This article is written by Nishka Kamath, a graduate of Nalanda Law College, University of Mumbai. In this article, an attempt is made to analyse the basic concepts of money laundering. Further, the various methods practised by money launderers and the disadvantages of money laundering have been briefly discussed here. Moreover, a national and global perspective on combating the issue of money laundering is also deliberated upon, inter alia. 

It has been published by Rachit Garg.

Introduction 

With the advancement of technology in the financial sector, there has also been a rise in economic crimes; these crimes have become more complex than they were at first. These offences are not only enervating to trace but also have an adverse effect on the financial assets of a nation. One of these criminal offences is that of money laundering. 

Money laundering, a virus in the economic sector, is quite easy to define but involves several complex techniques. It can be said to be the process of disguising the proceeds of crime and incorporating them into the legal financial system. It is one of the many methods used by money launderers to conceal the nature, source, location, situation, or movement of a criminal activity or to depict illegal money as legal money or proceeds of crime. As money laundering is not an easily detectable crime, there is no exact data on the extent to which money can be laundered; however, the case laws discussed below will help authors get an idea of the big picture. 

Further, to combat these issues, several rules and regulations have been implemented by regional and international authorities. This article gives a brief overview of all such measures from both national and international perspectives. It also discusses the techniques used by money launderers, the impact of money laundering on a nation, and the necessary steps and measures that can be implemented to combat it. It also gives an outline of money laundering in the banking and real estate sectors and the nuts and bolts of these sectors. 

What is money laundering 

Money laundering is a heinous financial crime that is practised by both white-collar and street-level criminals in the same manner. Money laundering can be described as an illegitimate process of putting together huge sums of money that are usually obtained from illegal methods or criminal activities like drug trafficking, terrorist funding, etc. and portraying them as having been obtained from a legitimate source. Simply put, it is a method used to show that the channel from which money was obtained via illegal income is a regular, legitimate income and not otherwise. The money thus obtained from such illegal activities is said to be “dirty,” and the process is said to be “laundering,” which is committed by “launderers” to show that the money is clean.

How can you tell if someone is laundering money

There are numerous points to consider to determine if money is being laundered. Some of them include:

1. Dubious or secretive behaviour of a person in matters relating to finance,
2. Carrying out large transactions with cash,
3. Owning a company that appears to actually have no purpose,
4. Carrying out very complicated transactions, or
5. Making transactions just under the reporting threshold. 

Must know: electronic money laundering – a new method to launder money 

The internet has revamped the ways people commit crimes.  With the rise of online banking institutions, online payments without revealing the true identity of the payee, and peer-to-peer (P2P) transfers using cell phones, identifying illegitimate transfers of funds has become tougher than before. Further, using proxy servers and software that conceals one’s identity makes integration, which is one of the steps of laundering money, has made it nearly impossible to detect money laundering nowadays, the reason being that illegal amounts can be transferred or withdrawn with barely any trace of an Internet protocol (IP) address.

Furthermore, money can be laundered via online auctions and sales, along with gambling websites and online gaming websites; here, the money obtained via illegal means is converted into gaming money and again into real, usable, and untraceable “clean” money.

Moreover, the most novel forms of money laundering include cryptocurrencies like Bitcoin. Even though they are not completely anonymous, they are increasingly used in blackmailing individuals, the drug trade, and other illegitimate activities, considering their relatively anonymous nature as compared to the more traditional forms of currency.

How does money laundering work 

Since the funds obtained from criminal activities are most of the time in cash, it is quite difficult to use all the money in one go, so launderers use or deposit small amounts of money slowly and gradually instead of doing so rapidly. Also, the funds obtained through such illegal acts are transferred by smugglers to countries where money laundering is not a crime or where anti-money laundering laws are not strictly enforced. As a consequence, this technique gives the impression of legitimate money, and thus criminals can easily cover up their crimes. 

The sale of illegitimate arms, smuggling, and other organised crimes, including drug trafficking and prostitution, can help an individual earn heaps of money. Moreover, embezzlement, insider trading, bribery, and computer fraud schemes can help an individual generate large amounts of money and thus create an opportunity to portray illegitimate money as legitimate money. 

Money laundering is a heinous crime, and the person committing such an activity will be subject to huge fines and imprisonment if caught. Which is why most financial companies now-a-days have anti-money-laundering (AML) policies to forbid and deal with the issue of laundering. 

Interesting fact: Around 90% of money laundering cases around the world go undetected every year.

The definitions of money laundering 

Definition by Investopedia 

Investopedia defines money laundering as “The process of creating the appearance that large amounts of money obtained from serious crimes has originated from a legitimate source.”

Definition under the Prevention of Money Laundering Act 2002 

Under Section 3 of the Prevention of Money Laundering Act, 2002, the offence of money laundering is defined as:

Whosever-

• Either directly or indirectly,
• Tries to involve oneself, or
• Intentionally abets, or
• Deliberately is a party to, or
• Has an involvement in the activity, or
• Activity connected 

With the proceeds of crime, including the:

•  Concealment,
• Possession,
• Acquisition or use; and
• Showing or professing it to be an untainted property

Will be said to be guilty of committing the offence of money laundering. 

Key reasons why individuals launder money 

One of the main issues faced by large, organised criminal organisations such as drug smuggling operations is that they have heaps of money that they need to conceal to avoid any legal investigation by authorised officials. The individuals receiving such huge heaps of money refrain from claiming it as their income, thus saving massive amounts of income tax that are payable as a consequence of acquiring such funds. 

In order to manage the issue of having millions and billions in cash acquired through illegal means, criminal organisations find ways of laundering money to conceal its illegal nature. In other words, the main aim of money launderers in performing the activity of money laundering is to conceal the illegal nature of the money obtained by running it through legitimate financial systems like banks or businesses. 

Some examples of money laundering

Illegal drug trafficking 

Let’s say money is obtained through illegal means from selling drugs, and the drug dealer wishes to buy a brand-new car with the laundered money. Now, it will become highly suspicious if an individual tries to get the car totally in cash, thus, the drug dealer has to launder money to disguise it as legitimate. Now, let’s say the drug dealer runs a small laundromat, which is a huge cash-incentive business. Now, the cash obtained from the drug dealings is mingled with the laundromat’s cash and then deposited in a financial institution, say a bank. Now, the money thus laundered can be easily utilised for buying the car via issuing a cheque and no authority will have any suspicions about the method of obtaining money. 

Casinos

Another instance of money laundering will be the purchase of chips from casinos with cash and the receipt of cheques in return for the chips from the casinos, sometimes with or without gambling at all or placing minimal bets. 

Morre techniques are discussed in the following passages. 

Stages of money laundering 

Money laundering is a single-process. However, the process can be segregated into four stages, namely:

Illicit activity

In order for the process of money laundering to begin, it is necessary that an illegal activity be committed. 

Placement stage 

In the placement stage, the money obtained by illegal means is introduced into the economic system; here, the amounts, mostly in the form of cash deposits, are put into local financial institutions like banks. At times, money is deposited into the accounts of anonymous corporations or a professional middleman, who will then channelise the money to distinct sources. 

A point must be made that this is the most dangerous stage of money laundering, as such huge amounts are easily noticeable, and in case of any suspicion, banks are obliged to immediately report such activities to the authorities. Now, in order to reduce the risk of getting caught, such amounts are smartly broken down into smaller amounts, and these amounts are then deposited directly into a bank account or by purchasing monetary instruments like the following:

1. Money orders, 
2. Cheques,
3. Demand draft, etc.

Such monetary instruments are collected and deposited directly in other places. 

Layering stage

In the third stage of money laundering, which is the layering stage, a chain of transactions is created, thus giving it the appearance of legitimate financial transactions. This layering stage involves passing laundered money through shell banks, shell corporations, offshore jurisdictions, charitable organisations, etc. Further, a point must be made that while the process of layering is followed, the launderers can transfer the funds to legal businesses and genuine banks; at this point, e-transfer of funds becomes quite useful, and money, if passed through several entities within a quick span of time. 

In simple words, in the process of layering, the money received from the placement stage is moved, transferred, or spread over various transactions in different accounts; three accounts can either be in the same country or different countries, especially where money laundering laws are not very strict or are not followed relentlessly in comparison to other countries. This makes it tough for the authorities to trace the sources.

Some instances of the layering stage can be the purchase of tradable assets like-

1. Expensive, high-end cars;
2. Artwork;
3. Real estate; inter alia.

Integration stage

The final stage, which is the integration stage, conceals the money obtained through criminal activities completely, and the money starts entering into the financial system of the nation. As soon as the money passes the stage of layering, it is brought into the financial system through investments in legitimate commercial organisations, and it is depicted to be legal by means of several financial instruments, namely: 

1. Bonds, 
2. Bank notes, 
3. Securities, 
4. Cheques, and 
5. Guarantees. 

By adding the money to such financial institutions, one can effortlessly send the money back to the home country, i.e., the original source, thus depicting it as legitimate income. 

