This article is written by Apurv Umredkar, freshly graduated from KIIT Law School, KIIT University, Bhubaneswar. It non-exhaustively covers money laundering and its related aspects. 

Introduction

Today money laundering is among the biggest threats to the global economy. As globalization and industrialization is increasing day by day, so is the illegally generated cash by the entities and persons, thereby catering a need for converting piles of money into legitimate ones. Various steps have been taken by law enforcement authorities and governments to tackle this problem of injecting illegal money into legal economy. 

Money laundering is the process of converting illegal money into legal one through sophisticated mechanisms of commercial transactions and transfers. The term ‘money laundering’ came into limelight for the first time in mid 1920s during the Prohibition Era[1] in the United States. The prohibition was a nationwide ban on production, distribution, transportation and sale of alcoholic beverages.

The main motto of the U.S government behind this was to reduce crime and corruption, solve social problems, reduce the tax burden and improve health and hygiene in America. After the ban, organized crime rose to power as alcohol smuggling became the lucrative business option for criminals. To curb the unwanted suspicions from government and law enforcement, they started to invest in legal businesses such as stock market, real estate, car dealerships, properties etc. that was used as a legal front for their illegal activities. One such business was of Laundromats across town in order to disguise the origin of the money earned from alcohol sales. Any illicit profits would simply be added to the revenue generated by the laundromats and thus re-introduced into the financial system. Hence the term “LAUNDERING”[2]

Meaning

Money laundering is the process of converting illegal money proceeds into the legal ones by wiping out it’s criminal origin through a series of multiple transactions bouncing through shell companies and limited partnerships creating an untraceable web of purchase orders and transaction reports thus ultimately scrubbing the ill-gotten money and making it useful for the ultimate beneficiary. In simplest terms, it is the cleaning of illegally obtained funds of a dirty origin allowing them to be used within the legal economy. According to the United Nations Office on Drugs and Crime a whopping $ 2 trillion [3] are laundered every year.  

The U.S Custom and Border Protection[4] defines money laundering as “the legitimization of proceeds from the illegal activity”.

The International Monetary Fund[5] (IMF) defines money laundering as a “process in which assets generated or obtained by criminal activities are concealed or moved to create a link between the crime and the assets which is difficult to understand.”

Although there is no clear definition of Money Laundering in India, Section 3 of Prevention of Money Laundering Act, 2002 reads as whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the [proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering.[6]

History of money laundering

The money laundering process dates back to around 2000 B.C, when wealthy Chinese traders funneled their profits through various cycles of transactions so as to make it invisible to the Chinese rulers and agencies the source of these profits. These profits were mainly from black marketing, extortion and bribe and were sought to garnish by Chinese. The latter considered the former’s activities with great amount of suspicions because they were considered to be merciless, greedy and power-hungry. It was at that time, the money laundering process was suddenly in rise among the business-community of China. The merchants were easily able to hide their black money from bureaucrats. They converted their money into properties, legal businesses, houses and any other thing worth the investment. These guys stayed in shadow, perfecting the game, building complex laundering and smuggling networks across China and beyond.

The term ‘Money Laundering’ came into limelight more prominently during the early 19th century when the era of prohibition began in the United States. The prohibition was a countrywide ban on production, distribution and selling of alcoholic beverages from 1920 – 1933. During this time many organized criminal groups and traffickers saw this illegality of alcohol trade as a lucrative business opportunity and stepped up their own alcohol production. One such person was Al Capone. He became actively involved in the alcohol smuggling business and, to launder his illegal profits he purchased laundries and made it as a front for his smuggling network. From that time onwards, this conversion of illegal cash into legal came to be known as ‘Money Laundering’.  

