‘Money laundering‘ refers to any activity that transforms illegally obtained or tax evaded funds into legitimate capital. It involves generating criminal proceeds but disguising their illegal source. Simply put, money laundering is the process of making dirty money look clean.
Predicate offenses such as drug trafficking or terrorist activity, corruption, fraud generate dirty money. It originates from illegitimate source. The money from the illicit activity is considered dirty, and the process “launders” the money to make it look clean.
According to some estimates, every year the money laundered out of India is more than Rs. 15,55,000 crores. It is a huge amount and poses a significant policy concern for government. As a result, governments and international bodies have undertaken efforts to deter, prevent, and apprehend money launderers.
As a result of these efforts an inter governmental body was formed under the name of Financial Action Task Force (FATF) in July 1989. Its primary role was to develop measures to combat money laundering. FATF require banks and financial institutions to report the suspicious transactions in Suspicious Activity Reports.
Financial institutions have likewise undertaken efforts to prevent and detect suspicious activities involving dirty money. Both as a result of government requirements and to avoid the reputation risk involved.
Laws against money laundering were created to use against organized crime during the period of Prohibition in the United States. Money laundering has been criminalized in the United States since the Money Laundering Control Act of 1986.
Regulations in India
Prevention of Money Laundering Act was passed in India in the year 2002. Currently, this is the only weapon in the fight against money laundering in India. The act was amended in the year 2012 and amended version removed the threshold requirement of the crime.
Director of Financial Intelligence Unit – India (FIU-IND) is empowered to impose fine on financial institutions. Year 2021 began with FIU’s strict action against Paypal India. FIU wants Paypal to pay a sum of Rs.9.6 million. This was a path breaking judgement.
This judgement will bring all the Payment Gateway service providers under the purview of Anti Money Laundering (AML). This increases the demand for Certified Anti Money Laundering Experts.
RBI, SEBI and Insurance Regulatory and Development Authority (IRDA) have been brought under the purview of PMLA, 2002. Hence, the provisions of this Act shall apply to all financial institutions, banks, mutual funds, insurance companies and their financial intermediaries.
Stages of Money Laundering
There are three stages of money laundering. Typical laundering operation goes through all of these three phases.
At this stage, the launderer introduce the proceeds of crime into a legitimate financial institution. This is often in the form of cash deposits. This stage carries highest risk in the laundering process. Obviously, Launderers have to be innovative to deposit large amounts of cash.
Large cash transactions into the bank accounts raise suspicions. In the United States, Bank Secrecy Act requires financial institutions to report high-value transactions. Many launderers prefer to split the transactions to make it look from a legitimate source.
Second phase is Layering. This involves sending the money through various financial transactions to change its form. However, this makes it difficult to trace. Layering consists of moving the funds through multiple bank accounts.
It involves wire transfers between different accounts in different names even in different countries.
In the layering phase banks witness continuous withdrawals, changing currencies, transactions with foreign jurisdictions. Money travels through various bank accounts. This is the most complex step in laundering process. It’s all about hiding the money from law enforcement agencies.
At the integration stage, the money re-enters the legitimate financial system. But it appears to come from a legal transaction. Sometimes the launderers initiate cross border transfers of money to the account of a local business. These transfers are disguised as investments.
Additionally, investments in startup company, exempt under income tax is a trending technique of integration.
Purchase of a million dollar painting from a company owned by the launderer is becoming trending topic. At this point, the criminal can use the money without getting caught. It’s very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.
Who benefits from Money Laundering ?
Money laundering has to involve amounts of money obtained from criminal organisations and operations of
- Mobsters and organised financial crime rings;
- Illegal activity related to Animal or human traffickers;
- Smugglers (tobacco, alcohol, arms, human organs and other criminal activity)
- Ponzi scheme owners
- Corporate embezzlers and white collar criminals
- High net worth tax evaders
- Corrupt politicians launder money from bribes and kickbacks.
Money Laundering Example
Let us discuss the real life scenario of money laundering. Let’s say you just earned a couple of million rupees of cash by selling illegal drugs. Of course, you can spend it on small cash purchases and usually nobody would notice. But when it happens occasionally, you have a problem.
However, you can’t really use the cash for purchasing, a luxury car, a real estate or a legitimate source without being reported.
So, you buy a lottery ticket. This lottery ticket has won the prize of Rs. One Crores. You bought the ticket for Rs.1.05 crores. Yes, you paid excess money.
But since, you are able to use the illegal money to invest, Rs. 5 lacs is just the cost of service.
With that pre-won lottery ticket, you now have one crore rupees in your bank account. You can legally spend on anything you want. You just ran lucky with a lottery ticket.
Techniques of Money Laundering
There are many techniques to change color of the money. These techniques help launderers to disguise the source of illegal money. Here are some of the examples.
- Bulk cash smuggling involves literally smuggling cash into another country for deposit into offshore banks or other type of financial institutions that honor client secrecy.
- Transaction Laundering is a scheme where illicit merchants use genuine merchant’s credentials to process eCommerce transactions. It’s easy to set up an online storefront for illicit sales, and then route transactions through a legitimate source.
- Structuring is a method of breaking down larger cash deposit into smaller amounts. In other words, Smurfing is a variation of structuring. Launderers purchase the bankers draft or money orders from the same money to avoid detection or suspicion.
- Trade based laundering involves under or over valued invoices. But these invoices disguise the movement of goods and money under the pretext of trade.
- Cash intensive business are the businesses which generate huge amount of cash from operations. But Money Laundering occurs when there is mixing. The legitimate business dealing with large amounts of cash uses its accounts to deposit money obtained through illegal means. Businesses also claim these proceeds as legitimate income.
- Bank Takeover is another technique. Money launderers not only own the bank but also move funds through the legitimate financial system.
- Real estate laundering occurs when someone purchases real estate with money obtained illegally, then sells the property. This makes it seem as if the profits are legitimate.
Crypto Currency Money Laundering
Crypto currency laundering poses a greater challenge before the Compliance officers in the year 2021. Moreover, non compliant crypto exchanges and DeFi are the new techniques of laundering.
Though, all the transactions are available in public registry, tracing them back to the beneficial owner is not an easy task. The digital currency knowledge base have different resources on the subjects of
- crypto currencies
- crypto assets
- types of tokens
- tokenize in addition to smart contracts.
Certified Digital Currency Expert is a new initiative on the topic of crypto currency money laundering.
Certification in Money Laundering
The Certified Anti-Money Laundering Expert (CAME) is a popular Indian program. CAME is a expert level and a practical course. It gives you a solid understanding of core KYC AML principles. At the same time, it is one of the promising programs in Asian countries.
Also, CAME offers the video learning modules like TBML, Shell Company investigations etc. This course is attractive for the compliance professionals from middle eastern countries. In addition, the module on money services business is a distinguishing factor of this program.
It introduces basic Anti Money Laundering (AML) concepts and goes further to cover the cross functional subjects such as digital currencies, corruption, tax evasion.
Additionally, institute distributes the study material to registrants. CAME examination is internet based exam. Students need to score 75% marks to successfully complete CAME exam.
KYC and AML
Customer information is collected when an account is opened. This information helps the bank to know the customer, his source of income, his business etc. Customer risk-rating models are one of three primary tools used by financial institutions to detect money laundering.
Financial Institutions have deployed complex risk models. However they are based on an assessment of risk factors such as the customer’s occupation, salary, and the banking products used.
Mock AML Examinations
This training program combines the benefits of e-learning with professional course. Aspiring candidates have many options to test their knowledge on AML concepts. And here is the list of simulated exams on compliance topics
Simulated exams for the aspirants of the Certification course offered by Indiaforensic can test their skills on Simulated CAME Exams. Additionally, there are mock tests available on the subjects like TBML, KYC, FATCA and CTF. These are free examinations but require user registration.