pri Money Laundering; The Many Colours of Money Money Laundering; The Many Colours of Money

Sumit Roy B.Com, B.Ed, MBA (IISWBM), MIMA

Sumit Roy

The word money laundering”, although not very common even 30 years back has become a household phenomenon. Every scientific invention or technology has been used as a boon or a curse since time immemorial. Little did Oppenheimer know that Manhattan Project” would turn out to be the forefather of the most destructive force the world shivers from – nuclear bombs. It would not be unjust to say that the concept of money laundering, although prevalent earlier, did not become a mass subject prior to 1991, the era of Indian globalization. Communication and internet, no doubt, has given the mammoth impetus and stand as the towering cause for money laundering. As said earlier, Science has always been looked upon from two different intents – benevolent and malicious. Several books and Bollywood movies have popularized money laundering to such an extent that even toddlers may think of S” for Swiss Bank and B” for Black Money in their preliminary vocabulary.

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering besides Narcotic Drugs and Psychotropic Substances Act (NDPS Act), 1985 Banking Regulations Act, 1949, Chit Funds Act, 1982, RBI Act, 1934, SEBI Act, 1992 among others to give an able support. In India, before the enactment of the Prevention of Money Laundering Act 2002, a number of statutes addressed scantily the issue in question. These statutes were The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974,The Income Tax Act, 1961,The Benami Transactions (Prohibition) Act, 1988,The Indian Penal Code and Code of Criminal Procedure, 1973,The Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988.

The literal meaning of laundering is washing or cleaning dirty clothes. The term Money Laundering is used for cleaning dirty money. It is the disguising or concealing of illicit income in order to make it appear legitimate. Money Laundering is being employed by launderers worldwide to conceal criminal activity associated with it such as drugs / arms trafficking, terrorism and extortion. The term “money laundering” is said to have originated from the mafia ownership of Laundromats in the United States. In India, money laundering is popularly known as Hawala transactions. Hawala is an alternative or parallel remittance system. “Hawala” is an Arabic word meaning the transfer of money or information between two persons using a third person.

The system dates to the Arabic traders as a means of avoiding robbery. It predates western banking by several centuries. The Hawala Mechanism facilitated the conversion of money from black into white.

What is money laundering?

The Financial Crime Enforcement Network defines it as “…the process by which criminal or criminal organisations seek to disguise the illicit nature of their proceeds by introducing them into the stream of legitimate commerce and finance”. Putting it into a more colloquial language, it is a technique designed to make dishonestly or unlawfully earned money appear to have been derived from honest and legitimate means. It is basically creating a veil of legal cleanliness around an illegal transaction.

Although the first thing that come into our mind is Black Money, whenever the discussion of money laundering arises. Fact is, there are several other terminologies in the Money Laundering Dictionary, namely white money or clean money, grey money, dirty money, hot money. Black money can be called a “set” within which the sub-set of grey money, dirty money, hot money lies. National Institute of Public Finance and Policy (NIPFP) defines“Black Money is the aggregate of incomes which are taxable but not reported to authorities.” According to the White Paper on Black Money published by the Ministry Of Finance, Govt. of India on May 2012, “There is no uniform definition of black money in the literature or economic theory. In fact, several terms with similar connotations have been in vogue, including unaccounted income”, “black income”, dirty money”, black wealth”, underground wealth”, “black economy”, parallel economy”, “shadow economy”, and “underground” or unofficial” economy. All these terms usually refer to any income on which the taxes imposed by government or public authorities have not been paid.”

Grey money is money associated with illegal activity while Dirty money refers to money associated with criminal activity. White money is the money that is earned legally, or on which the necessary taxis paid.

To illustrate, grey money can be a sum on which tax in not paid (the situation with which we use the term black money synonymously). It violates or defies the financial regulations of a country, avoiding which deprives the country of a deserving tax collection. Dirty money, on the contrary is money accumulating from activities like child trafficking, child pornography, selling arms & ammunitions to terrorists. These activities are illegal per se, violating which carries serious punishments including capital punishments.


The two terms of grey money and dirty money are two extremes of a continuum of unlawful activity starting from grey money to dirty money. The ranking depends on the particular situation and the moral and socio­economic condition of the given country.

For example, cultivation of opium is completely banned in India, but is a thriving, if not one of the main business of Afghanistan. Although, unwilling, the cultivators have no other option, given the present turmoil in the country. We cannot blatantly tag them as‟ dirty‟ just like that. Money from casino is grey in India, but legal in Nepal or Monte Carlo. Humane consideration and in depth analysis is required to tag any activity as grey or dirty.

