MONEY LAUNDERING

MONEY LAUNDERING

Introduction:

  • Money laundering is the process by which large amount of illegally obtained money, from drug trafficking, terrorist activity or other serious crimes, is given the appearance of having originated from the legitimate source. It allows the criminals to maintain control over their proceeds.
  • The process by which large amount of dirty money (i.e. money obtained from serious crime- drug trafficking, terrorist activity made to look clean money (i.e. legitimate) is known as money laundering.
  • Money laundering is an organised crime which is a prime source for funding terrorism.
  • Dirty (Illicit) Money
  • Process of Money Laundering
  • Clean Money (i.e. Legitimate)

 

Money Laundering:

  • According to INTERPOL, Money laundering is concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.
  • It is frequently a component of other, much more serious, crimes such as drug trafficking, robbery or extortion.
  • Some of the common methods of money laundering are Bulk Cash Smuggling, Shell companies and trusts, Round-tripping, Hawala, False invoicing etc.
  • The advent of cryptocurrency, such as bitcoins, has exacerbated this phenomenon.
  • Money laundering is an issue that has gained increasing significance following the events of 9/11. It has recognised it as a source of the funding of terrorist activities. The spread of international banks all over the world has facilitated the transmission and the disguising of the origin of funds.

 

Understanding the process of money laundering:

  • Money is also laundered using the method of Round Tripping – the black money is transferred to the tax-heaven countries from India. Then a company from that country will send that money back to India in form of ‘foreign investment’. Best example of this is Mauritius, Singapore among others.

 

Money-Laundering involves three steps:

  1. Placement puts the “dirty money” into the legitimate financial system.
  2. Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
  3. In the case of integration, the now-laundered money is withdrawn from the legitimate account to be used for criminal activities.
  • Source of money
  • Placement
  • Layering
  • Integration

 

Various forms of Money Laundering:

  • Structuring also called as Smurfing
  • Bulk Cash Smuggling
  • Cash intensive Businesses
  • Gambling
  • Trade based Laundering
  • Tax amnesties
  • Round tripping
  • Shell companies
  • Black salaries
  • Transaction laundering

 

Hawala and Money-Laundering:

  • The word “Hawala” means trust. Hawala is a system of transferring money and property in a parallel arrangement avoiding the traditional banking system. It is a simple way of money laundering and is banned in India.
  • Hawala works by transferring money without actually moving
  • In a hawala transaction, no physical movement of cash is there.
  • It is an alternative or parallel remittance system, which works outside the circle of banks and formal financial systems.

 

Reason why people prefer Hawala:

  • The commission rates for transferring money through hawala are quite low.
  • No requirement of any id proof and disclosure of source of income is there.
  • It has emerged as a reliable & efficient system of remittance.
  • As there is no physical movement of cash, hawala operators provide better
  • Exchange rates as compared to the official exchange rates.
  • It is a simple and hassle-free process when compared to the extensive
  • Documentation being done by the banks.
  • It is the only way to transfer unaccounted income
  • This network is being used extensively across the globe to circulate black money and to provide funds for terrorism, drug trafficking and other illegal activities.

 

Various Techniques Used for Money Laundering:                

  • Structuring Deposits: This is a method of placement whereby cash is broken into smaller deposits of money which is then exchanged by many individuals (known as “smurfs”) to avoid anti-money laundering reporting requirements. This is also known as smurfing because many individuals (the “smurfs”) are involved.
  • Shell companies: These are companies without active business operations. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
  • Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.
  • Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.
  • Credit Cards: Clearing credit and charge card balances at the counters of different banks. Such cards have a number of uses and can be used across international borders. For example, to purchase assets, for payment of services or goods received or in a global network of cash-dispensing machines

 

Status of Hawala in India

•        Hawala is illegal in India, as it is seen to be a form of money laundering.

•        As hawala transactions are not routed through banks, the government agencies and the RBI cannot regulate them

 

Cryptocurrency: The New Hawala

  • Cryptocurrency like Bitcoin provides absolute anonymity and facilitates terror financing which was evident in the 2015 Paris terrorist attack.
  • The Financial Action Task Force in Paris reported in 2015 that some terrorist websites encouraged sympathisers to donate in bitcoins.
  • After, demonetisation action by the Government of India in 2016, there was noticed a flood of such digital transactions.
  • This new Hawala has a potential to become an easy way to provide funds for terrorists and other illegal activities.
  • So, there is a need to have proper regulation over bitcoin in the interest of the economy and the security of the country.

 

Impact and Effects Of Money Laundering:

According to studies conducted by the International Monetary Fund, it was estimated that the quantum of money laundered is approximately 2 to 5 percent of GDP of the world.
Effects of Money Laundering

    • Social Effects
    • Economic Effects
    • Political Impact
 

 

 

 

 

 

Social Effects:

 

·         Money laundered successfully will boost more criminal activity in the country.

