Sunday, May 7, 2017

India's Biggest Scam: Round-Tripping Black Money As FDI (Foreign Direct Investment) - Trade-Based Money Laundering - Trade Fraud Routes - Black Money Laundered Through Safe Havens Like Mauritius and Cayman Islands - Commodities Used to Transfer Value - Invoice Fraud and Manipulation - Importing Goods at Overvalued Prices and Exporting Goods at Undervalued Prices - Dubai: Every Conceivable Illicit Means

Source: Great Game India

May 6, 2017 • 0 Comments • 7 min read

We were told that demonetization would combat the black economy and also crack a whip on the funding sources of terrorist outfits by curbing the circulation of Fake Indian Currency Notes. Far from it we are again in the midst of mindless terror acts across the Red Corridor and the Kashmir region.

What we were not told about the black money however was that while Indian govt. was cracking a whip on the informal economy the actual black money was already being routed back into India legally via FDI.

While the government is busy waging war on black money, international watchdog Global Financial Integrity has estimated that black money worth as much as USD 21 billion was taken out of India illegally in 2014. In its latest report, GFI also threw some light upon illegal inflow of funds, with India being identified as the parking spot for around USD 101 billion, 11 percent more than in the corresponding period a year ago.

Titled 'Illicit Financial Flows to and from Developing Countries: 2005-2014', the report said that between USD 620 billion and USD 970 billion was drained out across all emerging market countries, primarily through the trade fraud route. In all, illegal inflows and outflows were estimated to constitute 14-24 percent of total developing country trade between 2005 and 2014.

Now Reserve Bank of India (RBI) has slapped notices to at least eight companies — including some software firms — amid concerns of round-tripping of fund and violation of rules on foreign borrowing reported the Economic Times.

The central bank suspects that some Indian groups and business families have misused overseas arms to raise cheap dollar loans and bring back the money as foreign direct investment (FDI) into local outfits owned by the same group.

The regulator has in similar cases directed companies to unwind such investments, accept contravention committed under the Foreign Exchange Management Act (FEMA), and cough up a settlement fee for compounding the offence.

The nature of the fund-flow could typically be like this: company A floats a subsidiary or acquires an offshore company (say B, in the US), with B subsequently raising external commercial borrowing to buy equity of company C in India.

Finally the Reserve Bank of India catches up with the phenomenon of Round-Tripping. As explained in our report on the global war on cash the money that is generated through corruption by the politicians and private corporations through decades is the actual black money which is laundered to the safe heavens like Mauritius and Cayman Islands. While the Govt. was trying to curb the black money menace at home most of the Black Money was already being routed into India from the tax-havens and legally invested into the country through FDI.

This is called Round Tripping. One of the leading puzzles related to cross border flow of investment is the phenomenon of 'Round Tripping FDI'. Here, money from a country (eg. India) flows to a foreign country (Mauritius) and comes back as foreign direct investment to India. Round tripping of FDI refers to the capital belonging to a country, which leaves the country and then is reinvested in the form of FDI. Why the biggest sources of FDI are tax-havens? While the western countries cracked down on the actual sources of black money – the foreign tax havens, in contrast the Indian government waged a war within on the informal economy that saved the country during the worst economic crisis of 2008. There is a big contrast in how the foreign countries are dealing with their black money problem compared to what the Indian government is doing. So what is actually happening and where is the FDI money coming from?

Bailout of Dubai & Indian FDI

After the collapse of the US real-estate bubble in 2008, the Dubai real estate market also collapsed as it was the popular investment destination for all those in the west looking for a safe way to invest hard earned 'black money'. The total loss they suffered was close to $ 2 trillion. Most of the black money of US and Europe was invested in the Dubai Free Trade Zone. The sheikdoms were shaken, as their lavish life style and their way of life was under threat. Dubai's glitz and glamour has been built by money sourced from every conceivable illicit means – black money, drug laundered money, profits from smuggling gold, diamonds, metals, arms etc. It was rumored in 2009 at the height of the crisis that they couldn't afford to pay even the interest on the debt taken for the construction and maintenance of the Burj al Arab; Dubai's iconic landmark. This is what is known as the Dubai Flu.

Most Arab nations too were struggling to make their ends meet. International financial institutions like the IMF and the World Bank were also helpless, and no country could afford to bail UAE out. The real estate industry came to a standstill in UAE and foreclosures, layoffs and shrinkage of wages were on the anvil. Indian economists were forecasting that the Dubai Flu would rub off on India and would affect the Indian economy as millions of Indians would probably lose their jobs. The remittances sent back home by these workers, constitutes a large portion of the economy of some states in South India. Some thinkers suggested that the government take measures to reduce the impact of the Dubai Flu in India. Some suggested that it was the Government's responsibility to provide financial assistance to those affected by the ripple effect of the Dubai Flu.

Please go to Great Game India to read the entire article.

Source: Indian Economy

What is Round Tripping of FDI?

January 1, 2016

One of the leading puzzles related to cross border flow of investment is the phenomenon of 'Round tripping FDI'. Here, money from a country (eg. India) flows to a foreign country (Mauritius) and comes back as foreign direct investment to India.

Round tripping of FDI refers to the capital belonging to a country, which leaves the country and then is reinvested in the form of FDI.

Why round tripping happens?

There are a number of observed factors that promotes round tripping. Tax concessions allowed in the foreign country encourages individuals to park money there. The money will be invested in a company formed there (Mauritius) and later this company will be taking back the money as foreign direct investment into the home country (India).

Under the income tax law, a Mauritius based company that made investment in India has to pay its tax in Mauritius. An advantage for the Indian businessman parking his money in the Mauritius formed company is that tax there is significantly low.

Another promotional factor for round tripping is highlighted by the government's White Paper on Black Money. According to it, black money from India is transferred to foreign countries like Mauritius and returned to India as FDI. This is another form of round tripping.

Mauritius is the largest source of foreign investment to India. commodities

John Cassara Defines Trade-Based Money Laundering 

Emerging Issues in Illicit Financial Flows: Trade-Based Money Laundering 

Related website:

Global Financial Integrity

Related reading:

How a French-Israeli grifter became a money-laundering pioneer in China

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