PROJECT ON

EFFECT OF BLACK MONEY AND MONEY LAUNDERING ON ECONOMY OF INDIA.

Black Money and its Effect on Indian Economy

What is Black Money?
The money generated through any or all unrecognized and illegal sources, be it from land, corruption, fraud or any other unfair mean is collectively trashed under the label of Black Money by the law of any country. The law declares every single penny earned from an unsolicited and unrecognized source as a part of Black Money.

Sources of Black Money in India

In such a large country as India which may be called semi-developed while stats say that it's still developing due to the parasite that has stuck its economy very badly. Yes, it's the corruption that I'm talking about, the largest threat to any country's financial, political as well as social structure. This corruption only is the major source of black money in India. While corruption maybe in any form viz. properties, assets, costly gifts (mostly linked with high ranked officials and provided by the business class personalities for keeping the noose around their heads loose). All these forms are directly or indirectly responsible for increasing the black money of a country such as India. The person who possesses these things obviously possesses their worth as well. So, he has a property or asset in his possession that came from some unknown source (as considered by the law) clearly violating the terms for valid or recognized money. While this is just a specific example concerning a particular category of the system where corruption and black money join hands, there are many more such major sources of black money in India. Hence corruption and black money are like two faces of a coin while being illegally supportive towards the growth of each other. So, if we look for the sources of corruption we automatically get the sources of Black Money. Still there are sources of Black money which can't be called as a product of corruption and I've mentioned these here in my article Sources of corruption in India.

Effect of black money in India

The circulation of black money has adversely affected the Indian economy in several ways. 1. It leads to the misdirection of precious national resources. 2. It has enormously worsened the income-distribution. The fixed income salary class finds itself ever be the lower rung of the income-ladder as they pay taxes. They are not able to catch up with the people in business, or in professions, or many of those employed who make money by black activities. Many high placed official and honest employees earn much less than an average small shopkeeper in big cities like Bombay and Delhi. 3. The existence of a big-sized unreported segment of the econom is a- big handicap

in making a correct analysis and formulation of right policies for it. 4. Black money results in transfer of funds from India to foreign countries through clandestine channels. Such transfers are made possible by violations exchange regulations through the device of under invoicing of exports and over-invoicing of imports etc. 5. Black money requires for its protection, proliferation and expansion of a service organization composed of musclemen, touts and brokers to combat the forces of law and order on the one hand and on the other hand, there are income tax advisers, or chartered accountants in the pay of black money operators. There are contact men, liaison officers, dalals who negotiate favors from top bureaucracy and political bosses through bribes of black money. 6. Black money has corrupted our political system in a most vicious manner. At various levels, MLAs, MPs, Ministers, party functionaries openly go on collecting funds for party or elections. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen National policies are, therefore, being bent in favour of the big business under the pressure of black money. 7. Causes inflations :The politics of black money thus has corroded the moral fibre of Indian polity. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen. National policies are, therefore, being bent in favour of the big business under the pressure of black money.Due to the pernicious impact of black money on the Indian economy and polity that the Wanchoo Committee concluded: It is, therefore, no exaggeration to say that black money is like a cancerous growth in the countrys economy which, if not checked in time, is sure to lead to its ruination.

Ways to curb the Black money menace in India

With the present setup, India won't be able to alter the levels of Black money generation in India anytime in the near future because from the roots to the top it's the Black money that is being transpired. The Baba Ramdev's campaign failed to do any significant modification because of this fact only. How can the politicians agree to bring back the money from the Swiss banks when even they have their shares in it? Also the rich entrepreneurs of the country have their major shares there and these only

are the supporters of so many parties. The rich people are always involved in investing for these corrupt politicians then how come politicians stop their own funds by giving their consent for bringing it back. It was already known that the government can never agree to bring back those 1.4 trillion dollars. What we need is a total reform in the setup. Corruption needs to be checked upon from the roots or the beginning levels only. If the lower order of the society like the police officials does their duty honestly, so many large scale scams can be prevented from even starting. The need of the hour is to track the roots of the Black money plant and cut them. Take into account the various sources of Black money and make these vanish and surely the country's money will be protected. Still there are so many people in the society who do corruption only because if they don't, they are transferred from one place to another meaninglessly. The find their hands tied because there is no one listening. Why not frame a tested and trained task force for the complaints of the general public regarding the black work being done in various areas and equivalent action is taken without prior notice of the corrupt politicians. Give someone the power over the Chief Minister and I wonder in a month how that state will progress. Its easy to put the burden of clean-up of the system on the youths but when the hole pond is dirty, a clean fish can't even stay clean itself, cleaning the pond is still a second thing. If a person decides that he will rise against the corrupt, he is stopped by all possible means by the bigger giants including the murder of that person if situation persists. We have many examples of the same too. Still there is honesty in people who are in politics but there are very few of them and they are doing the best they can but alone a person can't stand so much burden for long so whatever we are willing to do we should never force it alone, do it in a such a way that the people themselves join you into a movement to change the course of things. One day or the other the earning of Black money in India will be stopped, why not we just work hard to convert tomorrow into that special day!

