83

pomographers who, according to the new liberal mythologies, were subject to repression

before the long overdue “liberation” of the markets)

Enterprise
Satellite television and the organised sex trade*

2.4.5 Money Laundering

Underground banking is a generic term used to describe any informal banking

arrangements which run parallel to, but generally independent of, the formal banking

system. Underground banking systems are also referred to as alternative remittance

‘Ibid., p.270
 84

systems118; informal funds transfer systems and informal value transfer systems particular

types of underground banking systems are also used to describe the underground banking

process.119 The combination of the geographic diversity and varied typology of

underground banking systems makes them attractive for illegal activities and difficult for

regulators to control.120 Whatever term is used, the basic principle of underground

banking remains the same it involves the transfer of the value of currency without

necessarily physically relocating it. Globalisation has created demand for a cheap and

mobile labour force and there is often a cultural expectation that members of that labour

force will dispatch a proportion of their earnings to their families in their home

countries.121 In 2002, US$80 billion was remitted through the formal banking sector by

workers from developing countries,122 constituting the second largest capital inflow to

developing countries behind foreign direct investment.123 (Allowing for unreported and

informal remittance flows, the total remittance figure might be in the order of US$200

billion per annum). Although the total level of funds is significant, it usually comprises a

large number of small transactions which the formal financial sector does not generally

118 Financial Action Task Force on Money Laundering (FATF) 1999. Report on money laundering typologies.
Paris, OECD,1998-1999, http://wwwl .oecd.org/fattfpdf/TY1999_en.pdf
119 These include hawala (India), hundi (Pakistan) and fei ch’ien (China). Underground banking takes place in
many parts of the world ranging from Hong Kong and Paraguay to Canada and Nepal, Financial Crimes
Enforcement Network (FinCEN), *Informal value transfer system', FinCEN Advisory Issue 33. (Washington
DC: US Department of Treasury, 2003).http://www.fmcen.gov/advis33.pdf
120 Rob McCusker, “Underground Banking: Legitimate Remittance Network or Money Laundering System?”
‘Trends and Issues in crime and criminal justice’, Australian institute of criminology, My 2005 no.300, p-1-2.
121 Passas N. Informal value transfer systems and criminal organisations: a study into so-called underground
banking networks, (Netherlands: Ministry of Justice., 1999) http://usinfo.state.gov/eap/img/assets/4756/ivts.pdf
122 Ratha D Workers, ‘Remittances: an important and stable source of external development finance. In Global
development finance: striving for stability in development finance' Washington DC: The World Bank,
www.worldbank.org
123 Sander C. ‘Migrant remittances to developing countries’, (London: Bannock Consulting),
http://www.bannock.co.uk/PDF/Remittances.pdf
 85

facilitate.124 The economic situation of the workers and their families makes it necessary

for earnings to be dispatched rapidly, efficiently and as cheaply as possible.125 This

anonymity serves illegal immigrants, who might fear that using a formal financial

institution could lead to their discovery by immigration authorities and legal

immigrants.126 Other advantages of underground banking include that its systems are

highly accessible, resilient and versatile. They are able to withstand sudden and dramatic

economic, political and social upheaval as evidenced by their presence in war ravaged

nations such as Afghanistan, Iraq, Kosovo and Somalia.127 In addition, transactions are

rapid, with authorisation and completion of transfers occurring within minutes or hours

by telephone, fax, and email or similar means. Finally, although the formal banking

sector is usually bound by an official or market exchange rate, underground bankers are

under no such constraint and, as they often speculate in currency exchange rates, are able

to charge far lower fees. Underground banking systems have been used to facilitate a

range of disparate crimes, involving intellectual property, arms and drugs trafficking, tax

evasion and the smuggling of illegal immigrants.128 It is, however, the potential for

money laundering activity which has heightened the importance of underground banking.

Money laundering involves disguising the source of illicit profits and is achieved through

124 Buencamino L and Gorbunov S, ‘Informal money transfer systems: opportunities and challenges for
development finance\ Discussion paper of the United Nations Department of Economic and Social Affairs
(DESA) no 26. http://www.un.org/esa/esa02dp26.pdf
125 Underground banking transactions in the hawala system require no identification from either the remitter or
receiver of the funds save for the exchange (via telephone, fax or similar) of a simple password between the
remitter and recipient of the funds.
126 World Bank and IMF. ‘Informal funds transfer systems: an analysis of the informal hawala system,’,
(Washington DC: World Bank)
http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2003/05/03/000094946_03041904002082
/Rendered/PDF/multiOpage.pdf
127 Ibid.
128 Passas N Informal value transfer systems and criminal organisations: a study into so-called underground
banking networks, (Netherlands: Ministry of Justice.,1999) http://usinfo.state.gov/eap/img/assets/4756/ivts.pdf
 86

a basic process (although money laundering typologies differ in complexity) The

processing of ’dirty’ money into ’clean’ untraceable funds, has been another key area of

organised criminal activity, and is essential in order to conceal the massive profits made

from their illegal activities. It has been estimated that $150 billion is laundered every

year, and legitimate’ banks, making a 10% profit for their services, have been reputed to

be highly attracted to money laundering for organised criminal groups.129 A United

Nations report concluded that money laundering is the tenth largest global economic

activity - and reliable estimates attribute 4% of the world’s economy to organized crime.

The ensuing chaos that will result from currency changeover, OC will move in to exploit

the opportunity to conceal ill-gotten profits.

