Money Laundering in India

  • Category
    Economy
  • Published
    3rd Sep, 2019

The Enforcement Directorate is investigating the money laundering angle in the INX MEDIA case.

Context

The Enforcement Directorate is investigating the money laundering angle in the INX MEDIA case.

About

MONEY LAUNDERING

  • It is a process where the proceeds of crime are transformed into apparently legitimate money or other assets. In simple words, it can be defined as the act of making money that comes from one source to look like it comes from another source.
  • INTERPOL's definition of money laundering is: "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 most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists.

PROCESS OF MONEY LAUNDERING

Money laundering is a single process however, its cycle can be broken down into three distinct stages namely, placement stage, layering stage and integration stage.

  1. Placement Stage: It is the stage at which criminally derived funds are introduced in the financial system. At this stage, the launderer inserts the “dirty” money into a legitimate financial institution often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions.
  2. Layering Stage: It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. At this stage, the launderer engages in a series of conversions or movements of the money in order to distant them from their source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow.
  3. Integration stage: It is the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy. 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.

Some of the most widely used methods used to implement the above stages are:

  1. Structuring Deposits: This is also known as smurfing , this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid anti-money laundering reporting requirements.
  2. Shell companies: These are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
  3. Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.
  4. 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.

    PREVENTION OF MONEY LAUNDERING – GLOBAL INITIATIVES

    THE VIENNA CONVENTION

    It was the first major initiative in the prevention of money laundering held in December 1988. This convention laid down the groundwork for efforts to combat money laundering by obliging the member states to criminalize the laundering of money from drug trafficking.

    BASLE COMMITTEE’S STATEMENT OF PRINCIPLES

    In December 1988, the Basle Committee on Banking Regulations and Supervisory Practices issued a statement of principles which aims at encouraging the banking sector to adopt common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities.

    THE FINANCIAL ACTION TASK FORCE (FATF)

    The FATF is an inter-governmental body established at the G7 summit at Paris in 1989 with the objective to set standards and promote effective implementation of legal, regulatory and operational measures to combat money laundering and terrorist financing and other related threats to the integrity of the international financial system

    UNITED NATIONS GLOBAL PROGRAMME AGAINST MONEY LAUNDERING (UNGPML)

    GPML was established in 1997 with a view to increase effectiveness of international action again money laundering through comprehensive technical cooperation services offered to Governments.

    PREVENTION OF MONEY LAUNDERING – INDIAN INITIATIVES

    LEGAL FRAMEWORK

    In India, before the enactment of Prevention of Money Laundering Act, 2002 (PMLA) the major statutes that incorporated measures to address the problem of money laundering were:

    • The Income Tax Act, 1961
    • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA)
    • The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)
    • The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)
    • The Benami Transactions (Prohibition) Act, 1988
    • The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988
    • The Foreign Exchange Management Act, 2000, (FEMA)

    INSTITUTIONAL FRAMEWORK

    • The Directorate of Enforcement was established in the year 1956 which is responsible for enforcement of the Foreign Exchange Management Act, 1999 (FEMA) and certain provisions under the Prevention of Money Laundering Act. Work relating to investigation and prosecution of cases under the PML has been entrusted to Enforcement Directorate.
    • Financial Intelligence Unit – India was set by the Government of India in 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. 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.

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