Prevention of Money Laundering - Indian Cooperation

Prevention of Money Laundering - Indian Cooperation				international and regional observers. It works in
				collaboration with FATF, International Monetary Fund,
				the World Bank, the United Nations Office on Drugs
1. INTRODUCTION				and Crime, the Asian Development Bank, the Egmont
				Group of Financial Intelligence Units, APEC and
As the name rightly suggests, money laundering is an				others.[11]
act of washing of black money and converting it into				The APG has five key roles:[12]
clean white money, the way we put dirty clothes				1. To assess compliance by APG member jurisdictions
into our washing machines and take out clean clothes,				with the global AML/CFT standards through a robust
similarly money launderers put their ill-gotten gains into				mutual evaluation;
various financial channels and take out so called				2. To coordinate technical assistance and training with
legitimate proceeds.				donor agencies and countries in the Asia/Pacific
				region in order to improve compliance by APG
Article 1 of the draft of European Communities				members with the global AML/CFT standards;
Directives of March 1990 defines it as;				3. To participate in, and co-operate with, the
				international anti-money laundering network
“The conversion or transfer of property,				- primarily with the FATF and with other regional
knowing that such property is derived from serious				anti-money laundering groups;
crime, for the purpose of concealing or disguising the				4. To conduct research and analysis into money
illicit origin of the property or assisting any person				laundering and terrorist financing trends and methods
who is involved in committing such an offence or				to better inform APG members of systemic and
offences to evade the legal consequences of his				other associated risks and vulnerabilities; and
action, and the concealment or disguise of the true				5. To contribute to the global policy development of
nature, source, location, disposition, movement, rights				anti-money laundering and counter terrorism financing
with respect to the ownership of the property,				standards by active Associate Membership status in
knowing that such property is derived from serious				the FATF.
crime.”				The APG also assists jurisdictions to establish
				coordinated domestic systems for reporting and
Therefore we see that money laundering is an				investigating suspicious transaction reports and to
activity where the illegal proceeds which have been				develop effective capacities to investigate and
obtained through activities like terrorism, trafficking,				prosecute money laundering and the financing of
smuggling, drug trade, corruption etc are given				terrorism.
appearance of legitimate proceeds of the launderer.
				4. LAWS OF NATIONS
In the past, the term "money laundering" was applied
only to financial transactions related to organized				Different nations have their own specific law for
crime. Today its definition is often expanded by				prevention of money laundering. Every jurisdiction
government regulators (such as the United States				recognises different set of offences for the
Office of the Comptroller of the Currency) to				purposes of the offence of money laundering. Indian
encompass any financial transaction which generates				Prevention of Money Laundering Act also specifies
an asset or a value as the result of an illegal act,				those offences in its three schedules. Similarly U.K.
which may involve actions such as tax evasion or				recognises all crimes for that purpose.
false accounting. As a result, the illegal activity of
money laundering is now recognized as potentially				1. 4.1 Law of United Kingdom
practiced by individuals, small and large businesses,
corrupt officials, members of organized crime (such				In U.K. Ss. 327-340 of Proceeds of Crime Act, 2002
as drug dealers or the Mafia), and even corrupt				(PoCA) and other money laundering regulations 2003
states, through a complex network of shell				& 2007 makes even possession of criminal or
companies and trusts based in offshore tax havens.				terrorist property or its acquisition, transfer, removal,
A few examples of money laundering are smurfing or				use, conversion, concealment, or disguise punishable
kiting.				also laundering need not involve money (it relates to
Many methods were found out to launder illegitimate				assets of any kind, both tangible and intangible, and
money derived by the sale of illegal alcoholic				to the avoidance of a liability) and need not involve
beverages during the Prohibition era in the United				laundering either (a thief's possession of the assets
States but this was definitely not the origin but only				he himself stole is included). When a person enters
a development in the world of money laundering.				into, or becomes concerned in, an arrangement which
Following Al Capone's 1931 conviction for tax evasion,				facilitates (by whatever means) the acquisition,
mobster Meyer Lansky transferred funds from				retention, use, or control of criminal property by
Florida "carpet joints" (small casinos) to accounts				another person, he is liable for the offence. This has
overseas. After the 1934 Swiss Banking Act, which				impacted upon lawyers and other professional
created the principle of bank secrecy, Meyer Lansky				advisers in the UK who act for a client whom they
bought a Swiss bank to which he would transfer his				suspect may possess criminal property of any kind.
illegal funds through a complex system of shell				However the law was relaxed for banks and financial
companies, holding companies, and offshore accounts.				institutions in 2005 where they were allowed to
The term "money laundering" does not derive, as is				proceed with low value transactions involving
often said, from Al Capone having used laundromats				suspected criminal property without requiring specific
to hide ill-gotten gains. It was Meyer Lansky who				consent for every transaction (but the reporting of
perfected money laundering's older brother, "capital				all transactions is still required).[13]
flight," transferring his funds to Switzerland and other
offshore places. The first reference to the term				1. 4.2 Law of United States of America
"money laundering" itself actually appears during the
Watergate scandal. US President Richard Nixon's				Unlike U.K. here mere possession of criminal proceeds
"Committee to Re-elect the President" moved illegal				is no more an offence because of a very recent
campaign contributions to Mexico, then brought the				judgment by the U.S. Supreme Court when by 9-0
money back through a company in Miami. It was				majority they overruled Mexico's Humberto Cuellar's
Britain's Guardian newspaper that coined the term,				conviction and held that for an offence of money
referring to the process as "laundering."[1]				laundering is not committed unless it is proved that
This term was first observed in judicial context in the				there was an intention to disguise or hide the
case of U.S. v. $ 4,255,625.39[2] but maximum				source.[14]
emphasis to this financial crime was given only after
9/11 attack and clearinghouse in Luxembourg called				Bank Secrecy Act, 1970 requires banks to report
Clearstream which has been questioned about its				cash transactions of $10,000.01 or more but this can
unpublished accounts has shown a record of account				be overcome by the launderers by using techniques
belonging to Bahrain International Bank, which is				like smurfing. Money Laundering Control Act, 1986
suspected of moving Osama bin Laden's money[3].				further defined money laundering as a federal crime.
				USA Patriot Act, 2001 which came after 9/11
In India this has been going unchecked for years and				massacre expanded the scope of prior laws to more
in fact at times the government has helped the				types of financial institutions, added a focus on
launderers by giving various amnesty schemes for				terrorist financing, and specified that financial
getting rid of so called black money and converting it				institutions take specific actions to "know your
into legitimate money. The old laws of India hardly				customer" (KYC).[15]
recognized this economic crime as was never given
importance by our legislature or judiciary.				In the United States, Federal law provides (in part):
				"Whoever . . . knowing[ly] . . . conducts or attempts
This activity normally involves series of complex				to conduct . . . a financial transaction which in fact
transaction which aim at disguising the authorities by				involves the proceeds of specified unlawful activity . .
hiding the origin of the tainted money by such				. with the intent to promote the carrying on of the
complex commercial transaction. It thereby also				specified unlawful activity . . . shall be sentenced to a
involves numerous financial institutions and therefore				fine of not more than $500,000 or twice the value of
its investigation and prosecution is also very tough.				the property involved in the transaction, whichever is
				greater, or imprisonment for not more than twenty
At times people also refer to it as a victimless crime				years, or both."
but the reality is that it is not a crime against a
particular individual but it is a crime against nations,				5. INDIAN COOPERATION IN
economies and world at a whole. Developing				PREVENTION OF MONEY LAUNDERING
countries that attract “dirty money” as a
booster of short term growth will as a consequence				The old laws of the country did not really recognize
find it tough to attract solid long term foreign direct				the menace. There was very little check on
investment which requires stable political conditions				conversion of black money into white, the only check
and good governance. Money-laundering can also				was chapter XXC of Income Tax Act, 1961 which
erode a nation's economy by changing the demand				monitored acquisition of immovable property in major
for cash, making interest and exchange rates more				cities over the prescribed value and even this
volatile, and by causing high inflation in countries				provision was made inoperative since 1st July 2002.
where criminal elements are doing business. It also
empowers corruption and organized crime. Corrupt				FERA imposed restrictions on transfer money outside
public officials need to be able to launder bribes,				India and therefore it helped as a check to transfer
kick-backs, public funds and, on occasion, even				of tainted money. But to overcome this launderers
development loans from international financial				used the non banking channels like hawala. Also for a
institutions. Organized criminal groups need to be able				very long time India has been importing dirty money
to launder the proceeds of drug trafficking and				by over invoicing goods but this has not helped in
commodity smuggling. Terrorist groups use				exporting dirty money as the taxes levied on
money-laundering channels to get cash to buy arms.				imported goods negate the viability of such dealings.
