This article is written by Gautam Badlani, a student at Chanakya National Law University, Patna. This article examines the concept of money laundering, thereby providing an overview of the techniques, stages, and harms of this activity. It further examines the provisions of the various domestic and international legislations relating to money laundering.
It has been published by Rachit Garg.
Table of Contents
Introduction
The advancement of the economic and financial systems has led to the rise of complex economic offenses which are not only difficult to trace but also adversely affect the nations’ economic assets. One such economic offense is money laundering. Money laundering is defined as the coordinated and systematic transfer of illicit funds through several financial systems which results in the creation of a complex web of transactions and makes it difficult to trace the original source of the funds. In this manner, the illegal proceeds are entered into a legitimate financial system and all the blemishes of illegality are wiped of.
This article analyses the concept of money laundering and provides an in-depth analysis of the various stages of money laundering. The article highlights the various techniques which are followed by the money launderers and the adverse effects of money laundering on a nation’s economic credibility. Lastly, the article also provides a comparative analysis of the financial regulatory regimes of various countries.
What is money laundering
Money laundering can be defined as the movement of illegal funds through a range of deceptive transactions which are intended to disguise the original source of the money and introduce it in the legitimate financial system.
The offence of money laundering threatens the credibility of the financial and economic systems of the nations and therefore most of the states have enacted laws to prevent money laundering. One of the reasons for a sudden rise in anti-money laundering laws is the growing public awareness regarding the harmful effects of money laundering. The growing public pressure has forced the governments to extend the scope of anti-money laundering laws and the financial and banking systems are also facing an enhanced public pressure to ensure the compliance with the regulatory standards.
However in order to ensure that the laws are effectively implemented there is a need to analyse the process and various techniques that are followed by the money launderers.
Reasons behind the rise of money laundering
The phenomenal growth of money laundering offences in the past few decades can be attributed to the rapid technological growth that has made international communications easier. Moreover, several international banks have emerged that have facilitated faster and easier cross-border transfers of funds. Once the money enters the international banking system, it becomes difficult to trace the original source of the money.
The money launderer need not physically carry the cash from one place to another, as he can launder money in the form of digital cash or currency or through electronic exchange mediums. Technology has made capital fluid in nature, and large amounts of money can be transferred with a single click.
Process of money laundering
Money laundering largely involves four steps:
Illicit activity
In order for money to be laundered, the first step is to have illicit financial activity. The proceeds of the illicit activity are the subject of the money laundering activities.
Placement stage
The first stage is called the placement stage. In this stage, the money is entered into the legitimate economy. This can be done by making a purchase through a legitimate financial system. Cash deposits in banks can also be made in a series of small transactions.
Layering stage
The second stage is known as the layering stage. Once the money enters the financial system, a system of complicated financial transactions is developed to conceal the source of the funds. The complex network of transactions avoids any audit trial.
Integration stage
The third stage is known as the integration stage. Under this stage, the money is integrated with the financial system. The money re-enters the financial system in legitimate form as normal funds.
Techniques of money laundering
There are several techniques for money laundering, such as:
Cyberlaundering
Cyberlaundering is popularly known as the money laundering of the digital age. Under cyber-money laundering, money laundering takes place using online channels and digital cash. This technique ensures the anonymity of the parties involved. The perpetrators leverage e-commerce, crowdfunding, or online games for the purpose of covering their illegal money.
Smurfing and structuring
This is one of the most popular techniques of money laundering. Under this technique, large amounts of funds are structured into numerous small transactions. These transactions are split into numerous accounts, which avoids regulatory attention.
Many countries have laws requiring banks and financial institutions to inform the government when any cash transaction exceeding a certain specified limit is processed. By structuring the transactions into multiple small amounts, the money launderers evade any scrutiny by the regulators. For example, in the United States, under the Bank Secrecy Act of 1970, financial institutions are required to report any cash transaction that exceeds $10,000.
Hawala system
Hawala system is a system which involves the informal transfer of funds and where the money is transferred based on trust without any actual movement. The transfer of money is merely informally recorded in the books maintained by the Hawala brokers. The hawala system is a traditional system which exists outside the modern banking system.
