INTRODUCTION -

Money Laundering
What is Money Laundering?
Money laundering is the illegal process of concealing the
origins of money obtained illegally by passing it through a
complex sequence of banking transfers or commercial
transactions. The overall scheme of this process returns the
money to the launderer in an obscure and indirect way.

The word “laundry “literally means “cleaning ”.metaphorically,

money laundering refers to “cleaning on money.

“Money laundering is the process of making large amounts of

money generated by a criminal activity, such as drug trafficking
or terrorist funding, appear to have come from a legitimate
source. The money from the criminal activity is considered dirty,
and the process "launders" it to make it look clean. Money
laundering is itself a crime.
Money obtained from certain crimes, such as extortion, insider trading, drug
trafficking, and illegal gambling is "dirty" and needs to be "cleaned" to appear to have
been derived from legal activities, so that banks and other financial institutions will
deal with it without suspicion. Money can be laundered by many methods which
vary in complexity and sophistication.

Law enforcement agencies of many jurisdictions have set up

sophisticated systems in an effort to detect suspicious
transactions or activities, and many have set up international
cooperative arrangements to assist each other in these
endeavors.
In a number of legal and regulatory systems, the term "money
laundering" has become conflated with other forms
of financial and business crime, and is sometimes used more
generally to include misuse of the financial system (involving
things such as securities, digital currencies, credit cards, and
traditional currency), including terrorism financing and evasion
of international sanctions.
Money laundering involves three steps:
placement, layering, and integration.

According to the United States Treasury Department:

Money laundering is the process of making illegally-gained proceeds (i.e., "dirty

money") appear legal (i.e., "clean").

First, the illegitimate funds are furtively introduced into the legitimate financial
system. Then, the money is moved around to create confusion, sometimes by wiring
or transferring through numerous accounts. Finally, it is integrated into the financial
system through additional transactions until the "dirty money" appears "clean".

