Author: Kshitish Shirodkar
College: OCL, New Mumbai
Money laundering can be defined as processing of criminal proceeds to disguise its illegal sources. Money can be generated that to huge sums by illegal Arms sale, Drugs trafficking, Financial crimes, Smuggling, etc. Basically the money from the criminal activity is dirty and to make it look clean it is laundered. In other words money laundering is considered as a white collar crime. Criminal use a dizzying numbers and variety of methods to launder money. Among the most common through, Stock trading, Precious stones and metal markets, Real estate, International trade and Virtual currencies are use to legitimise such illegal money.
Stages in money laundering process
Money laundering process usually consist of three stages
1) Placement - In Placement stage money launderer introduces his illegal profits i.e. dirty money into the financial system. Large amounts are divided into smaller sums and deposited into the bank accounts. Since it has been divided into smaller amounts, hence it is least likely to attract the attention of the enforcement agencies. Other methods which are adopted by the launderers are their family, friends or acquaintances that are trusted in the community conduct business on the launderer’s behalf, thereby disguising the sources of the illicit funds. Other launderers use the cash intensive business such as a restaurant, to justify large deposits that exceed the limits of reporting requirements.
2) Layering – In layering stage the money launderers engages himself into the series of conversion and movements of funds. These funds are used to purchase and sell investments instruments. He continues doing so for years to disguise the source of money. This step is called layering because the layers of financial transactions disguise the drugs proceeds owners and obscure the money trails. Layering is the most international and complex step of the laundry cycle because funds are typically moved from one foreign account to another. Law enforcements finds it difficult to detect when the countries involved in the layering process are tax havens or strict bank secrecy jurisdiction the deeper the dirty money gets into the international financial system, the more difficult it is to identify the origin.
3) Integration – The third and the final stage of the money laundering stage is the integration. During the integration stage the illicit money returns to the country’s economy in the legitimate form. Integration creates the illusion of legitimate source for criminally derived fund and involves technique as a numerous and creative as those used by legitimate business to increase profits and reduce tax liabilities. Common techniques used by them includes producing false invoice for a goods purportedly sol by a firm in one country to another country using securities held in the foreign bank as loan and purchasing a property to create illusion of the legal proceeds disposal.
Now let us discuss the impact of Money laundering on Development and Society.
Economies having developing financial sectors are more vulnerable to the money laundering activities due to inadequate control system and comprehensive anti money laundering policy.
The money launderers exploits the loopholes of anti money laundering system and use it for their own benefit and generally developing financial sectors suffers from weak and ineffective counter measures.
It negatively affects commercial and financial sectors of country. The foreign direct investment is negatively affected if there is a perception that commercial and financial system is subject to the control and influenced of organised crime.
In short term Money laundering may have positive effect and say rise of country FOREX reserves in servicing of foreign debts, however in long run it is mostly having a negative effect.
If Money laundered left unchecked it acquire control of large sectors of economy through investment or by offering bribes and such economic and political influence of criminal organisation will ultimately weaken social fabric , ethical standards and democratic institutions of our society.
Money laundering as an International threat
Money laundering has become a global problem as a result of influence of several remarkable changes in world especially Globalization of markets. The growth in international trade, the lowering of barriers for international travels and the surge in the internalization of organised crimes have combined to provide the source, opportunity, and means for converting illegal proceeds into what appears to be legitimate funds. Money laundering can have devastating effect on the soundness of financial institution and undermine the political stability of democratic nations. Criminal quickly transfer large sums of money to and from countries through financial systems by wire and personal computers. Such transfer can distort the demand for money on macro-economic level and produce an unhealthy volatility in international capital flows and exchange rates.
Many economist, law enforcement agencies and policy makers agree on the need to develop an acceptable means of identifying the scope of laundering problem. The international response to laundering has taken a number of forms, including multilateral regional agreements, international organization and the identification of universal counter laundering measures.
What are the global initiatives taken by enforcement agencies for eradication / prevention of money laundering?
Money laundering is no more a national issue it has become international problem which needs international collaboration and joint efforts .Following are the global initiatives in this direction.
Following are the Global initiatives taken to prevent Money Laundering
Vienna convention- This is the first and major initiative taken in prevention of drug money laundering. This took place in December 1988 popularly known as Vienna convention. The convention made it obligatory for members state to criminalise the laundering of the money from drug trafficking. It promotes international cooperation and investigation in the cases of money laundering. The convention established the principal that the domestic bank secrecy must not interfere with international criminal investigation.
Council of European convention
This convention demanded serge and seizure and confiscation of proceeds of crime. It gave the common definition of crime of money laundering and to deal with it.
European Union money laundering directive
The council of European communities in June 1991 issued a directive on use of financial system on money laundering. The directive required the member nations to pass a law on money laundering .the financial institutions were required to establish internal system to prevent money laundering and obtain customer identification and keep proper records of transactions.
Basle committee statement of principle
In December 1988 Basle committee issued statement of principles to be complied by international banks. These principles include identifying customers (Know Your Customer) for avoiding suspicious transactions and cooperate with the law enforcement agencies.
