Ascertaining size of the Corruption in India with respect to Money Laundering

1. Ascertaining size of the Corruption in India with respect to Money Laundering 2014

2. Page 4 Table of Contents Executive Summary Background of the Study Important event after the study commenced Number of Different Models Assumptions of this study Sources of Money Laundering Money Laundering based on the Joshi Model Money Laundering Quantification Property Recovery based Model Money laundering size is Min. Rs. 9.8 thousand crores Money Laundering Quantification Crime Incidences based Model Money laundering size is Min. Rs. 27 thousand crores. Page 3 Page 14 Page 5 Page 6 Page 6 Page 6 Page 7 Page 8 Page 8 Page 10 Page 10 Page 13 Why the official statistics is unhelpful? Money Laundering Quantification GDP based Model Page 14 Money laundering size is Min. Rs. 7.5 laccrores Table of contents

3. Executive Summary • This study analyse the period of ten years starting from year 2000-2009. • In the past decade money laundered out of India was at least Rs. 1886 thousand crores or $ 419 billion. This quantification of the laundering is worked out on the most pessimistic manner and by considering the global parameters. • 82% of the money laundered out of India is an outcome of the corruption, proceeds of rest of the crimes being meager 18%. • If the GDP based money laundering model is translated to quantify the corruption then the size of corruption in the last decade is Rs. 1555 thousand crores or $ 345 Billion in India. • All proceeds of the crime are not laundered; the criminals also have commitments and the business expenses to incur. Criminals launder only the surplus amounts after meeting their expenses, for the purpose of this study it is equally to the gross domestic savings. Executive Summary

4. For every case registered as the crime in decade ending 2009 the average value of the corruption is Rs. 39 crores. In the year 2000 average size of corruption case was Rs. 21 crores. By any means this loss is on a higher side. • Spending on corruption per person resident in India is Rs. 2218 in the year 2009, up 260% from the year 2000. In the year 2000, the spending was about Rs. 835 per person. • Based on the available statistics of crimes the money laundering size would be only Rs. 27 thousand crores. Hence the quality of the statistics needs to be improved and also more and more victims of the crimes should be encouraged to register the crimes. • There are various opinions and ways to calculate the money laundering globally. In India various organizations involved in the economic research are working on the quantification of the laundering.. This study could guide them to reach at the consensus figure. Executive Summary

5. Background of the Study • This study started with the sole objective of quantifying the size of the corruption with respect to the money laundering and while conducting the research a new model of Valuation was derived, this model was the joshi model basically defines the money laundering in the mathematical equation which was named after the Antifraud and Money Laundering research expert Mayur Joshi. • This study has looked at the scarce data available to measure money laundering, and assembled the same in a structured manner with number of estimates about the extent of money laundering in and through India. In India National Bureau of Crime Records maintains and publishes the statistics of the various criminal activities and the reported figures of crime are the basis of this model on quantification of Money Laundering. • If the measurement of the extent of money laundering is seen as a continuing need for policy assessment and development, then there is a need for considerable improvement in the provision of appropriate data on the estimated and proven proceeds of crime. Background of the Study

6. For every case registered as the crime in decade ending 2009 the average value of the corruption is Rs. 39 crores. In the year 2000 average size of corruption case was Rs. 21 crores. By any means this loss is on a higher side. • Spending on corruption per person resident in India is Rs. 2218 in the year 2009, up 260% from the year 2000. In the year 2000, the spending was about Rs. 835 per person. • Based on the available statistics of crimes the money laundering size would be only Rs. 27 thousand crores. Hence the quality of the statistics needs to be improved and also more and more victims of the crimes should be encouraged to register the crimes. • There are various opinions and ways to calculate the money laundering globally. In India various organizations involved in the economic research are working on the quantification of the laundering.. This study could guide them to reach at the consensus figure. Background of the Study

7. The effects, this money laundering, has on the Indian economy cannot be assessed accurately with the statistics and the information available with the NCRB. One of the primary reasons for the lack of accuracy in the crime records is the crime reporting mechanism. • To site an example, many times the businesses accept the payment of bribes as the cost of doing the business. In such cases the non-taxed money is generated however is not reported as there is no complainant. Similarly many instances are not reported to the crime records bureau by CBI & Income Tax Department. Economic models area capable of tracing the multiplier effects of money taken from one sector of the economy and spent in another sector, but there is little systematic data on how laundered money is spent. Background of the Study

