Introduction:
Money Laundering is an act by which the illegal gains from a criminal act are turned to show that it is legitimate. In simpler words, it means the act of making money coming from one source looks like it is coming from another source. The aim is to disguise the origin of money obtained by illegal means, in order to use it preferably and in a legal manner. Money laundering is not a small problem and not confined within limits, it is the concern of the whole world it is an elephant in the room.
According to the United Nations Office on Drugs and Crime (UNODC) around $800 billion and $2 trillion of the world’s global economy gets washed away every year.[i] Money Laundering is resorted to by criminals who are drug traffickers, corrupt politicians or bureaucrats, terrorists, embezzlers, con artists, smugglers, illegal arms traders, people who commit financial crimes the list is not exhaustive, it is mostly because these people have to deal almost exclusively in cash and have to derive a way to use the money by avoiding any suspicion about the origin or illegal source of such money.
Stages of Money Laundering:
In brief the process of Money Laundering consists of three stages: Placement, Layering and Integration on money. [ii]
1. Placement Stage: the illegally obtained cash is deposited with the Financial Institutions.
2. Layering Stage: complex movement and transaction of money within various Financial Institutions to hide the source of illegal income.
3. Integration Stage: re-introducing the funds as legitimate in the economy.
This process is not as easy as it looks, a number of people, transactions and bank accounts are involved to mask the identity of the launderer and to camouflage the source of the illegally obtained money. This process is not the only way there are various other methods of money laundering.
In India, the system of money laundering is done through an ancient technique of ‘Hawala’. Hawala is an alternative system wherein “financial services, traditionally operating outside the conventional financial sector, where value or funds are moved from one geographic location to another.”[iii] Transactions through Hawala take place without any governmental supervision it becomes easier for the individuals to make deposits and withdrawals via ‘hawala dealers’ in-place of the financial institutions.
Impact of Money Laundering:
Money laundering is increasing globally and developing economies are more vulnerable to money laundering, it has an adverse impact on the economy of a country as well as the social and political institutions, it weakens the democratic institutions, destabilizes the economy, increases criminal activities, decreases foreign investments, encourages tax evasion, and also increases illegal transactions of money. [iv]
Global Initiatives are taken to Combat Money Laundering:
Since money laundering is not restricted within the national boundaries of any nation, it is a global phenomenon and hence a global co-operation is required to combat crimes such as money laundering. Certain rules, norms and procedures have been developed by international bodies to regulate money laundering. Some international organizations established for the same are – The United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances; Basle Committee on Banking Regulation and Supervisory Practices; The financial Action Task Force (FATF); the Interpol and The United Nations Global Program against Money Laundering (GPML). Let us analyze the role of the above-mentioned institutions one by one in brief.
1. The United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances, 1988:
Also popularly known as the Vienna Convention[v], it was the first step in the prevention of money laundering taken globally. It established an international regime for combatting Drug trafficking by criminalizing the laundering of money through drug trafficking under the domestic laws of member states.[vi] Drug trafficking is one of the crimes where the offence of money laundering resorts to the most as already mentioned above for dealings prominently takes place in huge amounts of cash transactions. Thus, this convention calls for mutual assistance amongst the member states in investigations, prosecutions, jurisdictions and judicial proceedings relating to money laundering and drug trafficking.[vii] It also provides provisions for extradition in cases of money laundering.[viii]
2. Basle Committee on Banking Regulation and Supervisory Practices:
The Basle Committee is a committee of banking supervisory authorities which was established by governors of central bank in 1975, it consists of supervisory authorities and central banks from – Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, United Kingdoms and USA.[ix] In December 1988, the Basle committee issued a Statement of Principles which encouraged banking sectors to ensure that the banks are not concealing information or laundering assets acquired through criminal activities it extended to all aspects of laundering i.e. deposit and transfer of money obtained by illegal acts.
It aimed that the banks should collectively discourage transactions which do not appear legal with the cooperation of law enforcement agencies. However, these statements do not have any legally binding force and their implementation depends upon the domestic laws. [x] The Statement of Principles also seeks to encourage vigilance by the banks against criminal use of payments.[xi] Since then from time to time this committee has taken various steps to counter money laundering.
