General Studies Paper 3 (Security Issues): Money laundering and foreign exchange regulation

Anti-Money Laundering Laws

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Syllabus: General Studies Paper 3 (Security Issues)

 

Money laundering and foreign exchange regulation would be futile without international cooperation. Critically examine the statement highlighting various Agreements and Conventions on these issues.

 

Introduction:

Increasing threat of modern and sophisticated forms of transnational criminal activity, concern has arisen over the lack of effective national laws to combat organized crime and the laundering of its proceeds. Money laundering and foreign exchange regulations are international phenomenon transnational co-operation is of critical importance in the fight against this menace.  Due to its decentralised and global nature, foreign exchange market has been more prone to foreign exchange fraud. Money laundering can erode a nation’s economy by changing the demand for cash, making interest and exchange rates more volatile, and by causing high inflation in countries where criminal elements are doing business. Recent examples of money laundering such as Vijay Mallya money laundering case PNB scam, ICICI Scam   pose a threat to nations economy.

 

Body:

Money laundering is the conversion of money from illegal to legal one. The Money so converted is illegal and is obtained from illegal activities. The Illegal activities may involve corruption, Fraud, Cheating etc. In India, Money Laundering is generally linked with corruption but other reasons are also there such as tax evasion. 

 

Why Money laundering and foreign exchange regulation would be futile without international cooperation.

International Co-operation is needed  as every act of money laundering involves various transactions, national and/or international, with the aim of obscuring the origin of proceeds of crime. Since money laundering is an international phenomenon, transnational co-operation is of critical importance in the fight against this menace. A number of initiatives have been taken to deal with the problem at the international level.

Initiatives at Global level

  • In response to mounting concern over money laundering, the Financial Action Task Force (FATF) on Money Laundering was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, which set out the measures national governments should take to implement effective anti-money laundering programmes. India is an active member of the FATF.
  • The major international agreements addressing money laundering include the United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances, popularly known as the Vienna Convention
  • the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime.
  • The role of financial institutions in preventing and detecting money laundering has also been the subject of pronouncements by the Basle Committee on Banking Regulation Supervisory Practices, the European Union and the International Organization of Securities Commissions

 

Steps taken by Government of India.

  • Directorate of Enforcement is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance, Government of India, which enforces the following laws: –
    • Foreign Exchange Management Act,1999 (FEMA)
    • Prevention of Money Laundering Act, 2002 (PMLA)
    • Fugitive Economic Offenders Act, 2018
    • Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974(COFEPOSA)
    • Cooperation to foreign countries
  • FEMA: The main objective of Foreign Exchange Management Act (FEMA) is to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA deals with provisions relating to procedures, formalities, dealings, etc. of foreign exchange transactions in India. The transactions relating to foreign exchange have been classified under FEMA into two main categories, viz., (1) Current Account Transaction, (2) Capital Account Transaction.
  • PMLA: The Prevention of Money Laundering Act, 2002 [PMLA] mandates that the investigation of the offence of money laundering be linked to the Scheduled Offences investigated by the concerned Central or State Law Enforcement Agencies. The scheme of PMLA thus necessitates inter-agency coordination to take effective action against persons who are found by the Law Enforcement Agencies to be involved in criminal activity. Such action under PMLA entails attaching and confiscating tainted assets, and prosecuting persons/entities for the offence of money laundering.
  • Financial Intelligence Unit – India (FIU-IND)under the Department of Revenue, Ministry of Finance is the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.
  • Fugitive Economic Offenders: 
    • A fugitive economic offender is an individual who has committed some specified offence(s) involving an amount of one hundred crore rupees or more and has absconded from India or refused to come back to India to avoid or face criminal prosecution in India.
    • A Fugitive Economic Offender is a person declared so by a ‘Special Court’ set up under the Prevention of Money-laundering Act (PMLA), 2002, against whom an arrest warrant has been issued in respect of any of the economic offences provided in the schedule to Fugitive Economic Offenders Bill, 2018 and who has left India so as to avoid criminal prosecution, or being abroad, refuses to return to India to face criminal prosecution.
  • COFEPOSA:
    • In the era of 1970 to 1980 , when smuggling activities were at the top and the Foreign Exchange of India was at the lowest position, the Government of India passed “ COFEPOSA, 1974”. But in this liberalized era the Act has lost its significance.
    • The Act gives wide powers to the executive to detain a person on mere suspicion of smuggling. This Act has been criticized by various Human Right activists and organizations for being draconian. The Act has given special protection by including the same in the 9th schedule to the Constitution of India.

 

Way forward:

India has taken up various Anti-Money Laundering measures to curb with this issue but these measures somewhere or the other have some loopholes or lacunas and thus is not fulfilling their complete purpose.

  • All countries should enact strict and same laws:
    • As it can be seen that money laundering involves activities that are international in nature and are also at a greater level, therefore, to make a heavy impact it is necessary that all countries should enact strict and as far as possible same laws so that the money launderers will have no place to target in order to launder their proceeds of crime by way of weakness of jurisdiction or the like.
  • Need to enlist common predicate offences
    • Since the States have no obligation in deciding which offences should be considered as predicate offences to money laundering there is no consensus into the international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist common predicate offences to solve the problem internationally particularly keeping in mind the trans-national character of the offence of money laundering.
  • Financial confidentiality should be maintained in genuine cases .
    • provision of financial confidentiality in other countries is an issue. The states are unwilling in compromising with this confidentiality. There is a need to draw a line between such financial confidentiality rules and these financial institutions becoming money laundering havens.
  • Need for educating people and creating awareness
    • There is a need to educate such people and create awareness among them and therefore infuse a sense of watchfulness towards the instances of money laundering. This would also help in better law enforcement as it would be subject to public examination.
  • Proper co-ordination between centre and state:
    • Moreover, to have effective anti-money laundering measures there need to be a proper coordination between the Centre and the State. For that the tussle between the two should be removed. The laws should not only be the responsibility of the Centre but it should be implemented at the State level also. The more decentralised the law would be the better reach it will have.

 

Conclusion

India has taken extensive measures in order to curb with the issue of money laundering. It can rightly be said that the manpower has been tripled as there is Directorate of Enforcement which leads all the money laundering cases and investigations related to it in the country; there is also Financial Intelligence Unit which tracks down and analyses the risk of money laundering through the agencies reporting to it and there is time to time up gradation of the legislative framework through the proposed changes. However, there is still a further need to increase the enforcement and take more strict actions against the persons violating them. Also, the financial institutions are required to implement additional levels of control in areas such as transaction monitoring, annual review, periodic updation of accounts etc. Money laundering is usually done to hide the corruption but this also needs corruption. “Corruption is used to hide corruption”. The roots of money laundering are Corruption.

 

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