Money Laundering and its Effect on Indian Economy

Introduction
Money laundering is a practice which engages in specific financial transactions, in order to conceal the identity, source, and/or destination of money. It is the main operation of underground economy. The Interpol General Secretariat Assembly in 1995 defines money laundering as: "Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds, so that they appear to have originated from legitimate sources". The conversion of criminal incomes to forms, that allows the offender unfettered spending and investment has been an ongoing concern to the law enforcement agencies. After the attack on the twin towers in the U.S., the world has focused its attention on the entire concept of money laundering and has recognized it as a source of funding of terrorist activities.As per an estimate of the International Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product. This could be between $800 billion - $2 trillion each year. Thereby, all over the world, the need has been recognized to control this form of illegal activity, which involves the misuse of financial systems all around the world. Money laundering is the process, by which, large amounts of illegally obtained money is given the facade of having a legitimate source. Earlier the concept of money laundering was associated with organized crime alone.However in recent times, the ambit of money laundering operations has dramatically increased. The concept of money laundering originated in the U.S.A. It started with the attempt to disguise the ill-gotten wealth, obtained from trading in alcoholic beverages. American mobster Meyer Lansky transferred funds from small casinos to overseas accounts, especially Swiss banks, the term used for such activity is, 'capital flight'. The first reference to the term, 'Money Laundering' itself appeared during the Watergate scandal. Here illegal funds obtained for the president re-election were moved to Mexico and then brought back through a company to Miami. In this context the British newspaper coined the term 'Laundering'.

Money Laundering in India: The Problem and Solutions

In India, money laundering is largely connected with drug trafficking. The alternate remittance systems such as the Hawala transactions are used effectively for this very purpose. Offenders ensure that money doesn't reach the banking systems at all, so that

they can escape being caught or discovered. The easy route here is usually the underground banking system which leaves no paper trial. These systems are based on trust and the fear of retribution. Such systems are based on family and gang alliances and have been found to be difficult to penetrate. People here deposit money in one country and are given a 'chit' or a 'seal'. On production of this 'chit' or 'seal' money is remitted to the person concerned. Moreover now with the liberalization of the Indian economy and the dismantling of various regulations, increasingly the risk of money laundering via banks has increased tremendously. The impact of money laundering in India is substantial, the Union Revenue Department recently unearthed 900 bank accounts, with a pooled deposit of nearly Rs. 1,000 crore being run with fabricated names of companies and persons in two dozen banks of Delhi alone. According to a KPMG study money laundered in India is approximately 2% to 3% of the country's GDP. While adopting the political declaration and global programme of action of the Resolution S-17.2 of 1990 and political declaration to adopt the national money laundering legislation and programme in 1998 by the General Assembly of United Nation, India enacted Prevention of Money Laundering Act, 2002. The Money Laundering Act defines the offence of money laundering as any activity connected with the 'proceeds of crime' which in turn is defined as any property or value of such property derived as a result of criminal activity relating to a'Scheduled offence'. The schedule to the Act is in two parts. Part A lists waging of war against the government of India (Sections 121 and 121A of Indian Penal Code) and several offences under the Narcotics Drugs and Psychotropic Substances Act, 1985. Offences listed in Part B have now been subjected to a monetary limit of Rs. 3 million or more which was not there in the original Bill. There has been much concern about the terror funds coming into country. In addition to that it is also widely believed that the stock market can also be potential investment destination for terrorist groups. In absence of the adequate laws and enforcement mechanism in place, it is difficult to trace the source of money coming into the country and going outside from the country. Given the above context, anti money laundering laws and regulations assumes utmost significance. Prevention of Money Laundering (amendment) Bill , 2008 (PMLA) is yet another mile stone in the wide spectrum of anti-money laundering initiatives by government of India. Minister of state for finance Pawan Kumar Bansal on Friday (18 October, 2008) tabled a bill to amend the Prevention of Money Laundering Act, 2005 (PMLA) in Rajya Sabha. This Bill introduces new category of offences that have cross-border implications for fighting terrorism. Insider trading and market manipulation will be treated as a laundering offence and invite stricter punishment. Offences related to human trafficking, smuggling of migrants, piracy and environmental crimes, over invoicing and under invoicing under customs are also punishable under PMLA. With the passing of Prevention of Money

