Facets of Money Laundering
Introduction
Significant advancements in trade & commerce, information technology, economic and
social sectors around the world have expanded the frontiers of financial transactions in
several ways. However, the integrity of such financial institutions is threatening
worldwide with the money being laundered relating to terror financing transactions under
the guise of trade.
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According to an estimate of International Monetary Fund (IMF) the aggregate size of
money laundered every year in the world could be somewhere between two and five
percent of the world’s Gross Domestic Product (GDP). Money laundering is becoming
an imminent threat to financial security around the world because of its serious effects
on the economic, social and political factors of the countries. It affects demand for
money, exchange, interest rate volatility, and heightened risks to asset quality havocs on
the world economy and this need to be tackled.
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Money laundering and its Process
Money laundering is the process of concealing the illegal source of dirty money and
converting into legitimate funds. The money changes its appearance and difficult to
trace out the source. The source of generating may be from drug trafficking, terrorism,
smuggling, extortion etc. It is also called as the ‘fruits of crime’.
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PLACEMENT
Financial institions
(Money Integrates into
the Financial System)
INTEGRATION
Financial institions (Money
Exchange Houses,
Commodities/Precious Metals,
like Gold, Platinum
Securities Brokers, etc.,)
LAYERING
Financial institions (large
volume of transactions,
transfer between accounts
in different locations
across the globe), offshore
bank etc.,
ILLICIT ACTIVITIES
Drug Trafficking, Fraud,
Extortion, Pornography,
Smuggling of gold, diamonds
etc.,
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Who will come across the suspicious Transactions?
Financial entities, Includes banks, credit societies, trusts and lending
Institutions/companies and agents of the such institutions who accept deposit
liabilities;
Life insurance companies, brokers or agents;
Securities dealers, portfolio managers and investment bankers, and other
middleman in Securities markets.
Forex Dealers: Persons who are engaged in the business of foreign exchange;
Money services businesses, Which includes alternative remittance systems,
popularly known as Hawala, Hundi, Chitti, etc.
Agents, Who are selling National Saving Certificates, money orders and other
Financial Instruments etc.,
Chartered Accountants while carrying out certain activities on behalf of their
clients
Real estate, brokers or sales representatives of real estate when they carrying
out certain activities on behalf of their clients;
The process of money laundering involves disguising the sources of money or assets
derived from criminal activity. The techniques of laundering funds vary considerably and
quite often ticklish. However, there are generally three stages in the process, which are
briefly as under –
Placement: The proceeds of crime are diverted into the financial system. The form of
money is changed or converted. This mechanism usually involves the conversion of
currency into some other form, or the physical movement of the currency. In total, the
form of the money i.e., cash is deposited in multiple transactions into bank accounts.
Layering: At this stage, launderer moves the funds in anticipation to find an adequate
financial or business infrastructure, offshore transferring, transfers involving large
volume of funds between different locations across the globe. It also involves creating
complex layers of financial transactions to disguise the audit trail and the source and
ownership of funds (e.g., the purchasing and selling of stocks, commodities or real
estate etc.,)
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Integration: In this layer the launderer finds a beneficial mode of investment and makes
his dirty money to appear legitimate. He may invest in financial markets, real estate and
other commercial/industrial assets. Hence, the laundered funds are integrated into the
mainstream economy and it is difficult to trace out source of money.
Tools of money laundering
Smurfing: It is used as a tool by money launderer. It involves multiple deposits of lowvalue
monetary instruments purchased from banks or financial institutions with proceeds
of crime. It may be in several forms like, multiple deposits of cash or monetary
instruments in amounts specifically below the ceiling amount (it is Rs.50, 000 in India).
It can be done by one or more persons by making deposits into one or more accounts
during several visits to bank. Some times, it involves, deposit of multiple monetary
instruments into accounts with different financial institutions.
Structuring
It is through multiple cash deposits or withdrawals at amounts below than ceiling
amount. Both structuring and smurfing are similar types of suspicious activity, which may
result in money laundering.
E-Banking/Cyber Banking Many banks have started providing their banking services
on net by taking advantage of the global reach of the Internet and World Wide Web.
Cyber banking is vulnerable to money laundering because it facilitates fast movement of
funds across the globe within a short span of time and anonymity of user.
