MONEY LAUNDERING

Authors:

Manvi Goel, Jindal Global Law School

Nithya Sowmya, Tamil Nadu National Law University

Devesh Singh, Army School of Law, Mohali


Editor:

Puru Pratap Singh, GNLU

What is Money Laundering?

The illegal process of making a large sum of money through criminal acts such as terrorist funding or drug trafficking is primarily known as Money Laundering. The interesting part of this is that even though the money has been made illegally, it generally appears that it has a legitimate source.

The real question is; how does it actually works? So, the process of money laundering typically has three essential steps-

· Placement: The process of placement involves putting the money laundered illegally in a legitimate financial system.

· Layering: The people who launder the money have the idea of hiding the source of money. They do this through a sequence of transactions and book keeping trickeries.

· Integration: Now, the money will be taken out from the legitimate account by the criminal and used in whatever way he wishes.

Facts:

United Nations Office on Drugs and Crimes (UNDOC) conducted a study to determine “the magnitude of illicit funds generated by drug trafficking and organised crimes and to investigate to what extent these funds are laundered.  The report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6 trillion) being laundered.”[1]

Some Forms of Money Laundering:

· Structuring: One of the most common forms of money laundering where the money is broken down into smaller pieces to avoid suspicion and anti- money laundering report requirement.

· Bulk Cash Smuggling: This involves taking the entire sum of money to a different jurisdiction and depositing that sum in an off-shore bank, where the money laundering enforcement is less rigorous.

· Trade Based Laundering: This is one of the most upcoming and complex forms of money laundering. This comprises of under- or over-valuing invoices to mask any sort of money movement.

Impacts of Money Laundering

Economic Impacts:

· Undermines legitimacy of Private Sector- One of the most serious microelectronics effect of money laundering is felt on the private sector as many criminals tend to use front or shell companies to launder their money, where the proceeds of crime become immersed with legitimate fund to conceal the origins of the proceeds, this leads to instability in market.

· Undermines Integrity of Financial Markets- Many financial markets are heavily dependent upon laundered money. Due to the nature of this laundered money huge amount of capital may come and go within a short period of time, this creates liquidity problem and the bank may struggle to stay afloat.

· Loss of Control of Economic Policy- Micheal Camdessus, the former Managing Director of International Monetary Fund has estimated the magnitude of money Laundering is about 2% to 5% of the world's GDP, this is a huge amount and can have a huge impact especially on small economies, it can polarise the economy leading to loss of sovereignty of economic policy.

· Economic Distortion and Instability – in many countries, entire industry such as hotels, restaurants, construction, etc are based upon investment from money launders and not on actual demand, when these launders lose their intrest because that businesses become no more suitable to launder money, the entire industry collapses creating a huge loss for economy of the nation.

· Loss of Revenue- Money Laundering not only decreases government tax revenue but also makes it difficult for the government to collect tax. Therefore harming the honest taxpayers of the nation. It also leads to increase in tax rates.

Social Impacts:

Money Laundering mostly deals with criminal money, hence the people dealing with it resolve to take dirty path to recover their money, hence increasing crime rates. Moreover the laundered money again goes into funding crimes which again result into boosting crime rates. Money laundering also decreases the human development, as it is considered the backbone of many criminal activities like illicit drug trade and extortion it also effects the human development rate.

Money Laundering also affects the trust of local citizens in their domestic financial institutions. When the people experience rise in market prices and also in tax rates this creates a feeling of antitrust among the hardworking taxpayers of the nation and they start to question their financial institutions. These illicit activities which are related or are side effects of money laundering declines the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities

Political Impact:

Money laundering has a direct nexus with organized crimes and corruption which leads to political instability and hollow the political system of a nation. Criminalization of politics is one of the major problems especially in developing countries as it initiates political distrust among people. When there is a gradual decline in economic sovereignty due to non-performance of productive work or tax collection, the political authority of the government and nation's sovereignty is also jeopardized.

Steps taken by the Government of India

Prevention of Money Laundering Act, 2002 forms the backbone of anti-money laundering laws in India. It covers all the financial institutions like banks (including RBI), Mutual Funds, Insurance companies, etc. The PMLA Amendment Act, 2012 further helped in strengthening the act by introducing concept of 'reporting entity' and providing provision for confiscation of property of any person involved in such activities.

As we already know that Money laundering is connected to all sort of crimes like extortion, smuggling, drug trafficking, etc many other statutes such as The Smugglers and Foreign Exchange Manipulators (Forfeiture of property) Act, 1976 which deals with properties of Smugglers and foreign exchange manipulators. The Narcotic Drug and Psychotropic Substances Act, 1985 which covers offences related to drug trafficking also helped in preventing money laundering.

Except laws the government also took steps in creating institutions to keep such activities in check some of the most prominent institutions are the Financial Intelligence Unit- IND which directly reports to the Economic Intelligence council headed by the Finance minister. Other than this The Enforcement Directorate is the most important agency in India its main task is to tackle economic crimes. India is also a full fledged member of the Financial Action Tast Force (FATF) and follows all the guidelines of the same.

