126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERSECONOMIC CRIME IN A GLOBALIZING SOCIETY:ITS IMPACT ON THE SOUND DEVELOPMENT OF THE STATE AN INDIAN PERSPECTIVE
Deepa Mehta*

I. INDIA: THE LAND AND THE PEOPLE
India is a vast sub-continent covering an area of 3, 287,590 sq. km. It extends from the snow covered
Himalayas in the north to the tropical rain forests in the south. It is the seventh largest country in the world.
It is surrounded by water on three sides: the Arabian Sea on the west, the Bay of Bengal on its east and theIndian Ocean on the south. Neighbouring countries are Pakistan on the northwest, China, Nepal and Bhutanon the north and Bangladesh and Myanmar on the east. India is a federal republic with its national capital in
New Delhi. Administratively, it is divided into 28 states and 7 union territories. It is very densely populatedwith over 1050 million or 1.05 billion people. The national language is Hindi but there are 14 other official
languages. Likewise, about 80% of the population is composed of Hindus and others are Muslims,
Christians, Sikhs, Buddhists, Jains, Parsis, etc.
On the economic front, India has traditional village farming as well as modern agriculture, handicrafts aswell as a wide range of modern industries and a multitude of support services.
In recent years, government controls have been reduced on imports and foreign investment and thegrowth rate since 1990 has been 6%. Although, poverty has been reduced considerably, overpopulation isstill a major handicap and about a quarter of the population is still too poor to be able to afford an adequate
diet. Despite that, India has a large number of well-educated people skilled in the English language and is amajor exporter of software services and software workers. In fact, the information technology sector leads
the strong growth pattern.
India is a Union of States and is governed by a written Constitution, which came into force on 26th
November 1949. As I mentioned earlier, India consists of 28 states and 7 union territories. According to theConstitution Parliament can make laws on certain subjects for the whole or any part of India and this is
known as the Union List. Similarly, the Legislature of a State can make laws for the State and this is known
as the State list. There is also a third list known as the Concurrent list where both the Parliament and thestates can legislate. The ‘Police’ and ‘Public Order’ are both in the State List but ‘Criminal laws’ and‘Criminal procedure’ are in the Concurrent List. As a result, the Indian Parliament has enacted the basic
criminal statutes, namely, the Indian Penal Code, Criminal Procedure Code and Indian Evidence Act but‘Police’, being a State subject, is raised and maintained by the State government. Each State or Union
Territory has a separate police force. In addition to the state police, the Central government has set up
certain central investigating agencies, including the Central Bureau of Investigation. Established on 1 April
1963, and evolved from the Special Police Establishment established in 1941, it is a premier investigative
agency of the state government and can take up cases falling within the jurisdiction of the States with theirconsent. Other investigative agencies are the Narcotics Control Bureau, the Enforcement Directorate, theCentral Board of Direct Taxes and the Central Board of Customs and Excise, etc. These agencies investigate
criminal cases falling in the ambit of special statutes being administered by them and are empowered tolaunch prosecutions.
Against such a background, the New Year has heralded an even greater increase in the GDP of thecountry. The headlines in the Hindustan Times on 1st January, 2004 were ‘All sectors on fire, GDP grows
8.4%’. The Times of India stated ‘Economy breaks 8% barrier’. Agriculture has grown at 4.1%,
manufacturing has clocked 7.3% and services have grown at 9.6% according to data released by the Central* Inspector General of Police, Chief Vigilance Officer, Delhi Metro Rail Corporation, India.

71

RESOURCE MATERIAL SERIES No.66

Statistical Organization. Economic liberalization in India, which commenced in 1991 "has come to stay" as
benefits of an open economy have started percolating. Economic liberalization and globalization have opened
up the prospects of regional economic integration with the extended neighbourhood and the opening up of
markets. However, it has also brought in its fold opportunities for white-collar criminals to manipulate andbenefit from business expansion, particularly in the field of financial and capital markets. Lack ofunderstanding and expertise in these new spheres of crime has made it more difficult for government andcriminal justice agencies to control and suppress such economic crime.

II. CHARACTERISTICS OF ECONOMIC CRIME
It is important in the first instance to understand the nature of economic crime. Economic or white-collar
crime, as it is generally referred to, is a crime committed by a person of a certain social status in the courseof his occupation. The economic crime occurs as a deviation from the violator’s occupational role. Also, mostof the laws involved or violated are not part of the traditional criminal code. Such crimes are corruption,
corporate fraud, public fraud, tax evasion, goods smuggling, stock manipulation, currencies forgery, credit
card fraud, environmental crime, intellectual property infringement and the more recent phenomenon of
cyber crime.
These crimes are different from traditional crimes in the characteristics of their objective and modus
operandi. The traditional criminal steals small sums of money and often uses brute force and conventional
tools to achieve his aim. On the contrary, a criminal committing an economic crime steals large sums ofmoney and employs technology and communications to carry out unlawful commercial transactions, disturb
databases or orchestrate massive frauds. His victims are ignorant and naïve and often remain unaware of thefact that they have been cheated.
Another characteristic of economic, commercial, corporate or white-collar crimes is that they are often
perceived as ‘good business’: and good business often requires ‘cutting corners’. Legal violations bycorporations are often viewed as part of the business system, much like industrial spying or psychologicallysuggestive marketing techniques. These activities are considered as an extension of the capitalist system
based on profit and a technical adherence to the letter rather than the spirit of the law.
Such crimes are, however, very costly for our society. In contrast to conventional crimes, which affectspecific individuals, economic crimes affect society as a whole. For instance, false advertising induces the
public to invest in products that do not have the desired effect. Unsafe drugs, pesticides and food additives
affect the health of thousands. Exposure to industrial hazards such as unsafe equipment and poisonous
materials and emissions have an adverse effect on workers’ longevity. That is because many forms of
economic crime are relatively invisible, compared with violent crime, for example. The effects on society of
economic crime are hidden as public fear and concern are heightened in cases that affect personal security
more directly.
A significant proportion of transnational organized crimes assume the nature of global economic crime.
Proceeds of transnational crimes such as drug trafficking, extortion, corruption, tax evasion, arms
smuggling, terrorism, and fraud have to be laundered. The international economic threat, posed by Global
Organized Crime, in an increasingly global economy is among the major "new" threats to national security.
Global Economic Crime does not just affect a select group of financial institutions or regional areas; it affects
international financial networks and economies at a national level. Laundering billions of dollars in organizedcrime money worsens national debt problems because the large sums of money are then lost as tax revenue
to that country's government. Global Organized Crime can have a damaging effect on political structures,
especially fragile democracies and developing economies. As people feel that the government is powerlessto stop organized crime, they turn to crime leaders for protection and political institutions begin to
deteriorate.
Economic crimes have mushroomed in many countries, especially those that are in the process of
economic, social or political development. A number of difficulties arise in the investigation of such offences.
The first is that of definition: for instance the characteristics or constituents of ‘illegal monopolies’ or‘manufacture of unsafe products’. The second is the determination of responsibility: whether it is that of thecorporation or the individuals within it. Thirdly, it is often very difficult to prove the intent to commit acrime. Lastly, and perhaps, most importantly, the public, although it is becoming increasingly aware of the72