8. When illicitly gained money is spent on lavish real estate there is probably a net loss to the economy, but where it is turned into legitimate businesses the net effects can be quite positive to the economy. • This study will provide the outline to the researchers of money laundering on various different facets of the dirty money valuations in the past decade by creating the valuation model it becomes essential to create a wide spread awareness about this subject. • The certification programs of Indiaforensic centre of studies are likely to play a significant role. • Indiaforensic offers dedicated program called Certified Anti Money Laundering Expert. Background of the Study

9. Government of India has appointed various educational institutions to quantify the amount of black money. 1 [National Institute of Public Finance and Policy (NIPFP), National Institute of Financial Management (NIFM) and the National Council for Applied Economic Research (NCAER)] • Black money: Generally black money is a term used for the money where taxes are not paid. The objective of this study is not to look at the black money but to come at the range of the quantification of the money laundering in a scientific manner to the decision makers. This is an empirical study and we have reviewed numerous studies of the scholars globally. • This study will however be a guidance to the study commenced by the study of think tanks of India • Important event after the study commenced Important event after the Study Commenced

10. Number of Different Models • In this study we have tested three different models for quantification of money laundering in India. This study considers following three different models • Property Recovery based Model • Crime based model • GDP based model • Sources of Money Laundering • The main sources of black money in India include (There are 24 primary sources of the money available from the proceeds of crime.) • Drug trafficking, • Corruption, • Land grabbing, • Counterfeiting currency • Smuggling • Frauds • Running brothels etc. • Tax evasion is unfortunately the fuel, boosting the black money in indian economy. • Assumptions of this study • Sophisticated and organized crimes generate more income per crime than simpler and individual crimes. • This study is based on the various statistical data on reported crimes and it is presumed that only 20% of the cases are registered • Not all criminal income is laundered – even criminals have to eat, sleep, drive fast cars, and pay CAs and Doctors • Income from crime depends on the prevalence of different types of crime and the average proceeds per crime. Number of Different Models, Assumptions of this study , Sources of Money Laundering

11. Money Laundering based on the Joshi Model • Money laundering is principally dependent on the proceeds of the crimes. In this model, the quantity of money laundering generated in India is described as dependent principally upon: • The nature and extent of crime in India [ Only because the money is lying outside India will not be considered as Money Laundering ] • An estimated amount of money laundered per case of reported and unreported corruption and the economic offenses. [This estimate is worked out on the basis of the assumptions and the actual data ] • The economic environment in which the crime and the laundering takes place. Money Laundering based on the Joshi Model

12. Offenses to be covered under the Money Laundering Offenses to be covered under the Money Laundering

13. Money Laundering Quantification Property Recovery based Model • Money laundering size is Min. Rs. 9.8 thousand crores • If the money is laundered out of the country then it becomes very difficult to recover the same as the proceeds of the crime. This property recovery based model is developed on the official statistics available in the public domain about the property recovered from various crimes and the following presumptions made for this study • National Bureau of crime records has gathered all the data accurately. The statistics compiled by the NCRB is the basis of the quantification of Money Laundering in India • Only 20% of the crimes are registered with the authorities as offense in turn these authorities report their numbers to the NCRB. • Only 20% of the property created out of the proceeds of crimes are recovered legitimately recovered and rest of the property is generally not recovered. • Rate of recovery for every case investigated is applied to the cases which are not investigated and hence the property remains unrecovered. Money Laundering Quantification Property Recovery based Model

14. Valuation of recovered properties • Based on the data available with the National Bureau of Crime Records statistics of the properties recovered from the crimes is as follows Money Laundering Quantification Property Recovery based Model

15. Application of the Assumptions • Based on the first assumption that the per case recovery in the cases not yet investigated will be the same and hence the amount of recovered property becomes Rs. 401 crores. • Only 20% of the assets are recovered from the proceeds of the crime. Which converts the size of the crimes based on the property recoveries to Rs. 2008 crores. • Only 20% of the total crimes are registered with the authorities. Applying this final assumption the total size of the laundering to Rs. 10039 crores. • According to the above available data total amount of recovery from the crime proceeds is Rs. 190 crores in total 70773 cases investigated in the last decade. Application of the Assumptions

16. Application of the Equation • Property due for recovery – less property recovered = Amount laundered Assuming that the 100% of the reasons for the non recovery of the assets is the money laundered outside the country ,total size of money laundering as per the property recovery based model to Rs. 9849 crores. Application of the Equation

