This article is written by Nishka Kamath, a graduate of Nalanda Law College, University of Mumbai. It is an attempt to describe the Prevention of Money Laundering Act, 2002, commonly referred to as the PMLA, in great detail. It also has an overview of what is meant by money laundering, the common forms, the impact caused on nations, and so on. Further, an attempt is made to enlighten the readers on the important terms and provisions of the Prevention of Money Laundering Act, 2002, along with the way forward and the FAQs. 

It has been published by Rachit Garg.

Introduction

It is not a fact unknown that money and crimes are interrelated. People commit crimes when money is involved; simply put, such crimes are committed for economic gains. One of these offences is that of money laundering. 

The individuals committing the offence of money laundering want their money to move freely in society without any threat that such money will eventually lead to the discovery of their illegitimate activities. Not only this, but the money thus laundered helps them escape the clutches of the police, as such funds are difficult to be confiscated by the authorities. With all such aforementioned issues of illegal laundering of money, there was a dire need of enacting a legislation to prevent such activities, and the Prevention of Money Laundering Act, 2002, was enacted.  

Money laundering : a brief overview 

To understand the Act better, let’s first take a look at what is meant by money laundering. 

What is money laundering 

Money laundering is defined as the process by which an illegal fund, perhaps, black money, obtained from illegal activities is disguised as legal money, which is eventually portrayed to be white money. This is done by passing the funds through several channels (the process is discussed in brief below). The money, thus laundered, is passed on through various phases of conversions and transfers to achieve a sort of deceptive legality and to eventually reach a legally acceptable institution, say for instance, a bank.

Common forms of money laundering 

The most common forms of money laundering are:

1. Hawala system,
2. Smuggling bulk amounts of money ,
3. Fictional loans,
4. Business involving cash-incentives,
5. Round-tripping,
6. Laundering Laundering that is trade centric, 
7. Shell companies and trusts, 
8. Real estate, 
9. Fake invoicing, 
10. Gambling, etc. 

Please note : The top money laundering cases can be accessed here.  

Impact of money laundering on development

The impact of money laundering on the development of a nation is as stated below: 

Increase in crime and corruption rate 

When economic offences like money laundering attain success, criminal activities gain profit, thus causing an increase in crime and corruption rates. Moreover, the use of illegitimate means to gain profit, like that of bribery also rises. 

Threat to reputation and international repercussions 

A country might have to face serious repercussions when its reputation gets tarnished or when it becomes known as a money laundering or terrorist financing haven. Further, even legal businesses and companies may have to face the repercussions of such illegitimate activities; for instance, their access to the world market may get narrower due to overly cautious inspections and system controls. 

Weakened financial institutions 

Illegal activities like money laundering and terrorist financing possess the ability to harm the peace and harmony of a country’s economic sector; further, they can also disrupt the stability of individual financial institutions in several ways. 

Compromised economy and private sector 

It is common for money launderers to use ‘front companies’ to launder money. Front companies can be defined as those companies that appear to be legitimate, thus engaging in a legitimate business, but in actuality are controlled by criminal minds. Such companies ‘co-mingle’ with the illegitimate funds thus obtained with legitimate funds to conceal the source from which the illegitimate money was obtained. 

All you need to know about the Prevention of Money Laundering Act, 2002

A brief history of Prevention of Money Laundering Act, 2002

Before the enactment of the PMLA, 2002, various legislations dealt unanimously with the problem of money laundering. Some of them are as follows:

• The Income Tax Act, 1961;
• The Conservation of Foreign Exchange & Prevention of Smuggling Activities Act (COFEPOSA), 1974;
• The Smugglers and Foreign Exchange Manipulators Act (SAFEMA), 1976; 
• The Benami Transactions (Prohibition) Act, 1988;
• The Indian Penal Code, 1860 & the Code of Criminal Procedure, 1973;
• The Narcotic Drugs and Psychotropic Substances Act (NDPS),1985;
• Prevention of Illicit Traffic in Narcotic Drugs & Psychotropic Substances Act, 1988;
• The Foreign Exchange Management Act (FEMA),1999.

The Prevention of Money Laundering Bill was put forward in Parliament in 1998. Further, the PMLA Bill was referred to the Standing Committee on Finance. The Standing Committee then handed out its report to the Lok Sabha in 1999. Later, in 1999, the Government introduced the Prevention of Money Laundering Bill, 1999, in the Parliament after including all the suggestions laid down by the Standing Committee. Further, the Bill received the assent of the President and came to be known as the Prevention of Money Laundering Act, 2002. The Act became enforceable on July 1, 2005. 

It is noteworthy that the PMLA was sanctioned as a response to India’s global commitment (Vienna Convention) to combat the issue of economic crimes like money laundering. The other conventions include: 

• United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988;
• Basle Statement of Principles, 1989;
• Forty Recommendations of the Financial Action Task Force on Money Laundering, 1990;
• Political Declaration and Global Program of Action adopted by the United Nations General Assembly in 1990.

The main motive for enacting such a legislation was to combat the crime of legalising the economic gains obtained from illegal sources. This Act authorises the Indian Government and the police officials to seize any property that they have investigated to have been earned from illegal sources or by conducting any illegal activities. 

