what is money laundering, money laundering for upsc, prevention of money laundering act, types of money laundering, money laundering in india

What is Money Laundering ? Important Facts

Let’s read about what is money laundering for upsc, prevention of money laundering act upsc, types of money laundering, money laundering in India.

Money laundering, a term that often conjures images of shady characters in dark alleys, is a complex and pervasive financial crime that threatens the integrity of the global financial system. It enables criminals to legitimize their ill-gotten gains, obscuring the origins of their wealth while posing significant risks to society and the economy. In this post, we will come to know that the world of money laundering, exploring its definition, methods, consequences, and measures to combat it.

What is Money Laundering ? -:

Money laundering refers to the process of making illegally obtained money appear to come from legitimate sources. It is the bridge that connects illegal activities, such as drug trafficking, corruption, tax evasion, and terrorism, to the formal economy, where the proceeds can be used without raising suspicion.

According to Interpol General Secretariat Assembly in 1995, money laundering is any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources. It is concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

The International Monetary Fund (IMF) defined laundering money as being the “transferring (of) illegally obtained money or investments through an outside party to conceal the true source”. According to the United Nations Office on Drugs and Crime, global money laundering transactions account for roughly $800 billion to $2 trillion annually, or some 2% to 5% of global GDP.

In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) in an attempt to fight this crime on an international scale. In the early 2000s, its purview was expanded to combating the financing of terrorism.

The term MONEY LAUNDERING originated from the Mafia groups in the United States of America. The person who manipulates this money is called “launderer”. The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists.

Three Steps Of Money Laundering

The process of laundering money involves three steps :- Placement, Layering and Integration.

  • Placement -: The launderer deposits the illegal money ( dirty money ) through different agents and banks into the legitimate financial system.
  • Layering -: Layering conceals the source of the money through a series of transactions and bookkeeping tricks. The launderer tries to hide or disguise the origin of the funds by creating complicated layers of financial transactions designed to cover the audit trail and conceal it. The launderer deposits funds to investment instruments such as bonds, stocks, and traveler’s checks or in their bank accounts abroad. This account is often opened in banks of those countries which do not reveals the details of their account holders.
  • Integration -: Illegal money are taken back into the financial system as payments for services rendered. Making the launderer feel fulfilled by making the funds appear to be legally earned. Illegal funds is returned to the economy and disguised as genuine income. This money is brought back through investing in a company, purchasing real estate, purchasing expensive goods etc.

Methods and Techniques

Laundering MONEY can take several forms, some of them are -: Smurfing also called as Structuring, Bulk Cash Smuggling, Cash intensive Businesses, Casinos Trade based Laundering, Shell companies and trusts, Round tripping, Gambling, Black salaries, Tax amnesties, Transaction laundering.

Smurfing : Smurfing, also known as structuring, involves breaking down large amounts of illicit money into smaller, less suspicious transactions. This technique aims to avoid detection by financial institutions that are required to report large cash transactions.

Shell Companies : Criminals often create shell companies to disguise the true ownership of assets. These companies exist only on paper and are used to funnel dirty money through legitimate-seeming business transactions.

Offshore Accounts : Offshore accounts in tax havens offer anonymity and a lack of transparency, making them a favored choice for money launderers. These accounts can be used to hide funds and facilitate international transfers.

Trade-Based Money Laundering : This method involves manipulating trade transactions to move money across borders. Criminals overstate or understate the value of goods in invoices, effectively transferring funds under the guise of legitimate trade.

Consequences of Money Laundering

Undermining Economic Stability : It can distort economic systems by injecting ill-gotten gains into legitimate markets, driving up prices, and destabilizing financial institutions.

Encouraging Criminal Activity : The existence of money laundering opportunities can incentivize criminal activities, as it provides a way for criminals to enjoy the proceeds of their actions without significant consequences.

Eroding Trust in Financial Systems : It damages the credibility of financial institutions and governments, eroding public trust and confidence in the integrity of the global financial system.

Combating Money Laundering

Regulatory Measures : Governments and international organizations have implemented a range of regulations and laws to combat money laundering. These include Know Your Customer (KYC) procedures, suspicious activity reporting, and the establishment of financial intelligence units (FIUs).

Technological Solutions : Advanced technologies, such as artificial intelligence and blockchain, are being leveraged to enhance anti-money laundering efforts by improving transaction monitoring, data analysis, and fraud detection.

International Cooperation : Given the global nature of money laundering, international cooperation among law enforcement agencies, financial institutions, and governments is crucial to combat this crime effectively.

Prevention Of Money Laundering Act

In India, “Money Laundering” is popularly known as Hawala transactions. The word “Hawala” means trust. Hawala is a system of transferring money and property in a parallel arrangement avoiding the traditional banking system. It is banned in India.

Prevention of Money Laundering Act, 2002 ( PMLA ) in India was enacted in 2002 and it came into force in 2005. The chief objective of this legislation is to fight money laundering in India. The PMLA has been amended three times, that is, in 2009, 2009 and 2012.

The main objectives of the PMLA act are preventing and combating the channelising of money into illegal activities and economic crimes, providing for the confiscation of illegal property, providing for any other matters connected with or incidental to the act of money laundering.

Under the PMLA Act, the Enforcement Directorate is the body that has the right to conduct a Money Laundering investigation. Apart from this, there are other specialized provisions such as RBI/SEBI/IRDA anti-money laundering regulations and stipulated punishments for money laundering.


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