In simple words, integration means entering the well-placed and well layered amounts into the financial system again without showing a trace of the original source, thus representing that the laundered money came from clean sources so as to escape any legal consequences. The criminal will then invest the now-clean money into a legitimate business by showing fake sources of income through fake invoices, or he might even open up a fake charitable organisation and appoint himself as one of its board of directors with exorbitant remuneration. 

Different types and methods used by money launderers to launder money 

While reading about the different types and methods used by money launderers to launder money, the readers must make a note that the real-life situation may differ from the one discussed below. Also, money laundering may not involve all the stages stated above, at times, some stages could be combined or repeated multiple times. 

There are several methods used by launderers to launder money, ranging from simple to complex; one of the most common techniques includes creating a legal, cash-based business, the ownership of which is with a criminal organisation. For instance, let us take the example of an organisation that owns a restaurant. This organisation can transfer its daily cash inflow to the finance department of the restaurant and then into its bank account. Further, the amount can be removed as needed. Such businesses are always referred to as “fronts.” 

Several institutions and techniques are used to launder money, some of them are described below with instances:

Opening a bank account with a fake or wrong name

In order to avoid attention from legal authorities and prevent control in the banking system, the financial dealings are completely fictional or on behalf of someone else. 

Partnering in crime with financial institutions 

Another method of laundering money involves companies joining hands with accountants or managers to prevent these records from being tracked or even made an entry to. 

A case study on the subject matter is discussed below.

Say, there are illegal earnings that are given to the intermediary institutions to cooperate with the intermediary institutions’ personnel. In return, the cheques issued by the brokerage house are received. These cheques are then deposited into the customer account, which is in reality opened by the brokerage companies under fictitious names, and the funds in this account are utilised to acquire bearer bills and deposit certificates. When the date is due, the coupon prices and interest rates of the bonds are withdrawn, and the deposit certificates are sold to the bank account. 

Benefiting from various companies

In this method of money laundering, the following companies are used to launder money:

1. Nonfunctional companies,
2. Companies operating on a legitimate basis, and
3. Shell companies. 

Money laundering with workers 

This technique of money laundering is used by criminals to show that workers working in developed countries are sending huge amounts to their relatives residing in their own country. Thus, this method ensures that the officials will not raise any suspicion upon such transactions being carried out, giving the criminal a safe way to launder heaps of money without attracting much attention. 

Partnering in crime with foreign financial institutions 

This method of money laundering involves cooperating with cross-border centres and other foreign financial institutions to launder money. 

Exchange offices 

Exchange offices are yet another method of money laundering, wherein the receipt of illegal income in cash by foreign exchange offices is placed into financial services. 

Cash smuggling

In this technique of money laundering, the amounts acquired through illegal activities are taken to countries where there are not many obligations for individuals of that nation to follow per se. The cash is transferred by individuals serving as couriers or by other means; later, the cash is added to the financial systems in the countries. Now, these funds can be easily transferred to other countries or utilised without facing any difficulties or risks. 

Prize money from chance games

In this technique, the gamer has to pay some amount to enter into a competition, and if he wins the jackpot or the prize money, he is given money. Now, in the case of money laundering, he is given more money than the actual jackpot prize. Thus, it can be stated that the grand prize was taken by the criminal.

Casinos, businesses, etc. 

Here, the criminals’ money is used to buy chips from casinos, but either no or minimal gambling is done, and the chips are replaced with cheques given by casinos. The cheques in question are then deposited in a financial institution, say a bank, and the cheque money is subsequently transferred from that country to another country or used for purchasing assets like high-end cars, real estate, etc.  

On the other hand, the illegitimate income can also be transferred directly to the casinos. In contradiction, the money remaining after taking commission from the casinos can be processed by the accountants as money earned through gambling, and the holders of such amounts can point to their superiors as the main source of providing gambling money. 

Smurfing 

Smurfing, commonly known as structuring, refers to the process where criminals break huge amounts of funds into smaller amounts and then make several transactions, thus distributing the amount in different bank accounts, thereby making it difficult for the authorities to determine the source of the money. 

Basically, the term ‘smurf’ is used to define a money launderer who does not want to come under the scrutiny of the government. Since financial institutions have to report large deposits that go beyond $10,000 or point out any suspicious activity to financial officials, money launderers wittily add money by depositing smaller funds, thus, making it look like it has been obtained from a legal source. 

Electronic money 

There are numerous methods used by criminals to earn quick and easy money; some of them include:

1. Causing malware to be installed on someone’s device,
2. Phishing,
3. Account hackers, or
4. Other sectors. 

Value cards provided by stores are oftentimes utilised to launder such illegal money. The criminals/launderers purchase expensive items with such money.

Offshore accounts

Individuals who have huge credits deposit huge amounts of money in countries where there is minimal or no legislation followed in cases of anti-money laundering. The no-disclosure policy in such tax haven countries makes criminals feel safe, and they are under the impression that they can delude the law. 

Money mules

Another method of laundering money is through money mules. Cash smugglers across various nations carry illegal cash in several countries and deposit the money in those countries, especially those with zero or no policies on anti-money laundering. These smugglers are equally liable for the legal repercussions as the money launderer himself in the event they are held guilty of the offence of money laundering. 

Cryptocurrency 

Cryptocurrency, being one of the novel methods to transact money, has increased the chances of money laundering. Some common forms of cryptocurrencies are:

1. Bitcoin,
2. Ethereum,
3. Tether,
4. Binance, etc. 

Increasing amounts of OTC (over-the-counter) trading may lead to heavy transfers of funds across nations. Further, the lack of stringent KYC norms in some cryptocurrencies has also been a catalyst to invite more money launderers. 

Other forms of money laundering 

• Investing money obtained from illicit activities in commodities that are easily movable from one jurisdiction to another, like-

1. Gems,
2. Gold, etc.

• Secretly making investments and selling valuable assets like real estate, cars, etc.
• Counterfeiting. 

Interesting fact: AML has been very slow to catch up with new types of cybercrimes as most of the provisions under the Acts are still based on detecting dirty money as it passes through traditional banking institutions and channels. 

Money laundering in the banking sector 

Money laundering in the banking sector: a brief overview

The crimes related to money laundering in the banking sector have been a never-ending issue in India, and this issue has continued for more than a century. The earliest known forms of bank fraud, inter alia, include the following:

1.  Forging of instruments, 
2. Accounting irregularities, and 
3. Inflation of assets.

Over the last decade, money laundering in the banking sector has become more advanced, frequent, and sophisticated. With the advent of internet-based banking, the quantum of money involved has increased considerably. Recently, in February 2022, our nation witnessed one of the largest bank frauds of INR 22,843 crores (which is approx. USD 3 million) in the case of ABG Shipyard Ltd., which is a shipbuilding and repair company. 

Readers can read about the case in detail here. 

How does money laundering occur in the banking sector

Now that you know money laundering in the banking sector exists, you might wonder how it takes place. Let us find out. 

As we know, money laundering is the process of portraying illegally obtained funds (commonly referred to as ‘dirty money’) as legal money. As read in the above passages, illegal funds are first added to legitimate financial service organisations like banks, insurance companies, real estate companies, and investment brokers to further portray them as legitimate money and conceal the real source. Also, money launderers deposit cash in small amounts or sneak money into countries where there are no stringent laws against anti-money laundering to avoid any suspicion. With these multiple transactions, the illegitimate money appears to be clean and is then again added to the financial system of the nation. 

Once the money is integrated into the system, criminals can easily withdraw the laundered money from legitimate accounts and use it for their needs. Some criminals may add the money toward the following illicit activities:

1. Financing of terrorism, 
2. Organised crime, 
3. Drug trafficking, 
4. Human trafficking, or even
5. Terrorism.

Why is there a necessity to enforce anti-money laundering laws in the banking sector

Now that we know the illegal funds thus obtained are used for illicit purposes, we know we need anti money laundering laws in our nation. Below are some of the other reasons for the  need to implement anti-money laundering laws in the banking sector.

We know, banks are one of the largest institutions in the field of finance. Since banks across the globe tackle millions of transactions every day, there is a heightened risk of fraud in this institution  for matters pertaining to economic fraud. Moreover, criminal organisations are mostly known to execute money laundering activities via banks and other financial institutions. This is why, in this era, the banking sector must have anti-money laundering laws in place. 

Banks and other financial institutions must detect the threats by properly performing their AML obligations and taking all the requisite precautions. The AML process is crucial for the economy and the reputational status of banks. Also, auditors and regulators have to legally adhere to this process. 

Furthermore, with the technological shift in financial infrastructure and the upsurge of online payments, there is an increased demand for more stringent customer identity protection. As a response to this, new, stricter provisions are adopted by banks and financial institutions. These institutions have additionally adopted AI-based AML solutions to handle matters related to AML with greater efficiency. 

How does AML work in the banking sector 

You might wonder how AML works in the banking sector. Let us have a look at it. 

Basically, there are four key aspects that banks must address with their AML compliance programme, namely:

Know Your Customer (KYC)

Know your customer, commonly known as KYC, includes the identification and verification of identity of customers’ when they open a bank account. KYC, being one of the most important requirements for banks, is the first and foremost step in an AML programme. 