As the name suggests, the PML Act was enacted to intercept or obstruct the issue of  money laundering. Further, the motive was to seize any property bought or obtained by carrying out the crime of money laundering and for matters related to such an act. 

Objectives of the Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002, was sanctioned with the aim of combating the issue of money laundering. Some of its objectives are as follows:

1. To prevent and control the issue of money laundering.
2. To confiscate or take into custody any property that is likely derived from or has involvement in cases of money laundering.
3. To penalise the offenders with the offence of money laundering. 
4. For appointing the adjudicating authority and appellate tribunal for taking in charge of matters related to money laundering.
5. To make it obligatory for banking companies, financial institutions and intermediaries to preserve records or documents relating to financial transactions.
6. To manage any other issues related to money laundering. 

Important terms to know under the Prevention of Money Laundering Act

Attachment 

The term ‘attachment’ under the PMLA is defined as the interdiction of transfer, conversion, disposition, or movement of property, as stated under Chapter III of the Act. 

Beneficial owner

The term ‘beneficial owner’ under Section 2(fa) of the PMLA means a person who either possesses or has command over a client of a reporting entity or an individual in place of whom a transaction is being directed, and includes an individual who exercises optimum effective power over a juridical person. 

Chit fund company 

Under Section 2 (h) of the PMLA, a ‘chit fund company’ is defined as a company controlling, conducting or managing, as foreman, representative, or in any other capacity, chits as defined in Section 2 of the Chit Funds Act, 1982.

Client 

Under Section 2 (ha), the term ‘client’ means an individual involved in an economic transaction or activity with a reporting entity. This also includes any individual on whose behalf the individual involved in the financial transaction or activity is acting. 

Corresponding law

Under Section 2(ia) of the PMLA, the term ‘corresponding law’ is defined as any law of another country equivalent to any of the clauses of the Act or those that manage the offences in that country, similar to any of the scheduled offences. 

Payment system

Under Section 2(rb) of the PMLA, the term ‘payment system’ means a system that authorises payment to be affected between a payer and a beneficiary, pertaining to clearing, payment, or settlement services, or all of them.

There is a further explanation given to this term, which says that, for the purpose of this clause, the term ‘payment system’ will include those systems that permit the following operations, amongst others:

1. Credit card operations, 
2. Debit card operations, 
3. Smart card operations, 
4. Money transfer operations, 
5. Other similar operations. 

Payment system operator

Under Section 2(rc) of the PMLA, the term payment system operator is defined as an individual who performs a payment system, and such an individual will include his overseas principles. 

There is a further explanation given under the term, which says that overseas principal means-

1. In case of an individual,  an individual residing outside India, who possesses, manages or supervises directly or indirectly, the activities or functions of payment system in India; 
2. In case of an Hindu Undivided Family (HUF),  a Karta residing outside India, who possesses, manages or supervises directly or indirectly, the activities or functions of payment system in India;
3. In 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 possesses, manages or supervises directly or indirectly, the activities or functions of payment system in India. 

Person 

Under Section 2(s) if the PMLA, the term ‘person’ incorporates-

1. An individual, 
2. A Hindu Undivided Family, that is commonly known as HUF, 
3. A company, 
4. A firm,  
5. An association of individuals or a body of individuals, whether incorporated or not, 
6. Every artificial juridical person not coming under any of the preceding sub-clauses, and 
7. Any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses.

Proceeds of crime 

Under Section 2(u) of the PMLA, the term ‘proceeds of crime’ is defined as any property acquired or attained, directly or indirectly, by some individual by performing any crime or wrongdoing pertaining to a scheduled offence, or the value of any such property (or, where such property is taken or held outside the country, then the property equivalent in value held within the country). Later, modifications were made to the Section, and the term ‘or abroad’ was added to the definition of ‘proceeds of crime’.

Further, an explanation is added to avoid any sort of discrepancies, it states that ‘proceeds of crime’ include property that is derived or obtained from the scheduled offence but also includes any property that may directly or indirectly be acquired as a result  of any criminal activity having its relation to the scheduled offence. 

Property

Under Section 2(v) of the PMLA, the term ‘property’ means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and incorporates deeds and instruments evidencing title to, or interest in, such property or assets.

Further, an explanation is given under the said Section, stating that, in order to remove all doubts, it is stated that the term ‘property’ incorporates any type of property used in committing a wrong under this Act or any of the scheduled offences. 

Reporting entity 

Under Section 2(wa) of the PMLA, the term ‘reporting entity’ means a banking company, any financial institution, an intermediary, or an individual conducting a designated business or profession. 

Value 

Under Section 2(zb) of the PMLA, the term ‘value’ is defined as the market value of a particular property on the date it was bought by an individual, or if the date cannot be specified, the date on which such property is owned by the individual. 

Contracting state 

Under Section 55(a) of the PMLA, the term ‘contracting state’ is defined as any nation or location outside India  with respect to which pacts have been embodied by the Central Government with the government of such a nation by means of a treaty or otherwise. 

Important provisions under the Prevention of Money Laundering Act, 2002

Offence of money laundering (Section 3)  

The definition of money laundering is exhaustive enough to cover most of the instances of converting black money into white. The definition of money laundering is exhaustively covered under Section 3 of the PMLA. It says, a person is guilty of the offence of money laundering if he/she is found to have, directly or indirectly:

• An attempt to indulge, or
• Consciously assisted, or
• With full knowledge is a party, or
• Has an involvement in one or more of the below processes or activities associated with proceeds of crime, namely:
• concealment, or
• possession, or
• acquisition, or
• use, or
• projecting as untainted property, or
• claiming as untainted property.

