Monday, April 30, 2012



By Dr. T. Padma., LLM., Ph D (Law)

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.


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,
 [4] The Britain’s newspaper Guardian coined the term, referring to the process as “laundering”.
[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
 [8] Guidelines issued  by  IRDA on anti-money laundering program for insurers in  India
[9] The Hindu Business Line dated  12/04/2006
 [10] Times of India dated 20.01.2011 (commented by a bench of Justices B Sudharshan Reddy and SS Nijjar on 19.01.2011)

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