While following the KYC procedure, banks collect customer identification and then verify its accuracy, thus ensuring the customer’s provided digital-identity is not contradictory to his real-world identity. Banks can follow the process of KYC using the following techniques:

1. ID document verification, 
2. Face verification, and 
3. Proof of address (bills or bank statements). 

An identity verification solution can assist an individual in many ways, namely:

1. The KYC obligations are met, and
2. The business is protected, thus making it convenient for customers.

Customer due diligence (CDD)

Banks have a control process known as “customer due diligence” (CDD). Through this process, banks collect and assess relevant information about a customer’s profile and keep a check on any potential money laundering or terrorist financing risk. Even if the procedure for CDD varies from country to country, every country has only one aim in mind: to detect the risk of money laundering. 

After the KYC process is completed, banks apply risk assessment to their new customers, and they keep a check on the individual’s:

1.  politically exposed persons (PEPs), 
2. government records, 
3. watchlists and 
4. sanctions screening, inter alia. 

Any individual with his name on such lists has a high potential for committing economic frauds like money laundering and terrorist financing. Further, in banks providing global services, a customer’s nationality and record of financial transactions may also have an impact on the risk rating of the customer.

Customer and transaction screening

Banks and financial institutions have a large customer base, and the transactions carried out by these banks are not limited to their customer-base alone. For example, one customer of XYZ bank has deposited an amount in another customer’s bank account; this bank, say ABC, is different from the one mentioned above. Now, throughout the day, banks have numerous transactions like these, so they are obliged to monitor and control the people involved in such financial transactions. 

Interesting fact: Banks that transfer money to a sanctioned or banned individual will have to face the legal repercussions of doing so, as such an activity is considered a major criminal activity. The legal consequences of such transactions include severe administrative fines. Further, there is a possibility that banks lose their credibility and food reputation. 

In order to prevent money from being laundered, banks and other financial institutions must have a close-look at every transaction or deposit activity of a customer; this includes checking evidence to justify the origin of huge amounts of money and reporting cash transactions above ₹ 8-10 lakhs, or about $10,000. 

With the advent of technology, manual money laundering controls are outmoded and inefficacious; thus, there is a need for banks to have an automated transaction screening process in order to act in accordance with the policies laid down on AML for every customer transaction.

Suspicious activity reporting

Nowadays, money laundering inspections carried out by law enforcement agencies keep a close-eye on the financial records for any dubious activity or inconsistencies in transactions, and a substantial amount of transactions’ data is stored to help ED trace the perpetrator. In order to avoid financial fraud, it is crucial that banks have an inflexible audit process that can be relied upon by the regulating authority. 

What are the requirements of an AML compliance program in the banking sector 

In order to effectively combat the issue of money laundering and meet the requirements set by the regulating authorities, banks must create an efficient WML compliance programme. Failure to build an AML compliance programme will result in a huge penalty being charged by the authority to the bank.

An effective AML programme consists of all controls and directives applied to make sure that banks follow the proper rules and regulations set forth by the regulatory authorities. An efficient AML compliance programme has the following procedures:

AML compliance officer 

Banks and other financial institutions are obliged to appoint a compliance officer who will give the necessary input on matters relating to the AML compliance programme and act as a liaison for the financial authorities. The AML officer thus appointed must meet the following requirements: 

1. Must be a senior employee,
2. Must have the expertise and authority to carry out their role in an efficient manner.

AML training  

In order to remain capable of recognising dubious transactions for possible risks of money laundering or terrorist financing, it is necessary that every bank employee undergo an AML training programme. Moreover, it is important that banks implement policies that keep their employees well-informed on how to adapt to new laws and the upcoming trends in criminal methodologies. 

Record keeping 

The practice of record keeping is quite essential at every stage of the AML process. Banks are under the obligation to scrutinise the economic risks by looking at the existing records of their customers. A bank’s AML compliance programme must necessarily cover the need for effective record keeping along with documentation from onboarding to monitoring, screening, and submission of suspicious activity reports, commonly known as SARs.

Risk based approach 

Banks must necessarily perform a risk assessment test on their new customers with KYC and CDD procedures. Banks that have greater knowledge of customer criminal risk levels can strategically focus on and access which fields need more effort. 

Customer identity verification 

Banks must be well-aware of who their customers are and ensure they are actually the same individuals they claim to be. The general information that a bank or other financial institution must collect is as follows:

1.  Beneficial ownership, 
2. The nature of the business, 
3. The customer’s personal information, including- 

1. His/her full name and any aliases, 
2. Residential and mailing addresses, 
3. Specimen signature, and 
4. Place and date of birth.

Sanctions screening 

While following the procedure of AML, banks have to ensure that they do not carry out any business with anyone included in the list of international sanctions, which could consist of:

1. Individual(s),
2. Companies, or even
3. Countries.

A bank’s AML compliance programme must take into consideration every relevant sanction list, including those issued by international and national authorities. For instance, banks in the US must screen customers against the U.S. Office of Foreign Assets Control (OFAC) sanctions list.

PEP status

PEPs (politically exposed persons) are at higher risk of having involvement in money laundering, which is why banks have to keep a note of such individuals. Clients who fall under the PEP category are subjected to an enhanced due diligence measure.

Top money laundering cases in the banking sector 

ABG Shipyard case 

In this infamous case, a shipping company named ABG Shipyard Ltd. (ABG SL.), a Gujarat-based firm, was alleged to have defrauded several banks,  including the State Bank of India (SBI) and ICICI Bank, for a whopping  22,842 crore rupees, which roughly comes to $3 billion. As per the CBI’s investigation, the company would borrow loans from multiple banks and use them for other purposes than the ones stated.  

A charge sheet was filed in 2022 against Rishi Agarwal, the former promoter of ABG Shipyard Ltd., and five other accused, along with 19 companies, out of which three were based in Singapore.

For more details on the case, kindly visit this page. 

Yes Bank-DHFL case

This case revolves around Rana Kapoor, the founder and former CEO of Yes Bank, and the credit facilities provided to Dewan Housing Finance Limited (DHFL) bank during his tenure at Yes Bank, along with the promoters of DHFL bank- Kapil Wadhawan and Dheeraj Wadhawan, inter alia. While working as the CEO of Yes Bank, Rana Kapoor gave several loans to DHFL Bank for his own ulterior motive. 

When such a scandal was investigated, several of the accused in this case were pronounced guilty of the offence of money laundering under the The Prevention of Money Laundering Act (PMLA), 2002. 

For more details on the case, kindly visit this page. 

ICICI-Videocon case 

This case revolves around Chanda Kochhar, the former MD and CEO of ICICI Bank, and her husband, Deepak Kochhar. In this scam, Chanda Kochhar gave approval to loans worth 1,875 crores, which comes to an estimated $243 million, from ICICI Bank to Videocon Group in order to receive some sort of bribe from her husband’s business. 

Several accused in this case are now in the custody of the CBI for further investigation. 

For more details on the case, kindly visit this page. 

Punjab National Bank case 

This scam is by far the most advertised and controversial scam in the history of India. This scam was orchestrated by diamantaires Mehul Choksi along with his nephew Nirav Modi. In this case, Mehul Choksi and Nirav Modi, along with 50 other employees from the Punjab National Bank of the Brady House branch in Fort, Mumbai, conducted a scam of around 11,400-13,500 crores. In this infamous  scandal, bankers used fake Letters of Undertaking (LoUs) to import pearls. In 2018, the Punjab National Bank filed a suit with the CBI claiming that Nirav Modi obtained these LoUs from PNB without paying up the margin amount against the loans. 

Currently, the uncle and nephew are said to have escaped to foreign nations and may have to return to India soon.

For more details on the case, kindly visit this page. 

Final thoughts on money laundering in the banking sector

Banking and financial institutions are one of those areas that have the most number of scrutiny and audits, for they act as a direct channel for economic criminal activities. This is why there is a dire need for such organisations to have a detailed AML compliance programme, a talented AML officer, or a team, if need be! As discussed above, there is a certain procedure to be followed; risk assessment, KYC, and CCD are the major duties to be followed, after which attention must be paid to the consistency of compliance. 

Money laundering in the insurance sector 

It is not a fact unknown that the insurance industry all across the globe faces the threat of money laundering. As the cash-flow is huge throughout the insurance industry, the insurance companies have to adhere to the provisions laid down by the AML regulators. It has been observed in the past that insurance companies have been one of the major targets of money launderers because there were very limited AML controls on the subject matter. 

Several local and international regulators, especially the FATF Financial Action Task Force (FATF) and the European Union (EU), have published AML regulations for the insurance sector.  

Possible signs of money laundering in the insurance sector 

Before we dive deep into money laundering in the insurance sector, let us have a look at some of the instances of potentially suspicious activities an insurance company or professional may face that could be an indication that there is a threat of potential money laundering or terrorist financing activities.

1. A purchase is made that is outside his normal range of income or estate planning needs. 
2. An insurance policy or an insurance product is purchased by a consumer oftentimes by paying a single, large premium that too with cash or its equivalents.
3. A customer who has purchased several insurance products and then suddenly surrenders the policy before its due date and then uses the same amount to purchase some other financial assets. 
4. A customer uses several currency equivalents, like:

1. Cashier’s bank,
2. Money orders, etc.,

from multiple banks and financial businesses to make payments related to insurance policies or annuity payments. 