Stages of money laundering[7]

Money Laundering isn’t as simple as it sounds. Behind the scenes of any large criminal enterprise is a mastermind which launders the organization’s money to make trail less. It involves complex process of business transactions clearing money’s criminal origin making it untraceable for law enforcement authorities and at the same time injecting it into the legal economy. This process entails three different stages, as follows :

PLACEMENT – This is the preliminary stage of money laundering. It involves pooling all the illegitimately gained cash into banks and financial institutions. Once deposited, these are then converted into money orders, cash bank deposits and demand drafts of small amounts in order to avoid detection by financial intelligence unit managers and financial crimes investigative analysts. This stage is the most vulnerable to being caught as large cash proceeds increases the risk of being suspicious. This process leads to 2 things – 

1. It relieves the criminal of holding and guarding large amounts of bulky of cash; and 
2. It places the money into the legitimate financial system.

The physical possession of huge amount of cash can easily raise doubtful contentions in the mind of law enforcement. This process presupposes –

1.  Currency Smuggling
2. Currency Exchanges
3. Purchase of Assets
4. Security Broker

LAYERING – This is the second stage in the money laundering process. Also known as Structuring, it forms various layers of multiple financial transactions through different banks and accounts so as to conceal the origin of money and provide as much distance between source and present status of the same and provide anonymity. Through this process money (in the form of bank statements, govt. securities) is smuggled out of the country to the final resting place of the criminal organization or is transformed into wire transfers, money orders, stocks, bonds, valuable assets and various franchisees. Of the three, this is the lengthiest one as money is bounced through various financial institutions, off shore accounts abroad and shell companies. One of the primary objectives of the layering stage is to confuse any criminal investigation and place as much distance as possible between the source of the ill-gotten gains and their present status and appearance. This includes – Cash converted into monetary instruments and Material Assets that have been bought with laundered cash is sold.

Some countries or regions are more suitable for money laundering due to the less strict and liberal laws regarding financial transactions. One such place is Panama (U.S). During the 1980s, Colombian cartels used this city to launder their profits since it had one of the most flexible financial rules at that time. 

INTEGRATION – This is the final stage of money laundering. It is withdrawal of money from legitimate accounts ready to be used for legitimate purchases and transactions The money deposits, wire transfers and valuable assets are then deposited into local accounts or in the home state of the illegal enterprise. It is injected and reintroduced into the legal economy making it appear to have come from legitimate source without any chances of tracing it back to its origin. The money now into the hands of ultimate beneficiary (leader of the criminal organisation or drug kingpin) serves the purpose of mixing itself with the legal wealth of beneficiary and its almost impossible to distinguish between the two. This includes:

1. Property Dealings
2. Front Companies & False Loans.
3. False Import and export invoices.

Business such as restaurants, bars, hotels, car dealerships, casinos and real estate are some of the most used legitimate enterprises used by Italian mafia and Mexican cartel leaders to clean their dirty money. 

Laundering mechanisms

CASH SMUGGLING – Cash collected from illegal activities (like drug trafficking) is often transported the bulk of cash in small denominations directly to the origin from where the smuggled goods came. It is one of the oldest and most used method of laundering the illegal funds by the Mexican Drug cartels Italian Mafia and Russian Crime Syndicates. During 1980s, the drug trade boomed the U.S Drug market. Tonnes of illegal narcotics were smuggled by land, air and waterways. The planes and boats used to carry drugs were filled with cash and brought back to the source. This method is although convinient and simple but is one of the most vulnerable and dangerous. The chances of getting caught by the authorities is much higher in currency smuggling than in other advanced electronic methods. 

GAMBLING

• Casinos – Its very simple to launder money using casinos. Since the casinos deal with huge amount of cash on daily basis, it possesses the lesser risk of getting caught. A drug trafficker or any other criminal purchases betting chips using the illegal cash and after playing for a while he can cash out the remaining balance or sometimes the whole amount. Since casinos don’t have any strict regulation of asking origin of money, there is less to no risk of laundering in casinos. The cashed-out money in possession of the criminal appears to be legitimate. Authorities have hard time recognising the legal and illegal money. 
• Lotteries – Purchasing lottery tickets are also used by criminals to launder money. Winning lottery tickets are purchased by the criminal using dirty cash often for price more than the winning prize. As a result, the winner acquires more amount than he won, the money is laundered hassle-free. [8]

SECURITIES 

The money gained from illegal activity can also be invested into securities as a safety feature for wiping it clean. The laundering through securities and stock market is often done through MIRROR TRADING. In this scheme, the criminal uses the money of criminal origin to purchase shares/stocks and then sell it worth the same amount somewhere abroad. The trades technically cancel each other out, but the criminal successfully turns his black money into clean money. 

