The Effects Of Money Laundering On The Society And Economy
“Capital as such is not evil, it is its wrong use that is Evil, Capital in some form or other will always be needed” - Mohandas K. Gandhi
If we ask a layman “what is Money Laundering?” The general guesses would be that it must be something related washing or dry cleaning of the currency. It is world’s third largest industry. As per IMF reports the turnover of this industry is around $1. 5 trillion. Money laundering is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from the Legitimate source. But in simple terms it is the conversion of black money into white money.
Objectives
- To explore the concept of money laundering and how its impact on the society and economy.
- To understand how the economic and political influences of criminal organisations can weaken the social fabric, and ethical standards of a country.
- To trace the solutions and results for the issues relating to money laundering.
History
More than 3000 years ago, the merchants of China used to hide their assets and profits of trade, by the fear of forfeiture of the same from the Rulers. They did it by converting their profits into readily movable assets and traded at inflated prices to expatriate funds. These techniques are even now followed by sophisticated money launderers.
Money laundering is an inherent characteristic of organized crime, because without money laundering there would be no organized crime. Money Laundering is as old as old as money itself, though prior to 1970s no one looked it as a crime as such. Nation States were only bothered about the underlying crime, than the crime of money laundering. It is reported that during the period of Prohibition in U. S. A, especially during 1920-1933, huge sums of money were laundered.
Process Of Money Laundering
The money laundering cycle can be broken down into three distinct stages; however, it is important to remember that money laundering is a single process. The stages of money laundering include the:
- Placement Stage
- Layering Stage
- Integration Stage
- The Placement Stage:
The placement stage represents the initial entry of the 'dirty' cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding large amounts of bulk of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught.
- The Layering Stage:
After placement comes the layering stage (sometimes referred to as structuring). The layering stage is the most complex and has the international movement of the funds. The main purpose of this stage is to separate the illicit money from its source. This is done by the layering of financial transactions that obscure the audit trail and sever the link with the original crime.
- The Integration Stage:
The final stage of the money laundering process is termed the integration stage. It is at the integration stage where the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash they are now fully integrated into the financial system and can be used for any purpose.
Anti Money Laundering
India's Prevention of Money Laundering Act of 2002 requires financial institutions to develop training programs to combat money laundering and terrorist financing activities within the country.
On November 27, 2002, the lower house of Parliament passed the Prevention of Money Laundering Act, which had first been introduced in 1998. The bill was amended in August 2002 by the upper house to include terrorist financing provisions. This law criminalizes money laundering, establishes fines and sentences for money laundering offenses, imposes reporting and recordkeeping requirements on financial institutions, provides for the seizure and confiscation of criminal proceeds, and provides for the creation of a Financial Intelligence Unit (FIU). The Amendment to PMLA in 2012 came into operation from February 2013.
Vijay Mallaya
In a major setback for liquor baron Vijay Mallya, the special court in Mumbai has declared him a ‘Fugitive Economic Offender’, making him first businessman to be charged under the new anti fugitive law. This means now the government can initiate to confiscate his properties in alleged Rs. 9,000 Crore loan default case.
Special Prevention of Money Laundering (PMLA) judge M. S. Azmi in his oral order declared Mallya, a fugitive economic offender under Section 12 of the act, on a plea of Enforcement Directorate (ED). His properties can now be confiscated and sold by the Government, which may be most detrimental to Mallya. In July 2018, the ED had filed an application before the court, seeking to confiscate his assets of over Rs. 12,500 Crore.
According to the new law, a fugitive economic offender is a person against whom an arrest warrant has been issued for his or her involvement in economic offences involving at least Rs. 100 Crore or more and has left India to avoid prosecution.
Vijay Mallaya: From Riches To Rags
2005: Chairman of United Breweries (Holdings) Limited Vijay Mallya started a luxury airline–Kingfisher Airlines.
2006: Kingfisher Airlines applied for a loan with IDBI bank to seek support for its aircraft acquisitions. Mallya allegedly didn’t share the history with the bank in relation to his Mangalore Chemicals and Fertiliser Acquisitions in the past that led to the rejection of this proposal.
2007: Kingfisher Airlines performed financially good that encouraged Mallaya to take over Air Deccan.
2008: The official process of acquiring Air Deccan got finished. United Breweries paid Rs 550 Crore for their 26% stake in the entity.
2008: Kingfisher got a debt of Rs 934 Crore due to rising oil prices.
2009: The consolidated debt of the airline accumulated to a whopping Rs 5,665 Crore that further led to Rs 7,000 Crore.
IDBI approved the loan request of Kingfisher, and provided a loan of Rs 900 Crore to the airline.
2010 – Mallya had became the Rajya Sabha MP but Banks were pressurising him and gave his airline an ultimatum of 9 months to pay back the entire loan amount.
2011: Mallya took a salary of Rs 33. 46 Crore from Kingfisher Airlines annually. Meanwhile, the license of the Kingfisher airlines had been revoked due to which it stopped paying salaries to its employees.
Till March 2016, the total owed amount to employees for Kingfisher Airlines was Rs 3000 Crore payable to 3000 employees. It owed an amount close to a billion dollars to IDBI and the State Bank of India as loan.
2013: The Kingfisher airlines valued in negative at Rs 12,919 Crore due to massive liabilities.
2014: Vijay Mallya had been branded as wilful defaulter by United Bank of India. SBI and Punjab National Bank also joined the chorus.
2015 – The total amount owed by Kingfisher had reached to Rs 9,091. 40 Crore.
April 2015 – To recover the funds, Mumbai International Airport sold Vijay Mallya's personal aircraft for Rs 22 lakh.
The airline held accountable for non-payment of loans of Rs 115 Crore by the Service Tax Department. The Department then took the complaint to Bombay High Court that ordered the seizure of Mallya’s passport.
March 2016: A consortium of banks sought to move Supreme Court to stop Mallya from escaping from the country. Mallya had, meanwhile, left the country on March 3 for the UK and took refuge in London.
November 2016: PMLA special court declared Vijay Mallya an absconder.
February 2017: India sent extradition request to UK that got cleared after the interference from the Ministry of External Affairs and Finance Minister Arun Jaitley himself.
April 2017: Mallya got arrested by Scotland Yard in UK. However, he was granted bail hours after his arrest.
September 2017: Reports emerged that the CBI and Enforcement Directorate could be a step closer to make Vijay Mallya's extradition a success. The two organisations had been preparing a charge sheet against him that could strengthen the India's case in the UK court.
The loan defaulter allegedly diverted a large chunk of funds from the Rs 6,027-crore loan he took for his now- defunct Kingfisher Airlines from a consortium of banks led by State Bank of India.
The money was then diverted to shell companies in seven countries, including the US, UK, France and Ireland, the report stated, citing the sources.
October 3, 2017: Vijay Mallya got arrested in London Senior Indian officials described his arrest as the first salvo in the case, which will now involve a legal process in the UK to determine if Mallya can be extradited to India to face charges in Indian courts.
January 5, 2019: The special court in Mumbai has declared Mallya a ‘Fugitive Economic Offender’
Measures Taken By The Government
- India presented nine-point agenda at G20 summit.
- Agenda calls for strong cooperation to comprehensively deal with fugitive economic offenders.
- Joint efforts by G-20 countries to form mechanism that denies entry to safe havens to fugitive economic offenders.
- Principles of United Nations Convention against Corruption, United Nations Convention against Transnational Organized Crime be fully and effectively implemented.
- Financial Action Task Force called upon to assign priority, focus on establishing global cooperation that leads to timely exchange of information between authorities, financial intelligence units.
- Bilateral extradition treaties signed between India and 48 other countries.
- Implementation of acts against corruption and money laundering like the fugitive economic offenders’ act (2018), Prevention of Money laundering act (2002) and Benami transaction act (1988).
Conclusions
Money Laundering despite being illegal does not lose its popularity. Also, the advancement in technology has further added to the cause of money laundering by reducing its chances of detection to minimum. There is a need for significant change in method and approach to combat money laundering. The Kingfisher airlines case is an example of collective failure of the system. The banks should have declared it an NPA much earlier. A criminal case or money laundering investigation only focuses on prosecution and not on recovery of money. To mitigate fraudulent practices some basic requirements are:
- Strengthening of corporate government structure.
- Formation of strong regulatory and anti fraud collaborations.
- Controlling measures to deter fraud such as whistle blower policy
- Strong ethical code of conduct and proactive fraud management program meet care to be taken up by the world’s largest companies.
