UPSC Mains 2013 GS Paper 3 Q21: model answer
Money laundering poses a serious security threat to a country's economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace?
What the question wants
Explain why money laundering threatens India and list the steps needed to control it.
How to structure it
Threat, significance, steps.
- Meaning and stages
- Why it matters for India
- Measures: legal, institutional, international
How to think it through
Placement, layering, integration. India: hawala, round-tripping via tax havens, shell companies, real estate, gold, trade mis-invoicing, crypto later. Impacts: tax loss, terror funding, fake currency, distorts markets, capital flight, election funding, corruption. PMLA 2002, ED, FIU-IND (2004), Black Money Act 2015, Benami amendment 2016, FEOA 2018, DTAA revisions (Mauritius 2016), FATF membership 2010, Egmont.
Model answer
When a crore of bribe money comes back to India as 'foreign investment' from a Mauritius shell company, it does three things at once: it escapes tax, it gets clean, and it gains respectability. That is money laundering, the conversion of dirty money into apparently legal wealth through placement, layering and integration.
Why it threatens economic sovereignty
- Round-tripping through tax havens distorts FDI data and policy.
- Hawala channels move money outside the banking system and fund terror and insurgency.
- Trade mis-invoicing and fake firms erode the tax base.
- Real estate and gold absorb black money and price out ordinary buyers.
- It finances counterfeit currency and political corruption, weakening the state's hold on its own economy.
- Repeated scandals hurt India's credit and investor image.
Steps to control it
- Enforce the PMLA, 2002 firmly through the Enforcement Directorate, with time-bound trials.
- Strengthen FIU-IND analysis of suspicious transaction reports from banks.
- Beneficial ownership disclosure to unmask shell companies.
- Renegotiate tax treaties to plug round-tripping, as the 2016 Mauritius protocol did by taxing capital gains at source.
- Use the Fugitive Economic Offenders Act, 2018 to seize assets of those who flee.
- KYC discipline in banks, insurers, jewellers and property registrars.
- Global cooperation through FATF and the Egmont Group.
- Laws on benami property and undisclosed foreign assets.
Dirty money is patient; the law must be faster than its layering.
Draw: A three-step flow: placement → layering → integration, with an Indian example at each step.
Keywords, cases and data to drop in
placement, layering, integration, round-tripping, hawala, trade mis-invoicing, PMLA 2002, ED, FIU-IND, KYC, beneficial ownership, FATF (member 2010), Egmont Group, Benami Act.
Where most answers lose marks
- Discussing only black money and tax evasion and forgetting the terror-funding and sovereignty angle the question names.
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Question text as printed in the official UPSC Civil Services (Main) question paper. The model answer is original Battle IAS work; use it to learn structure, not to memorise.
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