INTRODUCTION
A significant development has occurred with the Supreme Court of India delivering its verdict on Electoral Bonds. The Court has declared that the issuance of Electoral Bonds, which allow anonymity, violates the Right to Information enshrined in Article 19(1)(a) of the Indian Constitution. Consequently, the Court has deemed Electoral Bonds unconstitutional and has instructed the State Bank of India, the issuing authority, to furnish details on these bonds to the Election Commission of India.[1]
The introduction of Electoral Bonds in India had sparked concerns regarding their potential for money laundering and their impact on democratic processes. These concerns are exacerbated by India’s weak regulatory frameworks, lack of fraud reporting guidelines, and inefficiencies within financial institutions.
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BRIEF BACKGROUND ABOUT MONEY LAUNDERING IN INDIA:
Money Laundering is defined under Section 3 of the Prevention of Money Laundering Act, 2002 as “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”
The issue of money laundering is a big and relevant threat to the growth and stability of Indian economy. Its intricate nature makes direct measurement challenging, as its primary objective is to obfuscate the illicit origin of funds. The absence of unanimous judicial interpretation regarding laws pertaining to money laundering, notably the Anti-money laundering law in India, PMLA which complicates the task for enforcement agencies in delineating the boundaries of money laundering offenses. This lack of clarity results in a perilous erosion of rights and ineffective implementation of anti-money laundering protocols.
BREIF BACKGROUND ABOUT ELECTORAL BONDS IN INDIA:
Electoral Bonds, initially introduced with the aim of “bring transparency in the process of political funding in the country” resemble promissory notes. These interest-free “bearer instruments” enable citizens or corporate entities to purchase bonds, facilitating anonymous donations to political parties.
In order to implement the electoral bonds scheme, four distinct legislations underwent amendments, namely the Foreign Contribution Regulation Act, 2010; Section 29C of the Representation of the People Act, 1951; Section 13A(b) of the Income Tax Act, 1961; and Section 183(3) of the Companies Act, 2013. However, these amendments have now been invalidated.[2]
CONNECTION OF ELECTORAL BONDS WITH MONEY LAUNDERING:
After the Supreme Court of India struck down the Electoral Bonds Scheme and directed SBI, the issuing bank of Electoral Bonds to issue all the relevant data about the Electoral Bonds, it became visible that the scheme was working as a way of quid pro quo arrangements between the political parties and the corporate doners through the scheme.
The significant concern arising from the disclosure pertained to companies misrepresenting their profits and losses, suggesting the potential for money laundering among those loss-making entities that made substantial donations to political parties, despite having either negative or minimal profits after tax over a span of seven years.
Upon analysis, it was noted that out of the donating companies, it was found that there were firms which had contributed amounts surpassing the original 7.5% cap. This breach occurred following the removal of a provision from Section 182(1) of the Companies Act, 2013, which previously imposed restrictions on corporate contributions to political parties. Such discrepancies raise questions regarding the origin of funds and hint at the potential for money laundering, as companies with negative profits would typically be unable to donate under Section 182(1) of the Companies Act, 2013.
It is noteworthy that a considerable number of donors operate in sectors characterized by limited resources, government control, or stringent regulatory requirements for licenses and clearances. These sectors include mining, energy, telecom, pharmaceuticals, real estate, and construction, fostering an environment susceptible to corruption and bribery.
LEGAL FRAMEWORK TO BRING CHECKS AND BALANCES TO MONEY LAUNDERING IN INDIA:
The main body of law that guides the examination and conviction of money laundering is the Prevention of Money Laundering Act, 2002 (PMLA) and its implementing regulations. This law covers the entire country, and the Enforcement Directorate/Financial Intelligence Unit (ED/FIU) is in charge of overseeing national enforcement activities. In addition, the PMLA gives law enforcement agencies extraterritorial jurisdiction when their actions result in consequences that across international borders. When assets obtained by illegal activity are worldwide and cannot be returned, the PMLA grants the relevant authorities the power to attach and seize assets of comparable value, irrespective of whether they are situated in India or globally.
Part C of the schedule to the Prevention of Money Laundering Act (PMLA) defines a deliberate effort to avoid paying any tax, penalties, or charge as described in Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Black Money Act”).
