Anda di halaman 1dari 77

“MONEY IS THE ROOT CAUSE OF ALL EVILS”

HISTORY AND ORIGIN

Money laundering is as old as the man himself. Even four thousand years before Christ,
Chinese merchants used to hide their wealth from their rulers so as to avoid confiscation.
The merchants also invested their money in remote provinces and even outside China.
Literature is replete with stories of Jewish shylocks that employed innovative methods to
hide their money. Meyer Lanski (Capone’s accountant) was very successful in concealing
his ill-gotten money. The Hindujas were criticised in British press for ‘obtaining British
passports by contributing a substantial sum of the Millennium Dome.’

The term "money laundering" is said to originate from Mafia ownership of Laundromats
in the United States. Gangsters there were earning huge sums in cash from extortion,
prostitution, gambling and bootleg liquor. The large proceeds so obtained by means of
such illegitimate businesses required the showing of a legitimate source. One of the ways
in which they were able to do this was by purchasing externally legitimate businesses and
to blend their illicit earnings with the legitimate earnings they received from these
businesses. Laundromats were chosen as a front for converting the illegitimate proceeds
by these gangsters because Laundromats were cash businesses and this was an
unquestionable advantage. One of the earliest names to have surfaced in relation to
money laundering was that of Al Capone. Al Capone, however, was prosecuted and
convicted in October, 1931 for tax evasion. It was this that he was sent to prison for
rather than the predicate crimes which generated his illicit income and according to
Robinson this tale that the term originated from this time is a myth. He states that:

"Money laundering is called what it is because that perfectly describes what takes place
- illegal, or dirty, money is put through a cycle of transactions, or washed, so that it
comes out the other end as legal, or clean, money. In other words, the source of illegally
obtained funds is obscured through a succession of transfers and deals in order that
those same funds can eventually be made to appear as legitimate income".
It would seem, however, that the conviction of Al Capone for tax evasion may have been
the trigger for getting the money laundering business off the ground.

Money laundering as a crime only attracted interest in the 1980s, essentially within a
drug trafficking context. It was from an increasing awareness of the huge profits
generated from this criminal activity and a concern at the massive drug abuse problem in
western society which created the impetus for governments to act against the drug dealers
by creating legislation that would deprive them of their illicit gains.

Governments also recognised that criminal organisations, through the huge profits they
earned from drugs, could contaminate and corrupt the structures of the state at all levels.

Money laundering is a truly global phenomenon, helped by the International financial


community which is a 24hrs a day business. When one financial centre closes business
for the day, another one is opening or open for business.

As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds
of crime, which to a large extent also mark the operations of organised and transnational
crime, are its global nature, the flexibility and adaptability of its operations, the use of the
latest technological means and professional assistance, the ingenuity of its operators and
the vast resources at their disposal.

In addition, a characteristic that should not be overlooked is the constant pursuit of


profits and the expansion into new areas of criminal activity
INTRODUCTION

If you were to conduct a survey in our country asking what is money laundering, the
general guesses from most people would be that it must be something related to drying,
washing or may be dry cleaning of the currency notes. This is rather the human tendency
about the world's very big crime. To some extent correct but layman don't know much of
this world's third largest industry. As per IMF reports the turnover of this industry could
be somewhere around $1.5 trillion. However common man does not pay attention
because primarily it seems to be a victimless crime. It has none of the issues associated
with a vanishing of the money from economy or performance of the government or
organizations involved in the same and yet, money laundering can only take place after a
predicate crime has taken place. If the person on the street is the banker he might throw
the three letters "KYC" to express his knowledge. Money laundering is the process by
which large amounts of illegally obtained money is given the appearance of having
originated from a legitimate source. But in simple terms it is the Conversion of Black
money into white money. This takes you back to cleaning the huge piles of cash. Indian
newspapers frequently report the money laundering scams perpetrated by the Political
leaders and some of the prominent stars are the chief ministers of UP, Punjab and Kerala.
Other Indian star in the laundering business is Ketan Parekh. If done successfully, it
allows the criminals to maintain control over their proceeds and ultimately to provide a
legitimate cover for their source of income. The primary purpose of organised crime is to
make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in
future activity. For the organised criminal, however, profit close to the source of the
crime represents a particular vulnerability and unless the criminal can effectively distance
himself or herself from the crime which is the source of the profit they remain susceptible
to detection and prosecution. Hence there is a need to launder their illicit profits to make
them appear legitimate. The biggest source of illicit profits comes from the drugs' trade
and it was drug trafficking that provided the initial catalyst for concerted international
efforts against money laundering. The drugs' industry is a highly cash intensive business
and "in the case of cocaine and heroin the physical volume of notes received is much
larger than the volume of drugs themselves". In order to rid themselves of this large
burden it is necessary to use the financial services industry and in particular, deposit-
taking institutions.
MONEY LAUNDERING -THE INDIAN SCENARIO

The following article throws light on the penetration of money laundering business
in India.

$1 trillion laundered every year in India: 5 Aug, 2008.

Over $1 trillion is being laundered every year by drug dealers, arms traffickers and other
criminals in India, according to a report by audit and consulting firm, KPMG.
KPMG said India's emerging status as a regional financial centre and informal cross-
border money flows are the main contributors to growing money laundering in the
country. "Some common sources of illegal proceeds in India are narcotics trafficking,
illegal trade in endangered wildlife, trade in illegal gems (diamonds), smuggling,
trafficking in persons, corruption, and income tax evasion. India continues to be a drug-
transit country," the US narcotics survey has said.
KPMG feels that in future, the major challenge for the finance sectors like banking,
brokerage houses and insurance companies would be combating money laundering and
terrorist financing. KPMG's report also highlighted the vote of confidence in parliament,
which exposed the prevalence of unaccounted for money in the country.

"A few politicians threw a large sum of cash in parliament and alleged that there was an
attempt to bribe them for their vote. This confirms the continued existence of a parallel
banking system popularly called as 'hawala'," it said. "According to Indian observers,
funds transferred through the hawala market are between 30 to 40 percent of the formal
market," the report said, and noted that the central Reserve Bank of India estimated
official remittances to the country to be around $28.2 billion.

The report suggests for India to reduce the informal money transfer channels it needs to
focus anti-money laundering (AML) policies and procedures, formal monitoring of AML
systems and controls, and ensuring sanctions compliance.

MONEY LAUNDERING – THE NITTY GRITTY

What is Money Laundering?

The goal of a large number of criminal acts is to generate a profit for the individual or
group that carries out the act. Money laundering is the processing of these criminal
proceeds to disguise their illegal origin. This process is of critical importance, as it
enables the criminal to enjoy these profits without jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized crime, including for
example drug trafficking and prostitution rings, can generate huge amounts of proceeds.
Embezzlement, insider trading, bribery and computer fraud schemes can also produce
large profits and create the incentive to “legitimize” the ill-gotten gains through money
laundering.

When a criminal activity generates substantial profits, the individual or group involved
must find a way to control the funds without attracting attention to the underlying activity
or the persons involved. Criminals do this by disguising the sources, changing the form,
or moving the funds to a place where they are less likely to attract attention.

How much money is laundered per year?

By its very nature, money laundering is an illegal activity carried out by criminals which
occurs outside of the normal range of economic and financial statistics. Along with
some other aspects of underground economic activity, rough estimates have been put
forward to give some sense of the scale of the problem.

The International Monetary Fund, for example, has stated in 1996 that the aggregate size
of money laundering in the world could be somewhere between two and five percent of
the world’s gross domestic product.

Where does money laundering occur?

As money laundering is a consequence of almost all profit generating crime, it can occur
practically anywhere in the world. Generally, money launderers tend to seek out countries
or sectors in which there is a low risk of detection due to weak or ineffective anti-money
laundering programmes. As the objective of money laundering is to get the illegal funds
back to the individual who generated them, launderers usually prefer to move funds
through stable financial systems.

Money laundering activity may also be concentrated geographically according to the


stage the laundered funds have reached. At the placement stage, for example, the funds
are usually processed relatively close to the under-lying activity; often, but not in every
case, in the country where the funds originate.

With the layering phase, the launderer might choose an offshore financial centre, a large
regional business centre, or a world banking centre – any location that provides an
adequate financial or business infrastructure. At this stage, the laundered funds may also
only transit bank accounts at various locations where this can be done without leaving
traces of their source or ultimate destination.

Finally, at the integration phase, launderers might choose to invest laundered funds in
still other locations if they were generated in unstable economies or locations offering
limited investment opportunities.
How does money laundering affect business?

The integrity of the banking and financial services marketplace depends heavily on the
perception that it functions within a framework of high legal, professional and ethical
standards. A reputation for integrity is the 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.

What influence does money laundering have on economic development?

Launderers are continuously looking for new routes for laundering their funds.
Economies with growing or developing financial centres, but inadequate controls are
particularly vulnerable as established financial centre countries implement
comprehensive anti-money laundering regimes.

Differences between national anti-money laundering systems will be exploited by


launderers, who tend to move their networks to countries and financial systems with
weak or ineffective countermeasures.

Some might argue that developing economies cannot afford to be too selective about the
sources of capital they attract. But postponing action is dangerous. The more it is
deferred, the more entrenched organised crime can become.

As with the damaged integrity of an individual financial institution, there is a damping


effect on foreign direct investment when a country’s commercial and financial sectors are
perceived to be subject to the control and influence of organised crime. Fighting money
laundering and terrorist financing is therefore a part of creating a business friendly
environment which is a precondition for lasting economic development.

What is the connection with society at large?

The possible social and political costs of money laundering, if left unchecked or dealt
with ineffectively, are serious. Organised crime can infiltrate financial institutions,
acquire control of large sectors of the economy through investment, or offer bribes to
public officials and indeed governments.

The economic and political influence of criminal organisations can weaken the social
fabric, collective ethical standards, and ultimately the democratic institutions of society.
In countries transitioning to democratic systems, this criminal influence can undermine
the transition. Most fundamentally, money laundering is inextricably linked to the
underlying criminal activity that generated it. Laundering enables criminal activity to
continue.
STAGES IN MONEY LAUNDERING

The basic money laundering process has three steps:

1. Placement - At this stage, the launderer inserts the dirty money into a legitimate
financial institution. This is often in the form of cash bank deposits. This is the
riskiest stage of the laundering process because large amounts of cash are pretty
conspicuous, and banks are required to report high-value transactions.
2. Layering - Layering involves sending the money through various financial
transactions to change its form and make it difficult to follow. Layering may
consist of several bank-to-bank transfers, wire transfers between different
accounts in different names in different countries, making deposits and
withdrawals to continually vary the amount of money in the accounts, changing
the money's currency, and purchasing high-value items (boats, houses, cars,
diamonds) to change the form of the money. This is the most complex step in any
laundering scheme, and it's all about making the original dirty money as hard to
trace as possible.
3. Integration - At the integration stage, the money re-enters the mainstream
economy in legitimate-looking form -- it appears to come from an legal
transaction. This may involve a final bank transfer into the account of a local
business in which the launderer is "investing" in exchange for a cut of the profits,
the sale of a yacht bought during the layering stage. At this point, the criminal can
use the money without getting caught. It is very difficult to catch a launderer
during the integration stage if there is no documentation during the previous
stages.

However, The Anti Money Laundering Network recommends the terms

1. Hide: To reflect the fact that cash is often introduced to the economy via
commercial concerns which may knowingly or not knowingly be part of the
laundering scheme, and it is these which ultimately prove to be the interface
between the criminal and the financial sector
2. Move: Clearly explains that the money launderer uses transfers, sales and
purchase of assets, and changes the shape and size of the lump of money so as to
obfuscate the trail between money and crime or money and criminal.
3. Invest: The criminal spends the money by investing in assets or his lifestyle.

General Steps in any money


laundering process.

PMLA
PMLA ©Rajkumar
©Rajkumar S
S Adukia
Adukia 20
20

Who would come across these suspicious transactions?


Financial entities, includes banks, credit societies, trusts and lending
institutions/companies and agents of the 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: People who are engaged in the business of foreign exchange.
Money services businesses, which includes alternative remittance systems,
popularly known as Hawala, Hundi, Chitti, etc.
Agents, selling National Saving Certificates, money orders etc.
Chartered Accountants while carrying out certain activities on behalf of their clients.
Real estate, brokers or sales representatives of real estate when they carrying out certain
activities on behalf of their clients.

METHODS 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.50, 000 in India).
It can be done by one or more persons by making deposits into one or more accounts
during several visits to bank. Some times, it involves, deposit of multiple monetary
instruments into accounts with different financial institutions.
Structuring
It is through multiple cash deposits or withdrawals at amounts below than ceiling amount.
Both structuring and smurfing are similar types of suspicious activity, which may result
in money laundering.

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.

Overseas banks
Money launderers often send money through various "offshore accounts" in countries
that have bank secrecy laws, meaning that for all intents and purposes, these countries
allow anonymous banking. A complex scheme can involve hundreds of bank transfers
to and from offshore banks.

Investing in legitimate businesses


Launderers sometimes place dirty money in otherwise legitimate businesses to clean
it. They may use large business like brokerage firms or casinos that deal in so much
money it is easy for the dirty stuff to blend in, or they may use small, cash-intensive
businesses like bars.These businesses may be "front companies" that actually do
provide a good or service but whose real purpose is to clean the launderer's money.
This method typically works in one of two ways: The launderer can combine his dirty
money with the company's clean revenues -- in this case, the company reports higher
revenues from its legitimate business than it is really earning; or the launderer can
simply hide his dirty money in the company's legitimate bank accounts in the hopes
that authorities won't compare the bank balance to the company's financial statements.

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 invoices and balance sheets.

Underground/alternative banking
Some countries in Asia have well-established, legal alternative banking systems that
allow for undocumented deposits, withdrawals and transfers. These are trust-based
systems, often with ancient roots, that leave no paper trail and operate outside of
government control. This includes the hawala system in Pakistan and India and the fie
chen system in China.
Mechanics/Classifications of money laundering:

1) Money laundering is multi-dimensional, constituting of both a national as well as an


international dimension; thus the typologies of money laundering are observed at both
levels.

2) Money laundering on an international level necessitates it having a national dimension


as well. Money laundering may, however, be practices exclusively on a national level.
Also there exists a possibility of overlap between the national and international
dimension of laundering money.

3) Money laundering requires embracing of economic liberalization, a consequence of


which is greater integration of financial and banking systems worldwide.

Techniques used for Money laundering at the National Level:

Money laundering is a vibrant and continually evolving process which demands keeping
abreast of its latest developments with regard to its techniques and instruments through
which it is affected. Some of the techniques of money laundering maybe depicted as
follows:

1) Retail Businesses: These businesses maybe used as mere fronts where most of the
sales disclosed are fictitious. Owners of such fronts may convert their illegally obtained
income into legitimate income by showing sales through the retail business and paying
the requisite taxes as applicable. The same technique of money laundering as applicable
to retail sale also applies to wholesale businesses.
2) Charity Shows: Money laundering by way of organizing charity and entertainment
shows constitutes an effective method of money laundering. The key to laundering
money by this mode lies in the fraudulent sale of tickets. The extant to which fraudulent
tickets can be sold is the extent to which money can be laundered.

3) Lottery tickets: The lottery constitutes big business in several countries. Money
launderers acquire lottery tickets from genuine winners by paying them the lottery prize
with their illegitimately acquired proceeds. The encashment of these tickets leads to the
legitimization of their proceeds. A similar technique of legitimizing illegal proceeds is
given effect by purchasing winning tickets of racecourses.

4) Casinos: Money laundering is given effect in casinos by way of the launderers taking
their proceeds to the casinos and buying large number of casino chips with which they
did little or practically no gambling. At the end of the day, the launderer conveniently
encashes the casino chips passing them off as genuine winnings.

5) Property: The sale of property at random prices constitutes an effective way of


laundering money. Sale of low value property at highly inflated prices is one such
technique. The level to which the price is inflated is the extant to which money is
laundered.

6) Inheritance laws: Laws of inheritance related to jewellery comprise yet another


technique of laundering money. Indian inheritance law permits a married woman to
acquire jewellery worth Rs. 500,000. Illegal proceeds may be laundered to this extant by
the families of such married women.

7) Securities market: The capitalization of markets is one of the primary ways to mobilize
funds for economic growth. The markets so capitalized are also known as the stock
exchanges. The stock market characterizes as one of its features that as long as the prices
of shares moves up or down, the participants in this market make money. In the securities
market, the profits can easily be recorded on paper to launder the illegal proceeds.
8) Insurance sectors: Insurance companies offer life insurance and other forms of general
insurance, including health and property insurance. Laundering of money is given effect
by investing in very expensive insurance policies and after paying a few premiums,
applying for premature encashment of policies at a discounted rate. The payment of the
premature policies received by the insurer is passed on as legitimate money.

9) Amnesty schemes: Money laundering is an offence which is punishable by law but it is


no secret that laws against money laundering have not entirely succeeded in curbing its
practice. The government, therefore, introduces amnesty schemes from time to time.
These schemes are introduced to bring black money into the open. Under these schemes
the government facilitates for the people to declare their illegally acquired proceeds on
the payment of a certain amount of tax. The scheme also provisions for non-inquiry of the
source of the money and after payment of tax it becomes legitimate money. The Indian
government too had implemented such a scheme in the form of the ‘Indira Vikas Patras’.

10) Indira Vikas Patras: The Indian economy is flooded with a high component of black
money. The Government, needless to say, faced the urgent requirement of channeling this
huge amount of black money circulation into more productive means for the upbringing
and development of the country. To achieve this privilege the Government introduced the
Indira Vikas Patras. These bearer certificates offered to double the investment amount in
a matter of six years and more importantly required no identification. This scheme
prompted huge sums of illegitimately earned income to be pushed into the government
machinery.
HAWALA -THE TRADITIONAL REMITTANCE SYSTEM

Since the September 11, 2001, terrorist attacks on the United States, public interest in
informal systems of transferring money around the world, particularly the hawala system,
has increased. The reason is the hawala system's alleged role in financing illegal and
terrorist activities, along with its traditional role of transferring money between
individuals and families, often in different countries. Against this background,
governments and international bodies have tried to develop a better understanding of
these systems, assess their economic and regulatory implications, and design the most
appropriate approach for dealing with them.
Informal funds transfer (IFT) systems are in use in many regions for transferring funds,
both domestically and internationally. The hawala system is one of the IFT systems that
exist under different names in various regions of the world. It is important, however, to
distinguish the hawala system from the term hawala, which means "transfer" or "wire" in
Arabic banking jargon. The hawala system refers to an informal channel for transferring
funds from one location to another through service providers—known as hawaladars—
regardless of the nature of the transaction and the countries involved. While hawala
transactions are mostly initiated by emigrant workers living in a developed country, the
hawala system can also be used to send funds from a developing country, even though the
purpose of the funds transfer is usually different.

How Hawala Works?

In the most basic variant of the hawala system, money is transferred via a network of
hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and
gives a sum of money to be transferred to a recipient in another, usually foreign, city. The
hawala broker calls another hawala broker in the recipient's city, gives disposition
instructions of the funds (usually minus a small commission), and promises to settle the
debt at a later date.

The unique feature of the system is that no promissory instruments are exchanged
between the hawala brokers; the transaction takes place entirely on the honor system. As
the system does not depend on the legal enforceability of claims, it can operate even in
the absence of a legal and juridical environment. No records are produced of individual
transactions; only a running tally of the amount owed by one broker to another is kept.
Settlements of debts between hawala brokers can take a variety of forms, and need not
take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing
official exchange rates. Generally the funds enter the system in the source country's
currency and leave the system in the recipient country's currency. As settlements often
take place without any foreign exchange transactions, they can be made at other than
official exchange rates.

Is Hawala Legal?

Since hawala is a remittance system, this question really addresses regulations governing
remittance services and the circumstances of the remittance.

In South Asia, the situation is more complicated. Many South Asian nations (such as
India and Pakistan) have laws that prohibit speculation in the local currency, prohibit
foreign exchange transactions at anything other than the official rate of exchange, and
impose strict licensing requirements on money remitters and foreign exchange dealers. In
addition, there are regulations governing inbound and outbound remittances.

It is, however, possible to state 'hawala is illegal in India with nearly complete accuracy.

The important point for our purposes is that the existence of these regulations is another
reason hawala is still used. Many people in these countries have money that they would
like to move to another country due to concerns about stability, to pay for education or
medical treatment. Hawala provides a ready means of doing this, and its use as a
facilitator of 'capital flight' on both large and small scales is very common. The existence
of these laws also explains, in part, the prevalence of invoice manipulation as part of
hawala schemes.

How Hawala Is Used To Launder Money?

Up to this point, no distinction has been made between hawala transactions where the
source of the money is legitimate and where the source, and intent, of the transactions is
illegitimate. Following Indian usage, the term 'white hawala' is used to refer to legitimate
transactions, and the term 'black hawala' refers to illegitimate transactions, specifically
hawala money laundering.

This distinction is valuable for money laundering enforcement. Many 'white' hawala
transactions are essentially remittances, and, while illegal under Indian and law, are not
illegal in other jurisdictions. `Black' hawala transactions, however, are almost always
associated with some serious offense (e.g. narcotics trafficking, fraud), that is illegal in
most jurisdictions.

Money laundering consists of three phases: placement, layering and integration. Since
hawala is a remittance system, it can be used at any phase.

What Are Some Indicators Of Hawala?

The hawala is actually quite simple; much of the complexity associated with and ascribed
to hawala money laundering comes from the nearly infinite number of variations that are
encountered in hawala transactions.

This complexity of variation makes it nearly impossible to lay out a straightforward guide
to recognizing hawala money laundering as part of a criminal undertaking. It is, however,
possible to provide a few indicators that may be useful.

One of the most consistent and valid indicators of hawala activity in investigations
conducted in the many countries is seen in bank accounts. A 'hawala' bank account
almost always shows significant deposit activity, usually in the forms of cash and checks,
which are often from one or more ethnic communities (e.g. Afghan, Bangladeshi, Indian,
Pakistani, Somali) associated with the hawaladar. These checks may be made out to the
primary account holder, or some secondary entity (often outside the United States)
somehow associated with the account. These checks may also have some sort of notation,
consisting of a name (presumably of the person to whom the money is remitted to) or
something supposedly indicating what was 'bought' with the money. In one case, many
checks were seen with the word 'bangle' written on them; this was done apparently in
order to make it appear as though the checks, which were almost all for even dollar
amounts, had been written to purchase jewelry.

These accounts will also almost always show outgoing transfers (usually by wire) to a
major financial center known to be involved in hawala. Three of the most common
locations are Great Britain, Switzerland, and Dubai. Given the flexible and casual nature
of the hawala business, hawala accounts will not always be seen to balance. The
following diagram summarizes 'hawala account' behavior:

Certain businesses are also more likely than others to be involved in hawala. Once again,
it is not possible to give an exhaustive list, but the following is a starting point:

Import/Export
Travel and Related Services
Jewelry (gold, precious stones)
Foreign Exchange
Rugs/Carpets
Used Cars
Car Rentals (usually non-chain or franchise)
Telephones/Pagers

Why Hawala Developed?

In earlier times, IFT systems were used for trade financing. They were created because of
the dangers of traveling with gold and other forms of payment on routes beset with
bandits. Local systems were widely used in China and other parts of East Asia and
continue to be in use there. They go under various names—Fei-Ch'ien (China), Padala
(Philippines), Hundi (India), Hui Kuan (Hong Kong), and Phei Kwan (Thailand). The
hawala (or hundi) system now enjoys widespread use but is historically associated with
South Asia and the Middle East. At present, its primary users are members of expatriate
communities who migrated to Europe, the Persian Gulf region, and North America and
send remittances to their relatives on the Indian subcontinent, East Asia, Africa, Eastern
Europe, and elsewhere. These emigrant workers have reinvigorated the system's role and
importance. While hawala is used for the legitimate transfer of funds, its anonymity and
minimal documentation have also made it vulnerable to abuse by individuals and groups
transferring funds to finance illegal activities.

Economic and cultural factors explain the attractiveness of the hawala system. It is less
expensive, swifter, more reliable, more convenient, and less bureaucratic than the formal
financial sector. Hawaldars charge fees or sometimes use the exchange rate spread to
generate income. The fees charged by hawaladars on the transfer of funds are lower than
those charged by banks and other remitting companies, thanks mainly to minimal
overhead expenses and the absence of regulatory costs to the hawaladars, who often
operate other small businesses. To encourage foreign exchange transfers through their
system, hawaladars sometimes exempt expatriates from paying fees. In contrast, they
reportedly charge higher fees to those who use the system to avoid exchange, capital, or
administrative controls. These higher fees often cover all the expenses of the hawaladars.

The system is swifter than formal financial transfer systems partly because of the lack of
bureaucracy and the simplicity of its operating mechanism; instructions are given to
correspondents by phone, facsimile, or e-mail; and funds are often delivered door to door
within 24 hours by a correspondent who has quick access to villages even in remote
areas. The minimal documentation and accounting requirements, the simple management,
and the lack of bureaucratic procedures help reduce the time needed for transfer
operations.

In addition to economic factors, kinship, ethnic ties, and personal relations between
hawaladars and expatriate workers make this system convenient and easy to use. The
flexible hours and proximity of hawaladars are appreciated by expatriate communities.
To accommodate their clients, hawaladars may instruct their counterparts to deliver funds
to beneficiaries before expatriate workers make payments. Moreover, cultural
considerations encourage expatriate workers to remit funds through the hawala system,
and such considerations also apply to family members in the home country. Many
expatriate communities are exclusively male, because wives and other family members
remain in the home country, where family traditions prevail. These traditions may require
family members, especially women, to maintain minimal contacts with the outside world.
A trusted hawaladar, known in the village and aware of the social codes, would be an
acceptable intermediary, protecting women from having direct dealings with banks and
other agents. Thus, a system based on national, ethnic, and village solidarity depends
more on absolute trust between the participants than on legal documents.

On the receiving side, repressive financial policies and inefficient banking institutions,
which have often lacked interest in the remittance business, have contributed to the
development of IFT systems. In addition to overly restrictive economic policies, unstable
political situations have offered fertile ground for the development of the hawala and
other informal systems. Most IFT systems have prospered in areas characterized by
unsophisticated official systems and during times of instability. They continue to develop
in regions where financial development has been slow or repressed. Overall, financial
development tends to check the spread of informal fund transfer systems, even though
they exist in financially mature countries as well.

Economic implications

Despite its informality, the hawala system has direct and indirect macroeconomic
implications—for financial activity as well as for fiscal performance. One aspect is its
potential impact on the monetary accounts of countries on either end of the hawala
transaction. Because these transactions are not reflected in official statistics, the
remittance of funds from one country to another is not recorded as an increase in the
recipient country's foreign assets or in the remitting country's liabilities, unlike funds
transferred through the formal sector. As a consequence, value changes hands, but broad
money is unaltered. However, hawala transactions may affect the composition of broad
money in a recipient country. In the remittance business, such transactions are conducted
mainly in cash, even though hawaladars may use the banking system for other purposes.
Individuals from developing countries who transfer funds abroad through the hawala
system for investment or other purposes are usually members of wealthy groups. They
supply local hawaladars with cash by making withdrawals from their bank accounts. As a
consequence, hawala-type transactions tend to increase the amount of cash in circulation.
Furthermore, IFT systems have fiscal implications for both remitting and receiving
countries because no direct or indirect tax is paid on hawala transactions. The negative
impact on government revenue applies equally to both legitimate and illegitimate
activities that involve the hawala system.

Hawala transactions cannot be reliably quantified because records are virtually


inaccessible, especially for statistical or balance of payments purposes. This holds true
for both the remitting and, especially, the receiving sides of the transactions. Hawala
transactions from developing countries are sometimes driven by capital flight
motivations; they may also be driven by a desire to circumvent exchange control
regulations and the like, leaving no traceable records. Nevertheless, the authorities of
some countries have sporadically made estimates of hawala activity based on their
expatriate populations and balance of payments data. In any case, all crude estimates
should take into account both hawala and reverse hawala transactions (see box) as well as
transactions driven by illicit activities. Although it would be impossible to provide a
precise figure, the amounts involved in hawala transactions are likely to entail billions of
dollars.

Difficulties for regulators

There is also a consensus that, in the wake of heightened international efforts to combat
money laundering and terrorist financing, more should be done to keep an eye on IFT
systems to avoid their misuse by illicit groups. Policymakers believe that the potential
anonymity afforded by these systems presents risks of money laundering and terrorist
financing that need to be addressed. Yet selecting the appropriate regulatory and
supervisory response requires a realistic and practical assessment and an understanding of
the specific country environment in which the IFT dealers operate.
Regulation of IFT systems in various jurisdictions will be a complex endeavor. The
variety of legal systems and economic circumstances across countries make a uniform
approach technically and legally impractical. In a number of countries, the hawala system
is prohibited. Any attempt to regulate this system in these countries would, therefore, be
at odds with existing laws and regulations and would be seen as legitimizing parallel
foreign exchange operations and capital flight. Where IFT regulations are conceivable,
there is agreement that overregulation and coercive measures will not be effective
because they might push IFT businesses, including legitimate ones, further underground.
The purpose of any approach is not to eliminate these systems but to avoid their misuse.
Against this background, policymakers tend to favor two options, which are already in
force in some countries: registration or licensing of IFT systems. While these measures
could deter illegal activities, they will not, in isolation, succeed in reducing the
attractiveness of the hawala system. As a matter of fact, as long as there are reasons for
people to prefer such systems, they will continue to exist and even expand. If the formal
banking sector intends to compete with the informal remittance business, it should focus
on improving the quality of its service and reducing the fees charged. Therefore, a longer-
term and sustained effort should be aimed at modernizing and liberalizing the formal
financial sector, with a view to addressing its inefficiencies and weaknesses.

CONSEQUENCES OF MONEY LAUNDERING

Money laundering has a corrosive effect on a country's economy, government, and social
well-being.

Money laundering has potentially devastating economic, security, and social


consequences. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt
public officials, and others to operate and expand their criminal enterprises. Crime has
become increasingly international in scope, and the financial aspects of crime have
become more complex due to rapid advances in technology and the globalization of the
financial services industry.
Unchecked, money laundering can erode the integrity of a nation's financial institutions.
Due to the high integration of capital markets, money laundering can also adversely
affect currencies and interest rates. Ultimately, laundered money flows into global
financial systems, where it can undermine national economies and currencies. Money
laundering is thus not only a law enforcement problem; it poses a serious national and
international security threat as well.

Exposed Emerging Markets

Money laundering is a problem not only in the world's major financial markets and
offshore centers, but also for emerging markets. Indeed, any country integrated into the
international financial system is at risk. As emerging markets open their economies and
financial sectors, they become increasingly viable targets for money laundering activity.

Increased efforts by authorities in the major financial markets and in many offshore
financial centers to combat this activity provide further incentive for launderers to shift
activities to emerging markets. There is evidence, for example, of increasing cross-border
cash shipments to markets with loose arrangements for detecting and recording the
placement of cash in the financial system and of growing investment by organized crime
groups in real estate and businesses in emerging markets. Unfortunately, the negative
impacts of money laundering tend to be magnified in emerging markets.

The Economic Effects of Money Laundering

Undermining the Legitimate Private Sector:

One of the most serious microeconomic effects of money laundering is felt in the private
sector. Money launderers often use front companies, which co-mingle the proceeds of
illicit activity with legitimate funds, to hide the ill-gotten gains. In the United States, for
example, organized crime has used pizza parlors to mask proceeds from heroin
trafficking. These front companies have access to substantial illicit funds, allowing them
to subsidize front company products and services at levels well below market rates.
In some cases, front companies are able to offer products at prices below what it costs the
manufacturer to produce. Thus, front companies have a competitive advantage over
legitimate firms that draw capital funds from financial markets. This makes it difficult, if
not impossible, for legitimate business to compete against front companies with
subsidized funding, a situation that can result in the crowding out of private sector
business by criminal organizations.

Clearly, the management principles of these criminal enterprises are not consistent with
traditional free market principles of legitimate business, which results in further negative
macroeconomic effects.

Loss of Control of Economic Policy:

Money laundering can also adversely affect currencies and interest rates as launderers
reinvest funds where their schemes are less likely to be detected, rather than where rates
of return are higher. And money laundering can increase the threat of monetary instability
due to the misallocation of resources from artificial distortions in asset and commodity
prices.

In short, money laundering and financial crime may result in inexplicable changes in
money demand and increased volatility of international capital flows, interest, and
exchange rates. The unpredictable nature of money laundering, coupled with the
attendant loss of policy control, may make sound economic policy difficult to achieve.

Economic Distortion and Instability:

Money launderers are not interested in profit generation from their investments but
rather in protecting their proceeds. Thus they "invest" their funds in activities that are not
necessarily economically beneficial to the country where the funds are located.
Furthermore, to the extent that money laundering and financial crime redirect funds from
sound investments to low-quality investments that hide their proceeds, economic growth
can suffer. In some countries, for example, entire industries, such as construction and
hotels, have been financed not because of actual demand, but because of the short-term
interests of money launderers. When these industries no longer suit the money launderers,
they abandon them, causing a collapse of these sectors and immense damage to
economies that could ill afford these losses.

Loss of Revenue:

Money laundering diminishes government tax revenue and therefore indirectly harms
honest taxpayers. It also makes government tax collection more difficult. This loss of
revenue generally means higher tax rates than would normally be the case if the untaxed
proceeds of crime were legitimate.

Risks to Privatization Efforts:

Money laundering threatens the efforts of many states to introduce reforms into their
economies through privatization. Criminal organizations have the financial wherewithal
to outbid legitimate purchasers for formerly state-owned enterprises. Furthermore, while
privatization initiatives are often economically beneficial, they can also serve as a vehicle
to launder funds. In the past, criminals have been able to purchase marinas, resorts,
casinos, and banks to hide their illicit proceeds and further their criminal activities.

Reputation Risk:

Nations cannot afford to have their reputations and financial institutions tarnished by an
association with money laundering, especially in today's global economy. Confidence in
markets and in the signaling role of profits is eroded by money laundering and financial
crimes such as the laundering of criminal proceeds, widespread financial fraud, insider
trading of securities, and embezzlement. The negative reputation that results from these
activities diminishes legitimate global opportunities and sustainable growth while
attracting international criminal organizations with undesirable reputations and short-term
goals. This can result in diminished development and economic growth. Furthermore,
once a country's financial reputation is damaged, reviving it is very difficult and requires
significant government resources to rectify a problem that could be prevented with proper
anti-money-laundering controls.

Social Costs:

There are significant social costs and risks associated with money laundering. Money
laundering is a process vital to making crime worthwhile. It allows drug traffickers,
smugglers, and other criminals to expand their operations. This drives up the cost of
government due to the need for increased law enforcement and health care expenditures
(for example, for treatment of drug addicts) to combat the serious consequences that
result.

Among its other negative socioeconomic effects, money laundering transfers economic
power from the market, government, and citizens to criminals. In short, it turns the old
adage that crime doesn't pay on its head.

Furthermore, the sheer magnitude of the economic power that accrues to criminals from
money laundering has a corrupting effect on all elements of society. In extreme cases, it
can lead to the virtual take-over of legitimate government.

Overall, money laundering presents the world community with a complex and dynamic
challenge. Indeed, the global nature of money laundering requires global standards and
international cooperation if we are to reduce the ability of criminals to launder their
proceeds and carry out their criminal activities

A closer examination of some of these negative impacts in both the micro- and
macroeconomic realms helps explain why money laundering is such a complex threat,
especially in emerging markets.

Due to these drastic effects anti money laundering comes into picture and plays a very
crucial role in combating money laundering in any country
ANTI MONEY LAUNDERING

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 or report money laundering activities. Anti-money
laundering guidelines came into prominence globally after the September 11, 2001
attacks and other terrorist activities.

Today, all financial institutions globally are required to monitor, investigate and report
transactions of a suspicious nature to the financial intelligence unit of the central bank in
the respective country. For example, a bank must perform due diligence by having proof
of a customer's identity and that the use, source and destination of funds do not involve
money laundering.

How Does Fighting Money Laundering Help Fight Crime?

Money laundering is a threat to the good functioning of a financial system; however, it


can also be the Achilles heel of criminal activity.

In law enforcement investigations into organised criminal activity, it is often the


connections made through financial transaction records that allow hidden assets to be
located and that establish the identity of the criminals and the criminal organisation
responsible.

When criminal funds are derived from robbery, extortion, embezzlement or fraud, a
money laundering investigation is frequently the only way to locate the stolen funds and
restore them to the victims.

Most importantly, however, targeting the money laundering aspect of criminal activity
and depriving the criminal of his ill-gotten gains means hitting him where he is
vulnerable. Without a usable profit, the criminal activity will not continue.

What Should Individual Governments Be Doing About It?

A great deal can be done to fight money laundering, and, indeed, many governments have
already established comprehensive anti-money laundering regimes. These regimes aim to
increase awareness of the phenomenon – both within the government and the private
business sector – and then to provide the necessary legal or regulatory tools to the
authorities charged with combating the problem.

Some of these tools include making the act of money laundering a crime; giving
investigative agencies the authority to trace, seize and ultimately confiscate criminally
derived assets; and building the necessary framework for permitting the agencies
involved to exchange information among themselves and with counterparts in other
countries.

It is critically important that governments include all relevant voices in developing a


national anti-money laundering programme. They should, for example, bring law
enforcement and financial regulatory authorities together with the private sector to enable
financial institutions to play a role in dealing with the problem. This means, among other
things, involving the relevant authorities in establishing financial transaction reporting
systems, customer identification, record keeping standards and a means for verifying
compliance.

STEPS TAKEN BY INDIAN GOVERNMENT TO COMBAT MONEY


LAUNDERING

INDIAN INITIATIVES
With the intention of protecting our society from the globally recognized and, growing
problem of money laundering, the Central Government moved the Prevention of Money
laundering Bill in the Parliament on 29th October 1999. 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.

The Government of India has decided to move amendments to the Prevention of Money
Laundering Act (PMLA) that will entail taking tougher measures to block terrorist
financing through banking channels. The amendments will bring terrorism financing and
customs offenses under the glare of prevention of money laundering.

The Prevention of Money Laundering Act, 2002 (PMLA 2002), forms the core of the
legal framework put in place by India to combat money laundering. PMLA 2002 and the
rules notified came into force with effect from July 1, 2005.
The Government of India has also set up Financial Intelligence Unit India (FIU-IND) on
18th November 2004 as an independent body to report directly to the Economic
Intelligence Council (EIC) headed by the Finance Minister.

FIU-IND has been established as the central national agency responsible for receiving,
processing, analyzing and disseminating information relating to suspect financial
transactions. FIU-IND is also responsible for coordinating and strengthening efforts of
national and international intelligence and enforcement agencies in pursuing the global
efforts against money laundering and related crimes. The Financial Intelligence Unit and
Enforcement Directorate have been entrusted with exclusive and concurrent powers
under relevant sections of the act to implement its provisions.

The PMLA 2002 and notified rules impose obligations on banking companies, financial
institutions and intermediaries to verify the identity of clients, maintain records and
furnish information to the Financial Intelligence Unit (FIU). PMLA 2002 defines money-
laundering offenses and provides for the freezing, seizure and confiscation of the
proceeds of crime.
Existing Legal Framework to Curb Money Laundering in India

In India, while the Prevention of Money Laundering Bill is yet to be enacted as a law, we
have certain statutes, as outlined below, which incorporate certain measures which
attempt to address the problem:

• 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

The Prevention of Terrorism Act (POTA), 2002, seeks to deal with types of heinous
crimes like subversion, insurgency and terrorism in place of the existing criminal justice
system, which is not designed to deal with such horrific crimes. The Act replaces the
Ordinance that was first promulgated on October 24, 2001 and re-promulgated thereafter
in December 2001. The Act also meets the requirement of the United Nations resolution
calling upon member nations to enact a model deterrent law to curb the growing menace
of internal and global terrorism.

The following article highlights the steps taken by RBI to curb money laundering.
RBI tightens anti-money laundering norms.
23 May 2008.
MUMBAI: Tightening the anti-money laundering norms, the Reserve Bank India (RBI)
on Thursday made it mandatory for banks to report all suspicious transactions, including
those of over Rs 10 lakhs, to the directorate of financial intelligence.

"The banks should report information in respect of all transactions referred under Rule 3
to the Director, Financial Intelligence Unit-India (FIU-IND)," RBI said in a notification
on Thursday.

In addition to suspicious transactions, the Rule 3 includes all cash transactions of more
than Rs 10 lakh (or its equivalent in foreign currency); series of connected transactions
with aggregate value of Rs 10 lakh; and cash transactions where forged currency notes
are used.

RBI has asked the banks not to alert the customer about the suspicious transactions being
reported to the FIU-IND. Pointing out that customers may abandon the transactions on
being asked to provide details, the notification said,

"Banks should report all such attempted transactions in STRs (Suspicious Transaction
Reports), even if not completed by the customers, irrespective of the amount of
transaction." The central bank further clarified that banks should include transactions in
the STRs if they have reasonable ground that these involve proceeds of crime, though the
amount may be below threshold limit prescribed by the Prevention of Money Laundering
Act. RBI has also asked the banks to put in place appropriate software "to throw alerts
when the transactions are inconsistent with risk categorisation and updated profile of
customers."

Nature of customer relationship and specific vulnerabilities of each sector


Banking
By its nature, because of its ability to move funds rapidly, the banking system is
especially vulnerable to money laundering. Customers of the bank include the person of
entity that maintains an account with the bank or those on whose behalf an account is
maintained (i.e. beneficial owners) and the beneficiaries of transactions conducted by
professional intermediaries. The account holder can be a customer that does not present
himself or herself for interview at the bank (i.e. a non face-to-face customer) or one
introduced to the bank by third party. It may also be a legal entity (e.g. corporate, trust)
interposed between the ultimate beneficial owners and the bank, or a professional
intermediary (e.g. mutual fund, lawyer) depositing funds that it manages for its clients.

Specific activities for which the risk of money laundering is relatively higher are:
• Customers who use fronts e.g. trust, corporates, professional intermediaries) to
open an account so as to hide their true identities.
• Private banking operations, which by nature involve a large measure of
confidentiality.
• Customers who are politically exposed persons (PEP’s) may significantly raise
the potential for reputation risk.
• Introduced business, where a bank may place undue reliance on the due diligence
conducted by an introducer.
• Correspondent banking business, especially where banks do not fully understand
the nature of the respondent banks’business, or if the respondents are shell banks
or located in a jurisdiction which has poor know-your-customer standards.
• Banks are vulnerable from the Money Laundering point of view since criminal
proceeds can enter banks in the form of large cash deposits. Bank officials
therefore need to exercise constant vigilance in opening of accounts with large
cash deposits and in checking suspicious transactions.

The major objectives of Money Laundering activities are:

• Concealing the true ownership of illegally-obtained money and


• Placement, layering and integration of such funds

Two cardinal rules that are to be invariably observed by bank officials for steering clear
of the Money Laundering Trap, are:

1. Know your customer (KYC) and,


2. Know your employee

Know your customer

KYC is an acronym for “Know your Client” or “Know your customer”, a term commonly
used for Client Identification Process. Pursuant to PMLA, SEBI has prescribed the
certain requirements relating to KYC norms for Financial Institutions and Financial
Intermediaries (such as Mutual Funds) to 'know' their clients. This could be in the form of
personal meetings or verification of identity and address, financial status, occupation and
such other personal information. Many companies who do not have face-to-face
transacting (such as Mutual Funds) employ the verification route. The underlying
principle is to follow the principles enshrined in the PMLA as well as the SEBI Act, 1992
so that the intermediary is aware of the clients on whose behalf it is dealing.

Know your employee accurate information about your employees is equally important
because they are the people who handle money and other confidential data hence if no
proper information about their background is obtained they might be the loose link in the
chain and may result in money laundering. the human resourse department here has a
pivotal role to play.

Irregular / Suspicious Transactions related to Money Laundering

The list below provides examples of some of the basic ways in which money can be
laundered. Banks need to be wary of such transactions.

• Customers depositing cash through a large number of cash deposit slips into the
same account or customers having numerous accounts into which large cash
deposits are made. Each deposit is such that the amount thereof is not significant
but the aggregate of all credits is sizeable. This is known as "smurfing".
• A substantial increase in turnover in a dormant account.
• Receipt or payment of large sums of cash, which have no obvious purpose or
relationship to the account holder and / or his business
• Reluctance to provide normal information when opening an account or providing
minimal or fictitious information
• Depositing high value third party cheques endorsed in favour of the customer or
other transactions on behalf of non-account holders
• Large cash withdrawals from a previously dormant or inactive account, or from
an account which has received an unexpected large credit from abroad
• Sudden increase in cash deposits of an individual with no justification
• Employees leading lavish lifestyles that do not match their known sources of
income

Although the above list is only indicative of the possible occurrence of Money
Laundering, the need for prompt recognition of suspicious / irregular transactions is
emphasised.

Insurance
the insurance industry is at risk of being misused by criminals for fraudulent
activities,. The financial resources of insurance companies will in particular attract
fraudsters. However, the nature of the insurance business means that other financial
institutions are more vulnerable to money laundering.

In insurance several parties could be involved in transactions that may raise the
possibility for money laundering: the insurer, the policy holder, the insured person
and the beneficiary. The contracting parties are generally free- within the boundaries
of law- to determine the conditions of the insurance contract e.g. with respect to
duration, benefits early surrender and designation of beneficiaries.

The insurance industry has several; ways to market its products. Some companies
(direct writers) sell insurance directly to the customer and have their own call centers
or agents. Some companies use intermediaries. These intermediaries could work
exclusively for the company in question or work independently, i.e. selling products
for more than one company. Sometimes insurance companies use other companies in
the same group to market its products, e.g. sale over the branches of bank.

In insurance, risk management and premium-setting are essential elements within the
underwriting process. To assess risk, information on the background of the client is
collected, investigated and filed, especially in the case of insurance of large risks.
Various ‘trigger events’ occur after the contract date and indicate where due diligence
is also applicable. These trigger events include claim notification and surrender
requests. Well understood, self-interest leads insurance companies to be careful in
their payment of claims which are normally only paid after thoroughly checking the
circumstances of the loss and the identity of the claimant.

Examples of the type of contracts that are particularly attractive as a vehicle for
laundering money are single premium invested policies, i.e.
• Unit-linked single premium contacts
• Purchase of annuities;
• Lump sum top-ups to an existing life insurance contract;
• Lump sum contribution to personal pension contacts.
Insurance is another mode used in different ways by money launderers. In this regard,
International Association of Insurance Supervisors has issued guidance paper on Anti-
Money laundering and Combating the financing of terrorism. Accordingly, insurer should
assess the customer prior to establishment of a business relationship. It has clearly
specified factors to be considered while issuing the policy and how to investigate. Some
of the important factors are –
 T ype and background of customer and/or beneficial owner
The customer’s and/or beneficial owner’s geographical base
The geographical sphere of the activities of the customer and/or beneficial owner
The nature of the activities
Means of payment as well as the type of payment (cash, wire transfer, etc.,)
The source of funds
The source of wealth
The frequency and scale of activity
The type and complexity of the business relationship
Whether or not payments will be made to third parties
Whether a business relationship is dormant
Any bearer arrangements

The agency monitoring the AML activities in India, Financial Intelligence Unit (FIU
IND) and compliance is required by all financial intermediaries. IRDA has made the
AML guidelines mandatory for all insurance companies from 1st August 2006.
IRDA has instructed all insurers to classify their customers, into the following risk
categories:
- High risk: Antique dealers, arms dealers / explosive dealers, money changers, film
personalities, persons dealing with real estate, politically exposed persons, NRIs, HNIs,
etc
- Low risk: All others

The following article published in times of India gives detailed information about it.

IRDA readies plan to curb money laundering

Insurance regulator IRDA has issued anti-money laundering guidelines that include strict
adherence of KYC norms by insurance companies.IRDA has asked the insurers to put in
place a proper policy framework by July 1 as the AML regime becomes effective from
August 1.The AML makes it mandatory for insurers to comply with 'Know Your
Customer' norms by obtaining documents to clearly establish the customer identity in
case of all new insurance contracts.Where premium is Rs 100,000 per annum in case of
individual policies, a detailed diligence should be exercised to establish KYC.
If insurance premium is paid by person other than the policy holder, the insurer should
look into to establish the motive behind it.The companies are advised to classify the
customer into high risk and low risk based on the individual's profile and product profile,
to decide upon the extent of due dilligence.

The AML guidelines should be strictly followed in vulnerable products like unit linked
products, which provide for withdrawals and unlimited top up premiums; single premium
products where investment is made in lumpsum and surrendered at the earliest
opportunity; and free look cancellations, especially in the big ticket cases.

However, products like standalone health insurance, group insurance issued by a


company and term life insurance contract are exempted from AML purviews
Moreover, larger number of documents has to be submitted before buyingan insurance
policy. For example a big insurance company has made the following documents
compulsory:

Verification Documents
Identify proof -PAN Card
-Voters Identity Card
-Driving License
-Passport
-Letter from a recognized public authority
(e.g. Gazetted authority/ municipal
corporation) verifying identity of the
customer
-Employee identity card of a listed
company or public sector company
-Ration card (where photograph of
customer is present)
Verification Documents
Proof of -Telephone Bill (not more than 3 months
Residence old)
-Electricity Bill (not more than 3 months
old)
-Credit card statement (not more than 3
months old)
-Bank account statement (showing
transactions within the last 6 months)
-Valid lease agreement along with rent
receipt which is not more than 3 months
old
-Passport
-Ration Card
-Letter from any recognized public
authority (e.g. Gazetted authority/ gram
panchayat/ municipal corporation)
verifying residence of the customer
-Letter from a listed/ public sector
company/ armed forces employer/
government depts. along with latest salary
Verification Documents
slip Standard -Income tax assessment orders/ Income
Income -Tax returns slips
Proofs -Form 16 in case of employed individual
-Salary slips from reputed private
limited / public sector employers (within

Securities last 3 months)


-Audited company account
The customer of an investment service provider
can be a person or entity that opens a securities -Audited firm accounts
account on its own behalf or on whose behalf a -Audited proprietorship profit & loss
securities account has been opened. A customer
can open an account with an investment service account
-Copies of form no. 10CCAC under
section 80 HHC of IT ACT 1961 for
export income
provider in person or via remote means (e.g. internet), and the opening of such account
would generally establish a direct relationship between he investment service provider
and the customer.
It is possible for a direct relationship to be established between an investment service
provider and a customer where a third party introduces the customer to the investment
service provider. There also exist indirect relationships in the securities industry, such as
where an investment service provider maintains an account for another provider (i.e.
omnibus account).
Investment service providers generally do not maintain cash deposit accounts for their
Customers. Rather. They require their customers to remit funds to them either by check
or by
Wire transfer to the deposit account of the investment firm at a bank. Consequently, the
securities industry is less at risk than the banking sector regarding the placement of
laundered funds directly into the securities industry. However, the securities industry
Is potentially vulnerable to the layering of laundered funds subsequent to the placement
phase.

Specific activities which the securities sector is potentially vulnerable to the risk of
money laundering include:
• The activities of employees that unwittingly are requested to take actions which
further a customers money laundering scheme and the activist of rogue employees
who undertake activities (in violation of the firm’s internal controls and policies)
such as the establishment of bank and securities accounts in multiple jurisdictions
on behalf of the customer and the transfer of funds and securities between such
accounts in furtherance of a customer’s money laundering scheme. while the risk
of rogue employees engage in may differ from those in the banking and insurance
sectors.
• Acceptance of orders and related funds from intermediaries or banks operation
from jurisdictions that do not have an effective AML/CFT system in place to
prevent the introduction of laundered funds into the firms and banks operating in
those jurisdiction o in which the securities regulator and/or banking supervisor
will not share information regarding customer positions or funds held by or
through firms operating in that jurisdiction with non-domestic regulators.
• Wash sales or other fictitious trading schemes to transfer money or value through
the clearing and settlement infrastructure. Reciprocal trades in offsetting positions
can generate profits in the account of one party and losses in the account of the
other party .in this type of scheme, the money launderers intentionally generate
trading losses in a securities account into which criminal proceeds have been
deposited and generate reciprocal trading profits in a seemingly unrelated
securities account into which criminal proceeds have been deposited and generate
reciprocal trading profits in a seemingly unrelated securities account that cannot
be easily identified or associated with the money laundering scheme. When the
trades are liquidated, the profits are paid in the ordinary course through the
clearance and settlement system from the account/party suffering the loss to the
account/ party earning the profit. Value can also be transferred between parties
through the sale of shares in small, illiquid issues at artificially arranged prices ,
without regard to fair market value. Such schemes may or may not also involve an
intent to generate additional profits from a manipulation of the value of the shares.
Such schemes often constitute a violation of the securities laws as well as a
money laundering offence

SOFTWARE SOLUTIONS

Recently many software development enterprises have come out with innovative banking
and financial solutions towards Anti-money laundering and it can be useful to Retail
Banks, Commercial Banks, Investment Banks, Brokers & Trading Organisations and
Insurance Firms etc., This solution pro-actively monitor all transaction activities across
the organisation and effectively detects money laundering activities and terrorist
financing. The system generates all statutory reports and provides for generation of
Suspicious activity reports. It also captures customer details, stores compliance rules,
monitors transactions and flags any violation of transactions against customer profile and
compliance rules.
AMLOCK is an automated Anti Money Laundering Solution that assists reporting
organizations in complying with regulatory requirements under the Anti Money
Laundering regimes. It offers financial institutions of different sizes, a means to detect
and investigate suspicious transactions, ensure compliance with regulatory KYC norms,
and a host of valuable investigation and analysis tools to aid the compliance officer in
performing his duties effectively and with ease. AMLOCK facilitates ingestion of data
from multiple source systems, thus enabling a single view of the customer across
products and services. The ingestion can be real-time where blocking of transactions is
required, or can be scheduled at stipulated intervals.
AMLOCK caters to:
• Banks

• Insurance companies
• Securities broker-dealers
• Money transmitters
• Asset Management companies
Regulatory Reporting is facilitated by AMLOCK by way of auto-population of the
required regulatory reports CTRs and STRs while also providing for the input of
comments of the Compliance Officer, wherever required. Respecting the mobility of
resources and the consequent location neutrality required, AMLOCK extends the facility
of SMS and e-mail Alerts to specified recipients, besides being an access controlled
browser based solution.
Customer Due Diligence is one of the foremost requirements in an AML program to
deter miscreants from entering the financial system. AMLOCK provides tools such as:
• List Screening for screening blacklisted entities. It supports both published lists or
the Blacklists and internal control lists termed the Watchlists.
• Compliance Scores for KYC to monitor the levels of adherence. This helps in
updating the KYC levels of existing customers and serves as a handy audit tool.
• Duplicate checks to fish out undisclosed multiple accounts. This may relate to the
same or multiple products or locations and is very handy when there are multiple
source systems.
• Link Tracer and Grouping for identifying hidden relationships between customers
so as to enable enhanced monitoring over a group of people who appear to be
connected or acting in concert.
Transaction monitoring tools to identify suspicious activity is central to the AML
compliance facilitation offered by AMLOCK. Features that assist in identifying,
prioritizing and monitoring potential suspicions include –
• Risk Categorization, which facilitates focusing on activities of higher risk
customers by segregating them on the basis of money laundering risks.
Acknowledging the diversity in the quantification of risk, AMLOCK provides for a
parameter-driven risk module.
• Profiling to judge what is abnormal or suspicious, normal behavior has to be
established. This is aided by the Profiling facility that tracks the changes in
identification attributes as also the transactions patterns.
• Benchmarking facilitates defining global or specific tolerances in transaction
behavior. This enables the demarcation between normal and potentially suspicious
deviations in the account activity.
• Pre-defined Industry specific Alert Scenarios of AMLOCK enable identification
of established typologies. There are three variants: Red Flags (Online Alerts),
which are based on single transaction and are triggered at the time of data
ingestion. Aggregated Alerts (Offline Alerts), which consider several attributes
and / or a specified period of time and are scheduled as per the required periodicity.
Subjective Alerts which facilitate the recording of non-transaction based
suspicions.
• Visual Event Response Builder (VERB) is a Rules Engine to introduce suspicions
based on the unique experiences in the geography, industry or institution. This
enables the user to set / define conditions that would qualify individually or in
combination with other conditions qualify a transaction or a set of transactions as
suspicious.
• Alerts assignment enables the distribution of workload between the resources in
the compliance team and also in ensuring that resources with the appropriate
expertise address the Alerts raised.
• Alert resolution facilitates the closure of an Alert as non-suspicious without
further investigation. To back this decision, notes can be appended to the Alert.

The Following 2 Articles Give Information About The Step Taken By Indian Banks
To Curb Money Laundering.
Union Bank to Deploy 3i Infotech's AMLOCK
Wednesday, February 27, 2008: 3i Infotech and Union Bank of India (UBI) have forged
an alliance under which the former will implement AMLOCK at the bank. AMLOCK is
an anti-money laundering (AML) and fraud detection software that is tailored for the
insurance, banking and capital market intermediaries like brokerages, mutual funds and
registrars. AMLOCK helps companies comply with global Know Your Customer (KYC)
and transaction monitoring norms.

Bank of India has signed an agreement to implement AMLOCK

Monday, July 21, 2008: Bank of India has signed an agreement to implement AMLOCK,
3i Infotech’s Anti Money Laundering (AML) software. As part of this agreement, 3i
Infotech will undertake complete system integration, from procurement and installation
of hardware including storage, database, middleware and report writer.
MULTILATERAL INITIATIVES

Large-scale money laundering schemes invariably contain cross-border elements. Since


money laundering is an international problem, international co-operation is a critical
necessity in the fight against it. A number of initiatives have been established for dealing
with the problem at the international level.

International organizations, such as the United Nations or the Bank for International
Settlements, took some initial steps at the end of the 1980s to address the problem.
Following the creation of the FATF in 1989, regional groupings – the European Union,
Council of Europe, and Organization of American States, to name just a few – established
anti-money laundering standards for their member countries. The Caribbean, Asia,
Europe and southern Africa have created regional anti-money laundering task force-like
organizations, and similar groupings are planned for western Africa and Latin America in
the coming years.

Asia / Pacific Group on Money Laundering (APG)

The purpose of the Asia/Pacific Group on Money Laundering (APG) is to ensure the
adoption, implementation and enforcement of internationally accepted anti-money
laundering and counter-terrorist financing standards as set out in the FATF Forty
Recommendations and FATF Eight Special Recommendations. The effort includes
assisting countries and territories of the region in enacting laws to deal with the proceeds
of crime, mutual legal assistance, confiscation, forfeiture and extradition; providing
guidance in setting up systems for reporting and investigating suspicious transactions and
helping in the establishment of financial intelligence units. The APG also enables
regional factors to be taken into account in the implementation of anti-money laundering
measures.
The origins of the APG go back to "awareness raising" activities undertaken by the FATF
in the early 1990s as part of its strategy to encourage adoption of money laundering
counter-measures throughout the world. In order to achieve more concrete results,
Australia agreed to set up a Secretariat for the purpose of obtaining regional commitment
and establishing a regional FATF-style body with practical objectives. Subsequently, an
agreement was reached in Bangkok in 1997 which created the APG. The first meeting
was held in Tokyo in 1998 and then annually thereafter. Following the events of 11
September 2001, the APG expanded its scope to include the countering of terrorist
financing.

The APG conducts mutual evaluations of its members and holds a periodic workshop on
money laundering methods and trends. Its work mandate has been set out in a document
containing specific terms of reference for the group. The APG is supported by a
Secretariat, which serves as the focal point for its activities.

The APG became an Associate Member of the FATF in 2006.

Some of the member countries of APG are Afghanistan, Australia, Bangladesh, Canada,
Hong kong, china ,India ,Indonesia ,Japan ,Malaysia ,Mongolia ,Myanmar ,Nepal
,Pakistan, Singapore ,Sri lanka ,Thailand.
The Financial Action Task Force (FATF)
The FATF is an inter-governmental policy-making body whose purpose is to establish
international standards, and develop and promote policies, both at national and
international levels, to combat money laundering (ML) and terrorist financing (TF). It
was established in July 1989 by a Group of Seven (G-7) Summit in Paris, initially to
examine and develop measures to combat money laundering. In October 2001, the FATF
expanded its mandate to incorporate efforts to combat terrorist financing, in addition to
money laundering. Since its inception, the FATF has operated under a finite life-span,
requiring a specific decision of the Task Force to continue. The current mandate of the
FATF (for 2004-2012) was subject to a mid-term review in 2007-2008 and was
reaffirmed and revised at a Ministerial meeting in April 2008. It sets policies that guide
countries in adopting anti-money laundering measures. The organization has designated
20 categories of offenses that should be brought under anti-money laundering rules. The
task force reviews its mission every five years..

MISSION

The priority of the FATF is to ensure global action to combat money laundering and
terrorist financing, and concrete implementation of its 40+9 Recommendations
throughout the world. Starting with its own members, the FATF monitors countries'
progress in implementing AML/CFT measures; reviews money laundering and terrorist
financing techniques and counter-measures; and, promotes the adoption and
implementation of the 40+9 Recommendations globally.
MEMBERSHIP DETAILS

There are currently 34 members of the FATF; 32 jurisdictions and 2 regional


organisations (the Gulf Cooperation Council and the European Commission). These 34
Members are at the core of global efforts to combat money laundering and terrorist
financing. There are also 27 international and regional organisations which are Associate
Members or Observers of the FATF and participate in its work

Any country can become a member of FATF these countries who desire to become the
members of FATF have to follow the membership policy laid down by the organization.
Step 1 - Fundamental criteria of membership
a) The jurisdiction should be strategically important:
Indicators
1 Size of gross domestic product (GDP).
2 Size of the banking sector.
3 Impact on the global financial system, including the degree of openness of the
financial sector and its interaction with international markets.
4 Regional prominence in AML/CFT efforts.
5 Level of commitment to AML/CFT efforts.

Additional considerations
1 Level of adherence to financial sector standards.
2 Participation in other relevant international organisations.
3 Level of AML/CFT risks faced and efforts to combat those risks.

b) If the jurisdiction was to become a member, the FATF’s geographic balance should be
enhanced.

Step 2 - Technical and other criteria


a) The country should provide a written commitment at the political level:
(i) Endorsing and supporting the FATF Forty Recommendations 2003, the Nine Special
Recommendations 2001 (together referred to as the FATF Recommendations) and the
FATF AML/CFT Methodology 2004 (as amended from time to time).
(ii) Agreeing to implement all the FATF Recommendations within a reasonable
timeframe (3 years).
(iii) Agreeing to undergo a mutual evaluation during the membership process for the
purposes of assessing compliance with FATF membership criteria, using the AML/CFT
Methodology applicable at the time of the evaluation, as well as agreeing to undergo
subsequent periodic mutual evaluations following admission as a full member.
(iv) Agreeing to participate actively in the FATF and to meet all the other commitments
of FATF membership, including supporting the role and work of the FATF in all relevant
aspects.
b) The country should be a full and active member of a relevant FATF-style regional
body.
c) The overall mutual evaluation needs to be regarded as satisfactory, and in particular
the level of compliance for the Recommendations dealing with the money laundering and
terrorist financing offences, freezing and confiscation, customer due diligence, record-
keeping, suspicious transaction reporting, financial sector supervision, and international
co-operation need to be acceptable.
In determining whether the overall level of compliance is satisfactory, some flexibility
may be allowed with respect to Recommendation due to its complexity and multi faceted
requirements. The assessed country is, however, expected to demonstrate significant
progress toward full compliance with the components of Recommendation.

• It is expected that a country should obtain ratings of fully or largely compliant for all
FATF Recommendations listed above in paragraph c). If that is not achieved however,
then the country must at a minimum achieve ratings of LC or C for a large majority of
these Recommendations, and for the remainder, should demonstrate substantial progress
toward full implementation and provide a clear commitment at Ministerial level to come
into compliance within a reasonable timeframe and a detailed action plan setting out the
steps to be taken and the timeframe for taking them.
1
Steps taken by Indian government to become the member of FATF

India is the members of the APG (the Asia Pacific Group on Money Laundering), a
FATF-style regional body. India became an FATF Observer in February 2007.

India is set to join the anti-money laundering syndicate – Financial Action Task Force
(FATF) , which would help local banks access developed country markets more easily.

Until recently, the United States was denying ICICI Bank, Bank of Baroda and State
Bank of India branch licences on the grounds that India was not a member of FATF.
These banks managed to win a temporary reprieve after the government and the RBI
withheld fresh branch permission to the likes of Citibank.

India has completed all but one formality – to amend the Prevention of Money Launder
Act (PMLA) – to include a host of offences, such as insider trading and human
trafficking, in the schedule of offences. The Bill to amend the PMLA would be placed in
Parliament and the government would be able to share the provisions of the proposed law
and win a membership.

six major prerequisites for a membership have already been put in place. For instance,
the FATF – that has 35 members, with India being an observer – wanted the government
to establish a trail of all foreign exchange transactions, including hawala.

While the RBI has put in place a trail by asking agents, including those for wire transfer,
to maintain records for a specified period of time, it managed to convince FATF that
hawala deals could not be tracked as such transactions were illegal.

The other five commandments already complied with since the government lnotified
changes to the rules related to the PMLA, specifying that suspected cases of terror
financing would be part of the suspicious transaction reporting system.
The other four specifications were in place as soon as the PMLA came into effect. They
included naming of enforcement agencies to deal with the notified laws and mandating
‘know your client (KYC)' norms that would be legally binding.

The establishment of the Financial Intelligence Unit (FIU-Ind) was also part of the
exercise to gain a membership of the elite group.
RECOMMENDATIONS

AT THE GRASSROOT LEVEL THE FOLLOWING IMPLICATIONS CAN BE


MADE TO CURB MONEY LAUNDERING.

Stringent rules should be followed by banks and other financial institutes in these
four areas.

1. Customer Identification
2. Compliance with Laws
3. Cooperation with Law Enforcement agencies, and,
4. Adherence to the Statement.

These are dealt with in some detail below:

• Customer Identification This reemphasis’s the motto "Know your Customer"


(KYC). KYC requires that banks should make reasonable efforts to determine the
customer’s true identity, and must introduce effective procedures for verifying the
bonafides of new customers.

• Compliance with Laws The laws and regulations pertaining to financial


transactions as enacted in different banking related statutes, must be observed.
Banks should not offer services or provide active assistance in case of transactions
where they have good reason to suppose that these are associated with Money
Laundering activities.

• Co-operation with Law Enforcement Authorities Banks should co-operate


fully with national law enforcement authorities to the extent permitted by specific
local regulations concerning customer confidentiality.

• Adherence to the Statement Adhering to the Statement implies that banks need
to adopt policies that are consistent with the Statement and ensure that all staff
members are informed of the banks policy in this regard. Some key factors in
promoting adherence to the Statement of Principles are staff training and
implementing specific procedures for customer identification and retaining
internal records of transactions.

The above act as an effective guideline for what banks and financial institutions should
do to cope with Money Laundering.

AT THE INTERNATIONAL LEVEL WE MUST DO THE FOLLOWING

We must continue to work with - and strengthen - our international partnerships, and
maintain strong ties with our counterparts in the financial centers of the world. We must
urge all countries to ratify the U. N. Convention and to pass more effective money
laundering and forfeiture laws. Above all, we must continue to identify the points where
the money is most vulnerable and identify what we can do to separate criminals from
their ill-gotten gains.

Launderers have a list popularly called a "shopping list" which they use to size up
specific opportunities when searching for jurisdictions to use. Knowing what is on this
list can give rise to specific measures for countries to adopt to fight money laundering.
These measures are a natural progression for countries that have the political will to
combat this insidious crime.

We need:-

a. to strengthen international co-operation on information exchange and law


enforcement;
b. proper mechanisms for handling suspicious reports;
c. a compliance culture among financial institutions; and to ensure that they put
proper systems and procedures in place;
d. to encourage financial supervisors to apply bank licensing procedures strictly,
exchange information, and train practitioners;
e. to increase public awareness of the threat from money laundering;
f. increasing co-ordination between the multiple agencies (national and
international) involved and to improve the limited intelligence sharing;
g. to increase the limited human resources involved in the labour intensive and time
consuming work of investigating suspected violations;
h. Implementation on a world-wide basis of a consistent set of policies.
i. to focus on new technologies and increase countermeasures to combat their use
for money laundering;
j. To share forfeited proceeds with law enforcement agencies. (a particular police
gripe);

`VAT system can spawn money laundering'

Mohan Padmanabhan

Kolkata , Oct. 14

Will the Value Added Tax (VAT) system become a potential source for obtaining dirty
money?

In a special report on `Money laundering - Definition, Tools & Means and Prevention,'
presented at a workshop on `Emerging fiscal trends vis-à-vis economic reforms,'
organised by the Direct Taxes Professionals' Association (DTPA) here recently, Mr
Anshuma Rustagi, a practising chartered accountant, has pointed out that in contrast with
the violent nature of cash-in-transit robberies and motor vehicle hijackings, "VAT fraud
is a typical convenient white-collar crime."

Mr Rustagi said that input tax deductions are allowed on the VAT component of the
purchase price of all goods or services acquired by a trader for consumption or taxable
supplies. Except for specific input tax denials relating to motor cars and air-conditioners,
input tax may also be deducted for capital goods.
"This creates the opportunity for disguising a large fraudulent input tax claim as merely
relating to an extraordinary acquisition of capital goods." Mr Rustagi held that the
availability of the deduction is not suspended until output tax linked to the goods or
services has been derived. This enables defrauders to claim large input tax credits and
subsequently disappear.

Common VAT frauds, which can be a means of money laundering, include export fraud,
conspiracy among the seller, the purchaser and the missing trader intra-community
(MTIC), which is known to occur in EU countries. Typically, in MTIC frauds, a dealer
registers under VAT, sells goods to a trader, charges VAT and disappears without
submitting any return or paying the VAT.

He said that in the EU, MTIC fraud is one of the most prevalent systems of misleading
the tax authorities. This involves obtaining a VAT registration number in one member-
state; purchasing goods free from VAT from another member-state (as imports are VAT-
free); and selling goods at a VAT-inclusive purchase price in the member-state of
registration, i.e., in the domestic market, and then going missing without paying the
output tax due in the member-state of registration.

Mr Rustagi said that in a federal set-up, it is proposed that Central Sales Tax would be
phased out, thereby making cross-border transactions across States VAT-free.
"International experience suggests that this VAT-exempt cross-border supply of goods
shall present the perfect breeding ground for MTIC fraud to take roots."

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page


Harshad Mehta scam
Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early
childhood was spent in Mumbai where his father was a small-time businessman. Later,
the family moved to Raipur in Madhya Pradesh after doctors advised his father to move
to a drier place on account of his indifferent health. But Raipur could not hold back
Mehta for long and he was back in the city after completing his schooling, much against
his father’s wishes.
Mehta first started working as a dispatch clerk in the New India Assurance Company.
Over the years, he got interested in the stock markets and along with brother Ashwin,
who by then had left his job with the Industrial Credit and Investment Corporation of
India, started investing heavily in the stock market.
As they learnt the ropes of the trade, they went from boom to bust a couple of times and
survived.
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did
very well for himself. At his peak, he lived almost like a movie star in a 15,000 square
feet house, which had a swimming pool as well as a golf patch. He also had a taste for
flashy cars, which ultimately led to his downfall.

The fall

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was
all along considered as the architect of the Bull Run was blamed for the crash. It
transpired that he had manipulated the Indian banking systems to tap off the funds from
the banking system, and used the liquidity to build large positions in a select group of
stocks. When the scam broke out, he was called upon by the banks and the financial
institutions to return the funds, which in turn set into motion a chain reaction,
necessitating liquidating and exiting from the positions which he had built in various
stocks. The panic reaction ensued, and the stock market reacted and crashed within days.
He was arrested on June 5, 1992 for his role in the scam.
His favorite stocks included
• ACC
• Apollo Tyres
• Reliance
• Tata Iron and Steel Co. (TISCO)
• BPL
• Sterlite
• Videocon.
The extent
The Harshad Mehta induced security scam, as the media sometimes termed it, adversely
affected at least 10 major commercial banks of India, a number of foreign banks
operating in India, and the National Housing Bank, a subsidiary of the Reserve Bank of
India, which is the central bank of India.

How the case was cracked


The broker was dipping illegally into the banking system to finance his buying.
The crucial mechanism through which the scam was affected was the ready forward (RF)
deal.
The RF is in essence a secured short-term (typically 15-day) loan from one bank to
another.
Crudely put, the bank lends against government securities just as a pawnbroker lends
against jewellery….
The borrowing bank actually sells the securities to the lending bank and buys them back
at the end of the period of the loan, typically at a slightly higher price.”
It was this ready forward deal that Harshad Mehta and his cronies used with great success
to channel money from the banking system.
A typical ready forward deal involved two banks brought together by a broker in lieu of a
commission.
The broker handles neither the cash nor the securities, though that wasn’t the case in the
lead-up to the scam.
In this settlement process, deliveries of securities and payments were made through the
broker. That is, the seller handed over the securities to the broker, who passed them to the
buyer, while the buyer gave the cheque to the broker, who then made the payment to the
seller.
In this settlement process, the buyer and the seller might not even know whom they had
traded with, either being know only to the broker.
This the brokers could manage primarily because by now they had become market
makers and had started trading on their account.
To keep up a impression of legality, they pretended to be undertaking the transactions on
behalf of a bank.
Another instrument used in a big way was the bank receipt (BR). In a ready forward deal,
securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller
of securities, gave the buyer of the securities a BR.
It acts as a receipt for the money received by the selling bank. Hence the name - bank
receipt. It promises to deliver the securities to the buyer. It also states that in the mean
time, the seller holds the securities in trust of the buyer.

Having figured this out, Metha needed banks, which could issue fake BRs, or BRs not
backed by any government securities?
Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-
operative Bank (MCB) - came in handy for this purpose. These banks were willing to
issue BRs as and when required, for a fee.
Once these fake BRs were issued, they were passed on to other banks and the banks in
turn gave money to Mehta, obviously assuming that they were lending against
government securities when this was not really the case. This money was used to drive up
the prices of stocks in the stock market. When time came to return the money, the shares
were sold for a profit and the BR was retired. The money due to the bank was returned.
The game went on as long as the stock prices kept going up, and no one had a clue about
Mehta’s blunder. Once the scam was exposed, though, a lot of banks were left holding
BRs which did not have any value - the banking system had been swindled of a whopping
Rs 4,000 crore.
The jain hawala scandal

The Hawala scandal was an Indian political scandal involving payments allegedly
received by politicians through hawala brokers, the Jain brothers. It was a US$18 million
dollar bribery scandal that implicated some of the country's leading politicians.

Those accused included Lal Krishna Advani who was then Leader of opposition. He and
others were acquitted in 1997 and 1998, partly because the hawala records (including
diaries) were judged in court to be inadequate as the main evidence..The scam hovered
around the fact that the Hawala channels through which terrorist outfits in Kashmir like
Hijbul-Mujahideen used to get funds, the same channels used to grease the palms of over
115 top bureaucrats and politicians of the country.

The case

Jain Hawala Case put the career of 24 politicians in Jam.The Jain Hawala Case has
shown that corruption has now taken the front seat in India.Panja, Shiv Shankar, Sinha
and Vora discharged in Jain hawala case Former Union ministers Ajit Kumar Panja, P
Shiv Shankar, former Uttar Pradesh governor Motilal Vora, Bharatiya Janata Party leader
Yashwant Sinha and the Jain brothers were discharged by Special Judge V B Gupta in the
Rs 650 million Jain hawala case .
Allowing the petitions by Advani and Shukla challenging the special judge's order,
Justice Shamim had ruled in his 70-page judgment that the Jain diaries could not be
converted into legal evidence against them.
Allowing similar petitions by the Jain brothers, S K Jain, N K Jain and B R Jain and their
employee, J K Jain, the high court quashed the proceedings against them too. The
quashing of charges against Advani and Shukla by the high court triggered a spate of
petitions with the trial court by other politicians involved in the hawala case, seeking
pardon.
Citing the high court order, he said, ''When the diaries, notebooks and loose sheets cannot
be legal evidence in one case arising out of the same first information report, then
certainly it cannot be legal evidence in the present cases based on the same F
The investigations done by the cbi was highly criticized as they failed to do justice
to hawala scam probe

The verdict of the case lead to the following findings

Investigating agencies had not done a satisfactory job in probing the case, otherwise it
would not have been possible for all the charge-sheets to end up in a fiasco.

``The hawala case was one in which the Court had granted complete insulation to the
investigating agencies from extraneous circumstances. We even relieved them of the
power of supervision by the highest authority in the executive (the Prime Minister) and
yet they could not perform,'' Justice Verma said, adding this proved that mere insulation
was not enough.

``It is clear that they only put up an excuse of filing a charge-sheet because if the
discharge of accused is justified then apparently there was no prima facie case put up
along with the charge-sheet for the trial to commence,'' Justice Verma said, adding that if
there was no justification, no evidence available from the investigation, they should not
have filed the charge-sheet.

despite the non-availability of evidence the agencies still filed charge-sheets, which
meant they had tried to say that there was a case to proceed with.

So either the filing of charge-sheets was without proper investigation or the investigation
was improper. It cannot be anything else, adding all this did not go well with the efficient
functioning of the agencies.
the hawala case had proved that even if the agency was completely insulated, that by
itself was not enough and something more was required -- which was the will to
investigate properly. Probably the agencies wanted to get rid of the Court's control and,
therefore, they had filed the charge-sheet.

Meanwhile, in an interview Justice Verma said judges of the Supreme Court and the High
Courts should be brought under the ambit of a new law on the lines of the Prevention of
Corruption Act to make them more accountable for their misconduct.

``Today the judges of the superior judiciary in India are not answerable to anyone for
their misconduct as neither impeachment procedures nor internal judicial machinery is
workable,'' Justice Verma said.

There were only two ways of ensuring accountability which was either through internal
machinery that involved following conventions coupled with social sanction by the
judicial community itself or a new law.
Bibliography
Websites
• www.economictimes.com
• www.timesofindia.com.
• www.hindubusinessline.com
• www.rbi.org
• www.fatf-gafi.org
• www.indiaforensics.com
• www.carajkumarradukia.com

Books:-
Money Laundering and combating the Menance in global & Indian context
Arya Ashok Kumar
Publication taxman allied services (P).ltd

Magazines:-
Profeesional banker
Articles by:-
• Prasad RS -edition August,2004
• Gopal rama C –edition May June,2005
• Tom K Alweendo -edition August,2005
Insurance chronicle
Article by:- TS Rama Krishna Rao –edition January,2008
ACKNOWLEDGEMENT

It gives me immense pleasure and satisfaction while presenting this


report on:

MONEY LAUNDERING-THE INDIAN SCENARIO


I would like to thank Mrs. J.K. Phadnis, Principal, V.E.S. College of Arts, Science and
Commerce and Prof. Mrs. A. Martina, Co-ordinator, BMS (Bachelor of Management
Studies) for granting me the authority to do the project on the topic MONEY
LAUNDERING-THE INDIAN SCENARIO

I sincerely acknowledge with deep sense of gratitude and indebtedness the harmonious
and invaluable guidance and encouragement given by my Project Guide Mr. NIKHIL
BHOBE. and also for being a continuous source of inspiration and for constructive
criticism to make this project a success.

I extend my profuse thanks to ms hanita wadhwani who extended so much of learning


to me and added value to my project. It would have been impossible for me to complete
my project without their enthusiastic support which helped me develop a practical
insight.
Last but not the least is the contribution staff members, and the non staff members
at the V.E.S. College library for providing me with the relevant books and magazines
required for this project. I also appreciate the support and encouragement of my family
and my friends in the completion of this project.

Thanking you once again.


Harsha jethmalani
EXECUTIVE SUMMARY
Project title
Benchmarking of Recruitment Process in IT companies

The scope:
The project would cover various sources and process of recruitment at different levels of
management followed by the IT Companies; challenges associated in recruiting
incumbents especially in the ERP department.

Methodology:
Questionnaire was designed for the HR professionals and Field interviews were
conducted with the managers. The following project is a mixture of descriptive and
quantitative comparative analysis of seven Information Technology companies providing
ERP solutions to its clients and make businesses easy for them. The summary of these
interviews has been included in the report along with comparative analysis of the same.

Findings:
The IT industry, like any other service industry, is people driven. There are a number of
challenges in the Indian IT industry, which require the serious attention of HR managers
to ‘find the right candidate’ and build a ‘conducive work environment’ which will be
beneficial for the employees, as well as the organisation. The IT industry is already under
stress on account of persistent problems such as attrition, confidentiality, and loyalty.

The objective of this project was to study the various sources of recruitment of the IT
companies and understand the difficulties faced by them in recruiting ERP Consultants
who have functional as well as technical experience. The idea was to understand what
should be done to overcome this difficulty, as such candidates are difficult to source in
the IT job markets.

For this first hand information was collected of seven IT companies. The companies
visited were a mixture of large to mid-sized organizations. In all, seven companies were
visited to understand their recruitment strategies. More than half of the executives
surveyed expressed that the major challenges for the HR managers are recruiting the right
people and retaining them for longer times. The next most important HR concerns listed
were meeting the demand, supply requirements in the industry, expectations management
of the resources and other stakeholders, efficiency in processes and HR policies.
The companies have realized that there exists a shortage of skilled manpower within the
IT job market, and have accepted this challenge. They are using various contemporary
sources of recruitment with a fine usage of the traditional sources as well. Companies
now understand that recruitment is not the end all of the HR activities. Emphasis is laid
not only on recruiting the right candidate; but also on retaining him, by the various
training programmes and employee welfare activities.
anisha
Acknowledgement

The most pleasant part of any project is to express gratitude and bestow honor
towards all those who directly or indirectly contributed to the smooth flow of the project
work and this being the good opportunity I would like to thank them all.

I would like to thank Mrs. J.K. Phadnis, Principal, V.E.S. College of Arts, Science
and Commerce and Prof. Mrs. A. Martina, Co-ordinator, BMS (Bachelor of Management
Studies) for granting me the authority to do the project on the topic ‘The Indian Foreign
Exchange Market’ and would also like to express my gratitude towards my guide Prof.
Govind Sowani of V.E.S. College of Arts, Science and Commerce whose guidance and
inspiration right from the conceptualization to the finishing stages has proved to be a very
essential and valuable in the completion of the project.

I would also like to thank the staff and the non staff members at the V.E.S.
College library for providing me with the relevant books and magazines required for this
project. I also appreciate the support and encouragement of my family and my friends in
the completion of this project.
Executive Summary

“Money speaks sense in a language all nations understand” –


Aphra Behn 1640-1689, British Playwright, Poet

The best way to explain the above quote would be the referral to the Foreign
Exchange Markets. The Foreign Exchange market, also referred to as the "Forex" or
"FX" market is the largest financial market in the world, with a daily average turnover of
US$1.9 trillion. "Foreign Exchange" is the simultaneous buying of one currency and
selling of another. Currencies are traded in pairs, for example Euro/US Dollar
(EUR/USD) or US Dollar/Japanese Yen (USD/JPY). Due to vast network throughout the
world, finance in terms of currency is a necessity to maintain economic relationship.

This project explains how the Forex market behaves differently from other
markets with specific reference to the Indian foreign exchange market.

The Indian forex market is predominantly a transaction based market with the
existence of underlying forex exposure generally being an essential requirement for
market users. Foreign exchange market in India is totally structured and well regulated.
The Indian Forex market is a 3-tier structure consisting of:

• Transaction between RBI and Ads.


• Interbank market.
• Transaction between Ads and their corporate customers.

When speaking about the Indian forex market it is not possible to forget the
mention of ‘FEDAI’. Foreign Exchange Dealer Association of India (FEDAI)
provides a vital link in the administrative set up of foreign exchange in India. It is the
mouthpiece of the authorized dealers, representing their views to the Reserve Bank and
other international agencies.
This project also discusses the different exchange rate systems followed by
various countries, the types of exchange rates like fixed and floating rates, free and
managed exchange rates, and the journey of the Indian Rupee and so on.

The Forex market is uncontrollable - no single event, individual, or factor rules it.
There is no perfect market! Just like any other speculative business, increased risk entails
chances for a higher profit/loss. The speed, volatility, and enormous size of the Forex
market are unlike anything else in the financial world.
Objective of the Study
Objectives are the base for any work without which work can’t be done.
Foreign exchange market, which is of a very dynamic nature, is becoming increasingly
competitive day after day. Through this project I aim to gain a better understanding of the
foreign exchange mechanism and the exchange rates prevalent in the market.

Liberalisation and globalization has paved the way for the development of the Indian
economy thus increasing the volume of international trade. The growth in the trade will
surely pave the way for the growth of the Forex market too. In short, the market in India
is sure to bloom. Hence, a study on the Indian Foreign Exchange Market has been done.

Methodology
Methodology shows how and through which source the data or information is collected.
This report is a collection of secondary data. The data for the project report was collected
from diverse sources like books and internet. The details of the books and sites visited
have been mentioned in the bibliography.

Limitation of the Study


With its dynamic nature, the forex market is too informative and any data collected
would be less. Also as there is only factual description mostly available, collecting
primary data was not possible.

To limit the scope of the study, a detailed study on risks and risk management tools and
derivatives have not been included.
Acronyms

AML - ANTI-MONEY LAUNDERING


CBI - CENTRAL BUREAU OF INVESTIGATION
CTR - CASH TRANSACTION REPORT
EIC - ECONOMIC INTELLIGENCE COUNCIL
FIU – IND – FINANCIAL INTELLIGENCE UNIT INDIA
IFT - INFORMAL FUND TRANSFER
IMF –INTERNATIONAL MONETORY FUND
IRDA – INSURANCE REGULATORY DEVELOPMENT AUTHORITY
KPMG – KLYNVELD PEAT MARWICK GOERDELER
KYC – KNOW YOUR CUSTOMER
PEP – POLITICALLY EXPOSED PERSON
PMLA – PREVENTION OF MONEY LAUNDERING ACT
RBI – RESERVE BANK OF INDIA
SEBI – SECURITIES AND EXCHANGE BOARD OF INDIA
STR – SUSPICIOUS TRANSACTION REPORT
UN - UNITED NATIONS

THE PREVENTION OF MONEY-LAUNDERING ACT, 2002


(15 of 2003)
[17th January, 2003]
An Act to prevent money-laundering and to provide for confiscation of property derived from, or
involved in, money-laundering and for matters connected therewith or incidental thereto
PRELIMINARY
1. Short title, extent and commencement.- (1) This Act may be called the Prevention of
Money-laundering Act, 2002.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in the
Official Gazette, appoint, and different dates may be appointed for different provisions of this Act
and
any reference in any such provision to the commencement of this Act shall be construed as a
reference to
the coming into force of that provision.
OFFENCE OF MONEY-LAUNDERING
3. Offence of money-laundering.-- Whosoever directly or indirectly attempts to indulge or
knowingly assists or knowingly is a party or is actually involved in any process or activity
connected with
the proceeds of crime and projecting it as untainted property shall be guilty of offence of
moneylaundering.
4. Punishment for money-laundering.-- Whoever commits the offence of money-laundering
shall be punishable with rigorous imprisonment for a term which shall not be less than three years
but
which may extend to seven years and shall also be liable to fine which may extend to five lakh
rupees:
Provided that where the proceeds of crime involved in money-laundering relates to any offence
specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have
effect as if
for the words "which may extend to seven years", the words "which may extend to ten years" had
been
substituted.

OBLIGATIONS OF BANKING COMPANIES, FINANCIAL INSTITUTIONS AND


INTERMEDIARIES
12. Banking companies, financial institutions and intermediaries to maintain records.-- (1)
Every banking company, financial institution and intermediary shall—
(a) maintain a record of all transactions, the nature and value of which may be
prescribed, whether such transactions comprise of a single transaction or a series of
transactions integrally connected to each other, and where such series of transactions
take place within a month;
(b) furnish information of transactions referred to in clause (a) to the Director within
such time as may be prescribed;
(c) verify and maintain the records of the identity of all its clients, in such manner as
may be prescribed:
Provided that where the principal officer of a banking company or financial institution or
intermediary, as the case may be, has reason to believe that a single transaction or series of
transactions
integrally connected to each other have been valued below the prescribed value so as to defeat the
provisions of this section, such officer shall furnish information in respect of such transactions to
the
Director within the prescribed time
(2) The records referred to in sub-section (1) shall be maintained for a period of ten years from
the date of cessation of the transactions between the clients and the banking company or financial
institution or intermediary, as the case may be.
14. No civil proceeding against banking companies, financial institutions, etc., in certain
cases.-- Save as otherwise provided in section 13, the banking companies, financial institutions,
intermediaries and their officers shall not be liable to any civil proceedings against them for
furnishing
information under clause (b) of sub-section (1) of section 12.