This article is written by Aman Kumar Yadav, a University of Allahabad law student, who digs into the complex realm of money laundering.
Yadav throws light on the changing nature of financial crime and the issues it poses to global regulatory regimes by providing insights into its causes and consequences. It navigates the complexity of money laundering with rigorous research and analysis, demonstrating its effects on economies and cultures around the world.
Table of content
1
Introduction
2
Money laundering : An overview
3
Process of Money laundering
4
Methods of Money laundering
5
Prevention of money laundering act ad it’s goal
6
Key provision of the PMLA , 2002
7
Global efforts against money laundering
8
Authority that can investigate under PMLA,2002
9
Criticism of PMLA,2002
10
Important case laws
11
References
INTRODUCTION
Complex economic offenses have become more prevalent as a result of the development of the financial and economic systems. These offenses not only pose a threat to national financial assets but are also a threat to financial security of a nation. Money laundering is one such crime.
The deliberate and organized transfer of illegal money via many financial institutions, known as money laundering, creates a complex web of transactions that makes it challenging to identify the funds’ original source. In this way, the illicit gains are incorporated into an authorized financial framework, and all traces of illicit activity are eliminated.
Money Laundering is a heinous crime that not only undermines the social and economic fabric of the country but also frequently encourage other crimes like terrorism and drug trafficking etc.
India’s global commitment to combating money laundering has prompted the enactment of the Prevention of Money Laundering Act, which addresses this expanding issue.
WHAT IS MONEY LAUNDERING ?
Money and crime are linked with each other. Crimes are committed because of the large sums of money involved. Money laundering is the conversion of black money into white money.
To put it simply, money laundering is the process of transforming illegally generated money into legitimate money.
Money laundering is the process of converting significant sums of money earned by criminal activities, such as drug trafficking or terrorist financing, appear to have originated from a legitimate source.
Criminal operations such as illegal arms sales, smuggling, drug trafficking , prostitution houses, insider trading, bribery, and online fraud schemes all generate large profits.
This offers an incentive for money launderers to “legitimize” their ill-gotten earnings through money laundering.
The money created is referred to as ‘dirty money’, and money laundering is the act of converting ‘dirty money’ into ‘legal’ money.
WHAT IS THE PROCESS OF MONEY LAUNDERING?
Money laundering is a three-step process.
- Placement: The first stage occurs when criminal funds are introduced into the formal financial system.
- Layering: In the second stage, money injected into the system is layered and dispersed across multiple transactions in order to hide the money’s tainted origin.
- Integration: In the third and final stage, money enters the financial system in such a way that any initial relationship with the crime is removed, and the money can then be utilized by the offender as clean money.
COMMON METHODS OF MONEY LAUNDERING
- Smurfing: This strategy breaks down huge sums of money into smaller, less suspicious amounts. The money is then placed into one or more bank accounts over time by a group of people (smurfs) or a single individual.
- Overseas banks: Money launderers routinely transfer money through numerous “offshore accounts” in nations with strict bank secrecy rules. A complicated plan may include hundreds of bank transactions to and from offshore banks. The Bahamas, Bahrain, the Cayman Islands, Hong Kong, Panama, and Singapore are among the “major offshore centers,” according to the International Monetary Fund.
- Shell firms: They are fraudulent businesses that operate mainly to launder money. They receive dirty money as “payment” for ostensible goods or services but offer none; they just create the illusion of legitimacy.
- Investing in genuine enterprises: Launderers may occasionally wash dirty money in otherwise legitimate firms. They may use major enterprises, such as brokerage firms, where filthy money fits in well, or tiny, cash-intensive businesses, such as pubs, car washes, strip clubs, or check-cashing stores. These companies may be “front companies” that offer a product or service but their primary aim is to clean the launderer’s money. This method typically works in one of two ways: the launderer can combine his dirty money with the company’s clean revenues, in which case the company reports higher revenues from its legitimate business than it actually earns; or the launderer can simply conceal his dirty money in the company’s legitimate bank accounts in the hopes that authority would not be able to catch him.
PREVENTION OF MONEY LAUNDERING ACT,2002
The Prevention of Money Laundering Bill was introduced in 1998 and passed in 2002 in response to the urgent need for comprehensive legislation to prevent money laundering and related activities, confiscate proceeds of crime, establish agencies and mechanisms for coordinating anti-money laundering measures, and so on. The Act became law on July 1, 2005.
MAJOR GOALS OF THE ACT
1)To fight against money laundering.
2)To provide for the confiscation of property deduced from or involved in money laundering.
3)For matters related to or ancillary thereto, it serves as the foundation for India’s legislative framework in combating money laundering.
4)To act as a hinderance for the culprits for the crime of money laundering.
