Money laundering

What is Money Laundering?

Money laundering is not simply a cinematic gimmick but is very much based upon real-time events and happenings. Although current international and domestic authorities and legislations place emphasis on the prevention of money laundering by drug cartels and other criminal organizations, the reality is that the practice is more widespread than one may think. Money Laundering is intrinsically connected to tax evasion and other white-collar crimes and this article simply seeks to provide a starting point for individuals interested in raising their awareness on such matters.

Ever since the uproar caused by our dear Prime Minister’s surprise move to demonetize 500- and 100-Rupee Notes back in 2016, awareness of the amount of black money circulating the Indian Economy has only risen. It is estimated that a total of $343 billion has been laundered out of India during the period 2002-2011. That’s more than 4 times the net worth of India’s wealthiest man, Mukesh Ambani.

The major legislation dealing with this type of crime is the Prevention of Money Laundering Act, 2002 (PMLA). Here, the offense of money laundering is defined under Section 3 of the Act,

Although the definition seems rather convoluted, we can infer the definition as the process of turning “black” or illegally-earned currency into “white” or legitimate currency. This process is often called white-washing and the individual or group involved are known as “launderers”.

Example

If there is anything world-famous shows like Narcos and Breaking Bad (both of which are available on Netflix) have taught us, it is how to launder black money. To explain the process of money laundering we can take the example of the latter show where Jesse Pinkman launders his money through his lawyer.

•The first step is known as placement. Here, Jesse deposits the money that he illegally earned through his drug trade into the hands of his lawyer who acts as his agent. Black money can also be deposited in certain private banks through formal or informal agreements.

•The next step is called layering. In the show, Jesse’s lawyer suggests he buy a nail salon so that the deposited amount can be slipped into its “clean” cash flow.

• This step can be conducted with any legitimate business and involves disguising black money as legit revenue from said business. However, the most popular form of this kind of layering usually involves the formation of shell companies as they don’t require much initial investment (such as buying a nail salon) and can also potentially provide tax benefits to the launderer.

•The last step is integration. Jesse’s illegal drug money is fully integrated into the balance sheet of the nail salon. Since the money has a legitimate source, it can now be returned to the owner of the business as taxable income.

There are many other methods of money laundering, but the basic steps of each scheme are more or less the same.

Legal Implications of Money Laundering


The Prevention of Money Laundering Act,2002 was enacted with three objectives in mind, namely,
•Prevention and Control of Money •Laundering
•Confiscate and Seize Property involved in Money Laundering
•Other issues related to Money Laundering in India

It further enshrines the Government and other appropriate authorities’ certain powers in furtherance of the prevention of money laundering. Section 4 of the Prevention of Money Laundering Act 2002 prescribes the punishment for money laundering in a rather straightforward manner,

Impact of Money Laundering


According to a paper written by John McDowell and Gary Novis, Senior Policy Advisor and Program Analyst at the US Bureau of International Narcotics and Law Enforcement Affairs respectively, money laundering can have large adverse effects upon a nation. The primary effects are as follows:
•Undermining of the legitimate private sector
•Undermining of the integrity of financial markets
•Loss of control of economic policy
•Economic distortion and instability
•Loss of revenue
•Security threats to privatization efforts
•Reputation risk

Notable Cases


Here are some noteworthy cases, both international and local, where allegations of money laundering have been made,
•Common Wealth Games: Out of the 70,000 crores allocated, it was estimated that only half of this amount was spent on Indian sportspersons while the rest was leeched through a variety of methods such as payment to non-existent parties, wilful delays in contracts, over-inflated price, and errors in the purchase of equipment.
•HSBC: A US Senate report found that HSBC was providing banking services to a number of shady clients including clients in Saudi Arabia with known terrorist links and Mexicans with known links to the cartel. An estimated $8 billion was laundered before it could be stopped.
•Nauru: An island found on the coast of Australia, it became a haven for shell companies and it is estimated that over $70 billion was laundered before the US Treasury imposed extravagant sanctions in an attempt to put a stop to the illicit activities.

Conclusion


The Indian Government has been trying to combat the excessive circulation of black money for quite some time. Records show that members of various Indian royal families attempted to stash funds acquired from public sources abroad so as to evade the government purview as far back as 1960. The enactment of the Prevention of Money Laundering Act, 2002 was one such move to combat the conversion of illicit funds into legitimate money. It can be ascertained that at the very least, India as a country has not been lackadaisical with regard to financial laws regulating money laundering.

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George Elappunkal Cyriac

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