The National Criminal Intelligence Service (NCIS) has said that ‘An opportunity

is created for OC to take advantage of the pressure on banking systems dealing with bulk

cash transactions to bypass the existing disclosure defenses against money laundering’. It

has also been mooted that counterfeit currency would be, in the financial melee, easy to

off-load into the system through banks and retail outlets.130 Money laundering is used by

organized crime groups that have great economic power. These groups have one

objective: profit. “The area of wire transfers has often been the black hole of money trails

and is still very arcane to many investigators,” it is not an easy matter to identify one

transfer in an ocean of transactions by wire transfers when we keep in mind that each day

129 www.ex.ac.uk/politics/pol_data/undergrad/ojscott/laimdermg.htin/
130 Taylor, The Express, April 22,2000, p.27
 87

over 1 trillion of dollars (about 800 billion) pass through the New York chips system

alone.131

2.4.5.1 Narco and Money laundering

The illicit drugs industry is reckoned to be worth $400 billion per annum (that is

bigger than the world’s oil and gas industry) with 400m regular customers - and $200

billion of that total is successfully laundered each year.132 One discernible side effect of

this is the willingness of drug cartels to pay bribes to officials. Drug money underpins

property and share prices and much of the local economies. More importantly drugs take

up a much larger share of exports. However the money is not made in the country of

origin, but at the retail stage where gross profit margins are, in some cases, 300%.133 This

example highlights two major aspects of organised criminal activity. Firstly, it shows that

OC is highly adaptable and extremely quick to seize opportunities in emerging markets.

Secondly, it shows that the all- important criteria OC applies as to the markets is it

exploits the high level of profit to be made. Where there are huge sums of money, and

massive profits to be made, and a high level of organisation, then it would

seem reasonable to assume organised criminal involvement.

2.4.5.2 Concealment of Money laundering: Interpol General Assembly in 1995 defined

money laundering as “any act or attempted act to conceal or disguise the identity of

131 www.jmksu.se/jmk/eurorep/32.htm#menu
132 The UN estimates that the share of the illicit drags industry in the GDP of Peru at 6%, Colombia 7+% and in
Bolivia at over 9%. In early 1998 die Mexican Government concluded that gangs in that country had overtaken
the Colombians as the most powerful drug cartels in the Americas - profits from drags have been conservatively
estimated at £9 billion - 5% of the country’s GDP.
133 Peter Lilley, “Dirty Dealing: The untold truth about global money laundering, international crime and
terrorism"-, ‘Money laundering and Organised Crime: An Overview’, Proximal White Paper 10.
www.proximalconsulting.com
 88

illegal obtained proceeds so that they appear to have originated from legitimate sources.”

It covers all procedures to change the identity of illegally obtained money as detailed

hereunder:

a. Consolidation: Cash generated by criminal activities is consolidated and converted

into high denomination bank notes or traveler’s cheques in various names which are

easily transportable, bypassing the conventional banking system to avoid creation of

an audit trail.

b. Transportation: Money is then transported to other jurisdiction through different

banks or those having dubious/doubtful reputation, where it can enter conventional

banking systems.

c. Cleaning: Once in the conventional banking system, the money becomes involved in

a large number of transactions, possibly in many jurisdictions, usually with ultimate

aim of reaching a “respectable” banking system.

d. Repatriation: The “clean” money is then repatriated to the jurisdiction in which it was

originally generated, to provide income for criminals and investment resources for

their organisations.

The aforementioned stages of money laundering are carried out through an

integrated process, which has three distinct features as below:

i. Placement: "Placement" refers to the physical disposal of bulk cash proceeds derived

from illegal activity and placed within the formal banking sector

ii. Layering: "Layering" refers to the separation of illicit proceeds from their source by

creating complex layers of financial transactions. Illicit proceeds are redistributed

 89

through a series of accounts in small amounts so as to disguise the origin of the funds

and conceal the audit trail and provide anonymity; and

iii. Integration: "Integration" refers to injection of the laundered proceeds back into the

economy in such a way that they re-enter the financial system as normal business

funds (the once-illicit proceeds are now licit and are used to purchase property, stocks

and bonds so that they can be deposited legally into client bank accounts)

2.4.6 Terrorism as Organised Crime

Legally and administratively terrorism is an extreme manifestation of OC where

the criminal who is at war with the system indulges in a spate of serious crimes and

creates a situation endangering public safety and security. Terrorism entails the threat or

use of symbolic violence acts aimed at influencing political behaviour.134 The line, which

separates the criminality in terrorism from OC, has become obliterated because both

forms of criminality use violence or the threat to achieve their ends, both sustain

themselves financially through the control of criminalised resources such as drugs and

arms, and both have a political strategy. Both groups have chosen their paths as their

profession and vocation. Nonetheless, one can generally distinguish between the

ideological content and orientation of political terrorism and the pragmatic, business like

goals of OC.135 ‘The global war on terrorism is constructing the flow of financial support

to terror groups. To circumvent these measures, transnational terrorist organisations are

moving deeper into organised criminal activity. This transition poses a tremendous

challenge to states struggling with a threat that has changed significantly since September

134 P.M.Nair, Combating Organised Crime (New Delhi; Konark Publishers Pvt.Ltd, 2002), pp.-202-203.
135
Ibid.
 118

advantages over non-mob-connected firms in the industry.49 OC groups dominated

construction companies and suppliers engage in tax fraud, money laundering, over billing

and sometimes fraudulent performance of their contracts, they can steer ancillary

contracts to other mobbed-up companies with which they are associated in short, they

have an extremely anti-competitive impact on the whole industry.