5) For appointing the adjudicating authority and appellate tribunals to handle money laundering cases.
Making it mandatory for banks, fiscal institutions and intermediaries to keep records.
6) To handle any fresh matters relating to money laundering.
KEY PROVISION OF THE PMLA,2002
Sec 3 – Definition of money laundering
- It provides for the definition of money laundering. Any individual who has direct or indirect involvement connected to the offence of money laundering will be deemed to be guilty under this act.
Section 4 – Punishment for money laundering
- PMLA states that anyone who conducts money laundering shall face a punishment of rigorous imprisonment for up to three years, which may be extended to seven years, as well as a penalty.
It should be emphasized that if the offense in issue is related to any offence specifically stated under the Narcotic Drugs and Psychotropic Substances Act, 1985, the penalty may be extended to a rigorous imprisonment of ten years rather than seven years.
Section 5 – Attachment of property having nexus with money laundering
- A point must be observed that under Section 5 of the PMLA, the power of attachment has been accorded to the director, the joint director, or any officer not below the rank of a deputy director.
- If there is reason to suspect that someone has acquired property immorally or that they are in possession of criminal profits and are facing charges related to those proceeds, the person in charge has the ability to seize property for a period of up to 180 days. It is also possible for the proceeds of money to be moved or hidden.
- Moreover, the authority in power must record in writing with proper reason that, why they believe the property is obtained through illicit means?
- The reason provided must be sent to the adjudicating authority along with a copy of the attachment order.
Section 6 – It talks about the adjudicating authority, its composition, power, salary, appointment, resignation and dismissal
Section 8 – Adjudication of matter
- If a complaint is filed under Section 5(5) or an application is made under Section 17(4) or Section 18(10), the individual alleged to have committed the offence of money laundering will be served with a notice of not less than 30 days asking him to provide proof of the sources of the income, earnings, or assets and a reasonable justification for why the property should not be impounded.
Following a hearing by the party accused of the crime, the adjudicating authority will record its findings on whether all or any of the properties are implicated in money laundering.
Section 9 – Vesting of property in the hands of central government
- As previously indicated, when a court orders that property obtained by money laundering be confiscated, the Central Government will have all rights and titles to the property, free of any encumbrances.
Section 12 – Obligation of banking firms, financial institutions, and intermediaries
Section 12 states that the reporting entity is responsible for maintaining records.
Section 12 requires financial institutions, banks, and intermediaries to comply with the following obligations:
To keep records of all transactions and amounts as specified in the regulations, regardless of whether they were completed in one transaction or if they were part of a series of transactions with an internal relationship to one another that occurred within a thirty-day period.
To notify the director of any transactions within the specified time frame.
To authenticate the clients’ identities in the manner prescribed.
To preserve a record of all the documentation relevant to the identification of the clients and the beneficial owners.
Section 16 – Power of Survey
Section 16 of the PMLA discusses the effectiveness of surveys.
It specifies that if an authority has cause to suspect that money laundering has occurred, they are permitted to enter any building or location.
SECTION 17 – Search and Seizure of property
Section 17 of the PMLA authorizes officials to search for and seize any property gained through the crime of money laundering. Any director, joint director, or deputy director may entrust a subordinate officer to conduct the activity.
Section 19 – Power to Arrest
Regarding the authority to make an arrest, Section 19 gives any officer—director, deputy director, assistant director, or any other officer—the authority to make an arrest on behalf of the central government by general or special order. The relevant authorities may detain a person if they have reasonable suspicion, supported by evidence, that—
The grounds for such a belief has been adequately documented in writing, and the person is guilty of an offense punishable under the PMLA.
Section 23 – Presumption related to interconnected transaction
Section 23 addresses presumptions relating to interconnected transactions. It says that for the purpose of deciding whether to confiscate or adjudicate the property, it is presumed that the remaining transactions are interconnected when the offence of money laundering involves two or more interconnected transactions and one or more transactions are proven to be involved in money laundering.
Section 45 – Cognizable and Non Bailable Offence
All offenses committed under the Act shall be cognizable under Section 45 of the PMLA. If the public prosecutor receives information opposing the application of a release on bond or bail, no one who has been detained for the crime of money laundering will be freed from custody.
Furthermore, in the event that the public prosecutor raises objections, the court must determine that there are good reasons to believe that the person who was detained is innocent of all charges and that he won’t commit any new ones while he is free on bond. Only then can bail be granted.
Additionally, if the special court directs it, the defendant may be released on bond in the following circumstances:
- the accused person is less than 16 years of age,
- is a woman,
- is sick or infirm, or
- if the person is accused either on his own or along with other co-accused of an amount of money laundering that does not exceed ₹1 crore.