3. Financial Action Task Force on Money Laundering:
The Financial Action Task Force was created by the G-7 countries in the Paris Summit in 1989 to curb the occurrence of money laundering currently there are over 200 countries and jurisdictions associated with FATF. It is an inter-governmental organization. It is a policy-making body which lays down international standards with an aim to prevent money laundering.[xii] They also aid the authorities to find out about the illegal money of criminals earned by dealings in drugs, human trafficking, arms and other crimes. The FATF has from time to time developed the FATF Recommendations to ensure coordinated global response against crimes of terrorism, laundering of money and corruption. The revised FATF Recommendations were developed in 2012.[xiii]
4. Interpol:
International Criminal Police Organization was established in 1923 and has 194 members. Interpol helps to maintain global security with the mutual support of the national police authorities around the world. Interpol plays an important role in tracking the crime, holding joint investigations, capacity building and training, sharing and providing access of data with the nations. Interpol had developed the Interpol Money Laundering Automated Search Service (IMLASS) to facilitate anti-money laundering measures by creating a database and by tracking, linking and recognizing suspects and individuals from all the nations and tracking the transfer of illegal money.
6. United Nations Global Program against Money Laundering, 1997:
The goal of Global Program against Money Laundering is to increase the effectiveness of action against money laundering by providing technical support to the members. Through GPML the UN Office on Drugs and Crimes (UNODC) assists Governments to find out criminals involved in money laundering and also provides assistance to the governments and law enforcing agencies in preparing strategies to counter money laundering, improvise banking policies and providing technical assistance, training, transfer of expertise to the investigating agencies.[xiv]
Indian Initiatives to Combat Money Laundering:
The Prevention of Money Laundering Act, 2002[xv] was enacted as an urgent need to prevent money laundering and activities connected therewith. A bill was introduced in 1998 in the Parliament which was enacted on 17th January 2003 and came into force on 1st July, 2005. The objective of the act is –
“An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.”
The Salient Features of the Act:
This act aims to identify practices pertaining to money laundering and ways to combat it. The Act comprises of 10 chapters divided into 5 parts consisting of 75 sections and 1 schedule. The act extends to the whole of India. Money laundering is defined in section 3 of the Prevention of Money Laundering, Act[xvi] –
“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.” [xvii]
According to section 4, a person who committed of money-laundering shall be punished with rigorous imprisonment for a term not less than 3 years but extending up to 7 years and with a fine. The offences under this Act are cognizable and non-bailable.[xviii] The burden of proof is on the accused to prove that he is not guilty of an offence under this act[xix].
Foreign exchange of Management Act, 1999(FEMA) – it is a civil law which empowers the officers to conduct investigations into those contraventions of foreign exchange laws which are suspicious of money-laundering and the like crimes. It also provides the authority of adjudication and imposing penalties.
Anti-Money Laundering Regulators in India:
There are various units, authorities and institutions which are involved in the efficient and effective implementation, enforcement and administration of anti-money laundering laws. Like the FIU-IND, Reserve Bank of India and the Enforcement Directorate –
Financial Intelligence Unit – India (FIU-IND) – was set up by the government on 18th November 2004 it is the central nodal agency set up for receiving, processing, analyzing and dissemination of information related to suspicious transactions. It is an independent body which is responsible to the Economic Intelligence Council (EIC) headed by Finance Minister. This organization has helped by way of coordinating and strengthening efforts of both domestic and international agencies to combat money laundering and related crimes.[xx]
Functions of this unit are[xxi]
1. Collection – receive reports of information such as Cash Transaction Reports; Non-Profit Organization Transaction Report; Cross Border Wire Transfer Reports; and the like,
2. Analysis – analyzing information received,
3. Sharing – sharing information with the domestic and global law enforcement agencies, authorities and investigative units,
4. Central repository – maintain a national data base of all the information received,
5. Coordinating and strengthen a national, and global network to combat money laundering,
6. Research and analysis – identify areas, trends, patterns and make strategies against money-laundering.
Reserve Bank of India (RBI) – has regulatory powers to check money laundering activities, it lays down anti-money laundering guidelines for banks and other financial institutions. These powers are available to the RBI under the Reserve Bank of India Act, 1935 and the Banking Regulations Act, 1949.
Enforcement Directorate (ED) – it is a specialized financial investigation agency under the Revenue Department, Ministry of Finance.[xxii] The primary role of the ED is the enforcement of Foreign Exchange Management Act, 1999[xxiii] (FEMA) and the PMLA. The roles are mainly – Investigation of violation of the provisions of FEMA and PMLA and taking actions like confiscation, seizure and attachment of assets and properties that are obtained by the proceeds of the crime and rendering cooperation to foreign countries in matters related to money laundering.
