MONEY LAUNDERING: AN INTODUCTION, METHODS AND TECHCHNIQUES USED BY LAUNDERERS


WHAT IS MONEY LAUNDERING

Money laundering is a process which involves cleansing of “dirty” money earned through criminal/illegal activities to disguise their illegal origin. The tainted money is projected as clean money through intricate processes of placement, layering and laundering. The process of money laundering is of critical importance as it enables the criminals to enjoy the profits generated by criminal acts without jeopardizing their source. When criminal activity generates substantial profits, the individual or the group involved tries to disguise the sources of ill-gotten funds or change the form of such funds, or move the funds to a place where they are less likely to attract attention. Consequently, the links between the politicians and businessmen, money laundering of foreign accounts and insider-trading remain a mystery to the public .  In other words Money Laundering  is a process where the proceeds of crime are transformed into apparently legitimate money or other assets. It is the processing of criminal proceeds to disguise its illegal origin. In simple words, it can be defined as the act of making money that comes from one source to look like it comes from another source. The meaning of Money laundering has been assigned  under section 3 of the PMLA Act, which is as under:-

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or  activity connected with the proceeds of crime including  including its concealment, possession, acquisition 

or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering. 

 

WHAT IS THE OBJECTIVE OF THE  PREVENTION OF MONEY LAUNDERING ACT

The  main objective of this act is “to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.” This law allows the attachment, adjudication and confiscation of property of the offender if found guilty and prescribes 3 to 10 years of imprisonment and also liable to fine.

 

HOW MUCH MONEY IS LAUNDERED PER YEAR

The laundered  money is increasing rapidly for the last 4-5 years. The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address.

There have been a number of developments in the international financial system during recent decades that have made the three F's-finding, freezing and forfeiting of criminally derived income and assets-all the more difficult. These are the "dollarization" (i.e. the use of the United States dollar in transactions) of black markets, the general trend towards financial deregulation, the progress of the Euro-market and the proliferation of financial secrecy havens.

Fuelled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which "megabyte money" (i.e. money in the form of symbols on computer screens) can move anywhere in the world with speed and ease.

 

WHAT ARE METHODS OF THE MONEY LAUNDERING 

There are basically three methods/stages of laundering the money which is used by the launderer.

PLACEMENT  

It is the stage at which criminally derived funds are introduced in the financial  system. At this stage, the launderer inserts the “dirty” money into a legitimate financial institution often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions. To curb the risks, large amounts of cash is broken up into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

 

LAYERING

It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. At this stage, the launderer engages in a series of conversions or movements of the money in order to distant them from their source. In this process  the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money's currency, and purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money. This is the most complex step in any laundering scheme, and it's all about making the origin of the money as hard to trace as possible. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

 

INTEGRATION 

At this stage  the ‘laundered’ property is re-introduced into the legitimate economy.  The launderer might choose to invest the funds into real estate, luxury assets, or business ventures etc.. At this point, the launderer can use the money without getting caught. It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

 

WHICH TECHNIQUES ARE USED BY THE LAUNDERERS

Following techniques are being used by the money launderer in normal course:-

 

STRUCTURING DEPOSITS OR SMURFING 

By this method the cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid anti-money laundering reporting requirements.

 

SHELL COMPANIES

These are fake companies that exist for no other reason than to launder money. 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.However, the shell companies has not been defined under the Companies Act.

 

THIRD-PARTY CHEQUES 

Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.

 

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. 

 

WHAT PREVENTIVE MEASURES HAVE BEEN TAKEN BY THE CENTRAL GOVERNMENT TO CURB THE MONEY LAUNDERING IN INDIA

India has its own set of guidelines and regulations which are being implemented against money laundering. The pioneering efforts come in the form of the well-known Income Tax Act of 1961.Even more specific steps were taken in the form of The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 and The Smugglers and Foreign Exchange Manipulators Act, 1976. These laws had a holistic definition and specified the punishment for the offences as mentioned in the Act.Other acts include The Narcotic Drugs and Psychotropic Substances Act, 1985; The Benami Transactions (Prohibition) Act, 1988; The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and The Foreign Exchange Management Act, 2000.

While these acts of the 20th century had their main focus on eradicating criminal activities, it was not until 2003 when the first act stressing on money laundering was passed- The Prevention of Money Laundering Act, 2002 (PMLA) came into force on 01.07.2005 and to strengthen the Act to curb the money Laundering several amendments have been done in the Act . The List of amending Acts   are as under:-

The prevention of Money-Laundering(Amendment) Act,2005(20 of 2005)w.e.f. 01.07.2005

The prevention of Money-Laundering(Amendment) Act,2009(21 of 2009)w.e.f. 01.06.2009

The prevention of Money-Laundering(Amendment) Act,2012(2 of 2013)w.e.f. 15.02.2013

The Finance Act,2015(20 of 2015)w.e.f.14.05.2015

The Black Money (Undisclosed Foreign Income and Assets )and Imposition of Tax act,2015(22of 2015)w.e.f.01.07.2015

The Finance Act,2016(28 of 2016)w.e.f.01.06.2016

The Finance Act,2018(13 of 2018)w.e.f.19.04.2018

The Prevention of Corruption(Amendment) Act,2018(16 of 2018)w.e.f. 26.07.2018

The Finance Act,2019(7 of 2019)w.e.f.20.03.2019

The Aadhaar and other laws(Amendment)Act,2019(14 of 2019) w.e.f.25.07.2019

The Finance (No.2) Act,2019(23 of 2019) w.e.f. 01.08.2019.

Furthermore, the RBI also issued a master notice to introduce Know-Your-Customer norms alongside Anti-money laundering standards, combating of financing of terrorism and obligation of banks under PMLA, 2002.These policies prevent the consumer from misusing of bank privileges by criminal outfits for money laundering and terrorist financing. KYC in particular helps the banks to understand their customers better and calculate the risks of loans and funds prudently.

In addition to the laws, the government of India also set nodal agencies for efficient management of anti-money laundering ecosystem. These agencies are known as Financial Intelligence Units- India (FIU-INDs). They single-handedly act as the interface between the finance sector and the enforcing agencies. Their job includes collection, analysis and dissemination information, especially about suspicious financial transactions.