Mahatma Gandhi said: Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.

In advanced societies, crime is increasingly economicin character. Criminal associations now tend to be organized like business enterprisesand to follow the same tendencies as legitimate firms; specialization, growth, expansionin international markets and linkage with other enterprises. The holders of capital ofillegal origin are prepared to bear considerable cost in order to legalize its use

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money Laundering refers to the conversion or "Laundering" of such profits which is illegallyobtained, so as to make it appear to originate from a legitimate source. It refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money.

Money Laundering is not an independent crime, it depends upon another crime, the proceeds of which is the subject matter of the crime in moneylaundering.Hiding ordisguising the source of certain proceeds will of course, not amount to money launderingunless these proceeds were obtained from a criminal activity.

The Mechanism ofMoney Laundering

Money laundering operations are typically summarized in four stages: generation, placement, layering, and integration.

Generation: the illegal activity that garners the money places it in the launderer’s hands. Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering. If a crime generates non-currency proceeds (for example, the proceeds of a fraudulent stock sale or public corruption), placement occurs when the proceeds first come under the criminal’s control.

Placement: Currency is anonymous, but it is difficult to handle, hard to hide, takes time to move, and attracts attention. The first concern of the money launderer is to enter the funds into the financial system as quickly as possible. Large blocks of cash are broken up into multiple deposits, placed in several financial institutions in a process known as structuring or “smurfing”. They can be transformed into other assets in such a way as to avoid detection from the authorities.

Layering: Once funds have been entered into the system, they must be moved as far from the point of origin as possible to hide their true nature. Through layering, the launderer can move funds from one company, financial institution, or country through multiple stages by creation of a complex web of financial transactions aimed at concealing the sources and ownership of funds and, simultaneously, confusing the audit trail. Funds might be channeled through the purchase and sales of investment instruments or through a series of accounts at various banks across the globe.

This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not cooperate in anti-money laundering investigations. The launderer might disguise the transfers as payments for goods or services to front companies controlled by the launderer himself or his colleagues. Pre-payment of fake contracts is a frequently used method of moving money whereby the client remits payment but delivery of the supposed product is never made, giving the appearance that the client in this case is the victim.

Integration: Money is now re invested in a legitimate purpose.

Means andMethods

Virtually every type of financial vehicle can be enlisted in the money launderer’s task.

§  Cash smuggling through the use of couriers and bulk cash shipments

§  Structured deposits to or withdrawals from bank accounts,

§  Purchase of various types of monetary instruments (such as travelers’ cheques, bank cheques, and money orders) as well as credit or debit cards and wire transfers are used in moving illicit money.

§  Enterprises that have high cash turnovers are ideal for placing cash proceeds from criminal acts. These include casinos, cash-based businesses, and money exchanges (bureaux de change).

§  Informal financial arrangements (“underground banking”) such as the hawala  and Hundis. Rather than physical movement of cash, hawala-type systems capitalize on networks of trusted friends, relatives, and associates who can front the money for the person making the request with some arrangement on the repayment worked out.

§  In the insurance sector, there is an expanding pool of evidence indicating that single premium insurance products are being utilized to hide illegal wealth.

§  Cyber crimes such as identity theft, illegal access to e-mail, and credit card fraud are coming together with money laundering and terrorist activities. Large amounts of money is now stored in digital form. Now you can transfer money through electronic Cyber payments technology sector has been infiltrated/manipulated by criminal elements.

