MANAGEMENT THESIS

ARTICLE

ON Money laundering and its impact on India

BY CHANDAN KUMAR MBA 4TH SEMESTER ICFAI UNIVERSITY, SIKKIM

Money laundering and its impact on India

We all hear from time to time about money laundering and black money. Like in recent times we have seen Baba Ramdev doing protest to bring back black money. A question comes in mind of every Indian is what is money laundering and how its impact our country let us first discuss about what is money laundering. Common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, and trade in illegal gems, smuggling, human trafficking, corruption, and income tax evasion. money laundering occurs if an individual or legal entity undertakes to convert, transport, send, store, assist in delivering, conceal unaccounted money (illegal money) or information pursuant to its origins, nature, location, disposal or transport of such gains or in any similar manner participates in ensuring the unaccounted money to move from one location to another location and making this unaccounted money legal by means of false documentation. Money laundering also occurs because of tax avoidance. Like if I dont pay tax on my gains and show my gains as money used in day to day operation of my business will also be treated and money laundering. Let us take an example to understand this money laundering concept clearly once Mr. Ramesh gave Amit US$ 50,000 cash at some Middle East country. Karan operates a retail business (and also performs remittance services for others). He will deposit his money regularly with his banker as the proceeds of his business in shape of cash and checks. He will justify these deposits to Bank/Tax officials as the proceeds of his legitimate business. Even though, he might prefer it if reports were not filed, he will not object to this as it would arouse suspicion at the bank because he can give as many as justification for this money as his business proceedings. He may also use some of the cash received to meet business expenses, reducing her need to deposit that cash into her bank account. In the layering stage, the money launderer manipulates the illicit funds to make them appear as though they were derived from a legal source. A component of many layering schemes has been seen to be the transfer of money from one account to another. Such activity is called Hawala. Hawala transfers leave a sparse or confusing paper trail if any. Even when invoice manipulation is used, the mixture of legal goods and illegal money, confusion about `valid' prices and a possibly complex international shipping

network create a trail much more complicated than a simple wire transfer. Now Amit has easily transferred the money from the Middle East country to India and then drew it at the United States, apparently as part of an investment in a business there. Such sham transactions are rampant and thus eating into the sinews of the Indian economy. In recent years, India is emerging as an important regional financial center. It is facing an acute problem of large informal cross-border money flows against the fictitious exports and under invoiced imports resulting into tax avoidance. The large amount of FDI from tax heavens has also come under suspicion. The situation exposes the countrys vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, and trade in illegal gems (particularly diamonds), smuggling, human trafficking, corruption, and income tax evasion. Due to Indias location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India becomes a drug-transit country. Money Laundering has a close ties with Organized Crime. Money Launderers accumulate profits through drug trafficking, international frauds, arms dealing etc. Cash transactions are predominantly used for Money Laundering as the launderers facilitate the concealment of the true ownership and origin of money. It is well recognized that through the huge profits, the criminals earn from drug trafficking and other illegal means, by way of money laundering contaminate and corrupt the structure of the State at all levels. This situation definitely leads to corruption. Further, this adds to constant pursuit of profits and the expansion into new areas of criminal activity. Through money laundering, organized crime diversifies its sources of income and enlarges its sphere of action. The social danger of money laundering consists in the consolidation of the economic power of criminal organizations, enabling them to penetrate the legitimate economy. In advanced societies, crime is increasingly economic in character. Criminal associations now tend to be organized like business enterprises and to follow the same tendencies as legitimate firms; specialization, growth, expansion in international markets and linkage with other enterprises. The holders of capital of illegal origin are prepared to bear considerable cost in order to legalize its use.

Increasing Money Laundering activities and inability to Control

There are some reasons for increase in Money Laundering is because of financial haven which provide money launderer an escape from the hands of law enforcement agencies and the few features can be as follows: Nil or only nominal taxes:-Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence. Protection of personal financial information: - Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. Lack of transparency. In India, hawala is divided into two parts viz. white and black. The term white hawala is used to refer to legitimate transactions whereas the term black hawala refers to the illegal transactions, specifically hawala. Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase. In placement, money derived from criminal activities is introduced into the financial system. In many money laundering schemes, the biggest 'problem' here is handling cash. Money laundering takes several different forms although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing".

