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International Marketing

Notes 4.4 Money Laundering

The government, in the winter session of the Parliament in 2002, passed the Indian Money
Laundering Act. Money laundering is one of the serious worldwide menaces that are bothering
all countries. Anti-money laundering measures have been introduced in some countries to
stabilise their economy. If this menace goes unattended, there will be a parallel black money
economy resulting in high inflation and increase in poverty.
Although progress has been made, notably in the countries that have introduced any anti-
money laundering measures, the problem of money laundering has not been resolved, according
to a senior official of the Organisation of Economic Cooperation and Development (OECD), Ms
Patrick Moulette. Writing in the latest issue of the OECT Observer, the official journal of the
Paris-based inter-governmental think-tank of 29 rich industrial countries, Ms Moullete, a member
of the OECT’s Financial Action Task Force on money laundering (FATF), said that the facilities
used by the money launderers are changing all the time as they try to circumvent the preventive
measures put in place by various countries.
Citing an IMF study on scale of money laundering, she said that worldwide this could be
somewhere between 2 and 5% of the GDP. According to 1996 statistics, this translates into a
range of $590 billions to $1.5 trillions. It was in 1989 that a group of 7 industrial countries set up
the FATF, which coordinated the action on this score.

One of the first tasks of this body, which comprises 26 member countries, two international
organisations and three observers, was to spell out a spate of measures that the national
government should take to combat money laundering. The OECD Report assumes significance
in the Indian context where the Prevention of Money Laundering Bill (PMLB), supposed to be
passed along with the Foreign Exchange Management Act (FEMA) as “concurrent legislation” to
substitute the much dreaded Foreign Exchange Regulation Act (FERA), remained stuck in a
reference to a Selection Committee of Parliament. Despite all these developments, the OECD
official said that instead of introducing illegally obtained cash into the country’s financial system,
the launderers move it to other countries where no questions are asked about its origin.
Set-up involving offshore financial centres seems to have certain common features; a series of
financial transactions and a global network of all shell companies. She said that inability to
obtain information about the real owners of foreign entities with corporate status is one of the
chief hurdles to detection, investigation and prosecution of persons suspected of money
laundering.
Money laundering also entails professional service providers – accountants, lawyers and similar
professionals – who operate not only in offshore zones but also in some FATF countries. These
service providers set up and manage entities with corporate status thereby giving apparatus of
money laundering considerable sophistication of gloss of clout. Currently, only a few countries
require professional service providers to report suspicious transactions. With the ever widening
range of financial instruments on offer, other laundering possibilities are being opened up.
Ms Moulette said that derivatives and security markets seem particularly susceptible to recycling
of organised crime proceeds because the audit trail is so easily blurred. A broker could easily
launder a sum of money through a perfectly legal transaction with no need even to make a false
entry. All that is necessary is to assign genuine trading losses to the account in which the illegal
funds will be deposited. For instance, she said, “It is absolutely legal for a dealer in the financial
future market to hold two contracts for subsequent offset”.

By assigning trading gains and losses to two different accounts, one “regular” and the other to
receive the laundered funds, the dealer could put through a laundering operation on the loss
account without breaking the law. Insurance, notably life, property and long-term capitalisation

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