From PD’s Desk Economic crimes in India, like else where, are linked to several other offences, or even organised crimes, having bearing on national security. Every day a greater degree of sophistication is being noticed in the activities of the criminals indulging in these activities. There is a growing recognition in the world that the economic offences are, many times, part of other serious crimes posing serious threat to the security of the nation. Problems such as international terrorism, narco-terrorism, money laundering, IPR violations, cyber crimes, import of hazardous substances etc. continue to occupy centre stage as the global threats. A multi-pronged approach by various arms of the Government could help in effectively dealing with this menace. Besides the investigating agencies, Auditors could play a significant role in their prevention and detection. Through a thorough understanding of the key areas of risk and modus operandi adopted in committing the crimes, Auditors could effectively plan their audit engagements focusing on the identified areas of risk. In pursuance of the institute’s endeavour to bring out quality reading material on issues related to the subject of its specialization i.e Audit of Fraud and Fraud Detection Techniques and Forensic Audit, this compilation of selected readings on ‘Economic Crimes’ has been brought out. This compilation seeks to provide a broader perspective so as to further enhance the understanding of the subject. We hope that the readers would find the compilation informative and useful. 7th June 2007 Dr. Sadu Israel CONTENTS Sr. No Topic Page No. 1. The Scenario and Impact i) Dimensions of Economic Crime in India 1 ii) Money Laundering 6 iii) Economic Crimes in a Globalised Society: Its impact on the sound development of the State-An Indian Perspective 12 iv) Report on the Transparency International Global Corruption Barometer 2006 26 2. Prevention and Detection i) Legislative measures to deal with Economic Crimes in India 50 ii) The set up for detection & Prevention of Economic Crimes in India 57 iii) President’s Address at the Inauguration of Biennial Conference of Anti-Corruption/Vigilance Bureaus of States, UT and Officers of the CBI. 62 iv) PM’s key note address to the conference of CBI and Anti-Corruption Bureau 80 v) Global Integrity-Interview with Mr. David Nussbaum Transparency International’s Chief Executive 83 DIMENSIONS OF ECONOMIC CRIMES IN INDIA. - Mahendra Kumawat IPS, Addl. D.G.P. &Chairman, SLPRB, A.P. Since the early 90's India has witnessed crime. While white collar crimes can be said a spate of major economic scams in different to be crimes committed by professionals like sectors of the economy. While millions of chartered accountants, public servants, small investors have lost thousands of crores private employees in the course of their of rupees, the economic crimes have also occupation, economic offences are crimes caused havoc in the government managed committed by intelligent but devious institutions like Banks, Public Sector Under- individuals involving huge sums of public or takings, Telecom Department, Insurance government money. Companies, etc. The magnitude and the new Magnitude of the problem methods of committing economic crimes have been a cause of serious concern to the Economic offenders have exploited Government as well as to the people. weaknesses in almost all areas of economic activity and siphoned off thousands of crores. Economic Crimes are not a new phenom- Their depredations will continue till the law enon in our country. Even one and a half cen- makers plug loopholes in the affected system. tury ago, when the Indian Penal Code was But the economic offenders, as they have the enacted, punishment was provided for Cheat- knack of exploiting weaknesses in any system ing (Sec.420), Criminal Breach of Trust (Sec- either traverse a new territory or subvert the 409), Counterfeiting of Coins (Sec-232), Mak- system which is their specialized field. In the ing and Selling of Adulterated Drugs (Sec.274 recent past alone, scams have cost the & 275), Fraudulent use of Weights and Mea- exchequer and millions of Indians, sures (Sec.265), Counterfeiting Govt. Stamps astronomical sums of money. Some major and their Sale (Sec,255 and 258), Making and scams/ economic offences, which have Selling of Fake Goods (Sec. 481 to 489), Soon adversely affected our national economy in after the introduction of currency notes in our the recent past are: country, counterfeiting of the currency led i) Primary Market Frauds: to addition of Section 489-A and B in the Indian Penal Code in the year 1955. But what The Stock Market Scams of 90's affected has changed in the past few decades is the millions of small investors across the country. magnitude and enormity of economic crimes Fly-by-night operators entered the primary owing to the development in technology markets and through Initial Public Offers and improved means of transport and com- (IPOs), collected hundreds of crores and munication and their