What is Money Laundering and how is it done?
The term "money laundering" is said to have originated from the mafia boss Al Capone. Capone had set up laundromats across the city as a front to disguise the original source of money which was obtained from the illegal sale of liquor during the Prohibition Era in the US.
In India, "money laundering" is popularly known as Hawala transactions.
Meaning of Money Laundering
Money Laundering refers to converting illegally earned money into legitimate money. So Money Laundering is a way to hide the illegally acquired money.
In the method of money laundering; money is invested in such a way that even the investigating agencies can’t trace the main source of wealth. The person who manipulates this money is called "launderer".
So the black money invested into capital markets or other ventures returns back to the real money holder as the legitimate money.
Steps involved in Process of Money Laundering
The first step in this process is the investment of black money in the market. The launderer deposits the illegal money through different agents and banks in the form of cash by having a formal or informal agreement.
Source : researchgate.net
In this process, the launderer hides his real income by making foul play. The launderer deposits funds to investment instruments such as bonds, stocks, and traveler's checks or in their bank accounts abroad. This account is often opened in banks of those countries which do not reveals the details of their account holders. So in this process the ownership and source of money is disguised.
The final stage at which the ‘laundered’ property is re-introduced into the legitimate economy or Returning the money back into the financial world as legal money.
Examples of Money Laundering
There can be several ways to do money laundering, but the most popular is the establishment of the fake companies which is also known as the "shell companies". ‘Shell Company’ acts like a real company but in reality this company does not exist in the real world and no production take place in such companies. Actually these shell companies exist only on paper, not in the real world.
But the launderer shows large transactions in these Shell Company’s balance sheets. He takes loan in the name of these companies, gets tax exemption from the government, does not fill income tax returns and through all these fake activities, he accumulates a lot of black money.
If investigating agencies or regulatory bodies want to check financial records, false documents are shown to confuse them.
Other Methods of Money Laundering
Buying a large house, shop, or mall but showing less value on paper, while the actual market value of these purchased properties is much higher. This is done so that they can reduce their tax burden. Thus, black money is collected through tax evasion.
In another way, money laundering takes place when the launderer deposits his black money in the foreign banks. These foreign banks do not share customer’s account information with any country. Like banks in the Switzerland do not share account information where large numbers of Indians have deposited their black money.
Prevention of Money Laundering Act, 2002 in India
The initial money laundering law in India was enacted in 2002, but it has been amended 5 times (2005, 2009 and 2012, 2015 and 2019).
The Prevention of Money-laundering Act, 2002 (PMLA) aimed at combating money laundering in India with three main objectives:–
1. To prevent and control money laundering
2. To confiscate and seize the property obtained from laundered money
3. To deal with any other issue connected with money laundering in India
The PMLA (Amendment) Act, 2012 has put concealment of funds, acquisition of possession, use of proceeds of crime and possession of money in criminal list.
It is worth to mention here that RBI, SEBI and Insurance Regulatory and Development Authority (IRDA) have been brought out under the purview of PMLA, 2002. Hence the provisions of this Act shall apply to all financial institutions, banks, mutual funds, insurance companies and their financial intermediaries.
Latest Amendments in Prevention of Money Laundering Act, 2002
The latest amendment to PMLA Act 2002 came into effect in 2019 as part of the Finance Act 2019. The primary amendment is the change in the definition of proceeds of crime under the PMLA Act, 2002.
It came into effect from 1st August 2019.
Section 3 of the PMLA Act 2002 contains provisions related to the offence of money laundering. To broaden the scope, an explanation was added to section 3 as a part of the amendment and was put to immediate effect. The explanation is as follows:
(i) a person shall be guilty of the offence of money laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:—
(a) concealment; or
(b) possession; or
(c) acquisition; or
(d) use; or
(e) projecting as untainted property; or
(f) claiming as untainted property,
In any manner whatsoever;
(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.”. (emphasis supplied)
On the basis of the above explanation it can be concluded that the process of money laundering is quite complex and manipulative. But the government must increase the process of digital transaction to curve the menace of corruption in the country.