analysis

Updated: Jan 21, 2019 07:50 IST

Illegitimate money drives the world of crime, and money laundering is the oxygen line that helps it thrive. Money laundering not only affects the people directly associated with it but also has devastating consequences for legitimate businesses, law-abiding citizens and the global economy. While it is difficult to put a monetary value, money laundering undoubtedly costs the nation’s economic progress, security, and social justice.

In simple terms, money laundering is a process of converting tainted or illegitimate money into white or legitimate money. The origin of the phrase money laundering traces back to Al Capone, the US-based infamous Italian mafia in the 1930s. He ran his money laundering business through Laundromat — a place where people washed and dried clothes in slot machines, which is operated by using coins. He mixed the illegal profit he obtained from prostitution and bootlegging with slot coins.

Illegitimate money has many forms. It is black money if it comes from tax evasion, pink money if its source is drugs, and red money if it’s crime. People with illegitimate funds try to conceal its origin so as to hoodwink law enforcing agencies.

The process of money laundering usually has three stages: placement; layering; and integration. It’s called placement if the illegitimate money is in the form of cash. The first use of cash can be done by depositing it in a bank account or giving loan to a friend or making a purchase in cash. In easy terms, the first use of illegitimate cash is termed as placement.

In layering, a paper trail is created so that the origin of the money is concealed. For example, a person deposits illegitimate money in a bank against which he obtains a loan from the bank and purchases a property A. After some time, he sells the property A and purchases properties B and C. This is the second layer. Then he sells B and starts a business. This is layer three. He earns profit from the business and deposits it in the bank to pay back the procured loan.

This is how a money launderer creates layers, making it immensely difficult for investigating agencies to unravel the source of money. Integration is when a number of layers leads to illegitimate money getting integrated into the financial system. It is like onion, each layer leading to another.

Detecting the movement of illegitimate funds in the banking system is a challenging task. However, it is not an impossible one. Information sharing and cooperation between intelligence agencies has helped tighten the noose on several money laundering cases in India. It is, however, difficult in the cases where money laundering structures involve various countries (tax havens), making it cumbersome and time consuming to trace the original ownership of money.

Criminals, financial violators, and international drug mafia had been indulging in money laundering to conceal the money’s origin. Till the 1980s, international drug mafia and crime syndicates enjoyed a free run. No direct evidence could be detected against their top layer as they did not directly commit the crime — they had their foot soldiers for that. In the 1980s, Italy took the issue seriously, and rather than following the crime trail, they followed the money trail. With the USA’s cooperation, it resulted into the conviction of around 350 mafioso in two well known trials, the Maxi case in Italy and the Pizza connection case in the USA. Soon, a number of international initiatives to counter such crimes followed.

•A United Nations convention was held in Vienna (Vienna convention) in 1988 to prevent drug-related money laundering. It sought international cooperation in dealing with cases of money laundering and relaxation in bank secrecy laws to curb the criminal use of financial systems.

•In 1989, the Basel Committee on Banking Supervision decided that banks should assist law enforcement agencies in tackling money laundering.

•Subsequently, in 1989 itself, an intergovernmental body named as Financial Action Task Force (FATF) was created for the purpose of “development and promotion of national and international policies to combat money laundering and terror financing”. India became its member in 2010.

•To enforce the international cooperation, the Egmont Group, consisting of Financial Intelligence Units (FIU) of a number of countries, was started in 1995. It has now 155 members. India joined it in 2007.

Keeping with the international commitment to prevent money laundering, India enacted the Prevention of Money Laundering Act 2002 (PMLA), which came into force on July 1, 2005. The primary agency responsible for enforcing the act is the Directorate of Enforcement. Financial Intelligence Unit (FIU) was set up in 2004 and is responsible for collecting intelligence from the financial sector and sharing it with investigative agencies.

In the next article, I will discuss the adverse impacts of money laundering on the national economy.

Karnal Singh is former chief of enforcement directorate

The views expressed are personal

(This is the first article of a two-part series on money laundering)