Saransh Khandelwal
Introduction:
Each year, vast sums of funds are raised by illegal activities. For these illegally acquired funds to appear lawfully acquired and become available, they need a mechanism called laundering. While the exact volume of money laundering cannot be determined, the International Monetary Fund has estimated that the world’s aggregate amount of money laundering could be between two and five per cent of the world’s gross domestic product.1 The literal sense of ‘laundering’ is ‘washing’; and ‘money laundering’ may therefore be referred to as washing of the money that is tainted or received from illegal activity and then mixing with legitimate funds in such a way that the source is obscured and money received from a legitimate source appears to be money. However, the INTERPOL has defined Money Laundering as “concealing or disguising the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.2”
Money laundering, an international problem, has some major economic consequences. By generating market uncertainty and turmoil, it has some structural impacts on the financial system and monetary developments. Money laundering leads to the development of shell companies and creates deceptive market practises that distort competition. The purpose of criminalising money laundering is to take the profit out of the crime. The reason for the existence of the crime is that it is wrong for individuals and organisations to support offenders by offering financial services to them to profit from the proceeds of their illegal activities or to encourage the commission of such crimes.3 The situation in India seems especially worse as this tainted money or ‘black money’ forms a very large proportion of our GDP, with estimates stating that India’s black money economy is 79% of its Gross Domestic Product.4
This problem of money laundering is being attempted to be curbed by the Indian Government through various reforms such as mandatory KYC for banks, and legislations such as the Prevention of Money Laundering Act, 2002, with the problem persisting. This paper briefly attempts to examine the issue of money laundering, with the analysis of the various legislations in place as well as the judicial precedents set. Furthermore, the paper also seeks to examine the socio-legal implications of this grave problem plaguing the Indian economy for decades.
Page Contents
REVIEW OF EXISTING LITERATURE AND RESEARCH:
For the research paper, a wealth of literature was examined to study the concept of Money Laundering. The meaning and nature of money laundering were introduced by most authors, such as Hasmet Sarigul, who, in his research examined the origin and nature, as well as methods of money laundering.5 Along with him, we see several authors who have examined the problem of money laundering in the context of their own countries, as was done by Hasmet Sarigul, such as Praveen Kumar, who has examined this problem in the Indian context, wherein it was noted by the author that the system of Hawala, traditionally used in India to launder money was based on fiduciary relations between the hawaladar and his connections, where there is very little paper trail involved and has also stated that it has been used historically for reasons both legitimate as well as illegitimate.6
Along with the scope and nature of the chief topic at hand, we have also studied literature regarding the impact of money laundering on various financial institutions, the economy and its various sectors. John McDowell and Gary Novis have also examined the implications of money laundering on the economy of the United States as well as the social implications that have been seen in the country.7 Concurrently with the research articles, we have also analysed the Prevention of Money Laundering Act, 2002 (PMLA) and its various provisions with the help of the available commentaries and research papers on the same. To this extent, we have sought the support of the research paper written by Paridhi Saxena wherein, various provisions of the PMLA were examined along with the circumstances and the purpose for which the Act was passed by the Parliament.8
However, the current literature examined has not been able to answer the question of how money laundering has worked in the contemporary Indian context, that is, after the implementation of the PMLA and the new KYC guidelines regarding the banking sector. The literature, along with that, has also missed out on the socio-legal implications of money laundering in developing countries such as India, which the instant paper targets to address.
RESEARCH OBJECTIVES:
In this paper we will conduct research with 3 objectives:
1. To examine the current situation of Money Laundering as it exists in the Indian context
2. To study the effects of Anti-Money laundering laws on the Indian Judicial scenario with the help of legislations in place as well as International Conventions.
3. To analyse the impact of money laundering on the Indian society and its Socio-Legal implications with the help of Judicial Precedent with a brief analysis of the shortcomings of current Anti-Money Laundering laws in India.
Research Question:
To what extent have Money Laundering laws in India been effective in the contemporary scenario?
Critically Analyse what have been the socio-legal implications of Money Laundering in India?
PROCESS AND TECHNIQUES OF MONEY LAUNDERING:
Before we examine the various legislations and the context of money laundering, we need to understand how it takes place. The term ‘money laundering’ seems to have been originated in popular use during the 1920s, in the United States, where gangs would launder their wealth generated from protection rackets and bootlegging to hide their material success from the government and the police and evade taxes9. Money Laundering, however, in a single event, can be broken down into three distinct stages, which are the placement stage, layering stage and integration stage.10
1. PLACEMENT STAGE: At this point, in the form of cash bank deposits, the launderer inserts the “dirty” money into a legal financial institution. Since large sums of cash are very noticeable, and banks are expected to disclose high-value transactions, this is the riskiest stage of the laundering process. For this purpose, this cash is broken down into smaller amounts with which, usually, financial instruments such as cheques are made and then deposited into other accounts at alternative destinations.
2. LAYERING STAGE: At this point, to separate them from their source, the launderer engages in a series of conversions or money movements. In other words, to change its type and make it impossible to trace, the money is sent through different financial transactions. Layering which consists of many bank-to-bank transfers, wire transfers in different countries between different accounts with different names, making deposits and withdrawals to constantly vary the amount of money in the accounts, changing the currency of the money, and buying high-value products to change the type of the money, such as houses, boats, diamonds and vehicles. This is primarily done to camouflage the illegal source of the money. This can even be done by the launderer when goods and services are disguised to make the transfer seem legitimate.11
3. INTEGRATION STAGE: The launderer could choose to invest the funds in real estate, luxury properties, or company projects at this point. The launderer can use the cash at this stage without being caught. When there is no documentation during the previous processes, it is very difficult to catch a launderer during the integration process. This way, the black money is recirculated in the economy.
Money Launderers use a variety of ever-evolving methods to launder illegitimate funds, such as Smurfing (where the money from illegitimate sources is split between deposit specialists or smurfs to make several deposits into different accounts in various financial institutions), Structuring12 (breaking of one large financial transaction into multiple, smaller ones), cross- border smuggling of currency in bulk,13 setting up of shell companies (that exist only on paper) and casinos (where the money can be gambled off in the forms of chips or tokens).14
MEASURES AGAINST MONEY LAUNDERING:
1. INTERNATIONAL MEASURES:
Money Laundering is an international as well as a domestic issue. This has especially been the case in drug trafficking enterprises, which mostly trade over cross-border and their revenues are laundered in other countries. Recognising the global nature of this problem, the International community has come up with various Treaties and Conventions to address the same. Some of these include United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances of 1988, popularly known as the Vienna Convention sought to tackle the issue of money laundering by obliging signatory States to criminalise laundering of money obtained from drug trafficking. Along with that, this Convention establishes that secrecy of domestic banks should not hinder international criminal investigations.15 In the same year, a Statement of Principles was released by the Basel Committee on Banking Regulations and Supervisory Practices, which sought to enable the banking sector to adopt a common stance to ensure that banks do not conceal or launder funds gained through illegal activities.16
The following year, in 1989, the G7 nations established the Financial Action Task Force (FATF) in Paris. This task force has been set up to frame standards and promote the implementation of legal, regulatory and operational measures to cease and combat money laundering and terrorist financing and other associated threats to the stability of the international financial system.17 A series of guidelines have been developed by the FATF that are accepted as international norms for combating money laundering and terrorist financing. They form the basis for a coordinated response to these challenges to the financial system’s credibility and help to maintain a level playing field. A report containing a collection of forty recommendations was released in April 1990 to include a detailed plan of action needed to tackle money laundering. It released Eight Special Guidelines in October 2001 to deal with the problem of terrorist financing. A Ninth Special Recommendation was issued in October 2004, further reinforcing the agreed international criteria for countering money laundering and terrorist financing.18
Finally, we see the United Nations Global Programme Against Money Laundering, which was introduced in 1997 to establish global technical cooperation in curbing money laundering. Along with that, it also aims to establish research and analysis over newer methods of money laundering as well as seeking State support for the establishment of financial investigation services and raising the efficacy of law enforcement initiatives. We have also seen that these conventions have set up somewhat of international regulation. Now we must see what the nature of money-laundering laws in India is.
2. MEASURES UNDER INDIAN LAW:
India has had a history of underground transfers of unaccounted money right from the times when western banking systems were not put into place. This was done through Benami transactions and hawala. ‘Black Hawala’ applies to fraudulent hawala-related transactions. Some elements of hawala are leading to important problems, such as corruption and smuggling, in India. There was no single legislation concerning the rising problem of money laundering in India but rather various sections in existing financial laws and strict foreign exchange laws such as The Income Tax Act, 1961, The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA), The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA), The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA), The Benami Transactions (Prohibition) Act, 1988, The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and The Foreign Exchange Management Act, 2000, (FEMA). However, these regulations did not provide wholesome legislation to prevent money laundering as it existed in India.
To keep up with the United Nations Special Sessions that was entered into by India in 1998, regarding money laundering, it was required to have national legislation concerning the same.19 With this view, the Prevention of Money Laundering Bill, introduced in the Parliament in 1998, received presidential assent in 2003 and became the Prevention of Money Laundering Act, 2002 (PMLA). The PMLA is the current act in place, with numerous measures put down to regulate transactions and punish the offenders.
When anyone deals with the proceeds of crime in some way, an offence of money laundering is said to be committed.20 The proceeds of the above-mentioned crime include normal and planned offences.21 The prescribed sentence is 3-7 years of rigorous imprisonment for a money laundering crime with a fine. In the case of a crime alluded to in Part A, imprisonment would be extended to a period of 10 years.22 The confiscation of property under the Act is done in compliance with the provisions of Chapter III of the Act. An official not below the rank of Deputy Director of Enforcement Directorate can, after informing the Magistrate, order the attachment of the proceeds of the crime for 180 days. He will then give to the Adjudicating Authority a report containing relevant details relating to such an attachment.23 The reporting agency shall also maintain a database of all relevant details concerning money laundering and shall forward it to the Director. It is important to retain such details for 5 years.24 The operation of the reporting entity shall be supervised by the Director, who may if the entity breaches its obligations, impose any monetary penalty or issue a notice or order to audit the accounts.25 After consulting the Reserve Bank of India, the central government is allowed to specify the rules relating to the reporting entity’s management of information.26
Along with the PMLA, there is an obligation on the part of the Banks to also follow Know Your Customer (KYC) guidelines as specified by the Master Circular of the Reserve Bank of India to prevent them from being used either intentionally or otherwise to launder money.
In the light of the recommendations made by the Financial Action Task Force (FATF) on Anti- Money Laundering (AML) requirements and on Countering the Funding of Terrorism (CFT), these KYC guidelines have been revisited. Banks have been instructed to ensure that, with the approval of the Board, a proper policy process for the KYC and AML initiatives is developed and placed in place.27
The nodal enforcement body for managing Anti-Money Laundering initiatives in India is the Financial Intelligence Unit – India (FIU-IND). It is also responsible for domestic correspondence and international cooperation with regards to Money Laundering. While it does not investigate cases, it analyses and then distributes them to the concerned financial agency such as the Narcotics Control Bureau and the Central Bureau of Investigation.28
SOCIO-LEGAL IMPACT OF MONEY LAUNDERING:
The adverse impact of money laundering is not strictly limited to the economy or the banking system but also the Society as a whole. The process of money laundering and its objective, as we have seen in the earlier sections of this paper, are traditionally criminal. Money laundering is a mechanism that is central to making crime worthwhile. This encourages drug dealers, smugglers, and other criminals to extend their activities. Because of the need for increased law enforcement and health care spending (for example, for the treatment of opioid addicts) to combat the drastic effects that arise, this pushes up government costs.29 Some countries have been used as havens to launder money, especially those which have weak Anti-Money Laundering norms. It creates more crime and corruption if money laundering is prevalent in a region. It also increases bribery use in vital gateways, such as Employees and financial institution administrators, Prosecutors and accountants, The legislature, Agencies for compliance, supervisory agencies, Police bodies, Prosecutors, and prosecutors and the trials themselves.30 Countries which are infamous for money laundering, especially in the form of free establishment of shell companies, have attracted global flak from nations as well as Anti- Money Laundering organisations, affecting their global reputation immensely.
The Indian society, and the economy, which had earlier served as a haven for money laundering for domestic criminals, has now been acknowledged as taking a strong stance against the menace of money laundering. This can be seen in the judicial pronouncement, as we see how the PMLA has been interpreted by the Judiciary. In the case of Ramalinga Raju,31 the retrospective application of Section 5 of the 2002 PMLA was questioned as to whether the provisions of the second clause of Section 5 applied to property obtained before the implementation of the provisions and, thus, as to whether the retrospective penalization clause was invalid.
The court held that the enormous amount of illegally obtained property vitiates the rule of law and unravels the fragile dignity of the nation’s sovereignty challenged by public officials and state actors. In the Telgi Scam case,32 the provisions of the PMLA were not expressly discussed but the doctrine of proportionality was elaborated upon, that the punishment for crimes like this should not be taken lightly and must attract criminal liability and that the law should come down with heavy hands to deal with individuals and establish a deterrent impact against such crimes on society as a whole. The accountability of the Enforcement Directorate was also questioned in the case of Shiv Kant Tripathi,33 where the Court noted that in a case in which the Compliance Directorate failed to file a report as an ingredient to constitute an offence under Sections 3 and 4 of the PML Act, it was lacking despite evidence to prove otherwise the laundering of money, the Court is responsible for maintaining strict supervision and control over the actions of the authorities under the Prevention of Money Laundering Act and direct them to do the acts as per the Act and in a dutiful manner.
Therefore, we see the relationship between the PMLA, as it exists on paper as well as in practice with the help of judicial precedents about the same. Upon doing so, it has been observed that the Courts have taken a stricter stance in the enforcement of PMLA as compared to the wording of the Act itself. Here, in the above-mentioned cases, the Court has kept in mind the compliance aspect of the same and have delivered judgments consonant not just to the punitive aspect but also have set a bar for deterrence regarding the same, thus addressing the societal flaws and shortcomings that would have otherwise been caused as a consequence of the rampant money laundering that would have existed. However, it has been noted that the judiciary has somewhat not been able to keep up with newer trends in money laundering.
CONCLUDING REMARKS AND SUGGESTIONS:
Though national and international laws have been drafted keeping in mind instances of money laundering and their modus operandi, existing loopholes have yet to be filled in India’s money laundering acts. Regulation of the current legal system is the most common issue that plagues money laundering laws. This is most clearly seen in the lack of understanding of Know-Your- Customer norms. Though banks have been directed to enforce strict KYC requirements that keep international law obligations in mind, the RBI is often unable to control the violation of the same and penalties often go undetected for violating KYC obligations.34 Furthermore, because of the competition faced by commercial banks in India, banks frequently disregard KYC standards as a tool for increasing performance. Therefore, in opening new accounts, KYC Requirements become identical to the Stand Form contract clauses.
Secondly, the issue of new technologies being introduced in the world of banking has not been addressed. Transaction rates have been catalysed and money passes hands at a metabolic rate with the expansion of e-commerce and modern encryption technologies, ensuring no monitoring is feasible.35 This has brought about somewhat of a resurgence in Hawala transactions, now happening online. Combined with the fact that there are multiple agencies separated from the Enforcement Directorate, which are also inadequately funded, this becomes a real problem as the burden of work increases leading to a backlog of cases. Therefore, calling for the need for a greater legislative ambit to regulate these agencies and to keep a greater role of the judiciary in addressing the scourge of money laundering in India. Thirdly, the provision of financial secrecy in other nations is a concern. The States are unable to negotiate on this secrecy. There is a need to draw a line between these laws on financial secrecy and these financial institutions being havens for money laundering.
Money laundering is not a concern unique to one country, but rather a global threat. Money launderers are targeted in countries with insufficient financial controls, especially in developing and underdeveloped countries. Strong financial regulation and universal legal requirements must be present in the world to combat the threat. The lack of tight financial regulation and the gap in legal provisions serve as a driving factor for money launderers, and the surprising part of this problem is that these issues continue to persist despite the domestic and legal provisions in place.
REFERENCES
- Hasmet Sarigul, Money Laundering and the Abuse of the Financial System, 2(1) INTERNATIONAL JOURNAL OF
- The International Criminal Police Organisation (INTERPOL), Money Laundering, https://www.interpol.int/en/Crimes/Financial-crime/Money-laundering (accessed Oct. 21, 2020, 07.09 pm.)
- International Compliance Association, What is Money Laundering? https://www.int-comp.org/careers/your- career-in-aml/what-is-money-laundering/ (accessed on Oct. 21, 2020, 07.20 pm.)
- Anjul Tomar, India’s Black Money Economy Estimated at 79% of GDP during 200911, DNA, Feb. 26, 2019 https://www.dnaindia.com/business/report-india-s-black-money-economy-estimated-at-79-of-gdp-during-2009- 11-2724048 (accessed on Oct. 21, 2020, 07.51 pm.)
- Praveen Kumar, Money Laundering in India: Concepts, Effects and Legislation, 3(7) INTERNATIONAL JOURNAL OF RESEARCH IN HUMANITIES AND SOCIAL SCIENCES (2015).
- John McDowell and Gary Novis, The Consequences of Money Laundering and Financial Crime, Bureau of International Narcotics and Law Enforcement Affairs, US Department of State (2001).
- Paridhi Saxena, Money Laundering in India, National Judicial Academy http://www.nja.nic.in/4.1.%20Paper-
- %20Money%20Laundering_1_%20Paridhi%20Saxena.pdf (accessed on Oct. 21, 2020, 09.23 pm.)
