Roadmap for Answer Writing
1. Introduction
- Define money laundering and provide context.
- Mention the scale of money laundering in India (5% of GDP).
2. Harmful Effects of Money Laundering on India’s Economy
- Macroeconomic Instability:
Money laundering disrupts the financial system by creating instability in exchange rates and inflating asset bubbles. Example: Yes Bank-DHFL money laundering case leading to financial instability. - Reduced Tax Revenues:
Money laundering and tax evasion lead to significant losses in tax revenue. According to the State of Tax Justice report (2020), India loses 0.41% of GDP annually due to global tax abuse. - Distorted Economic Productivity:
Laundered money is often diverted into non-productive assets like real estate or art, reducing the country’s overall economic productivity. - Erosion of Public Institutions:
Money laundering can undermine governance and the rule of law. Example: VVIP chopper scam, where illicit money influenced public decisions.
3. Harmful Effects of Money Laundering on National Security (Approx. 80 words)
- Fueling Criminal Activities:
Laundered money supports activities like drug trafficking and terrorism, which directly threaten national security.
Example: Rashtriya Raksha University report mentions that illegal online betting and gambling channels are used for money laundering and funding terrorism.
4. Challenges in Combating Money Laundering (Approx. 80 words)
- Complex Methods:
Criminals increasingly use sophisticated methods like shell companies and cryptocurrencies to conceal illicit funds. - Lack of Synergy Between Agencies:
Different enforcement agencies (CBI, ED, etc.) working in isolation leads to coordination issues. - Weak KYC Norms:
Non-compliance with Know Your Customer (KYC) regulations, as seen with Paytm Payment Bank. - Smuggling and Tax Havens:
The use of tax havens like Cayman Islands and Mauritius, where financial secrecy laws hinder tracking illicit funds.
5. Conclusion
- Summarize the key points.
- Emphasize the need for stronger enforcement, international cooperation, and effective coordination between agencies to combat money laundering.
Relevant Facts to Support the Answer
- Money Laundering in India:
- Money laundering constitutes 5% of India’s GDP.
- Macroeconomic Instability:
- Yes Bank-DHFL money laundering case led to significant financial instability and loss of trust in financial institutions.
- Reduced Tax Revenues:
- According to the State of Tax Justice report (2020), India loses 0.41% of its GDP every year due to tax evasion linked to global money laundering.
- Distorted Economic Productivity:
- Laundered money is often invested in non-productive assets, diverting resources away from productive investments.
- Erosion of Public Institutions:
- VVIP chopper scam illustrates the use of illicit funds to manipulate public institutions and government decisions.
- Impact on National Security:
- Rashtriya Raksha University report identifies how illegal online betting and gambling serve as channels for laundering money that funds terrorism.
- Challenges in Combating Money Laundering:
- Increasing use of shell companies and cryptocurrencies to conceal illicit funds.
- Lack of coordination among enforcement agencies like CBI, ED, and others.
- Paytm Payment Bank case, where KYC norms were not properly enforced.
- Cayman Islands and Mauritius are known tax havens, where anonymous accounts are used to launder money.
Model Answer
Impact on the Economy
Money laundering leads to significant financial outflows that destabilize the exchange rate and cause asset bubbles. This was evident in the Yes Bank-DHFL money laundering case, which triggered turmoil in India’s financial sector. The movement of illicit funds exacerbates economic instability and erodes trust in financial institutions.
Money laundering and tax evasion result in a direct loss to government revenue. According to the State of Tax Justice report (2020), India loses 0.41% of GDP annually due to global tax abuse. These losses hinder public spending and economic development.
Laundered money is often invested in non-productive assets like real estate, art, and antiques, diverting resources from productive investments. This reduces overall economic productivity and impacts long-term growth prospects.
Money laundering can be used to bribe public officials, manipulate elections, and undermine the rule of law. The VVIP chopper scam serves as a stark example where illicit money was used to influence government decisions, weakening the integrity of public institutions.
Impact on National Security
Money laundering also fuels criminal activities, including terrorism and drug trafficking, which pose a direct threat to national security. A report by Rashtriya Raksha University highlights how illegal online betting and gambling companies are used for money laundering and terrorist financing.
Challenges in Combating Money Laundering
Criminals constantly evolve their methods, using tools like shell companies and cryptocurrencies to conceal illicit funds, making detection challenging.
Agencies such as CBI and ED often work in silos, hindering effective coordination. Synchronization is crucial to track and prevent money laundering activities.
Non-compliance with Know Your Customer (KYC) regulations by banks and financial institutions, as seen with Paytm Payment Bank, exacerbates the problem.
The prevalence of illegal black markets and the existence of tax haven countries like Cayman Islands and Mauritius further complicate enforcement efforts.
Conclusion
Combating money laundering requires robust enforcement, effective coordination between agencies, stringent KYC norms, and international cooperation to tackle the global nature of the problem.