3.2.3 Money laundering (including black money) and Economy

Organized criminals, in particular drug traffickers, generate large amounts of cash

which they must convert and legitimize in order to benefit from, and further finance their

illegal activity. One method is to place illegal cash into the financial system through the

business community. Successful money laundering enables criminals to: Remove

or distance themselves from the criminal activity generating the profits, thus making it

more difficult to prosecute key organisers; Distance profits from the criminal activity - to

prevent them being confiscated if the criminal is caught; Enjoy the benefits of the profits

without bringing attention to themselves; and Reinvest the profits in future criminal

activity or in legitimate business.50

The International Monetary Fund (IMF) has estimated an annual figure of 2 to 5

per cent of global GDP. At the lower end of the scale, this would equate to some US$600

billion, which is approximately the total output of an economy the size of Spain (or about

1.5 times the total GDP of Australia).51 The above figures are officially through proper

49 Ibid.
50 Rick McDonnell, “'Money Laundering: The International and Regional Response”, APG Secretariat, January
2000, p. 1.
51 US Treasury & Justice Department, The National Money Laundering Strategy for 2000, March 2000, p. 1;
FATF-OECD, 'Money Laundering - Policy Brief, OECD Observer, July 1999, p.2 ;OECD, GDP estimates,
September 2000, www.oecd.org/std/gdp.htm
 119

channels of enforcement machineries, which show the known facts; the unknown

transactions may be more than the indicated figures.

Money laundering can have devastating social consequences. Laundered funds

provide financial support for drug traffickers, terrorists, arms dealers, and other criminals

to operate and expand their operations. For example, drug trafficking alone generates

billions of dollars in illicit funds for criminal organizations every year. Business

supported by the proceeds from crime creates unfair competition and can bankrupt

legitimate competitor in the market. It is hard to estimate or even define the size of the

black economy. It includes money from obvious criminal enterprises such as drug

smuggling, as well as illegal money generated by legal businesses. An estimate52 puts

India’s black economy to be an astonishing $500 billion (Rs 20,50,000 crore), about half

the size of the official economy. A full 80 per cent of this is money generated from legal

businesses.53 The new trends and ways in business has given an edge for money

launderers for example the art market in India is now estimated at Rs 5,000 crore a year,

and income tax authorities say the unregulated industry (it has no SEBI counterpart) has

also become a conduit for laundering illicit money. Most leading art galleries have been

guilty of under-reporting prices at which paintings are sold and accepting a substantial

portion of the price in cash, some galleries buy out entire art collections of unknown or

upcoming artists and then release some of these paintings in the market at auctions. The

galleries rig the prices at which the paintings are sold so that when the rest of the pieces

52 According to Arum Kumar, a professor of economics at Jawaharlal Nehru University (JNU) in New Delhi
and author of Black Money in India.
53 Anjuli Bhargava and Jehangir S. Pocha, “Big, Black & Booming'', Business world, 21 July, 2008,
www.bminessworld.in
 120

are introduced into the market, they fetch a hefty price. Some galleries send paintings

abroad to be sold in auctions and keep a part of the proceeds there or send the money

back through hawala. Money is invested in art funds (that run on the lines of mutual

funds and, in many cases, offer higher returns), which are in the hands of gallery owners

and auctioneers. They then use the money to buy up studios of artists and indulge in price

rigging. The real action is in foreign hawala, where black money is sent abroad,

laundered, and brought back as foreign investment. A former central board of direct taxes

member estimates that about 75 per cent of the black money in India now goes abroad

through Hawala channels.54 The illicit Indian money sitting in foreign countries,

enriching their citizens and propping up their economies, is a staggering $300 billion.55

For Love of Money, if this capital had been invested in India, it would have transformed

the economy; investigating agencies say illicit money is coming back into the country

from every possible pore. A favoured route is the dummy software company. Since

software has no material value, fraudsters are shipping out cartons of empty floppies to

foreign clients and showing export earnings in millions of dollars. Over the past few

years, more than 200 Nigerians have landed at Indian airports and thumped suitcases with

large amounts of money down in front of customs officials. According to government

reports all of Nigeria may not have the kind of money that these students declare at

Indian airports, says one official, half in jest. Officials say dollars come in on behalf of

others and the students earn a commission upon delivery. Nothing can be done about it as

foreign nationals can import any amount of money, if they declare it. Laundering billions

*Ibid.
55 Ibid.
 121

of dollars in OC money worsens national debt problems because the large sums of money

are then lost as tax revenue to the government as a result it affects the citizens who

deservingly wait from the government for their overall development and in turn

government is forced to borrow money to live up to its peoples expectations.

Money Laundering 2002 - 2006 (Cases under FERA & FEMA)*

♦Cases under FEMA

Sl.No year No. of Currency Currency Fine(in Indian

Seized(inlndian Confiscated (in Rs.in crore)
Rs.in crore) Indian Rs.in crore)
Searches/ Seizures/ Indian Foreign Indian Foreign Imposed Realised
Raids Recoveries
1 2002 417 393 0.8 1.2 1.0 4.0 354.6 5.4
2 2003 242 175 6.2 2.2 4.0 2.0 1083.5 5.3
3 2004* 78 56 2.6 0.4 6.0 6.9 2518.7 20.0

4 2005* 146 106 9.73 0.4 3.95 1.55 1454.66 11.04

5 2006* 51 44 4.87 0.38 0.98 0.14 527.71 9.06

The above table indicates the economic offences committed (on record) and value

of money recovered through fines, seizures, and confiscation. The amounts recovered are

very meager compared to the amount transacted in the open market through money

laundering. Money laundering is a silent crime. It crosses international boundaries

leaving in its wake no obvious victims, no lethal weapons and usually no witnesses.

