What is Money Laundering?

What is money Laundering?

Money Laundering is an unlawful process for whitening the illegally earned money.   The funds are generated through illegal means like that of drug trafficking, illegal arms trade, corruption, bribe, theft, money extortion etc. Then this money is routed through banking channels in various countries to make evidence of its source, so that such money can be invested in property, industry or other legitimate activities.  By routing the bad money through Banking systems, it becomes clean / white money, therefore, the entire activity is known as money laundering.

Thus, it is the washing of illegally obtained large amount of money to hide its true nature .  Money laundering happens by passing it secretly through bona-fide business channels by making a deposit in the Bank, investment or transfer from some accounts to another.

The issue of generating illegal money and routing the same into legal channels is not new.

Example:

A bureaucrat gets huge bribe in the form of Cash.  This creates two fold problems for him.  Firstly, neither can he purchase the property nor can he invest this money  nor can he deposit this money in the Bank.  Keeping huge cash is risky from thieves and is further faced with the danger of raid by taxation officers  or enforcement staff.   This is the dirty money.

To utilize the money, he will have to create its source.  He approaches a person who has won the lottery.  Gives him cash more than the prize money and brings the lottery ticket to claim the prize.  The lottery prize will be credited to his Bank account, after deduction of tax at source and this money is clean money.  This is what known as money laundering.

Likewise, there are many methods invented to use the banking channels for money laundering.

Dangers of money Laundering:

Money laundering is a great danger to the economy and also to the humanity as well, because of usage of this channel by terrorists to fund terrorist activities.  Black money and money laundering are sisters, both are menace not only to the economies of the world but also to the security and peace.

Steps taken by Government in India

As member of International Financial Community, our country is also serious about and committed to curb the hazard of money laundering.

Improvement in information technology and its application by Banks and taxation authorities has made the money laundering difficult.   The Banks have to take KYC (Know your customer) formalities completed in respect of every new or existing customer.