MONEY LAUNDERING IN INDIA
The aim of this paper is to study and evaluate the concept of money laundering in India and its
law enforcement. Money laundering happens in almost every country in the world, and a single
scheme typically involves transferring money through several countries in order to obscure its
origins. The paper initially develops with the idea of money laundering along with the process
and techniques used in it. Then it goes on to discuss the impact it has on a nation’s economy
and otherwise. It then discusses the various initiatives taken to prevent money laundering with
special emphasis on the Indian initiatives particularly focussing on the Prevention of Money
Laundering Act, 2002. It discusses, with case references, the status and efforts put in by the law
enforcement agencies and where they lack. An attempt is made to identify the problems or the
loopholes in the law enforcement and thus suggestive measures are given in order to improve
them. In level II analysis, the number of cases filed in the Supreme Court, High Courts and the
Tribunals are depicted graphically with the help of different charts also indicating the grounds
for filing the same.
INTRODUCTION
Money laundering is a process where the proceeds of crime are transformed into apparently
legitimate money or other assets. It is the processing of criminal proceeds to disguise its
illegal origin. In simple words, it can be defined as the act of making money that comes from
one source to look like it comes from another source. INTERPOL's definition of money
laundering is: "any act or attempted act to conceal or disguise the identity of illegally
obtained proceeds so that they appear to have originated from legitimate sources".2 The act of
money laundering is done with the intention to conceal money or other assets from the State
so as to prevent its loss through taxation, judgement enforcement or blatant confiscation. The
criminals herein try to disguise the origin of money obtained through illegal activities to look
like it was obtained from legal sources because otherwise they will not be able to use it as it
would connect them to the criminal activity and the law enforcement officials would seize it.3
Article 1 of EC Directive defines Money Laundering as “The conversion of property, knowing
that such property is derived from serious crime, for the purpose of concealing or
disguising the illicit origin of the property or of assisting any person who is involved in
committing such an offence(s) to evade the legal consequences of his action, and the
concealment or disguise of the true nature, source, location, disposition, movement, rights
with respect to, or ownership of property, knowing that such property is derived from serious
crime.”
The most common types of criminals who need to launder money are drug traffickers,
embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drug
traffickers are in serious need of good laundering systems because they deal almost exclusively
in cash, which causes all sorts of logistics problems. Criminal activities such as terrorism,
illegal arms sales, financial crimes, smuggling, or illicit drug trafficking generate huge sums of
money and criminal organizations need to find a way to use these funds without awakening
suspicions about their illicit origin.4
The purpose of these criminal organisations is to generate profits for the group or for one of its
individual members. When a criminal activity generates substantial profits, the individual or
group involved in such activities route the funds to safe heavens by disguising the sources,
changing the form or moving the funds to a place where they are less likely to attract
attention. The logic of controlling the drug money trial is that profit motivates drug sales, and
because most sales are in cash, the recipient of cash has to find some way of converting these
funds into utilizable financial resources that appear to have legitimate origins.
The objective of criminalizing money laundering is to take profit out of the crime. The
rationale for the creation of the offence is that it is wrong for individuals and organizations’ to
assist criminals to benefit from the proceeds of their criminal activity or to facilitate the
commission of such crimes by providing financial services to them.
PROCESS OF MONEY LAUNDERING
Money laundering is a single process however, its cycle can be broken down into three
distinct stages namely, placement stage, layering stage and integration stage.7
Placement Stage: It is the stage at which criminally derived funds are introduced in the
financial system. At this stage, the launderer inserts the “dirty” money into a legitimate
financial institution often in the form of cash bank deposits. This is the riskiest stage of the
laundering process because large amounts of cash are pretty conspicuous, and banks are
required to report high-value transactions. To curb the risks, large amounts of cash is broken
up into less conspicuous smaller sums that are then deposited directly into a bank account, or
by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then
collected and deposited into accounts at another location.
