1.

Financial Crime

Financial crime means illegal acts committed by individuals or organizations to gain a

financial or professional advantage. The main motive is unlawful financial gain. These crimes
harm individuals, businesses, governments, and the economy.

1.1. Types of Financial Crime

 Fraud
o Deception to obtain money or assets.
o Examples: insurance fraud, investment fraud, credit card fraud, corporate fraud.

 Money Laundering
o Process of concealing the origin of illegally obtained money by passing it through
legitimate businesses or banks.

 Terrorist Financing
o Providing funds for terrorist activities, often using legitimate businesses as a cover.

 Bribery and Corruption

o Offering or receiving something of value to influence decisions or gain unfair advantage.

 Insider Trading & Market Abuse

o Using confidential company information to trade in stocks and securities for personal
benefit.

 Tax Evasion
o Illegal practices to avoid paying taxes (e.g., hiding income, false reporting).

 Identity Theft
o Stealing personal information to commit fraud (e.g., using someone’s identity to open
bank accounts).

 Cybercrime (Financial Fraud Online)

o Crimes using digital systems to steal money or data.
o Examples: phishing, hacking, ransomware, online banking fraud.
  Embezzlement
o Misappropriation of funds entrusted to someone’s care (e.g., an employee stealing
company money).

 Counterfeiting & Forgery

o Producing fake money, documents, credit cards, or securities to deceive others.

2. AML – Anti Money Laundering

2.1 What is Money Laundering?

Money Laundering is a highly sophisticated act to cover up or camouflage the identity/
origin of illegally obtained earnings so that they appear to have derived from lawful
sources. It is the process by which illegal funds and assets are converted into legitimate
funds and assets. In other words, it is the process used by criminals to wash their
“tainted” money to make it “clean.”

Money laundering generally refers to earnings or profits generated from:

• Movement of drug money/ drug trafficking
• Financial scandals
• Arms, antique, gold smuggling
• Corruption
• Prostitution rings
• Illegal sale of wild life products
• Avoidance of legitimate tax and false accounting practices
• Money transfer through a complex network of shell companies and trusts based in offshore
tax havens
• Diversion of funds from a legitimate destination and use at another destination, etc.

2.2 What is AML?

o Anti-Money Laundering (AML) refers to a set of laws, regulations, and procedures

designed to prevent criminals from disguising illegally obtained money as
legitimate income.
o It mainly targets money laundering and terrorist financing activities.

2.3 Key Objectives of AML

o Detect and report suspicious financial transactions.

o Prevent use of the financial system for illegal activities.
o Protect the integrity of financial institutions.
o Ensure compliance with global and local regulations (e.g., FATF, RBI, SEBI in India,
FinCEN in US).

2.4 Stages of Money Laundering (Focus of AML)

o Placement – Illegal funds enter the financial system (e.g., deposits, purchasing assets).
o Layering – Concealing the source of funds through complex transactions (e.g., multiple
transfers, shell companies).
 o Integration – Laundered money re-enters the economy appearing legitimate (e.g.,
investment, property purchase).

2.5 Money Laundering Example

o Placement Stage Examples: Illegally earned money is first introduced into the financial
system.
 A drug dealer deposits cash in small amounts across different bank branches (called
structuring or smurfing) to avoid detection.
 Criminals buy lottery tickets, casino chips, or prepaid gift cards with illicit cash.
 Purchasing high-value goods (e.g., gold, luxury cars, watches) using illegal money.

o 2. Layering Stage Examples: Criminals create complex financial transactions to hide the
origin of funds.
 Transferring money between multiple accounts in different countries (offshore
banking).
 Using shell companies or fake invoices to move money.
 Buying cryptocurrency with illegal money and then converting it back into fiat
currency.
 Over-invoicing or under-invoicing trade shipments (called trade-based money
laundering).

