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13 Mar 2026
GS Paper 3
Internal Security
Q. Analyze the methods of money laundering and explain the measures adopted by the Indian government to combat it. (Answer in 200 words)
Approach:
- Define and explain the concept of money laundering.
- Briefly describe the methods used in money laundering.
- Outline international and national measures taken to combat money laundering.
Introduction
Money laundering refers to the process of concealing the origins of illegally obtained money and making it appear as though it originates from legitimate sources. The main objective of money laundering is to evade legal consequences such as prosecution, conviction, and confiscation of criminal proceeds.
This process generally comprises three stages: Placement (introducing illicit funds into the financial system), Layering (disguising the money trail through complex transactions), and Integration (releasing the laundered funds back into the legal financial system). While most money laundering follows these stages, exceptions may occur.
Body
Methods of Money Laundering
- Changing the Form of Assets: Converting liquid cash into less traceable assets, such as gold, bullion, or real estate, to disguise the origin of funds.
- Smurfing: Breaking large sums of money into smaller transactions to evade regulatory scrutiny and reporting thresholds.
- Round Tripping: Moving illicit funds to foreign entities, especially in tax havens with weak anti-money laundering laws and then reintroducing them as foreign investment.
- Shell Companies: Establishing companies that exist only on paper to channel illicit funds without legitimate business operations, while masking the true owner.
- New-age Methods like Cryptocurrencies: Utilizing digital currencies that are largely unregulated and difficult to trace, providing a convenient means for laundering money.
Measures Taken by the Indian Government
- Prevention of Money-Laundering Act (PMLA), 2002: This act criminalizes money laundering in India and establishes a framework for detection, investigation, and prosecution of offenders.
- Financial Intelligence Unit-India (FIU-IND): A central agency responsible for analyzing suspicious financial transactions and providing intelligence to enforcement agencies.
- National Investigation Agency (NIA): Empowered under the 2019 amendment to investigate cases of money laundering connected to terrorism financing.
- Foreign Contributions Regulation Act (FCRA): Prevents the misuse of foreign donations to NGOs for money laundering activities.
- Narcotic Drugs and Psychotropic Substances Act, 1985: Allows for the confiscation of property derived from illegal narcotics trafficking.
Conclusion
Money laundering poses a significant threat to the global and Indian economy by facilitating a parallel economic system and fuelling illegal activities such as terrorism and trafficking. While the Indian government has implemented robust measures to counter money laundering, consistent enforcement, international cooperation, and technological advancements are essential to mitigate its impact and secure the economy.
