By : SAMMARPAL SINGH GILL, legal counsel/ADVISER
layering and integration are the three stages through which illegitimate criminal proceeds are laundered.
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Abhishek Dadoo - 2/21/2008
The term "money laundering" is said to originate from Mafia ownership of Laundromats in the United States. Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor.2 The large proceeds so obtained by means of such illegitimate businesses required the showing of a legitimate source. One of the ways in which they were able to do this was by purchasing externally legitimate businesses and to blend their illicit earnings with the legitimate earnings they received from these businesses. Laundromats were chosen as a front for converting the illegitimate proceeds by these gangsters because laundromats were cash businesses and this was an indubitable advantage. One of the earliest names to have surfaced in relation to money laundering was that of Al Capone.3
Al Capone, however, was prosecuted and convicted in October, 1931 for tax evasion.4 His conviction on the grounds of tax evasion rather than the predicate crimes which generated his illicit income concurs many to dispute the tale that the term â€˜money launderingâ€™ emerged from this time. It would seem, however, that the conviction of Al Capone for tax evasion may have been the trigger for getting the money laundering business off the ground.
Meyer Lansky (also called â€˜the Mobâ€™s Accountantâ€™) was particularly affected by the conviction of Capone for something as palpable as tax evasion. Determined that the same fate would not befall him he set about searching for ways to hide money. Before the year was out he had discovered the benefits of numbered Swiss Bank Accounts. This is where the culture of money laundering would seem to have started, with the growth of Lansky as one of the most influential money launderers ever.5 The use of the Swiss facilities gave Lansky the means to incorporate one of the first real laundering techniques, the use of the â€˜loan-backâ€™ concept, which meant that hitherto illegal money could now be disguised by â€˜loansâ€™ provided by compliant foreign banks, which could be declared to the â€˜revenueâ€™ if necessary, and a tax-deduction obtained into the bargain.6
Money laundering is the criminal practice of filtering ill-gotten gains or â€˜dirtyâ€™ money though a series of transactions, so as to portray the funds as â€˜cleanâ€™ and look like proceeds from legal activities. Money laundering is driven by criminal activities and conceals the true source, ownership, or use of funds. The International Monetary Fund had stated that the aggregate size of money laundering in the world could be somewhere between two to five percent of the worldâ€™s gross domestic product whereas the World Bank has estimated money laundering to be US$ 1,000 billion enterprise.7
Money laundering refers to the process of concealing financial transactions. Various laundering techniques can be employed by individuals, groups, officials and corporations. The goal of a money laundering operation is usually to hide either the source or the destination of money. Money laundering is a diverse and often multifarious process that need not involve cash transactions. It is a three stage process. These stages can be taken at the same time in the course of a single transaction, but they can also appear in well separable forms one by one as well. The steps are:-
- Layering; and
There are also common factors regarding the wide range of methods used by money launderers when they attempt to launder their criminal proceeds. Three common factors identified in laundering operations are firstly, moving the funds from direct association with the crime; secondly, disguising the trail to foil pursuit; and thirdly, making the funds again available to the instigator, with their occupational origin hidden from view. Money is not truly laundered unless it is made to appear sufficiently legitimate that it can be used openly, precisely what the final stage of the process is designed to achieve. Money laundering is an unlawful bustle through which illegitimate proceeds take on the outward appearance of legitimacy. It is an essential sustenance activity practiced by virtually all profit-producing criminal organizations. The U.S. Criminal Code contains more than 100 predicate offenses to the crime of money laundering. These offenses, referred to as â€œspecified unlawful activities,â€ range from narcotics trafficking and financial fraud, to kidnapping and espionage.8 Financial transactions often leave a trail to link the funds to the person(s) involved. To avoid speculation and links to the crime the criminals abstain from using conventional payment modes, such as checks, credit cards, etc., which leave a definitive paper trail leading directly to the involved parties. The preferred mode of financial transaction, therefore, is cash, for the simple reason that it renders the trail anonymous. Physical cash, however, has its disadvantages. It is bulky and difficult to move and constitutes one of the biggest problems faced by a money launderer in the course of money laundering. To better understand the process by which money is laundered, a brief explanation of how criminals â€œlegitimizeâ€ cash through the traditional money laundering process is essential. As stated