The Role of Rbi in Prevention of Money Laundering

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  • Topic: Bank, Anti-money laundering, Bank Secrecy Act
  • Pages : 12 (3442 words )
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  • Published : February 26, 2013
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AUTHOR:R.BALAJI, M.Com,MBA,M.Phil, (Ph.D),

ABSTRACT

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. Several regulatory and governmental authorities cite figures for estimated amounts of Money laundered annually, either worldwide or within a national economy. International Monetary Fund’s estimated that the aggregate of money laundering in the world could be approximately 2-3% of world’s gross domestic product (GDP) or US$ 500 billion- 1.5 trillion. The trustworthiness of the banking and financial system depends heavily on legal, professional and ethical skeleton in which it works. As a result the International organizations and regulators started developing international standards and best practices to address to money laundering issues in a collaborative manner. Across the world, banks and financial institutions are required to initiate and execute systems to prevent anti-social elements from using banking channels for money laundering. Implementation of apt ‘Know Your Customer measures’ is a vital element of risk management in banks, in order to protect the confidence and the authenticity of banking systems. The role of RBI in India in containing this social and financial menace has been phenomenal. This paper has analysed the various facets of this newly emerging evil and also examined critically the various measures taken by RBI and Government of India in handling this evil with iron hand, finally suggesting the strategies and proactive measures to be adopted further to remove this money laundering in its root.

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.” ➢ In the past, the term “money laundering" was referred only to financial transactions related to organized crime. Today its definition is often expanded by Government regulators (such as the United States Office of the Comptroller of the Currency) to encompass any financial transaction, which generates an asset or a value as the result of an illegal act.

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 I Offshore tax havens
• Diversion of funds from a legitimate destination and use at another destination, etc.

Several regulatory and governmental authorities cite figures for estimated amounts of Money laundered annually, either worldwide or within a national economy. International Monetary Fund’s estimated that the aggregate of money laundering in the world could be approximately 2-3% of world’s gross domestic product (GDP) or US$ 500 billion- 1.5 trillion.

International consultant, KPMG has estimated that money-laundering flows into India are reported to be in excess of US$ 1 trillion every year by drug dealers, arms traffickers and other criminals.

According to Indian observers, fund transferred through the hawala/ alternative remittance system are equal to between 30 to 40% of the formal market. The...
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