What is Money Laundering?
Money laundering refers to the process/financial transactions that are carried out to conceal the source, identity and destination of illegally-obtained money.
By hiding the details of this illegally obtained money, a person can enjoy that money which otherwise would have landed him in jail.
Some examples of illegally obtained money: drug trafficking, extortion, insider trading and illegal gambling
Launderer– a person who does this money laundering.
How is this financial transaction done?
The process of money laundering involves passing the money through a complex sequence of banking transfers or commercial transactions so that it seems legitimate.
At the end of the process, the money is returned to the launderer n an obscure and indirect way.
Stages of Money Laundering (PLI)
Money laundering involves three stages, these are- placement, layering and integration.
Placement– It means to place the money into the financial system by any means. Some examples can be- via Asset Purchase, by Currency Exchanges and Currency Smuggling.
Layering- This step involves carrying out complex financial transactions (multiple transactions) to hide the illegal source of the cash. Means the money is distributed/transferred at various place, that is more than one place. You can understand it like, to put a layer on something so that the original thing becomes hidden.
Example– Cash converted into Monetary Instruments, Material assets bought with cash then sold
Integration– The last step means bringing in the previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. The last step is to integrate all the money that was distributed in the layering stage. This step returns the money to the launderer in an obscure and indirect way.
Example– Property Dealing, use of shell company, Foreign Bank Complicity (as there is higher order of sophistication), False Import/Export Invoices.
Reverse Money Laundering
It is a process in which legal money is used for illegal purposes. Example- terror financing. In this process, legitimate funds are taken out of regular circulation and is used for criminal activity and/or avoid tax.
Prevention of Money Laundering Act, 2002
It is an Act of the Parliament of India to prevent money laundering and to provide for confiscation of property derived from money Laundering. We will discuss this in a new post. What are Masala Bonds?
A Masala Bond is a type of bond which is issued by any company, denominated in Indian Rupee and issue outside India. It is issued outside India, but not in the local currency of that place, rather in Indian Rupee. It is also known as "Rupee denominated bonds overseas".
What is a bond:– A bond is a loan (given by person(s) who buys a bond) to a company or government (which issues a bond) that pays investors a fixed rate of return over a specific timeframe.
Why is Masala Bond named so? The term Masala means spices in India. The term was used by International Finance Corporation (an arm of World Bank) to evoke the culture and cuisine of India. First Indian Company to Issue Masala Bond:-
In the year 2016, HDFC became the first company in India to issue a Masala Bond. It raised Rs 3,000 crore through the masala bond issuance at 8.33% for a paper maturing in 37 months.
However the first Masala bond was issued by IFC (an arm of World Bank) in November 2014. There it raised Rs 1,000 crore bond to fund infrastructure projects in India.
Framework of Issuance of Rupee denominated bonds overseas (Masala Bond) by RBI
Eligibility of borrowers:- Any corporate or body corporate is eligible to issue Rupee denominated bonds overseas. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts coming under the regulatory jurisdiction of the Securities and Exchange Board of India are also eligible.
Type of instrument:– Only plain vanilla bonds issued in a Financial Action Task Force (FATF) compliant financial centres; either placed privately or listed on exchanges as per host country regulations.
Recognised investors:– Any investor from a FATF compliant jurisdiction. Banks incorporated in India will not have access to these bonds in any manner whatsoever.
Maturity:– Minimum original maturity period for Masala Bonds raised upto USD 50 million equivalent in INR per financial year should be 3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years. Merchant Discount Rate (MDR)
If a shopkeeper (referred to as a merchant) wants to accept payment using Debit/Credit Cards, he/she has to make arrangements Point of Sale (PoS) Machine. He gets this PoS machine from some bank. Say the shopkeeper approaches HDFC Bank for this PoS machine and HDFC Bank installs the Point of Sale at the shop.
Since the bank provides payment services to the merchant, it will charge the merchant for using the payment infrastructure set up by the bank. This service charged by the bank or other entity involved in this process is known as Merchant Discount Rate.
Definition of MDR
Merchant Discount Rate: It is the rate or fee being charged on the merchant by the service providers at the time the customer makes the payment using his/her card on the Point of Sale machine.
The service providers that come into the picture are-
Bank installing Point of Sale:- The Bank that has installed the PoS Machine. Card issuing Bank:- The Bank whose card has been used for making the payment. Payment Gateways:- These are the entities that provide technology infrastructure to route and facilitate the processing of an online payment transaction without any involvement in the handling of funds. Example: These mainly includes banks like HDFC, AXIS, ICICI Bank. Payment Aggregators:- These are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. They pass on the payment to the merchant after some point of time. Payment Aggregator is the inclusion of all these payment gateways. Examples: Citrus, Billdesk, Instamojo, CCAvenue and PayUMoney. When MDR Charge is applicable?
MDR charges are applicable on the merchants when the payment by the customer is made using all debit card/BHIM UPI/ Aadhaar enabled Payment System (AePS) transactions and QR based transactions.
Points to remember about MDR Charges
MDR charges are to be paid by the merchant to the service providers and not by customers. Merchants should not pass on the charge to the customer. MDR rates are fixed by the Reserve Bank of India. MDR is the maximum charge that a merchant has to pay to the service provider. If a merchant can bargain with the service providers he/she can pay less than MDR charges fixed by RBI. MDR denotes the maximum rate that can be charged by the service provider and it can also be less than the limit fixed by RBI.
Why MDR is necessary?
There are Payment Gateways and Payment Aggregators involved in online transactions. MDR charges serves as a profit for them. Absence of such MDR charges will kill the industry and will leave no incentive to expand the universe. How the cost is borne in case where MDR is zero?
The RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to the digital modes of payments.