This research work covers the meaning of Money Laundering, Importance of studying about it and Initiatives taken by the Indian government to prevent Money laundering.
What is Money Laundering?
Money laundering occurs in practically every nation in the world since money is a crucial component of the economy that is necessary for societies to run properly.
One may say that money laundering is a technique used by criminals to cover up the illegal source of their revenue. Criminal organizations urgently need to find a means to use the enormous sums of money generated by unlawful operations including terrorism, drug trafficking, financial crimes, the selling of weapons illegally, and smuggling. It is an illegal method of transforming money acquired illegally into "clean" money, which can be freely used in the market and does not have to be hidden from authorities. Money laundering operations handle trillions of dollars globally each year; thus, money laundering activities have a significant impact on large national economies.
Money laundering typically takes place in large financial institutions like banks. The bank just has to relax a little bit on its reporting requirements. Large cash deposits can be made by criminals without being noticed by central bank officials or other regulatory bodies due to the lack of regulation enforcement.
Shell corporations are businesses with significant funding, but they are not directly associated with any one enterprise that sells goods or services. The money is invested in other enterprises, usually those that are owned by the criminal organisation and are legal. Due to the criminals' diligence in hiding their involvement with the foreign investor, the cash infusion from the investor seems to be an ordinary foreign investment. Once the funds are put with the shell firm, the criminals can access them by having the shell company invest in another business that they own, perhaps by making a loan with the funds to the other company. The corporation can then fail on the loan after returning the money to the crooks, resulting in a loss for the shell company that can be utilised to lower taxes owed.
The receiving company can file for bankruptcy and shut down as a result of defaulting on its loan. The failure of the shell corporation could also result from the loan default. The two businesses that were used to wash the money now don't exist, but the criminals still have their money, which they acquired from the foreign investor, who appears to be a "clean" source. All of this makes it incredibly challenging for the authorities conducting the investigation to even have a remote chance of tracking the money back to its original source, the unlawful operations of the criminal organisation.
Why do we need to study money laundering?
Any criminal group that commits crimes for financial gain has that as their primary goal. Any criminal organization's operations end up producing enormous riches and financial gain while also creating a number of issues.
Because a sudden use of that money would be fraught with suspicion, the money created by the criminal organisation is difficult to conceal and use. Globally, money laundering is on the rise, and developing nations are more susceptible to it. Money laundering has a negative impact on a nation's economy as well as its social and political institutions; it weakens democratic institutions, destabilizes the economy, encourages criminal activity, reduces foreign investment, promotes tax evasion, and also increases illegal money transactions.
There are numerous dangerous impacts of money laundering on a country which includes:
● Money laundering distorts capital flows, which makes it difficult for the global economy to function properly. Money launderers, according to Castle and Lee (1999), would prioritise places where it would be simpler to avoid being discovered or where the cost of avoiding detection would be cheaper when deciding where to invest their funds.
● According to IMF reports from 2003, the amount of money being laundered and the fact that money launderers prefer to pass through developing economies to lessen the chance that their schemes will be discovered might have an impact on the influx and outflow of funds in these nations.
● Money launderers have been reported to attempt to set up a respectable front in order to launder money if they are able to acquire former government enterprises that are being privatised.
Due to the fact that money launderers are more interested in using these organisations as a means of money laundering than in running them as viable businesses, this may hinder economic reforms.
● Money laundering is affected negatively by the rise in crime, which is a severe issue. The success of money launderers allows them to live luxurious lives while committing this crime without drawing attention. They may even go so far as to reinvest their gains to fund additional criminal activity.
● Due to Money laundering the government and law-abiding citizens are deprived of their right, which gives criminals the advantage to prosper in their criminality. Money laundering harms financial institutions, which are crucial for a country's economic growth.
Preventive measures taken by India Against Money laundering
India uses the method called "Hawala" to carry out its system of money laundering.
Hawala is a different type of financial system where money is transported from one place to another using value or finances. It has historically operated outside of the mainstream banking industry. It is simpler for people to use "hawala dealers" instead of banking institutions since transactions through the hawala system are conducted without any government oversight.
Legal Methods To prevent money laundering
● Money Laundering Bill: The Prevention of Money Laundering Bill, 1999, which our government passed in response to the UN Resolution of 1998, which urges members to take strict action against money laundering, defines money laundering as the act of obtaining, owning, possessing, or engaging in any transaction involving any proceeds of crime that are listed in the Indian Penal Code, 1860.
