MONEY LAUNDERING AND ITS PREVENTION

What is Money Laundering?

MONEY LAUNDERING is the process by which large amounts of illegally obtained money is given the appearance of having originated from a legal source.

Stages of Money Laundering  –

It has three stages,

1.      Placement stage – at this stage, vast amount of money generate from an illegal source(e.g., drug dealing, terrorist activity or other serious crimes) placed into the financial system or retail economy or smuggled out of the country. The aim of this stage is to remove the cash from the location of acquisition and then transform it into other assets.

2.      Layering stage – at this stage, complex layers of financial transactions designed to disguise the audit trail and provide anonymity.

3.      Integration stage – at this stage, money is integrated into the legal economic and financial system and is adopted with all other legal assets in the system.

Methods of MONEY LAUNDERING –

1.      Structuring or Smurfing  - in this method cash is broken into small deposits to prevent the suspicion of MONEY LAUNDERING.

2.      Casinos – in this method, an individual transform its illegal money into legal money by playing for a while, and get all his cash back as gambling winnings.

3.      Real Estate – in this method, an individual buy property from illegal money and then sell it to gets his money back in a legal way.

4.      Cash intensive businesses – in this method, a business typically involved in receiving cash uses its account to deposit both legal are illicit money, claiming all of it as legitimate earnings. Examples are strip clubs, casinos, parking buildings, etc.

5.      Black salaries – a company may have unregistered employees without a written contact and pay them cash salaries. Black cash might be used to pay them.

Above list is not exhaustive.

Prevention of MONEY LAUNDERING –

At international level –

1.      United Nation Convention in 1988 against the Illicit Traffic in Narcotic Drugs and Phychotropic Substances is the first international legal instrument to embody the MONEY LAUNDERING. Also the first international which criminalizes MONEY LAUNDERING.

2.      UN convention against TransationalOrganized Crime in 2003 and UN convention against Corruption in 2005 came into force.

a.       Both convention states that MONEY LAUNDERING should not only apply to the proceed of drug trafficking, but should also cover the proceeds of all serious crimes.

b.      Both convention urge states to create domestic supervisory and regulatory regime for banks and non-financial institutions

c.       Both conventions also call for the establishment of Financial Intelligence Units (FIUs).

3.      Financial Action Task Force(FATF) –

a.       FATF is an inter-governmental body that sets standards, develops and promotes policies to combat MONEY LAUNDERING and terrorist financing for countries around the world.

b.      In 1990, FATF issued a set of 40 recommendations for improving national legal systems. These recommendations were revised and updated in 1996 and in 2003.

c.       FATF on MONEY LAUNDERING has identified certain choke points in its process. These choke points are –

·         entry of cash into financial system

·         transfers to and from the financial system

·         cross border flow of cash

Prevention in India -

1.      The financial intelligence unit-India (FIU-India) which is the nodal agency in India for managing the anti-MONEY LAUNDERING ecosystem. It helps in co-coordinating and strengthening efforts to reduce MONEY LAUNDERING and related crimes in India.

2.      Prevention of MONEY LAUNDERING Act, 2002 has been the core framework for combating it.

3.      In 2010, India admitted as the 34^th country member of FATF.

4.      This membership helped Indian enforcement agencies to exchange information and financial institutions to gain much better access to markets of other member countries.

5.      Prevention of MONEY LAUNDERING (Amendment) Bill, 2012 passed in LokSabha and Rajyasabha.

6.      The Enforcement directorate carries out investigations. The ED is also empowered to attach property entities involved in money laundering.

7.      The investigation begins with filing an Enforcement Case Information Report(ECIR), which is comparable with an FIR. The adjudicating authority under prevention of MONEY LAUNDERING act then decides whether the attachment is valid or not. The courts take the final call on punishment.

Key amendments to the Prevention of MONEY LAUNDERINGAct –

Ø  Expanded the definition of offence of MONEY LAUNDERING to include activity like concealment, acquisition, possession, and use proceeds of crime.

Ø  Removed the upper limit of fine of Rs. 5 lakh.

Ø  Expanded the scope and duration of attachment of property to 180 days.

Ø  Introduced the concept of reporting identity.

Ø  Increased the powers of the director to call for records and conduct enquiries.

Ø  Clarified that prosecution extends not only to individuals but also to the company.

Current status of money laundering in India -

·         India has considerablystepped up its investigations into money laundering and terror funding with the number of cases under probe rising to 1704, even though a low conviction level remains a "serious effectiveness issue".

·         The current status of money laundering in India can also be evaluated by looking at the Basel index prepared by the Basel Institute on governance, Switzerland. The Basel AML index scores countries on the basis of AML laws, financial regulations, political disclosure, etc. in that country. The overall score, which ranges from 0 (low risk) to 10 (high risk) .Out of 140 countries, India has been ranked 93^rd(score- 6.05) .