earlier Placement, layering and integration are the three stages through which illegitimate criminal proceeds are laundered. Placement is the first stage in the money laundering process. Physical currency is made to enter into the financial system during this stage; it is here that the illegitimate and illegal proceeds are most vulnerable to detection. The use of illicit proceeds to purchase money orders is an example of placement. Layering describes an activity intended to obscure the trail which is left by illegitimate proceeds. In the course of this stage, a launderer may conduct a series of financial transactions in order to build layers between the funds and their illicit source. â€˜For example, a series of bank-to-bank funds transfers would constitute layering. Activities of this nature, particularly when they involve funds transfers between tax haven and bank secrecy jurisdictions, can make it very difficult for investigators to follow the trail of money.â€™9 Integration, the final stage of the money laundering process requires the illicit funds to be integrated with proceeds from legitimate commercial activities as they enter the mainstream economy. The illicit funds thus take on a legitimate appearance. Laundering is a physical endeavor, an art of concealing the existence, the illegal source, or illegal application of income and to make it appear legitimate. It is imperative that the launderer find ways to physically transport hard cash without attracting superfluous attention and alerting Government agencies in the countries of operation. The launderers may accomplish this purpose by finding a bank in a country with less stringent banking laws, strike an understanding with the bank officials and purchase some property inconspicuously and begin to launder. There are many tax-haven10 countries indicating that it has soft banking system and no tax or low tax regime. These institutions provide great impetus and are a strengthening pillar of the crime of money laundering. The physical world of money laundering has begun to erode; the tendency to use electronic transfers to avoid detection is fast gaining ground. Electronic transfers of funds are known as wire transfers. Wire transfer systems allow criminal organizations, as well as legitimate businesses and individual banking customers to enjoy a swift and nearly peril free channel for moving money between countries. In Asian countries launderers use legal "underground banking" because it leaves no paper trail. The laundering process in countries such as India and Pakistan do not require for the money to enter the formal banking system but is instead transmitted through alternative banking systems such as the "Hawala".11 These parallel banking systems are based on family or gang alliances and reinforced with an unspoken covenant of retributive violence. It is in this context the provisions of IPC have been included in the scheduleof crime. This system generally involves depositing money in one country in exchange for a "chit" or "chop" (seal), and the remittance of this money in another country on presentation of the chit.12 Considering the major role played by banks in the laundering process, it is mandatory to note that money laundering can greatly be checked if all banks file appropriate reports in time. â€˜Bank's role in preventing money laundering begins with Know Your Customer (KYC) and to watch activities inconsistent with customer's business. Banks operating staff should monitor suspicious activities/transactions like large deposits immediately followed by wire transfers, large cash transactions, changing currency to higher denomination notes etc. It must be born in mind that illegal money can be moved by all manners of means. Criminal groups may deposit heavy cash by cheque in some account and withdraw it by debit cards or wire transfers.â€™13
The more automated the banking and financial system becomes, the less face-to-face contact between clients and employees and greater the holes in the detection unless client information is electronically scanned for abnormal patterns and connections.14 There is much disenchantment with suspect transaction being reported. Firstly it is difficult to distinguish between objectively suspect transactions or those which short of the threshold, are merely suspected.15 Ordinary transactions may present vital information as related to laundering money. In an effort to curtail the activities related to money laundering, the banks must closely observe the transactions being carried out by suspect customers. Money laundering involves hiding, moving, and investing the proceeds of criminal conduct. The degree of organization that is displayed in money laundering is of particular concern due to its scale, its capacity to exploit and influence the legitimate business world and its capacity for internationalization. There is a continuous growing apprehension about the extent that money laundering is interlinked with organized crime. The huge profits that accrue to these criminals from such areas as drug trafficking, international fraud, advance fee fraud, long firm fraud, arms dealing, trafficking in human organs and tissue, etc., are used not only to strengthen and fortify ongoing operations, but to consolidate the wealth, prestige and respectability of the true criminals responsible for the crime of money laundering.
