Open Access Research Article
IMPACT OF FINANCIAL CRIMES ON THE ECONOMY WITH INSTANCE OF PREVENTIVE ACTS
Published Paper
Article Details
“IMPACT OF FINANCIAL CRIMES ON THE ECONOMY WITH INSTANCE OF PREVENTIVE ACTS”
AUTHORED BY
- NAINCY KUMARI
(B.A.
LL.B.)
SEM-7,
A21511120012
ABSTRACT
Financial crimes have a huge and negative
impact on the Indian economy,
creating an imminent
threat to its growth and stability. Money laundering, tax evasion,
fraud, and corruption are all examples
of crimes that weaken the financial system and hinder sustainable growth. The consequences for the economy are
far-reaching, affecting both the public and private sectors, and can be seen in a variety
of ways. Financial crimes eliminate essential resources away from productive industries, decreasing the available
capital for investment and employment growth.
Furthermore, they undermine public trust in financial institutions,
forcing consumers to avoid investing and saving, restricting growth in the economy. These crimes also hinder fair competition by giving those prepared to engage in criminal practises an unfair edge. hindering the development of equal opportunities
for business organisations. Furthermore, financial crimes frequently result in tax revenue losses,
putting additional strain on government resources and harming
public welfare programmes. To address these concerns, India has put in place several preventive measures,
legislation, and processes designed to deter financial crime and
promote financial integrity. The PMLA and the Benami Transactions (Prohibition)
Act are important legal provisions
aimed at combatting money laundering and benami transactions, respectively.
KEYWORDS – FINANCIAL CRIMES, ECONOMIC SUSTAINABILITY, FINANCIAL SYSYTEM, FAIR COMPETITION, LEGAL PROVISIONS
A broad
word used to define criminal behaviours involving money or other financial
resources is "financial crime." It refers to any unlawful conduct
that makes use of financial products, institutions, or systems for fraudulent
ends, frequently with the intention of making money for the offenders.
Financial crimes are White- Collar crimes and these crimes are often committed
by individuals or groups seeking to profit from illegal activities, such as
drug trafficking, human trafficking, or terrorism. Financial crimes can have
serious consequences for individuals and society as a whole, including economic
instability, loss of public trust in financial institutions, and erosion of the
rule of law. Financial crime is a complicated and constantly changing issue
that needs to be addressed from various angles. Financial institutions,
regulatory organisations, and law enforcement agencies all have a crucial role
to play in identifying and stopping financial crimes. Increasing cross-border
collaboration, strengthening anti-money laundering regulations, and utilising
technology and data analytics to spot suspect activity are all effective ways
to tackle financial crime.
Financial crime is a well-known and widespread problem
that impacts brand value and reputation,
goodwill, and revenue of many organizations. In addition to the risk of losses
from financial crime itself,
companies also face spiralling costs in related areas. Compliance with increasing regulation, ongoing crime
detection efforts, internal investigations of potential wrongdoing, external enforcement actions and any associated
fines and penalties, class action lawsuits, and other litigation are among the factors driving
up both the costs and risks associated with financial crime. Globally there are two types of crimes prominently observe in the financial sector. First are the
crimes which causes financial damage to a party involved in the transaction. This includes Fraud,
Theft, or Corruption. Whereas, the Second type includes protecting the financial gains derived from causing damage to
another party. This involves Money Laundering.
In India
these white-collar crimes affect the economy in a negative
way and so to combat these financial crimes government of India have enacted
several economic laws such as –
·
Prevention
of Corruption Act, 1988
·
Prevention
of Money Laundering Act, 2002
·
The Benami
Transaction (Prohibition) Amendment Act, 2016
·
There are other provisions as well which have the regulations
to penalise the financial crimes which shall be discussed further in this paper.
Financial
crimes can be considered as a tiny part of White-Collar crimes because White
collar crimes are a much broader category than financial crimes. This category
can include organized crime, which cannot really be considered a financial
crime. White-Collar crimes have a large socio-economic affect on an individual
person and on economic fabric of a country as well.
White-Collar Crime is a nonviolent crime that is frequently characterised by deception in order to obtain losing money or property or to gain a competitive advantage for oneself
or a company. This type
of crimes lacks mens-rea in them. A crime committed by a person of high social standing while working was first referred
to as “white-collar crime” by sociologist Edwin Sutherland in 1949. This categorization is especially accurate
when the person accused of illegal
activity are professionals in business, finance, or government. Nevertheless,
this paper discusses contents related
to financial crimes thus, some of the prominent types of financial crimes which affect economy of a country and socially implicit are-
·
CORRUPTION
AND BRIBERY
·
MONEY
LAUNDERING
·
INSIDER TRADING
·
TAX EVASION
·
BENAMI
PROPERTY TRANSACTIONS
This paper shall discuss these financial crimes with a broader approach
along with their negative effects on
the economy and further some of the preventive acts which are enacted to curtail
these socio-economic offences by Government of India.