P-Notes and Money Laundering §  P-Notes are an internationally accepted route to invest money and there are many genuine players. But, the government and the regulator are concerned about round-tripping of money. §  As, there are some who are adopting P-Notes route for illicit money transactions. §  There is a concern that it is being used in money laundering. §  Wealthy Indians, like companies promoters, are using it to bring back unaccounted funds and to manipulate their stock prices. §  The primary reason for the concern with P-Notes is because of the anonymous nature. These investors could be beyond the reach of Indian regulators.  What are SEBI's moves? §   SEBI has recently put in place restrictions on foreign portfolio investors from issuing participatory notes. So, P-Notes can be issued only for the purpose of hedging (safeguarding) with respect to the equity shares held. SEBI said that existing positions on unhedged P-Note derivatives have to be liquidated by the end of December 2020. Earlier to this, SEBI tightened P-Note norms by deciding to levy a fee of USD 1,000 on each instrument. It had increased the know-your-customer (KYC) requirement. It also issued curbs on transferability, and prescribed more stringent reporting for P-Notes issuers and holders. Derivatives §  Derivative is a contract between two or more parties and its value is determined by the underlying asset. §  The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. §  SEBI also barred their issuance for speculative purposes from checking any misuse for channelizing black money. It also decided to relax the entry norms for foreign portfolio investors (FPIs) willing to invest directly in Indian markets rather than through P-Notes. It also mandated issuers to follow Indian anti-money laundering laws instead of norms prevalent in the jurisdiction of the end beneficial owner. What is the significance of SIT's directive? The tightening of P-Note norms was triggered by the concerns raised by SIT in 2015. The present directive is the first time the government-constituted SIT has sought such massive amount of data. It includes the list of beneficial owners and transfer trials of investors taking the P-Note route. The SIT wants to ensure that the regulatory changes made by SEBI are sufficient to curb the misuse of such instruments.

 

 

Implications of Money Laundering

Economic Distortions

Money laundering impairs the development of the legitimate private sector through the supply of products priced below production cost, making it therefore difficult for legitimate activities to compete. Criminals may also turn enterprises which were initially productive into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy. Furthermore, the laundering of money can also cause unpredictable changes in money demand as well as great volatility in international capital flows and exchange rates.

Erosion of Financial Sector

While the financial sector is an essential constituent in the financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may damage the reputation of financial institutions involved in the scheming resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money laundering may also result in bank failures and financial crises.

Reduction inGovernment Revenue

Money laundering also reduces tax revenue as it becomes difficult for the government to collect revenue from related transactions which frequently take place in the underground economy.

Socioeconomic Costs

The socio-economic effects of money laundering are various because as dirty money generated from criminal activities are laundered into legitimate funds; they are used to expand existing criminal operations and finance new ones. Further to that money laundering may lead to the transfer of economic power from the market, the government and the citizens to criminals, abetting therefore crimes and corruption.

The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society. In countries transitioning to democratic systems, this criminal influence can undermine the transition. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue.

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.

Terrorism

Money Laundering serves as an importantmode of terrorism financing. Terrorists have shown adaptability and opportunism inmeeting their funding requirements. Terrorist organizations raise funding from legitimatesources, including the abuse of charitable entities or legitimate businesses or selffinancingby the terrorists themselves. Terrorists also derive funding from a variety ofcriminal activities ranging in scale and sophistication from low-level crime to organisedfraud or narcotics smuggling, or from state sponsors and activities in failed states andother safe havens. Terrorists use a wide variety of methods to move money within andbetween organisations, including the financial sector, the physical movement of cash bycouriers, and the movement of goods through the trade system. Charities and alternativeremittance systems have also been used to disguise terrorist movement of funds

Other Fallouts

§  Money laundering is a crucial adjunct to the underlying crime that generates the money, whether drugs, fraud or other forms of crime.

§  The funds generated may be easily used for financing of terrorism

§  Money laundering helps corrupt officials disguise misappropriated public assets.

§  Money laundering by corporate executives undermines the public trust in a country’s institutions, particularly its financial infrastructure

§  The ability of criminal organizations and terrorist groups to flourish is tied closely to their success in moving and accessing the proceeds of their activities. It is incumbent upon governments to develop strong anti-money laundering measures in order to stem the momentum of these groups.

Extent of the Problem

The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organised crimes and to investigate to what extent these funds are laundered.  The report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7%  (or USD 1.6 trillion) being laundered.