Mechanics and Typologies of Money Laundering
The term Money Laundering refers to the criminal practice of converting â€˜dirtyâ€™ money by virtue of serial transactions, in effect depicting the money as â€˜cleanâ€™ and look like proceeds from legitimate activities. The understanding of the process of money laundering requires comprehensive analysis of the mechanics and typologies involved in the process of money laundering.
Mechanics/Classifications of money laundering:
1) Money laundering is multi-dimensional, constituting of both a national as well as an international dimension; thus the typologies of money laundering are observed at both levels.
2) Money laundering on an international level necessitates it having a national dimension as well. Money laundering may, however, be practices exclusively on a national level. Also there exists a possibility of overlap between the national and international dimension of laundering money.
3) Money laundering requires embracing of economic liberalization16, a consequence of which is greater integration of financial and banking systems worldwide.
Techniques/Typologies of Money Laundering at the National Level:
Money laundering is a vibrant and continually evolving process which demands keeping abreast of its latest developments with regard to its techniques and instruments through which it is effected. Some of the techniques of money laundering maybe depicted as follows:
1) Retail Businesses: These businesses maybe used as mere fronts where most of the sales disclosed are fictitious. Owners of such fronts may convert their illegally obtained income into legitimate income by showing sales through the retail business and paying the requisite taxes as applicable. The same technique of money laundering as applicable to retail sale also applies to wholesale businesses.
2) Charity Shows: Money laundering by way of organizing charity and entertainment shows constitutes an effective method of money laundering. The key to laundering money by this mode lies in the fraudulent sale of tickets. The extant to which fraudulent tickets can be sold is the extent to which money can be laundered.
3) Lottery tickets: The lottery constitutes big business in several countries. Money launderers acquire lottery tickets from genuine winners by paying them the lottery prize with their illegitimately acquired proceeds. The encashment of these tickets leads to the legitimization of their proceeds. A similar technique of legitimizing illegal proceeds is given effect by purchasing winning tickets of racecourses.
4) Casinos: Money laundering is given effect in casinos by way of the launderers taking their proceeds to the casinos and buying large number of casino chips with which they did little or practically no gambling. At the end of the day, the launderer conveniently encashes the casino chips passing them off as genuine winnings.
5) Property: The sale of property at random prices constitutes an effective way of laundering money. Sale of low value property at highly inflated prices is one such technique. The level to which the price is inflated is the extant to which money is laundered.
6) Inheritance laws: Laws of inheritance related to jewellery comprise yet another technique of laundering money. Indian inheritance law permits a married woman to acquire jewellery worth Rs. 500,000.17 Illegal proceeds may be laundered to this extant by the families of such married women.
7) Securities market: The capitalization of markets is one of the primary ways to mobilize funds for economic growth. The markets so capitalized are also known as the stock exchanges. The stock market characterizes as one of its features that as long as the prices of shares moves up or down, the participants in this market make money. In the securities market, the profits can easily be recorded on paper to launder the illegal proceeds.
8) Insurance sectors: Insurance companies offer life insurance and other forms of general insurance, including health and property insurance. Laundering of money is given effect by investing in very expensive insurance policies and after paying a few premiums, applying for premature encashment of policies at a discounted rate. The payment of the premature policies received by the insurer is passed on as legitimate money.
