Money Laundering: Problem and Prevention

Last Updated : 28 Mar, 2022

Money laundering usually refers to making money via illegal sources and presenting it as legit money. However, money is not limited to making illegal money every person who tries to steal taxes by hiding his actual wealth is also called a money launderer. Under the IRS tax code tax evasion is considered a criminal offence and the accused is subject to criminal charges. These tax evaders and money launderers usually invest their undeclared money in the stock market, cryptocurrencies, Antiques, and Paintings. Keeping disproportionate assets, declaring a false income, all come under money laundering. With time many billionaires are investing their money in the name of any bogus institution thus legalizing their undeclared money and evading tax. Apart from this, there are many other tricks that money launderers adopt for tax evasion that you’ll come to know below in this article.

Money Laundering and Tax Evasion:

Money laundering mainly involves drug trafficking, smuggling of precious metals, extortion, etc. Money launderers usually pass these illegal funds through various genuine financial systems and make them legal. It is mainly practised by tax evaders as they don’t need to pay any taxes on the laundered money. Tax evasion is a criminal offence and the FATF (Financial Action Task Force) treats this offence as money laundering. In India, there is a fine of INR 5,000 on tax evaders and in some critical circumstances, it can even lead to imprisonment. Tax evasion tricks like owing unclaimed property, not declaring genuine income and assets all come under money laundering.

Tax Evasion vs. Tax Avoidance:

Tax evasion is sometimes mistaken as tax avoidance but these both are different aspects. Tax avoidance can be better understood as using legal methods to reduce payable tax but on the other hand tax evasion means hiding your money in several ways and not paying tax. According to recent reports and leaks many Indian and international billionaires have put their billions of money in the Swiss bank to avoid taxes. Recent government data shows that more than Rs. 75,000 crores of tax are being evaded in India every year. Tax evasion acts as a major barrier in the development of any nation as the amount received via taxes is used by governments in the growth and development of a nation. Confidentiality allows tax evasion and thus European union proposed many laws to bring transparency in taxation observed a significant drop in money laundering cases. According to government data, only 82.7 million people in India pay tax which is 6.25% per cent of the total Indian population.

Tax Evasion and Corruption:

Money laundering via tax evasion is the biggest threat to any nation as it allows rich people of nations to use their undeclared money to bribe government officials. The Panama paper leaks showed how these powerful people use their black money for bribing and corruption. Thus, in 1996 OECD (Organization for Economic cooperation and development) came into the fight with money laundering. More than 38 countries are members of this organization, even though India is not a member country of the OECD still it’s been helping India since 1965 against money laundering. Another aspect of money laundering is bank fraud in recent times it’s been seen that many millionaires took money from banks in the form of loans and flew away. In India only, more than Rs 50,000 crore of banks has been laundered in 2 years.

Recent reports show India observes more than Rs 15,000 crores of money laundering cases in India every year.

Security Measures adopted by the Government of India to Tackle Money Laundering:

Tax evaders usually store their undeclared money in cash and thus in 2016, the Government of India announced a demonetization to bring out all that black money held by the tax evaders and money launderers. This government initiative proved to be successful as it not only bought back the laundered money but also demolished the fake currency.
A higher tax rate is one of the primary causes for tax evasion and thus the government of India provided relaxation in income tax rates. Also, at the time of the COVID 19 pandemic, the government extended the period for filing taxes so that taxpayers can easily pay their taxes thus reducing tax evasion.
There is a need for a strict law to prevent money laundering and thus in 2002 Indian Government came up with the PMLA (Prevention of Money Laundering Act), 2002. This amendment was aimed to form such a legal framework so that one money launderer could escape from it. Any individual that indulges in tax evasion or money laundering by holding an illegal property or stealing taxes etc. is treated under this act.
The implementation of GST (Goods and Service Tax) was a game-changing step to tackle money laundering and tax evasion. Before the implementation of GST, there were several taxes that a consumer need to pay on every product but that were not paid back by the seller to the government. But after the implementation of GST, this kind of tax evasion is not possible as there is only one tax.
Under the Digital India scheme of the Government of India, all the sellers and consumers are encouraged to switch towards digital payment thus bringing in transparency in taxation and reducing tax evasion. Unlike cash transactions, digital transactions compel sellers and consumers to pay taxes on every product they buy or sell.

India has observed a significant reduction in money laundering cases after the formation of ED

Security Measures adopted at the International Level to Tackle Money Laundering:

At a global level, many nations came together to sign the Vienna convention under which all the signatory nations are obliged to take strict action against money launderers who are making money with drug trafficking.
As the stocks and security market are the favourite place for money launderers to invest their money. Thus to deal with it IOSCO (International organization of Securities commissions) was formed. This organization complies with its member nations to adopt necessary security measures to tackle money laundering in futures and securities.
The formation of the 1990 council of Europe convention was a major step taken forward against laundering. The main purpose of this council was to provide cooperation to other nations in search of money launderers.
Money laundering was curbed to a great extent when FATF got into the game. The Financial Action Task Force (FATF) was set up by the member nations of G-7 countries at the Economic summit of 1989. After the Panama and pandora paper leaks, this organization is looking after all the suspects of having undeclared property overseas. In past years many people have been arrested by FATF under money laundering.
IMF (International Monetary Fund) also keeps an eye on these launderers and tax evaders and takes care that these money launderers shouldn’t finance terrorist organizations and drug traffickers.

Many steps are being taken at the national and international levels to stop money laundering, but at the same time, it is also necessary to play the role of a common citizen and report if you find anyone engaged in money laundering.