However, the above estimates should be treated with caution.  They are intended to give an estimate of the magnitude of money laundering. Due to the illegal nature of the transactions, precise statistics are not available and it is therefore impossible to produce a definitive estimate of the amount of money that is globally laundered every year.  The FATF therefore does not publish any figures in this regard.

The Nodes of Money Laundering

As money laundering is a consequence of almost all profit generating crime, it can occur practically anywhere in the world. Money launderers tend to seek out countries or sectors in which there is a low risk of detection due to weak or ineffective anti-money laundering programmes.

Money laundering activity may also be concentrated geographically according to the stage the laundered funds have reached. At the placement stage, for example, the funds are usually processed relatively close to the under-lying activity; often, but not in every case, in the country where the funds originate.

With the layering phase, the launderer might choose an offshore financial centre, a large regional business centre, or a world banking centre – any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may also only transit bank accounts at various locations where this can be done without leaving traces of their source or ultimate destination.

Finally, at the integration phase, launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering limited investment opportunities.

Causes of Increase in Money Laundering and Inability to Control

There are various causes for increase in Money Laundering and the few of them can beenlisted as follows which is popularly known as ‘Features of an Ideal Financial Haven’:

§  No deals for sharing tax information with other countries –

§  Availability of instant corporations

§  Corporate Secrecy Laws – as the corporate law of certain countries enableslaunderers to hide behind shell companies.

§  Excellent Electronic Communication

§  Tight Bank Secrecy Laws

§  A Government that is Relatively Invulnerable to Outside Pressures

§  A high degree of Economic Dependence on the Financial Services Sector

§  A Geographical Location that Facilitates Business Travel to and from richneighbors.

§  Increase in sophistication and employment of professional people for doing thetask

Regulation of Money Laundering – International Perspective

Money laundering is a truly global phenomenon. The increasing integration of theworld’s financial system, as technology has improved and barriers to the free movementof capital have been reduced, has meant that money launderers can make use of thissystem to hide their ill-gotten gains. They are able to quickly move their criminallyderived cash proceeds between national jurisdictions, complicating the task of tracing andconfiscating these assets

Action at the international level to combat money laundering began in 1988 with two important initiatives: The Basel Committee on Banking Regulations and Supervisory Practices and the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances

The Basle Statement of Principles70 on the prevention of criminal use of the bankingsystem was a significant breakthrough on the financial front to have some controllingmechanism for money-laundering on an international plane. The Statement of Principlesdoes not restrict itself to drug-related money laundering but extends to all aspects oflaundering through the banking system, i.e. the deposit, transfer and/or concealment ofmoney derived from illicit activities whether robbery, terrorism, fraud or drugs. It seeksto deny the banking system to those involved in money laundering by the application ofthe four basic principles:

§  1.    Know Your Customer (KYC) - This mandates the bank to take reasonable efforts to determine their customer’s true identity, and have effective procedures for verifying the bonafides of a new customer.

§  2.    Compliance with Laws – Bank management should ensure high ethical standards in complying with laws and regulation and keep a vigil to not provide services when any money-laundering activity is suspected.

3.    Cooperation with Law Enforcement Agencies

4.    Adherence to the Statement

UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances

This UN Convention was one of the historic conventions inasmuch as the parties to the Convention recognized the links between illicit drug traffic and other related organised criminal activities which undermine the legitimate economies and threaten the stability, security and sovereignty of States and that illicit drug trafficking is an international criminal activity that generates large profits and wealth, enabling transnational, criminal organizations to penetrate, contaminate and corrupt the structures of government, legitimate commercial and financial businesses and society at all levels. The treaty required the signatories to criminalize the laundering of drug money, and to confiscate it where found. All countries ratifying agree to introduce a comprehensive criminal law against laundering the proceeds of drug trafficking and to introduce measures to identify, trace, and freeze or seize the proceeds of drug trafficking. Based on the convention many countries have framed their national legislations. Council of Europe Convention on Laundering is motivated by this convention as well as this convention gave a framework for FATF to work.

