Money laundering
Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source. Financing of terrorism is the financial support, in any form, of terrorism or those who encourage plan or engage in terrorism. Sources of terrorism may or may not be legitimate. The two activities are linked because the techniques used to launder money are essentially the same as those employed to conceal the sources and uses of terrorist financing. Governments around the world recognize the corrosive dangers that unchecked money laundering poses to their economic and political systems and has prescribed acts, rules and regulation for prevention of money laundering.
Profits generated by some organized criminal activities, such as drug trafficking or traffic in human beings, cause a threat not only to public safety, because of the huge economic power accumulated by a number of criminal organizations, but also financial systems themselves and to economic development. Recent events showed that terrorist groups also build financial empires, the purpose of which are specifically to undermine public safety and international financial stability.
The international efforts to combat money laundering since the beginning of the 1990s are built on strategies aiming at attacking criminal organizations through their financial operations, firstly to deprive them of the means to act, and secondly, by unraveling the web of their financial networks and financing methods; to gain knowledge of how better to combat them.
This strategy was first developed in the late 1980s, when law enforcement was faced with the growing threat caused by the Colombian drug cartels, particularly the Cali and Medellin cartels. Both criminal organizations accumulated such wealth and power that the issue turned from a public safety problem to a threat against the State itself.
How big is the problem? (money laundering)
The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organised crimes and to investigate to what extent these funds are laundered. The report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6 trillion) being laundered.
HOW MONEY IS LAUNDERED :
•Smurfing involves the use of multiple cash deposits, each smaller than the minimum cash reporting requirement.
•Misinvoicing of exports and falsification of import letters of credit and customs declarations can conceal cross-border transfers of, say, the proceeds of drug trafficking.
•Barter: stolen property (e.g., antiques or automobiles) can be exchanged, across national borders or domestically, for illegal substances.
• Parallel credit transactions can be used to avoid the formal economy, except for the final use made of the net proceeds of illegal activity to purchase legally marketed goods or services.
•Interbank wire transfers may not be subject to reporting on money laundering; bribery of bank officials can thus make it easier to conceal large illegal transfers between accounts.
• Derivatives that replicate insider trading opportunities (e.g., a synthetic version of a company stock subject to merger or takeover) can be used to avoid detection of an unusual change in a listed stock price.
IMPACTS :
1.ECONOMY :
II. The Financial Sector: Money Laundering Undermines Domestic Capital Formation
A. Money laundering erodes financial institutions
B. Money laundering weakens the financial sector's role in economic growth
C. Anti-money-laundering reforms support financial institutions through enhanced financial prudence.
III. The Real Sector: Money Laundering Depresses Growth
A. Money laundering distorts investment and depresses productivity
B. Money laundering facilitates corruption and crime at the expense of development
C. Money laundering can increase the risk of macroeconomic instability
IV. The External Sector: Money Laundering Diverts Capital Away from Development
A. Outbound capital flows: facilitating illicit capital flight
B. Inbound capital flows: depressing foreign investment
C. Trade: distorting prices and content.
V. Offshore Financial Centers: Money Laundering Hinders Their Development Role
A. OFCs as an economic-development strategy
B. Effect of money-laundering activity on OFC development
2.SOCIAL ASPECT AND CRIME:
On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity actually does pay off. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions. This means more fraud, more corporate embezzling (which means more workers losing their pensions when the corporation collapses), more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who don't break the law and don't make nearly the profits that the criminals do.
3.CRIMINALISATION OF POLITICS
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I. Money laundering and financing of terrorism: Fundamentals
Criminal organizations are involved primarily in profit-making crime,. They are constituted for this purpose as well as to exploit crime opportunities in a systematic and large scale manner. The consequence is that the operation of a criminal organization may generate a vast amount of wealth, but at the same time, a vast number of problems.
The generated cash is neither easy to hide nor to utilize. Sudden use of unexplained wealth may raise suspicion. investigators may easily establish a link between cash, illicit activities, and their perpetrator.
It is thus necessary, for criminal organizations to,
(1) erase the link between the crime and the money,
(2) erase the link between the money and its new owner, and
(3) shelter the profits from possible confiscation.
The above activities constitute the very nature of money-laundering, which generally develops in three phases:
- The first phase consists of introducing the funds gained from criminal activities into the banking and financial system; this phase has become more and more fraught with risk due to the heightened attention now given these movements of cash by law enforcement, and the now widespread requirement that banks report suspicious transactions.
- The second phase consists of putting the funds that have entered the financial system through a series of financial operations, the purpose of which is to mislead potential investigators and to give these funds the appearance of having a legal origin. This is the money-laundering phase that most often uses offshore mechanisms. Numerous comings and goings between financial havens and the launderers’ banks, punctuated by false invoices, false loans, or other devices, ultimately mislead investigators regarding the origin of the money.
- Finally, the third phase in money-laundering, once these funds appear to have a legitimate origin, consists of reintroducing the funds into the legal economy, - through consumption of luxury items, since the goal of profitable criminal activity is first to be able to “burn” the ill-gotten funds;
- through investments in common place assets, including shares in companies, real estate, etc.;
- through investments in economic entities that are themselves susceptible of becoming money laundering machines including casinos, hotels, restaurants, cinemas, etc., as well as in companies in which payments are made in cash and where the dirty money can easily be mingled.
