Relevance: GS-3: Challenges to internal security through communication networks, money-laundering and its prevention.

Key phrases: PMLA, Enforcement Directorate, corruption, Prevention of Terrorism Act, 2002, RBI, SEBI, and IRDA, FATF, Vienna Convention.

Why in News?

• The government on Wednesday informed the Supreme Court that ₹18,000 crore was confiscated under the Prevention of Money Laundering Act (PMLA) from fugitive businessmen Vijay Mallya, Nirav Modi and Mehul Choksi, and returned to banks.

Key highlight:

• India is extensively gripped under crime of money laundering. According to the government, the total proceeds of crime in PMLA cases pending before the top court is ₹67,000 crore.
• The number of PMLA cases investigated by the Enforcement Directorate (ED) has varied in five years, from 111 to 981 in 2015-16 and 2020-21, respectively.
• Very small number of cases are being taken up for investigation under the PMLA as compared to annual registration of the cases under the Money Laundering Act in the UK (7,900), the U.S. (1,532), China (4,691), Austria (1,036), Hong Kong (1,823), Belgium (1,862) and Russia (2,764).
• The Solicitor General said "corruption in high offices is a major facilitator of money laundering". This is especially true in the developing world. Corruption is an "insidious player which undermines democracy. Money laundering, in turn, fuels organised crime and terrorism.
• The Solicitor General quoted a United Nations report which said the proceeds of crime being laundered amount to $2.1 trillion, which accounts for 3.67% of the global GDP.
• Three "supra-national or transnational" crimes which have brought together the global community are narcotics, money laundering and terrorism.

Consequences of Money Laundering:

• Economic Distortions: Money laundering impairs the development of the legitimate private sector through the supply of products priced below production cost, making it therefore difficult for legitimate activities to compete. Criminals may also turn enterprises which were initially productive into sterile ones to launder their funds leading ultimately to a decrease in the overall productivity of the economy. Furthermore, the laundering of money can also cause unpredictable changes in money demand as well as great volatility in international capital flows and exchange rates.
• Erosion of Financial Sector: While the financial sector is an essential constituent in the financing of the legitimate economy, it can be a low-cost vehicle for criminals wishing to launder their funds. Consequently, the flows of large sums of laundered funds poured in or out of financial institutions might undermine the stability of financial markets. In addition, money laundering may damage the reputation of financial institutions involved in the scheming resulting to a loss in trust and goodwill with stakeholders. In worst case scenarios, money laundering may also result in bank failures and financial crises.
• Reduction in Government Revenue: Money laundering also reduces tax revenue as it becomes difficult for the government to collect revenue from related transactions which frequently take place in the underground economy.
• Socioeconomic Costs: The socio-economic effects of money laundering are various because as dirty money generated from criminal activities are laundered into legitimate funds; they are used to expand existing criminal operations and finance new ones. Further to that money laundering may lead to the transfer of economic power from the market, the government and the citizens to criminals, abetting therefore crimes and corruption.
• International Consequences and Foreign Investment: Any developing country with a reputation as a haven for money laundering or terrorist financing could have significant negative consequences for development. Foreign financial institutions can limit their transactions with institutions from money laundering heavens, stop their investments, make transactions more expensive, and be subject to extra scrutiny.

Way forward:

• Money laundering and terrorism financing pose a serious threat to our financial as well as the sovereignty of any country. The increasing significance of international co-operation and cross-border dependence has given powers to international organisations to suggest measures and practically apply them for the causes of money laundering and other illicit manifestations of it.
• Some steadfast progress has certainly been made, notably in the countries that have introduced anti-money laundering measures, but the problem yet remains to be fully resolved.
• Often a laundering deal will involve more than one offshore centre. In this regard, the non-cooperative countries12 and jurisdictions, i.e. those that explicitly refuse to co-operate with the FATF, continues to be a cause of major concern.
• However, the real challenge of money laundering is more than something which is country specific. It also involves the professional service providers – accountants, lawyers and similar professionals – who operate not only in non-cooperative jurisdiction, but also in some FATF countries. Such service providers set up and manage entities with corporate status, thereby giving the apparatus of money laundering considerable sophistication and a gloss of respectability.
• The solution therefore pragmatically rests more in the actual implementation of the policy-making by the Governments and international organizations, and therefore can be resolved effectively through efficient monitoring and inherent discipline by the administrative authorities and decision makers.

Source: The Hindu  

Mains Question:

Q. “The social and economic consequences of money laundering are wide-reaching from a nation to global.” Critically Examine.