MONEY
LAUNDERING - A GLOBAL CONCERN
By
Dr. T. Padma., LLM., Ph D (Law)
kethepadma@gmail.com
Money
Laundering[1]
refers to the conversion or "Laundering" of money which is illegally
obtained, so as to make it appear to originate from a legitimate source ( Popularly this is known as making black
money white). Money Laundering is being employed by launderers worldwide to
conceal criminal activity associated with it such as drug / arms trafficking,
terrorism and extortion. Robinson[2]
states that
“Money
laundering is called what it is because that perfectly describes what takes
place – illegal, or dirty, money is put through a cycle of transactions, or
washed, so that it comes out the other end as legal, or clean money. In other
words, the source of illegally obtained funds is obscured through a succession
of transfers and deals in order that those same funds can eventually be made to
appear as legitimate income.”
Article
1 of European Commission (EC) Directive defines the term ‘money laundering’ as
“the conversion of property, knowing that such property is derived from serious
crime, for the purpose of concealing or disguising the illicit origin of the
property or of assisting any person who is involved in the committing such an
offence or offences to evade the legal consequences of his action, and the
concealment or disguise of the true nature, source, location, disposition,
movement, rights with respect to, or ownership of property, knowing that such
property is derived from serious crime”.[3]
Thus,
Money Laundering is not an independent crime, it depends upon another crime
(predicate offence), the proceeds of which is the subject matter of the crime
in money laundering. From the legal point of view, the Achilles’ heel in
defining and criminalizing money laundering relates to the so-called ‘predicate
offences’ understood as the criminal offences which generated the proceeds thus
making laundering necessary. Hiding or disguising the source of certain
proceeds will of course, not amount to money laundering unless these proceeds
were obtained from a criminal activity. Therefore, what exactly amounts to
money laundering, which actions and who can be prosecuted is largely dependent
on what constitutes a predicate crime for the purpose of money laundering.
Criminals
target foreign jurisdiction with liberal bank secrecy laws and weak anti-money
laundering regulatory regimes as they transfer illicit funds through domestic
and international financial institutions often with the speed and ease of
faceless internet transactions. The international nature of money laundering
requires international law enforcement cooperation to successfully investigate
and prosecute those that instigate these complex criminal schemes.
Money
Laundering - An Organized Crime
Money
Laundering has a close nexus with organized crime. Money Launderers accumulate
enormous profits through drug trafficking, international frauds, arms dealing
etc. Cash transactions are predominantly used for Money Laundering as they
facilitate the concealment of the true ownership and origin of money. It is
well recognized that through the huge profits the criminals earn from drug trafficking
and other illegal means, by way of money laundering could contaminate and
corrupt the structure of the State at all levels, this definitely leads to
corruption. Further, this adds to constant pursuit of profits and the expansion
into new areas of criminal activity.
Through
money laundering, organized crime diversifies its sources of income and
enlarges its sphere of action. The social danger of money laundering consists
in the consolidation of the economic power of criminal organizations, enabling
them to penetrate the legitimate economy. In advanced societies, crime is
increasingly economic in character. Criminal associations now tend to be
organized like business enterprises and to follow the same tendencies as
legitimate firms; specialization, growth, expansion in international markets
and linkage with other enterprises. The holders of capital of illegal origin
are prepared to bear considerable cost in order to legalize its use.
Historical
Evolution
‘Money
Laundering’ as an expression is one of
fairly recent origin. The original sighting was in the newspapers reporting the Watergate
Scandal in the United States in 1973[4].
The expression first appeared in a judicial or legal context in 1982 in America
in the case of US vs. $4,255,625. 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.
They needed to show a legitimate source for these monies. One of the ways in
which they were able to do this was by purchasing outwardly legitimate
businesses and to mix their illicit earnings with the legitimate earnings they
received from these businesses. Laundromats were chosen by these gangsters
because they were cash businesses and this was an undoubted advantage to people
like Al Capone[5]
who purchased them[6].
