• Money laundering is concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources. It is frequently a component of other, much more serious, crimes such as drug trafficking, robbery or extortion.
  • According to the IMF, global Money Laundering is estimated between 2 to 5% of World GDP.



  • Illegal arms sales, smuggling, and other organized crime, including drug trafficking and prostitution rings, can generate huge amounts of money. Corruption, embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits.
  • The money generated from such illicit activities is considered dirty and needs to be laundered to make it look ‘clean’. The criminals need a way to deposit the money in financial institutions. Yet they can do so if the money appears to come from legitimate sources.
  • By successfully laundering the proceeds, the proceeds can be made to appear ‘clean’ and the illicit gains may be enjoyed without fear of being confiscated or being penalized.



It involves three steps: placement, layering and integration.

  • Placementputs the “dirty money” into the legitimate financial system.
  • Layeringconceals the source of the money through a series of transactions and bookkeeping tricks.
  • In the case of integration,the now-laundered money is withdrawn from the legitimate account to be used for criminal activities.



  • Money Laundering can take several forms, some of them are:
  • Structuring is also called as Smurfing
  • Bulk Cash Smuggling
  • Cash intensive Businesses
  • Trade based Laundering
  • Shell companies
  • Round tripping
  • Gambling
  • Black salaries
  • Tax amnesties
  • Transaction laundering







  • Structuring Deposits: This is a method of placement whereby cash is broken into smaller deposits of money which is then exchanged by many individuals (known as “smurfs”) to avoid anti-money laundering reporting requirements. This is also known as smurfing because many individuals (the “smurfs”) are involved.
  • Shell companies: These are companies without active business operations. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
  • Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.
  • Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.
  • Credit Cards : Clearing credit and charge card balances at the counters of different banks. Such cards have a number of uses and can be used across international borders. For example, to purchase assets, for payment of services or goods received or in a global network of cash-dispensing machines



  • The word “Hawala” means trust. Hawala is a system of transferring money and property in a parallel arrangement avoiding the traditional banking system. It is a simple way of money laundering and is banned in India.

A) How it works?

  • Hawala is the informal means of transferring money across the globe.
  • Transfer is done from one country to another country secretly.
  • In hawala system, money is transferred via a network of hawala brokers.
  • Hawala is also known as hundimeans transfer or remittance.
  • Hawala system is mainly done by politicians.
  • It’s not the politicians who get into this work physically. It’s the hawala agents called Hawaladarsor Hawala brokers who directly involve in this system.



B) Few of whom even meet face to face

  • Hawala is an alternative remittance channel that exists outside of traditional banking systems.
  • Transactions between hawala brokers are made without promissory notes because the system is heavily based on trust and the balancing of hawala brokers’ books.
  • The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers.
  • The transaction takes place entirely on the honour system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.
  • Trust and extensive use of connections are the components that distinguish it from other remittance systems.
  • Settlements of debts between hawala brokers will be in variety of forms such as cash, properties, goods, services, etc and need not take the form of direct cash transactions.
  • In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates.
  • Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts.
  • These hawala agents will have separate account.
  • Generally, the funds enter the system in the source country’s currency and leave the system in the recipient country’s currency.
  • It operates almost exclusively in South and West Asia and it is cheaper than the formal remittance services.

C) Status of Hawala in India

  • 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 which 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. Inspite of the fact that hawala transactions are illegal, people use this method because of the following reasons:
  • The commission rates for transferring money through hawala are quite low
  • No requirement of any id proof and disclosure of source of income
  • It has emerged as a reliable and efficient system of remittance
  • As there is no physical movement of cash, hawala operators provide better exchange rates as compared to the official exchange rates
  • It is a simple and hassle free process when compared to the extensive documentation being done by the banks
  • It is the only way to transfer unaccounted income

D) Cryptocurrency: The New Hawala

  • Cryptocurrency like Bitcoin provides absolute anonymity and facilitates terror financing which was evident in the 2015 Paris terrorist attack.
  • The Financial Action Task Force in Paris reported in 2015 that some terrorist websites encouraged sympathisers to donate in bitcoins.
  • After, demonetisation action by the Government of India in 2016, there was noticed a flood of such digital transactions.
  • This new Hawala has a potential to become an easy way to provide funds for terrorists and other illegal activities.
  • So, there is a need to have proper control over bitcoin in the interest of the economy and the security of the country.



