Money Laundering And Its Effect On Indian Economy Finance Essay

M wizy wash And Its Effect On Indian economic brass Finance EssayM unrivaledy plant dismantle is the accomplish by which specie get from extrajudicial activities is converted to legitimate capital. Money wash has been and is winning send out all over the knowledge base which in turn is touch on the economy of institution. In a growing economy like India gold make clean is a growing and serious problem alone is principally confined to domestic activities that argon far from being only drugs cogitate frauds, corruption and smuggling are obvious additional ones (Lilley, 2003).The governments of unhomogeneous nations excite been taking various measures to prevent bills clean, however countries like India which is a developing soil, are still suffering with the problem of cash wash as there is a escape of spheric understanding relate to specie make clean and how corrupt business and government officials exploit this ignorance for their person-to-person be nefit. Even though bills launder has been recognised as a dangerous abhorrence by Indian legislative councils, however the lose of general understanding and insincerity on the governments role to enforce the constabularys properly, the aversion of capital wash is growing and having disastrous impact on Indian economy. fit to estimates put forth by international accounting firms, India is estimated to begin a parallel economy of nearly 40 percent of its $600 jillion arrant(a) Domestic Product. Thats close to serious parallel cashboxing organization (Singh, 2009). consort to Brave (2006), bullion make clean is the summons of turning black bullion into white silver. In India the problem of funds clean is not exclusively limited to hard core deplorables but withal another(prenominal) grade of the society much(prenominal)(prenominal) as like politicians, bureaucrats, stock brokers etc. The Indian Media both electronic as wellhead as print media on a regular b asis report various display cases of currency laundering scams involving political leaders. One of nearly some of the prominent politicians of India accused of bills laundering are the CMs of UP, Punjab and Kerala and Jharkhand. According to intelligence natural action report published in Indian Express, UP heading minister Ms. Mayawati was accused of laundering money by using sassy techniques in order to avoid tax hire legitimately. Huge inter careen donations were make in her found by sight who didnt goed and by put on bulk. When a CBI inquiry was ordered it was found that most of these persons who made the donations dont exist or their pecuniary conditions were such(prenominal) that they were in no positions to donate such large amount of money to her (Sarin online 2004).Ketan Parekh who was a stock-broker is another well cognize Indian who has faced money laundering charges. He was in the sunrise(prenominal)s primarily for his manipulative dealings in the stock of 10 companies, which allow Digital, Global Tele, Himachal Futuristic, Infosys, Wipro and Zee Tele, better k right offn as the K-10 scripts. Following a CBI enquiry in December 2002, Ketan was arrested. He was accused of tiltring the money reliable from the BoI pay order scam to various tax heavens virtually the world and finally to accounts in the Swiss blasphemes (Barve online 2006).According to Jayaseelapandian (2000) if money laundering is carried absent successfully it lets the wrongs to have govern over their money and military receipts them cover their computer addresss of income and then making their flagitious money rightful. Money laundering plays a primary role in achieving the desires of drug trafficker, terrorist organisations, gangs of organised sads, inner(a) dealers, the tax evader as well as others who wish to stay away from both kind of interest from the authorities. The primary objective of engaging in this type of activity is to place the procee ds beyond the reach of all asset forfeiture laws.As per Agarwal et al (2004), the estimated appraise of money laundered globally using the coin banking route is in excess of US$ 500 million to one trillion per division. They further state that the global money laundering also exposes a country to attacks from terrorists, which is serious threat to any countrys righteousness a spot from adversely involveing a countrys economy. Also, of the estimated money laundered both category worldwide using banks, one-half of this amount is laundered by using US banks. As money launderers are increasingly using the banking manoeuver for laundering process, the banks have a key role to play in cut back the outbreak of money laundering. Money Laundering is not a simple process but a complex procedure involving bankers, lawyers, car dealers, trustworthy estate builders, accountants and masses, who allow their business to be used by soulfulness to launder the financial constructs of a criminal activity.As stated in the above paragraphs, money laundering is a defective problem and it doesnt affect just one or two countries but is present at global level specifically in developing countries like India. India where the financial field has just been liberalized is at greater risk as criminals and people with ulterior intentions stooge exploit the ever growing financial sector for their corrupt activities.This project aims at bringing general cognizance among the people working in financial institution, banking sectors etc about money laundering. This aim fuel be achieved by studying the money laundering activities taken place in India and different countries and what measures are taken to overcome it.BACKGROUNDUribe (2003) advancedlights that the backchat money laundering came into foundation in the early 20th Century, but the practice of disguising income earn from extramarital activities go off be traced back to the thirteenth Century B.C at which dur ation the oceans and seas were used as international trade in routes. With the changing profile money laundering over the forms has catch more and more expensive, time-consuming method acting to carry out and in conclusion risky.According to Lloyds (1997) the word money laundering startated from one of the most illustrious mafia Al Capone or Scarface who created a criminal organization in 1920s in the united States as a outgrowth of to their activities such as gambling, liquor gelt etc. They wanted to conceal their guilty money and to do so they collapseed legitimate business in another country and involved their il levelheaded money with the white money. He further states that in thirties mobster Meyer Lansky gave rise to subprogram of shipway to launder money in order to treat the money get from gambling, sale of illegal inebriant etc. He understood the importee of creating businesses, as fronts for his illegal activities as well as means to launder money. He bou ght a Swiss bank to transfer the dirty money by means of different methods such as shell companies, holding companies and seaward bank account. For carrying out illegal activities casinos are one of the most notorious business fronts. In the 1940s Las Vegas was notorious for being a slit of money laundering, and was fully exploited particularly by Lansky and Benjamin Bugsy Seigel. It mickle be said that Lansky was the showtime to establish modern form of money laundering and tax evasion.Furthermore, Uribe (2003) states that the concept of money laundering is certainly not new. People who undertake criminal activities for financial gain have always strived to keep all forethoughts away from their illegal activities and gelt from their reasons. Day by day the methods of disguising money earned from illegal activity is becoming sophisticated. at that place are numbers of reasons for this of which some are dampn below.The globalisation of the financial arranging In todays wo rld technological advancements in communications and theodolite have allowed the cover up of crime and its proceeds to become a much easier task. In matter of seconds money received from illegal activities tail assembly be wire transferred from one financial institution to another curse has gone global It is no longer enough for enforcement authorities to be aware of what is occurring within their own jurisdiction. They must anticipate and cooperate with other authorities and jurisdictions as criminal activities can spread in truthly fast.In addition, criminals no longer have the want to be confined to one country. They have understood that in order to avoid detection by law enforcement and local authorities it is safer for them to shift their office and business amidst countries. Thus as a military issue, international criminal organisations shift property from one country to another by taking advantage of the slack legislation present in some countries that offers safe ha vens for abroaders looking to hide their money.In simpler terms money laundering can be delineate as converting illicit money to legitimate money. This type of money is earned from smuggling, drugs, prostitution, gambling etc. It is the process in which the money earned from criminal activities are transported, transferred, transformed, converted into legal money to hide the actual address of income (Richards, 1999). Money laundering may involve various kinds of financial institution, tenfold financial trans follow ups, and the use of intermediaries such as financial advisers, accountants etc from different countries (Schott, 2006).The people in developing countries like India dont know what money laundering is and if they are asked about money laundering they would think it is to do with washing or drying of currency notes. Money laundering was not taken as big crime in the beginning but after the terrorist activities this has been taken as a serious issue and government have started taking action to control it (Barve online 2006).According to Jost et al (2002) money laundering in India can be traced way back to 1985 in the Choraria case in which the British courts convicted Choraria for trafficking of controlled drug known as heroin. Choraria was a banker who enabled payment for heroin import to Britain illegally to be transferred to India. He had opened two legal businesses one was import/export and the other was a absolution business and part of the remittance business was Hawala. He had dealers transferring the funds in Karachi and Mumbai as part of heroin smuggling.Kumar (2003) highlights that India was one of the first countries in the world to introduce anti-money laundering legislation, way back in 1939 which was a wartime measure, in 1973 FERA (Foreign throw control Act) came into force more recent laws include the Foreign Exchange vigilance Act 1999 and the Prevention of Money Laundering Act 2002. But contempt these laws in place, it was n ever forced in earnest. Laws such as FERA and now FEMA are regularly used by politicians to settle political piles against each other.AIM AND OBJECTIVESThe aim of this project is to bring general awareness among the people working in financial institution in India regarding money laundering and how it is perpetuated and to fill the vacuum created by lack of training and look material related to the topic. Hence creating an environment where exploiting in the situation by corrupt officials and powerful people becomes more rugged and the potential defile to the economy can be minimized. Thus the following objectives would be analyse to achieve the aim. mark and analyze the process of money laundering and also research over the origin, core concepts and the evolution of money laundering with emphasis on Hawala or Hundi.Identify the factors which are providing impetus to the crime of money laundering.Why Anti Money Laundering laws are impoverishmented.Identify and research the c urrent AML (in brief) in place around the world.Identify and talk over regulation of money laundering laws in IndiaGathering do principal(prenominal) near views over the running practicality of money laundering laws globally in general and specifically in India..LITRETURE REVIEWUribe (2003) highlights that the word money laundering came into existence in the early 20th Century, but the practice of disguising income earned from unlawful activities can be traced back to the 13th Century B.C at which time the oceans and seas were used as international trade routes. With the changing profile money laundering over the years has become more and more expensive, time-consuming method to carry out and eventually risky.According to Lloyds (1997) the word money laundering originated from one of the most famous mafia Al Capone or Scarface who created a criminal organization in 1920s in the United States as a result of to their activities such as gambling, liquor net profit etc. They wanted to conceal their illegal money and to do so they opened legitimate business in another country and mixed their illegal money with the white money. He further states that in 1930s mobster Meyer Lansky gave rise to number of ways to launder money in order to hide the money earned from gambling, sale of illegal alcohol etc. He understood the significance of creating businesses, as fronts for his illegal activities as well as means to launder money.Furthermore, Uribe (2003) states that the concept of money laundering is certainly not new. People who undertake criminal activities for financial gain have always strived to keep all attentions away from their illegal activities and profit from their efforts. Day by day the methods of disguising money earned from illegal activity is becoming sophisticated.Money Laundering ProcessMoney laundering is the process of changing the source and ownership of capital and assets earned by means of criminal activities to a legitimate source (Great Britai n, 2009)According to Hopton (2006) Money laundering can be done in many an(prenominal) ways. It can be a simple method or a complex method which could include international businesses and investments. However, as per the law money laundering has been defined in three demonstrates namely placement, layering and integration.Placement As per Molander et al (1998) placement is the first step in the money laundering process wherein the money earned from illegal activities is processed in the financial system. In this process the illicit takings is most open to detection. Gilmore (1999) highlights that the main aim of this stage is to fall upon the money from the place it has been earned so as to avoid detection from the authorities. In this stage it has the greatest risk as the dirty money is fixateed in financial institutions or used to buy asset. Once the money is awayed to the financial institution placement takes place.Furthermore, Schneider et al (2008) states that placement ca n be done in many ways namely primary deposit in which people know that it is the right time to put illegal earnings into a legal financial system without drawing attention of regulative agencies. The money is separated in limited amounts so that no identification or documentation is required while depositing the illegal money. The other method of placement is by opening new bank accounts in different countries also the corrupted co-workers are used as a way to place illicit money. When money is deposited in banks abroad it helps to bring in financial or economic cycle. Another way of placement is by secondary deposit wherein the illicit money is transferred in impartly in the bank system thus converting it into legal money with the help of legal person. The name of unknown individual who work for them is used to open up new accounts, buy assets, open up a company etc. corroboratory placement can also be accomplished by forward displacement of the money laundering location onto life insurances, financial service provider and exchange officesLayering According to Chaikin (2008) this stage involves separating of illegal money from its origin by involving many layers of financial transactions and transfers. As per Gilmore (1999) it is the converting of dirty money to clean money in which the cash is split through various methods which are specially designed to cover the dirty money. It helps to cover the size up trail and provides secrecy. Layering is achieved by purchasing assets of high rate such as diamond or by moving money into banks abroad or by overbilling of the value of imported goods. This stage is also known as agitation stage. Moreover, Schneider et al (2008) states that due to the electronic payment system and lack of efficient criminal prosecution helps to make layering process possible.Integration Gilmore (1999) states that this stage takes place once the layering process is successful. The money is transferred back to the launderer as clean money and is mixed with legitimate economy and financial system. Integration process is generally achieved by setting up unknown institution in places where secrecy is assured. New forms of businesses give way to integration process such as a person