Case Study | Anti Money Laundering
Anti Money Laundering
By Preeti Anand, Nitish Kumar and Aditya Sharma (PGDRM Batch July’19-20 and Jan’20-21)
What is money laundering?
Money Laundering refers to the conversion of money which has been illegally obtained, in such a way that it appears to have originated from a legitimate source.
In India, money laundering is popularly known as Hawala. Hawala is an alternative or parallel remittance system. “Hawala” is an Arabic word meaning the transfer of money or information between two persons using third-person transactions.
Money laundering process
IL&FS case description
Stakeholder Mapping
Root Cause Analysis
- IL&FS hadn’t disclosed bad loans on its books for years despite a big part of its loan book having soured.
- As it was the shadow bank or NBFC company, “Unscrupulous, negligent and dormant management decisions were the main root cause of failure.
- Poor fund management and controls :- IL&FS lent funds to insolvent entities and troubled projects.
- “Deficient audit” by the auditors (Deloitte Haskins & Sell) and KPMG’s audit partner BSR & Co. They failed to issue warnings.
- According to the ICAI, the auditors did not highlight the Reserve Bank of India’s (RBI’s) inspection report, which had labelled IFIN as over-leveraged, besides failing to report negative cash flows and adverse key financial ratios.
- RBI or any other entity did not strictly regulated NBFCs. The IL&FS crisis has raised concerns over the management of such entities.
Aftermath of IL&FS failure
Financial impact
- The IL&FS group operated over a hundred subsidiaries and is sitting on a debt of Rs 94,000 crore.
- The bankruptcy cases wiped out Rs.8.48 lakh crore of investor’s wealth.
- Commercial Paper worth Rs 300 Crores was sold at a discounted price, which belonged to DHFL.
- Share market got affected because anxious retail investors started selling shares of other NBFCs and redeemed from mutual funds.
- Default by IL&FS led to panic in the debt market and dried liquidity in the system of 1 lakh Crore./
- All other housing financing companies and infra companies stocks fallen up to 60% of its stock prices.
- IL&FS engineering(from Rs 45 to Rs 2.20) , IL&FS transportation(from Rs 166 to Rs 1.45) and IL&FS investment(Rs 27 to Rs 2.40) share price crashed
- Widen of fiscal deficit which has adverse repercussion on inflation, exchange rate, growth etc.
- Sensex shed 2,000 points just in a week, sparking a bloodbath in the market.
Reputational Impact
Legal impact
Operational Impact
Disclaimer
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