The social consequences of allowing these groups				Also there was no provision in Customs Act, 1962 up
access to the capacity to launder money can be				till 2003, to deal with over invoicing of goods.
disastrous.[4]
				Since FEMA came into force on 3rd June 2000, all
With globalization international barriers have				current account transactions are free from
weakened in combating money laundering effectively.				restrictions except for those mentioned in three
Today with new technology& modes of				schedules to FEM (Current Account Transactions)
communication, money can be easily transferred				Rules, 2000. On the capital account side, there is a
through international borders. Also “megabyte				restriction of reporting of transactions mentioned in
money” i.e. money that is in form of computer				schedules I and II and therefore it is very easy for
symbols is being used, which can be moved easily at				launderer to launder money without even touching
a much faster pace. These have made the three F's-				the two schedules. Further Schedule III of the Act
finding, freezing and forfeiting of criminally derived				provides for cap on certain transactions relating to
income and assets-all the more difficult. The				expenses for education, medical treatment, donation
estimated amount of money laundered globally in one				etc. within which if money is to be transferred
year is 2 - 5% of global GDP, or $800 billion - $2				abroad, no prior permission of RBI is required.
trillion in current US dollars.[5]
				Other laws that had some role to play in prevention
Launderers benefit from open borders, privatization,				of money laundering are-
free trade zones, weak states, off shore banking				- The Conservation of Foreign Exchange and
centers, electronic financial transfers, smart cards and				Prevention of Smuggling Activities Act, 1974.
cyber banking. Those countries are taken up by				- The Benami Transactions (Prohibition) Act, 1988
launderers which do not have effective laws or the				- The Indian Penal Code and Code of Criminal
enforcement agencies are not active.[6] Also it is				Procedure, 1973
now being observed that the trend is shifting from				- The Narcotic Drugs and Psychotropic Substances
banking channels to international trade for laundering				Act, 1985
money. Since 1992 it has been found that over priced				- The Prevention of Illicit Traffic in Narcotic Drugs and
goods being traded for example razors priced at $ 30				Psychotropic Substances Act, 1988
and telephones at $ 2400.[7] Absence of				The Prevention of Terrorism Act (POTA),
transparency in corporate law of nations also pose a				2002, dealt with types of heinous crimes like
great challenge for the combat against money				subversion, insurgency and terrorism in place of the
laundering.				existing criminal justice system, which is not designed
				to deal with such horrific crimes. The Act replaced
Indications that predict money laundering through				the Ordinance that was first promulgated on October
banks and other financial institutions can be; [8]				24, 2001 and re-promulgated thereafter in December
- Customers depositing cash through a large number				2001. The Act also met the requirement of the
of cash deposit slips into the same account or				United Nations resolution calling upon member nations
customers having numerous accounts into which large				to enact a model deterrent law to curb the growing
cash deposits are made. Each deposit is such that the				menace of internal and global terrorism.[16]
amount thereof is not significant but the aggregate				Prevention of Money Laundering Act, 2002 (PML Act)
of all credits is sizeable. This is known as "smurfing".				was enacted in 2002 and came into effect along with
- A substantial increase in turnover in a dormant				the rules notified thereunder, on July 1, 2005 vide
account.				Notification No. GSR 436(E) issued by Department of
- Receipt or payment of large sums of cash, which				Revenue, Ministry of Finance, Government of India. It
have no obvious purpose or relationship to the				was to prevent money laundering and to provide for
account holder and / or his business				seizure and confiscation of proceeds of crime
- Reluctance to provide normal information when				obtained or derived, directly or indirectly from money
opening an account or providing minimal or fictitious				laundering and for matters connected therewith or
information				incidental thereto. Further SEBI vide its circular no. ISD
In some parts of Asia formal banking channels are				CIR/RR/AML/1/06 dated January 18, 2006 mandated
avoided by way of underground banking channels like				that all intermediaries including should implement a
‘Hawala’ in India & Pakistan, and				proper policy framework as per the guidelines on anti
‘fie chen’ or ‘flying money’ in China.				money laundering measures and also adopt a Know
These channels are based on family alliances,				Your Customer(KYC) Policy. Further in yet another
retributive violence etc. and transfer money by way				circular no. ISD/CIR/RR/AML/2/06 dated March 20,
of chits issued in lieu of money which can be				2006, all the intermediaries were advised to take
remitted in a different country on presentation of				necessary steps to ensure compliance with the
the chit.				requirement of S. 12 of PML Act which requires
				maintenance and preservation of records and
				reporting of information relating to cash and
2. PROCESS OF MONEY LAUNDERING				suspicious transaction to Financial Intelligence Unit of
				India (FIU- IND).[17]
The process of money laundering comprises of three				The bill for Prevention of Money Laundering Act was
stages i.e. Placement, Layering and Integration.				first tabled in 1998 but the definition of money
Placement stage involves transfer of funds or				laundering was very narrow, it was later widened and
illegitimate money to a less suspicious place, this				S. 3 of the PML Act includes any activity of
mainly involves transfer of proceeds to financial				representing proceeds of crime as untainted
institutions or retail economy or we can also call it				property.
