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According to recent report of Pandora paper investigation two offshore shell companies registered in British Virgin Islands (BVI) that have invested in Adani Group stocks are linked to Adani Group Chairperson’s Brother.
This news brings in focus the menace of money laundering which is prevalent from corporate sector to terrorist Groups. Money Laundering is a heinous crime that not only affects the economic and social fabric of a country but also promotes other serious offenses like terrorism and drug trafficking.
India has been plagued with the problem of money laundering. Some famous Money laundering cases that have dominated headlines and political narrative in India are-Sharada Group Financial scandal, Satyam Scandal, PNB Fraud case of Nirav Modi and Kingfisher Airlines case of Vijay Mallaya.
What is Money Laundering
Definition- According to the UN Office on Drugs and Crime (UNODC), money laundering is the processing of money obtained from criminal activities to disguise their illegal origin. These criminal activities include financial fraud, drug trafficking and terrorist activities.
Process of Money Laundering-Money Laundering involves 3 steps:
| Step 1-Placement | Injection of the “dirty money” into the legitimate financial system. |
| Step 2-Layering | Concealment of the source of the money through a series of transactions and bookkeeping tricks |
| Step 3-Integration | Withdrawal of laundered money from the legitimate financial system by the criminals for their ulterior motives. |
Common Methods of Money Laundering- Some common methods of money laundering are:
| Smurfing | This method involves dividing large sums of money into smaller, less suspicious amounts. The money is then deposited into one or more bank accounts over time by multiple people (smurfs) or by a single person. |
| Shell companies | These are companies without active business operations. They take in dirty money as “payment” for supposed goods or services but provide no goods or services.They simply create the appearance of legitimate transactions through fake invoices and balance sheets. |
| Overseas banks | Use of “offshore accounts” in countries with bank secrecy laws like Bahamas, Bahrain, the Cayman Islands, Hong Kong, Panama and Singapore. |
| Hawala | It is a parallel remittance system which functions independently from or concurrently with “traditional” banking or financial channels. |
| Electronic Money Laundering (EML)
| EML takes place through online auctions and sales, gambling websites, and virtual gaming sites. The newest frontier of money laundering involves cryptocurrencies, such as Bitcoin. The Paris attack in 2015 was funded through bitcoins.
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What are the negative impacts and effects on money laundering?
Economic effects
Destabilisation of economy- According to studies conducted by the International Monetary Fund (IMF) it was estimated that the quantum of money laundered is approximately 2 to 5 percent of GDP of the world. Unpredictability of the economy increasing due to pumping of illegal money can lead to destabilisation economy of the country causing financial crisis.
Loss of revenue exchequer to Govt- Money laundering decreases the tax funds available for collection in the economy and decreases government’s revenues. Social sectors like health, education suffer due to lesser allocation of budgetary resources.
Impact on financial sector- Money Laundering discourages foreign investors from long term investments in the financial markets. FPIs pull out money in the way money laundering scams from the Indian markets resulting in exchange rates and interest rates volatility in the financial market. It also encourages tax evasion culture.
Transfers of economic power from the right people to the wrong– Committing crime of money laundering transfers of economic power from the right people to the wrong. The good citizens and the government are dispossessed from their right making the criminals take the benefit to flourish in their criminality.
Social Effects
Decline of Social and Political morality of the society-Money Laundering leads to decline in the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities.
‘Demographic Dividend’ turns into ‘Demographic Disaster’- Money Laundering increases unemployment in the country as legitimate business companies fail to compete with operators operating through illegal money. It also increases criminal activities and more youth get attracted due to higher returns.
Political Effects
Policy Paralysis-Money laundering leads to policy paralysis due to measurement error and misallocation of resources. Legislative bodies are unable to quantify the negative economic effects of money laundering on economic development and its linkages with other crimes – trafficking, terrorism.
What are the Challenges in combating money laundering in India?
Increased use of digital currency like Bitcoins and cryptocurrency: The rise of cryptocurrency allows money launderers to conceal their illicit funds. According to IMF, more than $2.5 billion have been laundered since 2019 in cryptocurrencies.
Presence of tax haven countries- Strict financial secrecy laws by tax heaven countries like Bahamas, Bahrain, the Cayman Islands, Hong Kong, Panama and Singapore incentivize the creation of anonymous accounts in these countries by launderers.
Laxity on part of banks: Increasing competition in the financial market is forcing banks to lower their guards which allows money launderers to use the black money illicitly in furtherance of their crime.
Collusion by employees of financial institutions in money laundering: Some employees of financial institutions like Banks,NBFCs collude with the money launderers which further accentuates the menace of money laundering. PNB Fraud, Videocon-ICICI Bank cases are prime examples of this.
Lack of Convergence among the different enforcement agencies– Separate wings of law enforcement agencies dealing with money laundering, cyber-crimes, terrorist crimes, economic offences lack convergence among themselves. Lack of convergence between INTERPOL and CBI in the arrest of Indian fugitive Nirav Modi.
Lack of awareness about the seriousness of crimes of money laundering: People shop from several black markets which sell smuggled goods in India like the Chor Bazars. This further aggravates the problem of money laundering. Preference of Hawala system by the poor and illiterate population. This system is a major source of money laundering.
What measures have been taken to combat money laundering in India?
Statutory Measures
Passage of PMLA Act in 2002 to combat money laundering- Prevention on Money Laundering Act was passed in 2002 with the sole objective of combating money laundering in India. It provides greater power to the govt agencies in attachment and confiscation of properties and provides for stricter bail conditions. It is gradually becoming a dread law in the country.
Institutional Measures
Enforcement Directorate: Investigation and prosecution of cases under the PMLA have been entrusted to Enforcement Directorate. Prosecutions of Individuals under PMLA act have increased in recent times.
Financial Intelligence Unit India (FIU-IND)- Established in 2004 to serve as the primary national organization in charge of gathering, analyzing, and disseminating data about improbable financial transactions.
International Cooperation Measures
The Financial Action Task Force (FATF)- India as a member of FATF has effectively used the grouping to push for sanctions against countries like Pakistan which indulge in money laundering to breed terrorism.
India is a signatory to various conventions of UN to combat money laundering- India is also signatory to the International Convention for Suppression of Financing of Terrorism (1999); the United Nation Convention against Transnational Organised Crime (2000) and United Nation Convention against Corruption (2003).
What should be the way forward to combat money laundering in India?
Money laundering has the potential to completely destroy the economic and socio-political fabric of the country. Hence, we need to take further measures to protect our country from this menace.
Addition of stricter provisions– More strict provisions must be added to PMLA because money laundering tends to corrupt even the most professional players in the market.
Criminalization of money laundering in tax haven countries- Money laundering should be criminalized in accordance with the Vienna Convention and the Palermo Convention which must ensure that financial institution secrecy laws of tax haven countries do not impede the implementation of the FATF Recommendations.
Sensitization- Public must be sensitised that money laundering is more dangerous than terrorism. Hence they must refrain from buying from black markets or using hawala transactions. There is a need to sensitize the Private Sector about their role in anti-money laundering activities
There is a need to build a balance between financial confidentiality and this confidentiality turning to a money-laundering haven. India must use its diplomatic heft to nudge the tax haven countries to end their financial secrecy laws.
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