BACK TO BACK DEAL

This scheme is not much popular, but is a sure shot way of laundering illegal gains. In this deal, the person takes a loan in country other than his home country. The loan generally is guaranteed by a deposit of black money in the home country itself. The debtor knowingly and willfully defaults the loan and the bank seizes home country deposit. The dirty money is taken by the bank as a result of default of payment and the clean money is already in use by the debtor. Hence the transaction completed. Money laundered successfully.

LEGITIMATE BUSINESS OWNERSHIP 

Buying properties, farmhouses, car dealerships real estate are some of the common money laundering tactics used by criminal organisations. A typical organised crime group launders its money locally through purchasing assets (obviously through fake details). These properties in addition to being used for money laundering, are also used by the cartel kingpins for recreational purposes and own enjoyment or for other business purposes. 

SHELL COMPANIES 

A shell company is a company structured as a limited liability company established in offshore locations for the purpose of Domestic-Cross border currency, facilitating asset transfers and corporate mergers. The company’s existence is only on-paper. No physical existence. The owners create bank accounts in the name of company through which funds are easily laundered. Like any other method, these help criminals stay anonymous by decreasing transparency of funds network.  

SMURFING

This method is also known as Structuring Deposits. A group of associates called smurfs individually deposit small amount of bulk illegal cash into different accounts at different places to avoid suspicion and stay off the radar of local law enforcement. The amount deposited at each account is just below the prescribed regulation determined by national law, above which all transactions must be declared to authorities. At last these cheques are physically deposited into foreign accounts or transported offshore appearing just like any other legitimate income. 

Money Laundering in Indian context

After the KYC (Know Your Customer) policy in India was introduced by Reserve Bank of India in 2002 through Anti Money Laundering laws and regulations, it became mandatory for persons to update their bank accounts and financial docs and records with their identity proof. This made it impossible for criminals, drug dealers and other traffickers to launder their money. In South-Asia, the laundering is often done through Hawala System. The term originates from Arabic culture and it literally means – “a form of international money transfer often used to conduct money laundering.” It is the informal process of transferring money without actually physically moving it. The Hawala System is used as an substitute network channel outside the banking system system.

Anti money laundering laws in India

Money laundering in India is known by the name Hawala System. It is the most popular method of transferring money without any regulatory authority in India. The money is not physically transferred but digitally transferred to other person operating Hawala system just like the sender. Often in India, the illegal money is transferred through this system overseas. Below are the legally enforcing statutes used to detect and prevent money laundering in India –  

• Prevention of Money Laundering Act, 2002 – 

This act was introduced by the Central government of India to prevent the money laundering and seizure of property obtained by way of money laundering. It was enacted on 17th January 2003 and enforced on 1st July 2005. Crimes like white collar crimes, corporate and financial frauds, drug trafficking or smuggling and even cross border crimes (if anyhow connected to India) come under the ambit of PMLA Act, 2002. Entities like financial institutions, banks, and other related organisations are kept in check by the government. Various crimes that often lead to money laundering or precedes money laundering are also taken care of. Punishment prescribed in the act includes a jail term (rigorous imprisonment) of minimum 3 years to maximum 7 years. 

• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – 

This was introduced to curb black money and foreign assets of an Indian citizen, if he is suspected of hiding that property for tax evasion or other illegal financial gain. It was enacted on May 2015 and enforced on 1st April 2016. Generally, this Act applies when any Indian citizen is having monetary gain from foreign asset or account. The amount when transferred and converted into INR makes the owner of property liable to pay taxes on it according to the laws provided. If one tries to conceal any foreign gains, he may be held liable under this Act. Penalty for having undisclosed property is sum equal to three times the tax computed plus basic taxes. 

