This article is written by Aparna Jayakumar, from Guru Gobind Singh Indraprastha University. This article envisages the basics of the Money Laundering Act of 2002 and the recent growth and development with regards to the same.

Introduction

The literal meaning of laundering is washing or cleaning dirty clothes. The term money laundering is used for cleaning dirty money. It is the disguising or concealing of illicit income in order to make it appear legitimate. Money laundering is being employed by launderers worldwide to conceal criminal activity associated with it such as drugs/arms trafficking, terrorism and extortion. The word “money laundering” originated in the United States of America with the mafia party. Mafia groups have made enormous amounts of extortion, gambling, and so on and this money is shown to be legal money.

In India, Hawala transactions are popularly known as “money laundering“. In the money laundering method; money is spent in such a way that even the analysis agencies cannot track the principal source of wealth. The manipulator of that money is called a “launderer.” So, the black money invested in capital markets or other ventures, as the legitimate money, returns to the real money holder.

Money laundering can be achieved in many ways, but the most common is the establishment of fake companies, often known as “shell companies.” ‘Shell Corporation’ behaves like a real company but this business does not actually exist in the real world and there is no investment by these firms. Such shell corporations simply operate only on paper, and not in the real world.

Yet the launderer shows major transactions in the balance sheets of this shell business. He takes out loans in the name of these businesses, gets tax exemption from the government, doesn’t file income tax returns and accumulates a lot of black money from all these fraudulent activities. 

Buying a big home, shop or mall but having less value on paper when the real market value of such purchased assets is much higher. This is done so they can reduce the tax burden on them. Thus, it raises black money through tax evasion. The biggest example of money laundering, in recent times, would be the case of Karthi Chidambaram, S/o P. Chidambaram, Former Union Minister, involved in the INX Media Money Laundering case.

Steps involved in money laundering process

1. Placement: The first step in this process is black money investing in the market. By having a formal or informal agreement the launderer deposits the illegal money through various agents and banks in the form of cash.
2. Layering: The launderer hides his real income in this cycle by doing foul play. The launderer deposits funds in international bank accounts to investment assets such as shares, securities, and traveller’s checks. This account is often opened in those countries ‘banks that don’t reveal their account holders’ details. So, the ownership and the source of money are disguised in this process.
3. Integration: The final stage of reintroducing the ‘laundered’ property into the legitimate economy or; returning the money as legal money back into the financial world.

Money Laundering Prevention Act, 2002 

The original money laundering law was implemented in India in 2002 but it was revised 3 times (2005, 2009 and 2012). The President signed the last amendment of 2012 on January 3, 2013 and the legislation came into effect on February 15, 2013.

The Money Laundering Prevention Act, 2002 (PMLA) aimed at fighting money laundering in India with three main goals: 

1. Preventing and regulating money laundering.
2. The property obtained from laundered money must be confiscated and seized.
3. Tackling some other problem linked to money laundering in India.

The PMLA (Amendment) Act, 2011 has placed money concealment, possession acquisition, use of crime proceeds and possession of money on the criminal list. It is worth noting here that RBI, SEBI and the Regulatory and Development Authority for Insurance (IRDAI) were brought out under the authority of PMLA, 2002.

Therefore, all financial institutions, banks, mutual funds, insurance firms and their financial intermediaries shall be subject to the provisions of this Act. It can be concluded, through the above facts, that the money laundering process is quite complex and manipulative. But the government needs to step up the digital transaction process to curb the corruption threat.

Initiatives to fight money laundering prior to 2002

In India, before the 2002 Prevention of Money Laundering Act was enacted, a number of statutes sparsely addressed the issue at issue. Those statutes were;

1. The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974,
2. The Income Tax Act, 1961,
3. The Benami Transactions (Prohibition) Act, 1988,
4. The Indian Penal Code, 1860, and Code of Criminal Procedure, 1973,
5. The Narcotic Drugs and Psychotropic Substances Act, 1985,
6. The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988.

Money Laundering is a global problem that no nation alone can handle. Prevention of Money Laundering (Amendment) 2011 Bill was required with the view that India is an essential member of the Financial Action Task Force (FAFT) and aims to put prevention of money laundering regulations in line with global standards. The said Bill is still pending in Parliament for approval.

Indian banks were reluctant to depart from their strict bank secrecy policies, and this further allowed individuals in India to launder money. The problem of money laundering in India is complicated further by Hawala’s ancient underground banking system.

The Money Laundering Prevention Bill (“MLPB”) was drafted by the Indian Government in an effort to eliminate money laundering. It also concluded agreements with certain countries to assist one another in investigating money laundering.