126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

nature of such crimes, is largely apathetic, and even if in some cases it is concerned, is unable to put
pressure on the government leaving the issue to a few consumer protection groups.
Cooperation among Global Organized Crime groups has increased as restrictions have lessened between
international borders. These foreign havens for criminals and their assets have made it increasingly difficultfor Law Enforcement to trace illegal profits; gather evidence on the criminal leaders; and identify andcontain criminal groups. These global networks allow organized crime groups to greatly increase the profits
of their operations and their methods of evading local governments as they share information, skills, costs,
market access and relative strengths.
Financial transactions, while being perfectly legitimate, are extremely complex and involve the financial
systems of many countries. Financial markets operate with speed due to modern communications andelectronic data processing and create an impression of impropriety. Caution has to be exercised in regulating
financial and economic activities in such a way that they foster free competition and do not stifle it throughover regulation. In other words, a balance has to be struck between the regulatory and legislative systems.

III. STATE OF ECONOMIC CRIME IN INDIA
Against this backdrop, let us now focus on the state of economic crime in India and its effect on the sounddevelopment of the State. I have classified economic crime in India into three groups viz.:(i) Traditional economic crime such as corruption, smuggling, invoice manipulation, bogus imports;(ii) Emerging technological economic crime such as credit card frauds, counterfeiting, cyber crime;(iii) Money laundering and hawala through which proceeds of transnational organized crime aretransmitted abroad.

A. Group - I
1. Corruption
Corruption is an economic crime that is a primary reason for low achievement in the poverty alleviation
efforts of the nation. Greed and poverty are the two basic reasons for corruption. It occurs in many countries
but it has increased substantially in India in recent years. Corruption has a very upsetting impact as itincreases injustice and violates human rights. Corruption arises due to monopoly, power and discretion
without accountability. Too many laws, rules and formalities perpetuate corruption and provide opportunities
for corrupt practices among government officials. The demoralizing fact is that many in high places remain
untouched. In 2001, 2990 cases were registered by anti-corruption departments in India and property
recovered or seized was of the value of 84000 million rupees.
Mr. N. Vittal, former Central Vigilance Commissioner of India has stated that corruption in India is antinational involving the transfer of money through ‘Hawala’ or underground banking and money laundering;corruption is anti-poor; and corruption is anti-economic development. Measures for combating corruption
are simplification of rules and procedures, transparency and creation of public awareness, and an effective
prosecution and punishment system.
2. Smuggling
Smuggling, which consists of clandestine operations leading to unrecorded trade, is one of the major
economic offences affecting India. Though it is not possible to quantify the value of the contraband goods
smuggled into this country, it is possible to have some idea of the extent of smuggling from the value ofcontraband seized which is indicated in the table given below:
Year
1988
1989
1990
1991
1992
1993
1994
1995

Value of the Goods Seized
443 Crores
555 Crores
760 Crores
775 Crores
535 Crores
388 Crores
535 Crores
631 Crores73

RESOURCE MATERIAL SERIES No.66

The high point of smuggling was in 1991 when contrabands worth Rs. 775 crores were seized.
Introduction of various liberalization measures such as the gold and silver import policies in 1992-93 have
had their impact on customs seizures in that the total value of seizures came down by 30% in 1992.
A look at the seizures of important commodities seized from 1991 to 1996 indicates that gold and silver
which accounted for 44% of the total seizures prior to liberalized import policies came down to 21% after
liberalization and have been falling further. On the other hand, the seizure of commodities like electronic
goods, narcotics, synthetic fabrics, and foreign currency has been rising. In 1990, gold occupied the top
position amongst smuggled items followed by silver, electronic items and narcotics. In 1995, however,narcotics occupied the number one position followed by gold, foreign currency, electronics and synthetic
fabrics.
Year

