Money Laundering is earlier defined under the Page on "White-Collar Crimes - "The investment or transfer of money from racketeering, drug transactions or other embezzlement schemes so that it appears that its original source either cannot be traced or is legitimate". Money laundering is the process of converting ill-gotten funds into legitimate money through various transactions known as layers before the funds finally return to the system as clean-cash or "white money."

Traditionally money-laundering was employed as a devise to cleanse dirty-money (black money) and re-circulate as white-money. Millions of rupees that are being secreted out of the country as black money find its way back as white money through devious means. All that the money-launderer (ML) needed was 100 or so accounts in various banks across several countries. The money is wired to tax havens in Europe such as Luxembourg and Monaco. Setting up front companies, firms that exist only on paper, ML can transfer the money in and out of various accounts, before finally transferring it back to his own country to invest in any legitimate businesses such as restaurants and construction companies.

Thisis what Mr.K. SUNIL THOMAS in Delhi and Mr.JOYDEEP GHOSH in Mumbai writes about Money-laundering in the Journal "The Week" issue dated 21st June 1998.

"Many others, including a sizeable number of Indians, continue to secret out huge sums of money to tax havens for the clean-up job. The Indians' may not be drugs money but it is still tainted, mostly from tax evasion, kickbacks in government and corporate deals, and overinvoicing/underinvoicing exports and imports. "Whoever is in the import-export business is in it," said a tax consultant in Mumbai who has himself indulged in a bit of the black and white business which is worth a staggering $300 billion worldwide.

"Much of the moolah from India is stashed in tax havens such as Channel Islands, Bahamas, Bermuda, Cayman Islands, St. Kitts and Seychelles. Says CBI Special Director P.C. Sharma: "The fascination for Channel Islands and other havens is that they allow a lot of investments, impose no tax and ask no questions".

The authors quoted above have described a few other modus operandi for such conversion of black into white money. Specific names of corporate bodies mentioned by them is however not mentioned

"Unlike in most countries where it is the drugs trade that fuels money laundering, in India it is mostly the corporate houses and individuals who indulge in it. They are helped by a savvy bunch of launderers. An observer in Mumbai recounts a recent transaction: A family wanted to transfer Rs 50 lakh to the US and got in touch with an operator. A courier met them in a hotel and spent an hour counting the money. He then put the money in a bag and left.

"Two hours later the family received a call from a relative in the US confirming that the money had been received. The commission for the transaction: 10 per cent of the amount. In the next few months the US relative sent several gift cheques to his relative back home. The family in India thus got its money clean and white.

"Another way of laundering is by opening a portfolio fund in a country like Mauritius. It is then brought back as non-resident Indian (NRI) money and invested in the capital markets.

"Intelligence agencies say that the corporates convert their black money by claiming bogus exports. The company over-invoices the balance-sheet by showing a Rs 5 product as worth Rs 100. The favourite places for 'export' are Russia and the former Soviet republics.

"One of the biggest cases being investigated by the Enforcement Directorate (ED) is a Foreign Exchange Regulation Act (FERA) violation by "an Indian Corporate"(IC¹). It is alleged that IC¹ set up a number of front companies abroad with the help of a US-based NRI group. These companies were used to maintain IC¹'s image as a successful exporter. The ED claims that IC¹ artificially hiked up its profits by over-invoicing imports and later transferring the excess funds as export proceeds into the country.

"Another case under investigation involves a different Indian Corporate(IC²) whose boss has been accused of siphoning off hundreds of crores through paper companies. Between 1993-95 he is said to have picked up Rs 500 crore by means of ICDs (inter-corporate deposits) for the expansion plans of IC²; in the first year the company did purchase several new distilleries at a cost of Rs 80 crore. After that, it is alleged, everything came to a standstill and Rs 420 crore disappeared from the market. Meanwhile a lot of paper companies were created. When ED sleuths started checking these companies the address of one led to a pond while another one was a garage.

"A popular method of converting money is by becoming a money changer. As a senior official in ED put it, "The RBI has been giving licences without checking the credentials of the applicants." It is alleged that the 'restricted' money changer, whose duties include giving $2,000 to Indians travelling abroad, often uses this new status to launder money.

"His modus operandi is simple: dollars are purchased in bulk from a full-fledged money changer. Then he gets copies of passports of travellers through friends in travel agencies. He also obtains their flight ticket numbers and puts it on record that he has given the money to the travellers. The money is then transferred abroad or converted through NRE account route.

"Everytime you get money through illegal means it has to be laundered back into the system to make it clean," said an ED official. The enforcement agencies have been waging a futile war against the parallel banking system of the country popularly known as hawala.

"Hawala transactions worth Rs 50 crore take place in Mumbai every day. According to the tax consultant in Mumbai, the ED cannot catch anybody because each transaction is done by word of mouth. "The hawala dealer will call his agent in Dubai and say 'I am sending 200 shirts or I want 200 shirts'. The word 'shirt' is the code. The party at the other end knows immediately that he is supposed to give another person $2,000."

