The current societies across the world comprise of people both good and bad. India is no alien to this case. There are many such individuals residing in our country who are driven by greed and selfishness due to whom the nation has to bear the economically and the social brunt. And one of the most widely utilised bandwagon of such perpetrators is money laundering.
Money laundering is described as the act in which bulk amount of money or monetary assets that are assimilated through illegal activities are disguised as money originating from a legitimate source.
There are two important and well known terms related to this subject- white money, the money obtained via legal methods and black money, the money collected using criminal activities. In layman terms, money laundering can be defined as the process of converting this black money or ‘dirty money’ into white money.
The Indian economy has been locked in the choke hold of money laundering since the latter half of the 20th century. Many criminals and anti-national organisations were involving in this detrimental act.
These offenders have indulged in money laundering to be able to smoothly operate their shady businesses which involve smuggling of drugs, weapons and exotic materials, terrorist activities, trafficking of life (humans and animals), fraud, etc.
But the real extent of this economy hampering activity was revealed when the nation realised that even the politicians and bureaucrats were involving themselves in this.
Ever since discerning this, our nation has taken various steps, enacting and enforcing laws to control money laundering, yet cases have erupted time and again to showcase the inefficiency of these measure.
Money laundering is one of the biggest adversaries of a developing economy, and with respect to the fastest growing economy that India is, such activities are a cause of huge hindrance to our growth and hence should be understood properly so that we can implement effective measures to eradicate this issue.
TABLE OF CONTENTS
Processes of Money Laundering
In general, the entire process of turning black money into white money, or giving the former the appearance of the latter, can be summed up in four major stages-
In this stage, the black money is gathered by an individual or organisation through various illicit businesses and trades as mentioned previously, i.e. trafficking, terrorism, quid pro quo arrangements, etc.
This is the first and the most important stage in money laundering as it does not only produces black money, but also involves various criminal activities that prove disadvantageous to the society and the nation as a whole.
For example, drug trafficking does not only benefits the involved trading parties, but also ruin the productivity of the youth who get addicted to harmful activities of drug dependence.
Once the sum is collected, it has to be stored in such a way that the law enforcing authorities and the whistle blowers do not gain knowledge about the existence of this money. This stage is carried out by placing the dirty money in the financial system of the economy.
This is done by the launderer as he puts the money in legitimate financial institutions which are mainly banks. The money is stored in the form of cash deposits in the banks.
While this stage is the first step to secure the dirty money, it also has the highest risk factor for the launderer to get exposed as money laundering placements require large value transactions which the bank has to report to the financial authorities.
Hence to bypass this, launderers break the large amount of cash into less suspicious sums of money before depositing them. These small sums are then assimilated in a third account via various transactions to recover the entire lump sum.
This is the stage where the real masking of the dirty money begins. It is a complex procedure which involves a multitude of macro and micro transactions, buying and selling of assets, changing the form of currency, etc. which makes it difficult for enforcement authorities to follow the path of original sum deposited.
It is by far the most intricate step involved in money laundering with the aim of distancing the money from its original deposition to make its origins hard to trace.
The final course of action which establishes the black money into white money involves integration of the amount in the financial system. The laundered money is brought into the mainstream economy and utilised via various licit investments and purchases. By this time, it becomes tremendously difficult to catch the launderer as money can be utilised within the boundaries of law.
Existing Measures of Preventing Money Laundering in India
The modus operandi of the money launderers have been evolving to keep up with the laws and regulations levied on international and national levels. Yet their impact is widely affecting the economies around the globe. Money laundering has damaged the reputation of financial institutions and market.
The lack of efficient preventive measures has weakened the “democratic institutions” of the society. Most importantly, all the black money flowing in the market has destabilised the economy of the country, and if left unchecked can plunge the nation into financial crisis.
At the international level, there are various organisations that have enacted various schemes and policies to curb money laundering. The first crucial initiative was undertaken in 1988 in the form of the Vienna Convention which laid down an effective framework of policies to ensure that black money does not finds its way into the global economy.
It targeted the roots of money laundering- the illegal activities of drug trafficking, a major problem that the world was facing in the 1980’s and obliged its member nations to criminalise this trade.
The very next year in Paris, an inter-governmental body was set up during the G7 summit, christened The Financial Action Task Force. The goal of this task force was to lay down a set of guidelines to effectively combat money laundering and terrorist financing by implementation of legal, regulatory and operational measures.
In the year 1997, the United Nations involved itself in the war against money laundering by introducing the United Nations Global Programme against Money Laundering.