physical disposal of bulk cash derived from illegitimate				Now like U.S, in India also an intention of launder
sources. The second stage is layering where the				money is one of the ingredients for the offence and
origin of proceeds is made untraceable by series of				mere knowledge suffices in cases of assisting money
complex financial transactions. Lastly is the stage of				laundering and being involved in money laundering.
integration during which the illegal proceeds injected				Therefore unlike U.S.A and like U.K. for a person who
back into the economy as legitimate business funds				has been charged with money laundering, mens rea is
and there connection with there origin becomes				not a necessary ingredient.
impossible to trace. [9]				Union cabinet has given its approval on June 05,
				2008 for introduction of Prevention of Money
				Laundering (Amendment) Bill, 2008 in the parliament.
2.1 Placement Stage				This will help the government to meet certain
				domestic needs and international obligations. This bill
Money which is received from illegitimate sources is				focuses on adding more financial institutions within the
largely in form of cash and it becomes essential for				ambit of this act. It will include money changers,
the launderer to remove it from the location of				money transfer service providers, casinos,
acquisition and hence prevent the authorities from				international gateway etc. however government has
tracing it therefore this money is put into financial				chosen not to include designated non-financial
institutions, retail business or is even smuggled out in				business, professionals like lawyers, CAs etc.
form of cash. Therefore the form of money is				India is also set to be a member of FATF later this
transformed into travellers cheques, savings deposits				year as India has completed all but one formality to
etc. This first stage of laundering process is				amend the Prevention of Money Launder Act (PMLA)
accomplished moment the money is put into the				to include a host of offenses, such as insider trading
process of laundering and soon begins the second				and human trafficking, in the schedule of offences. Bill
stage.				to amend the PMLA is expected to be placed in
				Parliament soon and the government will be able to
1. 2.2 Layering Stage				share the provisions of the proposed law and win a
				membership. Other six major prerequisites for a
First attempt to disguise or conceal the real				membership have already been put in place. For
illegitimate source of monies is made at this stage by				instance, the FATF wanted the government to
forming layers of complex financial transactions to				establish a trail of all foreign exchange transactions,
confuse the authorities. This is mainly done by				including hawala. While the RBI has put in place a trail
moving money in and out of various financial				by asking agents, including those for wire transfer, to
channels, offshore banks, stocks, commodities etc.				maintain records for a specified period of time, it
Once these complex layers are formed and it				managed to convince FATF that hawala deals could
becomes impossible for the authorities to trace the				not be tracked as such transactions were illegal. The
origin of the proceeds, third and the final stage				other five commandments have already been
begins.				complied with since the government last year notified
				changes to the rules related to the PMLA, specifying
1. 2.3 Integration Stage				that suspected cases of terror financing would be
				part of the suspicious transaction reporting system.
In this final stage of the process, launderers integrate				The other four specifications were in place as soon
monies into the legitimate economy and portray it to				as the PMLA came into effect. They included naming
be there legitimately acquired money and therefore it				of enforcement agencies to deal with the notified
becomes extremely difficult for the authorities to				laws and mandating ‘know your client (KYC)'
distinguish between legitimately earned and laundered				norms that would be legally binding. [18]
money. This can be done by way of false loan				The establishment of the Financial Intelligence Unit
repayments, over invoicing goods etc.				(FIU-Ind) two years ago was also part of the
				exercise to gain a membership of the elite group.

3. INTERNATIONAL COMBAT AGAINST				6. CONCLUSION
MONEY LAUNDERING
				Today various legal systems have adopted their own
1. 3.1 Basel Committee & U.N.				measures and laws to counter money laundering
Convention				similarly international community has also formulated
				measures to counter the menace. India is also forging
As per the UNDCP estimate unlike 1980’s now				ahead in the fight as PML Act has already come into
almost 70% of the nations have an effective				force and not only that India is also to become a
legislation to combat money laundering. Combat had				member of the elite group of FATF. It has not only
first begun in 1988 with Basel Committee on Banking				made provisions for seizure and confiscation of the
Regulations and UN Convention against illicit traffic in				proceeds of crime but has also provided for punitive
narcotic drugs& psychotropic substances, which				action for persons involved in money laundering. SEBI
has already been ratified by over 140 countries. The				and RBI by issuing circular and notifications from time
Basel committee which was held at Basel in				to time have also ensured that all the financial
Switzerland in December 1988. The committee was				institutions follow the ‘know your customer’
formed by the Central Bank Governors of Belgium,				and ‘know your employee’ guidelines. An
Canada, France, Germany, Italy, Japan, Netherlands,				amply vast definition to money laundering has been
Sweden, Switzerland and United States. It had given				given so that there is less chance of any case
a ‘statement of principles’ which included				skipping conviction. PML Act also provides for an
