In this article, Kirti Raj Das pursuing M.A, in Business Law from NUJS, Kolkata discusses regulations related to black money in India.

There is no clear cut definition of black money. Even under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, black money has not defined it. Black money is the money that is unaccounted for, wherein taxes have not been paid on that money. If a person earns income, that is not illegal. But if it is not included in his tax returns, then it becomes black money. Black money also includes money earned through illegal means i.e., prohibited activities in the eyes of law.

Black money is a menace to the society. The three main sources of black money are crime, corruption and business. The criminal component of black money normally includes proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, forgery, securities fraud, embezzlement, sexual exploitation and prostitution, drug money, bank frauds and illegal trade in arms. The corrupt component of such money stems from bribery and theft by those holding public office – such as by grant of business, bribes to alter land use or to regularize unauthorized construction, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price controlled services, etc.

Indian legislations for prevention of black money

Before the advent of Prevention of money laundering act, 2002 (PMLA), the statutes that were framed to address the problem of money laundering are :

• The Income Tax Act, 1961
• Black Money and Imposition of Tax Act, 2015 (Undisclosed Foreign Income and Assets or the UFIA)
• Foreign Exchange Management Act
• Prevention of Money Laundering Act

For income tax purposes, all such income which has been concealed and on which tax has been evaded, irrespective of the source of such income or the motive for earning such income, acquires the character of black money. Thus, all income which is not reported to the tax authorities becomes black income even though there may have been no illegality involved in earning such income.

Several governments in the past have been introducing ‘amnesty schemes’ over the last few years that aims to give a chance for black income holders to come clean by paying a penalty. The measure is a preparatory one as the world is now moving an ‘Automatic Exchange of Information’ era where governments can automatically avail information about domestic resident’s income and assets stored in foreign countries. Once such information is with the government, it should come out with penal measures and prosecution against black income holders. So to give a chance to residents to reveal their income and assets abroad, the Government of India introduced an Act that gives a one-time opportunity to reveal income and assets in other countries.

The Act is known as the ‘Black Money and Imposition of Tax Act, 2015 (Undisclosed Foreign Income and Assets or the UFIA)’ became effective from July 1, 2015 with the starting of the one-time compliance window (initially it was prescribed to be effective from April 1, 2016).

Black money in the form of undisclosed foreign income and assets comes under the purview of this law. The UFIA Act gives an opportunity to the black income holders to reveal black money and pay a tax within a compliance window time. After this time, black income holders will come under severe penal and prosecution measures prescribed under the law.

Undisclosed foreign income and asset’ is defined as the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India.

Features of the Act

1. The Act will be applicable to a person: (i) who is a tax resident of India as per the tests of the Income Tax Act, 1961 (ITA); (ii) who is not a person who is a ‘resident but not ordinarily resident’; and (iii) by whom tax is payable under the UFIA Bill on undisclosed foreign income and assets or any other sum of money. The term ‘person’ is not defined in the UFIA Bill so its definition under the ITA must be adopted. As regards individuals, the ITA has a day-count test of physical stay in India. For companies, the test is whether the company is incorporated in India or Place of Effective Management (POEM) is in India.
2. One – time compliance window: A one-time compliance opportunity to persons who discloses their foreign income and assets will be provided. This compliance period was available from July 1 to September 30. Persons who use this compliance window will be permitted to file a declaration before a tax authority, and pay a tax rate of 30% and a penalty at the rate of 100% (of the tax); implying a total tax of 60%. No exemption, deduction or set off of any carried forward losses (as provided under the IT Act) would apply.
3. Income and assets that qualify the disclosure: The total undisclosed foreign income and asset of an individual would include: (i) income, from a source located outside India, which has not been disclosed in the tax returns filed; (ii) income, from a source outside India, for which no tax returns have been filed; and (iii) value of an undisclosed asset, located outside India.
4. Non-disclosure, penalties, prosecution and the criminal procedures:  Not furnishing income tax returns for foreign income and assets or providing misleading information for such foreign income and assets attracts a penalty of Rs 10 lakh under the new legislation. Criminal punishment for such tax evasion practices could attract rigorous imprisonment from three to 10 years and a discretionary fine. However, it is important to note that the Foreign Assets Act provides that persons who have foreign accounts with minor balances, which may not have been reported out of oversight or ignorance, are protected from penalty and prosecution. Different types of penalties and punishment are envisaged under the law depending on the seriousness of the offence.
5. Administering authority: The Central Board of Direct Taxes and the existing hierarchy of tax authorities under the provisions of the Income Tax Act, including the appeals machinery prescribed thereunder, have been tasked with implementation of the new legislation.

