A. Background:

Throughout the world, money earned through illegal means is a major cause for worry for the Government. The illegal money which is earned, is masked and reintroduced into the regular economy through varied ways, thereby bringing a shell of respectability for ill-gotten wealth and depriving the Government revenue arising out of such transactions.

The term Money Laundering means procedures adopted in legitimizing assets earned which may be not under the four corners of the law. The source of such ill-gotten wealth may be Corruption, Organized Crime, Narcotics Trade, prostitution arms trade etc.

Money Laundering is an offshoot of parallel economy, which deprives most governments of legitimate revenue, thereby, the less endowed section of the society will be deprived of their upliftment. Throughout the world, governments are seized of the gravity of the situation and have introduced statutes to prevent money laundering and India is also a signatory to the global convention against money laundering.

The present ruling dispensation in India, have brought a series of measures to check the generation of ill-gotten money and its reintroduction into the mainstream. One of the measures introduced was the enactment of the Prevention of Money Laundering Act 2002. One important and significant feature of this enactment is that, it covers the ill-gotten wealth reintroduced in the mainstream in other countries also and  reverse introduction of such wealth in India from illegal monies earned outside India, which in other words is known as cross border transaction.

Money Laundering

B. Legislative History: 

In India, before the enactment of the Prevention of Money Laundering Act 2002, the Government of the day brought several legislations to address the menace of money laundering.

These statutes were, The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, The Income Tax Act, 1961, The Benami Transactions (Prohibition) Act, 1988, The Indian Penal Code and Code of Criminal Procedure, 1973, The Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and also included demonetization of currency.

However, the provisions of such statute were inadequate and in consonance with GLOBAL concerns a specific statute to deal with the issue was introduced.

The specific legislation dealing with money laundering is the Prevention of Money-Laundering Act, 2002 (for short ‘PMLA’). The law was enacted to combat money laundering in India and has three main objectives:

  • To prevent and control money laundering;
  • To provide for confiscation and seizure of property obtained from laundered money; and
  • To deal with any other issue connected with money-laundering in India.

It came into force with effect from 1st July 2005. The Act was amended by the Prevention of Money Laundering (Amendment) Act 2009 w.e.f. 01.06.2009. The Act was further amended by the Prevention of Money Laundering (Amendment) Act, 2012 w.e.f. 15-02-2013.

It extends to the whole of India including the state of Jammu & Kashmir.

Apart from the provisions of PMLA, there are other specialised authorities dealing with the menace, such as RBI/SEBI/IRDA anti money laundering regulations. Many of these authorities are bound to provide suspicious transaction reports, which are in-turn analysed by Financial Intelligence Units established by the Central Government.

C. Key terms under the Act:

1. “Attachment” means prohibition of transfer, conversion, disposition or movement of property by an order issued under Chapter III;

2. “Beneficial owner” means an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person [Sec 2 (fa)].

3. “Client” means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting [Sec 2 (ha)].

4. “Corresponding law” means any law of any foreign country corresponding to any of the provisions of this Act or dealing with offences in that country corresponding to any of the scheduled offences [Sec 2 (ia)].

5. “Payment system” means a system that enables payment to be affected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them.

Explanation – For the purposes of this clause, “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations;

6. “Payment system operator” means a person who operates a payment system and such person includes his overseas principal.

Explanation – For the purposes of this clause, “overseas principal” means –

(A) in the case of a person, being an individual, such individual residing outside India, who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India;

(B) in the case of a Hindu undivided family, Karta of such Hindu undivided family residing outside India who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India;

(C)  in the case of a company, a firm, an association of persons, a body of individuals, an artificial juridical person, whether incorporated or not, such company, firm, association of persons, body of individuals, artificial juridical person incorporated or registered outside India or existing as such and which owns or controls or manages, directly or indirectly, the activities or functions of payment system in India

7. “Property” means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets [Sec 2 (v)].

Explanation. -For the removal of doubts, it is hereby clarified that the term “property” includes property of any kind used in the commission of an offence under this Act or any of the scheduled offences;

8. “Reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession [Sec 2 (wa)].

9. “value” means the fair market value of any property on the date of its acquisition by any person, or if such date cannot be determined, the date on which such property is possessed by such person

10. “Contracting State” means any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise [Section 55].

D. What is money laundering?

The goal of any criminal enterprise is to generate a profit, for the individual or group that carries out the act. Money laundering is the method adopted to mask these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

In a developing country like India, the main source would be corruption, extortion, blackmailing, Illegal arms sales, smuggling, and the activities of organized crime, including for example drug trafficking and prostitution rings, which can generate huge amounts of proceeds.

Other sources would include fraud, theft, insider trading, bribery and Ponzi schemes.

