This term paper report is based on research about money laundering, mainly focusing on the Indian scenario. Money is the prime motive behind almost every type of criminal activities. Money laundering is the method by which criminals cover the illegitimate source of their funds and protect their assets, so as to avoid notion of law enforcement agencies and to avoid leaving any mark of evidence. The ability to prevent money laundering is an effective way of identifying criminals and their illegal activities from which funds are derived. The use of search techniques ca be one way of detecting the terrorist activities. The money laundering activities provide reasons for positive approach, but such programs still have a long way to go. The report is a study of money laundering with reference to various case studies of the people involved in this process.
Money laundering can be described as the conversion money obtained through illegal activities in order to make its true source or nature difficult to understand. It other words it can be defined as the process of creating an appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist financing, originated from a legal source. There are a variety of ways in which the illegal money can be laundered and can range in sophistication. Such methods with the proceeds of criminal activities that if successful will leave the illegally derived appearing as the product of legitimate investments or transactions. There is a myth in the society regarding the line of difference between converting black money into white money and money laundering. The reality is that if the launderer tries to hide his true income and goes against income tax Act, he is not committing money laundering. Banks, financial institutions and intermediaries are obligated, by law, to keep an eye on transactions which enables someone to make a gain of Rs 30 lakhs or above by violating any of the Acts, like Air prevention and control of pollution Act, SEBI Act, Prevention of corruption Act. Money launderers indulge in big-ticket as well as small ticket scams. According to prevention of Money Laundering Act(PMLA), the director of FIU-IND can impose fines on banks and other financial institutions if they fail to detect or conceal wrongdoings. For the banks to do so have set up many regulations like strict “KYC norms” and other “AML” policies. The consequences of money-laundering operations can be particularly devastating to developing economies. Left unchecked, money launderers can manipulate the host’s financial to operate and expand their illicit activities. Apparently, legitimate but criminally owned businesses financed by laundered capital can quickly undermine the stability and development of established institutions. Money laundering activities can undermine the integrity and stability of financial institutions, discourage foreign investment, and distort international capital flow. Money launderers exploit differences between national anti-money laundering laws and systems, and are especially attracted to jurisdictions with weak or ineffective control where they can move their funds more easily. Moreover, problems in one country can quickly spread to other countries. The world’s largest and wealthiest economies tend to serve s the primary hosts for money launderers and their operations. The money laundering crimes are subject to rigorous imprisonment of not less than 3 years and upto 7 years. The PMLA Amendment Bill has proposed that jail term should go upto 10years Anti-money laundering has become a serious issues due to the possibility of such funds being used for terrorist financing, apart from the revenue loss to the government. The reserve Bank of India’s seriousness in this matter can be gauged from the fact that it significantly delayed the banking license of and stalled a mutual fund acquisition by a Swiss bank, on its reluctance to cooperate with Indian authorities to unravel a trail of funds involving racehorse owners and Saudi arms dealers. India now has a specific money Laundering law in the “Prevention of Money Laundering Act,2002” and its intention is to become a full member of Financial Action Task Force. Money laundering is not merely a white collar crime that robs a government of tax revenue. It is a hidden cancer that allows criminal activity to seeps through all sectors of legitimate business, making detection of, and enforcement against such crimes extremely difficult. Main objectives of Money laundering activities are: Hiding the true source and natures of illegally obtained money Placement, layering, and integration of such funds
To study about the Modus operandi of Money Laundering and the process which states “How to Launder money” To have an imperial study of Money Laundering by taking various cases. To study what has been the impact of money laundering in India
The report is based on Secondary Research. The sources through which the data is collected is through: Websites, articles, journals. Books based on concepts and principles of finance Cases from various legal books and legal websites. The research design undertaken is the exploratory research.
The criminalization of money laundering is modelled, following the law and economics strand of the literature which is described as the economics of crime. The theoretical model shows that a)the probability to be caught for money laundering, b) the sentence for money laundering, c) the probability to be convicted for the predicate crime and d) the transaction costs of money laundering are negatively related to the amount of crime. Under the assumption that these factors are all positively influenced by a stricter anti-money laundering policy, the hypothesis empirically tested in this paper is that anti-money laundering policy deters potential criminals from illegal behavior and therefore lowers the crime rate.
The Basle Principles suggest policies and procedures in four areas to curb Money Laundering: 1. Customer Identification 2. Compliance with Laws 3. Cooperation with Law Enforcement agencies, and, 4. Adherence to the Statement.
