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Transparency in Real Estate Sector in Digital India: A Study

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Empirical Economics Letters, 21 (Special Issue 2): (June 2022) ISSN 1681 8997

Transparency in Real Estate Sector in Digital India: A Study

Ranjith Karat*
Kerala University of Fisheries and Ocean Studies, Kochi, Kerala

Suraj ES
Naipunnya Institute of Management and Information Technology, Thrissur
Email: surajandsuraj@yahoo.com

Jacob Joju
LEAD College of Management, Palakkad
Email: mailerjoju@gmail.com

Manoj PK**
Dept. of Applied Economics, CUSAT, Kochi, Kerala

Gopalakrishnan
Divasprik Intelligence Private Limited, Kochi, Kerala
Email: sgksharma.sharma@gmail.com
Abstract: Given the diverse kinds of money laundering (ML) and allied evils in
Indian economy, especially in the Real Estate sector, this paper makes a critical
look into this vital sector in India from a transparency perspective. Despite vast
ICT adoption, demonetization, enactment of RERA, digitalization of land records
in many States of India, GST implementation, among others, real estate
transparency is noted to be still low in India and the same needs improvement.
Strict measures to curtail ML and other illegal deals, better thrust on ICT
integration and online transactions as against cash transactions, promotion of
innovative financing modes like REITs, complete digitalization of land records
etc. are suggested for transforming the real estate sector. Besides enhancing real
estate transparency, these steps support the national goal of ‘Affordable Housing
for All’ within the ‘Digital India’ framework.
Keywords: Money Laundering (ML), Real Estate, Digitalization, ICT, FinTech
JEL Classification Number: M21, 6P, 17P

*
Ph.D. Scholar, SME. Email: ranjithkaratk@gmail.com
**
Corresponding author. Email: manoj_p_k2004@yahoo.co.in. We acknowledge the support from
Professor K C Sankaranarayanan, Former Dean, Faculty of Social Sciences, Cochin University of
Science and Technology, Kerala, India.
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 140

1. Introduction
Real Estate is the sector that suffers maximum due to Money Laundering (ML) – the
illegal process of generating huge amounts of money by way of criminal activity, may it
be a terrorist funding or drug trafficking, making it appear to have sprang from a
legitimate source. Money launders strive to project the money so created (dirty money) as
clean funds.Fast growth in crypto currencies and online banking hasfurther aggravated
ML and other illegal fundtransfers without being detected. The best efforts are being
initiated at the global level to prevent the ML activities, called Anti-Money Laundering
(AML) activities. In the past, financial deals related to organized crime only were
considered as ML. Now, ML’s definition is broad based to include all financial deals that
even create a value or an asset followingan illegal act. This studyaimsto check the
MLmenace in Indian real estate.
2. Literature Survey
Australian Competition & Consumer Commission (ACCC) (2020) has notedthe ever
growing scams up to 2019 in Australia and that scams too grow along with ICT use. As
cash transactions transform fast into digital deals (61 percent cash deals in 2010 to 27
percent in 2020) ICT-based scams too grow fast which should be curtailed. Baker,
Raymond (2005) has noted that that for over 40 years in more than 60 nations, ‘free-
market’ system has been working in illicitly and corruptly, and this situation should totally
change. Basel (2021) in its AML report (10thedn, Sept 2021) and FATF (Financial Action
Task Force) in its 2021 report have both assessed the threatsdue to ML activities and
pointed out the need to arrest such deals. Grand Thornton (2017) report has discussed the
case of frauds in housing and real estate sector. JLL and La-Salle (2022) in its 12 Ed.
(2022) of Global Real Estate Transparency Indexdepicts India’s low real estate
transparency vis-à-vis. peer countries like China and US, and the top status of China.
Lakshmi, and Manoj (2017) have pointed out that service quality in rural banking of
Kerala Gramin Bank (KGB) is better than that of Kannur District Co-operative Bank
(KDCB) due tohigher ICT adoption and customer service. Lakshmi, and Manoj (2017) has
observed the positive impact of ICT in serving rural customers of by KGB and KDCB.
The ML case has been decided in a classic Civil Appeal 16899 of 1996 dt.16.04.2004,
Indian Kannon. Also, the positive attitude of banks’customers to e-CRM, ICT-based
services etc. has been noted by Joju et. al. (2017) after an empirical study in Kerala. Joju
et. al. (2017) has observed that financial technologies (Fintechs) can substantially improve
service quality of banks. Joju et. al. (2017) has noted the need for branch banking as
customers prefer branch (brick and mortar) banks and ‘human touch’ even in this ICT era
and Fintechs. Joju and Manoj (2019) have noted the positive effect of ICT in banks on
service quality. A study on retail loans in India with a focus on housing loans by Manoj
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 141

(2003) has found the huge development capacity of housing sector due to its vast linkages,
and has suggested strategies for faster economic growth by investing in housing and
promoting ICT, HMF, RMBS, etc. Manoj (2004) has noted the vast development potential
of housing sector to propel economic growth, suggested the need for promoting housing
investments through secondary housing market too (eg., RMBS). Manoj (2008) has got the
key role of HMF in providing housing finance to the poor, citing globalpractices. Manoj
(2009) has noted financing models and technologies that can help the poor to fulfil their
housing needs.