Layering Stage: It is the stage at which complex financial transactions are carried out in order
to camouflage the illegal source. At this stage, the launderer engages in a series of
conversions or movements of the money in order to distant them from their source. In other
words, the money is sent through various financial transactions so as to change its form and
make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire
transfers between different accounts in different names in different countries, making
deposits and withdrawals to continually vary the amount of money in the accounts, changing
the money's currency, and purchasing high-value items such as houses, boats, diamonds and
cars to change the form of the money. This is the most complex step in any laundering scheme,
and it's all about making the origin of the money as hard to trace as possible. In some instances,
the launderer might disguise the transfers as payments for goods or services, thus giving them a
legitimate appearance.8
Integration stage: It is the final stage at which the ‘laundered’ property is re-introduced into the
legitimate economy. At this stage, the launderer might choose to invest the funds into real
estate, luxury assets, or business ventures. At this point, the launderer can use the money
without getting caught. It's very difficult to catch a launderer during the integration stage if
there is no documentation during the previous stages.
At each of the three stages of money laundering various techniques can be utilized. Following are
the various measures adopted all over the world for money laundering, even though it is not
exhaustive but it encompasses some of the most widely used methods:
1. Structuring Deposits: This is also known as smurfing9, this is a method of placement
whereby cash is broken into smaller deposits of money, used to defeat suspicion of
money laundering and avoid anti-money laundering reporting requirements.10
2. Shell companies: These are fake companies that exist for no other reason than to
launder money. They take in dirty money as "payment" for supposed goods or
services but actually provide no goods or services; they simply create the appearance
of legitimate transactions through fake invoices and balance sheets.11
3. Third-Party Cheques: Counter cheques or banker’s drafts drawn on different
institutions are utilized and cleared via various third-party accounts. Third party
cheques and traveller’s cheques are often purchased using proceeds of crime. Since
these are negotiable in many countries, the nexus with the source money is difficult to
establish.
4. 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.
IMPACT OF MONEY LAUNDERING
Launderers are continuously looking for new routes for laundering their funds. Economies
with growing or developing financial centres, but inadequate controls are particularly
vulnerable as established financial centre countries implement comprehensive anti-money
laundering regimes. Differences between national anti-money laundering systems will be
exploited by launderers, who tend to move their networks to countries and financial systems
with weak or ineffective countermeasures.14
The possible social and political costs of money laundering, if left unchecked or dealt with
ineffectively, are serious. 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. The economic and political influence of criminal organisations can
weaken the social fabric, collective ethical standards, and ultimately the democratic
institutions of the society. In countries transitioning to democratic systems, this criminal
influence can undermine the transition.
If left unchecked, money laundering can erode a nation’s economy by changing the demand
for cash, making interest and exchange rates more volatile, and by causing high inflation in
countries where criminal elements are doing business. The draining of huge amounts of
money a year from normal economic growth poses a real danger for the financial health of
every country which in turn adversely affects the global market.15 Most fundamentally,
money laundering is inextricably linked to the underlying criminal activity that generated it.
Laundering enables criminal activity to continue.
Thus, the impact of money laundering can be summed up into the following points:
Potential damage to reputation of financial institutions and market
Weakens the “democratic institutions” of the society
Destabilises economy of the country causing financial crisis
Give impetus to criminal activities
Policy distortion occurs because of measurement error and misallocation of resources
Discourages foreign investor
Causes financial crisis
Encourages tax evasion culture
Results in exchange and interest rates volatility
Provides opportunity to criminals to hijack the process of privatization Contaminates
legal transaction.16
Money laundering is, thus, a very serious offence and it should not be taken lightly as any
other local crime. This study was supposed to be limited for money laundering in Indian
perspective but could not be done so as it is neither possible nor relevant to discuss the issue
of money laundering without taking its international aspect as every act of money laundering
involves various transactions, national and/or international, with the aim of obscuring the
origin of proceeds of crime.
India has taken up various Anti-Money Laundering measures to curb with this issue but these
measures somewhere or the other have some loopholes or lacunas and thus is not fulfilling
their complete purpose. Some of such problems are pointed out below:
Growth of Technology: with the advent of technology at such a greater speed it has been
possible for the money launderers to act on obscuring the origin of proceeds of crime by
cyber finance techniques. The enforcement agencies are not able to match up with the
speed of growing technologies.
