Last Updated: Jan 2025 (Money Laundering)
Table of Contents
Money Laundering
This article deals with ‘Money Laundering.’ This is part of our series on ‘Internal Security’, an important pillar of the GS-3 syllabus. For more articles, you can click here.
Introduction
Money Laundering is the process of taking the illicit money earned from illegal activities like drug trafficking or tax evasion and making that money appear to be earned from legal business activity.
Money Laundering involves concealing illegal funds by transferring money in a complex and intricate manner. The aim is to mislead anyone attempting to trace the transaction, making it challenging to identify the original party, the Launderer.
Process of Money Laundering
1. Placement
- It refers to moving the funds from a direct association with the crime into the financial system.
- It is the most vulnerable stage in the money laundering
- It is done through
- Currency Exchange
- Gambling
- Purchasing Assets
2. Layering
- It is the second and the most complex stage in the process of money laundering.
- During this stage, launderers transfer funds between various onshore and offshore bank accounts through a series of financial transactions to conceal the true source of the funds.
3. Integration
- The final stage involves integrating money back into the legitimate financial system.
- Some of the ways it is carried out include purchasing luxury assets, making commercial investments, etc.
Causes why India has high levels of Money Laundering?
- Poor Tax Administration: Inefficient tax collection systems and poor enforcement of tax laws allow individuals and companies to hide their incomes and evade taxes.
- Lack of Specific Laws in the Past: Until the Prevention of Money Laundering Act (PMLA) was enacted in 2002, India didn’t have a specific law dealing with money laundering.
- High Levels of Corruption: Corruption is very high in India. The money received via corrupt practices needs to be laundered back into the economy.
- Secrecy Clauses in Double Tax Avoidance Agreements (DTAAs): DTAAs signed between India and other countries (like Switzerland, Mauritius, and Singapore) have secrecy clauses that hinder the sharing of financial information, making it easier to launder money.
- Nexus between Bureaucrats, Political Leaders and Criminals: A close nexus between Bureaucrats, Political Leaders and Criminals provides a conducive environment for laundering Black Money.
Hawala & Money Laundering
- Hawala works by transferring money without actually moving it. It is an informal means of transferring money across the globe.
- It is an alternative or parallel remittance system that operates outside the circle of banks and formal financial systems.
- It is frequently used by criminals to launder money for their illicit acts like terrorism, drug trafficking, etc
- As hawala transactions are not routed through banks, the government agencies and the RBI cannot regulate them.
Status of Hawala in India
- Hawala is illegal in India, as it is seen to be a form of Money Laundering.
- FEMA (Foreign Exchange Management Act) 2000 and PMLA (Prevention of Money Laundering Act) 2002 are the two legislations which make such transactions illegal.
Impacts of Money Laundering
Social Impact
- Transfers the economic power from the right people to the wrong (criminals, crime syndicates, etc.)
- Increases income inequality and widens the gap between the rich and the poor
- Loss of morality and ethical standards leading to the weakening of social institutions
Economic Impact
- Volatility in exchange rates and interest rates due to unanticipated transfers of funds
- Discourages foreign investors to invest in particular economy as it tarnishes a country’s global reputation
- Policy distortion occurs because of measurement errors of the currency in circulation.
- Legitimate businesses lose, as there is no fair competition involved
Political Impact
- It affects the government’s ability to spend on development schemes, thereby affecting a large portion of the population that could have benefitted from such spending.
Security Impact
- Laundered money is used to fund terrorist organizations to purchase weapons, recruit personnel, and carry out attacks.
- Criminal organizations involved in arms smuggling and drug trafficking rely on money laundering to legitimize their earnings.
Steps taken to combat Money Laundering
Statutory Provisions
- Prevention of Money Laundering Act, 2002 (PMLA): Explained below
Institutional Framework
- Enforcement Directorate: It is a specialized agency to enforce certain provisions of the Prevention of Money Laundering Act (PMLA) related to financial fraud, tax evasion, and organized crime.
- Financial Intelligence Unit – India (FIU-IND): A central agency for collecting, analyzing, and disseminating information on suspicious financial transactions. Additionally, it coordinates with International agencies on Money Laundering cases.