GPML – The Global Programme against Money Laundering was established in 1997 in response to the mandate given to UNODC by the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. GPML mandate was strengthened in 1998 by the United Nations General Assembly Special Session (UNGASS) Political Declaration and Action Plan against Money Laundering which broadened its remit beyond drug offences to all serious crime

Three further Conventions have been adopted / specify provisions for AML/CFT related crimes:

§  International Convention for the Suppression of the Financing of Terrorism (1999),

§  UN Convention against Transnational Organized Crime (2000)

§  UN Convention against Corruption (2003)

The Financial Action Task Force (Fatf)

The Financial Action Task Force (FATF) is an inter-governmental body founded by G7 Countries (Canada, France, Germany, Italy, Japan, United Kingdom), created in 1989, whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. The Forty Recommendations of the Financial Action Task Force on Money Laundering (FATF) have been established as the international standard for effective antimony laundering measures. FATF regularly reviews its members75 to check their compliance with these Forty Recommendations and to suggest areas for improvement. It does this through annual self-assessment exercises and periodic mutual evaluations of its members. The FATF also identifies emerging trends in methods used to launder money and suggests measures to combat them. In addition to the existing 40 recommendations FATF has come up with 9 special recommendations on terrorist financing. As per the recommendations of the task force, all countries have to ensure that offences such as financing of terrorism, terrorist acts and

Terrorist organisations are designated as ‘money laundering predicate offences.’

REGULATION OF MONEY LAUNDERING IN INDIA

With its growing financial strength, India is vulnerable to money laundering activitieseven though the country's strict foreign exchange laws make it difficult for criminals tolaunder money

Money-laundering in India has to be seen from two different perspectives, i.e., Moneylaunderingon international forum and Money-laundering within the country. As far asthe cross-border money-laundering is concerned India’s historically strict foreignexchangelaws and reporting norms have contributed to a great extent to control moneylaundering on international forum. However, there has been threat from informaltransactions like ‘Hawala’.

Before 2002, the following provisions in Indian law addressed the issue:

• The Conservation of Foreign Exchange and Prevention of Smuggling ActivitiesAct, 1974

• The Income Tax Act, 1961

• The Benami Transactions (Prohibition) Act, 1988

• The Indian Penal Code and Code of Criminal Procedure, 1973

• The Narcotic Drugs and Psychotropic Substances Act, 1985

• The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic SubstancesAct, 1988

However, this was not sufficient with the growth of varied areas of generating illegalmoney by selling antiques, rare animal flesh and skin, human organ, and many suchvaried new areas of generating money which was illegal. Money-laundering was aneffective way to launder the black money (wash it to make it clean) so as to make itwhite.

Prevention of Money Laundering Act, 2002

The aforesaid Act was enacted to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering. The Act extends to the whole of India including J&K. The Act came into force in 2005 and defines money laundering offence and provides for freezing seizure and confiscation of the proceeds of the crime.

Financial Intelligence Unit – India (FIU-IND) was set by the Government of India in November 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister

In 2010 India gained membership of the Eurasian Group which is a Financial Action Task Force (FATF) styled regional body, responsible for enforcing global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT). India is the 9th member of the group. The other members are Russia, China, Turkmenistan, Serbia, Tajikistan, Uzbekistan, Belarus and, Kazakhstan. The group also has 16 nations and 15 organizations as observers. 

The role of the member nations of the group in achieving AML and CFT goals is of particular significance in the view of their geographical location which is close to the epicentre of terrorism. In addition to playing its own role in fighting terror, India is committed at the highest levels of the Government to adopt, enforce and contribute to international best practices in AML and CFT. 

As a nation that has been amongst the first to suffer at the hands of terrorists, India understands the human and financial loss to counties that are in the crosshairs of such groups. India would, therefore, individually and collectively face this challenge. Through this membership, India would learn from the experience of the member nations and also contribute to the collective effort in achieving AML CFT goals. In the process, India would be able to work towards achieving a more transparent stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups. 

