Professional Documents
Culture Documents
me/MaterialForExam
VISION IAS
www.visionias.in
www.iasmaterials.com
MONEY LAUNDERING
Student Notes:
MONEY LAUNDERING
Contents
1. Introduction ...........................................................................................................................2
1.1. Why is Money Laundered? ..............................................................................................2
1.2. How is Money Laundered? ..............................................................................................2
1.3. Various Techniques Used for Money Laundering ..............................................................3
1.4. Hawala and Money Laundering .......................................................................................3
1.4.1. Cryptocurrency: The New Hawala .............................................................................4
2. Impact of Money Laundering on Nation .................................................................................4
3. Prevention of Money Laundering ...........................................................................................5
www.iasmaterials.com
Student Notes:
1. Introduction
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.
www.iasmaterials.com
purchase monetary
sc
Layering stage - It is the stage at which complex financial transactions are carried out in order
w
w
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.
Student Notes:
• 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.
network of operators called Hawaldars or Hawala Dealers. A person willing to transfer money,
ls
ia
Student Notes:
• In India, FEMA (Foreign Exchange Management Act) 2000 and PMLA (Prevention of Money
Laundering Act) 2002 are the two major legislations which make such transactions illegal.
Hawala network is being used extensively across the globe to circulate black money and to
provide funds for terrorism, drug trafficking and other illegal activities. Inspite of the fact that
hawala transactions are illegal, people use this method because of the following reasons:
• The commission rates for transferring money through hawala are quite low
• No requirement of any id proof and disclosure of source of income
• It has emerged as a reliable and efficient system of remittance
• As there is no physical movement of cash, hawala operators provide better exchange
rates as compared to the official exchange rates
• It is a simple and hassle free process when compared to the extensive documentation
www.iasmaterials.com
• Economic Impact:
ls
ia
er
at
•
ee
•
w
Student Notes:
All the above points would lead to artificial inflation, jobless growth, income inequality, poverty
etc. which culminates in the end to pose security challenges to the society.
• Political Impact
o Affects the Government’s capability to spend on development schemes thereby
affecting a large section of populations who could have benefitted from such spending
o Legislative bodies find it difficult to quantify the negative economic effects of money
laundering on economic development and its linkages with other crimes – trafficking,
terrorism etc. becomes
• It seeks to bring certain financial institutions like Full Fledged Money Changers, Money
.o
ls
Transfer Service and Master Card within the reporting regime of the Act.
ia
er
• It adds a number of crimes under various legislations in Part A and Part B of the Schedule to
at
m
return the confiscated property to the requesting country in order to implement the
.fr
w
• The Act prescribes for formation of a three-member Adjudicating Authority for dealing with
matters relating to attachment and confiscation of property under the Act.
3.1.2. Financial Intelligence Unit - India (FIU-IND)
• Financial Intelligence Unit – India (FIU-IND) was set by the Government of India as the
central national agency responsible for receiving, processing, analyzing and disseminating
information relating to suspect financial transactions.
Student Notes:
• FIU-IND is also responsible for coordinating and strengthening efforts of national and
international intelligence, investigation and enforcement agencies in pursuing the global
efforts against money laundering and related crimes.
• FIU-IND is an independent body reporting directly to the Economic Intelligence Council
(EIC) headed by the Finance Minister.
3.1.3. Enforcement Directorate
• It is a government agency responsible for enforcement of the Foreign Exchange
Management Act, 1999 (FEMA) and certain provisions under the Prevention of Money
Laundering Act (PML).
• The Directorate is under the administrative control of Department of Revenue for
operational purposes; the policy aspects of the FEMA, its legislation and its amendments
www.iasmaterials.com
issued a statement of principles which aims at encouraging the banking sector to adopt
.o
ls
common position in order to ensure that banks are not used to hide or launder funds acquired
ia
er
The FATF is an inter-governmental body established at the G7 summit at Paris in 1989 with the
.fr
w
objective to set standards and promote effective implementation of legal, regulatory and
w
w
operational measures to combat money laundering and terrorist financing and other related
threats to the integrity of the international financial system. It has developed a series of
Recommendations that are recognized as the international standards for combating money
laundering and the financing of terrorism. They form a basis for a co-ordinated response to
these threats to the integrity of the financial system and help ensure a level playing field.
Student Notes:
world. Financial intelligence units are responsible for following the money trail, to
ls
ia
o FIUs participating in the Egmont Group affirm their commitment to encourage the
at
m
development of FIUs and co-operation among and between them in the interest of
sc
up
combating money laundering and in assisting with the global fight against terrorism
ee
financing.
