Money Laundering refers to the conversion of money which has been illegally obtained, in such a way that it appears to have originated from a legitimate source.Theterm "money laundering" is said to have originated from the mafia ownership of Laundromats in the United States. The mafia earned huge amounts from extortion, gambling etc. and showed legitimate source (such as laundomats) for these monies.

In India, money laundering is popularly known as Hawala transactions. It gained popularity during early 1990s when many of the politicians were caught in its net. Hawala is an alternative or parallel remittance system. "Hawala" is an Arabic word meaning the transfer of money or information between two persons using a third person. The Hawala Mechanism facilitated the conversion of money from black into white.

BLACK & WHITE MONEY

Black money refers to funds earned, on which income and other taxes have not been paid. Black money is earned through illegally traded goods or services.

While the money earned through legal means on which due taxes have been paid is referred to as white money.

MONEY LAUNDERING PROCESS

Placement: The first stage is the physical disposal of cash. The launderer introduces his illegal profits into the financial system. This placement is accomplished by depositing the cash in domestic banks or in other types of formal or informal financial institutions.

Layering: The Second stage in money laundering is layering. The launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channeled through the purchase and sale of investment instruments such as bonds, stocks, and traveler’s cheques or the launderer might simply wire the funds through a series of accounts at various banks across the globe, particularly to those jurisdictions that do not cooperate in anti-money laundering investigations.

Integration: This is the stage where the funds are returned to the legitimate economy for later extraction. Examples include investing in a company, purchasing real estate, luxury goods, etc. This is the final stage in the process. The launderer makes it appear to have been legally earned and accomplishes integration of the “cleaned” money into the economy.

AML BASEL INDEX 2013

AML Basel index is country risk ranking which focuses on money laundering/ terrorist financing risk, consisting of 14 indicators of assessment.

Out of 140 countries, India has been ranked 93rd and 70th in 2012 and 2013 respectively with a score of 6.05 in 2012 and 5.95 in 2013, as compared to Norway, which has a score of 2.36 and ranks No. 1 in the Anti Money Laundering (AML) Basel Index 2013.

This clearly shows that India, in the present-day scenario, is very vulnerable to money laundering activities and is a high risk zone.

REPORTS:

• The report by the Financial Action Task Force (FATF), a Paris-based global body to set standards to combat money laundering and terrorist financing, says that India has reported instances where diamond prices were overvalued for purposes of laundering and suspected financing.
• The report said as there were no set standards of diamond pricing in the country, agents were overvaluing the costly and prized gemstones
• A report from Global Financial Integrity, published in December 2013, reported that the total black money outflow from India was nearly $343 billion during 2002-2011. 
• According to data from BRICS Chamber of Commerce & Industry, the cases of money laundering in India increased from 798 at the end of 2009 to 1,561 in 2013.

LEGISLATIONS

Many acts exist in India, which directly or indirectly curbs money laundering activities.A few of such acts are:

The Conservation of Foreign Exchange and Prevention of Smuggling Activities  Act, 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 

They proved to be inadequate in the treatment of money laundering matters.

In 2002, the Parliament of India passed an act called the Prevention of Money Laundering Act, 2002 (PMLA).

The main objectives of this act are to prevent money-laundering as well as to provide for confiscation of property either derived from or involved in, money-launderingand to deal with any other issue connected with money laundering in India.

Section 12 (1) describes the obligations that banks, other financial institutions, and intermediaries have to

(a) Maintain records that detail the nature and value of transactions, whether such transactions comprise a single transaction or a series of connected transactions, and where these transactions take place within a month.

(b) Furnish information on transactions referred to in clause (a) to the Director within the time prescribed, including records of the identity of all its clients.

Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department.

Banks must record all transactions over Rs. 10 Lakhs. Banks must maintain these records for 10 years. Banks also must make cash transaction reports (CTRs) and suspicious transaction reports over RS. 10 Lakhs within 7 days of doubt. They must submit the report to the enforcement directorate and income tax department

Cases are investigated by the Enforcement Directorate and Indian Income Tax Department

FINANCIAL INTELLIGENCE UNIT

The Financial intelligence Unit (FIU) operates in the legal framework established by the PMLA. FIU performs the basic functions of receipt, analysis and dissemination of information in accordance with the international standards set up by the Financial Action Task Force (FATF) and Egmont Group of FIUs.

As prescribed under the PMLA, FIU receives reports on cash transactions, suspicious transactions, counterfeit currency transactions and funds received by non-profit organizations.

These reports are filed by reporting entities i.e. banks, financial institutions and capital market intermediaries, casinos, private locker operators, registrar to an issue of shares and dealers in precious metals. 

FIU maintains a database and shares these reports with various agencies.

KYC GUIDELINES

The objective of Know your Customer (KYC) guideline is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities.

In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc., the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.

The KYC guidelines were introduced by RBI in 2002, and all banks were instructed to be compliant by 31st Dec 2005.

AMENDMENTS IN PMLA

• Definition of “Activities of Terrorism” was not present in PMLA 2002, however the same was included in 2010 as “Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist acts or by a terrorist, terrorist organization or those who finance or are attempting to finance terrorism.” 
• Until 2010, the enactment allowed protecting identity of beneficial owners, who could be represented by lawyers and accountants. However, it has been abolished as a part of the recent amendments made to the act in 2013.
• RBI and IRDA did not have any provision to address cases for filling Suspicious Transaction Report to Financial Monitoring Unit. Circulars have been issued by both institutions to address the deficiency.

The earlier provisions of the Act lacked the prowess for due legislative action. Hence, the scope was broadened in 2013 to include concealment, possession, acquisition or use of property, and projecting or claiming it as untainted property. Commodity future brokers have also been included within the scope of the Act.