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MONEY LAUNDERING IN INDIA

ASHUTOSH SINGH
B.A.LL.B (HONS.)
ROLL NO. - 27

FACULTY OF LAW,
UNIVERSITY OF ALLAHABAD
Under the able guidance of
Mr. R. K Chaubey

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INDEX
S. No.
1
2
3
4
5
6
7
8
9

Description
Acknowledgement
Introduction
Historical Evolution
Effects
Instances- Case Studies
Prevention
Suggestions
Conclusions
Bibliography

Page No.
3
4
5
7
8
9
12
13
14

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ACKNOWLEDGEMENT
I would like to express my deepest gratitude towards my teacher Mr. R. K Chaubey for his
excellent guidance and valuable suggestions that have helped me in completing this project. His
teachings and an outstanding command in the subject has given me an opportunity to understand
it in a better way.
I would also like to thank my family and friends who have supported me in making this project
better and without which this project was impossible.
Fair criticism for the betterment of this project is most welcome and will be highly appreciable.
Ashutosh Singh,
VII Semester,
Roll No. 27,
Section A,
B.A. LLB (Hons.).

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MONEY LAUNDERING IN INDIA


INTRODUCTION
Money Laundering refers to the conversion or "Laundering" of money which is illegally
obtained, so as to make it appear to originate from a legitimate source. Money Laundering is
being employed by launderers worldwide to conceal criminal activity associated with it such as
drug / arms trafficking, terrorism and extortion. But in simple terms it is the Conversion of Black
money into white money.
Money laundering is the criminal practice of filtering ill-gotten gains or dirty money through a
series of transactions, so that the funds are cleaned to look like proceeds from legal activities.
Money laundering is driven by criminal activities and conceals the true source, ownership, or use
of funds. The International Monetary Fund has stated that the aggregate size of money
laundering in the world could be somewhere between 2 and 5 percent of the worlds gross
domestic product.
Money Laundering has a close nexus with organized crime. Money Launderers amass 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. Criminal activities such as drug trafficking acquire an air of
anonymity through cash transactions.
The most common types of criminals who need to launder money are drug traffickers,
embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drug
traffickers are in serious need of good laundering systems because they deal almost exclusively
in cash, which causes all sorts of logistics problems. One important aspect of money laundering
is the tendency and need for perpetrators to operate cross border schemes for the purpose of
concealment and/or to take advantage of the uneven developments in the national anti money
laundering regimes.
Banks and financial institutions are vulnerable from the Money Laundering point of view since
criminal proceeds can enter banks in the form of large cash deposits. Bank officials therefore
need to exercise constant vigilance in opening of accounts with large cash deposits and in
checking suspicious transactions.

