Money Laundering And Black Money



Money Laundering And Black Money

Money Laundering

Money laundering is the process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process “launders” it to make it look clean. Money laundering is itself a crime.

How it Works

The processes are extensive. Generally speaking, money is laundered whenever a person or business deals in any way with another person’s benefit from crime. That can occur in a countless number of diverse ways.

Traditionally money laundering has been described as a process which takes place in three distinct stages.

Placement, the stage at which criminally derived funds are introduced in the financial system.

Layering, the substantive stage of the process in which the property is ‘washed’ and its ownership and source is disguised.

Integration, the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy.

This three staged definition of money laundering is highly simplistic. The reality is that the so called stages often overlap and in some cases, for example in cases of financial crimes, there is no requirement for the proceeds of crime to be ‘placed’.

Offence

Money laundering offences have similar characteristics globally. There are two key elements to a money laundering offence:

  1. The necessary act of laundering itself i.e. the provision of financial services; and
  2. A requisite degree of knowledge or suspicion (either subjective or objective) relating to the source of the funds or the conduct of a client.

The act of laundering is committed in circumstances where a person is engaged in an arrangement (i.e. by providing a service or product) and that arrangement involves the proceeds of crime. These arrangements include a wide variety of business relationships e.g. banking, fiduciary and investment management.

The requisite degree of knowledge or suspicion will depend upon the specific offence but will usually be present where the person providing the arrangement, service or product knows, suspects or has reasonable grounds to suspect that the property involved in the arrangement represents the proceeds of crime. In some cases the offence may also be committed where a person knows or suspects that the person with whom he or she is dealing is engaged in or has benefited from criminal conduct.

Steps Of Government Taken To Curb Money Laundering

Legislators around the world have realized that concentrated efforts are required to deal with illegal funding and control money laundering.

India has different laws to tackle smuggling, narcotics, foreign trade violations, foreign exchange manipulations and also special legal provisions for preventive detention and forfeiture of property, which were enacted over a period of time to deal with such severe crimes. Some of these were considered to be strong measures, but may not now match the post-Sept.11 measures initiated in the US and the EU. In India, there were old age practices for prevention of Money laundering in the sense of seizure and repossession of proceeds of crime. The statutes predominant before the Prevention of Money Laundering Act, 2002 (Money Laundering Act of 2002) are:

  1. Criminal Law Amendment Ordinance (XXXVIII of 1944).
  2. The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976.
  3. Narcotic Drugs and Psychotropic Substances Act, 1985.
  1. Criminal Law Amendment Ordinance (XXXVIII of 1944): Under this law, police can get the proceeds of crime relating to bribe, breach of trust and cheating confiscated by an order of attachment and on completion of the criminal prosecution can get an order from court forfeiting the proceeds. This ordinance was modified in 1946 and responsibility of proof to the accused. In the event of crime under Prevention of Corruption Act, the implementation rests with the CBI. However this law covers proceeds of only certain crimes such corruption, breach of trust and cheating and not all the crimes under the Indian Penal Code.
  2. The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: According to this law, there is a penalty of illegally acquired properties of smugglers and foreign exchange manipulators and for matters connected therewith and incidental thereto. The application of this law is restricted to the persons convicted under the Customs Act, 1962 or Sea Customs Act, 1878 or other foreign exchange laws. Under this Act, no person shall hold any unlawfully acquired property either by himself or through any other person on his behalf. The word ‘illegally acquired property’ has been well defined under section 3(c) of the act.

There is very broad legislation in India on money laundering which includes all kinds of laundering of money relating to all crimes and offences under laws of India except offences relating to drug trafficking or offences under Indian Penal Code. As far as drug offences are concerned, prevention of money laundering is taken care of by Narcotic and Psychotropic Substances Act, 1985.

  1. Narcotic Drugs and Psychotropic Substances Act, 1985: Narcotic Drugs and Psychotropic Substances Act, 1985 provide for the penalty of property derived from, or used in illegal traffic in narcotic drugs. Sections 68A to 68Y of Chapter VA of the Act provides for forfeiture of assets derived from or used in unlawful traffic. The provisions are so broad that the authorities administering the law have huge powers including the power to trace the source of drug related money or property and afterward to proceed with freezing of accounts and seizure of property and forfeiting it to the government.

Other analogous statutes: Besides these legislations, there is a law of Foreign Contribution (Regulation) Act, 1976 under which the Central government regulates flow of funds to various organizations. If the Central government thinks any organization is acting against national interest, it can block its funds. Further to that Reserve Bank of India, which administers Foreign Exchange Management Act, 1999 has powers under section 11 of the Act to give appropriate directions to the authorized dealers to prevent violation of any laws. In addition to above Section 102 and Sections 451to 459 of the Code of Criminal Procedure, 1973 enables seizure and confiscation of the proceeds of crime.

