MONEY LAUNDERING: WHERE DOES THE BUCK STOP?

BY GAYATRI MENDIRATTA

LEGAL INTERN, H.K. LAW OFFICES

INTRODUCTION

The practice of cycling the proceeds of crimes into legitimate earnings through various businesses and complex financial transactions has been as old as civilization itself. However, the term “money laundering” is a relatively very modern one. The etymology of the term “money laundering” can be traced  to the activities of the Italian mafia in the U.S., including acts of the gangsters like Al Capone, who allegedly used “laundromats” to obscure the illegal profit. They allegedly mixed their ill-gotten gains from bootlegged sales, and prostitution with the legitimate business sales from the Laundromats. Laundromats were establishments with coin-operated washing machines and dryers for public use and hence embezzling money through them was relatively easy and tracing the money back was difficult.

However, with changing times and circumstances, money laundering has become a very common act practised by parties involved in any crime. It is most commonly practiced in order to hide the source of the money, which is  more often than not, illegal and to lose the trace of where the money is coming from. Another reason for the laundering of money is to evade paying taxes by hiding the source of the money and later sourcing it from different avenues.

Money Laundering is defined as “the illegal process of making large amounts of money generated by a  criminal activity, appear to have come from a legitimate source.”[1] These proceeds are generally from crimes like illegal arms sale, organized crimes like Drug trafficking, bribery, smuggling, prostitution, insider trading, to name a few. The parties on the receiving end of such transactions understandably try to launder the money, i.e., try to obscure it and legitimise the ill-gotten money.

MONEY-LAUNDERING IN INDIA

Money Laundering is one of the most commonly practiced financial offences in today’s digital world and to tackle the offence one-on-one, the Prevention of Money-Laundering Act, 2002 was passed by the Central Legislature. This act was passed in consonance with the resolution passed by the United Nations General Assembly in 1998.[2] It is an act to prevent money-laundering and to provide for confiscation of property  derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.[3]

Offence of money-laundering- “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”

Explanation.—For the removal of doubts, it is hereby clarified that,— 

  1. a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:— 
  2. concealment; or 
  3. possession; or 
  4. acquisition; or 
  5. use; or 
  6. projecting as untainted property; or 
  7. claiming as untainted property, 

in any manner whatsoever; 

  1. the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.[4]

Punishment for Money-Laundering[5]According to Section 4 of the Act, any person who commits the offence of money-laundering shall be punishable with-

  1. rigorous punishment for a term not less than 3 years but may extend to 7 years, and
  2. fine

Provision of punishment if money-laundering involves proceeds of crime relates to any offence specified under Paragraph 2 of Part A [6]of the Schedule attached to the Act.: If the crime involves money laundering of the proceeds of any of the offences mentioned in the Narcotic Drugs and Psychotropic Substances Act, 1985[7], the person committing the offence of money-laundering would be punishable with-

  1. rigorous punishment for a term not less than 3 years but may extend to 10 years, and
  2. fine
THE THREE STAGES OF MONEY-LAUNDERING

The ill-gotten money needs to be injected into the financial system for a successful case of money-laundering. In order to hide the original source of income, three essential stages are required to be followed. 

  1. Placement: It is the process by which the black money is formally injected back into the financial system.
  2. Layering: During this, the injected money is layered and in order to hide its original source, it is spread over numerous transactions.
  3. Integration: In this, the money that enters the financial system is such that its original association with the crime is hidden underneath numerous transactions and channels. This obliterates the money’s association with the original crime and makes it usable as clean money.
TECHNIQUES OF MONEY-LAUNDERING

Various techniques may be utilized at the different stages of money-laundering. Few of the most common ones are:

Hawala– Originally developed in India, hawala was a practice developed before the advent of western banking practices. It is one of the major remittance systems, used around the world. It exists parallel to the ‘traditional banking system’ and works in a similar fashion. The commission on hawala transactions are lesser as compared to bank charges and there are no formalities of opening a bank account or physical visit to banks. 