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Money laundering in Insurance
Insurance is another mode used in different ways by money launderers. In this regard,
International Association of Insurance Supervisors has issued guidance paper on Anti-
Money laundering and Combating the financing of terrorism. Accordingly, insurer should
assess the customer prior to establishment of a business relationship. It has clearly
specified factors to be considered while issuing the policy and how to investigate. Some
of the important factors are –
¨ Type and background of customer and/or beneficial owner
¨ The customer’s and/or beneficial owner’s geographical base
¨ The geographical sphere of the activities of the customer and/or beneficial owner
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¨ The nature of the activities
¨ Means of payment as well as the type of payment (cash, wire transfer, etc.,)
¨ The source of funds
¨ The source of wealth
¨ The frequency and scale of activity
¨ The type and complexity of the business relationship
¨ Whether or not payments will be made to third parties
¨ Whether a business relationship is dormant
¨ Any bearer arrangements
International Initiatives in Anti-money laundering
Deception is the heart of money laundering. Laundered funds find their way into
legitimate trade and commerce. It becomes difficult to carry the business in legal way
for an honest businessman due to competition by a money launderer who has unlimited
cash resources from undisclosed source. With these and other factors money
laundering is considered as a crime and the United States became first country to enact
law as the Money Laundering Control Act, 1986. Subsequently, the international
community also felt the need for curbing transactions resulting money laundering.
The International Criminal Police Organisation (INTERPOL): An International
organisation having 168 member countries headquartered at France, functioning as a
means for exchanging information about crime and criminals. This agency is
coordinating through National Central Bureau of all member countries (for example CBI
in India) around the world. INTERPOL is continuously monitoring and taking aggressive
steps towards international crimes money laundering and drug trafficking, etc.,
developing and implementing model legislation, providing training and other technical
inputs to member countries.
United Nations: The United Nations Narcotics Convention of 1988, popularly known as
Vienna Convention, made the member signatories to make money laundering as
criminal offence, and an extraditable. It also ensures co-operation and greatest
assistance amongst member countries in investigations, prosecutions, and judicial
proceedings.
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British Commonwealth: The member countries have set up a “Common Wealth
Scheme for Mutual Assistance in Criminal Matters”, for tackling international money
laundering activities. Each members are assisting each other in criminal investigations,
to include “identifying, locating, and assessing the value of, property believed to have
been derived or obtained, directly or indirectly, from, or to have been used in, or in
connection with, the commission of an offence and believed to be within the requested
country”.
Financial Action Task Force
It is an international organization formed with the initiatives of G-7 countries in July 1989
at Paris. The Task force continuously monitors its members' progress in implementing
necessary measures, reviews money laundering and terrorist financing techniques and
counter-measures, and promotes the adoption and implementation of appropriate
measures globally. It has also released a series of task reports recommending changes
in legislation on criminal law, banking and international cooperation.
Accordingly, FATAF is active in its aim of curbing the money laundering activities and
accepted to the working definition of money laundering as -
¨ The conversion or transfer of property, knowing it is derived from a criminal
offence, for the purpose of concealing or disguising its illicit origin or of assisting
any person who is involved in the commission of the crime to evade the legal
consequences of his actions,
¨ The concealment or disguising of the true nature, source, location, disposition,
movement, rights with respect to, or ownership of property knowing that it is
derived from a criminal offence,
¨ The acquisition, possession or use of property, knowing at the time of its receipt
that it was derived from a criminal offence or from participation in a crime.
Asia / Pacific Group on Money Laundering (APG)
It ensures the adoption, implementation and enforcement of internationally accepted
anti-money laundering and counter-terrorist financing standards as set out in the FATF
Forty Recommendations and FATF Eight Special Recommendations. It is assisting
countries and territories of the region in enacting laws to deal with the proceeds of crime,
mutual legal assistance, confiscation, forfeiture and extradition; providing guidance in
setting up systems for reporting and investigating suspicious transactions and helping in
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the establishment of financial intelligence units. The APG also enables regional factors
to be taken into account in the implementation of anti-money laundering measures. The
APG also expanded its scope of functions to counter terrorist financing after the events
of 11 September 2001.
The Financial Crimes Enforcement Network (FinCEN)
It is a network formed in 1990 and acts as a means of bringing people and information
together to fight the complex problem of money laundering. It has worked to maximize
information sharing among law enforcement agencies and its other partners in the
regulatory and financial communities. Through cooperation and partnerships, FinCEN's
network approach encourages cost-effective and efficient measures to combat money
laundering domestically and internationally.
The mission is to support law enforcement investigative efforts and foster interagency
and global cooperation against domestic and international financial crimes; and to
provide U.S. policy makers with strategic analyses of domestic and worldwide money
laundering developments, trends and patterns. FinCEN works toward those ends
through information collection, analysis and sharing, as well as technological assistance
and innovative, cost-effective implementation of the Bank Secrecy Act and other
Treasury authorities.
