MONEY LAUNDERING

Money Laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source. The processes by which criminally derived property may be laundered are extensive

Money laundering with examples

Money laundering is a process that criminals use in an attempt to hide the illegal source of their income

Bypassing money through complex transfers and transactions, or through a series of businesses, the money is cleaned of its illegitimate origin and made to appear as legitimate business profits

Meaning of Legitimate

Accepted by the law as rightful or confirming to the law or to rules

Meaning of illegitimate

Not recognized as lawful . Illegitimate is used to describe activities and institutions that are not in accordance with the law or with accepted standards of what is right

Stages of money laundering

1) Placement

The first stage of money laundering is when the individual participating in criminal activity places cash proceeds into the financial system

2) Layering

The next stage of money laundering attempts to separate the money from its original, illegal source, money may be transformed so that it is not detected through audits

3) Integration

This involves the process to get the funds back to the criminal from what seems to be a reputable source, this may include receiving money from a business purchased by the funds

4) Mobey laundering charges

Individuals who complete the stages of money laundering may be subject to money laundering charges

5) Defense to money laundering

Money laundering is a complicated crime

1. a) lack of evidence
2. b) no intent
3. c) duress

Duress

Duress describes the act of using force, coercion, threats or psychological pressure, among other things, to get someone to act against their wishes. If a person is acting under duress, they are not acting of their own free will and so may be treated accordingly in court proceedings

Detection of money laundering by banks

Bank focused on simple transactional behaviors

Detection rules are action-based and target suspicious transaction behaviors

1) excessive cash deposits

2) structured transactions intended to avoid government record-keeping thresholds

3) rapid money movement through one bank to another

Meaning of dirty money

Money earned in an illegal activity

Red flags for money laundering

Funds transfer activity is unexplained, repetitive or shows unusual patterns

Payments or receipts with no apparent links to legitimate contracts, goods or services are received

Funds transfers are sent or received from the same person to or from different account

Money laundering offenses

1) tax evasion

2) theft

3) fraud

4) bribery

5) terrorist funding

Sources of money laundering

1) illegal arms sales

2) smuggling

3) activities of organized crime

4) drug trafficking

5) prostitution rings

6) through casinos and online gambling sites

Prevention of Money Laundering Act 2002

It is an act of the parliament of India enacted by the NDA government to prevent money laundering and to provide for the confiscation of property derived from money laundering

Need for Money Laundering Act

1) Part of international/national commitment to fight terrorism, organized crime syndicates, major economic offenders by targeting their financial resources

2) PMLA, 2002 fills the gap in the criminal justice system, where attachment of proceeds of crimes was very difficult in the existing major criminal acts

The FATF

1) established by the G-7 summit in Paris in July 1989 to examine measures to combat money laundering

2) an inter-governmental body whose purpose is to establish international standards and promote national and international policies to combat Mobey laundering (ML) and terrorist financing (TF)

The parliamentary history of the law

1) the PML bill, 1998 was introduced in Lok Sabha on 04/08/1998

2) referred to the standing committee on finance on 05/08/1998

3) the committee submitted its report on 04/03/1999

4) the bill was presented in Rajya Sabha on 08/03/1999

5) the PML, Bill 1999 was presented in Lok Sabha on 29/10/1999

6) the PML, Bill 1999 was passed in Lok Sabha on 02/12/1999

7) Rajya Sabha referred the bill to a select committee

8) the committee finalized it’s report on 24/07/2000

9) the present act after being passed by both the houses received the assent of the president on 17/01/2003

The preamble to PMLA 2002

An act to prevent Mobey laundering and to provide for confiscation of property derived from, or involved in money laundering and for matters connected or incidental thereto

Money Laundering Cycle

1) Predicate crimes

Corruption or bribery

Fraud

Organized crime

Drug & human trafficking

Environmental crime

Terrorism

Other serious crime

2) Placement

The initial introduction of criminal proceeds into the stream of commerce

Most vulnerable stage of the money laundering process

3) Layering

Involves distancing the Mobey from its criminal source

Movement of money into different accounts

Movement of money to different countries

Increasingly difficult to detect

4) Integration

The last stage in the laundering process

Occurs when the laundered proceeds are distributed back to the criminal

Creates the appearance of legitimate wealth

PMLA administered by

1) financial intelligence unit for verification of the identity of clients, maintenance of records and reporting

2) Enforcement Directorate for investigation of money laundering offenses

Scheduled offenses

Schedule to PMLA has 156 offenses under 28 criminal acts

1) Indian Penal Code (IPC)

2) Narcotic Drugs and Psychotropic Substances Act (NDPS)

3) Unlawful Activities (Prevention)  Act (UAPA)

4) Explosive Substances Act

Salient Features

1) effective provisions for attachment and confiscation of proceeds of crime

2) provisions for overseas investigations and attachment of properties abroad

3) special courts set up by the government across the country for prosecution

4) provision by disclosure by banks, financial institutions and intermediaries – Financial Intelligence Unit (FIU)

5) burdon of proof on accused to prove that proceeds of crime are untainted

6) statements recorded by ED Officers admissible as evidence

Trade-based Money Laundering

1) use of the financial system

2) physical movement of money (eg through the use of cash couriers)

3) through the physical movement of goods through the trading system

Examples of Trade-based Money Laundering

1) over and under-invoicing of goods and services

2) multiple invoicing of goods and services

3) falsely described goods and services

Indicators and trends of trade-based money laundering

1) items priced well over or under market value

2) mismatch between customers and items ordered

3) business transfers made for no apparent reason

4) third party financing

5) packaging inconsistent with contents

6) routing is circuitous or economically illogical

7) size or weight of goods is inconsistent with the contents

Most common ways of money laundering

1) smurfing

2) using mules

3) opening she’ll corporations

4) buying and selling commodities

5) investing in various assets like real estate, gambling, and counterfeiting

Signs of money laundering

1) unexplained third party investment

2) difficulty identifying everyone in the business

3) the business operates in high-risk countries

4) high volumes of cash transactions through the business

5) finance from poorly regulated sources

6) unusual behavior or actions that are out of character

7) transactions that don’t appear to make sense

8) an overly complicated ownership structure

9) a frequent change in accountants

10) politically exposed people involved with the business

Compiled by:-

Avinash Kulkarni

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer