UNDERSTANDING THE BASIC MEANING AND CONCEPT OF MONEY LAUNDERING

[Pushpkumar Sahu]

Let us start this article by understanding some basic terminologies;

What is illegal money ?

By the term illegal money we can understand the money which has been obtained from doing illegal activities ( proceeds of crime ) like Murder, Extortion, bribery, Drug trafficking, Kidnapping etc. The process of converting such proceeds of crime into legal and white money is known as money laundering. Illegal money can also be referred as dirty money which can easily be clean by applying various tactics of money laundering.

In India, there is a law made for preventing such activities of money laundering known as Prevention of money laundering Act , 2002. This law is enfored by Enforcment directorate in India.

Money laundering has an adverse effect on economy. It can erode the nation’s wealth by fluctuating the demand and supply of cash, making interest and exchange rate more volatile.

Money laundering involves three distinct process, namly

1). Placement : This is the very first stage in which the proceeds of crime is injected into the formal financial system.

2). Layering  :  In the second stage, the money which is injected in the financial system is spread or moved over the various transactions in different accounts and different countries, thereby it becomes difficult to trace the source and origin of money.

3). Integration : In the last stage, money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving as clean money.

There are various methods of laundering illegal money;

1. Creating Shell and Bogus companies.
2. Investing in Real estate estate i.e. Buying a land for a money and then selling it making the profits legal by paying tax on such profit.
3. Cash smuggling, transferring money to swiss bank.
4. Hawala transactions.

If left, unchecked money laundering can destroy the nation’s economy via changing the demand and supply of cash. It also effects the interest rate, exchange rates by making it volatile.  

Discussions to this article

[KASTURI SETHI]

Nice article.