1. Placement puts the "dirty money" into the legitimate financial system.
This is the movement of cash from its source. On occasion the source can
be easily disguised or misrepresented. This is followed by placing it into
circulation through financial institutions, casinos, shops, bureau de change
and other businesses, both local and abroad.
2. Layering – The purpose of this stage is to make it more difficult to
detect and uncover a laundering activity. It is meant to make the trailing
of illegal proceeds difficult for the law enforcement agencies. Layering
conceals the source of the money through a series of transactions and
bookkeeping tricks.
3. Integration – This is the movement of previously laundered money into
the economy mainly through the banking system and thus such monies
appear to be normal business earnings. This is dissimilar to layering, for
in the integration process detection and identification of laundered funds
is provided through informants. In the final step, integration, the now-
laundered money is withdrawn from the legitimate account to be used
for whatever purposes the criminals have in mind for it.
Methods
Money laundering can take several forms, although most methods can be categorized into one of
a few types. These include "bank methods, smurfing [also known as structuring], currency
exchanges, and double-invoicing" and followings.
1. Structuring: Often known as smurfing, is a method of placement whereby cash is broken
into smaller deposits of money, used to defeat suspicion of money laundering and to
avoid anti-money laundering reporting requirements. A sub-component of this is to use
smaller amounts of cash to purchase bearer instruments, such as money orders, and
then ultimately deposit those, again in small amounts.
2. Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and
depositing it in a financial institution, such as an offshore bank, with greater bank
secrecy or less rigorous money laundering enforcement.
3. Cash-intensive businesses: In this method, a business typically expected to receive a
large proportion of its revenue as cash uses its accounts to deposit criminally derived
cash. Such enterprises often operate openly and in doing so generate cash revenue from
incidental legitimate business in addition to the illicit cash. In such cases the business will
usually claim all cash received as legitimate earnings. Service businesses are best suited
to this method, as such enterprises have little or no variable costs and/or a large ratio
between revenue and variable costs, which makes it difficult to detect discrepancies
between revenues and costs. Examples are parking structures, strip clubs, tanning
salons, car washes, arcades, bars, restaurants, and casinos.
4. Trade-based laundering: This method is one of the newest and most complex forms of
money laundering.This involves under- or over-valuing invoices to disguise the
movement of money.For example, the art market has been accused of being an ideal
vehicle for money laundering due to several unique aspects of art such as the subjective
value of art works as well as the secrecy of auction houses about the identity of the buyer
and seller.
5. Shell companies and trusts: Trusts and shell companies disguise the true owners of
money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose
their true owner. Sometimes referred to by the slang term rathole, though that term
usually refers to a person acting as the fictitious owner rather than the business entity.
6. Round-tripping: Here, money is deposited in a controlled foreign corporation offshore,
preferably in a tax haven where minimal records are kept, and then shipped back as
a foreign direct investment, exempt from taxation. A variant on this is to transfer money to
a law firm or similar organization as funds on account of fees, then to cancel the retainer
and, when the money is remitted, represent the sums received from the lawyers as a
legacy under a will or proceeds of litigation.
7. Bank capture: In this case, money launderers or criminals buy a controlling interest in a
bank, preferably in a jurisdiction with weak money laundering controls, and then move
money through the bank without scrutiny.
8. Casinos: In this method, an individual walks into a casino and buys chips with illicit cash.
The individual will then play for a relatively short time. When the person cashes in the
chips, they will expect to take payment in a check, or at least get a receipt so they can
claim the proceeds as gambling winnings.
9. Other gambling: Money is spent on gambling, preferably on high odds games. One way
to minimize risk with this method is to bet on every possible outcome of some event that
has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose
only the vigorish and will have one or more winning bets that can be shown as the source
of money. The losing bets will remain hidden.
10. Black salaries: A company may have unregistered employees without written contracts
and pay them cash salaries. Dirty money might be used to pay them.
11. Tax amnesties: For example, those that legalize unreported assets and cash in tax
havens.
 12. Transaction Laundering: When a merchant unknowingly processes illicit credit card
transactions for another business. It is a growing problem and recognised as distinct from
traditional money laundering in using the payments ecosystem to hide that the
transaction even occurred(e.g. the use of fake front websites). Also known as
"undisclosed aggregation" or "factoring".[

OBJECTIVES OF MONEYLAUNDERING

 The main objectives of money launderers are thus to place

their funds in the financial system without arousing suspicion, to
move them around, often after a series of complex transactions
crossing multiple jurisdictions so that it becomes difficult to
identify their original sources, and finally to move the funds
back into the financial and business systems so that they
appear legitimate.

 Money laundering is performed systematically and

clandestinely, making it difficult to identify exactly how much
money is involved, what methods are employed and what the
magnitude of the problem is.

 Hide: to reflect the fact that cash is often introduced to the

economy via commercial concerns which may knowingly or not
knowingly be part of the laundering scheme, and it is these
which ultimately p y prove to be the interface between the
criminal and the financial sector

 Move: clearly explains that the money launderer uses

transfers, sales and purchase of assets, and changes the
shape and size of the lump of money so as to obfuscate the
trail between money and crime or money and criminal.

 Invest: the criminal spends the money: he/she may invest it

in assets, or in his/her lifestyles.
 CAUSES OF MONEY LAUNDERING

 Absence of legislation against money laundering: Absence of

legislation against money laundering give a free hand to criminals.
sometimes governments itself is involved they do this to win political
rivals, to please their allies and to strengthen their rule. Also CBR
(Central Board of Revenue) has never bothered to unearth laundered
money, rather always joined hands with the and money launderers.

 Evasion of tax Tax evaders launder money so that they can lie about
where money and assets came from in order to evade tax. And
sometimes they simply operate outside that part of the economy where
records are kept.

 Increase in profits When people have incentive for more profit in any
particular area, such as in production and trading of drugs, arms, and
across the borders trade, they start taking risk to earn higher profits.

 To make black money appear white money To Appear black money

legitimate: In money laundering, black money usually becomes
legitimate after a series of process. And less risk is involved of being
caught. This doesn’t happen in other economic crimes. So in order to
appear their money more legitimate they go for money laundering.