Corruption
and Bribery is nothing but offering, promising, giving, accepting, or
soliciting an advantage as an inducement for an illegal action, unethical or
breach of trust. Individuals with political influence, such as government
officials may be able to use their status and influence to launder the proceeds
of corrupt activities while avoiding governmental controls Evidence that corruption hinders
economic growth through
a variety of ways is one of the many disagreeable
features of corruption. When there is corruption, businesspeople are frequently informed that an upfront bribe is
necessary before an enterprise can start and that corrupt authorities may later demand a portion of the investment's profits. Therefore, businessmen view corruption as a
form of tax that reduces their motivation to invest, corruption significantly reduces investment and slows economic
growth. When it takes the form of tax evasion or claiming improper tax exemptions, corruption may bring about
loss of tax revenue. The allocation
of public procurement contracts through a corrupt system may lead to lower
quality of infrastructure and
public services.
· MONEY LAUNDERING
Money laundering
is a technique that allows the launderer to cover up the money's illicit and
criminal origin. It is the procedure used to give the money gained from crime a
legal appearance. Money laundering is a sophisticated, well-organized,
skilfully carried out, and heinous crime that has an impact on the nation's
social, political, legal, and economic conditions. It is a crime committed
against nations, economies, the rule of law, and the global economy rather than
any specific person. Money laundering affects societies and economies in many
of various and negative ways. It increases criminal activity by legitimising
illicit gains, weakens the fabric of society by encouraging a sense of
injustice, causes changes in exchange rates, threatens financial predictability,
supports terrorism by providing illicit funds, discourages foreign direct
investment because of perceived risk, creates economic instability and
distortion, unfairly favours criminals over the legal private sector, and
undermines democratic institutions by affecting political leadership.
Therefore, coordinated efforts are required to combat money laundering in order
to lessen these serious negative effects.
Insider
trading in the financial markets refers to trading in securities like bonds and
stocks by employees of a company who have access to confidential information
about the creation of a particular security before that information is made
public. Insiders can take advantage of this by purchasing or selling shares
before they change in value. Insider trading has existed throughout the history
of financial markets, but it peaked during the formative years of the Indian
stock markets. Insider trading is widespread in emerging nations, such as
India.
High
liquidity is essential for financial market’s existence and performance, as
large trades must be made at low
transaction costs. Insider trading impacts the liquidity of the market, making transaction costs higher and
reducing small investor’s returns. Insider trading also makes it more expensive for companies to issue stocks and bonds
since it has a large effect on the supply and demand of various
securities. Overall, insider
trading discourages small
investors from participating in the financial
markets and allows
the elite to maintain the unequal power imbalance they have over ordinary
citizens. This imbalance leads to
direct impact on the economy of any country by decreased
GDP and per capita income.
Tax evasion
is an activity that aims to hide, understate, or falsely report income to
reduce your tax liability. It comes under Tax fraud which consists not paying
tax, paying less than what is due, not declaring cash transactions, fabricating
income, falsifying deductions without proof etc.
Tax Evasion
not only deprives
governments of much-needed revenue, leading to fiscal deficits,
but it also perpetuates the generation of black money. This hidden, untaxed wealth
often follows Gresham's law, where "bad money drives out good," resulting
in a less transparent and equitable financial system. As black money
circulates within the economy, it can trigger high inflation, especially evident in sectors
like real estate
where prices become
artificially inflated. India, for instance, grapples with the issue of black money being
stashed in offshore tax havens such as Swiss banks, exacerbating the problem by siphoning off funds that could otherwise be invested domestically
for the nation's development. Addressing money laundering and curbing the generation of black money is crucial not
only for fiscal stability but also for fostering a more equitable society and
a transparent financial environment.
The
definition of a benami transaction, which is widely accepted in India, is where
a person purchases a property using his or her own funds but in the name of
another person, or purchases property in his or her own name and then transfers
it into the name of another person, without intending to benefit such other
person in either case. The transaction is referred to as "benami" and
the person in whose name it is carried out as "Benamidar.” Benami holding
is equally widespread in relation to all types of movable properties, although
often being more common in the case of immovable properties (land and buildings),
since registration of the property in the name of the owner can only ensure his
or her legal title. Most Benamidar are relations generally husband, wife and
children. The objective is to have the benefits of bifurcation of income and
wealth without properties going away from the control or area of close
relations.