The purpose of the Prevention of Money-laundering Act, 2002 (PMLA) is to combat money laundering in India in order to prevent and control money laundering, to confiscate and seize the property obtained from laundered money, and to deal with any other issue connected with money laundering in India. It came into force from 1st July, 2015. The Act provides that whosoever directly or indirectly attempts to pamper or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, shall be guilty of offences of money-laundering. For the purpose of money-laundering, the PMLA identifies certain offences under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Arms Act, the Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act and the Prevention of Corruption Act, the proceeds of which would be covered under this Act.

International initiatives are also taken to fight against drug trafficking, terrorism and other organized and serious crimes have concluded that financial institutions including securities market intermediaries must establish procedures of internal control aimed at preventing and impeding money laundering and terrorist financing. In other nations such as US, The US Congress passed the USA Patriot Act of 2001 within 43 days of Sept.11, October 26, 2001. This Act made as many as 52 amendments to the existing Bank Secrecy Act of 1970 (BSA). The range of these new provisions touched every financial institution and business not only in the US, but also in many countries of the world. One of the changes made in the BSA requires every financial institution to establish anti-money laundering programmes. Moreover, the list of businesses defined as financial institutions is wide ranging and includes banks, brokers and dealers in securities or commodities, currency exchanges, insurance companies, credit card operators, dealers in precious metals, stones and jewels, travel agencies, businesses engaged in the sale of vehicles including automobiles, air planes and boats, casinos and gaming establishments, and even telegraph companies and US postal service. It also adds secretive banking systems, such as ‘hawala’, to the description of financial institutions. It creates customer documentation and due diligence duties. Simultaneously, it grants immunity to financial institutions and their personnel for sharing reports of doubtful activities with any government agency or with each other. It also makes it a crime to conceal more than US $ 10,000 in money or monetary instruments while entering or leaving the US. Consequently, huge number of financial institutions and businesses, who were not earlier concerned about money laundering, now have to maintain anti-money laundering programmes requiring them to “develop internal policies, procedures and controls”, “elect a compliance officer”, conduct “ongoing employee training programmes” and perform “independent audit functions”.

 

Currently, the US intelligence agencies can have access to reports and records of financial institutions and businesses including suspicious activity reports filed by them. One of the major changes is ban of correspondent accounts for foreign shell banks, which have no physical presence anywhere. A foreign bank must have a fixed address, employ at least one full-time employee, maintain operating records and be inspected by a banking authority to qualify for a correspondent account. Besides amending the BSA, the USA Patriot Act of 2001 also modified in the Money Laundering Control Act of 1986. It now acquires extra-territorial jurisdiction to combat terrorist funding and criminal proceeds. The law covered funds representing proceeds of nearly 200 specified unlawful activities such as fraud, kidnapping, gambling, espionage, drug trafficking, etc. It now covers bribing of a foreign public official, embezzlement of public funds, smuggling or export control violations involving items covered by the Arms Export Control Act as well as crimes of violence. The new law requires the financial institutions to provide information regarding customers within 120 days if the account is in the US and within seven days if the records are maintained outside the US in respect of correspondence accounts. The new law also supports forfeiture powers over funds of foreign persons and institutions. The US authorities now have vast power to track and grab laundered money that runs terrorist activities and to penalise the criminals involved. The USA Patriot Act of 2001 has also seen a jump in filing SARs. The US Finance Crimes Enforcement Network reported an increase in SARs by over 40 per cent in the year 2002 compared to the preceding year. The compliance costs for the financial institutions have also gone up but many think that this may be a small price to pay to be able to live in a world with reduced risks of terrorist assaults.

Procedures for Anti Money Laundering: Each registered intermediary must implement written procedures to implement the Anti-Money Laundering provisions as envisaged under the Prevention of Money laundering Act, 2002. Such procedures should include inter alia, the following three specific parameters which are related to the overall ‘Client Due Diligence Process:

  1. Policy for acceptance of clients
  2. Procedure for identifying the clients
  3. Transaction monitoring and reporting especially Suspicious

In India, to combat the threat of offences of money laundering, the Government is entrusting the work relating to investigation, attachment of property/proceeds of crime relating to the scheduled offences under the Act and filing of complaints etc. to the Directorate of Enforcement, which currently deals with offences under the Foreign Exchange Management Act.

Black Money

Black money is money earned through any illegal activity controlled by country regulations. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed. Recipients of black money must hide it, spend it only in the underground economy, or attempt to give it the appearance of legitimacy through money laundering.