Bilateral agreements

India has begun bilateral agreements aimed at combating drug trafficking and money laundering in an effort to achieve the stated goals of the Vienna Convention and the FATF recommendations. India signed an agreement with Egypt in April of 1995 to join efforts to fight drug-related money laundering in both countries. The agreement enables the exchange of operational intelligence, as well as the identification, freezing and confiscation of property used in connection with money laundering related to narcotics.

The Indian government recently concluded a similar, yet more comprehensive agreement with the Pakistani government in 1997. The countries agreed to institute several cooperative measures to control drug trafficking and money laundering, including the fast and efficient exchange of information. The governments also agreed to establish mechanisms for conducting joint financial investigations and information exchanges. Recently, a new agreement was discussed between 2 countries that would include other nations in the region.

Amendments under Finance Act, 2019

The Prevention of Money Laundering Act, 2002 (‘PMLA’) has been amended as a result of the Finance Act of 2019. The most significant change is to the PMLA’s concept of “proceeds of crime,” which also covers not only assets derived or acquired from a scheduled offense, but also any property derived or obtained directly or indirectly as a result of any illegal activity related to a scheduled offense. Furthermore, whether a person is found to have actively or indirectly intended to engage in, intentionally participated in, knowingly is a party to, or is found to be engaged in concealing, owning, obtaining, or using a property associated with proceeds of crime, the person is guilty of money laundering.

Enlargement of the scope of ‘proceeds of crime’ 

When it comes to money laundering, the PMLA’s provision on what constitutes “proceeds of crime” leaves a lot of room for interpretation. The Directorate of Enforcement (ED) has stated that this uncertainty hinders its ability to investigate the money trail, adjudicate attachments before the PMLA Adjudicating Authority and Tribunals, and prosecute money laundering cases. The phrase “proceeds of crime” is specified in Section 2(1)(u). The Finance Act of 2019 has added the following Explanation to the above Section:

Explanation: “For the avoidance of doubt, “proceeds of crime” includes property not only produced or received from the scheduled offence, but also any property derived or obtained directly or indirectly as a result of any unlawful activity related to the scheduled offence.”

In the case of Rohit Tandon v. Enforcement Directorate, the Supreme Court ruled,

“…In reality, the term ‘criminal activity’ has yet to be identified. The suspected actions of the accused alluded to in the predicate offence are illegal activities by definition… The alleged conduct of the accused named in the commission of the predicate offence, on the other hand, is replete with mens rea. In the case of, concealing, possessing, acquiring, or using the property by projecting or declaring it as untainted property and converting it to bank drafts will undoubtedly fall within the scope of criminal activity related to a scheduled offence. That would be a case of money laundering, as specified by Section 3 of the Act, and punishable under Section 4 of the Act..”

The scope of Section 2(1)(u) has been expanded as a result of this explanation, allowing proceeds resulting from illegal activity relating to the scheduled offence to be brought in. Since the word “any illegal activity” is not specified in the Act, it is sufficient whether the authorities charged with enforcing the Act obtain proof that the assets were obtained through criminal activity.

Nikesh Tarachand Shah v. Union of India & Anr.

Facts

The constitutional validity of Section 45 of the Act was challenged in court. The issuance of the bond is subject to two provisions under Section 45. The lawyer must have the opportunity to refuse any parole appeal, and the Court must be satisfied that the criminal was not convicted of the crime and did not commit another crime while on bail.

In this case, the main change that this Court would accept is the non-applicability of the twin conditions under Section 45 of the PMLA, which was the primary explanation for Rohit Tandon’s earlier bail plea being denied.

The second main factor is that the offence punishable under Section 4 PMLA carries a mandatory penalty of seven years in prison and a minimum sentence of three years in prison… As a result, the trial will most likely take some time. As a result, the petitioners are granted bail by this Court.

Holding

Reason/ Ratio decidendi

Article 14 allows classification as long as the classification has a fair relationship to the objective to be met. Although a proper definition is permissible, it must be based on a true and substantive distinction that has a reasonable and equitable connection with the objective to be achieved, and it cannot be performed arbitrarily and without causing any substantial loss. Following the decision in the Maneka Gandhi case, Article 21 now provides safeguards not only against executive intervention but also against regulations that take away a person’s life or personal liberty.

Obiter dictum (Decision)

The Special Court was to hear both the money laundering and the predicate offenses, and bail was only issued if the twin provisions of Section 45(1) were met. The doctrine of arbitrariness would mean that a statute was disproportionate, excessive, or manifestly irrational. The stated sentences’ manifest arbitrariness test will be used to invalidate the law, as well as the subordinate legislation, under Article 14. A designation based on a defining felony in Part A of the List being imprisoned for longer than three years does not have a reasonable connection with the purpose of adding. A classification based on more than three years of imprisonment for a crime listed in Part A of the List, which is a deciding crime, will be incompatible with the goal of attaching and contributing substantial sums to the economy as proceeds of crime.

Analysis

The question in Nikesh Tarachand Shah v. Union of India was whether Section 45 of the Prevention of Money Laundering Act 2002, which governs bail, infringes on the right to freedom and life. The Supreme Court’s decision in the aforementioned case on the procedural legitimacy of twin requirements for issuing bail raises concerns about identical clauses of other laws, including those concerned with economic crimes. Although the decision, in this case, is incredibly important. 

The question of whether an economic crime, such as money laundering, made necessary strict requirements like the impugned conditions, and whether an individual’s rights might be curtailed by the state in the case of such an economic crime, remains unanswered. As a result, the Supreme Court in the aforementioned case did not discuss the justiciability of pre-bail conditions such as the Impugned Conditions in the case of economic offences. In the case of individuals convicted of fraud involving a company’s affairs, Section 212(6) imposes limitations identical to the impugned conditions.

If the constitutional validity were to be challenged solely on the grounds that they are necessarily ‘arbitrary’ and ‘unreasonable,’ it is highly doubtful that the Apex Court will uphold such an appeal, given that the Supreme Court Rohit Tandon v. The Enforcement Directorate has already stated that “economic offences ought to be taken seriously and treated as grave offences affecting the economy of the country.” As a result, the legality and justification of the pre-bail conditions (similar to the Conditions set forth in the PMLA) in the case of economic offenses remain ‘enigmatic’ and await judicial clarification.

Amendments to Section 45 of the Act

In the case of Nikesh Tarachand Shah v. Union of India, Section 45(1) of the PMLA was challenged. Following an examination of the Act and its history, the Supreme Court determined that the indiscriminate implementation of Section 45 would undoubtedly violate Article 21 of the Constitution. Section 45(1) is unconstitutional insofar as it imposes dual requirements for bail release, as it violates Article 14 and Article 21.

According to Section 45(1)(ii) as it stood, no one convicted of an offence punishable by more than three years in prison under Part A shall be released on bail until the following two conditions are met:

1. The Public Prosecutor was granted the opportunity to object to bail.
2. If the Prosecutor refuses bail, the Court shall release the accused on bail if it is satisfied that the accused is not guilty of the crime and is not likely to commit another offence while on bail.

Later, in the case of Rajbhushan Omprakash Dixit v. Union of India, a Division Bench of the Delhi HC referred the following issue to a larger Bench:

“As a result of the amendment to Section 45 of the PMLA that took effect on July 1, 2005, are the offences under the PMLA cognizable or non-cognizable?”

The doubts are dismissed by the addition of Explanation to Section 45(2), which states that the offenses are cognizable and non-bailable and that the provisions of the PMLA apply notwithstanding something in the CrPC to the contrary. The question of whether it is prospective or retrospective would be moot.

Conclusion

Besides creating laws that criminalize the laundering of the proceeds of crime, India also needs to enact strict compliance programs for the financial industry that make money laundering more difficult. Financial organizations must be required to report suspicious transactions, as these reporting provisions increase the probability of money laundering operations being detected by law enforcement.

Although demonetisation was introduced in november 2017, with a view of preventing the flow of black money, it could only control the Act to a certain extent, and not brush it off totally from the system, and prevent the darkness thereof. 

In addition, financial institutions should train employees to spot suspicious activity. The most vulnerable for detection is the placement stage of the money laundering process. As such, if bank employees can identify the characteristics of the transaction They will be able to spot more transactions. Such training might allow law enforcement agencies to apprehend and convict an even greater percentage of money launderers.

Furthermore, financial institutions within India should develop identification criteria similar to the rules for, know-your-customers. To ensure they engage in legitimate business activity, financial institutions should be required to obtain substantial information about their clients. Such a program will give banks greater flexibility in detecting fraudulent transactions.

References

• https://economictimes.indiatimes.com/news/politics-and-nation/government-makes-anti-money-laundering-law-stricter-widens-definition-of-proceeds-of-crime/articleshow/70283032.cms?from=mdr
• https://corporate.cyrilamarchandblogs.com/2019/09/finance-act-2019-prevention-money-laundering-act-amendment/#:~:text=The%202019%20Act%20clarifies%20that,or%20claiming%20it%20as%20untainted
• https://www.barandbench.com/columns/amendments-to-pmla-by-finance-act-2019-widening-the-scope-of-the-legislation
• https://www.lexology.com/library/detail.aspx?g=5bf016bc-7872-4496-8cce-6c784e7f7aeb
• https://www.mondaq.com/india/money-laundering/857752/amendments-to-the-pmla-made-by-the-finance-act-2019

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