Pickens (2009) has found that ICT advances readily accepted by the public including the
poor (eg. mobile phones) enable fast financial inclusion as everyone can use ICT tools.
Manoj (2012) has noted that Kudumbashree’s MEs have high potential for empowering its
member women. A field-based CRM study by George and Manoj (2013) has found the
superior ICT adoption and CRM in private banks vis-à-vis public sector banks in Kerala.

James and Manoj (2014) has noted that as E-banking empowers the rural customers must
be promoted. ML based on trade is studied closely so as to develop a working definition of
ML in trading by Naheem (2015). Manoj (2015) has noted the vast potential of HMF to
empower the homeless poor. In another paper, Manoj (2015) has found the deterrents to
the growth of HMF in Kerala as the lack of awareness on the loan terms and conditions,
expectation of ‘writing of’ etc. Vasantha, Manoj and Joju (2015) compared the ICT
experiences (E-CRM) of rural and urban customers, and has noted that both groups are
interested in E-CRMdue to its convenience and other benefits, but have suggested separate
marketing strategies for the two groups. Viswanath and Manoj (2015) has noted the poor
socio-economic conditions of migrants but high level of earnings in Kerala vis-à-vis home
States.
The concept of ML, its effect on Indian economy, the need for effective legislation to
check ML etc. are closely studied by Kumar (2015). Nasar and Manoj (2015) has noted
that price, quality and location as the key factors behind the purchase decision of
apartments by buyers in central Kerala. Manoj (2016) has observed the key role of ICT in
rising the competitiveness of banking services and to integrate ICT in bank marketing at
all levels.A study on Real Estate Investment Trusts (REITs) by Manoj (2016) has noted
the need for promoting REITs in India for faster development of the housing sector and
hence the whole economy. Tiwari (2017) has reported that as per Enforcement Directorate
(ED) data 48 percentof the ML cases relate to financial institutions. Manoj (2018) has
noted superior CRM in private banks mainly due to higher ICT adoption as against public
sector (Govt.) banks leading to higher businessof private banks and better customer
service at lower cost. Manoj (2019) has reported the changing HRM practices of banks
and the need for a ‘human touch’ even in this ICT era. Another study by Manoj (2019) has
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 142

reiterated the need for social banking even today,and the need for ICTfor inclusive and
equitable growth. St. Paul’s Chambers (2021) Report has noted the ML stages, its fast
growth, the need to checkML for fast economic growth in a transparent and corruption-
free way.Studies on ML in the housing and real estate are scarce.So this study seeks to
bridge this research gap.

3. Significance and Relevance

Studies have noted the gains of ICT onfinancial inclusion (Neeraja and Manoj, 2013;
Vasantha et. al., 2015; Lakshmi and Manoj, 2017; Joju et al. 20170. But, studies indicate
that growing ICT adoption causesrise in MLcases and other evils; like, ACCC, Basel
Report and FATF Report. As the ML is most common in Real Estate sector (Thornton,
2017; JLL and La-Salle, 2022), this study focuses on this sector. The Global Real Estate
Transparency Index (2022) has noted India’s ‘Semi’ transparency; but it has ‘global
improver’ status by digitalization, promotion of REITs.So, a closer look into ML in the
housing and real estate sector is relevant as this sector plays a key role in accelerating the
pace of economic growth.
4. Objectives and Methodology
The objectives are (i) to study the case of money laundering (ML) in Indian real estate and
allied sectors and to suggest steps to control ML for enhanced real estate transparency and
faster housing development, thus ensuring faster economic growth; (ii) to study the role of
digitalization and ICT-based tools like FinTechs in controlling ML and allied evils.The
study is descriptive-analytical and it is exploratory too. It uses common analytical tools.
5. Money Laundering in Real Estate and Allied Sectors in India
Housing and Real Estate sectoris one in which ML and allied evils are maximum in India.
Dirty cash is invested in this sector to make it clean cash. Money earned through
corruption and other illegal acts are diverted into land, wherein different structures are
built, including housing units. The unstructured growth in housing sector adversely
affects the economy, and has disastrous environmental consequences in cities.Most
politicians are reported tohave unaccounted funds in this sector. This sector is misused
for ML deals as cash deals used to be possibleand the true property ownership can be
concealed too. Enforcement Directorate (ED), Govt. of India (GOI) reports that 48
percent of ML deals are in financial institutions. Of the rest, 35 percent is in the real
estate, 7 percent in illicit trade in gold and silver, and 10 percent in other fields. Table I
shows the frauds in this sector.
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 143

Table 1: Fraud in Real Estate and Construction Sector in India

Type of Fraud Level of Fraud
Real estate billing Low
Bid Rigging, market collusion High
Corruption High
False vendors, Forging Payment applications Low
Change order manipulation Medium
Robbery of Materials Low
Fabricated Demonstration Medium
Money Laundering High
Source: ‘Fraud trends in realty’. The Hindu Business Line (23.11. 2017).

