What is Money Laundering?
It is the process of taking the proceeds of criminal activity and making them appear legal.
Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. Those who commit the underlying criminal activity may attempt to launder the money themselves, but increasingly a new class of criminals provides laundering services to Organized Crime. This new class consists of lawyers, bankers, and accountants.
Criminals want their illegal funds laundered because they can then move their money through society freely, without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from being confiscated by the police.
Accuse of Money Laundering
Anybody who is directly or indirectly involves in any process or activity connected to the proceeds of crime or he assists anybody who is actually involved in this process shall be guilty of this offence of Money laundering.
How this Money Laundering takes place?
Money laundering is accomplished in many ways, though most include three common steps, including
How this Money Laundering Starts in small transactions and then turns to higher Level……………
Just understand this with the help of the following example:
Mr. A, an Accountant of XYZ Co. steals heavy cash from the business. But he did not want this to be detected. So, instead of depositing large amount of money into his bank account, he breaks the money in different small amounts and deposit the same in bank account on weekly basis. So, This ensures the bank does not look at his transaction suspiciously since it is uncommon for him to deposit large sums of money.
Techniques of Money Laundering:
There are many techniques of money laundering. Some of them includes:
Bulk cash smuggling: It involves literally smuggling cash into another country for deposit into offshore banks or other type of financial institutions that honor client secrecy. The best and famous example in India is Big Businessmen depositing their money in Swiss Bank Accounts.
Structuring: It is a method in which cash is broken down into smaller amount, which are then used to purchase money orders or other instruments to avoid detection or suspicion.
Real estate laundering: It occurs when someone purchases real estate with money obtained illegally, then sells the property. This makes it seem as if the profits are legitimate.
Casino laundering: It involves an individual going into a casino with illegally obtained money. The individual purchases chips with the cash, plays for a while, then cashes out the chips, and claims the money as gambling winnings.
Punishment for Money Laundering:
Whoever commits the offence of money-laundering shall be punishable 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: Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been subs’tituted.
Section 12 of the Act:
According to Section 12 of this act and the Rules impose obligations on Banking companies Financial institutions Intermediaries of the securities market To maintain records furnish information verify identity of clients.
“Banking Company” under this act includes:
All nationalized banks, private Indian banks and private foreign banks All co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) co-operative banks State Bank of India and its associates and subsidiaries Regional Rural Banks
“Financial Institution” under this act includes:
Financial Institutions as defined in Section 45-I of the RBI Act namely EXIM Bank, NABARD, NHB, SIDBI, IFCI Ltd., IDFC Ltd., IIBI Ltd. and TFCI Ltd. Insurance companies Hire Purchase companies Chit fund companies as defined in the Chit Funds Act.
“Intermediary” under this act includes:
Persons registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992:
• Stock brokers • Sub-brokers • Share transfer agents • Registrars to issue • Merchant bankers • Underwriters • Portfolio Managers.
Here the question is How to maintain and verify the identity of the above mentioned clients?
The answer to this question is as simple as banks have started KYC Policy under which banks maintain the identity of their clients.
What is KYC?
Know your customer (KYC) is the process of a business verifying the identity of its clients. The term is also used to refer to the bank regulation which governs these activities.
One who maintains an account, establishes business relationship, on who’s behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction.
Who should know? Branch manager, audit officer, monitoring officials, PO.
What you should know? True identity and beneficial ownership of the accounts. Permanent address, registered & administrative address.
Making reasonable efforts to determine the true identity and beneficial ownership of accounts; Sources of funds. Nature of customers’ business.What constitutes reasonable account activity?
Who your customer’s customer are?
Each and Every Thing so as to obtain True Identity of your customer.
Advantages of KYC norms:
KYC procedures have particular relevance to the safety and soundness of banks, in that:
1. They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage;
2. They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities).
Measures to avoid Money Laundering:
1. Transactions Monitoring
2. SUSPICIOUS TRANSACTION:
Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith –
How to know that the transaction is suspicious?
Use of cash in Money Laundering:
High risk areas of Money Laundering:
Prevention of Money laundering Act, 2002 was a major step taken by Indian Government for tracing and stopping fraudulent monetary activities but despite of this step a lot of scams happened in Country which proved this act to be a failure. The major reason for failure is the Corruption in Govt. Departments because ultimately it our own administration who is helping these people in committing frauds.
“The Author is a student of Institute of Chartered Accountants of India. For any query related to above article, You can contact him anytime at firstname.lastname@example.org or call him at 98888-55340 (preferably 6 pm to 9 pm)”