The “Prevention of Money Laundering Act, of 2002” defines money laundering in India, and the study examines how illicitly obtained cash is hidden. It emphasizes the Hawala system, a clandestine money transfer scheme banned in India. Banks must maintain client confidentiality and follow Know Your Customer (KYC) standards to verify names and fund sources. Despite these safeguards, the article notes that commercial banks’ low KYC compliance and technology advances that enable speedier and more discreet transactions make money laundering regulations difficult to enforce. In conclusion, the essay recommends legal alignment, public knowledge of money laundering’s repercussions, and judicial vigilance to strengthen India’s anti-money laundering efforts and provide a strong legal precedent.
WHAT IS MONEY LAUNDERING?
To “launder” money is to make the origin of illegally obtained finances or assets appear to be lawful. In most cases, illegal behaviour is behind such a change of ownership or possession.[1] In India, “Section 2(1)[2]” read in conjunction with “Section 3[3]” of the “Prevention of Money Laundering Act, 2002” defines money laundering as an “endeavour to conceal the source of proceeds or property obtained through criminal activity.”[4]
MODE OF OPERATION OF MONEY LAUNDERING?
There are three basic concealment steps that make money laundering feasible. It commences with the initial placement stage. The majority of illegally obtained funds are liquid in nature. This money is then transferred, subdivided, and placed into the formalized framework for financial savings and investment. Typically, “banks and capital markets” serve function. Such stratification typically occurs in two ways.[5] The first stage, after depositing the liquid currency in a financial institution like a bank, is to convert it into monetary instruments like money orders. The second prevalent practice involves the acquisition and subsequent selling of assets, with the goal of concealing the true source of the funds and the identity of the original owner. “Integration” refers to the final phase of the money laundering process. The term “integration” describes the process by which money earned dishonestly is returned to the legitimate financial system. This is often accomplished through a banking mechanism so that the money can be recirculated within the economy.[6]
THE HAWALA SYSTEM
The Arabic word for trust is hawala. Hawala is a parallel remittance mechanism for money-laundering proceeds, similar to trusts. It is also called “Underground Banking”[7]. The transaction relied mainly on Hawaldar middlemen. Money is not physically transferred. The Hawaldar, who may be reached at the money source, makes it possible.
The Hawaldar then contacts a Hawaldar in the money-transfer sector. A commission is cut by the original Hawaldar, who collects and passes the payment to the transferee Hawladar.[8] Only until the transferee or his Hawaldar divulges a specific password can the money be received or collected. Thus, this system relies primarily on commercial contacts and mutual confidence. This money transfer method is popular since it avoids scrutiny and documentation and provides tax benefits.[9] Thus, it is great for money laundering. Indian law prohibits hawala transactions under the “Foreign Exchange Management Act, of 2000” and the “Prevention of Money-Laundering Act, of 2002”.
MONEY LAUNDERING IN THE INDIAN CONTEXT
“Money laundering” has emerged as a widespread concern across various echelons. The first aspect relates to the global level. The following level is associated with the occurrence of domestic money laundering. Several legislations have been promulgated to address these transactions, such as the “Benami Transactions (Prohibition) Act of 1988”, the “Income Tax Act of 1961”, “The Narcotic Drugs and Psychotropic Substances Act of 1985”, as well as the “Indian Penal Code” and “The Criminal Procedure Code”. However, the existing legislation has demonstrated its ineffectiveness in addressing the constantly evolving strategies utilized in the domain of money laundering. There existed a widely acknowledged imperative to enact legislation that expressly addresses the prevention of “money laundering”. Furthermore, the impetus to address the issue of “money laundering” in India was heightened as a result of the liberalization of the stock market and economy. Consequently, the “Prevention of Money Laundering Act, of 2002” was enacted, serving as a specialized legislation specifically designed to address this issue.
OBLIGATION ON BANKS
It is of utmost importance for financial institutions to continually bear in mind that the data obtained from customers during the course of initiating a new account is of a confidential nature, and any provided information should not be disclosed for the purpose of engaging in cross-selling or comparable endeavours.[10] Hence, it is imperative for banks to guarantee that transactions including data draughts, telegraphic transfers, or travellers’ cheques amounting to INR fifty thousand or above are recorded as debits in the customer’s account or subtracted from checks, rather than being settled through cash.[11] Nevertheless, these measures are counteracted by the implementation of “Know Your Customer (KYC)” norms, which serve to enable banks to confirm the identity of a prospective account holder as well as the origin of the funds being deposited into the bank. “The Reserve Bank of India” issues “Know Your Customer (KYC) Norms” through its Master Circulars. These rules encompass four fundamental characteristics that the Bank must investigate. The framework comprises several components, namely “Customer Identification Procedures, Customer Acceptance Policy, and Risk Management and Monitoring of transactions”.[12]
CONCLUSION AND SUGGESTIONS
India’s money laundering measures are still insufficient in fixing gaps, notwithstanding national and international legislation. The biggest challenge with money laundering laws is their enforcement. Commercial banks in India sometimes neglect Know Your Customer (KYC) rules to improve operational efficiency due to their competitive environment. KYC regulations are similar to standard form contract conditions for creating new accounts. The second issue is technical progress. E-commerce and encryption technology have increased transaction speeds, allowing monies to move quickly and preventing tracing. Legal alignment in India’s enforcement and investigation bodies is necessary to overcome the above challenges. This method is cheaper and more efficient. Additionally, money laundering’s negative effects must be communicated to the public, especially those who engage in complex and expensive banking operations. In summary, it is imperative for the judiciary to exercise heightened vigilance in matters pertaining to money laundering in order to establish a stringent legal precedent that upholds India’s money laundering legislation.
Author : Rajri Patel, A student at Symbiosis Law School, Pune, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD
[1] V. Kumar Singh, Controlling Money-Laundering in India-Problems and Perspectives, 11th Annual Conference on Money and Finance in the Indian Economy, (23-1-2009 — 24-1-2009).
[2] The Prevention of Money Laundering Act, § 2(1), No.15, Acts of Parliament,2002, (India).
[3] The Prevention of Money Laundering Act, § 3, No.15, Acts of Parliament,2002, (India).
[4] Michael Lev and Peter Reuter, Money-Laundering: Crime and Justice, A Review of Research, Vol. 34, 289-376, (2006).
[5] Fauto Martis de Sanctis, Money-Laundering through Art: A criminal Justice perspective, 97-102, (2013 Edn.).
[6] Commonwealth Secretariat, Combating Money-Laundering and Terrorist Financing, 46-47, (2006 Edn.).
[7] Rob McCusker, Underground Banking: Legitimate Remittance Network or Money-Laundering System, (July 2005), (last visited on: Dec 3, 2023, 9:05 PM).
[8] Mayur Joshi, Occupational frauds and money, 6-8, (2005 Edn.).
[9] David C. Faith, The Hawala System, Global Security Studies, Vol. 2, Issue 1, 23-25, (2011).
[10] Vijay Singh, Controlling Money-Laundering in India-Problems and Perspectives, (January 2009), (last visited on: Dec 3, 2023, 12:05 PM)
[11] Suresh Padmalatha, Management of Banking and Financial Services, 108-109, (2011 Edn).
[12] Dhandapani Alagiri, Money-Laundering: Issues and Perspectives, 3-4, (2006 Edn.).
