JUNE 28, 2015

By TIOL Edit Team

FINANCIAL Action Task Force's (FATF's) focus on abuse of gold as an instrument of money laundering especially for terror financing is a well-timed alert for India. Timely because the Government would shortly finalize Gold Monetization Scheme (GMS) and Sovereign Gold Bonds Scheme (SGBS).

The Finance Ministry had recently put draft of both the schemes in public domain for seeking comments. The Ministry should transform FTAF's concern into an opportunity to minimize the scope of misuse of the two proposed schemes.

The Ministry should factor in all the concerns listed in FATF's 'Typologies report on the money laundering / terrorist financing risks and vulnerabilities associated with gold.' The report was approved at FTAF's six-day plenary meeting that concluded at Brisbane in Australia on 26th June. It ought to make an interesting reading after it is published in due course of time.

As put by FTAF, "This report identifies the features of gold and the gold trade that have made it an alternative means for criminals to transfer value and generate proceeds. Gold is anonymous, has a stable value and is easily transformable and transportable, which have made it an attractive alternative for criminals to store or move and generate value as regulators implement stronger AML/CFT (anti-money laundering and countering the financing of terrorism) regulations measures to protect the formal financial sector from abuse."

This report provides a series of case studies and red flag indicators to raise awareness, particularly with AML/CFT practitioners and companies involved in the gold industry, of the key vulnerabilities of gold and the gold market, says FTAF.

As India is member of this august global entity, the Ministry does not have to wait for publication of the report. It should straightaway access the approved report and accordingly revise the two draft schemes.

It should also tighten an array of existing gold-linked investment & jewellery export schemes. Money laundering apart, the misuse of jewellery export schemes has already caused revenue loss to the exchequer. This has been documented by Comptroller & Auditor General (CAG), Parliament's Committee on Public Undertakings (COPU) and other entities.

The Ministry might as well take a hard look at allegations of money laundering and corruption that hit Turkey in 2013.

As put by a FTAF expert in an article published by OECD Observer in April 2010, "As in the case of high-value commodity markets, the gold market is causing some concern over the money laundering possibilities it offers. A number of FATF members have received reports of suspicious gold transactions. In some instances, these transactions appeared to reflect attempts to avoid high VAT rates by making large purchases of gold in countries with low VAT rates and then exporting the bullion back to the country of origin."

The use of gold for purposes of laundering is often intrinsic to movements of money through parallel banking circuits, an example being the South Asian hawala/hundi system, it says.

Before launching GMS and SGBS, the Ministry must do their risk analysis the schemes getting abused for conversing gold derived through dubious means including bribes and other criminal activities into white money.

GMS would replace both gold deposit scheme (GDS) meant for public and gold metal loan scheme (GMLS) meant for jewellers as proposed by the Union Budget 2015-16.

To make GMS a success from the standpoint of investors as well as for reining in the current account deficit, it should offer terms that are better than the ones available under GDS and GMLS.

Like GDS, GMS is targeting households. Would it not be better to improve GDS for households and launch an imaginative specific scheme to monetize pots of gold lying with temples and other entities?

If RBI can purchase gold from International Monetary Fund (IMF) as it bought 200 tonnes from International Monetary Funder in 2010, there is no reason why it can't buy the gold from religious trusts to increase RBI's reserves or to later sell them to jewellery makers.

It would be better for the Government to formulate a comprehensive gold policy as suggested by a joint study by World Gold Council and Federation of Indian Chambers of Commerce and Industry (FICCI) in December 2014.

As put by the study, "Adopting the right policies would allow gold in India to take its rightful place as a national asset, not a liability."