1995-96

1994-95

1991-92

1990-91

Gold

198.8

188.5

55.4

50.8

Silver

146.6

147.7

3.6

0.54

Narcotics

25.1

21.8

54.3

77.94

Electronic items

55.5

23.1

51.2

38.0

Foreign currency

7.7

10.8

27.4

40.2

Indian currency

6.5

5.6

6.6

5.6

Synthetic fabrics

4.8

2.0

2.4

12.9

Watches

3.2

6.2

3.3

3.9

Smuggling, in its broader connotation also includes drug trafficking, smuggling of migrants and trafficking
in persons.
3. Invoice Manipulation
This is another variety of economic crime affecting India. In fact all developing countries are victims of
invoice manipulations. The term means invoicing of goods at a price less or more than the price for which
they were actually sold or purchased. Such transactions are collusive between the trade partners. Both are
guilty of fabrication of false documents and records and violate national laws with a view to cheating customs
and tax authorities.
By under-invoicing, the value of the goods is lowered which would mean lesser payment of import duties.
By over-invoicing the value of goods is shown higher which would mean higher out-flow of foreign exchange
from the country. By these methods, the country is depleted of its revenues and foreign exchange earnings.
The practice of invoice manipulation has international ramification and adversely affects the economy ofthe victim country. A number of difficulties are experienced in the investigations of invoice manipulations
particularly in retrieving information such as documents like “Bills of Entry, “Shipping Bills,” “Bills of
Lading,” “Invoices,” “Letters of Credit,” departure schedules of sailing vessels, etc. despite their being
public documents. International cooperation is therefore needed to curb this menace.
4. Bogus Imports
Several cases have come to notice in the recent past, which indicate that there is leakage of foreignexchange through the device of bogus imports. The modus operandi is quite simple. The operator opens acurrent account in India in a bank authorized to deal in foreign exchange. He usually poses as a small-scaleindustrialist and produces forged certificates/ documents to establish his credentials. His partners abroad
prepare a set of export documents such as an invoice, bill of lading, and bill of exchange and send themthrough their foreign bank branches to Indian banks for collection. On receipt of these documents, generally
on collection basis, the importer’s agent deposits the amount in Indian rupees in his bank’s current accountand the bank remits the foreign exchange. No goods, of course, are ever imported and the country loses
valuable foreign exchange.

74

126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

B. Group – II
1. Cyber Crime
The use of computers has grown exponentially during the last few years. Financial networks,
communication systems, power stations, modern automobiles and appliances all depend on computers, andthese computers can record withdrawals, deposits, purchases, telephone calls, usage of electricity, medical
treatments, driving patterns and a lot more. It is therefore not surprising that computer technology is
involved in a growing number of crimes. These are generally taken to include theft of computer services,
unauthorized access to protected computers, software piracy and the alteration and theft of electronicallystored information, extortion committed with the assistance of computers, obtaining unauthorized access torecords from banks, credit card issuers or customer reporting agencies, traffic in stolen passwords andtransmission of destructive viruses or commands. With the physical growth of the Internet over the past few
years, a number of new generation crimes affecting the LAN, WAN and Internet such as theft ofcommunication services, information piracy, forgery and counterfeiting, dissemination of offensive materials,
stalking, extortion, electronic vandalism and terrorism, sales and investment fraud, etc. Hacking, computer
network breaches, copyright piracy, software piracy, child pornography, password sniffers, credit card frauds,
cyber squatting are some of the new terms in the average criminal investigator’s dictionary. Highly
intelligent persons commit these new generation crimes leaving hardly any trace and making investigation
highly difficult and complicated.
Computer crimes are now a matter of growing concern. Traditional barriers to crime faced by criminals
are being obliterated by digital technologies. In a digital world, there are no state or international borders;customs agents do not exist. Bits of information flow effortlessly around the globe, rendering the traditional
concept of distance meaningless. In the past, the culprit had to be physically present to commit a crime. Now
cyber crimes can be committed from anywhere in the world as bits are transmitted over wires, by radio
waves or over satellite. Similarly, in the past, companies protected their secrets and bank funds in locked filecabinets and vaults in buildings surrounded by electronic fences and armed guards. Now this information is
located in one computer service that is connected to thousands of other computers round the world. Anyoneof these networks or even a phone line into a company’s main computer is a transnational invitation tocrime. Crime in the digital world has another advantage for crooks over “atom-based” crime: electrons andbits have no effective mass or weight. Robbing a bank or an armoured vehicle of cash would pose problemsof transportation and storage whereas transfer of money poses no such problems in the digital world.
Information technology is redefining the ways of conducting business and communication, and is shaping
the interaction between business and consumers for sale and purchase of goods and services. Traditionalcommerce has become electronic commerce. It involves selling and purchasing of information, products andservices over communication networks. It encompasses a wide array of commercial activities carried out
through the use of computers, including online trading of goods and services, electronic fund transfers,
online trading of financial instruments and electronic data transfers within and among companies. For
purchasing goods or services, a customer is required to pay. While in a traditional business it is done throughcash or cheque, in E-business, it is done through digital cash. However, the growth of the electronic mode of
conducting business hinges on assuring the consumers and the business that their use of communication
network services is secure and reliable, that their transactions are safe, and that they will be able to verify
important information about the transacting parties. Security is indispensable to E-commerce.
Authentication, integrity and confidentiality are the three issues associated with electronic communications.
Cyber crimes have become a reality in India too. Cyber hackers have broken into and maliciously altered
the content of several computer websites, including that of the Ministry of Information Technology and of
Parliament. Indian Airlines was subjected to fraud of several millions of rupees by tampering with thecomputerized booking records. Computer hackers also got into the Bhaba Atomic Research Centre
Computer and extracted some data. Some computer professionals, who prepared the software for the
M.B.B.S. examination, altered the data and gave an upward revision to some students in return for a heftyfee. A big loss was caused to a bank where the computer records were manipulated to create false debts andcredits and in another bank false bank accounts were created. A telephones official manipulated computer
terminals by reversing the electronic telephone meter systems, thereby allowing some companies to makeoverseas calls without charges. In a case of software piracy some of the employees stole a copy of the sourcecode and in another educational software was stolen.

75

RESOURCE MATERIAL SERIES No.66

Law enforcement agencies today face a number of challenges in the investigation of such cases. Thesecan be categorized as technical, legal and operational challenges.

