“MONEY IS THE ROOT CAUSE OF ALL EVILS”

HISTORY AND ORIGIN

Money laundering is as old as the man himself. Even four thousand years before Christ,

Chinese merchants used to hide their wealth from their rulers so as to avoid confiscation.

The merchants also invested their money in remote provinces and even outside China.

Literature is replete with stories of Jewish shylocks that employed innovative methods to

hide their money. Meyer Lanski (Capone’s accountant) was very successful in concealing

his ill-gotten money. The Hindujas were criticised in British press for ‘obtaining British

passports by contributing a substantial sum of the Millennium Dome.’

The term "money laundering" is said to originate from Mafia ownership of Laundromats

in the United States. Gangsters there were earning huge sums in cash from extortion,

prostitution, gambling and bootleg liquor. The large proceeds so obtained by means of

such illegitimate businesses required the showing of a legitimate source. One of the ways

in which they were able to do this was by purchasing externally legitimate businesses and

to blend their illicit earnings with the legitimate earnings they received from these

businesses. Laundromats were chosen as a front for converting the illegitimate proceeds

by these gangsters because Laundromats were cash businesses and this was an

unquestionable advantage. One of the earliest names to have surfaced in relation to

money laundering was that of Al Capone. Al Capone, however, was prosecuted and

convicted in October, 1931 for tax evasion. It was this that he was sent to prison for

rather than the predicate crimes which generated his illicit income and according to

Robinson this tale that the term originated from this time is a myth. He states that:

 "Money laundering is called what it is because that perfectly describes what takes place

- illegal, or dirty, money is put through a cycle of transactions, or washed, so that it

comes out the other end as legal, or clean, money. In other words, the source of illegally

obtained funds is obscured through a succession of transfers and deals in order that

those same funds can eventually be made to appear as legitimate income".

 

It would seem, however, that the conviction of Al Capone for tax evasion may have been

the trigger for getting the money laundering business off the ground.

Money laundering as a crime only attracted interest in the 1980s, essentially within a

drug trafficking context. It was from an increasing awareness of the huge profits

generated from this criminal activity and a concern at the massive drug abuse problem in

western society which created the impetus for governments to act against the drug dealers

by creating legislation that would deprive them of their illicit gains.

Governments also recognised that criminal organisations, through the huge profits they

earned from drugs, could contaminate and corrupt the structures of the state at all levels.

Money laundering is a truly global phenomenon, helped by the International financial

community which is a 24hrs a day business. When one financial centre closes business

for the day, another one is opening or open for business.

As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds

of crime, which to a large extent also mark the operations of organised and transnational

crime, are its global nature, the flexibility and adaptability of its operations, the use of the

latest technological means and professional assistance, the ingenuity of its operators and

the vast resources at their disposal.

 In addition, a characteristic that should not be overlooked is the constant pursuit of

profits and the expansion into new areas of criminal activity

INTRODUCTION

If you were to conduct a survey in our country asking what is money laundering, the

general guesses from most people would be that it must be something related to drying,

washing or may be dry cleaning of the currency notes. This is rather the human tendency

about the world's very big crime. To some extent correct but layman don't know much of

this world's third largest industry. As per IMF reports the turnover of this industry could

be somewhere around $1.5 trillion. However common man does not pay attention

because primarily it seems to be a victimless crime. It has none of the issues associated

with a vanishing of the money from economy or performance of the government or

organizations involved in the same and yet, money laundering can only take place after a

predicate crime has taken place. If the person on the street is the banker he might throw

the three letters "KYC" to express his knowledge.  Money laundering is the process by

which large amounts of illegally obtained money is given the appearance of having

originated from a legitimate source. But in simple terms it is the Conversion of Black

money into white money. This takes you back to cleaning the huge piles of cash. Indian

newspapers frequently report the money laundering scams perpetrated by the Political

leaders and some of the prominent stars are the chief ministers of UP, Punjab and Kerala.

Other Indian star in the laundering business is Ketan Parekh. If done successfully, it

allows the criminals to maintain control over their proceeds and ultimately to provide a

legitimate cover for their source of income. The primary purpose of organised crime is to

make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in

future activity. For the organised criminal, however, profit close to the source of the

crime represents a particular vulnerability and unless the criminal can effectively distance

himself or herself from the crime which is the source of the profit they remain susceptible

to detection and prosecution. Hence there is a need to launder their illicit profits to make

them appear legitimate. The biggest source of illicit profits comes from the drugs' trade

and it was drug trafficking that provided the initial catalyst for concerted international

efforts against money laundering. The drugs' industry is a highly cash intensive business

and "in the case of cocaine and heroin the physical volume of notes received is much

larger than the volume of drugs themselves". In order to rid themselves of this large

burden it is necessary to use the financial services industry and in particular, deposit-

taking institutions.

MONEY LAUNDERING -THE INDIAN SCENARIO

The following article throws light on the penetration of money laundering business

in India.

$1 trillion laundered every year in India: 5 Aug, 2008.

Over $1 trillion is being laundered every year by drug dealers, arms traffickers and other

criminals in India, according to a report by audit and consulting firm, KPMG.

KPMG said India's emerging status as a regional financial centre and informal cross-

border money flows are the main contributors to growing money laundering in the

country. "Some common sources of illegal proceeds in India are narcotics trafficking,

illegal trade in endangered wildlife, trade in illegal gems (diamonds), smuggling,

trafficking in persons, corruption, and income tax evasion. India continues to be a drug-

transit country," the US narcotics survey has said.

KPMG feels that in future, the major challenge for the finance sectors like banking,

brokerage houses and insurance companies would be combating money laundering and

terrorist financing. KPMG's report also highlighted the vote of confidence in parliament,

which exposed the prevalence of unaccounted for money in the country.

"A few politicians threw a large sum of cash in parliament and alleged that there was an

attempt to bribe them for their vote. This confirms the continued existence of a parallel

banking system popularly called as 'hawala'," it said. "According to Indian observers,

funds transferred through the hawala market are between 30 to 40 percent of the formal

market," the report said, and noted that the central Reserve Bank of India estimated

official remittances to the country to be around $28.2 billion.

The report suggests for India to reduce the informal money transfer channels it needs to

focus anti-money laundering (AML) policies and procedures, formal monitoring of AML

systems and controls, and ensuring sanctions compliance.

MONEY LAUNDERING – THE NITTY GRITTY

What is Money Laundering?

The goal of a large number of criminal acts is to generate a profit for the individual or

group that carries out the act. Money laundering is the processing of these criminal

proceeds to disguise their illegal origin. This process is of critical importance, as it

enables the criminal to enjoy these profits without jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized crime, including for

example drug trafficking and prostitution rings, can generate huge amounts of proceeds.

Embezzlement, insider trading, bribery and computer fraud schemes can also produce

large profits and create the incentive to “legitimize” the ill-gotten gains through money

laundering.

When a criminal activity generates substantial profits, the individual or group involved

must find a way to control the funds without attracting attention to the underlying activity

or the persons involved. Criminals do this by disguising the sources, changing the form,

or moving the funds to a place where they are less likely to attract attention.

How much money is laundered per year?

By its very nature, money laundering is an illegal activity carried out by criminals which

occurs outside of the normal range of economic and financial statistics. Along with

some other aspects of underground economic activity, rough estimates have been put

forward to give some sense of the scale of the problem.

The International Monetary Fund, for example, has stated in 1996 that the aggregate size

of money laundering in the world could be somewhere between two and five percent of

the world’s gross domestic product.

Where does money laundering occur?

As money laundering is a consequence of almost all profit generating crime, it can occur

practically anywhere in the world. Generally, money launderers tend to seek out countries

or sectors in which there is a low risk of detection due to weak or ineffective anti-money

laundering programmes. As the objective of money laundering is to get the illegal funds

back to the individual who generated them, launderers usually prefer to move funds

through stable financial systems.

Money laundering activity may also be concentrated geographically according to the

stage the laundered funds have reached. At the placement stage, for example, the funds

are usually processed relatively close to the under-lying activity; often, but not in every

case, in the country where the funds originate.

With the layering phase, the launderer might choose an offshore financial centre, a large

regional business centre, or a world banking centre – any location that provides an

adequate financial or business infrastructure. At this stage, the laundered funds may also

only transit bank accounts at various locations where this can be done without leaving

traces of their source or ultimate destination.

Finally, at the integration phase, launderers might choose to invest laundered funds in

still other locations if they were generated in unstable economies or locations offering

limited investment opportunities.

How does money laundering affect business?

The integrity of the banking and financial services marketplace depends heavily on the

perception that it functions within a framework of high legal, professional and ethical

standards. A reputation for integrity is the one of the most valuable assets of a financial

institution.

If funds from criminal activity can be easily processed through a particular institution –

either because its employees or directors have been bribed or because the institution turns

a blind eye to the criminal nature of such funds – the institution could be drawn into

active complicity with criminals and become part of the criminal network itself. Evidence

of such complicity will have a damaging effect on the attitudes of other financial

intermediaries and of regulatory authorities, as well as ordinary customers.

What influence does money laundering have on economic development?

Launderers are continuously looking for new routes for laundering their funds.

Economies with growing or developing financial centres, but inadequate controls are

particularly vulnerable as established financial centre countries implement

comprehensive anti-money laundering regimes.

Differences between national anti-money laundering systems will be exploited by

launderers, who tend to move their networks to countries and financial systems with

weak or ineffective countermeasures.

Some might argue that developing economies cannot afford to be too selective about the

sources of capital they attract. But postponing action is dangerous. The more it is

deferred, the more entrenched organised crime can become.

As with the damaged integrity of an individual financial institution, there is a damping

effect on foreign direct investment when a country’s commercial and financial sectors are

perceived to be subject to the control and influence of organised crime. Fighting money

laundering and terrorist financing is therefore a part of creating a business friendly

environment which is a precondition for lasting economic development.

What is the connection with society at large?

The possible social and political costs of money laundering, if left unchecked or dealt

with ineffectively, are serious. Organised crime can infiltrate financial institutions,

acquire control of large sectors of the economy through investment, or offer bribes to

public officials and indeed governments. 

The economic and political influence of criminal organisations can weaken the social

fabric, collective ethical standards, and ultimately the democratic institutions of society. 

In countries transitioning to democratic systems, this criminal influence can undermine

the transition.   Most fundamentally, money laundering is inextricably linked to the

underlying criminal activity that generated it. Laundering enables criminal activity to

continue.

STAGES IN MONEY LAUNDERING

The basic money laundering process has three steps:

1. Placement - At this stage, the launderer inserts the dirty money into a legitimate

financial institution. This is often in the form of cash bank deposits. This is the

riskiest stage of the laundering process because large amounts of cash are pretty

conspicuous, and banks are required to report high-value transactions.

2. Layering - Layering involves sending the money through various financial

transactions to change its form and make it difficult to follow. Layering may

consist of several bank-to-bank transfers, wire transfers between different

accounts in different names in different countries, making deposits and

withdrawals to continually vary the amount of money in the accounts, changing

the money's currency, and purchasing high-value items (boats, houses, cars,

diamonds) to change the form of the money. This is the most complex step in any

laundering scheme, and it's all about making the original dirty money as hard to

trace as possible.

3. Integration - At the integration stage, the money re-enters the mainstream

economy in legitimate-looking form -- it appears to come from an legal

transaction. This may involve a final bank transfer into the account of a local

business in which the launderer is "investing" in exchange for a cut of the profits,

the sale of a yacht bought during the layering stage. At this point, the criminal can

use the money without getting caught. It is very difficult to catch a launderer

during the integration stage if there is no documentation during the previous

stages.