International Steps
- Financial Action Task Force (FATF): Intergovernmental body sponsored by OECD & based in Paris. India is member
- Asia-Pacific Group on Money Laundering (APG): A FATF-style regional body to combat money laundering in Asia-Pacific. India is a member
- Vienna Convention, 1988: To combat money laundering in Drug Trafficking
- Basel Statement of Principles, 1989: Set of principles issued by the Basel Committee on Banking Supervision to guide banks in preventing money laundering
Financial Action Task Force (FATF)
- FATF is an intergovernmental body that deals to combat money laundering & terrorist financing by establishing global standards to prevent these illegal activities.
- It was established in 1989 by the G-7 at a summit held in Paris in response to growing concerns about money laundering.
- Membership: 37 Countries and 2 regional organizations (Gulf Co-operation Council and European Commission). India has been a member since 2010.
- FATF maintains Black and Grey Lists.
- Grey List: Nations that are a safe haven for terror financing and money laundering. For example, Syria and Yemen are on the grey list. (In 2022, Mauritius & Pakistan were REMOVED from this list)
- Black List: Nations that are not cooperating in the global fight against money laundering and terrorist financing. E.g., Iran and N.Korea
Prevention of Money Laundering Act (PMLA)
Background
The Prevention of Money Laundering Act (PMLA) was enacted in 2002 to combat money laundering.
Main Provisions
- Definition of the Money Laundering offence: The person who directly or indirectly indulges or assists or is party to activity connected with proceeds of crime, including its possession or concealment, is guilty of Money Laundering.
- Obligations on Financial Institutions: The Act obligates financial institutions and intermediaries to
- Verify the identity of clients through KYC guidelines.
- Maintain records of transactions
- Report suspicious transactions to the Financial Intelligence Unit – India (FIU-IND).
- Stringent Bail Provisions: Section 45 of the PMLA is a ‘negative’ provision — which bars courts from granting bail unless the accused can prove that there is no “prima facie” case against them and they will not commit any offence in the future.
- Enforcement Directorate’s Powers: The Enforcement Directorate (ED) can:
- Attach illegal properties suspected of being proceeds of crime.
- ED orders are valid for 180 days, during which time the Adjudicating Authority must confirm it. The property will be automatically released from the attachment if it is not confirmed.
- An officer not below the rank of a joint secretary would be appointed to manage properties confiscated under this.
- Punishments: Punishment under PMLA ranges from:
- Minimum of 3 years to a maximum of 7 years
- For cases under the NDPS Act, punishment may extend up to 10 years.
- Special Courts: Special Courts have been established across states to conduct speedy trials for offences under PMLA.
- Supreme Court Ruling on Public Servants: According to the Supreme Court Judgement, no court can take cognizance of offences committed by a Public Servant during their official duties without prior sanction from the appropriate government authority.
Challenges
- Rapid advancements in Digital Technology: The enforcement agencies are not able to match up with the speed of growing technologies. For example, money launderers use cryptocurrency due to its anonymity and decentralized nature.
- Tax Haven Countries: Tax havens are jurisdictions with strict financial secrecy laws that prohibit the disclosure of financial information. E.g., the Panama Papers Leak (2016) exposed how global elites used offshore entities to launder money.
- Involvement of Employees of Financial Institution: Usually, employees of the financial institution are involved in money laundering. Several banking scams in India have revealed the complicity of bank officials in laundering funds.
- Lack of Comprehensive Enforcement Agencies: In India, there are separate wings of law enforcement agencies dealing with money laundering, terrorist crimes, economic offences, etc., and they lack convergence among themselves.
- Low Financial Education: Low Financial Education makes the common people vulnerable to exploitation. For example, Jan Dhan account holders are used as money mules.
- Failure of Banks to Effectively Implement KYC Norms: Failure of Banks to effectively implement KYC norms as stipulated by the RBI allows criminal activities to thrive.
Thank you, Civilspedia, for imparting such complete data on cash laundering. Your in-depth insights and explanations are notably precious for these looking for to apprehend this complicated issue. Keep up the notable work in instructing and elevating recognition about economic crimes and their consequences.