Technical challenges:
When a hacker disrupts air traffic control at a local airport or a child pornographer sends computer files
over the Internet, or when credit card numbers are stolen from a company engaged in e-commerce,
investigators must locate the source of the communication. They have to trace the ‘electronic trail’ leadingfrom the victim to the perpetrator in almost every case. To succeed in identifying and tracing global
communications investigators have to work across borders, not only with one’s counterparts but also withindustry to preserve critical evidence such as log files, e-mails, etc. before it is altered or deleted. Besides,
while less sophisticated cyber criminals may leave electronic ‘fingerprints’ more experienced criminals
know how to conceal their tracks in cyber space. Internet telephony, strong encryption, and wireless andsatellite communication and other technological advances have made it possible for international criminals
and terrorists to target victims in unprecedented ways.
(i) Legal challenges:
Deterring and punishing computer criminals requires a legal structure that will support detection
and prosecution of offenders yet the laws defining computer offences, and the legal tools needed toinvestigate criminals using the Internet, often lag behind social and technological changes, creating
legal challenges to law enforcement agencies. In India, however, the Information Technology Act,
2000 has been enacted in pursuance to the General Assembly of United Nations resolution
A/RES/51/162, dated the 30th January 1997.
The Information Technology Act elaborates upon digital signature; electronic governance;
attribution, acknowledgement and dispatch of electronic records; secure electronic records andsecure digital signatures; regulation of certifying authorities; digital signature certificates; duties ofsubscribers, penalties and adjudication; the cyber regulations appellate tribunal; offences; and nonliability of network service providers in certain cases, etc. It specifies that Electronic Signatures will
be valid and legally enforceable only if the e-transaction is done through “public key cryptography”.
The Act delineates two separate types of penal provisions: contraventions and information
technology offences. While contravention results in monetary penalty, the IT offences may result inthe offender being imprisoned or paying a fine or both. Tampering with computer source codes,
obscenity, hacking, unauthorized access to a protected system, misrepresentation before authorities,
breach of confidentiality and privacy, publication of false particulars in digital signature certificates,etc. have been listed as criminal offences under this Act. Amendments have also been made to theIndian Penal code, Indian Evidence Act, the Bankers’ Book Evidence Act and Reserve Bank of India
Act to facilitate investigation and prosecution of cyber crime.
(ii) Operational challenges:
There is a need to have high tech crime units that respond to quick investigation and assist law
enforcement agencies faced with computer crimes. The police have to be made cyber sensitive
through adequate training and supported by an expert group with specialized knowledge of computer
forensics.
Just as investigators followed the trails and physical signs of robbers, modern investigators have tounderstand and follow a criminal’s paper trail, or cyber trail, in the form of invoices, communications, andother records that leave behind evidence of the criminal’s passing. A cyber trail is both an extension of crime
scenes in the real world, and a digital crime scene in itself. If a crime occurs in the physical world and there
is a computer with network access at the crime scene, investigators have to search the computer andnetwork for related digital evidence. Similarly, if a crime is first witnessed or recorded on a network,
investigators have to collect all relevant digital evidence on the network and, if possible, determine thephysical locations of the primary computers involved and treat those locations as crime scenes.
The investigation of computer crime requires a team effort of police, forensic scientists, lawyers andprogrammers or system administrators. Police are generally expected to know how to oversee aninvestigation, but may not know much about computers and computing and thus not know what evidence tolook for. Programmers and system administrators may know a great deal about computers, networks, andhow they work, but nothing about legal procedural requirements regarding the preservation of evidence.
Forensic scientists may know how to deal with evidence but, like the police, may not know what to look for

76126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

when dealing with digital evidence or how to apply real-world forensic science methods to it. Lawyers may
know about the law of evidence but not much else. But today, when cyber crimes are fast increasing, thepolice have to learn how to handle digital evidence, use it to generate investigative leads, and to know whento call in an expert for assistance. Programmers and system administrators, who handle digital evidence,need to use it to generate investigative leads, and to know when to call in police for assistance. Forensic
scientists have to become intimately familiar with every aspect of digital evidence so that they can process it
to support an investigation. Finally, lawyers of both prosecution and defence, have to learn to dig up digital
evidence, defend it against common arguments, and determine whether it is admissible. Together, this teamwill then be able to conduct an investigation of a computer crime, look for evidence, find it, and treat it so as
to preserve its admissibility once it is found.
The Central Bureau of Investigation has recently created a Cyber Crime Research & Development Unit
which maintains close liaison with international agencies like the FBI, Interpol and other foreign police
agencies to share skills and techniques in investigating cyber crimes. The officers of the CBI associated inthis exercise share their expertise with the State police forces through regional training programmes held
periodically.
2. Counterfeiting
Currency counterfeiting is an organized white-collar crime, which has assumed serious proportions
globally. It not only causes serious setbacks to the world’s economy but also jeopardizes genuine business
transactions. These days, counterfeiting of currency notes is done with the help of modern equipment suchas colour scanners, colour laser photocopiers and printers, as well as by computer graphics software. Mostof the security features such as the use of complex designs, special paper, watermarks, optical fibre, security
thread, micro-printing, currency-printing, colour shift, and holography in genuine notes are copied with thehelp of advanced computer technology, which provides them with sophistication and perfection.
There has been an upsurge in the incidence of supply of counterfeit Indian currency notes from acrossIndia’s borders. During the year 1999, counterfeit Indian currency notes valued at Rs. 18.4 million wereseized as compared to Rs. 6.5 million during 1998 indicating a threefold increase. Almost half of the total
seizures are made from the three states of Uttar Pradesh, Bihar and West Bengal. Counterfeiting of currency
is resorted to to gain quick profit, acquire funds for drug trafficking or subversive activities, or mobilize
funds for smuggling. Sometimes, external agents in the form of travellers and cross border smugglers are
involved. Counterfeit currency can be used for destabilizing economies, provide financial assistance toterrorists and militants for buying arms and ammunition and sponsor religious fundamentalism, etc.
India, as a signatory to the Geneva Convention, 1929, is committed to extend full cooperation to all othercountries for eliminating or containing to the furthest extent possible, the counterfeiting of domestic as well
as foreign currencies. Indian laws and enforcement measures are in full conformity with the principles laid
down in the Convention. The Indian Penal code provides for punishment of varying degrees and up to life
imprisonment for counterfeiting any currency or making or possessing instruments or materials for forging
or counterfeiting currency notes or for possession of forged or counterfeit currency notes or bank notes.
Counterfeiting, however, goes beyond the production of bogus currency to the counterfeiting of all kindsof manufactured products such as clothing, audio and video equipment, compact discs, watches, liquor,
perfumes, etc. In such cases, losses are suffered by the manufacturers of the products, their employees, theeconomies of the concerned states and the concerned governments that would have received tax revenues.
3. Credit Card Frauds
A major form of economic crime is credit card fraud. Here also, the fraudster is one step ahead of law
enforcement agencies as technology has facilitated the manufacture of false cards. As financial institutions
introduce innovations against counterfeiting and fraud, increasingly sophisticated ways of profiting from or
beating those systems are devised. Most of the credit card fraud is committed by using counterfeited cards,
which are re-embossed or re-encoded. Nowadays, counterfeiters have reproduced holograms and encoded
magnetic stripes on credit cards. New security measures can only be introduced gradually and if measures
are taken against fraudulent card users in one part of the world, they quickly move to another part wheredetection measures are less sophisticated. Thus, problems associated with these kinds of frauds take a longtime to overcome and cause losses around the world. In India, credit card frauds also occur by stealing the77

RESOURCE MATERIAL SERIES No.66

cards and the accompanying information at the time of application or delivery and forging signatures.
Sometimes merchants or employees of hotels, restaurants or shops take genuine numbers of cards fromsales slips and pass them on to syndicates.