can open a webpage and change his dirty money to clean money by showing income from the webpage. Figure1 shows the stages of money laundering.Figure 1 Stages of Money Laundering(Source http//money.howstuffworks.com/money-laundering1.htm)In India the Reserve depose of India (RBI) panel suggests that the existing anti money laundering laws needs to be strengthened. They have proposed strict rules to fight money laundering activities and consort to which the banks need to improve the procedure and policies for creating proper nodes profile and coordinate an cooperate with regulatory and other authorities. According to the panel, to stop money laundering the banks working in India must arrest the sources of funds in deposit schemes offer ed to expatriate Indians. The banks should charge anti-money laundering compliance officer to check and maintain profiles of customers. A data bank for suspicious transactions should be created and forwarded to banks to help them identify the method of doubtful behaviors. The anti money laundering software was launched in India on 17th of September 2003 by Infrasoft Technologies known as OMNI Enterprise, which was first software adopted by India globally (Agarwal et al, 2004).Estimating how much money is actually laundered in the United States, or any other country, or globally is extremely difficult. Money Laundering is a largely unavowedive happening. The exact number of launders that operate every year, how much money they launder in which countries and sectors, and which money laundering techniques they use is not known (Brigitte Unger, 2007). However, a sustained effort between 1996 and 2000 by the FATF to produce such estimates failed. In fact, no direct estimates exists of how much money passes through the financial system, whether broadly or narrowly defined, for the purposes of converting illegal gains into a non-traceable form (Peter Reuter and Edwin M. Truman,2004). rump Walker (1995) was the first to make a serious attempt at quantifying money laundering and initial output. His model suggests that US$2.85 trillion are laundered globally. As per an estimate of the supranational Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds hoggish Domestic Product. While it is impossible to state how much money is laundered every year with authority, it is estimated that US$300 billion to US$500 billion in proceeds from serious crime (not tax evasion) is laundered each year (Scott, David. 1995). Though data on the size of money laundering is scant, UK and US officials estimate that the amount of money laundered annually in the financial system worldwide was roughly $500 billio n some 2% of global gross domestic product (Quirk, Peter J., 1997). According to international accounting firms, India is estimated to have a parallel economy of nearly 40 percent of its $600 billion Gross Domestic Product (Singh, 2009).Table 1 lists several specific estimations of the value and extent of money laundering worldwide.Publication yearEstimation yearEstimation of Global MLSource19951995US$100-500 billion sewer Walker19981997US$ 300-500 billionU.S. Department of State199819982-5% of the global GDPMichel Camdessus IMF20021998US$ 800 billion toUS$ 1.5 trillionSimon Maylam19981998US$ 2.85 trillionJohn Walker2004US$ 45-280 billionReuter and Truman2005US$ 1 trillionbread maker2008US$ 1.425 trillionAUSTRAC20092-5% of the global GDP (US$ 800 billion to US$ 2 trillion)UNODC(Source Alkaabi et al, 2010)HawalaAccording to Fritsch et al (2001) the Hundi system can hardly be bring in and was developed many centuries before by bookkeepers who were keen to prevent highwayman attack s on transcontinental caravans. In this system the money changer takes money from its customer to transfer it to another person in a foreign city which is often done within a day. The changer calls a colleague in the receivers country to deliver the money. To receive the money the donee needs only a receipt which is generally a bank note or a code word mailed by the sender. This method is guaranteed not by fixed assets but by fear. Moreover, in Hawala system Bank notes and pictures are torn in half, and one half is given to the customer and the other is mailed to the beneficiary. The two halves needs to chink for the transfer to be completed (Nove, 1991 cited in Carroll, 2007)However, Lilley (2003) highlights that Hawala or Hundi is a taciturnity or parallel process of transferring money. It exists and runs outside of, or parallel to, conventional banking or financial systems. Hawala was established in India before the Western banking system was introduced, and is one of the most common methods used In India and around the world to launder money. This system provides secrecy as there is no piece of music work and is based on trust. The money is not transferred physically. In this system the client goes to the broker in one country and asks to make payment to another person in another country. The broker then calls his coworker in the destined country and asks to make payment to the recipient. As a result no paper work is done and is based on trust. The funds are physically transferred at a later stage between the brokers. Furthermore, Mirza (1996) cited in Carroll (2007) states that in the Hawala system transfer of money is confirmed through telephone, email and facsimile. This method even offers pick-up and delivery of money.Dougherty (2006) highlights that Hawala is a value transfer system which has been in use for 1200 years. It can be said as a poor mans Western union wherein they pay 1% of the value sent. It is described as informal value transfer sys tem and is recognized as alternate remittance