Modem technology has lead to new avenues to disguise the proceeds of crime. The

advent of electronic money has meant that tracing the transfer of possibly illicit funds is

an extremely difficult, if not impossible task.

The profits from the illicit narcotics trade now make a substantial contribution to

the economies of certain countries. In those countries, the eradication of narcotic

* NCRB annual reports 2006.Table (C)

 122

production and trafficking or related money laundering would have a measurable impact

on the quality of life of the average citizen. Under those circumstances it is difficult for

the respective governments to sustain a prolonged attack on narcotics production. For

example, in Peru the coca market generates US$ 1 billion in export earnings (the

equivalent of 30% of that country’s legal exports) and employs 15% of the Peruvian

workforce. In Bolivia, the coca market generates US$ 600 million in export earnings (the

equivalent of all of Bolivia’s legal exports) and employs 20% of the workforce.56

Possession of large amounts of money has enabled international criminal syndicates to

purchase the very best of equipment and other facilities. The operating capital of criminal

networks can sometimes greatly exceed that of the law enforcement agencies

investigating their activities. The large sums now available to criminal groups for

investment have enabled them to enter the world of legitimate business, to launder and

invest their funds. The dividing line between the so-called black and white economies is

becoming less distinct. Of greater concern, however, is the fact that OC figures do not

change their methods when engaging in legitimate business activity.

The most organically advanced forms of OC are those that have become the most

sophisticated agents of corruption, which in turn has allowed them to become highly

integrated into legitimate society and often camouflaged as a social or criminal problem.

Thus this neutralisation of opposition that corruption can bring becomes the master card

for OC. Also, it can be part of a broader societal behavioural continuum, because similar

processes may be employed by nations, organisations or individuals in the course of

56 P.R. Andreas, E.C. Bertram, MJ. Blachman and K.E. Sharpe, “Dead End Drug Wars”, Foreign Policy, vol.
85, Winter 1991, p. 113.
 123

conventional business.57 Access by underworld groups to sophisticated information

technologies and weaponry as well as to the various instrumentalities through which the

global market economy functions are vastly increasing the potential power and influence

of these groups, are posing a threat to law and order and to legitimate economic and

political institutions. To both industrialised and developing countries, this is an issue of

growing concern.

33 Impact on Political System

The new nature of OC enables us to distinguish certain facts which imply

substantial challenges to the governance of democratic regimes. However, it should be

noted that transnational OC is not monolithic, but rather a diversified, complex and

multidimensional phenomenon where collaboration between groups is more frequent than

confrontation.58 It has different manifestations in specific countries and has been

perceived differently throughout time and space. It does not function uniformly nor does

it have a constant degree of impact on individuals, state agencies and non governmental

entities throughout the world.59 The first political impact of OC has to do with

sovereignty, an old concept which continues to dominate the sphere of relations between

states. States are separated by frontiers, which not only divide up territory but also mark

out different legal systems, levels of economic development and political cultures. Pitted

against this are the criminal organizations which, due to their illegal and transnational

nature, ignore the sovereignty of states and have no respect for borders as far as their

57 George Peter Gilligan, “Business, Risk and Organised Crime’, Journal of Financial Crime Volume-14,2007
pp.101-112
“Williams, P. ‘Transnational criminal organizations: strategic alliances” The Washington Quarterly, 18: 1994,
pp.57-72.
” Potter G., and Thompson B., ‘Emerging Influences and Trends in African Organised Crime’, Criminal
Organizations, (1997), p 11.
 225

5.2.4 Money-Laundering

International strategies and standards for combating money laundering have been

in development for a period of less than fifteen to twenty years, which in terms of law-

making, would still be considered to be in its early stages. Yet, the environment in which

organized crime develops is constantly evolving. New threats, particularly that of

terrorism and its financing, require ongoing review of the validity of the strategies put

into place. Moreover, the balance sheet in die fight against money-laundering is very

mixed. Many financial markets, and particularly tax havens, offer too many shelters for

drug traffickers and money-launderers.

1988 marked the starting point for an international strategy with the signature of

the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic

Substances, “established a basis for placing international controls on money laundering

thus setting the standard for international antimony laundering efforts to follow”.59 In

addition, the Basel Statement of Principle60 adopted at the same period, involved the

financial system in the fight against funds of criminal origin and terrorism financing.

Since then, a succession of international legal instruments and international initiatives

have established the framework in which the States operate and the standards on the

subject.