9) Amnesty schemes: Money laundering is an offence which is punishable by law but it is no secret that laws against money laundering have not entirely succeeded in curbing its practice. The government, therefore, introduces amnesty schemes from time to time. These schemes are introduced to bring black money into the open. Under these schemes the government facilitates for the people to declare their illegally acquired proceeds on the payment of a certain amount of tax. The scheme also provisions for non-inquiry of the source of the money and after payment of tax it becomes legitimate money. The Indian government too had implemented such a scheme in the form of the â€˜Indira Vikas Patrasâ€™.
10) Indira Vikas Patras: The Indian economy is flooded with a high component of black money. The Government, needless to say, faced the urgent requirement of channeling this huge amount of black money circulation into more productive means for the upbringing and development of the country. To achieve this prerogative the Government introduced the Indira Vikas Patras. These bearer certificates offered to double the investment amount in a matter of six years and more importantly required no identification. This scheme prompted huge sums of illegitimately earned income to be pushed into the government machinery.
Techniques/Typologies of Money Laundering at the International Level:
The international dimension of money laundering is far more effective as compared to the national dimension; it also becomes extremely difficult, if not impossible, to unravel the complex web transactions in order to expose the origin of the money that is the proceeds of the crime. The international money laundering circuit essentially comprises of three stages; i.e. placement, layering and integration whereby illegal money is legitimized.
Placement of Money: The Placement or introduction of illegitimate money in the international money laundering circuit is an indispensable but susceptible maneuver. This is the first stage in the washing cycle. Money laundering is a "cash-intensive" business, generating vast amounts of cash from illegal activities (for example, street dealing of drugs where payment takes the form of cash in small denominations)18. The illegitimate proceeds so acquired are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travellers cheques, postal orders, etc. Money is generally introduced into the international circuit of money laundering through financial havens classified as â€˜entry point safe havensâ€™19. Smurfing is another effective technique of facilitating placement of illegitimate money in the international circuit; it successfully exploits the provision of reporting international transactions exceeding a certain monetary limit. The illegitimate cash is converted into valuable security which is of an amount less than the reporting requirement; thus money is pushed undetected into the international money circuit. Other effective modes of placement of money for the purpose of laundering in the international circuit comprises making use of money orders, purchase of expensive art objects, use of underground and parallel banking systems and the employ of correspondent banking channels.
Layering of Money: The second stage involved in the process of laundering money in the international circuit is called layering. In the course of layering, there is the first attempt at concealment or disguise of the source of the ownership of the funds by creating multifaceted layers of financial transactions premeditated to disguise the audit trail and provide obscurity. The purpose of layering is to disassociate the illegal proceeds from the source of the crime by deliberately creating an intricate web of pecuniary transactions aimed at concealing any review trail and the source and ownership of illegal proceeds.
Layers are created by moving the illegitimate proceeds in and out of the offshore bank accounts of bearer share shell companies through electronic funds' transfer. Given that there are over 500,000 wire transfers - representing in excess of $1 trillion - electronically circling the globe daily, most of which is legitimate, there isnâ€™t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money20. Money is also laundered by multifarious dealings with stock, commodity and futures brokers. The sheer volume of daily transactions and the high scale of anonymity available render the probability of laundering transactions being traced to miniscule.
Integration of money: Integration of money constitutes the final stage in the process of laundering money at the international level. It is at this stage that the money is integrated into the legitimate economic and financial system and is assimilated with all other chattels in the system. Integration of the laundered proceeds into the economy is accomplished by the launderer making it materialize as having been legally earned. By this stage, it becomes exceptionally difficult to distinguish between the legal and illegal proceeds.
Popular methods to
launderer money at this stage of the fixture include: 21
a) The establishment of anonymous companies in countries where the right to secrecy is guaranteed. The establishers then grant themselves loans out of the laundered money in the course of upcoming legal transactions. In addition to legitimizing illegal proceeds the launderers further increase their profits by claiming tax relief on the loan repayments and also charge themselves interest on the credit.
b) The sending of false export-import invoices22 overvaluing goods allows the launderer to move money from one company and country to another with the invoices serving to validate the source of the money sited with financial institutions. Thus by manipulating the price of goods for actual or spurious import/export transactions, money can successfully be laundered.
c) A simpler method is to transfer the money to a legitimate bank from a bank owned by the launderers; such purchases may be carried out in many tax havens.