 Limited risks of exposure The availability of multiple opportunities for

personal enrichment without the risk of being exposed is another cause
of money laundering. Such economic environments are much more
conducive to make black money.

EFFECTS OF MONEY LAUNDERING ON ECONOMY

1. Economic Distortion and Instability: Money launders "invest" their funds in
activities that are not necessarily economically beneficial to the country. They
redirect funds from sound investments to low-quality investments that hide
their proceeds, economic growth can suffer.
2. Money laundering facilitates corruption and crime: Money laundering
reduces criminals Cost of crime, thereby increasing the level of crime. Lax
anti- money-laundering policies encourage the criminal activities and
corruption.
3. Loss of Control of Economic Policy:Some phases of money laundering
transactions are "underground" or in the informal sector of the economy, such
transactions do not appear in official monetary and financial statistics, thus
 giving misleading information to policymakers and leads to misallocation of
resources.
4. Undermining the integrity of financial markets Large sums of laundered
money may arrive at a financial institution but then disappear suddenly,
without notice, This can result in liquidity problems to financial institutions.
Indeed, criminal activity has been associated with a number of bank failures
around the globe.
5. Risks to Privatization Efforts: Privatization can also serve as a vehicle to
launder funds. Criminal organizations have funds to purchase formerly state-
owned enterprises and use them for their own interests.
6. Reputation at stake: The reputation of country and its financial institutions can
be tarnished by an association with money laundering. The negative
reputation that results from these activities diminishes legitimate global
opportunities and sustainable growth while attracting international criminal
organizations with undesirable reputations and short-term goals. This can
result in diminished development and economic growth.
7. Money Laundering distorts capital and trade flows Laundering of outbound
illicit funds constitutes the facilitation of illicit capital flight, which drains
resources from developing economies, and extensive money laundering of all
forms can deter legitimate inward foreign direct investment (FDI). The obvious
effect of illicit capital flight is to worsen the scarcity of capital in developing
countries.
8. Evasion of tax: Laundered money is usually untaxed, meaning the rest of us
ultimately have to make up the loss in tax revenue. People who indulge into
money laundering do not declare the funds to the tax authorities. As a result
taxes are not paid for the ill-gotten funds. This effectively reduces tax
revenues for the governments and ends up damaging economic development.

EFFECTS OF MONEYLAUNDERING ON SOCIETY:

1. Increase In Criminal Activities: Money Laundering allows drug

traffickers, smugglers, and other criminals to expand their operations.
This drives up the cost of government due to the need for increased
law enforcement and health care expenditures (for example, for
treatment of drug addicts) to combat the serious consequences that
result.
2. Concentration Of Power To Criminals Among its other negative
socioeconomic effects, money laundering transfers economic power
from the market, government, and citizens to criminals. As the
economic power is in the hands of criminals so they have a corrupting
effect on all elements of society. In extreme cases, it can lead to the
virtual take-over of legitimate government.
3. Undermines Democracy: The economic and political influence of
criminal organizations can weaken the social fabric, collective ethical
standards, and ultimately the democratic institutions of society.
EFFECTS OF MONEYLAUNDERING ON BUSINESS:

 If funds from criminal activity can be easily processed through aparticular

business – either because its employees or directorshave been bribed or
because the institution turns a blind eye to the criminal nature of such funds –
 the institution could bedrawn into active complicity with criminals and become
part ofthe criminal network itself.
 Evidence of such complicity will have a damaging effect on the attitudes all
stakeholders ofcompany i.e. shareholders, suppliers, customers, employees
etc.

Electronic Money Laundering

The Internet has put a new spin on the old crime. The rise of
online banking institutions, anonymous online payment services
and peer-to-peer (P2P) transfers with mobile phones have
made detecting the illegal transfer of money even more difficult.
Moreover, the use of proxy servers and anonymizing software
makes the third component of money laundering, integration,
almost impossible to detect—money can be transferred or
withdrawn leaving little or no trace of an IP address.