In other words, any individual who has a direct or indirect involvement, or if he knowingly assists or is a part of the activity that is connected to such a crime, including its concealment, possession, acquisition, or use, and projects or declares it as untainted property, will be held guilty of the offence of money laundering. 

Punishment for money laundering (Section 4)

Under Section 4 of the PMLA, any individual who commits the crime of money laundering will be accountable to receive a punishment that involves rigorous imprisonment up to 3 years, which may extend to 7 years, and will also be culpable to pay a penalty. 

A point must be noted that, in case if the crime in question is related to any offence specifically mentioned under the Narcotic Drugs and Psychotropic Substances Act, 1985, the penalty may be extended to a rigorous imprisonment of 10 years instead of 7 years. 

Attachment, Adjudication & Confiscation

Attachment of property involved in money laundering (Section 5)

Section 2(v) of the PMLA defines the term ‘property’ as “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, wherever located”.

Further, Section 2(d) of the PMLA defines the term ‘attachment’ as “means prohibition of transfer, conversion, disposition, or movement of property” by any direction given under the provisions of the PML Act.” 

A point must be noted that under Section 5 of the PMLA, the power of attachment has been conceded to the director, the joint director, or any officer not below the rank of a deputy director. The person in authority can attach property for up to 180 days, if there is a cause to believe the property was obtained illegally or that the individual is in  possession of proceeds of crime and is charged with that crime, and proceeds of money are likely to be concealed or transferred.

Further, such attachment must be executed in a manner prescribed under the Second Schedule of the Income Tax Act, 1961. Moreover, the person in authority must record in writing the reasons they believe the property was obtained through illegal means. The reason must be sent in a sealed envelope to the adjudicating authority along with a copy of the attachment order. After attachment, the adjudicating authority will receive the complaint, which should be filed within 30 days. 

Adjudicating authorities (Section 6)

Under Section 6 of the PMLA, the Central Government is entrusted with the authority to appoint an adjudicating authority to exercise jurisdiction, powers and  authority conferred

by or under this Act. An adjudicating authority must consist of a bench of:

1. A chairperson, and
2. Two other members, out of which one individual shall have experience in the field of law, administration, finance or accountancy.

It is pertinent to note that, the individual will not be qualified to be assigned as a member of the adjudicating authority in the field of law unless he has the following:

1. Has qualifications to be appointed as a judge of any district, or
2. Has been a representative member of the Indian Legal Service and has held a post in Grade I of that service.

And the individual will not be qualified to be appointed as a member of the adjudicating authority in the fields of finance, accountancy, or administration unless he has the prescribed possession. 

Moreover, the adjudicating authority will not be obliged to act according to the terms laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice. Further, the adjudicating authority will be entrusted with the authority to have and follow its own procedure. 

Powers of the bench under the adjudicating authority 

As stated above, the bench may consist of a chairperson with one or two members. The benches of the adjudicating authority will sit in New Delhi and at other locations that the Central Government along with the chairperson may specify. Further, the Central Government has the authority to mention which areas shall be governed by the bench of the adjudicating authority via a notification. 

Further, the chairperson is entrusted with the authority to transfer a member from one bench to another. Moreover, if the chairperson, at any stage of the case or matter, believes that the essence of the case is such that it must be discerned by a bench involving two members, the chairperson can transfer the case to another bench. Additionally, the chairperson or members shall have a tenure of five years from the date of entering the office; however, any individual who has attained the age of 65 years will not be eligible to hold office. 

Salary of the bench under the adjudicating authority 

The salary and other allowances payable, along with other terms and conditions of service, to the bench and other members will be the same as prescribed, provided that there is no disadvantage after the appointment of the members. 

Vacancy under the adjudicating authority 

In case if there is any position available in the office of the chairperson or any other member, the Central Government is entrusted with the power to appoint another individual in accordance with the specifications of the Act. Further, the proceedings will thus commence from the stage where the vacancy was filled.  

Resignation, death or illness of any member of the adjudicating authority 

The chairperson or any other member can resign the office only after giving a proper written application. The application should be addressed to the Central Government. After the application is sent, the member has to serve a three months of notice period, unless his/her replacement is appointed, unless he is permitted to resign earlier than prescribed by the Central Government. 

In case there is a vacancy in the office of the chairperson because of the resignation, death, or illness of any member, the senior-most member will act as chairperson until a new individual is appointed to discharge such duties. 

Dismissal of any member of the adjudicating authority 

The chairperson, or any other member for that matter, cannot be dismissed from the office except by an order passed by the Central Government. The dismissal can be done only after giving the party the opportunity to speak, thus, following the principle of audi alteram partem. 

Adjudication (Section 8)

If any complaint is filed under Section 5(5) or an application is made under Section 17(4) or Section 18(10), the individual allegedly said to have been guilty of committing the offence of money laundering will be served with a notice of not less than 30 days asking him to submit proof the sources from where the income, earnings, or assets were obtained and to provide a reasonable justification for why the property must not be impounded. 

After hearing from the side of the party accused of the crime, the adjudicating authority will record its findings as to whether all or any of the properties are involved in money laundering or not. In case the adjudicating authority reaches a decision that the property in question is involved in money laundering, he shall state the reason and confirm it in writing about the attachment of the property, and in case if the property is already attached, it will continue until the order of trial becomes final. Then, if the individual is found guilty by the court, the attached property will vest in the Central Government. 

Vesting of property in the hands of Central Government (Section 9)

As stated above, when the court passes an order that the property obtained through money laundering has to be confiscated, all the rights and titles to the said property will lie in the hands of the Central Government, free from any encumbrances. 

Further, if the special court or the adjudicating authority becomes aware that any hindrances on the property or lease-hold interest have been created with a view to vanquish the clauses of the Act, it may proclaim that such hindrances or lease-hold interests are void. And if it is declared void, all the property will be vested in the hands of the Central Government free from any hindrance or lease-hold interest. 

Obligation of the banking companies, financial institutions and intermediaries 

Reporting entity to maintain records (Section 12)

Under Section 12, the financial institutions, banks and intermediaries have the following obligations to observe:

1. To maintain records of all transactions and amount as stated in the rules, irrespective of the fact that such transactions were carried on in one go or there were series of transactions that had an internal connection to each other when such series occur within a span of thirty days.  
2. To inform the director about any transaction within the allotted time. 
3. To verify the identity of the clients in the manner thus prescribed. 
4. To keep a record of all the documentation relating to identity of the clients and the beneficial owners, along with keeping record of account files and business transactions relating to the clients. 

Further, every piece of information recorded, furnished, or verified as mentioned above must not be revealed to the public at large. The records must be kept for a period of 5 years from the time the transaction took place. The Central Government is given the authority to exempt any reporting entity from reporting under Section 12. 

Power of directors to levy fine (Section 13)

Under Section 13, the director has the power to call for records from the bank, financial institutions, and intermediaries. Further, if the director, after a thorough investigation, discovers that the bank, financial institutions, and intermediary have not adhered to the conditions imposed under Section 12, he can levy a charge or fine ranging from ₹10,000 to  ₹100,000.

No civil or criminal suit can be filed against the reporting entity (Section 14)

Under Section 14, no civil or criminal suit can be filed against any bank, financial institution, or intermediary that provides information to the authority. 

Procedure and the manner in which information can be furnished. by the reporting entities (Section 15)

Under Section 15, the Central Government along with the Reserve Bank of India (RBI) lay down the procedure and manner in which information can be furnished to the reporting entity in order to enforce the laws laid down in the Act.

Summons, searches and seizures 

Power of survey (Section 16)

Section 16 of the PMLA deals with the power of surveys. It states that an authority has the capacity to enter any property or premises if they have reasons to believe that an offence of money laundering has been committed or if they believe that carrying out an investigation will give him an opportunity to look into the requisite records that might aid in determining whether any illegal activity was conducted under the Act or not. The authority has to mention the reason for carrying out the proceedings in writing, along with recording any statement of any individual present at the place of investigation if it is beneficial to the proceedings under the Act. 

Search and seizure (Section 17)

Section 17 of the PMLA has provisions regarding the power of the officials to search for and seize any property acquired through the offence of money laundering. Any director, joint director, or deputy director may entrust an officer subordinate to him to perform the following activity:

1. To get and search into any building, place, vessel, vehicle or aircraft where the authority reckons that any records of such activities are reserved.
2. To smash open any type of lock on any door, box, locker, safe, almirah where the keys are not accessible. 
3. To seize any property obtained through such an investigation.
4. To mark the records on the property thus obtained via investigation or to make an extract or copies of the document.
5. To make a note on the inventory of records of the property. 
6. To inspect and survey if any individual is on oath or is in possession or control of any record or property, in matters relating to any inquiry carried on under the PMLA. 

Moreover, in matters relating to a scheduled offence, a search can be carried out only after a report has been sent to a magistrate or if a complaint is filed by any authority that has been entrusted with the power to make inquiries in matters relating to a scheduled offence before a magistrate. In matters where the property cannot be seized, the authority has the power to make an order to freeze such property. After a property is searched and seized or frozen as per the order, the officer must forward a copy of the reasons so recorded, along with any material in his hands, to the adjudicating authority in a sealed envelope in a manner described in the Act. 

OPTO Circuit India Ltd. v. Axis Bank & Ors. (2021)

The Supreme Court in this case held that in cases where a proper procedure for search and seizure is not followed, the search and seizure will be said to be invalid and a stay order can be passed, thence. 

Further, the Apex Court said that the director or any authorised authority upon whom the power of search and seizure is vested must have a reasonable basis to believe that the individual has committed the offence of money laundering, and the same must be recorded in writing by the authority. Moreover, the Court said that the person in power has to adhere to the provisions laid down by the Act and follow proper procedure while searching for and seizing property. In the event of a failure to comply with the provisions, it would be presumed that due process of law was not followed. 

Search of persons (Section 18)

Section 18 that has provisions on the authority to search an individual states that if any authorised official has grounds to believe that any person has suppressed any person or anything under his custody, ownership, or control, any activity of a crime that may be helpful or relevant to any proceedings under the PMLA, the person in power will have the capacity to search such an individual and seize records of any such property. 

Power to arrest (Section 19)

Section 19, which deals with the power to arrest a person, states that any director, deputy director, assistant director, or any other officer has the power to arrest a person on behalf of the central Government by general or special order. An individual can be arrested by the concerned authority if such authority had on the basis of the proof has reason to believe that-

• The individual is guilty of an offence punishable under the PMLA, and
•  The reason for such a belief  has been duly recorded in writing.

Steps to be followed by the authority after arrest 

After the arrest, the authority has to follow the following measures:

1. To inform the arrested individual about the reasons for the arrest.
2. To share a copy of the detention order along with the material in his possession to the adjudicating authority. 
3. To produce the individual held guilty of the offence of money laundering in front of the special court or judicial magistrate or a metropolitan magistrate as the case may be within 24 hours of the arrest. 

A plain reading of Section 19 of the PMLA would make it evident that there is no requirement under this Section to receive an arrest warrant from the court before taking the individual guilty of the offence of money laundering into custody. Simply put, if the provisions of Section 19 are met, the officer in authority can arrest the individual without a warrant. 

Please note: While arresting an individual for the offence of money laundering, it is irrelevant to consider whether such an offence is cognizable or non-cognizable under the PMLA. However, there are dissenting judgements of high courts on this matter, and the matter is now up for discussion in the Apex Court. 

Retention of property (Section 20)

Under Section 20 of the PMLA, any property that is expropriated during the investigation may persist to be in the possession of the official in power, or in case if such a property is frozen, it may persist to remain frozen for a period not going beyond 180 days from the date the official expropriated or froze the property in question. Further, once the property is frozen or seized for 180 days, it will be given back to the individual from whom it was confiscated or frozen; however, the adjudicating authority has the authority to keep possession or allow to continue to freeze the property even after 180 days if they have reasons to believe that the property is prima facie  involved in money laundering. Furthermore, after the order of seizure has been passed, the court or the adjudicating authority has to release all property other than the one having its involvement in the money laundering case.  

Retention of records (Section 21)

Under Section 21 of the PMLA, if the investigating officer believes that there is a rationale to prolong the 180 days term for seizure or freezing of records, he can do so under the PML Act. However, it must be noted that the copies of the records can be acquired on request. Further, on expiration of 180 days, the records must be returned to the individual from whom they were seized or the court or adjudicating authority ordered to freeze them; however, after passing an order of seizure, the adjudicating authority has the power to order the release of the records to the individual from whom such records were confiscated. Further, when an order for releasing the record has been made, the director or the officer in authority has the power to hold back the release of records for a period of 90 days from the date of the order if they have reasons to believe that such a record is important for making an appeal. 

Inter-connected transactions (Section 23)

Section 23 deals with presumptions relating to inter-connected transactions. It states that when the offence of money laundering has two or more inter-connected transactions and one or more transactions are shown to have their involvement in money laundering, then for the matter of adjudicating or confiscating the property, it will be presumed that the rest of the transactions carried on are inter-connected transactions. 

Presumptions & Onus of Proof (Section 24)

Section 24 of PMLA has provisions relating to presumptions and onus of proof. In this Section, the burden of proof lies with the individual who states that the proceeds of the crime alleged to be involved in money-laundering, are not so involved. The presumption against the accused or third party is good enough to detonate the onus of the officials under the PML Act. It must be noted that, the presumptions are absolute, and the burden to ascertain the same otherwise lies on such a person.

Cognizable and non-bailable offences (Section 45)

Under Section 45 of the PMLA, every offence punishable under the Act will be cognizable. Any individual who has been arrested for the offence of money laundering will not be released on bail or bond, unless a change has been provided to the public prosecutor to oppose the application of such a release. Further, if any opposition is raised by the public prosecutor, a bail can be granted only if the court feels that there are reasonable grounds to believe that the individual arrested is not guilty of any offence and that he will not commit any offence while he is out on bail. Furthermore, the person may be sent out on bail if the special court orders to do so in cases where- 

1. the accused person is less than 16 years of age, 
2. is a woman, 
3. is sick or infirm, or 
4. if the person is accused either on his own or along with other co-accused of an amount of money laundering that does not exceed ₹1 crore. 

The special court shall not take cognizance of any offence punishable under Section 4 of the PMLA, unless a complaint is made in writing by the director or any other officer of the Central Government or the state government authorised by a general or special order. Furthermore, no police officer will have the authority to carry out any investigations as such unless the Central Government permits him to do so specifically, by a general or special order. 

Offences of cross border implications 

Offences of cross border implications are scheduled offences covered under Part C of the Schedule of the PMLA, thus, PMLA will be applicable in such matters. Further, the crime of purposely making an endeavour to dodge paying tax under Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is also included in the list of scheduled offences under PMLA, which is why, PMLA is relevant in cases relating to such an offence. 

Limitation period, if any relating to the PMLA 

There is no specific limitation period in respect to matters relating to money laundering, thus, the general law of criminal procedure will be applicable. Further, Section 468 of the CrPC states that there is no limitation period for any offence that attracts a penalty of more than three years; hence, for any wrong committed under the PMLA, there will be no limitation period applicable. So, the ED has the authority to initiate a proceeding after any number of years. Moreover, even the Financial Intelligence Unit (FIU-IND) has no limitation period under the PML Act for bringing an enforcement action for not adhering to the rules set by Reporting Entities (REs).

