Tackling the Menace of Money Laundering


Considering that over 50 percent of cases under the Prevention of Money Laundering Act (PMLA) since it was notified on July 1, 2005 were registered in just the last one year, it is no surprise that Prime Minister Narendra Modi’s cabinet, in its first meeting, decided to form a Special Investigation Team (SIT) to unearth the black money stashed outside the country. This indicates the commitment of the new government to pursue this serious issue in right earnest. Dimpy Gulati gives a brief overview of money laundering and the co-relation between companies and money laundering

In today’s economy, incorporating a company is the most common way of doing any kind of business. Companies are incorporated to earn profits through lawful business activity. However, the desire to make a quick buck often entices people to indulge in unlawful activities that bypass the legal system in order to achieve illegal goals. The most widespread problem affecting the global economy is conversion of income earned by illegal means into ‘income from legitimate sources’, commonly known as money laundering.

Understanding Money Laundering

Money laundering1 is the process by which income is earned from the conduct of illegal activities like drug trafficking, illegal arms sales, embezzlement, smuggling, insider trading; frauds, bribery etc. It may be committed directly or indirectly, by anyone who attempts to indulge, knowingly assists, is a party or is actually involved in any process or activity connected with the proceeds of the crime. It involves projecting proceeds of crime as untainted property.

The whole process of money laundering is conducted in three stages:

Placement: Placement is the first step wherein the person having possession of illegal money introduces the same into the financial system by either depositing small sums in different bank accounts or by purchasing travellers’ cheque and bank drafts, which are then collected and deposited into accounts at a later stage.

Layering: In layering, the person tries to separate the origin of the money by following a series of transactions like continuous movement of funds within the financial system in order to disguise the true source of the money.

Integration: Integration is the last step in which the person integrates legitimate and illegitimate money into the financial system in a way that the two cannot be differentiated. The person can then enjoy that money by investing in property, luxury cars, expensive jewellery etc.

Co-relation between Money Laundering and Shell Companies

Usually, fake companies, also known as ‘shell companies’, are incorporated in order to give effect to the entire gamut of back and forth transactions. These business entities are formed with no significant assets or on-going business activities, have no physical presence, except a mailing address, provide no employment and are of insignificant value.

Measures to Check Money Laundering

Section 4 of the Act imposes huge penalties on the person involved directly or indirectly in laundering money2. All banks are obligated to maintain and keep track of all transactions and furnish such information to the director on a monthly basis. Banks are responsible to report all suspicious transactions within seven days of establishing the true nature of such transactions, failing which they are penalised heavily.

Securities and Exchange Board of India (SEBI)3 has also issued a master circular on February 12, 2010 on anti-money laundering activities, which mandates in-person verification of clients interested in opening depository account. SEBI has also mandated the implementation of policies and procedures such as maintenance and retention of records, monitoring of transactions and reporting of suspicious transactions to concerned authorities.

International Scenario

Every country has initiated proactive steps to combat this menace. Various measures have been instituted on a global level against money laundering, like the establishment of the Financial Action Task Force (FATF) in 1989 to ensure global implementation of standards for combating money laundering. FATF identifies and responds to money laundering and terrorist financing threats. Organisations like the Basel Committee of Banking Supervision, Egmont Group, the United Nations, Asia-Pacific Group on Money Laundering, World Bank and the International Monetary Fund are also involved in anti-money laundering activities.

Money laundering threatens economic stability by giving a boost to criminal activities like terrorism, smuggling, corruption, financial fraud, drug trafficking, cyber-crimes etc. Countries have joined hands to overcome money laundering by way of rigorous punishments and confiscation of property. The recent decision of Prime Minister Narendra Modi’s cabinet, in its very first meeting, to form a Special Investigation Team (SIT) to unearth the black money stashed outside the country is a clear reflection of the commitment of the new government to pursue the issue of money laundering in right earnest.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.