Money Laundering

Context

• Recently the Indian government has expanded the scope of the PMLA Act 2002 to include additional reporting entities and enhanced the recording of financial transactions. These amendments aim to strengthen the anti-money laundering framework in India and empower authorities to combat money laundering more effectively.

What is Money Laundering?

• Definition: Money laundering is the process of hiding the source of money obtained from illegal sources and converting it to a clean source, for the purpose of avoiding prosecution, conviction, and confiscation of the criminal funds.
• As per FATF: The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

Various Technique of Money Laundering

• Shell Companies: Setting up fictitious entities to create the appearance of legitimate business activity and facilitate the movement of funds.
• Smurfing/Structuring: Breaking down large sums of money into smaller transactions to avoid reporting thresholds and conceal the source of funds.
• Offshore Accounts: Using offshore banks or jurisdictions with strict bank secrecy laws to hide the true ownership and control of funds.
• Trade-Based Laundering: Manipulating invoices, over- or under-invoicing goods or services in international trade transactions to disguise the movement of funds.
• Money Mules: Recruiting individuals to transfer funds on behalf of criminals, making it difficult to trace the money back to its original source.
• Cryptocurrencies: Utilizing digital currencies like Bitcoin to obfuscate transactions and launder money across various blockchain platforms.
• Shell Banks: Establishing banks without physical presence or legitimate banking operations to facilitate money transfers without proper oversight.
• Casino Laundering: Converting illicit funds into chips, gambling them, and then cashing out with "clean" money from the casino.
• Real Estate Investments: Purchasing properties with illicit funds to legitimize the money and generate rental income or capital gains.
• Layered Transactions: Conducting multiple complex financial transactions to obscure the audit trail and confuse investigators.

Impact of Money Laundering

Economic Impact

• Distortion of Economic Sectors: Money laundering disrupts fair competition and market integrity by injecting illicit funds into legitimate businesses.
• Undermining Financial Stability: Money laundering weakens the financial system, increasing the risk of crises and compromising the credibility of banks.
• Reduced Tax Revenues: Money laundering enables tax evasion, leading to lower government revenues and reduced public spending.
• Inequality and Poverty: Money laundering worsens wealth inequality, hindering equitable economic development and perpetuating poverty.
• Distorted Investment Patterns: Money laundering misallocates resources by diverting funds into sectors that may not contribute to genuine economic growth.
• Increased Costs for Businesses and Consumers: Anti-money laundering measures impose costs on businesses, which are passed on to consumers through higher prices.

Social impact

• Undermining Rule of Law: Money laundering undermines the rule of law by allowing criminals to benefit from their illegal activities, eroding trust in legal systems.
• Impeding Development: Money laundering diverts funds from legitimate economic activities and social programs, hindering development efforts in areas such as education, healthcare, and infrastructure.
• Facilitating Organized Crime: Money laundering provides financial support to organized crime groups, allowing them to expand operations and engage in further criminal activities.
• Reinforcing Corruption: Money laundering perpetuates corruption by infiltrating and corrupting public and private institutions, undermining transparency, and accountability.
• Supporting Illegal Markets: Money laundering sustains illegal markets, such as drug trafficking and human trafficking, by legitimizing and profiting from illicit proceeds.
• Exacerbating Inequality: Money laundering contributes to wealth inequality as illicit funds concentrate in the hands of a few, widening social disparities.

Political impact

• Corruption and Capture of Institutions: Money laundering infiltrates and corrupts institutions, compromising their integrity and effectiveness.
• Undermining Democracy: Money laundering distorts political processes by allowing illicit funds to influence elections and policy decisions, undermining fairness, and transparency.
• Weakening Governance and Rule of Law: Money laundering weakens governance structures, eroding the rule of law and diminishing public trust in institutions.
• State Fragility and Security Risks: Money laundering contributes to state fragility, undermining national security and exacerbating conflicts.
• Illicit Influence and Covert Operations: Money laundering facilitates covert operations and illicit influence, manipulating public opinion and political outcomes.
• Global Political Instability: Money laundering funds terrorism, supports rogue regimes, and destabilizes economies, contributing to global instability.

Security impact

• Financing Terrorism: Money laundering provides funds for terrorist activities, including recruitment and violence.
• Transnational Organized Crime: Money laundering strengthens organized crime groups involved in drug trafficking, human trafficking, and arms smuggling, posing security threats.
• State Destabilization: Money laundering contributes to state fragility, political unrest, and conflicts by supporting corruption and criminal networks.
• Cybersecurity Risks: Money laundering involving digital transactions and virtual currencies exposes vulnerabilities for cybercriminals to launder funds and finance illegal activities.
• Illicit Arms Trade: Money laundering legitimizes and funds the purchase of weapons, exacerbating regional conflicts and security threats.
• Border Security Challenges: Money laundering facilitates the cross-border movement of illicit funds, creating challenges for border security in detecting and preventing illegal financial flows.

