Today we are living in the era of globalization, although it has made world economy global village making it more interactive, interrelated and inter connected but at the same time it has unleashed the floodgates of opportunities for criminals to expand. Today criminals and terrorist are using weapon like money laundering to damage and destroy the financial setup and to finance the terrorism and criminal activities in countries having weak and inadequate financial controls and from those countries they get the opportunity of entering financial system of developed countries having strong financial controls. Most fundamentally we can say that money laundering is inextricably linked to underlying criminal activities.
Is laundered money and black money same?
The common myth connected with the concept of money laundering is that black money and laundered money is same but it is not correct. Black money means money which has been not disclosed to income tax authorities for purpose of tax evasion it may be earned through legal business but laundered money is always crime generated proceed.
What is money laundering?
Money laundering is a process by which illegal origin of criminal proceeds is disguised. Criminals and persons involved in illegal activities use money laundering to legitimize the ill gotten gains. Terrorism, illegal arms sales, financial crimes, smugglings and activities of organized crime, trafficking, prostitution, embezzlement, insider trading, bribery etc generate huge money and then they are routed to safe heaven by disguising their source to the countries having weak financial control. In ordinary way we can say that it is a process by which criminal money is made legal money by laundering it.
How is money laundered?
Money laundering basically involves three steps:
1. Placement
This is the stage of initial entry. First of all the huge sum of money is broken into small sums then they are deposited in to banks or are used for purchasing monetary instruments which are sold afterwards and money is deposited into bank. Small amount of money or investment into financial system is less likely to attract the attention of the authorities as compared to larger sum of money. Thus by placement process laundered becomes successful in entering the ill-gotten and criminal proceeds in the financial system of the target country.
2. Layering
After placement comes layering as the name suggests in this process the launderer engages in series of conversions or movement of funds by transferring it from one account to another account, from one bank to another bank to distance it from its source. Alternatively they may draw the money from bank and invest it in monetary and financial instruments and afterwards may sale it and deposit the sum in bank again or may wire the funds globally using online banking system or other facilities available.
3. Integration
Authorities can easily detect the laundered money in the previous two phases but once the launderer enters the last phase i.e. integration and completes it successfully then it becomes next to impossible to ascertain the origin of the money. In this stage the funds re enters the legitimate economy. It may get invested into real estate, luxury assets etc. So it is very much essential to detect, adjudicate the matter and punish the offender before he enters the stage of integration.
Global challenge
Money laundering is not specific or limited to any country but is a global problem. Growing and developing countries having inadequate financial control are target of money launderers .We will have to understand that by making strong only the law of our country we cannot rule out the possibility of money laundering. For fighting against this menace it is very much essential to have uniform laws, rules and regulations though out the globe. Differences in the anti money laundering regime of various countries provides opportunity to launderers and help them in accomplishing their evil goal. Since the phenomenon is international it can be eradicated only by international cooperation. The United Nation is playing important role in fighting against the financial menace. The Vienna convention, Council of Europe convention, the European union money laundering directives, Basel committee’s statement of principles have contributed a lot. Contribution of Financial action task force is also worth mentioning.
Money laundering and India
In India the prevention of money laundering bill 1998 was introduced in the parliament on 4th August, 1998, the bill received the assent of president and became Prevention of Money Laundering Act, 2002 on 17th January 2002. The act has come into force with effect from 1july, 2005. After that for keeping it in tune with the international happenings the act has been amended in the year 2009 and 2012.
Punishment under the Act
Section 4 of the act says that any person who commits the offence of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and also liable to fine. However where the proceeds of crime involved in money laundering relates to any offence specified under the narcotics drugs and psychotropic substances Act, the punishment may extend to rigorous imprisonment for ten years.
Role of banks and financial institutions
Banks and financial institutions are used by money launderers for money laundering. Section 12 of the Act requires every banking company, financial institution and intermediary to maintain a record of all transactions, the nature and value of which may be prescribed, whether such transaction comprises of a single transaction or a series of transactions legally connected to each other, and when such series of transactions take place within a month. These information’s are required to be furnished to the director within such time as may be prescribed. Banks and financial institutions are also required to follow KYC norms prescribed by the Reserve Bank of India.
Impact of Money Laundering if left Unchecked
In turbulent economic conditions infusion of laundered currency can make the things rosy for the economy but ultimately the economy will suffer because criminals and terrorist will use this money for criminal and terrorist activities in that particular economy. Since the laundered money is unaccounted money the central bank of the country will not have control over it and launderer may deal with it as they want. Through the process of money laundering organized crime can infiltrate financial institutions, acquire control of larger sector of the economy. The economy which has its financial control in the hands of launderers is not considered appropriate venue for FDI. Thus we can say that money laundering if left unchecked will cause economical, legal, and social and several other problems in the economy. In India govt. is taking appropriate steps for proper implementation and execution of the Act. We all have witnessed the famous case of Madhu Kora ex- CM of Jharkhand although the matter has not been fully resolved because of loopholes and lacuna in the system but it shows that govt. and judiciary is committed to deal with the problem. A lot has been done and lot more is needed for making the machinery work properly.
POOJA SHUKLA
CS, LL.B
EX- SECRETARY
RANCHI CHAPTER
OF THE ICSI
