Contemporary Issue

7/28/2019 Contemporary Issue

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Money Laundering

ISSUE & CHALLENGES

OF

MONEY LAUNDERING

In India

MBA- Dual Specialization

II- semester

2013-2014


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Money Laundering

Table of Contents

I. MeaningII. The Working

III. CharacteristicsIV. ProcessV. ConsequencesVI. Money Laundering - An Organized Crime

VII. The Basle PrinciplesVIII. The Indian Scenario

IX. Current NewsX. Conclusion

XI. Bibliography


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Money Laundering

Money Laundering

In India

The Concept:

The process of creating the appearance that large amounts of money obtained from

serious crimes, such as terrorist activity, etc., originated from a legitimate source.

Money laundering is a way of converting black money into white through any

unscrupulous bank transaction.

How Money Laundering Works?

Money laundering is a serious charge. The rise of global financial markets makesmoney laundering easier than ever. Money laundering is the process of disguising

this illegally obtained money as legitimate profits, which you can then use withoutattracting attention. The most common way to do this is for criminals to own some

kind of legitimate business, normally called a "front". They can then disguise theirillegal money as profits obtained by this business. Otherwise, they can't use the

money because it would connect them to the criminal activity, and law-

enforcement officials would seize it.

Characteristics:

it is a group activity, in that it is carried out often by more than one person; it is a criminal activity which is long term and continuing; it is a criminal activity which is carried out irrespective of national

boundaries;

it is large scale; and it generates proceeds which are often made available for licit use.


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Money Laundering

Process of Money Laundering:

Experience has shown that money laundering is generally carried out in three

phases, namely placement, layering, and integration.

I. Placement stage, which is the initial stage, is the introduction of criminallytainted money into the financial system.

II. Layering stage is the dissociation of the dirty money from their sourcethrough a series of transactions to obscure the origins of the proceeds. Thesetransactions may involve different entities such as companies and trusts as

well as different financial assets such as shares, securities, properties orinsurance products.

III. Integration stage is the use of the funds in the legitimate economy throughfor instance, investment in real estate or luxury assets.


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Money Laundering

Consequences of Money Laundering:

Economic

Distortions

Erosion

of

Financial

Sector

Reduction

in

Government

Revenue

Socio-Economic

Costs


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Money Laundering

Economic Distortions-Money laundering impairs the development of the legitimate private sector

through the supply of products priced below production cost, making it

therefore difficult for legitimate activities to compete. Criminals may alsoturn enterprises which were initially productive into sterile ones to launder

their funds leading ultimately to a decrease in the overall productivity of the

economy.

Erosion of Financial Sector-While the financial sector is an essential constituent in the financing of the

legitimate economy, it can be a low-cost vehicle for criminals wishing tolaunder their funds. Consequently, the flows of large sums of laundered

funds poured in or out of financial institutions might undermine the stability

of financial markets. In addition, money laundering may damage the

reputation of financial institutions involved in the scheming resulting to a

loss in trust and goodwill with stakeholders. In worst case scenarios, money

laundering may also result in bank failures and financial crises.

Reduction in Government Revenue-Money laundering also reduces tax revenue as it becomes difficult for the

government to collect revenue from related transactions which frequently

take place in the underground economy.

Socio-economic costs-The socio-economic effects of money laundering are various because as

dirty money generated from criminal activities are laundered into legitimate

funds; they are used to expand existing criminal operations & finance new

ones. Further to that money laundering may lead to the transfer of economic

power from the market, the government and the citizens to criminals,

abetting therefore crimes and corruption.


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Money Laundering

Money Laundering - An Organized Crime:

Money Laundering has a close nexus with organized crime. Money Launderers

accumulate enormous profits through drug trafficking, international frauds, armsdealing etc. Cash transactions are predominantly used for Money Laundering as

they facilitate the concealment of the true ownership and origin of money. It is well

recognized that through the huge profits the criminals earn from drug trafficking

and other illegal means, by way of money laundering could contaminate and

corrupt the structure of the State at all levels, this definitely leads to corruption.

Further, this adds to constant pursuit of profits and the expansion into new areas of

criminal activity.

Through money laundering, organized crime diversifies its sources of income andenlarges its sphere of action. The social danger of money laundering consists in the

consolidation of the economic power of criminal organizations, enabling them to

penetrate the legitimate economy. In advanced societies, crime is increasingly

economic in character. Criminal associations now tend to be organized like

business enterprises and to follow the same tendencies as legitimate firms;

specialization, growth, expansion in international markets and linkage with other

enterprises. The holders of capital of illegal origin are prepared to bear

considerable cost in order to legalize its use.