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HISTORICAL EVOLUTION
Efforts to launder money and finance terrorism have been evolving rapidly in recent years in
response to heightened countermeasures. The international community has witnessed the use of
increasingly sophisticated methods to move illicit funds through financial systems across the
globe and has acknowledged the need for improved multilateral cooperation to fight these
criminal activities.
Money laundering as an expression is one of fairly recent origin. The original sighting was in
newspapers reporting the Watergate scandal in the United States in 1973. The expression first
appeared in a judicial or legal context in 1982 in America.
Money laundering as a crime only attracted 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 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 monies1.
As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime,
which to a large extent also mark the operations of organized and transnational crime, are its
global nature, the flexibility and adaptability of its operations, the use of the latest technological
means and professional assistance, the ingenuity of its operators and the vast resources at their
disposal.
In India money laundering is popularly known as Hawala transactions. It gained popularity
during early 90s when many of the politicians were caught in its net. Hawala is an alternative or
parallel remittance system. The Hawala Mechanism facilitated the conversion of money from
black into white. "Hawala" is an Arabic word meaning the transfer of money or information
between two persons using a third person2. The system dates to the Arabic traders as a means of
avoiding robbery. It predates western banking by several centuries.
METHODOLOGICAL PHASES:
The basic money laundering process has three steps:
1. Placement - At this stage, the launderer inserts the dirty money into a legitimate financial
institution. This is often in the form of cash bank deposits. This is the riskiest stage of the
laundering process because large amounts of cash are pretty conspicuous, and banks are required
to report high-value transactions.
2. Layering - Layering involves sending the money through various financial transactions to
change its form and make it difficult to follow. Layering may consist of several bank-to-bank
transfers, wire transfers between different accounts in different names in different countries,
making deposits and withdrawals to continually vary the amount of money in the accounts,
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changing the money's currency, and purchasing high-value items (boats, houses, cars, diamonds
etc.) to change the form of the money. This is the most complex step in any laundering scheme,
and it's all about making the original dirty money as hard to trace as possible.
3. Integration - At the integration stage, the money re-enters the mainstream economy in
legitimate-looking form -- it appears to come from a legal transaction. This may involve a final
bank transfer into the account of a local business in which the launderer is "investing" in
exchange for a cut of the profits. At this point, the criminal can use the money without getting
caught. It's very difficult to catch a launderer during the integration stage if there is no
documentation during the previous stages.
Following are the various measures adopted all over the world for money laundering, even
though it is not exhaustive but it encompasses some of the most widely used methods.
Structuring deposits
This method is also known as smurfing. In this method large amount of money is broken into
smaller, less-suspicious amount.
Overseas banks underground/ alternative banking
Money launderers often send money through various "offshore accounts" in countries that have
bank secrecy laws, meaning that for all intents and purposes, these countries allow anonymous
banking. A complex scheme can involve hundreds of bank transfers to and from offshore banks.
Shell companies
These are fake companies that exist for no other reason than to launder money. They take in dirty
money as "payment" for supposed goods or services but actually provide no goods or services;
they simply create the appearance of legitimate transactions through fake invoices and balance
sheets.
Investing in legitimate business
Launderers sometimes place dirty money in otherwise legitimate businesses to clean it. They
may use large business like brokerage firms or casinos that deal in so much money it's easy for
the dirty stuff to blend in, or they may use small, cash-intensive businesses like bars, car washes,
strip clubs or check-cashing stores.
It gives an overview as to how this menace has developed into transnational business involving
various sophisticated techniques and procedures. The ill-effects of money laundering are
unimaginable and have been discussed in next section.

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EFFECTS
Ill-effects of money laundering are seen all over the world on almost all the sectors of life.
More noticeable are economic effects which are on a broader scale. Developing countries often
bear the brunt of modern money laundering because the governments are still in the process of
establishing regulations for their newly privatized financial sectors. This makes them a prime
target. In the 1990s, numerous banks in the developing Baltic States ended up with huge, widely
rumoured deposits of dirty money. Bank patrons proceeded to withdraw their own clean money
for fear of losing it if the banks came under investigation and lost their insurance. The banks
collapsed as a result.
Other major issues facing the world's economies include errors in economic policy resulting
from artificially inflated financial sectors. Massive influxes of dirty cash into particular areas of
the economy that are desirable to money launderers create false demand, and officials act on this
new demand by adjusting economic policy. When the laundering process reaches a certain point
or if law enforcement officials start to show interest, all of that money will suddenly disappear
without any predictable economic cause resulting in that financial sector to fall apart. Laundered
money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax
revenue.
The negative economic effects of money laundering on economic development are difficult to
quantify. It is clear that such activity damages the financial-sector institutions that are critical to
economic growth, reduces productivity in the economys real sector by diverting resources and
encouraging crime and corruption, which slow economic growth, and can distort the economys
external sector international trade and capital flows to the detriment of long-term economic
development. Money laundering also facilitates crime and corruption within developing
economies, which is the antithesis of sustainable economic growth. Money laundering reduces
the cost of doing business for the criminal element, thereby increasing the level of crime.
Money laundering can also be associated with significant distortions to a countrys imports and
exports. On the import side, criminal elements often use illicit proceeds to purchase imported
luxury goods, either with laundered funds or as part of the process of laundering such funds.
Such imports do not generate domestic economic activity or employment, and in some cases can
artificially depress domestic prices, thus reducing the profitability of domestic enterprises.