Hot money refers to financial flows stimulated by adverse changes in social, political or economic conditions. It might be a combination of clean, grey and dirty money depending on the circumstances. Hot money flows are generally short-term and volatile in nature. Dirty money is hot money, but the reverse is not inevitably true. Hot money is basically, flow of funds in order to earn profit from differential interest/exchange rates. Hot money is usually originated from the capital rich, developed countries that have lower GDP growth rate and lower interest rates compared to the GDP growth rate and interest rate of emerging market economies like the BRICS countries.

What are the stages of money laundering?

Stages of Money Laundering

What is the situation of money laundering in India?

Almost every sector in our country generates and uses black money for its survival in the market, society etc. It includes Real estate, financial market, bullion & jewellery market, non-profit organisations, external trade and so on.

Apart from this, in India black money persists due to the existence of Demonstration Effect i.e. the way to live a life in terms of others point of view or we say live a life by looking at others livelihood. People of India are very much affected by the lifestyles of other people of the society who are maintaining considerable high status, and in turn want to be like them. For this, they want to generate money by any means. Therefore to fulfil these desires or to maintain their status in society they force themselves to generate and use black money.

The presence of rampant corruption in every field of the economy nurtures the growth of black money. Another very astonishing source from which significant amount of black money is generated and used and is the field spirituality, especially in Indian context. The multi-millionaires self-acclaimed babas” and matajis” are not very rare to find.

Manipulation of Accounts, seldom called window dressing, in which the accounts are manipulated to misrepresent the authorities is a very important source from which black money is generated. The recent scams against chit fund companies are burning examples.

The 3rd report published in May, 2012 by Swiss National Bank, estimates total deposits as below:

Country Money Deposited (USD Billion)
India 1456
Russia 470
UK 390
Ukraine 100
China 96

According to White Paper on Black Money in India report, published in May 2012, Swiss National Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of India were sr. 92.95 billion, (US$2.1 billion). The Swiss Ministry of External Affairs has confirmed these figures upon request for information by the Indian Ministry of External Affairs. This amount is about 700 fold less than the alleged $1.4 trillion in some media reports.

As per the latest data released by Switzerland’s central banking authority SNB (Swiss National Bank), Indians’ money in Swiss banks declined by over 10 percent to about $1.98 billion or Rs. 12,615 crore) in 2014.

llicit money flow as percentage of GDP between 2002 and 2011 (Source: Global Financial Integrity)

icit money flow as percentage of GDP between 2002 and 2011

Bars show total money (in Rs. crore) held by Indians in Swiss banks (Source: Swiss National Bank)

Bars show total money (in Rs. crore) held by Indians in Swiss banks

The way forward

The gradual erosion of black money held in Swiss Banks by Indians is a direct consequence of the actions taken by the Government of India regarding bringing the money back to India, a very important agenda in the Narendra Modi led BJP Government.

The alleged stashing of wealth by Indians in Swiss banks has been a matter of great debate in India. The cumulative illicit money moving out of the country over a ten-year period from 2003 to 2012 has risen to USD 439.59 billion, as per the latest estimates released by the Global Financial Integrity (GFI) ranking her 3rd. globally, with Russia topping with USD 122.86 billion followed by China with USD 249.57 billion. The Washington-based research and advocacy group further said that the illicit fund outflows from India accounts for nearly 10 % of illegal capital that moved out of all developing and emerging nations in 2012.

The Indian government has been pushing the Swiss authorities for a long time to share information on the suspected tax evaders, while Switzerland has shared some details in cases where India has been able to provide some independent evidence of suspected tax evasion by Indian clients of Swiss banks. Committing full support to India’s fight against the black money menace, Switzerland had said its Parliament would soon consider changes in laws to look into the possibility of sharing information in cases being probed on the basis of stolen data of Swiss bank accounts.

Indian Parliament has recently passed a new black money law under which those found to be stashing illicit funds in foreign locations, including Swiss banks, would face strict penal action, including up to ten years in jail and a penalty of 90 per cent of funds in addition to 30 per cent tax levy.

With the Government of India opening a single window system before the law comes into force to declare the undeclared foreign assets for a 90 day period ending 30-September-2015, a mere Rs. 4147 crore was declared from 638 disclosures. The 90 day period provided an opportunity to foreign assets holders to declared assets, pay a total of 30 per cent tax and 30 per cent penalty and escape stringent provisions of the new black money law. In May 2015, The Switzerland Official Gazette named 5 Indian nationals with Swiss bank Accounts with regard to the ongoing tax probes against them in India.

