What is money laundering? What are the different stages involved in money laundering? What are the various methods of money laundering? What are FATF’s mutual evaluation reports? Take a look at the essential concepts, terms, quotes, or phenomena every day and brush up your knowledge. Here’s your knowledge nugget for today.

Knowledge Nugget: Money Laundering

Subject: Polity and Security issues

(Relevance: “Money laundering” is explicitly mentioned in the UPSC CSE syllabus for GS-III, and UPSC has frequently asked questions on this topic. For instance, in 2021 mains, a question was asked on the “contribution of emerging technologies and globalisation in the money laundering. Similarly, in the 2018 mains, there was a question that explored the connections between drug trafficking and other illicit activities such as gunrunning, money laundering, and human trafficking.)

The Financial Action Task Force (FATF) released its Mutual Evaluation Report for India. The report placed India in the “regular follow-up” category regarding its compliance with anti-money laundering and counter-terrorism financing recommendations.

However, it highlighted several areas for improvement, including the need to strengthen prosecutions in money laundering and terrorism financing cases, protect the non-profit sector from terrorist abuse, and enhance the supervision and implementation of preventive measures.

1. Prior to this year’s mutual evaluations report, the FATF had undertaken an evaluation for India in June 2010. India was then placed in the “regular follow-up” category, but was subsequently removed after a follow-up report in June 2013. India’s onsite assessment by FATF happened in November last year, while the assessment came up for discussion in the plenary discussion in June 2024.

2. The “regular follow-up” rating is being seen positively by India. Currently, only four other G20 countries share this rating: the UK, France, Italy, and Russia (which was suspended from the FATF in February 2023).

3. Most developing countries fall under the “enhanced follow-up” category, which mandates them to submit reports annually, compared to the once-every-three-years requirement in the “regular follow-up” category.

4. The FATF in its report said that the main sources of money laundering in India originate from within.The “most significant” terror threats seem to be related to the Islamic State or al-Qaeda-linked groups active in and around Jammu and Kashmir.

5. India’s largest money laundering risks are related to fraud including cyber-enabled fraud, corruption and drug trafficking.

6. According to the United Nations, money laundering is the processing of criminal proceeds to disguise their illegal origin. This money is generated by a criminal activity but may appear to come from a legitimate source.

“Money Laundering is the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions”- UN Vienna 1988 Convention

7. Money laundering generally involves three key stages to integrate funds into the legal financial system.

(i) Placement: The crime money is injected into the formal financial system.

 

(ii) Layering: Money injected into the system is layered and spread over various transactions and book-keeping tricks to hide the source of origin.

(iii) Integration: Laundered money is withdrawn from the legitimate account to be used for criminal purposes. Now, money enters the financial system in such a way that the original association with the crime is disassociated. The money now can be used by the offender as legitimate money.

Notably, it is not necessary for money laundering cases to have all three stages; some stages may be combined, or several stages may repeat multiple times.

8. There are various methods through which money laundering is done, such as:

(i) Smurfing (the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection.)

(ii) “Mules” (cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.)

(iii) Gambling and laundering money at casinos;

(iv) Hawala transactions

(v) Investing in commodities such as gems and gold that can be moved easily to other jurisdictions

(vi) Discreetly investing in and selling valuable assets such as real estate, cars, and boats;

(vii) Counterfeiting

(viii) Use of currency exchanges

(ix) Using shell companies (inactive companies or corporations that essentially exist on paper only).

9. The FATF monitors countries to ensure full and effective implementation of FATF standards. FATF mutual evaluations provide detailed country reports analyzing the effectiveness of measures against money laundering, as well as terrorist and proliferation financing.

10. The mutual evaluations reports consist of peer reviews, where members from various countries evaluate another country. After analyzing a country’s anti-money laundering and counter-terrorist financing system, mutual evaluations provide recommendations to further strengthen its framework.

11. The Paris-based intergovernmental organisation FATF is the global money laundering and terrorist financing watchdog. It was formed in 1989 as a G7 initiative to examine and develop measures to combat money laundering. In 2001, the FATF expanded its mandate to also combat terrorist financing.

12. The FATF is a 40-member body. India became a member of FATF in 2010.

13. FATF has outlined a framework of measures to help countries tackle illicit financial flows. These are listed as 40 Recommendations that are divided into seven distinct areas: (i) AML/CFT Policies and coordination, (ii) Money laundering and confiscation, (iii) Terrorist financing and financing of proliferation, (iv) Preventive measures, (v) Transparency and beneficial ownership of legal persons and arrangements, (vi) Powers and responsibilities of competent authorities and other institutional measures, (vii) International cooperation.

(Sources: FATF report on India and the significance of the observations, UN, IMF, UNODC)

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