Conclusion:
Money laundering is not a simple crime which can be ascertained by looking at facts of a case, interrogating and putting it to trial before a judge, it requires extensive investigation and efficient legislatures and competent administrative and enforcement authorities. Since money laundering is not confined within the geographic boundaries the role of international institutions is immensely important to combat money laundering, mutual cooperation and assistance for regulation of transaction of money through proper channels. Money laundering is not confined to specific processes or patterns its methods keep on changing and evolving from person to person and region to region, it is necessary to understand the complexities involved and keep improving the statues on book and in the implementation both nationally and globally.
One such way is to bring about effective reforms in domestic taxation policies and to ensure the trust and confidence of people in legitimate sources of money by providing them certainty and benefits. All the nations should internationally work to strengthen the systems to combat money laundering equally because one of the loopholes is that money launderers target those areas and jurisdictions which are comparatively very weak and do not have stringent domestic laws. Hence, a definitive policy needs to be framed to recognize all the practices which are adopted even at the miniscule level and anti-money laundering practices to combat them should be deliberated.
[i]Andrew Gage, ‘5 shocking Money Laundering Stats and Facts to Remember’ (GLAnalytics, 13 September 2018) https://glanalytics.ca/shocking-money-laundering-stats/ accessed on 2 October 2020
[ii]Paridhi Saxsena, ‘Money Laundering in India’ http://www.nja.nic.in/4.1.%20Paper20Money%20Laundering_1_%20Paridhi%20Saxena.pdf accessed on 1 October 2020
[iii]‘Combating The Abuse of Alternative Remittance Systems: International Best Practices’ (Financial Action Task Force on Money Laundering, 20 June 2003) http://www.fatf-gafi.org/dataoecd/32/15/34255005.pdf. accessed on 1 October 2020
[iv]Paridhi Saxsena, ‘Money Laundering in India’ http://www.nja.nic.in/4.1.%20Paper20Money%20Laundering_1_%20Paridhi%20Saxena.pdf accessed on 1 October 2020
[v]Vienna Convention 1988 https://www.unodc.org/pdf/convention_1988_en.pdf accessed on 2 October 2020
[vi]Vienna Convention 1988, Article 3(b)
[vii]Vienna Convention 1988, Article 7
[viii]Vienna Convention 1988, Article 6
[ix] The Basle committee on Banking supervision, https://www.bis.org/press/p980922b.htm accessed on 3 October 2020
[x]‘Prevention Of Criminal Use Of The Banking System For The Purpose Of Money-Laundering’, (Basel committee on Banking Supervision, 28th December 1988) https://www.bis.org/publ/bcbsc137.htm accessed on 3 October 2020
[xi]Ibid
[xii]‘Who we are’, (Financial Action Task Force) https://www.fatf-gafi.org/about/ accessed on 3 October 2020
[xiii]‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation -The FATF Recommendations’, (Financial Action Task Force, 16 February 2012) https://www.fatf-gafi.org/publications/fatfrecommendations/documents/internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation-thefatfrecommendations.html accessed on 3 October 2020
[xiv]‘Technical Assistance Against Money Laundering’, (United Nations Office On Drugs And Crimes) https://www.unodc.org/unodc/en/money-laundering/technical-assistance.html?ref=menuside accessed on 3 October 3, 2020
[xv]Prevention of Money Laundering Act 2002, Act 15 of 2003
[xvi] PMLA for short
[xvii]Prevention of Money Laundering Act 2002, Chapter II – Offence Of Money Laundering
[xviii]Prevention of Money Laundering Act 2002, S. 45
[xix]Prevention of Money Laundering Act 2002, S. 24
[xx]‘About FIU-IND’, (Financial Intelligence Unit- India) https://fiuindia.gov.in/files/About_FIU-IND/About_FIUIND.html accessed on 3 October 2020
[xxi]‘Functions of FIU-IND’, (Financial Intelligence Unit – India) https://fiuindia.gov.in/files/About_FIU-IND/About_FIUIND.html accessed on 3 October 2020
[xxii]‘About ED’, (Enforcement Directorate of India) https://enforcementdirectorate.gov.in/about_ed.html?p1=120931601730323124 accessed on 3 October 2020
[xxiii] Foreign Exchange Management Act, Act 42 of 1999
This article has been written by Priyanshi Gupta, L.L.M. student from Nirma University.
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