Don't charge money launderers with chit fund offence

With such charge, launderers may get away by 'refunding' money to investors who never existed

Another chit fund has been raided at a time when there is an unstable political situation in a particular state. Irregularities worth hundreds of crores have been found and investors might see their life’s savings wiped off.

It is amusing to see central agencies acting against these entities only when there is some political capital to be harvested. These entities take root and grow in front of everyone’s eyes, often blatantly violating rules and norms. Yet, action comes only when they are big enough to ruin a few hundred lives.

As the ‘good’ chit fund sector often argues, regulated funds which conduct their businesses within the four corners of law get a bad name because of these unscrupulous players. The Sachet portal, launched last year, has a simple and clear definition of chit funds. The latter activity involves contributions by members in instalments by way of subscription to the chit; by rotation, each member of the chit receives the chit amount.

By Section 45I (bb) of the Reserve Bank of India (RBI) Act, any subscription to a chit is specifically excluded from the definition of a deposit. While chit fund companies registered with a state government may collect a subscription to a chit in this manner, they are formally prohibited by RBI from accepting deposits. This way, chit funds are outside the purview of RBI, the most powerful financial sector regulator.

The business is governed by the Chit Funds Act, 1982, a central law but administered by state governments. Companies registered under this Act may legally carry on a chit fund business.

The question, after such repeated instances of politically connected ‘chit funds’ coming under scrutiny and getting raided, is whether these are real funds. It appears the chit fund structure is often a façade. While there might be some genuine investors or subscribers, a significant portion in some of these politically connected structures comes from ill-gotten money.

Typically, any party in power in the states generates undisclosed wealth ('black money') in loads, via kickbacks on infrastructure projects, favours and other inducements. The chit fund structure appears a good vehicle to launder this money and invest it, usually in commercial buildings and other forms of real estate. 

Since administration of the Chit Funds Act is in the hands of the state government itself, it is very likely they'd turn a blind eye.

So, despite the hanging sword of raids and probes by central agencies, which might come in extraordinary circumstances, there is nobody to disturb the apple cart. This is why there are no early warnings in such collapses. In fact, the structure comes to their rescue from the more stringent laws governing money laundering offences.

It would be appropriate for lawmakers to look at these loopholes. Money launderers should be charged for that criminal offence. Not for the business failure of chit funds, where they might get away with “refunding” money to investors who never existed.

The Union finance minister in his Budget presentation spoke about a new “anti Ponzi” law, to be introduced in consultation with stakeholders as part of the 'Clean India’ agenda. It has been over a year since the draft of the ‘Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill’ was put before the public for comments. The deadline for reactions closed on April 30 last year but it is never too late to sneak one more in: Don’t charge money launderers with a chit fund offence.