Benami
transactions have a significant negative influence on the economy of the
nation. The government loses tax
revenue that could have been used for the welfare and development of the country because it fragments
activities that generate revenue. Benami agreements are a significant contributor to the growth of
black money, and without reducing this flow, poverty and inequality cannot be eradicated. Benami transactions,
particularly in the real estate sector, have
emerged as important methods for the storage and creation of black money in
India, as people prefer to invest
their unreported income in real estate. These transactions have raised real estate prices, limited the options
available to homebuyers, and placed owning a home out of reach for many
people.
CRIME IN INDIA
· PREVENTION OF CORRUPTION ACT, 1988
The
Prevention of Corruption Act was enacted in order to fight corruption and other
malpractices in government and public sector business in India. Under PCA, 1988
the Central Government has the power to appoint judges to investigate and try
those cases where the following offences have been committed
·
Offences
punishable under the act
·
A conspiracy
to commit or an attempt to commit the offences specified under the act
The following are the offences
specified under the Prevention of Corruption act –
1. Taking
gratification other than legal remuneration
2. Taking
gratification with the purpose of influencing a public servant, through illegal
and corrupt means
3. Taking
gratification with the purpose of wielding personal influence with public
servant
4. Act of
criminal misconduct by the public servant
· PREVENTION OF MONEY LAUNDERING ACT, 2002
The main motive
for enacting such a legislation was to combat the crime of legalising the
economic gains obtained from illegal sources. This Act authorises the Indian
Government and the police officials to seize any property that they have
investigated to have been earned from illegal sources or by conducting any
illegal activities. As the name suggests, the PML Act was enacted to intercept
or obstruct the issue of money laundering. Further, the motive was to seize any
property bought or obtained by carrying out the crime of money laundering and
for matters related to such an act.
The basic
objectives of the PMLA are:
1. Preventing
money laundering.
2. Combating
the channelising of money into illegal activities and economic crimes.
3. Providing
for the confiscation of property derived from or involved in money laundering.
4. Providing
for any other matters connected with or incidental to the act of money
laundering.
·
THE BENAMI TRANSACTION (PROHIBITION) AMENDMENT
ACT, 2016
The prohibition of Benami Property Transaction Act,
2016 is an amendment of the older Benami
transaction (prohibition) Act. 1988 and has come into force from 01.11.2016. It prohibits illegal benami transaction and
provides imprisonment up to seven years and the fine for violation of the act, which may extend to 25% of the fair
market value of the benami property. The new law provides for authorities to conduct inquires
on any benami transactions. These are initiating
officer, approving authorities,
administrator, and adjudicating authority.
Under the new law, the appellate tribunal will hear appeals against
orders passed by the adjudicating
authority. Original Benami
Transactions Act 1988 has been amended to make it more stringent. Directors of shell companies who hardly get the
remuneration of 10,000/- per month, Doctors,
Industrialists, and politicians belong to categories of benami transactors who thrive
behind such type of suspicious persons.
It is
essential to use multiple strategies in order to reduce financial crimes in
India. First and foremost, it is crucial to strengthen regulatory bodies and
improve their capacity to identify and prevent financial crimes using advanced
technology and analytics. Second, increasing people's financial knowledge and
awareness can enable them to see and report suspicious activity. Thirdly,
increasing cooperation between law enforcement agencies, financial
institutions, and international organisations can enhance the overall
efficiency of investigations by allowing them to share information and intelligence
on suspected criminals. Lastly, deterring potential offenders can be
accomplished by enforcing high penalties and guaranteeing quick and easy fair,
and transparent legal processes. Combining these tactics can improve India's
ability to fight financial crime.
CONCLUSION
The 1992 Indian stock market scam that shook India and immediately highlighted the loopholes in the banking sector which benefited
the corrupt stockholders and brought the collapse of the Indian stock market is one of the many lessons in history that
we should keep revisiting. It called for fundamental restructuring and preventive reforms
in the economic sector (Harshad S. Mehta & Ors vs The State
of Maharashtra, 2001). Presently we have the legislation, what we lack is the proactiveness of the
financial sector and the implementation of these laws. Our judicial system is burdened with thousands
of cases and the delivery of justice is rather slow so people have lost faith in the legal mechanism. The evolution
of technology can be used to curb financial
crimes and promote
safety infrastructure.
Artificial Intelligence, Machine
Learning, and Data analytics can be used to distinguish fraudulent
transactions from real transactions. One can only hope that India considers the
necessary recommendations and moves
towards a robust financial system.
Article Information
IMPACT OF FINANCIAL CRIMES ON THE ECONOMY WITH INSTANCE OF PREVENTIVE ACTS
Authors: NAINCY KUMARI
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/11/23
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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