Money Laundering

Money laundering involves converting illegal money into legal tender by diverting it through different channels, making tracking of the origin of money difficult. Money laundering has potentially devastating economic, security, and social consequences.

Criminals retrieve illicit proceeds after entering into a lawful financial channel to use them for any purpose. After going through multiple laundering routes, funds are then integrated into the legitimate financial system as ‘legal’ tender. The money placed and layered is subsequently integrated into the economy and can be diverted into major investments.

The money laundering integration stage can be used to purchase assets to facilitate future money laundering.

Laundered money fuels drug dealings, terrorism activities, illegal arms funding, corruption, and other operations of criminal enterprises. Crime is increasingly becoming global in scope because of money laundering.

Three stages of money laundering

Money laundering involves placing criminal proceeds into financial institutions through deposits, wire transfers, or other means. These criminal proceeds can be any form of property.

This objective of laundering money is achieved through the various processes:

Placement

Money laundering occurs by introducing illegal profits into the financial system. In the placement stage, the money is placed into the financial system through banks, casinos, shops, and other businesses.

To avoid the traceability of illicit money, various types of transactions can be done by:

  • Breaking up large amounts of money into smaller sums and depositing them directly into various bank accounts within the country or outside the country or
  • Depositing the funds in financial institutions abroad or;
  • Buying precious goods like artwork, antique diamonds, and gold in small amounts.

These assets can be resold for payment by cheque or bank transfer.

Methods involved in the placement

Scaling

A common way that the placement stage of money laundering is accomplished is through scaling. Criminal entities take large amounts of money and divide them into less obvious and harder to track sums.

The divided money is segregated into small channels and is complex to trace. Subsequently, this divided money is retrieved by the launderer from various small channels.

Offshoring

Another method to launder money through placement is offshoring. In this method, the illegally obtained profits from criminal activities are moved overseas, far away from the source of the ill-gotten gains.

Laundering the funds abroad moves the cash away from the source. Therefore, the money is some distance between the criminals, at least on paper. However, criminal entities still control funds.The money moves through foreign investments, exchange houses, and other businesses.

Funds can be deposited in a bank, added to the accounts of an existing business or disguised as a transaction (for example, for products that are never provided).

Layering

Layering is performed to create multiple financial transactions to disguise the source and ownership of illegal funds. A complex layer of financial transactions is created to separate the revenue of criminal activity from its source.

Layering of money gradually justifies illegal funding sources and makes detection difficult. Layering involves dealing with multiple financial intermediaries to confuse Anti-Money Laundering (AML) checks.

Depositing of funds in the financial system makes detection of money laundering difficult for authorities.

Criminals use this strategy by obfuscating the audit trail through a strategic stratification of financial transactions and fraudulent accounting.

  • Change the currency of money.
  • Multiple inter-bank transfers
  • Multiple structured deposits and withdrawals, also known as ‘smurfing’.
  • Purchasing high-value products such as diamonds, cars, and real estate
  • Multiple transfers between different accounts in different countries
  • Making investments with minimal paperwork
  • Use of money ‘mules’.

Integration Stage (final stage of money laundering)

Money laundering Integration stage is the third and final stage of money laundering, wherein the cash is legitimised by criminals after positioning within the monetary device, frequently breaking it into an extraordinary couple of smaller monetary transactions.

The money is channelled through various investment transactions by making multiple transfers of a large amount of money into smaller sums and brought back to the banking account of the launderer through various small unnoticeable transactions.

In the money laundering integration stage, illicit money is brought back into the economy, which can be further used for funding criminal activities.

Money laundering takes the form of a business investment and assets are bought or sold during the layering phase.

Generally, the detection and identification of money-laundered funds are made by whistleblowers. To prevent this laundering, the source of origin of money is made untraceable.

The known methods of money laundering integration stage are as follows:

  • Real estate transactions
  • Shell company and fraudulent loan
  • Complicity of foreign banks
  • Invoice for import/export against the product which is not even provided

How to prevent money laundering?

There are several ways companies can prevent money laundering activities. they are:

Improve search with technology

With advancement in technology, artificial intelligence (AI) can detect false positives and perform searches 24 h a day, 7 days a week, and reduce burden on money laundering prevention (AML) regulators and false positives.

Regular cross-communication

Continuous communication between various stakeholders, including law enforcement agencies, governments, and regulatory agencies is essential.

Communication can inform all parties, verify suspicions, identify possible networks, strengthen public-private partnerships, and ultimately build a united front against money launderers.

Use data analysis to identify patterns

With more data available, regulators can use historical information to identify and recognise patterns and develop customer models for investigating suspicious activities.

System standardisation

Different anti-fraud policies in different regulatory bodies can cause problems in different jurisdictions that use the network of legacy computer systems.

Without standardisation, communicating and processing data with other parties to prevent fraud detection can become challenging.

Training

To prevent money laundering, the most trustworthy staff should be entrusted with delicate work. Training employees and stakeholders is essential for companies to take instant cognisance of any suspicious activity and initiate appropriate action in case of evidence of fraud.

Conclusion

In India, annually, the government loses 18 billion dollars because of money laundering to escape the tax net. Effective steps regarding this concern should be taken to enhance the tracking mechanism of the transactions of the financial transactions by individuals, companies, or any other entity.

Detecting and tracing illicit laundered money is becoming increasingly difficult due to the changing technology and integration of economies among markets. The money laundering integration stage plays a vital role in integrating financial markers, making it challenging to identify the source of funds and their objective.

The origin of the source of funds should be known by having a swift, reliable identification verification system to stop offenders in the beginning stages of money laundering. On losing track, the tracing the laundered money is difficult.

FAQs

What is the punishment for money laundering in India?

The punishment for money laundering is prescribed under Section 4 of the prevention of Money Laundering Act, 2002, which is imprisonment for a minimum of 3 years, extending up to 7 years, including a fine.

What is the maximum period for an offender's property to be attached?

The maximum period for an offender’s property to be attached is 180 days.

What is smurfing?

Smurfing is a form of money laundering in which a major transaction is divided into a series of small transactions smaller than the threshold limit to avoid reporting.
These deposits are acquired through minimal transactions from various accounts within or outside the country to avoid regulatory inspection.

Who has the onus of proof in case of money laundering?

innocent. It is deemed that such a person was involved with the proceeds of the crime unless proven otherwise.

Categories:
Criminal Law