Prevention of Money Laundering
by Vinod K. Shah*
Cite as : (2002) PL WebJour 7
India's security is threatened by the spread of international crime cartel, free trade, globalization and advances in telecommunications increased reach of crime syndicates. Under the auspices of UNO, there is an international campaign to crack down on an essential component of the problem of money laundering. Now countries have enacted laws to prevent money laundering and allow closer scrutiny of suspect bank accounts of criminals. Before introduction of the Prevention of Money Laundering Bill in Parliament, Government of India had issued anti-money laundering guidelines. Indian Bill embraces money laundering from drug-trafficking, terrorism, profits from prostitution, extortion, smuggled items like gold, diamond etc.
Laundering is a physical effort. It is an art of concealing the existence, the illegal source, or illegal application of income and to make it appear legitimate. The launderer has to find the means to physically transport hard cash without attracting unwanted attention and alerting government agencies in the countries of operation. It is also called cleaning "dirty money" into clean. For this purpose launderers should find a bank in a country with less stringent banking laws, strike understanding with the bank officials, purchase some property discreetly and operate. So we have tax-haven countries indicating that it has soft banking system and no tax or low tax regime. It is one end of the operation.
As the physical world of money laundering began to erode, the tendency to use electronic transfers to avoid detection gained a loyal following. Electronic transfers of funds are known as wire transfers. Wire transfer systems allow criminal organizations, as well as legitimate businesses and individual banking customers, to enjoy a swift and nearly risk-free conduit for moving money between countries. The Bill suggests the bank to report suspicions of money laundering promptly to the authorities. The Bill, likely will widen the offence of banks failing to report money laundering. Section 11 of the Bill states that every banking company and financial institutions is to maintain record of all transactions, the nature and value of which may be prescribed and to verify and maintain the records of the identity of all of its clients. However, banks have no other means to determine the truth. Many countries do not require their politicians to complete a register of interests. Trade liberalization and free trade zones provide additional money laundering venues. "We believe that it's shifting from using the banking system to using international trade to launder money."
The Bill in Section 3 deals with the offence of money laundering which states that whoever acquires, owns, possesses or transfers any proceeds of crime or knowingly enters into any transactions or deals or aids the concealment of the proceeds of crime. The expression "proceeds of crime" means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. The Bill has the schedule offence which lists 16 sections of Indian Penal Code, 6 sections of the Arms Act, 9 sections of the Narcotic Drugs Act and 4 sections of the prevention of Corruption Act. Thus the Bill is covering arms smuggling, drug-trafficking and extortion and embraces generally all activities which are capable of producing illegal money.
Structured transactions (surfing) are a pandemic way of evading the significant financial transaction and international wire transfer reporting obligations. In UK because of vagueness of the law, it remained unworkable. The use of structured transactions will be facilitated by Internet-based surfing transactions (net surfing) where transaction costs are low and the opportunities for automating structured transactions are high. Cayman Islands provides the extent and operation of the offshore industry. It has the seventh largest deposit base in the world. It has 550 banks in the territory, of which 17 have physical presence and are subject to money-laundering laws. The asset base of the banks in 1994 was $ 430 billions. Non-banking financial institutions are being used for laundering purposes as the scrutiny is being tightened on banks by law.
In Asian countries launderers use legal "underground banking" because it leaves no paper trail. Money never enters the formal banking system but is instead transmitted through alternative banking systems such as the "Hawaii" in India and Pakistan. These parallel banking systems are based on family or gang alliances and reinforced with an unspoken covenant of retributive violence. It is in this context the provisions of IPC have been included in the schedule of crime. This system generally involves depositing money in one country in exchange for a "chit" or "chop" (seal), and the remittance of this money in another country on presentation of the chit. Increasingly, money-laundering experts are focusing on Africa, as one end of the operation. "The reality is that we don't have a good handle on how much money laundering there is in Africa because money launderers tend to want their money somewhere that is safe", says Interpol's Mr Brown. However, he does acknowledge that criminal groups are buying banks in Africa to use as transit points before wiring money to banks in more established markets. UNDCP, which sees Africa, and all developing regions of the world, as a new target for money launderers. By definition, money laundering involves hiding, moving, and investing the proceeds of criminal conduct. Even legal money can become illegal, for example, if moving it violates a country's foreign-exchange controls or other financial regulations.
Role of Banks
It would be great help if all banks file appropriate reports in time. Banks' role in preventing money laundering begins with Know Your Customer (KYC) and to watch activities inconsistent with customer's business. Banks' operating staff should monitor suspicious activities/transactions like large deposits immediately followed by wire transfers, large cash transactions, changing currency to higher denomination notes etc. It must be borne in mind that illegal money can be moved by all manners or means. Criminal groups may deposit heavy cash in check-in account and withdraw it by debit cards or wire transfers. The more automated the banking and financial system becomes, the less face-to-face contact between clients and employees and the greater the holes in the detection net unless client information is electronically scanned for abnormal patterns and connections. This growing reality has already been recognised in Australia in the context of significant cash transactions reports and details of all wire transfers the data is automatically sent by the banks to AUSTRAC for checking and the checking process involves a variety of pattern matching and other computer-based detection routines. Such a system may be adopted by banks or similar system may be developed suitable to Indian conditions.
There is much disenchantment with suspect transaction reporting. Firstly it is difficult to distinguish between objectively suspect transactions or those which short of the threshold, merely suspected. Unusual transactions may provide critical linkage. It is basically shadowing the customer. Banks will have to do it, if they were to smoke out all the laundering and fraud (Michael Levi, Money Laundering & Regulatory Policies, Harwood Academic, 1997 at 279.)
Launderers want banks
Banking and cyberbanking will attract launderers because of its potentials in placement, layering and integration. The placement is desired of large money in banks as legitimate repositories. In the initial or placement stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders etc.) that are then collected and deposited into accounts at another location. Layering means moving assets through series of transactions to camouflage the source and ownership. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not cooperate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. Having successfully processed his criminal profits through the first two phases of the money-laundering process, the launderer then moves them to the third stage integration in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures. Greater the layers, harder to determine the beneficial owner. This particular aspect is well guarded in cyberbanking, because of cryptographic technology. There is need to integrate for the launderers because they want to inject monies into mainstream economy for larger benefits and raking profits further. Cyberbanking may facilitate first person-to-person cash like transfers without cash i.e. ATM or smart card technologies etc. Alan Tyree has said that the money-laundering problems raised by smart cards or computer transfer in street drug deals or prostitution should not be overstated since those means are unlikely to supplant the use of cash unless transfers are or can be anonymous and until portable terminals are available, hence cash-based money-laundering control systems may be little affected. Much depends on the extent to which smart cards become readily accessible at street level and there can be little doubt that drug traffickers would have an incentive to insist on payment by means of anonymous smart cards. Moreover, money-laundering is a social problem not only in the context of drug-trafficking but also in relation to major areas of white-collar and corporate crime including tax evasion, corporate fraud, and insider trading and resort to smart card technology may well become a standard part of the modus operandi of offenders of this ilk. (Allan Tyree Digital Cash, Sydney: Butterworths, 1997 at 4.84 - 4.85.)
Why banks should join battle?
It affects integrity of the banking and financial services. The confidence of banks' customers rests heavily on the perception that it functions within a framework of high legal, professional and ethical standards. A reputation for integrity is one of the most valuable assets of a financial institution. If funds from criminal activity can be easily processed through a particular institution either because its employees or directors have been bribed or because the institution turns a blind eye to the criminal nature of such funds the institution could be drawn into active complicity with criminals and become part of the criminal network itself. Evidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers. Banks in India are equipped and aware of the problems of money laundering and can do enough to tackle the problem. The Indian Bill has laid down procedure for search and seizure, line of administrative authorities for implementation. It is hoped with this legislation, we join international effort in combating money laundering.