Money Laundering and Smuggling | UPSC Mains: Internal Security & Disaster Management PDF Download

Money Laundering 

• It is not necessary that all money laundering goes through three stages; these stages may occur as separate  phases or simultaneously or may overlap with each other. How these basic steps have been used is dependent on available money laundering and the requirement of criminal organisations.

Placement:

• Introduction of Funds: It is the stage of introducing funds raised through criminal activities into the legal financial system via various financial instruments and institutions.
• Most vulnerable stage: This is the most vulnerable stage of money laundering as criminals are holding cash in bulk and there is always a chance of coming on the radar of law enforcement agencies.
• Transfer to the legal financial system: In this stage, money is put into the financial system or retail economy or smuggled out of the country through banks, travellers' cheques, postal orders, etc.

Layering:

• Structuring stage: Money structuring conceals laundering. It breaks money by doing multiple small transactions in banks with different names.
• Complex transaction: Layering generally uses multiple complex transactions to disguise the audit trails and maintain as much distance as possible between the source of illegal money and its present status.
• Use various techniques: Launderers use wire transactions through electronic fund transfer in offshore banks, the sheer volume of daily transactions, and buying high-value assets like cars, bungalows, diamonds, etc.

Integration:

• Reintroduction into the financial system: It is the final stage by which illegal funds are reintroduced into the legal financial system and appear to originate from legitimate sources.
• Use for buying Luxury: Most redemptions involve buying luxury assets like homes, jewellery, or businesses to avoid law enforcement.
• Difficult to recognise: Due to lack of documentation and use of loopholes in law it becomes very difficult to catch laundering at this stage.

Various Techniques used for money Laundering 

• Hawala: Hawala is an alternative or parallel remittance system outside traditional banking and financial channels.
• Round tripping: In this criminal money is deposited into controlled foreign-based organisations preferably in tax haven countries like Mauritius where anti-money laundering laws are weak. Then money is shipped back in the form of foreign investment.
• Shell companies: These are the companies established only for the conversion of dirty monies. Companies did not have any business operations and disguised the true owner of the company.
• Third-party Cheques: Third-party cheques are paid to the payee who then transfers it to another person.
• P-Notes: P notes are derivative instruments issued by registered foreign portfolio investors to their overseas investors to enable them to invest in the Indian market without retraction with SEBI.
• Crypto-currency: It is a digital currency without any central regulatory authority. Cryptocurrency is now becoming a choice for criminal activities due to its non-regulatory nature.
• Structural deposits: It is also called smurfing where money is broken into smaller deposits. It is used to beat suspicious money laundering reporting.
• Cash-intensive business: Criminals set up a cash-based business like salons, restaurants, or casinos to hide their illegal cash.
• Casino: In this method, individuals use the money to buy chips in a casino and play for a very small time and then convert chips into cash again with receipts to show that money is earned from gambling.
• Salaries in Cash: Some companies or businesses may hire many unregistered employees and then pay them in cash so that dirty money can be diverted for making payments without being noticed by law enforcement agencies.

The Prevention of Money Laundering Act (PMLA), 2002

The Prevention of Money Laundering Act (PMLA) was enacted in India in 2002, to combat money laundering.The PMLA is an important legal framework that is aimed at preventing and combating money laundering, as well as the financing of terrorism.
Provisions of the PMLA

• Definition of Money Laundering: Section 3 of the PMLA defines money laundering as an act of directly or indirectly concealing or aiding in the concealment of the proceeds of crime or knowingly acquiring, possessing, or using such proceeds.
• Punishment for Money Laundering: The act provides for punishment ranging from rigorous imprisonment for three to seven years and a fine up to Rs. 5 lakhs to imprisonment for ten years and a fine up to Rs. 5 crores, depending on the amount involved.
• Criminalizes money laundering and provides for punishment: The PMLA makes money laundering a criminal offence and provides for stringent punishment, including imprisonment and fine.
• Investigation and seizure powers: The Act empowers various authorities such as the Enforcement Directorate to investigate money laundering cases and to seize and confiscate property involved in money laundering.
• Obligation to report suspicious transactions: The Act imposes an obligation on banks and other financial institutions to report suspicious transactions to the authorities.
• Obligations of Banking Companies, Financial Institutions, and Intermediaries: The act places obligations on banks, financial institutions, and intermediaries to maintain records of all transactions and furnish information to the ED on suspicion of money laundering.
• Reporting Entity: Section 12 of the act defines a reporting entity as a banking company, financial institution, intermediary, or any other person carrying out a designated business or profession.
• Appointment of an Adjudicating Authority: The Act provides for the appointment of an Adjudicating Authority to adjudicate on matters relating to the confiscation of property.

Loopholes and Challenges of the legislation

• Weaknesses in implementation: Despite the presence of a robust legal framework, the implementation of the PMLA has been weak, with limited resources and capacity-building in relevant institutions.
• Definitions not given: The Act does not define the term 'proceeds of crime,' leading to confusion in interpretation and enforcement.
• Complex legal provisions: The provisions of the Act are complex and require technical expertise, which has resulted in delays in the investigation and prosecution of money laundering cases.
• Use of Cryptocurrencies: One of the major challenges is the detection and investigation of money laundering involving cryptocurrencies, such as Bitcoin. Cryptocurrencies operate on a decentralised, peer-to-peer network, which makes it difficult to track transactions and identify the parties involved.
• Lack of coordination: There is a lack of coordination between different agencies involved in combating money laundering, which has resulted in a lack of effectiveness in the implementation of the Act.
• High burden of proof: The burden of proof in money laundering cases is very high, which makes it difficult for the authorities to prove their case beyond a reasonable doubt.

Key Recommendation of Fatf on Money Laundering 

• Assessing Risk and applying Risk-based approach: Countries should identify, assess and understand money laundering and terrorist financing risk and then apply the risk-based approach for prevention and regulatory mechanism to deal with money laundering.
• National Cooperation and coordination: Countries should have dedicated policies and designated authority for their implementation.
• Criminalization of Money laundering: Countries should criminalise money laundering based on the Palermo Convention and Vienna Convention.
• Confiscation and provisional measures: Countries should adopt measures as per the Vienna Convention which allows enforcement agencies to confiscate proceeds from money laundering without the requirement of a criminal conviction.
• Criminalising Terrorist financing: Based on the terrorist financing convention countries should criminalise not only the financing of terrorists but also the financing of terrorist organisations and individual terrorists.
• Targeted Financial sanctions: Countries should implement targeted financial sanctions like freeze of funds and assets without delay to comply with United Nations Security Council resolutions relating to the prevention and suppression of terrorism and terrorist financing.
• Scrutiny of NGOs: Countries should review the adequacy of laws and regulations related to NGOs which have been identified as vulnerable to terror financing.
• Prohibit from anonymous accounts: Financial institutions should be prohibited from keeping anonymous accounts or accounts with obviously fictitious names.
• Correspondent Banking: Financial institutions should have cross-border banking correspondence and other similar relationships to gather information whenever required by enforcement agencies.
• Monitoring High-risk Countries: It involves conducting risk assessments of countries that have been identified as having weak anti-money laundering and counter-terrorist financing (AML/CFT) regimes or are known to be involved in illicit financial activities.