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Money Laundering Prevention: Statutes and AML Techniques

Ashish M. Shaji

| Updated: Sep 18, 2021 | Category: Finance

Money Laundering Prevention

Money laundering is a tainted tactic used by criminals to hide the original source of illegally obtained money. Massive amount of money is obtained through this process. Money laundering has an adverse impact on the economy therefore, nations must come together and devise policies and adopt measures for money laundering prevention by strict enforcement of law.

Processes of Money Laundering

The process of Money Laundering is explained below in detail.

  • Placement

In the money laundering cycle, placement is the first step. Large amount of money is made from illegal activities such as drugs sale, prostitution/human trafficking etc. Money made from these illegal sources has to be disposed of quickly by the money launderer therefore, they deposit it in the financial institutions, spend in retail economy and involve in a business/acquisition of an expensive property. The intention of the launderer here is to remove the cash from the place of possession, thereby escaping any form of detection from the law enforcement agencies.

  • Layering

In the second stage, the money launderer hides or disguises the original source of funds by creating layers of financial transactions designed to cover the audit trail and conceal it.

The main objective behind layering is to-

  1. separate illegal duties from the source of crime
  2. moving illegal funds between accounts or business;
  3. buying and selling assets on a local/international basis.
  • Integration

After the second stage, illegal funds are moved back to the financial system as payments for services provided, thus making the funds look as if it were earned legally.

Ramifications of Money Laundering

The ramifications of money laundering can be disastrous for a nation. Here we look at some of the severe ramifications of money laundering.

  • Economic distortion and instability;
  • Revenue loss;
  • Increases criminal activity in the nation;
  • Damages social fabric of the economy;
  • Nourishes terrorism;
  • Leads to volatility in the exchange rate;
  • Weakens the democratic institution;
  • Encourages the culture of tax evasion;
  • Leads to financial crisis.

Money Laundering Prevention Efforts

Lawmakers all over the world have understood the fact that concentrated efforts are needed to deal with the menace of illegal funding and money laundering. Indian has various laws in place for tackling smuggling, narcotics, foreign exchange manipulations, foreign trade violations which were enacted to deal with such severe crimes. Some of them were considered to be strong measures. Prevention of Money Laundering Act 2002 is the fundamental statute for combating money laundering in India. The statutes predominant before PML Act 2002 are as follows:

  • Criminal law amendment ordinance (XXXVII of 1944);
  • Smugglers and Foreign Exchange Manipulators Act 1976;
  • Narcotic Drugs and Psychotropic Substances Act 1985.

Other Analogous Statutes

Apart from the legislations mentioned above, there is a law of Foreign Contribution (Regulation) Act 1976 wherein the central government regulates the funds flow to different organizations. In case where the government feels that an organization is working against the national interest, then it can block its funds.

Moreover, the RBI administering FEMA 1999[1] has power to give directions to appropriate directions to the authorized dealers to prevent laws violation. Section 102 and Section 451 to 459 of the CrPc, 1973 allows seizure and confiscation of the crime proceeds.

PMLA 2002 combats money laundering in India and provides for confiscation and seizure of properties obtained from the laundered money & to deal with any other issue associated with money laundering. For the purpose of Money Laundering, PMLA identifies certain offences under IPC, NDPS Act, Arms Act, Immoral Traffic (Prevention) Act & the Prevention of the Corruption Act, the proceeds of it are covered under the act. In order to combat threat of money laundering in India, the government is entrusting the work of investigation, attachment of property/proceeds of crime relating to the scheduled offences and complaints filing to the Enforcement Directorate (ED).

Need for Anti-money laundering program for money laundering prevention

Every registered entity should implement anti-money laundering provisions envisaged under the PMLA 2002. Financial institutions should undertake the following measure to keep such instances at bay:

Anti-money laundering program for money laundering prevention
  • KYC;
  • Customer Due Diligence;
  • Customer and Transaction screening;
  • Suspicious activity reporting.

Financial institutions must ensure proper customer identification and verification to make sure that the customer is legitimate. Higher risk products and services need more in-depth documentation.

Further through customer due diligence, relevant information of customer’s profile is assessed and collected for potential money laundering. The main objective behind this exercise is to detect risks.

Banks and financial institutions should keep a check on customer deposits and other transactions to make sure that they are not a part of money laundering scheme.

Investigations for Money laundering by law enforcement agencies involve scrutinizing financial records for suspicious activity or inconsistency.

Successful AML program involves the use of data analytics to detect any unusual activities. It can be done by monitoring transactions, customers etc. Technologies such as AI, ML can automate various manual processes, thereby helping in identifying financial crimes risks.

Conclusion

To summarize, money laundering is a serious evil that has to be curbed for smooth functioning of the economy of the country. Nations must come together to eliminate it from its root. Money laundering prevention is possible with penal ways and through the cooperation among judicial and law enforcement authorities. Law enforcement agencies should be at par with the changing dynamics of money launderers who evolve with advanced techniques.

Read our article:Why should Anti Money Laundering be the top priority in the Digital Era?

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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