The Strange Links Between Organized Crime and Terrorism
-criminal assets and terrorist assets represent the same threats to financial systems and public institutions, and it is clear that the strategies designed to fight criminals when they channel their funds through financial systems may apply with the same success in combating terrorist financing cases.
-mysterious ties often unite organized crime and terrorism. A sort of objective alliance forms in many instances between criminal and terrorists groups, fed by their convergent interests: criminal organizations benefit from the ability of terrorist and guerrilla organizations to do damage, while the latter in turn benefit from the financing that criminal activities can obtain for them. The strange similarity between the geography of terrorism movements and other guerrillas and the geography of large-scale drug trafficking is selfexplanatory:
e.g.the Revolutionary Armed Forces of Colombia (FARC) are to be found in coca producing areas, whilst the African civil wars are taking place in areas where precious stones and other natural riches are extracted; the soldiers of Al-Qaeda in Afghanistan and the Khun Sa rebels in Myanmar foment their armed actions in the world’s largest opium-producing areas. Cambodia, Chechnya, the Balkans, and Sri Lanka are equally interesting areas for studying the manner in which ideology can become the front for organized crime, or the manner in which organized crime can come to the aid of terrorist causes.
The Sources of Terrorism Financing:
-criminal activities are today an increasingly more important part of the terrorist economy, and these activities vary according to the terrorist organizations concerned. The criminal activity that provides by far the largest funding for terrorism is drug trafficking. However, other activities also provide significant sources of funding, and include:
-racketeering, sometimes discreetly called a “revolutionary tax” (ETA, FLNC, IRA),
-abductions with ransom demands (Colombian paramilitary groups, groups active in the republics of the
former Soviet Union),
-trafficking in precious stones (Khmer Rouge, rebel groups in Sierra Leone and in Angola), as well as procuring and trafficking in human beings.
-Arms trafficking is a separate case in that it is both the source of financing and involves the use of these
resources and also combines with other types of trafficking in which it is a medium of exchange.
-Government-provided financing used to be the principal source of income for terrorist organizations during the cold war period, when regional conflicts often were battlefields for the two blocs, and each terrorist cause an opportunity to destabilize or disorganize the other bloc. The end of the cold war has dried up this source of financing. Although some isolated states continue to provide certain terrorist groups with weapons, training camps and financing, the principal terrorist organizations have had to look elsewhere for support.
-Collecting funds from the diaspora,
e.g. the GIA in Algeria, by the Al-Qaeda, Sri Lankan rebels, Armenian terrorists, to cite just a few, seeking funds from compatriots who are on exile or are expatriates for economic reasons.
-Charitable organizations play a big part in this mode of financing, which explains why they are
particularly targeted in current strategies. But it is also because charitable organizations could
mingle legitimate proceeds from individuals and private enterprises (whether voluntary or
not), and governments with the proceeds from criminal activities, all behind a charitable
façade, that makes potential investigations unseemly and makes it difficult to distinguish
dirty money from clean money.
II. The International Community’s Response: Identify and Destroy Criminal Financial Networks
(1) The Objective:
Prevent the Accumulation of Wealth by Organized Criminal Groups :
For the international community, the objective in combating money-laundering is three-fold.
It involves simultaneously protecting the international financial system, preventing criminals
from enjoying the proceeds of their crimes, and preventing them from utilizing the
formidable economic power they have amassed to challenge the stability of governments.
(2) The Means :
The strategy is implemented through a series of legislative measures taken by governments and revolving around three axes:
- prevention, the goal of which is to prevent the financial system from being used for purposes of money-laundering, particularly through a general requirement to precisely identify originators, as well as placing and limitations on certain transactions that serve as vehicles for money-laundering;
- detection of money-laundering operations through legislative provisions allowing for the centralization of information by authorities charged with combating such operations (reporting suspicions) and implementation of specialized investigative measures (access to computer systems and commercial and banking information, etc.);
- suppression of money-laundering activities and associated crimes, as well as confiscation measures that are complements to enforcement, and preventive measures such as freezing and seizing assets.
(3) The Necessary Involvement of the Financial and Banking Sector in Accomplishing the Objectives :
Transactions associated with money-laundering go through channels that are outside law enforcement’s customary range of control, with illegal transactions thus becoming particularly problematic.
(4) The international legal Bases of the fight against money-Laundering and the financing of terrorism:
A. International Conventions
-The 1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances,The Strasbourg Convention (The Council of Europe’s Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime )
-The OECD Convention on Corruption
-The Palermo Convention against Transnational Organized Crime:
The United Nations Convention against Transnational Organized Crime is the first instrument of criminal law designed to combat the phenomenon of transnational organized crime. Under the Convention, four offenses considered to comprise the structural characteristics of organized crime are required to be addressed by the States in their domestic law: criminal association, money-laundering, corruption and obstruction of justice.
