India Internal Security | Money-laundering- Introduction and causes

Mahatma Gandhi said:

“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or another will always be needed.”

The primary function of money is to serve as a medium of exchange, and as such it is accepted without question in final discharge of debts or payment of goods or services.

Money is the root cause of many evils like corruption, black marketing, smuggling, drug trafficking, tax evasion, and the buck does not stop here it goes to the extent of sex tourism and human trafficking (a human selling another human in the era of human rights).

The more developed the nation, the more the standard of living of the people. People want more money to cater to their needs and at a point of time they don’t hesitate to have money from any source (black or white who cares). This is the available soft corner where the concept of money laundering enters and prospers.

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.

Article 1 of EC Directive defines the term ‘money laundering’ as “the conversion of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime”.

Thus, Money Laundering is not an independent crime, it depends upon another crime (predicate offence), the proceeds of which is the subject matter of the crime in money laundering. From the legal point of view, the Achilles’ heel in defining and criminalizing money laundering relates to the so-called ‘predicate offences’ understood as the criminal offences which generated the proceeds thus making laundering necessary.

Hiding or disguising the source of certain proceeds will of course, not amount to money laundering unless these proceeds were obtained from a criminal activity. Therefore, what exactly amounts to money laundering, which actions and who can be prosecuted is largely dependant on what constitutes a predicate crime for the purpose of money laundering.

Money Laundering – An Organized Crime:

Money Laundering has a close nexus with organized crime. Money Launderers accumulate 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. It is well recognized that through the huge profits the criminals earn from drug trafficking and other illegal means, by way of money laundering could contaminate and corrupt the structure of the State at all levels, this definitely leads to corruption. Further, this adds to constant pursuit of profits and the expansion into new areas of criminal activity.

Through money laundering, organized crime diversifies its sources of income and enlarges its sphere of action. The social danger of money laundering consists in the consolidation of the economic power of criminal organizations, enabling them to penetrate the legitimate economy. In advanced societies, crime is increasingly economic in character.

Criminal associations now tend to be organized like business enterprises and to follow the same tendencies as legitimate firms; specialization, growth, expansion in international markets and linkage with other enterprises. The holders of capital of illegal origin are prepared to bear considerable cost in order to legalize its use.

As per an estimate of the International Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds Gross Domestic Product. Although money laundering is impossible to measure with precision, it is estimated that US$300 billion to US$500 billion in proceeds from serious crime (not tax evasion) is laundered each year.

It is really not possible to enlist all the techniques of Money Laundering exercise; however, some techniques are illustrated for the sake of understanding:

  1. Hawala – Hawala is an alternative or parallel remittance system. It exists and operates outside of, or parallel to ‘traditional’ banking or financial channels. It was developed in India, before the introduction of western banking practices, and is currently a major remittance system used around the world. In hawala networks the money is not moved physically.
  2. Structuring Deposits – Also known as smurfing, this method entails breaking up large amounts of money into smaller, less-suspicious amounts. In the United States, thisn smaller amount has to be below $10,000 — the dollar amount at which U.S. banks have to report the transaction to the government. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time.
  3. Third-Party Cheques – Utilizing counter cheques or banker’s drafts drawn on different institutions and clearing them via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.
  4. Credit Cards – Clearing credit and charge card balances at the counters of different banks. Such cards have a number of uses and can be used across international borders. For example, to purchase assets, for payment of services or goods received or in a global network of cash-dispensing machines.

Causes of Increase in Money Laundering and Inability to Control

There are various causes for increase in Money Laundering and the few of them can be enlisted as follows which is popularly known as ‘Features of an Ideal Financial Haven’:

  • No deals for sharing tax information with other countries –
  • Availability of instant corporations
  • Corporate Secrecy Laws – as the corporate law of certain countries enables launderers to hide behind shell companies.
  • Excellent Electronic Communication
  • Tight Bank Secrecy Laws
  • A Government that is Relatively Invulnerable to Outside Pressures
  • A high degree of Economic Dependence on the Financial Services Sector
  • A Geographical Location that Facilitates Business Travel to and from rich neighbors.
  • Increase in sophistication and employment of professional people for doing the task
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By B2B

Revisiting the Basics

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