Money laundering is an activity in which criminals introduce illegal money into the financial system and use it in the economy. Money is 'cleaned' and is used for other purposes. Laundering money is a widespread problem in India and has been difficult to stop. To prevent money laundering, the Prevention of Money Laundering Act was enacted in 2002. It has made money laundering a criminal offense attracting imprisonment ranging from 3 years to 7 years besides a monetary fine. Money laundering is not just a single action, in fact, the process involves three basic stages. These stages can occur in one single transaction but generally take place over a series of transactions.
What are the three steps/stages of Money Laundering
The process begins with the introduction of illegal money through cash deposits or any other means into the financial system. The cash or funds when infused into the financial system are easy to move around and thus turn liquid. This is the first stage of the washing cycle. Money laundering is largely used by criminals involved in illegal activities like company frauds and dealing with drugs. The main aim of the launderers in this stage is to hide the illegal sources of cash/ funds and move them away from these sources.
It is a process of separating the funds from the points of their introduction in the financial system, and to cover these effectively with different techniques to layer the funds. The main intention of layering is to confuse any criminal investigation and create distance between the source of the illicit gains and its present appearance. Other forms used by the launderers are complex dealing with stocks and commodities. The volume of these transactions is huge, and hence the chances of tracing their sources are difficult.
In this stage, the laundered money is merged into the legitimate economy. Integration is the final stage of the process where the illicit funds are assimilated with other assets like stocks, bonds, jewelry, etc. in the economic cycle. This 'integration' of clean money into the economy is successfully accomplished by the launderer making it appear to have been legally earned. Now, it is almost impossible to identify legal and illegal wealth. Not all money laundering activity goes through the same process. Some may overlap.
Financial sector regulators (viz. SEBI, RBI, IRDA, OFRDA, etc.)) have issued guidelines to their regulated entities for taking various measures to curb Money laundering. AML compliance is essential mitigating ML/TF risks and keeping the organization safer.