Money Laundering

What is Money Laundering?

• Money Laundering refers to converting illegal earned money into legitimate money.
• The government does not get any tax on the money because there is no accounting of the black money.
• So Money Laundering is a way to hide the illegally acquired money.
• The term "money laundering" originated from the Mafia group in the United States of America. Mafia groups have made huge amounts of extortion, gambling, etc. and this money is shown as legal money.
• In India, "money laundering" is popularly known as Hawala transactions.
• According to the IMF, global Money Laundering is estimated between 2 to 5% of World GDP.

Components of Money Laundering:

It involves three steps: placement, layering and integration.

• Placement puts the "dirty money" into the legitimate financial system.
• Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
• In the case of integration, the now-laundered money is withdrawn from the legitimate account to be used for criminal activities.
• Some examples of Money laundering are Smurfing, Shell companies, Round tripping, Gambling, etc.

Impacts of money Laundering:

• Economic Impact:

1. Undermines integrity of financial markets.
2. Loss of control of economic policy
3. Economic distortion and instability
4. Loss of revenue

• Social Impacts:

1. Increased criminality
2. Decreases human development
3. Misallocation of resources
4. Affects trust of local citizens in their domestic financial institutions.

• Political Impacts:

1. Initiates political distrust and instability
2. Criminalisation of politics

The Legal Framework in India to deal with Money laundering:

In India, the specific legislation dealing with money laundering is the Prevention of Money-Laundering Act((PMLA), 2002

• It forms the core of the legal framework put in place by India to combat Money Laundering.
• The provisions of this act are applicable to all financial institutions, banks(Including RBI), mutual funds, insurance companies, and their financial intermediaries.
• The law was enacted to combat money laundering in India and has three main objectives :

1. To prevent and control money laundering.
2. To provide for confiscation and seizure of property obtained from laundered money.
3. To deal with any other issue connected with money-laundering in India.

• Under the PMLA Act, the Enforcement Directorate is empowered to conduct a Money Laundering investigation.
• Apart from the provisions of PMLA, there are other specialised provisions such as RBI/SEBI/IRDA anti-money laundering regulations.

Other methods to control Money Laundering:

• Narcotic Drugs and Psychotropic Substances Act, 1985: It provides for the penalty of property derived from, or used in illegal traffic in narcotic drugs.
• Financial Intelligence Unit-IND: It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.
• Enforcement Directorate (ED):

1. It is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime in India.
2. One of the main functions of ED is to Investigate offences of money laundering under the provisions of Prevention of Money Laundering Act, 2002(PMLA).
3. It can take actions like confiscation of property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA, and to prosecute the persons involved in the offence of money laundering.

• India is a full-fledged member of the FATF and follows the guidelines of the same.

Money laundering

• It is the concealing or disguising of the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

Round Tripping of Funds

• Round tripping refers to money that leaves the country through various channels and makes its way back into the country often as foreign investment.
• This mostly involves black money and is allegedly often used for stock price manipulation.

Prevention of Money-Laundering Act

• Prevention of Money-Laundering Act (PMLA), 2002 deals with money laundering and 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.
• Under the PMLA Act, the Enforcement Directorate is empowered to conduct a Money Laundering investigation.
• PMLA (Amendment) Act, 2012
  • Adds the concept of ‘reporting entity’ which includes a banking company, financial institution, intermediary etc.
  • It prescribes the obligation of banking companies, financial institutions and intermediaries for
    • Verification and maintenance of records of the identity of all its clients and also of all transactions.
    • Furnishing information of such transactions in prescribed form to the Financial Intelligence Unit-India (FIU-IND).
      • It empowers the Director of FIU-IND to impose a fine on a banking company, financial institution or intermediary if it or any of its officers fail to comply with the provisions of the Act as indicated above.
  • PMLA, 2002 levied a fine up to Rs 5 lakh, but the amendment act has removed this upper limit.
  • It has provided for provisional attachment and confiscation of property of any person involved in such activities.