In popular parlance, the unofficial economy goes by the

name of black money and the official, of white money.

Black and white are also variously substituted by
number two and number one, unaccounted and
accounted, unreported and reported, unrecorded and
recorded and so on. Prof. J.C. Sandesara

The Effects of Money Laundering

It varies between agencies, but the amount of money laundered

every year is between $500 billion and $1 trillion worldwide. This causes
devastating effects in social, economic and security terms.

The reason why international events are experience is dovetailed in to

the Indian experience is, because the methods and means are common.
Also, with rapid integration of the world economy, the ramifications of
financial crisis are wider. Money laundering allowed to grow unfettered
shall cause debilitating damage to the International community

Considering the social effects, successfully laundering money means

that criminal activity actually does pay off. This success encourages
criminals to continue their illicit schemes because they get to spend the
profit with no repercussions. This means more fraud, more corporate
embezzling (which means more workers losing their pensions when the
corporation collapses), more drugs on the streets, more drug-related
crime, law-enforcement resources stretched beyond their means and a
general loss of morale on the part of legitimate business people who
don't break the law and don't make nearly the profits that the criminals
do.

The economic effects are on a broader scale. Developing countries

often bear the brunt of modern money laundering because the
governments are still in the process of establishing regulations for their
newly privatized financial sectors. This makes them a prime target. In
the 1990s, numerous banks in the developing Baltic states ended up
with huge, widely rumoured deposits of dirty money. Bank patrons
proceeded to withdraw their own clean money for fear of losing it if the
banks came under investigation and lost their insurance. The banks
collapsed as a result. Other major issues facing the world's economies
include errors in economic policy resulting from artificially inflated
financial sectors. Massive influxes of dirty cash into particular areas of
the economy that are desirable to money launderers create false
demand, and officials act on this new demand by adjusting economic
policy. When the laundering process reaches a certain point or if law-
enforcement officials start to show interest, all of that money will
suddenly disappear without any predictable economic cause and that
financial sector falls apart.

Some problems on a more local scale relate to taxation and small-

business competition. Laundered money is usually untaxed, meaning
the rest of us ultimately have to make up the loss in tax revenue. Also,
legitimate small businesses can't compete with money-laundering front
businesses that can afford to sell a product for cheaper because their
primary purpose is to clean money, not turn a profit. They have so much
cash coming in that they might even sell a product or service below cost.

In terms of security, the majority of global investigations focus on two

prime money-laundering industries: drug trafficking and terrorist
organizations. The effect of successfully cleaning drug money is clear:
more drugs, more crime, and more violence. The connection between
money laundering and terrorism may be a bit more complex, but it plays
a crucial role in the sustainability of terrorist organizations. Most people
who financially support terrorist organizations do not simply write a
personal check and hand it over to a member of the terrorist group. They
send the money in roundabout ways that allow them to fund terrorism
while maintaining anonymity. On the other end, terrorists do not use
credit cards and checks to purchase the weapons, plane tickets and
civilian assistance they need to carry out a plot. They launder the money
so authorities can't trace it back to them and foil their planned attack.

In the golden crescent bordering Pakistan , Afghanistan and

Iran , illicit opium cultivation is an open secret. The result is illegal drug
dealing. The money generated through sale of drugs is invested in a
posh hotel, frequented by travellers from all over the world. Now the
proceeds from the drug deals are used for payments related to this legal
business, along with other regular trading incomes. The launderer now
opens up other supply companies to serve the business of the hotel.
These companies now issue invoices that the hotel settles through
cheque payments. The increased amount of such transactions and
movement of money along with this make a smokescreen, so that the
criminal origin of money is effectively obscured. The whole process
continues for the enrichment of the persons involved.
Money laundering is a crime if it is used to disguise the origins
of illegally-obtained money, because the proceeds of a crime are made
to appear legitimate. The methods by which money may be laundered
are varied and can range in sophistication.

The large number of so-called tax-havens give enough facility to

keep money in numbered accounts, while keeping the true ownership of
money anonymous to the outside world. The existence of Offshore
Finance Centres (OFC) is a weak spot in the global financial system, as
the regulation of the financial transactions in OFC is seldom effective
because of its nature of operations.