Example of a typical hawala transaction is when a Non-Resident Indian living abroad sends money back to his family in India. If he uses Hawala instead of normal Banking Channels, the money would reach the family physically and the process is cheaper and speedier.

Structuring Deposits- This is a method wherein a large amount is broken down into numerous smaller amounts and then deposited into banks by multiple people or one person over a period of time. The amount deposited at one time has to be less than the amount at which the banks are required to inform the government. This is more commonly known as Smurfing and the people depositing the money are known as smurfs.

Third Party Cheques- Clearing counter cheques drawn on different institutions, via third party accounts. These third party cheques and traveller’s cheques are generally purchased using proceeds of crimes. Establishing the nexus of these cheques with the source money is exceptionally difficult as cheques such as these are negotiable in multiple countries.

Credit Cards: Paying off Credit card debts at different bank counters is one way to wash off dirty money. These cards may be used to purchase assets, and for payment of goods or services.

EFFECTS OF MONEY-LAUNDERING
  • Economic Effects

Money Laundering is that termite which if left unattended can eat up the entire economy and the fiscal state of states. It threatens a nation’s international relations because of corruption of officials. In addition to these general issues, money laundering has disastrous effects and poses some major challenges to countries throughout the world. Some of these life altering effects of money laundering are:

  • Terrorism

Terrorism is a man-made catastrophe, and no person is the world is untainted by it. Terrorist activities cannot be carried out without major financing and here, money-laundering plays a huge role. Terrorists derive funding from both legitimate and illegitimate sources. The legitimate sources include abuse of charities and financing by major corporations and state sponsors. The illegitimate sources involve criminal activities like trade in drugs, smuggling, arms deals. The money used by these organisations need to be thoroughly cleaned so that it cannot be traced back to the sponsors in any case. For the purpose, terrorist organizations use a variety of methods to move money between numerous organisations and trade systems. The ultimate use of these laundered money is for large scale destruction of mankind, which not only has severe economic, but long term social, political physical effects as well.

  • Threat to Banking System

Banks all around the world are both targets and sources of Money laundering operations and other financial crimes. The function of banks is not limited to control of credit in the economy, but they also provide numerous instruments and services, both of which can be easily used to  hide the source of money. Money laundering is an organised crime, and the launderers work in a very sophisticated fashion. Launderers first legitimize their funds by introducing them into the financial system and when this is done, they obscure the origin of those funds through a series of numerous transactions scattered into different accounts. Hence, the banks become victims of this major crime unknowingly.

  • Threat to Political and Economic Stability

After the  dirty money is laundered and is brought into the main financial stream, the job is not complete. In fact, the ill effects of this offence begin after this. The absorption of money into the financial sector threatens the political and economic stability of the nation, and there are high chances of monetary instability and volatility in exchange and interest rates due to unforeseen cross border  transfer of funds.

It’s not only about the money: Socio-political effects

The obvious issue with Money Laundering stems from the fact that it is one of the biggest feeders for organized crime. Large amounts of ill-gotten gains and profits line the pockets of a few, who use that money to fund, not only their lifestyle, but also to perpetuate and create a model of self-sustaining crime throughout the country.       


This continues because within the bounds of organized crime, those involved flex a hegemony and coercive power over a population or a particular territory with the main goal of legitimizing, through whatever means necessary the proceeds of their criminal activities. This is done through influence and soft-power, but more often than not, further criminal misdeeds, intimidation, blackmail, bribes and eliminating the competition (Legal and Illegal business rivals) When ‘dirty money’ is successfully cleaned by criminals this leads to more drugs, crime, violence and terrorism in an ever-increasing circle of criminality which draws more and more people into its net.[8] When the road to fast money routes through illegal activity, many legitimate business and government employees too cross over to the other side in order to get  their hands on the prize.   


For this, trade in goods and services is crucial towards facilitating the functioning of organized crime, much like a legal business. The social ramifications that result from this are partly due to the victimization of innocent people, and partly due to the money that is laundered, after the fact.

