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Financial Statements, Cash Flow, and Taxes

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Money Laundering refers to the conversion or 'Laundering' of money which is illegally obtained, so as to make it appear to originate from a legitimate source. Money Laundering is being employed by launderers worldwide to conceal criminal activity associated with it such as drug / arms trafficking, terrorism and extortion. As per an estimate of the International Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product.

There are three independent steps or stages in Money Laundering as shown below:

1. Placement: 'Placement' refers to the physical disposal of bulk cash proceeds derived from illegal activity.

2. Layering: 'Layering' refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail and provides anonymity.

3. Integration: 'Integration' refers to the reinjection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.

Banks and financial institutions are vulnerable from the Money Laundering point of view since criminal proceeds can enter banks in the form of large cash deposits. Bank officials therefore need to exercise constant vigilance in opening of accounts with large cash deposits and in checking suspicious transactions.

Objectives of Money Laundering and Rules for Bankers :

The major objectives of Money Laundering activities are:

  • Concealing the true ownership of illegally-obtained money and
  • Placement, layering and integration of such funds

Two cardinal rules that are to be invariably observed by bank officials for steering clear of the Money Laundering Trap, are:

1. Know your customer (KYC) and,

2. Know your employee

Money Laundering can be traced back to the Hawala Mechanism, which facilitated the conversion of money from black into white. 'Hawala' is an Arabic word meaning the transfer of money or information between two persons using a third person. The system dates to the Arabic traders as a means of avoiding robbery. It predates western banking by several centuries.

The Hawala Mechanism left virtually no paper trail, which would attract investigations. The profits generated from Hawala were surreptitiously invested in real estate, gilt edged securities etc., to launder them.

Crime & Money Laundering :

Across the world, banks have become a major target of Money Laundering operations and financial crime because they provide a variety of services and instruments that can be used to conceal the source of money.

Money Laundering has a close nexus with organized crime. Money Launderers amass enormous profits through drug trafficking, international frauds, arms dealing etc. Cash transactions are predominantly used for Money Laundering as they facilitate the concealment of the true ownership and origin of money. Criminal activities such as drug trafficking acquire an air of anonymity through cash transactions.

With their polished, articulate and disarming behavior, Money Launderers attempt to make bankers lower their guard so as to achieve their objective.

Implications of Money laundering for banks:

What are the implications of Money Laundering for banks? Launderers employ currency deposits, fake businesses and cash being generated through legitimate businesses. Across the world, banks and financial institutions are liable for prosecution if their employees become involved in Money Laundering activities. At the same time, norms for record keeping, reporting, account opening and transaction monitoring are being introduced by central banks across the globe for checking the incidence of Money Laundering. Employees of banks are also being trained to recognize suspicious transactions. The dilemma of the banker in the context of Money Laundering is to sift the transactions representing legitimate business and banking activity from the irregular / suspicious transactions.

Money Laundering: The Indian Scenario

With increasing sophistication in the use of technology for transfer of funds and given the fact that there has been considerable liberalization and progressive dismantling of controls in the regulatory framework in India, banks in India need to be in a state of high alert so that they can steer clear of Money Laundering. It is important to remember that banks and financial institutions are both transmitters of money and regulators of the flow of money.

In India, we already have certain prudent banking practices which check the proliferation of Money Laundering activities in the country. Some of these practices are outlined below:

  • Identification of prospective clients is carried out prior to the opening of a bank account by obtaining proper introduction. This procedure partly addresses the requirement of KYC.
  • Criminal investigation is allowed in banking transactions in India. For example, the Income Tax Department can call for information relating to customers accounts and transactions. Erring accounts can be frozen. This addresses the Basle Principle on Compliance with legislation and law enforcement agencies.
  • Certain statues such as 'The Bankers Books Evidence Act, 1891' and the 'Banking Companies (Preservation of Records) Rules, 1985' require the making available / retention of records to investigating agencies, which addresses the Basle Principle on Record Keeping and Systems.


The Enforcement Directorate will register a case against Satyam Computer and its tainted founder-chairman B Ramalinga Raju for alleged money laundering.

The ED stepped into the multi-crore rupee fraud in Satyam after it claimed to have found prima facie evidence against Raju and others of violating the Prevention of Money Laundering Act.

The CBI will file the charge sheet against B Ramalinga Raju and others accused in the Satyam scam on April 9.

The ED sources alleged that Raju had diverted funds of Satyam into purchasing nearly 50 plots in Medchal and Qutbullahpur near Hyderabad.

The ED alleged that several hundred crore rupees had been diverted from the Satyam Computer accounts and had been invested in purchasing land and other infrastructure for Maytas.

The Directorate will go through deals of the IT company and ascertain their genuineness including payments made to acquire companies abroad.

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