C. Group – III
Before we discuss the strategies that have been adopted by money launderers, let us pause to consider
the specific kinds of transnational crimes where proceeds are transmitted out of a country’s national borders.
1. Transnational Organized Gangs
In the sixties and seventies India had Haji Mastaan (gold smuggling), Yusuf Patel (gold smuggling) and
Karim Lala (drug smuggling). In the eighties and nineties other gangs emerged. Dawood Ibrahim, Tiger
Memon and Mohammad Dosa are reportedly operating from abroad (Dubai) and are involved in extortion ofmoney from builders and film producers, mediating in monetary disputes, and undertaking contract killings.
The other major gangs of Mumbai indulging in organized crime are those of Chota Rajan (Drug Trafficking
and Contract Killings), Arun Gawli (Contract Killings and Protection Money), Late Amar Naik (Protection
Money), Chota Shakeel and Om Prakash (Babloo) Shrivastava (Kidnappings for ransom and Killings). In thefield of terrorism certain transnational organizations such as Lashkar-e-Toiba, Jaish-e-Mohammad, Hizbul
Mujahiddin, etc. have been operating. The most essential characteristic of organized crime is making moneyor “maximisation of profits”.
2. Drug Trafficking
Flanked by the Golden Crescent, (South-west Asia) and the Golden Triangle (South-east Asia), India has,due to its geographic location, become the corridor for movement of heroin and hashish to various
destinations in Europe, America and Africa. Substances of abuse include alcohol, tobacco and natural andmanufactured drugs. A kilogram of heroin, which costs approximately a thousand dollars on the Indo-Pak
border, is reportedly sold for 250,000 dollars in Europe or USA.
The global drug trade has grown phenomenally. It is said to fund terrorism and other forms oftransnational crime. Legislative measures against drug trafficking include The Narcotic Drug andPsychotropic Substances Act and Rules, 1985 and The Prevention of Illicit Traffic in Narcotic Drugs andPsychotropic Substances Act, 1988. The Narcotics Control Bureau functions as a coordinator between
various departments and arranges interagency coordination meetings
International drug trafficking poses a threat to the social fabric of all countries. The increase in the scaleof these operations has led to an increase in drug use, addiction, and the general crime level. Drug profits
are transferred electronically to dozens of banks around the world in less than 24 hours by using falsified
export documents and invoices for goods in order to disguise drug trafficking transactions.
3. Smuggling of Migrants
There have recently been many reports of smuggling migrants from India and an industry has emerged
which involves Indian agents recruiting migrants, transporting them to Europe or North America, collecting
fees from them and sometimes providing them with jobs in the destination areas. India is both a source and a
destination country for migrant workers. Skilled workers from India migrate to the U.S.A., Europe, theMiddle East and East Asian countries. Similarly, migration into India takes place from neighbouring
countries. Sometimes smuggling and trafficking activities are carried out by criminal networks, which arealso involved in trafficking of narcotics, document fraud, money laundering, arms smuggling and othertransnational crimes
4. Trafficking in Persons
Trafficking in human beings is a transnational organized crime that involves the illegal trade of humanbeings, through abduction, threat of force, deception, fraud or “sale” for the purposes of sexual exploitationor forced labour. A major reason is the search for work abroad due to economic disparity, high unemployment
and disruption of traditional livelihoods. Traffickers face few risks and earn huge profits by taking advantageof large numbers of potential immigrants. In many cases, drug traffickers have switched to trafficking humanbeings because it is more lucrative and relatively risk free.
In cross border trafficking, India is a sending, receiving and transit nation. Receiving women and children
from neighbouring countries and sending women and children to Middle Eastern nations is a common