• Benami Transactions (Prohibition) Act, 1988 – 

The main purpose behind this act was to criminalize the transactions often involving concealing of identity of ultimate beneficiary through purchasing and selling assets using fake names. Generally, the transactions in this involve real estate properties. Since such transactions involve huge amount of money, it can lead to black money problem in our country if the source of money is not legitimate. The term Benami Transaction is defined as a transaction where one person pays for property but the property is transferred to or held by somebody else. The act was commenced on 19th May, 1988.  

Prominent cases of money laundering in India

1. Coal Allocation Scam – It can be called as one of the biggest political scandal in India till date with an amount involving around INR 185000 Crores. It involved many top notch politicians and bureaucrats in coal ministry and coal industry. The companies both (private and public) were alotted coal blocks in a price less than market value. The investigation was initiated by Comptroller and Auditor General of India and then further operated by Chief Vigilance Commission and Central Bureau of Investigation. This issue received massive media attention and public outrage due to its seriousness and complexity. 
2. 2G Spectrum Scam – It involved various ministers among bureaucrats and officials of telecom ministry most remarkably former Telecom Minister and MLA Andimuthu Raja. This case created a huge loss and downfall of UPA Government. UPA was in power at that time under Prime Minister Manmohan Singh. The scam amount was estimated at INR 2867800000000. 
3. Commonwealth Games Scam – This also ranks among the major financial scams in India. The prime accused was Member of Parliament Suresh Kalmadi who served as a chairman of Organizing Committee of Commonwealth Games. The scam amount was INR 70000 Crores. He was arrested under sections 120 B (criminal conspiracy) and 420 (cheating) of the Indian Penal Code. 

Administrative agencies conducting cases under PML Act, 2002

Directorate of Enforcement – The Enforcement Directorate is law enforcement agency under Department of Revenue, Ministry of Finance, Government of India. It acts as a intelligence unit to curb money laundering and other economic crimes in India. Officers of Indian Revenue Services, Indian Corporate Law Services, Indian Administrative Services are employed in ED as its members. The Enforcement Directorate is responsible for enforcement of Prevention of Money Laundering Act, 2002 and Foreign Exchange Management Act, 1999. There are 10 zonal offices in India under Deputy directors and several sub-zonal offices headed by Assistant Directors. 

Functions of Enforcement Directorate:

• To collect, develop and disseminate intelligence relating to violations of FEMA, 1999, the intelligence inputs are received from various sources such as Central and State Intelligence agencies, complaints etc.
• To investigate suspected violations of the provisions of the FEMA, 1999 relating to activities such as “hawala” foreign exchange racketeering, non-realization of export proceeds, non-repatriation of foreign exchange and other forms of violations under FEMA. 
• To adjudicate cases of violations of the erstwhile FERA(Foreign Exchange Regulation Act), 1973 and FEMA, 1999.
• To handle adjudication, appeals and prosecution cases under the erstwhile FERA, 1973
• To process and recommend cases for preventive detention under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA)
• To undertake survey, search, seizure, arrest, prosecution action etc. against offender of PMLA offence.
• To provide and seek mutual legal assistance to/from contracting states in respect of attachment/confiscation of proceeds of crime as well as in respect of transfer of accused persons under PMLA.

