Money Laundering

Banking Awareness: Money Laundering

What is Money Laundering?

Money laundering refers to the process/financial transactions that are carried out to conceal the source, identity and destination of illegally-obtained money. 

By hiding the details of this illegally obtained money, a person can enjoy that money which otherwise would have landed him in jail.

Some examples of illegally obtained money: drug trafficking, extortion, insider trading and illegal gambling

Launderer– a person who does this money laundering.

How is this financial transaction done?

The process of money laundering involves passing the money through a complex sequence of banking transfers or commercial transactions so that it seems legitimate.

At the end of the process, the money is returned to the launderer n an obscure and indirect way.

Stages of Money Laundering (PLI)

Money laundering involves three stages, these are- placement, layering and integration.

Placement– It means to place the money into the financial system by any means. Some examples can be- via Asset Purchase, by Currency Exchanges and Currency Smuggling.

Layering- This step involves carrying out complex financial transactions (multiple transactions) to hide the illegal source of the cash. Means the money is distributed/transferred at various place, i.e. more than one place. You can understand it like, to put a layer on something so that the original thing becomes hidden. 

ExampleCash converted into Monetary Instruments, Material assets bought with cash then sold

Integration– The last step means bringing in the previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. The last step is to integrate all the money that was distributed in the layering stage. This step returns the money to the launderer in an obscure and indirect way.

ExampleProperty Dealing, use of shell company, Foreign Bank Complicity (as there is higher order of sophistication), False Import/Export Invoices.

Reverse Money Laundering

It is a process in which legal money is used for illegal purposes. Example- terror financing. In this process, legitimate funds are taken out of regular circulation and is used for criminal activity and/or avoid tax. 

Prevention of Money Laundering Act, 2002

It is an Act of the Parliament of India to prevent money laundering and to provide for confiscation of property derived from money-laundering. We will discuss this in a new post.

The offence of Money Laundering has been defined in Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA).


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