India is a signatory to this resolution. As such, our government is bound by its demands. With regard to drugs, narcotics, and other crimes, the act aims to prevent and control unlawful financial operations.
● Prevention of Money Laundering Act 2002: The Prevention of Money Laundering Act, 2002 was passed in response to the urgent need to stop money laundering and seeks to identify money laundering techniques and methods to combat it. The Act has 10 chapters, each divided into 5 parts, each with 75 sections and 1 schedule. The act applies to all of India. Section 3 of the Prevention of Money Laundering Act defines money laundering. This law made it possible for our government or any other legitimate public authority to seize any property obtained by fraudulent means or with illegal funds.
According to this statute, the Financial Intelligence Unit carefully examines all the records to identify any suspicious transactions, if any, and the Enforcement Directorate then conducts the inquiry.
● Financial Intelligence Unit: It was established by the government on November 18, 2004, and it serves as the central nodal agency for gathering, handling, evaluating, and disseminating data pertaining to suspicious transactions. It is a separate entity answerable to the Finance Minister-led Economic Intelligence Council (EIC).Although it is not a regulatory body, the main responsibility of this unit is to acquire all financial intelligence while working closely with the regulatory bodies, such as the RBI, SEBI, and IRDA, and to keep an eye out for any questionable transactions before reporting them.
It is in charge of coordinating and reinforcing all domestic and foreign intelligence.
● Reserve Bank of India (RBI): RBI has the authority to regulate money laundering operations and sets anti-money laundering standards for banks and other financial institutions. The major goal is to stop people and businesses from using banks and NBFCs improperly to launder money. Banks have a legal obligation to keep customer information private when a new account is opened. They must also make sure that no one will misuse the information, and that the information requested of and gathered from customers is pertinent to the perceived risk.
Separate requests for the customer's information should only be made with the customer's permission.
● The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: This law imposes penalties on individuals who illegally acquire property for the sake of smuggling, manipulating foreign exchange, and related activities. No individual may hold any property that has been acquired illegally, either directly or through a third party acting on their behalf, in accordance with this Act.
This fairly broad money laundering law in India covers all forms of money laundering related to all crimes and offences under Indian law, with the exception of offences pertaining to drug trafficking.
● Enforcement Directorate (ED): Under the Ministry of Finance's Revenue Department, it is a specialised financial investigation unit. The Foreign Exchange Management Act of 1999 (FEMA) and the PMLA are the ED's two main responsibilities. The main responsibilities are to investigate potential violations of the FEMA and PMLA provisions, take appropriate action, such as confiscating, seizing, and attaching assets and properties acquired through the proceeds of crime, and provide assistance to other nations in matters involving money laundering.
Money laundering is not a straightforward crime that can be identified by reviewing the evidence, questioning the suspect, and bringing the case before a judge; instead, it involves thorough investigation, effective legislative action, and capable administrative and enforcement agencies.
In order for society to run smoothly and for the country's economy to grow, money laundering must be stopped. It is a critical issue for legislative authorities and needs to be controlled. Money laundering is not a simple crime that can be identified by reviewing the facts of a case, questioning the parties involved, and bringing the case before a judge; rather, it calls for thorough investigation, effective legislative processes, and capable administrative and enforcement agencies.
Due to the fact that money laundering is not restricted by national borders, the involvement of international institutions in preventing it, fostering mutual aid, and supporting the regulation of money transactions through appropriate channels is crucial. In order to stop such destructive criminal activities, all nations must cooperate. In order to effectively prevent money laundering, judicial and law enforcement agencies must cooperate together internationally and use severe punishments.
One could argue that simply passing anti-money laundering laws won't stop such serious crimes from happening. Instead, the law enforcement community needs to stay up to date on the constantly evolving dynamics of money launderers, who constantly develop cutting-edge methods that enable them to enforce strict laws to stop money laundering.
One such method is to implement efficient domestic taxation policy reforms and to maintain the public's faith and confidence in legal financial sources by offering them security and rewards.
One such method is to implement efficient domestic taxation policy reforms and to maintain the public's faith and confidence in legal financial sources by offering them security and rewards. Because one of the gaps is that money launderers target those regions and jurisdictions that are relatively extremely poor and do not have strict domestic laws, all nations should cooperate internationally to develop the mechanisms to combat money laundering equitably. Therefore, a clear policy must be developed to recognise all methods, even those used at a very low level and anti-money laundering strategies must be considered in order to counter them.
This article is written by Sidratul Muntaha of Delhi Metropolitan Education.