17. Money Laundering Quantification Crime Incidences based Model • Money laundering size is Min. Rs. 27 thousand crores • This crime based model is based on the official statistics available in the public domain and the following presumptions made for this study • National Bureau of crime records have gathered all the data accurately. The statistics compiled by the NCRB is the basis of the quantification of Money Laundering in India • Sophisticated and organized crimes generate more income per crime than simpler and individual crimes. Average per case corruption rate is considered to be Rs. 10 lacs. This is one of the biggest assumptions of this study. The size of money laundering will change with the change in the average per case of corruption and complexities involved. • Out of the total crimes only 20% of the cases are reported to the authorities like regulators and enforcement agencies. In as many as 80% cases the crimes may not be registered due to various reasons. Money Laundering Quantification Crime Incidences based Model

18. Gross domestic savings rate of the country is 24%2 for the base year 1999-2000. This rate is applied to the savings of the criminal proceedings as well. • The analysis of the crimes is for only one decade. • Wherever the figures are not available with theCrime Records, previous year’s figures are taken as the base figures for the calculations. • Calculation of corruption is based on the number of cases registered in India. Average loss per case of Corruption is presumed to be at Rs. 10 lacs. Money Laundering Quantification Crime Incidences based Model

19. Equation for quantification of the Money Laundering • Receipts from Crimes – Cost of Crimes – Other costs and cash disposals = Savings for laundering • Savings for the Laundering is 24% of the Income from Crimes as the Gross Domestic Savings Rate in the year 2009 was 24% of the Gross Domestic Product of the country. Equation for quantification of the Money Laundering

20. Valuation of reported crimes • Based on the data available with the National Bureau of Crime Records statistics of the crimes is as follows Valuation of reported crimes

21. These are the reported figures available in the public domain. * Corruption is valued on the basis of Rs. 10 lacs average loss for every case reported with the NCRB. This is the minimum loss. ** Private bank frauds are obtained from RBI under right to information act Total loss to the Indian economy due to the various crimes is quantified at Rs. 22528 crores. • Application of the Assumptions • One of the biggest assumptions of this study is that not all the crimes are reported to the authorities. There are multiple reasons including • 1. Inability to understand that there is any crime involved in the transaction • 2. Influence on the registering authority to avoid accepting the crime • 3. Loopholes in the legal system • 4. Complexity involved in reporting incidences of cybercrimes and credit card frauds. • 5. Accepting the cost of crime as cost of doing business. • On the assumption that only 20% cases are actually registered with the authorities. This translated the total crime size of India to Rs. 112639 crores for the period of 10 years ending on 2009. Application of the Assumptions

22. Application of the Gross Domestic Saving Rates • The criminals are ultimately the human beings. They have their business expenses and also they have their own commitments. Finally the amount which is sent outside the country is the amount which is saved out of the proceeds of the crimes. The only advantage they will have is avoiding the taxes. Hence the rate of Gross Domestic Savings is applied for the total amount of the proceeds of the crimes instead of working out the costs of the crimes separately. After applying the Gross Domestic Saving rate to the total crime size, the quantification of money laundering is crystalised at Rs. 27033 crores. The gross domestic savings rate is 24% as per the Reserve Bank of India statistics. Application of the Gross Domestic Saving Rates

23. Why the official statistics is unhelpful? • Based on the above two models the money laundering can be worked out at Rs. 27000 crores, which is purely based on the statistical compilations and the hypothesis of the corruption. This statistical data majorly lacks in quantification of the corruption cases. While compiling the data only the cases registered and persons arrested are mentioned without providing the value of the corruption crimes. Generally it is a tough job to assess the amounts that a corrupt person has generated out of occupational opportunities. In the words of Kautilya, “It is impossible to quantify the water swallowed by a fish in the sea.” • Secondly there is a possibility that there would be a cascading effect while calculating the data on the crimes. The money laundering is a process of disguising the nature of the origin of the funds, hence the same can run in various different sectors and banks and industries. Why the official statistics is unhelpful?

24. Thirdly, not all the agencies will provide the data, all the time. In some instances the Income Tax authorities have not provided the values and in some cases CBI has avoided providing the statistics. Non-availability of the authentic data becomes the major roadblock in the calculation of the money laundering and the valuation becomes function of hypothesis. • In order to quantify the money laundering in India to the accurate levels it is necessary that the data would be collected passionately by all agencies concerned. These would definitely include: • Various Police services, including the Economic Offenses, Cyber cells , CID and even CBI who should be keenly interested in monitoring their own success at bringing serious offenders to justice as an important performance indicator; • Regulators like banks need to strengthen the fraud reporting system which should clearly outline the definition of the fraud and there should not be any discretion to the bankers in reporting the same. Why the official statistics is unhelpful?