"Delhi and Mumbai are the major sources of money to the hawala circuit," said a financial analyst. While big businesses indulge in laundering blatantly in an attempt to avoid the tax regime, the salaried classes are not far behind. Earnings from personal investments, usually in stocks, are not filed for tax. The high tax rates are in fact one of the main reasons for money laundering. "The question people ask is, 'What are we getting back from the system'?" said Mr.TB, manager with a leading financial company in Delhi.

"With the reforms, there are new ways of money laundering where FERA has proved ineffective," said a senior official dealing with anti-corruption cases. For example, an Indian company which has black money stashed in tax havens can float a Global Depository Receipt scheme in Europe. Huge sums will be invested by shell companies in the tax havens. The entire black money comes back into the company's coffers as white money."

"Money laundering was also among the top issues discussed at last week's UN General Assembly session on the World Drug Problem. Various international agencies, including the International Narcotics Control Bureau, the UN and the IMF have been highlighting the need to check laundering, but the absence of proper legislation in most countries blunts the move."

A decade or so back it was merely a problem of money laundering for conversion of ill-gotten money into clean-cash. Then came extensive use of laundered-money for terrorist activities at several countries of the world against leading western powers. In fact our country is a victim of such terrorists activities for more than two decades.

Legislation to check financial institutions and commercial banks as conduits of transferring or remitting laundered money was then considered by India on the basis of suggestions from Global bodies. The Prevention of Money Laundering Bill 1999 seeking the introduction of steps to deal with unaccounted wealth was introduced in the Lok Sabha but subsequently, following a motion adopted by the Rajya Sabha, the Bill was referred to a select committee of the House. The bill has been finally passed into ACT on 28th Nov 2002. The bill was drafted along the lines of a 1990 United Nations General Assembly resolution that urged member states to adopt national legislation and programmes to combat money laundering.

In the same month (Nov. 2002) India also voiced its resolve to bolster efforts to cut funding sources for terrorist groups as part of efforts spearheaded by the Group of 20 (G-20) developed and developing countries.

Finance ministers and central bankers of the G-20 issued a communique to close a one-day meeting in New Delhi, pledging to continue "efforts to eliminate other abuses of the financial system, particularly money-laundering."

The objects clause of the Bill describes the needs and purposes of the legislation as under:

A Bill to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.

WHEREAS the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its seventeenth special session on the twenty-third day of February, 1990;

AND WHEREAS the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money-laundering legislation and programme;

AND WHEREAS it is considered necessary to implement the aforesaid resolution and the Declaration;

BE it enacted by Parliament in the Fiftieth Year of the Republic of India as follows:-

Whoever-

acquires, owns, possesses or transfer any proceeds of crime; or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly; or conceals or aids in the concealment of the proceeds of crime, commits the offence of money-laundering."

Punishment

Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees:

Provided that where the proceeds of crime involved in money-laundering relates to any offence specified in Part IV of the Schedule, the provisions of this section shall have effect as if for the words "which may extend to seven years", the words "which may extend to ten years" had been substituted."

Chapter IV of the Act relates Banks, & Financial Institutions and reads as under:

1. Every banking company or financial institution and Intermediary shall-

   1. maintain a record of all transactions, the nature and value of which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month;

   2. furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed;

   3. verify and maintain the records of the identity of all its clients, in such a manner as may be prescribed.

2. The records referred to in sub-section (1) shall be maintained for a period of five years from the date of cessation of the transactions between the clients and the banking company or financial institution or intermediary, as the case may be.

1. The Director may, either of his own motion or on an application made by any authority, officer or person, call for records referred to in sub-section (1) of section 11 and may make such inquiry or cause such inquiry to he made, as he thinks fit.

2. If the Director, in the course of any inquiry, finds that a banking company, financial institution or an intermediary or any of its officers has failed to maintain, or, retain records in accordance with the provisions contained in section 11, then without prejudice to any other action that may be taken under any other provisions of this Act, be may, by an order, levy a fine on such banking company or financial institution or intermediary which shall not be less than ten thousand rupees but may extend to one lakh rupees.

3. The Director shall forward a copy of the order passed under sub-section (2) to every banking company, financial institution or intermediary or person who is a party to the proceedings under that subsection.

Save as otherwise provided in section 12, the banking companies, financial institutions, intermediaries and their officers shall not be liable to any civil proceedings against them for furnishing information under clause (b) of sub-section (1) of section 11.

The Central Government may, in consultation with the Reserve Bank of India, prescribe the procedure and the manner of maintaining and furnishing information under sub-section (1) of section 11 for the purpose of implementing the provisions of this Act."

The measures effected by RBI to implement the above provisions are discussed in the next chapter