MONEY LAUNDERING

MONEY LAUNDERING
Money is the prime reason for engaging in almost any type of criminal activity.
Money-laundering is the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.
Terrorists and terrorist organizations also rely on money to

1. sustain themselves and

2. to carry out terrorist acts.
Money for terrorists is derived from a wide variety of sources. While terrorists are not greatly concerned with disguising the origin of money, they are concerned with concealing its destination and the purpose for which it has been collected. Terrorists and terrorist organizations therefore employ techniques similar to those used by money launderers to hide their money.
The ability to prevent and detect money-laundering is a highly effective means of identifying criminals and terrorists and the underlying activity from which money is derived. The application of intelligence and investigative techniques can be one way of detecting and disrupting the activities of terrorists and terrorist organizations.
As they deal with other people's money, financial institutions rely on a reputation for probity and integrity. A financial institution found to have assisted in laundering money will be shunned by legitimate enterprises. An international financial centre that is used for money-laundering can become an ideal financial haven.
Developing countries

1. Attracting "dirty money" as a short-term engine of growth can find it difficult, as a consequence, to attract the kind of solid long-term foreign direct investment that is based

2. Only stable conditions and good governance can help them sustain development and promote long-term growth.

3. Money-laundering can erode a nation's economy by changing the demand for cash, making interest and exchange rates more volatile,

4. By causing high inflation in countries where criminals are doing business.

5. fuels corruption and organized crime

6. Corrupts public officials

7. Terrorist groups use money-laundering channels to get cash to buy arms. The social consequences of allowing these groups to launder money can be disastrous.
In recent years, the international community has become more aware of the dangers that money-laundering poses in all these areas and many Governments and jurisdictions have committed themselves to taking action. The United Nations and other international organizations are committed to helping them in any way they can.
Criminals are now taking advantage of the globalization of the world economy by transferring funds quickly across international borders.

The Money-Laundering Cycle



Money-laundering is the process that disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. There are two reasons why criminals - whether drug traffickers, corporate embezzlers or corrupt public officials - have to launder money: the money trail is evidence of their crime and the money itself is vulnerable to seizure and has to be protected. Regardless of who uses the apparatus of money-laundering, the operational principles are essentially the same. Money-laundering is a dynamic three-stage process that requires:

* placement, moving the funds from direct association with the crime;

* layering, disguising the trail to foil pursuit; and,

* integration, making the money available to the criminal, once again, with its occupational and geographic origins hidden from view.
These three stages are usually referred to as placement, layering and integration.

MONEY LUNDERING & GLOBALISATION
Rapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease. This makes the task of combating money-laundering more urgent than ever.
The deeper "dirty money" gets into the international banking system, the more difficult it is to identify its origin. Because of the clandestine nature of money-laundering, it is difficult to estimate the total amount of money that goes through the laundry cycle.
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 Euromarket 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.
The Financial Action Task Force (FATF) on Money Laundering has identified certain choke points in the money laundering process that the launderer finds difficult to avoid and where he is vulnerable to detection. The initial focus has to be on these areas if the war against the launderer is to proceed successfully.
The choke points identified are:

* entry of cash into the financial system;

* transfers to and from the financial system; and

* cross-border flows of cash



Ravi Kunal Nayyar

Topic MONEY LAUNDERING AND ITS PREVENTION

What is Money Laundering?
MONEY LAUNDERING is the process by which large amounts of illegally obtained money is given the appearance of having originated from a legal source.
Stages of Money Laundering
It has three stages,

1. Placement stage at this stage, vast amount of money generate from an illegal source(e.g., drug dealing, terrorist activity or other serious crimes) placed into the financial system or retail economy or smuggled out of the country. The aim of this stage is to remove the cash from the location of acquisition and then transform it into other assets.

2. Layering stage at this stage, complex layers of financial transactions designed to disguise the audit trail and provide anonymity.

3. Integration stage at this stage, money is integrated into the legal economic and financial system and is adopted with all other legal assets in the system.

Methods of MONEY LAUNDERING

1. Structuring or Smurfing - in this method cash is broken into small deposits to prevent the suspicion of MONEY LAUNDERING.

2. Casinos in this method, an individual transform its illegal money into legal money by playing for a while, and get all his cash back as gambling winnings.