Offences under Prevention of Money Laundering Act, 2002

Under the Prevention of Money Laundering Act, 2002, any activity thus committed, as mentioned under Part A, Part B, and Part C of the Schedule of the Act, will result in a punishment under the said Act. The list of some of the offences listed under the Prevention of Money Laundering Act, 2002, is as follows:

Part A

Under Part A, several offences listed under the said acts are enlisted:

1. The Indian Penal Code (IPC), 1860;
2. The Narcotics Drugs and Psychotropic Substances (NDPS) Act, 1985;
3. The Prevention of Corruption Act, 1988;
4. The Antiquities and Art Treasures Act, 1972;
5. The Copyright Act, 1957;
6. The Trademark Act, 1999;
7. The Wildlife Protection Act, 1972 and 
8. The Information Technology Act, 2000.

Part B

Part B involves offences related to the aforementioned offences in Part A. The only difference is that such offences have a monetary value of a crore or more. 

Part C

Whereas, Part C handles issues related to trans-border crimes and reflects the dedication to resolve the issue of money laundering on a global level. 

Penalties under Prevention of Money Laundering Act, 2002

The authority has the power to initiate action against any individual found guilty of having committed the offence of money laundering. Some of the penalties are as follows:

1. Freezing or seizing cash, bank accounts, investments, property and records and/or any attachment of any property that was bought via illegitimate means.
2. This offence is punishable with-

• A minimum of 3 years of  rigorous imprisonment and a maximum period of 7 years, or 
• A fine. 

3. If the crime of money laundering has drugs or any substances involved or has any relation to the  Narcotic Drugs and Psychotropic Substances (NDPS) Act, 1985, the penalty can go up to 10 years, along with a fine.

Authorities that can investigate under Prevention of Money Laundering Act, 2002

Enforcement Directorate

The enforcement directorate in the Department of Revenue, Ministry of Finance, the Government of India, has the authority to investigate matters of money laundering in India under the PMLA.

Financial Intelligence Unit- India (FIU-IND)

The Financial Intelligence Unit- India (FIU-IND) under the Department of Revenue, Ministry of Finance, is an autonomous body that reports directly to the Economic Intelligence Council (EIC). The EIC is headed by the Finance Minister. FIU-IND is a central agency with the responsibility of receiving, processing, analysing, and disseminating information in matters related to suspicious economic transactions. It is also responsible for:

1. Corresponding and building up the efforts of national and international intelligence,
2. Carrying out inquiries for pursuing the global efforts against money laundering and connected offences.

Agencies 

The scheduled offences are individually investigated by agencies mentioned under the respective Acts, for instance, the local police, CBI, customs departments, SEBI, or any other investigative agency, as the needs of the case may be. 

Criticism of Prevention of Money Laundering Act, 2002

Some provisions in the PMLA, 2002, are recognised to be quite problematic and controversial right from the beginning. They have often been in the spotlight or in the news, considering their competing interests with several acts. On numerous occasions, the courts have questioned the constitutionality of several provisions under the PMLA. 

Vast power vested in the hands of the authorities 

There are numerous challenges made in court to question the constitutional validity of the PMLA, 2002. The Act has had numerous shortcomings and disparities since its inception. There is no doubt that several amendments were carried out to close the loopholes, but the effort was not fruitful. The Act, in some cases, takes harsh steps and provides the authorities with vast power for combating the issue of black money in the nation, however, the provisions thus enacted should be made in the interest of the public instead of exploiting them, and thus the views of the courts on this subject matter will be highly awaited. 

Lack of transparency 

There is a lack of transparency in the ED under the PML Act. Even the Enforcement Case Information Report, commonly known as the ECIR, which is an equivalent of the FIR, is said to be an ‘internal document’ and not provided to the accused. The ECIR can be filed on the whims and fancies of the ED as opposed to the principles and practises set under the criminal procedure law. 

Bail 

The bail terms were dealt with under Section 45(1) of the Act. In the landmark case of Nikesh Tarachand Shah v. Union of India (2017), this draconian clause was proclaimed to be illicit as it was in violation with Article 14 and Article 21 of the Constitution of India and the principle “bail, not  jail” as an identical provision was enlisted in the CrPC, 1973, as well. Thus, an additional provision had to be dealt with in cases involving imprisonment of more than three years under Part A of the Schedule. Hence, Section 45(1) was said to be unconstitutional and was struck down. 

Attachment of property 

In the case of B. Rama Raju v. Union of India and Ors. (2019), a challenge was made to the constitutional validity of sections 2(1) (u), 8, and 23. The argument was based on the issue that property that is under the control of another individual other than the one charged under this Act can also be seized and attached to the case. The court also has the authority to attach property that was obtained via illegitimate means before the Act came into force. It was stated that the presumption under Section 23 is against the presumption of innocence in favour of the individual accused of committing such an offence. 

Thus, after thoroughly looking at the provisions and the purpose of the Act, the Court made a decision that the aforementioned provisions are not in violation of any of the fundamental rights of the Constitution, hence the Court declared the sections to be legitimate. 

