Money Laundering: Problem and Prevention

Money Laundering: Problem and Prevention

Money laundering is the illegal act of representing a legitimate source as the source of large sums of cash obtained through criminal activity, such as financing terrorism or drug trafficking.

Money Laundering: Problem and Prevention

Money laundering is the illegal act of representing a legitimate source as the source of large sums of cash obtained through criminal activity, such as financing terrorism or drug trafficking.

White-collar and low-level criminals alike use it as a serious financial offence. Anti-money laundering (AML) policies exist at most financial institutions today to identify and stop this activity.

Variants of Money Laundering

The practice of smurfing, also referred to as "structuring," is one of the most popular types of money laundering. To avoid being caught, the criminal divides large sums of money into numerous small deposits and frequently disperses them among numerous accounts. Currency exchanges, wire transfers, and "mules," or cash smugglers who smuggle large sums of cash across borders and deposit them in foreign accounts where money-laundering enforcement is less stringent, are other money laundering methods.

Other techniques for laundering money include:

  • Purchasing goods that can be easily transported to other countries, such as gold and gemstones;
  • Selling valuable assets like cars, boats, and real estate covertly;
  • Casino gambling and money laundering;
  • Counterfeiting; and
  • utilizing shell corporations, dormant businesses or corporations that only exist on paper.

Significance of Money Laundering: 

Since the unfortunate events of the 9/11 attack on the twin towers in the United States, money laundering has become a significant criminal issue for policymakers and government authorities. The idea of money laundering was then brought to the forefront of everyone's minds, and it was acknowledged as a means of financing terrorism in all countries. 

Unchecked money laundering encourages insider trading and other forms of fraud, damages financial institutions, makes exchange rates more volatile, discourages foreign investment, and throws the economy out of the government's control. 

How does money laundering impact the Nation?

Money laundering has several dangerous effects on the Nation and the entire world. According to McDowell and Novis (2001), money laundering has the following significant effects:

  1. Interference with the reputable private sector: The use of front companies by money launderers undermines the private legal sector, according to Quirk (1997: 7-9), as their primary goal is not always to turn a profit from the front company's operations.
  2. Financial market integrity being undermined: Consumers lose faith in the impacted financial institutions due to the subsequent reputational damage they suffer from appearing to be engaged in fraudulent activities. Additionally, this might harm a nation's standing and compel investors to place their money in nations with economies that are thought to be less susceptible to the risk of money laundering. The integrity of the financial markets and a country's reputation can both be negatively impacted by money laundering.
  3. Economic policy loss of control: IMF reports from 2003 indicated that the amount of money being laundered and that money launderers prefer to use developing economies to hide their schemes could have an impact on the inflow and outflow of money in these nations. 
  4. Economic distortion and instability: Money laundering may also represent capital flows incorrectly, disrupting the efficient operation of the global economy. 
  5. Loss of revenue: Money laundering, according to many theorists, including Kovacevic (2002) and Funding (2003), lowers the amount of tax revenue that can be collected in the economy and, consequently, lowers government revenues. In order to raise the money needed to meet their obligations to their citizens, governments may need to levy higher taxes.
  6. Reputation risk: According to Van Fossen (2003), countries competing to attract legitimate investments may find it challenging to do so if there is a perception that the Nation has difficulty combating money laundering or is seen as a hub for it. This is so because reputable investors are leery of doing business with any nation with a bad reputation.

Other impacts of money laundering are as follows:

Rising criminal activity: The rise in criminal activity has serious consequences for money laundering. Money launderers succeed by distancing themselves from the illegal activity that generates income. This allows them to live opulent lives while committing crimes without drawing attention to themselves, and they may even go so far as to reinvest their gains to fund additional crimes. In order to reduce crime, the government, legislative action, and other enforcing laws must put policies into place. 

The social impact of money laundering crimes is the transfer of economic power from the right people to the wrong ones. The government and law-abiding citizens are deprived of their rights, which allows criminals to profit from their criminality. 

Money laundering hurts financial institutions, which are crucial to a country's economic growth.

Steps Taken by the Government of India to Prevent Money Laundering

  • An ordinance amending the criminal law (XXXVIII of 1944): It does not cover all of the crimes listed in the Indian Penal Code; it only covers the proceeds of specific crimes like corruption, breach of trust, and fraud.
  • The Foreign Exchange Manipulators and Smugglers (Forfeiture of Property) Act of 1976: The punishment for smugglers and manipulators of foreign exchange's illegally acquired property, as well as issues related to and incidental to those activities, are covered.
  • Drug Abuse Prevention and Control Act of 1985: Property derived from or used in the illegal trafficking of narcotic drugs is punishable under this provision.
  • The PMLA, or Prevention of Money Laundering Act, was passed in 2002.
    • It serves as the cornerstone of the legal system India set up to fight money laundering.
    • All financial institutions, including banks (including the RBI), mutual funds, insurance companies, and their financial intermediaries, are subject to the provisions of this act.
  • PMLA (Amendment) Act, 2012
    • Adds the idea of a "reporting entity" that could be a bank, a financial institution, an intermediary, etc.
    • Until the passage of the amendment act, the PMLA, 2002, could levy fines of up to Rs 5 lakh. 
    • Any person involved in such activities has their property provisionally attached and seized.
  • FIU-IND: Financial Intelligence Unit: It is a separate entity that answers only to the Finance Minister-led Economic Intelligence Council (EIC).
  • Enforcement Directorate (ED):
    • It is an economic intelligence and law enforcement organization tasked with upholding economic regulations and preventing economic crime in India.
    • Investigation of money laundering offences in accordance with the PMLA's provisions is one of ED's primary responsibilities.
    • In addition to prosecuting those responsible for money laundering, it may take measures such as seizing property if it is found to be the proceeds of crime derived from Scheduled Offenses under PMLA.
  • India adheres to the FATF's rules and regulations as a full member.

Global efforts to combat Money Laundering

  • The Vienna Convention requires signatory nations to make it illegal to launder money obtained through drug trafficking.
  • The Council of Europe Convention of 1990 establishes a common criminal code regarding money laundering.
  • Principles of the Basel Committee of the G-10: The international banks of member states must abide by a "statement of principles" that it released. 
  • IOSCO, or the International Organization of Securities Commissions: Exhorts its participants to take the necessary actions to stop money laundering in the securities and futures markets.
  • The Financial Action Task Force:
    • The G-7 governments created it at their 1989 Economic Summit, and it consists of representatives from
      • The Gulf Cooperation Council
      • The European Commission
      • 24 OECD countries
      • Hong Kong
      • Singapore
    • It keeps track of how its members are doing with their efforts to combat money laundering.
    • FATF provides the well-known Forty Recommendations.
  • IMF: To stop the financing of terrorism, it has pressured its 189 member nations to adhere to international standards.
  • The Office on Drugs and Crime of the United Nations actively looks for and attempts to halt money laundering.

Book A Free Counseling Session

What's Today