system. As this method of transferring fund is very difficult to track, it is estimated that $100 billion to $300 billion of money is laundered through them every year. He further states that according to Interpol, with language that leaves and error, Hawala system of remittance can be said illegal in India. As per the law in India the conception of Hawala, such as transfer of value is illegal but more than that under the jurisdiction of foreign currency exchange laws, when Hawala deal includes foreign currency it goes beyond the line of illegality. Hawala can be used in any stage of money laundering for instance in the placement stage the customer can give the money to the broker. In the layering stage the money can be separated from the source and leave a puzzling or nonexistence trial and in the integration stage the money transferred from one country to another is difficult to track using Hawala.Hawala system helps in converting ill egal money into legal money. The word Hawala is an Arabic word which means moving of money or information from one person to another using the help of terzetto person. This method of transferring money is not traceable by authorities as no paper work is left fanny. To launder the money the profits made out of Hawala transactions are put in real estate, films etc (Devi et al, 2010). Also, Hawala is assumed to be used by terrorist to transfer assets (Fernandes, 2002).One of the well known Hawala or foreign exchange case in India was the S. K. Jainist (a Hawala broker) case who was arrested in 1991. Huge amount of Indian and foreign currency, some notebooks and a diary was discovered during the searches done in his and his familys property. The diary contained the initials of high level politicians to whom large amount of money were said to have been salaried illegally (Wescott et al, 2009). Furthermore, Chopra (1996) highlights that the diary which was found during the search list ed a sum of $18 million that was given to the government officials. Although Hawala is illegal in India, it is the corrupt politicians who give rise to such method.Factors which are providing Impetus to the Crime of Money Laundering (Vijay Singh)Many reasons can be attributed to the rising instance of money laundering around the globe of which some are given below.No agreements for sacramental manduction tax information with other countriesAvailability of instant corporationsCorporate closeness Laws as the corporate law of certain countries enable launderers to hide behind shell companies.Excellent Electronic Communication internet, mobile phones, phonesTight Bank Secrecy LawsA Government that is Relatively In indefensible to Outside PressuresA high degree of Economic Dependence on the Financial operate SectorA Geographical Location that Facilitates Business Travel to and from large neighbors.Increase in sophistication and employment of professional people for doing the task.T he politician-criminal liaisonThe lack of effective control over contributions to political parties and election expenses. This enables criminal elements to use their contributions to the political process as a safe channel for money-laundering and for gaining political influence to incapacitate the intelligence and investigating agencies so that they cannot in effect act against them(Raman, B., 2009).According to Agarwal et al (2004) Money Laundering is more vulnerable in the private banking sector due to the following six reasons thus giving rise to instances of money laundering.Private Bankers as Client AdvocatesThe main players in private banks are the bankers who are trained to serve their customers. They open up accounts and move the money around the world using secret tools and financial systems. The private bankers are encouraged by their banks to create individualized relationship with their customers by visiting their homes and organizing their financial affairs. As a re sult of this the private bankers may feel loyal for their customers and may avoid the controls made to detect or stop money laundering.Powerful ClientsThe customers of private banks may use political or economic power because of which the banks become bear on to fulfill their needs and ask very few questions. Also if the customer is a government employ with control over the banks in country procedure, the bank has grounds to evade fraud.Culture of SecrecyIn a private bank secrecy is maintained and one of the examples is that in Swiss banks, accounts are opened by using numbers. Also, the private banks and clients use many levels of privacy to hide accounts and transactions. They open up shell companies to hide the individuality of the owner of the bank account and also open up accounts in code names.Secrecy JurisdictionsSome private banks follow business according to secrecy jurisdiction and if the banking information of the client is disclosed it may be illegal and action can be taken against it.Culture of free ControlAt the time to follow the anti-money laundering controls it is the private banker who is asked to check the enforcement of anti money laundering controls. They check the history of their prospective customers and also monitor existing accounts for any fraudulent activity. Also, they are the ones to open any new account and sum up client deposits. The private bankers become the proponent for their customers and do not follow the procedure to check their transactions. They do not ask enough questions about their funds and do not render the information provided in a proper form.Cut Throat rivalAs a result of competition in the private banks for clients to increase their profitability, money laundering problem is increased.