three things;				adjudicatory authority and special court which can
				judge and decide upon the offences of money
1. Avoidance of Suspicious transactions.				laundering.
2. Cooperation with law enforcement agencies.
3. Know Your Customer (KYC) Rules.				Much old American legislation has shown many cases
				but now since very recent judgments of the
All of these significantly led to prohibition on				American Supreme Court, the definition has become
anonymous, mandatory reporting of suspicious				narrow and conviction has become all the more
transaction, detailed records for five years and close				tough. U.K. legislation seems to be much effective as
monitoring of cross border transactions.				even a dog thief who has stolen a dog is guilty of
				money laundering if he keeps or sells the dog without
The U.N. Convention against illicit traffic in narcotic				the permission of government.
drugs& Psychotropic substances is the first
legally binding instrument addressing the issue of				But still such glaring amount of money is being
money laundering& it provides for identification,				laundered blatantly. The only solution to the problem
seizure & confiscation of the proceeds of drug				is probably as suggested by Tom Brown (Interpol) is
trafficking & also for punitive action. It also				to have uniformity in the laws of various nations so
encourages nations to deposit the confiscated				that there is no place for the launderer to escape.
proceeds with international organizations.				There has to be extreme international cooperation
				against fighting this menace and least developed
1. 3.2 Financial Action Task Force				countries should not have an attitude towards
				attracting criminal proceeds to promote short term
FATF(Financial Action Task Force) an				growth and should be aware of its long term
intergovernmental body was established by 7 major				consequences. Further bank secrecy Laws should be
industrialized countries and European Communities at				amended and corporate laws should be made more
G-7 Summit held in Paris in 1989. It has issued 40				transparent. Apart from all of the above,
recommendations which were first given in 1990 and				enforcement agencies should take this matter
updated in 1996. These give methods of countering				seriously and carry out regular investigation for these
money laundering like ratification of 1988 convention,				matters and extra banking channels like
punitive actions for the acts of money laundering,				‘hawala’ and ‘fie chen’ should be
strengthening international cooperation and abolition				tracked down.
of most bank secrecy laws. FATF also collaborates
with international organizations fighting against money				[1] Lucy Komisar (October 4, 2001). "Tracking
laundering.				Terrorist Money - 'Too Hot for US to handle?'",
				Pacific News Service. Retrieved on February
1. 3.3 UNODC & Global Program against				2006 & Jeffrey Robinson's three books on
Money Laundering				money laundering, The Laundrymen, The Merger and
				The Sink via
United Nations Office on Drugs and Crime (UNODC)				[2] (1982) 551 F Supp. 314
carries out The Global Program against				[3] Lucy Komisar, Pacific News Service on October
Money-Laundering (GPML) which was established in				4, 2001
1997 in accordance with the Convention against Illicit				[4] as on 15th July 2008
Traffic in Narcotic Drugs and Psychotropic				[5] as on 15th July 2008
Substances,1988. It was strengthened by Political				[6] Tom Brown (Head of four person anti-money
Declaration and Action Plan against Money-Laundering				laundering unit of the International Criminal Police
of the UNGASS (United Nations General Assembly				Organization, Interpol)
Special Session), which increases its scope from drug				[7] Prof. John Zdanowicz, Florida International
offences to all serious crimes.[10]				University.
				[8] as on 29th July 29, 2008(S.Ganesh Member of
Its main objectives are-				Faculty / General Manager, Bankers Training College,
				Reserve Bank of India)
- Helping the member states in implementing anti				[9] as on 29th July 29, 2008(S.Ganesh Member of
money laundering measures and countering terrorist				Faculty / General Manager, Bankers Training College,
financing.				Reserve Bank of India)
- Assisting the member states in detecting, seizing				[10] as on 3rd August 2008
and confiscating illicit proceeds.				[11] as on 3rd August 2008
- Giving appropriate technical support to the member				[12] as on 3rd August 2008
states.				[13] U.K. Proceeds of Crimes Act, 2002 via as on
				5th August 2008
Further an autonomous and collaborative international				[14] REGALADO CUELLAR v. UNITED STATES, No.
organizations named Asia/Pacific Group for Money				06–1456, June 2, 2008
Laundering (AML) was founded in Bangkok in 1997. It				[15] Wikipedia online encyclopedia
consists of 38 member jurisdictions and a number of				[16] as on 29th July 2008(S.

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Prevention of Money Laundering - Indian Cooperation