Let us start this article by understanding some basic terminologies.
What is illegal money?
By the term illegal money, we can understand the money which has been obtained from doing illegal activities ( proceeds of crime ) like Murder, Extortion, bribery, Drug trafficking, Kidnapping, etc.
The process of converting such proceeds of crime into legal and white money is known as money laundering. Illegal money can also be referred to as dirty money which can easily be clean by applying various tactics of money laundering.
In India, there is a law made for preventing such activities of money laundering known as Prevention of money laundering Act, 2002. This law is enforced by Enforcement Directorate (ED) in India.
Money laundering has an adverse effect on the economy. It can erode the nation’s wealth by fluctuating the demand and supply of cash, making interest and exchange rate more volatile.
Money laundering involves three distinct processes, namely:
1). Placement: This is the very first stage in which the proceeds of crime is injected into the formal financial system.
2). Layering: In the second stage, the money which is injected in the financial system is spread or moved over the various transactions in different accounts and different countries, thereby it becomes difficult to trace the source and origin of money.
3). Integration: In the last stage, money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving as clean money.
There are various methods of laundering illegal money;
1. Creating Shell and Bogus companies.
2. Investing in Real estate i.e. Buying land for money and then selling it making the profits legal by paying tax on such profit.
3. Cash smuggling, transferring money to the Swiss bank.
4. Hawala transactions.
If left, unchecked money laundering can destroy the nation’s economy by changing the demand and supply of cash. It also affects the interest rate, exchange rates by making it volatile.
Article Written By- Pushp Kumar Sahu