gained acceptability at international level, rules were framed to make it more convenient for the parties to avail the facilities on an international level and be able to enforce the results in their respective jurisdictions. The 1958 New York Convention on enforceability of Foreign awards, UNCITTRAL Model Law 1985 and then the rules of Arbitration and Conciliation pushed the concept of ADR further making it a more positive and realistic approach to a dispute settlement.

The advent of computers helped in assimilating raw data and information which could then be processed into the meaning reports. It was this need of the hour that prompted improvement in technology and more and more use of computers. These days internet has taken a vital role of free information dissemination mechanism. The phenomenal growth of e-commerce makes it amply clear that commerce via the internet has been accepted at large both by the business world and the consumers. The change in computer arena also signifies the possibility of rise in clashes in interests of the parties, i.e.., rise in disputes. More the people tend to get online and more the commercial world prefers the internet as its medium to reach to the consumers and sell its products and more the consumers are willing to purchase goods and services on the net, there is a likelihood of certain disputes. These kinds of disputes have their own variety of legal hurdles like the issue of jurisdiction or the question of law applicable to the dispute due to the cross boundary nature of the Internet.

ODR on a prima facie screening has two connotations. On one hand it can be viewed as resolution of online disputes and one the other hand it can be looked from the perspective of method of solving a dispute may the disputes be an online or an offline dispute. ODR in its ambit includes online negotiation, online mediation, online arbitration and online neutral evaluation along with online peer jury etc. taking the method based approach, ODR covers a variety of ways in which a party, by making use of the online environment solves its clash of interests wrapped up in the form of interests.

Any institution providing ODR services must be able to generate the trust and confidence among the users. The primary concern of any user of such online services is, apart from the authenticity and reliability of the service provider, possibility of fixing the responsibility on a single person in case of any deficiency of services. In such a situation, not only the online service institution should be backed by an offline set up, it should also follow the disclosure based approach which further helps in creating e-trust and e-confidence among the users of online system.

Its always good to compromise when the ODR side understands your feelings... but it’s not good to bend so much that you loose your existence…

"..............to be continued"

Ramakant Gaur
Advocate
Supreme Cpurt of India
09810004702

ADR - A Conceptual Overview...

Every system has certain limits of performance based on the capacity of its components. Too many of overload tends to result in mediocre performance, quality deterioration, system break down and ultimate collapse.

The concept of Conflict Management through Alternative Dispute Resolution (ADR) has introduced a new mechanism of dispute resolution that is non adversarial. A dispute is basically ‘lis inter partes’ and the justice dispensation system in India has found an alternative to Adversarial litigation in the form of ADR Mechanism. Justice delivery institutions in most of the developing countries in the world are currently confronted with serious crises, mainly on account of delay in the resolution of the disputes particularly the delay in disposal of the commercial and other civil matters. We must admit that this situation has eroded public trust and public confidence in the justice delivery institutions. It obstructs economic growth, development and social justice to the citizens in a country. The crises therefore, call for an urgent solution. The cause for such backlog of cases is institutional and the delay in disposal of the cases, is due to procedural laws. Administrative institutions have failed to monitor the status, substance and pace of litigation in the courts.

“It is the spirit and not the form of law that keeps the justice alive.”
L.J Earl Warren

Alternative Dispute Resolution (ADR) is an effective substitute to resolution of disputes through courts under prevailing procedure (Cr.P.C. for criminal cases and C.P.C for civil cases). It is the most beneficial, expeditious, inexpensive and easy way of resolving disputes. It is satisfactory for litigants, being based on facts rather than technicalities of law. In courts of law a litigant may take the benefit of legal technicalities despite his weaknesses on the factual side. In courts, those who can afford to hire the services of more qualified and experienced lawyers may be on a better footing as compared to their rival litigants not having the financial means to do the same. The process of ADR, by and large, has no place for legal technicalities.

New methods of dispute resolution such as ADR facilitate parties to deal with the underlying issues in dispute in a more cost-effective manner and with increased efficacy. In addition, these processes have the advantage of providing parties with the opportunity to reduce hostility, regain a sense of control, gain acceptance of the outcome, resolve conflict in a peaceful manner, and achieve a greater sense of justice in each individual case.

Prolonged litigation not only causes prolonged agony and suffering of litigants, it also adversely affects economic activity. In many cases, genuine litigants cannot obtain relief promptly, and the delay in justice would amount to denial of justice. If a genuine litigant gets redressal of his grievances promptly, he would be able to pursue his business actively, which may otherwise suffer. It is well known that civil litigation may last for decades and involve many generations. Prolonged proceedings also result in multiplicity of litigation due to offshoots from the basic dispute. With a view to avoiding lengthy litigation and heavy expense, parties to a business deal generally provide for resolution of disputes through an arbitrator or mediator in their contracts. To save time and money, sensible people make efforts to resolve disputes through ADR before approaching courts of law.

