Money Laundering and Its Prevention

Frndss everybody of us is hearing about money laundering these days .today I m going to make you explain what actually money laundering is....

India is extensively gripped under crime of money laundering. Money laundering is usually used by criminals to hide money made through illegal act. It is the process by which huge amount of money obtained unlawfully, from drug trafficking, terrorist activity or other severe crimes. Money laundering has an unfavourable impact on economy and political steadiness of nation. It is necessary that all nations of the world must jointly device policies and adopt measures to curb act of money laundering by resorting to forceful enforcement of law.

Generally people consider Money laundering is the conversion of black money into white money. This takes one back to cleaning the huge piles of cash. If it is done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide an authentic cover for their source of income. Money laundering fulfils the ambitions of the drug trafficker, theterrorist, the organized criminal, the insider dealer, the tax evader as well as the many other groups who need to avoid the kind of attention from the authorities that unexpected prosperity comes from illegal acts. These criminal tries to get money and power through criminal activities and then attempt to penetrate the legitimate society, thereby misrepresenting the terms of the compact. They create huge amount of money for the members of the enterprise and permit their associates to live extravagant lifestyles.

Concept of Money Laundering: Money laundering is designated as the source of illegally obtained funds covered through a series of transfers and deals in order that those same funds can eventually be made to appear as legitimate income (Robinson). According to Interpol General Secretariat Assembly in 1995, money laundering is any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

Money Laundering is an expression that has recent origin. Money laundering is a cultured crime that is not to be taken seriously by society. When comparing with street crimes, it is a modern crime. Some experts refer to it as a victimless crime but in reality, it is not a crime against a particular individual, but it is a crime against nations, economies government, rule of law and world at large. Money laundering has become a worldwide threat. The objective of a huge number of criminal acts is to get profit for the individual or group that performed the act and then hide either the source or the purpose ofcash. Money laundering is the processing of these criminal proceeds to cover their illegal origin. This process is very crucial for government and other responsible authorities as it enables the criminal to enjoy money obtained from illegal source. Some of the crimes such as illegal arms sales, smuggling, corruption,drug trafficking and the activities of organized crime including tax evasion produce huge money. Insider trading, corruption and computer fraud schemes also generate more profits and create the incentive to legitimize the illegal gains through money laundering. When a criminal activity produces large profits, the individual or group involved must find a way to control the funds without attracting attention to the original activity or the persons involved. Criminals perform this by disguising the sources, changing the form, or transferring money to a place where they are less likely to attract attention. Otherwise, they will not be able to use the money because it would connect them to the criminal action, and law enforcement authorities would grab it. If criminals perform this process successfully, it allows the criminals to maintain control over their proceeds and eventually to provide a legitimate cover for their source of income. Where criminals are allowed to use the proceeds of crime, the ability to launder such proceeds makes crime more attractive.

Significance of Money Laundering:Money laundering is an important criminal issue for policy makers and government authorities that gained increasing significance after the occurrence of heart throbbing indents of 9/11 attack on the twin towers in the U.S. After that all nations has focused its attention on the notion of money laundering and has recognized it as a source of the funding of terrorist actions. The process ofglobalization and advancements of the communicationshave made crime increasingly international in scope, and the financial aspects of crime have become more complex due to technology enhancement. The huge expansion of international banks all over the world has facilitated the transmission and the disguising of the origin of funds. This may have shocking social consequences and poses a threat to the security of any nation at large or small scale. It offers immense facilities for drug dealers, terrorists, illegal arms dealers,corrupt public officials and all types of criminals to operate and increase their criminal activities. Laundering enables criminal activity to continue. Money laundering causes an alteration of resources to less productive areas of the economy which in turn deceaseseconomic development. If security authorities and government ignore this crime, there will be serious consequences on social and political development of nation. The economic and political influence of criminal organizations can deteriorate the social fabric, collective ethical standards, and eventually the democratic institutions of civilisation.

Theoretical review of money laundering:It has been demonstrated in academic reports that financial institutions have made efforts to detect and prevent money laundering since last many years, but the main feature of money laundering are its processes in which itis carried out. Many experts have argued that money laundering does not take a singular act but takes a morecomplex operation, which is completed in three basic steps which include placement, layering and integration (Anon, 2006). The International Monetary Fund (IMF) (2001: 7-8) defined money laundering as being the"transferring (of) illegally obtained money or investmentsthrough an outside party to conceal the true source". In South Africa, the Public Accountants and Auditors Board (2003), stated that money laundering is defined in local legislation as being "virtually every act or transaction that involves the proceeds of crimes, including the spending of funds that were obtained illegally". There are variation in views of different authorities to explain the notion of money laundering.

Processes of Money
laundering placement:First step is the Placement stage in the money laundering cycle. Money laundering activities is usually generated from cash intensive business, large amount of cash or hard currency and grown from illegal activities such as sale of drugs, illegal firearms, prostitution or human trafficking. Currencies gained from this cycle need to be disposed of immediately by the launderer, so they go as far as depositing it back in financial institutions, spending in retail economy, and involvement in a business or acquisition of an expensiveproperty/asset or smuggled out of the country. The launderer's intention in this stage is to eliminate the cash from the place of possession so as to escape any form of detection from the authorities and to transform it to other form of assets such as travellers' cheques. Temple (2002) delineated some of the more common ways in which placement could be achieved, such as exchanging currency for smaller denominations that will make it easier to utilise, transport or conceal to methods involving the use of multiple deposits entailing small amounts in different bank accounts. Nixon (2000) refers to the practice of utilising multiple deposits being placed in many accounts by different individuals as"smurfing". Moulette (1995) recognised other strategies such as use of representative offices of foreign banks, international "houses" or "sub accounts" that may be maintained by banks on behalf of their clients for the funnelling of funds through casino's or unregulated Asian games such as Pai-Gow.

Layering:  In this stage, the launderer tries to hide or disguise the origin of the funds by creating complicated layers of financial transactions designed to cover the audit trail and conceal it. Banerjee (2003) stated that layering serves to hide the source and ownership of the funds. Moulette (2000) suggested the methods used to accomplish layering such as the use of offset accounts by dealers, online electronic fund transfers between certain tax havens, and doubtful gold transactions in which large purchases of gold in countries with low VAT rates and then (there is an) exporting (of) the bullion back to the country of origin". The aim of layering is to separate the illegal duties from the source of the crime, layers upon layers of transactions are created, moving illegal funds between accounts or business, or buying and selling assets on a local and international basis untilthe original source of the money is undetectable. Suter (2003) designated that there are other methods that canbe adopted to allow, layering to take place that involve the over-invoicing and false invoicing of imports and exports.

Integration:After the layering stage, illegal funds are taken back into the financial system as payments for services rendered. Making the launderer feel fulfilled by making the funds appear to be legally earned. Illegal funds is returned to the economy and disguised as genuine income. Schroeder (2001) indicated that the techniques adopted to successfully integrate funds froma criminal enterprise would very often be similar to that of practices adopted by legitimate business.