The Criminal Procedure Code (CrPC) regulations apply to PMLA processes under Section 65, with the possible exception of cases where they violate PMLA requirements.
The Enforcement Directorate (ED) is primarily responsible for pursuing and investigating money laundering offenses. It can bring money laundering litigation in the approved Special Court and initiate property seizure processes.
The primary national institution in charge of gathering, processing, analysing, and distributing information about questionable financial activities to law enforcement and international Financial Intelligence Units (FIUs) is the Financial Intelligence Unit – India (FIU).
Furthermore, regulatory agencies that fall under their jurisdiction, like the Reserve Bank of India (RBI), set Know Your Customer (KYC) and Anti-Money Laundering (AML) policies for banks and other financial organizations. Through the SEBI Guidelines on AML Standards/CFT/Obligations of Intermediaries (“SEBI AML Guidelines”), the Securities and Exchange Board of India (SEBI) establishes standards and regulations for investors and financial intermediaries in the securities market. For the purpose of preventing the funding of terrorism (CFT), the Insurance Regulatory and Development Authority of India (IRDAI) is empowered to establish AML standards that apply to certain insurance types.
In addition, organizations like the Income Tax Department, Central Bureau of Investigation (CBI), and Economic Offenses Wing are vital to the fight against money laundering. For example, the CBI is a department of the Indian police force that specializes in looking into certain kinds of crimes, such as fraud, major economic offenses, corruption involving public officials, and crimes that have implications for many states or perhaps the entire country. By taxing undeclared foreign income and assets owned by Indian citizens, the Income Tax Department is able to stop money laundering crimes.
Taken along with the PMLA and PML Rules, these rules and standards form the cornerstone of the legislative structure that oversees the implementation of Anti-Money Laundering (AML) legislation in India.
RECENT DEVELOPMENTS:
2018 saw the inclusion of new offenses to the list of scheduled offenses under the Prevention of Money Laundering Act (PMLA), expanding the scope of the Prevention of Corruption Act (PCA).
The PMLA was amended by the Finance Act of 2019, which expanded the meaning of “proceeds of crime” to include assets and properties acquired by any illegal activity connected to Scheduled Offenses, even if they were not specifically included in the PMLA. Furthermore, these changes impose more stringent reporting requirements on Reporting Entities by introducing Section 12AA, which mandates comprehensive client verification prior to specific transactions.
Foreign Portfolio Investors (FPIs) are no longer subject to regulation 9(1A) of the PMLA, as per the Central Government’s decision after consulting with the Securities and Exchange Board of India (SEBI). Within ten days of beginning an account-based connection, Reporting Entities are required by this rule to electronically submit electronic copies of their clients’ KYC records to the Central KYC Records Registry.
The Ministry of Finance extended to different service providers of virtual digital assets the compliance standards specified in the PMLA, including identity verification, record management, and improved due diligence.
To strengthen current laws controlling client due diligence and record-keeping procedures, the Ministry of Finance released the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023.
CONCLUSION:
Recent legislative reforms and concerted efforts by both domestic and international investigative bodies have bolstered India’s anti-money laundering regime. However, challenges persist in establishing clear boundaries for money laundering offenses under the Prevention of Money Laundering Act (PMLA), 2002, due to the lack of consensus among the judiciary regarding its interpretation. This uncertainty has resulted in a precarious infringement of rights and ineffective enforcement measures. Additionally, strained relationships among law enforcement officials exacerbate difficulties in implementing money laundering regulations, especially during investigations. The shift from physical to electronic modes of committing offenses further complicates law enforcement activities, making it challenging to demonstrate predicate offenses.
Addressing money laundering requires a multifaceted approach, with financial institutions adhering to stringent customer due diligence principles. Despite having procedures in place, Investigative bodies struggle to effectively prevent money laundering.
[1] Supreme Court declares electoral bonds scheme unconstitutional The Hindu, https://www.thehindu.com/news/national/electoral-bonds-scheme-unconstitutional-sbi-should-reveal-the-details-of-donors-rules-sc/article67848211.ece (last visited Apr 8, 2024)
[2] Electoral bonds: How SC struck down amendments in three key laws, restored status quo restricting political donations The Indian Express, https://indianexpress.com/article/explained/explained-law/supreme-court-electoral-bonds-verdict-restore-status-quo-9163356/ (last visited Apr 8, 2024)
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