Money can also be laundered through online auctions and

sales, gambling websites, and virtual gaming sites, where ill-
gotten money is converted into gaming currency, then back into
real, usable, and untraceable "clean" money.

The newest frontier of money laundering involves

cryptocurrencies, such as Bitcoin. While not totally anonymous,
they are increasingly being used in blackmail schemes, the
drug trade, and other criminal activities due to their relative
anonymity compared with more conventional forms of currency.

Anti-money-laundering laws (AML) have been slow to catch up

to these types of cybercrimes, since most of the laws are still
based on detecting dirty money as it passes through traditional
banking institution

Another increasingly common way of laundering money is to

use online gaming. In a growing number of online games, such
as Second Life and World of Warcraft, it is possible to convert
money into virtual goods, services, or virtual cash that can later
be converted back into moneys.

Preventing Money Laundering

 Governments around the world have stepped up their efforts to combat
money laundering in recent decades, with regulations that require financial
institutions to put systems in place to detect and report suspicious activity.
The amount of money involved is substantial: According to a 2018 survey
from PwC, global money laundering transactions account for roughly $1 trillion
to $2 trillion annually, or some 2% to 5% of global GDP .

 In 1989, the Group of Seven (G-7) formed an international committee called

the Financial Action Task Force (FATF) in an attempt to fight money
laundering on an international scale. In the early 2000s, its purview was
expanded to combating the financing of terrorism.

 The United States passed the Banking Secrecy Act in 1970, requiring
financial institutions to report certain transactions to the Department of the
Treasury, such as cash transactions above $10,000 or any others they deem
suspicious, on a suspicious activity report (SAR). The information the banks
provide to the Treasury Department is used by the Financial Crimes
Enforcement Network (FinCEN), which can share it with domestic criminal
investigators, international bodies or foreign financial intelligence units.

 While these laws were helpful in tracking criminal activity, money laundering
itself wasn't made illegal in the United States until 1986, with the passage of
the Money Laundering Control Act. Shortly after the 9/11 terrorist attacks, the
USA Patriot Act expanded money-laundering efforts by allowing investigative
tools designed for organized crime and drug trafficking prevention to be used
in terrorist investigations.

 The Association of Certified Anti-Money Laundering Specialists (ACAMS)

offers a professional designation known as a Certified Anti-Money Laundering
 Specialist (CAMS). Individuals who earn CAMS certification may work as
brokerage compliance managers, Bank Secrecy Act officers, financial
intelligence unit managers, surveillance analysts and financial crimes
investigative analysts.

The role of financial institutions

While banks operating in the same country generally have to follow the same anti-
money laundering laws and regulations, financial institutions all structure their anti-
money laundering efforts slightly differently.[47] Today, most financial institutions
globally, and many non-financial institutions, are required to identify and report
transactions of a suspicious nature to the financial intelligence unit in the respective
country. For example, a bank must verify a customer's identity and, if necessary,
monitor transactions for suspicious activity. This process comes under "know your
customer" measures, which means knowing the identity of the customer and
understanding the kinds of transactions in which the customer is likely to engage. By
knowing one's customers, financial institutions can often identify unusual or
suspicious behaviour, termed anomalies, which may be an indication of money
laundering.[48]

Bank employees, such as tellers and customer account representatives, are trained
in anti-money laundering and are instructed to report activities that they deem
suspicious. Additionally, anti-money laundering software filters customer data,
classifies it according to level of suspicion, and inspects it for anomalies. Such
anomalies include any sudden and substantial increase in funds, a large withdrawal,
or moving money to a bank secrecy jurisdiction. Smaller transactions that meet
certain criteria may also be flagged as suspicious. For example, structuring can lead
to flagged transactions. The software also flags names on government "blacklists"
and transactions that involve countries hostile to the host nation. Once the software
has mined data and flagged suspect transactions, it alerts bank management, who
must then determine whether to file a report with the government.

