Money Laundering And The Process Finance Essay

To study about the Modus operandi of Money Laundering and the process which states "How to Launder money"

To have an imperial study of Money Laundering by taking various live cases.

To study what has been the impact of money laundering in India

Materials and methods

The report is based on Secondary Research.

The sources through which the data is collected is through:

websites, articles, journals.

Books based on concepts and principles of finance

Live cases from various legal books and legal websites.


Money laundering can be described as the manipulation of illegally acquired funds in order to make its true source or nature difficult to understand. It other words it can be defined as the process of creating an appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist financing, originated from a legal source. There are a variety of ways in which the illegal money can be laundered and can range in sophistication. Such methods with the proceeds of criminal activities that if successful will leave the illegally derived appearing as the product of legitimate investments or transactions. There is a myth in the society regarding the line of difference between converting black money into white money and money laundering. The reality is that if the launderer simply conceals income and violates income tax Act, he is not committing money laundering.

Banks, financials institutions and intermediaries are obligated, by law, to keep an eye on transactions which enables someone to make a gain of Rs 30 lakhs or above by violating any of the Acts, like Air prevention and control of pollution Act, SEBI Act, Prevention of corruption Act. Money launderers indulge in big-ticket as well as small ticket scams.

According to prevention of Money Laundering Act(PMLA), the director of FIU-IND can impose fines on banks and other financial institutions if they fail to detect or conceal wrongdoings. For the banks to do so have set up many regulations like strict "KYC norms" and other "AML" policies.

The consequences of money-laundering operations can be particularly devastating to developing economies. Left unchecked, money launderers can manipulate the host’s financial to operate and expand their illicit activities. Apparently, legitimate but criminally owned businesses financed by laundered capital can quickly undermine the stability and development of established institutions. Money laundering activities can undermine the integrity and stability of financial institutions, discourage foreign investment, and distort international capital flow.

Money launderers exploit differences between national anti-money laundering laws and systems, and are especially attracted to jurisdictions with weak or ineffective control where they can move their funds more easily. Moreover, problems in one country can quickly spread to other countries. The world’s largest and wealthiest economies tend to serve s the primary hosts for money launderers and their operations.

The money laundering crimes are subject to rigorous imprisonment of not less than 3 years and upto 7 years. The PMLA Amendment Bill has proposed that jail term should go upto 10years

Anti-money laundering has become a serious issues due to the possibility of such funds being used for terrorist financing, apart from the revenue loss to the government.

The reserve Bank of India’s seriousness in this matter can be gauged from the fact that it significantly delayed the banking license of and stalled a mutual fund acquisition by a Swiss bank, on its reluctance to cooperate with Indian authorities to unravel a trail of funds involving racehorse owners and Saudi arms dealers.

India now has a specific money Laundering law in the "Prevention of Money Laundering Act,2002" and its intention is to become a full member of Financial Action Task Force.

Money laundering is not merely a white collar crime that robs a government of tax revenue. It is a hidden cancer that allows criminal activity to seeps through all sectors of legitimate business, making detection of, and enforcement against such crimes extremely difficult.

Main objectives of Money laundering activities are:

Concealing the true ownership of illegally obtained money

Placement, layering, and integration of such funds

Literature Review







Mystery Shopper' Money Laundering Scams

Brett Christensen and Hoax-Slayer

Emails that offer mystery shoppers lure the people and trap them into their money laundering schemes.

Emails offer recipients part time work as mystery shoppers and promise to send cheques for them to use in their shopping evaluations. The Jobs offered in such emails are money laundering scams. The cheques sent are in fact fake or stolen. This is a method of converting bogus cheques into cash. The scammers can thereby abscond with their stolen money while leaving the hapless "mystery shopper" to deal with any legal consequences.


The Economis of Crime and Money Laundering: Does anti-money laundering policy reduce crime ?

Joras ferwerda, Utrecht School Of Economis

Crime rate can be reduced by: increasing the probability to be caught for money laundering, increasing the punishment of money laundering, and by increasing the transaction costs of money laundering.

The criminalization of money laundering is modelled, following the law and economics strand of the literature which is described as the economics of crime. The theoretical model shows that a)the probability to be caught for money laundering, b) the sentence for money laundering, c) the probability to be convicted for the predicate crime and d) the transaction costs of money laundering are negatively related to the amount of crime. Under the assumption that these factors are all positively influenced by a stricter anti-money laundering policy, the hypothesis empirically tested in this paper is that anti-money laundering policy deters potential criminals from illegal behavior and therefore lowers the crime rate.


Money Laundering in Banking Sector

Mrs. Sandhya Singh, Lecturer, MBA Department, SRMSCET, Bareilly

Two cardinal rules that are observed by bank officials for steering clear of the Money Laundering Trap

The Basle Principles suggest policies and procedures in four areas to curb Money Laundering:

1. Customer Identification

2. Compliance with Laws

3. Cooperation with Law Enforcement agencies, and,

4. Adherence to the Statement.


Money laundering risks of prepaid stored value cards

Kim-Kwang Raymond Choo

Risk of misuse of prepaid stored value cards to keep the proceeds of crime and move them across borders without alerting law enforcement and financial intelligence units.

To reduce the money laundering risk, SVC providers need to be aware of and comply with local regulatory requirements such as AML/CTF regulation, and prudential and financial regulations. Compliance with these measures can, however, be challenging and expensive for SVC providers, although the potential legal liability and reputational risk for non-compliance can be significantly costly.

he burden of compliance is more significant for smaller, local institutions, where "know your customer" and reporting requirements are less automated’.

Theoretical Framework


Who will come across the suspicious transaction?

Financial entities, includes banks, credit societies, trusts and lending

Institutions/companies and agents of such institutions who accept deposit liabilities

Life insurance companies, brokers or agents

Securities dealers, portfolio managers and investment bankers, and other middleman in securities markets

Forex dealers

Agents, who are selling National savings certificates, money orders and other Financial Instruments

Chartered Accountants while carrying out certain activities on behalf of their clients

Real estate, brokers or sales representatives of real estate when carrying out certain activities on behalf of their clients

The illegally obtained money is set to pass through three evitable stages of the process, namely the Placement stage, the Layering stage, the Integration stage.


The proceeds of criminal conduct, usually in the form of cash, are moved away from the location where it was obtained and placed in the financial system. Entry into the financial system is usually gained through financial institutions. The process of placement can be carried out through many processes including:

Currency Smuggling – This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail FATF 1996-1997 Report on Money Laundering Typologies.

Bank Complicity – This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organised crime groups. This makes the process easy for launderers. The complete liberalisation of the financial sector without adequate checks also provides leeway for laundering.

Currency Exchanges – In a number of transitional economies the liberalisation of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies.

Securities Brokers – Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds.

Blending of Funds – The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions.

Asset Purchase – The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.


In the second stage the money, which is now in the form of electronic funds, is distributed through the financial system. This done by layering one transaction involving these funds on top of another by means of electronic transfers, shell companies, false invoices, etc. The result of these transactions is that the laundered money becomes indistinguishable from "legitimate" money. The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies. The known methods are:

Cash converted into Monetary Instruments – Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders.

Material assets bought with cash then sold – Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.


In the integration stage the money that was diffused into the commercial sphere is collected and made available to the offender under the guise of being legitimate earnings. In this, the launderer finds a beneficial mode of investment and makes his dirty money to appear legitimate. This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. This is dissimilar to layering, for in the integration process detection and identification of laundered funds is provided through informants. The known methods used are:

Property Dealing – The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered legitimate.

Front Companies and False Loans – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction.

Foreign Bank Complicity – Money laundering using known foreign banks represents a higher order of sophistication and presents a very difficult target for law enforcement. The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries.

False Import/Export Invoices – The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports.

Tools of money laundering:

Smurfing: it is used as a tool by money launderer. It involves multiple deposits of low value monetary instruments purchased from banks or financial institutions with proceeds of crime. It may be in several forms like, multiple deposits of cash or monetary instruments in amounts specifically below the ceiling amount(it is Rs.50000 in India). It can be done by one or more persons by making deposits into one or more accounts during several visits to banks. Sometimes, it involves, deposits of multiple monetary instruments into accounts with different financial institutions.

Structuring: it is through multiple cash deposits or withdrawals at amounts below the ceiling amount. Both structuring and smurfing are similar types of suspicious activity, which may result in money laundering.

Shell companies: these are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services, they simply create the appearance of legitimate transactions through fake invoice and balance sheets.

E-banking/Cyber banking: many banks have started providing their banking services on net by taking advantage of the global reach of the internet and world wide web. Cyber banking is vulnerable to money laundering because it facilitates fast movement of funds across the globe within a short span of time and anonymity of user.

New money laundering possibilities offered by the digital money system and by the development of Internet

To the greatest pleasure of the laundries, the "face to face", respectively "know your client" principle gets more and more injured by the expansion of online. It is not in the power of the banks, economic units to know who is standing exactly behind the transaction (phone, computer). Who has the disposal of user name and the password belonging to it, can open bank account online; can order international business enterprises; can participate in different share trading models; can communicate via nameless e-mail; can diffuse money through online casinos and betting offices; can buy houses via Internet; can penetrate money through online auctions; can open his own off-shore or online bank, i.e. can do nearly everything.

The possibility of opening online bank account and the banking and electronic payment systems operated through this terminate more and more the need of personal contact. Making use of the free and anonymous services offered by e-mail have access via the Internet to the letters and bank accounts of their own and of others (e.g. in Internet café or in public library). Thus they can create an e-mail possibility which will be then used only from public terminals, that means it's nearly impossible to follow that kind of communication access and utilization. To cover their transactions, they use online channels, deemed to be legal, suitable for money transfer, as e.g. E-Gold or Gold & Silver Reserve, whilst they use names which refer to their position in the hierarchy and their age (e.g. decoders, young people, flock). Let's imagine that one of these groups obtains our personal data or can create false identity. Then he can open with it as much accounts as he wants, has access to them anytime and from anywhere in the world, i.e. can easily launder money through them.

The spreading of prepaid card mobile phones also offers opportunity for anonymity. These can easily be bought without knowing the buyer's identity. Moreover, certain criminal groups are coding their phones with such a sophisticated safe digital method, that it's nearly impossible to trace them.

It's possible to play in the virtual casinos and online football pools sides from any point of the world. Most of them operate as off-shore company of course, and the organised crime is standing in the background. The money laundering trick is as follows. In order to play for "prize", first a credit line is to be registered at the casino. Exploiting the lack of regulation, the most simple is to send average amount of cash. Some gambling is played and the rest of credit line is claimed in form of cheque or transfer.

The sex and pornographic pages as by-product of the sex industry also offer enormous possibilities for those wanting to launder money.

With the use of virtual money used in Internet games, the gambling regulation can be evaded and the criminals can launder illegal money. The registered users can participate in different gambling for the money "issued" by the company. Some companies accept this virtual money for means of payment too, i.e. changes into official currency, thus it becomes available everywhere in the world and can be transferred to everywhere. (E.g. the Internet community building company - where more than 220 million chatters have registered by January 2007 - puts popular virtual money, called Q coin, to the disposal of the users, based on determined Yuan rate, for buying electronic services)

Anti-money Laundering

AML is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent, detect and report money laundering activities. Anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force(FATF) and the promulgation of an international framework of anti-money laundering standards. These standards began to have more relevance in 2000 and 2001 after FATF began a process to publically identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as "name and shame".

An effective AML program requires a jurisdiction to have criminalized money laundering, given the relevant regulators and police the powers and tools to investigate, be able to share information with others countries as appropriate, and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.

RBI has instructed all banks to adopt KYC/AML Policy:

To prevent criminal elements from using the banking system for money laundering activities.

To enable the bank to know/understand the customers and their financial dealings better, which in turn would help the bank to manage risk prudently.

To put in place appropriate controls for detection and reporting of suspicious activities in accordance with applicable laws/laid down procedures.

To comply with applicable laws and regulatory guidelines

To take necessary steps to ensure that the concerned staff is adequately trained in KYC/AML procedures.


Reserve Bank Of India

The RBI has said that every bank should set key indicators for accounts, taking note of the background of the customer, the type of transactions involved and the other risk factors.

The RBI has asked Indian banks to put in place a proper policy framework on the "know your customer"(KYC) guidelines and "Anti-Money Laundering(AML) measures".

It has asked all commercial banks to submit their plan of action with regards to deployment of AML systems by 2006. And submit the final report on the solutions and infrastructure installed by December 2006.

Banks should put in place a system of periodical review of risk categorization of accounts.


SEBI has asked non-banking agencies to put in place their AML policies and KYC norms and procedures.

All this is good news for the country’s software industry, which is sitting on a $2 billion market for AML solution.

Guidelines by SEBI

Written anti-money laundering procedures

Customer due diligence

Elements of customer due diligence

Policy for acceptance of clients

Risk based approach

Clients of special category

Clients identification procedure

Record keeping

Retention of records

Monitoring of transactions

Suspicious transaction monitoring and reporting

The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005 . Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act. 

The PMLA and rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

Objectives of the PMLA

To prevent, combat and control money laundering.

To protect the company from being used for money laundering.

To confiscate and seize the property obtained from the laundered money.

Undertake periodic Customer Due Diligence measures which are sensitive to money laundering and terrorist financing risks.

To comply with applicable laws as well as norms adopted internationally with references to money laundering.

To deal with any other issue connected with money laundering in India.

What is Know Your Clients?

Reserve Bank of India (RBI) circular on AML/ KYC states:

"The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently"

Banks should frame their KYC policies incorporating the following four key elements:

a) Customer Acceptance Policy;

b) Customer Identification Procedures;

c) Monitoring of Transactions; and

d) Risk Management.

KYC (also commonly referred to as Client Due Diligence) involves verifying an investors identity as well as checking that the investor’s activities are in line with the identity which they have claimed.

The Prevention of Money Laundering Act, 2002(PMLA) & SEBI Circular ISD/CIR/RR/AML/1/106 require CSSIPL to collect certain information about each investor and verify their identity, supported by relevant identification documents.

In accordance with client identification requirements introduced under Rule 9 of PMLA rules, CSSIPL is required to collect certain information about each investor. This includes collecting proof identity, proof of address, photograph such other documents including in respect of nature of business and financial status of the client as may be required by the CSSIPL of investors in the capacity of beneficial owners, directors, authorized persons, Delegation of Authority or Power of Attorney holders or any key stakeholders of the relationship.

In accordance with client identification requirements for corporate entities under rule 9 of PMLA Rules of PMLA, CSSIPL is required to obtain documents to establish incorporation status, mandate of governing body, or equivalent documents. Additional documents to determine financial soundness, source of income, of the client may be required as supporting identification documents.


KYC is required out at the following stages:

Prior to establish a new relationship.

Opening of subsequent account where documents or KYC information has changed since opening the initial document.

Opening a locker facility where these documents are not available with the bank for all locker facility holders.

From time to time when CSSIPL feels it necessary to obtain additional information from existing customers based on conduct of the account.

When there are changes to signatories, mandate holders, beneficial owners etc.

After periodic intervals based on instructions received from RBI.

Famous criminal cases

Sani abacha

During Sani Abacha’s five year reign (1993–1998) as military dictator of Nigeria he and his family managed to transfer national funds of up to £5 billion ($8 billion) into foreign bank accounts. Listed by Transparency International as the fourth most corrupt leader in recent history, Abacha was named as being responsible for wholesale looting of up to 10% of Nigeria’s national income. Following his sudden death in 1998 — possibly due to poisoning — the Nigerian government was able to recover $2 billion of the funds. Abacha’s family insists to this day that the vast amount of money was generated by wholly legal means.

The BCCI Scandal

At its peak, the Bank of Credit and Commerce International (BCCI) was the seventh largest private bank in the world. However, during the mid-1980s the bank was found to be involved in various fraudulent activities including massive amounts of money laundering. Billions in criminal profits, including drug money, went through its accounts. The bank was not too picky about its customers, either: clients included Saddam Hussein, former military dictator of Panama Manuel Noriega, and Palestinian terrorist leader Abu Nidal. It has also been alleged that the CIA used accounts at the BCCI to fund the Afghan Mujahideen during their war with the Soviet Union in the 1980s.

The benex scandal

In what was to become known as the "Benex Scandal," vast sums of money with suspected links to the Russia mafia made its way into "Benex Worldwide" accounts at the Bank of New York, one of America’s oldest and most prestigious banks. This so called "capital flight" money — the economic term applied when money or assets rapidly flow out of a country — was then distributed amongst various European companies before returning to Russia. It is estimated that between 1996 and 2002 between $7 and $9 billion was laundered through the Bank of New York accounts. After a massive police operation, numerous arrests were made

Franklin Jurado

In 1996, Harvard educated Franklin Jurado pleaded guilty to laundering $36 million on behalf of Colombian drug lord José Santacruz-Londoño. Using his economic smarts, Jurado moved the cocaine profits far and wide in an effort to make them seem like legitimate earnings. After being funneled through various European banks and companies, the funds would eventually make their way back to Santacruz-Londoño’s businesses in Colombia. Eventually, a bank collapse in Monaco highlighted Jurado’s connection to several accounts. An extremely noisy bank counting machine at his house in Luxembourg did not help his cause, either. He was sentenced to seven-and-a-half years in jail.


Nauru is a tiny Pacific island, 1,200 miles off the coast of New Guinea. It may well be one of the most obscure places on earth. However, this little-known landmass was also at the center of some of the highest profile money laundering activity of recent years. In the late 1990s, Russian criminal gangs laundered around $70 billion through "shell banks" registered on Nauru. Shell banks exist only "on paper" (they don’t have a physical presence in any country), and Nauru allowed its banks to operate without recording the identities of its customers or the trail of deposited money in its accounts. All of which made them extremely popular with money launderers. Since 2001, Nauru has taken steps to clean up its act and has accepted financial aid from Australia.

Al Capone

The best known of America’s mobsters was at the forefront of the birth of modern money laundering schemes. It is estimated that he laundered $1 billion through various businesses. His first businesses were in fact laundromats, which, being cash operated, were very helpful in hiding and disguising illegal gains. The fact that Capone made use of the laundry trade is frequently given as the origin for the phrase "laundering" — however this is still subject to debate. Capone was eventually indicted in 1931 for a different financial crime: tax evasion.

Meyer lanskey

Following Capone’s imprisonment one of his contemporaries, the Polish born "mob’s accountant" Meyer Lansky, deduced that he needed to hide the root of money gained through illegal means in order to avoid the law. It has been said that he can be credited with establishing the modern form of money laundering. He siphoned off around $1 billion from his growing casino empire into Swiss bank accounts and businesses in Hong Kong, South America and the Caribbean. He was never convicted and died in 1983 with an estimated net worth of $100 million.

Ferdinand Marcos

Ferdinand Marcos, an ex-lawyer, was president of the Philippines from 1965 to 1986 before being removed from power by a popular uprising. During his reign he laundered billions of dollars of stolen public funds through banks in the US and Switzerland. It took the Philippines a massive operation, known as "Operation Big Bird," to retrieve the money (estimated as US$7.5 billion). As a memorable indication of Marcos’ opulent lifestyle it is widely remembered that his wife Imelda owned over 2,500 pairs of shoes.

President Suharto

Coming in at number one on Transparency International’s most corrupt leaders list, Suharto was President of Indonesia from 1967 to 1998. After his forced resignation, Time Asia magazine estimated the Suharto family’s wealth at $15 billion, and of this $9 billion was alleged to have been deposited in an Austrian bank. Allegations were also made that up to $73 billion had passed through the family’s coffers during Suharto’s presidency. He died in 2008, aged 86, and escaped trial due to his advanced age.

Pablo Escobar

The most successful criminal ever known, it has been said that at one point Pablo Escobar was so rich he spent $1,000 a week on rubber bands in order to wrap his bundles of cash. Escobar’s business was drugs — at one time his cartel controlled 80% of the world’s cocaine trade. Laundering money was central to Escobar’s empire, and his recipe for success was relatively simple: "[Y]ou bribe someone here, you bribe someone there, and you pay a friendly banker to help you bring the money back." In 1989, Escobar’s personal fortune was estimated at $9 billion, making him the seventh richest man in the world. His criminal career — and life — ended in 1993 following a gun fight with Colombian authorities.


The money laundering Scandals

Russian Money Laundering Scandal

This scandal became public during the summer of 1999, with media reports of $7 billion in

suspect funds moving from two Russian banks through a U.S. bank to thousands of bank

accounts throughout the world. Two Russian banks deposited more than $7 billion in

correspondent bank accounts at a New York bank. After successfully gaining entry for these

funds into the U.S. banking system, the Russian banks transferred amounts from their New

York bank correspondent accounts to commercial accounts at the bank that had been opened

for three shell corporations. In February 2000, guilty pleas were submitted by a bank

employee and spouse and the three corporations for conspiracy to commit money laundering,

operating an unlawful banking and money transmitting business in the United States.

Operation Wire Cutter

The U.S. Customs Service, in conjunction with the Drug Enforcement Administration (DEA)

and Colombian Departamento Administrativo de Seguridad, arrested 37 people in January

2002 as a result of a two-and-one-half-year undercover investigation of Colombian peso

brokers and their money laundering organizations. These people are believed to have

laundered money for several Colombian narcotics cartels. Laundered monies were

subsequently withdrawn from banks in Colombia in Colombian pesos. Investigators seized

more than $8 million in cash, 400 kilos of cocaine, 100 kilos of marijuana, 6.5 kilos of

heroin, nine firearms, and six vehicles.

Wire Remittance Company

Both a wire remittance company and a depository institution filed SARs outlining the

movement of about $7 million in money orders through the U.S. account of a foreign

business. The wire remittance company reported various persons purchasing money orders at

the maximum face value of $500 to $1,000 and in sequential order. They received amounts

ranging from $5,000 to $11,000. The foreign business identified by the wire remittance

company also was identified as a secondary beneficiary. The money orders cleared through a

foreign bank’s cash letter account at the U.S. depository institution.

Ketan parikh

The Indian cases involved that of Ketan parikh who brought the stock market to fall and

many Indian politicians who received kickbacks for performing there executive functions

through Hawala channels. The Hawala Mechanism left virtually no paper trail, which would

attract investigations7. The profits generated from Hawala were surreptitiously invested in

real estate, gilt edged securities etc., to launder them. The list is unending and there is dire

need to control these forces.


The Enforcement Directorate has registered a case against Satyam Computer and its tainted founder-chairman B Ramalinga Raju for alleged money laundering.The ED sources alleged that Raju had diverted funds of Satyam into purchasing nearly 50 plots in Medchal and Qutbullahpur near Hyderabad. The ED alleged that several hundred crore rupees had been diverted from the Satyam Computer accounts and had been invested in purchasing land and other infrastructure for Maytas. The Directorate will go through deals of the IT company and ascertain their genuineness including payments made to acquire companies abroad. The ED will also send a team to a few countries to investigate and get documents of bank accounts opened in violation of Indian laws

Hasan Ali Khan

India's lone banking regulator, Reserve Bank of India, recently blocked the application of Swiss bank UBS for a banking license in India on the ground that it was involved in $8 billion money-laundering racket. RBI said it put the UBS application on hold because the bank failed to cooperate in a money-laundering case in which controversial Bombay-based businessman Hasan Ali Khan was involved. Khan is charged with large-scale breaching of India's currency controls. RBI investigators found the link between UBS and Khan, as the businessman had deposited $8 billion at a Zurich branch of UBS. They cited it as direct evidence for blocking the license of the bank.

Money Laundering: The Indian Scenario

The concept of Money Laundering can be traced back to the "Hawala" transactions well known in India for long time now. Hawala mechanism facilitates the conversion of money from black to white."Hawala" is the transfer of money or information between two persons using a third person.The Hawala mechanism usually does not leave any paper trail and thus is a nightmare for the investigative agencies. The profits generated from Hawala transactions are covertly invested in real estate, films etc. so as to launder them.

A few years back it was thought of only petty crime, but with the changed circumstances, especially after terrorist activities after September 11, 2001 attack on World Trade Centre, money laundering is considered as a very serious crime. Worldwide special Acts have been passed to check such activities.

The criminals have developed number of methods for the purpose of "Structuring" and "Laundering" currency in the process of converting it from "dirty" to "clean" funds. The major risk to a bank is in the potential for complicity and violation of Acts if such funds are channeled through that Bank.

In India, a number of Acts have existed which played the role of prevention of money laundering, though these were not so named. However, in India, we have certain statutes, as given below that incorporate measures which attempt to address the problems of money laundering:-

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; The Income Tax Act, 1961 The Benami Transactions (Prohibition) Act, 1988 The Indian Penal Code and Code of Criminal Procedure, 1973 The Narcotic Drugs and Psychotropic Substances Act, 1985 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

In November, 2002, PARLIAMENT approved the long-pending legislation to prevent the offence of money laundering. The President gave its assent to the Bill in January, 2003. The Bill was originally passed in December 1999 by the Lok Sabha and sent to the Rajya Sabha. The Upper House approved the Bill in July 2002 with amendments suggested by the Select Committee. The Bill in its modified form is, however, regarded as a diluted version of the original one. This is because the definition of the offence of money-laundering itself has been watered down.

Money Laundering Act is an endorsement of various international conventions to which India is a party, and it seeks to declare laundering of monies carried through serious crimes a criminal offence. The Act also lists modalities of disclosure by financial institutions regarding reportable transactions, confiscation of the proceeds of crime, declaring money laundering as an extraditable offence and promoting international cooperation in investigation of money laundering.

The Act allows for confiscation of property derived from or involved in money laundering. Co-operative banks, non-banking financial companies, chit funds and housing financial institutions come under its ambit.

The Act also makes it mandatory for banking companies, financial institutions and intermediaries to maintain a record of all transactions of a prescribed value and to furnish information whenever sought within a prescribed time period. Thus, these entities are required to maintain the record of the transactions for 10 years.

The minimum threshold limit for certain categories of offences under the Indian Penal Code and other legislations has been fixed at Rs 30 lakh in the Bill.This limit is further likely to be reduced to Rs.10 lakh.


Feb 12, 2013,

A Ranchi court on Tuesday allowed the Enforcement Directorate (ED) to question jailed former Jharkhand chief ministerMadhuKoda in a money laundering case allegedly involving businessman Anil Bastawade,

Feb 7, 2013

The Delhi high court asked the Central Board of Direct Taxes (CBDT) to furnish an action taken report on allegations of money laundering to the tune of Rs 6,530 crore relating to action taken on a letter by the Indian High Commission in Singapore raising an alarm about the huge transaction. It has fixed March 20 as the next date of hearing. 


The combating of money laundering presupposes the existence of capacity and resources at national level. In India Prevention of Money-Laundering Act, 2002 has been passed which came into effect since 1st July, 2005. As per section 3 of the Act, offences of money laundering covers those persons or entities who directly or indirectly attempts to indulge or knowingly assists in any activity connected with the proceeds of crime and projecting it as untainted property, such person entity shall be guilty of offence of money-laundering.

Section 4 of the Act prescribes punishment for money laundering with rigorous imprisonment for a term which shall not be less than 3years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned in paragraph 2 of part A of the Schedule, the punishment shall be upto 10years.

Section 12(1) prescribes the obligation on Banking companies, financial institutions and intermediaries

To maintain certain records detailing the nature and value of the transaction which may be prescribed, whether such transaction comprise of single transaction or series of transaction integrally connected to each other, and were such series of transactions taken place within a month.

An effective anti-money laundering program will help minimize exposure to transaction compliance, and reputation risk.

The AML norms such as "Know Your Customer" emphasize that banks must keep a record of their customers backgrounds in order to reduce and control the risk of money laundering.

The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions.

Strict investigations under the Acts to detect the original source of transactions.

The following hypothetical example will highlight the importance of investigation:

Mr X is the leader of an organised criminal group that generates income through the sale of drugs. Mr X is the main beneficiary of this criminal activity, but never becomes involved in the actual purchase or sale of any drugs.

The purchase and sale of the drugs are undertaken by lower ranking members of the group. These members all have access to bank accounts. On Mr X’s instructions, some members deposit payments from drug sales into these accounts, while others withdraw payments for drug purchases from these accounts.

The surplus funds in the accounts are periodically transferred to an account held by a shell corporation of which Mr X is the director. From this account, funds are transferred to an account held by Mr X under the guise of a salary paid to him. Apart from this, luxury items are bought in the name of the shell corporation for use by Mr X.

Normal investigative methods will link the lower ranking members of the group with drug-dealing. However, this will not expose Mr X’s involvement in these activities. By extending the investigation beyond drug-dealing, it will be possible to establish where the funds go that are generated by the drug-dealing. Once these funds are traced to the shell corporation, it will be possible to establish the link between members dealing in drugs and the income of the shell corporation. If this is followed by investigation of the next step in the process, the link between Mr X and the shell corporation, and consequently the drug dealers can be established.

This investigation can also be approached from another perspective. By starting the process with an investigation of Mr X’s lifestyle, his income and the property that ostensibly belong to him can be traced back to the shell corporation. Tracing the funds further will reveal the connection between the shell corporation and the accounts used by the members of the organisation for the operation of the criminal group. Once this is achieved, it will be possible to link the activities of the members of the group with the leader of the group.

Combating money-laundering provides law enforcement authorities with an additional weapon to fight organised crime. The efficacy of this weapon is increased substantially if it is used hand-in-hand with a system to enable the forfeiture of proceeds from criminal activity.

The continued existence of an organised criminal group is dependent upon its ability to recycle the proceeds of its criminal activities and to use these proceeds to sustain future criminal activity. If an effective forfeiture system enables the removal of the proceeds of an organised criminal group’s activities, this cycle can be broken. This allows law enforcement authorities to use financial disruption as one more line of attack on organised criminal groups.

The aim of a money-laundering investigation is to identify the relationship between the funds or property representing the proceeds of criminal activity and the underlying criminal activity from which these proceeds had been acquired. If this type of investigation is carried out successfully, it will enable law enforcement authorities to identify the underlying criminal activity and to deprive organised criminal groups of their ill-gotten gains. The subsequent disruption of an organised criminal group will affect the members, including those who have sufficiently distanced themselves from the criminal activities of the organisation to avoid prosecution.


Criminals commit three basic types of crimes: crime of passion, crime of violence, economic crime. When they make money from crimes they want to move the money further and faster than investigators can follow it.

Millions of dollars are being laundered each year and banks and other financial institutions act as an intermediary in laundering money.

Banks should implement effective KYC policy, checking the sources of funds, monitoring the conduct of accounts, and by learning to recognize suspicious/ irregular transactions

India is developing and its difficult to monitor how much money goes in and comes out every day. Plus the banks should update the customer information on a regular basis, leaving no stone unturned.

Money launderers are on a prowl, on the part of the society, following the various prevention acts and being aware and not falling in trap to any schemes offered which may ultimately make you a pray to money launderers