As per OECD, “Money laundering is the process of concealing illicit gains that were generated from criminal activity”. Prevention of Money-Laundering Act, 2002 defines the offence of ‘Money Laundering’ as, “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 and projecting it as untainted property shall be guilty of offence of money-laundering”. In simple terms, Money laundering is the process of taking money earned from illicit activities, such as drug trafficking or tax evasion, and making the money appeared to be earnings from legal business activity.

Why is Money Laundered?

Illegal arms sales, smuggling, and other organized crime, including drug trafficking and prostitution rings, can generate huge amounts of money. Corruption, embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits. The money generated from such illicit activities is considered dirty and needs to be laundered to make it look ‘clean’. The criminals need a way to deposit the money in financial institutions. Yet they can do so if the money appears to come from legitimate sources. By successfully laundering the proceeds, the proceeds can be made to appear ‘clean’ and the illicit gains may be enjoyed without fear of being confiscated or being penalized.

How is Money Laundered?

Traditionally money laundering has been described as a process which takes place in three distinct stages.Placement Stage – At this stage criminally derived funds are introduced in the financial system. This is the riskiest stage because of large amounts of cash involved which can catch the eyes of law enforcement agencies. So the launderer breaks large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or is used to purchase monetary instruments such as cheques, money orders etc.

Layering stage - It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may be done by below mentioned ways:

• Several bank-to-bank transfers which may be in small amounts.
• 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.
• Purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money.
• Disguising the transfers as payments for goods or services provided

Integration stage – This is the final stage at which the ‘laundered’ property is re-introduced into the financial system as legitimate money. At this stage, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures. 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.

Various Techniques Used for Money Laundering

1. 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 ecause many individuals (the “smurfs”) are involved.

2. 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.

3. 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.

4. Bulk cash smuggling: This involves physically smugglin\g 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.

5. 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.