Financial Intelligence Unit – The Financial Intelligence Unit is a national enforcement agency under the Government of India introduced in 2004 to gather information financial affairs of entities, nature and intentions of businesses. It basically identifies financial transaction which may involve money laundering, tax evasion and other major financial crimes. It directly reports to Economic Intelligence Council chaired by Finance Minister. The total member count is 75 from Reserve Bank of India, Securities Exchange Board of India, Central Board of Direct Taxes, and related authorities. The Financial Intelligence Unit also coordinates with investigation and enforcement agencies.[9]

Functions of Financial Intelligence Unit:

• Receive cash/suspicious transaction reports, analyze them and, as appropriate, disseminate valuable financial information to intelligence/enforcement agencies and regulatory authorities.
• Collection of Information: Act as the central reception point for receiving Cash Transaction reports (CTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities.
• Analysis of Information: Analyse received information to uncover patterns of transactions suggesting suspicion of money laundering and related crimes.
• Sharing of Information: Sharing information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units.
• Act as Central Repository: Establish and maintain national data base on cash transactions and suspicious transactions on the basis of reports received from reporting entities.
• Coordination: Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.

Anti money laundering laws worldwide 

• International Monetary Fund/United Nations Model Legislation on Money Laundering and Financing of terrorism (2005)
• UN ODCCP Model Legislation on Laundering, Confiscation and International Cooperation with regard to Illicit Traffic in Narcotic Drugs, Psychotropic Substances and Precursors 2003 (French) (for civil law systems)
• Commonwealth Secretariat, IMF, and UNODC Model Provisions on Money Laundering, Terrorist Financing, Preventive Measures and Proceeds of Crime, 2009 (for common law legal systems)
• UNDCP Model Foreign Evidence Bill 2000 (for common law systems)   
• UNDCP Model Extradition (Amendment) Bill 2000 (for common law systems)
• Commonwealth Model Law for the Prohibition of Money Laundering & Supporting Documentation, 1996 
• OAS – CICAD Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and other Serious Offenses 

Anti money laundering : global initiatives

FINANCIAL ACTION TASK FORCE – 

The Financial Action Task Force is a global intergovernmental organization that frames and implements policies, protocols and standards to effectively combat money laundering and other financial crimes. Out of necessity, the FATF later expanded its scope to other big crimes such as terrorist financing, organized crime, drug trafficking and major threats to global financial system. FATF was established at the G7 Summit held at Paris in 1989. 

There are total 39 full time members nations including 2 regional organizations. Every members nation has to comply with following regulations – 

• Implement Know Your Customer (KYC) ID verification measures.
• Perform FATF recommended due diligence measures.
• Maintain suitable records of high-risk clients.
• Regularly monitor accounts for suspicious financial activity and report that activity to the appropriate national authority.
• Enforce effective sanctions against legal persons and obliged entities that fail to comply with FATF regulations.

ASIA/PACIFIC GROUP ON MONEY LAUNDERING –

Also known as “FATF – Asia secretariat”, the Asia/Pacific Group on Money Laundering is FATF-styled[10] inter governmental organisation with the aim of implementing strict anti money laundering laws and curbing financial and terrorism related crimes in the Asian region. Originally founded in 1997 with 13 only founding members. As of 2020, the total member count is 41 including the 8 observer states. It is basically funded by Australia and is headquartered in Sydney, Australia. The Asian/Pacific group is in charge of assisting on money laundering matters, setting up of financial bureau and vigilantly enforces the applicable laws and statutes. APG acts as an Asian agent of the Financial Action Task Force. 

EGMONT GROUP OF FINANCIAL INTELLIGENCE UNIT –

Egmont Group is an international body which comprises of 165 Financial Intelligence Units all working together and coordinating in analysing, interpreting and systematically passing the information received. It is not a proper law enforcement authority but an informer who passes suspicious account activities, related transaction reports, and other relevant details. It is a gateway to pass and channelize the important info to concerned authorities. This group is headquartered in Toronto, Canada. The group was formed in 1995 unofficially (not in official capacity) and in the year 2008 Toronto was held as its official headquarter. The main motto behind formation of this group was to establish a strong network which can handle and pass further the information related to terrorist financing and money laundering. Behind each international anti-money laundering operation or information, this Egmont group is involved either directly or indirectly. 

