Author : Shruti S Jha, BBA LLB from Chandigarh University
ABSTRACT
Financial crimes encompasses broad range of illegal activities like money laundering, fraud, insider trading, tax evasion, embezzlement, corruption etc. which creates havoc to the financial system by destabilizing markets. This further facilitates other illicit acts of organised crimes, terrorism, drug trafficking, human trafficking and many more. Rapid evolution in technology has increased such crimes and possess the threat of collapsing entire backbone of economy. Thus, this Article gives comprehensive overview over Money laundering by exploring Regulatory landscape designed to combat it through AML (Anti Money Laundering) Regulations.
EVOLUTION
The practice of criminals owning illegal business and mixing their earnings to legitimate business just to obscure illicit nature of funds has been age old. With the rise in organised world order and technological advancement, this assimilation of money became more complex leading to the origin of a new group of crime called money laundering.
In 1930’s US Prohibition Era where Alcohol smuggling industry was at rise, AML laws were formulated. Execution of Al Capone (American gangster) for tax evasion proved to be bringing new chapter to AML efforts by enforcement agencies and “Money laundering” as a term originated.
1980’s Drug War, a campaign led by US, turned global attention towards illicit incomes from organised crimes like drug trafficking.
2001, 9/11 attack shook entire world adding new chapter to combat money laundering and legislations were passed for same. The G-7 expanded FATF mandate to counter ML along with terror financing.
2010 and later years saw surge of digital assets and introduction of cryptocurrencies, net banking, cross border payments, all these technological advancement has added new layers to AML regulation.
Money Laundering
Money laundering literal meaning refers to “cleaning the dirty money” procured from illegal sources which is often associated with crimes like trafficking, illegal gambling, corruption etc. It is obscuring the origin of illicit funds typically by means of assimilating it to legitimate source of business. Methods of money laundering include acts like smurfing, bulk cash, smuggling, shell company, round tripping, tax amenities, currency exchanges, double invoicing, and trade-based laundering.
There are 3 stages of money laundering : Placement ( i.e. placing funds away from original source and to integrate it to financial system) ; Layering ( creating complex trails of financial transactions in order to hide the source of funds) ; Integration / Extraction (i.e. cleaning or integrating of funds back into formal financial system as earned from legitimate business) .
AML Regulations
Anti money laundering regulations are a set of laws to counter money laundering and other illicit activities attached to it. They are designed for prevention, detection and reporting of illegal funds into the financial system, ensuring that financial institutions are not complicit in criminal activities.
Key AML Regulations Globally :
- Vienna Convention (1988) : UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (commonly known as the Vienna Convention). It is the first international legal instrument to recognize money laundering as a major issue tied to organized crime and drug trafficking. It laid the foundation for later agreements and frameworks, like the Palermo Convention and the Financial Action Task Force (FATF) recommendations.
- UNTOC (2000) : UN Convention against Transnational Organised Crime ( also referred as Palermo Convention) , an international treaty to address organised crime that crosses national border like drug- human trafficking, arms smuggling, money laundering etc. Article 6,7,12,13,14 contains provisions to combat money laundering particularly.
- UNCAC (2003) : UN Convention against Corruption provides global framework that supports and complements AML efforts and are closely linked because corruption often generates significant illicit proceeds, which are then laundered to conceal their origins. Article 23 requires signatories to establish money laundering as a criminal offense.
- Financial Action Task Force (FATF) : It is an intergovernmental organization est. in 1989 to develop and promote international standards to combat money laundering. “FATF 40 Recommendations” which is a comprehensive framework for AML( anti money laundering) / CTF (counter terror financing) measures globally.
- International Monetary Fund (IMF) : Contribute to AML regulations by maintaining financial stability of global monetary system.
- APG (Asia/Pacific group on Money Laundering)
National efforts on AML Regulations :
- Bank Secrecy Act (BSA) (1970), MLCA (1986), Patriot Act (2001), Office of Foreign Assets Control Act in US
- European Union’s Fourth Anti – Money Laundering Directives
- POCA (Proceeds of Crime Act), 2002 to prevent financial crime in UK
- PMLA (Prevention of Money laundering Act), 2002 and amendments of 2005,2013 along with Rules ; FIU -IND (Financial Intelligence Unit),UAPA 1967 & ammend. 2019, guidelines by RBI, SEBI, IRDAI in India.
AML Measures In India
AML evolution has established a very comprehensive legal and regulatory framework to combat money laundering and terror financing in India.
Pre -2002 phase :
- There was no specific law for AML and financial crimes like tax evasion, corruption, black money had been a major concern for decades.
- Prevention of Corruption Act, 1988 : indirectly addressed illicit acquisition of wealth which could be laundered later.
- FEMA (Foreign Exchange Management Act),1999 : FEMA had basic control over border movement of money.
Est. of AML framework (2002-2005) :
Major turning point in evolution of India’s AML regulation to fulfill its commitment to global fight against money laundering, and its increasing engagement with FATF & APG.
- PMLA (2002) : Full-fledged law was enacted, which criminalised money laundering and laid groundwork for punishing offenders of crime.