When a criminal activity generates substantial profits, the individual or group involved have to devise a method to be in possession of the ill-gotten wealth, without attracting attention to the underlying activity or the persons involved. The method adopted is to do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

E. How does Money Laundering take place?

There are three stages to a transaction of money-laundering:

  • The first stage is Placement, where the criminals place the proceeds of the crime into normal financial system.
  • The second stage is Layering, where money introduced into the normal financial system is layered or spread into various transactions within the financial system so that any link with the origin of the wealth is lost.
  • The third stage is Integration, where the benefit or proceeds of crime are available with the criminals as untainted money.

F. Authority for implementation of the Act:

The Directorate of Enforcement, in the Department of Revenue, Ministry of Finance, is responsible for investigating the cases of offence of money laundering under Prevention of Money Laundering Act, 2002.

Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

Some Predicate Offences will also be investigated by agencies such as Police, Customs, SEBI, NCB and CBI, etc. under their respective Acts.

G. What are the powers available to the Investigating Officers under the Act?

The Investigating Officers have the following powers:

(a) to provisionally attach any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [Section 5];

(b) to conduct survey of a place [Section 16];

(c) to conduct search of building, place, vessel, vehicle or aircraft & seize/freeze records & property [Section 17];

(d) to conduct personal search [Section 18];

(e) to arrest persons accused of committing the offence of Money Laundering [Section 19];

(f) to summon and record the statements of persons concerned [Section 50].

H. To whom does the provisions of the Act apply?

The provisions of the Act applies to every Person directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected 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” [Sec 3].

As per Section 2(1)(s) “Person” includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) every artificial juridical person not falling within any of the preceding sub-clauses, and

(vii) any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses.

Thus, besides the natural person, even legal entities are also covered under the expression “person” as per the Act.

I. What Is an Offence under Money Laundering Act?

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 (Section 3).

J. What are proceeds of Crime?

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [Section 2(1)(u)].

The offences listed in the Schedule to the Prevention of Money Laundering Act, 2002 are scheduled offences in terms of Section 2(1)(y) of the Act. The scheduled offences are divided into two parts – Part A & Part C.

In Part ‘A’, offences to the Schedule have been listed in 28 paragraphs and it comprises of offences under Indian Penal Code, offences under Narcotic Drugs and Psychotropic Substances, offences under Explosive Substances Act, offences under Unlawful Activities (Prevention) Act, offences under Arms Act, offences under Wild Life (Protection) Act, offences under the Immoral Traffic (Prevention) Act, offences under the Prevention of Corruption Act, offences under the Explosives Act, offences under Antiquities & Arts Treasures Act etc.

Part ‘B’ Omitted by the Amendment in 2012 and all the offences have now been placed in Part A of the Schedule.

Part ‘C’ deals with trans-border crimes and is a vital step in tackling Money Laundering across International Boundaries.

Every Scheduled Offence is a Predicate Offence. The Scheduled Offence is called Predicate Offence and the occurrence of the same is a prerequisite for initiating investigation into the offence of money laundering

K. Are such offences cognizable?

As per Sec 45(l) notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), no  person accused of an offence punishable for a term of imprisonment of more  than three years under Part A of the Schedule shall be released on bail  or on his  own bond unless-

(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and

(ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is  not guilty of such offence and that he is not likely to commit any  offence while on bail:

Provided that a person who is under the age of sixteen years or is a woman or is sick or infirm, may be released on bail, if the special court so directs.

L. What are penal provisions?

Section 4 provides rigorous imprisonment for a term between three to seven years, along with the fine without any upper limit for money laundering relating to all schedule offences apart from offences pertaining to narcotics, wherein, the maximum term of imprisonment may extend to 10 years.

Attachment of property under Section 5, seizure/freezing of property and records under Section 17 or Section 18.

M. What are the provisions for arrest?

The relevant authority under PMLA can arrest a person if on the basis of material in his possession,

  • he has reason to believe that any person has been guilty of an offence punishable under PMLA, and
  • the reason for such belief has been recorded in writing.

in Vakamulla Chandrashekhar  vs. UOI, where it was held that the “information of the ground of arrest” “as soon as may be satisfies the requirement of the arrest under Section 19 of the PMLA.

N. What are the Conditions after Arrest?

  • inform the arrested person about the grounds for his arrest.
  • forward a copy of the arrest order along with the material in his possession to the Adjudicating Authority.
  • Produce such person, within twenty-four hours, before the Special Court or Judicial Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction.
  • Provided that the period of twenty-four hours shall exclude the time necessary for the journey from the place of arrest to the Court.

O. Is Warrant mandatory for Arrest?

From the bare perusal of the Section 19 of the PMLA, it is apparent that there is no requirement under the section to obtain an arrest warrant from the Court before arresting a person. If the conditions mentioned in Section 19 of the PMLA are fulfilled, the relevant authority under PMLA can arrest a person.

