ISSUE & CHALLENGES OF MONEY LAUNDERING In India MBA- Dual Specialization II- semester 2013-2014

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Table of Contents

I. Meaning II. The Working III. Characteristics IV. V.

VI.

Process Consequences
Money Laundering - An Organized Crime

VII. VIII. IX. X. XI.

The Basle Principles The Indian Scenario Current News Conclusion Bibliography

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Money Laundering In India The Concept:

The process of creating the appearance that large amounts of money obtained from serious crimes, such as terrorist activity, etc., originated from a legitimate source. Money laundering is a way of converting black money into white through any unscrupulous bank transaction.

How Money Laundering Works?

Money laundering is a serious charge. The rise of global financial markets makes money laundering easier than ever. Money laundering is the process of disguising this illegally obtained money as legitimate profits, which you can then use without attracting attention. The most common way to do this is for criminals to own some kind of legitimate business, normally called a "front". They can then disguise their illegal money as profits obtained by this business. Otherwise, they can't use the money because it would connect them to the criminal activity, and lawenforcement officials would seize it. Characteristics:

it is a group activity, in that it is carried out often by more than one person; it is a criminal activity which is long term and continuing; it is a criminal activity which is carried out irrespective of national boundaries; it is large scale; and it generates proceeds which are often made available for licit use.

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Process of Money Laundering:

Experience has shown that money laundering is generally carried out in three phases, namely placement, layering, and integration.

I.

Placement stage, which is the initial stage, is the introduction of criminally tainted money into the financial system. Layering stage is the dissociation of the dirty money from their source through a series of transactions to obscure the origins of the proceeds. These transactions may involve different entities such as companies and trusts as well as different financial assets such as shares, securities, properties or insurance products. Integration stage is the use of the funds in the legitimate economy through for instance, investment in real estate or luxury assets.

II.

III.

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Consequences of Money Laundering:

Economic Distortions

Erosion of Financial Sector

Reduction in Government Revenue

Socio-Economic Costs

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 Economic DistortionsMoney laundering impairs the development of the legitimate private sector through the supply of products priced below production cost, making it therefore difficult for legitimate activities to compete. Criminals may also turn enterprises which were initially productive into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy.

Erosion of Financial SectorWhile the financial sector is an essential constituent in the financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may damage the reputation of financial institutions involved in the scheming resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money laundering may also result in bank failures and financial crises. Reduction in Government RevenueMoney laundering also reduces tax revenue as it becomes difficult for the government to collect revenue from related transactions which frequently take place in the underground economy. Socio-economic costsThe socio-economic effects of money laundering are various because as dirty money generated from criminal activities are laundered into legitimate funds; they are used to expand existing criminal operations & finance new ones. Further to that money laundering may lead to the transfer of economic power from the market, the government and the citizens to criminals, abetting therefore crimes and corruption.

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Money Laundering - An Organized Crime:

Money Laundering has a close nexus with organized crime. Money Launderers accumulate enormous profits through drug trafficking, international frauds, arms dealing etc. Cash transactions are predominantly used for Money Laundering as they facilitate the concealment of the true ownership and origin of money. It is well recognized that through the huge profits the criminals earn from drug trafficking and other illegal means, by way of money laundering could contaminate and corrupt the structure of the State at all levels, this definitely leads to corruption. Further, this adds to constant pursuit of profits and the expansion into new areas of criminal activity. Through money laundering, organized crime diversifies its sources of income and enlarges its sphere of action. The social danger of money laundering consists in the consolidation of the economic power of criminal organizations, enabling them to penetrate the legitimate economy. In advanced societies, crime is increasingly economic in character. Criminal associations now tend to be organized like business enterprises and to follow the same tendencies as legitimate firms; specialization, growth, expansion in international markets and linkage with other enterprises. The holders of capital of illegal origin are prepared to bear considerable cost in order to legalize its use.

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The Basle Statement of Principles The Committee on Banking Regulations and Supervisory Practices of the G 10 at a meeting in Basle in Switzerland, in December 1988, evolved a set of principles to address the dangers posed by Money Launderers. The committee was formed by the Central Bank Governors of Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland and United States. These principles, which are now known as the Basle Principles, deal with the prevention of criminal use of the banking system for the purpose of Money Laundering. Recommendations for banks and other financial institutions have been set out in the Basle Principles so that these institutions can protect themselves against Money Laundering. The Basle Statement of Principles covers all aspects of laundering through the banking system. The Basle Principles suggest policies and procedures in four areas to curb Money Laundering as shown below:

I. II. III. IV.

Customer Identification Compliance with Laws Cooperation with Law Enforcement agencies Adherence to the Statement.

I.

Customer IdentificationThis reemphasizes the adage "Know your Customer" (KYC). KYC requires that banks should make reasonable efforts to determine the customer's true identity, and must introduce effective procedures for verifying the bonafides of new customers.
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II.

Compliance with LawsThe laws and regulations pertaining to financial transactions as enacted in different banking related statutes must be observed. Banks should not offer services or provide active assistance in case of transactions where they have good reason to suppose that these are associated with Money Laundering activities.

III.

Co-operation with Law Enforcement AuthoritiesBanks should co-operate fully with national law enforcement authorities to the extent permitted by specific local regulations concerning customer confidentiality.

IV.

Adherence to the StatementAdhering to the Statement implies that banks need to adopt policies that are consistent with the Statement and ensure that all staff members are informed of the banks policy in this regard. Some key factors in promoting adherence to the Statement of Principles are staff training and implementing specific procedures for customer identification and retaining internal records of transactions.