Al Capone was prosecuted, though not for money laundering but for tax evasion.
However, the conviction of Al Capone may have triggered the money laundering
business off the ground. But other historians differ from this inasmuch as they
are of the view that money laundering is called so, because it perfectly
describes what takes place illegal or dirty money is put through a cycle of
transactions, or washed, so that it comes out at the other end as legal or
clean money. In other words, the source of illegally obtained funds is obscured
through a succession of transfers and deals, in order that those same funds can
eventually be made to appear as legitimately earned income.[7]
Another
celebrated mode of doing money laundering was with Swiss Bank. Gangster Meyer
Lansky used the number of Swiss Bank accounts to hide his illegal money. He
used the ‘loan-back’ concept, which meant that the hitherto illegal money could
now be disguised as ‘loans’ provided by compliant foreign banks, which could be
declared as their ‘revenue’ if necessary, and a tax-deduction obtained in the
bargain.
Money
Laundering as a crime attracted the interest in the 1980s, essentially within a
drug trafficking
context. It was from an increasing awareness of the huge profits generated from
this criminal activity and a concern at the massive drug abuse problem in
western society which created the impetus for governments to act against the
drug dealers by creating legislation that would deprive them of their illicit
gains.
The
Process of Money Laundering – PLI
Money
Laundering is not a single act but is in fact a process that is accomplished in
three basic
steps as enumerated below:
1) Placement
"Placement" refers to the physical disposal of bulk cash
proceeds derived from illegal activity. This is the first step of the
money-laundering process and the ultimate aim of this phase is to remove the
cash from the location of acquisition so as to avoid detection from the
authorities. This is achieved by investing criminal money into the legal
financial system by opening up a bank account in the name of unknown
individuals or organizations and depositing the money in that account.
2) Layering
"Layering" refers to the separation of illicit proceeds from
their source by creating complex layers of financial transactions. Layering
conceals the audit trail and provides anonymity. This is achieved by moving
money to offshore bank accounts in the name of shell companies, purchasing high
value commodities like diamonds and transferring the same to different
jurisdictions. Now, Electronic Funds Transfer (EFT) has become boon for such
layering exercise. Different techniques like correspondent baking, loan at low
or no interest rates, money exchange offices, back-to-back loans, fictitious
sales and purchases, trust offices, and recently the Special Purpose Vehicles
(SVPs) are utilized for the purpose of laundering the money.
3) Integration
"Integration" refers to the reinjection of the laundered
proceeds back into the economy in such a way that they re-enter the financial
system as normal business funds. The launderers normally accomplish this by
setting up unknown institutions in nations where secrecy is guaranteed. New
forms of business give a platform for integration exercise. Now a person can
start a business with just a webpage and convert his illegal money to legal by
showing profits from the webpage. There are other ways like capital market
investments, real estate acquisition, the catering industry, the gold market,
and the diamond market. Money laundering, at its simplest, is the act of making
money that comes from Source A look like it comes from Source B.
Some
Techniques of Money Laundering
At
each of the three stages of money laundering various techniques can be
utilized. It is
really
not possible to enlist all the techniques of Money Laundering exercise;
however,
some techniques are illustrated for the sake
of understanding:
a) Hawala
“Hawala”
is
an alternative or parallel remittance system. It exists and operates outside
of, or parallel to 'traditional'
banking or financial channels. It was developed in India, before the
introduction of western banking practices, and is currently a major remittance
system used around the world. In hawala networks the money is not moved
physically. A typical hawala transaction would be like a resident in USA of
Indian origin doing some business wants to send some money to his relatives in
India. The person has option either to send the money through formal channel of
banking system or through the hawala system. The commission in hawala is less
than the bank charges and is without any complications for opening account or
visit the bank, etc. The money reaches in to the doorstep of the person’s
relative and the process is speedier and cheaper.
