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Financial Institutions and Technology in Preventing Money Laundering

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Money Laundering

The purpose of a vast majority of illegal acts is to make money for the person or group who commits the crime. The processing of criminal funds to conceal their illegal origin is known as money laundering. This procedure is crucial since it allows the criminal to earn without jeopardising their source of income.

Illegal arms sales, smuggling, and organised crime activities, such as drug trafficking and prostitution rings, all have the potential to earn large sums of money. Large profits can be made through embezzlement, insider trading, bribery, and computer fraud schemes, all of which create an incentive to "legitimise" the ill-gotten earnings by laundering money.

When an illegal operation generates significant earnings, the person or group involved must find a way to keep control of the funds without drawing attention to the underlying action or the individuals involved. Criminals conceal the sources of cash, change the form, or move the funds to a location where they are less likely to attract attention.

In response to growing concern about money laundering, the G-7 Summit in Paris in 1989 established the Financial Action Task Force on Money Laundering (FATF) to build a coordinated international response. One of the FATF's initial objectives was to draught 40 Recommendations outlining the steps that national governments should follow to build effective anti-money laundering programmes.

How much money is laundered each year?

Money laundering is, by definition, an illegal criminal activity that occurs outside of the usual range of economic and financial data. Rough estimates of the extent of the problem, as well as certain other features of subterranean economic activity, have been proposed.

The United Nations Office on Drugs and Crime (UNODC) performed a research to assess the size of illicit revenues generated by drug trafficking and organised crime, as well as to establish how much of that money gets laundered. According to the research, illegal proceeds accounted for 3.6 percent of global GDP in 2009, with 2.7 percent (or USD 1.6 trillion) laundered.

This is consistent with the International Monetary Fund's widely referenced estimate from 1998 that global money laundering might account for two to five percent of global GDP. These percentages, based on 1998 data, show that money laundering totalled between USD 590 billion and USD 1.5 trillion. The lower figure was about similar to the total output of an economy the size of Spain at the time.

The above projections, however, should be viewed with caution. They're meant to give a rough idea of how much money is laundered. Because of the illicit nature of the transactions, detailed figures are unavailable, making a definitive estimate of the amount of money laundered globally each year difficult. As a result, the FATF does not provide any figures in this area.

What is the process of money laundering?

The launderer introduces his illegal riches into the financial system during the initial - or placement - stage of money laundering. This can be accomplished by dividing large sums of cash into smaller, less visible sums that are then placed directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are subsequently collected and transferred into accounts at a different location.

The second – or layering – stage begins after the money has entered the financial system. The launderer engages in a series of conversions or movements of the cash to separate them from their source at this phase. The money may be channelled through the purchase and sale of investment items, or it could simply be sent through a succession of accounts at different banks across the world. Laundering through widely dispersed accounts is especially common in nations that refuse to cooperate with anti-money laundering investigations.

After successfully processing his unlawful income through the first two stages, the launderer proceeds to the third stage, integration, where the money is re-integrated into the legitimate economy. The money could be invested in real estate, luxury possessions, or commercial initiatives by the money launderer.

What role does money laundering play in the development of a country's economy?

Launderers are always seeking new ways to get their money out of the country. As established financial centre countries build robust anti-money laundering regimes, economies with rising or developing financial centres but insufficient controls are particularly vulnerable.

Launderers will take advantage of differences in national anti-money laundering systems, moving their networks to nations and financial systems with weak or inefficient remedies.

Some believe that developing economies cannot afford to be overly picky about the finance sources they seek. However, delaying action is risky. The longer it goes unchecked, the more entrenched organised crime becomes.

When a country's commercial and financial sectors are thought to be under the control and influence of organised crime, it has a dampening effect on foreign direct investment, similar to when an individual financial institution's integrity is harmed. Combating money laundering and terrorist financing is thus an element of fostering a business-friendly environment, which is a prerequisite for long-term economic growth.

Role of Banks and Financial Institutions in Preventing Money Laundering

The Reserve Bank of India has published a number of circulars outlining how banks in India should operate. Other regulators, such as SEBI and IRDA, have issued similar rules in response to this development. KYC, according to the Reserve Bank of India, is an important part of identifying an individual or company opening an account.