CARIBBEAN ACTION TASK FORCE –

The Caribbean Action Task Force is a FATF-styled intergovernmental organization consisting of 25 members in the Caribbean Basin. It can be called as an associate member of Financial Action Task Force. The group was initially commenced after a series of meetings which took place in Jamaica in the year 1992. Their main objective is the implementation of guidelines and procedures issued by its parent organisation FATF (Financial Action Task Force). This group is important because of the place its been dealing with. One of the biggest leading illegal industry i.e. drug trafficking are present in Latin or Central America and these criminal enterprises often launder their illegal cash proceeds through Caribbean due to earlier liberal money laws. That’s why law enforcement authorities made a separate financial task force to eliminate and curb the illicit money of drug traffickers.

AUSTRALIAN TRANSACTION REPORT AND ANALYSIS CENTRE – 

The Australian Transaction Report and Analysis Centre is a governmental agency in Australia to analyze and monitor financial intelligence to track down money laundering, organized crime groups, tax evasion and other sort of financial crimes. It is the Australian branch of Financial Action Task Force implementing the guidelines issued by the latter in Australia. It is also one of the 165 members of Egmont Group of Financial Intelligence Unit. It was formed in 1989 and is currently headquartered in Barton, Australia. 

FINANCIAL CRIMES ENFORCEMENT NETWORK – 

The Financial Crimes Enforcement Network (also referred to as FinCEN is the federal agency under the Department of Treasury, United States which is responsible for curbing all the international and domestic money laundering, illicit cash flows and terrorist financing. It mainly consists of 3 main agencies – law-enforcement agencies, the regulatory community, and the financial-services community. It was established on April 1990 with a view to take control of widespread laundering by cartels and crime rings. It consists of some 200-300 members as of now.

Conclusion 

The problem of organized crime and its effects on the society as a  whole is not a new question. Every year billions of dollars are spent to curb, eradicate, eliminate and stop the drug traffickers, money launderers and related associates. But in spite of being crushed, they come out stronger than ever all thanks to the deep rooted corruption, lawlessness and malpractices going on in the bureaucracy. Maybe its the time to rethink and implement new policies and provision through which the out lawyers and law violators cannot bypass. It is a harsh truth that no matter how hard we try, how much good policies we make, but ultimately there’s gonna be someone somewhere who drenched in the vicious cycle of corruption will try to make his way through bribery and intimidation. We as a law abiding citizens of this great nation will have to uproot this illegal and immoral system of corruption. Because we are only responsible for upcoming India either in a positive or negative way. 

References

1. Prohibition Era was the 13 year period from 1920-1933 in the United States during which trading and business of alcoholic beverages were totally considered illegal as a result of temperance movement for complete eradication of alcohol for its menacing and ghastly effect on the society. The reason why this era is linked to money laundering is that the first formal and systematic money laundering scheme began in this period only. 
2. https://www.thestreet.com/personal-finance/education/what-is-money-laundering-14897715
3. The amount $2 trillion is a rough estimate according to a report by the United Nations Office on Drugs and Crime (a United Nations Office committed to prevent and eradicate major international crimes like Drug trafficking, Organized Crime, Corruption and Terrorism). The amount is considered as 5% of world Gross Domestic Production. Due to its very nature, it is very difficult to track down the exact amount of money laundered globally on an annual basis. Illegal money is retained into legal economy bypassing all the relevant authorities, financial institutions and law enforcement.  
4. The US Custom and Border Protection is a federal agency of United States Government responsible for its internal affairs and border control and security. 
5. https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/31/Fight-Against-Money-Laundering-the-Financing-of-Terrorism
6. http://www.enforcementdirectorate.gov.in/PreventionOfMoneyLaunderingAct2002.pdf?p1=117281489017600032
7. https://www.enforcementdirectorate.gov.in/PreventionOfMoneyLaunderingAct2002.pdf?p1=117281489017600032
8. https://thebusinessprofessor.com/lesson/loan-back-method-of-money-laundering-definition/
9. https://fiuindia.gov.in/files/About_FIU-IND/About_FIUIND.html 

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