Money Laundering And Its Prevention
Baljit Dhaka
hcs prelims testseries image
hcs prelims mains testseries image
HCS Mains test series

Money Laundering And Its Prevention

Validity: 9 Months
What you will get
Course Highlights
  • Based on latest Pattern
  • English Medium eBooks
Click to Bookmark

Money Laundering And Its Prevention

Why in the news?

Recently, the Government made the

Prevention of Money Laundering Act, 2002 law stricter via a recent amendment made to the Act through the Finance Act of 2019.

Money laundering


According to INTERPOL(the International Criminal Police Organization), Money laundering is concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

Some of the common methods of money laundering are Bulk Cash Smuggling, Shell companies, and trusts, Round-tripping, Hawala, False invoicing, etc.

It is often a component of other, much more serious, crimes such as drug trafficking, robbery, or extortion.

The advent of cryptocurrency, such as bitcoins, has exacerbated this phenomenon.

Impact of Money Laundering

Damage to the reputation of the financial market and institutions.

Weakens the “democratic institutions” of society.

Criminal activities: Provides an opportunity for criminals to hijack the process of privatization.

Economic Impact:

Destabilizes the economy of the country causing the financial crisis.

Policy distortion occurs because of measurement error and misallocation of resources.

 Discourages foreign investors.

Encourages tax evasion culture.

Results in exchange and interest rates volatility.

What is Hawala and How it works

The word "Hawala" means trust. Hawala is a system of transferring money and property in a parallel arrangement avoiding the traditional banking system.

In a hawala transaction, no physical movement of cash is there. Hawala system works with a network of operators called Hawaldars or Hawala Dealers. 

A person willing to transfer money, contacts a Hawala operator at the source location who takes money from that person. The Hawala operator then calls upon his counterpart at the destination location who gives the cash to the person to whom the transfer has to be made, thus completing the transaction.

Hawala is illegal in India, as it is seen to be a form of money laundering.

As hawala transactions are not routed through banks, the government agencies and the RBI cannot regulate them.

In India, FEMA (Foreign Exchange Management Act) 2000 and PMLA (Prevention of Money Laundering Act) 2002 are the two major legislations that make such transactions illegal.

Hawala network is being used extensively across the globe to circulate black money and to provide funds for terrorism, drug trafficking, and other illegal activities.

Challenges in tackling money laundering

Growth Of technology: The enforcement agencies do not match up with the rapid growth technology which makes the process of integration, layering more difficult.

Non-adherence to regulations and KYC norms: Spurring of fraudulent agencies and growing competition in the banking sector sometimes causes banks to lower their guards allowing the money launderers.

Widespread Smuggling: Many black market channels in India sell imported goods that facilitate the act of money laundering.

Tax Heaven Countries: They have long been associated with money laundering because their financial secrecy laws allow the creation of anonymous accounts while prohibiting the disclosure of financial information.

Lack of coherence among all enforcement agencies: Separate wings of law enforcement agencies dealing with money laundering, cybercrimes, terrorist crimes, economic offenses, etc lack convergence among themselves.

Prevention of Money Laundering Act (PMLA) 2002 Act

The objective of the act is to prevent money laundering, confiscate the properties obtained from laundered money, and to deal with other issues related to money laundering.

The Act covered some offenses under other regulations like the Arms Act, the Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act, and the Prevention of Corruption Act and the proceeds of which would be covered under this Act.

It allows the central govt. To agree with other central govt across the globe to exchange financial information and enforce provisions of PMLA.

Institutional framework for prevention of money laundering 

It includes 2 bodies

1. Enforcement Directorate for investigation and prosecution of cases under the PML.

2. Financial Intelligence Unit – India (FIU- IND) for receiving, processing, and analyzing information relating to suspect financial transactions as well as for coordinating with national and international intelligence, investigation and enforcement agencies. 

International coordination

Financial Action Task Force (FATF): It is an inter-governmental body established to set standards and promote effective implementation of legal, regulatory, and operational measures to combat money laundering and terrorist financing, and other related threats to the integrity of the international financial system.

Asia Pacific group: It works with countries in the Asia-Pacific to generate a wide regional commitment to implement anti-money laundering policies and initiatives and secure agreement to establish a more permanent regional anti-money laundering body.

Way Forward

Awareness and education: To infuse a sense of watchfulness towards the instances of money laundering which would also help in better law enforcement as it would be subject to public examination

Coordination between different stakeholders: for instance between center and States. Also, there is a requirement to have a convergence of different enforcement agencies, sharing of information is necessary.

Special cell dealing with money laundering activities: It should be created on the lines of the Economic Intelligence Council (EIC) exclusively dealing with research and development of AML(Anti-Money Laundering). It should be linked with INTERPOL and other international organizations dealing with AML. All key stakeholders, like, RBI, SEBI, etc. should be a part of this.

Special Note::

The recent amendment

The definition of “proceeds of crime” has been widened which now includes properties and assets created through any criminal activity even if it is not under the Prevention of Money Laundering Act (PMLA) and it will now be considered as “relatable offense”.