Software solutions
Recently many software development enterprises have come out with innovative
banking and financial solutions towards Anti-money laundering and it can be useful to
Retail Banks, Commercial Banks, Investment Banks, Brokers & Trading Organisations
and Insurance Firms etc., This solution pro-actively monitor all transaction activities
across the organisation and effectively detects money laundering activities and terrorist
financing. The system generates all statutory reports and provides for generation of
suspicious activity reports. It also captures customer details, stores compliance rules,
monitors transactions and flags any violation of transactions against customer profile
and compliance rules.
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Indian Initiatives
With the intention of protecting our society from the globally recognized and, growing
problem of money laundering, the Central Government moved the Prevention of Moneylaundering
Bill in the Parliament on 29th October 1999. After incorporating several
suggestions both Rajaya Sabha and Lok Sabha passed the Bill in the winter session of
the Parliament in 2002. Further, the Government recently amended certain provisions of
this Act.
Recent changes in the Amended legislation 2005
· Definition of Investigation has been extended. Now investigation
includes, investigations conducted by the Director or any authority
authorised by the Central Government.
· Chairman and members of existing Appellate Tribunal under any
other Act shall be appointed as such under this Act.
· Police officer has to get authorisation by the Central Government for
investigating offences under this Act.
Vistas for CAs
Legislation on Anti-money laundering has opened wide professional opportunities to the
profession of Chartered Accountancy.
¨ Development of Accounting & Auditing Standards: Guidance notes and
Standards can be set and can be made compulsory to follow while undertaking
auditing of clients books of accounts. A chartered accountant who audits the books
of accounts of a client may come across the several transactions which may
directly/indirectly reflects money-laundering practices. He is also under professional
obligation to report such activities in his audit report and to concerned authorities.
¨ Monitoring Mechanism: As a profession of great importance on financial
sovereignty and integrity, research studies can be enunciated to know and assess
the new methods of deployment of illegal funds by launderer. It can also assist
enforcement directorate in framing regulations to curb financial crimes of the nation.
¨ Enforcement Directorate: It should contain efficient staff with sufficient knowledge
on insurance, banking, securities market, foreign exchange etc., Here, a qualified
chartered accountant who is adept in the above filed of knowledge shall be a right
person for this right job. He can also undertake an Independent investigation under
this authority.
¨ Adjudicating Authority: There is no doubt that a CA excels in the filed of finance,
accountancy, etc., Hence, he shall be having an advantage over others in becoming
a member to the adjudicating authorities. [Under section 6(3) of the Prevention of
Money-laundering Act, 2002.]
¨ Member to Appellate Tribunal Act specifically provides an opportunity to a
practicing Chartered Accountant in becoming a member to ‘Appellate Tribunal’,
which hears appeals against the orders of the Adjudicating Authority and authorities.
[Under section 28(2) of the Prevention of Money-laundering Act, 2002.]
¨ Legal representation A person preferring an appeal to the Appellate Tribunal [under
section 39(1) of the Prevention of Money-laundering Act, 2002] may appoint a
representative of his choice to present his case before the Appellate Tribunal. Here,
a qualified Chartered Accountant, who is an authoritative in finance, accounting,
taxation and other matters shall be in better position to appreciate the client’s case
before the Tribunal.
Conclusion
Money laundering is serious threat to global financial system and good governance. It is
also boosting international crimes and terrorist activities. In this regard, most of the
governments have already enacted statute to combat money-laundering activities. In
this regard, the effort of the Indian Government in enacting the Prevention of Money
Laundering Act 2002 is most timely, appropriate and appreciable.
International developments
Sl.
No.
Countries Statue
1. USA ¨ The Money Laundering Act, 1986
¨ The Bank Secrecy Act
¨ USA PATRIOT Act
¨ Canadian Proceeds of Crime
(Money Laundering) and Terrorist
Financing Act
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¨ Office of Foreign Assets Control
(OGAC) regulations
¨ Financial Action Task Force of
South America (GAFISUD)
2. Caribbean ¨ Caribbean Financial Action Task
Force (CFATF)
3. Europe ¨ First EU Money Laundering
Directive (1991)
¨ Second EU Money Laundering
Directive (2001)
4. UK ¨ Proceeds of Crime Act 2002 (PoCa)
¨ Terrorism Act 2000
¨ Financial Services Authority (FSA)’s
Handbook of rules and guidance
(20001)
¨ Joint Money Laundering Steering
Group (JMLSG) Guidance
5. Asia ¨ Asia Pacific Group on Money
Laundering (APG)
Dr. P.T. Giridharan
Joint Director &
Secretary, Committee on Financial Markets &
Investors’ Protection
A.N.Vijaya Kumar
Education Officer
