Piyush Goel

Money Laundering:- What is this?

Money Laundering is the processing of criminal proceeds to disguise its illegal origin.

  • Terrorism
  • Illegal arms sales
  • Financial Crimes
  • Smugglings
  • Activities of Organized Crimes
  • Including drug trafficking
  • Prostitution rings

Generates a huge sum of money embezzlements, Insider training, bribery and computer fraud also produces large profit and game through money laundering.

Why Money Laundering :-

Criminals want to:

  • Avoid prosecution
  • Increase profits
  • Avoid seizure of accumulated wealth
  • Appear legitimate
  • Tax evasion

They are trying to conceal the origin of the cash

Process of Money Laundering:-

Money laundering has three processes

Placement :-

In the placement stage of money laundering the launderer introduce his illegal profits into the financial systems by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directed into up bank account or by purchasing a series of monetary instruments that are later collected and deposited into accounts at another location.

Layering:- After the funds entered into financial system the layering takes place. In this stage, the launderer engages in the series of conversion or movements of the funds to distance them from their sources. The funds might be channeled through the purchase and sale of instruments, or the launderer might my simply wire the funds through a series of accounts at various banks across the globe.

Integration:- After successful processing of criminal profits through the first two phases of money laundering process the launderer moves to integration. In this state the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets or business nature.

Impact on Development:- The possible social and political costs of money, if unchecked or dealt with ineffectively, are serious. Organized crimes can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public official and indeed government. The economy and political influence of criminal organization can weaken the

  • Social fabric
  • Collective ethical standard
  • Ultimately the democratic Institution of Society.

In countries transitioning to democratic system, the criminal influence can undermine the transition. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generate it laundering enables criminals activity to continue.

Prevention of Money Laundering Global Initiative :-

Since money laundering is international hence numbers of initiatives has been taken to deal with the problem at international level.

In this context

  • United nation
  • Banks for international settlements took some initiatives to address this problem. However, with the creation of the Financial Action Task Force (FATF) in 1989, regional groupings
  • European union
  • Council of Europe
  • Organization of American state


The major international agreements money laundering include the united nation convention against illielt trafficking in Drugs and Phychotropic substance and the council of Europe conventional on laundering, search, seizure and confiscation of the proceeds of crime.

The role of financial institutions of preventing or detecting money laundering has also been the subject of pronouncement by the Basic committee on banking regulation.

The Vienna Convention:-

It is a collective effort of the members of UNION NATION to prevent money laundering. It promotes international co-operation in investigation and makes extradition between states applicable to money laundering.


It is a “Policy Making Body”. The financial action task force is an inter government body establish in 1989 by the minister of its jurisdiction. The opjective of FATF are to set – standards and promote effective implementation of legal, regulatory, operational measures for combating money laundering, terrorists financing or other related threats to the integrity of the international financial system.

The FATF has developed a series of Recommendation that are recognized as the international standard for combating of money laundering, financing of terrorism and proliferation of weapons of mass destruction.

The first issue in 1990, the FATF Recommendation were revised in 1996, 2001, 2003 and in 2012 to ensure that they remain upto date and relevant and they are intended to be universal application.

FATF Recommendation:-

It is the responsibility of FATF to examine the techniques and trends reviewing the action which had already been taken at a national or international level, and setting out the measures that steel needed to be taken to combat money laundering. In April 1990 less than 1 year after its creation, the FATF issued a report containing a set of   40 recommendation, which were intended to provide a comprehensive plan of action needed to fight against money laundering.

Revision of standards:-

The developments of standard in the fight against terrorist financing was added to the mission of the FATF.

To deal with issue of money laundering and terrorist financing, FATF recommended following standards.

  • 2001, Eight Standards
  • 2003, Revised Standards
  • 2004, Nine Special Standards

The revision is intended to strengthen global safeguard.

What Influence does money laundering have on economic development:-

Launderer are continuously looking for new routes for laundering their funds. Economics with growing or developing financial centre, but inadequate control are particularly vulnerable as established financial centers countries implement, comprehensive anti money laundering regimes.

