Five things you need to know about money laundering

by Bindisha Sarang Mar 14, 2013

A couple of big private sector Indian banks including HDFC Bank, Axis Bank and ICICI appear to have been targeted in a sting operation conducted by digital magazine CobraPost with the purported objective of discovering money laundering. Read the whole story here. But if you are not sure what money laundering is all about, here are five things everyone should know.

What is money laundering: Investopedia defines money laundering as, “The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.” Simply put, it is washing (laundering) illegal back money by showing it as legitimate gains by moving it into financial system to make the money white.

“Placement” refers to the physical disposal of bulk cash proceeds derived from illegal activity. Reuters

What’s the general modus operandi: Broadly there are three steps to money laundering activity as per the Reserve Bank of India.

1) Placement: “Placement” refers to the physical disposal of bulk cash proceeds derived from illegal activity.

2) 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.

3) 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.

So, simply put, the money is taken from the source and then put into the financial system, via small deposits or demand drafts and like. Then these funds are moved into a number of accounts across several banks across different locations. There are numerous layers of transactions to disguise the original source of money. Then this money is use to buy real assets like property, gold and the gains are made on these assets. At times, black money is also used to create on-paper companies and money is moved via them by making fake bills and invoices.

Steps to prevent money laundering: There are a number of steps that financial institutions are suppose to take, like fulfilling the Know Your Customers (KYC) norms and asking for PAN on compulsory basis for financial transactions. Financial institutions also are supposed to check the source of funds, monitor the activities on accounts, and track irregular transactions. Like it or not, money laundering usually happens when an employee of the financial institution is involved, and thus makes process of layering mentioned above easier.

What can you do as a consumer: Dormant accounts can be easily used for conducting money laundering activities. If you have dormant accounts, it’s best you close them as soon as possible. Do not share your bank account number with people who ask you to help them transfer money from foreign locations to India, by offering a commission for using your bank account. Inadvertently you will become a part of money laundering activity.

Consequence to you: Even if you are not directly involved, if your dormant account is used or you allow your bank account to be used for money laundering activities inadvertently, you may suffer penalties which also includes imprisonment.



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