India has signed a Multilateral Convention on Mutual Administrative Assistance in Tax Matters in 2012. The Convention was amended to respond to the 2009 G20 Summit call for developing a broader multilateral approach to improve the effectiveness of exchange of information, co-operation between the countries in the assessment and collection of taxes, with a view to combating tax avoidance and evasion.

 By signing the Convention, India and the other 31 signatories encourage more countries to join, sending a strong signal that countries are acting together to ensure that individuals and multinational enterprises pay the right amount of tax, at the right time and in the right place.

Salient features of this Multilateral Convention are

§   It is based on international standard of transparency and exchange of information.

§  This instrument is multilateral and a single legal basis for multi-country co-operation as against the DTAAs/TIEAs which are bilateral. It provides for an extensive network and there will be consistent application of provisions leaving limited scope for deviation.

§  It provides extensive forms of co-operation among the signatories on all taxes.

§  It not only facilitates the exchange of information, but also provides for assistance in the recovery of taxes. This will give a fillip to the efforts of the Government in bringing the Indian money illegally stashed abroad.

Provisions of PMLA (Amendment) Act 2012

The Act 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 Act expands the definition of offence under money laundering to include activities like concealment, acquisition, possession and use of proceeds of crime.

The Prevention of Money Laundering Act, 2002 levies a fine up to Rs five lakh.  The New Act has removed the upper limit.

Act provides for provisional attachment and confiscation of property of any person (for a period not exceeding 180 days).

The Act provides for appeal against the orders of the Appellate Tribunal directly to the Supreme Court within 60 days from the communication of the decision or order of the Appellate Tribunal.

How to Combat Cyber-Laundering?

Urgent action is required, in particular because more and more of todays and tomorrows financial activities use and will use new channels and new means of payment that often bypass the financial sector and therefore escape the oversight of financial regulators.

All institutions involved in preventing and combating money laundering and terrorist financing, especially supervisory and law enforcement bodies, urgently need to strengthen their IT knowledge to keep up pace with criminals across the world. This includes increased training and, if needed, the hiring of former hackers.2)

Criminals and terrorists can often operate largely anonymously due to lax enforcement of due diligence, in particular in areas outside the financial industry. We therefore have to introduce better ID checks with new financial instruments (e.g. prepaid storage cards), especially outside the financial sector. This could help reduce the use of anonymous payments.3)

Cyber-savvy users can relatively easily avoid the tracking of their online identity by using proxy servers and anonymous software. Although a certain degree of online anonymity is acceptable, especially in politically delicate regions of the world, financial operations should never be conducted anonymously. We therefore need better IP tracking to prevent criminals from hiding their online identities.4)

Criminals can easily exploit the lack in international co-operation by moving from country to country. We therefore need much better international co-operation and co-ordination to prevent and combat money laundering and terrorist financing. We have to strengthen national and international efforts and instruments aimed at combating on line money laundering and terrorist financing, for example by allowing for faster exchange of information and speeding up requests for mutual legal assistance.

Amendments to PMLA, 2018

·         The government has introduced amendments to the Prevention of Money-laundering Act, 2002 (PMLA) through Finance Act 2018.

·         The definition of "proceeds of crime" in PMLA was amended in 2015 to include "property equivalent held within the country" in case proceeds of crime is taken out. The present amendment shall allow including of property equivalent to proceeds to crime held outside the country too. 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 provision which could deny bail even when there were sound grounds to believe that a person was not involved in money laundering. Scheduled offence - Corporate frauds is being included as scheduled offence under PMLA so that Registrar of Companies in to report such cases for action by Enforcement Directorate for money laundering probe.

·         The amendment also makes it mandatory for the ED to share relevant details with other agencies. Restoration of property - Present provisions allow distribution of confiscated property to the rightful claimants, only after the trial is complete. The amendment allows Special Court to restore confiscated assets to the rightful claimants even during the trial.