This article is written by Gaurav Kumar, from Surendranath law College (University of Calcutta). This article exhaustively deals with the burning issue of money laundering and its connection with society at large.
Since a long time back, money has been a reason for people indulging in illegal activities to lead lavish lives without any work. The term ‘money laundering’ indicates how people can legitimise their illegally earned money providing them with a disguise of a legal source.
Money laundering is a burning concept that is most of the time overlooked by the people and generally perceived as the losses incurred to the banks. However, the term is far ahead of the said concept and it damages the financial institutions, government and all the individuals and finally the society at large. This concept of money laundering got its importance after the 9/11 terrorist attack that happened in the United States Of America. The terrorist funding term got relevant as it was related to money laundering. Money laundering takes place when a person tries to conceal the funds that were obtained illegally and funnelling them through banks and businesses.
The term refers to the process by which the criminals hide their illegal funds earned by the way of unlawful trafficking, drugs peddling and terror funding and other severe crimes. Money laundering has an unfavourable impact not only on society at large but also affects the economy and business. Money laundering may have an impact on society in many ways. Suppose the illegally earned money is used in the real estate sector, buying properties, vehicles and many more things, such activity can create an artificial demand in the market inflating the value of the product. In an external sector, it affects fair competitiveness in the market.
What is money laundering?
The term money laundering is defined as the way of legitimising the source of illegal money earned by criminal activities like fraud, bribery, terrorism, drug peddling, human trafficking and so on. In the 21st century, the launderers use several ways of disguise to legalise the colour of the money source. The main aim of these acts is to obtain a huge amount of money and hide the source of money from financial institutions. The criminals enjoy the profits made by the source without jeopardizing their source of money. In the era of digitalisation, the new digital processes like online games, rummies, online betting shops are the ways through which the illegal funds are funnelled into legitimate ways. Money laundering has a very far evil impact on the business, society and the economics of the nation. Data surveyed by the United Nations Office on Drugs and Crime stated the magnitude of the laundered illegal funds earned by drug trafficking and organised crimes stands 3.6 per cent of the global GDP. This large sum states the extent the criminals have damaged the financial institutions, society and the economy of the nations.
Money laundering affecting society
- First, the political and social cost of money laundering if left cross-checked are very serious. It acts as a bug in degrading the social structure of any nation. The criminals indulge in drug peddling business, trap the young generation college and school students. These students succumb to the business of the drug peddlers as customers and get addicted to the drugs destroying their career and life. So, the launderers by the way of smuggling drugs and affecting the young generation of the society.
- Second, comes trafficking which is considered as one of the most dangerous ways that the launderers use, to extract money. Trafficking involves a wide range of crimes entailing from organ to human trafficking. Human trafficking is a heinous crime that destroys the social structure of a civilised society. Human trafficking involves the selling and purchasing of human beings including children for commercial and sexual purpose, whereas organ trafficking refers to the trading of human organs in the medical field. Human and organ trafficking are serious crimes that the developed nations like the United States, Mexico and the Philippines are facing even today. Such crimes are a curse for society.
- The criminal acts of the launderers rip off a huge portion of the funds by the government in order to demarcate them. The criminal act also increases the demand for enforcement agencies to fight against violent crimes that facilitate laundering activities. So, for such a purpose, the government has to divert the funds earlier used for the development of the people in fighting the financial and actual crimes. The hard-earned tax revenues paid by the citizens are to be used for job creation, providing educational and health facilities and their development and maintenance goes in controlling such criminal activities.
- The healthcare cost also increases in the nation where drug addiction and violence is triggered by the original crimes. Amidst such commission of a crime, the lives of the people are also lost and permanently or temporarily impaired which leaves the society in a state of distress.
