By K. Manoggnya Reddy

Published On: October 2, 2021 at 19:40 IST


Money laundering is a process used to convert illegitimate money to appear legitimate. It has wide repercussions for both individuals and businesses. Money laundering is carried following various crimes such as bribery, extortion, and many more. Money laundering is a crime that requires the specialized skills and resources of law to successfully combat it. Money laundering is a sophisticated business used by organized criminals to avoid getting caught up in the cross-border flow of money.

Money laundering is a process used to hide the existence of illegal sources of money from illegal activities. This process involves identifying and concealing the existence of an illegal source of income to deem it as clean legitimate money.

Though it does not directly affect society at large, it has indirect effects on the state’s financial security. Money laundering can be achieved through various means. This complexity often leads to the failure of law enforcement agencies to detect the activities of criminals.

For the first time, Money laundering has used the activities of Mafia-owned laundry services namely Laundromats in the US. During the 1950s, drug lords and gangsters showed how they earned their money illegally by purchasing legitimate businesses. They then used these establishments to launder their Illicit earnings.

Sources of this Money laundering were usually:

  • Real estate transactions,
  • Drug trafficking,
  • People smuggling,
  • Arms, antique, gold smuggling,
  • Casinos & Gambling avenues (such as Horse races & lotteries)
  • Prostitution rings,
  • Financial frauds,
  • Corruption, or
  • Illegal sale of wildlife products and other specified predicate offenses.

Historical evolution

The basic characteristics of money laundering, which are the factors that distinguish it from other forms of organized crime, are its global nature, its flexibility, its ability to work seamlessly across borders, the use of modern technology, and the ingenuity of its operators. These principles of money laundering were summarized in a 1993 report by the United Nations

In India, money laundering is referred to as Hawala transactions. This is a process where a person transfers money from one account to another in India. Hawala transactions are done through a network of intermediaries known as banks. They gained popularity during the 1990s due to the influx of political corruption cases. Hawala is a type of parallel or alternative remittance system.

Hawala is an Arabic word that means the transfer of money or other information between two persons while using a third person. The system was used by the Arabic traders to avoid robbery. It was developed way before the evolution of the western banking system.

The increasing use of sophisticated techniques to move illicit funds across international financial systems has raised concerns about the ability of governments to fight these crimes.

The illicit funds flowing through financial systems globally have become increasingly sophisticated. The international community has acknowledged the need for better multilateral cooperation in addressing this issue.

Even though there are many kinds of interpretations of money laundering the most often or commonly used is the one by Financial Action Task Force on Money Laundering (FATF). It was defined as

The processing of criminal proceeds to disguise their illegal origin, in order to, legitimize the ill-gotten gains of crime.

Money laundering was only applied to financial transactions that were related to organized crime groups. However now, This definition also covers any financial transaction that involves the acquisition or disposition of an asset or value as a result of illegal acts.

Section 3 of the Prevention of Money Laundering Act, 2002 defines the offence of money laundering as follows:

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the *[proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money laundering.”

Process of Money Laundering

There are three steps in money laundering, respectively:

  • Placement  

The first step is splitting the proceeds into smaller lots so that they can be less susceptible to manipulation. Cash generated by a crime is then attempted to be deposited into a financial system. This stage is delicate as it involves trying to transform money while the whole process is more transparent. This is also vulnerable because of this reason.

  • Layering

Layering involves sending money from one account to various other accounts. Doing so makes it difficult to follow. Layering is the process of transferring money between different accounts in a different country. The account’s value will always vary as long as the money is kept in a certain currency. They are then used to purchase high-value items such as expensive jewelry and boats and change its initial liquidated form. The dirty money that flows through the financial system is often routed through shell corporations. The object of layering is to distance the fund from its origin which in turn makes it very difficult to trace the origin.

  • Integration

At the integration stage, money is brought back to the mainstream economy in a legitimate-looking form. It’s usually appears as from a legal transaction. This is where the criminal makes the final bank transfer. He would then use the money to invest in a local business, and without getting caught he would be able to withdraw it. This is the stage where the ‘Black money’ is indiscernible from that of the clean money.

Emerging Modus Operandi for Money Laundering

There are many methods that come into light with the increase in technology for laundering money off the market. One of these methods is when a large sum of money is converted into smaller and less suspicious money is known as Smurfing.

Money launderers often use offshore accounts to transfer money to and from other countries with bank secrecy laws. A complex scheme involving transferring hundreds of millions of dollars from offshore banks.

Shell companies are fake companies that operate without any other reason than to launder the money. They show dirty money as the money that is used to purchase goods or services that they do not provide. They use fake invoices and balance sheets to trick legitimate customers into transferring money.

Launderers usually use investing in legitimate businesses to launder their dirty money. They can choose from a wide range of establishments that deal in such things as brokerage firms, restaurants, and strip clubs.

Money services and foreign exchange businesses allow individuals to convert their foreign currency into local money. Money can also be sent to other countries through these transfers. These establishments also offer a variety of services related to money transfer which makes it easy to mask dirty money.

Value Tampering is done when launderers are usually looking for properties that the seller has agreed to sell at a price below its true value. They then accept the difference between the sale price and the purchase price. In this way laundering technique is that it allows a person to hide the real value of a portion of a property’s value while transferring the purchase price to the seller and show that the transaction has taken place for the sale price necessarily hiding the black money.

Effects and Prevention

Money laundering is a serious threat to the integrity of the financial system. It can destabilize a nation’s economy.

Among the negative effects of money laundering on countries is a full range of severe macroeconomic consequences such as:

  • Unpredictable changes in money demand.
  • Prudential risks to the soundness of financial institutions and financial systems.
  • Contamination effect on legal, financial transactions.
  • Increased volatility of International capital flows and exchange rates due to anticipated cross-border transfers.
  • Money-Laundering can have a negative effect on foreign direct investment. It can also put a country in danger of becoming an organized crime base.

Money laundering would have a negative effect on the country’s economy. It would also affect the patterns of consumption and savings. Money-laundering investigations are conducted when funds are stolen from victims due to crimes such as robbery, extortion, and fraud. Other major issues include the excessive use of financial instruments and the resulting in inflation in the financial markets.

The influx of dirty cash into certain industries can create false demand, which officials adjust to by adjusting economic policy. When the money laundering process reaches a point where law enforcers start to show interest, it will suddenly disappear without a predictable economic cause resulting in the falling apart of the economy.

Laundered money is usually not taxed, which means the rest of us to have to make up for the loss in the revenue. The negative effects of money laundering on the economy are difficult to determine. It is clear that those involved in this activity damage the financial institutions that are critical to the country’s economic growth and reduce productivity. It can also distort the country’s external sector.

Money laundering also contributes to crime and corruption in developing economies. It is a negative sign for sustainable economic growth. Money laundering cuts costs for businesses involved with criminal intent, which can then increase the level of crime. Money laundering can also cause significant distortions in a country’s trade.

On the import side, illicit proceeds are used to purchase luxury goods. Usually, these are used to fund criminal activities. Such imports do not create domestic demand or employment, and they can artificially depress prices, which can reduce the profitability of domestic businesses.

Prevention of Money Laundering Act, 2002

The existence of adequate capacity and resources to combat money laundering at the national level is the key to the successful implementation of this strategy.

In India, the Prevention of Money-laundering Act, 2002 was passed which came into effect on July 1, 2005.

As per Section 3 of the Act, Says that the Offence of Money laundering covers those who knowingly or unknowingly indulge in any act or activity that is connected with the proceeds of crime and that such persons shall be entitled to be guilty of offence.

Section 4 of the Prevention of Money-laundering Act punishes persons with a prison term of not less than three years and which may extend to seven years. The fine for such offences is five lakh rupees.

Section 12 (1) provides an obligation on the banks, financial institutions, and intermediaries:

  1. To maintain certain records related to the transactions that may be prescribed, and to ensure that they are conducted in a proper manner.
  2. To furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and to
  3. Verify and maintain the records of the identity of all its clients,

As per Section 12 (2) of the Act, records related to transactions between clients and financial institutions must be maintained for a decade from the date of their cessation.

An effective money laundering program can help minimize risks associated with money laundering and transactions. Such a program that includes account opening controls and monitoring of suspicious activity should be implemented. The Reserve bank of India has issued regulations related to the Anti-Money laundering (AML) guidelines which were effective from March 2006. The Anti-Money Laundering norms require banks to keep a record of their customers’ background in order to prevent them from being used for money laundering.

Case studies

  • Russian Money Laundering Scandal

In 1999, it was revealed that over $7 billion was moved from two Russian banks to a US bank. The funds were then deposited into thousands of accounts in the US.

In total, two Russian banks deposited over $7 billion into their New York bank’s correspondent accounts. The funds were transferred to accounts of shell corporations.

In February 2000, a bank employee and his spouse were among those who pled guilty to participating in a conspiracy to launder money.

  • Satyam Fraud Case

On January 7, 2009, Ramalinga Raju, the chairman of Satyam Computer Services, resigned after admitting that the company’s accounts were falsified.

In a shocking admission, Satyam’s Chairman Ramalinga Raju confessed that the company’s balance sheet had been inflated and wrong financial reporting of 30 September 2008. The amount involved in the case was approximately Rs. 7000 crores. The investigation is still on. Large portion of the money is being used to invest in real estate.

In 2014, the Securities and Exchange Board of India’s probe into the multi-million dollar Satyam scam unearthed that India’s biggest corporate fraud was perpetrated. The Securities and Exchange Board of India (SEBI) has ordered the disgorgement of over Rs.1,849 crore worth of unlawful gains from various individuals and companies.

On December 8, 2014, a special court in Hyderabad sentenced former Satyam CEO B. Ramalinga Raju and eight others to six months’ imprisonment and a fine of Rs 5 lakh each.


Money laundering has become a global issue. It can affect the integrity of the financial system and can also be the source of crime. Money laundering is a serious social and political risk that businesses need to take into account. Money laundering is a serious and hazardous issue that affects both the business environment and society as a whole.

Money laundering is linked to activities that are anti-social and unethical. These activities can then expand their horizon and weaken the foundations of society. Money laundering and terrorist financing are complex and often have significant issues that need to be addressed. Money laundering has a negative effect on economic development. Although it is difficult to determine the damage caused, as it is widely believed to be not possible to estimate the extent of money laundering.

It is clear from the shreds of evidence at hand that tolerating money laundering activities can have detrimental effects on the economy. This is because it can encourage crime and corruption, which can distort the flow of both national and international trade and disrupt long-term economical development. Awareness campaigns are also needed to educate the masses about the issue, as it affects the entire country.

Our education system should inculcate the ideologies that our future generations should not get involved in these atrocities. Money laundering is not a healthy mechanism and should not be tolerated in our society.


K. Manoggnya Reddy is a student of BBA.LLB at ICFAI Law School. She is the kind of person who is hardworking not to achieve dreams but to collide with the reality. She is a typical student who likes to keep being positive most of the time. Achieving good results is her motivational drive. She is excited to improve and correct her mistakes. She took up law studies to achieve a stable career and now thriving to achieve the respect that she deserves from the society and to give the service the society deserves in return.

Edited by: Aashima Kakkar, Associate Editor, Law Insider


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