b) Structuring
Deposits
Also known as smurfing, this method entails breaking
up large amounts of money into smaller, less-suspicious amounts. In the United
States, this smaller amount has to be below $10,000 – or else U.S. banks have
to report the transaction to the government. The money is then deposited into
one or more bank accounts either by multiple people (smurfs) or by a single
person over an extended period of time.
c) Third-Party Cheques
Utilizing
counter cheques or banker’s drafts drawn on different institutions and clearing
them via various third-party accounts. Third party cheques and traveller’s
cheques are often purchased using proceeds of crime. Since these are negotiable
in many countries, the nexus with the source money is difficult to establish.
d) Credit Cards
Clearing credit and charge card balances at the
counters of different banks. Such cards have a number of uses and can be used
across international borders. For example, to purchase assets, for payment of
services or goods received or in a global network of cash-dispensing machines.
e) Peso
Broker
A drug trafficker turns over dirty U.S. dollars to a
peso broker in Colombia. The peso broker then uses those drug dollars to
purchase goods in the United States for Colombian importers. When the importers
receive those goods (below government radar) and sell them for pesos in
Colombia, they pay back the peso broker from the proceeds. The peso broker then
gives the drug trafficker the equivalent in pesos (minus a commission) of the
original, dirty U.S. dollars that began the process. The list is endless and
quite a lot of techniques are not easily attributed to one laundering phase
alone. With each reporting of crime, the modus operandi changes keeping in view
the earlier detection. The money-launderers appear to be serious researchers
and the officials appear to be mere readers of research reports.
Some
New Areas of Operation of Money Laundering
Both
authorities and the money launderers seem to permanently change their behaviour
when trying to hunt and escape money laundering. One can notice changed
techniques of money laundering as a reaction to regulation. Launderers
continuously explore new routes for laundering their money. Economies with
growing or developing financial centers, but inadequate controls are more
vulnerable than countries with established financial centers as the latter must
have implemented comprehensive money-laundering regimes.
a) Insurance Sector
– The insurance sector is a relatively less haunted sector compared to banks and
other avenues of financial services. However, there has been a gradual increase
in laundering activity in insurance as well. The Laundering in insurance is
either internal or external in nature. The internal channels of laundering
money are agent/broker premium diversion, reinsurance fraud and rented asset
schemes etc. Phony insurance companies, offshore/unlicensed Internet companies,
staged auto accidents, viatical and senior settlement fraud are external
channels of money laundering.[8]
b) Open Securities Market
- Money launderers have traditionally targeted banks, which accept cash and
facilitate domestic and international funds transfers. However, the securities
markets, which are known for their liquidity, may also be targeted by criminals
seeking to hide and obscure illicit funds. Money launderers can target any of
the various types of businesses that participate in securities industry.
Broker-dealers, for instance, provide a variety of products and services to
retail (usually individual) and institutional investors—buying and selling
stocks, bonds, and mutual fund shares. This is moreover possible due to the
instruments like Hedge Funds and Participatory Notes which have very limited
disclosures as to the source. These funds can be effectively used as Laundromats.
Although the number of documented cases in which broker-dealer or mutual fund
accounts have been used to launder money is limited, law enforcement agencies
are concerned that criminals may increasingly attempt to use the securities
industry to launder money. This is a new area which requires a serious thought
processing.
c) Cyber Crime
– Now one has to confront with hybrid crimes, the crimes with many attributes.
According to Capt. Raghu Raman[9],
“Five types of crimes are now converging. Cyber crimes such as identity theft,
illegal access to e-mail, and credit card fraud are coming together with money
laundering and terrorist activities. Large amounts of money is now stored in
digital form. Now you can transfer money through electronic and online gateways
to multiple accounts.” This convergence leads to a greater problem of tackling
of different issues at one time.