Under this system, transactions take place between the hawala brokers based on trust, and the hawala dealers credit or debit the transactions in the informal journals kept by them. This system does not involve any actual movement of currency, and no official records are kept of the transaction. As a result, the system ensures the anonymity of the source of funds.
The system is frequently used by people in poor countries, which have no proper formal banking infrastructure and where formal banking is highly expensive. For example, this system may be used by migrant workers to send remittances to their families. Due to the lack of regulatory oversight and the anonymous nature of this system, it provides an opportunity for money launderers to hide the source of their illegal funds.
Shell companies
Money launderers often use shell companies and cash incentive concerns such as casinos, bars, restaurants, etc., to mix their illegal funds with the legitimate revenue gained from these concerns. They are thus able to hide the source of their illegal funds and avoid legal scrutiny.
Disadvantages of money laundering
Money laundering poses a threat to the economic growth and stability of every nation. Money laundering also poses a threat to the political and social stability of a nation. Corporations and rich individuals escape paying taxes through money laundering, which causes economic loss to the national treasury and adversely affects the government’s spending power. Ultimately, it is the poor and the society at large that suffer when the government has to cut down on its expenditure on welfare schemes. It results in increased taxes for those who pay their taxes honestly and also increases business costs.
Money laundering provides economic resources to criminals and increases their influence in society. This makes people lose their faith in economic institutions and harms national ethical standards. The money is used by criminals to commit further offences.
Money laundering is closely interconnected with corruption. It is often used to provide safe havens for the bribes received by high-ranking officials. Countries that witness high levels of money laundering enjoy less confidence among global investors, which adversely affects the national economy. Money laundering destabilises international capital flows and also adversely affects foreign direct investments.
The International Monetary Fund (IMF) points out that the crimes related to money laundering threaten the financial stability of a country and adversely affect foreign investments and international capital flow.
Money laundering in the banking sector
Most of the money is laundered through banks and financial institutions. Numerous small deposits are made in banks around the globe by the money launderers, and then these amounts are syphoned off. In most cases, the money launderer builds a complex web of financial transactions, which makes it difficult to trace the source of the funds.
Many countries have enacted laws requiring banks and financial institutions to keep records of suspicious transactions and to carry out due diligence on their customers. Banks and financial institutions must report any suspicious financial transactions to the regulatory authorities. They must also carry out detailed assessments to analyse the money laundering risk that the institution faces.
Under the domestic legislation of various nations, the banks are required to build an inherent Anti Money Laundering (AML) system. The AML mechanism is aimed at preventing transactions that legitimise illegal proceeds. The banks are required to verify the identity of the customers and check the legitimacy of the funds deposited by them. Banks are required to conform to compliance requirements such as Know Your Customer (KYC). The banks must check whether their customers belong to the list of economic offenders, criminals, crime suspects, or companies that phase in sanctions.
Yes Bank case
Recently, the Yes Bank co-founder, Rana Kapoor, and his family members were charged by the ED for the offence of money laundering. The investigation by the ED revealed that the promoters of Dewan Housing Finance Limited engaged in a criminal conspiracy and syphoned the proceeds of crimes offshore.
The investigation stated that debentures worth Rs. 3700 crores were issued by Yes Bank, and subsequently, the funds were transferred to Dewan Housing Finance Limited. Thereafter, a loan of Rs 600 crore was issued by Dewan Housing in favour of an entity that was owned by Rana Kapoor and his family members. The loan was sanctioned without adequate collateral. The ED noted that the entity to which the loan was sanctioned was not engaged in any active business and was not in a position to repay the loan.
Furthermore, Yes Bank officials approved another loan for M/s Belief Realtors Private Limited. However, the sanctioned loan was transferred offshore and was not utilised for the purpose for which it was sanctioned.
Rana Kapoor and others involved are facing legal proceedings, and several chargesheets have been filed by the ED.
Money laundering in the insurance sector
Insurance companies, particularly life insurance companies, have become a primary target of money launderers. Compared to banks and financial institutions, insurance companies have to comply with few regulatory statutes and do not have a robust mechanism to monitor suspicious activity.