Laundering (Amendment) Act, all casinos, payment gateways like Mastercard, Visa and Western Union and even Credit Card deals will be monitored by law. These organizations will be required to report details of all suspected transactions to the government. The substantive law aspect of the act seems less well developed, compared to the US Patriot Actor the EU Directives, the crimes included under the money laundering are fewer. Significant omissions in the Schedule of Money Laundering Act to the new law are lack of any references to offences relating to tax evasion, smuggling, foreign trade law violations and foreign exchange manipulations on account of these offences. Proceeds of crime relating to these offences, therefore, will remain outside the scope of the Money Laundering Act. It will be the case also with Schedule B offences if the amount involved in a case is less than Rs 3 million. It is also somewhat incongruous that large-scale manipulations of foreign exchange, let us say arising out of tax evasion or import/export violations, will be mere civil offences under FEMA and will attract no penalty under the anti-money laundering law, yet the same can lead to preventive detention under COFEPOSA. Though the Money Laundering Act has been passed, but the rules to effect its operations are yet to come. The RBI too has played an important role in curbing the menace of money laundering The RBI issued the Know-Your-Customers (KYC) Guidelines Anti Money Laundering Standards on 16th August 2005. The Government has also established a Financial Intelligence Unit-India (FIU-IND), in rank with FATF recommendations. The FIU would be given the Suspicious Activity Reports from all FIs and would study them before passing them to the Enforcement Directorate for investigation and prosecution. The RBI has asked all the banks to put the policy with the sanction of their boards, within the next three months. The RBI has stressed that banks can successfully control and decrease their risks only if they have an understanding of the normal and practical activity of the customer so that they have the means of spotting transactions that fall outside the standard model of activity. In the context of internet banking, there is always a danger that being extremely mobile, these transactions shall remain undetected. Thereby such banks have been asked to open accounts only after proper physical introduction and substantiation of the customer. The online banking systems are also required to keep a record of all the transactions or series of transactions taking place within a month, the character and worth of which may be set by the Central Government. This will sufficiently guard in opposition to any abuse of the Internet banking services for the intention of money laundering. The RBI's know your customer standards are important in the context of controlling

money laundering. As per these standards Banks must outline their KYC policies slotting in the following four key fundamentals:
y y y y

Customer Acceptance Policy; Customer Identification Procedures; Monitoring of Transactions; and Risk management. Despite the various measures that have been undertaken it has to be understood that India's anti-money laundering regime is still in its early stages and banks need to put in place, better systems to ensure they do not fall prey to misuse. Banks can effectively reduce the risks of banking transactions if they identify transactions that fall outside the regular pattern of consumer's activities. Banks need to have an effective anti-money laundering technology system. These have yet to be effectively implemented in the country.

Effects of Money Laundering

Money Laundering threatens national governments and international relations between them through corruption of officials and legal systems. It undermines free enterprise and threatens financial stability by crowding out the private sector, because legitimate businesses cannot compete with the lower prices for goods and services that businesses using laundered funds can offer. There are few specific challenges which is posed by Money-laundering activities throughout the world. 1. Terrorism Terrorism is an evil which affects each and everybody. Now and then we can find terrorist attacks being made by terrorists. These attacks definitely cannot be done without the help of money. Money Laundering serves as an important mode of terrorism financing. Terrorists have shown adaptability and opportunism in meeting their funding requirements. Terrorist organizations raise funding from legitimate sources, including the abuse of charitable entities or legitimate businesses or selffinancing by the terrorists themselves. Terrorists also derive funding from a variety of criminal activities ranging in scale and sophistication from low-level crime to organised fraud or narcotics smuggling, or from state sponsors and activities in failed states and other safe havens. Terrorists use a wide variety of methods to move money within and between organisations, including the financial sector, the physical movement of cash by couriers, and the movement of goods through the trade system. Charities and alternative remittance systems have also been used to disguise terrorist movement of funds 2 Threat to Banking System Across the world, banks have become a major target

of Money Laundering operations and financial crime because they provide a variety of services and instruments that can be used to conceal the source of money. With their polished, articulate and disarming behavior, Money Launderers attempt to make bankers lower their guard so as to achieve their objective. Though norms for record keeping, reporting, account opening and transaction monitoring are being introduced by central banks across the globe for checking the incidence of Money Laundering and the employees of banks are also being trained to recognize suspicious transactions, the dilemma of the banker in the context of Money Laundering is to sift the transactions representing legitimate business and banking activity from the irregular / suspicious transactions. Launderers generally use this channel in two stages to disguise the origin of the funds first, when they place their ill gotten money into financial system to legitimize the funds and introduce these funds in the financial system and second, once these funds have entered the banking system, through a series of transactions, they distance the funds from illegal source. The banks and financial institutions through whom the dirt money is laundered become unwitting victims of this crime. 3 . Threat to Economic and Political Stability the infiltration and sometimes saturation of dirty money into legitimate financial sectors and national accounts can threaten economic and political stability. An IMF working paper concludes that money laundering impacts financial behaviour and macro-economic performance in a variety of ways including policy mistakes due to measurement errors in national account statistics; volatility in exchange and interest rates due to unanticipated cross border transfer of funds; the threat of monetary instability due to unsound asset structures; effects on tax collection and public expenditure allocation due to misreporting of income and many more such ways.