SIT recommendations to curb laundering

The Supreme Court-appointed SIT on black money has come out with a slew of recommendations to curb money laundering, including misuse of exemption on long-term capital gains tax, Participatory Notes and creation of shell companies.

The Special Investigating Team (SIT) has advocated action under anti-money laundering law for trade based money laundering, putting a cap on huge cash transactions. Huge cash transactions generally take place in illegal activities like drug trade & betting deals. In its report submitted to the apex court, the SIT mentioned about the need to check the generation of black money in the education sector and through donations to religious institutions and charities.

Recommendations to Curb Money Laundering

  • The SIT has emphasised the need for
    • establishing additional courts to decide the pending cases under the Income Tax Act
    • establishment of Central KYC Registry
    • Empowering the Directorate of Revenue Intelligence under the Special Economic Zone Act.
  • A specific recommendation has been made to check generation of black money through cricket betting.
  • While dealing with the misuse of exemption on Long Term Capital gains tax for money laundering, the SIT has recommended that SEBI needs to have an effective monitoring mechanism to study the unusual rise in stock prices of companies when such an increase takes place.
  • Enforcement Directorate should be informed to take action under Prevention of Money Laundering Act for the predicate offences.
  • While deliberating on the misuse of Participatory notes for money laundering, the panel said it is clear that obtaining information on “beneficial ownership” of P-notes is of crucial importance to prevent their misuse. “SEBI needs to examine the issue raised above and come up with regulations where the ‘final beneficial owner’ of P-notes /ODIs are known,” it said adding that the information of “beneficial owner” with SEBI should be in form of individual whose KYC information is known to it.

Identification of shell companies

The SIT in its third report dealt with the issue of shell companies and beneficial ownership and said the strategy to curb this menace has to be two-fold.

  • Firstly, there should be proactive detection of creation of shell companies which would involve intelligence gathering through regular data mining and dissemination of information to various law enforcement agencies for active surveillance.
  • Secondly, there should be deterrent penal action against persons involved in the creation of shell companies and providing accommodation entries.
  • SIT’s recommendation said Serious Frauds Investigation Office (SFIO) needs to “actively and regularly mine the MCA 21 database for certain red flag indicators.”
  • Further there is need for sharing of information on such high risk companies with law enforcement agencies.

Curb Money Laundering through trade

  • SIT recommended action under PMLA for trade-based money laundering detected by DRI where violation of section 132 of Customs Act has been found “must be shared by DRI with the Enforcement Directorate to enable ED to take action under Prevention of Money Laundering Act.”
  • The SIT further said that the illegal activity of cricket betting requires to be controlled by some provisions which are deterrent to all the concerned. “However, considering the fact that large amount of black money is generated and used in this sector, it is suggested that some appropriate legislative directions or rules or regulations are required to be put in place to curb the menace of such betting.