Saturday, May 2, 2015

Money Laundering

Money Laundering

Laundering means concealing/hiding the origins of money, that are obtained through illegal means, violating the laws of land. It often involves transfers to/from foreign banks or legitimate businesses to hide the illegal nature of the money, and make it appear as obtained form legitimate source.

In broad sense, Money Laundering is the process of converting Black Money into White Money.

Civil or Criminal Offense?

Often we talk about Black Money that are stashed abroad, mainly to avoid high taxes of the land. These money could have legitimate or illegitimate origin.

If these are achieved through legitimate sources, but to avoid taxes, are stored in foreign countries, then we simply call these as Black Money (not considered as Money Laundering). This is a case of civil offense.

But in Money Laundering, the Black Money must involve a predicate crime, such as the violation of IPC, etc, and is considered as criminal offense.

Stages of Money Laundering

Money Laundering involves three distinct stages, as follows -

1.  Placement
Illegitimate money / Dirty Money is collected and placed into a legitimate financial institution, generally in the form of cash (a way to hide trace). This stage is known as Placement of Illegitimate money.

2.  Layering
Layering is the stage, where the illegitimate money is processed through several financial transactions to change its form and hide its trace, so that it is difficult to follow and find its source.

It may consist of -

  • Bank to bank transfer
  • Wire transfer between different accounts, possibly in different names and in different countries
  • Changing the nature of currency
  • Purchasing other instruments, or assets to change the form of money, etc.

3.  Integration
In this stage, the illegitimate money returns to the mainstream economy as a legitimate one. This may involve a final bank transfer to the account of the business, where the launderer wants to invest. In this stage, the legitimate-looking money is difficult to trace back to its illegitimate source.

Prevention of Money Laundering Act, 2002 (PMLA)

The PMLA, 2002 is the principal framework in India to combat money laundering cases. It defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

Some features -
  • RBI, SEBI and IRDA have been brought under the PMLA, making the provision of this act to be applicable to all the financial institutions in India, including banks, MFs, Insurance companies, etc.
  • The monitoring agency of Anti-Money Laundering activities in India is the Financial Intelligence Unit (FIU-IND). It is an independent body reporting directly to the Economic Intelligence Council (EIC), headed by the Finance Minister.
  • Punishment includes imprisonment up to 3 - 7 years, with fine up to Rs. 5 lakh.

Banks' Obligations

  • To follow the KYC norms properly
  • Maintain records for - nature and value of the transaction, single or series of transactions, keep record for 10 years, etc.
  • Verify and maintain the records of identity of all clients, etc.

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