78

126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

occurrence. The long and porous border between India and its neighbouring countries facilitates trafficking
in women and girls.
5. Terrorism
Terrorism has been there for quite a while in India. It is characterized by hijacking and killing of wellknown individuals, shoot-outs or bomb attacks in public and religious places and more recently, an attemptedattack on the Indian Parliament. There are a number of terrorist outfits operating in India such as Lashkar-eToiba, Hizbul Mujahidin, Jaish-e-Mohammad and so on.
There are many causes of terrorism ranging from ideology, religion, fundamentalism, fanaticism, politics
to corruption and money-laundering and mercenary ones. Different and varied methods have been adopted
to create panic – from the hijack of the Indian Airlines aircraft in Afghanistan in December 1999 to suicide
strikes evident in the assassinations of former Prime Minister Rajiv Gandhi in 1991 and Chief Minister
Beant Singh in 1995 to ‘Fidayeen’ strikes in Jammu and Kashmir to terrorist attacks such as the attack on
the Indian Parliament in 2001, an attack on the American Centre, Kolkata in 2002 and attacks on
Akshardham temple and Raghunath temple, also in 2002. . Firm links have also been established between
militant outfits in India and the underworld – drug traffickers, border crossers, currency counterfeiters,
travel racketeers, mafia syndicates, etc. – which are used not merely as a support mechanism but also to
execute actual actions.
6. Trafficking in Arms
The Purulia Arms Drop case is the most glaring example of transnational arms smuggling. In December
1996, an Anotov 26 aircraft dropped over 300 AK 47/56 rifles, ammunition, sniper weapons, rocket launchers
and night vision devices in Purulia in West Bengal. The aircraft was bought from Latvia, chartered by acompany, Carol Airlines, registered in Hong Kong, moved to Bulgaria to pick up the consignment of arms
and finally apprehended in Bombay after it had dropped its consignment. There is evidence of smuggling ofarms in Jammu and Kashmir, Punjab and the North East where caches of arms have been seized.
7. Money Laundering
Crime pays and criminals naturally want to be able to enjoy their profits without worrying about thepolice or the courts. This is not something new. However, globalization has brought about an increase in theinternational movement of money. The rapid expansion of international financial activity has gone hand inhand with the development of transnational crime, which takes advantage of political borders and exploits
the differences between legal systems in order to maximize profits.
Money laundering cannot be disassociated from other forms of crime. It is a fact that it thrives on
corruption. Corrupt people use financial techniques to hide their fraudulently obtained assets and thecontinued successful application of these techniques depends on the involvement of influential accomplices.
Money laundering is therefore at the centre of all criminal activity, because it is the common denominator of
all other criminal acts, whether the aim is to make profits or hide them.
Laundering operations are, in fact, intended more to conceal the origin of the money than its criminal
nature, in other words to hide the traffic from which it is derived rather than the general criminal activity
which actually generated it. It is therefore essential to move the money in order to scramble the route it
takes. The operation is wholly successful when the nature of the money is also concealed and it is
impossible to establish a link with any criminal activity because the different circuits taken give it theappearance of legitimate income.
8. Hawala
The Indian Hawala or Hundi system is the transfer of money through unofficial channels, normallyoutside the banking channels used by businessmen. The money so transferred often includes the money
derived from criminal activities or in violation of the country’s legislation. Underground banking, whichconveys a sense of a system, may not strictly cover the misuse of a banking channel. It may refer to, in a
restricted manner, a system of rendering services, the most important in this context being the transmissionof money. Hawala represents such services. It operates in the following manner.
Someone in the U.S.A., for example, deposits $1,000 to an underground banker for payment to be madeto an Indian in India. The U.S.A. underground banker contacts his counterpart in India immediately on the79

RESOURCE MATERIAL SERIES No.66

phone or by wire and sends some coded message for payment of money to the Indian recipient. As in a bank,there is no physical transfer of money from one country to another; the accounts are settled by a reverse
process when an Indian sends $1000 to someone in the U.S.A. The Indian operator contacts his counterpart
in U.S.A. and money is paid in U.S.A. without any physical transfer of money. These operators work in avery organized manner and have a well-knit network. They undertake their business under cover of absolute
secrecy and no paper trail for audit is kept. The system operates on an ethnic network. The network may
include more than three or four countries. The principal operators engage agents and sub-agents in various
countries for collection and disbursement of money. Hawala is widespread in India from metropolitan cities
to smaller towns. Members of Indian families earning a living abroad are the clients of the system.
Money laundering and Hawala transactions, threaten developing economies and contribute to illicit drugtrafficking and terrorist and subversive activities. As mentioned earier, India, for instance, is a transit point
for drug traffickers and other criminals from the Golden Crescent and the Golden Triangle. It has become aconduit for the South East, Middle East, and Far East and Latin American countries. Both non-resident
Indians and resident Indians use the Indian Hawala system or underground banking extensively for drugtrafficking and remittances of money. In the mid-nineties Bombay was attracting huge amounts of Narcotics
money from drug cartels in Columbia (London Times, May, 1993). The private sector is also involved inquick transfer of cash across continents. Travel agents and courier companies target Indians living abroad
who want to repatriate money. The time taken to transfer money is much less. Money launderers also use
such private companies for money transfers.
There are many reasons for the use of underground banking channels instead of the normal banking
system. The high tax rate and the Exchange Control Regulations (though now considerably liberalized) havebeen the major reasons for Hawala and other economic crimes in India. Underground banking is extensively
used for drug trafficking and remittances of money. It is here that the economic offenders and the launderers
meet. Economic offenders want to remit money and money launderers help in doing so. Another reason formoney laundering is due to evasion of taxes by some corporate houses.
Money laundering techniques include smurfing (a large number of small transactions, each transaction
being less than the mandatory transaction reporting threshold), establishment of front companies,
remittances through Hawala (non-banking channels), over-invoicing and double invoicing legitimate
business (ordering goods at inflated prices and depositing the difference between the real and inflated values
in an offshore account) and foreign remittances. Non-resident Indians have been given some special banking
facilities. These facilities are misused to bring back the money as white money. For example, a portfolio
account is opened in a foreign country and the money is laundered back to be invested in the stock markets.
Another modus operandi is to launder the money through bogus exports. The conversion of black money isdone by over-invoicing the products. Some shell companies are set up to issue bills or invoices accompanied
by bogus transport receipts in order to obtain funds against these documents from bank/financial institutions
and then divert major parts of such proceeds by issuing cheques in the names of non-existent front
companies of cheque discounters. The cheque discounters then hand over cash immediately to the party
after deduction of their commission. They file income tax returns in which the commission is shown astaxable income and also issue fake Letters of Credit and false bills. The cheque discounters are generally
associated with commodities markets where fake transactions in commodities can largely go unnoticed.
Money laundering has so far been dealt with mainly under the Foreign Exchange Regulation Act, 1973,
but with effect from 1999, FERA has been replaced by the Foreign Exchange Maintenance Act. A bill named
as ‘The Prevention of Money Laundering Bill’ has been introduced in Parliament by the Government of Indiaand is to be enacted as law. Money laundering has been proposed as a cognizable crime punishable withrigorous imprisonment of 3-7 years which could be extended to 10 years and a fine of up to Rs. 0.5 million.
The acquisition, possession or owning of money, movable and immovable assets from crime, especially fromdrug and narcotic crimes, would be tantamount to money laundering. Concealment of information on
proceeds or gains from crime committed within India or abroad is proposed to be an offence. An adjudicating
authority is proposed which would have powers to confiscate properties of money launderers. An
administrator may be appointed to manage the confiscated assets. An appellate tribunal is proposed to be set
up to hear appeals. Financial institutions are expected to maintain transaction records and furnish these to
the adjudicating authority. Failure to do so would be punishable too.

