Where Can We Hide Our Blackened Faces?

Shame and humiliation–these were the first emotions that would have
engulfed any reasonably self-respecting and patriotic Indian the other day. The
next feeling, for those who are also painfully aware of how policing works in
our country, was that of reluctant acceptance. A third was that of frustrated
indignation and anger. The last one, after this quick-turn tumult of emotions,
was just one seething question–why?

Why should our country–the emerging tiger economy and the Lion King as far
as the it revolution worldwide is concerned–allow herself to get into a
position where it can be clubbed with the likes of Pakistan, Nigeria and Nauru,
dubbed "nations with weak financial institutions and weaker enforcement
mechanisms to check financial misappropriation?" Finally, given India’s
economic successes of the last decade, the fantastic headway made in the IT
sector and the massive policy restructuring that has changed the way business is
done in India, why is it that policing has not kept up?

It was a fortnight ago, on May 15 to be precise, that the United States
decided that India needed to pull up her socks and move on imposing some
stringent measures to monitor and streamline financial dealings. The Bush
administration went about the exercise clinically–feelers were sent to India
regularly over the past two years with a clear message–clean up the act and
get those long-pending laws into place; if not, India could end up on that list.
Bureaucratically impotent as we are, and suffering a battalion of
chutzpah-stricken politicians as we do, we did nothing–in quick time, this led
to our recent and shameful categorization as a country of "primary
concern" on money-laundering.

Behind the scenes, though, this is not merely a attempt by the United States
to tabulate data on countries less endowed than itself (that is just a favorite
US pastime; think of China, Japan and their month-long standoffs over the MFN
status). The move against India is clearly a warning, to ship up fast on the
financial reforms front or face global criticism; for admittedly, our financial
sector reforms plan has stagnated for long. Also, the powers that be are being
indirectly censured for their failure to clamp down on financial abuse through
tax havens. Finally, this is also a final warning to India on a systemic
overhaul.

Loud the shouts of indignation might be from the government, but it is clear
that we have called this upon ourselves. The ‘Prevention of Money Laundering
Bill’ and the ‘Foreign Exchange Management Bill’, which are to replace the
draconian FERA laws of 1973, have been passed by the Lok Sabha a long time ago,
but are yet to become law because they are stuck in the Upper House.

And the reasons for the rejection are even sillier, if we recall them–the
opposition Congress, let by then party chief whip PR Dasmunshi refused to allow
the tabling of the Bill as it was not listed in the agenda, but only in the
supplementary list circulated later in the day! For this reason, and this reason
alone, a critical piece of legislation has been gathering dust for over a year
now. India almost figured in the US watchlist last year as well, but got away by
the skin of its teeth when the Bill was tabled of the Bill in the Lower House of
Parliament. Even Mauritius was in a similar position, and got by through the
introduction of a similar draft. There have been no such escape hatches this
time around for India, but Mauritius learnt its lesson and has managed to stay
ahead.

Even Russia, which has been to an economic hell and back over the past decade
and lost all of its superpower status, launched a similar attempt to fight money
laundering? Tabling the Bill in the Duma in April, President Vladimir Putin made
it clear that the move was not just aimed at making things easy for Russian
business and businessmen, but also to pave the road for cleaner and more
transparent transacting for foreign investors and joint venture partners.
"Without this Bill, there would be no check on illegalities and the
parallel economy would continue to eat into the real one," Putin said. The
same holds true for India too, but we are refusing to get a move on.

Under the provisions of the Bill, there would be strict penalties and
punishments for offenders, while external trade would get a fillip with hurdles
to foreign exchange transactions being eased out. What is more ironical is that
even as this column is being written, finance minister Yashwant Sinha must be
making a presentation at Stanford University on international trade and finance.
Sinha is also scheduled to meet up with the top brass in Washington and explain
India’s position. What also comes in spiked is that Sinha, at a recent meeting
with International Monetary Fund officials, had reiterated a commitment to fight
international financial abuse. A month later, he gets slapped across the face
with a label that calls him smaller than the smallest in terms of financial
cleanliness...little wonder then, that he is complaining.

Typically, policing on the financial front has been a big drawback. Take a
look at all the stock market scams and it is easy to understand how. As previous
columns have said, the Securities and Exchange Board of India is not proactive
or reactive enough to keep the lid on irregularities. The K10 wrangle which is
still growing in size each day is a recent one involving technology stocks and
their manipulation by someone using other people’s money. This was when we had
the scrips of giants like Wipro, Infosys Technologies, Global Tele-Systems, MTNL,
Satyam Computer, Zee Telefilms, Himachal Futuristic Communications, Reliance
Industries, Reliance Petroleum, Hindustan Lever and State Bank of India used to
reap a financial harvest by Ketan Parekh, while million small investors stared
financial nemesis in the face.

Compound the same problem to international proportions and you have money
laundering. A recent report in The Times said Internet banks were turning out to
be a dangerous haven for money-laundering and quoted the OECD as saying that
there should be tighter regulatory controls. Fraudsters and launderers are able
to hide behind the anonymity of the Internet to create false identities to
siphon the proceeds of crime. Internet gambling businesses are ideal operations
for money laundering, along with financial trusts.

With the Internet beginning to spread its tentacles in India, how long will
it be before the above-mentioned irregularities make their appearance in
un-policed India. Clearly, the US listing is a wake-up call. Let’s forget the
whys and the hows of the listing. Unless we do something about this now, it
might be too late... unless it already is.

Rajeev Narayan in New Delhi