The objective of ADR as the phrase itself suggest is to resolve disputes of all sorts outside the traditional legal mechanism i.e. courts/judicial system. There is a broad spectrum ranging from the purely consensual mode of resolution of disputes to an executive procedure like arbitration, conciliation or negotiation.

The rising popularity of ADR can be explained by the increasing caseload of traditional courts, the perception that ADR imposes fewer costs than litigation, a preference for confidentiality, and the desire of some parties to have greater control over the selection of the individual or individuals who will decide their dispute. ADR is generally classified into at least four subtypes: Negotiation, Mediation, Collaborative law and Arbitration. Sometimes a fifth type, conciliation, is included as well, but for present purposes it can be regarded as a form of mediation.

The system of dispensing justice in India has come under great stress for several reasons mainly because of the huge pendency of cases in courts. In India, the number of cases filed in the courts has shown a tremendous increase in recent years resulting in pendency and delays underlining the need for alternative dispute resolution methods. It is in this context that a Resolution was adopted by the Chief Ministers and the Chief Justices of States in a conference held in New Delhi on 4th December 1993 under the chairmanship of the then Prime Minister and presided over by the Chief Justice of India. It said: "The Chief Ministers and Chief Justices were of the opinion that Courts were not in a position to bear the entire burden of justice system and that a number of disputes lent themselves to resolution by alternative modes such as arbitration, mediation and negotiation. They emphasized the desirability of disputants taking advantage of alternative dispute resolution which provided procedural flexibility, saved valuable time and money and avoided the stress of a conventional trial".

In a developing country like India with major economic reforms under way within the framework of the rule of law, strategies for swifter resolution of disputes for lessening the burden on the courts and to provide means for expeditious resolution of disputes, there is no better option but to strive to develop alternative modes of dispute resolution (ADR) by establishing facilities for providing settlement of disputes through arbitration, conciliation, mediation and negotiation

Indian overview of ADR: -

In our country, in the past statutory provisions on arbitration were contained in three different enactments i.e. the Arbitration Act 1940, the Arbitration (Protocol and Convention) Act 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. The Arbitration Act, 1940 laid down the framework within which domestic arbitration was conducted in India, while the other two Acts dealt with foreign awards. The Arbitration and Conciliation Act, 1996 has repealed the Arbitration Act, 1940 (10 of 1940) and the Arbitration (Protocol & Convention) Act, 1937 (6 of 1937) and the Foreign Awards (Recognition and Enforcement) Act, 1961 under section 85 of the 1996 Act.

United Nations Commission on International Trade Law (UNCITRAL) prepared a Model Law on international commercial arbitration in 1985. The General Assembly of the United Nations has recommended that all member countries should give due consideration to the Model Law, for the desirability of uniformity of the Law of Arbitral Procedures and the specific needs of International Commercial Arbitration Practice. The United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Conciliation Rules in 1980. The Arbitration and Conciliation Bill 1996 was passed by both the Houses of Parliament and received the assent of the President of India on August 16, 1996 and was enforced w.e.f. January 25, 1996 and the enactment came on the statute book as the Arbitration and Conciliation Act, 1996 (26 of 1996).

The use of ADR, is promoted by the enactment of section 89 of the Code of Civil Procedure which is inserted by Section 7 of the Code of Civil Procedure (Amendment) Act 1999. The courts also encourage the parties to use an ADR procedure in appropriate cases. The Governments including Central Government are committed to settle their legal disputes out of the court by ADR methods whenever the other party agrees for it. Normally ADR is an alternative way of settlement of the disputes or issues. ADR is simple, cheaper, quicker and less stressful to all parties, in comparison to adversarial litigation.

The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay and expense. The parties should be free to agree as to how their disputes are to be resolved, subject only to such safe guards as are necessary in the public interest. In the matter governed by the provisions of the 1996 Act, the court should not intervene except as provided by those provisions. The main object of Arbitration is to exclude judicial intervention with the process of Arbitration. There are separate enactments specially to settle disputes arising between employer and employee under the Industrial Disputes Act. Statutory tribunals are also some time lacking in their effort as they do not have the simplicity, transparency and practical approach to resolve the disputes, as in the Arbitration and Conciliation Act, 1996. The English Arbitration Act, 1996, provides that the provisions of law must not be construed as excluding the operations of rule of law consistent with those provisions, in particular any rule of law as to (a) matters which are not capable of settlement by arbitration, (b) the effect of an oral arbitration agreement or (c) the refusal of recognition or enforcement of an arbitral award on ground of public policy. The English Arbitration Act, 1996 must not be construed as reviving any jurisdiction of the court to set aside or remit an award on the ground of errors of fact or law on the face of award.


"The future is not some place we are going to, but one we are creating. The paths are not to be found but made, and the activity of making them changes both the maker and the destination".

Ramakant Gaur
Advocate
Supreme Court of India
09810004702