February 2008. http://www.unodc.org/unodc/en/human-trafficking/index.html

59 William C. Gilmore. “Money laundering: the international aspect", in David Hume Institute, Money
Laundering (Hume Papers on Public Policy, vol. 1, No. 2) (Edinburgh: Edinburgh University Press, 1993), p-3
60 Adopted by the Basel Committee on Banking Supervision in December 1988
 226

The Basel Committee on Banking Supervision consists of representatives from the

central banks and supervisory authorities of the G-1061 group of industrialised nations. It

exists to improve banking supervision and strengthen prudential standards in member,

and increasingly in non-member, countries.62 It issued its Statement of principles on the

prevention of criminal use of the banking system for the purpose of money-laundering on

12 December 1988. Its function is to “encourage the banking sector to adopt a common

position in order to ensure that banks are not used to hide or launder funds acquired

through criminal activities and, in particular, through drug trafficking.” Thus, the

Statement declares its purpose to be: “...to outline some basic policies and procedures that

banks’ management should ensure are in place within their institutions with a view to

assist in the suppression of money laundering through the banking system, national and

international.” The Statement thus sets out to reinforce existing best practices among

banks and, specifically, to encourage vigilance against criminal use of the payments

system, implementation by banks of effective preventive safeguards and co-operation

with law enforcement agencies.63 After setting out its purpose in Part I, Part II indicates

that banks should make reasonable efforts to learn the true identity of all those seeking to

61 The Group of Ten (G-10) refers to the group of countries that have agreed to participate in the General
Arrangements to Borrow (GAB), a supplementary borrowing arrangement that can be invoked if the IMF’s
resources are estimated to member’s needs. The members are Belgium, Netherlands, Canada, Sweden,
Switzerland, France, Germany, The United Kingdom, Italy, The United States of America, and Japan.
62 Bruce Broomhall & Allan Castle “Action against Transnational Organised Crime: Tackling Money
Laundering in the Context of Institution-Building in the Asia Pacific” Paper prepared for the ISPAC
International Conference on “Responding to the Challenges of Transnational Crime” - Courmayeur Mont
Blanc, Italy, 25-27 September 1998. http://www.icclr.law.ubc.ca/Publications/Reports/Transnational.PDF
63 Statement of Principles, s.1, “Purpose,” 2, in “Basle Committee on Banking Regulation and Supervisory
Practices,” vol. I. Release 93-2, p.7,
 227

use its services, including those holding or seeking to open accounts.64 Part HI asks bank

management to adhere to high legal and ethical standards, stating that although it might

not always be possible to know whether (particularly foreign) laws are being broken,

banks should not offer services or provide active assistance in transactions which they

have good reason to suppose are associated with money laundering.65 Part IV urges banks

to give full co-operation to national law enforcement authorities to the extent that specific

local confidentiality regulations permit.66 Finally, Part V declares that all banks should

adopt policies especially with respect to customer identification and internal transaction-

record retention consistent with the Statement and advise their staff concerning these

policies.67

The scheme laid out by the Basle Committee was fundamental to the way in

which banks have come to be regulated in this area. Its basic philosophy of preventative

regulation continues to be the defining one. Although non-binding itself, the Statement

contemplates that bank management will be required by local law or policy to put in

place procedures designed to prevent ‘dirty money’ from entering the system. The

Statement thus aimed to co-ordinate internationally regulation that had previously been

64 Know your customer. Banks should make reasonable efforts to determine the customer’s true identity, and
have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of
the balance sheet)
65 Compliance with laws: Bank management should ensure that business is conducted in conformity with high
ethical standards, that laws and regulations are adhered to and that a service is not provided where there is good
reason to suppose that transactions are associated with laundering activities.
* Co-operation with law enforcement agencies: Without any constraints imposed by rules relating to customer
confidentiality, banks should cooperate fully with national law enforcement agencies including, where there are
reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the
law.
67 Gilmore, William C, "International Initiatives”. Chapter 2 in Parlour, Richard (ed.) International Guide to
Money Laundering Law and Practice (London: Butterworth’s, 1995), p.68.
 228

left to the domestic efforts of individual states.68 Nevertheless, the Statement does not

impose reporting or recording requirements, it does not extend to non-bank financial

institutions, its focus is very much on self-regulation, and its guidelines are stated to

operate wjthin the framework of (unexamined) local standards of client confidentiality.

Hie Basle Statement is the product of drafters knowledgeable about and sensitive to the

needs of the banking community, which is as conscious of its need to assure clients of

confidentiality as it is of the need to assure the public that criminal monies are not being

solicited.

The Financial Action Task Force on Money laundering- (FATF)69 has provided

and continues to provide the impetus to give legislative form to the policy framework set

up by the Basle Committee. The FATF was established by the G770 at the Paris Economic

Summit in 1989. It is the leading international body on money laundering policy.71 Its

most important report, and the one to which later reports have largely provided only a

gloss, was its first, of April 1990. This report reviewed the nature and extent of money

laundering, considered programs in place nationally and internationally to address it, and

68 The Committee commended its standards to supervisory authorities world-wide, and the Statement has
been endorsed by the Offshore Group of Banking Supervisors, which includes such important centres as
Hong Kong and Singapore
69 The FATF is an inter-governmental body which sets standards, and develops and promotes policies to combat
money laundering and terrorist financing. It currently has 34 members: 31 countries and governments and two
international organisations; and more than 20 observers: five FATF-style regional bodies and more than IS
other international organisations or bodies.
70 The Group of Seven (G-7) major industrial countries are Canada, Japan, The United Kingdom, France,
Germany, The United States of America and Italy.
71 The thirty-four members of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; China;
Denmark; the European Commission; Finland; France; Germany; Greece; the Gulf Co-operation Council; Hong
Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the Kingdom of the Netherlands; New
Zealand; Nonvay; Portugal; the Russian Federation; Singapore; South Africa; Spain; Sweden; Switzerland;
Turkey; the United Kingdom; and the United States.
 229

made 40 recommendations72 for a co-operative international regime.73 In October 2001

the FATF expanded its mandate to deal with the issue of the financing of terrorism, and

took the important step of creating the Eight Special Recommendations74 on Terrorist