The table below provides some typical examples encompassing all three stages.
|Cash paid into bank (sometimes with staff complicity or mixed with proceeds of legitimate business).||Wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business).||False loan repayments or forged invoices used as cover for laundered money.|
|Cash exported.||Cash deposited in overseas banking system.||Complex web of transfers (both domestic and international) makes tracing original source of funds virtually impossible.|
|Cash used to buy high value goods, property or business assets.||Resale of goods/assets.||Income from property or legitimate business assets appears "clean".|
Under ground and parallel banking systems
Under ground and parallel banking systems are an efficient and clandestine way of moving money around the world. The reason these systems are called underground and parallel banking is because they have evolved as a result of traditional banking practices followed by communities in some countries over several centuries23. There are three prime underground banking systems, namely, â€˜hundi/hawalaâ€™, â€˜chop shop/chitti bankingâ€™ and â€˜black market peso exchangeâ€™24. The hundi/hawala system has its origin in the Indian subcontinent and in trade related to the Arabs, the chop shop/ chitti banking system has its origin in the traditional Chinese banking practices, and the black market peso exchange system prevalent in Latin America is of recent origin25.
Hundi/Hawala System: This system was used by Indians akin to a form of modern-day banking in order to assist trade. The â€˜Hundiâ€™ which means â€˜trustâ€™ and â€˜Hawalaâ€™ which means â€˜transfer related to moneyâ€™ can actually be equated to modern-day letters of credit.26 In earlier times if a trader was going from one town to another, he would take hundi as a letter of credit, thus facilitating trade between the two regions. It is this traditional hundi/hawala banking system which has survived to the present day as an underground banking system. For these underground and parallel banking systems to operate, communication of data from one underground banker to another has to take place. The modes adopted by underground bankers are quite eccentric, and they do not leave a paper trail and even if they do, they render it vague. The underground and parallel banking systems are useful for laundering money in countries with exchange control as well as in countries without exchange control. These systems offer two great advantages for laundering money; the first being that they eliminate the physical movement of money; and the second is that they annihilate or obscure the paper trail. Thus, these systems when used in conjunction with conventional money laundering; make the task of tracking down the laundered money or even the launderer virtually impossible. The simplest example of laundering money through the use of underground and parallel banking systems is that of simulating a fake export of, say, highly sophisticated machinery, while the thing being exported is actually junk.27The junk that is so exported actually holds negligible value but the stated value of this junk (falsely portrayed as sophisticated machinery) is represented by a huge sum. In such transactions the Hawala route is used to send the stated value of the exports outside the country, to be repatriated as laundered export proceeds, in the form of foreign exchange by way of fronts in the forms of fictitious companies or business associates based abroad.
Perhaps the most appealing design of money laundering through underground and parallel banking is that related to the diamond trade in India, which runs into 400 billion INR, or US$ 9 billion.28 Until recently no provisions were in place to enforce a duty on either cut and polished diamonds or uncut and raw diamonds, although there has been a certain degree of control over its trade activities. The procedure of laundering money through the diamond trade requires initially the importing of raw diamonds into the country; one consignment of these diamonds is polished and they sent to centers in Europe; then this same consignment of diamonds which was exported is smuggled in and out of the country on numerous occasions to show an export on paper against raw diamonds which are continually imported, cut and polished and sold in the black market instead of being exported. For each import of raw diamonds and for each consignment of smuggled diamonds that has been re-exported, an export realization has to be present, for this purpose money is sent out through the Hawala route; it is by way of this export realization in foreign exchange through this route that the premium earned in the black market sale of diamonds is laundered.