80

126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

D. Indian Legislation to deal with Money Launderers
Presently, legislation to deal with such offenders is specifically intended to deprive offenders of theproceeds and benefits derived from the commission of offences against the laws of the country. It provides
for the confiscation or forfeiture of the proceeds or assets used in connection with the commission of certain
crimes. The concerned Acts in Indian legislation are:(i) Criminal Law (Amendment) Ordinance, 1944;(ii) Customs Act, 1962 (Secs. 119 to 122);(iii) Code of Criminal Procedure, 1973 (Sec. 452);(iv) Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;(v) Narcotic Drugs & Psychotropic Substances Act, 1985 (Sections 68-A to 68-Y);(vi) In addition, Indian statutes also contain provisions for preventive detention of foreign exchange
racketeers under the Conservation of foreign Exchange and Prevention of Smuggling Activities(COFEPOSA) Act, 1974, and of the drug traffickers under the Prevention of Illicit Traffic in Narcotic
Drugs and Psychotropic substances (PITNDPS) Act, 1988.
For this purpose, the Government of India has set up the following Investigating Agencies that function
under the Department of Revenue in union with the Ministry of Finance.

E. The Central Economic Intelligence Bureau
An apex intelligence and coordinating body, the Central Economic Intelligence Bureau was set up with
the intention of coordinating and strengthening intelligence gathering and investigative efforts of allagencies enforcing economic laws. Accordingly, the Bureau collects intelligence regarding aspects of theblack economy that require close watch and investigation as well as the emergence of new types of suchoffences and evolves counter-measures required for effectively dealing with existing and new types of
economic offences. It acts as the nodal agency for cooperation and coordination at the international levelwith other customs, drugs, law enforcement and other agencies in the area of economic offences. It
implements the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1971.
F. The Directorate of Revenue Intelligence
The Directorate of Revenue intelligence is concerned with Customs related offences and collects
intelligence about smuggling of contraband goods, narcotics, under-invoicing, over-invoicing, etc. throughsources. It analyses and disseminates such intelligence to its field formations for action and keeps a watch
over important seizures and investigations. It also functions as the liaison authority for exchange of
information among ESCAP countries for combating international smuggling and customs frauds and liaisonswith foreign countries, Indian Missions and enforcement agencies abroad as well as with the CBI and
INTERPOL on anti-smuggling matters. Cases are referred for action to the Income Tax Department.
G. Enforcement Directorate
The Directorate of Enforcement is mainly concerned with the enforcement of the provisions of theForeign Exchange Management Act 1999 to prevent leakage of foreign exchange which generally occurs
through remittances of Indians abroad otherwise than through normal banking channels; illegal acquisition offoreign currency; non-repatriation of the proceeds of exported goods; unauthorized maintenance of accounts
in foreign countries; under-invoicing and over-invoicing of exports and imports and other types of invoice
manipulation; siphoning off of foreign exchange against fictitious and bogus imports; illegal acquisition offoreign exchange through Hawala and obtaining secret commissions abroad.
The main functions of the Directorate are to collect intelligence relating to violation of the provisions of
the Foreign Exchange Regulation Act; conduct searches of suspected persons, conveyances and premises
and investigate such cases. The Directorate also adjudicates cases of violations for levying penalties andconfiscates amounts involved in contraventions.

H. The Directorate General of Anti-Evasion (Central Excise)Due to the growth of the Central Excise revenue and its coverage to almost all manufactured products a
specialized intelligence agency, the Directorate of Anti Evasion, was created to target prevention of Central
Excise duty evasion. The Directorate collects intelligence relating to evasion of central excise duties,
studies their modus operandi and alerts Collectorates. It also studies the price structures, marketing
patterns and classification of commodities in respect of which possibilities of evasion are likely in order to81

RESOURCE MATERIAL SERIES No.66

advise Collectorates for plugging loopholes and co-ordinates with Enforcement agencies like Income tax,
Sales tax, etc.

I. The Directorate General(s) of Income Tax (Investigation)
The Directorate Generals of Income Tax Investigation deal with all matters connected withinvestigations under the Income Tax Act of the Central Government. They collect intelligence pertaining toevasion of Direct Taxes and organize searches to unearth black money. They take steps to ensure that
persons having information about tax evaders come forward with the same to the Department and disburse
rewards.
J. The Narcotics Control Bureau
The national policy on Narcotic Drugs and Psychotropic Substances is based on the Directive Principles
contained in the Indian Constitution (Article 47), which directs that the State shall endeavour to bring aboutprohibition of the consumption, except for medicinal purposes, of intoxicating drugs injurious to health.
Besides, India is also a signatory to:•••Single Convention on Narcotic Drugs 1961 as amended by the 1972 Protocol.
Conventions on Psychotropic Substances 1971.
United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances,
1988.

The broad legislative policy in the matter is contained in the three Central Acts, viz. Drugs andCosmetics Act, 1940, The Narcotic Drugs and Psychotropic Substances Act, 1985, and The Prevention of
Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988. The Department of Revenue has thenodal co-ordination role as administrator of the Narcotic Drugs and Psychotropic Substances Act, 1985 andthe Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988.
The Narcotics Control Bureau was constituted in 1986 to exercise the powers and functions of theCentral Government for coordination of action by various authorities under the N.D.P.S. Act, Customs Act,
Drugs and Cosmetics Act, etc. and for countermeasures against illicit traffic under various international
conventions and protocols presently in force. It is the apex-coordinating agency and collects and analyses
data related to seizures of narcotic drugs and psychotropic substances, studies trends, modus operandi,collects and disseminates intelligence and works in close cooperation with the Customs, State Police andother law enforcement agencies.