- In the regulation of the crime happening in society for facilitating the laundering, the government staff are persuaded to jump into the slavish imitation of the criminals by taking their share. This leads to an increase in corrupt practices in the government offices as well as corporate crimes as the financial institutions turn a blind eye towards the criminals on the payment of money. The influential reach of criminals to the government’s financial institution in their quest to turn their illegal money into legal leads the society infected by a new disease of “corruption.” When the dirt money is cleaned by the launderers it attracts the other section of society to get in its trap as it facilitates them with the huge flow of money, lavish life, good connection links with high profile people and many things related with ease of life. However, the social and political links of the criminals not only degrades the social fabric, collective moral and ethical standards but also the democratic system of governance.
First, money laundering has a very negative impact on the economy of a nation. It constitutes a serious threat to the economy and the respective state government. The infiltration and saturation of illegal money in financial institutions may threaten the social and political stability of a nation. Economic crimes have a far adverse impact on the lives of people. A huge amount of tax evasion takes place in this process as the illegal money is regulated very complexly in the system of an undercover economy. So, the reduced tax works as a negative factor for the government as it hinders development by escaping from paying taxes.
Second, the company under whose disguise the whole process of laundering runs, affects the people, as their hard-earned money faces the danger of being blown away causing them irreparable losses. The companies which are involved in such activities run in a deficit by providing goods and services at very low cost and henceforth, playing an unfair competitive practice in the market. It is very hard to quantify the losses caused by the practice of laundering. It can slow down the economy, affect international trade and block the real capital flow in the economy. It diverts the finances of the real sector economy towards crime and corrupt practices.
The businesses in regulated sectors have experienced a serious effect of money laundering. Any organisation found to be indulged in money laundering may lose its reputation, contacts and face the imposition of penalties. Businesses may not be aware of the wrongdoings and indulge in such transactions related to money laundering. However, the financial institutions have started complying with stringent KYC (Know your customer) and anti-money laundering regulations to trace any kind of such transactions that take place. There is a compliance team for tracing transactions where the people ask for payment against their policies through channelling payment via offshore bankings. Such transactions have higher risks of being involved in money laundering.
The money launderers are also responsible for monopolizing the competitive market. They can invest their money in the sinking companies and drive up the stock prices of the company in the market. This gives them a virtual monopoly in the market. The legitimate competitors of the market fall into the trap of the launderers and lose their existence in the market. So, the launderers regulate the business markets indirectly and rotate the money from the real sector economy to their pocket making it legitimate.
Legislation to prevent money laundering in India
The Government of India has implemented several anti-money laundering legislations in order to control the money laundering practices in India. These legislations are as below:
Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002 is an Act of parliament that was enacted by the government in the year 2005. The scope of laundering, punishment and criminal liability on the wrongdoer is covered under the scope of this Act. This Act is based on the Criminal Justice Act of the United Kingdom and levies the criminal liability on those who know or suspect someone to be involved in the laundering and fails to report about the same. Section 4, of the Act, provides a punishment of a minimum of 3 years extending up to seven years for those who commit the act of money laundering. However, in case of money laundering involves acts as stated in the Narcotic Drugs and Psychotropic Substances Act, the punishment may be rigorous imprisonment which may extend up to ten years.
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
This Act was passed by the parliament in the year 1974, in furtherance of the government endeavours to retain foreign exchange by providing foreign exchange within the country by providing for ‘preventive detention in certain cases for the purposes of conservation and augmentation of foreign exchange and prevention of smuggling activities and matters connected therewith. The Act provided wide powers to the executive to detain the individuals indulged in smuggling activities. It has been effective since 19 December 1974, repealing the maintenance of the Internal Security (Amendment) Ordinance, 1974.
The Act is based on the concept of preventive detention provided under Section 10 of the Act. The said provision provides that the person found to be indulged in smuggling goods shall be detained for a period of a minimum of one year which may exceed up to two years.
Benami Transactions (Prohibition) Act, 1988
The Act was passed in the year 1988, to prohibit Benami transactions, and the right to recover property held as Benami, or any matters connected thereto. The Act under Section 2 (a) defines benami transaction as: ‘Benami transaction means any transaction in which the property is transferred to one person for the consideration paid or provided by another person.
Section 3 of the Act, provides prohibition of Benami transactions and imposes a punishment of imprisonment for a term extending to three years or with fine or with both.