Money laundering laws in India
â€œAn 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.â€29
Money laundering laws in India are governed by the provisions of the â€˜Prevention of Money Laundering Act, 2002â€™, approved by the Indian Parliament on 28 November 2002.
Laundering of money poses a serious threat not only to the financial system of the country, but also to its integrity and sovereignty. This realization had instigated the international community to take up initiatives to obviate such threats. The initiates taken by the international community include the following:30
- The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which India is a party, calls for prevention of laundering of proceeds of drug crimes and other connected activities and confiscation of proceeds derived from such offense.
- The Basel Statement of Principles, enunciated in 1989, outlined basic policies and procedures that banks should follow in order to assist the law enforcement agencies in tackling the problems of money laundering.
- The Financial Action Task Force established at the summit of seven major industrial nations, held in Paris from 14th-16th July, 1989, to examine the problem of money laundering has made forty recommendations, which provide the foundation material for comprehensive legislation to combat the problem of money-laundering. The recommendations were classified under various heads. Some of the important heads are-
- declaration of laundering of monies carried through serious crimes of criminal offense;
- to work out modalities of disclosure by financial institutions regarding portable transactions;
- confiscation of the proceeds of crime;
- declaring money-laundering to be an extraditable offense; and
- promoting international co-operation in investigation of money-laundering.
4) The Political Declaration and Global Programme of Action adopted by United Nations General Assembly by its Resolution No. S-17/2 of 23rd February 1990, inter alia, calls upon the member States to develop mechanism to prevent financial institutions from being used for laundering of drug related money and enactment of legislation to prevent such laundering.
5) The United Nations in the Special Session on countering World Drug Problem Together concluded on the 8thto 10th June, 1998 has made another declaration regarding the need to combat money-laundering. India is a signatory to this declaration.
The urgent need for curbing the crime of money laundering in India by way of enactment of a comprehensive legislature was given great impetus by the above stated initiatives of the international community. Furthermore, the United Nations resolution passed by its member-states in June 1998 to adopt national money laundering legislation and programmes gave rise to the formulation of the Prevention of Money-laundering Bill, 1998 in the Lok Sabha on the 4th of August, 1998. The Bill was referred to the Standing Committee on Finance, which presented its report to the Lok Sabha on 4th March, 1999 with certain recommendations. The Bill was passed taking into consideration some of the recommendations put forth by the committee but soon was sent back for further improvement. The Bill after several such modifications and improvements of its provisions by the subcommittee was presented before the Parliament for enactment as law.
Money-laundering poses a serious threat to financial system integrity and has the ability to destabilize and perish a sound economy. It has the capacity to emerge as a parallel economic system, within a nation, controlled by a few.31
Among the negative effects of money laundering on countries are a full range of severe macro economic consequences; such as:32
- Unpredictable changes in money demand;
- Prudential risks to the soundness of financial institutions and financial system;
- Contamination effect on legal financial transactions;
- Increased volatility of international capital flows and exchange rates due to unanticipated cross-border transfers;
- Money laundering can have a dampening effect on foreign direct investment, if a countryâ€™s commercial and financial sectors are perceived to be under the control and influence of organized crime. [International Monetary Fund]
Money laundering organizations are equipped with huge resources at their disposal; these organized groups may indulge into price-cutting, under charging, intimidation and corruption. This may lead to the eviction of less equipped competitors and giving rise to monopoly. If such circumstances arise in strategic sectors such as banking, insurance, stock market etc., the economy may get distorted. The existence of money laundering in large scale in an economy would blunt the planning tools, thereby destabilizing the economy further. 33 Money laundering not only threatens the financial system of a country by taking away command of the economic policy from the government, but also deteriorates the moral and social standing of the society by exposing it to activities such as drug trafficking, smuggling, prostitution, tax evasion and other criminal activities.
