Why this matters now
This topic spans internal security and the economy. UPSC asks the laundering process, the PMLA/ED/FIU framework, and the FATF — all frequent current-affairs items (ED actions, FATF lists).
How money laundering works
Laundering typically has three stages: placement (introducing illicit cash into the financial system), layering (moving it through complex transactions to obscure the trail), and integration (bringing the “cleaned” money back as apparently legitimate wealth). Hawala (informal value transfer), shell companies and crypto are common channels.
Terror financing
Terror financing is the provision of funds for terrorist activities — from drug trafficking, extortion, fake currency, charities misuse and hawala. Choking these funds is central to counter-terrorism, since money is the “oxygen” of terror networks.
India’s legal framework
The key law is the Prevention of Money Laundering Act (PMLA), 2002, enforced by the Enforcement Directorate (ED). The Financial Intelligence Unit (FIU-IND) analyses suspicious transactions, and banks follow KYC/AML norms. Related laws target benami property and fugitive economic offenders.
The FATF
Globally, the Financial Action Task Force (FATF) sets anti-money-laundering and counter-terror-financing standards, and places non-compliant countries on a “grey list” (increased monitoring) or “black list” (high-risk). FATF pressure is a major lever in combating terror financing internationally.
UPSC angle
Know the three laundering stages, the PMLA-ED-FIU framework, hawala, and the FATF (grey/black lists). Link terror financing to counter-terrorism.
Frequently asked questions
What are the stages of money laundering?
Placement (introducing illicit cash), layering (obscuring the trail) and integration (returning it as legitimate wealth).
What is the PMLA?
The Prevention of Money Laundering Act, 2002 — India’s main anti-money-laundering law, enforced by the Enforcement Directorate.
What is the FATF?
The Financial Action Task Force — a global body setting anti-money-laundering and counter-terror-financing standards, with grey and black lists for non-compliant countries.
What is hawala?
An informal, undocumented system of transferring value across borders, often misused for laundering and terror financing.