  • Socio-Cultural Breakdown

Socio-cultural breakdown happens when there is general apathy and dissatisfaction amongst the citizens of a country (or the population of a territory), often brought about due to low rates of employment, Government indifference to the circumstances, an unwarranted subsidising impact on the economy and bitter animosity from various factions come together and stress the ties that ensure the smooth functioning of a place and its people. Once this occurrence sets in, one of the only means that is left to alleviate the impending monetary issues is often illegitimate-and stems from and flows into money laundering. Organized crime will often jump at this chance to recruit disenfranchised youth, particularly labour and exploits the hardship being faces, which elicits an obvious impact, as the strain on the social structure creates a workforce that is under and loyal to the mafia and subservient to organized crime structures.

Circumstances such as these also have the opposite effect. They effectively break down members’ ties to the formal society, essentially perpetuating the continual disintegration of socio-cultural and societal values.

Thus, victimization is rampant, not only in the form of victims of the crimes, but also through the persistent interaction of people with a criminally charged environment and the subsequent break from law and order.

  • Corruption

Corruption with regards to money laundering is the foremost systemic issue, as throughout the process, the first step of laundering, i.e., “placement” is the most vulnerable part of the entire process and the best chance at identification of it. 

Therefore, ‘third-party’ failures are often inserted into the system: like lawyers or accountants or those professionals who are most likely to identify the crime in its throws, ‘fail’ at their due-diligence.

Socially, this impacts the legacy of the Government and that of professional services, especially if they are knowingly involved as these are the professionals that are looked upon to structure and uphold the intrinsic morality of the fabric of the society.        
In large, market-oriented countries, the rate of transactions such as these can be processed at a higher rate, allowing for an increased frequency of exploitation of legislative and infra loopholes, which then become highly detrimental to consumers and businesses.
These corrupt practices seep into politics and the society, tearing at the very fabric that holds a country together, highlighting the inherent weakness and inefficiencies in a democratic set-up.

  • Human Trafficking

Human trafficking is the flesh trade of human beings (women and children being the most vulnerable) to fulfil the illicit demands for commercial sex work, forced labour and various forms of exploitation. Currently, there are over 40.3 million victims of human trafficking across the globe, and according to the recent FATF report; Financial Flows from Human Trafficking, the aggregated criminal proceeds of human trafficking reached $150 billion in 2018.[9] The sheer potential to be able to amass and generate such returns is what makes trafficking one of the most common predicate crime for money laundering.

Human Trafficking is a highly profitable venture, with a major social impact- primarily on the victims of trafficking because they are forced into a cycle of endless exploitation, but also often are integrated into the illegal trade market, by providing goods or money in exchange, which is subsequently used to maintain a hold and blackmail the victims into submissiveness.

Organized crime is deemed to be one of the most likely sources for human trafficking as the proceeds generated are massive, with over 2.5 million people exploited for gains, per annum,[10] the proceeds from which will be laundered into the system through legitimate sources and ‘cleaned’. This profit keeps the cycle going, as it provides the necessary capital to procure goods and services [11]for future use. Victimization is identified as the clearest and most destructive social fall-out as human trafficking promotes flesh trade, loss of livelihood, dignity, and the uprooting of all family and societal ties.

  • Drug Dealings

“There are only two industries that refer to their customers as ‘users’, one is of course IT, the other is the illegal drugs trade…” — Edward Tufte.

Essentially, human attention and the mind has become a commodity which is sought to be exploited, viz a viz the use of drugs to manipulate the sensory experience of humans, and trap them in a self-fulfilling cycle of dependence. This increasing dependence on drugs is a business model-one that organized crime syndicates are at the helm of.
The selling of drugs, perpetuates crimes and cycles increased drug-use. According to the UNO on drugs and Crime [12]the estimated retail value was over 300 billion USD, which then goes on to interfere with all levels of security including health, education, livelihood and socio-economic development.

Drug money forms a major part of money that is laundered, especially through off-shore accounts and ‘shell- companies’ and is used to build an empire of control and manipulation in the dark. This form of abuse runs a dark parallel structure to the international organizations, spanning territories and blurring boundaries. Drugs generate more in interest than most governments generate in tax, thereby providing serious socio-economic clout to those who are involved. Society heads a step further towards deprivation and degradation every time a billion is added to the cartel’s pockets.

  • Economic Monopoly

Truly managing to calculate the damages caused by laundered money is close to impossible as it is subject to the unique challenges faced by individual countries and their priorities. These being so unique that there will always be a class of criminals who will find ways to exploit institutional loopholes. This exploitation fuelled by Money Laundering activities compromises the integrity of a country’s financial institutions and markets.

The most serious micro-economic effect of Money Laundering would be the ability to provide goods and services through legal, often revered ‘fronts’[13] as well as subsidized prices, leading to the possibility of jeopardizing stable markets and undermining them leading to loss of financial control. Because these fronts are on the rise, and are fuelled by seemingly unlimited and endless cash supplies, legitimate businesses are forced out of the market, which lowers competition and transfers control to crime syndicates waiting in the shadows, deeply affecting what, how and when society consumes, what the mafia wants them to consume.


Money Laundering thereby, through seemingly  impenetrable market forces actually ends up controlling “ free-of-coercion” consumer behaviour, dictating the purchasing power and choice, subtly manipulating the macro-economics of a country in the long run.

CONCLUSION

Fight against Money laundering is not a passive process, it involves active participation of the legislature, executive, judicial mechanisms, and the ground personnel. Launderers of black money are on a continuous hunt, seeking newer, better, efficient, and more effective means to exploit people, their desires and control the economy that curbing their activities is an obstreperous task.

Money laundering is not only a crime that is spoken about in hushed tones, it is, infact sophisticated white-collar crime which effects the economic and financial state of the Nation. It has a polymorphous effect wherein it has far-reaching effects on the society at large. Being a major catalyst in terror financing, it is a promoter of crimes like prostitution, drug trafficking, smuggling, and illicit arms trade, as the parties have numerous ways of cleaning  funds earned in such transactions and effecting the economic dynamism of the international arena. 

Realising the grave effect this act has on economies of nations, major International bodies like the United Nations and the World Bank have taken various steps to combat this growing menace and have also pushed their members to do the same. Numerous International Conventions and Resolutions have been passed by these organisations in the hopes of ensuring a semblance of control and an eventual eradication of crimes related to Money Laundering.

Countries around the world are working at an individual level as well as together to vet and implement as many anti- money laundering procedures as they can to protect its citizens and the world at large. 

India, as one of the fastest growing economies, can effectively contribute to the international dialogue on Money Laundering and work towards stopping this insidious problem in its tracks, once and for all.


[1] Definition by Investopedia

[2] United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988, Art. 3 & 5

[3] The Prevention of Money-Laundering Act, 2002, (Act 15 of 2003), Preamble

[4] The Prevention of Money-Laundering Act, 2002, (Act 15 of 2003) s. 3

[5] The Prevention of Money-Laundering Act, 2002, (Act 15 of 2003) s. 4

[6] poppy straw, Coca plant and Coca leaves, prepared opium, Opium poppy and Opium, Cannabis plant and cannabis, Manufactured drugs and preparations, Psychotropic substances, Embezzlement of opium by its cultivator,are some of the offending substances

[7] The Narcotic Drugs and Psychotropic Substances Act, 1985 (Act 61 of 1985) Chapter IV

[8] Duncan Taylor “Money Laundering: Why it’s bad for Society, Business and the Economy. Infinity Star. Available at: https://www.infinitysolutions.com/blog/money-laundering-why-it-s-bad-for-society-business-and-the-economy/ (Accessed on 15 March 2020, 16:42 PM)

[9] FATF – APG (2018), Financial Flows from Human Trafficking, FATF, Paris, France,

http://www.fatf-gafi.org/publications/methodandtrends/documents/human-trafficking.html

[10] Ibid.

[11] Humans, being commodified

[12] UNDOC 2005

[13] Primarily cash-based business used to provide cover to money launderers and help circulate the ‘clean; money into the economy. 

Published by meghachaturvedi

Associate Partner, H.K. Law Offices

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