·         More fraud activities and more youth can get attracted due to higher returns.

·         Declines the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities.

·         Social balance of society may suffer because of ease of availability of drugs in the market.

·         Damage to reputation of financial institutions and market and Weakens the “democratic institutions” of the society.

·         Transfers the economic power from the right people to the wrong

·         Increased unemployment as legitimate business companies fail to compete with operators operating through illegal money.

 

 

 

 

 

Economic Effects:

Macro
Micro
·         Loss of revenue to the government due which social services suffers.

·         Unpredictability of economy increasing due to pumping of illegal money.

·         Threaten the stability of economy

·         Destabilises economy of the country causing financial crisis

·         Policy distortion occurs because of measurement error and misallocation of resources

·         Discourages foreign investors

·         Encourages tax evasion culture

·         Results in exchange and interest rates volatility

·         Contaminates legal transaction.

·         Money laundering decreases the tax funds available for collection in the economy and by implication government’s revenues

·         Committing crime of money laundering transfers of economic power from the right people to the wrong. The good citizens and the government are dispossessed from their right, making the criminals take the benefit to flourish in their criminality.

·         Organised crime at local level can flourish.

·         It also leads to higher cost of doing business.

 

 

 

Political Impact:

 

·         Affects the Government’s capability to spend on development schemes thereby affecting a large section of populations who could have benefitted from such spending.

·         Policy distortion occurs because of measurement error and misallocation of resources.

·         Legislative bodies find it difficult to quantify the negative economic effects of money laundering on economic development and its linkages with other crimes – trafficking, terrorism etc.

 

Trade-Based Money Laundering (TBML):

  • Trade Based Money Laundering (TBML) is the processes of transferring money through trade transactions this is achieved through misrepresentation of the price, quantity or quality of import or export.

 

Techniques of TBML:

  • Over-invoicing and under-invoicing of goods and services
  • Multiple-invoicing of goods and services
  • Over-shipment and under-shipment of goods and services
  • Wrong information about goods and services.

 

Challenges in tackling Money Laundering:

  • Predicate-offence-oriented law: This means a case under the Act depends on the fate of cases pursued by primary agencies only such as the CBI, the Income Tax Department or the police. (Predicate offence- any offence that is component of more serious offence)
  • Growth of Technology: The enforcement agencies are not able to match up with the speed of growing technologies.
  • Non-fulfilment of the purpose of KYC Norms: KYC norms does not cease or abstain from the problem of Hawala transactions as RBI cannot regulate them. Also, the increasing competition in the market is forcing the Banks to lower their guards and thus facilitating the money launderers to make illicit use of it in furtherance of their crime.
  • Widespread act of smuggling: there are a number of black-market channels in India for the purpose of selling goods offering many imported consumers goods such as food items, electronics etc. which are routinely sold.
  • Lack of comprehensive enforcement agencies: Separate wings of law enforcement agencies dealing with money laundering, cyber-crimes, terrorist crimes, economic offences etc lack convergence among themselves
  • Tax Heaven Countries: They have long been associated with money laundering because their financial secrecy laws allow the creation of anonymous accounts while prohibiting the disclosure of financial information.

 

P-notes and money laundering:

  • Participatory Notes (P-Notes) are instruments used by foreign investors not registered with the SEBI to invest in Indian securities. They are issued overseas against underlying Indian securities (like shares).
  • P-Notes hides the identity of the investor. According to the ‘White Paper’ on black money (2012) prepared by the central government, a considerable portion of PNs are used by wealthy individuals who uses it as a mechanism to channelize black money kept in foreign countries to India. The Special Investigation Team (SIT) on black money also recommended the phasing out of P-Notes.
  • In addition, SEBI has no jurisdiction over P-note trading. Although FIIs must register with SEBI, the P-notes trading among FIIs are not registered, leading to concern that P-notes are being used for money laundering.

 

Framework for prevention of money laundering:

  • Framework For Prevention Of Money Laundering:
    • Statutory framework
    • Institutional framework
    • International coordination

 

 

Statutory framework:

  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA)
  • The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)
  • FEMA act 1973
  • Prevention of Money Laundering (Amendment) Act (PMLA) 2012:
  • Bill has introduced the concept of corresponding law to link the provisions of Indian law with the laws of foreign countries.
  • It also adds the concept of reporting entity which would include a banking company, financial institution, intermediary or a person carrying on a designated business or profession.
  • The Prevention of Money Laundering Act, 2002 levied a fine up to Rs. 5 lakh. The amendment act has removed this upper limit.
  • The act has provided for provisional attachment and confiscation of property of any person (for a period not exceeding 180 days). This power may be exercised by the authority if it has reason to believe that the offence of money laundering has taken place.
  • The bill expands the definition of offence under money laundering to include activities like concealment, acquisition, possession and use of proceeds of crime.
  • PMLA, 2018:
  • Amendment in definition of “proceeds of crime”: It now allows the ED to proceed against assets of equivalent value located even outside the country.
  • Bail provisions: It also makes the applicability of bail conditions uniform to all the offences under PMLA. The proposal comes after the Supreme Court recently struck down the previous stringent provisions.
  • Corporate frauds: Corporate frauds is being included as scheduled offence under PMLA, so that Registrar of Companies can report such cases for action by Enforcement Directorate for money laundering probe.
  • Details sharing: The amendment also makes it mandatory for the ED to share relevant details with other agencies.
  • Restoration of property: The amendment allows special court to restore confiscated assets to the rightful claimants even during the trial. Earlier, the assets could be restored only after completion of the trial.

 

Institutional framework:

  • Enforcement Directorate for investigation and prosecution of cases under the PML. The Directorate is under the administrative control of Department of Revenue for operational purposes
  • Financial Intelligence Unit – India (FIU- IND) for receiving, processing, analysing and disseminating information relating to suspect financial transactions as well as for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies against money laundering. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.
  • Various agencies were created– Financial intelligence Unit, Combating financing of terrorism cell, Terror funding and fake currency cell.

 

United Nations Global Programme Against Money Laundering (GPML)

GPML was established in 1997 with a view to increase effectiveness of international action again money laundering through comprehensive technical cooperation services offered to Governments. The programme encompasses following 3 areas of activities, providing various means to states and institutions in their efforts to effectively combat money laundering. Three further Conventions have been adopted for Money Laundering related crimes:

1.      International Convention for the Suppression of the Financing of Terrorism(1999)

2.      UN Convention against Transnational Organized Crime (2000)

3.      UN Convention against Corruption (2003)

 

International coordination:

Since money laundering is an international phenomenon, transnational co-operation is of critical importance in the fight against this menace.

  • FATF: FATF is an intergovernmental body established by the G7 summit in Paris in 1989 and responsible for setting global standards on anti-money laundering and combating financing of terrorism. Blacklisting of countries by FATF.
  • OECD: Automatic Exchange of Financial Information by many countries as part of the OECD initiative.
  • BEPS: Base Erosion and Profit Shifting (BEPS) initiative, under which the countries have agreed to take necessary measures.
  • UN convention against illicit traffic: It combats drug trafficking organizations by emphasising attacking the goal of all organised crime, and also its weakest point namely money itself.
  • UN convention against organised crime: It is designed to combat the phenomenon of transnational organised crime.
  • Vienna convention It was the first major initiative in the prevention of money laundering held in December 1988.This convention laid down the groundwork for efforts to combat money laundering by obliging the member states to criminalize the laundering of money from drug trafficking.
  • The Council of Europe Convention-This convention held in 1990 establishes a common policy on money laundering to facilitate international cooperation
  • The Egmont Group Of Financial Intelligence Units is an informal network of national financial intelligence unit.
  • Asia Pacific group: It works with countries in the Asia-Pacific to generate wide regional commitment to implement anti-money laundering policies and initiatives and secure agreement to establish a more permanent regional anti-money laundering body.
  • Basel Committee on Banking Regulations and Supervisory Practices issued a statement of principles which aims at encouraging the banking sector to adopt common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities.
  • India is also signatory to the International Convention for Suppression of Financing of Terrorism (1999); the United Nation Convention against Transnational Organised Crime (2000); and United Nation Convention against Corruption (2003).

 

What can be done:

  • Enlist common predicate offences: to solve the problem internationally particularly keeping in mind the trans-national character of the offence of money laundering.
  • Awareness and education: To infuse a sense of watchfulness towards the instances of money laundering which would also help in better law enforcement as it would be subject to public examination
  • Proper Coordination between centre and States: The more decentralised the law would be the better reach it will have.
  • Law in every country: The key to making an impact in money laundering is to get all of the countries of the world to enact and enforce the same laws dealing with money laundering so the criminals have nowhere to go.
  • Special cell dealing with money laundering activities: It should be created on the lines of Economic Intelligence Council (EIC) exclusively dealing with research and development of anti-money laundering. This Special Cell should have link with INTERPOL and other international organizations dealing with money laundering. All key stakeholders, like, RBI, SEBI etc. should be a part of this.
  • There is a requirement to have a convergence of different enforcement agencies, sharing of information is necessary.
  • Laws in line with conventions: Countries should criminalise money laundering on the basis of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (the Vienna Convention) and the United Nations Convention against Transnational Organized Crime, 2000

 

Treating Money laundering as a separate offense:

  • Central government is considering a proposal to make money laundering a separate criminal offence to be investigated by the Enforcement Directorate, irrespective of a probe by other agencies
  • Money laundering can be regarded as a multiplier of criminal activities as it gives economic power to criminals
  • The current arrangements in India leave the fate of money laundering cases on probes and prosecution by multiple agencies because the definition of “proceeds of crime” is dependent on predicate offences listed under schedule of PMLA act.
  • Thus, fighting money laundering without fighting organized crime is a waste of time and efforts.
  • Money laundering as a separate offence begins where the intention to conceal the illicit money ends and it needs to be treated separate offence to break the link between money laundering and organized crime and speed up investigations

 

Significance of treating as separate offence:

  • Financial Action Task force (FATF) in its review in 2010 and India’s Special Investigation Team (SIT) on black money had also recommended the same as this will facilitate quick action against those indulging in money laundering.
  • Further it will bring India’s law in line with foreign practices such as U.K where money laundering is treated as a stand-alone crime and based on circumstantial evidence, they have to just establish that the proceeds had a criminal origin, rather than waiting for the outcomes of various other probes.

 

Reason for emergence of FATF as effective body:

  • It follows a consensus-based model of decision making with no overriding voting rights to any of its members. Thus, countries cannot prevent blocking of finance as in UN
  • It has adopted a policy of “naming and shaming “with focus on correction. The country can be placed on a list and then removed thereafter seeing the progress made to implement the guidelines. It ensures an improvement in countering terror funding & money-laundering.
  • The basis of listing countries by the FATF is on the basis of their compliance with transparent guidelines and their effective implementation.
  • Its actions are based more on technical parameters formed after objective and professional analysis and less on geopolitical considerations.
  • It gains credibility by its ability to hurt a country’s economic well-being as its indication of a country’s non-compliance with its guidelines affect its ratings with banks, financial institutions and other countries.
  • It scrutinizes not just the laws of a country but also their implementation.
In 2019, The Asia-Pacific Group (APG) on Money Laundering, a regional affiliate of the Financial Action Task Force (FATF), has placed Pakistan in the “Enhanced Expedited Follow Up List (Blacklist)” for its failure to meet its standards.

 

FATF’s key recommendations:

  • Identify, assess and take effective action to mitigate their money laundering and terrorist financing risks.
  • Countries should have anti-money laundering policy and should designate an authority that is responsible for such policies.
  • Criminalise on the basis of the Vienna Convention and the Palermo Convention.
  • Enable competent authorities to confiscate property and proceeds from money laundering.
  • Ensure that financial institution secrecy laws do not inhibit implementation of these measures.
  • Prohibit financial institutions from keeping anonymous accounts.
  • Require financial institutions to maintain all records on transactions.
  • Money transfer services providers should be licensed or registered.
  • Identify risks that may arise with development of new technologies.
  • Ensure that financial institutions monitor wire transfers.
  • Ensure that FIs’ foreign branches and subsidiaries apply these measures.
  • Financial Institutions should report suspicious transaction to FIUs.
  • Establish financial intelligence unit (FIU).
  • Ensure that designated law enforcement authorities have responsibility for money laundering and terrorist financing investigations.
  • Take immediate steps to become party to important global conventions framed to combat money laundering.
  • Provide mutual legal assistance in relation to money laundering.
  • Effectively execute extradition requests in relation to money laundering and terrorist financing.

 

Measures to stop fake currency:

  • It is necessary to stay ahead of counterfeiters. RBI needs to constantly upgrade both paper based (water mark) and print based (optical variable ink, see through effect) security features.
  • Promote digital transactions and increase digitisation of economy.
  • Frequently demonetise higher denomination notes like Rs.500 and Rs.2000.
  • Increase cooperation among law enforcement agencies, border security agencies, police, etc.
  • External dependence on security paper and ink could be reduced by increasing indigenous production. As most the paper is imported from EU, it can be asked to keep tight monitoring over currency rated printing in Pakistan.

 

Suggestions:

  • More strict laws related to Anti-money laundering is necessary because money laundering tends to corrupt even the most professional players in the market.
  • There is a need to sensitize the Private Sector about their role in anti-money laundering activities
  • Continuous up-gradation and dissemination of information is necessary
  • There is a need to build a balance between financial confidentiality and this confidentiality turning to a money-laundering haven.
  • International regimes attempt to monitor or regulate international relations and activities.
  • Intergovernmental groups have also taken action against the rising levels of global money laundering.
  • Promotion of The Basel committee on Banking regulations and adopted a statement of principles that targeted money laundering.
  • Promotion of The Vienna Convention creates an obligation for signatory states to criminalize the laundering of money from drug trafficking.
  • Promote a regional approach to addressing problems, develop and maintain strategic relationships with other organizations.

 

Previous Years UPSC Questions

  1. Money laundering poses a serious threat to country’s economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace? (2013).
  2. India’s proximity to two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What countermeasures should be taken to prevent the same? (2018)