Money Laundering : Global Problem Case Presentation Essay

MONEY LAUNDERING : GLOBAL PROBLEM CASE PRESENTATION AS PART OF LEGAL ASPECTS OF BUSINESS , MBA Money laundering is the process of concealing illicit sources of money or in simple language it is the process of washing dirty money (money earned through illegal activities) to make it appear to be legitimate. Now question arises that who launders the money? No doubt, it is always launder by criminals. And who helps the criminals to launders the money is also a money launder. Money laundering is the dynamic that enables criminal activity of all descriptions to grow and expand. INTRODUCTION Money laundering is the process of concealing illicit sources of money or in simple language it is the process of washing dirty money (money earned through illegal activities) to make it appear to be legitimate. Now question arises that who launders the money? No doubt, it is always launder by criminals. And who helps the criminals to launders the money is also a money launder. Money laundering is the dynamic that enables criminal activity of all descriptions to grow and expand. As per Cambridge Dictionary, definition of money laundering is â€Å"The crime of moving money that has been obtained illegally through banks and other businesses to make it seem as if the money has been obtained legally.† If we look at historical aspect of money laundering it is not a new concept. There are historical evidences that in China, merchants would hide their wealth from rulers (4000 BC). Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996, the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the Financial Action Task Force on Money Laundering (FATF), an intergovernmental body set up to combat money laundering, stated that â€Å"overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard†. Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance. Mechanism of Money Laundering: There are 3 stages of money laundering: 1. Placement Stage: At this stage launderer introduces the illegal money into the legal financial system. It could be done to deposit money into financial institutions by various methods. 2. Layering stage: At this stage launderer engages in movements of funds to distance them from their source. Various financial instruments are purchased and resale many times especially through Shell companies and financial institutions. 3. The Integration Stage: At this stage, the funds re-enter the legitimate economy. Then launderer may choose to invest the funds into real estate, luxury assets, or business ventures. Methods of money laundering: The methods by which money may be laundered are varied and can range in sophistication 1. Hawala 2. Shell Corporation and co. 3. Structuring 4. Bulk cash smuggling 5. Trade based laundering 6. Round tripping 7. Bank capture 8. Casinos 9. Real estate 10. Black salaries 11. Fictional loans 12. Tax amnesties REGULATORY FRAMEWORK: premble: The prevention of Money Laundering Act, 2002 (PMLA) was enacted in 2003 and brought in to force with effect from 1st July 2005 to prevent money laundering and to provide for attachment, seizure and confiscation of property obtained or derived, directly or indirectly, from or involved in money laundering and for matters connected therewith or incidental thereto. Necessary Notifications/Rules under the said Act were published in the Gazette of India on July 01, 2005. Pursuant to the recommendations made the Financial Action Task Force on anti- money laundering standards, SEBI has issued a master circular No. CIR/ISD/AML/3/2010 dated December 31, 2010 on anti-money laundering/ Combating the Financing of Terrorism (CFT) in line with the FATF recommendations and PMLA Act, 2002. As per the Guidelines on Anti Money Laundering standards notified by SEBI, All registered intermediaries have been advised to ensure that proper policy frameworks are put in place. The objective is to ensure that we identify and discourage any money laundering or terrorist financing activities and that the measures taken by us are adequate enough to follow the spirit of the Act and guidelines As per the provisions of the PMLA, Intermediary includes a stockbroker, sub-broker, share transfer Agent, banker to an issue, trustee to a trust deed, registrar to an issue, asset management company, depository participant, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with the Securities market and registered under section 12 of the Securities and Exchange Board of India Act,1992(SEBI Act) shall have to adhere to client account opening procedures and maintain records of such transactions as prescribed by the PMLA and Rules notified there under. SEBI has issued necessary directives vide circulars from time to time, covering issues related to Know your Client (KYC) norms, Anti- Money Laundering(AML), Client Due Diligence(CDD) and combating Financing of Terrorism (CFT). The directives lay down the minimum requirements and it is emphasized that the intermediaries may, according to their requirements, specify additional disclosures to be made by clients to address concerns of money laundering and suspicious transactions undertaken by clients. Obligations under Prevention of Money Laundering [PML] Act 2002 Section 12 of PML Act 2002 places certain obligations on every Financial Institution/Intermediary/ banking company which include: (i) Maintaining a record of prescribed transactions. (ii) Furnishing information of prescribed transactions to the specified Authority (iii) Verifying and maintaining records of the identity of the investors/customers (iv) Preserving records in respect of (i), (ii), (iii) above