o 3. Integration Stage Examples: The money re-enters the economy looking legitimate.
 Investing laundered funds into real estate, hotels, or restaurants.
 Setting up a legitimate business (e.g., car wash, nightclub, or export company) to mix
illegal money with genuine revenue (“front businesses”).
 Criminals giving loans to their own companies and then repaying themselves.
 Using laundered money to buy shares, bonds, or mutual funds.

o Quick Real-Life Examples:

 Panama Papers Case (2016): Offshore shell companies used to hide wealth and
launder money.
 Danske Bank Scandal: Over €200 billion in suspicious transactions flowed through
its Estonian branch.
 Satyam Scam (India): Corporate fraud where money was layered through fake
invoices and investments

2.6 AML Measures / Controls

o KYC (Know Your Customer) – Verifying customer identity before opening accounts.
o CDD (Customer Due Diligence) – Ongoing monitoring of customer’s financial behavior.
o Enhanced Due Diligence (EDD) – Extra scrutiny for high-risk customers (e.g., PEPs –
Politically Exposed Persons).
o Transaction Monitoring – Automated systems to detect suspicious transactions.
o Suspicious Transaction Reports (STRs) – Reporting unusual activities to regulators.
 o Sanctions Screening – Ensuring customers are not on watchlists (OFAC, UN, EU, etc.).

2.7 Importance of AML

o Prevents crime and terrorism financing.

o Maintains trust in financial institutions.
o Avoids legal penalties and reputational damage for banks/companies.
o Protects the global financial system’s stability.

3. Economic & Social Consequences

3.1. Economic Consequences

 Market Distortion
o Dirty money flows into real estate, stock markets, or luxury assets, inflating
prices unnaturally.
o Example: Housing prices go up because criminals invest heavily in
property.
 Unfair Competition
o “Front businesses” backed by illegal funds can sell products/services at
lower prices, hurting legitimate businesses.
 Reduced Foreign Investment
o Countries with high money laundering risk are seen as unsafe → foreign
investors avoid them.
 Financial System Instability
o Sudden movements of illicit money can destabilize banks and capital
markets.
o Can lead to bank collapses if institutions are heavily exposed.
 Tax Revenue Loss
o Governments lose billions in taxes because laundered money often avoids
tax systems.
 Economic Inequality
o Criminals get richer while honest businesses/individuals struggle,
worsening income gaps.

3.2. Social Consequences

 Growth of Crime & Corruption

o Laundering strengthens organized crime (drug trafficking, smuggling,
terrorism).
o Encourages bribery of officials, weakening governance.
 Terrorism Financing
o Laundered funds are often used to finance terrorism, threatening national
security.
 Weak Institutions & Rule of Law
o Corruption erodes public trust in banks, courts, police, and governments.
 Reputation Damage
o A country known for weak AML controls is blacklisted (e.g., FATF grey
list/blacklist).
o This reduces global standing and trade opportunities.
  Social Inequality & Poverty
o Criminal groups capture resources meant for development → reduces
money for healthcare, education, and social welfare.
 Erosion of Public Trust
o Citizens lose faith in the fairness of financial and political systems.

4. Methods of Money Laundering

4.1. Banks & NBFC’s

 Structuring (Smurfing)
o Breaking up large sums of cash into multiple small deposits to avoid
reporting thresholds.
o Example: Instead of depositing ₹20 lakh at once, depositing ₹1.9 lakh 100
times.

 Wire Transfers
o Sending money across multiple accounts and countries to confuse the audit
trail.
o Often routed through “shell companies” or offshore banks.

 Trade Finance Abuse

o Over-invoicing or under-invoicing exports/imports, with payments routed
through banks.
o Used to transfer value disguised as legitimate business transactions.

 Loan & Credit Manipulation

o Criminals take loans using illicit money as collateral.
o After repayment, the loan proceeds appear “clean.”

 Shell Accounts & Dormant Accounts

o Opening accounts under fake names, businesses, or using stolen identities.
o Dormant accounts are reactivated and used to move illicit money
unnoticed.