Once the money laundered makes a lump sum payment to the insurance companies, he is entitled to make a claim. Thus, money launderers invest illegal proceeds in insurance policies and receive legitimate funds when they make a claim. Some money launderers surrender their claims, while others take out a loan against the insurance policies. This helps in creating an intricate web of financial transactions that goes unnoticed by the regulatory authorities.
The insurance companies must also conduct due diligence on their customers and verify their identities. They must ensure that they do not provide services to economic offenders or criminal suspects. Any unusual payment methods, excessive premiums, or substantial transactions must be reported to the regulatory authorities.
International initiatives
In the past few decades, there has been a worldwide increase in the number of money laundering offences. Since the crime of money laundering is international in nature and crosses borders, a need was felt to establish standards for international law enforcement. Several initiatives have been taken at the international level by organisations such as the United Nations to establish international standards for preventing the crime of money laundering. Here are a few examples:
Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) was set up at the 1989 G7 Summit, which was held in Paris. It consists of 39 members and aims at developing global standards for preventing money laundering. FATF also keeps a check on terror financing, and its primary responsibility is to develop worldwide standards for preventing money laundering.
India joined the FATF as an observer in 2006 and became a full member of the organisation in 2010.
The FATF Recommendations 2012 require the countries to identify risks associated with money laundering and terrorist financing. The countries are required to establish mechanisms and designate authorities for the purpose of mitigating these risks. Moreover, the recommendations provide that financial institutions should be prevented from maintaining anonymous accounts, and they should be required to maintain records of domestic and international transactions for a minimum of 5 years.
The members are required to criminalise money laundering as per the norms of the Vienna Convention.
Vienna Convention
The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 is aimed at preventing the drug traficals from covering the source of them illegal funds through money laundering. The primary aim of the Convention is to criminalize and punish money laundering. The Convention obliges the nations to undertake legislative measures to ensure that the drug traffickers are not able to launder the proceeds generated from their illegal activities. This would eliminate the monetary incentive behind drug trafficking. The Convention defines proceeds as the property that is obtained by the commission of any offense, whether directly or indirectly. The party states have to enact laws enabling the confiscation of the proceeds and prosecution of the traffickers.
The parties to the convention are under an obligation to ensure that the justice system and banks and other financial institutions are sufficiently empowered to monitor, detect and block the transactions involving illegal proceeds. If the proceeds are converted into any property, then the property would be liable to confiscation as well. The Convention also contains provisions aimed at promoting international cooperation for the purpose of preventing money laundering. It facilitates the extradition of drug traffickers.
United Nations Convention Against Transnational Organized Crime
The United Nations Convention against Transnational Organized Crime was adopted by the United Nations General Assembly in the year 2000. The primary aim of this Convention is to prevent the cross-border organized crimes.
Article 6 of the Convention deals with the measures that the parties to the Convention are supposed to take in order to prevent the offence of money laundering. Each party to the Convention is under an obligation to implement a comprehensive regulatory mechanism for the purpose of supervising the banking and financial systems and other institutions which are likely to be used by the money launderers to cover their illegal proceeds. The domestic regulatory mechanism must emphasize on the identification of customers, keeping a record of the customers and reporting of any suspicious transactions.
Moreover, the member states must ensure that the administrative agencies and the judicial authorities are empowered to exchange information at the domestic as well as international level for the purpose of collecting and analysing data about the potential offences of money laundering. The states must ensure that there is a feasible mechanism for the purpose of detecting and monitoring the cross-border movement of cash and other monetary instruments. However, the regulatory measures must not act as an impediment to the free flow of legitimate capital. An example of such a measure can be imposing an obligation on the ndividuals and institutions to report any cross-border transfer of cash or other monitory instrument that they undertake.
Prevention of Money Laundering Act, 2000
The Prevention of Money Laundering (PMLA) Act, 2000, was enacted by the Parliament to fulfil international obligations and commitments. It is aimed at prohibiting money laundering and confiscating the property that is involved in concealing or facilitating the offence of money laundering.
Section 3 of the Act defines the offence of money laundering and states that whoever knowingly or intentionally indulges, directly or indirectly, in any activity relating to the proceeds of a crime or attempts to project the proceeds of the crime as untainted property, will be guilty of the offence of money laundering. Section 4 prescribes the punishment for money laundering. Any person who commits the crime of money laundering faces up to seven years in prison and a fine of up to five lakh rupees.