However, The Anti Money Laundering Network recommends the terms

1. Hide: To reflect the fact that cash is often introduced to the economy via

commercial concerns which may knowingly or not knowingly be part of the

laundering scheme, and it is these which ultimately prove to be the interface

between the criminal and the financial sector

2. Move: Clearly explains that the money launderer uses transfers, sales and

purchase of assets, and changes the shape and size of the lump of money so as to

obfuscate the trail between money and crime or money and criminal.

3. Invest: The criminal spends the money by investing in assets or his lifestyle.

PMLAPMLA ©Rajkumar S Adukia©Rajkumar S Adukia 2020

General Steps in any money General Steps in any money laundering process.laundering process.

Who would come across these suspicious transactions?

Financial entities, includes banks, credit societies, trusts and lending

institutions/companies and agents of the such institutions who accept deposit

liabilities.

Life insurance companies, brokers or agents.

Securities dealers, portfolio managers and investment bankers, and other

middleman in securities markets.

Forex Dealers: People who are engaged in the business of foreign exchange.

Money services businesses, which includes alternative remittance systems,

popularly known as Hawala, Hundi, Chitti, etc.

Agents, selling National Saving Certificates, money orders etc.

Chartered Accountants while carrying out certain activities on behalf of their clients.

Real estate, brokers or sales representatives of real estate when they carrying out certain

activities on behalf of their clients.

METHODS OF MONEY LAUNDERING

Smurfing: It is used as a tool by money launderer. It involves multiple deposits of low

value monetary instruments purchased from banks or financial institutions with proceeds

of crime. It may be in several forms like, multiple deposits of cash or monetary

instruments in amounts specifically below the ceiling amount (it is Rs.50, 000 in India).

It can be done by one or more persons by making deposits into one or more accounts

during several visits to bank. Some times, it involves, deposit of multiple monetary

instruments into accounts with different financial institutions.

Structuring

It is through multiple cash deposits or withdrawals at amounts below than ceiling amount.

Both structuring and smurfing are similar types of suspicious activity, which may result

in money laundering.

E-Banking/Cyber Banking Many banks have started providing their banking services

on net by taking advantage of the global reach of the Internet and World Wide

Web.Cyber banking is vulnerable to money laundering because it facilitates fast

movement of funds across the globe within a short span of time and anonymity of user.

Overseas banks

Money launderers often send money through various "offshore accounts" in countries

that have bank secrecy laws, meaning that for all intents and purposes, these countries

allow anonymous banking. A complex scheme can involve hundreds of bank transfers

to and from offshore banks.

Investing in legitimate businesses

Launderers sometimes place dirty money in otherwise legitimate businesses to clean

it. They may use large business like brokerage firms or casinos that deal in so much

money it is easy for the dirty stuff to blend in, or they may use small, cash-intensive

businesses like bars.These businesses may be "front companies" that actually do

provide a good or service but whose real purpose is to clean the launderer's money.

This method typically works in one of two ways: The launderer can combine his dirty

money with the company's clean revenues -- in this case, the company reports higher

revenues from its legitimate business than it is really earning; or the launderer can

simply hide his dirty money in the company's legitimate bank accounts in the hopes

that authorities won't compare the bank balance to the company's financial statements.

Shell companies

These are fake companies that exist for no other reason than to launder money. They

take in dirty money as "payment" for supposed goods or services but actually provide

no goods or services; they simply create the appearance of legitimate transactions

through fake invoices and balance sheets.

Underground/alternative banking

Some countries in Asia have well-established, legal alternative banking systems that

allow for undocumented deposits, withdrawals and transfers. These are trust-based

systems, often with ancient roots, that leave no paper trail and operate outside of

government control. This includes the hawala system in Pakistan and India and the fie

chen system in China.

Mechanics/Classifications of money laundering:

1) Money laundering is multi-dimensional, constituting of both a national as well as an

international dimension; thus the typologies of money laundering are observed at both

levels.

2) Money laundering on an international level necessitates it having a national dimension

as well. Money laundering may, however, be practices exclusively on a national level.

Also there exists a possibility of overlap between the national and international

dimension of laundering money.

3) Money laundering requires embracing of economic liberalization, a consequence of

which is greater integration of financial and banking systems worldwide.

Techniques used for Money laundering at the National Level:

Money laundering is a vibrant and continually evolving process which demands keeping

abreast of its latest developments with regard to its techniques and instruments through

which it is affected. Some of the techniques of money laundering maybe depicted as

follows:

1) Retail Businesses: These businesses maybe used as mere fronts where most of the

sales disclosed are fictitious. Owners of such fronts may convert their illegally obtained

income into legitimate income by showing sales through the retail business and paying

the requisite taxes as applicable. The same technique of money laundering as applicable

to retail sale also applies to wholesale businesses.

2) Charity Shows: Money laundering by way of organizing charity and entertainment

shows constitutes an effective method of money laundering. The key to laundering

money by this mode lies in the fraudulent sale of tickets. The extant to which fraudulent

tickets can be sold is the extent to which money can be laundered.

3) Lottery tickets: The lottery constitutes big business in several countries. Money

launderers acquire lottery tickets from genuine winners by paying them the lottery prize

with their illegitimately acquired proceeds. The encashment of these tickets leads to the

legitimization of their proceeds. A similar technique of legitimizing illegal proceeds is

given effect by purchasing winning tickets of racecourses.

4) Casinos: Money laundering is given effect in casinos by way of the launderers taking

their proceeds to the casinos and buying large number of casino chips with which they

did little or practically no gambling. At the end of the day, the launderer conveniently

encashes the casino chips passing them off as genuine winnings.

5) Property: The sale of property at random prices constitutes an effective way of

laundering money. Sale of low value property at highly inflated prices is one such

technique. The level to which the price is inflated is the extant to which money is

laundered.

6) Inheritance laws: Laws of inheritance related to jewellery comprise yet another

technique of laundering money. Indian inheritance law permits a married woman to

acquire jewellery worth Rs. 500,000. Illegal proceeds may be laundered to this extant by

the families of such married women.

7) Securities market: The capitalization of markets is one of the primary ways to mobilize

funds for economic growth. The markets so capitalized are also known as the stock

exchanges. The stock market characterizes as one of its features that as long as the prices

of shares moves up or down, the participants in this market make money. In the securities

market, the profits can easily be recorded on paper to launder the illegal proceeds.

8) Insurance sectors: Insurance companies offer life insurance and other forms of general

insurance, including health and property insurance. Laundering of money is given effect

by investing in very expensive insurance policies and after paying a few premiums,

applying for premature encashment of policies at a discounted rate. The payment of the

premature policies received by the insurer is passed on as legitimate money.

9) Amnesty schemes: Money laundering is an offence which is punishable by law but it is

no secret that laws against money laundering have not entirely succeeded in curbing its

practice. The government, therefore, introduces amnesty schemes from time to time.

These schemes are introduced to bring black money into the open. Under these schemes

the government facilitates for the people to declare their illegally acquired proceeds on

the payment of a certain amount of tax. The scheme also provisions for non-inquiry of the

source of the money and after payment of tax it becomes legitimate money. The Indian

government too had implemented such a scheme in the form of the ‘Indira Vikas Patras’.

10) Indira Vikas Patras: The Indian economy is flooded with a high component of black

money. The Government, needless to say, faced the urgent requirement of channeling this

huge amount of black money circulation into more productive means for the upbringing

and development of the country. To achieve this privilege the Government introduced the

Indira Vikas Patras. These bearer certificates offered to double the investment amount in

a matter of six years and more importantly required no identification. This scheme

prompted huge sums of illegitimately earned income to be pushed into the government

machinery.

HAWALA -THE TRADITIONAL REMITTANCE SYSTEM

Since the September 11, 2001, terrorist attacks on the United States, public interest in

informal systems of transferring money around the world, particularly the hawala system,

has increased. The reason is the hawala system's alleged role in financing illegal and

terrorist activities, along with its traditional role of transferring money between

individuals and families, often in different countries. Against this background,

governments and international bodies have tried to develop a better understanding of

these systems, assess their economic and regulatory implications, and design the most

appropriate approach for dealing with them.

Informal funds transfer (IFT) systems are in use in many regions for transferring funds,

both domestically and internationally. The hawala system is one of the IFT systems that

exist under different names in various regions of the world. It is important, however, to

distinguish the hawala system from the term hawala, which means "transfer" or "wire" in

Arabic banking jargon. The hawala system refers to an informal channel for transferring

funds from one location to another through service providers—known as hawaladars—

regardless of the nature of the transaction and the countries involved. While hawala

transactions are mostly initiated by emigrant workers living in a developed country, the

hawala system can also be used to send funds from a developing country, even though the

purpose of the funds transfer is usually different.

How Hawala Works?

In the most basic variant of the hawala system, money is transferred via a network of

hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and

gives a sum of money to be transferred to a recipient in another, usually foreign, city. The

hawala broker calls another hawala broker in the recipient's city, gives disposition

instructions of the funds (usually minus a small commission), and promises to settle the

debt at a later date.

The unique feature of the system is that no promissory instruments are exchanged

between the hawala brokers; the transaction takes place entirely on the honor system. As

the system does not depend on the legal enforceability of claims, it can operate even in

the absence of a legal and juridical environment. No records are produced of individual

transactions; only a running tally of the amount owed by one broker to another is kept.

Settlements of debts between hawala brokers can take a variety of forms, and need not

take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing

official exchange rates. Generally the funds enter the system in the source country's

currency and leave the system in the recipient country's currency. As settlements often

take place without any foreign exchange transactions, they can be made at other than

official exchange rates.

Is Hawala Legal?

Since hawala is a remittance system, this question really addresses regulations governing

remittance services and the circumstances of the remittance.

In South Asia, the situation is more complicated. Many South Asian nations (such as

India and Pakistan) have laws that prohibit speculation in the local currency, prohibit

foreign exchange transactions at anything other than the official rate of exchange, and

impose strict licensing requirements on money remitters and foreign exchange dealers. In

addition, there are regulations governing inbound and outbound remittances.

It is, however, possible to state 'hawala is illegal in India with nearly complete accuracy.

The important point for our purposes is that the existence of these regulations is another

reason hawala is still used. Many people in these countries have money that they would

like to move to another country due to concerns about stability, to pay for education or

medical treatment. Hawala provides a ready means of doing this, and its use as a

facilitator of 'capital flight' on both large and small scales is very common. The existence

of these laws also explains, in part, the prevalence of invoice manipulation as part of

hawala schemes.

How Hawala Is Used To Launder Money?

Up to this point, no distinction has been made between hawala transactions where the

source of the money is legitimate and where the source, and intent, of the transactions is

illegitimate. Following Indian usage, the term 'white hawala' is used to refer to legitimate

transactions, and the term 'black hawala' refers to illegitimate transactions, specifically

hawala money laundering.

This distinction is valuable for money laundering enforcement. Many 'white' hawala

transactions are essentially remittances, and, while illegal under Indian and law, are not

illegal in other jurisdictions. `Black' hawala transactions, however, are almost always

associated with some serious offense (e.g. narcotics trafficking, fraud), that is illegal in

most jurisdictions.

Money laundering consists of three phases: placement, layering and integration. Since

hawala is a remittance system, it can be used at any phase.

 What Are Some Indicators Of Hawala?

The hawala is actually quite simple; much of the complexity associated with and ascribed

to hawala money laundering comes from the nearly infinite number of variations that are

encountered in hawala transactions.

This complexity of variation makes it nearly impossible to lay out a straightforward guide

to recognizing hawala money laundering as part of a criminal undertaking. It is, however,

possible to provide a few indicators that may be useful.