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INSTANCES: CASE STUDIES


Money laundering is the process that takes place every day in every part of the world. Here are
few instances when they were unearthed and resulted in a great lesson for our policy makers.
Russian Money Laundering Scandal
This scandal became public during the summer of 1999, with media reports of $7 billion in
suspect funds moving from two Russian banks through a U.S. bank to thousands of bank
accounts throughout the world. Two Russian banks deposited more than $7 billion in
correspondent bank accounts at a New York bank. After successfully gaining entry for these
funds into the U.S. banking system, the Russian banks transferred amounts from their New York
bank correspondent accounts to commercial accounts at the bank that had been opened for three
shell corporations. In February 2000, guilty pleas were submitted by a bank employee and
spouse and the three corporations for conspiracy to commit money laundering, operating an
unlawful banking and money transmitting business in the United States.
Operation Wire Cutter
The U.S. Customs Service, in conjunction with the Drug Enforcement Administration (DEA) and
Colombian Departamento Administrativo de Seguridad, arrested 37 people in January 2002 as a
result of a two-and-one-half-year undercover investigation of Colombian peso brokers and their
money laundering organizations. These people are believed to have laundered money for several
Colombian narcotics cartels. Laundered monies were subsequently withdrawn from banks in
Colombia in Colombian pesos. Investigators seized more than $8 million in cash, 400 kilos of
cocaine, 100 kilos of marijuana, 6.5 kilos of heroin, nine firearms, and six vehicles.
Wire Remittance Company
Both a wire remittance company and a depository institution filed SARs outlining the movement
of about $7 million in money orders through the U.S. account of a foreign business. The wire
remittance company reported various persons purchasing money orders at the maximum face
value of $500 to $1,000 and in sequential order. They received amounts ranging from $5,000 to
$11,000. The foreign business identified by the wire remittance company also was identified as a
secondary beneficiary. The money orders cleared through a foreign banks cash letter account at
the U.S. depository institution.

The Indian cases involved that of Ketan parikh who brought the stock market to fall and many
Indian politicians who received kickbacks for performing there executive functions through
Hawala channels. The Hawala Mechanism left virtually no paper trail, which would attract
investigations7. The profits generated from Hawala were surreptitiously invested in real estate,
gilt edged securities etc., to launder them. The list is unending and there is dire need to control
these forces.