Mr. N.K. Singh, Permanent Secretary for Taxation and Revenue matters, including narcotic for the Government of India, in panel discussions held at the United Nations, New York on 10th June, 1998, pointed out that there are four important dimensions in which money laundering directly impinges on the deregulation process, which is a normal process which most emerging markets adopt.34
Firstly, moving towards greater current account convertibility and then embracing full account convertibility, provides a great opportunity, and a threat for money laundering to occur as emerging markets gradually relax their exchange control regime.
Secondly, in many economies which are gradually privatizing their public monopolies, the scope of money laundering has been seen to be dramatically enhanced.
Thirdly, emerging markets must be wary that expert-fastening regimes do not provide an alibi for money laundering. There are many examples where emerging markets, in trying to replace explicit export subsidiary regimes with export-fastening regimes, also began to faster money laundering.
Fourthly, most emerging markets reform the financial system, their financial system thus becoming increasingly deregulated. Concomitant symmetrical reform also takes place in capital markets. There are problems associated with reforms of financial systems, and integration of capital markets. Coupled with this are rapid technological changes, which integrate markets and faster movement of money and currency at dramatic speed.
Money laundering cannot be confronted in an isolated sense, issues concerning judicial processes, international cooperation on matters such as investigation and extradition treaties and the role of banks and other financial organizations in helping curb the activities related to laundering money, are all required to function in a synchronized manner. It is for this purpose and others, like prevention and control of the fundamental crimes related to the Indian Penal Code, tax-evasion, narcotics, corruption, etc., by preventing the proceeds obtained through such crimes, from entering into the mainstream of the economy which is prone to be used for similar crimes, that the Prevention of Money Laundering Act, 2002 has been enacted.
Prevention of money laundering Act, 2002
â€˜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 with the proceeds of crime and projecting it as untainted property shall be guilty of offense of money laundering.â€™35
â€˜Money launderingâ€™ is defined under Section 3 of the Prevention of Money Laundering Act, 2002. To understanding the definition of money laundering, it is pertinent that the definition of "proceeds of crime" be understood first. "Proceeds of crime" is defined under section 2(u) of the Act as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. The definition of money laundering reads as follows:36
- acquires, owns, processes or transfers any proceeds of crime; or
- enter into any transaction which is related to proceeds of crime either directly or indirectly; or
- conceals or aids in concealment of the proceeds of crime, commits the offence of money laundering.
The crime of money laundering is a punishable offence under section 4 of the Prevention of Money Laundering Act, 2002. This section of the Act lays down that any person found guilty of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years and which may extend to seven years and shall also be liable to pay fine which may extend to Rs.5 lakhs. In the case offences related to drugs, the maximum sentence is extended to ten years. The provisions for attachment and adjudication of property involved in Money-laundering are made under section 5-10 of the Act. Section 11 of the Act proposes to make it obligatory for the banking companies, financial institutions and intermediaries to maintain a record of all such transactions or series of transactions, the nature and value of which is prescribed by the Central Government. It shall also be requisite for these institutions to validate and preserve the records of identity of all its clients in the prescribed manner for a period of five years from the date of cessation of transactions between them. It is also proposed that they would be required to provide details of these transactions to the Director appointed (under the provisions of the Act) within the prescribed time and the manner.
Dealing with a crime as serious as money laundering often requires the use of force and some degree of autonomous functioning. Provisions for conducting survey, search and seizure are laid down under sections 15, 16 & 17 of the Act. Provision for retention of property seized in search and seizure proceedings are made undersection 19 of the Act. A certain degree of autonomy is provided under Section 18 of the Act which empowers the specified authority to arrest any person, whom they suspect of having committed on offence under Act, with on obligation to produce him before a Judicial Magistrate within twenty four hours. A noteworthy provision of the Act is its presumption clause which is stated under section 23 of the Act. It states that the onus of â€˜mens reaâ€™ is not on the prosecution. It means that the person charged with money laundering is assumed to have a culpable or guilty state of mind and it is he who has to prove, beyond reasonable doubt, that he possesses no such guilty state of mind. The independence and dependability of the Prevention of Money Laundering Act, 2002 is established under section 70, which provides that the proposed Act is to have overriding effect over other laws that are in force for the time being.