use by the perpe- vanished! The irony is that the whereabouts trators of these crimes. of over 100 companies are still not known either to SEBI or to the other investigating The terms 'Economic Crime' and 'White agencies. Even those companies, which did Collar Crimes' are more often than not, used not vanish, used the people's money for as synonyms In fact, both the terms need to purposes other than for which it was be used to define different categories of 1 collected. As a result, the value of their shares iv) Import /Export Frauds: plummeted resulting in heavy losses to the Money laundering operations by under- investors. invoicing imports and over-invoicing of ii) Secondary Market Frauds: exports have been resorted to by unscrupulous traders in a big way and thereby Insider trading has the dangerous converted their black money into white and potential of market manipulation and misuse at the same time, obtained liberal incentives of unpublished price sensitive information by given by the Government in the form of a privileged few insiders who are in exemption of income tax on the earnings, possession of such information. This kind of etc. This is in addition to import/export frauds malpractice defeats the very principle of fair being committed based on forged and and ethical business practices, besides fictitious documents. spelling a doom for the common and small investors. The Capital Markets in India have v) Insurance Frauds: been victims of this malady for years and Insurance companies have been victims more particularly when liberalization attracted of frauds perpetrated by unscrupulous small investors to the markets. Instances of claimants with or without the active artificially jacking up prices of shares and connivance of insurance officials. Instances thereby inducing gullible people to buy them of deliberately setting fire to the insured are also common. People have lost heavily goods, go-down, factory, making more than on account of frauds of this nature committed one claim on the basis of same accident, by unscrupulous market players. inflated claims supported by corrupt iii) Bank Frauds: surveyors, are quite common. Economic offenders have targeted vi) Intellectual Property Crime/ Theft: nationalized and cooperative banks and The Federal Bureau of Investigation (FBI) siphoned off thousands of crores by having of USA has estimated that in 2003 alone, criminal nexus with the managements of the $3 billion (Rs. 13,500 Crores) worth money banks. The big borrowers alone are was lost world wide as a result of criminals responsible for the huge non-performing swiping copyright protected digital copies assets (Rs. 55,000 Crores in 2003) the of music, movies, software and games and nationalized banks are saddled with. distributing them through websites, chat In the 90's, unscrupulous economic of- rooms, mass e-mails. fenders set up large number of UCBs (Urban According to a music and film market Cooperative Banks) in the States of Andhra survey, the Indian Music and Film industry is Pradesh, Maharashtra, Gujarat and collected losing around Rs. 1800 crores because of thousands of crores by offering unsustainable piracy, since some unscrupulous people are high rate of interest and later siphoned off making copies of DVD movies and MP 3 hundreds of crores either by sanctioning loans songs illegally without obtaining permission to themselves, or to the borrowers with and paying royalty to the concerned whom they had criminal nexus. Naturally, producers. Some internet sites are offering such banks collapsed, which caused havoc free of cost latest music from hit movies by to the millions of small investors. 2 uploading to the internet which can then be NBFCs failed to repay the amounts to the downloaded by people anywhere in the depositors and finally they collapsed. And world without paying anything to the original hundreds of NBFCs vanished, leaving producers of the music. Thus, the original investors in financial crisis. Unfortunately, till producers of movies and songs as well as date, non-repayment by NBFCs is still a non- exchequer lose heavily on account of this new cognizable crime. The Financial Companies type of economic crime committed with the Regulations Bill 2000, which seeks to protect help of technology. the interest of investors, introduced in the Parliament on 13th December, 2000, has not vii) Non -Banking Finance Companies yet received the attention it deserves. (NBFCs) Frauds: viii) FAKE CURRENCY : NBFCs engaged in wide range of activities like hire-purchase finance, hiring Large scale circulation of fake currency can finance, equipment leasing finance, loans and undermine the economy, as well as national investments have been performing an security of any country. In India, the problem important role in our financial sector. is age old, but with the development in However, unscrupulous market players technology, high quality fake currency notes targeted NBFCs in a big way in the early 90's have been recovered from terrorists, who had .