Structuring: Often known as "smurfing", is a method of placement by which cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts. Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will be deposited in a financial institution, such as an offshore bank, with greater secrecy or less rigorous money laundering enforcement.

Cash-intensive businesses: A business typically involved in receiving cash will use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Best suited is a service business. As such business has no variable costs; it is hard to detect revenues-costs discrepancies. Examples are parking buildings, strip clubs, tanning beds or a casino. Trade-based laundering: Under- or over-valuing invoices in order to disguise the movement of money. Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true, beneficial, owner. Round-tripping: Money is deposited in a controlled foreign corporation offshore, preferably in a Tax haven where minimal records are kept, and then shipped back as a Foreign Direct Investment, exempt from taxation. Bank capture: Money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny. Casinos: An individual will walk in to a casino with cash and buy chips, play for a while and then cash in his or her chips, for which he or she will be issued a check. The money launderer will then be able to deposit the check into his or her bank account, and claim it as gambling winnings. Real estate: Real estate may be purchased with illegal proceeds, and then sold. The proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the price of the property is manipulated; the seller will agree to a contract that under-represents the value of the property, and will receive criminal proceeds to make up the difference. Black salaries: Companies might have unregistered employees without a written contract who are given cash salaries. Black cash might be used to pay them. Fictional loans

The money laundering activity involves a foreign country for washing the illegal money. This situation gives birth to muti country investigation, which hardly gives any result. Some of the recent cases are the example of such investigation failure whereby it was difficult for govt. of India to sustain the charge what to talk out of the evidence. There is hardly any country help other country and if it involves tax havens so this is a serious problem because tax havens do not provide any details

on financial transaction takes place in their country. Money Laundering is a secretive phenomenon. The exact number of launders that operating every year, how much money they launder in which countries and sectors, and which money laundering techniques they use is not known. Above we have discussed about what is money laundering and reasons for increase in money laundering activity in India and its impact on Indian economy now let us discuss about how we can prevent or stop money laundering activities

in India.

Due Diligence
Before a business relationship can be established, due diligence must always be carried out on customers. Due diligence must also be performed in the following instances: For individual transactions amounting to 15,00,000 or more according to current and official exchange rates, whether the transaction is carried out in a single operation or in several operations which appear to be linked. For FX transactions amounting to 1,00,000 or more according to current and official exchange rates, whether the transaction is carried out in a single operation or in several operations which appear to be linked. When there is a suspicion of money laundering or terrorist financing, regardless of any derogation or exemption. When doubt exists as to the accuracy or reliability of customer information data. Due diligence involves knowing the customer, obtaining information on the intended transactions and verifying the above information through identification and certificates. Information gathered in relation to due diligence is updated as appropriate; for instance, the customer must present valid identification again if previously presented identification expires while the business relationship is on-going.

Traceability of transactions
One of the key conditions for detecting money laundering and terrorist financing is to ensure the traceability of transactions in order to establish the origin of funds. All business transactions, regardless of the amount, must therefore be recorded in such a manner as to ensure traceability. For this reason, the following information must be made available: a) Names of customers and their addresses, as well as the names of the authorized signatories and proxies involved in the transaction in the case of a legal entity; b) Legal domicile / residence; c) Identity number (kennitala) and other personally identifiable information; d) Information on the type and nature of the transaction; e) Information on the amounts of the transactions and the currencies concerned; f) Information on what accounts were used for the transactions; g) Point in time of the transactions; and, h) Name of the recipient of funds, if applicable.

CONCLUSION
Money laundering can be minimized but we cant say that money laundering can be stopped till these tax havens stop giving shelter to money launderers and hiding their financial transaction. Money laundering has a vast effect on India not only in monetary terms but also responsible for increased criminalization and corruption in India. Stopping money laundering can help in elimination corruption from India and will reduce criminal activities from India.

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