Money laundering

WHY IN NEWS?

Money laundering is a serious concern that affects the well-being of the economy and at the same time is an internal security concern for India and the world.

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.

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: 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.

INDIAN INITIATIVES AGAINST MONEY LAUNDERING:

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:

• Directorate of Enforcement: It was established in the year 1956. It 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 (FIU-IND): It 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.

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 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.
• The Financial Action Task Force (FATF):
  • It is an inter-governmental body established at the G7 summit at Paris in 1989 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.
  • Its secretariat is housed administratively at the OECD. Its decision-making body, the FATF Plenary, meets three times per year.
  • There are two types of list that FATF maintains:
    • Black list (now called the "Call for action") is given to the countries that FATF considers as uncooperative tax havens. These countries are known as Non-Cooperative Countries or Territories (NCCTs). As of October 2019, North Korea and Iran are the only countries in the list.
    • Grey list (officially called as "Other monitored jurisdictions") is a warning given to the country that it might come in Black list. But even when a country comes under Grey list it faces many problems like getting international sanctions, loans and ensuring smooth trade. In October 2019, Sri Lanka was removed from this list.

CRYPTO CURRENCY AND MONEY LAUNDERING:

• A cryptocurrency is a digital asset designed to work as a medium of exchange. It uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
• Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems.
• Cryptocurrencies have quickly become an important part of many investors’ asset protection and investment portfolios. However this has also raised the concern which is its ability to be used for money laundering and other nefarious purposes.

Concerns:

• Anonymity: The blockchains which underlie Cryptocurrencies do not store personal data. It only records the transactions and not the identities of the users. The anonymity associated with cryptocurrencies allows it to be used as a medium of exchange for criminal organizations and sanctioned governments.
• Lack of regulation: Virtual currencies are borderless and disconnected from any government issuance, oversight or regulation. This also increases the chance of them being used by terrorist and organized crime outfits.  
• Volatile technology: The main cryptocurrencies, like Bitcoin, have an audit trail which can be traced. However, there are a growing number of exchanges where mainstream cryptocurrencies like Bitcoin can be exchanged for other cryptocurrencies called ‘alt-coins’ which may offer more privacy and anonymity.

Way ahead:

• 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.
  • Proactive legislations: Although banks have largely shied away from virtual currencies to this point, this may change in the future (Eg: JP Morgan recently created the position of Head of Crypto-Assets Strategy). Hence legislations to ensure transparency and accountability should be created with a view of the future.

Practice Question

Q. Money laundering is the important conduit that establishes linkage between organized crime and terrorism. Comment?