Financing. These Recommendations contain a set of measures aimed at combating the

funding of terrorist acts and terrorist organisations, and are complementary to the Forty

Recommendations.75 These recommendations seek to achieve three objectives:

i. Improve national systems to combat money-laundering, in consideration

of and consistent with the Vienna Convention, by criminalizing all aspects of

money laundering crimes, even for offenses not associated with drugs, and by

setting up an effective confiscation procedure;

ii. Strengthen the role of the financial system, in the broadest sense, i.e.,

banking institutions and non-banking financial institutions. These

recommendations, consistent with the Basel Statement of Principles, seek to make

better provision within financial institutions for the identification of clients, the

detection of unjustified or suspicious transactions and the development of secure

and modem transaction techniques;

72 The original FATF Forty Recommendations were drawn up in 1990 as an initiative to combat the misuse of
financial systems by persons laundering drug money. In 1996 the Recommendations were revised for the first
time to reflect evolving money laundering typologies. The 1996 Forty Recommendations have been endorsed
by more than 130 countries and are the international anti-money laundering standard.
72 The revised Forty Recommendations now apply not only to money laundering but also to terrorist financing,
and when combined with the Eight Special Recommendations on Terrorist Financing provide an enhanced,
comprehensive and consistent framework of measures for combating money laundering and terrorist financing.
74 Special Recommendation IX (October-2004) calls on countries to stop cross-border movements of currency
and monetary instruments related to terrorist financing and money laundering and confiscate such funds. It also
calls for enhanced information-sharing between countries on the movement of illicit cash related to terrorist
financing or money laundering.
75 The FATF Forty and Eight Special Recommendations have been recognised by the International Monetary
Fund and the World Bank as die international standards for combating money laundering and the financing of
terrorism
 230

iii. strengthen international cooperation, at the administrative level through the

exchange of information on international foreign currency flows, and at the
judicial level through the development of mutual judicial assistance for purposes
of investigation, seizure and confiscation of funds, and extradition.

The FATF has been and remains the most significant nexus in the emerging

international regime against money laundering. It designed the regime, it administers the

process whereby member states review each other’s implementation of it, and it

undertakes the research necessary to ensure that the regime responds adequately to

emerging technologies, new laundering trends, and law enforcement needs. The impetus

provided by the FATF (particularly through its peer-review mechanism) is largely

responsible for the fact that there is an international anti-money laundering regime of

which to speak today. The international nature of the drug economy and of the

technology which moves financial data around the globe demands that efforts against the

drug trade, to be effective, be equally international in orientation. In this area, the efforts

of the FATF have been important in encouraging nations outside the major consumer

markets, in less developed producer and financial intermediary countries, to adopt its

recommendations.

The money laundering regime is inevitably engaged in a perpetually uphill battle

against advancing technologies that slip money into ever newer channels outside of

regulatory scrutiny as the scope of that regulation broadens. Moreover, there will always

be incentives for some jurisdictions and some institutions to look the other way, to trade

the fast buck for the clean one. An anti-money laundering regime is not a panacea.

Ultimately, it is a secondary phenomenon, as criminal justice measures almost always

 231

are. It can tip the balance in favour of deterrence where other institutional factors are

present (notably, when other economic opportunities are available to potential players in

illicit economies, and where financial institutions see their reputations as being on the

line). But it can never, alone, do the whole job itself until there is universal cooperation.

5.2.5 Terrorism
The international dimension of terrorism had been identified prior to World War

II. Nonetheless, no agreement could be reached on an acceptable definition, or

appropriate action, and the 1937 Convention on the Prevention and Punishment of

Terrorism, adopted by the League of Nations,76 was ratified by a single country.77 The

issue resurfaced in the late 1950’s when private individuals perpetrated an alarming

number of incidences endangering civil aviation during transnational flights. Between

1963 and 2005, the international community adopted 13 universal legal instruments78

76 Convention on the Prevention and Punishment of the crime of Terrorism opened for signature November 16,
1937, Doc.C.546.M.383.1937.V, 19 League of Nations OJ.23 (1938).
77 Dias Bantekas, Susan Nash, and Mark Mackarel, International Criminal Law (2001) as quoted in Ilias
Bantekas “The International Law of Terrorist Financing” The American Journal of International Law vol.97,
No.2 (April 2003) p.315.
78 1. Convention on Offences and Certain Other Acts Committed on Board Aircraft, signed at Tokyo on 14 September 1963.
United Nations, Treaty Series, vol. 704, No. 10106.
2. Convention for the Suppression of Unlawful Seizure of Aircraft, signed at The Hague on 16 December 1970. United
Nations, Treaty Series, vol. 860, No. 1232S.
3. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, signed at Montreal on 23
September 1971. United Nations, Treaty Series, vol. 974, No. 14118.
4. Convention on the Prevention and Punishment of Crimes against Internationally Protected Persons, including Diplomatic
Agents, adopted by the General Assembly of the United Nations on 14 December 1973. United Nations, Treaty Series, vol.
1035, No. 15410.
5. International Convention against the Taking of Hostages, adopted by the General Assembly of the United Nations on 17
December 1979.Resolution No. A/RES/34/146
6. Convention on the Physical Protection of Nuclear Material, signed at Vienna on 3 March 1980. United Nations Treaty
Series, vol. 1456, No. 24631.
7. Protocol on the Suppression of Unlawful Acts of Violence at Airports Serving Intranational Civil Aviation,
supplementary to the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, signed at
Montreal on 24 February 1988. International Civil Aviation Organization, document DOC 9518.
8. Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation, done at Rome on 10 March
1988. International Maritime Organization, document SUA/CONF/15/Rev.l.
9. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms Located on the Continental Shelf,
done at Rome on 10 March 1988. International Maritime Organization, document SUA/CONF/16/Rev.2.
10. Convention on the Marking of Plastic Explosives for the Purpose of Detection, signed at Montreal on 1 March 1991.
 255

