Tax-free special economic zones new havens to stash cash

NEW DELHI: In an indication of how special economic zones (SEZs) are prone to black money laundering, directorate of revenue intelligence ( DRI) has seized consignments of over 57,000 kg of red sanders and sandalwood being smuggled out of the country through a firm in Noida SEZ.

One of the consignments, of 55,000kg of red sanders, was being smuggled to UAE with goods being declared as bath tubs. The consignment was intercepted by DRI officials last month based on intelligence inputs. Investigations revealed that the goods were being exported on shipping bills of a firm in Noida SEZ.

Another consignment of 2,300kg of sandalwood was recovered from a container in Tughlaqabad inland container depot (ICD). The total value of the consignments has been calculated to be Rs 30 crore even as DRI has arrested four people from Delhi in connection with the case.

Sources said that agency had been investigating money laundering through export-import routes when it got the intelligence about the consignments. It is now investigating the extent to which the firm mentioned on the shipping bills was involved in smuggling.

Because of relaxed laws, lack of strict customs oversight and rebate in tax and duties, SEZs are often used for money laundering i.e. sending black money abroad and bringing it back as white through fraudulent trade. It is also rampantly used by smugglers, said sources.

"Special Economic Zones (SEZs) pay no tax. So all one has to do is set up an SEZ and then send money in from abroad against an invoice. This can be manipulated in various ways which includes smuggling," said a DRI official.

A 2010 Financial Action Task Force report had raised serious objections to the way SEZs led to money laundering because of tax breaks, lax laws and poor oversight. It had even raised a red flag over trade-based money laundering (TBML), as is visible in this case.

The report noted, "A successful TBML scheme often includes false documentation which misrepresents the contents and/or volume of cargo. The size and scope of Free Trade Zones (another name for SEZs), some cities in themselves, makes it difficult to effectively monitor incoming and outgoing cargo, repackaging, and relabeling. Some FTZs export billions of dollars per year but have fewer competent authorities present to monitor and examine cargo and trade transactions. The relaxed oversight in FTZs makes it more challenging to detect illicit activity and provides an opportunity for misuse. As a result, FTZs provide a setting in which certain TBML schemes are more easily conducted."