Laws
for prevention of Money-laundering in India
Money-laundering
in India has to be seen from two different perspectives, i.e., Money laundering
on international forum and Money-laundering within the country. As far as the
cross-border money-laundering is concerned India’s historically strict foreign
exchange laws and reporting norms have contributed to a great extent to control
money laundering on international forum. However, there has been threat from
informal transactions like ‘Hawala’. The recent activity in money laundering in
India is through political parties, corporate companies and share market.
1) The Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002
was enacted in India to prevent money
laundering and to provide for confiscation of property derived from, or
involved in, money-laundering. The Act
came into effect from 1st July 2005. The provisions of the Act are
frequently reviewed and various amendments have been passed from time to time.
However, there are certain short comings in the Act. As a result of these
infirmities, the Act became a
toothless tiger, capable of a roar to impress the bystanders, but no bite when
it comes to bringing the criminals to book.
This is
evident from the comment of the Supreme court as follows:
“One
trillion dollars is one estimate of the black money quantum. It is huge money,
almost plunder of the nation and of far reaching consequences. We cannot
understand why government is stylizing money parked abroad as Tax evasion. We
are talking about pure and simple theft of national economy, a mind- boggling
crime. We are not (talking) about
niceties of this treaty or that treaty”[10].
The above
comment of the Apex Court speaks volumes about the approach and seriousness of the Federal Government at the center
in tackling the menace of black money.
2)
Other Laws
1) Smugglers and Foreign Exchange Manipulators
Forfeiture of Property Act, 1976
2)
The
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,
1974 (COFEPOSA)
3)
The Benami
Transactions (Prohibition) Act, 1988
4)
The Prevention
of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988
Harmful
Effects of Money Laundering
Money
Laundering threatens national governments and international relations between
them through corruption of officials and legal systems. It undermines free
enterprise and threatens financial stability by crowding out the private
sector, because legitimate businesses cannot compete with the lower prices for
goods and services that businesses using laundered funds can offer. There are
few specific challenges which are posed by Money-laundering activities
throughout the world.
1)
Terrorism
–
Terrorism is an evil which affects each and everybody. Now and then we can find
terrorist attacks being made by terrorists. These attacks definitely cannot be
done without the help of money. Money Laundering serves as an important mode of
terrorism financing. Terrorists have shown adaptability and opportunism in
meeting their funding requirements. Terrorist organizations rise funding from
legitimate sources, including the abuse of charitable entities or legitimate
businesses or self financing by the terrorists themselves. Terrorists also
derive funding from a variety of criminal activities ranging in scale and
sophistication from low-level crime to organized fraud or narcotics smuggling,
or from state sponsors and activities in failed states and other safe havens.
Terrorists use a wide variety of methods to move money within and between
organisations, including the financial sector, the physical movement of cash by
couriers, and the movement of goods through the trade system. Charities and
alternative remittance systems have also been used to disguise terrorist
movement of funds.
2)
Threat
to Banking System – Across the world, banks have become a
major target of Money Laundering operations and financial crime because they
provide a variety of services and instruments that can be used to conceal the
source of money. With their polished, articulate and disarming behaviour, Money
Launderers attempt to make bankers lower their guard so as to achieve their
objective. Though norms for record keeping, reporting, account opening and
transaction monitoring are being introduced by central banks across the globe
for checking the incidence of Money Laundering and the employees of banks are
also being trained to recognise suspicious transactions, the dilemma of the
banker in the context of Money Laundering is to sift the transactions
representing legitimate business and banking activity from the irregular /
suspicious transactions. Launderers generally use this channel in two stages to
disguise the origin of the funds first, when they place their ill gotten money
into financial system to legitimize the funds and introduce these funds in the
financial system and second, once these funds have entered the banking system,
through a series of transactions, they distance the funds from illegal source.
The banks and financial institutions through whom the ‘dirt money’ is laundered
become unwitting victims of this crime.
3)
Threat
to Economic and Political Stability – the infiltration and
sometimes saturation of dirty money into legitimate financial sectors and
national accounts can threaten economic and political stability. An IMF working
paper concludes that money laundering impacts financial behaviour and
macro-economic performance in a variety of ways including policy mistakes due
to measurement errors in national account statistics; volatility in exchange
and interest rates due to unanticipated cross border transfer of funds; the
threat of monetary instability due to unsound asset structures; effects on tax
collection and public expenditure allocation due to misreporting of income and
many more such ways.
Conclusion
Money
laundering is a truly global phenomenon and it must be combated mainly by penal
means and within the framework of international co-operation among judicial and
law enforcement authorities. Therefore, the key to making an impact in money
laundering is to get all of the countries of the world to enact and enforce the
same laws dealing with money laundering so the criminals have nowhere to go. A
penal approach should, however, not be the only way to combat money laundering,
since the financial system can play a highly effective role. The
recommendations of the Council of Europe (1980) and the Basle declaration
(1988) are major steps towards preventing the use of the financial system for
money laundering. Money laundering is usually carried out in an international
context so that the criminal origin of the funds can be better disguised.
Measures exclusively adopted at a national level, without taking account of
international coordination and cooperation, would have very limited impact.
Any
community action should take particular account of the recommendations adopted
by the Financial Action Task Force on money laundering, set up in July 1989 by
the Paris summit of the seven most developed countries. Money laundering occurs
not only in relation to the proceeds of drug-related offences but also in
relation to the proceeds of other criminal activities (such as organized crime
and terrorism). Credit and financial institutions require identification of
their customers when entering into business relations or conducting
transactions. Banks must not permit any abnormally suspicious movement of slush
funds. The criminals want to take advantage of anonymity to carry out their
criminal activities. Banks must not provide this anonymity. Credit and
financial institutions must keep for at least five years copies or references
of the identification documents required as well as supporting evidence and
records consisting of documents relating to transactions. They should pay
special attention to transactions with third countries, which do not apply
comparable standards against money laundering.
Preventing
the financial system from being used for money laundering is a task which
cannot be carried out by the authorities responsible for combating this
phenomenon without the cooperation of credit and financial institutions.
Banking secrecy must be lifted in such cases. Effective supervision of banks
and financial institutions both onshore and offshore, proper licensing
mechanism for creation of banks and financial institutions, registration of
institutions, proper safeguards preventing criminals or their confederates to
acquire banks, proper customer identification, ensuring no anonymous or
fictitious account, existence of law emphasizing the need to identify the
account holder and the real beneficiary, making it obligatory to report
suspicious, abnormal movement of funds and maintaining records for five years,
sharing of information, arranging training on combating money laundering and
doing away with rigid banking secrecy, will help in combating money laundering.
Identification of beneficiaries, directors, international exchange of
information, reporting suspicious movement of capital, international judicial
cooperation will help in preventing money laundering.
Last
but not the least, the intention and the desire of the people of India to bring
back our huge banking deposits held in
foreign banks and to put a full stop to
the menace of black money will remain as a dream only, unless there is a ‘political will’.
[1] Section 2(1) (p) of Prevention
of Money Laundering Act, 2002
[2] Jeffrey Robinson (born 1945) is an American author of
25 books. He has been labeled by the British Bankers' Association "the
world's leading financial crime author.
[3] EC Directive on Prevention of
the use of the Financial System for the Purpose of Money Laundering,
1991
[5] Al Capone was an Italian-American gangster who led a
Prohibition-era crime syndicate. Known as the "Capones", the group
was dedicated to smuggling and bootlegging liquor, and other illegal activities
such as prostitution, in Chicago from the early 1920s to 1931.
[6] Gururaj, B.N., Commentaries on FEMA, Money Laundering Act
and COFEPOSA,
[7] Alagiri, Dhandapani,. Money Laundering: Issues and Perspectives, 2006
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