Issue of Money Laundering in India

WHY IN NEWS?

• The Supreme Court has been hearing a clutch of more than 80 petitions challenging the constitutionality of multiple sections of the Prevention of Money Laundering Act 2002.

WHAT IS MONEY LAUNDERING?

• As per Interpol, Money laundering is concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.
• It is a process where the proceeds of crime are transformed into apparently legitimate money or other assets. It is frequently a component of other, much more serious, crimes such as drug trafficking, robbery or extortion.
• How it is done?
  • Stage 1-Placement: 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.
  • Stage 2-Layering: 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.
  • Stage 3-Integration: It is the 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.

METHODS OF MONEY LAUNDERING:

• Structuring Deposits (Smurfing):
  • A method of placement whereby cash is broken into smaller deposits of money, so as to defeat suspicion of money laundering and avoid anti-money laundering reporting requirements.
• Shell companies and round tripping:
  • Fake companies are established 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.
• Bank Drafts and Similar Instruments:
  • Bank drafts, money orders, and cashier’s cheques purchased for cash are useful for laundering purposes because they provide an instrument drawn on a respectable bank or other credit institution and so break the money trail.
  • Since these are negotiable in many countries, the nexus with the source of money is difficult to establish.
• Remittance Services:
  • Often, the remittance business receives cash, which it transfers to the banking system of another account held by an associated company in the foreign jurisdiction.
  • There, the money can be made available to the ultimate recipient in a legitimate way.
• Bulk cash smuggling:
  • Involves physically smuggling cash and depositing it in a financial institution with greater bank secrecy or less rigorous money laundering enforcement, such as an in tax havens or offshore bank like Swiss bank.
• Through activities like gambling and betting and modern technologies like crypto currencies.

STATISTICS:

• India is ranked 61 in Anti-Money Laundering Index 2018 published by Basel Institute of Governance

IMPACT OF MONEY LAUNDERING:

• Economic distortion and instability:
  • Money launderers are not interested in profit generation from their investments but rather in protecting their proceeds.
  • Thus they “invest” their funds in activities that are not necessarily economically beneficial to the country where the funds are located.
• Undermining legitimate private sector:
  • Money laundering impairs the development of legitimate private sector through the supply of products priced below production cost, making it difficult for legitimate activities to compete.
  • Criminals may also turn enterprises which were initially productive into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy.
• Loss of revenue to government:
  • Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers.
  • It also makes government tax collection more difficult.
• Risks to privatization efforts:
  • Money laundering threatens the efforts of many states to introduce reforms into their economies through privatization.
  • While privatization initiatives are often economically beneficial, they can also serve as a vehicle to launder funds.
• Source for anomic groups:
  • Money laundering is a major source of funding illicit activities of anomic groups, such as terrorists and insurgents
• Social cost:
  • Money laundering is a process vital to making crime worthwhile.
  • It 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 to combat the serious consequences that result.
• Undermining the integrity of financial markets:
  • Laundering of money causes unpredictable changes in money demand as well as great volatility in international capital flows and exchange rates.
  • This eventually leads to loss of control over the economic policy of a country.
• Loss of reputation for the country:
  • Confidence in markets and in the signaling role of profits is eroded by money laundering and financial crimes such as the laundering of criminal.
  • Money laundering transfers de-facto the economic power from the market, government, and citizens to criminals.

CHALLENGES IN CURBING MONEY LAUNDERING

• Emerging technologies contribute to money laundering:
  • Use of cryptocurrencies and alternate finance that are unregulated by governments
  • Encrypted conversations facilitate exchange of information about money laundering 
  • Large volume of digital transactions at online market places is used to disguises the structured chunks of layered money.
  • Identity theft through hacking of credit card information etc. >> is used to layer illegitimate money under untraceable identities.
• Globalization contributes to money laundering in following ways:
  • Placement of money in global financial system creates problems of coordination between multiple jurisdictions.
  • Tax haven countries like Cayman Island, Panama etc. have structured their economies around assistance in tax evasion.
  • Distribution of assets across countries prevents punitive action by authorities.
• Ineffectiveness of Double Taxation Avoidance Agreement (DTAA) and Tax Information Exchange Agreement (TIEA):
  • Signing DTAA and TIEA may not lead to intended impact as these agreements deal only with declared sources of incomes
• Banks face anti-money laundering (AML) compliance challenges:
  • Banks and financial institutions can find it difficult to manage cross-border and multi-jurisdictional AML-compliance requirements and ever-growing customer due diligence requirements.
  • Getting skilled resources with in-depth knowledge of AML can be a challenge for banks.
• Lack of political will
  • As black money is prime source of election funding
• Difficult to quantify
  • The estimates of the black money in the system provided by the Standing Committee on Finance (2019) vary from 7% of GDP to 120% of GDP, highlighting the wide variance in the methods of estimation.

INITIATIVES AGAINST MONEY LAUNDERING:

• Legal framework:
  • Prevention of Money Laundering Act, 2002:
    • It forms the core of the legal framework put in place by India to combat money laundering. It came into force in 2005.
    • It has three main objectives:
      • To prevent and control money laundering;
      • To provide for confiscation and seizure of property obtained from laundered money
      • To deal with any other issue connected with money-laundering in India
    • PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.
    • Regulatory bodies such as RBI, SEBI and IRDA are under the purview of the act and therefore the provisions of this act are applicable to all financial institutions, banks, mutual funds, insurance companies, and their financial intermediaries.
    • The Act provides that every banking company, financial institution and intermediaries should maintain a record of transaction and provide this information to the Director when required to do so. They are also required to verify and maintain the records of the identity of all its clients. Such records shall be maintained for a period of 10 years
    • PMLA (Amendment) Act, 2012:
      • Adds the concept of ‘reporting entity’ which would include a banking company, financial institution, intermediary etc.
      • It has provided for provisional attachment and confiscation of property of any person involved in such activities
    • PMLA (Amendment) Act, 2019:
      • Widened the definition of 'proceeds of crime': Now the proceeds would not only include property obtained from the PMLA offence but also any property which may "directly or indirectly" be obtained as a result of any criminal activity related to the scheduled offence on the basis of which a money laundering case is filed
      • Also now, a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in money laundering.
  • Other major statutes that incorporated measures to address the problem of money laundering:
    • 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:
  • Enforcement Directorate:
    • It was established in the year 1956.
    • It is responsible for enforcement of FEMA and certain provisions under the Prevention of Money Laundering Act.
  • Financial Intelligence Unit-India (FIU-IND):
    • Set up 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.
  • Economic Intelligence Council:
    • It is the apex forum overseeing government agencies responsible for economic intelligence and combating economic offences in India.
    • Formed in 1990, it ensures inter-ministerial cooperation and coordination to combat the menace of economic crimes and threat to national security
  • Directorate of Revenue Intelligence (DRI)
    • It is an apex anti-smuggling agency of India.
    • It enforces the prohibition of the smuggling of items (drugs, gold, diamonds, electronics, foreign currency and counterfeit Indian currency)
  • National Investigation Agency (NIA)
    • Statutory body formed in 2008 under the NIA Act to combat terror in India.
    • Terror Funding and Fake Currency Cell set up in the NIA to investigate Terror Funding cases.
  • Serious Fraud Investigation Office (SFIO)
    • Under Ministry of Corporate Affairs
    • Probes corporate frauds (including shell companies) in coordination with IT Dept. / CBI

ISSUES WITH PREVENTION OF MONEY LAUNDERING ACT:

• Wider coverage:
  • It was enacted to prevent money laundering mainly resulting from the international narcotics and drugs trade. However, over the years a number of crimes have been brought under the ambit of this law through amendments.
  • It started with offences from six legislations but now it has offences from 30 legislations.
  • Thus, the scope for Enforcement Directorate to start proceedings under this law has increased
• More stringent procedure:
  • The Prevention of Money Laundering Act has specific provisions on aspects such as how the investigation has to be conducted, arrests have to be made and bail is to be given.
  • These provisions go beyond general criminal statutes like the Code of Criminal Procedure.
  • They are much more stringent compared to how criminal trials usually take place.
  • Further, where there is no specific provision in the Prevention of Money Laundering Act, the Enforcement Directorate does not follow the Code of Criminal Procedure but follows the Enforcement Directorate manual, an internal document prepared by the Enforcement Directorate.
  • The petitioners have argued that money laundering investigations should be brought within the Code of Criminal Procedure as the Enforcement Directorate manual is an internal document prepared by the executive arm and should not govern investigations.
• Violates the rights of accused:
  • In many instances, the accused may not even be informed what the crimes they are being charged with are.
  • As opposed to First Information Reports (FIR), the Prevention of Money Laundering Act has an Enforcement Case Information Report, which is an internal document that the Enforcement Directorate may not even share with the accused.
  • Enforcement Directorate can start proceedings against a person on the basis of an enforcement case information report, where the accused may not even know the crimes they are accused of since the report is not shared with them.
• Issues with Enforcement Directorate:
  • While the Enforcement Directorate has powers like the police, it is not regulated by the same rules as the police.
  • Powers given to the Enforcement Directorate to attach an accused’s property and take its possession are very wide and continue till the accused is acquitted.
  • There are allegations that ED is used to target political opponents
• Stringent bail conditions
  • Bail is very difficult under the Prevention of Money Laundering Act
  • These conditions are even more stringent than the terror law, Unlawful Activities (Prevention) Act 1967
• Abuse of law for political gains:
  • There are accusations that the law is being used in a politically motivated manner.
• Low conviction rate:
  • Often in statutes like these, the process becomes the punishment.
  • This is evident from the convictions under the Prevention of Money Laundering Act >> out of a total of 1,700 raids and more than 1,500 investigations since 2011 only 13 people have been convicted in 9 cases.

GLOBAL INITIATIVES AGAINST MONEY LAUNDERING:

• The Vienna Convention:
  • The global community, for the first time identified money-laundering as an international crime in the year 1988 when the United Nation adopted the United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances ('Vienna Convention').
  • 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.
• 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.
• United Nations Security Council Resolution No. 1373:
  • For the prevention and the suppression of the financing of terrorist acts, the criminalization of terrorism-related activities and the provision of assistance to carry out those acts
• Basel Committee on Banking Supervision
  • Basel Committee on Banking Supervision has provisions within its guidelines to monitor the banking system for potential money laundering activities and sharing of information regarding this.
• OECD's Forum on Tax and Crime:
  • It supports countries in combating the threats through greater transparency, more effective intelligence gathering, and improvements in co-operation between government agencies and countries to prevent, detect and investigate offences, prosecute criminals and recover the proceeds of their illicit activities.
• Financial Action Task Force (FATF):
  • It is an inter-governmental body established with the objective to combat money laundering and terrorist financing. India is a member of the FATF.
  • It sets standards and promotes effective implementation of legal, regulatory and operational measures to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system.
  • The FATF has developed a series of Recommendations that are recognised as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction.
  • The FATF monitors the progress of its members in implementing necessary measures and reviews its money laundering and terrorist financing techniques and counter-measures.

WAY FORWARD:

• International collaborations:
  • Due to its borderless nature, it’s likely that any regulation needs to be centered around an international agreement on how to do so.
  • For the same, global forums like FATF and International Telecommunication Union should be leveraged >> to clamp down on tax havens
  • Moreover India should collaborate with other countries to ensure equality in corporate taxing norms.
• Focus must be on prevention of black money generation
  • Because once generated, money is quickly laundered away to become untraceable.
  • India should adopt stringent corruption laws as a strategy of deterrence.
• Strict enforcement of tax and other laws
  • Loopholes in tax subsidies and grants to be checked corrected.
  • The law must be periodically changed to catch up with global taxation reforms.
• Robust surveillance system
  • To curb round tripping through shell companies.
• Simplification of tax system
  • Create more open and less discriminatory administrative system to remove tax terrorism
• Capacity building
  • For ex: training tax officials in CBDT to help them identify suspicious transactions.
• Focus on digital payment-related issues:
  • Focus on containing money-laundering risks associated with new payment methods like mobile wallets, e-payments, and e-money issuers.
  • In addition, top priority is being accorded to combating cybercrime and curbing potential money-laundering risks associated with virtual currencies.
• Banks can adopt advanced data analytics:
  • Some areas where analytics can be used successfully include :
    • Fraud detection:  Advanced filtering technologies and analytics for real-time fraud detection and generation of alerts based on changes in behavior patterns are gaining ground
    • Screening: Banks are tapping social media as an additional source of information to validate customer identity.
• Role of Machine Learning
  • Machine learning holds great promise for the banking system, especially in the area of detecting hidden patterns and suspicious money-laundering activities

PRACTICE QUESTION:

Q. Analyse the efficacy of measures taken to tackle the problem of money laundering both at national and international levels?