3. Real Estate in this method, an individual buy property from illegal money and then sell it to gets his money back in a legal way.

4. Cash intensive businesses in this method, a business typically involved in receiving cash uses its account to deposit both legal are illicit money, claiming all of it as legitimate earnings. Examples are strip clubs, casinos, parking buildings, etc.

5. Black salaries a company may have unregistered employees without a written contact and pay them cash salaries. Black cash might be used to pay them.
Above list is not exhaustive.
Prevention of MONEY LAUNDERING
At international level

1. United Nation Convention in 1988 against the Illicit Traffic in Narcotic Drugs and Phychotropic Substances is the first international legal instrument to embody the MONEY LAUNDERING. Also the first international which criminalizes MONEY LAUNDERING.

2. UN convention against Transational Organized Crime in 2003 and UN convention against Corruption in 2005 came into force.

3. Both convention states that MONEY LAUNDERING should not only apply to the proceed of drug trafficking, but should also cover the proceeds of all serious crimes.

4. Both convention urge states to create domestic supervisory and regulatory regime for banks and non-financial institutions

5. Both conventions also call for the establishment of Financial Intelligence Units (FIUs).


1. Financial Action Task Force(FATF)

2. FATF is an inter-governmental body that sets standards, develops and promotes policies to combat MONEY LAUNDERING and terrorist financing for countries around the world.

3. In 1990, FATF issued a set of 40 recommendations for improving national legal systems. These recommendations were revised and updated in 1996 and in 2003.

4. FATF on MONEY LAUNDERING has identified certain choke points in its process. These choke points are

* entry of cash into financial system

* transfers to and from the financial system

* cross border flow of cash
Prevention in India -

1. The financial intelligence unit-India (FIU-India) which is the nodal agency in India for managing the anti-MONEY LAUNDERING ecosystem. It helps in co-coordinating and strengthening efforts to reduce MONEY LAUNDERING and related crimes in India.

2. Prevention of MONEY LAUNDERING Act, 2002 has been the core framework for combating it.

3. In 2010, India admitted as the 34th country member of FATF.

4. This membership helped Indian enforcement agencies to exchange information and financial institutions to gain much better access to markets of other member countries.

5. Prevention of MONEY LAUNDERING (Amendment) Bill, 2012 passed in Lok Sabha and Rajya sabha.

6. The Enforcement directorate carries out investigations. The ED is also empowered to attach property entities involved in money laundering.

7. The investigation begins with filing an Enforcement Case Information Report(ECIR), which is comparable with an FIR. The adjudicating authority under prevention of MONEY LAUNDERING act then decides whether the attachment is valid or not. The courts take the final call on punishment.
Key amendments to the Prevention of MONEY LAUNDERING Act

* Expanded the definition of offence of MONEY LAUNDERING to include activity like concealment, acquisition, possession, and use proceeds of crime.

* Removed the upper limit of fine of Rs. 5 lakh.

* Expanded the scope and duration of attachment of property to 180 days.

* Introduced the concept of reporting identity.

* Increased the powers of the director to call for records and conduct enquiries.

* Clarified that prosecution extends not only to individuals but also to the company.

Current status of money laundering in India -


* India has considerably stepped up its investigations into money laundering and terror funding with the number of cases under probe rising to 1704, even though a low conviction level remains a "serious effectiveness issue".

* The current status of money laundering in India can also be evaluated by looking at the Basel index prepared by the Basel Institute on governance, Switzerland. The Basel AML index scores countries on the basis of AML laws, financial regulations, political disclosure, etc. in that country. The overall score, which ranges from 0 (low risk) to 10 (high risk) . Out of 140 countries, India has been ranked 93rd (score- 6.05) .

Recommendations


1. To strengthen international co-operation on information exchange and law enforcement

2. Proper mechanisms for handling suspicious reports

3. To increase public awareness of the threat from MONEY LAUNDERING

4. To focus on new technologies and increase counter measures to combat their use for MONEY LAUNDERING

5. Introduce measures that make the movement of money more visible

6. Increasing co-ordination b/w the multiple agencies involved and to improve the limited intelligence sharing

by Neha Mittal
References-
1. www.indianexpress.com
2. www.laundryman.u-net.com
3. www.unodec.org
4. www.lawyersclubindia.com