Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

The Father of our Nation, Mahatma Gandhi exclaimed that money is not evil as such but is the root cause of evil intents. Money is required for the proper functioning of societies post the Barter system generations but the manner in which it is used must be regulated due to the power it possesses. Money laundering has been defined in the Prevention of Money Laundering Act of 2002 (PMLA)under section 3 where a person shall be guilty of the offence if such person is found to have:

  • directly or indirectly attempted to indulge or
  • knowingly assisted or knowingly is a party or
  • is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely: --
  • concealment; or
  • possession; or
  • acquisition; or
  • use; or
  • projecting as untainted property; or
  • claiming as untainted property,
  • in any manner whatsoever;

The process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its:

  • concealment or
  • possession or
  • acquisition or
  • use or
  • projecting it as untainted property or
  • claiming it as untainted property in any manner whatsoever.

The crime has its origin in the organized crime activity in the West. The infamous ‘Watergate Scandal' led to the origin of the term as the Mafia, in order to legitimize their income on paper, indulged in the ownerships of laundry houses in the United States. Laundry is a business focused on cash transactions and was ideal for the criminals to ‘wash' their money clean of the illegitimacy. This has been illustrated in pop culture as well such as the hit American TV series Breaking Bad, where the show's main character Walter White decides to buy a car-wash business in order to “legitimize” the money he was acquiring through the production and sale of Methamphetamine. Similarly, the mafia money was usually acquired through extortion, sale of drugs, gambling activities, dodgy liquor sales, sex-trafficking, contract killing, corruption, bribery, etc. Laundry houses as well as other legitimate businesses were the manner which led to the boom for Scarface, an infamous American gangster, more famously known as ‘Al Capone'. This way the illicit earnings were mixed with the legitimate income from these businesses to legalize their stash.

If the author were to ask a lay man today about the most infamous ‘laundering' technique, they would probably point towards the Swiss National Bank. The scam originated with Meyer Lansky depositing his illicit money to his Swiss bank accounts and then withdrawing his money disguised as zero or very low interest loans provided by the bank which can be further declared as a measure for tax-deduction. It eventually became a go-to exercise for drug traffickers which led to the increasing motivation for governments around the world to curb this. Considering the secretive nature, it might be the case that the money laundered on a daily basis at the time and even today might be bigger than the economies of major countries. It is virtually impossible to identify all the techniques used and the industries affected by the crime which makes government action even more required. Chaim Even-Zohar claims that the laundered money can form an economy parallel to that of India of which the former comprises of more than 40 per cent of the country's GDP.

A well renowned system developed in India has been that of Hawala which runs parallel to the traditional banking methods to launder money. It originated in the 8th century and has been very ripe during the time of the Islamic Empire in the Middle East. It does not involve physical movement of money but a system which involves middlemen who might receive money from Country A and then instruct their agents to transfer funds, already in Country B, to the beneficiary. The system involved journals keeping records of transactions and the element of trust between the parties involved and there have been examples of ex-communications of middlemen for not honoring their end of the bargain.

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