Difference between anti money laundering system will be exploited by launderers, who tends to move their network to countries and financial system with week or ineffective counter measures.

Some might argue that developing economies can not afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deffered, the more entrenched organized crime can become.

As with the damaged integrity of an individual financial institution, where is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organized crime. Fighting money laundering and terrorist financing is therefore a part of creating a business friendly environment which is a precondition for lasting economic development.

Prevention of money laundering – Indian Initiative:-

In the view of urgent need for the enactment of comprehensive legislation for preventing money laundering and connected activities confiscation of proceeds crimes, setting up of agencies and mechanism for coordinating measures for combating money laundering etc. The Money Laundering Bill 1998 was introduce in the Parliament on the 4th August 1998. The Bill was referred to the standing committee on finance, which presented its report on the 4th March, 1999 to Lok Sabha. After incorporating the recommendations of the standing committee, the govt. introduce The Prevention of Money Laundering Bill 1999 in the Parliament on 29th Oct. 1999.

The bill received the assent of President and become Prevention of Money Laundering Act, 2002 on 17th Jan. 2003.

The Act has come in force w.e.f 1st July 2005. The act has last amended in the year 2009, 2012.

Major Provisions of PMLA, 2002:-

Definition:- The act defines the term used in this act.

Some of the important definitions are as follows.

Attachment:- Attachment means under this act prohibition of transfer, conversion, disposition or movement of property by an order issued.

Proceeds of Crimes:-

Proceeds of crimes means any property derived or obtain, directly or indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.

Intermediary:-Intermediaries means

  • Stoke broker
  • Sub – broker
  • Share Transfer agent
  • Bank to an issue
  • Trustee of a Trusted
  • Registrar to an issue
  • Merchant Banker
  • Portfolio Manager & Investment Advisor.

Investigation:- All proceeds conducted by the director or by authority by the central government under this act for the collection of evidences.

Money Laundering:- The act state that whosoever directly or indirectly attempts to indulge or knowingly assisted or knowingly is a party or actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it is an untained property shall be guilty of offence of money laundering.

Punishment:- The act defines that any person who commits the offence of money laundering shall be punishable with imprisonment for a term we shall not be less than three years but can be extended to seven years and fine or both.

Adjudicating Authority:- The act empowers the central government to appoint, by notification, one or more person not below the rank of Joint Secretary to the government of India as Adjudicating Authority to exercise the jurisdiction, power and authority conferred on or under the act.

Summons and Seizueres:- Adjudicating Authority is empower to enter, on having reason to believe that an offence has been committed under this act, within the limit of the area assigned to him or in respect of which he is authorized.

Adjudicating Authority after entering into the promises and inspect the books, accounts and reports and ask to produce required books and accounts. If authority believes that such records and books may be useful for the proceeding then they can seize the books and property.

Anti Money Laundering Standards:- RBI issued master circulation on KNOW YOUR CUSTOMER (KYC), Anti Money Laundering (AML), combating of financing of terrorism (CFT) and obligation of banks under prevention of money laundering act, PMLA, 2002.

Banks are advised to follow certain customer identification procedure for opening of accounts and monitoring transaction or suspicious nature for the purpose of reporting it to appropriate authority.

These ‘Know Your Customer’ guidelines have been revisited in the context of the recommendation made by the FINANCIAL ACTION TASK FORCE (FATF), on anti money laundering standards and on combating financing of terrorism (CFT).

Objective of KYC Norms / AML Measures / CFT Guidelines:-

The objective of know your customer norms / AML measures / CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities.

Obligation of Banks:-

Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purpose.

Banks should ensure that any remittance of funds by way of demand draft / mail / telegraphic form or any other more and issue of traveler’s checked for value of rupees 50000 and above is effected by debit to the customer account or against cheques are not against cash payment.

How to prevent money Laundering:-

  • Use plastic money
  • Use intellectual banking
  • Anti Money Laundering Programmes

“Be Loyal and Stop Money Laundering

(Author is a CA Final Student and can be reached at [email protected])

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June 2021