Section 48 lists the classes of authorities who will be appointed for the purposes of the Act. It includes a Director (who may also be called Joint Director or Additional Director), Deputy Director, Assistant Director and other such class of authorities as may be appointed by the Central Government. A Director or Joint Director or Additional Director or Deputy Director will be appointed by the Central Government under Section 49. Thereafter, the Central Government may empower the Director to appoint the authorities subordinate to him.
Vijay Madanlal Choudhary v. Union of India (2022)
Conditions of bail
The twin conditions of bail, as provided under Section 45 after the 2018 Amendment, were challenged in the case of Vijay Madanlal Choudhary v. Union of India (2022). The Supreme Court, while upholding the constitutional validity of the twin conditions, held that money laundering not only adversely affects the social and economic stability of the country but also promotes heinous offences such as terrorism, drug trafficking, etc. The Court held that while the conditions were struck down in Nikesh Tarachand, the Parliament had cured the defect by introducing the 2018 amendments.
The Court held that once the Parliament, by appropriate legislation, removes the defect due to which the concerned provisions were declared unconstitutional, the provisions cannot be declared void on the ground of being violative of Article 13 of the Constitution. The Court further noted that the 2018 Amendment was applicable retrospectively.
The Court noted that the 2002 Act is special legislation that is aimed at preventing money laundering. Money laundering has a transnational adverse effect on financial structures and threatens the sovereignty and integrity of nations. Thus, it is necessary to introduce stringent measures for dealing with the offence of money laundering. The special procedure laid down by the Act for prosecuting money laundering offences was in view of the gravity of the offence. The Court held that the offence of money laundering constituted a separate class of offence and that the stringent conditions for bail were reasonable.
Thus, the Court concluded that the conditions of bail provided under Section 45 are reasonable and not unconstitutional.
Powers of ED
The petitioners also challenged the wide powers conferred on the ED by the Act. The petitioners contended that the ED can undertake search and seizure operations without even registering an FIR. The petitioners pleaded that the Act did not contain the requisite safeguards to control the exercise of arbitrary power by the ED. The Act provides that the ED has to prepare a document concerning the details of the alleged offense and such report is to be called the Enforcement Case Information Report. However, the petitioners pleaded that the ED must be held to be bound to furnish a copy of the ECIR to the accused.
The Court pointed out that search and seizure operations under Section 5 can be conducted only by the Director or an officer who has been authorised by the Director and such an officer must not be below the rank of the Deputy Director. The Director or the officer can act only if he has reasons to believe that there is a person who is in the position of illegal proceeds and such an opinion has to be formed on the basis of legitimate reasons which have to be recorded in writing. The court heLD that an ECIR is different from an FIR and there is no statutory obligation imposed on the ED to finish a copy of the ECIR to the accused person. It is sufficient if the ED discloses the grounds of arrest to the accused person at the time of arrest.
The judgment has also been criticized by some people because it gives judicial legitimacy to the wide, unrestricted and unfettered powers that have been conferred on the ED by the Act.
Landmark cases relating to money laundering
Vijay Mallya
Vijay Mallya was an Indian businessman who was the founder and chairman of Kingfisher Airlines Ltd. His airline company went bankrupt in the year 2012.
Subsequently, an investigation was initiated against him and it was alleged that he had used his influence and power to obtain heavy loans without providing sufficient and credible collateral. The Enforcement Directorate booked him under the Prevention of Money Laundering Act and reported that Vijay Mallya had used the techniques of layering and integration for the purpose of concealing the original source of money and making it difficult for the regulatory authorities to trace where he transacted the funds borrowed from the nationalised banks. It was alleged that Mallya violated Section 3 of the Prevention of Money Laundering Act and transferred the funds through several foreign accounts and created over invoices for the purpose of obtaining loans from the banks.
However, Mallya went to London to escape the Indian enforcement authorities. Thereafter, extradition requests were made by the Government of India before the courts of the United Kingdom. Vijay Mallya is now facing extradition proceedings in the United Kingdom.