Indian real estate sector faced some instances that seriously affected the economy. (1)
Rangmahal Co-operative Group Housing Scheme Scam: This involved an amount of
USD 0.53 Billion whereby housing plots were illegally allotted to people at subsidized
prices in North West Delhi, by forging the documentsand by misrepresenting as the
officers of the Delhi Development Authority. The members of Rangmahal group and
some public servants, totally 11 people were involved. (2) Karnataka Wakf Board Land
Scam: This involved the illegal distribution by Karnataka Wakf Board in 2012 of 27000
acres of land for a meagre amount lower than the market value; causing a loss of
USD26.67 Billion.Earlier, real estate sector was not covered under Prevention of Money
Laundering Act 2002 (PMLA). India’s governance system took many steps to expose the
issues of real estate sector and to control to checkthe deviations. India could improve its
rank in the Global Real Estate Transparency Index till 2020; but it fell to 2016 level in
2022 (Table 2).
Table 2: Global Transparency Index – India’s Rank
Year Rank Year Rank Year Rank
2012 48 2016 36 2020 34
2014 40 2018 35 2022 36
Source: JLL and La-Salle, Global Real Estate Transparency Index, 2022.

According to the GOI, India is losing about USD 18 Billion every year due to different
ML deals. As of 2018, about 884 business units in India are on high alert because of their
involvement in ML deals, the amount being about INR 50 Billion. These businesses are
under probe as per the PMLA 2002 provisions. As per AML Basel Index (an index
showing the risk of ML and terrorist financing) India has relatively high vulnerability, as
a high score (1-10) shows high vulnerability but it is slowly improving (falling) (Table
3).
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 144

Table 3: Vulnerability Index of India – A Global Assessment

Year Rank Score No of Countries
2012 52 6.05 144
2013 70 5.95 149
2014 75 5.85 151
2015 79 5.77 152
2016 78 5.69 149
2017 88 5.58 146
2018 68 5.28 112
2019 51 5.60 125
2020 70 5.15 141
2021 (Details of India are not included in AML Report, Sept.2021)
Source: Basel, Basel AML Index– for 2012 to 2021. (www.baselgovernance.org)

Low scores show low risk with respect to the ML. The scores are between 1 to 10.
Higher score shows higher risk in the ML. India’s vulnerability score has been rather
constant and its rank is low. This situation needs improvement (Table 3).

6. Digitalization and ICT Adoption for Curbing ML and Enhancing Transparency

India witnessed the Hawala transactions, which are segments of money laundering,
capturing its momentum during 1990s. The members of political organizations, business
tycoons and other bureaucrats were found to have been indulging actively in Hawala
activities and escorted for a parallel remittance system in the country. The roles played
by the transactional ambassadors were key to the performance and completion of the
entire process, in which they will be taking the part as the central elements that receive
the money at one location and will be delivering the amount to the beneficiary at a
different location through their counterparts. These steps outmaneuver the transfers
through formalized channels and all other documents, presupposed if any. Thus hawala
transactions were contributing towards transmutation of money from its legal and white
form to illegal and black form. Section 6 and Section 10 of FEMA (1999) highlights the
importance and role of RBI. Accordingly, people who deal on foreign exchange dealings
should invariably be registered with RBI, but this is not applicable to Hawala traders. The
vital element that makes Hawaladeals most attractive is the commission rates involved
which are found to be much lower than the regular bank transfer charges and moreover
the customers can escape from the tax liability which will arise otherwise. Terrorist
financing out of Hawala funds is one of the worst problems that India faces today. Cyber
Laundering is another main evil that is committed using digital cash as against physical
cash. Despite facing many ‘digital’ threats, India could attain 7 th rank globally in the
transparency front.
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 145

Figure 1: India – Seventh in International Transparency (2022)

Source: JLL and La-Salle, Global Real Estate Transparency Index 2022, p.25.

The digitalization in India should be pursued more vigorously, though India has high
International Transparency (Figure 1); as India’s Real Estate Transparency is only ‘Semi’
(Figure II). Globally, India’s rank is very poor in technology adoption (20th) and market
fundamentals (17th) (Figure 3).

Figure 2: India is ‘Semi’ in Real Estate Transparency globally (2022)

Source: JLL and La-Salle, Global Real Estate Transparency Index 2022, p.20.
Empirical Economics Letters, 21 (Special Issue 2): (June 2022) 146

Figure 3: India’s Rank in Technology Adoption and Market Fundamentals (2022)

Source: JLL and La-Salle, Global Real Estate Transparency Index 2022, p.44 & 52.

7. Strategies to Control Money Laundering and Concluding Remarks

Extra thrust is accorded for promoting REITs in India. This ensures more investments in
the real estate sector and in a transparent manner, and more foreign funds also. This
improves the confidence of the investors in real estate investments through REITs.
The ICT initiatives of the GOI in this ‘Digital India’ regime should continue. More and
more Start-ups and FinTechs are encouraged to curb ML and allied evils in the real estate
sector. Digitalization of land records, keeping central registry of real estate and housing
assets and making it compulsory to use banking channels for real estate transactions would
enhance real estate transparency.

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