Global efforts against money laundering
1988 Vienna Convention – At the 1988 Vienna meeting, the United Nations Conference for the adoption against Illegal Traffic in Narcotic Drugs and Psychotropic Substances adopted the resolution to also fight against money laundering.
It was demanded by all nations to act quickly to stop the laundering of money obtained via drug offenses and related practices.
Financial Action Task Force (FATF) formation: The G7 nations convened in Paris in 1989 to discuss the issue of money laundering and to form the FATF with the goal of investigating and recommending solutions for this threat.
Comprising Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, the Group of Seven is an intergovernmental political and economic forum.
Global Programme of Action and Political Declaration: The Political Declaration and Global Programme of Action were resolutions passed by the United Nations General Assembly in 1990.
It urged each of the member nations to pass appropriate legislation in order to effectively stop the laundering of drug money.
India drafted legislation to stop the money laundering of drugs using the FATF’s guidelines as per this resolution.
Authorities that can investigate under the Prevention of Money Laundering Act, 2002
The Enforcement Directorate
The enforcement directorate of the Department of Revenue, Ministry of Finance, Government of India, has the jurisdiction to investigate money laundering in India under the PMLA.
Financial Intelligence Unit—India (FIU-IND)
The Financial Intelligence Unit-India (FIU-IND), which is part of the Department of Revenue in the Ministry of Finance, is an autonomous entity that reports directly to the Economic Intelligence Council (EIC). The EIC is led by the Finance Minister. FIU-IND is a central organization in charge of receiving, processing, analysing, and disseminating information connected to suspicious economic activities.
Agencies
The scheduled offenses are investigated individually by the agencies mentioned in the separate Acts, such as the local police, CBI, customs departments, SEBI, or any other investigative agency, depending on the circumstances of the case.
Criticism of the Prevention of Money Laundering Act, 2002.
Authorities wield immense authority.
There have been various court challenges to the constitutionality of the PMLA, 2002. Since its establishment, the Act has had numerous problems and discrepancies . The Act, in some cases, takes harsh measures and gives the authorities vast power to combat the issue of black money in the country; however, the provisions enacted should be made in the public’s interest rather than exploiting it, and thus the views of the courts on this subject will be eagerly awaited.
Lack of transparency
There is a lack of openness in the ED under the PML Act. Even the Enforcement Case Information Report, also known as the ECIR, which is a counterpart of the FIR, is described as a internal document and is not disclosed to the accused. The ECIR can be filed based on the ED’s whims and fancies, rather than the norms and practises established by criminal procedural legislation.
Attachment of property
The court also has the ability to seize property gained illegally before the Act went into effect. It was asserted that the presumption under Section 23 is contrary to the presumption of innocent in favor of the person accused of committing such an offence.
Being used for ordinary crimes
It has been stated that PMLA has been drawn into the investigation process of ordinary crimes, and the authorities have also attached the assets of non-guilty victims.
Important Case laws
- Kewal Krishna Kumar V. ED 2022
This case pertains to a bail application where the accused, a 70-year-old individual, sought bail on medical grounds under the proviso of section 45 of the PMLA
The court held that it is the responsibility of court to analyze the accused’s medical condition, which includes the medical board report.
Furthermore, the court noted that being admitted to a hospital for medical treatment does not entitle the accused to bail. The court must determine the seriousness of the sickness and whether it can be treated in detention or in government hospitals. The “sickness” mentioned in the provision refers to a potential risk to the accused’s life. The term “infirm” in section 45(1) refers not just to old age but also to a handicap that prohibits the individual from undertaking everyday activities.
(2)Vijay Madanlal Choudhary V. Union of India 2022
In this case, the Supreme Court without clarifying the mode of informing the grounds of arrest to the accused, held that as long as the accused has been informed about the reason at the time of arrest,it sufficiently fulfils the mandate of article 22(1) of the constituton. It also held the constitunality of PMLA to be valid.
(3)Pankaj Bansal V. Union of India 2023
The accused challenged their arrest since they did not obtain a copy of the ECIR (Enforcement Case Information Report) or any written information about the grounds for their detention.
The Supreme Court ruled that the arrest by the ED was unconstitutional because the grounds of detention were not properly notified to the Petitioners. The Court clearly underscored and enhanced the requirements under Section 19(1) of the PMLA (providing for the power to arrest), holding that it is obligatory for the ED to inform the arrested persons of the grounds of their arrest in writing.
Although Vijay Madanlal held that the supply of ECIR is not mandatory in the event that grounds of arrest were communicated. This judgement superseded the view laid down in the Vijay Madanlal case.
References
1) https://www.clearias.com/money-laundering/