25. The Customs Service, whose job it is protect India’s borders and who are the first and last line of defense against transnational crime; should provide the complete information of the crime statistics. • The Income Tax Departments, whose job it is to ensure that earnings in India - including illegal earnings are properly taxed; should provide the accurate information on the amounts which skipped the taxes. This could be even the projections. This amount will be • important in the wake of the fact that in our country black money is the amount on which no taxes are paid. • The Securities Exchange Board of India, which is the Stock market regulator should also contribute to the National Bureau of Crime Records in terms of value of stock market frauds and the losses due to the insider-trading. Why the official statistics is unhelpful?

26. Money Laundering Quantification GDP based Model • Money laundering size is Min. Rs. 7.5 laccrores • According to studies conducted by International Monitory Fund it was estimated that the quantum of money laundered is approximately 2 to 5% of GDP of the world. Money Laundering Quantification GDP based Model

27. This quantification is based on the assumption that 5% of the amount equivalent to the size of GDP is laundered. GDP is the market value of all final goods and services from a nation in a given year. Based on the predictions of International Monetary funds we believe that in past four years the money laundered is $ 419 billion in last decade. However this is a very gross model of quantifying the money laundering. This translates the size of Money Laundering to Rs. 18,86,625 crores. This quantification is based on the assumption that 2% of the amount equivalent to the size of GDP is laundered. Money Laundering Quantification GDP based Model

28. Money Laundering Quantification GDP based Model

29. GDP is the market value of all final goods and services from a nation in a given year. Based on the predictions of International Monetary funds we believe that in past four years the money laundered is $ 198 billion in last decade. This translates the size of Money Laundering to Rs. 7,54,650 crores. • This translates the range of money laundering based on the GDP model to Rs. 7.5 laccrores to 18.9 lacscrores based on the global parameters. Though these are gross models, valuations of these models go closer to the global studies. • According to the previous study of John Walker the size of global money laundering is $ 2850 billion.5 Whereas as per the GDP model the global money laundering pegged at 5% is $ 2238 billion. The Indian money laundering size is very close to the John Walker Model if the base of calculations is GDP. • GDP based model is the model which goes very close to the global estimates of the money laundering. This model also helps to understand the size of the corruption in India. It is easier to quantify the figures of Corruption in India based on the GDP model of quantification of money laundering. Money Laundering Quantification GDP based Model

30. Quantification of Corruption in India • It is essential to apply the crime based model of money laundering here and the assumptions of this study are considered to be applied here and hence • National Bureau of crime records have gathered all the data accurately. The statistics compiled by the NCRB is the basis of the quantification of Money Laundering in India • Only 20% of the cases are reported to the authorities like regulators and enforcement agencies. In as many as 80% cases the crimes may not be registered due to various reasons. • Gross domestic savings rate of the country is 24%6 base year 1999-2000. This rate is applied to the savings of the criminal proceedings as well. The money which is saved from the criminal proceedings is generally parked outside the country to disguise the true origin of the funds. • The analysis of the crimes is for only one decade. • Wherever the figures are not available with the Crime Records, previous year’s figures are taken as the base figures for the calculations. Quantification of Corruption in India

31. Corruption in India for past decade based on the assumption that 2% of the GDP is laundered. Money Laundering Quantification GDP based Model

32. Based on the assumption that money laundering is equivalent to 2% of Gross Domestic Product of the country. The size of corruption per case registered with the total of CBI and State has increased significantly from Rs. 8 crores in the year 2000 to Rs. 23 crores in the year 2009. Money Laundering Quantification GDP based Model

33. Corruption in India for past decade based on the assumption that 5% of the GDP is laundered. Money Laundering Quantification GDP based Model

34. After considering all of the above models it is possible to conclude that the size of Money Laundered is 1886 thousand crore rupees and the corruption in India could be more than Rs. 1555 thousand crores. Money Laundering Quantification GDP based Model

35. Looking at the above table it is observed that the average loss per registered case of corruption is more than Rs. 39 crores. This looks on the higher side because there are multiple cases in the public domain which are below this amount. • How much every Indian spends on corruption • Total population of India has grown up from 1.016 billion to 1.155 billion in the last decade. The corruption per person has grown up from Rs. 836 per person per year to Rs. 2218 per person per year. Money Laundering Quantification GDP based Model

36. Money Laundering Quantification GDP based Model

37. The population above also includes the population under the age group of 10 years and also includes the patients, population below poverty line and also the population which is honest enough to avoid the bribes. • Analytics on the corruption figures • The amount of Rs. 39 crores per case or Rs. 2200 per person indicates that there are small groups of the corrupt people who improve the per person or per case amounts of the corruptions statistics. These could be the groups of businesses related to the politicians or bureaucrats. Money Laundering Quantification GDP based Model