Recommendations –

1.      To strengthen international co-operation on information exchange and law enforcement

2.      Proper mechanisms for handling suspicious reports

3.      To increase public awareness of the threat from MONEY LAUNDERING

4.      To focus on new technologies and increase counter measures to combat their use for MONEY LAUNDERING

5.      Introduce measures that make the movement of money more visible

6.      Increasing co-ordination b/w the multiple agencies involved and to improve the limited intelligence sharing

written by - Neha Mittal

MONEY LAUNDERING - A detailed exlaination

Money is the prime reason for engaging in almost any type of criminal activity.

Money-laundering is the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.

Terrorists and terrorist organizations also rely on money to

1)      sustain themselves and

2)      to carry out terrorist acts.

 Money for terrorists is derived from a wide variety of sources. While terrorists are not greatly concerned with disguising the origin of money, they are concerned with concealing its destination and the purpose for which it has been collected. Terrorists and terrorist organizations therefore employ techniques similar to those used by money launderers to hide their money.

The ability to prevent and detect money-laundering is a highly effective means of identifying criminals and terrorists and the underlying activity from which money is derived. The application of intelligence and investigative techniques can be one way of detecting and disrupting the activities of terrorists and terrorist organizations.

As they deal with other people's money, financial institutions rely on a reputation for probity and integrity. A financial institution found to have assisted in laundering money will be shunned by legitimate enterprises. An international financial centre that is used for money-laundering can become an ideal financial haven.

Developing countries

1)      Attracting "dirty money" as a short-term engine of growth can find it difficult, as a consequence, to attract the kind of solid long-term foreign direct investment that is based

2)      Only stable conditions and good governance can help them sustain development and promote long-term growth.

3)      Money-laundering can erode a nation's economy by changing the demand for cash, making interest and exchange rates more volatile,

4)      By causing high inflation in countries where criminals are doing business.

5)      fuels corruption and organized crime

6)      Corrupts public officials

7)      Terrorist groups use money-laundering channels to get cash to buy arms. The social consequences of allowing these groups to launder money can be disastrous.

In recent years, the international community has become more aware of the dangers that money-laundering poses in all these areas and many Governments and jurisdictions have committed themselves to taking action. The United Nations and other international organizations are committed to helping them in any way they can.

Criminals are now taking advantage of the globalization of the world economy by transferring funds quickly across international borders.

Money-laundering is the process that disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. There are two reasons why criminals - whether drug traffickers, corporate embezzlers or corrupt public officials - have to launder money: the money trail is evidence of their crime and the money itself is vulnerable to seizure and has to be protected. Regardless of who uses the apparatus of money-laundering, the operational principles are essentially the same. Money-laundering is a dynamic three-stage process that requires:

• placement, moving the funds from direct association with the crime;
• layering, disguising the trail to foil pursuit; and,
• integration, making the money available to the criminal, once again, with its occupational and geographic origins hidden from view.

These three stages are usually referred to as placement, layering and integration.

MONEY LUNDERING & GLOBALISATION

Rapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease. This makes the task of combating money-laundering more urgent than ever.

The deeper "dirty money" gets into the international banking system, the more difficult it is to identify its origin. Because of the clandestine nature of money-laundering, it is difficult to estimate the total amount of money that goes through the laundry cycle.

The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address.

There have been a number of developments in the international financial system during recent decades that have made the three F's-finding, freezing and forfeiting of criminally derived income and assets-all the more difficult. These are the "dollarization" (i.e. the use of the United States dollar in transactions) of black markets, the general trend towards financial deregulation, the progress of the Euro market and the proliferation of financial secrecy havens.

Fueled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which "megabyte money" (i.e. money in the form of symbols on computer screens) can move anywhere in the world with speed and ease.

The Financial Action Task Force (FATF) on Money Laundering has identified certain ‘choke’ points in the money laundering process that the launderer finds difficult to avoid and where he is vulnerable to detection. The initial focus has to be on these areas if the war against the launderer is to proceed successfully.

The choke points identified are:

1. entry of cash into the financial system;  
2. transfers to and from the financial system; and  
3. cross-border flows of cash

written by - Ravi Kunal Nayyar

Diesel Pricing in India

·        I usually come across many terms in news like Subsidy, Under-Recovery, and more recently EPP (Export Parity Price) & IPP (Import Parity Price). 

·        Let’s understand how the retail price of Diesel is calculated in India?

Ø Let crude is imported by IOC (Indian Oil Corporation) from a company of Saudi Arab. The price at which this crude is purchased is called FOB Price i.e. free On Board Price. In simple words this is the price at which Saudi Arab Company will bring the crude from its Well and deliver it at a nearby international port.

