Money Laundering

Money Laundering is the process of converting  dirty money into legal money. It is a process  in which  cash from illegal activities is converted to an alternate form in a manner  that  conceals  origin, ownership, or  other potentially embarrassing factors.

The turnover of money laundering industry  worldwide , is estimated  to be close to USD 500 bn.

The  sources of dirty money  are : Drug trafficking, Tax evasion, organized crimes including extortion, kidnapping, contract killing, gambling, protection money, adulteration, bank frauds and corruption etc, terrorism, international  trafficking in arms and human beings, and  smuggling .

There are three stages  in the process of money laundering. First is Placement, which means infusion of currency ( in trickles) from illegal activity  into the legitimate financial sector ( through opening of bank account). Second stage is Layering , which implies movement of money in the financial system by adding complex layers of financial transactions, i.e. conducting a series of transactions to  move the money like Letters of credit, guarantees, drafts, wire transfers, bill business etc. The third and final stage is Integration, in which tainted money is  fully integrated into the financial system as legitimate funds.

The laundered money is invested through chartered accountants  in shell corporations. Shell corporations take over legitimate business organizations  and perpetrate  economic crimes in various forms. Laundered money is also used in developing  lobbies in bureaucracy, Judiciary, enforcement agencies, media  and financing individual politician and political parties. This results in subversion of democratic  political process. It also helps in attaining respectability so that organized crime and criminal enterprise can thrive.

FATF ( Financial Action Task Force) is the highest international body established at Paris by members of G-7 in 1989 for fighting the menace of money laundering. FATF  formulated   40 recommendations  for implementation by National Governments for countering  money laundering. At present there are 34 countries who are members of FATF. India and Republic Of Korea are the observer members of FATF.

FATF  constantly monitors the implementation of AML ( Anti money laundering measures) by the National Governments, reviews the procedures, advises the new trends in money laundering and develops counter measures for tackling money laundering.

In India FIU ( Financial Intelligence Unit ) and Reserve Bank Of India along with commercial banks play an important role in prevention of money laundering. The PMLA ( Prevention Of Money Laundering Act) passed by Parliament is in force. FIU is an independent body which, receives, analyses the particulars of  all suspicious financial transactions and disseminates the information to the agencies concerned, . FIU reports directly to the Economic Intelligence Council ( EIC) headed by Finance Minister. RBI issues comprehensive guidelines, viz,  KYC & AML ( Know your customer and  Anti Money Laundering ) to all banks from time to time for strict compliance. The banks have to grade customers according to the risk category and scrupulously monitor the transactions in their accounts. Cash transactions above a particular limit and Suspicious transactions are to be reported by banks to their corporate offices promptly. Suspicious transactions are reported to FIU who will take further action in this matter.

There is no information on how much money is laundered in India but the problem certainly is quite serious as the drug money is being laundered and integrated into the economy. The tainted money is being accumulated by organized racketeers, smugglers, economic offenders, anti social elements and terrorist groups and is adversely affecting the internal security of the country.