Easy Office

Money Laundering in India

Ayyswariya RG , Last updated: 16 August 2014  

Hi all,

Let us start from definition of Money laundering defined under Prevention of Money Laundering act, 2002 & with some insights about its impact on economy.

Definition of Money Laundering:-

Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.

In simple terms, Money laundering means converting “dirty money” in such a way that appears to have originated from a lawful/ legitimate source. To be precise, it is an act of projecting tainted property as untainted property. (Tainted meaning polluted/dirty).

Why is it done so?

To avoid suspicion & detection of banks and other financial institutions, money is being projected as obtained from non-criminal activities.

Is the economy affected?

The answer is obviously yes. It is very difficult to quantify the negatives of Money Laundering. Thus, some important aspects are covered below.

1. Increased Money laundering means Increased crime and corruption

2. Reputation and Goodwill of the economy is at damage.

3. Weakens the Bank & other financial institutions.

4. Creates financial instability.

5. Evasion of taxes, thus, leading to lower revenues to the government.

6. Reduces productivity in real sector (dealing with goods & services).

7. Loss of needed revenue for development etc.

Note:- The above list is not exhaustive.

India – High risk zone

Out of 140 countries, India was ranked 70th in 2013 by Anti Money Laundering (AML) basel level which clearly shows that our economy is very vulnerable to money laundering activities. Before introduction of Prevention of Money Laundering act (PMLA) 2002, there were many acts which directly or indirectly helped to curb money laundering activities. They are

a. The Conservation of Foreign Exchange and Prevention of Smuggling Activities  Act, 1974 

b. The Income Tax Act, 1961 

c. The Benami Transactions (Prohibition) Act, 1988 

d. The Indian Penal Code and Code of Criminal Procedure, 1973 

e. The Narcotic Drugs and Psychotropic Substances Act, 1985 

But, the above acts proved inadequate on account of which PMLA was introduced in 2002. Other steps taken by government are

Financial intelligence Unit (FIU)

The FIU operates in the legal framework established by the PMLA. FIU receives reports on cash transactions, suspicious transactions, counterfeit currency transactions and funds received by non-profit organisations

RBI Initiatives - KYC

RBI has issued a master circular on Know your customer (KYC) norms, Anti- Money Laundering (AML) norms, Combating of financing of terrorism (CFT), Obligation of banks under Prevention of Money Laundering act (PMLA), 2002 as a step against Money Laundering.

The KYC guidelines were introduced by RBI in 2002. This involves verifying & maintaining a record of customers' identity, Permanent & current address, Nature of business, his/her financial status etc. Mandatory details required under KYC norms are proof of identity and proof of address.

Money Laundering Scandal

There are many scandals happening relating to this offense. Let us take up one of the famous HSBC scandal (global).

1. Mexican Drug trafficking 

 The following were the findings from such offence

a. High profile clients involved in drug trafficking

b. Millions of dollars of suspicious bulk travellers cheques

c. A resistance to close accounts linked to suspicious activity.

2. Dealing with Iran

US laws prevent banks doing business with regard to dangerous Individuals and countries. Despite such laws, HSBC frequently had dealings with Iran and most of the dealings were of the nature of undisclosed sensitive transactions between years 2001 to 2007 amount involving $ 19.7 billion.

3. Terrorist financing links

HSBC did business with Saudi Arabia’s biggest financial institution , Al Rajhi Bank; which happened to be linked with terrorists. A report claims that after terrorist attack in US on 11th September 2001, evidence emerged that Al Rajhi bank has links to financial institutions associated with terrorism

4. Suspicious travellers cheque

HSBC cleared large amount of travellers’ checks over a number of years amounting to $ 290 million between 2005 to 2008 which were being presented to Japanese bank. After a thorough investigation, it was found out that travellers’ cheque were bought in Russia – a country at high risk of money laundering.


Battling against Money Laundering is an urgent requirement for not only our country but also globally. There should be a vigilant mechanism to deal with this offense. Not to forget, the public awareness becomes necessary to reach the masses.

Thanks for reading. Please express your views below.              

Join CCI Pro

Published by

Ayyswariya RG
(Knowledge Seeker)
Category Others   Report

5 Likes   28097 Views


Related Articles