This article is written by Kashmira Sahani from the School of law, UPES Dehradun. This is an exhaustive article that covers the meaning of money laundering and the global and Indian initiatives on the prevention of money laundering.

Introduction

Money is not evil as such but it is the root cause of evil intents – Mahatma Gandhi. Money is an essential part of the economy which is required for the proper functioning of societies and money laundering happens in almost every country in the world. Money laundering is usually used by corrupt politicians, criminals to hide their illegal money obtained through terrorist activity, drug trafficking. It can be said that it is a process that disguises illegal profits without compromising the people who wish to benefit from the proceeds. Criminal activities such as terrorism, illegal arms sales, financial crimes, smuggling, or illicit drug trafficking create a huge amount of money and because of these it is the need of an hour for criminal organizations to find the way to use those funds but without awakening suspicions about their illegal origins.

Money laundering

Article 1 of the European Communities Directive and Convention on Laundering, Search and Confiscation of the Proceeds from Crime has defined money laundering as the conversion of property knowing that such property is derived from serious crime, to conceal or disguise the illicit origin of the property, or of assisting any person who is involved in committing such offenses. It can also be defined as the process of creating the appearance that large amounts of money obtained from serious crimes have originated from a legitimate source. The offense of money laundering has also been defined under sec 3 of the Prevention of Money Laundering Act. 

How money laundering works

1. Placement Stage: This is the first and one of the riskiest stages where the launderer inserts the money into a financial institution often in the form of cash bank deposits. To curb the high risk, the large amount of money is broken into a smaller part and then directly deposited into bank accounts.
2. Layering Stage: In this stage, the launderer engages the money in a series of conversions of money to distant them from their sources and to change the forms of money, it is sent through different and various financial transactions. This stage sometimes may consist of the different bank-to-bank transfers, wire transfers between different accounts in different names.
3. Integration Stage: This is the third and final stage in which money enters the financial system just like an original way. The launderer might choose to invest the funds into real estate, luxury assets, or any business ventures as well which means money is used in such a way that it becomes very difficult to catch the launderer at this stage.

Impact of money laundering

1. Discourages foreign investors
2. Causes financial crisis
3. Results in exchange and interest rates volatility
4. Encourages tax evasion culture
5. Give impetus to criminal activities
6. Damages to the reputation of the financial market and institutions

Money laundering and terrorism financing

The main aim of any criminal organization is profit-making and is involved in profit-making crimes. The result is that the operation of any criminal organization leads to a vast amount of wealth and money and at the same time several problems as well. The cash generated from the criminal organization is not easy to hide and to be utilized because sudden use of that money will raise a lot of questions. We see money laundering and terrorism financing as two distinct activities.

Criminals make the dirty money look like legal money and they do this by selling and channeling the funds into the property, goods, and financial services. Money laundering makes it difficult for authorities to find out the sources of that dirty or illegal money. People who are financing terrorism use these methods to money launderer and to channel funds to terrorism to cause harm at large.

Global initiatives to prevent money laundering and terrorism financing

Money laundering is not a new thing rather it is an international phenomenon. Many international conventions talk about money laundering and several initiatives have been taken to deal with this international problem.

1. The Vienna convention

This was held in December 1988 and it is one of the first initiatives for the prevention of money laundering. The main aim of this convention is that it laid down efforts to combat any money laundering by obligating the member states to criminalize the laundering of money from drug trafficking, it also promotes international cooperation in investigations and makes extradition between member states. Later on, it also laid down a principle on bank domestic secrecy provisions should not interfere with international criminal investigations.

 2. The Council of Europe convention

It establishes a common policy on the problem of money laundering, it gives the common definition of money laundering and measures on how to deal with them. It also lays down certain international cooperation among the member states, which may also include states outside the Council of Europe. The main aim of this convention is to facilitate international cooperation as regards investigative assistance, search, seizure, and confiscation of the proceeds of all types of criminal activities and mainly for drugs, terrorist offenses, arms dealing, etc.