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Money Laundering

The Basle Statement of Principles -

The Committee on Banking Regulations and Supervisory Practices of the G 10 at a

meeting in Basle in Switzerland, in December 1988, evolved a set of principles toaddress the dangers posed by Money Launderers. The committee was formed bythe Central Bank Governors of Belgium, Canada, France, Germany, Italy, Japan,

Netherlands, Sweden, Switzerland and United States.

These principles, which are now known as the Basle Principles, deal with the

prevention of criminal use of the banking system for the purpose of Money

Laundering. Recommendations for banks and other financial institutions have beenset out in the Basle Principles so that these institutions can protect themselves

against Money Laundering. The Basle Statement of Principles covers all aspects of

laundering through the banking system.

The Basle Principles suggest policies and procedures in four areas to curb Money

Laundering as shown below:

I. Customer IdentificationII. Compliance with Laws

III. Cooperation with Law Enforcement agenciesIV. Adherence to the Statement.

I. Customer Identification-This reemphasizes the adage "Know your Customer" (KYC). KYC requiresthat banks should make reasonable efforts to determine the customer's true

identity, and must introduce effective procedures for verifying the bonafidesof new customers.


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Money Laundering

II. Compliance with Laws-The laws and regulations pertaining to financial transactions as enacted in

different banking related statutes must be observed. Banks should not offer

services or provide active assistance in case of transactions where they havegood reason to suppose that these are associated with Money Laundering

activities.

III. Co-operation with Law Enforcement Authorities-Banks should co-operate fully with national law enforcement authorities to

the extent permitted by specific local regulations concerning customerconfidentiality.

IV. Adherence to the Statement-Adhering to the Statement implies that banks need to adopt policies that are

consistent with the Statement and ensure that all staff members are informed

of the banks policy in this regard. Some key factors in promoting adherenceto the Statement of Principles are staff training and implementing specific

procedures for customer identification and retaining internal records oftransactions.


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Money Laundering

Money Laundering: The Indian Scenario

With increasing sophistication in the use of technology for transfer of funds andgiven the fact that there has been considerable liberalization and progressive

dismantling of controls in the regulatory framework in India, banks in India needto be in a state of high alert so that they can steer clear of Money Laundering. It is

important to remember that banks and financial institutions are both transmitters ofmoney and regulators of the flow of money.

In India, we already have certain prudent banking practices which check the

proliferation of Money Laundering activities in the country. Some of thesepractices are outlined below:

Identification of prospective clients is carried out prior to the opening of abank account by obtaining proper introduction. This procedure partlyaddresses the requirement of KYC.

Criminal investigation is allowed in banking transactions in India. Forexample, the Income Tax Department can call for information relating to

customers accounts and transactions. Erring accounts can be frozen. This

addresses the Basle Principle on Compliance with legislation and lawenforcement agencies.


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Current News:

Recently the topic came into the highlight in India, asan Indian journalist has

claimed the involvement of three major banks of India in money laundering.

On March 14, 2013, Cobrapost had released the contents of video recording ofofficials of HDFC, ICICI and AXIS Bank allegedly agreeing to receive unverified

sums of cash and put them in their investment schemes and benami accounts inviolation of anti-money laundering laws.

Cobraposts Mega Expose:

Major Indian Private Sector Banks,HDFC Bank, ICICI Bank and Axis Bankareblatantly running a huge nation-wide money laundering racket. The banks, after the

release of the report on television, were prompt enough to issue statements

promising internal investigations.

The report states:

A Cobrapost pan-India undercover investigation spanning several months,

discloses a vast, nation-wide money laundering racket being run by HDFC Bank,

ICICI Bank and Axis Bank. The unashamed illegal doings by these banks is

channelizing vast amounts of black money into the regular banking system as

laundered white money.

The investigation, conducted across dozens and dozens of branches of these banks

and their insurance associates, across all five zones of the country, revealed these

shocking facts:

That these money laundering practices are part of a standard set ofprocedures within these banks;

These money laundering services are being openly offered to even walk-incustomers who wish to launder their illicit money;


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Money Laundering

A variety of options for laundering ill-gotten cash are being offeredbrazenly.

These money laundering services are being offered practically as a standardproduct across the country.

The investigation finds the banks and their managements systematically and

deliberately violating several provisions of the Income Tax Act, Foreign Exchange

Maintenance Act (FEMA), RBI regulations, Know Your Customer (KYC) norms,

the Banking Act and Prevention of Money laundering Act (PMLA), with absolute

disregard to consequences, driven by their desire to boost cheap deposits and

thereby increasing their profits.

How these banks launder black money?

The ways these major banks suggested to transform the black money intowhite were both imaginative in their range and brazen in their approach.