- Act provides establishment of ED (Enforcement Directorate) as primary agency for investigating and enforcing PMLA.
- FIU-IND (Financial Intelligence Unit): set up in 2004 by the Ministry of Finance as a central agency for receiving, analysing and disseminating financial information.
Strengthening legal framework (2005-2010) :
- FATF Compliance : India sought to align on domestic and international standards especially “40 FATF Recommendations” on AML/CTF.
- Became active member of APG (Asian/Pacific Group on money laundering) to strengthen AML measures.
- PMLA (Ammend.) Act,2005 : widened the definition of money laundering and included reporting obligations of financial institutions.
- KYC Norms : RBI and other financial regulators began implementing stringent KYC norms making it mandatory for financial institutions.
- Financial institutions, banks made internal regulations and policies to comply with AML regulations.
Implementation of International Standards (2010-2015) :
With increase in global scrutiny of money laundering and terror financing, India refined its AML framework to meet international standards.
- FATF Mutual Evolution (2010) : Reviewed country’s compliance with international AML/CTF standards .
- 2013 PMLA (ammend.) : Addressed various concern, expanded scope of terror financing, increasing penalties & punishments, empowered authorities to attach asset, mandate reporting of cross border transaction & monitoring non-financial businesses like real estate, jewellery business etc.
- RBI guidelines on AML : KYC compliance, CDD, reporting suspicious transactions to FIU-IND.
Technological Advancement & AML (2015 onwards) :
With technology advancement, role of technology in combating money laundering increased. Growing digital assets like cryptocurrencies, digital bank, cross border payment created a new set of challenges.
- PMLA (Ammend.) 2017 : attachment & seizure of properties in money laundering cases even before final conviction, confiscating assets in case of suspected terrorism, power of ED strengthened to take preventive actions.
- FIU-IND prominence to assist law enforcement & combat money laundering and terror financing.
- FATF compliance and Global pressure increased for AML/CFT measures.
- International cooperation between nations enhanced though UN, Interpol, FATF to track cross border activities.
Recent Developments and Updates
- Aadhaar-based KYC: The use of Aadhaar (India’s biometric identification system) has streamlined KYC procedures. Financial institutions can verify customer identity online, which has increased transparency and compliance with AML laws.
- Increased Scrutiny of Virtual Assets: With the rise of cryptocurrencies, the Indian government has been paying close attention to the AML risks posed by digital assets. The RBI and Securities and Exchange Board of India (SEBI) have been taking steps to regulate crypto exchanges and digital asset services to prevent misuse for money laundering or terrorist financing.
- AI based system to enhance surveillance over such financial crimes.
- Crypto regulation by RBI and other regulatory agencies.
- e-Governance like GST, e-KYC ensures transparency.
CONCLUSION
AML regulation has evolved from US Secrecy Act to FATF mandates into more structured and comprehensive legal framework to combat financial crimes globally. With increase in global scrutiny,India has also strengthened its regulatory norms. However, challenges still remain as financial landscape continues to evolve with innovations like cryptocurrency and blockchain technology, and so as AML regulations will likely continue to adapt. Regulators are now increasingly focused on emerging risks, such as digital assets, decentralized finance (DeFi), and non-fungible tokens (NFTs), as these could potentially be used to obscure illicit financial flows. Thus, a dynamic, multi-faceted approach is needed along with global cooperation to detect and disrupt criminal networks, including those linked to terrorism financing, corruption, drug trafficking, and cybercrimes.
FAQs :
- What is AML ?
Anti-Money Laundering (AML) refers to the set of laws, regulations, and procedures designed to combat money laundering i.e. uncover illicit funds disguised as legitimate one.
2. What does KYC refers to ?
KYC i.e. Know your Customer, refers to the process of verifying the identity of clients to ensure that financial institutions are not dealing with criminals, money launderers, or terrorists. KYC involves collecting and verifying information such as government-issued IDs and proof of address.
3.What does Customer Due Diligence (CDD) means?
CDD involves assessing the risk posed by a customer, including their background, the nature of their transactions, and whether they are politically exposed persons (PEPs). These procedures are critical in preventing financial institutions from being exploited for money laundering, as they help identify suspicious patterns and reduce the risk of dealing with illicit activities.
4. What are the challenges in enforcing AML regulations globally?
Despite global cooperation, several challenges remain:
- Regulatory arbitrage, where criminals exploit differences in AML laws across jurisdictions.
- Lack of resources or political will in some countries to enforce AML regulations.
- Technological gaps, where some financial institutions or countries are slow to adopt modern AML tools.
- New financial technologies, such as DeFi and cryptocurrencies, create difficulties in tracking and monitoring illicit transactions.
- Data privacy concerns, as AML regulations require financial institutions to share large amounts of customer information, which can conflict with privacy laws in some jurisdictions.
5.What does SAR mean in Anti-Money Laundering?
Suspicious Activity Report (SAR) is a key tool used by financial institutions and regulated entities in the fight against money laundering and terrorist financing. SARs are used to report potentially suspicious transactions or activities that may indicate money laundering, fraud, terrorist financing, or other financial crimes. These reports are essential for enabling law enforcement agencies to detect and investigate financial crimes.