.fr
w
Student Notes:
• A number of black market channels sell imported smuggled goods and they deal in cash
transactions and avoid custom duties thus generating black money.
• Multiplicity of agencies dealing with money laundering, cyber crimes, terrorist crimes,
economic offences etc. Such agencies lack convergence among themselves which is
required to tackle multi-facet and global nature of money laundering
• Many Tax Haven countries exist which allows the creation of anonymous accounts with
strict financial secrecy laws prohibiting the disclosure of financial information to foreign tax
authorities.
• The provision of financial confidentiality in other countries which are unwilling in
compromising with this confidentiality.
5. Way forward
• Implement procedures for Anti Money Laundering provisions as envisaged under the
Prevention of Money laundering Act, 2002. Such procedures should include inter alia, the
following three specific parameters which are related to the overall 'Client Due Diligence
Process:
o Policy for acceptance of clients.
o Procedure for identifying the clients.
o Transaction monitoring and reporting especially suspicious transactions
• Bankers also has vital role and without their involvement, the operation cannot be
successful.
• The global nature of money laundering requires international law enforcement cooperation
to effectively examine and accuse those that initiate these complex criminal organizations.
rg
• Money laundering must be combated mainly by penal ways and within the frameworks of
.o
ls
• There is a need to draw a line between financial confidentiality rules in various financial
at
m
•
up
between the Centre and the State. The FATF Recommendations set out a comprehensive
.fr
w
combat money laundering and terrorist financing, as well as the financing of proliferation of
weapons of mass destruction. Some of them are as
o Identify the risks, and develop policies and domestic coordination.
o Countries should criminalise money laundering on the basis of the Vienna Convention
and the Palermo Convention. Countries should apply the crime of money laundering to
all serious offences, with a view to including the widest range of predicate offences.
Student Notes:
o Countries should implement targeted financial sanctions regimes to comply with United
Nations Security Council resolutions relating to the prevention and suppression of
terrorism and terrorist financing.
o Countries should review the adequacy of laws and regulations that relate to non-profit
organisations which the country has identified as being vulnerable to terrorist financing
abuse.
o Apply preventive measures for the financial sector and other designated sectors.
o Countries should ensure that financial institution secrecy laws do not inhibit
implementation of the FATF Recommendations.
o Financial institutions should be required to maintain, for at least five years, all
necessary records on transactions, both domestic and international, to enable them to
comply swiftly with information requests from the competent authorities.
www.iasmaterials.com
o Establish powers and responsibilities for the competent authorities (e.g., investigative,
law enforcement and supervisory authorities) and other institutional measures.
o Enhance the transparency and availability of beneficial ownership information of legal
persons and arrangements.
o Facilitate international cooperation to ensure that their competent authorities can
rapidly, constructively and effectively provide the widest range of international
cooperation in relation to money laundering, associated predicate offences and
terrorist financing.
Therefore, to have an effective anti-money laundering regime, nations need to think regionally,
nationally and globally to mitigate internal security threat associated with it.
1. Any counter-terrorism strategy can succeed only if sources of terrorist funding are
blocked by efficient financial regulation. In light of the statement discuss the need for
an efficient legal framework to combat terror financing in India and steps taken by
the government in this regard.
Approach:
Question must be answered in two parts
• Stress on the need for legal framework to tackle terrorist financing.
• Enumerate the steps taken by government to block the financing routes.
Answer:
rg
.o
ls
Terrorism finance (TF) has been termed as the lifeblood of terrorism, one of the most
ia
er
important factors sustaining its continuing threat, both from within and without.
at
m
•
ee
efforts. Preventing terrorists from raising, moving, placing and using funds is central
w
w
to this effort. Government must deprive terrorists of their enabling means, which
w
Student Notes:
Prevention of Money Laundering Act, 2002 (PMLA), the Narcotic Drugs and
Psychotropic Substances Act, 1985 (NDPS Act) and Unlawful Activities (Prevention)
Act, 1967 (UAPA) are some of the legislations that are aimed at blocking the
activities that produce funds for terrorist activities.
• However, these legislations need changes in light of the best international
practices. PMLA needs changes. It must expand the list of financial institutions
under scrutiny list, non-business entities must be under the PMLA supervision and
the agencies working to investigate cases must get access to information for
effective implementation. To secure compliance to PMLA rules, sanctions under the
act must be harsh to check evasion.