One of the most consistent and valid indicators of hawala activity in investigations

conducted in the many countries is seen in bank accounts. A 'hawala' bank account

almost always shows significant deposit activity, usually in the forms of cash and checks,

which are often from one or more ethnic communities (e.g. Afghan, Bangladeshi, Indian,

Pakistani, Somali) associated with the hawaladar. These checks may be made out to the

primary account holder, or some secondary entity (often outside the United States)

somehow associated with the account. These checks may also have some sort of notation,

consisting of a name (presumably of the person to whom the money is remitted to) or

something supposedly indicating what was 'bought' with the money. In one case, many

checks were seen with the word 'bangle' written on them; this was done apparently in

order to make it appear as though the checks, which were almost all for even dollar

amounts, had been written to purchase jewelry.

These accounts will also almost always show outgoing transfers (usually by wire) to a

major financial center known to be involved in hawala. Three of the most common

locations are Great Britain, Switzerland, and Dubai. Given the flexible and casual nature

of the hawala business, hawala accounts will not always be seen to balance. The

following diagram summarizes 'hawala account' behavior:

Certain businesses are also more likely than others to be involved in hawala. Once again,

it is not possible to give an exhaustive list, but the following is a starting point:

Import/Export

Travel and Related Services

Jewelry (gold, precious stones)

Foreign Exchange

Rugs/Carpets

Used Cars

Car Rentals (usually non-chain or franchise)

Telephones/Pagers

  Why Hawala Developed?

In earlier times, IFT systems were used for trade financing. They were created because of

the dangers of traveling with gold and other forms of payment on routes beset with

bandits. Local systems were widely used in China and other parts of East Asia and

continue to be in use there. They go under various names—Fei-Ch'ien (China), Padala

(Philippines), Hundi (India), Hui Kuan (Hong Kong), and Phei Kwan (Thailand). The

hawala (or hundi) system now enjoys widespread use but is historically associated with

South Asia and the Middle East. At present, its primary users are members of expatriate

communities who migrated to Europe, the Persian Gulf region, and North America and

send remittances to their relatives on the Indian subcontinent, East Asia, Africa, Eastern

Europe, and elsewhere. These emigrant workers have reinvigorated the system's role and

importance. While hawala is used for the legitimate transfer of funds, its anonymity and

minimal documentation have also made it vulnerable to abuse by individuals and groups

transferring funds to finance illegal activities.

Economic and cultural factors explain the attractiveness of the hawala system. It is less

expensive, swifter, more reliable, more convenient, and less bureaucratic than the formal

financial sector. Hawaldars charge fees or sometimes use the exchange rate spread to

generate income. The fees charged by hawaladars on the transfer of funds are lower than

those charged by banks and other remitting companies, thanks mainly to minimal

overhead expenses and the absence of regulatory costs to the hawaladars, who often

operate other small businesses. To encourage foreign exchange transfers through their

system, hawaladars sometimes exempt expatriates from paying fees. In contrast, they

reportedly charge higher fees to those who use the system to avoid exchange, capital, or

administrative controls. These higher fees often cover all the expenses of the hawaladars.

The system is swifter than formal financial transfer systems partly because of the lack of

bureaucracy and the simplicity of its operating mechanism; instructions are given to

correspondents by phone, facsimile, or e-mail; and funds are often delivered door to door

within 24 hours by a correspondent who has quick access to villages even in remote

areas. The minimal documentation and accounting requirements, the simple management,

and the lack of bureaucratic procedures help reduce the time needed for transfer

operations.

In addition to economic factors, kinship, ethnic ties, and personal relations between

hawaladars and expatriate workers make this system convenient and easy to use. The

flexible hours and proximity of hawaladars are appreciated by expatriate communities.

To accommodate their clients, hawaladars may instruct their counterparts to deliver funds

to beneficiaries before expatriate workers make payments. Moreover, cultural

considerations encourage expatriate workers to remit funds through the hawala system,

and such considerations also apply to family members in the home country. Many

expatriate communities are exclusively male, because wives and other family members

remain in the home country, where family traditions prevail. These traditions may require

family members, especially women, to maintain minimal contacts with the outside world.

A trusted hawaladar, known in the village and aware of the social codes, would be an

acceptable intermediary, protecting women from having direct dealings with banks and

other agents. Thus, a system based on national, ethnic, and village solidarity depends

more on absolute trust between the participants than on legal documents.

On the receiving side, repressive financial policies and inefficient banking institutions,

which have often lacked interest in the remittance business, have contributed to the

development of IFT systems. In addition to overly restrictive economic policies, unstable

political situations have offered fertile ground for the development of the hawala and

other informal systems. Most IFT systems have prospered in areas characterized by

unsophisticated official systems and during times of instability. They continue to develop

in regions where financial development has been slow or repressed. Overall, financial

development tends to check the spread of informal fund transfer systems, even though

they exist in financially mature countries as well.

Economic implications

Despite its informality, the hawala system has direct and indirect macroeconomic

implications—for financial activity as well as for fiscal performance. One aspect is its

potential impact on the monetary accounts of countries on either end of the hawala

transaction. Because these transactions are not reflected in official statistics, the

remittance of funds from one country to another is not recorded as an increase in the

recipient country's foreign assets or in the remitting country's liabilities, unlike funds

transferred through the formal sector. As a consequence, value changes hands, but broad

money is unaltered. However, hawala transactions may affect the composition of broad

money in a recipient country. In the remittance business, such transactions are conducted

mainly in cash, even though hawaladars may use the banking system for other purposes.

Individuals from developing countries who transfer funds abroad through the hawala

system for investment or other purposes are usually members of wealthy groups. They

supply local hawaladars with cash by making withdrawals from their bank accounts. As a

consequence, hawala-type transactions tend to increase the amount of cash in circulation.

Furthermore, IFT systems have fiscal implications for both remitting and receiving

countries because no direct or indirect tax is paid on hawala transactions. The negative

impact on government revenue applies equally to both legitimate and illegitimate

activities that involve the hawala system.

Hawala transactions cannot be reliably quantified because records are virtually

inaccessible, especially for statistical or balance of payments purposes. This holds true

for both the remitting and, especially, the receiving sides of the transactions. Hawala

transactions from developing countries are sometimes driven by capital flight

motivations; they may also be driven by a desire to circumvent exchange control

regulations and the like, leaving no traceable records. Nevertheless, the authorities of

some countries have sporadically made estimates of hawala activity based on their

expatriate populations and balance of payments data. In any case, all crude estimates

should take into account both hawala and reverse hawala transactions (see box) as well as

transactions driven by illicit activities. Although it would be impossible to provide a

precise figure, the amounts involved in hawala transactions are likely to entail billions of

dollars.

Difficulties for regulators

There is also a consensus that, in the wake of heightened international efforts to combat

money laundering and terrorist financing, more should be done to keep an eye on IFT

systems to avoid their misuse by illicit groups. Policymakers believe that the potential

anonymity afforded by these systems presents risks of money laundering and terrorist

financing that need to be addressed. Yet selecting the appropriate regulatory and

supervisory response requires a realistic and practical assessment and an understanding of

the specific country environment in which the IFT dealers operate.

Regulation of IFT systems in various jurisdictions will be a complex endeavor. The

variety of legal systems and economic circumstances across countries make a uniform

approach technically and legally impractical. In a number of countries, the hawala system

is prohibited. Any attempt to regulate this system in these countries would, therefore, be

at odds with existing laws and regulations and would be seen as legitimizing parallel

foreign exchange operations and capital flight. Where IFT regulations are conceivable,

there is agreement that overregulation and coercive measures will not be effective

because they might push IFT businesses, including legitimate ones, further underground.

The purpose of any approach is not to eliminate these systems but to avoid their misuse.

Against this background, policymakers tend to favor two options, which are already in

force in some countries: registration or licensing of IFT systems. While these measures

could deter illegal activities, they will not, in isolation, succeed in reducing the

attractiveness of the hawala system. As a matter of fact, as long as there are reasons for

people to prefer such systems, they will continue to exist and even expand. If the formal

banking sector intends to compete with the informal remittance business, it should focus

on improving the quality of its service and reducing the fees charged. Therefore, a longer-

term and sustained effort should be aimed at modernizing and liberalizing the formal

financial sector, with a view to addressing its inefficiencies and weaknesses.

CONSEQUENCES OF MONEY LAUNDERING

Money laundering has a corrosive effect on a country's economy, government, and social

well-being.

Money laundering has potentially devastating economic, security, and social

consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt

public officials, and others to operate and expand their criminal enterprises. Crime has

become increasingly international in scope, and the financial aspects of crime have

become more complex due to rapid advances in technology and the globalization of the

financial services industry.

Unchecked, money laundering can erode the integrity of a nation's financial institutions.

Due to the high integration of capital markets, money laundering can also adversely

affect currencies and interest rates. Ultimately, laundered money flows into global

financial systems, where it can undermine national economies and currencies. Money

laundering is thus not only a law enforcement problem; it poses a serious national and

international security threat as well.

Exposed Emerging Markets

Money laundering is a problem not only in the world's major financial markets and

offshore centers, but also for emerging markets. Indeed, any country integrated into the

international financial system is at risk. As emerging markets open their economies and

financial sectors, they become increasingly viable targets for money laundering activity.

Increased efforts by authorities in the major financial markets and in many offshore

financial centers to combat this activity provide further incentive for launderers to shift

activities to emerging markets. There is evidence, for example, of increasing cross-border

cash shipments to markets with loose arrangements for detecting and recording the

placement of cash in the financial system and of growing investment by organized crime

groups in real estate and businesses in emerging markets. Unfortunately, the negative

impacts of money laundering tend to be magnified in emerging markets.

The Economic Effects of Money Laundering

Undermining the Legitimate Private Sector:

One of the most serious microeconomic effects of money laundering is felt in the private

sector. Money launderers often use front companies, which co-mingle the proceeds of

illicit activity with legitimate funds, to hide the ill-gotten gains. In the United States, for

example, organized crime has used pizza parlors to mask proceeds from heroin

trafficking. These front companies have access to substantial illicit funds, allowing them

to subsidize front company products and services at levels well below market rates.

In some cases, front companies are able to offer products at prices below what it costs the

manufacturer to produce. Thus, front companies have a competitive advantage over

legitimate firms that draw capital funds from financial markets. This makes it difficult, if

not impossible, for legitimate business to compete against front companies with

subsidized funding, a situation that can result in the crowding out of private sector

business by criminal organizations.

Clearly, the management principles of these criminal enterprises are not consistent with

traditional free market principles of legitimate business, which results in further negative

macroeconomic effects.

Loss of Control of Economic Policy:

Money laundering can also adversely affect currencies and interest rates as launderers

reinvest funds where their schemes are less likely to be detected, rather than where rates

of return are higher. And money laundering can increase the threat of monetary instability

due to the misallocation of resources from artificial distortions in asset and commodity

prices.

In short, money laundering and financial crime may result in inexplicable changes in

money demand and increased volatility of international capital flows, interest, and

exchange rates. The unpredictable nature of money laundering, coupled with the

attendant loss of policy control, may make sound economic policy difficult to achieve.

Economic Distortion and Instability:

Money launderers are not interested in profit generation from their investments but

rather in protecting their proceeds. Thus they "invest" their funds in activities that are not

necessarily economically beneficial to the country where the funds are located.

