Know Money Laundering For No Money Laundering

By Saurav Gupta

Edited by Liz Maria Kuriakose, Associate Editor, The Indian Economist

Proletariats might think that money laundering signifies cleaning or washing or drying the currency note. We often come across the term BLACK MONEY (thanks to the media and opposition parties) but how exactly are these BLACK MONEY goons in our Indian economy? The term BLACK MONEY is not easy to define. In a vernacular and lucid language, it may be defined as wealth accumulated through illegitimate channels. The quilt of illegitimate channels has no line on the horizon. Some of the pre-eminent earning from illegitimate channel includes Drug Trafficking, Stock market fraud, Insider trading, Terrorism Financing, Smuggling, Gambling, Human Trafficking, and Wagering etc …..phewww!! If an individual earns money through a legitimate channel but stash his income from taxation compliance, then such income also falls under the ambit of illegitimate earning. Wealth generated through legal and commercially acclaimed sources which are properly disclosed by the generator of such wealth and on which due taxes are paid, is termed as WHITE MONEY.

Money laundering is a process by which mammoth amount of money generated from legally barred activity, is given a texture of being generated through legitimate channels. In lucid term, it is simply a process of converting black money into white money .The nomenclature is said to have emanated from Laundromats owned by Mafias in United States. Huge amount of money earned from extortion, coercion, gambling, drug trafficking etc were given a texture of wealth earned through legitimate source (such as Laundromats) by the mafias there. Indian economy received a fierce set back through ‘HAWALA TRANSACTION’. The term ‘HAWALA’ is an Arabic word which means the transfer of money or pecuniary information between two people using a third person. HAWALA mechanism allowed the conversion of black money into white money with ease.

Money Laundering is also a matter fraudulent ‘ART’ which requires proper excavation of economical channels and investment strategies. Money Laundering is summed up in 3 basic steps: PLACEMENT, LAYERING and INTEGRATION.

Let’s have an in-depth analysis of different stages leading to money laundering.

PLACEMENT

Placement is the first stage in money laundering. The money launderer decomposes big denomination of wealth into smaller denominations. The easiest way of decomposing big denomination of wealth is simply by depositing fragmented part of money into numerous banks, capital market, money market, financial institutions etc. Here, the launderer introduces his illegal profits into the financial system in an incredibly whimsical manner.

LAYERING

Layering is a stage where the launderers undergo a series of transactions to convert or seclude the fund from its source. Through uninterrupted process of unfaltering investment or divestment of money introduced in the earlier stage, the launderer successfully isolates the money from its source. They tend to transfer the money in a prerogative nation that do not co-operate in anti money laundering investigations.

INTEGRATION

This is the last stage of money laundering where the endowments of the earlier stage are returned to the legitimate economy for later haul outs by ways of investing in a company, purchasing real estates, amenity goods, sumptuous lifestyle etc. The launderer makes the money appear to have been legally generated and accomplishes integration of the ‘CLEANED’ money into the economy.

PREVENTIVE MEASURES

India has been classified as high risk zone in terms of money laundering. Out of 140 countries approx, India ranked 70^th in 2013 and 93^rd in 2012, by the ANTI MONEY LAUNDERING (AML) BASEL INDEX.

THE BASEL AML INDEX, 2013

Statistics indicate that India is exposed to money laundering activities. In the mid ‘90s few acts were enacted by government to curb this malpractice. Some of the notable acts to be introduced were:

• The Income Tax Act,1961
• The Indian Penal Code and Code Of Criminal Procedure,1973
• The Conservation Of Foreign Exchange and Prevention Of Smuggling Activities Act,1974
• The Narcotic Drugs and Psychotropic Substances Act,1985
• The Benami Transaction(Prohibition) act,1988

These acts could not make an impact towards the agenda of sweeping away money laundering activities. On 4^th August 1998, Prevention of Money Laundering Act (PMLA) was introduced in Lok Sabha, which was ultimately enacted and enforced on 17^th January, 2003.

REMEDIES UNDER PREVENTION OF MONEY LAUNDERING ACT (PMLA)

• According to SECTION 4 of Prevention of Money Laundering Act 2002, whoever commits the offence of money-laundering shall be punished with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees.
• On being convicted under PMLA, fine imposed upon must be paid within six months from the date of imposition of fine.
• SECTION 56 of PMLA allows the Central Government to enter into an agreement with the Government of any country outside India for enforcing the provision of this law or exchanging of information for the prevention of any offence under PMLA and corresponding laws.
• PMLA, 2002 allows the authority to seize or freeze the property of money launderer, if found guilty. Property also includes property of any kind used in the commission of offence under PMLA, 2002 or any of the scheduled offence.

The introduction of PMLA was not the only solution to this economical pandemonium activity. Government also introduced some adjacent measures along with PMLA to restrict adulteration in Indian Economy.

FINANCIAL ACTION TASK FORCE (FATF)

Financial Action Task Force (FATF) is an inter-governmental body that sets standards and develops and promotes policies to combat money laundering and terrorist financing. It was formed by the G-7 at Paris in the year 1989. Asia Pacific Group (APG) is the regional body of FATF and India is also an active participant in APG deliberations. FATF investigates the process of determining compliance to Anti Money Laundering (AML) and Countering Financing of Terrorism (CFT).

FINANCIAL INTELLIGENCE UNIT (FIU)

Financial Intelligence Unit works on the legal framework prescribed by the PMLA. Financial Intelligence Unit (FIU) performs its operation of receipt, analysis and annunciation of information in conformity with the international standards set up by the FATF and Egmont Group of Financial Intelligence Unit. As laid down in PMLA, FIU receives reports on suspicious transaction, counterfeit currency transactions and fund raising activities of non-profit organization. These reports are prepared and presented reporting entities such as financial intermediaries, commercial banks, registrar of shares, capital market intermediaries etc. 

KNOW YOUR CUSTOMER (KYC)

In the year 2002, Reserve Bank of India (RBI) instructed all the commercial banks and financial institutions to put in place a policy framework to know their customer before opening any account. Under the norms of KYC, every account holders must mandatorily submit proof of identity and proof of address with the bank. The objective of the KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. The KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. KYC was introduced with a vision of sweeping away identity theft, money laundering, terrorist financing, identity fraudulence etc. Banks must maintain also the record of account holders for TEN YEARS from the date of termination of their bank accounts.

Saurav is a graduate from Calcutta University. While pursuing his graduation in the field of Accounts, he cleared the intermediate examinations conducted by The Institute of Chartered Accountants of India and Institute of Company Secretaries of India. He did an internship at the Civilian Welfare Foundation while he was completing his college. Writing has always been one of his favorite hobbies. His ability to connect with the mass allows him to discover different perspectives of different people in a same subject.