The defense by the accused is simple - the money so transferred was not bribe but genuine loan. The charge by the Enforcement Directorate is exactly the opposite - it is bribe money.
Bribe or a loan it is in the eye of the beholder. But the fact remains that this transaction has attracted the provisions of Prevention of Money Laundering Act on the charge that illicit bribe money was portrayed as a clean loan transaction.
But what is appalling is that this transaction remained undetected in the normal course till the 2G investigation was carried out by the CBI. Crucially questions arise. Should these transactions not have been detected by authorities in the normal course?
Please note that Kalaignar TV was not in the borrowing such sums of money from anyone else. Neither were the upstream lending companies in banking business. That makes all this much more bizarre.
Surely, when a company with a paid up capital of Rs 10 crore (Rs 100 million) (as Kalaignar TV was in the instant case) borrows Rs 200 core from a company which is not in banking business, surely alarms bells must ring. But where and how? Did they ring? Or were they systematically muted? Or were the alarm programmed not to ring at all in such cases? Or was it a combination of all of these? Let us explore.
Politically exposed Persons
Money laundering is an exotic subject. It is the act of cleansing the dirt associated with such money. No wonder, it is referred to as the mother of all crimes. Being an extremely complex, sophisticated and intelligent exercise, laundering money, requires, guile, tact and complete understanding of the legal architecture, financial world and criminal laws.
Jeffrey Robinson, a recognised expert on organised crime, fraud and money laundering, explains the concept succinctly, "Money laundering is called what it is because that perfectly describes what takes place - illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income."
Money laundering, therefore, is not a simple crime. It is a cover up for many crimes committed. In the process, it seeks to remove the taint of illegality associated with money obtained from criminal acts.
Importantly, money laundering is invariably linked to criminals, especially big criminals. Conversely, big crimes usually have a money laundering dimension. Terrorists, drug peddlers and corrupt politicians all launder money - the money from their crime has to be cleansed, passed of as clean lily white money and put to use in normal commerce.
It is in this connection, concerned at the debilitating impact of laundering money at the global level, governments across continents have initiated the Financial Action Task Force (FATF), which is an independent inter-governmental body.
The objective of FATF is to develop and promotes policies (through precise recommendations) to protect the global financial system against money laundering including proceeds of terror, sales of drugs and of course laundering of corrupt proceeds by politically exposed persons (PEPs).
One of the key recommendation of the FATF is to mandate financial institutions viz., banks to take reasonable measures when dealing with a domestic PEP by ensuring that they
(a) Have appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
(b) Obtain senior management approval for establishing (or continuing, for existing customers) such business relationships;
(c) Take reasonable measures to establish the source of wealth and source of funds; and
(d) Conduct enhanced ongoing monitoring of the business relationship.
These requirements, it may be noted also apply to family members or close associates of such PEPs.
Based on the recommendations of the FATF, the RBI has come out with the circulars to banks by defining PEPs. Accordingly "Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc."
In other words, not a whisper about domestic PEPs or foreign PEPs in India !
Damned by FATF
The RBI circular then goes on laboriously to direct how "Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for a PEP should be taken at a senior level which should be clearly spelt out in Customer Acceptance Policy. Banks should also subject such accounts to enhanced monitoring on an ongoing basis."
Who monitored transactions involving Kalaignar TV on an ongoing basis? Well that may be irrelevant as the very definition of PEP does not pass muster.
Shocked? More is to follow. India became a full-fledged member of the Financial Action Task Force (FATF) in 2010. Simultaneously the FATF carried out an evaluation of India along with Indian authorities.
It is in this connection the Mutual Evaluation Report (MER) points to another fatal flaw in the RBI circulars. According to the FATF the RBI guidelines do not provide any "specific indication of what additional measures should be applied with respect to high risk customers, (PEPs for instance)." In short the circulars are vague. Deliberate? Let us examine further.
What is damning is that the MER points out that the RBI Master Circular specifies PEPs as an example of a class of customer that might fall into the highest risk category. Significantly and as already pointed out, the mutual evaluation report confirms the fact that the RBI circular excludes domestic PEP from its definition.
Of course the MER points out that the Indian banking sector disagreed with this interpretation and pointed out that it tends to apply all these safeguards to domestic PEPs. Surely this explanation fails to impress me.
That takes us to the most important question - how do our banks monitor such transactions involving domestic PEPs?
Is it that our PEPs are all saint and do not have any illicit wealth to launder in the first place? Or have our politicians ensured that the definition of PEPs is tweaked to exclude them in the first place? What is fascinating to note here is that even after the MER in 2010, till date we have not amended this definition to include domestic PEPs!
Failure of FIU?
Simultaneously as a means to monitor money laundering through the financial sector, the India Government had also set up the Financial Intelligence Unit (FIU) in 2004 as the nodal agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.
Consequently, banks are mandated to report on Cash Transaction Reports CTRs), Suspicious Transaction Reports (STRs) and Counterfeit Currency Reports (CCRs) based on pre-determined parameters
The Kalaignar TV loan transaction, even if genuine, must have received immediate attention of the FIU, first for the reason that it involves PEPs, secondly because of the nature of the transaction (Recall Kalaignar TV never borrowed such huge money and the lenders were not in the business of banking either) and finally because of the gargantuan size of the transaction.
Yet the 2010-11 annual report of the FIU covering the period of this transaction does not mention domestic PEPs even in passing or about this particular suspicious transaction when the entire nation was seized of the 2G scam. In the alternative, did the FIU had information about these transactions and yet failed to act under extraneous pressure?
Interestingly, the flow of funds to Kalignar TV begins on 23rd December 2008 and goes on till August 2009. The Finance Minister during that time was Pranab Mukherjee - the UPA's candidate for the post of Presidency.
Does it imply that FM must monitor each and every transaction? Surely not. But what explains the continued lax definition of the domestic PEP even to this date when it has not found international scrutiny? And the ultimate beneficiary of such lax definition will be Kalaignar TV when this matter comes to courts.
More importantly, it is to be noted FIU reports directly to the Economic Intelligence Council headed by FM - viz. Pranab Mukherjee in the instant case. The billion dollar question remains unanswered - did banks report the Kalignar TV transaction to the FIU or was it smothered by FIU?
PS: In a piece of remarkable coincidence, the DMK was the first to support the candidature of the former FM. Or am I hallucinating?