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

Two basic reasons

• If the money is trailed to its source, then such a money becomes evidence of their crime.
• The money itself is vulnerable to seizure and thus has to be protected; Tax Evasion.

Process Involved

Traditionally money laundering has been described as a dynamic three-stage process.

• Placement stage - Criminally derived funds are introduced in the legitimate financial system. Placing large amount cash in legitimate financial system may raise suspicions of officials, hence it is vulnerable to get caught. (Ex: Sivaji Movie, all money gets into one place (Chennai).
• Hawala – Transfer of money without movement of Money. (Now use Cryptocurrency).
• Money is given to one person in Chennai & Sivaji get it from New York.
• Layering stage - money injected into the system is layered and spread over various transactions with a view obfuscate the tainted origin of the money. This process is called “layering”. Such complex or multiple transactions intends to cover the audit trails (Smurfing). Split Money into small parts. (Give small parts of money to friends).
• Integration stage - In the third and the final stage, money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving as clean money. This is called Integration.  (The different parts of money are get back to same person as donation. Then it became white Money).

Mechanisms

• Currency Smuggling - Physical illegal movement of currency out of the country.
• Smurfing - It is a method where cash is broken into smaller amounts, which are then dropped separately in bank accounts or other instruments to avoid detection
• Informal Value Transfer or Hawala.
• Shell companies and fake auditing.
• Blending of funds - Legitimate cash focused on business are used to comingle with dirty funds with day's legitimate sales receipts.
• Purchasing of goods which store value like gold, crypto currencies.
• False reporting of Import and Exports.
• Round tripping - The mechanism whereby money is deposited in a controlled foreign corporation, preferably located in tax heaven. The funds are then shipped back as tax exempted foreign direct investments.
• Black Salaries - Unregistered employees are paid through black money.

Acts and Body related to Money Laundering

• The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976.
• Narcotic Drugs and Psychotropic Substances Act, 1985.
• Foreign Exchange Management Act, 1999.
• Prevention of Money-laundering Act, 2002 (PMLA).
• Financial Intelligence Unit.
• Obligation of banking or Financial Institutions and Intermediaries.
• Role of Securities Exchange Board of India.
• Enforcement Directorate.
• The prime objective of the Enforcement Directorate is the enforcement of two key Acts of the Government of India namely, the Foreign Exchange Management Act 1999 (FEMA) and the Prevention of Money Laundering Act 2002 (PMLA).

Financial Action Task Force

• The FATF is an inter-governmental body that works to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering (40 Regulation), terrorist financing (9 Regulation) and other related threats to the integrity of the international financial system.
• The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 during the G7 Summit in Paris.
• The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
• Its Secretariat is located at the Organisation for Economic Cooperation and Development (OECD) headquarters in Paris.
• It consists of thirty-seven member jurisdictions. India is one of the members.
• A country is put on the grey list when it fails to curb terrorism financing and money laundering.
• Putting a country on the blacklist means shutting all doors to international finance for that country.
• In June 2018, Pakistan gave a high-level political commitment to work with the FATF and the Asia Pacific Group (APG) to strengthen its anti-money laundering/combating the financing of terrorism (AML/CFT) regime.
• Successful implementation of the action plan and its physical verification by the APG will move Pakistan out of the grey list; failure by Pakistan will result in its blacklisting.
• FATF wants to see effective implementation of targeted financial sanctions against all terrorists designated under UN Security Council Resolutions 1267 and 1373.
• The FATF's Forty Recommendations on money laundering of 1990 are the primary policies issued by FATF [and the Nine Special Recommendations (SR) on Terrorism Financing (TF). The Recommendations are seen globally as the world standard in anti-money laundering as well many countries have made a commitment to put the Forty Recommendations in place.