Effect of Black Money on Indian Economy

Black money is a socioeconomic evil. The existence of rapidly growing black money in our economy has grave and disastrous consequences. The major effects of black money are discussed below:

1. Dual Economy

The increase in the amount of black money in India over a period of time lead to the perpetual growth of economic dualism which consists of Parallel economy(black money economy) operating side by side with the Official or Reported economy on the country.

The black economy represents not less than one fifth of the aggregate economic transactions. There is also interaction between the reported and unreported activities such that it is difficult to identify black money from the white money economy. Such a Parallel Economy will ruin the entire economic development of the country.

2. Under-estimation

A large underground economy and growth of black income lead to under-estimation of the true size and incorrect picture of the economy by the officially complied national income data.

Since unreported economy is apparently excluded from the official records of the Gross National Product, the estimates of savings and consumption of nations to the national income and measurement of other macroeconomic variables would be biased and misleading for accurate policy making and planning considerations.

3. Loss of Revenue to the Government

Black money is largely attributed to tax evasion. Its direct impact is the loss of the Government revenue. Since the Government fails to get sufficient tax revenue due to large-scale tax evasion, it is forced to resort to high taxation and deficit financing which again carry their ill-economic effects.

4. Undermining the Equity

When the Government resorts to progressive direct taxation to maintain equity in the distribution of the tax burden, the tax evasion and growth of black money affect the very concept of social justice by not allowing the desirable reduction in inequalities of incomes. Again, when underground activities like smuggling etc. could not be taxed, the Government will impose higher taxes on officially sanctioned activities.

Further, the tax evasion will also equally enjoy the public services without paying the due contribution; to that extent also social enquiry is undermined. The honest have to bear high tax burden to make up for the deficit in revenue caused by the tax evasion of black money makers.

5. Widening the Gap between the Rich and the Poor

Growth of the black economy causes regressive distribution of income in the society. When the black money grows faster, rich becomes richer and the poor become poorer. By way of concentration of income and wealth in few hands, the black money widens the gap between the rich and the poor.

6. Lavish Consumption Spending

Black money is disposed off by lavish spending on travels and tours, entertainment, ostentatious articles, financing of extravagant elections etc. This has also lead to many social evils and deteriorated the values of life of the common people.

7. Distortion of Production Pattern

The black money has altered the choice coefficients in the market in favor of luxuries, which lead to the diversification of productive resources from essential goods to the non-essential goods.

8. Distribution of Scarce Resources

Black money holders are always in a position to put their prior claim over the scarce goods in the market due to their readiness and ability to pay more, thereby depriving the honest and poor people from their legitimate share. This obviously reduces the net economic welfare of the Indian society at large.

9. Deteriorate the General Moral Standards of the Society

Black money is largely responsible for the deterioration of general moral standards of the society. Black income generation implies a deviation from the accepted norms in society and from the point of view of the society is unethical.

Socially, we can say that the structure and ethos of a society undergoes a massive change. Social values of honesty, hard work, thrift and simplicity get eroded. Even the political institutions and organizations lose their credibility as they also gradually become a part of the entire system of black income generation.

10. Average Effect on Production

As a consequence, the consumption pattern is titled in favor of the rich and elite, at the cost of encouraging production of articles of mass consumption. A rise in overall consumption leaves fewer resources for investment in priority areas, having an adverse effect on production.

Measures taken by Government to tackle Black Money

There is no reliable information about the money of Indians in undisclosed bank accounts outside the jurisdiction of the country. There are various estimations based on various assumptions and presumptions which may not be correct. Further there is a marked difference in the amount of these estimates. During the Budget Speech of 2012, the Finance Minister announced that he proposes to lay on the table of the House a white paper on black money in the current session of the Parliament.

The Government has commissioned a study, inter-alia, on estimation of unaccounted income and wealth both inside and outside the country. The study is being conducted by three Institutes separately namely:

a) National Institute of Public Finance and Policy (NIPFP);

b) National Institute of Financial Management (NIFM); and

c) National Council of Applied Economic Research (NCAER).

Given the complexities inherent in quantification of unaccounted income and wealth both inside and outside the country, it is likely to take some more time for the finalization of these reports. Memorandum of understanding has been signed between CBDT and each of three institutes on 21.03.2011. The study will be completed within a period of 18 months from the date of MOU.

Government has formulated a five pronged strategy to tackle the menace of black money which is as below:

(i) Joining the global crusade against black money,

(ii) Creating an appropriate legislative framework,

(iii) Setting up institutions for dealing with Illicit Funds,

(iv) Developing systems for implementation (new manpower policy); and

(v) Imparting skills to the manpower for effective action (constant training for skill development).

 


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