• The Financial Intelligence Unit, India (FIU-IND), as an independent body is
responsible for coordinating and strengthening efforts of national and international
www.iasmaterials.com
2. India has put in place stringent rules to tackle money laundering. The growing
at
Approach:
.fr
w
w
Student Notes:
• The Financial Intelligence Unit - India (FIU-India) is the nodal agency in India for
managing the AML ecosystem and has significantly helped in coordinating and
strengthening efforts of national and international intelligence, investigation and
enforcement agencies in pursuing the global efforts against money laundering and
related crimes; while the Prevention of Money Laundering Act (PMLA), forms the
core framework for combating money laundering in the country.
There are many a key constraints which need to be addressed to implement an
effective AML regime in India. Some of the key constraints are as follows:
• Unlike relatively mature regulatory countries, Indian AML regulations are being
viewed as a compliance tool by the financial services community rather than as a
risk management tool. Hence the objective has been basic compliance rather than
www.iasmaterials.com
solution.
.o
•
ls
Another significant issue is lack of enforcement. Despite the laws that criminalise
ia
er
convictions have been few and the rate of confiscation is low. Based on the
sc
findings, the SIT has recommended to the government stricter enforcement of tax
up
ee
laws and expediting pending prosecutions. Government records revealed that over
.fr
w
8,000 prosecution cases pertaining to direct tax laws had been pending for the past
w
w
several years. Nearly 5,000 other cases had been pending before lower courts for
over a decade in Mumbai alone.
India has a long way to go before we can match the efforts of developed countries in
the area of AML. The government needs to take more effective action and generate a
grassroots-level focus amongst financial institutions. It is difficult to implement control
over money laundering activities without support from legislative and executive bodies.
Student Notes:
3. Over the years, laws dealing with money laundering have proved to be less than
effective. Briefly discuss the statement in the context of government's proposal to
make money laundering a separate criminal offence. Also enumerate the
recommendations made by FATF to combat money laundering.
Approach:
• In the introduction briefly highlight the seriousness of money laundering and then
proceed to delineate laws dealing with money laundering.
• Briefly discuss arguments regarding there ineffectiveness.
• Link the above discussion with the new proposal to deal money laundering as a
separate criminal offence.
www.iasmaterials.com
Under the current arrangement in India, the fate of money laundering cases depends
.o
These restrictions cause impediments in taking the money laundering cases to their
er
at
logical conclusion.
m
sc
up
It will also align India’s quest against money laundering with best practices around the
ee
world. Several countries such as the United Kingdom have defined it as a separate
.fr
w
criminal offence.
w
w
However, the government will have to bring about several amendments to the PMLA,
including the current definition of the “proceeds of crime” that is right now dependent
upon the predicate offences as listed in the Act’s schedule.
FATF’s key recommendations
• Identify, assess and take effective action to mitigate their money laundering
and terrorist financing risks.
Student Notes:
• Ensure that FIs’ foreign branches and subsidiaries apply these measures.
• Apply appropriate countermeasures when called upon to do so by FATF.
• Financial Institutions should report suspicious transaction to FIUs.
• Establish financial intelligence unit (FIU).
• Ensure that designated law enforcement authorities have responsibility for
money laundering and terrorist financing investigations.
• Take immediate steps to become party to important global conventions framed to
combat money laundering.
• Provide mutual legal assistance in relation to money laundering.
• Effectively execute extradition requests in relation to money laundering and
terrorist financing.
8. References
• http://www.nja.nic.in/4.1.%20Paper-
%20Money%20Laundering_1_%20Paridhi%20Saxena.pdf
• http://www.fatf-gafi.org/publications/methodsandtrends/documents/role-hawalas-in-ml-
tf.html
• http://www.business-standard.com/article/current-affairs/why-no-one-has-gone-to-jail-for-
rg
.o
money-laundering-116061100602_1.html
ls
•
ia
http://blogs.economictimes.indiatimes.com/et-commentary/bitcoin-the-new-hawala/
er
•
at
http://www.igidr.ac.in/conf/money/mfc-11/Singh_Vijay.pdf
m
•
sc
http://www.thehindu.com/news/national/money-laundering-may-be-made-criminal-
up
offence/article18279241.ece
ee
•
.fr
http://timesofindia.indiatimes.com/business/india-business/first-money-laundering-
w
w
conviction-ex-min-jailed-for-7-yrs/articleshow/56890458.cms
w
• http://www.fatf-
gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf