laundering

In this article, Bedadutta Nag pursuing M.A, in Business Law from NUJS, Kolkata discusses Anti-Money Laundering Laws in India.

INTRODUCTION

The term “money laundering” is generally attributed to the collective of procedures involved in legitimising assets amassed by means which may not be have been legitimate. Described otherwise, it involves the transmutation of ill-gotten proceeds into ostensibly legitimate assets, and sometimes into businesses developed as means to generate more revenues to finance the very ill-means from where the proceeds were generated in the first place.

In most jurisdictions today, this term is taken to have conflation with other kinds of financial and business crime, and malpractices affecting the set order of the financial system in such jurisdictions, including but not limited to obfuscation of the source of money, or even the mode of generation of money from a source considered to be illegal in the country where the money is being utilised.

Background

Organised societies with flourishing monetary systems have been plagued by effects of money laundering (in various forms) and such societies have also been combating the same ever since. In most jurisdictions across space and time, an enduring method to ‘salvage’ one’s wealth from unwanted state action, has been the use of parallel banking or Informal value transfer systems that allowed people to move money out of the country avoiding state scrutiny. On the other hand, rulers, administrators, and governments have also been acting against such activities in some way or other sometimes, by declaring such practices to be illegal outright, and on some other times, permitting a free run with the ambitions of generating more wealth to finance the state machinery.

On that note, an attempt is hereby made to understand the way money laundering activities take place in India – a country which is fast emerging as an economic superpower, alongside a long history of prevailing graft and corrupt practices at various levels. An attempt is also made to understand the endeavours that have been taken up at the legislative levels and even the administrative levels to counter such activities. Whereas pieces of legislation have been brought into force over various periods of time, the most potent legislation enacted and enforced against money laundering practices is the Prevention of Money Laundering Act 0f 2002. In addition to the legislative endeavours, judicial precedents set forth on the subject of money laundering and the concurrent pieces of legislation have also been highlighted.

THE INDIAN PERSPECTIVE

In line with the topic of discussion, an attempt is now made to comprehend the scenario of how money laundering has affected the financial system in India, and how laws and procedures have been formulated to counter money laundering, as such.

On money laundering, India has been vulnerable and combative, to say in a nutshell. The country has been classified as a high-risk zone in terms of money laundering. Out of 152 countries, India was ranked 79th in the year 2015 and out of 149 countries, India was ranked 78th for the year 2016[1], by the Anti Money Laundering (AML) Basel Index.

Money laundering activities have also been the leading cause behind a thriving black economy which exists in India. Very briefly explained, black economy means an economic ecosystem which runs and sustains itself on the availability of black money. Black money refers to cash saved from one’s black income, that is income which is earned from illegal or means which are unaccounted for, as discussed in the preceding clauses. In addition, such activities also create avenues for existence of parallel economies, whereby part of a transaction is paid for with accounted amounts and the other with unaccounted amounts, and the vendors in this regard make use of undervalued invoices to do transactions as such.

Anti-Money Laundering Laws in India

The successive governments in India, since independence, being aware of the ground realities, have been at various times, proactive in the formulation of laws and legal mechanisms to counter the effects of money laundering and break the existing networks.

In India, before the enactment of the Prevention of Money Laundering Act 2002, a number of statutes addressed scantily the issue in question. 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.

Money Laundering is a global menace that cannot be contained by any nation alone. The Prevention of Money Laundering (Amendment) Bill 2011 was necessitated in view of India being an important member of the Financial Action Task Force and to bring prevention of money laundering legislation on par with global norms. The said Bill is still pending for approval in the Parliament.

The major pieces of legislation preceding the Prevention of Money Laundering Act, 2002 or the PMLA, inter alia, which directly or indirectly aim to curb and combat money laundering activities are noted and listed in the following manner:

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

This was passed in the year 1974 in furtherance of the government endeavours to retain foreign exchange within the country by providing for ‘preventive detention in certain cases for the purposes of conservation and augmentation of foreign exchange and prevention of smuggling activities and for matters connected therewith’. The Act was enacted to give wide powers to the executive to detain individuals on the apprehension of their involvement in smuggling activities. It has been effective since 19th December, 1974 and had repealed the Maintenance of Internal Security Act, 1970.

The Act is based on the concept of Preventive Detention, which apart from being a colonial legacy, is also given explicitly in our constitution as ‘the necessary evil’, and laws exist under Article 22 of the Indian Constitution for the same for reasons related to security of the state and maintenance of public order. As per the provisions of section 10 the prescribed periods of detention are 1 (one) to 2 (two) years.

One noticeable element in respect of this piece of legislation is the complete disregard of any judicial proceeding in respect of any action taken in respect of this law. All decisions in furtherance of the Act may be taken by the state governments or the central government. The relevant provisions in this regard, which must be taken note of are power to make orders detaining certain persons (section 3), execution of detention orders (section 4), power to regulate place and conditions of detention (section 5), revocation of detention orders (section 11).

There have been calls to repeal this Act many times, however, the provisions are no longer given effect.

The Benami Transactions (Prohibition) Act, 1988

This Act was passed in the year 1988, ‘to prohibit Benami transactions and the right to recover property held Benami and for matters corrected therewith or incidental thereto’.

Under section 2(a) of this Act, a ‘Benami transaction’ is defined as follows:

“Benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person;”

Section 3 of the Act, categorically debars anyone from entering into a Benami transaction.

The Act further lays down that properties acquired underBenamii transaction are liable to be acquired by the competent authority without any liability of compensation to be payable by such authority.

The Indian Penal Code, 1860 and Code of Criminal Procedure, 1973

The Indian Penal Code of 1860 is the major substantive law which identifies a number of criminal activities and also prescribes penalties for them. The Code of Criminal Procedure of 1973, on the other hand is a piece of procedural law which lays down procedures to be followed in criminal cases.

To better understand laws against money laundering, reference must be made to these laws as well.

As such it may be noted that the laws as such also have a close relation with PMLA. A number of offences under the Indian Penal Code have been noted as being scheduled offences within the meaning described in the PMLA.

Further section 65 of the PMLA also lays down that the provisions of the Code of Criminal Procedure are to be followed in respect of the various proceedings stipulated under the PMLA.

The Narcotic Drugs and Psychotropic Substances Act, 1985 – the NDPS Act

This Act was passed in the year 1985 with the objective of consolidation and amendment of laws relating to narcotic drugs, to make stringent provisions for the control and regulation of operations relating to narcotic drugs and psychotropic substances, to provide for the forfeiture of property derived from, or used in, illicit traffic in narcotic drugs and psychotropic substances, the implementation of the provisions of the International Convention on Narcotic Drugs and Psychotropic Substances and for matters connected therewith.

This Act, keeping in line with its objectives identifies, lists, and describes various forms and types of narcotic drugs and psychotropic substances. In consonance, there are many offences as well which have been identified as such.

The Act, though in essence seeks to stop and restrict the transport, and vending of narcotic and psychotropic substances, and does not really speak about money laundering activities, it may however be noted that the trade of narcotic substances does generate a lot of hard cash for people involved in it. So much so that a substantial portion of the money involved in drug trafficking is then mobilised to give it legitimacy, or in other words, the same money gets laundered.

The NDPS Act by acting against practices pertaining to the drug trading and trafficking puts a direct restriction on the flow of money into illicit activities.

As such the offences under the NDPS Act are noted as scheduled offences under the PMLA.

By-Laws

Apart from the laws discussed above, a special mention may also be made on the EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991.

Notwithstanding the fact that most of such laws, as have been listed hereinabove, were quite potent, they still proved to be inadequate in core money laundering matters. One reason causing such inadequacy could be that such laws were effected piecemeal and were simply targeting specific acts and omissions which could have a remote connection with money bearing relation to grey businesses and vocations, and not the act of money laundering. In other words, the cannons targeted the effect and not the cause behind them.

Eventually, to curb instances of Money Laundering, the Prevention of Money Laundering Act (PMLA) was introduced in the Lok Sabha on 4th August 1998 and was eventually passed on the 17th January, 2003.

Apart from the enactment and enforcement of the PMLA, several other steps have been and are being taken by the government to ensure that the instances of money laundering are prevented.

The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 or the PMLA is an Act of the Parliament of India enacted to prevent money-laundering and to provide for confiscation of property derived from money-laundering.

The PMLA and the Rules notified there under came into force with effect from July 1, 2005. The Act and Rules notified thereunder impose obligation on banking companies, financial institutions, and intermediaries to verify identity of clients, maintain records and furnish information in prescribed form to the competent authorities formed and appointed in that regard [e.g., Financial Intelligence Unit – India (FIU-IND)]. The Act was subsequently amended in the years 2005, 2009 and 2012.

The Objectives

The PMLA seeks to combat acts pertaining to money laundering in India and in view of this, it mainly has three main objectives:

  • To prevent and control money laundering
  • To confiscate and seize the property obtained from the laundered money; and
  • To deal with any other issue connected with money laundering in India.

Key Concepts in the PMLA

The PMLA, it may be reiterated, is the most exhaustive piece of legislation meant to identify acts and practices pertaining to money laundering and combat the effects thereof. Within its ambit, a number of concepts have been defined, described and dealt with in detail, which would have a direct reference to money laundering activities.

Some of such key-concepts are discussed hereinafter in the following manner.

Money-laundering

The concept of money laundering is described under section 3 of the PMLA, in a manner to include those activities whereby there are ‘attempts to indulge or assist other person’ or become ‘involved in any activity connected with the proceeds of crime and projecting it as untainted property’ are said to be activities which may be acts of money laundering.ii) Proceeds of crime: This is one of the most important terms to be understood insofar as the aim is to understand the scope of the term money laundering within the PMLA. This term is defined within the PMLA to describe properties and assets acquired out of a criminal activity.

Beneficial Owners

Activities given effect with the ulterior motive to launder money, usually operate under a veil, which makes it necessary to have the veil lifted out of monetary transactions and identify the movement of money, and also identify the persons benefitting out of such transactions. Which is why, the term beneficial owner has been used in many places throughout the PMLA.

The term ‘beneficial owner’ is defined under section 2(1) clause (fa) of the PMLA to mean a person who ultimately owns or controls a client regarding a reporting entity, or someone on whose behalf a transaction is effected and who is meant to reap the ulterior benefits out of such transactions.

In addition to the aforementioned definition of ‘beneficial owners’ provided within the PMLA, additional description are provided under the MASTER DIRECTION ON KYC NORMS ISSUED BY RBI FOR REGULATED ENTITIES[2], to identify beneficial owners in respect of myriad situations.

In accordance with the RBI regulations as such, the following provisions may be taken note of.

Company as a customer

Pursuant to the provisions of the section 3(a) (ii), in the event the customer is a company, the beneficial owner is the natural person/s, who, whether acting alone or together, or through one or more juridical person, has/ have a controlling ownership interest or who exercise control through other means.

And in pursuance of the above provisions the following concepts used bear the meanings attributed in the following manner.

The term “Controlling ownership interest” refers to the ‘ownership of/ entitlement to more than 25 per cent of the shares or capital or profits’ of the concerned company.

The term “Control” means and includes the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. Where the customer is a partnership firm, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/ have ownership of/ entitlement to more than 15 per cent of capital or profits of the partnership. Where the customer is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/ have ownership of/ entitlement to more than 15 per cent of the property or capital or profits of the unincorporated association or body of individuals.

And the term “Central KYC Records Registry” (CKYCR) means and includes an entity defined under Rule 2(1)(aa) of the Rules, to receive, store, safeguard and retrieve the KYC records in digital form of a customer.

Payment System

The term payment system has been defined as a system that enables payment to be effected between a person making a payment (designated as a ‘payer’ in the PMLA) and a beneficiary, involving clearing, payment, or settlement service or all of them. It includes the systems enabling credit card, debit card, smart card, money transfer or similar operations.

Adjudicating Authority

The Adjudicating Authority is the authority appointed by the central government through notification to exercise its jurisdiction, powers, and authority conferred under the PMLA. It decides whether any of the property attached or seized is involved in money laundering. The Adjudicating Authority shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and subject to the other provisions of PMLA. The Adjudicating Authority shall have powers to regulate its own procedure. Presumption in inter-connected transactions Where money laundering involves two or more inter-connected transactions and one or more such transactions is or are proved to be involved in money laundering, then for the purposes of adjudication or confiscation, it shall be presumed that the remaining transactions form part of such inter-connected transactions.

Non-Profit Organizations

“Non-profit organisations” (NPO) means any entity or organisation that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a company registered under Section 25 of the Companies Act, 1956.

Reporting Entities

The PMLA further has provisions pertaining to certain units known as ‘reporting entities’ within its ambit. Within clause (wa) of section 2(1), reporting entities include banking company, financial institution, intermediary or a person who may be carrying out a business or profession specifically designated within the PMLA.

Designated Business or Profession

Within the ambit of the PMLA, certain businesses and professions and the persons associated therewith are also included within the meaning of a ‘reporting entity’. Such persons include the followings

  • A person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;
  • A Registrar or Sub-Registrar appointed under Section 6 of the Registration Act, 1908, as may be notified by the Central Government.
  • Real estate agent, as may be notified by the Central Government.
  • Dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government.
  • 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
  • Person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

The above description is mentioned under the Section 2(1)(s) of the PMLA.

Procedure under the PMLA

Obligations of the Reporting Entities

The reporting entities are tasked under the provisions of the PMLA to perform the major activities mandated by the law. In their specific capacities are obligated to perform certain functions, which concisely include the followings:

  1. Maintenance of records;
  2. Furnish information pertaining to such records;
  3. Verification of identity of its clients by carrying out due diligence procedures;
  4. Identification of beneficial owner, in respect of the transactions undertaken with its various clients.

The aforesaid obligations in detail are provided under section 12 of the PMLA.

In addition to the above-mentioned obligations, it is also the duty of the reporting entities to provide access to necessary information as and when called for by a director (appointed under the provisions of the PMLA).

The necessary provisions in this regard occur under section 12A of the PMLA.

For all the obligations which are to be shouldered by a reporting entity, the PMLA specifically gives exclusions to reporting entities against any kind of civil or criminal proceedings. Such exclusion or exemption also extends to the directors and/or employees of the concerned reporting entity.

Monetary Penalties on Reporting Entity

Notwithstanding the protection of law according to reporting entities, it may also be noted that the reporting entities are also subject to vigilance and for obligatory violations, such reporting entities may also get penalised.

In accordance with the provisions of Section 13(2)(d), it may be noted that reporting entities may get penalised for non-maintenance of records or non-submission of information sought from such reporting entity. As such, monetary penalties can be imposed on defaulting reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each instance of failure.

Burden of Proof

The offence of money laundering as noted under section 3 of the PMLA is considered an aggravating one, and an accusation under the same shifts the onus of proof on the person accused of having committed the offence, as such.

Following the provisions as noted above, In the case of a person charged with the offence of money-laundering under section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-laundering; and (b) In the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.

Presumption of inter-connected transactions

In cases where money laundering was effected by involvement of two or more inter-connected transactions and one or more such transactions is or are proved to be involved in money laundering, then for the purposes of adjudication or confiscation, it shall be presumed that the remaining transactions form part of such inter-connected transactions.

The relevant provision in this regard occur under section 23 of the PMLA.

Essentially, under PMLA, the burden of proof lies on the person who claims that the proceeds of crime alleged to be involved in Money-Laundering, are not involved in Money-Laundering. The presumption against the accused or any 3rd party is good enough to discharge the onus of the authorities under PMLA.

Even in the case of Records, and Properties, which are found in the possession or control of any person in the course of a survey or search under the Act (Section 16, Section 17 and Section 18 of PMLA), under a presumption is raised that such records or property belongs to such person, and the contents of such records are true, and further that signatures and any part of such records in hand-writing of a particular person or in the hand-writing of such person, the presumptions as to the records in property are absolute, and the onus to prove the same otherwise, lies on such person. It is clear that, a person accused of an offence under Section 3 of PMLA, whose property is attached and proceeded against for 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.

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.

Attachment

Defined under section 2 clause 1(d), the term attachment refers to the procedure for transfer, conversion, disposition or movement of property in pursuance of an order passed in accordance with chapter III of the PMLA.

Kinds of Penalties under the PMLA

The PMLA is a piece of criminal legislation, where presumption of guilt has precedence and the burden of proof lies on the person accused of a violation. Following this there are certain penalties which are prescribed within the provisions of the PMLA.

The PMLA prescribes that any person found guilty of money-laundering shall be punishable with rigorous imprisonment from three years to seven years and where the proceeds of crime involved relate to any offence under paragraph 2 of Part A of the Schedule (Offences under the Narcotic Drugs and Psychotropic Substance Act, 1985), the maximum punishment may extend to 10 years instead of 7 years.

Powers of attachment of tainted property Appropriate authorities, appointed by the Govt of India, can provisionally attach property believed to be “proceeds of crime” for 180 days. Such an order is required to be confirmed by an independent Adjudicating Authority.

The Authorities – PMLA

Section 48 of the PMLA lays down the provision on the authorities holding competence under the Act. The authorities are as follows.

  • Director or Additional Director or Joint Director,
  • Deputy Director,
  • Assistant Director, and
  • such additional directors/officers whose appointment may be deemed necessary under the provisions of the PMLA.

Special Court and Appellate Tribunals

Special Courts

Section 43 of Prevention of Money Laundering Act, 2002 (PMLA) says that the Central Government, in consultation with the Chief Justice of the High Court, shall, for trial of offence punishable under Section 4 of the PMLA, by notification, designate one or more Courts of Session as Special Court or Special Courts for such area or areas or for such case or class or group of cases as may be specified in the notification.

Section 43 and the relevant subsequent provisions in this regard.

Trial under Special Courts formed under the PMLA

Special courts formed under the provisions of the PMLA are empowered to take cognisance of complaints made by an authority authorised in this behalf under the PMLA. And even if the proceedings under the provisions of the PMLA are being conducted by a court other than a special court under the PMLA, then the proceedings could be committed to the special courts formed under the PMLA.

The relevant provisions under the PMLA occur under section 44 of the PMLA.

Appellate Tribunals

An Appellate Tribunal under the PMLA is a body which may be appointed by the (union) Government of India. It is given the power to hear appeals against the orders of the Adjudicating Authority, and any other authority under the PMLA.

Orders of the tribunal can be appealed in appropriate High Court (for that jurisdiction) and finally to the Supreme Court.

Procedure of Appellate Tribunals

The appellate tribunals formed under the provisions of the PMLA to adjudicate upon orders of the special courts, are not bound to follow the procedural requirements of the Code of Civil Procedure.

Procedure of appeal to the Appellate Tribunals

Section 26 of the PMLA lays down the procedures pertaining to the filing of appeals to appellate tribunals. The provisions therein specifically permit a ‘person aggrieved by an order made by the Adjudicating Authority under this Act, may prefer an appeal to the Appellate Tribunal’. Subsequently, appeals may also be preferred by reporting entities ‘aggrieved by any order of the Director made under sub-section (2) of section 13, may prefer an appeal to the Appellate Tribunal’.

Further, it is stipulated that appeals as such are to be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or Director is received and it shall be in such form and be accompanied by such fee as may be prescribed. This is also subject to the provision that the Appellate Tribunal may after giving an opportunity of being heard entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. Once an appeal is received by the Appellate Authority, the authority may give an opportunity of being heard to each concerned party and subsequently pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

Representation

An appellant filing an appeal before an appellate tribunal may represent his case in person or take the assistance of an authorised representative.

The relevant provision in this regard occur under section 39 of the PMLA.

Appeals to High Courts

In the event there are grievances against orders passed by an appellate tribunal, the aggrieved party may take a further appeal against such order to the high court of competent jurisdiction.

Offences – Cognisable and Non-Bailable

The offences under the PMLA are to be treated as cognisable and non-bailable. The specific provisions in relation thereto occur under section 45 of the PMLA.

Bar on Civil Proceedings

Section 67 of the PMLA specifically lays down that suits cannot be brought in any civil court to set aside or modify any proceeding taken or order made under PMLA, 2002 and no prosecution, suit or other proceeding shall lie against the Government or any officer of the Government for anything done or intended to be done in good faith under the PMLA, 2002

Scheduled Offence

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 various pieces of legislations relating to criminal activities which includes – 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, and so on. Part ‘C’ deals with trans-border crimes, and is a vital step in tackling Money Laundering across International Boundaries. Prior to 15th February, 2013, i.e., the date of notification of the amendments carried out in PMLA, the Schedule also had Part B for scheduled offences where the monetary threshold of rupees thirty lakhs was relevant for initiating investigations for the offence of money laundering. However, all these scheduled offences, hitherto in Part B of the Schedule, have now been included in Part A of Schedule w.e.f 15.02.2013. Consequently, there is no monetary threshold to initiate investigations under PMLA.

MAJOR ACTS COVERED IN THE SCHEDULE

  • Indian Penal Code, 1860;
  • NDPS Act, 1985;
  • Unlawful Activities (Prevention) Act, 1967;
  • Prevention of Corruption Act, 1988;
  • Customs Act, 1962;
  • SEBI Act, 1992;
  • Copyright Act, 1957;
  • Trade Marks Act, 1999;
  • Information Technology Act, 2000;
  • Explosive Substances Act, 1908;
  • Wild Life (Protection) Act, 1972;
  • Passport Act, 1967;
  • Environment Protection Act, 1986;
  • Arms Act, 1959.

ANTI-MONEY LAUNDERING REGULATORS IN INDIA

FIU-IND Financial Intelligence Unit – India (FIU-IND)

FIU-IND Financial Intelligence Unit [FIU-IND] was set by the Government of India, on 18 November 2004, as the central national agency responsible for receiving, processing, analysing, and disseminating information relating to suspect financial transactions. The FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation, and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

As an entity involved in intelligence gathering, the main function of FIU-IND is to receive reports/data/information regarding cash/suspicious transactions, the analysis of such data/information and, as appropriate, the dissemination of valuable financial information to intelligence/enforcement agencies and regulatory authorities. In this regard, the major functions of the FIU-IND may be noted as follows[1]:

  • Collection of Information: Act as the central reception point for receiving Cash Transaction reports (CTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities.
  • Analysis of Information: Analysis of received information in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes.
  • Sharing of Information: Sharing of information with national intelligence/law enforcement agencies, national regulatory authorities, and foreign Financial Intelligence Units.
  • Act as Central Repository: Establishment and maintenance of national database on cash transactions and suspicious transactions based on reports received from reporting entities.
  • Coordination: Coordination and strengthening the collection and sharing of financial intelligence through an effective national, regional, and global network to combat money laundering and related crimes.
  • Research and Analysis: the monitoring and identification of strategic key areas on money laundering trends, typologies, and developments.

OTHER ANTI-MONEY LAUNDERING REGULATOR(S)

The major data collection agency for all information and investigation pertaining to activities of money laundering is the FIU-IND.

There are various bodies and authorities involved in the implementation and enforcement of the anti-money laundering laws. RBI is one of such authority which lays down anti-money laundering guidelines for banks and other financial institutions to adhere to. Similarly, SEBI has also prescribed certain requirements relating to Know Your Customer (KYC) norms for the financial intermediaries in securities market to follow to combat money laundering.

Further, there are law enforcement bodies like the Directorate of Enforcement and the Central Bureau of Investigation – Economic Offences Wing, dealing with money laundering issue.

Further, the Income Tax Department, Government of India under the Income Tax Act, is also authorised to take steps to prevent the offence of money laundering by imposing tax on undisclosed foreign income and assets on Indian residents. This has been further augmented by enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

The scope of authority and powers of such anti-money laundering regulators in India are discussed in the following manner.

Enforcement Directorate

The prime objective of the Enforcement Directorate is the enforcement of two key Acts of the Government of India namely, the Foreign Exchange Management Act 1999 (FEMA) and the Prevention of Money Laundering Act 2002 (PMLA) The ED’s (Enforcement Directorate) official website enlists its other objectives. Some of such objectives are cited hereinafter.

  1. The investigation of contraventions of the provisions of Foreign Exchange Management Act, 1999(FEMA) which came into force with effect from 1.6.2000. Contraventions of FEMA are dealt with by way of adjudication by designated authorities of the Enforcement Directorate, whereby penalties of up to three times the sum involved can be imposed.
  2. The investigation of offences of money laundering under the provisions of Prevention of Money Laundering Act, 2002 (PMLA) which came into force with effect from 1.7.2005. Taking actions of attachment and confiscation of property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA. And in pursuance thereof the prosecution of persons involved in the offence of money laundering. There are 156 offences under 28 statutes which are Scheduled Offences under PMLA.
  3. The adjudication of ‘Show Cause Notices’ issued under the repealed Foreign Exchange Regulation Act, 1973 (FERA) till 31.5.2002 for the alleged contraventions of the Act which may result in imposition of penalties. And in pursuance thereof to pursue the prosecutions launched under FERA in the concerned courts.
  4. Acting as sponsor to cases of preventive detention under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974(COFEPOSA) in regard to contraventions of FEMA.
  5. Rendering cooperation to foreign countries in matters relating to money laundering and restitution of assets under the provisions of PMLA and to seek cooperation in such matters.

Securities and Exchange Board of India (SEBI)

The Preamble of the Securities and Exchange Board of India Act, 1992 describes the basic functions of the Securities and Exchange Board of India as “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

Functions of SEBI

In accordance with the provisions of section 11 of the SEBI Act, the SEBI is entrusted with the following functions:

  • To protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit;
  • The SEBI may also take measures pertaining to:
  • Regulating the business in stock exchanges and any other securities markets;
  • Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;
  • Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;
  • Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;
  • Promoting and regulating self-regulatory organisations;
  • Prohibiting fraudulent and unfair trade practices relating to securities markets;
  • Promoting investors’ education and training of intermediaries of securities markets;
  • Prohibiting insider trading practices with respect to securities;
  • Regulating substantial acquisition of shares and take-over of companies;
  • Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries, and self-regulatory organisations in the securities market;
  • Calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of SEBI, shall be relevant to any investigation or inquiry by the SEBI in respect of any transaction in securities;
  • Calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the SEBI, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard. This shall be subject to the provision that the SEBI, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government;
  • Performing such functions and exercising such powers under the specific provisions of the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;
  • Levying fees or other charges for carrying out its functions;
  • Conducting research for the above purposes;
  • Calling from or furnishing to any such agencies, as may be specified by the SEBI, such information as may be considered necessary by it for the efficient discharge of its functions;
  • Performing such other prescribed functions within its capacity.

Reserve Bank of India (RBI)

The Reserve Bank of India is the central bank of the Republic of India. And in such capacity, the Reserve Bank of India also has some regulatory powers to keep a check on money laundering activities.

The major powers and functions and powers of the RBI may be analysed in the light of the Reserve Bank of India Act, 1935 and in the light of the Banking Regulation Act, 1949.

The powers accorded under the RBI Act may be summarised as follows.