- Paul Allen Schott, REFERENCE GUIDE TO ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM, World Bank, I-7 (2003)
Referance
1 Hasmet Sarigul, Money Laundering and the Abuse of the Financial System, 2(1) INTERNATIONAL JOURNAL OF BUSINESS AND MANAGEMENT STUDIES 287 (2013)
2 The International Criminal Police Organisation (INTERPOL), Money Laundering, https://www.interpol.int/en/Crimes/Financial-crime/Money-laundering (accessed Oct. 21, 2020, 07.09 pm.)
3 International Compliance Association, What is Money Laundering? https://www.int-comp.org/careers/your-career-in-aml/what-is-money-laundering/ (accessed on Oct. 21, 2020, 07.20 pm.)
4 Anjul Tomar, India’s Black Money Economy Estimated at 79% of GDP during 2009-11, DNA, Feb. 26, 2019 https://www.dnaindia.com/business/report-india-s-black-money-economy-estimated-at-79-of-gdp-during-2009-11-2724048 (accessed on Oct. 21, 2020, 07.51 pm.)
5 Id at 1.
6 Praveen Kumar, Money Laundering in India: Concepts, Effects and Legislation, 3(7) INTERNATIONAL JOURNAL OF RESEARCH IN HUMANITIES AND SOCIAL SCIENCES (2015).
7 John McDowell and Gary Novis, The Consequences of Money Laundering and Financial Crime, Bureau of International Narcotics and Law Enforcement Affairs, US Department of State (2001).
8 Paridhi Saxena, Money Laundering in India, National Judicial Academy http://www.nja.nic.in/4.1.%20Paper-%20Money%20Laundering_1_%20Paridhi%20Saxena.pdf (accessed on Oct. 21, 2020, 09.23 pm.)
9 Paul Allen Schott, REFERENCE GUIDE TO ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM, World Bank, I-7 (2003)
10 Syed Akhter Hussain Shah et al., Governance of Money Laundering: An Application of the Principal-Agent Model, 45(4) THE PAKISTAN DEVELOPMENT REVIEW 1120 (2006)
11 Financial Action Task Force (FATF), What is Money Laundering, https://www.fatfgafi.org/faq/moneylaundering/ (accessed Oct. 22, 2020, 10.02 pm.)
12 National Drug Intelligence Centre, NATIONAL DRUG THREAT ASSESSMENT 40, (2011).
13 United States Drug Enforcement Administration, NATIONAL MONEY LAUNDERING THREAT ASSESSMENT 33 (2005).
14 Vijay S. Kumar, CONTROLLING MONEY LAUNDERING IN INDIA –PROBLEMS AND PERSPECTIVES 11 (2009).
15 United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances, 1988, Article 5(3).
16 Basel Committee on Banking Regulations and Supervisory Practices, Prevention of Criminal Use of the Banking System for the Purpose of Money-Laundering (1988).
17 Kathryn L. Gardner, Fighting Terrorism the FATF Way, 13(3) LYNNE RIENNER PUBLISHERS 325-345 (2007).
18 Id.
19 The Prevention of Money Laundering Act, 2002, Statement of Objects and Reasons.
20 The Prevention of Money Laundering Act, 2002, Section 2(u).
21 The Prevention of Money Laundering Act, 2002, Section 3.
22 The Prevention of Money Laundering Act, 2002, Proviso, Section 4.
23 The Prevention of Money Laundering Act, 2002, Proviso, Section 5(2).
24 The Prevention of Money Laundering Act, 2002, Proviso, Section 12(3).
25 The Prevention of Money Laundering Act, 2002, Proviso, Section 12(3).
26 The Prevention of Money Laundering Act, 2002, Proviso, Section 15
27 Id at 8.
28 Standing Committee on Finance (2011-2012), The Prevention of Money Laundering (Amendment) Bill, 2011, (56th Report), Ministry of Finance (Department of Revenue) pg. 18 (2012).
29 Id at 7.
30 Schott, at II-3.
31 B. Rama Raju, s/o B. Ramalinga Raju v. Union of India [2011] 108 SCL 491 (AP).
32 Abdul Karim Telgi and Sohail Khan v. Union of India, through CBI 2014 (2) JLJ 136
33 Shiv Kant Tripathi versus State of Uttar Pradesh 2013 (6) ADJ 672
34 Reserve Bank of India, Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating Financing of Terrorism (CFT)/Obligation of banks and financial institutions under PMLA, 2002, (2015).
35 Jimmy Gurule, The 1988 U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances – A Ten Year Perspective: Is International Cooperation Merely Illusory? 22(1) FORDHAM INTERNATIONAL LAW JOURNAL, 74-121 (1998).
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Author’s Name Saransh Khandelwal | College National Law University, Jodhpur