The Supreme Court of India ordered Mallya to appear before the court for his trial. Upon his failure to appear before the Court, the Supreme Court found him guilty of contempt of court.
Nirav Modi and Mehul Choksi
Nirav Modi is a famous jeweller and businessman. He and his uncle, Mehul Choksi, were accused of fraudulently obtaining loans worth crores of rupees from Punjab National Bank through fraudulent letters of undertaking. Through fraudulent letters of undertaking, Nirav Modi obtained guarantees from the banks. Letters of undertaking are bank guarantees that enable an entity to obtain short-term credit from the overseas branch of the bank. These letters are generally used for business and trade transactions. Nirav Modi did not use the funds obtained through bank guarantees for legitimate business purposes but rather syphoned them to foreign countries.
Subsequently, proceedings against him were initiated by the Central Bureau of Investigation for obtaining letters of undertaking through fraud. The ED also registered a case against him for laundering the proceeds of crime. The ED also attached several movable properties of Nirav Modi such as jewellery and properties. The ED also discovered that foreign dummy companieswere used by him to transfer the funds.
However, Nirav Modi escaped to the United Kingdom days before his scam came to light. Nirav Modi is also facing extradition proceedings in the United Kingdom. Nirav Modi’s uncle, Mehul Chouski, was also charged with the offence of money laundering.
Chanda Kochhar
Chanda kochin, the former head of the ICICI Bank, was arrested by the Central Bureau of Investigation for offence of money laundering. She was accused of providing high valued loans to the Videocon group by exploiting her power and position. She had resigned as the Chief Executive Officer and the Managing Director of ICICI Bank in 2018 when alligations surfaced in regards to the misuse of power by her to exploit the lending systems of the bank. A whistleblower had reported that the husband and other family members of Chanda Kochhar had gained financial benefits by the sanctioning of loans to Videocon gGroup.
The CBI reported that a sanctioning committee which was headed by Chanda Kochhar had approved the sanction of loans wort crores of rupees to the Videocon group in violation of the policies and rules of the ICICI Bank. These loans for subsequently declared to be non performing assets.
United States laws
The United States legal system also has machinery for the prevention of money laundering activities. The Bank Secrecy Act, 1970 is aimed to ensure that the financial systems of the country are not exploited to facilitate the offence of money laundering. It is often regarded as the first US Federal law enacted to keep a check on money laundering activities. Under this Act, the banks and financial institutions are under an obligation to report any transaction beyond $ 10,000. They are also under an obligation to report suspicious activities in relation to foreign banks or accounts.
Moreover 18 U.S. Code § 1956 provides that whoever knowingly conducts a transaction involving the property related to the proceeds of a crime with-
- The intention to promote a specified unlawful activity,
- The intention to evade taxes,
- The knowledge that the transaction is designed to conceal the source, nature or location of the illegal proceeds,
- The intention to avoid any transaction disclosure requirement under the federal or state law,
shall be punishable with a fine of up to $5,00,000 or twice the value of the property involved in the transaction, or with imprisonment for up to 20 years.
18 U.S. Code § 1957 provides that it shall be an offence to knowingly engage in a transaction involving a property that has been derived from a specific unofficial activity through the medium of banks, financial institutions, or foreign banks. Moreover, the Section confers extraterritorial jurisdiction on the courts for any money-laundering-related conduct by a US citizen anywhere in the world or where the money-laundering activity has been conducted by a non-US citizen, provided that the activity occurs in part in India.
Cuellar v. United States (2008)
In the case of Regalado Cuellar v. United States (2008), the petitioner was driving from Texas to Mexico when his car was searched and $81,000 was discovered in it. The petitioner was convicted of violating federal money laundering statutes, that is, 18 U. S. C. §1956(a)(2)(B)(i). The petitioner filed an appeal before the Supreme Court and pleaded that under the federal statute, the government is required to establish that the petitioner intended to portray the discovered money as legitimate wealth.
The Court held that merely proving that the defendant intended to conceal the money he was carrying is not sufficient, and the government was required to establish that the petitioner intended to conceal the nature and source of the money. While overturning the conviction, the Court held that the prosecution had not adequately discharged its burden.
