Have you ever played a game where there are three glasses that are kept upside down and you have to guess which glass when picked up will have a ball concealed under it? Initially, the ball is placed inside one of the glasses (concealed) and then the glasses are shuffled in such a way that it becomes difficult to understand where did the ball goes from its initial position. So is the case with money laundering. Instead of a ball, we now play with money. Money laundering is the process by which the proceeds of the crime and true ownership of those proceeds are concealed or made opaque so that the proceeds appear to come from a legitimate source.
Now let’s take another example for you. Say a criminal comes across a bag filled with Rs. 1 Crore. What would he like to buy? A yacht, a mansion or a sports car? But the government won’t let him buy any of this. For buying any of this, he needs to clean the money and make it seem it comes from a legitimate source and the taxes for this have been paid for. Money laundering is a process that would help him.
We all have heard of the word “laundering”. The purpose of giving our clothes for laundering is to get our dirty clothes cleaned. In the same way, money laundering is done to convert “black money” to “white money” or “dirty money” to “clean money”.
Historians claim the term “money laundering” originated from the Italian mafia, notably Al Capone. During the 1920s and 30s, Mr Capone and his associates would buy laundromats (hence the term ‘laundering’) to mask profits made from illegal activities such as prostitution and bootlegged liquor sales.
However, another figure allegedly pioneered the technique – Meyer Lansky. Known as the mob’s accountant, Lansky worked with the infamous mobster, Charles “Lucky” Luciano. He proposed the practice after fearing he’d suffer the same fate as Al Capone, who was arrested and convicted for tax evasion.
Now the question that arises is how is it done? The process can be divided into 3 stages.
- Placement: X steals your jewelry and keeps it in his refrigerator where no one can imagine that it can be kept, this is known as placement. The first stage involves the movement of proceeds (frequently currency) from the scene of the crime to a place or into a formless suspicious and more convenient for the criminal.
- Layering: Now if X gives this jewelry to his brother in law and he gives it to his grandmother, it becomes very difficult to follow and find out where is the jewelry. This is what layering aims at exactly. Layering involves sending the money through various financial transactions to change its form and make it difficult to follow. This process may consist of several banks to bank transfers or wire transfers between different accounts in different names in different countries making deposits and withdrawals continuously.
- Integration: Now finally X sells the jewelry and uses the money for buying a washing machine. Integration is this last stage which involves the conversion of illegal proceedings into apparently legitimate business earnings through normal financial or commercial operations.
How to perform these stages without being caught? There are a few options. One of which is forming a shell company. It’s fairly easy and there are plenty of law firms who can help. A shell company is a company that only exists in paper and has no office or employees. Once a shell company is set up, make some fake transactions for goods and services that you pay for with your dirty money and suddenly that dirty money looks legitimate. In India, out of the 1.9 million companies registered only 60% are active.
Another technique is mirror trading; in case the stock market wants to be used. In this method, money is used to buy shares and then those shares are sold abroad for the same amount.
Back to back trading would be a third option. In this case, one takes a loan from another country and the black money is given as a security deposit. When one defaults, the bank takes the deposit but one is still left with loan proceeds.
Risking the black money at the casino can also be considered as an option. Smurfing is another way in which one finds associates or “smurfs” who deposit small amounts of a large amount of money in different banks in different places.
The rich are greedy and selfish and do not want to contribute their wealth for the development of society and their country and therefore they prevent themselves from paying taxes. Money laundering, therefore, is his easy access to money they do not wish to share.
It is estimated that 2-5% of global GDP is laundered every year. This means that this can have some serious economic effects in different areas. It affects the developing economies the most as they are often targeted by criminals as these economies lack banking regulations which make it easier to anonymously hide money. An example of how harmful this could be is the collapse of the banks in the Baltic countries in the 1990s. There were rumors that these banks have a lot of black money deposits and people feared that if the investigation would take place they would lose all their money deposited. So people start withdrawing all their money from the banks which led to the collapse.
On a local scale, money laundering can be harmful for a few reasons. First, criminals don’t pay taxes so other taxpayers have to make up for the loss in the tax revenue. Secondly, front companies, their primary purpose is to launder money so infusing a large amount of illegal cash into these companies means that they can charge a lower price for good and services because they are not relying on the sale of goods and services to make money so then the small local businesses can’t compete with them.
The most common currencies among the money launderers are dollar and euro. Both of them are also currencies very important for the International Foreign Exchange. Therefore, when laundering takes places many national economies can suffer because the demand and supply get affected by this process.
Money laundering can have some serious social impacts as well. Not only is money laundering in itself as a big crime, but it also plays a wider role in funding criminal activities. This means more money laundering leads to an increase in drugs, crimes, and violence.
The European Union is trying to make the formation of shell companies harder by forcing member states to publish registers disclosing the beneficial owners of the company. Britain has introduced unexplained wealth orders which allow the court to order “politically exposed persons” to explain why their assets are much larger than their salaries. Yet tough laws do not work unless everyone imposes them.
Prevention of Money Laundering
Act, 2002 is an Act of the Parliament of India
enacted by the NDA government to prevent money
and to provide for confiscation of property derived from money
. PMLA and the Rules notified there under came into force with effect from July 1, 2005.
The consequences of being caught in this crime can be severe and can lead to not only loss of reputation but also power.
One of the instances is as follows : The Panama Papers leaked in 2016 revealed to us how the big politicians, criminals and even Prime Ministers of countries launder dirty money and get away easily. Firms such as Mossack Fonseca help these criminals to get clean money through shell companies. Pakistanis protested in the streets when it was revealed that children of then-prime minister Nawaz Sharif had set up shell companies to help discreetly hold multi-million dollar London real estate. Sharif resigned in July 2017 after Pakistan’s supreme court disqualified him from office.
This year two large Western European banks, ING and Danske Bank, along with Australian Commonwealth Bank and India Canara bank were in news for failing to prevent large scale money laundering operations.
How can we forget our own Headline favorite names? Nirav Modi is accused of laundering around Rs. 28000 crores while Vijay Mallya only has been held for Rs. 9000 crore. During Chidambaram’s tenure as the finance minister, INX media laundered Rs.307 crores. Lastly, IF&LS top executives have been arrested in the money laundering case.
Laundering techniques are constantly evolving and the rise of digital technology has ensured this to be especially true. In 2009, Bitcoin was introduced and gave widespread attention to digital currency for the first time in history. What differentiates Bitcoin from your typical online transactions is it has no centralized authority. If a drug lord was laundering money in an offshore account, all you need to do is find the offshore account; while Bitcoins, on the other hand, have numerous miners, or freelance accountants if you will, handling the necessary day to day computations.
The truth is there is no country where no money laundering does not take place. If there exists some country like that, money launderers find ways in other countries for their benefits. In order to overcome this great issue that affects the money of many hard-working individuals, global cooperation is required. Though agencies like FATF (Financial Action Task Force) exist, there are still loopholes in the system. In my opinion, the main flaw lies in our banking system. The bank salesmen are given incentives to increase their customers therefore in the process of acquiring customers who are willing to deposit large sums of money the bankers sometimes adopt a relaxing attitude and do not check the source of the money. Till the time of this system of giving incentives doesn’t stop money will be laundered.