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Summary
Security Class 06

THE CLASS STARTED WITH THE BRIEF REVIEW OF THE PREVIOUS CLASS AT: (04:59 PM):

MONEY LAUNDERING: (05:26 PM):

  • Temperance Movement: Abolition of intoxicating liquor in the USA by the Protestants this was known as Prohibition.
  • This prohibition came into existence through the Volstead Act.
  • During prohibition, a lot of bootlegging of illegal liquor started.
  • In bootlegging a lot of criminal gangs got involved in which the prominent name was of Al-Capone.
  • These gangs started converting the black money earned from selling illegal liquor into legitimate money from here the concept of Money Laundering originated.
  • Money Laundering:
  • Some of the crimes generate huge sums of money and create an incentive to legitimize ill-gotten gains without attracting attention.
  • The term Money Laundering simply put means washing the 'dirty money' so that it appears clean.
  • The term money laundering describes a range of practices to disguise the source of the illegal profits/proceeds and to integrate them into the legitimate economy.
  • Terminologies:
  • Bribery: Offering money to get favors.
  • Extortion: Intentionally instilling fear in someone & inducing them to give you a valuable asset.
  • Embezzlement: Miss appropriation of funds entrusted to you.

OPERATING PRINCIPLE OF MONEY LAUNDERING: (05:56 PM):

  • For the illicit proceeds to be eventually used there must be certain operating principles by the money launderers:
  • 1) Moving the funds away from any direct association with crime.
  • 2) To hide the trail.
  • 3) To make the money available for use while keeping the source a secret.
  • Stages Of Money Laundering:
  • There are typically three states involved in the Money laundering:
  • 1) Placement:
  • This stage is all about the physical disposal of cash (valuable assets).
  • Usually, this is done by breaking up a large amount of cash into less conspicuous smaller sums. That is then deposited directly into the bank account or used to purchase valuable assets.
  • 2) Layering:
  • It refers to the separation of the illicit proceeds from their source by creating complex layers of financial transactions.
  • The launderer engages in a series of conversions or movements of the funds to distance them from their source.
  • The objective is to conceal or to hide the audit trail and provide anonymity.
  • 3) Integration:
  • It refers to the reinjection of laundered proceeds back into the economy in such a way that they re-enter the financial system as legitimate funds.
  • Examples For Each Stage of Money Laundering:
  • Placement: A third breaks down the stolen cash into several smaller chunks and finds people to deposit these smaller chunks into their bank accounts.
  • Layering: These people can make a series of transfers between multiple ban accounts, maybe even across different countries, maybe to buy or sell expensive items, etc.
  • Integration: After confusing the trail these people may re-route these proceeds to the individual for instance by making a loan offer from a registered NBFC.

MECHANISMS OF MONEY LAUNDERING: (07:27 PM):

  • Various Mechanisms:
  • 1) Cash holding: It is the oldest technique where launderers purchase shipping businesses so that they can smuggle cash across destinations.
  • 2) Casinos/Gambling: For instance in casinos chips are bought with cash then after some time in which gambling may or may not take place the chips are traded in for cash/wire transfer from the casinos.
  • Winning tickets for lotteries could be purchased from the lottery winners by paying a certain premium (loss rate).
  • 3) Smurfing: Ordinarily countries have reporting requirements e.g. in India there is a restriction on every person from receiving cash of rupees two lakhs or more from a single person for one or more transactions.
  • Accounts holding 10 lakhs or more (except Current A/C) are to be reported by the banks.
  • In such cases, the services of cash couriers (smurfs) are used to make small deposits.
  • 4) Informal value Transfer System: For instance the services of the Hawala System which is a parallel banking network could be used to make payments/transfers without any actual movement of money.
  • 5) Legitimate business ownership: Dirty money can be added to the cash revenues of a legitimate business enterprise.
  • Their invoices can then be manipulated to give a legitimate appearance to the dirty money.
  • 6) Front-end companies/shell companies: A shell corporation exists only on paper but transacts no business operations.
  • These companies have on the other hand had legitimate business activity underlined and such companies could be used to launder the proceeds e.g. tax havens like Mauritius is the biggest FDI contributor in India.
  • 7) Real-Estate Transactions: Properties can be bought or sold under false names or by shell corporations and can serve either as collateral in further layering the transactions or used to integrate the illicit proceeds back into the economy.

IMPACT OF MONEY LAUNDERING: (07:45 PM):

  • 1) Economic Impact:
  • 1.1) Money laundering incentivizes offenses like tax evasion amongst other things which creates a parallel/underground economy, the extent of which is hard to estimate.
  • Consequently, this affects the transmission of monetary policy in the economy and creates a demand and supply mismatch e.g. 37% of India's formal labor force files tax returns which are typically around 7-8 crore people. 70% of the tax returns are zero tax returns.
  • This doesn't explain the periodic boom witnessed by the real estate market in India.
  • 1.2) It affects the reputation of the economy as an investment destination (banks, financial institutions).
  • 1.3) It creates problems for the Balance of Payments in an economy.
  • 1.4) It can create irregularities in the Securities Market by incentivizing illicit activities like insider trading.

TOPICS OF THE NEXT CLASS: Continuation of Money Laundering, etc.