5. A customer withdraws an insurance policy early, including during the free-look period.
6. A customer assigns a completely unrelated third party as the policy’s or product’s beneficiary. 

Possible products that are prone to insurance money laundering methods

The following is a list of money laundering-prone products and mechanisms of life insurance:

Annuity policies/high regular premium savings

Annuity policies and high regular premium savings are the two loopholes in the insurance sector that are smartly used by money launderers to get a legitimate income after paying premiums with the money obtained through illegal means. 

Refund of premiums 

During the cooling-off period, money launderers deliberately overpay premiums, thus forcing insurance companies to directly reimburse them. 

Single premium policies

Single premium policies are one of the easiest methods for money launderers to deposit heaps of money with a single cash transaction, as the name of the policy suggests. This is only applicable for those insurance companies that still accept cash payments. 

Surrendering a policy

In order to get the money obtained illegally into the criminal’s possession, he/she may surrender the policy before the due date or maturity period. 

Top-ups

Once a customer makes payment of an initial premium to avoid any detection of suspicious activity, money launderers can top-up such policies with additional payments to hide their money. Such top-up payments can be in a series of multiple small payments or a one-shot large deposit. 

Transferring ownership

Life insurance policies come with a unique facility of being purchased and transferred to a third-party. The customer buying it will then have ownership of it and permission to withdraw money as per their needs and wants. 

Secondary life market 

Say, a customer who has a life insurance policy with a higher premium rate falls sick and wants to sell-off his policy to a third party instead of withdrawing it. In this case, a third party criminal can buy such a policy, and money launderers can easily take undue advantage of such schemes.  

Money laundering methods in the insurance sector

In order to combat the issue of money laundering in the insurance sector, it is necessary that the insurance companies pay close attention to the common methods of money laundering. Money launderers can easily perform illegal activities like the ones mentioned below with the insurance system:

1. Structure transactions,
2. Force employees to join hands with them in such illicit activities, and
3. Set up a legal “front” insurance institution for the purpose of money laundering. 

The most common form of money laundering that insurance companies face is paying a single premium for an insurance agreement. Money launderers, after doing so, will smartly try to outwit insurance companies and make an attempt to get the money back by making fraudulent claims. Simply put, money launderers use insurance companies to  launder money and will then try to withdraw the amount before the due date by making excuses. 

At times, money launderers even take undue advantage of investment-structured insurance products, namely:

1. Variable annual income, and 
2. Certain life insurance policies. 

Duties and responsibilities of the board of directors for AML compliance

The company’s board of directors is entrusted with the responsibility to carry out the company’s AML/CFT programmes in an effective manner. Furthermore, the board of directors also has the duty to create an AML programme for the company, along with employing an AML compliance officer to carry out AML compliance programmes effectively. Additionally, the board has to make sure that all the activities, like risk management, monitoring, etc., are carried out diligently. 

Responsibilities of insurance company employees for AML compliance

It is the duty of the employees of the company to adhere to the AML programme laid down by their respective companies for preventing and reporting any activity of money laundering or to pin-point any suspicious transaction. The employees have the responsibility to report any suspicious transactions to the financial intelligence units.

Duties and responsibilities of the AML compliance officer

An AML compliance officer has several duties and responsibilities to combat the issue of money laundering and prevent terrorist financing, namely:

1. Meeting the obligations of the company,
2. Design and execute an AML programme,
3. Instruct the board of directors to execute the AML compliance programme, and
4. Store the data of customers and their transaction records. 

Know Your Customer (KYC) for insurance

All companies related to the insurance sector have the duty to follow proper Know Your Customer (KYC) procedures with any customer they develop a business relationship with. In this procedure, the insurance company has the obligation to collect information related to the customer’s identification and then verify whether their identity is as per the documents thus submitted. Insurance companies also have the duty to verify the identities of legal entities, organisations, and other foundations like charitable trusts. Keeping a check on the ultimate beneficial ownership is also one of the duties of the companies related to the insurance sector.

Customer due diligence for insurance

The main motive behind AML controls is risk assessment. A customer due diligence procedure helps one determine the risk level of customers. While assessing the risk level of the customer, the type of business he is in becomes one of the major determining factors. Additionally, insurance companies have to keep track of the flowing details of their customers:

1. Sanctions lists,
2. PEP lists, and 
3. Adverse media data.

Any insurance company having business relations with customers belonging to any of the aforementioned criteria will pose a threat to the insurance company, which is why risk assessment of customers becomes important. 

How do insurance companies comply with AML/CFT regulations

Insurance companies must include CDD in their AML/CFT programmes to make sure that the customer’s identity is the same as what they claim it to be. Any information obtained from such procedures can be further utilised for the purpose of transaction monitoring and screening.

Transaction monitoring and screening can be quite tedious, for the information available is in abundance, which is why insurance companies have now begun to take advantage of smart technology and artificial intelligence to automate their AML/CFT programmes. By using such a technology, sorting the necessary information for sanction screening and transaction monitoring will become a cakewalk with an increased rate of accuracy in comparison to before. 

Final thoughts on money laundering in the insurance sector

The insurance sector is yet another sector that will be subject to a high level of scrutiny and audits as money launderers smartly try to outwit everyone for economic profit. It is necessary that AML laws and regulations be properly implemented all across the globe to combat the issue of money laundering and terrorist financing. Further, utilising advanced technology to determine such frauds can be an added advantage.

Money laundering in the real estate sector 

As seen above, there are so many ways money launderers launder money, and one of them is money laundering through real estate. Criminals often launder money through goods in which they can invest huge amounts of money; real estate is one such sector. 

It has been observed that around $30 billion entered the real estate market in Germany in 2017. Further, around $20 billion entered the Greater Toronto area’s real estate market in Canada in the last decade without gaining the attention of anti-money laundering authorities. 

How do criminals launder money through real estate 

The various money laundering techniques used by money launderers to launder money in the real estate sector are as follows:

Using third parties 

Money launderers can buy real estate in the name of someone they know. The third party is usually a family member with no existing criminal record. The name of the criminal will not come up in the transaction as the money to buy the real estate is transferred from the account of a third party. 

Use of credit and mortgage 

Credit and mortgages can be used as sureties for laundering crime proceeds. Refunds can be used to combine illegitimate funds with legitimate funds. 

Manipulation of property values

Another method used by money launderers is to seek the help of third parties like real estate agents to underestimate or overestimate the value of the property. 

Please note: underestimating the value of the property is called undervaluation, whereas overestimating the value of a property is referred to as overvaluation. 

Money launderers may use overvaluation to get the highest loan from a lender. The higher the loan amount, the more money can be laundered. 

Configuring cash deposits to purchase real estate 

Money launderers deposit huge amounts of money by breaking them into smaller transactions to avoid the scrutiny of the authorities and the reporting of such transactions. The money is then used to get bank cheques, which in turn are used to purchase real estate.  

Rental income will legalise illegal funds

Money launderers usually rent their property and use black money to cover the rent payments. Further, as mentioned above, they buy property in the name of another party, rent the property themselves, and then use illegitimate incomes to cover the payments. 

 Real estate purchases facilitate other illicit activities 

At times, money launderers and criminals purchase a particular property, renovate it using black money obtained from illicit sources. This renovation, in turn, causes a rise in the value of the property, thus escalating the sale price.

Use of front companies

The properties owned by shell companies that are actually formed overseas allow the criminals to move black money from nation to nation. 

Why is there an increased risk of money laundering in the real estate sector

There are several reasons why the risk of money laundering in the real estate sector is increasing. Some of the reasons are as follows:

A lucrative investment for criminals 

These assets provide a stable value and can be transferred without hassle, along with their ever increasing rates. Further, the properties can be easily bought and sold. 

High value transactions

Real estate transactions involve a lot of money, thus making them an attractive target for money launderers. Criminals, oftentimes, take the help of real estate to purchase real estate and combine their illegal funds with legal money, making it very difficult for the regulators to track the source of funds. 

Lack of transparency 

The real estate sector is infamous for its lack of transparency, thus, making it tough to recognise the beneficiaries of such transactions. This ambiguity poses a loophole for criminals to launder money via the real estate sector.

Limited scrutiny of the authorities 

The focus of the regulators on transactions in the real estate sector is often limited as compared to other financial transactions. This lack of vigilance encourages criminals to take undue advantage of the real estate sector for illicit activities like money laundering. 

The top red flags to look for in the real estate sector 

Red flag 1

Someone is offering you financing to buy a property or get a mortgage using your name. In such a case, it is most likely that the criminal is trying to launder money. 

Please note: Being a part of such a financial scam is not only a crime but also mortgage fraud.  

Red flag 2

In cases where an individual offers a price for the property that is beyond the market rate, a red flag for money laundering can be raised. 

Red flag 3

In case if an individual makes an offer to enter into a lease agreement to hold a commercial space on your business property, such an instance can be a sign of money laundering, reason being, it is most likely that the person making the rent payments has access to a larger economic flow, and he/she might launder money through rent payments.  