Currently, numerous government agencies like the Central Board of Direct Taxes (CBDT), Enforcement Directorate (ED), Finance Intelligence Unit (FIU-IND), Central Board of Excise & Customs (CBEC), Central Economic Intelligence Bureau (CEIB), Narcotics Control Bureau (NCB), Central Bureau of Narcotics (CBN) etc are constantly working to curb the menace of money laundering in India.

Search and Seizure Statistics 2006-2012 (Source: White Paper on Black Money, Ministry of Finance, May 2012)

No. of
Cash (in Rs. crore) Jewellery
(in Rs.
(in Rs.
Total Assets
(in Rs.
Total undisclosed
income (in Rs.
2006-07 3534 187.48 99.19 77.96 364.64 3612.89
2007-08 3281 206.35 128.07 93.39 427.82 4160.58
2008-09 3379 339.86 122.18 88.19 550.23 4613.06
2009-10 3454 300.97 132.20 530.33 963.50 8101.35
2010-11 4852 440.28 184.15 150.55 774.98 10649.16
2011-12 5260 499.91 271.40 134.30 905.61 9289.43

Undisclosed Income Detected 2006-2012 (Source: White Paper on Black Money, Ministry of Finance, May 2012)

Financial Year No. of Warrants Undisclosed Income detected (in Rs. crore)
2006-07 6207 2612.77
2007-08 6071 3581.77
2008-09 5777 3059.89
2009-10 4680 4857.10
2010-11 3911 5894.44
2011-12 3706 6572.75

Number of Complaints Filed, Convictions, Compounding of Offences, and Success Rate 2005-2012 (Source: White Paper on Black Money, Ministry of Finance, May 2012)

Cases Decided * Cases Compounded Cases
Success Rate
(in %)
2005-06 326 125 84 1 85 68
2006-07 73 100 57 2 59 59
2007-08 263 280 13 11 24 8.6
2008-09 162 146 13 14 27 18.5
2009-10 312 599 291 32 323 53.9
2010-11 244 356 83 51 134 37.6
2011-12 105 471 342 12 354 75.2
Total 1485 2077 883 123 1006 48.4

* Cases decided have no direct correlation with complaints filed

Year-wise Details of Number of STRs Disseminated by the FIU-IND 2006-2012 (Source: White Paper on Black Money, Ministry of Finance, May 2012)

Agency 2006-07 2007-08 2008-09 2009-10 2000-11 2011-12 Total
ED 35 68 90 221 317 1615 2346
CBDT 254 677 1766 5360 7475 10956 26488
CBEC.DRI, DGCEI 10 14 26 96 121 1130 1397
RBI 1 2 5 19 8 51 86
SEBI 27 35 30 76 59 117 344
IRDA 1 6 7 5 2 21

With the present corrective measures taken by the Government of India including making the existing laws harsher, entering into Double Taxation Avoidance Agreements (DTAA) and Tax Information Exchange Agreement (TIEA) with more countries, preparing a comprehensive database of Non-Profit Organisation (NPO) – one of the major source of illicit fund flow, strict implementation of Know Your Customer (KYC) norms, better reporting / monitoring systems to trace the dealings in bullion / jewellery through the Income Tax / Customs / Sales Tax Acts; things are looking brighter than before. The silver lining has been visible.

However, no investigation, no penalty, no punishment can however replace the basic instinct, i.e., humane. The day we realize that the tax we pay is used to run the country we live in for our own benefit, will be the day to cherish. That money has only one colour – white. No black, no grey. Being an optimist myself, I wish to envisage that moment as a distant dream and not a day dream.

Special thanks and gratitude:

  • Harkish Mourjani, Senior Associate, Quadrisk Advisors Private Limited.
  • Criminal Finance: The political Economy of Money Laundering by Kris Hinterseer (page 11-13).
  • Black Money in India : Present status and future challenges by Rajni Arora.
  • International Journal of Science, Engineering & Technology Research (IJSETR), Volume I, Issue V, November, 2012.
  • The Hindu, “India third on black money list”, 16th December 2014.
  • Times of India, 26th May 2015.
  • “ Blackmoney clampdown effect : India‟s ranking drops to 61st in holding money in Swiss Banks”, 22nd June 2015.

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