for a period of 10 years from the date of cessation of transactions i.e, the date of termination of account or business relationship between the client/ investor and the intermediary Legal highlights of PML Act 2002: * Special courts: The trial for the offences mentioned in the act are conducted by a special court, also called â€Å"PMLA Court†. The Central Government (in consultation with the Chief Justice of the High Court), designates a Sessions Court as Special Court. Any appeal against order passed by PMLA court can directly be filed in the High Court. * Punishment: Punishable with rigorous imprisonment from three years to seven years. He could also be liable to fine of upto 5 lakh. * Burden of proof: A person, who is accused of having committed the offence of money laundering, has to prove that alleged proceeds of crime are in fact lawful property OBJECTIVE OF PML Act 2002: The main objectives of the PMLA are as follows: 1. To have a proper Customer Due Diligence (CDD) process before registering clients. 2. To monitor/maintain records of all cash transactions of the value of more than Rs.10 lakhs. 3. To maintain records of all series of integrally connected cash transactions within one calendar month. 4. To monitor and report suspicious transactions. 5. To discourage and identify money laundering or terrorist financing activities. 6. To take adequate and appropriate measures to follow the spirit of the PMLAct 2002. Current Issue of money laundering by Indian banks: The on-camera sting carried out by website cobrapost.com has not only brought into focusthe presence of black money in our economy but also the methods used to convert it into white. Estimates of black money circulating in the system range between 10-30% of the actual size of the economy: Rs 88 lakh crore. As holding large chunks of cash is cumbersome, the search is always on for ways to convert it into mainstream assets. From the expose carried by cobrapost, it looks like even Indian banks are being used to launder cash of their prospective clients, taking advantage of the lax know-your-client(KYC) procedures. Video-clippings showed some employees of select branches of ICICI Bank, HDFC Bank and Axis Bank offering full support to bringing cash into the mainstream. Analysis: A person with black money is told by the customer relations executives to deposit cash in any bank and prepare demand draft (DD) in favor of single-premium insurance products. KYC norms are generally flouted while making DDs. Or clients were advised to make deposits in small amounts, generally below Rs 50000, for which KYC norms are less stringent or the compliance is ignored. Then this investment is routed in products with a horizon of seven or more years as tax authorities have statute limitations of asking assesses to produce documents going back beyond six years. The insuranceproducts chosen are such that the proceeds are tax-free in the hands of the investor. Thus, a person can easily get away without paying any tax on his black moneyand convert it into white. Second, investors can also use the recent window of investing an amount of Rs 20000 per fund house per year. On the face of it, Rs 20000 may look small. But considering there are 40 asset management companies (AMCs) in India, an investor can put in as much as Rs 8 lakh a year in mutual funds and hold the investment beyond six years to escape the tax authorities. A family with five heads can invest Rs 40 lakh in mutual funds in bits of Rs 20000 to conveniently convert the cash into white seven years down the line. As the amount per investment is low, the transaction may skip the taxman’s lenses. Also, those investing up to Rs 50000 per year through the systematic investment plan have been kept out of the KYC net. Such loopholes are being used for money laundering. Current norms state that investors can become KYC-compliant while making investment. The investment is accepted even if the KYC information is incomplete. Thus, a person can deliberately give wrong information so that the application is rejected. But this does not affect his investment. The form will have the remark ‘KYC not OK’, which hardly matters as he can still redeem the proceeds. An investor can repeat the procedure by submitting wrong KYC for each of his investment. Bank officials are interested in such clients as these investors have few options and tend to invest in insurance products where banks earn hefty commissions. Also, a large portion of the commissions come back to the employees as performance incentives. The staff are under constant pressure to meet sales quotas as their jobs and career growth are at stake. Thus, they resort to mis-selling and money laundering to achieve their internal targets. Many private banks are also focusing on non-core areas like sales of financial instruments to boost their non-core banking income. Very often a bank’s strength is judged by the fee-based income as it is unaffected by the interest-rate cycle. On the face of it, the KYC rules for transactions in financial instruments put in place by regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) may look quite stringent. But the cobrapost investigation has revealed the loopholes. Thus, Sebi and the RBI should take the incident seriously and see how KYC can be made leak-proof. Punishment for flouting norms should be stricter for all financial intermediaries. References: 1. Dirty Dealing, the untold truth about global money laundering: Peter Lilley 2. Money laundering, An insight into the dark world of financial frauds :BuhreLal 3. Capital Market : April 1-14 2013 4. PML Act 2002 5. Cambridge dictionary