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Monday, July 14, 2014

Money Laundering - Everything about it


1. Introduction
Money laundering is a serious threat to economic, security and social stability. It provides the fuel for drug dealers, terrorist, illegal arm dealers, corrupt public officials and others to operate and expand their criminal enterprises.  If unchecked, money laundering can erode the integrity of a nation’s financial institutions. Due to the high integration of capital markets money laundering can also adversely affect currencies and interest rates. Ultimately, laundered money flows into global financial system, where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem; it also poses a serious threat to national and international security level.

Prevention of money laundering Act (PMLA) was passed in 2002 to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connection therewith. It forms the core of the legal framework put in place by India to fight money laundering. PMLA and rules notified there under come into force from July 1, 2005.

2. What is money laundering??
Money laundering is directly or indirectly attempting to indulge or knowingly assisting or knowingly is a party or is actually involved in any process or activity connected with the property. It is the process of moving illegally acquired cash through financial system so that it appears to be legally acquired.

Whoever commits the offence of money laundering shall be punishable with rigorous imprisonment for a term which shall be not less than three years but which may extend to seven years and shall also be liable for a fine, which may extend to five lakhs rupees. The Period of seven years may extend to ten years depending up on the thickness of the offence.

2.1. Steps involved in money laundering
2.1.1.Placement: Cash in introduced in to the system by some means
2.1.2.Layering: Such cash in revolved into the financial system by carrying out complex financial transaction to cover the illegal source
2.1.3.Integration: The final step involves acquiring wealth from such complex transactions.
2.2.Some of the methods of Money Laundering
2.2.1.Structuring:  also named as ‘smurfing’, is a process by which cash is broken into smaller deposits to avoid suspicion of money and is again recovered by breaking such deposits in smaller amounts. Ex. Purchase of money order
2.2.2.Bulk cash smuggling: Physically smuggling of cash from one jurisdiction to another
2.2.3.Cash intensive business:  A business especially a service business involved in receiving cash will use its accounts to deposit both legal and illegal cash, calming all of it as legal earnings.
2.2.4 Casinos: An individual will walk in to a casino with cash and buy chips, play for a while and then cash in his or her chips, for which he or she will be issued a check. The money launderer will then be able to deposit the check into his or her bank account, and claim it as gambling winnings

3. Money Laundering In India – Prevention of Money Laundering Act(PMLA): India facing various cases of Money Laundering in the last one decade or two, an act known as Prevention of Money Laundering Act was passed in year 2003, which came effective from 1st of July, 2005.  The Act States that,“whosoever 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 shall be guilty of offence of money-laundering”.

It empowers Financial Intelligence Unit (FUI – IND) to impose fine on banks, financial institutions and other intermediaries for not maintaining the proper records of identity of all its clients and also of all the transactions as prescribed by the Act. The Directorate of Enforcement Department which was established in the year 1956, in New Delhi is primarily responsible for enforcement of Foreign Exchange Management Act but also covers certain provisions under the Prevention of Money Laundering Act.

3.1. Objectives of the Act: The following are the objectives of PMLA to fight against Money Laundering:
3.1.1.To prevent and control money laundering
3.1.2. To confiscate and seize the property obtained from the laundered money;
3.1.3. To deal with any other issue connected with money laundering in India

3.2. Functions:
3.2.1.To collect, develop and disseminate intelligence relating to violations of FEMA, 1999, the intelligence inputs are received from various sources such as Central and State Intelligence agencies, complaints etc.
3.2.2.  To investigate suspected violations of the provisions of the FEMA, 1999 relating to activities such as “hawala” foreign exchange racketeering, non-realization of export proceeds, non-repatriation of foreign exchange and other forms of violations under FEMA, 1999.
3.2.3.To adjudicate cases of violations of the erstwhile FERA, 1973 and FEMA, 1999.
3.2.4.To realize penalties imposed on conclusion of adjudication proceedings.
3.2.5.To handle adjudication, appeals and prosecution cases under the erstwhile FERA, 1973
3.2.6. To process and recommend cases for preventive detention under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA)
3.2.7. To undertake survey, search, seizure, arrest, prosecution action etc. against offender of PMLA offence.
3.2.8.To provide and seek mutual legal assistance to/from contracting states in respect of attachment/confiscation of proceeds of crime as well as in respect of transfer of accused persons under PMLA.

4. Few Cases:
4.1. I-T Dept probing HSBC list of accounts: The Income tax department and its other wings are probing the information received with regard to foreign bank account of individuals and entities with HSBC Bank. With respect to the above, the government has also initiated the exercise of getting the foreign account details from foreign government.

4.2. ICICI Bank and ING Vyasa Bank: In October 2012, RBI has slapped a penalty of Rs.30 lakh on ICICI Bank and Rs.55 lakh to ING Vyasa Bank for violating certain norm related to anti – money laundering while opening new accounts with the bank. The main reason for the same was insufficient documents while opening new accounts. - See more at:

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