What is money laundering? As per the definition of a layman, money laundering is the process of conversion of black money into legal money that is white money. However, this definition is a bit incomplete. Strictly speaking, money laundering is not converting black money into white but to hide the sources of the generation of that black money along with getting legitimate proofs for those earnings that hide the actual source and make the source appear to be legal so that no case can be initiated against them. The word is often believed to be synonymous with the word, "Capital flight" but in reality, there exists some difference between the two word. There are many sources through which this act of money laundering becomes essential as they are illegal and anti-society sources. A few example of the sources include Hawala market, tax evasion, illicit drug trading, smuggling, human trafficking, illegal deals in the arms and weapons, false pricing or trade mispricing etc. These methods of money laundering are more commonly used by the terrorists. Hence, one of the greatest threats of money laundering is the financing of the terrorists.
Steps used for money laundering There are generally three steps that is followed by the guilty to convert their black money in to white. The three steps involved in money laundering are:
- Firstly, the people earns black money by some illegal ways and try to bring the same or partial amount of cash into the economic channels by way of placements or any other methods that I have discussed below.
- Second step is a bit complicated. It is made to appear complex so that it becomes more complex to trace the proper inflow and outflow of the transactions.
- Finally, the concerned people employs some tactics to get the money back into their hands. This time when the money returns to them, they have absolute proofs of the legality of that money so that no legal inquiry can be initiated on them.
An example of money laundering - taken from the movie, "Shivaji- the boss" This is a well known and highly appreciated movie of Rajnikanth that attracted the worldwide recognition due to the outstanding concept of the director and the script writer. The protagonist of the movie comes to know about the vast amount of the black money hidden by the leaders and the ministers in various forms. After getting hold of that money through physical infliction on the guilty, he starts dissipating them to the foreign banks in the tax-haven countries. From those banks, he distributes the money to various people residing in various countries in small packets. After all the money has been distributed to the relatives and others in small packets, he asks all of them to send the money back through internet transfer in the name of "Shivaji foundation and trusts". In this way, he has all the required documents and the smallest details of the transactions that occurred thorough the bank account of his trust. He utilizes the same money for building schools, hospitals, colleges, roads and other developmental activities. But do you really think that this could be possible in the real world. When you shall hear about the uses of the money generated through money laundering, you shall be intensely terrified.
Another example can be seen in the case of trading business. In order to avoid tax such as sales tax and VAT, the firms are able to get false invoices for their purchase from another firm. The other firm is only a firm-on-paper without any real transaction. After the invoice has been made, the owner of the false firm pays the amount of the invoice to the owner of the former firm as hard cash. He charges some commission on it. The owner of the real firm deposits the same into his bank and get the invoice cleared as there is enough money in his bank account to be transferred to the owner of the paper firm. Thus, the owner of the paper firm gets his money back and also, the owner of the real firm is able to get the cheque honored. In this way, the banks do not get any clue as to the illegal acts of these people.
Various methods used in money laundering
- First method for the placement of the money which is the circulation of the black money into the economic system of the country is to break the vast amount of money into small packets as discussed above so as to prevent any suspicion to befall on them.
- Second method is very common. It is achieved through the physical carriage of bulk money into a bank, generally of foreign country, that has more of relaxed laws regarding the payment of taxes or the revelation of the bank account information.
- False invoices can also be used for the same purpose. The traders either under-charge or over-charge the invoice so as to hide the actual locomotion or the movement of black money from one place to another.
- Another clever money to hide the vast amount of money and deposit them safely and securely in a bank shall to enter the casinos and the horse race tracks. The money launderer enter into a casino where the gambling is legal and buy some chips or biscuits. After playing for some time, he encash them again for money and preferably asks for a cheque or a demand draft. This way, he can claim the earnings to be gambling earnings. If he loses during gambling, there shall be not enough loss for him.
- Another common and easiest way is to find a victim who can sell his land or any other real estate to a money launderer. After purchasing the property with his black income, he sells it off to another person at a high price. This way, the earnings can be claimed to a legal one. Generally,the invoice prepared for such purposes if also a false one. Hence, this is a combination of two ways to help in money laundering. It is estimates that half of the money is laundered in this way itself.
Steps to be taken to prevent money laundering Most of the money laundering takes place due to the negligence of the banks or due to the lack of proper information regarding the bank account holder.
- One of the preventive ways for the bank shall be to use the anti-money laundering software for their clients. Such software are generally tailor based software that track the entire information of the bank account holder, any sudden transaction involving huge amount of money withdrawals or deposits, connections and transaction with other customers, transaction with the enemy nations or the tax haven countries, frequency and the amount of transaction, whether the business of the person permits such huge or small transactions, time period for which the account holder has been active etc.
- UIC or Unique Identity card must be used by the bank. Such cards are called the smart cards as they possess a complete detail on the PAN card number, telephone No., address etc. The transactions through such cards reveal all the
information of the customers thus, preventing any fraudulent activity.\\
- It must be made a rule that all the bank transaction are completed through online or internet transfer as it reduces the danger of any malicious activity.
- There must be a upper limit as to the total amount of the transaction that has happened in a particular day, week or month. For example, in Bangladesh, any transaction involving more than Rs.7 lakh has to be reported to the concerned authority.
- The accountability of the banks should be increased. It means that the banks should be made more accountable to the RBI so that the central bank of our country can find out any anomaly that has taken place in the accounts of the banks. For example, it has been reported by RBI that there are crore of money in the nationalized banks of our country over which no one has yet admitted any claim. Some of these banks are SBI, ICICI, HSBC etc. All the scheduled and non-scheduled banks must submit their true reports to the RBI.
- Finally, Prevention of Money Laundering must be strictly followed. The acts has given some ways to tackle money laundering. It has given both preventive as well as remedial measures against black money. These measures and law provisions must be kept in mind by the banks and they should act accordingly.