Judgements related to Money Laundering:

Pareena Swarup v Union of India[2]:

The constitutionality of the Adjudicating Authorities and the Appellate Tribunal under PMLA, 2002 was determined by the Supreme Court in this case. Ms. Pareena Swarup filed a petition under Article.32 of the Constitution of India requesting to pronounce various section under Prevention of Money Laundering Act, 2002 ultra vires. Some of those sections under PMLA, 2002 were Section 25 (dealing with establishment of Appellate Tribunal), Section 27 (dealing with composition) as well as Section 32 (dealing with removal and resignation).

Final Judgement: The argument of the petitioner was found to be meritorious and the Supreme Court implemented the amended rules in the Act.

Anosh Ekka v Central Bureau of Investigation[3]:

In the case, the petitioner asserted to be a public representative. He was guilty of laundering money and looting enormous money from the public. Moreover, he got work done under his fictitious work identity. He had not only done contempt to the Justice-delivery system but also violated the process of law.

Final Judgement: The accused was guilty and cannot get out of the crime he did without being held liable by the law.

Hari Narayan Rai v Union of India[4]:

In this case, The High Court held that “It was clear that the offence under PMLA, 2002 would continue till the accused continues to hold proceeds of crime and got himself involved in the process and activity connected with the proceeds of crime projecting the same as untainted property and in the present case, the accused had been attempting to convert and project the proceeds of crime in the aforesaid manner.”[5] Further, there was sufficient evidences against the petitioner that he has committed the crime.

Final Judgement: The accused was guilty under Section 3 and 4 under the Prevention of Money Laundering Act, 2002.

Global Efforts To Combat Money Laundering

Money laundering is considered as a major problem in the global level as well. There is an Anti-Money Laundering Global Task Force which helps in fighting against the money laundering in global level which is known as Anti-Money Laundering Global Task Force (GTF-AML) works with anti-money laundering experts, and organizations such as the Financial Action Task Force (FATF), the World Bank, the International Monetary Fund (IMF), the United Nations Office on Drugs and Crime (UNODC), Interpol, the Egmont Group, and Transparency International[6]. In order to fight against money laundering in the international standards, in 1989 the Financial Action Task Force (FATF) has been set up by leaders of countries and organizations around the world which put forth some standards and implement them in order to stop money laundering and also this money laundering is one of the financial source for terrorist, in order to fight against the terrorist financing and the other international financial system this force has been setting standards regarding the same. International Monetary Fund (IMF), is another group of countries which participates in the global efforts to combat money laundering. It also put special efforts and helps its member countries to fight against money laundering and terrorist financing along with FATF.

As a part of GTF-AML to help parliamentarians it has developed GOPAC Anti-Money Laundering Action Guide for Parliamentarians which provides information and tools for them to positively engage them to fight against the money laundering in their legislatures. Through the guide parliamentarians will gain the knowledge necessary to introduce anti-money laundering legislation and build a coalition with other parliamentarians to police and prosecute money laundering in their countries.[7] It also takes action thorough capacity building by means of conducting workshops, promotions and awareness creation in the international level, partnership with countries, action plans in the regional as well as global level and the experiences gained from parliamentarians of tackling anti money laundering in their regions by all these means it can tackle the situation of Money Laundering in the global level.

The Vienna Convention: It creates an obligation for signatory states to criminalize the laundering of money from drug trafficking. The 1990 Council of Europe Convention: It establishes a common criminal policy on Money Laundering.There is also an initiative taken by United Nation which is the UN Global Programme against Money Laundering (GPML) is a research and assistance project within the United Nations Office and its goal is to increase the effectiveness of international action against money laundering by offering comprehensive technical expertise to requesting Member States and it works on three main areas which are Promoting Cooperation: Training, Institution-building and Awareness raising, Understanding the Money Laundering Phenomenon: Research and Analysis, Raising the Effectiveness of Law Enforcement[8].

Conclusion

“After Foreign Exchange and the Oil Industry, the laundering of dirty money is the world’s third-largest business” – Jeffrey Robinson.

‘A threat to Global Financing’ is the money laundering. There has been lot of steps and remedies given and taken in the regional as well as global in order to tackle this problem especially through stricter means of KYC rules with respect to beneficiaries and also in online transaction and bank transactions it also creates issues in the constitutional level. New techniques and methods such Bitcoins increased the chance of Money Laundering. In order to prevent Money Laundering the stricter and proper techniques and methods should be implemented.

[1] United Nations Office on Drugs and crimes, 1997 [2] Pareen Swarup v Union of India (1997) 3 SCC 261 [3] Anosh Ekka v Central Bureau of Investigation (2013) 15 SCC 222 [4] Hari Narayan Rai v Union of India (2010) 3 JLJR 475 [5] Hari Narayan Rai v Union of India (2010) 3 JLJR 475 [6] http://gopacnetwork.org/programs/antimoney-laundering/ [7] http://gopacnetwork.org/programs/antimoney-laundering/ [8] http://www.imolin.org/imolin/gpml.html

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