Furthermore, to the extent that money laundering and financial crime redirect funds from

sound investments to low-quality investments that hide their proceeds, economic growth

can suffer. In some countries, for example, entire industries, such as construction and

hotels, have been financed not because of actual demand, but because of the short-term

interests of money launderers. When these industries no longer suit the money launderers,

they abandon them, causing a collapse of these sectors and immense damage to

economies that could ill afford these losses.

Loss of Revenue:

Money laundering diminishes government tax revenue and therefore indirectly harms

honest taxpayers. It also makes government tax collection more difficult. This loss of

revenue generally means higher tax rates than would normally be the case if the untaxed

proceeds of crime were legitimate.

Risks to Privatization Efforts:

Money laundering threatens the efforts of many states to introduce reforms into their

economies through privatization. Criminal organizations have the financial wherewithal

to outbid legitimate purchasers for formerly state-owned enterprises. Furthermore, while

privatization initiatives are often economically beneficial, they can also serve as a vehicle

to launder funds. In the past, criminals have been able to purchase marinas, resorts,

casinos, and banks to hide their illicit proceeds and further their criminal activities.

Reputation Risk:

Nations cannot afford to have their reputations and financial institutions tarnished by an

association with money laundering, especially in today's global economy. Confidence in

markets and in the signaling role of profits is eroded by money laundering and financial

crimes such as the laundering of criminal proceeds, widespread financial fraud, insider

trading of securities, and embezzlement. The negative reputation that results from these

activities diminishes legitimate global opportunities and sustainable growth while

attracting international criminal organizations with undesirable reputations and short-term

goals. This can result in diminished development and economic growth. Furthermore,

once a country's financial reputation is damaged, reviving it is very difficult and requires

significant government resources to rectify a problem that could be prevented with proper

anti-money-laundering controls.

Social Costs:

There are significant social costs and risks associated with money laundering. Money

laundering is a process vital to making crime worthwhile. It allows drug traffickers,

smugglers, and other criminals to expand their operations. This drives up the cost of

government due to the need for increased law enforcement and health care expenditures

(for example, for treatment of drug addicts) to combat the serious consequences that

result.

Among its other negative socioeconomic effects, money laundering transfers economic

power from the market, government, and citizens to criminals. In short, it turns the old

adage that crime doesn't pay on its head.

Furthermore, the sheer magnitude of the economic power that accrues to criminals from

money laundering has a corrupting effect on all elements of society. In extreme cases, it

can lead to the virtual take-over of legitimate government.

Overall, money laundering presents the world community with a complex and dynamic

challenge. Indeed, the global nature of money laundering requires global standards and

international cooperation if we are to reduce the ability of criminals to launder their

proceeds and carry out their criminal activities

A closer examination of some of these negative impacts in both the micro- and

macroeconomic realms helps explain why money laundering is such a complex threat,

especially in emerging markets.

Due to these drastic effects anti money laundering comes into picture and plays a very

crucial role in combating money laundering in any country

ANTI MONEY LAUNDERING

Anti-money laundering (AML) is a term mainly used in the financial and legal

industries to describe the legal controls that require financial institutions and other

regulated entities to prevent or report money laundering activities. Anti-money

laundering guidelines came into prominence globally after the September 11, 2001

attacks and other terrorist activities.

Today, all financial institutions globally are required to monitor, investigate and report

transactions of a suspicious nature to the financial intelligence unit of the central bank in

the respective country. For example, a bank must perform due diligence by having proof

of a customer's identity and that the use, source and destination of funds do not involve

money laundering.

How Does Fighting Money Laundering Help Fight Crime?

Money laundering is a threat to the good functioning of a financial system; however, it

can also be the Achilles heel of criminal activity.

In law enforcement investigations into organised criminal activity, it is often the

connections made through financial transaction records that allow hidden assets to be

located and that establish the identity of the criminals and the criminal organisation

responsible.

When criminal funds are derived from robbery, extortion, embezzlement or fraud, a

money laundering investigation is frequently the only way to locate the stolen funds and

restore them to the victims.

Most importantly, however, targeting the money laundering aspect of criminal activity

and depriving the criminal of his ill-gotten gains means hitting him where he is

vulnerable. Without a usable profit, the criminal activity will not continue.

What Should Individual Governments Be Doing About It?

A great deal can be done to fight money laundering, and, indeed, many governments have

already established comprehensive anti-money laundering regimes. These regimes aim to

increase awareness of the phenomenon – both within the government and the private

business sector – and then to provide the necessary legal or regulatory tools to the

authorities charged with combating the problem.

Some of these tools include making the act of money laundering a crime; giving

investigative agencies the authority to trace, seize and ultimately confiscate criminally

derived assets; and building the necessary framework for permitting the agencies

involved to exchange information among themselves and with counterparts in other

countries.

It is critically important that governments include all relevant voices in developing a

national anti-money laundering programme. They should, for example, bring law

enforcement and financial regulatory authorities together with the private sector to enable

financial institutions to play a role in dealing with the problem. This means, among other

things, involving the relevant authorities in establishing financial transaction reporting

systems, customer identification, record keeping standards and a means for verifying

compliance.

STEPS TAKEN BY INDIAN GOVERNMENT TO COMBAT MONEY

LAUNDERING

INDIAN INITIATIVES

With the intention of protecting our society from the globally recognized and, growing

problem of money laundering, the Central Government moved the Prevention of Money

laundering Bill in the Parliament on 29th October 1999. In November, 2002, parliament

approved the long-pending legislation to prevent the offence of money laundering. The

President gave its assent to the Bill in January, 2003. The Bill was originally passed in

December 1999 by the Lok Sabha and sent to the Rajya Sabha. The Upper House

approved the Bill in July 2002 with amendments suggested by the Select Committee. The

Bill in its modified form is, however, regarded as a diluted version of the original one.

This is because the definition of the offence of money-laundering itself has been watered

down.

Money Laundering Act is an endorsement of various international conventions to which

India is a party, and it seeks to declare laundering of monies carried through serious

crimes a criminal offence. The Act also lists modalities of disclosure by financial

institutions regarding reportable transactions, confiscation of the proceeds of crime,

declaring money laundering as an extraditable offence and promoting international

cooperation in investigation of money laundering.

The Act allows for confiscation of property derived from or involved in money

laundering. Co-operative banks, non-banking financial companies, chit funds and housing

financial institutions come under its ambit.

The Act also makes it mandatory for banking companies, financial institutions and

intermediaries to maintain a record of all transactions of a prescribed value and to furnish

information whenever sought within a prescribed time period. Thus, these entities are

required to maintain the record of the transactions for 10 years.

The minimum threshold limit for certain categories of offences under the Indian Penal

Code and other legislations has been fixed at Rs 30 lakh in the Bill. This limit is further

likely to be reduced to Rs.10 lakh.

The Government of India has decided to move amendments to the Prevention of Money

Laundering Act (PMLA) that will entail taking tougher measures to block terrorist

financing through banking channels. The amendments will bring terrorism financing and

customs offenses under the glare of prevention of money laundering.

The Prevention of Money Laundering Act, 2002 (PMLA 2002), forms the core of the

legal framework put in place by India to combat money laundering. PMLA 2002 and the

rules notified came into force with effect from July 1, 2005.

The Government of India has also set up Financial Intelligence Unit India (FIU-IND) on

18th November 2004 as an independent body to report directly to the Economic

Intelligence Council (EIC) headed by the Finance Minister.

FIU-IND has been established as the central national agency responsible for receiving,

processing, analyzing and disseminating information relating to suspect financial

transactions. FIU-IND is also responsible for coordinating and strengthening efforts of

national and international intelligence and enforcement agencies in pursuing the global

efforts against money laundering and related crimes. The Financial Intelligence Unit and

Enforcement Directorate have been entrusted with exclusive and concurrent powers

under relevant sections of the act to implement its provisions.

The PMLA 2002 and notified rules impose obligations on banking companies, financial

institutions and intermediaries to verify the identity of clients, maintain records and

furnish information to the Financial Intelligence Unit (FIU). PMLA 2002 defines money-

laundering offenses and provides for the freezing, seizure and confiscation of the

proceeds of crime.

Existing Legal Framework to Curb Money Laundering in India

In India, while the Prevention of Money Laundering Bill is yet to be enacted as a law, we

have certain statutes, as outlined below, which incorporate certain measures which

attempt to address the problem:

The Conservation of Foreign Exchange and Prevention of Smuggling Activities

Act, 1974

The Income Tax Act, 1961

The Benami Transactions (Prohibition) Act, 1988

The Indian Penal Code and Code of Criminal Procedure, 1973

The Narcotic Drugs and Psychotropic Substances Act, 1985

The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances

Act, 1988

    The Prevention of Terrorism Act (POTA), 2002, seeks to deal with types of heinous

crimes like subversion, insurgency and terrorism in place of the existing criminal justice

system, which is not designed to deal with such horrific crimes. The Act replaces the

Ordinance that was first promulgated on October 24, 2001 and re-promulgated thereafter

in December 2001. The Act also meets the requirement of the United Nations resolution

calling upon member nations to enact a model deterrent law to curb the growing menace

of internal and global terrorism.

The following article highlights the steps taken by RBI to curb money laundering.

RBI tightens anti-money laundering norms.

23 May 2008.

MUMBAI: Tightening the anti-money laundering norms, the Reserve Bank India (RBI)

on Thursday made it mandatory for banks to report all suspicious transactions, including

those of over Rs 10 lakhs, to the directorate of financial intelligence.

"The banks should report information in respect of all transactions referred under Rule 3

to the Director, Financial Intelligence Unit-India (FIU-IND)," RBI said in a notification

on Thursday.

In addition to suspicious transactions, the Rule 3 includes all cash transactions of more

than Rs 10 lakh (or its equivalent in foreign currency); series of connected transactions

with aggregate value of Rs 10 lakh; and cash transactions where forged currency notes

are used.

RBI has asked the banks not to alert the customer about the suspicious transactions being

reported to the FIU-IND. Pointing out that customers may abandon the transactions on

being asked to provide details, the notification said,

"Banks should report all such attempted transactions in STRs (Suspicious Transaction

Reports), even if not completed by the customers, irrespective of the amount of

transaction." The central bank further clarified that banks should include transactions in

the STRs if they have reasonable ground that these involve proceeds of crime, though the

amount may be below threshold limit prescribed by the Prevention of Money Laundering

Act. RBI has also asked the banks to put in place appropriate software "to throw alerts

when the transactions are inconsistent with risk categorisation and updated profile of

customers."

Nature of customer relationship and specific vulnerabilities of each sectorBankingBy its nature, because of its ability to move funds rapidly, the banking system is especially vulnerable to money laundering. Customers of the bank include the person of entity that maintains an account with the bank or those on whose behalf an account is maintained (i.e. beneficial owners) and the beneficiaries of transactions conducted by professional intermediaries. The account holder can be a customer that does not present himself or herself for interview at the bank (i.e. a non face-to-face customer) or one introduced to the bank by third party. It may also be a legal entity (e.g. corporate, trust) interposed between the ultimate beneficial owners and the bank, or a professional intermediary (e.g. mutual fund, lawyer) depositing funds that it manages for its clients.

Specific activities for which the risk of money laundering is relatively higher are: Customers who use fronts e.g. trust, corporates, professional intermediaries) to

open an account so as to hide their true identities. Private banking operations, which by nature involve a large measure of

confidentiality. Customers who are politically exposed persons (PEP’s) may significantly raise

the potential for reputation risk.

Introduced business, where a bank may place undue reliance on the due diligence conducted by an introducer.

Correspondent banking business, especially where banks do not fully understand the nature of the respondent banks’business, or if the respondents are shell banks or located in a jurisdiction which has poor know-your-customer standards.