K. Special Investigative Tools
In addition to traditional investigative methods to combat global economic crime, law enforcement
agencies utilize special investigative tools such as controlled delivery, undercover operations and electronic
surveillance (wiretapping, communications interception, etc.) to effectively fight global economic crime.
However, their use is controversial because they may infringe on human rights to privacy or may bemisused.
L. Controlled Delivery
Controlled delivery techniques have proven an important enforcement tool in identifying the principles
involved in drug trafficking and other major smuggling offences especially those who, by the use of couriers,
creation of false documents and other deceptive practices, carefully disassociate themselves and try to be
remote from the drug trafficking operations. It is the technique of allowing illicit or suspect consignments…
to pass out of, through or into the territory of one or more countries, with the knowledge and under thesupervision of their competent authorities, with a view to identifying persons involved in the commission of
offences (The United Nations Conference for the Adoption of a Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances). Further, according to Article 11 of the Convention, controlled delivery
is to be allowed on the basis of mutual agreements or arrangements between nations.
Section 4 of the Indian Narcotic Drugs and Psychotropic Substances Act, 1985 endorses theseinternational obligations. However, before adopting this technique, the originating country and the recipient
country should discuss in detail the entire operation, maintain surveillance simultaneously in both thecountries, keep close surveillance on the movement of drugs either through cargo or through couriers, andtime the final strike operation simultaneously in both the countries to achieve maximum results. In India,

82

126TH INTERNATIONAL SENIOR SEMINAR
VISITING EXPERTS’ PAPERS

the Narcotics control Bureau, the nodal agency for enforcement of laws concerning narcotic drugs andpsychotropic substances, has undertaken controlled delivery operations with a number of countries fromtime to time.

M. Electronic SurveillanceElectronic surveillance covers wiretapping, communications interception, etc. Telephone interception
and the monitoring of all electronic communications are controversial aspects of electronic surveillance, yet
are useful in assisting law agencies to combat global economic crime. In India, interception of messages iscovered under subsection 2 of section 5 of the Indian Telegraphic Act, 1885, when it is necessary or
expedient to do so in the public interest. Also, a legal provision has been made in the licensing conditions ofcellular companies to provide parallel monitoring facilities for all communications being received andemanating from mobile sets.
N. Survey on Economic Crime in India
PriceWaterhouseCoopers Corporation carried out a survey across a sample drawn from the top 1000
Indian companies in the manufacturing, services and financial services sector in 2003. According to thesurvey, there has been a significant increase in economic crime over the past two years but there has been areluctance to report it. Corruption and bribery are perceived as the most prevalent economic crimes in India.
Reluctance to admit them may be due to fear of adverse implications or acceptance of corruption as aneveryday cost of doing business. Other economic crimes having high prevalence include financial
misrepresentation, product piracy and counterfeiting. The incidence of low reporting of financial
misrepresentation may be attributed to low transparency and poor accountability. Companies appear to be
unaware of the extent to which product piracy and counterfeiting are rampant and tend to avoid publicity forfear of adverse implications, particularly their effect on brand image. Perceived prevalence of asset
misappropriation and cyber crime in India is also relatively low and suggests the need for tighter internal
controls and other deterrents. The reported absence of money laundering is somewhat surprising and seems
indicative of poor detection.
Most Indian respondents were unable to quantify their loss arising from economic crime as the financial
impact of less tangible economic crimes such as corruption and bribery or product piracy and counterfeiting
is difficult to quantify. They are, however, conscious of the collateral cost of economic crime on theirbusiness which, apart from financial loss results in undermining of staff morale and impacting business
relationships, reputation and brand image.
Audits (external and internal), tip-offs and accident or chance are reported to be the main factors in thedetection of economic crime in India. Most organizations are aware that they are required to report frauds
but the reporting is low because of a reluctance to initiate recovery proceedings, scepticism about recovery,
desire to avoid publicity, concerns regarding implications of disclosure, drawn out litigation process and apropensity to accept certain crimes as a customary business risk. Development of controls in theirorganization such as organization ethics or a code of conduct will form an effective deterrent in combination
with pre-employment screening and fraud detection training. Looking ahead, respondents believe that
despite improved controls, vulnerability to corruption and bribery, asset misappropriation and financial
misrepresentation continue to be high, despite an expected decline in corruption. However, an increased
threat is expected from economic crimes like product piracy and counterfeiting, cyber crime and industrial
espionage.

IV. CONCLUSION
National strategies are inherently inadequate for responding to challenges that cross multiple borders andinvolve multiple jurisdictions and a multiplicity of laws. The rapid growth in global economic crime and thecomplexity of its investigation requires a global response. At present, the measures adopted to counter thesecrimes are not only predominantly national, but these measures differ from one country to another. It isabsolutely imperative to increase cooperation between the world’s law enforcement agencies and tocontinue to develop the tools, which will help them effectively counter global economic crime.
Tracing the money trail, including the origin of funds, combating money laundering through reduction ofbank secrecy and seizure of assets are issues of paramount importance. Putting in place legislation on
forfeiture and confiscation of properties acquired through criminal activities and sharing of available

83

RESOURCE MATERIAL SERIES No.66

technology on the subject would be a step in the right direction. Extradition is one of the most important
tools used for bringing transnational fugitives to justice and extraditable crimes include unlawful seizure ofaircraft; unlawful acts against the safety of civil aviation; crimes against internationally protected persons;common law offences like murder, kidnapping, hostage taking; and offences relating to firearms, weapons,
explosives and dangerous substances, etc. when used as a means to perpetrate indiscriminate violence
involving death or serious injury, or serious damage to property. However, it is also an area that poses thegreatest problems. A large number of countries have not entered into extradition treaties and even wheresuch treaties exist, they are mostly embroiled in complicated procedures leading to undue delay inextradition. There is a need for simplifying procedures and expediting the process.
In India, the Extradition Act, 1962 deals with extradition of fugitive criminals. India has extradition
treaties with a number of countries. It has also entered into Mutual Legal Assistance Agreements/Treatiesin criminal matters such as the investigation and prosecution of crime and the tracing, restraint andconfiscation of the proceeds and instruments of crime, including currency transfer and terrorist funds with anumber of countries. India is a signatory to the United Nations Convention against Transnational Organized
Crime and to the South Asia Association for Regional Cooperation (SAARC) Convention for Suppression ofTerrorism. Pursuant to the SAARC Convention, India enacted the SAARC Convention (Suppression ofTerrorism) Act.

84