Money Laundering

Money Laundering:


Money is the prime reason for engaging in almost any type of criminal activity. Money-laundering is the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.

Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.


How is money laundered?

The process of laundering money typically involves three steps: placement, layering, and integration.

Source: UNDOC

  • Placement, moving the funds from direct association with the crime; As launderer introduces his illegal profits into the financial system by breaking up large amounts of cash or by purchasing a series of monetary instruments 
  • Layering, disguising the trail to foil pursuit in a series of conversions or movements of the funds to distance them from their source.and,
  • Integration, making the money available to the criminal, once again, with its occupational and geographic origins hidden from view i.e. the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.


Methods:

Money laundering can take several forms, although most methods can be categorized into one of a few types.

  • Structuring (smurfing): a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. 
  • Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.[12]
  • Cash-intensive businesses: a business which receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash. Examples are parking structures, strip clubstanning salonscar washesarcadesbars, restaurants, and casinos.
  • Trade-based laundering:  one of the newest and most complex forms of money laundering.This involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of art works as well as the secrecy of auction houses about the identity of the buyer and seller.
  • Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. the slang term rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.
  • Round-tripping: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. 
  • Bank capture: money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.
  • Casinos: an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.
  • Other gambling: Money is spent on gambling, preferably on high odds games. One way to minimize risk with this method is to bet on every possible outcome of some event that has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose only the vigorish and will have one or more winning bets that can be shown as the source of money. The losing bets will remain hidden.
  • Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.
  • Tax amnesties: It legalize unreported assets and cash in tax havens.
  • Transaction Laundering: When a merchant unknowingly processes illicit credit card transactions for another business.[20] It is a growing problem[21][22] and recognised as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred[23] (e.g. the use of fake front websites[24]). Also known as "undisclosed aggregation" or "factoring".

Electronic Money Laundering as a new evolving methodology

The Internet has put a new spin on the old crime. The rise of online banking institutions, anonymous online payment services and peer-to-peer (P2P) transfers with mobile phones have made detecting the illegal transfer of money even more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect—money can be transferred or withdrawn leaving little or no trace of an IP address.

The newest frontier of money laundering involves cryptocurrencies, such as Bitcoin. While not totally anonymous.

the three F's-finding, freezing and forfeiting of criminally derived income and assets-all the more difficult.
These are the "dollarization" (i.e. the use of the United States dollar in transactions) of black markets, the general trend towards financial deregulation, the progress of the Euromarket and the proliferation of financial secrecy havens.
The"megabyte money" (i.e. money in the form of symbols on computer screens) can move anywhere in the world with speed and ease.


Effects of Money Laundering;

  • The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.
  • money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue
  • Money-Laundering and GlobalizationRapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease.
  • Organised crime- movement of finances and international travel, have also created opportunities for transnational organized criminal groups to flourish, diversify and expand their activities. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.
  • Money launderers have shown themselves through time to be extremely imaginative in creating new schemes to circumvent a particular government’s countermeasures.
  • Terror outfits funding
  • The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society.
  • The employees or directors of a particular institution have been bribed or because the institution turns a blind eye to the criminal nature of such funds. It will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers.
  • potential negative macroeconomic consequences

Institutional Mechanisms to fight Money Laundering:

Anti-money laundering refers to laws, regulations, and procedures intended to stop criminals from disguising illegally obtained funds as legitimate income. 

Government Measures:

Enforcement Directorate:

Directorate of Enforcement is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance, Government of India, which enforces the following laws:

  • Foreign Exchange Management Act,1999 (FEMA) – A Civil Law, with officers empowered to conduct investigations into suspected contraventions of the Foreign Exchange Laws and Regulations, adjudicate, contraventions, and impose penalties on those adjudged to have contravened the law.
  • Prevention of Money Laundering Act, 2002 (PMLA) – A Criminal Law, with the officers empowered to conduct investigations to trace assets derived out of the proceeds of crime, to provisionally attach/ confiscate the same, and to arrest and prosecute the offenders found to be involved in Money Laundering.

 

Financial Intelligence Unit-India(FIN-IND)



Prevention of Money Laundering Act 2002:

Prevention of Money Laundering Act, 2002 is an Act of the Parliament of India enacted to prevent money-laundering and to provide for confiscation of property derived from money-laundering.

  • PMLA and the Rules notified there under came into force with effect from July 1, 2005.
  • The Act and Rules notified thereunder impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information.

International Measures:

UNODC:

About UNODC:

Established in 1997 through a merger between the United Nations Drug Control Programme and the Centre for International Crime Prevention, UNODC is a global leader in the fight against illicit drugs and international crime.

  • UNODC operates in all regions of the world through an extensive network of field offices.
  • UNODC relies on voluntary contributions, mainly from Governments, for 90% of its budget.
  • UNODC is mandated to assist Member States in their struggle against illicit drugs, crime and terrorism.
  • In the Millennium Declaration, Member States have resolved to intensify efforts to fight transnational crime in all its dimensions, to redouble the efforts to implement the commitment to counter the world drug problem and to take concerted action against international terrorism.

The three pillars of the UNODC work programme are:

  1. Field-based technical cooperation projects to enhance the capacity of Member States to counteract illicit drugs, crime and terrorism.
  2. Research and analytical work to increase knowledge and understanding of drugs and crime issues and expand the evidence base for policy and operational decisions.
  3. Normative work to assist States in the ratification and implementation of the relevant international treaties, the development of domestic legislation on drugs, crime and terrorism, and the provision of secretariat and substantive services to the treaty-based and governing bodies.

FATF:

About FATF:

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 on the initiative of the G7.  It is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in various areas.

Objectives:

The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. 

What it does?

The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally.  In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.

FATF recommendations:

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. 

  • They form the basis for a coordinated response to these threats to the integrity of the financial system and help ensure a level playing field. 
  • First issued in 1990, the FATF Recommendations were revised in 1996, 2001, and 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and they are intended to be of universal application.

Members:

FATF consists of 34 member jurisdictions and two regional organisations, the EU and the Gulf Co-operation Council. The FATF also works in close co-operation with a number of international and regional bodies involved in combating money laundering and terrorism financing. It also has 8 associate members and 25 observer members.


Practice in developed countries:

Money laundering in itself has been defined as a criminal offence in several countries. There are also separate legislations for dealing with funds generated through activities like drug trafficking or terror financing.

  • The United States has very stringent laws to check money laundering. Shortly after the 9/11 terrorist attacks, the USA Patriot Act expanded money-laundering efforts by allowing investigative tools designed for organized crime and drug trafficking prevention to be used in terrorist investigations.
  • In the United Kingdom, police have to prove predicate offence through circumstantial evidence, linking it to the funds generated and laundered. Wherever money laundering is treated as a stand-alone crime, U.K. agencies are not required to wait for the outcome of investigations into the predicate offence.
  • Also, they are not supposed to prove that the funds are proceeds of a particular offence. Based on enough circumstantial evidence, they have to just establish that the proceeds had a criminal origin.

Last modified: Sunday, 27 October 2019, 3:31 PM