MONEY LAUNDERING: MEANING, IMPACT, CHALLENGES WAY FORWARD

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Picture Courtesy: EQS

Context

According to a report submitted by the Finance Minister to the Rajya Sabha, special courts have ordered convictions in only 15 of 5,892 Prevention of Money Laundering Act (PMLA) cases since 2015, highlighting the complexities of money laundering cases.

What is Money Laundering?

• It is a criminal practice of legitimizing illegal funds, poses a global threat, impacting national security and economic stability.
• The Prevention of Money Laundering Act, 2002 (PMLA), defines money laundering as transforming illegally acquired money, from activities like drug trafficking or tax evasion, into legitimate funds.
• An IMF study estimated the global quantum of money laundered at 2%- 5% of the world's GDP. 

3 stages of Money laundering  

1. Placement: Criminals introduce illegal funds into the formal financial system, by breaking large sums into smaller deposits or converting them into monetary instruments to evade detection.
2. Layering: They perform complex financial transactions to hide the money's illegal source, using methods like multiple bank transfers, cross-border transfers.
3. Integration: The "laundered" funds re-enter the financial system as legitimate money, invested in areas like real estate or businesses, making detection difficult,

Key Methods used in money laundering

• Hawala: Informal transfer system moves funds without physical cash, operating through a network of "hawaladars" or dealers.
  • It allows money movement across jurisdictions, bypassing formal financial systems.
• Shell Companies: These companies, lacking active business operations, receive "payments" for fictitious goods or services.
  • They create an illusion of legitimate transactions using fabricated invoices and balance sheets.
• Cryptocurrencies: Digital currencies, with their cryptographic security and lack of central authority interference.
  • Illicit transactions using cryptocurrencies reached an estimated $14 billion in 2021.
  • Services like mixers, tumblers, and foggers aggregate funds from multiple customers to hide origins.
• Illegal Wildlife Trade (IWT): Generates global profits estimated between $7 billion and $23 billion annually.
  • Criminals utilize methods like cash deposits, e-banking platforms, and licensed money value transfer systems, including 'hawala', to place and layer funds.

Impact of Money Laundering

Weakens Social Fabric: It empowers illegal businesses, aggravates issues like drug addiction and corruption, and shifts economic power from legitimate entities to illicit ones, eroding morality and ethics.

Undermines Economic Integrity: Money laundering damages financial institutions' reputations, distorts market mechanisms, and raises business costs, especially for small enterprises.

Creates Macroeconomic Instability: Unanticipated fund transfers cause volatility in exchange and interest rates, lead to misallocation of resources, erode market confidence, discourage foreign investment, and contribute to artificial inflation, jobless growth, income inequality, and poverty.

Fuels Political Instability: Economic power gained by criminals through money laundering enables corrupting influence, leading to the takeover of legitimate governments and undermining democratic processes.

Threatens National Security: It finances criminal activities like drug trafficking, arms dealing, terrorism (through informal channels like hawala), and human trafficking, increasing government security costs.

What are the framework to combat money laundering in India?

Legal Pillars

• Prevention of Money Laundering Act, 2002 (PMLA): Provides for confiscation of laundered property, mandates client identity verification, record maintenance, and suspicious transaction reporting by financial institutions to FIU-IND.
• PMLA Amendments (2019): Tightened "beneficial ownership" definition (from 25% to 10% limit), classified PMLA offenses as cognizable and non-bailable, empowering the ED to arrest without a warrant.
• Other Laws: Legislation like the Foreign Exchange Management Act (FEMA, 2000), Information Technology Act (2000), Indian Penal Code (1860), Fugitive Economic Offenders Act (2018), and COFEPOSA (1974) strengthen the framework.

Institutional Framework

• Financial Intelligence Unit – India (FIU-IND): Established in 2004, under the Ministry of Finance, acts as the central agency for receiving, processing, analyzing, and disseminating financial intelligence, coordinating national and international efforts.
• Enforcement Directorate (ED): Established in 1956, under Ministry of Finance, enforces FEMA (civil) and PMLA (criminal), conducting investigations, attaching/confiscating assets, and prosecuting offenders.

What are the global framework to deal with money laundering?

Conventions

Vienna Convention (1988): Criminalized laundering of drug trafficking proceeds and promoted international cooperation.

Council of Europe Convention (1990): Established a common policy, international cooperation for all types of criminality.

UN Conventions: Conventions against Terrorism Financing (1999), Transnational Organized Crime (2000), and Corruption (2003), support global anti-money laundering (AML) efforts.

International Bodies

Financial Action Task Force (FATF): Founded in 1989, sets international standards and promotes effective implementation of AML measures; India became a member in 2010.

Basel Committee on Banking Regulations: Issued principles to encourage banks to prevent their use for criminal funds.

United Nations Global Programme against Money Laundering (GPML): Established in 1997, it provides technical cooperation and manages the Anti-Money Laundering International Database (AMLID).

Egmont Group of FIUs (1995): A coordinating body for international FIUs, promoting cooperation among its 165 global member units.

Asia-Pacific Group on Money Laundering (APG): A regional organization of 42 members aiming for regional commitment to implement AML policies.

Wolfsberg AML Principles: Non-binding best practice guidelines to combat financial crime. 

Challenges in Prevention of Money Laundering

Sophisticated criminal tactics: Criminals constantly innovate, utilizing techniques like shell companies, offshore accounts, digital currencies, and complex layering transactions to obscure illicit funds.

Technological advancements: While providing opportunities for detection, technology also empowers criminals with tools like cryptocurrencies, blockchain, and online payment platforms, which challenge traditional anti-money laundering (AML) systems to keep pace.

Cross-border regulatory complexities: Differing AML laws and enforcement standards across jurisdictions create gaps that criminals exploit.

Resource constraints: Financial institutions and regulatory bodies face limitations in funding, personnel, and technological infrastructure, limit the implementation of effective AML programs.

Data management issues: Organizations struggle with unreliable and incomplete customer and transaction data, impact the accuracy and effectiveness of risk assessment and monitoring efforts.

Insufficient adoption of advanced analytics: Many organizations lag in leveraging data mining, predictive analytics, and big data analysis for deeper insights and improved detection capabilities.

Enforcement Limitations: Widespread smuggling and insufficient bank KYC compliance hinder efforts.

Multiple agencies dealing with economic crimes lack convergence, restricting a holistic approach.

• Presence of tax haven countries complicates investigations due to financial confidentiality laws.

Low Conviction Rates: According to a report submitted by the Finance Minister in the Rajya Sabha, the Enforcement Directorate (ED) has investigated 5,892 cases under the Prevention of Money Laundering Act (PMLA) 2002 since 2015. However, only 15 cases have resulted in convictions by special courts.

What are the way Forward to Deal with Money Laundering?

Strengthen Regulations: Regularly update and enforce robust anti-money laundering (AML) and counter-terrorist financing (CTF) regulations to address emerging risks.

Prevention of Money Laundering Act (PMLA) needs ongoing adjustments to counter evolving threats.

Use Advanced Technology: Implement Artificial Intelligence (AI) and Machine Learning (ML) to improve detection.

• AI can analyze large datasets to identify suspicious patterns more accurately.  

Prioritize Risk-Based Approaches: Focus AML efforts on the highest-risk areas, such as transactions involving high-risk jurisdictions or individuals.

• Customize strategies to specific industries and customer types for efficient resource use and effective risk reduction.

Promote Public-Private Partnerships: Encourage collaboration between financial institutions, law enforcement, and regulators to share information on suspicious activities.   

Invest in Training and Education: Provide continuous training for AML professionals and staff to keep them updated on new money laundering methods, technologies, and regulations.

Address Cryptocurrency Risks: Enforce strict Know Your Customer (KYC) measures and transaction monitoring for cryptocurrencies. The FATF Travel Rule requires data sharing between crypto exchanges to improve accountability. 

Inter-Agency Convergence: Creating specialized cells for money laundering activities, linked with international organizations like INTERPOL, and encouraging information sharing among enforcement agencies.

FATF Compliance: Implement FATF recommendations, including risk identification, policy development, criminalizing money laundering across all serious offenses, applying targeted financial sanctions, and reviewing non-profit organization vulnerabilities. 

Conclusion

The fight against money laundering demands continuous adaptation, enhanced international cooperation, technological investment, and ongoing refinement of regulatory frameworks to stay ahead of sophisticated criminal networks.

 Source: THE HINDU