Being used for ordinary crimes 

It has been alleged that PMLA is said to have been pulled into the investigation process of ordinary crimes, and assets of non-guilty victims have also been attached by the authorities. 

Rights being compromised 

PMLA was ratified in response to India’s global commitment (including the Vienna Convention) to fight against the issue of money wandering, however, it ‘s said that the rights have been “cribbed, cabined, and confined“.

Some provisions have no relation to narcotics or organised crimes whatsoever 

The PMLA was enacted with a view to counter the danger of money laundering, especially in matters related to the trade in narcotics. At present, the offences enumerated in this Act are exceedingly overbroad and, in several cases, have no relation to narcotics or organised crime. 

Amendments carried out in the Prevention of Money Laundering Act, 2002

The 2012 Amendment 

The PMLA (Amendment) Act, 2012, implemented the following changes: 

1. The concept of ‘reporting entity’ was added. It included a banking company, a financial institution, an intermediary, etc.
2. The 2002 Act had an upper limit of fine of up to ₹5 lakhs; however, the 2012 amendment removed such limitation. 
3. The 2012 amendment provisional attachment and confiscation of property of any individual who had been involved in such activities.

The 2019 Amendment 

The 2019 Amendment brought with it a lot of changes. The Centre issued a circular on the same in 2019. Since the 2002 Act needed a revamp, the following amends were carried out:

1. The ED had the authority to carry out any investigation in matters relating to money laundering. 
2. One of the most noteworthy amendments are the removal of subsections (1) of Section 17 (search and seizure) and Section 18 (search of persons).
3. Another noteworthy amendment was the introduction of explanation under Section 44. The explanation says that the jurisdiction of the special court while dealing with the offence of money laundering under this Act, during any investigation, enquiry or trial under this Act, shall not be relied upon any orders passed in respect of the scheduled offence. Further, the trial of both the offences by the same court shall not be read or considered as a joint trial.
4. Moreover, an explanation under Section 45 of the Act makes it clear that the offences under the PMLA will be cognizable and non-bailable. Thus, the ED is now authorised to arrest an accused without warrant, provided some conditions are met. 
5. Additionally, Section 3 of the Act was amended to make concealment of proceeds of crime, possession, acquisition, use, projecting as untainted money, or claiming untainted property as independent and complete offences under the Act. Such activities are said to be continuing offences until an individual enjoys the proceeds of crime.

Must know information on the Prevention of Money Laundering (Maintenance of Records) Rules, 2005

The Prevention of Money Laundering (Maintenance of Records) Rules, 2005, were passed by the Central Government with the inputs given by the Reserve Bank of India. The main motives of enacting the rules were as follows: 

1. For keeping a record of the nature and value of transactions; 
2. For keeping a track of the process and manner along with the time for providing information and verifying records related to the identity kf the clients of  banking companies, financial institutions and intermediaries.

Constitutional validity of several provisions of the Prevention of Money Laundering Act, 2002

Recently, in July 2022, the Hon’ble Supreme Court, in the case of Vijay Madanlal Choudhary vs Union of India (2022), upheld the constitutional validity of various provisions of the Prevention of Money Laundering Act, 2022, namely:

1. Section 3, 
2. Section 5, 
3. Section 17, 
4. Section 18,
5. Section 19,
6. Section 24,
7. Section 44, 
8. Section 45, and 
9. Section 50.

The main issue in this case was whether the aforementioned provisions under the PMLA were constitutionally valid or not. Further, the other issue was whether provisions relating to arrest were against the provisions laid down in the CrPC or not. 

The Apex Court held that just because the provisions are not the same, this does not mean they are unconstitutional. Further, the Court held that the aforementioned provisions are legally valid. Moreover, the Court rejected the petitioners’ contention that the said sections are against any provision stated in the law. 

In matters relating to the constitutional validity of the aforementioned Sections, the Court opined the following, inter alia: 

1. Section 3 has a wider scope and it is not restricted to the property as untainted. Thus, any activity connected with the proceeds of crime where the property is not disguised as untainted can still constitute an offence of money laundering. This conclusion was achieved by the Court by reading the word “and” as “or” in the aforementioned Section.
2. Section 5 was also held to be constitutional as it provided a balanced setting to safeguard the interests of the public along with keeping a check that the proceeds of crime are available to deal with in the manner described under the PMLA. 
3. Moreover, the Court held Section 19 to be constitutionally valid. It said there were no strict measures provided under Section 19 and that there was no arbitrariness or unconstitutionality in it. 
4. Further, while referring to Section 50 of the Act, the Court asserted that the process laid down under the Section has to be treated as an investigation in its strict sense. It also pronounced that the ED authorities are not “police officials” as such.

Steps that can be taken against an individual involved in money laundering 

Any individual found guilty of money laundering can face the following repercussions:

1. His property obtained via this illegal activity may be seized, freezed or confiscated.
2. He may have to face rigorous imprisonment from three to seven years.
3. He may be charged with a fine that has no limitation per se.

The new way forward  

• Steps are needed to be taken to tackle the threat of cryptocurrency in cases of money laundering. 
• There is a dire need to sensitise the society on the ill effects of money laundering. 
• Financial institutions can implement measures like conducting risk assessment before launching any product in the market, business practice or before using any new or developing technology. 

