Notes

Money Laundering

Properties1
tagssecurity, corruption, fatf

6 min read

  • USA: 1920-33: Prohibition: MSD (manufacture, sale, distribution) on liquor
    • 17th Amendment
    • Temperance movement
    • Al Capone -> bought laundromats to cover up trails
    • thus came the word “laundering”

Definition: act of cleaning up illicit / cleaning money

  • range of practices to disguise src of illicit proceeds
  • and to integrate them into legitimate economy
flowchart TD

A[Illicit Money] --> B[Crime] & C[Corruption] & D[Corporate]

C --> E[Bribery] & F[Embezzlement] & G[Self Dealing]

Operational principle

  • move funds away from direct association w/ crime
  • disguise the trail
  • make money available to criminals again while keeping source secret

Stages

  1. Placement
    • phy disposal of cash
    • launderer introduced illicit money into financial system
    • usually: break into small sums, then deposit into bank accounts or buy valuable assets
  2. Layering
    • sep illicit proceed frm src by creating complex layers of fin txn
    • series of convs, mvmts across jurisdictions
    • objective: concede audit trail, provide anonymity**
  3. Integration
    • re-injection of laundered proceeds back into economy
    • re-enter financial system as legitimate funds

Mechanisms of Money Laundering

  • Casino
    • casino chips bought in cash
    • then later (gambling may/may not take place) chips redeemed for cash via electronic transfers
  • Lottery tickets
    • winning lotteries bought from actual winners for cash consideration
  • Horse racing
  • Ownership of valuable assets
    • interest in art market, where commodities bought at high premium as store of values
    • watches
  • Legitimate business ownership
    • front business
    • failing business
      • shipping business
        • Cash smuggling
    • dirty money added to cash revenues of legitimate business
    • invoices manipulated to give money legitimate appearance
  • Shell company
    • exists only on paper
    • no legitimate underlying business
    • exists to either invest money, offer loans or acquire assets on behalf of launderer
  • Cash smuggling
    • one of the oldest placement techniques
    • launderers purchase shipping businesses (freight) to smuggle cash across destinations
  • Real estate
    • properties bought/sold under false names, shell corpo
    • collateral in layering txn
    • integrate illicit proceeds back into economy
  • Smurfing
    • smurfs (cash couriers) make smaller deposits
      • bypass reporting requirements
    • eg. India limit 2L
  • Informal value transfer systems
    • Hawala (parallel banking network)
      • make payment w/o actual movement of money

Impact of Money Laundering

  • less money supply
    • => inflation
  • obfuscation of monetary policy
    • central banks rely on accurate data to make decisions wrt interest rates, money supply, inflation targets
    • distort effectiveness of monetary policy
      • incentives for cash to flow to underground economy
  • demand supply mismatch
    • India, 7-8cr ppl file ITR
      • 70% zero tax
      • yet, real estate market seen consistent unexplainable appreciation
  • hurts reputation of economy
    • global stage
    • if country weak anti money laundering measures => hub for illicit financial activity
      • => discourage foreign investment
  • hurts BoP
  • political impact
    • breeds corruption
    • infiltration of illicit funds into political campaigns, parties, democratic process
  • social impact
    • rise inequality
      • feeds into & exacerbates inequality
      • conceal illicit wealth => concentration of wealth
    • money often used for crime
      • erosion of public trust
      • erodes social solidarity
    • can lead to general tolerance amongst members of society as long as it doesn’t affect individual

Anti Money Laundering Measures

PMLA 2002

  • defines Money Laundering
  • implemented by Dept. of Enforcement, under Dept of Revenue, MinFin
  • 7yr imprisonment
  • power of search, seizure, arrest, confiscation to ED

Attachment, adjudication, confiscation

  • Officer of ED can issue written order for provisional attachment of property upto 90 days
  • copy of order sent to adjudicating authority
  • ED files complaint before adjudicating authority
  • adjudicating authority may serve notice to person to indicate source, means
  • after consideration of reply if adjudicating authority believes property is involved in ML, it confirms attachment of property which continues till court proceedings are pending
  • if guilt proven in court, order final, property confiscated
  • burden of proof: lies on accused
  • appellate tribunal
    • if either party agrees with order of adjudicating authority, they can file appeal with appellate tribunal, appt. by CG
    • any appeal against appellate tribunal only in HCs
  • special courts
    • CG in consultation w/ HC may designate any session court as spl court for trial of both offence of money laundering and scheduled offence
  • all offences under PMLA are cognizable

Bail

  • twin condition
    • public prosecutor has to be given opportunity to oppose bail
    • when public prosecutor opposes bail, court can release accused on bail if satisfied that accused is not guilty of offense and not likely to commit any offence while on bail

Vijay Madanlal Chaudhary Case (IMPORTANT)

  • bones of contention
    • petitioner argues that projecting tainted money as clean is essential component of money laundering
    • not enough to have raised proceeds or use those proceeds
    • SC rejected this argument
  • now can be charged w/ offense of ML if have merely received money or used those proceeds
  • petitioner argued that ED has power similar to police
    • must be governed by same procedural standards
    • court rejected
      • “inquiries under PMLA are significantly different from criminal investigations”
  • consequently, PMLA doesn’t violate right against self incrimination
  • court also stated that ECIR is internal doc of ED
    • ED not bound to share copy w/ accused
    • effectively SC clarified ED has no police pwrs, hence not req. to meet same procedural standards

Other measures

  • Income Tax Act, 1961
    • puts the 2L restrition
  • Benami Transactions Act, 1988
  • NDPS Act 1985

Institutional measures

  • ED
  • Appellate Tribunal
  • Adjudicating Tribunal
  • Financial Intelligence Units
  • RBI, SEBI (regulatory pwrs)

Compliance measures

  • KYC
  • Banks req. to follow Chapter 4 of PMLA

Global Mesaures: FATF

  • Financial Action Task Force
  • set up 1989, by G7 to examine, develop policies to combat ML
  • since 2001, FATF added to its mandate counter financing of terror & proliferation

Role of FATF

  • research evolving methods of ML
  • issues comprehensive list of measures to help countries tackle illicit financial flows
  • review implementation of FATF standards
  • identification of high risk jurisdiction
    • continuously monitors, identifies jurisdictions w/ significant weakness in their AML/CFT (counter terror financing) measures and issues a public warning abt risks emanating from these jurisdictions through its docs, published thrice each yr
    • Grey List: under increased monitoring i.e. countries actively cooperating
    • Black List: high risk jurisdictions subjective to CTA
      • FATF issues advise its members to enhance due diligence

Other global measures

  • Asia Pacific Group on ML
  • Intl. ML Info Network (IMoLIN)
  • Egmont group

Questions

  • challenges associated w/ anti money laundering efforts in india?
  • role of tech in both aiding and addressing money laundering

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