What is Money Laundering?

What is Money Laundering?

What is Money Laundering?

The chief purpose of the Prevention Of Money Laundering Act, 2002 is to prevent money laundering and specify the provisions for confiscation of property derived from or involved in the action of money laundering. Following statues prevailed before PMLA came into existence:

  1. Criminal Law Amendment Ordinance (XXXVIII of 1944)
  2. The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976
  3. Narcotic Drugs and Psychotropic Substances Act, 1985.

The Prevention Of Money Laundering Act, 2002 is applicable to all financial institutions which include banks, insurance companies, financial intermediaries, Reserve Bank of India, Securities Exchange Board of India, Insurance Regulatory Development Authority, mutual funds, and many more. The Financial Intelligence Unit (FIU IND) monitors all the activities with respect to anti-money laundering and further all financial intermediaries are required to comply with the same.

Money Laundering

Money laundering means the process of converting illegal proceeds from crime to legalized money and used into the regular business. The process of money laundering involves three key stages: placement, layering, and integration.

Placement is the first step which mainly involves the transfer of illegitimate money into the legalized sources through financial institutions. The second stage which is Layering involves separation of the illegitimate money through complex financial transactions. Thirdly, the integration stage which refers to the conversion of money into legitimate earnings through business transactions. It is an act or an attempted act to conceal the origin of the illegal proceeds of crimes so that they seem to have originated from the lawful sources. The act of money laundering is mainly carried out so as to conceal the money obtained from any kind of illegal source and further also avoid confiscation or taxation of such money or property.

The most common type of source from where the money is laundered includes corrupt officials, drug traffickers, politicians, embezzlers, terrorists, and many more. There exist many ways in which money could be laundered such as securities, cash smuggling, lotteries, and insurance policies. The key objective of money laundering is to generate illegal profits and route them into the legalized business. To fight against money- laundering, many governments have been issuing guidelines and require financial institutions to report any sort of suspicious activity.

Article 1 of EC Directive defines the term ‘money laundering’ as converting the property so as to conceal its illicit origin knowingly as the same has been derived from the proceeds or further assisting a person, to evade any kind of legal consequences knowing that such person was involved in the offense of money laundering.

Techniques of Money Laundering

There are many techniques by which money could be laundered. The earliest form of technique to be followed is cash structuring. This involves the division of large amounts of money into smaller transactions. Thus, wire transfer is another method to traffic money cross border. Other techniques include investing in real estate, gold, gambling, and many more. Modern techniques have made it much easier to launder money internationally and domestically. Online banking institutions have made the process much easier. The recent trend of investing in Cryptocurrencies such as bitcoins has made the process of money laundering much more easily. Thus, phishing is another form of offense where portions of money are laundered through bank accounts. Thus, modern technology has made the detection process really tough for enforcement agencies.

Anti Money Laundering

The expression Anti Money laundering means all the policies and legislation drafted for financial institutions to keep an orderly check at their client so as to prevent the offense of money laundering and corruption. This is prevalent at the international level. Though it is a costly technique.

Factors Aiding to the Process of Money Laundering

At present, there exist strict and precise foreign laws for transacting in India. There is an actual reporting requirement needed. Also, knowing your customer is another prerequisite for the transactions. Thus, all this makes it almost inconvenient for traffickers to use any kind of financial institution or bank. Therefore, they depend on another system of laundering money popularly known as “Hundi” or “Hawala”. Thus, such a system requires easy transfer without involving much documentation as compared to banks and at lesser rates as well. There exist no regulations to govern such transactions in India.

Effects of Money Laundering

Money laundering leaves a social impact to a greater extent. It highly impacts the economy as further it impacts the business as well. Money laundering also leaves a serious impact on the financial sector as it leaves a critical impact on economic growth, reducing productivity in an economy's real sector as it diverts resources and leads to corruption and crime. Money laundering erodes the financial sector, as there exists huge corruption. It further leads to operational risks too. Thus, it breaks the trust of any institutional investor if the financial institution is itself involved in the fraud.

Case Laws

Anosh Ekka v. Central Bureau of investigation

In this case, the Supreme Court duly rejected the bail of the petitioner as after becoming MLA and later minister, he acquired various assets within a period of three years. All these were obtained under 108 sale deeds and he even floated a construction company in the name of his wife. Later, the petitioner had even avoided all the standing orders of the court and was also involved in the tampering of evidence. Thus, the court made an observation that the petitioner is responsible for looting and laundering huge amounts of public money.

Hari Narayan Rai v. Union of India 

In this case, the bail of the petitioner was dismissed as at the time of elections in 2005, the petitioner and his wife claimed to have agricultural land worth Rs. 1.90 lakhs. Though, his wife and other immediate relatives were not even income tax assesses. Whereas after holding the post of minister, he turned his income as Rs. 15.39 lakhs whereas after investigation his income was only assessed to be Rs. 1.63 crores. As under Section 24 of the Act, the burden lies on the petitioner to prove that proceeds of crime are untainted property. Thus, the Supreme Court observed that as under Section 45 of the Act, the bail could be dismissed on assessing the seriousness of the offense, and thus it was considered a clear case of loot and laundering of public money.


The government has no effectual laws for the Hawala transactions being carried out as it is the primary source of terrorist financing and also one of the methods of laundering money. Thus, India should work in cooperation with international agencies for instituting efficient laws, which will be able to combat the issue at a larger scale.