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PREVENTION
PREVENTION OF MONEY LAUNDERING ACT, 2002
The combating of money laundering presupposes the existence of capacity and resources at
national level. In India Prevention of Money-Laundering Act, 2002 has been passed which came
into effect since 1st of July, 2005. As per Section 3 of the Act, Offence of money laundering
covers those persons or entities who 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 and projecting it as untainted property, such person or entity shall be guilty
of offence of money-laundering.
Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for
a term which shall not be less than three years but which may extend to seven years and shall
also be liable to fine which may extend to five lakh rupees and for the offences mentioned in
paragraph 2 of Part A of the Schedule, the punishment shall be up to ten years.
Section 12 (1) prescribes the obligation on Banking companies, financial institutions and
intermediaries (a) to maintain certain records detailing the nature and value of the transaction
which may be prescribed, whether such transactions comprise of a single transaction or a series
of transactions integrally connected to each other, and where such series of transactions take
place within a month; 12 (b) to furnish information of transactions referred to in clause (a) to the
Director within such time as may be prescribed and to (c) verify and maintain the records of the
identity of all its clients, As per Section 12 (2), the records referred to in sub- Section (1) as
mentioned above, is required to be maintained for a period of ten years from the date of cessation
of the transactions between the clients and the banking company or financial institution or
intermediary, as the case may be.
An effective anti-money laundering program will help minimize exposure to transaction,
compliance, and reputation risks. Such a program should include account opening controls and
the monitoring and reporting of suspicious activity. The Reserve Bank of India's extensive AntiMoney Laundering (AML) guidelines has become effective from March 2006.
The AML norms such as "Know Your Customer" emphasize that banks must keep a record of
their customers' backgrounds in order to reduce and control the risk of money laundering. The
Money Laundering Control Act of 1986 further defined money laundering as a federal crime.
The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial
institutions.
ANTI MONEY LAUNDERING STANDARDS
RBI issued Master Circular on Know Your Customer (KYC) norms/ Anti-Money Laundering
(AML) standards/ Combating of Financing of Terrorism (CFT)/ Obligation of banks under
Prevention of Money Laundering Act, 2002 and Banks were advised to follow certain customer
identification procedure for opening of accounts and monitoring transactions of a suspicious
nature for the purpose of reporting it to appropriate authority. These KYC guidelines have been
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revisited in the context of the Recommendations made by the Financial Action Task Force
(FATF) on Anti-Money Laundering (AML) standards and on Combating Financing of Terrorism
(CFT). Banks have been advised to ensure that a proper policy framework on KYC and AML
measures with the approval of the Board is formulated and put it place.
The Objective of KYC Norms/ AML Measures/ CFT Guidelines is to prevent banks from being
used, intentionally or unintentionally, by criminal elements for money laundering or terrorist
financing activities. KYC procedures also enable banks to know/ understand their customers and
their financial dealings better which in turn help them manage their risks prudently.
OBLIGATION OF BANKS
Banks should keep in mind that the information collected from the customer for the purpose of
opening of account is to be treated as confidential and details thereof are not to be divulged for
cross selling or any other like purposes. Banks should, therefore, ensure that information sought
from the customer is relevant to the perceived risk, is not intrusive, and is in conformity with the
guidelines issued in this regard. Any other information from the customer should be sought
separately with his/her consent and after opening the account. Banks should ensure that any
remittance of funds by way of demand draft, mail/ telegraphic transfer or any other mode and
issue of travellers cheques for value of Rupees fifty thousand and above is effected by debit to
the customers account or against cheques and not against cash payment.
Banks should ensure that provisions of Foreign Contribution (Regulation) Act, 1976 as amended
from time to time, wherever applicable are strictly adhered to.
KYC Policy
Banks should frame their KYC policies incorporating the following four key elements:
Customer Acceptance Policy;
Customer Identification Procedures;
Monitoring of Transactions; and
Risk Management.
For the purpose of KYC policy, a Customer is defined as:
A person or entity that maintains an account and/or has a business relationship with
the bank;
One on whose behalf the account is maintained (i.e. the beneficial owner);
Beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers, Chartered Accountants, Solicitors etc. as permitted under the law; and
Any person or entity connected with a financial transaction which can pose significant
reputational or other risk to the bank, say, a wire transfer or issue of a high value demand draft as
a single transaction.
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THE FINANCIAL INTELLIGENCE UNIT - INDIA (FIU-IND)


While the Prevention of Money Laundering Act (PMLA) 2002, forms the core framework for
combating money laundering in the country, The Financial Intelligence Unit - India (FIUIND) is
the nodal agency in India for managing the AML ecosystem and has significantly helped in
coordinating and strengthening efforts of national and international intelligence, investigation
and enforcement agencies in pursuing the global efforts against money laundering and related
crimes. These are specialized government agencies created to act as an interface between
financial sector and law enforcement agencies for collecting, analyzing and disseminating
information, particularly about suspicious financial transactions.
In terms of the PMLA Rules, banks are required to report information relating to cash and
suspicious transactions and all transactions involving receipts by non-profit organizations of
value more than rupees ten lakh or its equivalent in foreign currency to the Director, FIUIND
in respect of transactions.
It receives prescribed information from various entities in financial sector under the
Prevention of Money Laundering Act 2002 (PMLA) and in appropriate cases disseminates
information to relevant intelligence/ law enforcement agencies which include Central Board of
Direct Taxes, Central Board of Excise & Customs Enforcement Directorate, Narcotics Control
Bureau, Central Bureau of Investigation, Intelligence agencies and regulators of financial sector.
FIU-IND does not investigate cases.

