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Money Laundering & Prevention

Money Laundering: Money laundering is the process by which large amount of illegally obtained money from drug trafficking, terrorist activities or other serious crimes and giving the appearance of this money originated from legitimate source. If Money laundering activity completed successfully it allows the criminals to maintain control over there proceeds and ultimately to provide legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of drug trafficking, terrorists, the insider dealer and the tax evaders. Money laundering is the crucial step in success of drug trafficking and terrorist activities. So many organizations around the world are trying to curb the Money laundering activities. Because of successful money laundering in so many countries illegal terrorist activities are rising day by day. How Money laundering works: Most common players in the money laundering are drug traffickers, embezzlers, corrupt politicians and public officials. The basic money laundering has following steps (i)Placement (ii)Layering (iii)Integration (i) Placement: At this stage launderer saves the illegal money into legitimate financial institution. This will be like cash bank deposits and this is the most risky and toughest stage of laundering process. Because of large amount of cash and high value transaction should be reported by banks to their central bank. (ii)Layering: Layering involves sending the money through various financial transactions to change its form. Layering consists of several bank to bank transfers between different accounts in different names in different countries. Making deposits and withdrawals to continually vary the account of money in the accounts. Changing the money currency and purchasing the high value items to

change the form of money .This layering helps in making the dirty money to legitimate money as hard to trace as possible. (iii)Integration: At this stage money re-enters the main stream economy in the legitimate form. It appears in the way as it came from a legal transaction. This may involve final bank transfer into the account of local business. It is very difficult to catch the launderer during the integration stage. How money laundering affects economy: Money laundering is a threat to the good functioning of a financial system; however, it can also be the Achilles heel of criminal activity. The negative effects of money laundering on economy are hard to put into numbers. Money laundering not only damages financial institutions but also countries productivity in its various economic sectors. In view of socio cultural, successful money laundering means criminal activities in the country will be increasing .Success of money laundering encourages criminals to grow their illicit schemes. Laundering money is usually untaxed meaning the rest of us ultimately have to make up the loss in the tax revenue Major part of the money laundering is drug trafficking and terrorist organization

Effects on interest and exchange rate: Money laundering has adverse consequences on the interest rates and the exchange rate volatility particularly in developing nations and dollarized nations. It complicates the government effort to manage economic policies. It affects the income distribution contaminating the legal transaction thus reducing the GDP growth. Effect of money laundering on cost of capital: When money laundering takes place the capital is reduced due to which the supply curve of capital is reduced due to which the supply curve of capital moves towards the left. In this case due to the scarcity of the capital then central bank infuses cash in the financial system due to which the cost of capital increases. Because of money laundering there will be huge gap between capital and productivity. Effects on Economic growth: Money laundering distorts the investments and depresses the productivity. Diverting resources to less-productive activity and by facilitating domestic corruption and crime, which in turn depress economic growth. For developing countries, the diversion of such scarce resources to less productive domestic assets or luxury imports is a serious detriment to economic growth.

Prevention of money laundering: Below are the points where money laundering can be detected Entry of cash into the financial system Transfers to and from the financial system Cross border flow of cash

Few steps taken by financial institutions to curb the money laundering Financial institution or intermediaries have to maintain records in detail about the nature and value of transaction whether such transaction comprise or single transaction or series of connected transaction. Information on transaction to be informed to the central bank

The main action of these acts is to curb the money laundering in the initial stage i.e. placement stage (entry of cash into the financial system) where the launderer is most vulnerable to detection. International cooperation is essential in identification, tracking and prosecuting of illegal proceeds of crime. In 2002 the parliament of India passed act called prevention of money laundering act 2002 the main objective of this act is to prevent money laundering as well as to provide for confiscation of properties either derived or involved in money laundering. The Prevention of Money Laundering Act 2002 provides for mutual legal assistance in India by making enabling provisions for agreements with foreign countries to enforce this act, assistance to a contracting state in the investigation of an offence, reciprocal arrangements for processes and assistance for transfer of accused persons and attachment, seizure and confiscation of property in a contracting State or India. To eradicate the Money laundering completely all countries should come to one agreement and they should cooperate with each other. India has to fight against money laundering it should take proper anti money laundering measures and enforce the m strictly. Though money laundering cannot be eradicated permanently proper checks and balances will ensure India rise as economic power house and future development.



Nava Bharavi Pampana