Money Laundering.docx 2

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Money launderingrefers to the process of concealing financial transactions. Various

laundering techniques can be employed by individuals, groups, officials and

corporations. The goal of a money laundering operation is usually to hide either the

source or the destination of money.

Perhaps the best way to understand the concept is to take a look at some common

examples. Suppose, for example, that an employee was stealing large sums of cash

from her employer without getting caught. If she was to make large deposits into her

bank account, some regulator (or computer program) might notice the unusually large

deposits, thereby increasing the chances of getting caught. To launder the money, the

criminal might simply use the cash to make purchases and then resell the items in a

legitimate market. The revenue gained from these sales is 'cleaner' and the criminal is

drawing less attention to herself----

Secton -3 defines money laundering as Whosoever directly or indirectly attempts to

indulge or knowingly assists or knowingly is a party or is actually involved in any

process or activity connected with the proceeds of crime and projecting it as untainted

property shall be guilty of offence of money-laundering.

In general, money laundering follows a three-stage process. First comesplacement, when

black money is injected into the financial system. Then comeslayering, when money is

layered or spread across multiple entities, in order to conceal the identity of the source.

The last stage is integration, which is routing the money back to the original entity

through legal channels.

Black Money in India

If we come to define the term black money we can say that it actually refers

to the money that is being earned in black market and/or on which the tax is

not paid. Though this black money trend has prevailed in every other

country but this problem is quite serious in India. According to a report

being published in a business magazine, India possesses more black money

as compared to the rest of the world. Other countries that failed to top the
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list include Russia, United Kingdom, Ukraine and China.

At first, the Government of India was not willing to disclose the total amount

of black money either in their country or the money transferred in foreign

accounts, however, official sources estimate this amount to be around $ 1.4trillion. Amazing isn't it? Well the Indian nation is quite wealthy in terms of

their black money savings. It is very thwarting for a nation to be known as a

leading black money holder because this is the money that has been illegally

saved by the people into their respective accounts. Most of these personal

accounts belong to corrupt politicians, high-ranked officers and industrialists.

This total amount accounts for around 40% of India's Gross Domestic

Products and hence one can imagine how the growth could prosper if India

gets back this money.

It is a known reality that 450 million Indian people are living below the

threshold of poverty and that means on average a poor person gets less

than Rs. 1.25 (Indian currency) per day. So why the Government has

become a silent spectator of this issue and cannot think of bringing the black

money back to the country which can later be used for the prosperity of the

Indians. The country has already taken enough loans from foreign countries

and it has been impossible to get free from these debts since then.

Beholding the taxpaying population of India, it has been seen that 31 million

Indians pay annual taxes that means that only 2.5 % of the whole

population is in fact paying taxes. The number of people legally responsible

for tax payment is 10 times higher than this.

Ways used by people to earn black money

There are number of ways used to earn black money in India. One super

way that comes at the top of the list is making money and not paying tax on

it. It is where you utilize the money in a way that it cannot be taxed

including sending the cash to a friends' bank or especially a foreign bank

where the Indian Government cannot access easily. Black money has also

been earned by using criminal ways such as payment to kidnappers, drugs


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and weapons business (smuggling), bribes taken on the grounds of

immorality etc. some very common sources of black money are described

here in some detail.

Escape from taxation: This is considered as the root source of

black money as it allows the holders to hide money from the

government in order to evade the taxation.

Voting scenario: This is the time when all the political members

pull up their socks and get ready to earn as much black money as

possible. In reality they ask for money to support the electioncampaigns and thus they get a chance to use less and earn more

later.

Under the table income: : People approve a project and get

commission on it. Such people never bother to understand the

danger of approving an unethical project and they simply do it for

the sake of earning black money.

Taking bribes: Anything that people think they can undertake can

only become possible if they receive money from the other party.

This bribe taking system is very common in India and has become

an important factor in any work dealing.

On the name of social welfare: This trick of making black money

in India is prevailing in the high society as the people are aware of


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the fact that government would definitely have no objection if they

channel their cash into a welfare project.

Overnight visa offers: Using this people open an office (rental) in

aside area and claim to provide work visa in few days. Once a

person is convinced to their bogus ideas they ask to submit non-

refundable visa registration fee and give a time limit. After they

have gathered enough money, they simply close their offices and

run away.