Money laundering definition

In simple terms, money laundering is the process where proceeds of the crime in converted into legal money or asset in order to obscure its origin. In other words, it can be defined as an act of making money that come from one source to appear as if it comes from another source.

INTERPOL’s defines money laundering as “ any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.”

Money laundering is usually done with the intention to conceal money or other assets from state’s ire so as to prevent loss through its taxation, confiscation and legal proceedings. The criminal herein tries to disguise the origin of money obtained through illegal means to appear like it was obtained through legal means so that they use the money which otherwise would connect their activities to criminal proceedings and the law enforcement agencies would seize it.

The most common type of criminals who launder money is drug traffickers, embezzler, corrupt politicians, mobster, terrorist and con artists.These criminal organisations generated huge profits through their activities. Therefore, they route money earned through illegal means to various safe havens to disguise their origin.

Process of money laundering

Money laundering is a single process. However, its cycle can be categorised into three distinct stages namely placement stage, layering stage and integration stage :

Placement stage

At this stage the funds obtained through criminal activities are introduced into the financial system. The launderer inserts the illegal money into a legitimate financial institution in the form of cash deposits. This is a very risky stage huge amounts of money are very conspicuous. And banks are under obligation to report high value transactions. To minimise the risk, the huge amounts of money is broken into less conspicuous smaller sums that are then deposited into bank account by purchasing monetary instruments such as cheques, money orders, etc that are the collected and deposited into bank accounts of another location.

Layering stage

It is the most complex stage as series of financial transactions are carried out in order to camouflage the illegal source. The launderer engages in a series of conversions and movements of money in order to make it almost untraceable. The illegal money is sent through various financial transactions as to change its form and make it difficult to follow. Layering usually involves several transfer being made from one bank to another, wire transfers between different accounts with different names in different countries, making continuous deposits and withdrawal to vary the amount of money in the bank accounts, converting the illegal money into other countries currencies and purchasing high value items such as houses, cars , diamonds , yachts, etc. There are instances also where the launderer disguises the transfers as payment towards purchase of goods and services, giving them a legitimate look.

Integration stage

At this stage the money laundered is reintroduced into the legitimate economy. The launderer at this stage decides to put the funds into real estate, luxury assets or ventures with out the fear of getting caught. It’s very difficult to catch a laundered during the stage in the absence of any documentary evidence from the previous stages.

Some of the most utilised money laundering techniques used through out the world at the above mentioned three stages are as follows :

Structuring deposits – It is also known as smurfing. It is used at placement stage whereby is broken into deposits of small sums to defeat the suspicion of money laundering and to avoid anti- money laundering repouring requirements.

Shell companies – These are fake companies created that exists only for the purpose of money laundering. They simply create the companies in order to avoid tax, invoicing the transfers made as payments for goods and services thus giving them a legitimate appearance in the balance sheets.

Third part cheques – Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.

Bulk cash smuggling – This involves smuggling cash into another jurisdiction and depositing it into financial institution, such as offshore bank, with high secrecy or less rigorous money laundering enforcement.

During the first half of the 20^th century, apprehensions were raised regarding the lack of affection laws to deal with escalating transnational criminal activity.India had specific laws to deal with smuggling, narcotics, foreign trade violations, etc. However, one of the laws to deal with foreign exchange known as Foreign Exchange Regulation Act, 1973 (FERA) had draconian provisions.

In 1991 with opening up of the Indian economy, the foreign exchange inflows into the various sectors started rising. Foreign exchange reserves topped the $ 13 billion by February, 1994 buoyed foreign investment in various sectors and foreign companies buying Indian stocks. After such a remarkable feat achieved by the Indian economy, the Reserve Abank of India and the government decided to ease rules to allow Indians to spend money overseas on travel, education and other expenses. During the 1994-95 budget, Finance Minister Manmohan Singh announced that rupee has been made convertible on the current account. As the Indian economy improved and the balance of payment position improved, the central bank and finance minister were prompted to review the Foreign Exchange Regulation Act, 1973 (FERA). Their intention was to replace it with a new law. With the opening up of the Indian economy, the FERA has outlived its utility. This particular law was more suitable during the period where there was shortage of foreign exchange. The objective of the law was to conserve the forex and to ensure that it was only utilised in the interest of the development of the country. Although the RBI had initiated the work on a new potential law. However, the new law was not pursued a while as the PV Narasimha Rao led government went out of office in 1996. But in 1997-98, P Chidambaram decide to go ahead with some of the unfinished goals of liberalisation, include the potential law to replace the FERA. Finally, the decision was taken, and Y V Reddy who had joined RBI after quitting civil service was asked to work on it. The new law was called Foreign Exchange Management Act or FEMA which was more suitable for the changed economic scenario and to boost external trade and payments and promote the development of the foreign exchange market. One of the most remarkable change was the decision to make violations under this law a civil offence rather than criminal offence. Normal transactions in current account such as travelling abroad, tourism, education, etc. were made a right whereas restrictions were put on capital account.

However,  agencies the dealing with violation under the FERA led by the Enforcement Directorate were reluctant to give up the powers and argued that the removal of threat of criminal action would encourage the companies and individuals to take advantage of the loopholes in the law. P Chidambaram did not provide his assent to those objections, and decided to go ahead with the idea of levying monetary penalties or compounding of penalties.

In addition to the drafting of the FEMA, the government also had to think of another law which was intended to equip the state agencies with the powers of criminal action, a law on money laundering.

However, with the fall of the incumbent government in 1998, the new government had to follow up on the start. The new Finance Minister Yashwant Sinha and the RBI had not fully reckoned with the agencies that had administered the law for years. Their main concern was how the many cases of violations of the former law that are yet to be adjudicated would be handled and how things would change once the new law was implemented. Finally, a decision was made to keep a two years sunset clause for cases under FERA. Following this, a flurry of notices was issued just before the deadline which included one against a top Indian hotel chain for its acquisition of a hotel abroad.

When the FM Yashwant Sinha went to the parliament to get the bill passed for the two new laws, FEMA did not face much of the opposition, but with money laundering bill, the government found resistant opposition. After suggestion from parties across political spectrum, the bill was referred to a select committee of parliament. The panel recommended many changes to which Yashwant agreed. Finally, the bill was passed in 2002.

With the new laws coming into the picture, it was FEMA and in certain cases, the Prevention of Money Laundering Act was supposed to come into play.

The Act consists of 10 chapters containing 75 sections and 1 schedule divided into 5 parts.

Chapter I consisted of section 1 and 2 which deals with short title, extent and commencement and definitions. Chapter II consisted of  section 3 and 4 which provide for offences and punishment for money laundering. Chapter III consisted of sections 5-11 which provide for attachment of property, adjudication and confiscation. Chapter IV comprised of sections 12-15 which deals with obligations of banking companies, financial institutions and intermediaries. Chapter V has sections 16-24 which relate to summons, searches, seizures, retention, presumptions, etc. Chapter VI has sections 25-42 which deal with the establishment, composition, qualifications, powers and procedures, etc. of the Appellate Tribunal. Chapter VII has sections 43-47 which deal with Special Courts, and Chapter VIII has sections 48-54 which provide for various authorities under the Act their appointment, powers, jurisdiction, etc. Chapter IX has sections 55-61 which deal with reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property. Chapter X has sections 62-75 which deals miscellaneous provisions including punishments, cognizance of offences, offences by companies, etc.

Features of the Act

1. Offence of money laundering and its punishment

An offence of money laundering is said to be committed the accused deals with the proceeds of the crime. The punishment prescribed for offence of money laundering can range from three to seven years of rigorous imprisonment for an offence of money laundering with fine.

2. Attachment, Adjudication and confiscation

Chapter III of the Act deals with the confiscation of the property under the Act. An order for the attachment of the proceeds of the crime can be given by an official not below the rank of the Deputy Director, after informing the magistrate. Following the order, the deputy director can send report containing material information relating to such attachment to the adjudicating authority. After the receipt of the report, the adjudicating authority should send a show cause notice to the concerned person within 30 days. The authoring after giving opportunity to the concerned person and considering his response and all the related information can give finality to the order of attachment and pass a confiscation order, which will after that be confirmed or rejected by the special court.

3. Obligation of banking companies, Financial institutions and intermediaries

The above parties are required to keep a record of allt he material information relating to money laundering and forward the same to the director. Such information has to be preserved for 5 years. The director will supervise the functioning of the reporting entity and has the power to impose penalty, issue warning or order audit of the accounts to be conducted, in case of violations of its obligations. The central government after consulting the Reserve Bank of India is authorised to specify rules relating to managing information by the reporting entity.