 3. Basel Committee’s Statement of Principles

Basel Committee on Banking Regulations and Supervisory Practices stated of Dec 1988 intending to encourage the banking sector to adopt a common position to ensure that banks are not used to hide or launder funds acquired through criminal activities or any illegal activities. But that statement does not restrict itself to any drug-related money laundering rather than it extends to laundering which includes banking systems may be through deposit, transfer, and any type of concealment of money from drugs, terrorism, fraud, etc. It also focuses on the area in which the person will not be allowed to enjoy any banking system that is involved in any kind of money laundering.

4. The Financial Action Task Force

FATF is an inter-governmental body which in Paris in 1989 at the G7 summit with an idea and objective to set some high standards and to promote effective implementation of any legal, regulatory, and operational measures to curb the evil practice of money laundering and terrorist financing. Many recommendations have been recognized by FATF which are recognized by international standards for money laundering. Eight special recommendations were issued in October 2001 and in October 2004, a ninth special recommendation was published which talks about the strengthening of international standards for combating money launder and terrorist financing.

 5. UN Global Program Against Money Laundering

It was established in 1997 with an idea to increase the effectiveness of all the international actions against any kind of money laundering through technical cooperation services offered to governments. Technical cooperation under this program is the main task which encompasses the activities of awareness and institution training and building. It also aims to support the establishment of financial investigation services to the proper functioning of law.

Legal framework in India to prevent money laundering

• Money Laundering Bill: India is a signatory to the UN Resolution of 1998 which calls upon the member states to take strict actions against money laundering, hence our government initiated a specific Prevention of Money Laundering Bill, 1999 which defines money laundering as an act of acquiring, owning, possessing any proceeds of crime and knowingly entering into any transaction about a crime listed in Indian Penal Code, 1860. The act seeks to prevent and control criminal financial activities relating to drugs and narcotics and other crimes. 
• Prevention of Money Laundering Act 2002: This Act was introduced in 2002 to fight against the crime of money laundering and to punish the people benefitting out from this crime. This act enabled our government or any authorized public authority to confiscate the property earned from illegal gains and illegal money. Under this act, the Financial Intelligence Unit scrutinizes all the records to find out and spot any suspicious transactions if any, and then the investigation goes on by the Enforcement Directorate.
• Prevention of Terrorism Act, 2002 – It is the first legal effort by our government for the prevention of terrorism activities and other matters related to it. Sec 8 of this Act allows forfeiture by the Central government of proceeds of terrorism, whether or not the person from whose possession it is seized or attached is prosecuted under the given act, It further also attempts to deter terrorist activities in general and enforce seizure and blocking of money for terrorism financing.
• Financial Intelligence Unit: It is not a regulatory authority but its main duty of this unit is to gather all the financial intelligence in close operation with the regulatory authorities which also includes RBI, SEBI, and IRDA along with looking after all the suspicious transactions and then to report it. It is responsible for the coordination and strengthening of any national and international intelligence.

Anti-money laundering guidelines

Security and Exchange Board of India

1. These apply to SEBI registered intermediaries.
2. It puts on certain duties on SEBI registered intermediaries to enact policies and procedures to assist policies.
3. It also talks about how to fight against money laundering which should include the communication of such group policies related to anti-money laundering and illicit activities such as terrorist financing.
4. It handles customer account information, securities transactions, client acceptance policy, Customer due diligence measures, and maintenance of records.

Reserve Bank of India (RBI)

1. These guidelines apply to all banking companies and Non-Bank Financial Companies which are regulated by RBI.
2. Implantation of KYC (Know Your Customer).
3. The main aim is to prevent individuals and companies to misuse the Banks and NBFCs from being used for money laundering.

Initiatives for preventing money laundering

1. Obligations of Banks: It is the legal duty of banks to keep the details of customers at the time of opening of new account very confidential and should also ensure that all the details should be in safe hand and no one can misuse that information and also ensure that the information sought and collected from the customer is relevant to the perceived risk and should only be sought separately with the customer’s consent.
2. KYC Policy- The Bank must frame KYC for every customer out there incorporation some basic elements which are Customer Acceptance Policy, Customer Identification Procedures, Risk Agreement, and Monitoring of Transactions.

Proposed amendments of the Act

The Government of India in 2019 brought 8 amendments in the Prevention of Money Laundering Act of 2002. As we know that earlier, money laundering was not treated as an independent crime, and therefore the main aim of the amendments to treat the crime of money laundering as a standalone crime in our country.

Explanation to Section 2(1)(u) – Under sec 2(1)(u), proceeds to crimes means crimes related to the property which directly or indirectly obtained by any activity relatable to any scheduled offenses.

Explanation to section 3 – Sec 3 of this Act talks about the offense of money laundering which states that a person shall be guilty of money laundering if the person is directly involved or is knowingly a party to one or more of the following processes connected with the proceeds of crime –

1. Concealment 
2. Possession
3. Acquisition 
4. Use
5. Projecting as untainted property
6. Claiming it as untainted property in any manner

This explanation was inserted based on the observation made by FATF and hence after amendment all of the above falls under crimes.

In the case of Rohit Tandon vs. Enforcement Directorate, the Supreme Court held that concealment, possession, acquisition, or use of the property by projecting or claiming it as untainted property and converting the same by bank drafts would certainly come within the meaning and scope of criminal activity relating to scheduled offense and being a case of money laundering it would be punishable under sec 4 of the Act.

The omission of proviso under sec 17(1) and sec 18(1)– By omitting the said provisos, now the authorizes office under the act has the authority to enter any property for purpose of conducting any search and seizure even in the absence of reporting of a scheduled offense to a magistrate or any authorized competent authority. Before the omission, it was provided that no search shall be conducted unless the crime falls under the scope of scheduled offenses.

Amendment to Sec 44 – A proviso has been added which states that no offense of money laundering can be determined after investigation and the authority shall submit a Closure report before the Special Court and the case should be closed as soon as it is proved that there was no offense.

Under sec 44(1)(d), an explanation clause has been added which provides special power to a special court for exclusive jurisdiction regarding all scheduled offenses. It also talks about trials conducted by the Special Court.

Insertion of explanation to sec 45(2) – An explanation has also been added to sec 45 which further clarifies that the offense of money laundering is cognizable and non-bailable which means the accused can be arrested by any authorized officer without any warrant and to issue bail or not, it is on Court’s discretion and the punishment for this offense is more than 3 years.

In the case of Kavi Arora vs. State, the petitioner (Kavi Arora) who is the former CEO of Religare Finvest Ltd. filed a petition for seeking regular bail in case of money laundering. The Delhi High Court in this case dismissed the petition because the petitioner is charged under sec 409 IPC whose punishment in life imprisonment and also the fraud committed by the accused is of Rs. 2000/- crores of public money, hence the petitioner should not be granted bail.

Conclusion

Money laundering and terrorism financing pose a serious threat to our financial as well as the sovereignty of any country. Terrorism financing is another major hurdle that seems almost impossible to track and apprehended since most of these transactions are in cash and no banks are involved in this process. The Protection of money laundering act (PMLA) has been amended for financing activities related to terrorism activities as well. RBI and SEBI have their own set of anti-money laundering guidelines. The FIU seeks to receive maximum reports in electronic forms. We have many high-profile money laundering cases in India even though we have this act and so many guidelines, we just need to apply those guidelines and laws correctly.

References

1. https://www.mondaq.com/india/money-laundering/591688/prevention-of-money-launderi
2. ng-a-global-panorama
3. https://www.google.com/amp/s/m.economictimes.com/news/politics-and-nation/fatf-review-of-indias-anti-money-laundering-terror-financing-regime-pushed-to-2021-due-to-covid/amp_articleshow/77181119.cms
4. http://www.unodc.org/unodc/en/money-laundering/Instruments-Standards.html?ref=menuside#UN-Conventions
5. http://www.unodc.org/pdf/convention_1988_en.pdf
6. https://www.google.com/amp/s/m.economictimes.com/news/politics-and-nation/government-makes-anti-money-laundering-law-stricter-widens-definition-of-proceeds-of-crime/amp_articleshow/70283032.cms
7. https://www.google.com/amp/s/taxguru.in/rbi/money-laundering.html%3famp

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