Methods to detect money laundering in the real estate sector

Asset declaration by public officers

The public officers must give a declaration of their assets before and after their term of service. Further, the senior most officials and their close circle should also report their assets. All these declarations must be made in public, and there must be an independent officer appointed to verify the validity of such statements.   

Regulation gatekeepers 

Gatekeepers must be aware of who is behind the corporation they are working for. A beneficiary ownership list will help them keep track of identities and suspicious activities, if any. Further, an independent official must also be appointed to keep track of the beneficial owners or authorities in case they break any sanction bans.

Land registers 

An online, centrally verified system should demonstrate who is the owner of a property to create greater accountability over the sources of money in the market.

The downside/disadvantages of money laundering 

Impacts of money laundering

Economic impacts

• Weakens the legitimacy of the private sectors,
• Subverts the morality of financial markets,
• Losing control over fiscal policies,
• Loss of revenue, and  
• Causes an impact on the trade and international capital flows of a nation. 

Social impacts

• A surge in crime rates,
• Downtick in human development,
• Resources being misallocated,
• Causes a huge impact on the trust of local citizens in their domestic financial institutions, and
• Declines the moral and social position of society by exposing it to activities such as drug trafficking, smuggling, corruption, and other criminal activities.

Political impacts

• Instigates political distrust and uncertainty, and
• Criminalisation of politics. 

Prevention of money laundering 

Now that we know the ill-effects of money laundering, let us take a look at why and how to prevent or combat the issue of money laundering. 

Why must one prevent money laundering 

Money laundering is a bane to society as a whole, as it makes the rich richer and disrupts the balance in society. Legalising any illegal activities caused by money laundering, like drug trafficking, terrorism funding, people smuggling, etc., will have a detrimental impact on the social and economic aspects of society. This is why there is a dire need to combat the issue of money laundering, especially in a highly populated country like India.

What is anti-money laundering 

Anti-money laundering, as the name suggests, is the antonym of money laundering, as it deprives a criminal of the money obtained through illegal activities, which in turn helps the government and economy of a nation.

Why is it important to combat money laundering

AML, or anti-money laundering, deprives criminals of the benefits obtained through illegal activities like money laundering, thus discouraging them from engaging in such heinous activities. Illegitimate and dangerous activities like drug trafficking, smuggling individuals, providing financial aid to terrorists, extortion, and fraud pose a threat to millions of individuals all across the world and also leave a negative impact on the social and economic aspects of society. As the aforementioned illegal activities are carried out with money being laundered, it is necessary that the issue of money laundering be combated, thus causing a reduction in the crime rate and benefiting society.   

Acts that govern the issue of money laundering in India 

Since India became independent, successive governments were well aware of the ground realities of everything, including the counter effects of money laundering upon our nation, hence, a number of laws were put in place to keep a check on such illegal activities. 

The following are the acts that majorly address the issue of money laundering in India:

The Prevention of Money Laundering Act (PMLA), 2002, and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 

The Prevention of Money Laundering Act (PMLA), 2002, and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, are the major laws enacted to battle against the issue of money laundering in our country.

The aforementioned laws are applicable to people and institutions that meet the following criteria: 

The PMLA and the Rules are applicable to all individuals, including a person, a company, a firm, an organisation, a group of people (incorporated or not), an agency, an office, or a branch owned or controlled by any of the aforementioned individuals.

Acts that governed the issue of money laundering in India before the PMLA

Before the enactment of the Prevention of Money Laundering Act, 2002, there were plenty of statutes enacted that addressed the issue of money laundering; however, they were not adequate. Some of the major laws were as follows:

Criminal Law Amendment Ordinance, 1944 

The Criminal Law Amendment Ordinance (XXXVIII of 1944) has provisions only for criminal activities like:

1. Corruption, 
2. Breach of trust, and
3. Cheating.

and not all the crimes under the Indian Penal Code.

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act was enacted in 1974 to keep track of foreign exchange within the nation. The Act was based on the concept of ‘preventive detention’, which is stated under the Constitution of India as ‘necessary evil’.

Further, this law exists under Article 22 of the Constitution for the security of the state and the maintenance of public order. Under this Act, all decisions related to the Act may be taken either by the state government or the Central Government. The most important provisions under the said Act are as follows:

1. Section 3 (power to make orders detaining certain persons), 
2. Section 4 (execution of detention orders), 
3. Section 5 (power to regulate place and conditions of detention), and 
4. Section 11 (revocation of detention orders).

The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976

The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, has provisions relating to the properties acquired illegitimately by smugglers and foreign exchange manipulators, along with other matters connected to such cases.   

The Income Tax Act, 1961

The Income Tax Act was passed in 1961. This legislation has everything related to taxation in India under one umbrella, including:

1. Levying taxes,
2. Collecting tax,
3. Administration of taxes payable and paid, and
4. Recovering income tax. 

Basically, this Act was enacted with the aim of  consolidating and modifying the laws related to taxation in the country. This Act has a long list of sections, each dealing with separate aspects of taxation. 

The Indian Government presents a finance budget every year in the month of February, and this budget brings with it a lot of amendments to the IT Act. 

The Benami Transactions (Prohibition) Act, 1988

A ‘benami transaction’ refers to a transaction wherein property is transferred to one person; however, the amount is paid by another individual, whose identity is usually not revealed. The Benami Transactions (Prohibition) Act was enacted in 1988 to ban benami transactions and recover properties held by such transactions. 

Further, Section 3 of the Act explicitly bans any individual from entering into a benami transaction. Furthermore, the Act also has a provision that mentions that those properties that were acquired through benami transactions are to be acquired by the authority without any compensation to the individuals having ownership of such properties. 

The Indian Penal Code, 1860, and the Code of Criminal Procedure, 1973 

The Indian Penal Code, 1860, is the major law that governs numerous activities related to crimes and also specifies several penalties for such wrongdoings. On the other hand, the  Code of Criminal Procedure, 1973, is a crucial part of procedural law that has a detailed procedure to be followed in matters relating to criminal cases. 

A point must be noted that a number of offences under the IPC have been recognised as being scheduled offences within the meaning explained under the PMLA. Moreover, Section 65 of the PMLA also specifies that the provisions of the Code of Criminal Procedure are to be followed with respect to the several proceedings stipulated under the PMLA.

The Narcotic Drugs and Psychotropic Substances Act, 1985 

The Narcotic Drugs and Psychotropic Substances Act, 1985, was enacted in 1985 with the main motive of consolidating and amending laws relating to narcotic drugs. The secondary motive for bringing this Act into effect was to keep under control the objectives, lists, etc. Furthermore, this Act has a brief description of different types of narcotic drugs and psychotropic substances.

The Act was implemented as an attempt to seize and impose limitations on the transport and sale of narcotics and psychotropic substances and does not make any explicit mention of money laundering activities per se. However, one must take into consideration that the activities related to such substances generate a lot of income for each and every individual having an involvement in such activities; the involvement is so obvious that the money involved in such illegal acts has to be passed through several channels to give it the appearance of having a legal status. Simply put, the profit earned is so high that criminals have to launder such amounts. The NDPS Act, by working against practices involving drug trading and trafficking, puts a direct limitation on the flow of money into such illegal acts.

The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988, is yet another major drug law in India. This Act was passed by the Parliament of India. The main object of this Act was to fully entitle and enforce the Narcotic Drugs and Psychotropic Substances Act of 1985. 

FEMA and FERA

The  Foreign Exchange Management Act, 1999, and the Foreign Exchange Regulation Act, 1973, were sanctioned and passed with the main object of imposing limitations on the hawala market system to bar its usage for activities relating to money laundering and terrorism financing. The main aim of laying down these Acts was to make improvements to the surveillance and preemptive methods used to battle the issue of money laundering instead of completely depending on the legislation enacted to prevent money from being laundered. 

Other regulations 

Apart from the regulations mentioned above, there are other specialised provisions, like:

1. RBI,
2. SEBI, and
3. IRDA.

Many of these authorities have the obligation to report suspicious activity, which is in turn analysed by Financial Intelligence Units established by the Central Government.

Further, SEBI has introduced ‘Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT)/Obligations of Securities Market Intermediaries’ and IRDA has introduced ‘Guidelines on Anti Money Laundering Programme for Insurers’. They are sector specific based on the principles of the PMLA and Rules. 

Punishment for money laundering 

Now that we know about the legislations that govern the offence of money laundering, let us take a look at the punishment for the crime. 

Punishment for money laundering under the Prevention of Money Laundering Act, 2002

The punishment for the offence of money laundering is prescribed under Section 4 of the Prevention of Money Laundering Act, 2002. It states the following punishments: 

• Rigorous imprisonment for a term,
• That will not be less than 3 years, but
• Which is expandable up to 7 years, 
• Or 10 years in cases relating to the offences under the Narcotic Drugs & Psychotropic Substances Act, 1985,
• Along with a fine. 

Also, Section 5 of the PMLA has provisions for the attachment of property involved in money laundering.  