Money laundering is a captivating method of wealth fabrication adopted on a large scale mainly by drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and tax-evaders. The crime of money laundering, however, is my no means beyond the reach of a common who too can launder illegal proceeds depending on his resources. The sheer applicability of the crime of laundering money makes it one of the largest businesses in the world today. Criminals throughout history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion. Former US Secretary of State George Shultz summed it up when he stated:
"Todayâ€™s criminals make the Capone crowd and the old Mafia look like small time crooks".37
Money laundering is a burgeoning threat to the international economy. The practice of money laundering is essentially based on a few defined principles of the crime which remains largely invariable, but the technological developments related to the modes of laundering money are increasingly becoming more and more sophisticated and meandering, which makes the task of authorities prone to curb money laundering, virtually impossible. The largely unchecked growth of the Internet presents what has been described as the "Armageddon scenario of banking on the `Net - criminals could have money transferred without any audit trail"38. It is essential for requisite authorities to ensure that the legislation related to money laundering is continually updated and kept abreast of the latest development related to the modes of laundering money.
The deep inter-linkage between the crime of money laundering and organized crime make it not only a threat to the economy but also a threat to the security and peace of a country. Organized crimes syndicates dealing with drug trafficking, international fraud, advance fee fraud, long firm fraud, arms dealing, trafficking in human organs and tissue, etc., draw exorbitant amounts as proceeds of their illegal activities. The proceeds so obtained and laundered, are used not only to facilitate ongoing operations, but to consolidate the wealth, prestige and respectability of those in control of the criminal business. Money laundering can be defined as a very particular kind of somber criminal activity which, at its most developed, is highly sophisticated and complex. The degree of organization that is displayed in money laundering is therefore of particular concern because of its scale, its capacity to exploit and influence the legitimate business world and its capacity for internationalization39. These apprehensions have led to strenuous international reactions against this fast evolving menace called Money Laundering.
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Anonymous, â€˜IBA-TCS Joint Seminar on Anti-Money Launderingâ€™, (held on Saturday, January 22nd, 2005), TATA Consultancy Services, available online at http://www.tcs.com/0_media_room/events/200501Jan/Anti-Money-Laundering.htm, last visited on 5th December 2005.
Anonymous, â€˜Money Launderingâ€™, available online athttp://www.rand.org/publications/MR/MR965/MR965.pdf/MR965.chap1.pdf, last visited on 6th December 2005.
Anonymous, â€˜Offence of Money-laundering & Attachment, Adjudication and Confiscationâ€™, The Prevention of Money-laundering Bill,1999, (Bill No. 72 of 1999) available online athttp://www.vakilno1.com/bareacts/prevofmoneylaundering/prevmoneylaund.htm, last visited on 6th December 2005.
Anonymous, â€˜What is Money Laundering?â€™ available online at http://www.wisegeek.com/what-is-money-laundering.htm?referrer=adwords_campaign=moneylaundering_ad=010262&_search_kw=money%20laundering, last visited on 6th December 2005.
1 Steel, B, â€˜Billyâ€™s Money Laundering Information Websiteâ€™, available online at http://www.laundryman.u-net.com/page1_hist.html.
10 Supra note 7, pp- 94. One of the major benefits offered by offshore jurisdictions is that they are zero tax jurisdictions or impose a nominal amount of tax- hence they are also called tax havens. Several multinationals have their holding companies in these tax havens in order to avoid paying heavy taxes in countries where they are conducting the major part of their business activities.
18 Steel. B, â€˜Billyâ€™s Money Laundering Information Websiteâ€™, available online athttp://www.laundryman.u-net.com/page5_mlstgs.html
37 Steel, B, â€˜Billyâ€™s Money Laundering Information Websiteâ€™, available online athttp://www.laundryman.u-net.com/page14_conclusions.html
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