There are more than one hundred offshore finance centres

spread all over the world. Prominent among these are located in Hong
Kong, Thailand, Tahiti, Macao, Philippines, Singapore in Asia and
Pacific, Andorra, Cyprus, Dublin, Liechtenstein, London, Switzerland in
Europe, Bahrain, Israel, Lebanon in Middle East, Bahamas, Belize,
Cayman Islands, St. Lucia, United States (Delaware) in Western
Hemisphere. (Delaware laws allow non-disclosure of real or
beneficial owners of companies. Similarly, because of terror-
finance linked problems, Israel does not have a banking system
that allows bank secrecy. Lebanon, is a problem area for terror
linked transactions, but then these are state-sponsored or blind
eyed in many locations including Pakistan, Nepal, Saudi as well as
UAE). International banks in OFCs accept deposits in multiple
currencies and conduct banking operations on behalf of clients and they
maintain secrecy. In fact, it is the secrecy and confidentiality that is their
main product and these banks charge their clients for that.
 Many small countries encourage the growth of offshore financial
services, as these attract large volume of foreign capital and that is
invested for local development. In lieu of that OFC provides certain
services like;

(i) Maintenance of secrecy and confidentiality,

(ii) No exchange control,
(iii) Absence of any tax burden, or nominal or simple taxes, eg.
Singapore taxes normal income, but does not tax interest or
dividends or capital gains on sale of shares.
(iv) The facility of disguising the ownership of corporate vehicles
through the use of nominee directors, or, a bigger problem, nominee
shareholders, thus, concealing identity of the real owners.

(v) No reporting requirements for companies like annual reports,

(vi) No system of supervision of companies such as annual general
meetings.
In 1998, Mr. Stanley Morris, Chairman of the Financial Action
Task Force (FATF) of the Organization for Economic Cooperation and
Development (OECD) stated that the need to estimate the size of
money laundering and quantify its constituent parts has been a concern
of the FATF since its initial report. The report identified the following
areas of legitimate demand for quantitative measures of money
laundering:

(a) Understanding the magnitude of the crime so that different agents

of legal system can reach agreement on the place of anti money
laundering programmes within national and international enforcement
systems.
(b) Understanding the effectiveness of counter-money laundering
efforts with a given baseline and scale of measurement.
(c) Understanding the macroeconomic effects of money laundering, as
it has adverse effects on the overall economy and financial institutions.
ML has undesirable influence on demand for money, exchange rate
movement, interest rate and effectiveness of fiscal policies.
 Considering the above aspects of money laundering, Mr. Stanley
Morris observed that There is not, at present, any economic dues ex
machina that will allow the accurate measurement of money laundering
world-wide, or even within most large nations. The basis for such
estimations simply does not exist.

Prevention of Money Laundering Act, 2002

Taking a cue from the activities of FATF, Government of India

enacted the Prevention of Money Laundering Act, 2002 that came into
effect from July 1, 2005. As per different provisions of the Act, every
banking company, financial institutions like cooperative banks, housing
finance institutions and mutual funds and other intermediaries shall have
to maintain a record of all transactions. The nature and value of the
transactions have been prescribed in the Act. Such transactions include:

(A) All cash transactions of the value of more than ten lakh
rupees or its equivalent in foreign currency;

(B) All series of cash transactions integrally connected to

each other which have been valued below ten lakh rupees or its
equivalent in foreign currency where such series of transactions
have taken place within a month;

(C) All cash transactions where forged or counterfeit currency

notes have been used as genuine, or where any forgery of a valuable
security or a document has taken place, facilitating the transactions

(D) All suspicious transactions, whether or not made in cash and

including, inter-alia, credits or debits into from any non-monetary
account such as demat account, security account maintained by the
registered intermediary.

In spite of the rigorous implementation of the Act, it is difficult to

stop the flow of laundered money because of global connections and
India is basically an open economy.
 The Prevention of Money-Laundering Act, 2002 came into effect
on 1 July 2005. Section 3 of the Act covers the offense of money-
laundering on those persons or entities who directly or indirectly attempt
to indulge or knowingly assist or knowingly are party or are actually
involved in any process or activity connected with the proceeds of crime
and projecting it as untainted property, such person or entity shall be
guilty of offense of money-laundering
Section 4 of the Act prescribes punishment for money-
laundering 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 and for the offences
mentioned [elsewhere] the punishment shall be up to ten years.
Section 12 (1) prescribes the obligations on banks, financial
institutions and intermediaries
(a) To maintain records detailing the nature and value of
transactions which may be prescribed, whether such transactions
comprise of a single transaction or a series of transactions integrally
connected to each other, and where such series of transactions take
place within a month;
(b) To furnish information of transactions referred to in clause (a) to
the Director within such time as may be prescribed and
(c) To verify and maintain the records of the identity of all its
clients.
Section 12 (2) prescribed that the records referred to in sub-
section (1) as mentioned above, must be maintained for 10 (now 5
years) years after the transactions finished.
(S.12 as amended in 2013)
 The provisions of the Act are frequently reviewed and various
amendments have been passed from time to time. The recent activity in
money laundering in India is through political parties, corporates and
share market.
The Act allows for confiscation of property derived from or
involved in money laundering. Co-operative banks, non-banking financial
companies, chit funds and housing financial institutions come under its
ambit.
The Act also makes it mandatory for banking companies,
financial institutions and intermediaries to maintain a record of all
transactions of a prescribed value and to furnish information whenever
sought within a prescribed time period. Thus, these entities are required
to maintain the record of the transactions for 5 years.