MONEY LAUNDERING

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The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source.

Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

Stages of Money Laundering

Placement Stage

The launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

Layering Stage

After the funds have entered the financial system, the second – or layering – stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe.

This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

Integration Stage

Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.

Impact of Money Laundering on Economy

  • Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimes.
  • Differences between national anti-money laundering systems will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures.
  • Some might argue that developing economies cannot afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organised crime can become.
  • There is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organised crime. Fighting money laundering and terrorist financing is therefore a part of creating a business friendly environment which is a precondition for lasting economic development.
  • Potential damage to the reputation of financial institutions and markets.
  • Weakens the “democratic institutions” of the society.
  • Destabilized economy of the country causing financial crisis.
  • Give impetus to criminal activities.
  • Policy distortion occurs because of measurement error and misallocation of resources.
  • Discourages foreign investors.
  • Causes financial crisis.
  • Encourages tax evasion culture.
  • Results in exchange and interest rates volatility.
  • Provides opportunity to criminals to hijack the process of privatisation.
  • Contaminates legal transaction.
  • Money laundering is an activity which is capable of corrupting a chain of financial institution.

Steps taken by Government to curb the generation of black money

Action against black money is an on-going process. Such actions include policy-level initiatives, effective enforcement action on the ground, putting in place robust legislative and administrative frameworks, systems and processes with due focus on capacity building and integration and mining of information through increasing use of information technology.

Recent major steps in this regard include

  1. Constitution of the Special Investigation Team (SIT) on Black Money under Chairmanship and Vice-Chairmanship of two former Judges of Hon’ble Supreme Court,
  2. Enactment of a comprehensive law – ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ to specifically deal with black money stashed away abroad,
  3. Constitution of Multi-Agency Group (MAG) consisting of officers of Central Board of Direct Taxes (CBDT), Reserve Bank of India (RBI), Enforcement Directorate (ED) and Financial Intelligence Unit (FIU) for investigation of recent revelations in Panama paper leaks,
  4. Proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions,
  5. Proactively furthering global efforts to combat tax evasion/black money, inter alia, by joining the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information (AEOI) and having information sharing arrangement with USA under its Foreign Account Tax Compliance Act (FATCA),
  6. Renegotiation of DTAAs with other countries to bring the Article on Exchange of Information to International Standards and expanding India’s treaty network by signing new DTAAs and TIEAs with many jurisdictions to facilitate the exchange of information and to bring transparency,
  7. Enabling attachment and confiscation of property equivalent in value held within the country where the property/proceeds of crime is taken or held outside the country by amending the Prevention of Money-laundering Act, 2002 through the Finance Act, 2015.
  8. Enactment of the Benami Transactions (Prohibition) Amendment Act, 2016 to amend the Benami Transactions (Prohibition) Act, 1988 with a view to, inter alia, enable confiscation of Benami property and prosecution of benamidar and the beneficial owner,
  9. Initiation of the information technology based ‘Project Insight’ for strengthening the non-intrusive, information driven approach for improving tax compliance,
  10. Launching of ‘Operation Clean Money’ on 31st January 2017 for collection, collation and analysis of information on cash transactions, extensive use of information technology and data analytics tools for identification of high risk cases, expeditious e-verification of suspect cases and enforcement actions in appropriate cases, which include searches, surveys, enquiries, assessment of income, levy of taxes, penalties, etc. and filing of prosecution complaints in criminal courts, wherever applicable.

SIT recommendations to curb laundering

The Supreme Court-appointed SIT on black money has come out with a slew of recommendations to curb money laundering, including misuse of exemption on long-term capital gains tax, Participatory Notes and creation of shell companies.

Recommendations to Curb Money Laundering

  • The SIT has emphasised the need for
    • establishing additional courts to decide the pending cases under the Income Tax Act
    • establishment of Central KYC Registry
    • Empowering the Directorate of Revenue Intelligence under the Special Economic Zone Act.
  • A specific recommendation has been made to check generation of black money through cricket betting.
  • While dealing with the misuse of exemption on Long Term Capital gains tax for money laundering, the SIT has recommended that SEBI needs to have an effective monitoring mechanism to study the unusual rise in stock prices of companies when such an increase takes place.
  • Enforcement Directorate should be informed to take action under Prevention of Money Laundering Act for the predicate offences.
  • While deliberating on the misuse of Participatory notes for money laundering, the panel said it is clear that obtaining information on “beneficial ownership” of P-notes is of crucial importance to prevent their misuse. “SEBI needs to examine the issue raised above and come up with regulations where the ‘final beneficial owner’ of P-notes /ODIs are known,” it said adding that the information of “beneficial owner” with SEBI should be in form of individual whose KYC information is known to it.

Identification of shell companies

The SIT in its third report dealt with the issue of shell companies and beneficial ownership and said the strategy to curb this menace has to be two-fold.

  • Firstly, there should be proactive detection of creation of shell companies which would involve intelligence gathering through regular data mining and dissemination of information to various law enforcement agencies for active surveillance.
  • Secondly, there should be deterrent penal action against persons involved in the creation of shell companies and providing accommodation entries.
  • SIT’s recommendation said Serious Frauds Investigation Office (SFIO) needs to “actively and regularly mine the MCA 21 database for certain red flag indicators.”
  • Further there is need for sharing of information on such high risk companies with law enforcement agencies.

Curb Money Laundering through trade

  • SIT recommended action under PMLA for trade-based money laundering detected by DRI where violation of section 132 of Customs Act has been found “must be shared by DRI with the Enforcement Directorate to enable ED to take action under Prevention of Money Laundering Act.”
  • The SIT further said that the illegal activity of cricket betting requires to be controlled by some provisions which are deterrent to all the concerned. “However, considering the fact that large amount of black money is generated and used in this sector, it is suggested that some appropriate legislative directions or rules or regulations are required to be put in place to curb the menace of such betting.

Suggestions

  • More strict laws related Anti-money laundering is necessary because money laundering tends to corrupt even the most professional players in the market.
  • There is a need to sensitize the Private Sector about their role in anti-money laundering activities
  • Continuous upgradation and dissemination of information is necessary

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