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Into India’s Anti-Money Laundering Regime

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The phrase “Money Laundering” is very similar to its literal meaning. The practice of cleaning unclean money and turning it into relatively safer assets to hide the initial origin sums up the essence of money laundering. INTERPOL has defined money laundering as: “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”. To characterize the nature of money laundering as a criminal activity, it would be essential to understand that the scope of its entire ambit is very sophisticated. It would also be important to consider that money laundering does not only safeguard the illegally generated money but in a way, provides a path for the criminal activity which produced the money to sustain. Hiding illegal assets and further converting them into cleaner ones would in the process require a plenty of networking, making it into an organized crime of economic character.

Money Laundering in Stages:

As a highly sophisticated crime to circumvent around stringent national as well as international laws, the whole process takes place in three stages to keep the relevant authorities from getting an idea of dirty play[1]. The first stage of money laundering is called placement where large hoard of money is let go of from bulk into legitimate financial institutions(usually in smaller pieces)  to attract less attention. The second stage of money laundering is called “layering” and it is what might be the main and the most difficult part of the activity. It includes a plethora of bank transactions, a number of which are cross country and investment of money into luxury or other items with increasing market   value. The crux of this stage is to induce chaos in the potential tracking of the original sum so that it can be as hard as possible to hide the same.

The last stage or “integration” is quite indispensible from the other two stages, where the now laundered money is returned to the launderer, from a clean source and can be used by them without a risk of the authorities coming to know the actual origin of the money. Under this process, a final bank transfer into the account of an unknown institution in which the launderer is investing in exchange for a cut of the profits.  

India’s anti-Money Laundering framework:

Prevention of Money Laundering Act, is a special statute whose aim is to prevent money-laundering and to provide for confiscation of property derived from or involved in money laundering. The confiscated property is managed by an Administrator who will act in accordance with the instructions of the Central Government. The Act levies heavy punishments upon the offenders and has a very calculated structure consisting of 10 chapters run by 75 sections. A very peculiar part of the Act is that it requires all the banks and other financial institutions dealing with the public to maintain all the records of their customers’ verification details.

It further empowers the adjudicating authority under the act to survey and scrutinize. The Authority may ask any of its officials to carry on the search, collect all relevant information, place identification marks and thereafter send a report to it.  

India also setup the Financial Intelligence Unit (FIU-IND), an agency which majorly looks out for financial crimes and acts as an interface between financial sector and law enforcement agencies. The international coordination of this agency was one of the reasons why fugitive Nirav Modi’s 11,420 crore INR deposited in two banks in Belgium were identified and it further furnished all the relevant details to the Enforcement Directorate because of which the same were frozen[2].

Challenges in dealing with money laundering:

The technological advancements of this era can make the encryption of money transfers very hardened at times. The transferer as well as the transferee can have their whereabouts and identities entirely anonymous using cryptocurrency, decryption of which would require the expertise of cyber crimes related authorities. Thus, a more robust and integrated framework to address contemporary developments in the technological sphere is needed. Some countries also refrain from compromising the identity of suspicious clientele which makes it even more difficult to combat money laundering, as such banks attract multitudinous defaulters as they make themselves into a safe haven for such.

Hawala transactions probably make the biggest challenge for restraining money laundering, as an informal, tax or rather, authority evasive method of international money transfer. In such transactions, there is literally no movement of money, as an individual pays the sum they want transferred to one Hawala Dealer in the individual’s jurisdiction and that dealer would usually give a code to that individual and at the same time the dealer will also intimate another Hawala dealer in the jurisdiction in which the money is to be transferred. The sender is expected to convey the code to the receiver who would then accost the dealer in his jurisdiction and receive the sum. The documentation is utterly unmonitored and as such it makes it easier to mask criminal actions.

Stringent punishments for the crime and impeccable coordination between centre and state agencies to tackle the same would be likely make an upgrade in the existing framework. India’s anti-money laundering regime has significantly strengthened, keeping up with the International standards yet it still needs to tackle the decentralized and illegitimate Hawala transfers as well as a better cross-agency cooperation for the technological bottlenecks.

-Osho Dubey, Writer

Bharat Bhagya Vidhata.


[1] Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of Money Laundering: An Application of the Principal-agent Model” The Pakistan Development Review, Vol. 4 Proceedings PARTS I and II Twenty-second Annual General Meeting and Conference of the Pakistan Society of Development Economists Lahore, December 19-22, 2006 (Winter 2006), pp. 1117-1133.

[2] Noronha, Neil. Follow the Money: India Should Become an International Leader in Financial Intelligence. Carnegie Endowment for International Peace, 2018, http://www.jstor.org/stable/resrep20721.

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