Money Laundering in India: An Analysis

By Bhagyashree Sonwane, Vaishnav Institute of Law, DAVV, Indore.

Money Laundering is the processing of criminal proceeds to disguise its illegal origin. When a criminal activity generates substantial profits, the individual or group involved in such activities route the funds to safe heavens by disguising the sources to a place where they are less likely to attract attention. As per IMF reports the turnover of this industry could be somewhere around $1.5 trillion.[1] The International Monetary Fund has stated that the aggregate size of money laundering in the world could be somewhere between 2 and 5 percent of the world’s gross domestic product. But in simple terms it is the Conversion of black money into white money. The term “Black Money” includes ‘unaccounted income’, ‘black income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, and ‘underground’ or ‘unofficial’ economy.

Robinson states that: “Money laundering is called what it is because it perfectly describes what takes place – illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income.”[2]

Article 1 of EC Directive defines the term ‘money laundering’ as “the conversion of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime”[3]

India has a specific Money-Laundering law i.e. Prevention of Money-Laundering Act, 2002. As per the Section 3 of the Prevention of Money-Laundering Act, 2002, the offence of Money- Laundering is defined as under:

“Whosoever directly or indirectly, attempts to indulge, or knowingly assists, or knowingly is party, or is actually involved in any process, or activity connected, with the Proceeds of Crime, including its concealment, possession, acquisition or use; and projecting or claiming it as untainted property shall be guilty of offence of Money Laundering.”

EVOLUTION

Money is the root cause of many evils like corruption, black marketing, smuggling, drug trafficking, tax evasion, and the buck does not stop here it goes to the extent of sex tourism and human trafficking (a human selling another human in the era of human rights). People are crazy for money. Majority is here to become rich and money has become the basic goal of education. The term “money laundering” is said to have originated from the mafia ownership of Laundromats in the United States. The mafia earned huge amounts from extortion, gambling etc. and showed legitimate source (such as laundomats) for these monies. The original sighting was in the newspapers reporting the Watergate Scandal in the United States in 1973.[4]

In India, money laundering is popularly known as Hawala transactions. It gained popularity during early 1990s when many of the politicians were caught in it. The Indian cases involved that of Ketan parikh who brought the stock market to fall and many Indian politicians who received kickbacks for performing their executive functions through Hawala channels. The Hawala Mechanism left virtually no paper trail, which would attract investigations.
Hawala is an alternative or parallel remittance system. “Hawala” is an Arabic word meaning the transfer of money or information between two persons using a third person.

PROCESS OF MONEY LAUNDERING:

The process of Money Laundering can be classified into three stages, namely, placement, layering and integration.

Placement: The first stage is the physical disposal of cash. The launderer introduces his illegal profits into the financial system. This placement is accomplished by depositing the cash in domestic banks or in other types of formal or informal financial institutions. The process involves breaking up of large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account or by purchasing monetary instruments that are later collected and deposited into accounts at another location.

Layering: The Second stage in money laundering is layering. The launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelized through the purchase and sale of investment instruments, or the launderer might wire funds through accounts at various banks across the globe.

Integration: After successful processing of criminal profits through the first two phases, the launderer moves them to integration. Here the funds are returned to the legitimate economy for later extraction. Examples include investing in a company, purchasing real estate, luxury goods, etc.

CAUSES OF INCREASE OF MONEY LAUNDERING:

There are various causes for increase in Money Laundering and the few of them can be enlisted as follows which is popularly known as ‘Features of an Ideal Financial Haven’:

 No deals for sharing tax information with other countries; Availability of instant corporations; Corporate Secrecy Laws – as the corporate law of certain countries enables launderers to hide behind shell companies; Excellent Electronic Communication; Tight Bank Secrecy Laws; A Government that is Relatively Invulnerable to Outside Pressures; A high degree of Economic Dependence on the Financial Services Sector; A Geographical Location that Facilitates Business Travel to and from rich neighbors; Increase in sophistication and employment of professional people for doing the task[5]

METHODS AND MEANS FOR GENERATION OF BLACK MONEY IN THE CORPORATE WORLD:

Some of the ways for generation of black money which are peculiar to the Corporate Sectors may be narrated herein below:

External Trade and Transfer Pricing; Manipulation by Way of International Transactions through Associate Enterprises; Financial Market Transactions; Out of Book Transactions; Parallel Books of Accounts; Manipulation of Books of Account; Manipulation of Sales/Receipts; Under-reporting of Production; Manipulation of Expenses; Manipulations of Accounts; Manipulation of Capital; Manipulation of Closing Stock; Manipulation of Capital Expenses; Generation of Black money in Some Vulnerable Sections of the Economy; Land and Real Estate Transactions; Bullion and Jewellery Transactions; etc.

STATISTICS

Out of 140 countries, India has been ranked 93rd and 70th in 2012 and 2013 respectively with a score of 6.05 in 2012 and 5.95 in 2013, as compared to Norway, which has a score of 2.36 and ranks No. 1 in the Anti Money Laundering (AML) Basel Index 2013. AML Basel index is country risk ranking which focuses on money laundering/ terrorist financing risk, consisting of 14 indicators of assessment.

This clearly shows that India, in the present-day scenario, is very vulnerable to money laundering activities and is a high risk zone. India needs to curb Money laundering as the practice is rampant across the country. It is estimated that a total of $343 billion has been laundered out of India during the period 2002-2011.[6]

PREVENTION OF MONEY LAUNDERING – GLOBAL INITIATIVE

A number of initiatives have been taken to combat with the issue at international level. The United Nations or the Bank for international settlements, took some initiatives in 1980s to address the problem of money laundering. The major international agreements addressing money laundering includes United Nations Convention against illicit Trafficking in Drugs and Psychotropic Substances (the Vienna Convention) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of the Crime. India has ratified (namely, UN’s Political Declaration and Global Programme of Action, Financial Action Task Force, Asia/Pacific Group on Money Laundering).  It seeks to ‘enlarge the definition of the offence of money laundering to include therein activities like concealment, acquisition, possession, and use of proceeds of crime’ and also ‘link the provisions of Indian law with the laws of foreign countries and provide for transfer of the proceeds.

The Indian Government has also formed several institutions to strengthen efforts against money laundering and other economic offenses. Enforcement Directorate , Financial Intelligence Unit , Central Economic Intelligence Bureau , Economic Intelligence Council, Serious Frauds Investigation Office  and Central Bureau of Investigation- Economic Offences Wing  1994 which reports to Special Police Establishment. Its aim is to investigate not only cases of bribery and corruption, but also violation of Central fiscal laws, major frauds relating to Government of India departments, public joint stock companies, passport frauds, crimes on the high seas, crimes on the Airlines and serious crimes committed by organized gangs and professional criminals.

[1] http://indianjournals.com/ijor.aspx?target=ijor:ajrbf&volume=2&issue=3&article=001

[2] Robinson, Jeffery. “The Laundrymen: Inside Money Laundering, the World’s Third-Largest Business,” pg 4. Arcade Publishing, New York, 1996.

[3] EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991

[4] The action of the US President Richard Nixon’s “Committee to re-elect the President” that moved illegal campaign contributions to Mexico, and then brought the money back through a company in Miami. It was Britain’s newspaper Guardian that coined the term, referring to the process as “laundering”.

[5] www.undoc.org/unodc/money_laundering_haven_features.html

[6] http://www.rediff.com/business/report/how-money-is-laundered-in-india/20131231.htm