5.53 Money Laundering

Liberalisation, Privatisation and Globalisation (LPG) in 1993, opened up the

Indian markets; ushered an era of plenty but simultaneously gave birth to new problems.

In the wake of industralisation (open markets) new form of criminality (especially

economic and social) has assumed menacing propositions.217 India’s growing status as a

regional financial center, has added to its large system of informal cross-border money

flows, and its widely perceived tax avoidance problems all contribute to the country’s

vulnerability to money laundering activities. Some common sources of illegal proceeds in

India are narcotics trafficking, trade in illegal gems (particularly diamonds), smuggling

(goods, and contraband items), trafficking in persons, corruption, and income tax evasion.

Historically, because of its location between the heroin-producing countries of the

Golden Triangle and Golden Crescent, India has been a drug-transit country. The large

portions of illegal proceeds are laundered through the alternative remittance system

called “hawala” or “hundi.”218 In recent years, the growing Indian diamond trade has also

been increasingly important in providing counter valuation, a method of “balancing the

books” in external hawala transactions. Invoice manipulation is used extensively to avoid

both customs duties, taxes and to launder illicit proceeds through trade-based money

laundering. The hawala market is estimated at anywhere between 30 and 40 percent of

the formal market. Remittances to India reported through legal, formal channels in 2005-

2006 amounted to $24 billion (reportedly the largest in die world).219

217 Mahesh Chandra, Socio-Economics Crimes (Bombay :N.M.Tripathi Private Ltd., 1979), p.l
218 The hawala system can provide the same remittance service as a bank with little or no documentation and at
lower rates and provide anonymity and security for their customers as belived by customers
219 International Narcotics Control Strategy Report - 2007- Southwest Asia- INDIA Released by the Bureau for
International Narcotics and Law Enforcement Affairs. http://www.state.gOv/p/inl/rls/nrcrpt/2007/rpt/
 256

IPC and Cr.P.C. establishes India’s basic framework for confiscating illegal

proceeds.220 The NDPS empowers the authorities for the tracing and forfeiture of assets

that have been acquired through narcotics trafficking and prohibits attempts to transfer

and conceal those assets. The Smugglers and Foreign Exchange Manipulators (Forfeiture

of Property) Act, 1976 (SAFEMA) allows for the seizure and forfeiture of assets linked

to Customs Act violations. The Competent Authority (CA), located in the Ministry of

Finance (MOF), administers both the NDPSA and the SAFEMA. The Foreign Exchange

Management Act, 1999 (FEMA),221 is one of the government of India’s primary tools for

fighting money laundering. The FEMA's objectives include establishing controls over

foreign exchange, preventing capital flight, and maintaining external solvency. FEMA

also imposes fines on unlicensed foreign exchange dealers. A closely related piece of

legislation is the Conservation of Foreign Exchange and Prevention of Smuggling Act,

1974 (COFEPOSA), which provides for preventive detention (one year to two years)222 in

smuggling and other matters relating to foreign exchange violations.223

The Prevention of Money Laundering Act, 2002 (PMLA) 224 is the specific

legislation that was enacted to combat money laundering. The Act does not define money

laundering but defines the offence of money laundering as “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 and projecting it

220 Bribery and Illegal gratification-sections 161-165; Misuse of position by public servants -sections 168,169,
217-222 and 225A; Counterfeiting of coins and government stamps- sections 230-264; Chapter XXXTV
(Sections 451-459)
221 No. 42 of 1999 (29th December, 1999)
222 COFEPOSA Section 10.
223 The MOFs Directorate of Enforcement (DOE) enforces FEMA and COFEPOSA. The RBI also plays an
active role in the regulation and supervision of foreign exchange transactions.
224 No. 15 Of 2003. Brought into force from 1 July, 2005
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as untainted property shall be guilty of offence of money laundering”225 The Act

criminalizes money laundering, imposes fines and sentences for money laundering

offenses,226( the schedule A and B under the act provides offences committed under other

provisions that can be punished under PMLA)227 can be tried imposes reporting and

record keeping requirements on financial institutions,228 provides for the summoning,

search, seizure229 and confiscation of criminal proceeds,230 and provides for the creation

of a financial intelligence unit (FIU).231

There was much concern about the terror funds coming into country and the stock

market used as investment destination for terrorist groups. In absence of the adequate

laws and enforcement mechanism in place, it was difficult to trace the source of money

coming in and going out of the country. Anti money laundering laws and regulations of

2005 seemed to be inadequate in dealing with new category of offences that have cross-

border implications for fighting terrorism, human trafficking, and smuggling of migrants,

piracy and environmental crimes.