One of the most noteworthy features of this Act is that there is no upper limit on the penalty inflicted on offenders who commit the offence of money laundering under the PMLA. The most apparent reason is that the authorities decide the penalty based on the nature and extent of the offence and the amount of money laundered. 

Fugitive Economic Offenders Act, 2018

The Fugitive Economic Offenders Act (FEO), 2018, has provisions to discourage FEOs from acting against the laws stated under Indian laws for any individual staying outside the jurisdiction of Indian courts. An FEO can be described as a person:

1. Against whom a warrant is issued for arrest in relation to a Scheduled Offence as mentioned in the FEO Act,
2. The warrant has been issued against the individual by any court in India,
3. The accused has left India to stay away from criminal prosecution, and
4. The accused is in a foreign country and refuses to return to India and face criminal prosecution.

The offence of money laundering under the PMLA is a FEO-scheduled offence. The proceeds of crime in relation to the FEO-scheduled offence of money-laundering may be attached or seized as per a separate procedure prescribed under the FEO Act, which is in addition to the PMLA regime itself.

Authorities responsible for investigating matters relating to money laundering  

There are special authorities that deal with the offence of money laundering, like:

1.  Reserve Bank of India, 
2. The Securities and Exchange Board of India (SEBI), and
3. Insurance Regulatory and Development Authority of India (IRDAI).

which are based on the PMLA and other legislation. Each of them are discussed briefly in the coming passages. 

Government authorities responsible for issuing guidelines on matters associated with money laundering  

In India, the Enforcement Directorate, established under the guidance of the Department of Revenue, Ministry of Finance, is one of the major authorities responsible for investigating and prosecuting the offence of money laundering. The ED has the authority to initiate [proceedings for attachment of property and launch proceedings in the designated special court for crimes related to money laundering. Further, the Financial Intelligence Unit (FIU) under the Department of Revenue, Ministry of Finance, is the central national authority having the responsibility to receive, process, analyse, and disseminate information related to any suspicious financial transaction to any enforcement agencies and foreign FUs.   

Apart from the ED and FIU, the other authorities authorised to enforce AML guidelines are:

SEBI

The Securities and Exchange Board of India, commonly known as SEBI, has issued detailed Know Your Customer (KYC) norms and essentials for financial intermediaries and investors in the securities market. 

RBI

Like SEBI, the Reserve Bank of India, commonly known as the RBI, has specified several guidelines for KYC and AML for the banks and other financial organisations that it regulates to follow. 

IRDAI

The Insurance Regulatory and Development Authority of India, commonly known as the IRDAI, has also issued guidelines to advise certain categories of insurance companies on how to tackle the issue of financing of terrorism (CFT).   

Economic Offences Wing, Central Bureau of Investigation (CBI)

The Central Bureau of Investigation, commonly known as the CBI, is a special agency established by the police for carrying out investigations on specific types of crimes, like:

1. Corruption by public servants, 
2. Serious economic offences, and
3. Fraud and crime with inter-state/all-India ramifications. 

Income Tax Department 

The income tax department has the special authority to levy taxes on undisclosed foreign income and assets of residents of India.

Registrar of Companies (RoC)

The Registrar of Companies is commonly addressed as ROC. As per the new amendment in the Companies Act, 2013, every private or public Indian company has to file a record of the company’s major beneficial owner with the ROC. 

Landmark Indian case laws on the issue of money laundering 

INX Media case

The Apex Court in the case of P. Chidambaram v. Directorate of Enforcement (2019), commonly known as the INX Media case, defined money laundering as the process of concealing illegal money, wherein a launderer transforms the money obtained from illegitimate means into depicting it as a legitimate fund. The Court also said that money laundering is a serious threat not only to the economic system but also to the integrity and sovereignty of the nation. This case mainly revolves around the financial irregularities in the foreign exchange clearance granted to INX Media Group for accepting overseas investment in the year 2007.

There were two main issues in this case, namely:

1. Whether bail should be granted to the appellant or not?
2. Whether the Court, having found the merits of the case, must consider the application filed for granting bail or not?

The Supreme Court held that bail could be granted to Chidambaram, thus overturning the judgement of the Delhi High Court. The Apex Court also ordered Chidambaram to pay a surety bond of Rs. 2 lakh as well as two securities. 

For more details on the case, kindly visit this page. 

Hassan Ali Khan’s case

In Union of India v. Hassan Ali Khan & Ors. (2011), Hassan Ali, a businessman based in Pune, was held guilty of charges of money laundering and for depositing huge sums of black money in financial organisations of foreign countries. The businessman is now serving a jail sentence after several bail applications were denied. 

For more details on the case, kindly visit this page.

The Kingfisher Airline case

This case revolves around Vijay Mallya’s company, Kingfisher Airlines. The company had incurred several losses due to the increasing oil prices, and to keep his business going, Mallya borrowed huge sums of money from banks and several financial institutions. After an investigation was carried out in this matter, it was found that Mallya used this loan amount to launder it in tax havens outside India.  

He was sentenced to a four-month jail sentence by the Supreme Court of India for his bank loan default case. The bench, which was headed by Justice U. U. Lalit, also imposed a penalty of Rs. 2000. Currently, Mallya is living in the United Kingdom and is on a bail extradition warrant, which is executed by Scotland Yard. 

For more details on the case, kindly visit this page.

Punjab National Bank Fraud case 

This case, being one of the most well-known in India, was planned by diamantaires Mehul Choksi and his nephew Nirav Modi, who conducted such a huge scam with the assistance of over 50 employees of Punjab National Bank. Here, fake Letters of Undertaking (LoUs) worth more than 10,000 crores were used by the masterminds over a period of 6-8 years. 

PNB filed a suit against Nirav Modi for not paying up the margin amount against the loans. Then, the masterminds fled from India to avoid prison sentences.

For more details on the case, kindly visit this page.

ICICI Bank-Videocon case

This case involves several masterminds, including Chanda Kochhar, the former MD and CEO of ICICI Bank, and her husband, Deepak Kochhar. This case came to light when a whistleblower pointed out some suspicious activities between ICICI Bank and Videocon Group. Chanda Kochhar and her husband, Deepak Kochhar, were arrested under the PMLA Act. Furthermore, the ED had attached movable and immovable assets worth Rs 78 crore as part of the recovery process. The Kochars are now in the custody of the CBI for further investigation. 

For more details on the case, kindly visit this page.

Murali Krishna Chakrala v. Deputy Director (2022)

In the case of Murali Krishna Chakrala v. Deputy Director (2022), the petitioner, Murali Krishna Chakrala, a practising CA, issued five certificates in FORM- 15CB under Rule 37-BB of the Income Tax Rules, 1962, in the name of M/s. B.K. Electro Tools Products.  However, this money was eventually detected as having been used to buy a vehicle through money laundering. 

Please note: Form-15CB is a certificate issued by CA certifying that the payment, TDS rate, TDS deduction, and other details are apt for any sort of payment to be made. 

After a thorough investigation, the ED filed a complaint stating that Murali Chakrala had gone ultra vires of his professional scope, ethics, and values by issuing Form 15 CB. Aggrieved by such allegations, the petitioner approached the High Court for rescinding of such allegations. 

The High Court held the following:

1. Mr. Murali Chakrala had no involvement in the money laundering incident. 
2. He had only accepted fees for the certificates he issued for his clients.
3. Moreover, a CA is only obliged to inspect the nature of the payment to be made and nothing more.
4. The CA does not have any obligation to check the genuineness of the documents the client has submitted. 

Considering the above points, the High Court quashed the allegations against Murali Chakrala.

Money laundering : a global perspective 

General information 

What are the latest anti-money laundering laws and regulations across the globe

The laws related to anti-money laundering are changing repeatedly in order to keep up with the new methods to launder money and the trends associated with them. Over the last 5 decades, the Bank Secrecy Act (BSA), 1970, has seen tremendous advancement in the United States. Further, with the upcoming electronic currencies like crypto, new AML laws are being enacted to prevent virtual currency from being used to commit economic crimes. Below are some of the latest amends to regulations across the globe:

1. The definition of money laundering was broadened by the Sixth Anti-Money Laundering Directive (6AMLD) of the European Union. This amendment authorised the criminal prosecution of any legitimate individual, including businesses, and an increase in prison time and punishments, amongst other things.
2. In the United States, the AML 2020 Act is by far one of the most substantial reforms since the USA Patriot Act, which was reformed about two decades ago. Among other amendments, this Act incorporates language curated especially to annihilate the issue of anonymous companies, commonly known as shell companies (discussed above), and also broadens its definition to encompass antiquities traders and virtual currencies.
3. Further, Singapore has recommended new guidance on AML with the aim of focusing on digital currency businesses and other virtual asset service providers (VASPs).
4. Moreover, South Korea has also enacted new AML rules for digital currency companies. 
5. Furthermore, Estonia is all set to pass stringent AML laws related to cryptocurrencies. 
6. Additionally, six members of the EU, namely:

1. Germany,
2. Spain, 
3. Austria,
4. Italy,
5. Luxembourg, and
6. Netherlands.

have joined hands to bring together a new AML watchdog that will mainly focus on cryptocurrency. 