United Kingdom
The United Kingdom is a member of FATF, and therefore its domestic legislation dealing with money laundering complies with the global standards laid down by FATF. The Financial Conduct Authority is the primary financial regulatory body of the United Kingdom and is responsible for ensuring the safety of the nation’s financial systems. It investigates offences related to money laundering.
The Proceeds of Crime Act 2002 defines the acts that constitute an offence of money laundering. The Act mandates the banks and financial institutions to keep a check on money laundering activities, keep records of transactions, and conduct customer due diligence. Part 7 of the Act provides that the following activities will constitute an offence of money laundering:
- If any person conceals, disguises, converts or transfers any criminal property.
- If any person removes a criminal property from England, Scotland, Wales and Northern Ireland.
- If any person contributes to an arrangement that he knows or suspects to facilitate the use, control or retention of a criminal property.
- If any person acquires, operates or possesses the criminal property.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force in June 2017. These Regulations are applicable to financial systems, real estate companies, legal professionals, crypto asset exchanges and other relevant areas. These regulations are applicable to all types of gambling providers and put an obligation on the trustees to ensure enhanced transparency of beneficiaries. The individuals and institutions covered by these regulations have to implement a risk based due diligence procedure and they have to frame policies, in writing, regarding the steps taken to mitigate the risk that their institutions face in relation to being exposed to money laundering. It is pertinent to note that the new requirements make it a penal offence to make a false or misleading statement about money laundering.
European Union
The European Union has published three Directives which are guidelines for exacting appropriate legislations for the establishment of effective regulatory mechanisms. These Directives are intended to counter the money laundering activities by enabling member states to identify and identify the loopholes that are exploited by the money launderers and take corrective measures.
The Directive makes it mandatory for the member states to carry out a nationwide risk assessment after every 4 years. Moreover, the member states are required to coordinate with each other for the proper formulation of cross border assets registers. These registers are supposed to contain the information about accounts, real estate transactions etc.
However, one of the challenges that Directives have faced is that the time period prescribed by the European Union for the implementation of the Directives by the member states extends to several years. During this period, money launders are able to develop new techniques and methods of money laundering. Thus, even before the complete implementation of any Directive, new methods of exploiting the financial and credit systems are developed by the money launderers.
First Directive
The European Economic Community adopted Council Directive 91/308/EEC with the objective keeping a check on the misuse of financial systems for the purpose of money laundering. This Directive states that money laundering possesses a threat to the financial stability of the national economy and facilities and promotes organised crime and drug trafficking. Moreover, the Directive acknowledged the possibility of services of professionals being used in the offence of money laundering. The Directive provides that the member states should use their penal powers to prosecute the offenders of money laundering and their domestic and national legislations should comply with the global standards and norms.
Moreover, the Directive provides that the member states should amend the confidentiality rules applicable in their countries to enable the banks, financial and credit institutions to legally disclose the suspicious activities of their customers to the regulatory authorities. These Directives impose an obligation on the member states to enact efficient laws to prevent the exploitation of the banking and financial systems. Moreover the Directives also impose an obligation on the member states to ensure that the free flow of capital which is aimed at flourishing the national economy is not exploited by the money launderers to cover there illegal proceeds.
Second Directive
The Second Money Laundering Directive (2001) extended the scope of the Directive to cover the activities related to organised crime and fraud. The primary purpose of the Second Directive was to ensure that the recommendations provided by the FATF were inculcated by the member states in their domestic legislation.
The Second Directive gave a wider meaning to the definition of money laundering and included currency exchange offices and investment firms within its scope on the grounds that they were also vulnerable to money laundering activities.
The Directive also hinted at the possibility of including legal professionals who are engaged in financial and corporate transactions within its scope. The European Parliament opposed this on the ground that covering legal professionals within the scope of the Directive would compromise the client confidentiality rules. Resultantly, lawyers are not included within the scope of the Directive and they are exempted from providing the information that they receive from the client in the course of the court proceedings.
Third Directive
The Third Directive noted that even the non-financial businesses can be exploited by the money launderers for advancing the money laundering activities. Moreover, it was felt that the services of professionals such as lawyers can also be used for the purpose of furthering the transactions relating to money laundering.