Steps for tackling Menace of Money Laundering

Legal Framework

• The Income Tax Act, 1961: Mandates reporting of certain transactions, investigates tax evasion cases, and enables tax information exchange to detect and investigate money laundering activities.
• The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974: Targets smuggling activities and confiscates assets acquired through smuggling, which can be associated with money laundering.
• The Benami Transactions (Prohibition) Act, 1988: Prohibits benami transactions, where property is held in someone else's name, aiding in the identification and prevention of money laundering schemes.
• The Foreign Exchange Management Act, 2000 (FEMA): Regulates foreign exchange transactions, monitors cross-border movements of funds, and prevents money laundering associated with illegal foreign exchange activities.
• NIA Act, 2008: Provides investigative and legal powers to the National Investigation Agency (NIA) in cases related to terrorism, which can have links to money laundering.
• Fugitive Economic Offender Act, 2018: Targets economic offenders who flee the country to avoid prosecution, facilitates confiscation of their assets, and helps combat money laundering by such individuals.
• Prevention of Money Laundering Act, 2002: Provides a comprehensive framework for the prevention, detection, and prosecution of money laundering offenses, including the establishment of the Financial Intelligence Unit (FIU) and the enforcement of anti-money laundering measures.

Institutional Measure

• Enforcement Directorate (ED): The ED is a law enforcement agency responsible for enforcing economic laws and combating financial crimes, including money laundering, through investigations, seizures, and prosecutions.
• National Investigation Agency (NIA): The NIA is a specialized counter-terrorism law enforcement agency that investigates and prosecutes terrorism-related offenses, including those linked to financing of terrorism and money laundering.
• Combating Financing of Terrorism (CFT) Cell: The CFT Cell is a specialized unit within law enforcement agencies that focuses on identifying, tracking, and disrupting the financing of terrorism activities, including money laundering.
• Financial Intelligence Unit (FIU): The FIU is an independent government agency responsible for receiving, analysing, and disseminating information related to suspicious financial transactions to aid in the detection and prevention of money laundering and terrorist financing.

International Cooperation

• Vienna Convention, 1988: The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances provides a framework for international cooperation in combating drug-related crimes, including money laundering.
• The 1990 Council of Europe Convention: The Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime promotes international cooperation to combat money laundering and recover proceeds from criminal activities.
• Financial Action Task Force (FATF): The FATF is an intergovernmental organization that sets global standards and promotes the implementation of effective measures to combat money laundering, terrorist financing, and proliferation financing.
• Egmont Group: The Egmont Group is a network of financial intelligence units (FIUs) that facilitates the exchange of financial intelligence and enhances cooperation among FIUs worldwide to combat money laundering and terrorist financing.
• SDG Target Number 16.4: Sustainable Development Goal Target 16.4, adopted by the United Nations, aims to reduce illicit financial flows, combat organized crime, and strengthen the recovery of stolen assets as part of broader efforts to promote peaceful and inclusive societies.

Challenges to tackle Money laundering

• Weak Global Cooperation: Example-Different laws in different countries.
• Complex Transactions: Example-funds may be moved through multiple shell companies, layered through various financial institutions, or converted into different assets like real estate or art to hide their illegal source.
• Evolving Technology:Example-use of cryptocurrencies like Bitcoin.
• Regulatory Compliance: Example-Vague provision and complex language in money laundering act.
• Informal Economies: Example-funds from illegal activities (Drug trafficking, tax evasion) may be integrated into legitimate businesses operating in cash-based sectors
• Corruption: Example-when law enforcement officials or regulators are bribed or coerced into turning a blind eye to money laundering activities,
• Tax haven countries: Example-Cayman Islands, British Virgin Island, Mauritius etc.
• Data Analysis: Lack of use of advanced technology and expertise for analysing vast amounts of financial data to identify suspicious transactions.
• Public Awareness: Lack of awareness among individuals and organizations about money laundering.

Prevention of Money laundering act 2002

Recent Context-

• The government has recently made changes to the Prevention of Money Laundering Act (PMLA) to increase disclosures for non-governmental organizations and address loopholes.
• These changes are in preparation for India's assessment by the Financial Action Task Force (FATF), a global watchdog for money laundering and terrorist financing.

Recent Amendments to the PMLA:

• Inclusion of new entities: Chartered accountants, company secretaries, and cost and works accountants are now covered under the amended law when conducting financial transactions for clients.
• Expanded coverage of financial transactions
• Aadhaar verification for designated financial entities
• Definition clarification for PEPs: The amendment provides clarity on politically exposed persons (PEPs) who hold prominent public functions in foreign countries, such as heads of states or governments and military officers.

Concerns Related to recent amendment

• Misuse of powers: Risk of targeting political rivals or dissenters.
• Issues with ECIR (Enforcement Case Information Report)
• Accused not provided with details of allegations.
• Contrast to general criminal law: Burden of proof shifted to accused.
• Accused-bound to be a witness: Violation of right against self-incrimination.
• Inefficiency of ED: Low conviction rates despite numerous cases

Way Forward

• Internal Checks: Ensure consensus on constitutionality between adjudicating authority and ED.
• Process Not Punishment: Use ED's powers to expedite trials, preventing prolonged investigation as punishment.
• Operational Vigilance: Scrutinize ED's operations, assess conviction rate, address deficiencies.