-The Convention for the Suppression of the Financing of Terrorism:
B. The FATF 40 Recommendations
These recommendations seek to achieve three objectives:
• Improve national systems to combat money-laundering, in consideration of and consistent with the Vienna Convention, by criminalizing all aspects of money laundering crimes, even for offenses not associated with drugs, and by setting up an effective confiscation procedure;
• strengthen the role of the financial system, in the broadest sense, i.e., banking institutions and non-banking financial institutions. These recommendations, consistent with the Basel Statement of Principles, seek to make better provision within financial institutions for the identification of clients, the detection of unjustified or suspicious transactions and the development of secure and modern transaction techniques;
• strengthen international cooperation, at the administrative level through the exchange of information on international foreign currency flows, and at the judicial level through the development of mutual judicial assistance for purposes of investigation,
seizure and confiscation of funds, and extradition.
----- INDIAN CONTEXT
The Financial Intelligence Unit - India (FIU-India) 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; while the Prevention of Money Laundering Act (PMLA) 2002, forms the core framework for combating money laundering in the country.
In June 2010, after a stringent evaluation, India was admitted as the 34th country member to the Financial Action Task Force (FATF). This membership has helped domestic enforcement agencies to exchange information and Indian financial institutions gain entry into markets of other member countries by portraying that Indian financial institutions are more comparative in terms of risk management standards.
What is the existing Anti-money laundering & Counter Terrorist financing legislations in India?
-The Prevention of Money Laundering Act, 2002 (PMLA) was enacted with effect from July 1,
2005. The PMLA forms the core of the legal framework to combat money laundering and terrorist financing in India. AND LATEST AMENDMENT+ UAPA AMENDMENT(CFT)
ESTIMATES:
In 2010, US-based Global Financial Integrity estimated that $462 billion went out of India between 1948 and 2008. Earlier this year, the CBI Director stated that Indians have ‘nearly Rs 24.5 lakh crore ($500 Billion) of illegal money stashed away in tax havens’ while another report claims that in 2009 $1500 billion was laundered by Indians . One of the key challenges while estimating the flow of illicit money is to effectively and promptly monitor transactions and thus, it is difficult to assess the accuracy of methods to calculate unaccounted money.
GOI INSTITUTIONS INVOLVED :
Body
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Formed
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Reports to
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Aim
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2000
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Ministry of Finance
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2004
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Economic Intelligence Council, Department of Revenue, Ministry of Finance
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1985
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Department of Revenue, Ministry of Finance
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1990
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Central Economic Intelligence Bureau, Chairperson is the Finance Minister
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Ministry of Corporate Affairs
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1994
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Special Police Establishment
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FATF Recommendations 2012 |
A – AML/CFT POLICIES AND COORDINATION
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1 - Assessing risks & applying a risk-based approach
2 - National cooperation and coordination
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B – MONEY LAUNDERING AND CONFISCATION
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3 - Money laundering offence
4 - Confiscation and provisional measures
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C – TERRORIST FINANCING AND FINANCING OF PROLIFERATION
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5 - SRII Terrorist financing offence
6 - SRIII Targeted financial sanctions related to terrorism & terrorist financing
7 - Targeted financial sanctions related to proliferation
8 - Non-profit organisations
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D – PREVENTIVE MEASURES
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9 - Financial institution secrecy laws
Customer due diligence and record keeping
10 - Customer due diligence
11 - Record keeping
Additional measures for specific customers and activities
12 - Politically exposed persons
13 - Correspondent banking
14 - Money or value transfer services
15 - New technologies
16 - Wire transfers
Reliance, Controls and Financial Groups
17 - Reliance on third parties
18 - Internal controls and foreign branches and subsidiaries
19 - Higher-risk countries
Reporting of suspicious transactions
20 - Reporting of suspicious transactions
21 - Tipping-off and confidentiality
Designated non-financial Businesses and Professions (DNFBPs)
22 - DNFBPs: Customer due diligence
23 - DNFBPs: Other measures
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E – TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS
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24 - Transparency and beneficial ownership of legal persons
25 - Transparency and beneficial ownership of legal arrangements
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F – POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES AND OTHER INSTITUTIONAL MEASURES
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Regulation and Supervision
26 - Regulation and supervision of financial institutions
27 - Powers of supervisors
28 - Regulation and supervision of DNFBPs
Operational and Law Enforcement
29 - Financial intelligence units
30 - Responsibilities of law enforcement and investigative authorities
31 - Powers of law enforcement and investigative authorities
32 - Cash couriers
General Requirements
33 - Statistics
34 - Guidance and feedback
Sanctions
35 - Sanctions
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G – INTERNATIONAL COOPERATION
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36 - International instruments
37 - Mutual legal assistance
38 - Mutual legal assistance: freezing and confiscation
39 - Extradition
40 - Other forms of international cooperation
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IX Special Recommendations
I.
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Ratification and implementation of UN instruments
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II.
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Criminalising the financing of terrorism and associated money laundering
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III.
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Freezing and confiscating terrorist assets
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IV.
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Reporting suspicious transactions related to terrorism
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V.
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International co-operation
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VI.
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Alternative remittance
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VII.
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Wire transfers
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Non-profit organisations
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IX.
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Cash couriers
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