Hence, the Third Directive included within its scope professionals such as lawyers, accountants, real estate agents, casinos and other company services. It simplified the due diligence procedure for certain low risk transactions involving public authority or bodies that have a transparent record and whose activities are available to the general public. At the same time, the Third Directive also enhanced the due diligence procedure for transactions involving politically exposed persons.
Penalties under the three Directives
It is pertinent to note that the money laundering Directives do not prescribe any penalties. The penalties are left at the discretion of the member states to be determined by their domestic legislation. However, the member states are directed to provide effective and dissuasive penalties so as to deter the commission of the offence of money laundering.
Suggestions
The fight against money laundering has become a priority for the international community. Money launderers exploit the loopholes in the banking and financing systems of different countries. This happens because of the differences in the regulatory standards followed by different nations. There is an urgent need to ensure that all nations follow the basic international standards laid down for monitoring and regulating the flow of cross-border finances.
Money launderers have developed new and innovative techniques for covering the source of their illegal funds. In their efforts, the money launderers are backed by a nexus of politicians, bankers, lawyers, and accountants. This makes it very difficult for regulators to trace and identify any illegal transactions.
The Prevention of Money Laundering Act, 2002, is essential to prevent the nation from being engulfed by scams of money laundering. However, there have been numerous disputes relating to the excessive powers that this Act confers on the investigating authorities.
In order to control the menace of money laundering, there is a need for greater cooperation among the nations and international enforcement agencies. The bankers need to be more cautious and aware and flag any suspicious transactions to regulatory agencies. The banking and financial systems need to be made more robust to ensure that they are not used as a vehicle for money laundering. Every financial institution must have an inherent mechanism to monitor and detect any suspicious transactions.
Conclusion
Money laundering has become a global problem. Laws aimed at preventing money laundering are the need of the hour to save the country from being engulfed by a series of economic offences. It is perhaps because of this reason, the Supreme Court has upheld the constitutional validity of the wide powers conferred on the ED by the Prevention of Money Laundering Act, 2002.
Most nations have adopted a twin approach for the purpose of countering and monitoring money laundering activities. A preventive approach is adopted in relation to the banking, financial, and insurance sectors. Under this approach, steps are taken to introduce regulatory mechanisms in the financial sector to prevent money laundering activities. On the other hand, a regressive approach is adopted by virtue of laws such as the Prevention of Money Laundering Act, which prescribe criminal penalties for those who engage in money laundering activities.
Frequently Asked Questions (FAQs)
What are the basics of money laundering?
Money laundering is the process by which money generated from illicit sources is passed through several transactions to give it a legitimate basis and conceal the original source of the funds.
What are some of the examples of money laundering?
Some of the general examples of money laundering are bank laundering, real estate laundering, restaurant and hotel laundering, laundering through casinos, and laundering in the insurance sector.
What are tax havens?
Tax havens are those countries that impose no or minimal tax rates on foreign businesses and individuals. Wealthy corporations and individuals often transfer their funds to these jurisdictions so that they are subjected to lower tax rates as compared to their home countries. These jurisdictions thus provide an opportunity for wealthy individuals to hide their money from law enforcement agencies.
Who is the biggest money launderer?
The Wachovia Bank is often regarded as the world’s biggest money launderer. It facilitated the laundering of about $380 billion by the drug traffickers during the period 2004–2007. Wachovia Bank was one of the biggest banks in the United States. However, it was used by the drug traffickers to launder the illegitimate proceeds of drug trafficking.
References
- https://law.marquette.edu/facultyblog/2008/09/supreme-court-raises-doubts-about-the-money-laundering-trap/
- https://www.raijmr.com/ijrhs/wp-content/uploads/2017/11/IJRHS_2015_vol03_issue_07_11.pdf
- https://www.researchgate.net/publication/256040462_Money_Laundering_and_Abuse_of_the_Financial_System
- https://sumsub.com/blog/kyc-aml-regulations-in-the-uk/
- https://www.lawsociety.org.uk/topics/anti-money-laundering/quick-guide-to-the-mlrs
- https://www.mondaq.com/india/money-laundering/1169784/the-rise-of-money-laundering-in-banking-sector-in-india-how-unsafe-is-the-public-money
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