Section 4 of the Act, provides that the person can’t claim any kind of compensation or establish suit against the property which is held as benami and acquired by the competent authority.
International effort to combat money laundering
Like Indian provisions, every nation has its legislation for curbing money laundering and such associated practices. However, across borders, several watchdog agencies set international standards for the prevention of illegal activities related to money launderings. These agencies are provided as below:
FATF on money laundering
The Financial Action Task Force is an intergovernmental money laundering and terror financing watchdog body that sets the standard in the mode of public policies to prevent the money laundering activities that harm society. Founded in 1989, as the initiative was taken by the G7 countries to tackle money laundering the FATF is headquartered in Paris. There are more than 200 countries that have complied with the setup standards of the FATF to fight money laundering. The FATF helps the international authorities to blow money laundering, terrorist funding and corruption.
United Nations Convention Against Illicit Traffic In Narcotic Drugs And Psychotropic Substances
The United States has played an important role in the global community in fighting against drug trafficking and money laundering. The United States in 1988, passed the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention). The Vienna Convention is an important weapon against fighting drug trafficking and money laundering. In the Vienna Convention, the United Nations requested all the member nations to adopt a system of criminal offences under their domestic laws, a list of matters like selling, distributing and manufacture of illicit drugs, and money laundering. Article 3 (1)(b) of the Vienna Convention addresses the issue of money laundering and it requires all the parties in the agreement to establish a system declaring money laundering as an offence. Further, Article 5 of the Vienna Convention provides all the member countries to empower their courts to seize the property and money found to be linked with drug trafficking. This article further provides the signatories to assign the courts to order bank and financial records available for the law enforcement agencies. Any party failing to provide its records to the law enforcement agencies shall attract penalties.
The International Criminal Police Organization, most commonly known as INTERPOL is an international organisation that was established in 1923 in Vienna, with its headquarters in France. Interpol cooperates with all the police organisations to control crime. Today, Interpol has grown to have 177 member countries across the world. Interpol plays an important role in combating money laundering. In Latin America and Carrebian regions, Interpol has played a vital role in combatting terrorism. Interpol provides technical assistance and training to all law enforcement agencies of its signatory member countries. Interpol has maintained an international database where all its signatory members provide information of internationally recognised offenders and criminals who are on the list of most wanted ones.
Asia Watch, a group of 13 executive members of Interpol which also includes India has studied and researched the ongoing money laundering practices in Asia, blown away their identities and put a curb on them through the help of law enforcement agencies.
- India lacks the stringent implementation of laws concerning money laundering. The banking and financial staff are technically not well equipped to cross-check the transactions and detect the vulnerable ones. Financial institutions must provide technical training to their staff so that they can check suspicious transactions and report about the same.
- The government also needs to order a stagnant order to report every kind of suspicious transaction to the RBI. In any case of non-compliance, the registration of that financial institution should be cancelled. At the earliest, if the transactions can be identified at the primary level they can be cross-checked and seized in case it is found to be a laundering one. Further, the Know Your Customer (KYC) guidelines should be implemented in a better way taking the information of the business they are indulged in. Such information shall ensure the legitimate business of the customer and help the institutions to eliminate the money laundering transactions/ accounts.
- The law enforcement agencies of the territory should be trained to tackle the criminals who are indulged in drug and human trafficking crimes. Such steps are needed to be taken by the government at the earliest so that money laundering can be eliminated and curbed.
Today, money laundering has been a major menace for all nations. The privacy guidelines of the cross borders banks have opened an abode for the criminals to hide their illegally earned money. India needs to negotiate over the Mutual Legal Assistance Treaties with other nations. This will help India to get international judicial assistance from the signatory nations and obtain the information which shall be admissible in Indian courts. This will be helpful in conducting trials of the offenders and bring the escaped criminals back to India. Financial Institutions also need to comply with the government’s guidelines and report any kind of suspicious activities or account if found. India needs stringent compliance with the anti-money laundering regulations to prevent the launderers from getting successful in their aim.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: