UPSC Essentials: One word a day- Money laundering

Subjects: Polity, Governance and Ethics

What is money laundering?

Money laundering is the illegal process of making large amounts of money. This money is generated by a criminal activity but may appear to come from a legitimate source. Criminal activities include drug trafficking, terrorist funding, illegal arms sales, smuggling, prostitution rings, insider trading, bribery, and computer fraud schemes that produce large profits.

What are the different stages involved in money laundering?

Generally, money laundering is a three-stage process :

1) Placement: The crime money is injected into the formal financial system.

2) Layering: Money injected into the system is layered and spread over various transactions and book-keeping tricks to hide the source of origin.

3) Integration: Laundered money is withdrawn from the legitimate account to be used for criminal purposes. Now, money enters the financial system in such a way that the original association with the crime is disassociated. The money now can be used by the offender as legitimate money.

Note: All three sources may not be involved in money laundering. Some stages could be combined or repeated many times.

What are different methods of money laundering?

– smurfing (the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection.)

– use of currency exchanges

– “mules” (cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.)

– investing in commodities such as gems and gold that can be moved easily to other jurisdictions

– discreetly investing in and selling valuable assets such as real estate, cars, and boats;

– gambling and laundering money at casinos;

– counterfeiting

– Using shell companies (inactive companies or corporations that essentially exist on paper only).

– Hawala transactions

What are some of the national and global efforts to combat money laundering?

1) Some of the national efforts are- The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, Narcotic Drugs and Psychotropic Substances Act, 1985, and Prevention of Money-Laundering Act, 2002 (PMLA), PMLA (Amendment) Act, 2012.

Other than these efforts two important agencies/ units involved are-

Financial Intelligence Unit-IND: It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Enforcement Directorate (ED):

It is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime in India. Main function of ED is to Investigate offenses of money laundering under the provisions of the Prevention of Money Laundering Act, 2002(PMLA).

Note: India is a full-fledged member of the FATF and follows its guidelines.

2) Some of the global efforts are: The Vienna Convention, The 1990 Council of Europe Convention, The International Organization of Securities Commissions (IOSCO), The Financial Action Task Force (It has been set up by the governments of the G-7 countries), IMF, The United Nations office on Drugs and Crime.

Point to ponder: Can cryptocurrencies be used in money laundering?

(sources: fatf-gafi.org, investopedia.com)