P. What are the Conditions for Provisional Attachment?

The Appellate Tribunal Under Prevention of Money Laundering Act
New Delhi,
In the case of Sarosh Munir Khan Vs. The Deputy Director, [534/MUM/2013], it was held as under:

The following conditions are required to be satisfied before a provisional attachment order is passed by the Director or any other Officer authorized by him occupying a rank not below that of a Deputy Director;

i. There should be adequate material before such officer, which makes him believe that if the attachment of the proceeds of crime are not ordered, it might result in frustration of the confiscation.

ii. A person must be in possession of the proceeds of crime

iii. Such person must have been charges of having committed one or the other of scheduled offences under this Act;

iv. Such proceeds of crime are likely to be concealed or transferred or dealt with in any manner, which may result in frustrating any proceedings of their ultimate confiscation.

The Honorable Supreme Court of India has held in the case Prem Singh and Ors. Vs. Birbal and Ors. as under:

“There is a presumption that a registered document is validly executed. A registered document, therefore, prime facie would be valid in law. The onus of proof, thus, would be on a person who leads evidence to rebut the presumption.

Q. What is the Presumption of Interconnected Transactions?

Where Money Laundering involves two or more interconnected transactions and one or more such transactions is or are proved to be connected with Money Laundering, then for the purposes of Adjudication or Confiscation, under section 8 or for the trial of the Money Laundering offence, it shall unless otherwise proved, be presumed that the remaining transactions form part of such interconnected transactions associated with Money Laundering.

Where a transaction of acquisition of property is part of inter-connected transactions, the onus of establishing that the property acquired is not connected to the activity of Money Laundering, is on the person in ownership, control or possession of the property, though not accused of a Section 3 offence under PMLA, provided one or more of the interconnected transactions is or are proved to be involved in Money-Laundering.

R. What is “offence of cross border implication”?

(1) Any conduct by a person at a place outside India which constitutes an offence at that place and which would have constituted an offence specified in Part A or Part C of the Schedule, had it been committed in India and if such person transfers in any manner the proceeds of such conduct or part thereof to India; or

(2) Any offence specified in Part A or Part C of the Schedule which has been committed in India and the proceeds of crime, or part thereof have been transferred to a place outside India or any attempt has been made to transfer the proceeds of crime, or part thereof from India to a place outside India [Section 2(1)(ra)].

The two instances mainly pertain to the transfer of the proceeds of crime ‘to India’ or ‘from India to a place outside India’ or an attempt is made in regard to the latter. This provision on its own doesn’t constitute an offence but supplements the offence of money laundering and increases its applicability to cross-border transactions as well. Anyone who is found guilty u/s 2(1)(ra) of PMLA would be held guilty u/s 3 and would be punishable for the offence of PMLA u/s 4 of the Act.

S. Which institutions / persons must carry out AML (Anti Money Laundering) measures?

Reporting Entities are required to carry out AML measures under PMLA. “Reporting Entity” as defined under section 2(wa) of the PMLA means and includes:

1. Banking company: Banking company under PMLA means a banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies and includes any bank or banking institution referred to in section 51 of the Act.

Banking company includes all nationalized banks, private Indian Banks and private foreign banks, all co-operative banks, State Bank of India and its associates and subsidiaries and Regional Rural Banks.

2. Financial Institution: Financial Institution under PMLA means a financial institution as defined in section 45-I(C ) of the Reserve Bank of India Act, 1934 and includes a chit fund company, a co-operative bank, a housing finance institution, insurance companies, hire purchase companies, Non-Banking Financial Companies (NBFCs as defined in section 45-I of the RBI Act) and the Department of Posts.

3. Intermediary: Intermediary under PMLA includes the following persons registered under Section 12 of SEBI Act- Stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees to trust deed, registrars to issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories and depository participants, custodian of securities, foreign institutional investors, credit rating agencies, venture capital funds, collective investment schemes including mutual funds, an association recognised/ registered under the Forward Contracts (Regulation) Act, 1952 or any member of such association, an intermediary registered by the Pension Fund Regulatory Development Authority, and a recognized stock exchange.

4. Person carrying on a designated business or profession: Section 2(1) (sa) defines “person carrying on designated business or profession” to mean:

“(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii) a Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908(16 of 1908), as may be notified by the Central Government;

(iii) real estate agent, as may be notified by the Central Government;

(iv) dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government;

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.”