To reduce the money laundering risk, SVC providers need to be aware of and comply with local regulatory requirements such as AML/CTF regulation, and prudential and financial regulations. Compliance with these measures can, however, be challenging and expensive for SVC providers, although the potential legal liability and reputational risk for non-compliance can be significantly costly. he burden of compliance is more significant for smaller, local institutions, where “know your customer” and reporting requirements are less automated’.
HOW TO LAUNDER MONEY-“THE PROCESS” Who will come across the suspicious transaction? Financial entities, includes banks, credit societies, trusts and lending Institutions/companies and agents of such institutions who accept deposit liabilities Life insurance companies, brokers or agents Securities dealers, portfolio managers and investment bankers, and other middleman in securities markets Forex dealers Agents, who are selling National savings certificates, money orders and other Financial Instruments Chartered Accountants while carrying out certain activities on behalf of their clients Real estate, brokers or sales representatives of real estate when carrying out certain activities on behalf of their clients The illegally obtained money is set to pass through three evitable stages of the process, namely the Placement stage, the Layering stage, the Integration stage.
The illegal funds obtained are moved away from its true source and put into the financial system. Entry into the financial system is usually gained through financial institutions. The placement stage can be carried in the following ways: Currency SmugglingA – This is the method of currency which has been a result of illegal practices and other monetary instruments out of the domestic country. Bank ComplicityA -This is when the banks are controlled by suspected individuals with drug dealers and other criminal groups. Inadequate control of the financial sector provides easy way to launderers. Securities BrokersA – structuring and restructuring large deposits of cash by the brokers in a manner that will manipulate the original source of funds. Blending of FundsA – Inorder to hide illegal cash, mix it with a lot of legal cash. The alternative is to use the money from illicit activities to set up front companies. Asset PurchaseA – purchasing assets out of the illegal money is the best way to laundering. The objective is to convert the results of suspicious transactions to equally valuable but less suspicious form.
In the second stage the money, which is now in the form of electronic funds, is distributed through the financial system. This done by layering one transaction involving these funds on top of another by means of electronic transfers, shell companies, false invoices, etc. The result of these transactions is that the laundered money becomes indistinguishable from “legitimate” money. The known methods are: Cash converted into Monetary InstrumentsA -once the money is placed in the financial system through financial intermediaries like banks, the money is then converted into monetary instruments. Banker’s drafts and money orders are used as a tool to this process. Material assets bought with cash then soldA – assets bought in the placement stage out of the illegal funds are moved further in the financial institution by reselling them abroad to make the real source difficult to trace.
In the integration stage the money that was diffused into the commercial sphere is collected and made available to the offender under the guise of being legitimate earnings. In this, the launderer finds a beneficial mode of investment and makes his dirty money to appear legitimate. This process requires identification of laundered funds. The known methods used are: Property DealingA – buying and selling property inorder to integrate the money which is floating in the laundering process back to the economy. Shell companies are used as a tool to accomplish this deals in property, hence these transactions will be considered as legitimate. Front Companies and False LoansA – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction. False Import/Export InvoicesA – use of bogus invoice is an effective way to integrate the laundered money back in the financial system. This is the process which involves falsely increasing the value of the documents to justify the late entry of funds in the domestic banks.