Ø Now this crude will be transported on ships from aforementioned port to some Indian Port. For this a charge will be paid to transporter. This charge is called Ocean Freight. When Ocean Freight is added to FOB Price we get resultant as C & F Price i.e. Cost & Freight Price. Thus

C & F Price = FOB Price + Ocean Freight

Ø Now the crude has reached an Indian Port. Here a term called Import Charges comes into picture. It consists of three charges -

'  Insurance charges i.e. premium paid to an insurance company for the insurance cover it provided to the crude

'  Port Dues i.e. fees paid in lieu of using the facilities of a port

'  Ocean Losses i.e. to compensate for the oil lost during transportation

Ø On the imported crude Govt of India imposes a tax called Custom Duty. It is 2.5 % of theC & F Price i.e. if IOC purchases crude whose C & F Price is Rs. 100 per Litre then Custom Duty will be Rs 2.5 per Litre.

Ø When we add C & F Price , Import Charges and Custom Duty we get a very important term called IPP i.e. Import Parity Price. In very simple words IPP is the price of crude paid by IOC at an Indian Port. Hence

IPP = C & F Price + Import Charges + Custom Duty

Ø One more term becomes worth mentioning here which is EPP i.e. Export Parity Price. It is basically a hypothetical term. It is equal to the FOB price realised by IOC if it WOULD HAVE exported its Diesel to international market.

Ø In India the weighted average of IPP and EPP is used. Thus we get another popular term called TPP i.e. Trade Parity Price. It is calculated as follows-

TPP = 0.8 X IPP + 0.2 X EPP

Ø Now the imported crude moves towards Refinery and processed into Petrol/Diesel/kerosene etc. Here a term called RTP i.e. Refinery Transfer Price comes into scene. It is the price paid by OMC (Oil Marketing Company) to Refinery for the purchase of Diesel and in case of diesel it is equal to TPP. In other words

RTP = TPP

Ø This refined Diesel is transported by Rail / Road to different retail outlets. For this Inland Freight is paid. OMC spend a lot of money on marketing its product. When we add them we get TDP i.e. Total Desired Price. In other words

TDP = RTP + Inland Freight + Marketing Cost

Ø But OMC sells aforementioned Diesel to retail outlet at a price which is less than TDP. This price is called Depot Price.

Ø Now the Diesel has reached retail outlet. Here Central Govt imposes Excise Duty, State Govt imposes Value Added Tax (VAT) and Retail Outlet / Petrol pump add its margin.

Ø Hence finally we get the retail price of Diesel.

·        Lets now understand above definitions in the light of latest available data -

S.No	Factor	Value
1	FOB Price	$ 124 / Barrel
2	Ocean Freight	$ 2 / Barrel
3	C & F Price  (1 + 2)	$ 126 / Barrel  = Rs. 48 / Litre (1 Barrel = 159 Litres and $1 = Rs 62)
4	Import Charges	Rs. 0.5 / Lt
5	Custom duty	Rs. 1.5 / Lt
6	IPP (3 + 4 + 5)	Rs. 50 / Lt
7	EPP	Rs. 48 / Lt
8	TPP	Rs. 49 / Lt
9	RTP	Rs. 49 / Lt
10	Inland Freight + Marketing Cost of OMC	Rs. 3 / Lt
11	Total Desired Price (8 + 10)	Rs. 52 / Lt
12	Depot Price	Rs. 42 / Lt
13	Excise Duty + VAT + Dealer Commission	Rs. 10 / Lt
14	Retail Price (13 + 14)	Rs. 52 / Lt

·        Let’s find out the answers of some Basic Questions-

Ø What is Under Recovery?

Under Recovery is the difference between Total Desired Price & Depot price. Mathematically –

Under Recovery = TDP – Depot price

Ø Are Under Recovery and Loss are similar terms?

OMC’s are selling Diesel at Rs.10 /Lt Loss. But they are getting the same amount from Govt as Subsidy. So OMC’s are not incurring any loss. The Govt too is taking almost Rs.10 /Lt as tax on Diesel so they too are not incurring any loss.

Hence Under- Recovery and Loss are not the same terms.

Ø What is presently used in India EPP /IPP /TPP?

Presently for the pricing of diesel TPP is used.

Ø Why Finance Ministry is insisting on using EPP?

From the above table it is crystal clear that if EPP is used instead of TPP then TDP will become 51 instead of 52. Hence Under-Recovery will become Rs.1/ Lt lesser. So Govt will have to give lesser subsidy to OMC’s. But Govt will continue to get same amount as Taxes. Therefore Govt Deficit will come down.

Ø Why OMC’s and Petroleum Ministry are insisting on using TPP?

It is clear from the above answer that if EPP is used instead of TPP than OMC’s will get lesser subsidy from Govt. But their expenditure will remain exactly same as earlier. Hence their financial health will deteriorate.

written by - KAVI DEEPENDRA