Banks are vulnerable from the Money Laundering point of view since criminal proceeds can enter banks in the form of large cash deposits. Bank officials therefore need to exercise constant vigilance in opening of accounts with large cash deposits and in checking suspicious transactions.

The major objectives of Money Laundering activities are:

Concealing the true ownership of illegally-obtained money and

Placement, layering and integration of such funds

Two cardinal rules that are to be invariably observed by bank officials for steering clear

of the Money Laundering Trap, are:

1. Know your customer (KYC) and,

2. Know your employee

Know your customer

KYC is an acronym for “Know your Client” or “Know your customer”, a term commonly

used for Client Identification Process. Pursuant to PMLA, SEBI has prescribed the

certain requirements relating to KYC norms for Financial Institutions and Financial

Intermediaries (such as Mutual Funds) to 'know' their clients. This could be in the form of

personal meetings or verification of identity and address, financial status, occupation and

such other personal information. Many companies who do not have face-to-face

transacting (such as Mutual Funds) employ the verification route. The underlying

principle is to follow the principles enshrined in the PMLA as well as the SEBI Act, 1992

so that the intermediary is aware of the clients on whose behalf it is dealing.

Know your employee accurate information about your employees is equally important

because they are the people who handle money and other confidential data hence if no

proper information about their background is obtained they might be the loose link in the

chain and may result in money laundering. the human resourse department here has a

pivotal role to play.

Irregular / Suspicious Transactions related to Money Laundering

The list below provides examples of some of the basic ways in which money can be

laundered. Banks need to be wary of such transactions.

Customers depositing cash through a large number of cash deposit slips into the

same account or customers having numerous accounts into which large cash

deposits are made. Each deposit is such that the amount thereof is not significant

but the aggregate of all credits is sizeable. This is known as "smurfing".

A substantial increase in turnover in a dormant account.

Receipt or payment of large sums of cash, which have no obvious purpose or

relationship to the account holder and / or his business

Reluctance to provide normal information when opening an account or providing

minimal or fictitious information

Depositing high value third party cheques endorsed in favour of the customer or

other transactions on behalf of non-account holders

Large cash withdrawals from a previously dormant or inactive account, or from

an account which has received an unexpected large credit from abroad

Sudden increase in cash deposits of an individual with no justification

Employees leading lavish lifestyles that do not match their known sources of

income

Although the above list is only indicative of the possible occurrence of Money

Laundering, the need for prompt recognition of suspicious / irregular transactions is

emphasised.

Insurancethe insurance industry is at risk of being misused by criminals for fraudulent activities,. The financial resources of insurance companies will in particular attract

fraudsters. However, the nature of the insurance business means that other financial institutions are more vulnerable to money laundering.

In insurance several parties could be involved in transactions that may raise the possibility for money laundering: the insurer, the policy holder, the insured person and the beneficiary. The contracting parties are generally free- within the boundaries of law- to determine the conditions of the insurance contract e.g. with respect to duration, benefits early surrender and designation of beneficiaries.

The insurance industry has several; ways to market its products. Some companies (direct writers) sell insurance directly to the customer and have their own call centers or agents. Some companies use intermediaries. These intermediaries could work exclusively for the company in question or work independently, i.e. selling products for more than one company. Sometimes insurance companies use other companies in the same group to market its products, e.g. sale over the branches of bank.

In insurance, risk management and premium-setting are essential elements within the underwriting process. To assess risk, information on the background of the client is collected, investigated and filed, especially in the case of insurance of large risks. Various ‘trigger events’ occur after the contract date and indicate where due diligence is also applicable. These trigger events include claim notification and surrender requests. Well understood, self-interest leads insurance companies to be careful in their payment of claims which are normally only paid after thoroughly checking the circumstances of the loss and the identity of the claimant.

Examples of the type of contracts that are particularly attractive as a vehicle for laundering money are single premium invested policies, i.e.

Unit-linked single premium contacts Purchase of annuities; Lump sum top-ups to an existing life insurance contract; Lump sum contribution to personal pension contacts.

Insurance is another mode used in different ways by money launderers. In this regard,

International Association of Insurance Supervisors has issued guidance paper on Anti-

Money laundering and Combating the financing of terrorism. Accordingly, insurer should

assess the customer prior to establishment of a business relationship. It has clearly

specified factors to be considered while issuing the policy and how to investigate. Some

of the important factors are –

Type and background of customer and/or beneficial owner

The customer’s and/or beneficial owner’s geographical base

The geographical sphere of the activities of the customer and/or beneficial owner

The nature of the activities

Means of payment as well as the type of payment (cash, wire transfer, etc.,)

The source of funds

The source of wealth

The frequency and scale of activity

The type and complexity of the business relationship

Whether or not payments will be made to third parties

Whether a business relationship is dormant

Any bearer arrangements

The agency monitoring the AML activities in India, Financial Intelligence Unit (FIU

IND) and compliance is required by all financial intermediaries. IRDA has made the

AML guidelines mandatory for all insurance companies from 1st August 2006.

 IRDA has instructed all insurers to classify their customers, into the following risk

categories:

- High risk: Antique dealers, arms dealers / explosive dealers, money changers, film

personalities, persons dealing with real estate, politically exposed persons, NRIs, HNIs,

etc

- Low risk: All others

 The following article published in times of India gives detailed information about it.

IRDA readies plan to curb money laundering

 Insurance regulator IRDA has issued anti-money laundering guidelines that include strict

adherence of KYC norms by insurance companies.IRDA has asked the insurers to put in

place a proper policy framework by July 1 as the AML regime becomes effective from

August 1.The AML makes it mandatory for insurers to comply with 'Know Your

Customer' norms by obtaining documents to clearly establish the customer identity in

case of all new insurance contracts.Where premium is Rs 100,000 per annum in case of

individual policies, a detailed diligence should be exercised to establish KYC.

If insurance premium is paid by person other than the policy holder, the insurer should

look into to establish the motive behind it.The companies are advised to classify the

customer into high risk and low risk based on the individual's profile and product profile,

to decide upon the extent of due dilligence.

The AML guidelines should be strictly followed in vulnerable products like unit linked

products, which provide for withdrawals and unlimited top up premiums; single premium

products where investment is made in lumpsum and surrendered at the earliest

opportunity; and free look cancellations, especially in the big ticket cases.

However, products like standalone health insurance, group insurance issued by a

company and term life insurance contract are exempted from AML purviews

Moreover, larger number of documents has to be submitted before buyingan insurance

policy. For example a big insurance company has made the following documents

compulsory:

 

Verification Documents

Identify proof -PAN Card

-Voters Identity Card

-Driving License

-Passport

-Letter from a recognized public authority

(e.g. Gazetted authority/ municipal

corporation) verifying identity of the

customer

-Employee identity card of a listed

company or public sector company

-Ration card (where photograph of

customer is present)

 

Verification Documents

Proof of

Residence

-Telephone Bill (not more than 3 months

old)

-Electricity Bill (not more than 3 months

old)

-Credit card statement (not more than 3

months old)

-Bank account statement (showing

transactions within the last 6 months)

-Valid lease agreement along with rent

receipt which is not more than 3 months

old

-Passport

-Ration Card

-Letter from any recognized public

authority (e.g. Gazetted authority/ gram

panchayat/ municipal corporation)

verifying residence of the customer

-Letter from a listed/ public sector

company/ armed forces employer/

government depts. along with latest salary

slip

 

 

 

 

 Securities

The customer of an investment service provider can be a person or entity that opens a securities account on its own behalf or on whose behalf a securities account has been opened. A customer can open an account with an investment service provider in person or via remote means (e.g. internet), and the opening of such account would generally establish a direct relationship between he investment service provider and

the customer.It is possible for a direct relationship to be established between an investment service provider and a customer where a third party introduces the customer to the investment service provider. There also exist indirect relationships in the securities industry, such as where an investment service provider maintains an account for another provider (i.e. omnibus account).Investment service providers generally do not maintain cash deposit accounts for their Customers. Rather. They require their customers to remit funds to them either by check or byWire transfer to the deposit account of the investment firm at a bank. Consequently, the securities industry is less at risk than the banking sector regarding the placement of laundered funds directly into the securities industry. However, the securities industryIs potentially vulnerable to the layering of laundered funds subsequent to the placement phase.

Specific activities which the securities sector is potentially vulnerable to the risk of money laundering include:

The activities of employees that unwittingly are requested to take actions which further a customers money laundering scheme and the activist of rogue employees who undertake activities (in violation of the firm’s internal controls and policies) such as the establishment of bank and securities accounts in multiple jurisdictions on behalf of the customer and the transfer of funds and securities between such accounts in furtherance of a customer’s money laundering scheme. while the risk

Verification Documents

Standard

Income

Proofs

-Income tax assessment orders/ Income

-Tax returns slips

-Form 16 in case of employed individual

-Salary slips from reputed private

limited / public sector employers (within

last 3 months)

-Audited company account

-Audited firm accounts

-Audited proprietorship profit & loss

account

-Copies of form no. 10CCAC under

section 80 HHC of IT ACT 1961 for

export income

of rogue employees engage in may differ from those in the banking and insurance sectors.

Acceptance of orders and related funds from intermediaries or banks operation from jurisdictions that do not have an effective AML/CFT system in place to prevent the introduction of laundered funds into the firms and banks operating in those jurisdiction o in which the securities regulator and/or banking supervisor will not share information regarding customer positions or funds held by or through firms operating in that jurisdiction with non-domestic regulators.

Wash sales or other fictitious trading schemes to transfer money or value through the clearing and settlement infrastructure. Reciprocal trades in offsetting positions can generate profits in the account of one party and losses in the account of the other party .in this type of scheme, the money launderers intentionally generate trading losses in a securities account into which criminal proceeds have been deposited and generate reciprocal trading profits in a seemingly unrelated securities account into which criminal proceeds have been deposited and generate reciprocal trading profits in a seemingly unrelated securities account that cannot be easily identified or associated with the money laundering scheme. When the trades are liquidated, the profits are paid in the ordinary course through the clearance and settlement system from the account/party suffering the loss to the account/ party earning the profit. Value can also be transferred between parties through the sale of shares in small, illiquid issues at artificially arranged prices , without regard to fair market value. Such schemes may or may not also involve an intent to generate additional profits from a manipulation of the value of the shares. Such schemes often constitute a violation of the securities laws as well as a money laundering offence

SOFTWARE SOLUTIONS

Recently many software development enterprises have come out with innovative banking

and financial solutions towards Anti-money laundering and it can be useful to Retail

Banks, Commercial Banks, Investment Banks, Brokers & Trading Organisations and

Insurance Firms etc., This solution pro-actively monitor all transaction activities across

the organisation and effectively detects money laundering activities and terrorist

financing. The system generates all statutory reports and provides for generation of

Suspicious activity reports. It also captures customer details, stores compliance rules,

monitors transactions and flags any violation of transactions against customer profile and

compliance rules.

AMLOCK is an automated Anti Money Laundering Solution that assists reporting

organizations in complying with regulatory requirements under the Anti Money

Laundering regimes. It offers financial institutions of different sizes, a means to detect

and investigate suspicious transactions, ensure compliance with regulatory KYC norms,

and a host of valuable investigation and analysis tools to aid the compliance officer in

performing his duties effectively and with ease. AMLOCK facilitates ingestion of data

from multiple source systems, thus enabling a single view of the customer across

products and services. The ingestion can be real-time where blocking of transactions is

required, or can be scheduled at stipulated intervals.

AMLOCK caters to:

Banks

Insurance companies

Securities broker-dealers

Money transmitters

Asset Management companies

Regulatory Reporting is facilitated by AMLOCK by way of auto-population of the

required regulatory reports CTRs and STRs while also providing for the input of

comments of the Compliance Officer, wherever required. Respecting the mobility of

resources and the consequent location neutrality required, AMLOCK extends the facility

of SMS and e-mail Alerts to specified recipients, besides being an access controlled

browser based solution.

Customer Due Diligence is one of the foremost requirements in an AML program to

deter miscreants from entering the financial system. AMLOCK provides tools such as:

List Screening for screening blacklisted entities. It supports both published lists or

the Blacklists and internal control lists termed the Watchlists.

Compliance Scores for KYC to monitor the levels of adherence. This helps in

updating the KYC levels of existing customers and serves as a handy audit tool.

Duplicate checks to fish out undisclosed multiple accounts. This may relate to the

same or multiple products or locations and is very handy when there are multiple

source systems.

Link Tracer and Grouping for identifying hidden relationships between customers

so as to enable enhanced monitoring over a group of people who appear to be

connected or acting in concert.

Transaction monitoring tools to identify suspicious activity is central to the AML

compliance facilitation offered by AMLOCK. Features that assist in identifying,

prioritizing and monitoring potential suspicions include –

Risk Categorization, which facilitates focusing on activities of higher risk

customers by segregating them on the basis of money laundering risks.

Acknowledging the diversity in the quantification of risk, AMLOCK provides for a

parameter-driven risk module.

Profiling to judge what is abnormal or suspicious, normal behavior has to be

established. This is aided by the Profiling facility that tracks the changes in

identification attributes as also the transactions patterns.

Benchmarking facilitates defining global or specific tolerances in transaction

behavior. This enables the demarcation between normal and potentially suspicious

deviations in the account activity.

Pre-defined Industry specific Alert Scenarios of AMLOCK enable identification

of established typologies. There are three variants: Red Flags (Online Alerts),

which are based on single transaction and are triggered at the time of data ingestion.

Aggregated Alerts (Offline Alerts), which consider several attributes and / or a

specified period of time and are scheduled as per the required periodicity.

Subjective Alerts which facilitate the recording of non-transaction based

suspicions.

Visual Event Response Builder (VERB) is a Rules Engine to introduce suspicions

based on the unique experiences in the geography, industry or institution. This

enables the user to set / define conditions that would qualify individually or in

combination with other conditions qualify a transaction or a set of transactions as

suspicious.

Alerts assignment enables the distribution of workload between the resources in

the compliance team and also in ensuring that resources with the appropriate

expertise address the Alerts raised.

Alert resolution facilitates the closure of an Alert as non-suspicious without

further investigation. To back this decision, notes can be appended to the Alert.

The Following 2 Articles Give Information About The Step Taken By Indian Banks

To Curb Money Laundering.

Union Bank to Deploy 3i Infotech's AMLOCK

Wednesday, February 27, 2008:  3i Infotech and Union Bank of India (UBI) have forged

an alliance under which the former will implement AMLOCK at the bank. AMLOCK is

an anti-money laundering (AML) and fraud detection software that is tailored for the

insurance, banking and capital market intermediaries like brokerages, mutual funds and

registrars. AMLOCK helps companies comply with global Know Your Customer (KYC)

and transaction monitoring norms.

Bank of India has signed an agreement to implement AMLOCK

Monday, July 21, 2008:  Bank of India has signed an agreement to implement AMLOCK,

3i Infotech’s Anti Money Laundering (AML) software. As part of this agreement, 3i

Infotech will undertake complete system integration, from procurement and installation

of hardware including storage, database, middleware and report writer.

MULTILATERAL INITIATIVES

Large-scale money laundering schemes invariably contain cross-border elements. Since

money laundering is an international problem, international co-operation is a critical

necessity in the fight against it. A number of initiatives have been established for dealing

with the problem at the international level.

International organizations, such as the United Nations or the Bank for International

Settlements, took some initial steps at the end of the 1980s to address the problem.

Following the creation of the FATF in 1989, regional groupings – the European Union,

Council of Europe, and Organization of American States, to name just a few – established

anti-money laundering standards for their member countries. The Caribbean, Asia,

Europe and southern Africa have created regional anti-money laundering task force-like

organizations, and similar groupings are planned for western Africa and Latin America in

the coming years.

Asia / Pacific Group on Money Laundering (APG)

The purpose of the Asia/Pacific Group on Money Laundering (APG) is to ensure the

adoption, implementation and enforcement of internationally accepted anti-money

laundering and counter-terrorist financing standards as set out in the FATF Forty

Recommendations and FATF Eight Special Recommendations. The effort includes

assisting countries and territories of the region in enacting laws to deal with the proceeds

of crime, mutual legal assistance, confiscation, forfeiture and extradition; providing

guidance in setting up systems for reporting and investigating suspicious transactions and

helping in the establishment of financial intelligence units. The APG also enables

regional factors to be taken into account in the implementation of anti-money laundering

measures.

The origins of the APG go back to "awareness raising" activities undertaken by the FATF

in the early 1990s as part of its strategy to encourage adoption of money laundering

counter-measures throughout the world. In order to achieve more concrete results,

Australia agreed to set up a Secretariat for the purpose of obtaining regional commitment

and establishing a regional FATF-style body with practical objectives. Subsequently, an

agreement was reached in Bangkok in 1997 which created the APG. The first meeting

was held in Tokyo in 1998 and then annually thereafter.  Following the events of 11

September 2001, the APG expanded its scope to include the countering of terrorist

financing.

The APG conducts mutual evaluations of its members and holds a periodic workshop on

money laundering methods and trends.   Its work mandate has been set out in a document

containing specific terms of reference for the group. The APG is supported by a

Secretariat, which serves as the focal point for its activities.

The APG became an Associate Member of the FATF in 2006.

Some of the member countries of APG are Afghanistan, Australia, Bangladesh, Canada,

Hong kong,

china ,India ,Indonesia ,Japan ,Malaysia ,Mongolia ,Myanmar ,Nepal ,Pakistan,

Singapore ,Sri lanka ,Thailand.

The Financial Action Task Force (FATF)

The FATF is an inter-governmental policy-making body whose purpose is to establish

international standards, and develop and promote policies, both at national and

international levels, to combat money laundering (ML) and terrorist financing (TF).  It

was established in July 1989 by a Group of Seven (G-7) Summit in Paris, initially to

examine and develop measures to combat money laundering.  In October 2001, the FATF

expanded its mandate to incorporate efforts to combat terrorist financing, in addition to

money laundering.  Since its inception, the FATF has operated under a finite life-span,

requiring a specific decision of the Task Force to continue.  The current mandate of the

FATF (for 2004-2012) was subject to a mid-term review in 2007-2008 and was

reaffirmed and revised at a Ministerial meeting in April 2008. It sets policies that guide

countries in adopting anti-money laundering measures. The organization has designated

20 categories of offenses that should be brought under anti-money laundering rules. The

task force reviews its mission every five years..

 MISSION

The priority of the FATF is to ensure global action to combat money laundering and

terrorist financing, and concrete implementation of its 40+9 Recommendations

throughout the world.  Starting with its own members, the FATF monitors countries'

progress in implementing AML/CFT measures; reviews money laundering and terrorist

financing techniques and counter-measures; and, promotes the adoption and

implementation of the 40+9 Recommendations globally.

MEMBERSHIP DETAILS

There are currently 34 members of the FATF; 32 jurisdictions and 2 regional

organisations (the Gulf Cooperation Council and the European Commission). These 34

Members are at the core of global efforts to combat money laundering and terrorist

financing. There are also 27 international and regional organisations which are Associate

Members or Observers of the FATF and participate in its work

Any country can become a member of FATF these countries who desire to become the

members of FATF have to follow the membership policy laid down by the organization.

Step 1 - Fundamental criteria of membership

a) The jurisdiction should be strategically important:

Indicators

Size of gross domestic product (GDP).

Size of the banking sector.

Impact on the global financial system, including the degree of openness of the financial

sector and its interaction with international markets.

Regional prominence in AML/CFT efforts.

Level of commitment to AML/CFT efforts.

Additional considerations

Level of adherence to financial sector standards.

Participation in other relevant international organisations.

Level of AML/CFT risks faced and efforts to combat those risks.

b) If the jurisdiction was to become a member, the FATF’s geographic balance should be

enhanced.

Step 2 - Technical and other criteria

a) The country should provide a written commitment at the political level:

(i) Endorsing and supporting the FATF Forty Recommendations 2003, the Nine Special

Recommendations 2001 (together referred to as the FATF Recommendations) and the

FATF AML/CFT Methodology 2004 (as amended from time to time).

(ii) Agreeing to implement all the FATF Recommendations within a reasonable

timeframe (3 years).

(iii) Agreeing to undergo a mutual evaluation during the membership process for the

purposes of assessing compliance with FATF membership criteria, using the AML/CFT

Methodology applicable at the time of the evaluation, as well as agreeing to undergo

subsequent periodic mutual evaluations following admission as a full member.

(iv) Agreeing to participate actively in the FATF and to meet all the other commitments

of FATF membership, including supporting the role and work of the FATF in all relevant

aspects.

b) The country should be a full and active member of a relevant FATF-style regional

body.

c) The overall mutual evaluation needs to be regarded as satisfactory, and in particular

the level of compliance for the Recommendations dealing with the money laundering and

terrorist financing offences, freezing and confiscation, customer due diligence, record-

keeping, suspicious transaction reporting, financial sector supervision, and international

co-operation need to be acceptable.

In determining whether the overall level of compliance is satisfactory, some flexibility

may be allowed with respect to Recommendation due to its complexity and multi faceted

requirements. The assessed country is, however, expected to demonstrate significant

progress toward full compliance with the components of Recommendation.

• It is expected that a country should obtain ratings of fully or largely compliant for all

FATF Recommendations listed above in paragraph c). If that is not achieved however,

then the country must at a minimum achieve ratings of LC or C for a large majority of

these Recommendations, and for the remainder, should demonstrate substantial progress

toward full implementation and provide a clear commitment at Ministerial level to come

into compliance within a reasonable timeframe and a detailed action plan setting out the

steps to be taken and the timeframe for taking them.

Steps taken by Indian government to become the member of FATF

India is the members of the APG (the Asia Pacific Group on Money Laundering), a

FATF-style regional body.  India became an FATF Observer in February 2007.

India is set to join the anti-money laundering syndicate – Financial Action Task Force

(FATF) , which would help local banks access developed country markets more easily.

Until recently, the United States was denying ICICI Bank, Bank of Baroda and State

Bank of India branch licences on the grounds that India was not a member of FATF.

These banks managed to win a temporary reprieve after the government and the RBI

withheld fresh branch permission to the likes of Citibank.

India has completed all but one formality – to amend the Prevention of Money Launder

Act (PMLA) – to include a host of offences, such as insider trading and human

trafficking, in the schedule of offences. The Bill to amend the PMLA would be placed in

Parliament and the government would be able to share the provisions of the proposed law

and win a membership.

six major prerequisites for a membership have already been put in place. For instance,

the FATF – that has 35 members, with India being an observer – wanted the government

to establish a trail of all foreign exchange transactions, including hawala.

While the RBI has put in place a trail by asking agents, including those for wire transfer,

to maintain records for a specified period of time, it managed to convince FATF that

hawala deals could not be tracked as such transactions were illegal.

The other five commandments already complied with since the government lnotified

changes to the rules related to the PMLA, specifying that suspected cases of terror

financing would be part of the suspicious transaction reporting system.

The other four specifications were in place as soon as the PMLA came into effect. They

included naming of enforcement agencies to deal with the notified laws and mandating

‘know your client (KYC)' norms that would be legally binding.

The establishment of the Financial Intelligence Unit (FIU-Ind) was also part of the

exercise to gain a membership of the elite group.

RECOMMENDATIONS

AT THE GRASSROOT LEVEL THE FOLLOWING IMPLICATIONS CAN BE

MADE TO CURB MONEY LAUNDERING.

Stringent rules should be followed by banks and other financial institutes in these

four areas.

1. Customer Identification

2. Compliance with Laws

3. Cooperation with Law Enforcement agencies, and,

4. Adherence to the Statement.

These are dealt with in some detail below:

Customer Identification This reemphasis’s the motto "Know your Customer"

(KYC). KYC requires that banks should make reasonable efforts to determine the

customer’s true identity, and must introduce effective procedures for verifying the

bonafides of new customers.

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 have good reason to suppose that these are associated with Money

Laundering activities.

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 customer confidentiality.

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 adherence to the Statement of Principles are staff training and

implementing specific procedures for customer identification and retaining

internal records of transactions.

The above act as an effective guideline for what banks and financial institutions should

do to cope with Money Laundering.  

AT THE INTERNATIONAL LEVEL WE MUST DO THE FOLLOWING

We must continue to work with - and strengthen - our international partnerships, and

maintain strong ties with our counterparts in the financial centers of the world. We must

urge all countries to ratify the U. N. Convention and to pass more effective money

laundering and forfeiture laws. Above all, we must continue to identify the points where

the money is most vulnerable and identify what we can do to separate criminals from

their ill-gotten gains.

 Launderers have a list popularly called a "shopping list" which they use to size up

specific opportunities when searching for jurisdictions to use. Knowing what is on this

list can give rise to specific measures for countries to adopt to fight money laundering.

These measures are a natural progression for countries that have the political will to

combat this insidious crime.

 We need:-

a. to strengthen international co-operation on information exchange and law

enforcement;

b. proper mechanisms for handling suspicious reports;

c. a compliance culture among financial institutions; and to ensure that they put

proper systems and procedures in place;

d. to encourage financial supervisors to apply bank licensing procedures strictly,

exchange information, and train practitioners;

e. to increase public awareness of the threat from money laundering;

f. increasing co-ordination between the multiple agencies (national and

international) involved and to improve the limited intelligence sharing;

g. to increase the limited human resources involved in the labour intensive and time

consuming work of investigating suspected violations;

h. Implementation on a world-wide basis of a consistent set of policies.

i. to focus on new technologies and increase countermeasures to combat their use

for money laundering;

j. To share forfeited proceeds with law enforcement agencies. (a particular police

gripe);

`VAT system can spawn money laundering'

Mohan Padmanabhan

Kolkata , Oct. 14

Will the Value Added Tax (VAT) system become a potential source for obtaining dirty

money?

In a special report on `Money laundering - Definition, Tools & Means and Prevention,'

presented at a workshop on `Emerging fiscal trends vis-à-vis economic reforms,'

organised by the Direct Taxes Professionals' Association (DTPA) here recently, Mr

Anshuma Rustagi, a practising chartered accountant, has pointed out that in contrast with

the violent nature of cash-in-transit robberies and motor vehicle hijackings, "VAT fraud

is a typical convenient white-collar crime."

Mr Rustagi said that input tax deductions are allowed on the VAT component of the

purchase price of all goods or services acquired by a trader for consumption or taxable

supplies. Except for specific input tax denials relating to motor cars and air-conditioners,

input tax may also be deducted for capital goods.

"This creates the opportunity for disguising a large fraudulent input tax claim as merely

relating to an extraordinary acquisition of capital goods." Mr Rustagi held that the

availability of the deduction is not suspended until output tax linked to the goods or

services has been derived. This enables defrauders to claim large input tax credits and

subsequently disappear.

Common VAT frauds, which can be a means of money laundering, include export fraud,

conspiracy among the seller, the purchaser and the missing trader intra-community

(MTIC), which is known to occur in EU countries. Typically, in MTIC frauds, a dealer

registers under VAT, sells goods to a trader, charges VAT and disappears without

submitting any return or paying the VAT.

He said that in the EU, MTIC fraud is one of the most prevalent systems of misleading

the tax authorities. This involves obtaining a VAT registration number in one member-

state; purchasing goods free from VAT from another member-state (as imports are VAT-

free); and selling goods at a VAT-inclusive purchase price in the member-state of

registration, i.e., in the domestic market, and then going missing without paying the

output tax due in the member-state of registration.

Mr Rustagi said that in a federal set-up, it is proposed that Central Sales Tax would be

phased out, thereby making cross-border transactions across States VAT-free.

"International experience suggests that this VAT-exempt cross-border supply of goods

shall present the perfect breeding ground for MTIC fraud to take roots."

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Harshad Mehta scam

Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early

childhood was spent in Mumbai where his father was a small-time businessman. Later,

the family moved to Raipur in Madhya Pradesh after doctors advised his father to move

to a drier place on account of his indifferent health. But Raipur could not hold back

Mehta for long and he was back in the city after completing his schooling, much against

his father’s wishes.

Mehta first started working as a dispatch clerk in the New India Assurance Company.

Over the years, he got interested in the stock markets and along with brother Ashwin,

who by then had left his job with the Industrial Credit and Investment Corporation of

India, started investing heavily in the stock market.

As they learnt the ropes of the trade, they went from boom to bust a couple of times and

survived.

Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did

very well for himself. At his peak, he lived almost like a movie star in a 15,000 square

feet house, which had a swimming pool as well as a golf patch. He also had a taste for

flashy cars, which ultimately led to his downfall.

The fall

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was

all along considered as the architect of the Bull Run was blamed for the crash. It

transpired that he had manipulated the Indian banking systems to tap off the funds from

the banking system, and used the liquidity to build large positions in a select group of

stocks. When the scam broke out, he was called upon by the banks and the financial

institutions to return the funds, which in turn set into motion a chain reaction,

necessitating liquidating and exiting from the positions which he had built in various

stocks. The panic reaction ensued, and the stock market reacted and crashed within days.

He was arrested on June 5, 1992 for his role in the scam.

His favorite stocks included

• ACC

• Apollo Tyres

• Reliance

• Tata Iron and Steel Co. (TISCO)

• BPL

• Sterlite

• Videocon.

The extent

The Harshad Mehta induced security scam, as the media sometimes termed it, adversely

affected at least 10 major commercial banks of India, a number of foreign banks

operating in India, and the National Housing Bank, a subsidiary of the Reserve Bank of

India, which is the central bank of India.

How the case was cracked

The broker was dipping illegally into the banking system to finance his buying.

The crucial mechanism through which the scam was affected was the ready forward (RF)

deal.

The RF is in essence a secured short-term (typically 15-day) loan from one bank to

another.

Crudely put, the bank lends against government securities just as a pawnbroker lends

against jewellery….

The borrowing bank actually sells the securities to the lending bank and buys them back

at the end of the period of the loan, typically at a slightly higher price.”

It was this ready forward deal that Harshad Mehta and his cronies used with great success

to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieu of a

commission.

The broker handles neither the cash nor the securities, though that wasn’t the case in the

lead-up to the scam.

In this settlement process, deliveries of securities and payments were made through the

broker. That is, the seller handed over the securities to the broker, who passed them to the

buyer, while the buyer gave the cheque to the broker, who then made the payment to the

seller.

In this settlement process, the buyer and the seller might not even know whom they had

traded with, either being know only to the broker.

This the brokers could manage primarily because by now they had become market

makers and had started trading on their account.

To keep up a impression of legality, they pretended to be undertaking the transactions on

behalf of a bank.

Another instrument used in a big way was the bank receipt (BR). In a ready forward deal,

securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller

of securities, gave the buyer of the securities a BR.

It acts as a receipt for the money received by the selling bank. Hence the name - bank

receipt. It promises to deliver the securities to the buyer. It also states that in the mean

time, the seller holds the securities in trust of the buyer.

Having figured this out, Metha needed banks, which could issue fake BRs, or BRs not

backed by any government securities?

Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-

operative Bank (MCB) - came in handy for this purpose. These banks were willing to

issue BRs as and when required, for a fee.

Once these fake BRs were issued, they were passed on to other banks and the banks in

turn gave money to Mehta, obviously assuming that they were lending against

government securities when this was not really the case. This money was used to drive up

the prices of stocks in the stock market. When time came to return the money, the shares

were sold for a profit and the BR was retired. The money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a clue about

Mehta’s blunder. Once the scam was exposed, though, a lot of banks were left holding

BRs which did not have any value - the banking system had been swindled of a whopping

Rs 4,000 crore.

The jain hawala scandal

The Hawala scandal was an Indian political scandal involving payments allegedly

received by politicians through hawala brokers, the Jain brothers. It was a US$18 million

dollar bribery scandal that implicated some of the country's leading politicians.

Those accused included Lal Krishna Advani who was then Leader of opposition. He and

others were acquitted in 1997 and 1998, partly because the hawala records (including

diaries) were judged in court to be inadequate as the main evidence..The scam hovered

around the fact that the Hawala channels through which terrorist outfits in Kashmir like

Hijbul-Mujahideen used to get funds, the same channels used to grease the palms of over

115 top bureaucrats and politicians of the country.

The case

Jain Hawala Case put the career of 24 politicians in Jam.The Jain Hawala Case has

shown that corruption has now taken the front seat in India.Panja, Shiv Shankar, Sinha

and Vora discharged in Jain hawala case Former Union ministers Ajit Kumar Panja, P

Shiv Shankar, former Uttar Pradesh governor Motilal Vora, Bharatiya Janata Party leader

Yashwant Sinha and the Jain brothers were discharged by Special Judge V B Gupta in the

Rs 650 million Jain hawala case .

Allowing the petitions by Advani and Shukla challenging the special judge's order,

Justice Shamim had ruled in his 70-page judgment that the Jain diaries could not be

converted into legal evidence against them.

Allowing similar petitions by the Jain brothers, S K Jain, N K Jain and B R Jain and their

employee, J K Jain, the high court quashed the proceedings against them too. The

quashing of charges against Advani and Shukla by the high court triggered a spate of

petitions with the trial court by other politicians involved in the hawala case, seeking

pardon.

Citing the high court order, he said, ''When the diaries, notebooks and loose sheets cannot

be legal evidence in one case arising out of the same first information report, then

certainly it cannot be legal evidence in the present cases based on the same F

The investigations done by the cbi was highly criticized as they failed to do justice

to hawala scam probe

The verdict of the case lead to the following findings

Investigating agencies had not done a satisfactory job in probing the case, otherwise it

would not have been possible for all the charge-sheets to end up in a fiasco.

``The hawala case was one in which the Court had granted complete insulation to the

investigating agencies from extraneous circumstances. We even relieved them of the

power of supervision by the highest authority in the executive (the Prime Minister) and

yet they could not perform,'' Justice Verma said, adding this proved that mere insulation

was not enough.

``It is clear that they only put up an excuse of filing a charge-sheet because if the

discharge of accused is justified then apparently there was no prima facie case put up

along with the charge-sheet for the trial to commence,'' Justice Verma said, adding that if

there was no justification, no evidence available from the investigation, they should not

have filed the charge-sheet.

despite the non-availability of evidence the agencies still filed charge-sheets, which

meant they had tried to say that there was a case to proceed with.

So either the filing of charge-sheets was without proper investigation or the investigation

was improper. It cannot be anything else, adding all this did not go well with the efficient

functioning of the agencies.

the hawala case had proved that even if the agency was completely insulated, that by

itself was not enough and something more was required -- which was the will to

investigate properly. Probably the agencies wanted to get rid of the Court's control and,

therefore, they had filed the charge-sheet.

Meanwhile, in an interview Justice Verma said judges of the Supreme Court and the High

Courts should be brought under the ambit of a new law on the lines of the Prevention of

Corruption Act to make them more accountable for their misconduct.

``Today the judges of the superior judiciary in India are not answerable to anyone for

their misconduct as neither impeachment procedures nor internal judicial machinery is

workable,'' Justice Verma said.

There were only two ways of ensuring accountability which was either through internal

machinery that involved following conventions coupled with social sanction by the

judicial community itself or a new law.

Bibliography

Websites

www.economictimes.com

www.timesofindia.com.

www.hindubusinessline.com

www.rbi.org

www.fatf-gafi.org

www.indiaforensics.com

www.carajkumarradukia.com

Books:-

Money Laundering and combating the Menance in global & Indian context

Arya Ashok Kumar

Publication taxman allied services (P).ltd

Magazines:-

Profeesional banker

Articles by:-

Prasad RS -edition August,2004

Gopal rama C –edition May June,2005

Tom K Alweendo -edition August,2005

Insurance chronicle

Article by:- TS Rama Krishna Rao –edition January,2008

A C K N O W L E D G E M E N T

It gives me immense pleasure and satisfaction while presenting this

report on:

MONEY LAUNDERING-THE INDIAN SCENARIO

I would like to thank Mrs. J.K. Phadnis, Principal, V.E.S. College of Arts, Science and

Commerce and Prof. Mrs. A. Martina, Co-ordinator, BMS (Bachelor of Management

Studies) for granting me the authority to do the project on the topic MONEY

LAUNDERING-THE INDIAN SCENARIO

I sincerely acknowledge with deep sense of gratitude and indebtedness the harmonious

and invaluable guidance and encouragement given by my Project Guide Mr. NIKHIL

BHOBE. and also for being a continuous source of inspiration and for constructive

criticism to make this project a success.

I extend my profuse thanks to ms hanita wadhwani who extended so much of learning

to me and added value to my project. It would have been impossible for me to

complete my project without their enthusiastic support which helped me develop a

practical insight.

Last but not the least is the contribution staff members, and the non staff members

at the V.E.S. College library for providing me with the relevant books and magazines

required for this project. I also appreciate the support and encouragement of my family

and my friends in the completion of this project.

Thanking you once again.

Harsha jethmalani

EXECUTIVE SUMMARY

Project title

Benchmarking of Recruitment Process in IT companies

The scope:

The project would cover various sources and process of recruitment at different levels of

management followed by the IT Companies; challenges associated in recruiting

incumbents especially in the ERP department.

Methodology:

Questionnaire was designed for the HR professionals and Field interviews were

conducted with the managers. The following project is a mixture of descriptive and

quantitative comparative analysis of seven Information Technology companies providing

ERP solutions to its clients and make businesses easy for them. The summary of these

interviews has been included in the report along with comparative analysis of the same.

Findings:

The IT industry, like any other service industry, is people driven. There are a number of

challenges in the Indian IT industry, which require the serious attention of HR managers

to ‘find the right candidate’ and build a ‘conducive work environment’ which will be

beneficial for the employees, as well as the organisation. The IT industry is already under

stress on account of persistent problems such as attrition, confidentiality, and loyalty.

The objective of this project was to study the various sources of recruitment of the IT

companies and understand the difficulties faced by them in recruiting ERP Consultants

who have functional as well as technical experience. The idea was to understand what

should be done to overcome this difficulty, as such candidates are difficult to source in

the IT job markets.

For this first hand information was collected of seven IT companies. The companies

visited were a mixture of large to mid-sized organizations. In all, seven companies were

visited to understand their recruitment strategies. More than half of the executives

surveyed expressed that the major challenges for the HR managers are recruiting the right

people and retaining them for longer times. The next most important HR concerns listed

were meeting the demand, supply requirements in the industry, expectations management

of the resources and other stakeholders, efficiency in processes and HR policies.

The companies have realized that there exists a shortage of skilled manpower within the

IT job market, and have accepted this challenge. They are using various contemporary

sources of recruitment with a fine usage of the traditional sources as well. Companies

now understand that recruitment is not the end all of the HR activities. Emphasis is laid

not only on recruiting the right candidate; but also on retaining him, by the various

training programmes and employee welfare activities.

anishaAcknowledgement

The most pleasant part of any project is to express gratitude and bestow honor

towards all those who directly or indirectly contributed to the smooth flow of the project

work and this being the good opportunity I would like to thank them all.

I would like to thank Mrs. J.K. Phadnis, Principal, V.E.S. College of Arts, Science

and Commerce and Prof. Mrs. A. Martina, Co-ordinator, BMS (Bachelor of Management

Studies) for granting me the authority to do the project on the topic ‘The Indian Foreign

Exchange Market’ and would also like to express my gratitude towards my guide Prof.

Govind Sowani of V.E.S. College of Arts, Science and Commerce whose guidance and

inspiration right from the conceptualization to the finishing stages has proved to be a very

essential and valuable in the completion of the project.

I would also like to thank the staff and the non staff members at the V.E.S.

College library for providing me with the relevant books and magazines required for this

project. I also appreciate the support and encouragement of my family and my friends in

the completion of this project.

Executive Summary

“Money speaks sense in a language all nations understand” –

Aphra Behn 1640-1689, British Playwright, Poet

The best way to explain the above quote would be the referral to the Foreign

Exchange Markets. The Foreign Exchange market, also referred to as the "Forex" or

"FX" market is the largest financial market in the world, with a daily average turnover of

US$1.9 trillion. "Foreign Exchange" is the simultaneous buying of one currency and

selling of another. Currencies are traded in pairs, for example Euro/US Dollar

(EUR/USD) or US Dollar/Japanese Yen (USD/JPY). Due to vast network throughout the

world, finance in terms of currency is a necessity to maintain economic relationship.

This project explains how the Forex market behaves differently from other

markets with specific reference to the Indian foreign exchange market.

The Indian forex market is predominantly a transaction based market with the

existence of underlying forex exposure generally being an essential requirement for

market users. Foreign exchange market in India is totally structured and well regulated.

The Indian Forex market is a 3-tier structure consisting of:

Transaction between RBI and Ads.

Interbank market.

Transaction between Ads and their corporate customers.

When speaking about the Indian forex market it is not possible to forget the

mention of ‘FEDAI’. Foreign Exchange Dealer Association of India (FEDAI)

provides a vital link in the administrative set up of foreign exchange in India. It is the

mouthpiece of the authorized dealers, representing their views to the Reserve Bank and

other international agencies.

This project also discusses the different exchange rate systems followed by

various countries, the types of exchange rates like fixed and floating rates, free and

managed exchange rates, and the journey of the Indian Rupee and so on.

The Forex market is uncontrollable - no single event, individual, or factor rules it.

There is no perfect market! Just like any other speculative business, increased risk entails

chances for a higher profit/loss. The speed, volatility, and enormous size of the Forex

market are unlike anything else in the financial world.

Objective of the Study

Objectives are the base for any work without which work can’t be done.

Foreign exchange market, which is of a very dynamic nature, is becoming increasingly

competitive day after day. Through this project I aim to gain a better understanding of the

foreign exchange mechanism and the exchange rates prevalent in the market.

Liberalisation and globalization has paved the way for the development of the Indian

economy thus increasing the volume of international trade. The growth in the trade will

surely pave the way for the growth of the Forex market too. In short, the market in India

is sure to bloom. Hence, a study on the Indian Foreign Exchange Market has been done.

Methodology

Methodology shows how and through which source the data or information is collected.

This report is a collection of secondary data. The data for the project report was collected

from diverse sources like books and internet. The details of the books and sites visited

have been mentioned in the bibliography.

Limitation of the Study

With its dynamic nature, the forex market is too informative and any data collected

would be less. Also as there is only factual description mostly available, collecting

primary data was not possible.

To limit the scope of the study, a detailed study on risks and risk management tools and

derivatives have not been included.

Acronyms

AML - ANTI-MONEY LAUNDERINGCBI - CENTRAL BUREAU OF INVESTIGATIONCTR - CASH TRANSACTION REPORTEIC - ECONOMIC INTELLIGENCE COUNCILFIU – IND – FINANCIAL INTELLIGENCE UNIT INDIAIFT - INFORMAL FUND TRANSFERIMF –INTERNATIONAL MONETORY FUNDIRDA – INSURANCE REGULATORY DEVELOPMENT AUTHORITYKPMG – KLYNVELD PEAT MARWICK GOERDELER KYC – KNOW YOUR CUSTOMERPEP – POLITICALLY EXPOSED PERSONPMLA – PREVENTION OF MONEY LAUNDERING ACTRBI – RESERVE BANK OF INDIASEBI – SECURITIES AND EXCHANGE BOARD OF INDIASTR – SUSPICIOUS TRANSACTION REPORTUN - UNITED NATIONS

THE PREVENTION OF MONEY-LAUNDERING ACT, 2002(15 of 2003)[17th January, 2003]An Act to prevent money-laundering and to provide for confiscation of property derived from, orinvolved in, money-laundering and for matters connected therewith or incidental theretoPRELIMINARY1. Short title, extent and commencement.- (1) This Act may be called the Prevention ofMoney-laundering Act, 2002.(2) It extends to the whole of India.(3) It shall come into force on such date as the Central Government may, by notification in theOfficial Gazette, appoint, and different dates may be appointed for different provisions of this Act andany reference in any such provision to the commencement of this Act shall be construed as a reference tothe coming into force of that provision.OFFENCE OF MONEY-LAUNDERING3. Offence of money-laundering.-- Whosoever directly or indirectly attempts to indulge orknowingly assists or knowingly is a party or is actually involved in any process or activity connected withthe proceeds of crime and projecting it as untainted property shall be guilty of offence of moneylaundering.4. Punishment for money-laundering.-- Whoever commits the offence of money-launderingshall be punishable with rigorous imprisonment for a term which shall not be less than three years but

which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees:Provided that where the proceeds of crime involved in money-laundering relates to any offencespecified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as iffor the words "which may extend to seven years", the words "which may extend to ten years" had beensubstituted.

OBLIGATIONS OF BANKING COMPANIES, FINANCIAL INSTITUTIONS ANDINTERMEDIARIES12. Banking companies, financial institutions and intermediaries to maintain records.-- (1)Every banking company, financial institution and intermediary shall—(a) maintain a record of all transactions, the nature and value of which may beprescribed, whether such transactions comprise of a single transaction or a series oftransactions integrally connected to each other, and where such series of transactionstake place within a month;(b) furnish information of transactions referred to in clause (a) to the Director withinsuch time as may be prescribed;(c) verify and maintain the records of the identity of all its clients, in such manner asmay be prescribed:Provided that where the principal officer of a banking company or financial institution orintermediary, as the case may be, has reason to believe that a single transaction or series of transactionsintegrally connected to each other have been valued below the prescribed value so as to defeat theprovisions of this section, such officer shall furnish information in respect of such transactions to theDirector within the prescribed time(2) The records referred to in sub-section (1) shall be maintained for a period of ten years fromthe date of cessation of the transactions between the clients and the banking company or financialinstitution or intermediary, as the case may be.14. No civil proceeding against banking companies, financial institutions, etc., in certaincases.-- Save as otherwise provided in section 13, the banking companies, financial institutions,intermediaries and their officers shall not be liable to any civil proceedings against them for furnishinginformation under clause (b) of sub-section (1) of section 12.