International authorities responsible for combating the issue of money laundering 

Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS)

On an international level, there are several legitimate authorities that keep a check on any suspicious money laundering activities and duly investigate matters relating to the same. In the United States, the FBI (Federal Bureau of Investigation) and the IRS (Internal Revenue Service) are the two major agencies that tackle the issue of money laundering. 

International Money-Laundering Information Network (IMoLIN)

At times, it is noticed that money laundering becomes a huge problem, this is the reason why international agencies are specifically designed to fight this evil. For instance, there is the International Money-Laundering Information Network (IMoLIN), which was devised to help law enforcement agencies all around the world in identifying and tracking money laundering operations. 

Financial Action Task Force on Money Laundering (FATF)

Moreover, the Financial Action Task Force on Money Laundering (FATF) was established as a G-7 initiative for the advancement of financial standards and anti-laundering laws. As money laundering plays a key role in funding terrorist organisations, the FATF was entrusted with the responsibility of directly fighting to cut illegal flows to terrorists and their organisations.

It should be noted that the IMoLIN as well as the FATF work in harmony with Interpol as well as with domestic police agencies in the G-7 nations, the G-7 countries being:

1. The United States, 
2. Canada, 
3. the United Kingdom,
4.  France, 
5. Germany, 
6. Italy, and 
7. Japan.

The Vienna Convention

The Vienna Convention was one of the first initiatives to combat the issue of  money laundering and was enacted in 1988. This Convention was ratified to criminalise money laundering from drug trafficking with the assistance of all the member states. This theory promotes global cooperation by enquiring into and making extraditions between member states in cases of money laundering. 

Council of Europe Convention

Further, in 1990, the Europe Convention was sanctioned as a policy to battle against money laundering. This Convention has principles laid down for matters relating to global cooperation among other member states, including  states outside Europe. The main objects of the Convention are:

1. Facilitating global cooperation in matters relating to search, 
2. Investigative assistance, and
3. Forfeit and annex all criminalities, particularly arms dealing, drug offences, etc., and such other offences which generates huge profits. 

The Basel Committee on Banking Supervision 

In 1998, the Basel Committee on Banking Supervision gave a statement that motivated the banking organisations to make sure that no suspicious or dubious activity goes unreported by them. This statement was broad enough to be applicable to 

 all aspects through the banking system, like: 

1. Transfer, 
2. Deposit, 
3. Hiding illicit activities, whether by theft, drugs, or fraud.

Some real life instances of the offence of money laundering 

Millions and billions are laundered every year across the globe. Some cases go undetected, whereas some high profile cases get detected. These high-profile cases are infamous not only for the amounts of money laundered but also in relation to the fines and penalties imposed on the offenders. Below are some of the well-known money laundering cases of the past three decades. 

Wachovia 

In 2010, one of the leading banks in America, Wachovia, made a confession that there were some “serious and systematic” violations of the Bank Secrecy Act, which gave the Mexican and Colombian drug cartels permission to launder around $378.4 billion between 2004 and 2007. This was by far the ‘largest violation of the Bank Secrecy Act’. Wachovia agreed to forfeit $110 million and pay a $50 million fine to the US Treasury. 

Standard Chartered 

In 2012, one of the most famous British banks, Standard Chartered Bank, was charged with the offence of concealing $250 billion in a financial transaction from Iran. 

For failures in anti-money laundering controls and breaches of US sanctions on Iran, Burma, Libya, and Sudan, the bank had to pay a civil penalty of £262 million. Further, Standard Chartered also had to pay a further £232 million in civil penalties in 2014 for failing to report such suspicious transactions. 

Nauru

In 1993, an island country named Micronesia on Nauru became a tax haven. Around 5 decades later, Russian criminals managed to launder around £53.7 billion through shell banks. They safely managed to escape the penalties and fines as the Nauru Government did not bother inquiring where such a huge amount of money was obtained from. The sanctions came to light in 2005, when the island eliminated 400 shell companies. 

Bank of Credit and Commerce International (BCCI)

The Bank of Credit and Commerce International (BCCI) in the 1980s was a much discussed topic between financial regulators and intelligence agencies; these administrations worried that this bank was poorly regulated. On carrying out an investigation, it was discovered that BCCI was involved not only in money laundering but also in other economic frauds, too, on an international level. Upon further investigation, it was uncovered that an estimated fraud of £17.6 billion was conducted. In 1990, the bank pleaded guilty and was charged with a penalty of £11.3 million. 

HSBC

HSBC (Hongkong and Shanghai Banking Corporation), which has a longstanding history of more than 150 years, lost £1.2 billion in 2012. This was followed by a report by a US Senate Committee declaring that the bank had violated money laundering regulations. Further, it was also affirmed that the bank had helped countries like Iran and North Korea bypass some nuclear weapons. All these issues led to the laundering of an estimated £5.57 billion in a period of over seven years. 

• Money laundering: a global country-wise perspective 

There are numerous enforcement regulators around the world that have implemented measures and legislation to combat the issue of money laundering. Mentioned below is a brief overview of some of the countries. 

United Kingdom 

The major laws for combating the issue of money laundering and terrorist financing in the United Kingdom are as follows:

1. The Terrorism Act, 2000;
2. The Anti-Terrorism, Crime and Security Act, 2001;
3. The Proceeds of Crime Act, 2002;
4. The Serious Organised Crime and Police Act, 2005
5. The Criminal Finances Act, 2017;
6. The Sanctions and Anti-Money Laundering Act, 2018.

Further, the major criminal offences carry a maximum of 14 years of imprisonment

The United States of America

The United States has quite a unique approach to battling the issue of money laundering. There are two approaches, namely:

1. Preventive (regulatory) measures, and
2. Criminal measures.

Further, 38 out of 50 US states have enacted AML laws. Furthermore, there were a series of amends to the AML laws in 1990. The most significant laws in the US for AML and CTF are as follows:

1. The Bank Secrecy Act (BSA), 1970; 
2. The Patriot Act, 2001;
3. The Money Laundering Control Act. 1986;
4. The Anti Drug Abuse Act, 1988;
5. The Intelligence Reform and Terrorism Prevention, 2004;
6. The Anti-Money Laundering Act (AMLA) 2020.

Canada

To combat the issue of money laundering, Canada has the Proceeds of Crime (Money Laundering) Act, 1991. This Act has been amended numerous times to further widen its scope and keep up with the merging methods of laundering money. 

Further, the following individuals and groups are subject to reporting, and the authorities are obliged to record any suspicious activity under the aforementioned Act:

1. Banks,
2. Casinos,
3. Notaries,
4. Life insurance agencies,
5. Salesperson dealing with real estate,
6. Individual dealers dealing in precious metals, and
7. Accountant.

Singapore

In Singapore, there are some laws and legal instruments designed to combat the issue of money laundering, namely:

1. The Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA), 1992;
2. The Mutual Assistance in Criminal Matters Act (MACMA), 2002;
3. Legal instruments issued by regulatory agencies [such as the Monetary Authority of Singapore (MAS), in relation to financial institutions (FIs)] imposing requirements to conduct customer due diligence (CDD).

Switzerland

In Switzerland, money laundering and terrorism financing are governed under the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector, 1997, also known as the Anti-Money Laundering Act (AMLA). The Act imposes AML/CFT reporting and record-keeping regulations on financial institutions in Switzerland, along with sanctions, PEP, and adverse media screening requirements. 

The Swiss Financial Market Supervisory Authority (FINMA), or “Eidgenössische Finanzmarktaufsicht“, is Switzerland’s primary financial regulator. FINMA is responsible for issuing operating licences to Swiss banks and economic organisations and for ensuring compliance with AML/CFT regulations.

South Africa

In South Africa, there is the Financial Intelligence Centre Act, 2001, dealing with matters of money laundering. Several amends have been carried out to keep up with the new methods used by criminals to launder money. 

Steps to combat the issue of money laundering 

With the above facts and information on money laundering at the national and international level, it is important that countries have stringent legislation and, if possible, the same laws to avoid any loopholes left for money launderers to take advantage of considering the weak jurisdiction. There is also a dire requirement for state governments to be in proper harmony with the Central Government, and the struggle between the two government bodies. Also, there is a need to pass orders of restraint forbidding the dealings of properties that were obtained through illegitimate activities; such an order will cause the property to be frozen, which may further be liable to have been seized by the authorities. 

Moreover, it is necessary that the regulations enacted to combat the issue of money laundering in India cover the provisions of several professions, like:

1. Legal,
2. Insurance, and
3. Commercial trade, inter alia. 

Further, a special unit that manages money laundering affairs must also be established in  the way prescribed by the Economic Intelligence Council (EIC) for handling the Anti-Money Laundering (AML) activities. These units must have the power to access, share, and exchange information related to the various offences with INTERPOL and other big organisations that tackle the issue of AML. 

Moreover, for most individuals, money laundering occurs as a victimless crime; however, the ill effects of such a wrong have to be seen by the people of our nation and those of individuals belonging to other nations. Every person must be informed about the problem of money laundering, along with some real life examples on that matter. Once the individuals are aware of such an issue, they will be able to contribute towards good law enforcement as it will be subject to public scrutiny. Thus, for an effective anti-money laundering regime, it is important that measures are taken on national, global, and regional levels.

