CA Loan Bajaj Finserv
CA Final Online Classes
CA Classes

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Money Laundering

Megha Shah 
on 28 November 2015

LinkedIn


Today we listen the word too much “Black Money” and all politician parties say that we will bring it to India from Swiss Bank. But what is “Black Money”?

“Black Money” basically means Money Laundering. It simplifies to move money that has been obtained illegally into foreign bank accounts or legal business so that it is difficult for people to know where the money came from.

There are too many developments in financial sector, technology and somehow integrated communication. They all are allowed to move money all over the world with speed and ease. Terrorism, illegal arms sales, financial crimes smuggling and the activities of organized crime including drug trafficking and prostitution rings and generate huge sum of money. In general terms, the laundering enables criminal activity to continue.

Origin of Money Laundering

The “Hawala” mechanism is the original source of money laundering. It is an effective, efficient system of remitting money. It is an Arabic word for transferring of money or information involving two persons using a third person. Essentially the system is based on trust and proper links and connections between people. The third party in this transaction has to be trusted in order to make such type of transactions to be succeeded. It is usually found that such type of system is impossible to trace. Such money is basically used to do illegal activities such as smuggling, terrorist activities etc.

Process of Money Laundering

The process of money laundering can be classified into three stages: (1) Placement (2) Layering (3) Integration

In the initial/placement stage of money laundering introduces his illegal profits into the financial system by breaking up large amounts of cash into small sums that has been deposited directly into bank a/c or by purchasing monetary instruments that are later collected and deposited into accounts at another location. It refers to the physical disposal of bulk cash proceeds derived from illegal activity.

After the funds are entered into the financial system, the layering (2nd stage) takes place. In this stage, the launderer engages in movements of the funds to distance them from their sources. The funds might be channeled through the purchase and sale of investment instruments at various banks across the world.

After successful processing of criminal profits through the first two stages of money laundering process, the launderer re-enter these funds into the real economy i.e. he might choose to invest the funds into real estate, luxury seeds or business ventures and makes it legally/white money/ normal business funds.

Now-a-days Money laundering is a major challenge to countries all over the world. So, there have been international attempts to control this problem of money laundering.

Prevention of Money Laundering

Against Money Laundering, the Financial Action Task Force (FATF) on this was established by G-7 summit that was held in Paris in 1989.

Now-a-days money laundering is an international phenomenon; transnational co-operation is of critical importance in the fight against this menace.

The FATF is an inter-governmental body whose purpose is to develop and promotes the policies both at national and international levels to fight against money laundering and terrorist activities.

The FATF monitors members are trying to implement more and more necessary measures, taking reviews of money laundering actions and control the terrorist techniques and counter-measures, promotes the adoption and implementation of appropriate measures globally.

This task doesn’t have a tightly defined constitution/ an unlimited life span. This task currently has 34 members’ jurisdictions & 2 regional organizations representing most major financial centers in all parts of the world. India became 34th member (i.e. last) of this task in year 2010.

Actions against Money Laundering

RBI issued Master circular on Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating of Financing of Terrorism (CFT)/ Obligation of banks under Prevention of Money Laundering Act (PMLA), 2002 for controlling money laundering.

KYC necessitates that banks should make sensible pains to settle on the customers identify and must set up successful measures for verifying the bona fides of new customers. As per these standards banks must frame their KYC policies slotting in the following four key elements:

(1) Customer Acceptance Policy
(2) Customer Identification Procedures
(3) Monitoring of Transactions
(4) Risk Management

Conclusion

In global financial system and in the era of E-business for good governance, money laundering is a serious threat. It is also boosting international crimes and terrorist activities (e.g. attack on Paris). In India only, it is estimated about black money around 40% of India’s GDP i.e. Can you assume how much black money circulated only in India?


Tags :



Category Others
Other Articles by -
Megha Shah 

Report Abuse

LinkedIn



Comments


update