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SUGGESTIONS
As it can be seen that money laundering involves activities that are international in nature and are
also at a greater level, therefore, to make a heavy impact it is necessary that all countries should
enact strict and as far as possible same laws so that the money launderers will have no place to
target in order to launder their proceeds of crime by way of weakness of jurisdiction or the like.
Since the States have no obligation in deciding which offences should be considered as predicate
offences to money laundering there is no consensus into the international harmonizing efforts for
anti-money laundering. Thus, there is a need to enlist common predicate offences to solve the
problem internationally particularly keeping in mind the trans-national character of the offence
of money laundering.
Furthermore, the provision of financial confidentiality in other countries is an issue. The states
are unwilling in compromising with this confidentiality. There is a need to draw a line between
such financial confidentiality rules and these financial institutions becoming money laundering
havens.
Apart from that, many a people are of the opinion that money laundering seem to be a victimless
crime. They are unaware of the harmful effects of such a crime. So there is a need to educate
such people and create awareness among them and therefore infuse a sense of watchfulness
towards the instances of money laundering. This would also help in better law enforcement as it
would be subject to public examination. Moreover, to have effective anti-money laundering
measures there need to be a proper coordination between the Centre and the State. For that the
tussle between the two should be removed. The laws should not only be the responsibility of the
Centre but it should be implemented at the State level also. The more decentralized the law
would be the better reach it will have. Therefore, to have an effective anti-money laundering
regime, one has to think regionally, nationally and globally.

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CONCLUSION
Money Laundering is a serious threat to financial system of all countries and it leads to
destruction of the countrys sovereignty and character. The combating of money laundering has
assumed an urgent impetus at both national and international levels as a result of the scale that
money laundering has begun to assume, especially with respect to the financing of terrorist acts.
The efforts being made to combat money laundering are beginning to bear fruits in that it is now
taking centre stage in all jurisdictions. No one wants to be left behind mainly due to the
consequences of such a situation those lagging behind might find it difficult to transact and do
business with the rest of the complying world.
The negative economic effects of money laundering on economic development are difficult to
quantify, just as the extent of money laundering itself is difficult to estimate. Nonetheless, it is
clear from available evidence that allowing money laundering activity to proceed unchallenged is
not an optimal economic-development policy because it damages the financial institutions that
are critical to economic growth, reduces productivity in the economys real sector by diverting
resources and encouraging crime and corruption, and can distort the economys international
trade and capital flows to the detriment of long-term economic development.
Developing countries strategies to establish offshore financial centres as vehicles for economic
development are also impaired by significant money laundering activity through OFC channels.
Effective anti-money-laundering policies, on the other hand, reinforce a variety of other good
governance policies that help sustain economic development, particularly through the
strengthening of the financial sector. Despite the positive developments, the criminals are
constantly devising more elaborate and evasive means to circumvent anti money laundering
efforts.
We have to understand that it is problem not only for the government of the country but for the
people at large. Public awareness is necessary as masses do not understand the problem itself.
Our education system should be able to inculcate the ideologies that our future generation does
not get involved in this process. There needs to be a vigilant mechanism and our judiciary needs
to punish these criminals early to send out a message that money laundering is not tolerable to
this democratic society.

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BIBLIOGRAPHY
The books, websites and other sources which have helped me in completing this project include
the following:

1.
2.
3.
4.
5.

www.wikipeida.org
www.inidaforensic.com
www.fiuinida.gov.in
Prevention of Money Laundering Act, 2002
www.firstpost.com

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