This scheme promoted international action against money laundering by focusing on the technical aspects of creating awareness, institution building and training; research and analysis to understand the information better and act accordingly; betterment of financial investigative agencies for effective enforcement of laws and regulations. This was by far one of the most comprehensive policies to counter money laundering in the global scale.
Similarly, at National level, India has its own set of guidelines and regulations which are being implemented against money laundering. The pioneering efforts come in the form of the well-known Income Tax Act of 1961.
Even more specific steps were taken in the form of The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 and The Smugglers and Foreign Exchange Manipulators Act, 1976. These laws had a holistic definition and specified the punishment for the offences as mentioned in the act.
Other acts include The Narcotic Drugs and Psychotropic Substances Act, 1985; The Benami Transactions (Prohibition) Act, 1988; The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and The Foreign Exchange Management Act, 2000.
While these acts of the 20th century had their main focus on eradicating criminal activities, it was not until 2003 when the first act stressing on money laundering was passed- The Prevention of Money Laundering Act, 2002 (PMLA). The act came into force on first of July 2005 and was amended twice, once in 2009 and more recently in 2012. As the title states, the main objective of this act is
“To prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.”
Three of the most important financial institutions in India- RBI, SEBI and IRDA have been brought under this act which makes this act also applicable on all the other financial institutions including banks, mutual funds, insurance companies, etc. This law allowed the attachment, adjudication and confiscation of property of the offender if found guilty and prescribed 3 to 7 years of imprisonment and fines.
Furthermore, the RBI also issued a master notice to introduce Know-Your-Customer norms alongside Anti-money laundering standards, combating of financing of terrorism and obligation of banks under PMLA, 2002.
These policies prevent the consumer from misusing of bank privileges by criminal outfits for money laundering and terrorist financing. KYC in particular helps the banks to understand their customers better and calculate the risks of loans and funds prudently.
In addition to the laws, the government of India also set nodal agencies for efficient management of anti-money laundering ecosystem. These agencies are known as Financial Intelligence Units- India (FIU-INDs). They single-handedly act as the interface between the finance sector and the enforcing agencies. Their job includes collection, analysis and dissemination information, especially about suspicious financial transactions.
How to Improve the Preventive Measures for Money Laundering
While there does exist an extensive framework to control money laundering, the offenders are always evolving and coming up with new loopholes and lacuna in the existing system. Hence, it is important for the preventive controls to improve too. The first aspect of development is technology.
Improvement in this field will help the enforcing agencies to establish the origin of the chain of illicit transactions during the various stages of money laundering at a faster pace. This will ensure deliverance of justice faster and in a much more efficient manner.
Secondly, there should be a wider awareness regarding this subject amongst the citizens of India. The poor and illiterate people avoid the lengthy legal paperwork and opt for Hawala Systems which do not help in curbing money laundering.
Additionally, the widespread havoc that smuggling has dealt to the Indian economy should also be put to rest. But for that to happen, we would need a comprehensive law enforcing body with a multitude of areas of operation.
India should also focus on improving its relations with countries and certain financial organisations that have laws which secure financial confidentiality of individuals.
These laws are being misused by money launderers and economic offenders to the point that the countries now act as Safe Haven for these criminals. India should work upon its relations with these organisations to extract the information related to these offenders and prosecute them.
Finally, a synchronisation in the AML ecosystem between the Centre and the State will improve their cooperation and can extend the reach of AML laws to regional level. This would also help create awareness amongst the common mass regarding the harmful nature of money laundering as the crime is often taken lightly by the casual citizens who perceive it as a victim less crime.
It is important that efforts should be made at all the levels of financial, legislative as well as administrative bodies of our country as well as on a global scale to generate more awareness regarding this subject and take measures to completely eradicate this criminal offence.
The Indian economy is currently the fastest growing economy in the world. Yet its rate has been dampened due to various economic offenders acting up. Scams and scandals have forever marred the governments at both centre and state levels which have affected their trustworthiness.
Not only the governments but the private sector is also facing losses because of these people. The recent accusation of Chanda Kocchar, one of the most successful women personalities in the corporate sector who served as the MD and CEO of ICICI Bank in a quid pro quo arrangement and money laundering acts as a very strong example of the crime.
To say that our preventive system is completely ineffective would be an understatement. But yes, with the recent advancements in technology and evolution of criminal strategies, the governing agencies should also undergo upgradation to competitively inhibit money laundering and related crimes and make sure that our economy grows rapidly.