Cryptocurrency and PMLA: an interplay 

We do not have a separate law as such related to the interplay between cryptocurrency and the role it plays in the offence of money laundering.  However, a circular was issued by RBI that banned all the organisations governed by RBI, including:

1.  Banks, 
2. Financial institutions, 
3. Non-banking financial institutions, 
4. Payment system providers, etc. 

from dealing in Virtual Currencies (VCs). But the Hon’ble Supreme Court was approached to clarify this policy and the legality of cryptocurrency, along with the concern that whether the usage of cryptocurrency, or even its possession for that matter, is a violation of the PMLA or not. Further, the constitutional validity of the circular was also challenged. The Supreme Court in 2020, set aside this circular.  

How are cryptocurrencies being used in money laundering

In June 2021, in one of its reports, the U.S. Financial Crimes Enforcement Network (FinCEN) gave a statement that convertible virtual currencies, commonly known as CVCs, being another term used for cryptocurrencies, have become one of the most preferred currencies for conducting several illegal activities. Apart from being one of the most preferred forms of payment, especially for:

1.  Buying ransomware tools and services, 
2. Online exploitative material, 
3. Drugs, and 
4. Other illegal goods online,

The CVCs are increasingly used to layer financial transactions and further blur the source of money obtained from illicit activities. Criminals use several money-laundering methods that have an involvement of cryptocurrencies,  including “mixers” and “tumblers” that result in breaking the links between an  address (or crypto wallet) sending cryptocurrency and the address receiving it.

Conclusion 

Looking at all the above facts and information, we can safely infer that money laundering is not a local crime but a heinous offence that must not be neglected or taken for granted, for the repercussions will surely affect the economy of a nation at some point of time. In India, there are several laws, as discussed in the above paragraphs, that were enacted to combat the issue of money laundering, along with some authorities like-

1. Insurance Regulatory and Development Authority (IRDA), 
2. Reserve Bank of India (RBI), 
3. Securities and Exchange Board of India (SEBI), 
4. Financial Intelligence Unit India (FIU IND), etc.,

that helps regulate this issue on a deeper level. 

In India, there are several anti-money laundering measures taken; however, criminals smartly look for loopholes in them and escape from penalty, thus not fulfilling the purpose of enacting such rules and regulations completely. These issues are usually occurring due to the rapid growth in technology and advancement; money launderers are now easily able to  conceal the origin of the proceeds of crime using cyber techniques. Further, another issue is that the local public does not have much knowledge on this issue; if they are enlightened about the same, it will become a public issue, and the individuals will be able to contribute towards good law enforcement as it would be subject to public scrutiny then. 

Further, the offence of money laundering has become a dynamic process, for criminals are always looking for methods to attain such illegitimate goals. It is not stuck in one area but is involved in various operations. The government has to focus and take the necessary steps on illicit activities involving money laundering and black money.

Furthermore, there are numerous countries that are joining hands and entering into multiple conventions and agreements to reinforce the measures taken to battle against the issue of money laundering. Despite all this, money launderers are still exploiting those jurisdictions that do not have stringent laws in relation to this crime. Thus, proper, well drafted anti-money laundering legislation is the need of the hour, not only in India but at an international level.  

Moreover, for efficient economic growth in the nation, there needs to be a decline in illicit money laundering activities in the financial sector, as only this will divert and discourage money launderers and corrupt individuals from committing such illicit activities, leading to a decline in the efficiency of the economy and eventually slow economic growth. This will affect the external sector,, i.e., capital flow and international trade, and reduce the issue of money laundering.  

Frequently asked questions (FAQs) on money laundering 

What are some of the methods by which real estate is used for the offence of money laundering? 

Some of the most known ways utilised by criminals for money laundering through real estate are:

1. Under or over evaluation of properties,
2. Quick buying and selling of properties,
3. Using third parties or companies that distance the transaction from the criminal source of funds, and 
4. Private sales.

What are the proceeds of crime?

Any property related to a scheduled offence that is acquired via direct or indirect means represents the proceeds of crime. The value of such property or its equivalent value held within the country or abroad is also considered to be the proceeds of crime.

What constitutes an offence of money laundering under the Prevention of Money Laundering Act?

Under the PMLA, any individual who directly or indirectly has a role in or helps in any activity relating to the proceeds of crime is guilty of the offence of money laundering. Furthermore, activities like-

1. Concealment,
2. Acquisition, 
3. Possession, or
4. Utilising any project or claiming it as untainted property of such proceeds of crime  

In any manner will also be constituted as an offence under the Act. 

What is the meaning of the word ‘property’ under the PMLA? Are intangible assets also included in this asset?

Under the PMLA, the term ‘property’ means any property or asset of every description, whether-

1. Movable or immovable, 
2. Corporeal or incorporeal,
3. Tangible or intangible.

It also comprises deeds and instruments that represent titles or interests in the property or assets wherever it is situated and also covers any property that is utilised for committing the offence of money laundering under the PMLA.

What is a ‘scheduled offence’?

There is a list of offences under the Schedule in the PMLA and these offences are referred to as scheduled offences.  This Schedule consists of three parts specifying offences from twenty-nine legislations. The offences are mentioned in the next FAQ. 

What are the acts covered in the Scheduled offences under PMLA? Under which paragraph is the respective Act mentioned?

The acts covered in the Schedule are:

1. The Indian Penal Code (IPC), 1860, under Paragraph 1;
2. The Narcotic Drugs and Psychotropic Substances Act, 1985, under Paragraph 2;
3. The Explosives Substances Act, 1908, under Paragraph 3;
4. The Unlawful Activities (Prevention) Act (UAPA), 1967, under Paragraph 4;
5. The Arms Act, 1959, under Paragraph 5;
6. The Wildlife Protection Act, 1972, under Paragraph 6;
7. The Immoral Traffic (Prevention) Act, 1956, under Paragraph 7;
8. The Prevention of Corruption Act, 1988, under Paragraph 8;
9. The Explosives Act, 1884, under Paragraph 9;
10. The Antiquities and Arts Treasures Act, 1972, under Paragraph 10;
11. The Securities and Exchange Board of India, 1992, under Paragraph 11;
12. The Customs Act, 1962, under Paragraph 12;
13. The Bonded labour System (Abolition) Act, 1976, under Paragraph 13;
14. The Child Labour (Prohibition and Regulation) Act, 1986, under Paragraph 14;
15. The Transplantation of Human Organ Act, 1994, under Paragraph 15;
16. The Juvenile Justice (Care and Protection of Children) Act, 2000, under Paragraph 16;
17. The Emigration Act, 1983, under Paragraph 17;
18. The Passport Act, 1967, under Paragraph 18;
19. The Foreigners Act, 1946, under Paragraph 19;
20. The Copyright Act, 1957, under Paragraph 20;
21. The Trade Marks Act, 1999, under Paragraph 21;
22. The Information Technology Act (IT Act), 2000, under Paragraph 22;
23. The Biological Diversity Act, 2002, under Paragraph 23;
24. The Protection of Plants Varieties and Farmers Rights Act, 2001, under Paragraph 24;
25. The Environment Protection Act, 1986, under Paragraph 25;
26. The Water (Prevention and Control of Pollution) Act, 1974, under Paragraph 26;
27. The Air (Prevention and Control of Pollution) Act, 1981, under Paragraph 27;
28. The Suppression of Unlawful Acts against Safety of Maritime Navigation and Fixed Platforms of Continental Shelf Act, 2002, under Paragraph 28.
29. The Companies Act, 2013, under Paragraph 29.

Which authorities regulate the Prevention of Money Laundering Act?

The authorities responsible to investigate on matters relating to money laundering are as follows:

1. The Ministry of Finance, 
2. The SEBI, 
3. The RBI, 
4. THE IRDAI, and
5. The Directorate of Enforcement in the Department of Revenue, inter alia. 

Further, the Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is the central national agency whose duty is to receive, process, evaluate, and disseminate information in matters related to any suspicious  economic transactions to enforcement agencies and foreign FIUs.

Under which court will the first offence of money laundering be tried?

The Central Government, with the help of chief justices of high courts, has designed a special court for trying and penalising the offence of money laundering. The list of special courts assigned by the Central Government can be accessed here. 

References 

• https://sanctionscanner.com/blog/money-laundering-in-5-questions-step-by-step-guide-131  
• https://www.investopedia.com/terms/m/moneylaundering.asp 
• https://bharatchugh.in/2020/02/10/all-you-need-to-know-about-the-law-relating-to-money-laundering-in-india/ 
• https://economictimes.indiatimes.com/definition/money-laundering 
• https://www.jumio.com/aml-guidance-banking-finance-2021/ 
• https://sanctionscanner.com/blog/anti-money-laundering-guidance-for-banks-162 
• https://sanctionscanner.com/blog/overview-of-the-insurance-industrys-aml-compliance-181 
• https://blog.ipleaders.in/biggest-money-laundering-cases-in-india/

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