  1. To transact Government business.
  2. To transact Government business of States on agreement.
  3. to issue bank notes.
  4. Setting the denominations, legal tender, and forms of notes.
  5. Issue of special bank notes and special one rupee notes in certain cases.
  6. Maintaining cash reserves of scheduled banks.
  7. Publication of consolidated statement by the Bank.
  8. Power of Bank to collect credit information.
  9. To call for returns containing credit information.
  10. To furnish credit information to banking companies

Further, the major powers of the Reserve Bank of India under the Banking Regulation Act may be summarised as follows:

  • Power to control advances by banking companies
  • Power to give directions
  • Section 36AA – Power of Reserve Bank to remove managerial and other persons from office
  • To act as the official liquidator
  • Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation
  • To impose penalty/s in certain cases.

Insurance Regulatory & Development Authority of India (IRDA)

The IRDA was formed to bring about regulation in the insurance sector, it was decided that a regulatory body shall be formed by the name of the Insurance Regulatory and Development Authority.

The IRDA was formed by an Act of the Parliament of India, which was known as the Insurance Regulatory and Development Authority Act, 1999.

Income Tax Department

The Income Tax Department or the IT Department is the agency which oversees the monitoring the income tax collection by the Government of India. It functions under the Department of Revenue of the Ministry of Finance.

The IT Department is responsible for administering following direct taxation acts passed by Parliament of India.

  • The Income-tax Act, 1961
  • Expenditure Tax Act, 1987

And such other Finance Acts (Passed Every Year in Budget Session).

CASE LAWS

To understand the implications and interpretations of a piece of legislation, it is very essential to go through and comprehend the observations of the judiciary adjudicating on the provisions of the law. And therefore, three major cases bearing relation to interpretation and applicability of critical areas in the PMLA are discussed hereinafter.

In case of Narendra Mohan Singh and Another vs Directorate of Enforcement, the Hon’ble Jharkhand High Court took a strict view in respect of the applicability of the PMLA and its various provisions regarding ‘presumption’. However, the judiciary has also been a supporter of fair trial procedures, which may be noted in the judgement provided in the case of Sarosh Munir Khan vs. The Deputy Director (noted under para 6.2 hereunder).

Presumption in inter-connected transactions: Narendra Mohan Singh and Another vs Directorate of Enforcement And … on 22 March, 2014 [2]

In the instant case, it was submitted on behalf of the petitioners (i.e., Narendra Mohan Singh and Ankita Singh), that that “to establish an offence of money laundering, it is essential that the persons, charged, should have directly or indirectly attempted to indulge or knowingly assisted or knowingly been a party or actually involved in any process or activity connected with proceeds of crime.” Further it was contended that whereas, in terms of Section 2(u) of PML Act, “proceeds of crime” means property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence and the scheduled offence in terms of definition given under Section 2(1)(y) of the PML Act, happens to be the offence under Part A, Part B and Part C of the schedule, but allegation against the petitioners of projecting a sum of Rs. 1 crore as untainted money, is never the subject matter of the charge sheet submitted by the CBI and, therefore, any prosecution under Section 3 of the PML Act against the petitioners would not be maintainable as for prosecuting a person under PML Act, precondition is that one should involve himself in the process or activities connected with the proceeds of crime and the proceeds of crime be derived or obtained because of criminal activity relating to scheduled offence. But, here in the case as has been stated above, the charge upon which cognizance has been taken under the PML Act, that never form part of the charges upon which CBI has submitted charge sheet.

And in furtherance of the above, it was further submitted that, it was further submitted that the PMLA after amendment could not be given retrospective effect as the statute, which affects substantive rights is always presumed to be prospective in operation unless made retrospective.

Refuting the contentions stated hereinabove the Hon’ble Jharkhand High Court adjudged that whereas questions were raised over the maintainability of the supplementary complaint on the premise that the provisions as contained in Section 44 (1)(b) and 45 of the PML Act, refers to ‘a complaint’. Even if such reference is there of ‘a complaint’, it never prevents of filing of supplementary complaint as the reference of a complaint has been made in those provisions in the context that whenever a complaint filed by an authority authorized, court may take cognizance over it. And therefore, it was also decided that there was no illegality with the order taking cognizance.

Sarosh Munir Khan vs. The Deputy Director [534/ MUM/ 2013] – Importance of Procedure

In this case, it was held that a concerned adjudicating authority operating under the provisions of the PMLA, can pass an order confirming “provisional attachment”, once it has considered that the material on record including material or evidence furnished in response to the notice issued under Section 8(1), the subsequent reply furnished in response thereto, and taking all and other relevant material into consideration, a finding gets recorded that the property or so much of it, is involved in money-laundering.

