Money laundering is one of the biggest concern for every Country in the world. As it is accounted to be USD 1.5 – 2.5 Trillion, which is around 3-5% of the world GDP. This scheme is typically involved in transferring illegal or illegitimate money to Banking System and making it legal or legitimate. Each country is having strict laws against this crime, still the number of cases are increasing.
What is Money Laundering and how is it done?
Money laundering is the process of converting Illegal or Illegitimate money (dirty money) into Legal or Legitimate money (clean money).
The money which is generated from criminal activities like extorsion, drug trafficking, child or women trafficking, prostitution, corruption, tax evasion, frauds, forgery, insider trading, gambling or cash transactions is said to be Illegal or Illegitimate money. This is even called as dirty money and needs to be cleaned to make it Legal or Legitimate.
The term “Money Laundering” was originated from the Mafia group in USA in early 1900’s and gangsters like Al Capone, who bought laundromats to funnel dirty money and mix the cash with legitimate business income. Through this way Capone and other gangsters were hiding Illegal or Illegitimate money from the Government and Authorities and making it clean and Income from Business. In India “Money Laundering” is known by Hawala and Hawala Transactions.
In this method the money is moved in the system in such a way that it is difficult for investigating agencies to trace the source of these funds. The person who handles these transactions or does the manipulations is known as “Launderer”.
According to Prevention of Money Laundering Act, 2002 (PMLA), “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering”.
According to the United States Treasury Department: Money laundering is the process of making illegally-gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the “dirty money” appears “clean”.
There are 4 ways of hiding these illicit funds and introducing them back to the formal economy, such as:
- Through Financial Institutions.
- Physical movement of cash from one place to another or one country to another. This is called as smuggling or Hawala.
- By way of Transfer of Goods via Trade which is also called as Trade Based Money Laundering.
- Investing in Precious Metals, Gems and Jewellery, Real Estate etc.
These were the three ways through which Money Laundering is done and dirty money is converted into clean money. Launderers use either of the ways or mix of any of these or all of these methods during the money laundering process.
1. Converting illicit money into legal money through Financial Institutions:
Money Laundering through Financial Institutions takes place in 3 steps:
- Placement: This is the first step in Money Laundering process wherein the illegitimate or illegal money misrepresented and placed into the circulation through Banking and Financial Systems, shops casinos and other businesses. This money then is deposited into Banking system via multiple accounts by different agents into different accounts in form of cash.
- Layering: This is the second step in Money Laundering process, in this step the launderer conceals the sources of money by way of separating them from their source by making series of multiple and overlapping transactions often using anonymous shell companies. Sometimes these funds are deposited in different investment instruments such as property, stocks, foreign currency, travellers cheques, commodities and accounts abroad. These accounts abroad are maintained usually tax heaven countries or countries which do not reveal the details of their account holders. The ownership of these money and sources are disguised.
- Integration: This is the final step in Money Laundering process, in this step the money is collected in legitimate accounts and returned backed to the economy and financial world as legal money.
2. Physical movement of Cash as Smuggling or Hawala:
Physical movement of cash is done from one place to another place or from one country to another country is done by way of Smuggling or Hawala. This is an informal and illegal method of transferring money. The transaction happens without any physical movement but by way of settlement of one transaction with another. This is termed as an alternative method of fund transfer or remittance that is outside the purview of traditional banking systems.
In these transactions complete anonymity is there as there is no official records are kept and the sources of funds cannot be traced. And in this type of transactions physical cash does not move from one place to another place. For example, person A from Dubai have to send money to Person B in India similarly a Person C have to make payment from India to Person D in Dubai, Hawaladar would make the arrangement of pickup and drop of currency at both locations and settlement would happen there itself.
Due to the informal nature of transactions and absence of regulations related to such transactions, most countries have made Hawala transactions illegal.
3. Trade Based Money Laundering (TMBL):
Trade-Based Money Laundering (TMBL) is done by mixing Money Laundering along with Trade. TMBL takes the advantages of complex system of International Trade as it is difficult to track the transaction footprints, parties, AML checks and due diligence. TMBL involves all types of cross border transactions such as import, export and services.
In simple words TBML can be defined as the process of disguising the proceeds of illegal money and moving it through the use of trade transactions to make this money legitimate and hide the illicit sources of the money.
FATF defines TBML as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins”.
The most common TBML methods include the following:
- Over-Invoicing: In case of Over-invoicing the Exporter submits an inflated invoice to the Importer, getting an income that exceeds the value of the goods shipped. Higher value is transferred by the Importer to the Exporter.
- Under-Invoicing: In case of Under-invoicing the Exporter submits an deflated invoice to the Importer. Exporter shipping goods of higher value and transferring that value of benefit to the Importer.
- Multiple-Invoicing: In case of Multiple-invoicing the Exporter invoices multiple times for the same shipment, and higher value is transferred from the importer to the exporter.
- Over- or Under-Shipment: In this case either the Exporter ships more goods than previously agreed to the Importer, thereby higher value is transferred to the Importer. Alternatively, the Exporter ships lesser goods than agreed, transferring higher value to the Exporter.
- Misrepresentation of Quality: In this case the Goods shipped to importers are misrepresented as higher quality in the documents but actual quality is inferior, thereby higher value is transferred to the exporter.
- Services Payment: In case of Services payment, the Invoices may be misrepresented for higher value or lower value and sometimes no services been rendered. Still the payments been made may lead to transferring value from one person to another, depending on the transaction and value. This is becoming most coming of all these days, as it is difficult to determine the value of services in monetary terms.
- Payments to / Payments from Third Parties: Most often the payments are send to / received from Third parties, who may or may not be related to the trade.
4. Investing in Precious Metals, Gems and Jewellery, Real Estate etc:
In process of Money Laundering, illegitimate money is often invested in buying houses, shops, mall, showroom, land etc, the invested value of these assets is often high but shown lesser value in paper for disposing of money and evasion of tax.
Money launderers often invest their money in Precious Metals like Gems and Jewellery and also keep their money abroad in tax heaven countries or countries where they do not reveal the information of the investors.