4. Summons, searches and seizures, etc.

The adjudicating authority has been conferred with the power to survey and scrutinize records. The authority can ask any of its officials to conduct search, collect all relevant information, place identification marks and thereafter send a report to it. The search of the person can be conducted only after the central government orders for it. The authority authorized in this behalf cannot detain a person beyond 24 hours and must ensure that 2 witnesses are present, prepare a list of seized items signed by the witnesses and forward the same to the Adjudicating Authority. A property confiscated or frozen under this Act can be retained for 180 days. This period can be extended by the Adjudicating Authority based on the merits of the case. The Court or the Adjudicating Authority can subsequently also order the release of such property upon being adjudicated as not guilty. There shall be a presumption of the ownership of property and records recovered from a person’s possession. The burden of proof will be on the accused to prove that he is not guilty of an offence under this Act. The crimes under the Act is a cognizable and non-bailable offence.

Anti Money Laundering standards

RBI issued Master Circular on Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating of Financing of Terrorism (CFT)/ Obligation of banks under Prevention of Money Laundering Act, 2002 and all the banks were required to follow certain customer identification procedure before opening bank accounts and monitoring transactions which are of suspicious nature for the purpose of reporting it to appropriate authority. These KYC guidelines were revisited following the Recommendations made by the Financial Action Task Force (FATF) on Anti-Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Banks have been advised to ensure that a proper policy framework on KYC and AML measures after the approval of the Board was formulated and was put in place.

The Objective of KYC Norms/ AML Measures/ CFT Guidelines is to prevent banks from being used as platform by criminal elements for money laundering or for funding terrorist activities. KYC procedures also enable banks to know and understand their customers and their financial dealings in a better way which in turn help them manage minimise their significance.

Obligation of banks

Banks should ensure that the information collected from the customer for the purpose of opening of account must be kept confidential and details thereof must not be divulged for cross selling or any other similar purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the required context, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information required from the customer should be sought separately with his/her consent and after opening the account.

Banks should ensure that any remittance of funds by way of demand draft, mail/ telegraphic transfer or any other mode and issue of traveller’s cheques for value of Rupees fifty thousand and above is effected by debit to the customer’s account or against cheques and not against cash payment.

Banks should ensure their adherence to the provisions of Foreign Contribution (Regulation) Act, 1976 as amended from time to time.

Financial Intelligence Unit – India (FIU- IND)

While the Prevention of Money Laundering Act (PMLA) 2002, forms the main framework for Combating money laundering in the country, The Financial Intelligence Unit – India (FIU-IND) is the nodal agency in India for managing the AML ecosystem and has significantly contributed to coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in taking forward the global efforts against money laundering and related crimes. These are specialized government agencies which have been created to act as an interface between financial sector and law enforcement agencies for collecting, analysing and disseminating information, particularly about suspicious financial transactions.

As per PMLA Rules, banks are required to report information relating to cash and suspicious transactions and all transactions involving receipts by non-profit organizations of value more than rupees ten lakh or its equivalent in foreign currency to the Director, FIU-IND in respect of transactions.

It receives prescribed information from various entities in financial sector under the Prevention of Money Laundering Act 2002 (PMLA) and when required in cases disseminates information to relevant intelligence/ law enforcement agencies which include Central Board of Direct Taxes, Central Board of Excise & Customs Enforcement Directorate, Narcotics Control Bureau, Central Bureau of Investigation, Intelligence agencies and regulators of financial sector. FIU-IND does not investigate cases.

Conclusion

As we can see that black money and money laundering involves activities that are international in nature and are also committed at great level, therefore, in order to make a heavy impact it is necessary that all countries should enact stringent  laws so that the money launderers will have no room to target in order to launder their proceeds of crime by taking advantage of the loop holes of jurisdiction. Since the States have no obligation in deciding which offences should be considered as predicate offences to money laundering, there is no consensus into the international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist common predicate offences to solve the problem internationally particularly keeping in mind the trans-national character of the offence of money laundering.

Furthermore, the provision of financial confidentiality in other countries is an issue. The states are unwilling to divulge information which may infringe upon provision of confidentiality. There is a need to draw a line between such financial confidentiality rules and those financial institutions which have become money laundering safe havens.

Apart from that, many people have an opinion that money laundering seems to be a victimless crime. They are unaware of the harmful effects of such a crime. So there is a need to educate such people and create awareness among the masses and therefore instil a sense of watchfulness towards the instances of money laundering. This would also help in effective law enforcement as it would be subject to public examination.

Moreover, to have effective anti-money laundering measures both the Centre and the State has to work together on this common objective. For that the power struggle between the two should be removed. The laws should not only be the responsibility of the Centre but state should also have an equal responsibility. Decentralisation of the law would help it in reaching the public better. Therefore, one has to act regionally, nationally and globally to make the anti money laundering regime achieve its objectives.