FATF Recommendations

The FATF has an elaborate list of recommendations for combating the issue of money laundering; some of the suggestions are as follows:

1. Risks can be identified and policies and schemes can be developed to alleviate the threat of money laundering and terrorist financing. 
2. The offence of money laundering must be considered as a crime in accordance with the Vienna Convention and the Palermo Convention, thus making sure that the financial institution secrecy laws cause no hindrance to the implementation of the FATF recommendations.
3. Apply preventive measures for the economic sector and other designated sectors.
4. Measures like that of creating authorities’ powers and responsibilities (e.g., investigative, law enforcement, and supervisory authorities) must be taken along with other institutional measures. 
5. The countries must have policies against money laundering and must have a separate designated authority that is responsible for implementing and carrying out such policies. 
6. Providing legal help mutually in matters relating to money laundering and effectively conducting extradition requests on matters of money laundering and terrorist financing.

Conclusion 

Over the past decades, multiple policies have been implemented by nations to combat the issue of money laundering. Financial institutions as well as the governments of such nations have been persistently searching for new approaches to dealing with money launderers. Amends have been carried out from time to time to avoid the misuse of the loopholes in the law. Further, amends have been carried out to prevent the misuse of PMLA by government officials. PMLA can be referred to as a dynamic Act that will keep evolving over time considering the changes in society and a rise in awareness of the citizens. 

Banks, financial institutions, and other intermediaries play a key role in the world of economic crimes, which is why it is crucial that they receive proper training and guidance on how to determine and tackle the crime of money laundering. Usually, every employee working at a bank or any financial institution receives training on money laundering. Further, banks are legally obliged to report any activity, transaction, or series of transactions they find to be suspicious. Furthermore, with the aid of technology like special compliance platforms, companies and organisations can effortlessly conduct research on their customers and make sure that there is no fishy business going on. 

Frequently Asked Questions (FAQs) 

Where is the Prevention of Money Laundering Act applicable? 

The PMLA is applicable to the following: 

1. Individuals, 
2. Companies, 
3. Firms, 
4. Partnership firms, 
5. Associations of individuals or incorporations and any agency, 
6. Any office or branch owned or controlled by any of the aforementioned individuals. 

Who has the authority to control the Prevention of Money Laundering Act in India? 

The adjudicating authority is the authority assigned by the Central Government via a notification to exercise the jurisdiction, powers, and authority conferred under the PMLA. Further, the adjudicating authority has the power to determine whether any of the property attached or seized has been involved in money laundering.

Which Act will prevail if there is a clash between the provision of PMLA, 2002, and other Acts or legislations? 

Under Section 71 of the PMLA, the provisions of the PMLA will have an overriding effect, notwithstanding any incompatibilities in any other Act or legislation for the time being in force. 

What will happen to the proceedings instigated under PMLA, 2002, in case there is a death or insolvency of an individual against whom the suit has been filed? 

In matters where any property of an individual is linked under Section 8 and no appeal against such property has been filed, then, the legal representatives or the official assignee or the official receiver may file an appeal to the Appellate Tribunal or the high court or to proceed with the appeal before the Appellate Tribunal or the high court, instead of such an individual.

On whom will the onus of proof lie upon? 

Under Section 24 of the PMLA, an individual accused of the offence of money laundering, as discussed under Section 3 of the Act, whose property is attached and proceeded against, or seized, will have to prove that he is innocent. He can do so by revealing the sources of his income, earnings, or assets, out of which or by which he acquired the property thus attached for investigation. 

Will the statement recorded in front of the investigating office under the PMLA be acceptable evidence under the statute? 

Yes, the statement recorded before the investigating officer under the PMLA can be accepted as evidence, as such a proceeding under Sections 50(2) and 50(3) of the Act is a judicial proceeding that falls within the ambit of Sections 194 and 228 of the Indian Penal Code, 1860. 

Is PMLA a criminal law? 

Yes, the PMLA is a criminal law of the Parliament of India. It was passed by the NDA (National Democratic Alliance) Government in 2002 to combat the issue of money laundering and to seize any property or assets obtained through the wandered money. 

Who can lodge a complaint under the PMLA? 

The Enforcement Directorate, which plays the role of a prosecuting agency, has the authority to lodge a complaint under the PMLA in order to examine and investigate any allegations of money laundering of the proceeds of crime. These proceedings, therefore, have to be correlated to a separate criminal offence allegedly perpetrated by the individual, based on which the ED files its independent complaint under the said Act. 

References 

• https://www.indiacode.nic.in/bitstream/123456789/2036/1/A2003-15.pdf 
• https://www.taxmann.com/post/blog/guide-to-prevention-of-money-laundering-act-pmla/ 
• https://cleartax.in/s/prevention-of-money-laundering-act-2002 
• https://www.mondaq.com/india/money-laundering/1136310/anti-money-laundering-laws-in-india–the-prevention-of-money-laundering-act-2002-pmla 
• https://www.indialegallive.com/laws-research-indepth/pmla-2002-challenges-and-effectiveness/ 
• https://www.drishtiias.com/daily-updates/daily-news-analysis/misuse-of-prevention-of-money-laundering-act  
• https://www.clearias.com/money-laundering/ 
• https://taxguru.in/rbi/insight-prevention-money-laundering-act-2002.html 

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