T. Transactions for which reporting requirements apply?

The PMLA and the Rules thereunder require every reporting entity to furnish FIU-IND information relating to-

i. All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency;

ii. All series of cash transactions integrally connected to each other which have been valued below rupees ten lakhs (Rs. 10,00,000) or its equivalent in foreign currency where such series of transactions have taken place within a month;

iii. All transactions involving receipts by non-profit organizations of value more than rupees ten lakh (Rs. 10,00,000) or its equivalent in foreign currency.

iv. All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions.

v. All suspicious transactions whether or not made in cash.

vi. All cross-border wire transfers of the value of more than five lakh rupees (Rs. 5,00,000) or its equivalent in foreign currency where either the origin or destination of fund is in India.

vii. All purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity, as the case may be.

As per section 14 of the PMLA provides that Reporting Entities and their officers shall not be liable to any civil or criminal proceedings against them for furnishing information under clause (b) of sub-section (1) of section 12.

U. What are the sanctions for not complying with the obligations under the PMLA?

Section 13 of the PMLA empowers the Director, FIU-IND to impose a fine on Reporting Entities for failure to comply with the obligations of maintenance of records, furnishing information and verifying the identity of clients. The sanctions include both administrative action and monetary fine, which may vary between INR 10,000 and INR 1,00,000 for each failure.

V. On whom the burden of proof is cast?

It is clear that, a person accused of an offence under Section 3 of PMLA, whose property is attached and proceeded against or Confiscation, shall discharge the onus of proof (Section 24) vested in him by disclosing the sources of his Income, Earnings or Assets, out of which or means by which he has acquired the property attached, to discharge the burden that the property does not constitute proceeds of crime.

W. Whether the statement recorded before the Investigating Officer under PMLA is admissible evidence under the Law?

Yes, the statement recorded before the Investigating Officer under PMLA is admissible evidence in the Court as such a proceeding under Section 50(2) and 50(3) of the Act is a judicial proceeding within the meaning of Section 193 and 228 of IPC.

X. What will happen if there is conflict between the provisions of PMLA, 2002 and other Acts / laws?

The provisions of PMLA, 2002 have over-riding effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force [Section 71].

Y. What will happen to the proceedings initiated under PMLA, 2002 in the event of death or insolvency of the person?

In cases where any property of a person has been attached under section 8 and no appeal against the order attaching such property has been preferred, then, the legal representatives or the official assignee or the official receiver may prefer an appeal to the Appellate Tribunal / High Court or to continue the appeal before the Appellate Tribunal / High Court, in place of such person.

Z. Conclusion:

The Prevention of Money Laundering Amendment Act, 2013 has been made most stringent, in order to tackle the menace of Money laundering, arising out of ill-gotten money through dubious means. The provisions of the Act are equally harsh on one who such commits the offence and the person in whose name it is layered.

Many agencies have been roped into generate information regarding such activities which include RBI/SEBI/Registration Authorities/Banks/Business Entities. Information is being collated and acted upon real time basis.

In the fight against parallel economy the present ruling dispensation under Honorable Prime Minister Narendra Modiji, has made the life of such persons who are engaged in money laundering activities more difficult.

The success of the measure initiated under PMLA can be known by following statistics:

Minister of State for Finance Anurag Singh Thakur, in a written reply to a question in the Rajya Sabha, also said till October 2019, a total of 694 prosecution complaints or chargesheets were filed before courts under the Prevention of Money Laundering Act (PMLA).

“Trial is underway in these cases before the respective PMLA special courts. Till now, 13 persons have been convicted by PMLA special courts in 9 cases,”

The minister also informed the House that a total of 757 criminal cases were registered by the Enforcement Directorate (ED) in the last five years (from 2015 to October 2019) under the PMLA.

Since 2015, the central probe agency saw a phenomenal jump in registration of cases, attachment of assets and filing of charge sheets.

The ED attached assets worth over Rs 33,563 crore between April 2015 to October 2018, while the figure for the previous 10 years between July 2005 to March 2015 was Rs 9,003 crore. These include Sterling biotech bank loan fraud, where senior politician Ahmed Patel’s son and son-in-law are under the lens, the Agusta Westland and Rafale deals, bank loan frauds involving Vijay Mallya, the disproportionate assets case against veteran Karnataka politician D K Shivakumar, the ICICI bank loan to Videocon Industries, the Punjab National Bank cases involving Nirav Modi and Mehul Choksi, the Jammu & Kashmir Cricket Association case against  Farooq Abdullah, the INX Media one against former finance minister P Chidambaram.

The fact that Enforcement Directorate had been made the nodal authority for enacting the statute should send a shiver through the spine of persons engaged in such activity. If out of the actions initiated under the law, if more than 50% are convicted, then the act would have served its purpose.

The success or failure of any enactment to curb illegal generation of money depends upon a determined government and since the present government is using lot of Artificial Intelligence tools the percent of success may be significantly higher.

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