Smurfing: it is the process in which a large number of low value monetary instruments are deposited which are a result of criminal activities. The transactions involves many persons making deposits into many accounts during their visit to banks. Structuring: it is through multiple cash deposits or withdrawals at amounts below the ceiling amount. Shell companies: these are companies that are set up by the criminals for the purpose of money laundering. These are unreal companies which take in illegal funds as payment for delivery of goods and services but they do not provide any. Their work is to prepare bogus invoices and fake balance sheets. E-banking/Cyber banking: with the help of internet and various technologies that have created global reach simpler, many banks have opted for net baking services. This has given rise to the most critical money laundering tool, “cyber banking” because the money moves all around the world in short period of and the parties to such transactions are anonymous. The Internet and the digital money system has given rise to new money laundering possibilities. With the expansion of various online activities and the development in internet technologies the principle of “know your clients” is getting disturbed. The transactions have become anonymous and its is not in control of the banks or other units to know who are the users who are involved in the transactions. The online activities can be coined as who has the dumping of username and the password belonging to it, who opens an online bank account, participates in different share trading models with use of internet, can communicate through mysterious e-mails, can circulate money through online casinos, can enter into online betting offices, can enter into online auctions, can do everything through internet. The need of providing your personal contact details is terminated when there is the opening of an online bank account and banking and electronic payment systems. Various internet cafes and public library offers free and anonymous services through fake e-mails to get access to your letters and bank accounts. Various prepaid card mobile phones can be bought without disclosing the buyer’s identity. This offers the opportunity to the criminals to keep their identity secret. This is used by certain criminals groups so effectively that they use sophisticated safe digital methods inorder to code their phones so that it becomes impossible to identify them. Virtual casinos and online football pools sides have become very popular. These are used by the criminals to operate as off shore companies. The trick to which the fair people falls pray to is that, inn order to play for “prize”, first a credit line is to be registered at the casino. Due to lack of regulations it is easy to send cash. Some games or gambling takes place and the rest of the credit is claimed back in form of cheques. The internet games involves the use of virtual money, the regulations that govern online gambling are evaded and the launderers enter into making illegitimate money. Some companies provides the benefit of accepting the virtual money in order to make payments, thus such money is made available everywhere in the world. The internet community building company-consists of more than 220 million chatters, it uses virtual money, known as Q coins, to the clearance of users with reference to Yuan rate, for buying service offered.
AML is a term used express the power in the hands of the financial institutions and other entities to identify, prevent and report illegal money laundering activities in the industries. The AML procedures came into existence as a result of the Financial Action Task Force and the spreading of the anti-money laundering standards globally. These standards gained importance in 2000 and 2001 after FATF took up the task to identify the countries that lacked in their AML laws and international cooperation. FATF names this process of identification as “name and shame”. The AML procedures will be effective if they can influence criminalized money laundering, under the defined regulators, able to share suitable information with other countries, enables the financial entities to identify their users, keeping appropriate records and reporting doubtful activities. As an effective step towards anti-money laundering, RBI has come forward and has made mandatory adoption of KYC/AML Policy by all the banks. The objective of such policies are: To prevent the use of banking system for the purpose of illegitimate transactions by the criminals. To manage the risk of anonymity, it enables the banks to know their customers and their financial dealing better. To maintain proper controls for identification of doubtful activities in reference to the existing laws. To follow the existing laws and regulatory procedures. To provide proper training of KYC/AML procedures to the staff members.
RBI has come with a policy that every bank should set up key indicators for every account it has, conducting a background check of the customers, the transactions that they undertake and other factors that involve higher risk. The RBI has asked Indian banks to put in place a proper policy framework on the “know your customer”(KYC) guidelines and “Anti-Money Laundering(AML) measures”. Banks should submit a report of monthly assessment of risky accounts.
SEBI has asked non-banking agencies to frame their AML policies and KYC norms and procedures. Guidelines by SEBI: Written anti-money laundering procedures Customer due diligence Elements of customer due diligence Policy for acceptance of clients Risk based approach Clients of special category Clients identification procedure Record keeping Retention of records Monitoring of transactions Suspicious transaction monitoring and reporting
PMLA forms the central part of the legal structure established by India to battle against money laundering. PMLA and the rules came into force on July 1, 2005. Director FIU-IND and Enforcement Director have powers under the Act to put in action the provisions of the Act. The PMLA imposes responsibility on the banking companies and other financial institutions maintain the records of the clients they are dealing with and to provide required information to FIU-IND. PMLA provides for confiscation of the results of crimes.
To identify, fight against and prevent money laundering. To prevent the legitimate corporations being used as a tool to money laundering. To confiscate the proceeds of money laundering. To carry out monthly customer due diligence measures which are sensitive to risk of money laundering. To follow the appropriate laws that are accepted globally in the field of money laundering.
The KYC/AML/CFT procedures as set up with the aim to prevent banks being used by the criminals as a tool for money laundering and terrorist financing activities. These procedures facilitates the banks identify their customers and their dealings with them which help them reduce the risk. Banks should keep in mind the following key fundamentals while framing KYC procedures. a) Customer Acceptance Policy; b) Customer Identification Procedures; c) Monitoring of Transactions; and d) Risk Management. KYC activities involves identifying the background of the investors and ensuring that the investor’s activities are genuine and legitimate. PMLA & SEBI require CSSIPL to collect certain information about each investor and verify their identity, supported by relevant identification documents.This includes collecting proof identity, proof of address, photograph such other documents including in respect of nature of business and financial status of the client as may be required by the CSSIPL of investors in the capacity of beneficial owners, directors, authorized persons, Delegation of Authority or Power of Attorney holders or any key stakeholders of the relationship.