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Money Laundering: The Indian Scenario

With increasing sophistication in the use of technology for transfer of funds and given the fact that there has been considerable liberalization and progressive dismantling of controls in the regulatory framework in India, banks in India need to be in a state of high alert so that they can steer clear of Money Laundering. It is important to remember that banks and financial institutions are both transmitters of money and regulators of the flow of money. In India, we already have certain prudent banking practices which check the proliferation of Money Laundering activities in the country. Some of these practices are outlined below:

Identification of prospective clients is carried out prior to the opening of a bank account by obtaining proper introduction. This procedure partly addresses the requirement of KYC. Criminal investigation is allowed in banking transactions in India. For example, the Income Tax Department can call for information relating to customers accounts and transactions. Erring accounts can be frozen. This addresses the Basle Principle on Compliance with legislation and law enforcement agencies.

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Current News:
Recently the topic came into the highlight in India, as an Indian journalist has claimed the involvement of three major banks of India in money laundering. On March 14, 2013, Cobrapost had released the contents of video recording of officials of HDFC, ICICI and AXIS Bank allegedly agreeing to receive unverified sums of cash and put them in their investment schemes and benami accounts in violation of anti-money laundering laws.

Cobraposts Mega Expose:

Major Indian Private Sector Banks, HDFC Bank, ICICI Bank and Axis Bank are blatantly running a huge nation-wide money laundering racket. The banks, after the release of the report on television, were prompt enough to issue statements promising internal investigations.

The report states:

A Cobrapost pan-India undercover investigation spanning several months, discloses a vast, nation-wide money laundering racket being run by HDFC Bank, ICICI Bank and Axis Bank. The unashamed illegal doings by these banks is channelizing vast amounts of black money into the regular banking system as laundered white money. The investigation, conducted across dozens and dozens of branches of these banks and their insurance associates, across all five zones of the country, revealed these shocking facts: That these money laundering practices are part of a standard set of procedures within these banks; These money laundering services are being openly offered to even walk-in customers who wish to launder their illicit money;
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 A variety of options for laundering ill-gotten cash are being offered brazenly. These money laundering services are being offered practically as a standard product across the country. The investigation finds the banks and their managements systematically and deliberately violating several provisions of the Income Tax Act, Foreign Exchange Maintenance Act (FEMA), RBI regulations, Know Your Customer (KYC) norms, the Banking Act and Prevention of Money laundering Act (PMLA), with absolute disregard to consequences, driven by their desire to boost cheap deposits and thereby increasing their profits.

How these banks launder black money?

The ways these major banks suggested to transform the black money into white were both imaginative in their range and brazen in their approach. This brought to the fore a modus operandi that is tailored to rake in vast amounts of black money in the form of illegal deposits, insurance and investment products, sold by these banks. All these creative means make the dirty money squeaky clean without the regulatory authorities ever getting a whiff of what they are doing. Here is a gist of what the various bankers suggested to help the politician launder his illegitimate money: Accept huge amounts of cash and invest it in insurance products and gold. Open an account to route the cash into various investment schemes of the bank. Do it even without the mandatory PAN card or adhering to the KYC norms laid down by RBI.

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 Split the money into tranches to get it into the banking system without being detected. Use accounts of other customers to channelize the black money into the system for a fee. Get demand drafts made for the client either from their own banks or from other banks to facilitate investment without it showing up in the clients account. Keep the identity of the investor/depositor secret. Open multiple accounts and close them at will to facilitate the investment of black money. Allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash. Personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine. Use provisions like Form 60 to deposit the illegitimate cash into the account to route it into investment. Help the client to transfer black money abroad through NRE (Non-Resident External)/NRO (Non-Resident Ordinary) account; transfer the money telegraphically or through means other than regular banking procedures. After the accusation made by the journalist, the Banks said they were investigating allegations of widespread money laundering practices at their branches. The bank further said: "We want to assure our customers and all stakeholders that we are committed towards adherence to the high standards of business conduct, which is expected of us. We have constituted a high level inquiry
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committee to investigate into the matter and submit its findings in 2 weeks.

Audit by RBI:
RBI sends audit teams to three banks comprehensive scrutinize covering both, Head Office and branches of three private sector banks, namely, ICICI Bank, HDFC Bank and Axis Bank.

Statement by RBI- No Money Laundering Involved In Cobrapost Expose:

The Reserve Bank of India Deputy Governor KC Chakrabarty has given a clean chit to private banks. RBI also sought to downplay the money-laundering allegations, saying the country has a "perfect" system to prevent such offences and that not a single such transaction took place in the sting operation. "Allegations do not mean flouting norms. There is not a single transaction which has taken place. KYC violations will happen in any system. "Allegations do not mean flouting norms. There is not a single transaction which has taken place. KYC violations will happen in any system. These are all transactional issues and have nothing to do with money laundering," Deputy Governor KC Chakrabarty told reporters after a meeting with bankers in Mumbai.

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Conclusion:
Money Laundering is a serious, highly sophisticated and global criminal activity. The degree of organization displayed in Money Laundering is a major cause for concern of banks and bank supervisors. Banks and other financial institutions can protect themselves against Money Laundering by implementing an effective KYC Policy, knowing their customers, checking the source of funds, monitoring the conduct of accounts, and by learning to recognize suspicious/ irregular transactions.

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Bibliographyhttp://ibnlive.in.com http://www.rediff.com http://answers.yahoo.com http://m.indianexpress.com http://www.indianmba.com http://www.fiumauritius.org http://www.businessworld.in http://www.mapsofindia.com http://www.investopedia.com http://www.moneycontrol.com http://www.howstuffworks.com http://www.laundryman.u-net.com http://importantbankingnews.blogspot.in http://missiongalacticfreedom.wordpress.com

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