The framework's two goals are as follows:

  • Ensure proper consumer identification;

  • Keep an eye on questionable transactions.

Existing consumers should also be subjected to KYC procedures, and the importance of due diligence cannot be overstated. The IBA organised a working group to develop guidelines for banks in India to tighten KYC standards with anti-money laundering in mind. Formats for customer profile account opening procedures were also recommended. In terms of anti-money laundering, banks should concentrate on customer segmentation based on riskiness. According to this strategy, salaried class and those who have a limited number of financial transactions each month are low-risk clients as compared to commercial customers. Customers of little income, on the other hand, are more vulnerable.

Banks must monitor cash withdrawals or deposits of more than 10 lakh rupees in deposit, cash credit, or overdraft accounts when it comes to cash transactions monitoring. Furthermore, they should retain separate registers for details about major cash transactions.

For transactions above 50000 rupees, a PAN is now required equally. Bank branches are required to report cash deposits and withdrawals of more than 10 lakh rupees, as well as questionable activity, to the controlling office in fortnightly statements. The controlling office then submits a monthly report to the FIU. Furthermore, as part of their risk management system, banks should have an effective internal control system/audit and inspection mechanism in place, as well as follow the Foreign Contribution Regulation Act.

Banks must select an exclusive principal officer to ensure compliance with KYC regulations and take on the task of staff training.

Money laundering and terrorist financing must be combated by the banking industry on a proactive basis. They must be able to tell the difference between legitimate and questionable transactions. If the banks lack procedures and systems for customer identification or record keeping, they are in grave danger (adverse publicity). If there is a lapse, the regulator has the authority to levy penalties on banks, which can harm their reputation. As a result, banks are faced with a delicate duty that must be handled with caution.

Banks and financial organisations are responsible for detecting suspicious transactions. Now that e-banking services are more widely available, there is almost no conduct that is not suspect.

The FIU has defined a suspicious transaction as a transaction to someone, whether or not in cash, that gives rise to a reasonable suspicion that it may involve proceeds of crime, or appears to be made in circumstances of unjustified and unusual complexity, or appears to have no economic rationale or bona fide purpose.

The role of banks and financial institutions in combating money laundering is critical, and much is dependent on board-level policies, KYC/AML policies, extensive anti-money laundering manuals, internal control procedures, ongoing monitoring, and staff training. Banks must identify customers and monitor their accounts using due diligence procedures, as well as retain records and report questionable activity. It has the potential to aid in the prevention of money laundering.

Role of Technology in Money Laundering Prevention

Technology has a huge role to play in combating financial crime all over the world. In this process, cutting-edge technologies such as AI, machine learning, and data analytics have played a crucial role.

Various financial institutions have adopted anti-money laundering detection tools and implemented enterprise-wide procedural programmes to detect instances of money laundering. However, to solve the flaws in first-generation solutions, this must be taken to the next level.

AML technologies are also available in a second generation. It has the potential to track every transaction, identify various forms of anomalous behaviour, and alert officials to acts that could jeopardise the financial system. These clever business systems are capable of deciphering new money laundering strategies. They can examine a client's profile as well as the transactions they conduct. It aids the financial institution in more effectively preventing money laundering schemes.

The importance of an anti-money laundering solution is determined by its capacity to identify persons or organisations involved in suspicious financial activities. It should also be able to track every transaction, identify different forms of anomalous behaviour, and identify transactions that are potentially dangerous.


Money laundering has been combated in various ways by various countries. However, we must recognise that the role of financial institutions and technology is crucial in identifying and responding to threats early on. India has used technology to address this threat, but there are still some untapped opportunities for technology to reduce money laundering cases. As a result, there is a pressing need to accelerate the adoption of modern technologies in financial institutions.

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This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.


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Dheeraj Budhori, an Internet Researcher & SEO, started his Optimizer journey in 2019. His top executive is his passion for search engine analysis & interest in understanding User psychology

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