Global organizations
Organizations fighting for money laundering Other global organizations fighting
money laundering include the

 United Nations,

 the International Monetary Fund,

 The World Bank

In 1989 by the G7 countries, the Financial Action Task Force on Money

Laundering (FATF) is an intergovernmental body whose purpose is to develop and
promote an international response to combat money laundering. The FATF
Secretariat is housed at the headquarters of the OECD in Paris. In October 2001,
FATF expanded its mission to include combating the financing of terrorism. FATF is
a policy-making body that brings together legal, financial, and law enforcement
experts to achieve national legislation and regulatory AML and CFT reforms. As of
2014 its membership consists of 36 countries and territories and two regional
organizations. FATF works in collaboration with a number of international bodies and
organizations.These entities have observer status with FATF, which does not entitle
them to vote, but permits them full participation in plenary sessions and working
groups.

FATF has developed 40 recommendations on money laundering and 9

special recommendations regarding terrorist financing. FATF assesses
each member country against these recommendations in published
reports. Countries seen as not being sufficiently compliant with such
recommendations are subjected to financial sanctions.

FATF's three primary functions with regard to money laundering are:

1. Monitoring members’ progress in implementing anti-money

laundering measures,
2. Reviewing and reporting on laundering trends, techniques, and
countermeasures, and
3. Promoting the adoption and implementation of FATF anti-money
laundering standards globally.

The FATF currently comprises 34 member jurisdictions and 2 regional

organisations, representing most major financial centres in all parts of
the globe.

To comply with FATF regulations, member states and their financial

institutions should implement Know Your Customer (KYC) ID verification
measures, perform FATF recommended due diligence measures,
maintain suitable records of high-risk clients, regularly monitor accounts
for suspicious financial activity and report that activity to the appropriate
national authority, enforce effective sanctions against legal persons and
obliged entities that fail to comply with FATF regulations.

The United Nations Office on Drugs and Crime maintains

the International Money Laundering Information Network, a website that
provides information and software for anti-money laundering data
collection and analysis.The World Bank has a website that provides
policy advice and best practices to governments and the private sector
on anti-money laundering issues.]The Basel AML Index is an
independent annual ranking that assesses the risk of money laundering
and terrorist financing around the world.
Money Laundering in India
In 2002, the Parliament of India passed an act called the Prevention
of Money Laundering Act, 2002. 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-laundering.
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.
The provisions of the Act are frequently reviewed and various
amendments have been passed from time to time.
Most money laundering activities in India are through political
parties, corporate companies and the shares market. These are
investigated by the Enforcement Directorate and Indian Income
Tax Department. According to Government of India, out of the total
tax arrears of ₹2,480 billion (US$36 billion) about ₹1,300 billion
(US$19 billion) pertain to money laundering and securities scam
cases.
Bank accountants must record all transactions over Rs. 1 million
and maintain such records for 10 years. Banks must also make cash
transaction reports (CTRs) and suspicious transaction reports over
Rs. 1 million within 7 days of initial suspicion. They must submit
their reports to the Enforcement Directorate and Income Tax
Department.
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.

AML Basel index is country risk ranking which focuses on money

laundering/ terrorist financing risk, consisting of 14 indicators of
assessment.

This clearly shows that India, in the present-day scenario, is very

vulnerable to money laundering activities and is a high risk zone.

India needs to curb Money laundering as the practice is rampant

across the country. It is estimated that a total of $343 billion has
been laundered out of India during the period 2002-2011. This is a
massive amount and prevention of money laundering must be a
priority for the government.
RECENT MONEY LAUNDERING CASE

1.
Maharashtra cooperative bank scam: ED books
Sharad, Ajit Pawar in money laundering case

The case is based on a Mumbai

Police FIR which had named Ajit
Pawar, a former deputy chief
minister of Maharashtra, and 70
former functionaries of the
cooperative bank
2.
INX Media case: Chidambaram tells HC
no allegation against him for
influencing witnesses
23 Sep, 2019, 07.20PM IST
Chidambaram denied the CBI claim that
after being interrogated during the police
custody, he is well acquainted with the
fresh evidence and there is every
possibility of him influencing the witnesses
and tampering with the record.
3. Money Laundering In Pakistan

Sharif Brothers-Money Laundering Case:Mian

Nawaz Sharif andMian Shahbaz Sharif
werealleged of moneylaundering and used
theHudaibiya Paper Mills ascover for
moneylaundering during the late1990s. The
HudaibiyaPaper Mills case is stillpending in the
NationalAccountability Bureau.
4. President Zardari-Money Laundering Case:

President Zardari is alleged of misappropriated as much as

$1.5 billion.

