Money laundering is a process in which the illegally obtained wealth is disguised through various techniques in order to make it appear as legitimately earned income. Money laundering as a crime attracted interest in 1980s, when the western societies faced the problem of drug abuse and drug trafficking became a huge source of income for criminal activities. Today, the scope and sources of money laundering have widened, and the world is facing plethora of challenges associated with it.
Money Laundering is a three step process. The first step is, placement, which simply means to remove the illegal wealth from its actual location and investing it into legal financial system by opening up a bank account in the name of anonymous individuals or organizations. One related method is, smurfing, which involves breaking down the large amount to be deposited as per the requirements under bank regulations so as to avoid detection by authorities. Second step is, layering, which means to create complex set of transactions and make offshore investments in countries with weak financial regulations. And the last step is, integration, which means to reintegrate the wealth back into the original location or economy as legal business investments.
There are various other techniques used by money launderers, for example, hawala transactions, which originated in India, involves transfer of remittances through hawala agents at lesser commission rather than transferring through formal channels at higher charges. The Black money can be stashed in Swiss banks or can be invested in real estate sector. In a recent revelation by SEBI, various companies have resorted to use of shell companies in order to evade taxes; the shell company, which exist only on paper, issues shares at a very low price to tax evading company on preferential basis and buys back the shares at a very high price after a lock in period, thus, tax evading company can now show this profit as capital gains on its income tax returns, which is tax free.
Technology has become a boon to money launderers, as it is very difficult to regulate all financial transactions in a virtual sphere. It’s a daunting task to trace the origins of any financial transaction, when every day, millions of people are transferring their money electronically. This has given rise to a new form of money laundering method known as cyber laundering.
Today, money laundering has become a major threat for not only financial institutions of a country but for humanity as well. Money laundering increases corruption, and it has a strong nexus with organised crimes like drug trade and human trafficking, which is advantageous to terrorists. India is more vulnerable to such acts due to her volatile and porous borders.
Not only businessmen, but many politicians and executives also use various money laundering methods to hide their illegally earned wealth. They not only evade taxes but also misuse country’s resources for their own benefits, thus, leaving destitute in a deplorable condition and making mockery of democracy. The rags to riches stories of many politicians and government servants, India’s embarrassing position in Global Perception Index and a huge share in black money account holders in recently leaked HSBC list, all are testimonies to the prevalence of corruption in India’s economic , political and administrative domains.
Terrorists attacks can not be done without money, and money laundering serves as an important mode of terrorism financing. Terrorist outfits raise money by drug and human trafficking, illegal wildlife trade or even through legitimate means in case of weak financial regulatory infrastructure in any country. Terrorism financing first came into light after 9/11 terror attack on the US. Today, all terror outfits active in various parts of the world, are financing their acts through both traditional and modern ways of money laundering.
FATF is an inter-governmental body that promotes policies to combat money laundering and terrorist financing. India became a member of the Financial Action Task Force (FATF) in 2010. FATF pointed out a few deficiencies in India’s anti-money-laundering legislation and accordingly, India amended Prevention of Money Laundering Act in 2012. The PMLA (Amendment) Act, 2012 has enlarged the definition of money laundering by including activities such as concealment, acquisition, possession and use of proceeds of crime as criminal activities.
The amendments have been criticized for reducing threshold limit of amount, as this would lead to harassment of common citizens and would also increase the number of cases before the Enforcement Directorate because now, all money laundering cases, big or small, will be taken up for investigation.
Laws should not be enacted only on papers in order to show the commitment against the issue to the global community. Financial regulators are required to implement them efficiently to curb the practices like money laundering. For example, SEBI should not have taken this much time to unearth the money laundering practices through stock market. This gives a wrong impression of financial regulations in the country and can encourage unscrupulous elements to use it against India’s interests. KYC norms should be stringently implemented. There is a need to sensitize the Private Sector about their role in anti-money laundering activities. Anti-money laundering is not the responsibility of the Government alone, but of the private players as well.
Considering the trans-national nature of money laundering crime, it is imperative that all countries come together and make their Anti money laundering legislation compatible with each other. This will enhance the scope for coordinated action against money launderers and related challenges like terrorism. All countries should be willing to share certain amount of information about the financial activities of their institutions, instead of making their countries the tax heavens.