CONCEPT OF MONEY LAUNDERING

INTRODUCTION

Money laundering is the process by which large amounts of illegally obtained money, from drug trafficking, Terrorist activity, or other serious crimes are given the appearance of having originated from a legitimate source.

But in simple terms, it is the conversion of black money into white money. This takes one back to cleaning the huge piles of cash. If done successfully, it allows the criminals to maintain control over their proceeds and ultimately provide a legitimate cover for their source of income.

Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the
authorities that sudden wealth brings from illegal activities.

Money laundering is popularly known as Hawala transactions. It gained popularity during early 1990s when many politicians were caught in its net. Hawala is an alternative or parallel remittance system. “Hawala” is an Arabic word meaning the transfer of money or information between two persons using a third person.

MONEY LAUNDERING

What is illegal money?

 Illegal money We can understand the money which has been obtained from doing illegal activities ( proceeds of crime ) like Murder, Extortion, bribery, Drug trafficking, Kidnapping, etc. The process of converting such proceeds of crime into legal and white money is known as money laundering. Illegal money can also be referred to as dirty money which can easily be cleaned by applying various tactics of money laundering.

In India, there is a law made for preventing such activities of money laundering known as the Prevention of money laundering Act, 2002. This law is enforced by the Enforcement Directorate in India.

Money laundering has an adverse effect on the economy. It can erode the nation’s wealth by fluctuating the demand and supply of cash, making interest and exchange rates more volatile.

Concept of Money Laundering

Money laundering is a sophisticated crime not to be taken very seriously at first glance by anyone in society. Compared to street crimes, it is a modern crime. At times people also refer to it as a victimless crime but the reality is that it is not a crime against a particular individual, but it is a crime against nations, economies governments, the rule of law, and the world at large. Money laundering has become a worldwide menace.

The goal of a large number of criminal acts is to generate profit for the individual or group that carries out the act and then hide either the source or the destination of money. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

Some of the crimes like-illegal arms sales, smuggling, corruption, drug trafficking, and the activities of organized crime including tax evasion generate huge sums. Insider trading, bribery, and computer fraud schemes also produce large profits and create the incentive to legitimize ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. Otherwise, they can’t use the money because it would connect them to criminal activity, and law enforcement officials would seize it.

If done successfully, it allows the criminals to maintain control over their proceeds and ultimately provide a legitimate cover for their source of income. Where criminals are allowed to use the proceeds of crime, the ability to launder such proceeds makes crime more attractive.

Money laundering involves three distinct processes, namely

1). Placement: This is the very first stage in which the proceeds of crime are injected into the formal financial system.

2). Layering: In the second stage, the money which is injected into the financial system is spread or moved over the various transactions in different accounts and different countries, thereby it becomes difficult to trace the source and origin of money.

3). Integration: In the last stage, money enters the financial system in such a way that the original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving it as clean money.

How can money laundering be stopped?

Money laundering is an illegal activity and there are various governmental measures to stop the same. People or entities involved in money laundering majorly rely on fake exports to carry out these fraudulent fund transfers. It is also done by spending on expensive artwork & paintings, stock markets, etc. Here are some of the major action items that need to be in place to stop money laundering:

  • Money laundering may especially surface in an unorganized and underdeveloped market. Therefore, such economies need to have strong controls and checks.
  • A country’s government must design and implement policies to discourage tax evasion by companies. 
  • Every monetary transaction, whether it is related to production or consumption, must be tracked and monitored for illegal activity.
  • Enhanced due diligence by banks is another way to identify money laundering cases.
  • Knowing customers and their processes before dealing with them is also an important measure to be implemented by banks and financial institutions.

Famous money laundering cases in India

ABG Shipyard fraud case

A Gujarat-based company, ABG Shipyard Ltd. allegedly defrauded some Indian banks of Rs. 22,842 crores. Through a network of transactions, the company cheated a banking consortium of nearly 28 banks that involved the State Bank of India (SBI) and ICICI Bank. 

In January 2019, with the help of a forensic audit conducted by SBI under the guidance of Ernst and Young, it was found that the money laundering was done over a total of five years, starting from April 2012 up to July 2017. 

As per the Central Bureau of Investigation (CBI) investigation, ABG Shipyard Ltd first took loans from various banks and managed to divert funds to be used for other purposes. The company fraudulently made investments in many foreign subsidiaries using the loan amounts, purchased assets under different affiliated company names and transferred funds to various related parties

Punjab National Bank – Nirav Modi case

One of the most publicized money laundering cases in India was the Punjab National Bank scam orchestrated by the infamous diamantaires Nirav Modi and Mehul Choksi. It amounted to defrauding the bank of USD 2 billion. 

This illegal management of funds was conducted by at least 50 employees of the Punjab National Bank of a single branch that is located in Fort, Mumbai. These employees are said to have issued no less than 1200 illegal bank guarantees that allowed the diamantaires to get large amounts of foreign credit. 

While the Indian authorities have been trying hard to extradite these two fraudsters, Nirav Modi is still in Wandsworth Prison, awaiting extradition trial and Choksi is settled in Cuba. As a ray of hope, the Enforcement Directorate got back approx. USD 147 million worth of jewelry belonged to various foreign entities owned by Nirav Modi and Mehul Choksi. 

ICICI Bank – Videocon laundering case

Chanda Kochhar, the former CEO and MD of ICICI Bank along with her husband, Deepak Kochhar are currently being investigated by the ED for transactions between Videocon Group and NuPower Renewables Pvt. Ltd., 

This money laundering case was identified back in 2016, when Arvind Gupta, an investor in ICICI Bank and Videocon Group, highlighted suspicious transactions between the two companies. He eventually wrote a letter to various authorities, including the Prime Minister and the RBI Governor, to demand an investigation on the conflict of interest. However, this was not taken up until 2018, when a second whistle-blower raised similar complaints against Chanda Kochhar. 

Mrs. Kochhar was later questioned about sanctioning loans of Rs. 1,875 crores from ICICI Bank directly to Videocon Group, in exchange for illegal compensation from her husband’s businesses. The ED managed to attach about Rs. 78 crores worth of assets belonging to the Kochhar’s apart from arresting both Deepak and Chanda Kochhar in September 2020. Both these individuals were granted bail in 2021 by the High Court of Bombay.

Yes Bank – DHFL money laundering

This money laundering case involved Rana Kapoor, former CEO of Yes Bank, who was also its founder. During his tenure with the bank, he allegedly offered various credit facilities to Dewan Housing Finance Limited (DHFL) to gain substantial monetary benefits in return. 

He gained kickbacks of more than Rs. 900 crores from DHFL’s promoter. These were transferred in the form of loans to a wholly owned company in the name of Rana Kapoor’s daughters. He also got a bungalow in Delhi from Avantha Group’s promoter at an undervalued rate. 

A detailed investigation revealed that there were many irregularities in the loans approved by Mr. Kapoor to DHFL. The ED therefore attached properties worth nearly Rs. 2,203 crores, including Mr. Kapoor’s personal property in 2020. He, along with his family, has been placed under arrest on different occasions throughout the investigation. In 2022, however, he and his wife were granted bail, along with Avantha Group promoter Gautam Thapar. 

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