The Hindu Business Line : On the tainted money trail

To launder is `to wash dirty clothes or linen and, often, iron them as well,' as Encarta defines. The word derives from Old French lavandier, which in turn is from Latin lavare `to wash'. Sadly, though, the first meaning of laundry has a financial connotation: that of making money appear legal.

The phrase `money laundering' only makes the money link explicit. "It is the criminal practice of filtering ill-gotten gains or dirty money through a series of transactions, so that the funds are cleaned to look like proceeds from legal activities," describes A Study on Anti Money Laundering and Insurance Sector, a new publication from the Institute of Chartered Accountants of India (www.icai.org).

Most crime is economic, that is, committed to make money, says the book. "When they make money from crime, criminals use it for one of three purposes: to invest in another crime, to hide to use later, or to spend." Meanwhile, the cop goes after the thief! "One of the most tried, tested, and successful methods of investigating crime is to follow the money."

Criminals know that the long arm of law is after them. So, they try to `move the money further and faster than investigators can follow it'. They put the money in `black hole', a.k.a. launderette! "Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party to or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering," reads Section 3 of the Prevention of Money Laundering Act, 2002.

There are three stages to the `cleaning up' work — placement, layering, and integration. Placement involves `depositing the unlawfully earned money into the financial system'. This is a tiring process for criminals, because of the need to sort money into bundles. "Where the requirements to report the amount of cash transactions above a certain threshold limit exist as per the national laws of a country, criminals resort to a practice called `smurfing', which refers to the process of using multiple cash deposits/accounts each below the designated threshold limit."

Layering is when the actual cleaning or `washing' takes place, to remove the taint. How? "Mixing of criminal proceeds with the legal money, transforming the medium of money, and concealing the beneficial ownership of funds," elaborates the book. "This stage involves the complex commercial transactions involving different channels offered by the financial sector, such as offshore financial centres, wire transfer facilities and so on." The final stage, namely, integration, brings the illegal funds into "formal sector economic activity without attracting the attention of the law enforcement and regulatory agencies."

A subject that deserves top attention.

Essential read for those in the insurance industry is a chapter on how the `cleaning' crime can impact the insurance sector in the advanced stages of layering and integration. The FATF (Financial Action Task Force) has identified nine types of money laundering instances typical to the industry. First is the use of single premium policies, where cash is collected at the beginning of the relationship. "These policies enable laundering of large sums by making substantial payments, which serve as wrapped investment policies," cautions the book. Early policy redemption, general insurance claim frauds, cash payments to purchase insurance, third part payment of premiums, and international transactions are among the other laundering typologies in the insurance sector.

The ICAI insists that the insurance industry should be receptive to recent developments and take appropriate steps `including technology support' to avert being used as a conduit for laundering.

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