Lack of awareness about the problem: the issue of money laundering is growing at a very
high pace. Its unawareness among the common public is an impediment for
implementation of proper anti-money laundering measures. The poor and illiterate
people, instead of going through lengthy paper work transactions in Banks, prefer the
Hawala system where there are fewer complexities and formalities, little or no
documentation, lower rates and they also provide security and anonymity. This is mainly
because such people don’t know the seriousness of this crime and are not aware of its
harmful after effects.
Non-fulfilment of the purpose of KYC Norms: RBI has issued the policy of KYC norms
with the objective to prevent banks from being used by criminals for money laundering
or terrorist financing activities. However, it does not cease or abstain from the problem
of Hawala transactions as RBI cannot regulate them. Further, such norms are only a
mockery as the implementing agencies are indifferent to it. Also, the increasing
competition in the market is forcing the Banks to lower their guards and thus facilitating
the money launderers to make illicit use of it in furtherance of their crime.
The widespread act of smuggling: there are a number of black market channels in India
for the purpose of selling goods offering many imported consumers goods such as food
items, electronics etc. which are routinely sold. The black merchants deal in cash
transactions and avoid custom duties thus offering better prices than the regular
merchants. After liberalization of government, though this problem has been lessened but
it has not been done away with completely and still poses a threat to a nation’s economy.
Lack of comprehensive enforcement agencies: the offence of money laundering is no
more stuck to one area of operation but has expanded its scope include many different
areas of operation. In India, there are separate wings of law enforcement agencies
dealing with money laundering, cyber crimes, terrorist crimes, economic offences etc.
Such agencies lack convergence among themselves. The issue of money laundering, as
we have seen, is a borderless world but these agencies are still stuck with the laws and
procedures of the states.
Combating the offence of money laundering is a dynamic process since the criminals
involved in it are continuously looking for new ways to do it and achieve their illicit motives.
Moreover, since various countries are entering into multiple agreements and conventions in
order to strengthen their measures to combat money laundering, the money launderers are
targeting and exploiting those jurisdictions which are weak and do not have sufficient laws to
deal with such an offence. There is an urgent need for a definite policy of anti-money
laundering. The criminals dealing with these activities do not have any particular pattern i.e.
they have distinct patterns of operation.
India has taken extensive measures in order to curb with the issue of money laundering. It can
rightly be said that the manpower has been tripled as there is Directorate of Enforcement
which leads all the money laundering cases and investigations related to it in the country;
there is also Financial Intelligence Unit which tracks down and analyses the risk of money
laundering through the agencies reporting to it and there is time to time upgradation of the
legislative framework through the proposed changes. However, there is still a further need to
increase the enforcement and take more strict actions against the persons violating them.
Also, the financial institutions are required to implement additional levels of control in areas
such as transaction monitoring, annual review, periodic updation of accounts etc. Moreover,
cost factor also plays a very significant role in having an effective anti-money laundering
regime as high costs and low budget may lead to reduced focus and thus higher risks.
SUGGESTIONS
As it can be seen that money laundering involves activities that are international in nature and
are also at a greater level, therefore, to make a heavy impact it is necessary that all countries
should enact strict and as far as possible same laws so that the money launderers will have no
place to target in order to launder their proceeds of crime by way of weakness of jurisdiction
or the like. Since the States have no obligation in deciding which offences should be
considered as predicate offences to money laundering there is no consensus into the
international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist
common predicate offences to solve the problem internationally particularly keeping in mind
the trans-national character of the offence of money laundering.
Furthermore, the provision of financial confidentiality in other countries is an issue. The
states are unwilling in compromising with this confidentiality. There is a need to draw a line
between such financial confidentiality rules and these financial institutions becoming money
laundering havens.
Apart from that, many a people are of the opinion that money laundering seem to be a
victimless crime. They are unaware of the harmful effects of such a crime. So there is a need
to educate such people and create awareness among them and therefore infuse a sense of
watchfulness towards the instances of money laundering. This would also help in better law
enforcement as it would be subject to public examination.
Moreover, to have effective anti-money laundering measures there need to be a proper
coordination between the Centre and the State. For that the tussle between the two should be
removed. The laws should not only be the responsibility of the Centre but it should be
implemented at the State level also. The more decentralised the law would be the better reach
it will have. Therefore, to have an effective anti-money laundering regime, one has to think
regionally, nationally and globally.