Impact of money laundering on nation: There are many dangerous impact of money laundering on country as well as whole world. According to McDowell and Novis (2001), there are following key effects of money laundering:1.Undermining of the legitimate private sector: Quirk (1997 : 7-9) stated that The use of front companies by money launderers undermines the legitimate private sector, as the motive of money launderers is not necessarily to make a profit out of operations of the front company.2.Undermining of the integrity of financial markets: The succeeding reputational loss by financial institutions results in a loss of confidence by consumers in these affected financial institutions who may be perceived to be involved in fraudulent activities. This could also affect the reputation of a country and force investors to invest in economies that are perceived to be less exposed to the risk of money laundering. Money laundering can deleteriously impact on the truthfulness of financial markets, and also weaken the reputation of a nation.3.Loss of control of economic policy: Reports of IMF (2003) signified that the size of the funds being laundered, and the fact that money launderers wouldwant to launder their funds through developing economies to reduce possible detection of their schemes, can affect the inflow and outflow of funds in these countries.4.Economic distortion and instability: Money laundering may also misrepresent capital flows, and thus destabilise the effective functioning of the world-wide economy. Castle and Lee (1999) argued that money launderers would not look at where to best invest their money based on economic principles, but rather at where it would be easier to avoid being caught or based on where the cost of avoidance was lower.5.Loss of revenue: Many theorists such as Kovacevic (2002) and Fundanga (2003) stated that money laundering decreases the tax funds available for collection in the economy and by implication government's revenues. Consequently, governments may have to levy higher taxes in order to obtain the funds necessary to fulfil their responsibilities towards their citizens.6.Security threats to privatisation efforts: According toChossudovsky (1999), it was observed that money launderers who are able to obtain previous government entities that are being privatised, can attempt to establish a legitimate front to launder funds. This can weaken economic reforms as moneylaunders are not interested in operating these entities as going concerns, but rather as a channel for laundering money.7.Reputation risk: Van Fossen (2003) asserted that nations that are competing as destinations for legitimate investments may face difficulty to do so ifthere is a perception that the country has a poor track record of dealing with money laundering or is seen to be a centre for money laundering. This is because legitimate investors are wary of being associated with any country that has a negative reputation.

Prevention and Combat Of Money laundering..  legislators around the world have realized that concentrated efforts are required to deal with illegal funding and control money laundering. India has different laws to tackle smuggling, narcotics, foreign trade violations, foreign exchange manipulations and also special legal provisions for preventive detention and forfeiture of property, which were enactedover a period of time to deal with such severe crimes. Some of these were considered to be strong measures, but may not now match the post-Sept.11 measures initiated in the US and the EU. In India, there were old age practices for prevention of Money laundering in the sense of seizure and repossession of proceeds of crime.The statutes predominant before the Prevention of Money Laundering Act, 2002 (Money Laundering Act of 2002) are:

1.Criminal Law Amendment Ordinance (XXXVIII of 1944).
2.The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976.
3.Narcotic Drugs and Psychotropic Substances Act, 1985.

1.Criminal Law Amendment Ordinance (XXXVIII of 1944): Under this law, police can get the proceeds ofcrime relating to bribe, breach of trust and cheating confiscated by an order of attachment and on completion of the criminal prosecution can get an order from court forfeiting the proceeds. This ordinance was modified in 1946 and responsibility ofproof to the accused. In the event of crime under Prevention of Corruption Act, the implementation rests with the CBI. However this law covers proceeds of only certain crimes such corruption, breach of trust and cheating and not all the crimes under the Indian Penal Code.

2.The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: According to this law, there is a penalty of illegally acquired properties of smugglers and foreign exchange manipulators and for matters connected therewith and incidental thereto. The application of this law is restricted to the persons convicted under the Customs Act, 1962 or Sea Customs Act, 1878 or other foreign exchange laws. Under this Act, no person shall hold any unlawfully acquired property either by himself or through any other person on his behalf. The word 'illegally acquired property' has been well defined under section 3(c) of the act.There is very broad legislation in India on money laundering which includes all kinds of laundering of money relating to all crimes and offences under laws of India except offences relating to drug trafficking or offences under Indian Penal Code. As far as drug offences are concerned, prevention of money laundering is taken care of by Narcotic and Psychotropic Substances Act, 1985.

3.Narcotic Drugs and Psychotropic Substances Act, 1985: Narcotic Drugs and Psychotropic Substances Act, 1985 provide for the penalty of property derived from, or used in illegal traffic in narcotic drugs. Sections 68A to 68Y of Chapter VA of the Act provides for forfeiture of assets derived from or used in unlawful traffic. The provisions are so broad that the authorities administering the law have huge powers including the power to trace the source of drug related money or property and afterward to proceed with freezing of accounts and seizure of property and forfeiting it to the government.