KYC is required out at the following stages: Prior to establish a new relationship with the banking institutions. Opening of another account KYC information has changed since opening first account with the bank. Opening a locker facility with the bank for all locker facility holders. From time to time when CSSIPL feels it necessary to obtain additional information from existing customers based on conduct of the account. When there are changes to signatories, mandate holders, beneficial owners etc. After periodic intervals based on instructions received from RBI.
Sani Abacha, a military dictator of Nigeria and his family transferred an amount of £5 billion into an account of a foreign bank. He stands at the 4th position of the most corrupt leaders. Abacha was held responsible for extensive looting Nigeria’s national income. After his death in 1998, the Nigerian government had recovered an amount of $2 billion.
Bank of credit and Commerce International was considered as the 7th largest private bank in the world. During 1980s the bank had a part in various misleading activitites which included large amount of laundered money. Billions of profits earned by criminal activities which included drug money was transferred through its accounts. The bank was not much selective when it came to its clienteles, it had its clients like Saddam Hussein, Palestinian terrorist leader Abu Nidal. BCCI has been alleged for funding Afghan Mujahideen during the war.
A large amount of money with assumed links to the Russia mafia entered into “Benex Worlwide” accounts at the Bank of New York. BONY is one of the oldest and the most reputed bank of America. the process of “capital flight” came into the light which means rpid flow of money out of the country and being spread amongst various other European companies before entering back to Russia. It was projected that amount of $7 to $9 billion was laundered through BONY accounts.
Franklin Jurado was found guilty for laundering an amount of $36millions for the Colombian drug dealer Lord Jose Santacruz-Londono. In orer to make his proceeds seems legitimate, he moved the profits out of cocaine far and wide so that its source becomes impossisble to get detected. After being through various European banks, the amount would eventually enter bback to Santacruz business. Later, a fail of banking operations in Monaco highlighted Jurado’s illegal activities. He was 7.5years jail.
1200 miles away from the coast of New Guinea is a tiny Pacific island called Nauru. It was centre of high profile money laundering activities. In 1990s Russian criminals laundered an amount of $70 billion through shell banks set up particularly for this purpose. The bank was operating without identifying its customer’s identity or the path of money which is deposited in its accounts.
AlCapone, America’s mobster is assumed to be the head of the modern money laundering schemes. It was projected that he laundered an amount of $1 billion. His first business was known as Laundromat which was operating in cash and was very helpful in hiding illegal profits. Capone is alleged for a number of financial crimes like tax evasion etc.
Ferdinando was removed from his position of being the president of Philippines from 1965 to 1986. His removal was due to his act of laundering billions of dollars of stolen funds through US and Switzerland banks. It made the Philippines to come forward with an operation called as “Operation Big Bird” to recover the money back. As a memorable sign, it is said that Marcos wife owned 2500 pairs of shoes.
He is considered to be the most corrupt leader, Suharto was made to resign forcefully from his position of being the President of Indonesia from 1967 to 1998. According to Time Asia magazine Suharto family’s wealth was projected to be $15 billion. It was alleged that amount up to $73 billion had passed through the family’s funds.
During 1999, an amount of $7 billion illegal funds moved from Russian banks through a US bank to many other bank accounts of the world. Once the funds entered into US banking system, Russian banks later transferred the amount from New York bank to other bank accounts of the three shell companies. In 2000, bank employee surrendered for the plot of money laundering.
After a two and one half year undercover inquiry of Colombian peso brokers and their laundering activities, 37 people were arrested in 2002 by the US Customs Service, Drug Enforcement administration and Colombian Departamento Administrativio de Seguridad. The people laundered money on behalf of Colombian narcotics cartels. Investigators confiscated $8 billion cash, cocaine, marijuana, heroin etc.
Ketan Parikh brought a great fall in the stock market of India and many politicians had to receive a kickback for their performance through the Hawala chammels. The Hawala mechanism is a virtual mechanism which leaves behind no paper trails which makes it impossible for the investigators to look for clues. The profit generated through this mechanism was secretively spent on real estate, securities etc.
Satyam Computers and its founder-chairman B Ramalinga Raju has been alleged for money laudering.it was alleged that he has invested the funds of Satyam into purchasing property in Medchal and Qutbullahpur. It was also alleged that Raju opened bank accounts by violating the Laws of India.
In India, the Hawala transactions gave rise to money laundering. Hawala is a concept of converting black money to white. Money and information is transferred between two parties through a third party acting as an intermediary. It consists no traces of paper left behind, making it impossible for the investigators to detect the transaction. The profits are then invested into property, securities etc secretly in order to launder them. Earlier money laundering was considered as a unimportant crime but after the attack of September 11, 2011, several special acts have been enacted to check these money laundering activities. The launderers have undertaken several methods for the conversion of illegal funds into legal funds. The major risk arises for a bank as the criminals use banks as a tool for movement of such funds. Several acts has been enacted for the prevention of money laundering activities in India. The following certain acts attempt to prevent money laundering- The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; The Income Tax Act, 1961 The Benami Transactions (Prohibition) Act, 1988 The Indian Penal Code and Code of Criminal Procedure, 1973 The Narcotic Drugs and Psychotropic Substances Act, 1985 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 In November, 2002, PARLIAMENT approved the long-pending legislation to prevent the offence of money laundering. The Money Laundering ac has made it mandatory for the financial institutions to disclose and report transactions, seizure of the results of criminal activities, identifying money laundering as the most serious crime and demanding cooperation in investigation of such activities through various international agencies and nations. It has instructed all the banking companies and various other institutions to report every transaction and provide required information in given period of time.
Prevention of Money Laundering Act, 2002 came into existence from 1st July 2005. Section 3 of this Act states that money laundering involves those people who tries to participate in illegal activities which results in happening of crime and making them as clean properties, such people should be guilty of this crime. Section 4 of the above stated Act states money laundering results in imprisonment for a term of 3years and a fine of five lakhs rupees. Section 12(1) has imposed compulsion on Banking companies and other financial institutions to maintain proper records of the nature and value of every transactions. To report how many transactions take place in a month. Every bank is under a compulsion to follow the AML norms which are KYC norms in order to make a background check for his customers. Strict investigations under the Acts to detect the original source of transactions This example will explain the importance of strict investigation: H is leader of money launderer group and earns profits by selling drugs. H is the recipient of this activity, but never shows his participation in the actual deals of drugs. The actual transactions are undertaken by low ranking members who have access to bank accounts. When H instructs, the low rank member deposits the proceeds of drugs sales in the bank accounts while some withdraw funds for the purchase of drugs. The excess funds of the bank accounts are moved to the accounts of a shell company held by H. H being the director oh the shell company set up particularly for this purpose. From this account, H withdraws money making it appear as the salaries being withdrawn by him for himself. When the investigation will take place, the low rank members will be found guilty for such activities. This will not prove the participation of H in any activity. By broadening the scopes of the investigation, it will be likely to detect the destination of the proceeds of drug dealing activities. Once the shell company gets exposed, the link between the funds and the company and H participation can be established. The investigation can be undertaken with a better approach as well. This will involve the search for H, his earnings and the property that truly belongs to him can be traced to the shell company. Following the funds movement more the link between the shell company and the bank accounts of the members can be revealed. Once this is done, it is likely to reveal the connection between criminal activities of the members and H. The law making entities should create an additional weapon for a war against money laundering. This tool will be more effective if it goes along with the provisions of forfeiture of the results of the illegal activities.
Criminals commit three basic types of crimes: crime of passion, crime of violence, economic crime. When they make money from crimes they want to move the money further and faster than investigators can follow it. Money laundering is a dynamic process. It is a highly sophisticated and global criminal activity. The criminal groups are looking for new ways to accomplish their illegal objectives. Millions of dollars are being laundered each year and banks and other financial institutions act as an intermediary in laundering money. Whereas too many institutions have still not adopted the required legislations. Banks should implement effective KYC policy, checking the sources of funds, monitoring the conduct of accounts, and by learning to recognize suspicious/ irregular transactions. India is developing and its difficult to monitor how much money goes in and comes out every day. Plus the banks should update the customer information on a regular basis, leaving no stone unturned. Money launderers are on a prowl, on the part of the society, following the various prevention acts and being aware and not falling in trap to any schemes offered which may ultimately make you a pray to money launderers.
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