 NAB opened a fresh case against him: the so-called BMW

car reference (a BMW was imported in 1993 allegedly for
Zardari and allegedly while evading customs duties). Fast
forward to March 2008 and Zardari was cleared of all charges
in the BMW case, without recourse to the NRO.

 In 1994 Ms Bhutto, Asif Zardari and their agent Jens

Schlegelmilch were alleged to have received $60 million in
kickbacks from SGS in exchange for the award of a pre-
shipment inspection contract to the Swiss company. In 2003,
Ms Bhutto and Mr. Zardari were convicted of simple money
laundering by a Geneva investigating judge who handed down
a six-month suspended sentence
 The case was pending in the Swiss court when then
President Pervez Musharraf promulgated the National
Reconciliation Ordinance and the government dropped the
case in April 2008.

Recommendations
 The truth is that no individual nation has the power to
stop money laundering alone
 If one country is hostile to laundering, criminals simply
look elsewhere for a place to clean their money.
Therefore, Global cooperation is essential.
 The most prominent international organization in this
respect is probably the Financial Action Task Force
(FATF), which has 33 member states and international
organizations on its roster list as of 2005. The FATF
issued the "40 Recommendations" for banks that have
become the anti-money-laundering standard.
 Identify and do background checks on depositors.
 Report all suspicious activity. (For example, if a
background check revealed that depositor A works in a
steel factory, and he typically deposits $2,000 every two
weeks, a series of 10 $9,000 deposits over the course of
two weeks should raise a red flag.)
 Build an internal taskforce to identify laundering clues.
 Financial institutions should not keep anonymous
accounts or accounts in obviously fictitious
 Financial institutions should, in relation to politically
exposed persons, in addition to performing normal due
diligence measures:  Have appropriate risk
management systems to determine whether the
customer is a politically exposed person.  Obtain senior
management approval for establishing business
relationships with such customers.  Take reasonable
measures to establish the source of wealth and source
of funds.  Conduct enhanced ongoing monitoring of the
business relationship.
 Financial institutions should maintain, for at least five
years, all necessary records on transactions, both
domestic or international, to enable them to comply
swiftly with information
 Financial institutions should pay special attention to all
complex, unusual large transactions, and all unusual
patterns of transactions, which have no apparent
economic or visible lawful purpose
 If a financial institution suspects or has reasonable
grounds to suspect that funds are the proceeds of a
criminal activity, or are related to terrorist financing, it
should be required, directly by law or regulation, to
report promptly its suspicions to the financial intelligence
unit (FIU).
REFERENCES

•http://fiuindia.gov.in/faqmoneylaundering.htm•www.crime.hku.hk/moneylaunderi
ng.doc

•http://www.fatfgafi.org/document/28/0,3343,en_32250379_32236920_33658140
_1_1_1_1,00.html

•http://en.wikipedia.org/wiki/Money_laundering•http://www.laundryman.unet.com/
page1_hist.html

•http://www.countermoneylaundering.com/public/?q=node/6

•http://www.scribd.com/doc/9188630/Money-Laundering-A-Brief-History

•http://www.isyours.com/e/banking/secrecy/laundering.html

•www.countermoneylaundering.com

•www.money.howstuffworks.com

• http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/search

•http://www.unodc.org/unodc/en/money-laundering/globalization.html

•http://www.laundryman.u-net.com/page4_mlproc.html

•http://www.fatfgafi.org/document/29/0,3343,en_32250379_32235720_33659613
_1_1_1_1,00.hml