India: The Dark World Of Money Laundering: Exploring The Techniques Used By Criminals

Vijay Pal Dalmia, Advocate

Supreme Court of India & Delhi High Court

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Money laundering is a serious crime that has plagued the world for many years. Criminals use various techniques to launder money, making it difficult for authorities to track down the sources of illegal funds. In this blog post, we will explore the history and techniques used in money laundering.

A Short History of the Origin of the Crime

The crime of money laundering has its origins in organized criminal activity in the West. In the infamous 'Watergate Scandal', the term the Mafia was coined. To legitimize their income on paper, they indulged in the ownership of laundry houses in the United States. Laundry is a business focused on cash transactions and was ideal for the criminals to 'wash' their money clean of illegitimacy.

Similarly, the mafia money was usually acquired through extortion, sale of drugs, gambling activities, dodgy liquor sales, sex trafficking, contract killing, corruption, bribery, etc. Laundry houses and other legitimate businesses were the manners that led to the boom for Scarface, an infamous American gangster, more famously known as 'Al Capone'. This way, the illicit earnings were mixed with the legitimate income from these businesses to legalize their stash.

If the author were to ask a layman today about the most infamous 'laundering' technique, they would probably point towards the Swiss National Bank. The scam originated with Meyer Lansky depositing his illicit money to his Swiss bank accounts and then withdrawing his money disguised as zero or very low-interest loans provided by the bank, which can be further declared as a measure for a tax deduction. It eventually became a go-to exercise for drug traffickers, which led to the increased motivation for governments worldwide to curb this.

Understanding Money Laundering

Money laundering is the process of making illegal money appear legal. Criminals use various methods to do so, such as creating shell companies, mixing illegal funds with legitimate funds, and using offshore accounts. The process of money laundering is broken down into three stages: placement, layering, and integration.

Placement: This stage involves placing the illegal funds into the financial system. Criminals usually use cash-intensive businesses, such as casinos, car dealerships, and real estate, to deposit their illegal funds.

Layering: This stage involves the process of separating the illegal funds from their source. Criminals transfer the illegal funds through various accounts and transactions to make it difficult for authorities to track the original source of the funds.

Integration: This stage involves integrating the laundered funds back into the financial system. Criminals use the funds to purchase assets, such as luxury cars, yachts, and real estate, which they can then sell for clean money.

The Techniques Used by Criminals for Money Laundering

Now that we have looked at the history and origin of money laundering, it is important to understand the techniques used by criminals to launder their money. Criminals use a wide range of methods to launder their money, and we will explore some of the most common ones.

1. Smurfing: Smurfing is a technique used by criminals to break down large sums of money into smaller, less noticeable amounts. This process involves multiple individuals, known as "smurfs," who are tasked with making smaller transactions with the ultimate goal of obscuring the origin of the money. This technique is often used in combination with other money laundering methods.
2. Structuring: Structuring involves depositing money into bank accounts in a pattern that avoids detection by financial institutions. For example, a criminal may deposit $9,999 in cash into multiple bank accounts over a period of several days instead of depositing $50,000 all at once. This is done to avoid triggering the reporting requirements that financial institutions have for large transactions.
3. Trade-Based Money Laundering: Trade-based money laundering involves the use of trade transactions to move money across borders. Criminals use fraudulent or inflated trade invoices to hide the true value of the goods being traded and move money across borders without detection. This technique is often used in combination with other money laundering methods.
4. Real Estate: Criminals often use real estate transactions to launder money. This technique involves purchasing property using illicit funds and then selling the property at a later date to legitimate buyers. The proceeds from the sale are then considered "clean" money.
5. Cryptocurrencies: Cryptocurrencies are becoming an increasingly popular method for criminals to launder their money. Cryptocurrencies provide anonymity, making it difficult for law enforcement agencies to track the transactions. Criminals can also use cryptocurrency exchanges to convert their illicit funds into legitimate currencies.
6. Offshore Accounts: Offshore accounts provide criminals with a means of hiding their money from law enforcement agencies. These accounts are often located in countries with strict bank secrecy laws, making it difficult for law enforcement agencies to access the funds.

The Consequences of Money Laundering

Money laundering has far-reaching consequences. It not only impacts the financial sector but also has a negative impact on society as a whole. Some of the consequences of money laundering include:

The Role of Governments and Financial Institutions

The fight against money laundering requires the cooperation of governments and financial institutions. Governments must enact legislation and regulations that make it more difficult for criminals to launder their money. Financial institutions must also do their part by implementing anti-money laundering policies and procedures.

Governments can implement a range of measures to combat money laundering, including:

1. Increasing penalties for money laundering
2. Strengthening law enforcement agencies
3. Increasing transparency in financial transactions
4. Implementing Know Your Customer (KYC) regulations

Financial institutions can also implement a range of measures to combat money laundering, including:

1. Conducting due diligence on customers
2. Monitoring transactions for suspicious activity
3. Reporting suspicious activity to law enforcement agencies

Conclusion

In conclusion, money laundering is a significant problem that has plagued societies for centuries. Criminals have devised various techniques to "clean" their illicit earnings and make them appear legitimate. They do this by creating a web of transactions that is difficult to track and may involve various intermediaries, shell companies, and other entities that complicate the investigation. However, governments worldwide have recognized the seriousness of the issue and have implemented measures to prevent and combat money laundering. These measures include stricter regulations, enforcement, and the use of advanced technology to track suspicious transactions. The public's awareness and understanding of the issue are also essential to prevent money laundering. It is vital to recognize the warning signs, such as cash transactions, anonymity, and a lack of legitimate business activity, and to report suspicious activity to the relevant authorities. By working together, we can prevent the dark world of money laundering from continuing to harm our societies.

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