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Introduction to Money Laundering:

Money laundering is an illegal process in which black money is converted into white money. The word money laundering has come from the word laundering which means converting dirty into clean. In the same way, black money is converted into white money to make it look clean. Money Laundering is the way of hiding true ownership of money created by crime. In money laundering, it is shown that the black money which is converted into white has come from a legal source. There are 3 stages in money laundering: first is placement, second is layering and third is integration. All these 3 stages involve the conversion of black money into white money. Money laundering is a process that makes a lot of money from illegal activities (for example, drug trafficking on the street where the payment takes money from small programs). Funds are invested in the financial system or the retail economy or are smuggled out of the country. The objectives of the money launderer are to avoid recognition of black money from the authorities and then to transform it into white money.



In the first stage,i.e, placement involves shifting money from the crime scene to the other place. Money that has been generated from illegal activities for example corruption or any other activities is transferred to a safe place. In this stage, the money is moved from one place to another so that the doubt of having black money is reduced.


Once the process of placement is finished then the layering process starts. In the layering process, the money is transferred to the banking or financial institution through some contacts in different places in the countries. 


After the layering process is finished, the process of integration comes. In the integration process, all the black money is converted into white money by showing that the money is invested in financial operations. Here the black money which is converted into white money is shown to be legal. Therefore the criminals who have been using the black money can easily use it as white money in front of the government without any doubt of having black money in this process.


Impact of money laundering on an economy

The purpose of money laundering is harmful to the financial sector, which has been vital to economic growth, to encourage crime, and corruption, slow economic growth, and reduce the efficiency of the economy and the real sector. Global Research mainly concentrates on two main areas of money laundering which are drug trafficking and terrorist organizations. The effect of the success of the settlement of the drug money is clear, of course, more drugs will lead to more crime resulting in more violence. The link between money laundering and counter-terrorism can be a bit difficult, for example, the terrorists are disposing of or hiding the money so that the authorities are not able to track them and stop their aim or plan. 

Money laundering is not only the biggest problem in the global financial markets but also in the emerging markets. As the emerging markets are about to open up their financial sectors and economies, they are more targeted for money laundering. Money laundering creates unexpected changes in the demand for money, as well as changes in international capital flows and the exchange rate. 


When money laundering is done then the supply of money increases. But there is no increase in the production or income of the people. Income is increased for only those people who are doing illegal work like money laundering. Here in this case the demand is increased but the production activity is not increased. In this case, the money has increased but the goods are not increasing. Therefore all this results in inflation which means that the price of goods and services grows. 


Prevention of money laundering act, 2002

“Prevention of Money-laundering Act” was enacted in 2002 by the government with the consent of the Reserve Bank of India. The object of the act is to prevent the laundering of money and to seize the property which is involved in such activities. It also concentrates on preventing the involvement of the bank in money laundering. This act focuses on punishing the people who are involved in money laundering. Definition of money laundering is not given in the Act. There are three main authorities in the act. They are Director (who is appointed by the government), FIU-IND (Financial Intelligence Unit), and FATF (The Financial Action Taken Force). FIU is made by the Central Government and is an Indian agency whereas FATF is an International agency. Directors and FIU-IND are given the exclusive power to deal with the money laundering activities.


For investigating cases of money laundering under the “Prevention of Money-laundering Act”, it is the responsibility of “the Enforcement Directorate in the Department of Revenue, Ministry of Finance, the Government of India” to look into the cases. FIU-IND is responsible for receiving, processing, analyzing, and disseminating information relating to financial suspicions. It also oversees the following: To coordinate and intensify national and international intelligence efforts and an investigation into the efforts to combat money laundering and related crimes.

Organized cases are investigated separately by agencies mentioned under appropriate actions, for example, SEBI, local police, CBI, or another investigative organization, as the case may be.


Common Types of Money Laundering:

Types of money laundering involve “Hawala, bulk cash smuggling, fictional loans, cash-intensive businesses, round-tripping, trade-based laundering, Shell companies and trusts, real estate, gambling, and fake invoicing”. The property acquired by the criminal activity is known as “proceeds of crime”.


Punishment involved in this act are:
If there is any offense relating to the “Narcotic Drugs And Psychotropic Substances Act, 1985” then there will be fine of up to rupees five lakhs and a minimum of 3 years of imprisonment, and a maximum of 10 years of imprisonment depending on the offense. If another offense is not related to the “Narcotic Drugs And Psychotropic Substance Act, 1985” then the fine will be the same which is rupees five lakhs and the imprisonment period will be of minimum 3 years and a maximum of 7 years. 


There are some obligations of the bank and PFIs (public Financial Institutions). Their first obligation is to record the transactions and maintain them (whether in series or single). All the information related to the transaction should be given to directors including the value and nature of the transaction. If there are client owners and beneficiaries then their identity should be maintained and verified. The maintenance of records should be done for five years. Documents that are related to the identities should also be maintained till the 5 years starting from the end of the business relations of the client or when the client has closed the bank account. Directors have the right to enquire about the records of banks and PFIs. If the bank or institution fails to give the information related to the report which is asked by the director then the bank or institution will have to pay the fine of a minimum of Rs. 10000 and a maximum of Rs. 100000. 


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