Money laundering (ML) refers to the conversion or ?laundering? of money which is illegally obtained, so as to make it appear to originate from a legitimate source. Money laundering is employed by launderers worldwide to conceal criminal activities associated with it such as drug/arms trafficking, terrorism and extortion.
There are three independent steps in money laundering as shown below:
Placement: Placement refers to the physical disposal of bulk cash proceeds derived from illegal activities.
Layering: Layering refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail and provides anonymity.
Integration: Integration refers to the re-injection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.
Money laundering can be traced back to the hawala mechanism, which facilitated the conversion of money from black into white. Hawala is an Arabic word meaning the transfer of money or information between two persons using a third person. The system dates back to the Arabic traders as a means of avoiding robbery. It predates western banking by several centuries.
The hawala mechanism left virtually no paper trail, which would attract investigations. The profits generated from hawala were surreptitiously invested in real estate, gilt edged securities etc., to launder them.
Terrorist financing (TF) is the use of legitimate money or laundered money for the support, advancement or perpetration of acts of terrorism.
Global investigations after the September 11, 2001 attacks on the World Trade Center and other landmark buildings in the US have revealed the existence of a pervasive financial foundation for terrorists that uses business enterprises, charities, religious groups, trusts, educational and research institutes, political groups, and individuals.
In examining TF, it is important to distinguish between two types: TF through ML and TF through the use of legitimate funds. If the criminal proceeds of a predicate offense were used to finance TF, this would constitute both ML and TF, and would be caught by the provisions of most national AML laws.
The second type of TF involves the use or abuse of legitimate funds to finance terrorism. The ability to monitor and prevent such types of financial abuse has been hampered by lack of effective legal systems that impose strict rules of transparency, accounting, and auditing.
(Sourced from the websites of Reserve Bank of India, Asian Development Bank and Financial Action Task Force)
Leave a Comment