225 Prevention of Money Laundering Act, 2002, Section 3.

226 Ibid., Sections 3-4 imprisonment for three to seven years and fines as high as five lakhs rupees.. If the money
laundering offense is related to a drug offense under the NDPSA, imprisonment can be extended to a maximum
of ten years. -
227 Part A- Offences under Indian Penal Code Section 121 and 121A; Offences under NDPSA 1985- Sections
15, 18, 20, 22, 23, 24, 25A, 27A, 29. Part B- Offences under Indian Penal Code Section 302, 304, 307, 308,
327,329, 364A, 384 to 389,392 to 402,467,489A and 489B; Offences under The Arms Act, 1959 -Sections
25,26,27,28,29 and 30. Offences under the Wild Life Protection act 1972, Section-51 read with section, 17A,
39, 44, 48, 49B.Offences under Immoral Traffic (Prevention) Act ,1956 Sections- 5, 6, 8, 9. Offences under
Prevention of Corruption Act, 1988 Section 7,8,9,10. 4
228 Ibid., Section 12-15. *
229 Ibid., Sections 16- 24.
230 Ibid., Sections 5-11
231 Financial Intelligence Unit - India (FIU-IND) was set by the Government of India vide O.M. dated 18th
November 2004.
 258

To plug in the loopholes in the PML the government brought in the Money-

Laundering (Amendment) Bill232 2008 with the object of bringing certain financial

institutions like Full Casinos, Fledged Money Chargers, Money Transfer Service

Providers such as Western Union and International payment gateways including VISA

and Master Card within the reporting regime of the Act; further to combat financing of

terrorism and new category of offences which have cross-border implications. The Bill

empowers the investigating agency to attach any property and search a person and the

period of provisional attachment of property is extended form 90 days to 150 days. The

Bill empowers the ED “to search premises immediately after the offence is committed”.

It enables the Central Government in implementing the UN Convention against

Corruption by returning the confiscated property to requesting country. It has added

certain offences in part A and Part B of the schedule233 of Act and has given much wider

scope to the Act.234

Technology is certainly one of the factors that will play an important role in

complying with global requirements, whether in customers profiling for a risk-based

approach, simple record keeping, transaction monitoring or KYC (know your customer)

needs. Establishing systems and processes for collecting and retaining both identification-

232 Minister of state for finance Pawan Kumar Bansal on 18® October, 2008 tabled the bill to amend the
Prevention of Money Laundering Act, 2003 (PMLA) in Rajya Sabha.
233 Adds new offences under IPC and NDPS Act, 1985 such as counterfeiting currency notes, contravention
related to manufactured drugs and preparations. Adds offences from the Explosive Substances Act, 1908 and
the Unlawful Activities (Prevention) Act, 1967. Adds new offences to existing Acts in Part B. Adds offences
from the Explosives Act, 1884, The Antiquities and Arts Treasures Act, 1972, the Securities and Exchange
Board of India Act, 1992, the Customs Act, 1962, the Bonded Labour System (Abolition) Act, 1976, etc. Adds
Part C which includes all offences in Part A and B when they have cross border implications and offences
against property specified in the IPC. No threshold on value involved
233 The Prevention of Money Laundering Act, 2002; the Prevention of Money Laundering (Amendment) Bill,
2008; PRS Legislative Research. December 19, 2008 http://www.prsindia.org/ docs/latest/1229744560_
Legislative JBriefPreventioturfjtnoneyJaunderingJ3ill.pdf
 259

and transaction-related records in a manner from where the details can easily be retrieved,

as and when required, would be important. This would help comply with all global

sanctions lists that need to be monitored.235

5.5.4 Terrororism

The post British rule saw in modifications in the statutes made during British

India. Many are relevant and punish terrorist in India even today,236 such as The

Explosive Substances Act 1908,237 The Bengal Suppression of Terrorist Outrage

(Supplementary) Act, 1932,238 and the Bombay Public Security Measures Act 1947,239

they still remain no the statute book adding to the number. The Preventive Detention Act

was enacted in 1950;240 the constitutional validity of the Act was upheld in the Supreme

Court in A.K.Gopalan v. State of Madras.241 The Act was substituted by the Maintenance

of Internal Security Act 1971242(was enacted during the war with Pakistan and continued

in force till 1978).243 The Armed Forces (Special Power) Act 1958244 and The Unlawful

Activities (Prevention) Act 1967245 were enacted and their validity was upheld by the

Supreme Court in Naga People’s Movement of Human Rights v. Union of India246 and

235 Manish Jain and Vikas Jain, “Prevention of Money Laundering (Amendment) Bill, 2008: An Analysis.” p.4
http://www.taxmann.net/Datafolder/Flash/article2310_2.pdf
236 V.Vijayakumar “Legal and Institutional Responses to Terrorism in India”, in “Global Anti-Terrorism Law
and Policy”, Edited by Victor V.Ramraj, Michael Hor and Kent Roach, (Cambridge University Press, 2005)
p.352.
137 Act No.6 of 1908.
238 Act No.24 of 1932.
239 Act No.6 of 1947.
240 Act No.4 of 1950.
241 AIR (1950) SC27.
242 Act No.26 of 1971.
243 Maintenance of Internal Security (Repeal) Act 1978. Act No. 27 of 1978.
244 Act No.28 of 1958. (used as a offensive tool against the North-East Insurgencies and Separatist like
BODA.ULFA etc.,)
245 Act No.37 of 1967 Amended in 2004 and 2008
246 (1988) 2 SCC 109.