Money Laundering - A Big Crime

MONEY LAUNDERING

Introduction:

The word "laundering" has been derived from cleaning dirty clothes. Money laundering means conversion or laundering of money which is illegally obtained.

Commonly used definition by FATF "The Financial Action Task Force on Money Laundering" defines money laundering as "the Processing of criminal proceeds to disguise their illegal origin" in order to legitimize the ill gotten gains of crime.

In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators to encompass any financial transaction which generates an asset or a value as the result of an illegal act.

Process:

Money laundering is often described as occurring in three stages: placement, layering, and integration:-

ð    Placement: It refers to the initial point of entry for funds derived from criminal activities.

ð    Layering: It refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle.

ð    Integration: It refers to the return of funds to the legitimate economy for later extraction

How much money laundering occurs every year?   (Source: www.fatf-gafi.org)

The International Monetary Fund, for example, has stated in 1996 that aggregate size of money laundering is between 2% and 5% of world's GDP. Using the 1996 statistics, there percentages indicate that money laundering ranged between US$ 590 billion (Rs.2655000 crores) and US$ 1.5 trillion.

Role of FIU-IND and overview of the prevention of money laundering Act, 2002:

The government of India vide O.M. dated 18^th November, 2004, set up the financial intelligence unit - India as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.

The Prevention of Money Laundering Act, 2002 (the act) and the rules notified there under came into force with effect from July 1, 2005

Punishment for money laundering:

Section 4 of the Act provides that any person who commits the offence of  Money Laundering shall be punishable with rigorous imprisonment of not be less than three years but may extend to seven years and also liable to fine five lakh rupees. But any offence specified under the Narcotic Drugs and Psychotropic Substance Act, the punishment may extend to rigorous imprisonment for ten years.

Maintenance of records:   Sec. 2(1) (w) of the Act, defines Records.

"Records include the records maintained in the form of book or stored in a computer or such other form as may be prescribed;"

Section 12 (1) (a) of the Act, makes that it is compulsory for every banking company, financial institution, and an intermediary (Intermediary means a stock broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with security market and registered under Section 12 of the SEBI Act, 1992) to maintain a record of all transactions. i.e. nature, amount, date and party.  

Furnishing of information:

The Principal Officer of a banking company, the financial institution and intermediary, shall furnish the information in respect of specified transactions every month to the Director by the 15^th day of the succeeding month.

Identity of clients:

Section 12 of the act rules there under require every banking company, financial institution and intermediary to verify and maintain the records of the identity of all its clients, in such manner as may be prescribed. Presently compliance with KYC (Know Your Customer) norms as introduced by RBI have been made mandatory.

Client Identification programme:

Every banking company, financial institution and intermediary shall formulate and implement a client identification programme that it considers appropriate to enable it to determine the true identity of its clients as the required under the Act, A copy of the client identification programme is also required to be forwarded to the Director, FIU-IND.

Technology Vulnerabilities to Money Laundering:

At the dawn of the 21^st century the financial transactions are operating in a digital form with money transfer on computer screens. And the rise of the electronic banking and e-payment system presents lot of opportunities for money laundering.

The implementation of KYC procedures thus becomes slightly difficult when the customer could be anybody in front of the computer screen from any part of the world.

Money laundering and the Insurance sector:-

ð     The insurance sector is very much susceptible to money laundering as compared to other financial institutional sector.

ð     Insurance product is more complex as compared to banking product which results in lack of thorough check on the insurance products in terms of money laundering.

ð     The method of payment generally attractive to money launderers is like cash and wire transfer which results in lack of audit trail when the subsequent investigation is carried out.    

ð    The customer and the insurer may not get to see each other face to face.  

Money laundering indicators in insurance sector:

ð    Use of cash for purchase of insurance policies is an unambiguous mark of suspicious activity

ð    Use of false addresses for establishment of customer relationship or use of post box address for hiding identity.

ð    Offering high premium payment as compared to verifiable legitimate income.

ð    Unexplained changes in name of the beneficiary without any valid reason for the same.

ð   Claims placed by customers within a very short period from initiation of insurance coverage.

ð    Payment of policy premiums oriented from different sources.

ð    Involvement of third party, especially when premium is paid.

IMPORTANT NOTE:

For graphs and charts related to MONEY LAUNDERING click: http://www1.worldbank.org/finance/html/amlcft/docs/aml_westafrica.pdf

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