Financial action task force (FATF)
It is an intergovernmental organisation establishing in 1989 by the G7 summit held in Paris. The objectives are to set standards and promote effective measures for combating the money laundering issues. It is the policy making body which works to generate political will to bring about national legislative and regulatory reform.
Prevention of Money laundering – Indian Initiative
In the view of an urgent need for the enactment of a comprehensive legislation for preventing money laundering and connected activities, confiscation of proceeds of crime ,setting up of agencies and mechanism for coordinating measures for combating money laundering etc .,the prevention of money laundering bill passed in 1998 was introduced in parliament on 4th August 1998. The bill received the assent from the President and became Prevention of Money Laundering Act, 2002 on 17th January 2003. The Act has come into force with the effect from 1st July 2005. It has been amended in 2005, 2009 and recently in 2012. The objective of the act is to prevent money laundering and to provide for confiscation of the property derived from or involved in it and for matters connected there with and incidental thereto.
Salient features of the Act
Offence of money laundering
An offence of money laundering is said to be committed when a person in any way dealt with the proceeds of crime. Section 3 of the prevention of money laundering act 2002 states that a person shall be guilty of the offence of laundering if he/she directly or indirectly attempt or knowingly assist to the process or he’s knowingly partly or actually involved in any process or concealment , possession of proceeds of crime.
And now let’s talk about its punishments
Section 4 of the prevention of money laundering act states that if any person involved or commits the offence of money laundering shall be sentenced to rigorous imprisonment of 3 to 7 years along with fine. In case of offence relates to drugs and narcotics substances act then imprisonment may extent up to 10 years.
Provision relating to Attachment, Adjudication and Confiscation of the property involved in the Money Laundering Act.
Director or any officer not below the rank of the deputy director may by order in writing provisionally attach the property for period not exceeding 180 days if he has reason to believe on the basis of material in his possession that person is in possession of proceeds of money laundering and such possession is charged with schedule offence and he’s likely to conceal transfer in any manner proceeds of crime. Every order passed by officer shall be valid for 90 days and such and such officers who attach such property will have to file a complaint to the adjudicating authority within 30 days stating the facts.
Section 8 of the act states that on receipt of the complaint adjudicating authority shall serve notice giving at least 30 days time to such a person to prove sources of his income , earnings and assets.
Section 9 of the act states that if a person fails to prove his sources of his income, earning and assets then confiscation order shall be made and all such property will vest in Central Government free from all charges /mortgages/attachments.
Obligations of Banking Companies, Financial Institution and Intermediaries
The reporting entity is required to keep a record of all material information relating to Money Laundering and forward the same to the Director. Such information should be preserved for years. The functioning of the reporting entity will be supervised by the director who can impose any monetary penalty or issues a warning or order audit of accounts, if the entity violates its obligations. The Central Government, after consulting the reserve bank of India is authorised to specify rules relating to managing information by the reporting authority.
Steps taken by government of India to prevent money laundering
Criminal law Amendment ordinance
The Smugglers and Foreign Exchange Manipulators (Forfeiture of property) Act, 1976
Narcotic Drugs and Psychotropic substances act,1985
PMLA (amendment) Act, 2012
Financial intelligence Unit-IND
Enforcement Directorate. (ED)
High profile money laundering scams in India
Common Wealth Games Scam 2010: 70,000 CRORE SCAM
New Delhi, Suresh Kalmadi, Sheila Dixit the then chief minister of the state. It is estimated that out of 70,000 cores spent on the games, only half of the said amount was spent on Indian sportsmen discrepancies in tenders like payment to nonexistent parties, wilful delays in execution of contract, over inflated price and bungling in purchase of equipments through tendering and misappropriations of funds.
Group Financial Scandal 2013: A 4,000 CRORE SCAM
West Bengal Kuna Ghosh, Sudipto Sen, Madan Mitra and many more financial scams caused by the collapse of a Ponzi scheme run by Saradha Group consortium of over 200 private companies that were believed to be running collective investment schemes popularly but incorrectly referred as chit fund.
Indian coal allocation scam 2012: 1,85,591 CRORE SCAM
National comptroller and auditor general of India, the coal ministry, many electricity boards and private companies’ coal blocks allotted, not auctioned, leading to estimated losses as per the Comptroller and Auditor General of India. Supreme Court cancels all 214 coal blocks allocations since 1993. Government to e-auction the coal blocks now.
2G Scam 2008:1,76,000 CRORE SCAM
National Nira Radia, A. Raja, M.K. Kanimozhi and many telecommunications companies communication bandwidth auctioned for lower than market value A. Raja and M.K. Kanimozhi have been in Tihar jail for 15 months and 5 months respectively.
Conclusion: The global threat of money laundering posse’s unique challenges to the law enforcement agencies and to pursue evidentiary trial of money laundered, law enforcement agencies must identify and use tools and techniques that can help them when crossing international boundaries. Efforts undertaken by nations independent of communities often results in significant variations from the accepted standards and have the effect of facilitating laundering activity rather than combating it.