MONEY LAUNDERING

Money laundering is generally regarded as the practice of

engaging in financial transactions to conceal the identity,
source, and/or destination of illegally gained money by which
the proceeds of crime are converted into assets which appear to
have a legitimate origin.

In the United Kingdom the statutory definition is wider. It is

common to refer to money legally obtained as “clean”, and
money illegally obtained as “dirty”.
DEFINITION
Money laundering is the process by which large
amounts of illegally obtained money (from drug
trafficking, terrorist activity or other serious crimes) is
given the appearance of having originated from a
legitimate source.
THE MONEY LAUNDERING PROCESS
Money laundering is not a single act but is in fact a
process that is accomplished in three basic steps.
These steps can be taken at the same time in the
course of a single transaction, but they can also appear
in well separable forms one by one as well. The steps
are:-
Placement;
Layering; and
integration
There are also common factors regarding the wide range
of methods used by money launderers when they
attempt to launder their criminal proceeds. Three
common factors identified in laundering operations
are;
the need to conceal the origin and true ownership of the
proceeds;
the need to maintain control of the proceeds;
the need to change the form of the proceeds in order to
shrink the huge volumes of cash generated by the initial
criminal activity.
1) Placement –
At this stage, the launderer inserts the dirty money
into a legitimate financial institution. This is often in
the form of cash bank deposits. This is the riskiest
stage of the laundering process because large
amounts of cash are pretty conspicuous, and banks
are required to report high-value transactions.
2) Layering
- Layering involves sending the money through various financial
transactions to change its form and make it difficult to follow.
Layering may consist of several bank-to-bank transfers, wire
transfers between different accounts in different names in
different countries, making deposits and withdrawals to
continually vary the amount of money in the accounts, changing
the money's currency, and purchasing high-value items (boats,
houses, cars, diamonds) to change the form of the money. This is
the most complex step in any laundering scheme, and it's all
about making the original dirty money as hard to trace as
possible.
Typically, layers are created by moving monies in and out of the
offshore bank accounts of bearer share shell companies through
electronic funds' transfer (EFT). Given that there are over
500,000 wire transfers - representing in excess of $1 trillion -
electronically circling the globe daily, most of which is
legitimate, there isn’t enough information disclosed on any
single wire transfer to know how clean or dirty the money is,
therefore providing an excellent way for launderers to move
their dirty money. Other forms used by launderers are complex
dealings with stock, commodity and futures brokers. Given the
sheer volume of daily transactions, and the high degree of
anonymity available, the chances of transactions being traced is
insignificant.
3) Integration
- At the integration stage, the money re-enters the
mainstream economy in legitimate-looking form -- it appears
to come from a legal transaction. This may involve a final
bank transfer into the account of a local business in which
the launderer is "investing" in exchange for a cut of the
profits, the sale of a yacht bought during the layering stage
or the purchase of a $10 million screwdriver from a
company owned by the launderer. At this point, the criminal
can use the money without getting caught. It's very difficult
to catch a launderer during the integration stage if there is no
documentation during the previous stages.
 Legislation
The Prevention of Money-Laundering Act, 2002 came into effect on 1
July 2005. Section 3 of the Act makes the offense of money-laundering
cover those persons or entities who directly or indirectly attempt to
indulge or knowingly assist or knowingly are party or are actually
involved in any process or activity connected with the proceeds of
crime and projecting it as untainted property, such person or entity
shall be guilty of offense of money-laundering.

Section 4 of the Act prescribes punishment for money-laundering with

rigorous imprisonment for a term which shall not be less than three
years but which may extend to seven years and shall also be liable to
fine which may extend to five lakh rupees and for the offences
mentioned [elsewhere] the punishment shall be up to ten years.
Section 12 (1) prescribes the obligations on banks, financial
institutions and intermediaries (a) to maintain records detailing the
nature and value of transactions which may be prescribed, whether
such transactions comprise of a single transaction or a series of
transactions integrally connected to each other, and where such
series of transactions take place within a month; (b) to furnish
information of transactions referred to in clause (a) to the Director
within such time as may be prescribed and t records of the identity
of all its clients. Section 12 (2) prescribes that the records referred
to in sub-section (1) as mentioned above, must be maintained for
ten years after the transactions finished.
The provisions of the Act are frequently reviewed and various
amendments have been passed from time to time.
The recent activity in money laundering in India is through
political parties corporate companies and share market.
 Fighting money laundering
The first defense against money laundering is the requirement on
financial intermediaries to know their customers—often termed
KYC know your customer requirements. Knowing one's customers,
financial intermediaries will often be able to identify unusual or
suspicious behavior, including false identities, unusual transactions,
changing behaviour, or other indicators of laundering. But for
institutions with millions of customers and thousands of customer-
contact employees, traditional ways of knowing their customers
must be supplemented by technology. Many Companies provide
software and databases to help perform these processes. Bank and
corporate security directors can also play an important role in
fighting money laundering.
Anti-money laundering (AML) software
Anti-money laundering (AML) software is a type of computer
program used by financial institutions to analyze customer data
and detect suspicious transactions. Anti-laundering systems filter
customer data, classify it according to level of suspicion and
inspect it for anomalies. Such anomalies would include any
sudden and substantial increase in funds or a large withdrawal.
In both the United States and Canada, all transactions of
$10,000 or greater must be reported. Smaller transactions that
meet certain criteria may be also be flagged as suspicious. For
example, a person who wants to avoid detection will sometimes
deposit a large sum as multiple smaller sums within a brief
period of time. That practice, known as "structuring," will also
lead to flagged transactions.
 The software flags names that have been blacklisted and
transactions involving countries that are thought to be hostile
to the host nation. Once the software has mined data and
flagged suspect transactions, it generates a report.

Important aspects of AML software:-

 Suspicious Activity Detection
 Know Your Customer (KYC) Management

 Caution / Watch List Management & Checking Of Customers / Prospects

 Customer Risk Categorization

 Link Tracing

 Large Cash Transaction Reporting

 Regulatory Reporting

 KPI / KRI Dashboards for Chief Compliance Officers

 Online AML and List Check for Remittance Transactions

"If you want to steal, then buy a bank".
"Bertolt Brecht"

DIPIN KUMAR P