Customs investigators in India have unearthed a large-scale under-invoicing and money-laundering scheme at one of the India's largest ship-breaking centres according to one of India's established business dailies.

It reports that letters of credit (L/Cs) are used in the simple scheme that also involves cash payments and hawala unofficial money transfers.

The scheme

The scheme is simple and is operated according to The Economic Times out of one of the largest ship demolition centres in the world, Alang in Gujarat.

It says the original seller hands over the ship to be scrapped to a cash buyer who, after fabricating a series of transactions, sells it on in an under-invoiced transaction to the end-buyer ship-breaker in Bangladesh or India.

Hawala route

The end-buyer ship-breaker pays the cash buyer by L/C from any local bank in favour of a bank with a London branch, from any local bank, for the amount shown in a memorandum of agreement (MoA) according to the English language business daily.

It reports that a remaining amount, which is not shown in the MoA, is paid in cash to the cash buyer, who often sends it to the bank with London branch using a hawala informal money transfer.

European connections

The Economic Times reports that its sources say an Indonesian bank with a London branch and a European bank with a presence in London are active in this type of scheme that benefits the ship-owner who receives cash up front, the middleman who is paid a premium and the ship-breaker, who evades customs duty.

Middlemen and cash buyers, apparently many of whom are Indian, are believed by the paper to be under investigation by the Indian authorities while the original ship-owners may be under less scrutiny since the paper believes many of them are not Indian.

Bangladesh worse?

The Economic Times quotes sources as saying that under-invoicing is even more rampant in Bangladesh, where the government has apparently continued to hold the duty threshold at US$122.5 per tonne.

"In Bangladesh, ship-breakers preferred to open a L/C for $122 per tonne, and pay the balance via cash remittance, in order to avoid the duty," a London-based cash buyer is reported to have said.

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