  • Economic Impacts:
    • Undermines legitimacy of private sector
    • Undermines integrity of financial markets
    • Loss of control of economic policy
    • Economic distortion and instability
    • Loss of revenue
    • Security threats to privatisation efforts
    • Volatility in exchange rates and interest rates due to unanticipated transfers of funds
    • Rise of economic prices
    • Affects trade and international capital flows
  • Social Impacts:
    • Increased criminality
    • Decreases human development
    • Misallocation of resources
    • Affects trust of local citizens in their domestic financial institutions
    • Declines the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities
  • Political Impacts:
    • Initiates political distrust and instability
    • Criminalisation of politics



  • Criminal Law Amendment Ordinance (XXXVIII of 1944): It covers proceeds of only certain crimes such corruption, breach of trust and cheating and not all the crimes under the Indian Penal Code.
  • The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: It covers penalty of illegally acquired properties of smugglers and foreign exchange manipulators and for matters connected therewith and incidental thereto.
  • Narcotic Drugs and Psychotropic Substances Act, 1985: It provides for the penalty of property derived from, or used in illegal traffic in narcotic drugs.
  • Prevention of Money-Laundering Act, 2002 (PMLA)
  • It forms the core of the legal framework put in place by India to combat Money Laundering.
  • The provisions of this act are applicable to all financial institutions, banks(Including RBI), mutual funds, insurance companies, and their financial intermediaries.
  • PMLA (Amendment) Act, 2012
    • Adds the concept of ‘reporting entity’which would include a banking company, financial institution, intermediary etc.
    • PMLA, 2002 levied a fine up to Rs 5 lakh, but the amendment act has removed this upper limit.
    • It has provided for provisional attachment and confiscation of property of any person involved in such activities.
  • Financial Intelligence Unit-IND: It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.
  • Enforcement Directorate (ED):
    • It is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime in India.
    • One of the main functions of ED is to Investigate offences of money laundering under the provisions of Prevention of Money Laundering Act, 2002(PMLA).
    • It can take actions like confiscation of property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA, and to prosecute the persons involved in the offence of money laundering.
  • India is a full-fledged member of the FATF and follows the guidelines of the same.



  • The Vienna Convention: It creates an obligation for signatory states to criminalize the laundering of money from drug trafficking.
  • The 1990 Council of Europe Convention: It establishes a common criminal policy on Money Laundering.
  • G-10’s Basel Committee statement of principles: It issued a “statement of principles” with which the international banks of member states are expected to comply.
  • The International Organization of Securities Commissions (IOSCO): It encourages its members to take necessary steps to combat Money Laundering in securities and futures markets.
  • The Financial Action Task Force:
    • It has been set up by the governments of the G-7 countries at their 1989 Economic Summit, has representatives from
      • 24 OECD countries
      • Hong Kong
      • Singapore
      • The Gulf Cooperation Council
      • The European Commission
    • It monitores members’ progress in applying measures to counter Money Laundering.
    • The famous Forty Recommendations are given by FATF.
  • IMF: It has pressed its 189 member countries to comply with international standards to thwart terrorist financing.
  • The United Nations office on Drugs and Crime: It proactively tries to identify and stop Money Laundering.



  • The evolving threats of money laundering supported by the emerging technologies need to be addressed with the equally advanced Anti-Money Laundering mechanisms like big data and artificial intelligence. Both international and domestic stakeholders need to come together by strengthening data sharing mechanisms amongst them to effectively eliminate the problem of money laundering.


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