Commercial dons: In certain areas where the control of the

government is not strong, people demand money from the

businessmen and if they do not pay money, they do not allow the

businesses to run in their area.

Smuggling: This includes all kinds of smuggling ranging from drugs

and weapons to humans.

Property: Any property in the form of house or building has shown

the way to create black money. People simply sale or purchase the

property and hide it to evade taxes by either taking half of the

money cash and rest is taken or given as a cheque.

investing in a foreign market: Many times people use this way by

creating a fake company in any foreign country where usually the


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tax is less and then notify an investment being made in that.

Afterwards the money is diverted back in no time.

Impact of Black Money

The circulation of black money has adversely affected the Indian economy in

several ways.

1. It leads to the misdirection of precious national resources.

2. It has enormously worsened the income-distribution. The fixed income salary

class finds itself ever

be the lower rung of the income-ladder as they pay taxes. They are not able to

catch up with the

people in business, or in professions, or many of those employed who make

money by black activities. Many high placed official and honest employees earn

much less than an average small shopkeeper in big cities like Bombay and Delhi.

Money laundering increases the probability that the financial institution itself

will become corrupt or even controlled by criminal interests

3. The existence of a big-sized unreported segment of the econom is a- big

handicap in making a correct analysis and formulation of right policies for it.

4. Black money results in transfer of funds from India to foreign countries

through clandestine channels. Such transfers are made possible by violationsexchange regulations through the device of under invoicing of exports and

over-invoicing of imports etc.

The government actually receives a lot of money though taxes and only about 5

% or maybe less is spend on society welfare or progress

5. Black money requires for its protection, proliferation and expansion of a

service organisation composed of musclemen, touts and brokers to combat the

forces of law and order on the one hand and on the other hand, there are income

tax advisers, or chartered accountants in the pay of black money operators.

There are contact men, liaison officers, dalals who negotiate favors from top

bureaucracy and political bosses through bribes of black money.

6. Black money has corrupted our political system in a most vicious manner. At

various levels, MLAs, MPs, Ministers, party functionaries openly go on collecting

funds for party or elections. Ministers dole out favours of crores by accepting


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black money donations of a few lakhs from businessmen National policies are,

therefore, being bent in favour of the big business under the pressure of black

money.

7. Causes inflations

The politics of black money thus has corroded the moral fibre of Indian polity.

Ministers dole out favours of crores by accepting black money donations of a few

lakhs from businessmen. National policies are, therefore, being bent in favour of

the big business under the pressure of black money.

Due to the pernicious impact of black money on the Indian economy and polity

that the Wanchoo Committee concluded: It is, therefore, no exaggeration to say

that black money is like a cancerous growth in the countrys economy which, if

not checked in time, is sure to lead to its ruination.

When India became independent the value of UK Pound was equal to Rupees

seven and Paise fifty .

The seventies brought the value of US Dollars to around Rupees eight. You can

judge the effect of Black money on Indian economy considering today's

exchange values.

According to a KPMG study money laundered in India is approximately 2% to 3% of the

country's GDP.

The RBI too has played an important role in curbing the menace of money laundering The RBI

issued the Know-Your-Customers (KYC) Guidelines Anti Money Laundering Standards on

16th August 2005. The Government has also established a Financial Intelligence Unit-India(FIU-IND), in rank with FATF recommendations. The FIU would be given the Suspicious Activity

Reports from all FIs and would study them before passing them to the Enforcement Directorate

for investigation and prosecution. The RBI has asked all the banks to put the policy with the

sanction of their boards, within the next three months. The RBI has stressed that banks can

successfully control and decrease their risks only if they have an understanding of the normal

and practical activity of the customer so that they have the means of spotting transactions that

fall outside the standard model of activity.


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Conclusion

Money laundering is a serious threat to global financial system and good governance. It is also

boosting international crimes and terrorist activities. Governments in various countries today

have come up with different legislations to deal with this menace. However more needs to be

done in this regard. Black money in India, it is estimated accounts for around 40% of India's

GDP. Moreover it is politicians in India, who are high risk customers who indulge in this activity.

In times of globalization, Indian financial institutions and banks would like to become important

players in the financial setup. This could be achieved only by ensuring that proper prevention of

money laundering norms are in place and have been setup effectively.

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Money Laundering.docx 2