 Intermingling Funds (Commingling)

o Mixing illegal money with legitimate business deposits.
o Common in restaurants, nightclubs, car washes — cash-heavy businesses
depositing daily into banks.
 Securities & Investment Products
o Using depository institutions to buy stocks, bonds, or mutual funds with
dirty money.
o Later selling them to integrate “clean” funds.

 Correspondent Banking
o Criminals use foreign banks with weaker AML controls to move funds.
o Money enters through smaller banks and is layered via correspondent
accounts.

 Currency Exchange & Depository Receipts

o Converting illegal money into foreign currency, traveller’s cheques, or
certificates of deposit.
o Later reintroduced as legitimate funds.

4.2. Non-Financial Businesses and Professions (NFBPs).

 Real Estate Transactions

o Buying property with illicit money and later selling it to integrate “clean”
funds.
o Overvaluing or undervaluing property to shift money.
o Using third parties or shell companies to hide the real owner.

 Casinos & Gambling

o Buying chips with dirty cash, playing minimally, then cashing out with a
check.
o Laundered funds appear as gambling winnings.
o Online gambling platforms also used for layering.

 Dealers in Precious Metals, Stones & Luxury Goods

o Purchasing gold, diamonds, artwork, luxury cars, or watches with illegal
funds.
o Later reselling them, making money appear legitimate.
o Small items with high value (e.g., diamonds) are easy to transport across
borders.

 Lawyers & Notaries

o Creating shell companies, trusts, or complex contracts to hide ownership.
o Managing client accounts or real estate deals to disguise illegal funds.
 o Claiming “attorney-client privilege” to avoid disclosing suspicious
activities.

 Accountants & Auditors

o Manipulating financial statements or invoices.
o Setting up offshore structures for clients to shift illicit wealth.
o Creating false loans or business expenses.

 Company Service Providers

o Forming shell companies, trusts, or foundations to conceal beneficial
ownership.
o Moving money through multiple layers of corporate entities in different
jurisdictions.

 Non-profit & Charitable Organizations

o Using charities as fronts to move illegal funds under the guise of donations.
o Diverting legitimate donations to terrorist financing or money laundering.

 Cross-Border Trade & Informal Businesses

o Using import/export companies to over-invoice or under-invoice goods
(trade-based laundering).
o Hawala or informal value transfer systems move money outside regulated
banking.

 Professional Intermediaries
o Consultants, brokers, or middlemen acting on behalf of criminals to
conduct transactions.
o They often hide the real identity of the beneficial owner.

5. Indian Laws & Regulations

1. Prevention of Money Laundering Act (PMLA), 2002

o Main AML law in India.
o Defines money laundering as a criminal offence.
o Establishes Enforcement Directorate (ED) as the main investigating
agency.
o Requires reporting entities (banks, NBFCs, intermediaries) to maintain
KYC and report Suspicious Transaction Reports (STRs).
Punishment in India (Prevention of Money Laundering Act, 2002 – PMLA)

 Imprisonment:
o Minimum 3 years, up to 7 years.
o In cases involving narcotics trafficking, punishment can extend to 10
years.
 Fine:
o No fixed limit → can go up to several lakhs or crores, depending on the
case.
 Attachment & Confiscation:
o Property, bank accounts, and assets linked to money laundering are
seized by the Enforcement Directorate (ED).
 Additional consequences:
o Blacklisting of businesses.
o Disqualification from company directorships.
o Reputation damage and civil liabilities.

2. The Benami Transactions (Prohibition) Act, 1988 (amended in 2016)

o Prevents holding property in someone else’s name to conceal illicit
wealth.

3. FEMA (Foreign Exchange Management Act), 1999

o Regulates cross-border movement of money to prevent laundering
through foreign exchange violations.

4. Companies Act, 2013

o Mandates disclosure of beneficial ownership in companies, to prevent
misuse of shell companies.

5. Black Money (Undisclosed Foreign Income and Assets) and Imposition of

Tax Act, 2015
o Targets unaccounted money held abroad by Indians.