Rama Raju, S/ o B. Ramalinga Raju Vs. Union of India (UOI), [MANU/ TN/ 1696/ 2011]; [(2012) 1MLJ419] 

In this case, it was held that section 24 shifts the burden of proving that proceeds of crime are untainted property onto person(s) accused of having committed the offence under Section 3. In response to a notice issued under Section 8(1) and qua the legislative prescription in Section 24 of the Act the person accused of having committed the offence under Section 3 must show with supporting evidence and material that he has the requisite means by way of income, earnings or assets, out of which or by means of which he has acquired the property alleged to be proceeds of crime. Only on such showing would the accused be able to rebut the statutorily enjoined presumption that the alleged proceeds of crime are untainted property.

COMBATING MONEY LAUNDERING – A SHORT GLOBAL PERSPECTIVE

The magnitude of money laundering activities and the amount of money laundered each year is gauged by way of the estimations issued by various government and non-government financial research entities. Although, various estimates of the scale of global money laundering are sometimes repeated often enough to make some people regard them as factual — no researcher has overcome the inherent difficulty of measuring an actively concealed practice. Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions of US dollars and poses a significant policy concern for governments.

Some of such risks and concerns are of the following nature:

  • Reputational risk;
  • Loss of revenue required to sustain governance and fund public welfare projects;
  • War on Drugs
  • Terror Funding

As a result, governments and international bodies have undertaken efforts to deter, prevent, and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved. Issues relating to money laundering have existed as long as there has been large scale criminal enterprises.

The Financial Action Task Force (on Money Laundering) or the FATF

Formed in 1989 by the G7 countries, the FATF is an intergovernmental body with an aim to develop and promote international response to combat money laundering.

The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body that brings together legal, financial, and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms.

As of 2016, its membership consists of 35 countries and two regional organizations. FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits them full participation in plenary sessions and working groups.

FATF’s three primary functions with regard to money laundering are

  • Monitoring members’ progress in implementing anti-money laundering measures,
  • Reviewing and reporting on laundering trends, techniques, and Monitoring members’ progress in implementing anti-money laundering measures, Reviewing and reporting on laundering trends, techniques, and countermeasures, and
  • Promoting the adoption and implementation of FATF anti-money laundering standards globally. The FATF currently comprises 34 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe.

CONCLUSIVE NOTES

The activities pertaining to money laundering have been rampant in the Indian society, despite best efforts of the government to stop such practices. Through legislation and administrative bodies and efficient regulators who work tirelessly in this regard, the war on money laundering activities continues to go on. However, it may be noted that although such activities may be put in check at a domestic level, it may be taken note of that such practices are never restricted to the confines of a single jurisdiction. Restrictions at a particular jurisdiction, encourage launderers to shift base to another jurisdiction which may provide a hospitable environment for their activities to thrive. Information revealed in the Panama Papers leak is one shining example of how liberal policies in some jurisdictions may actually be detrimental to the interests of another jurisdiction and the people living there. Money laundering does have implications, which are nothing short of being serious. It may be noted that funds brought in by illicit means, for legitimisation may, once legalised, be then again used for vested interests of the beneficiaries, who may not always have good intentions in mind. Crime can only beget more crime – and the vicious circle would only continue.

Whereas check needs to be maintained at all times on money laundering activities, it may also be noted that strict economic and taxation policies have a way of getting projected as being punitive on honest people with legitimate business interests. And therefore, one of the better ways to stop money laundering practices may be for governments to take such legitimate interests into confidence and provide them protection and certain benefits, which may altogether stop people from engaging in money laundering activities altogether. Tax reforms could be one such step in the right direction.

[1] http://fiuindia.gov.in/files/About%20FIU-IND/functions.html

[2] Reported online at – https://indiankanoon.org/doc/155886752/

[1] https://index.baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2016.pdf

[2] https://rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10292

The following books, write-ups and articles were referred and relied on, during the making of the article:

  1. Singh, Anand. Anti-Money Laundering Laws in India [Kindle Edition]; East Law Mate (email – [email protected]); 2016;
  2. Chandna, Varun. The Curious Case of Black Money and White Money: Exposing the Dirty Game of Money Laundering! [Kindle Edition] Notion Press, McNichols Road, Chetpet Chennai – 600 031; 2017;
  3. UNDERSTANDING THE BLACK ECONOMY AND BLACK MONEY IN INDIA; Kumar, Arun. Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences & Remedies; Aleph Book Company. [Kindle Edition]; 2017;
  4. Study Report on COFEPOSA Act, 1974; Dutta, Dr Tanisha, Sen Kamanasish, Koudinya N. Varun, National Academy of Customs, Excise and Narcotics (NACEN), Faridabad

[URL: www.nacenkanpur.gov.in/download3.inc.php?rid=32]

  1. Taxmann. Prevention of Money Laundering Act 2002 with Rules; Taxmann Publications (P.) Ltd.,; Kindle Edition.

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