Recently Ministry of Finance through its notification Dated 3rd May,2023 mentioned under Section 2 (1) (sa) (vi) of the Prevention of Money Laundering Act, 2002(“PMLA”)practicing professionals in the field of Chartered Accountancy, Company Secretaries and Cost and Works Accountants are now brought under the ambit of the Prevention of Money Laundering Act (PMLA) if any financial transactions are executed on behalf of clients, in the course of his or her profession, in relation to the following activities-
- Buying and selling of any immovable property;
- Managing of client money;
- Management of bank, savings or securities accounts;
- Organisation of contributions for the creation, operation or management of companies;
- Creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities,
Shall be an activity for the purposes of said sub-section.
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Understanding Money Laundering
1. Money laundering refers to the process of making illegally obtained or “dirty” money appear legitimate or “clean” by channeling it through legitimate financial systems. It involves a series of complex transactions and activities designed to obscure the origin, ownership, or destination of the funds. Money laundering is typically carried out to hide the illegal source of money, evade taxes, finance criminal activities, or avoid financial scrutiny.
The process of money laundering typically involves following three main stages:
2. Placement: The first stage involves introducing the illicit funds into the financial system. This can be done through various means, such as depositing cash into bank accounts, purchasing assets, or using money transfer services. The aim is to place the funds into the legitimate economy while avoiding suspicion.
3. Layering: In this stage, the launderer tries to obscure the origin of the funds by creating a complex web of transactions. They may transfer money between multiple accounts, use shell companies, conduct international wire transfers, or engage in other financial transactions to create confusion and make it difficult to trace the original source.
4. Integration: The final stage involves integrating the laundered money back into the legitimate economy. The funds are made to appear as legitimate income or investments. The launderer may invest in real estate, businesses, or other assets, or they may use the funds for personal expenses, making it challenging to differentiate between legitimate and illicit funds.
Money laundering can occur in various industries, including banking, real estate, international trade, and gambling. It is a serious crime with severe legal consequences, as it facilitates and enables other criminal activities, such as drug trafficking, corruption, terrorism financing, and organized crime.
To combat money laundering, governments and financial institutions have implemented anti-money laundering (AML) regulations and measures. These include Know Your Customer (KYC) requirements, transaction monitoring, reporting of suspicious activities, and cooperation between financial institutions and law enforcement agencies to detect and prevent money laundering activities.
How Money Laundering is different from Hawala Transactions?
| Basis of differences | Money Laundering | Hawala Transactions |
| Meaning | Money laundering refers to the process of making illegally obtained or “dirty” money appear legitimate or “clean”. | Hawala transactions are a traditional system of money transfer that operates outside of formal banking channels. |
| Purpose | Money laundering is typically carried out to hide the illegal source of money, evade taxes, finance criminal activities, or avoid financial scrutiny. | Hawala transactions are typically used for transferring funds between parties, often in different locations or countries. They can serve purposes such as remittances or facilitating business transactions, particularly in regions with limited access to formal banking systems |
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Techniques |
Money laundering involves a series of complex transactions and activities designed to obscure the origin, ownership, or destination of the funds. It typically includes stages such as placement, layering, and integration, and can be conducted through various means, including traditional banking systems, shell companies, real estate transactions, and more. | Hawala transactions involve individuals known as hawaladars who act as intermediaries to facilitate the transfer of funds. The process relies on trust and personal relationships, and the transactions are often conducted based on oral agreements or informal arrangements.
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| Focus | Money laundering is a broader term that encompasses various methods and techniques used to conceal the origins and true nature of illicit funds. | Hawala transactions primarily focus on the transfer of funds and do not inherently involve the process of disguising or legitimizing illicit funds.
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What is Prevention of Money Laundering Act?
- The Prevention of Money Laundering Act (PMLA) is an Indian law enacted to combat money laundering and related offenses. It was passed by the Parliament of India in 2002 but came into force on July1, 2005. The primary objective of the Prevention of Money Laundering Act is to prevent and control money laundering activities and to confiscate the proceeds of crime. The Act defines money laundering as the process of converting “illegally obtained property” into legitimate assets. It aims to target individuals or organizations involved in money laundering and punish them for their illicit activities.
- The Act enables government authorities to confiscate property and assets earned from illegal sources and through money laundering.
- This act provisions are applicable to all banks (including RBI), financial institutions, mutual funds, insurance companies, and their financial intermediaries.
- Under the PMLA, the Enforcement Directorate (ED) is empowered to conduct a Money Laundering investigation. ED enforces the following laws:
- Foreign Exchange Management Act, 1999 (FEMA)
- Prevention of Money Laundering Act, 2002 (PMLA)
What are the changes being done under the PMLA?
- The amendments are part of a series of changes being undertaken in the money laundering law to plug loopholes ahead of India’s proposed assessment later this year under the Finance Action Task Force (FATF).
- In March, the Finance Ministry amended the money laundering rules to incorporate more disclosures for non-governmental organisations by reporting entities like financial institutions, banking companies or intermediaries.
- In addition, it also defined “politically exposed persons” (PEPs) under PMLA as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”. The amendment was in relation to foreign PEPs and not domestic ones.
- On May 3, the Finance Ministry brought in practicing chartered accountants, company secretaries, and cost and works accountants carrying out financial transactions on behalf of their clients into the ambit of the money laundering law.
- On May 4, the Finance Ministry widened the list of non-banking reporting entities to allow 22 financial entities to verify the identity of their customers via Aadhaar under the ambit of the money laundering law.
- Last month, the Ministry of Electronics and IT (MeitY) had proposed allowing a wide range of private entities to carry out Aadhaar authentication for a number of services, expanding the use of the digital identity beyond its ministries and departments.
Conclusion: In conclusion, the Prevention of Money Laundering Act (PMLA) in India plays a crucial role in combating money laundering and the financing of terrorism. It provides a robust legal framework, preventive measures, international cooperation mechanisms, and provisions for confiscation and seizure of illicit proceeds. However, ongoing efforts are necessary to address challenges and ensure the effectiveness of the legislation in combating money laundering activities.
Also Read: Implication of inclusion of practicing CA, CS & CWA under PML Act, 2002
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