This brought to the fore a modus operandi that is tailored to rake in vast

amounts of black money in the form of illegal deposits, insurance and

investment products, sold by these banks. All these creative means make thedirty money squeaky clean without the regulatory authorities ever getting a

whiff of what they are doing. Here is a gist of what the various bankers

suggested to help the politician launder his illegitimate money:

Accept huge amounts of cash and invest it in insurance products and gold. Open an account to route the cash into various investment schemes of the

bank.

Do it even without the mandatory PAN card or adhering to the KYC normslaid down by RBI.


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Split the money into tranches to get it into the banking system without beingdetected.

Use accounts of other customers to channelize the black money into thesystem for a fee.

Get demand drafts made for the client either from their own banks or fromother banks to facilitate investment without it showing up in the clients

account.

Keep the identity of the investor/depositor secret. Open multiple accounts and close them at will to facilitate the investment of

black money.

Allot lockers for the safekeeping of the illegitimate cash, including speciallarge size lockers to accommodate crores of hard cash.

Personally come to the residence of the client to take the black money dealforward and collect the cash, even bring along counting machine.

Use provisions like Form 60 to deposit the illegitimate cash into the accountto route it into investment.

Help the client to transfer black money abroad through NRE (Non-ResidentExternal)/NRO (Non-Resident Ordinary) account; transfer the money

telegraphically or through means other than regular banking procedures.

After the accusation made by the journalist, the Banks said they were investigating

allegations of widespread money laundering practices at their branches.

The bank further said: "We want to assure our customers and all stakeholders

that we are committed towards adherence to the high standards of business

conduct, which is expected of us. We have constituted a high level inquiry


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Money Laundering

committee to investigate into the matter and submit its findings in 2 weeks.

Audit by RBI:

RBI sends audit teams to three banks comprehensive scrutinize covering both,Head Office and branches of three private sector banks, namely, ICICI Bank,

HDFC Bank and Axis Bank.

Statement by RBI- No Money Laundering Involved In Cobrapost

Expose:

The Reserve Bank of India Deputy Governor KC Chakrabarty has given a clean

chit to private banks.

RBI also sought to downplay the money-laundering allegations, saying the country

has a "perfect" system to prevent such offences and that not a single such

transaction took place in the sting operation. "Allegations do not mean flouting

norms. There is not a single transaction which has taken place. KYC violations will

happen in any system.

"Allegations do not mean flouting norms. There is not a single transaction whichhas taken place. KYC violations will happen in any system. These are all

transactional issues and have nothing to do with money laundering," Deputy

Governor KC Chakrabarty told reporters after a meeting with bankers in Mumbai.


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Conclusion:

Money Laundering is a serious, highly sophisticated and global criminal activity.The degree of organization displayed in Money Laundering is a major cause for

concern of banks and bank supervisors. Banks and other financial institutions canprotect themselves against Money Laundering by implementing an effective KYC

Policy, knowing their customers, checking the source of funds, monitoring theconduct of accounts, and by learning to recognize suspicious/ irregulartransactions.


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Bibliography-

http://ibnlive.in.com

http://www.rediff.com

http://answers.yahoo.com

http://m.indianexpress.com

http://www.indianmba.com

http://www.fiumauritius.org

http://www.businessworld.in

http://www.mapsofindia.com

http://www.investopedia.com

http://www.moneycontrol.com

http://www.howstuffworks.com

http://www.laundryman.u-net.com

http://importantbankingnews.blogspot.in

http://missiongalacticfreedom.wordpress.com
http://ibnlive.in.com/http://ibnlive.in.com/http://www.rediff.com/http://www.rediff.com/http://answers.yahoo.com/http://answers.yahoo.com/http://m.indianexpress.com/http://m.indianexpress.com/http://www.indianmba.com/http://www.indianmba.com/http://www.fiumauritius.org/http://www.fiumauritius.org/http://www.businessworld.in/http://www.businessworld.in/http://www.mapsofindia.com/http://www.mapsofindia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.howstuffworks.com/http://www.howstuffworks.com/http://www.laundryman.u-net.com/page14_conclusions.htmlhttp://www.laundryman.u-net.com/page14_conclusions.htmlhttp://importantbankingnews.blogspot.in/http://importantbankingnews.blogspot.in/http://missiongalacticfreedom.wordpress.com/http://missiongalacticfreedom.wordpress.com/http://missiongalacticfreedom.wordpress.com/http://importantbankingnews.blogspot.in/http://www.laundryman.u-net.com/page14_conclusions.htmlhttp://www.howstuffworks.com/http://www.moneycontrol.com/http://www.investopedia.com/http://www.mapsofindia.com/http://www.businessworld.in/http://www.fiumauritius.org/http://www.indianmba.com/http://m.indianexpress.com/http://answers.yahoo.com/http://www.rediff.com/http://ibnlive.in.com/

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