Sovereign wealth funds
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This article is written by Priscilla Esther Deborah S, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.

Introduction 

Those engaged in the activity of money laundering are always on the look for new ways and techniques to launder their money. And with the advent of new technologies, it has only become easier. Therefore, to fight this crime efficiently, we need new and effective legal frameworks in place. The expression “money laundering” is by and large ascribed to the group of methods engaged with legitimizing assets amassed by methods which may not have been authentic. Portrayed in another sense, it includes the exchange of wrongly earned proceeds into apparently real resources, and in some cases into businesses created with an intention to produce more incomes to fund the evil methods from where the proceeds were created in the first instance. Thus, it is a highly sophisticated act to cover up or camouflage the identity of origin of illegally obtained earnings so that they appear to have been derived from lawful sources. 

It is the process by which illegal funds are converted into legitimate funds and assets. In other words, it is basically the process of converting black/ illegal money of a person in a legal or white money. High tech criminals very commonly use this process to facilitate a cleanup of their “tainted” money. This article is designed to reflect on the existing legal framework on Money Laundering in India, its key provisions and the changes brought by the recent RBI rules and SEBI guidelines.

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 instituted to forestall money laundering and to accommodate procedures for the seizure of property obtained from money laundering. This act is legislated basically to sub-serve twin purposes. Firstly, to prevent money laundering and secondly to provide for confiscation of property derived from, or involved in money laundering, and to ensure curbing of the tendency of committing scheduled offences.

The PMLA and the Rules advised there under came into power with effect from July 1, 2005. The Act and Rules told thereunder lay obligation on banking companies, financial institutions, and intermediaries to check on the identity of the clients, keep up records and publish data in recommended structure to the competent authorities created and designated keeping in regard to oversee such manner [e.g., Financial Intelligence Unit – India (FIU-IND)]. The Act was along these lines amended in the years 2005, 2009 2012 and 2019. 

The objectives of the Act

The PMLA looks to battle acts relating to illegal money laundering in India mostly has three primary objectives: 

  • To avert and control money laundering;
  • To confiscate and hold onto the property acquired from the laundered cash; and 
  • To manage some other issue associated with the act of money laundering in India. 

Key concepts in the PMLA 

The PMLA, it could be emphasized, is the most comprehensive piece of enactment intended to recognize acts and work relating to money laundering and take actions thereof. Inside the code, various ideas have been characterized, depicted and managed exhaustively, which have an immediate reference to tax evasion exercises. 

Some of such key topics of the Act which are very significant are described about hereinafter in the article.

Money laundering in PMLA

The idea of tax evasion is portrayed under Section 3 of the PMLA, in a way to incorporate those activities and deeds whereby there are ‘attempts to indulge or assist another person’ or become ‘involved in any process or activity connected with the proceeds of crime and projecting it as untainted property. These are said to be activities which may come under the subject of money laundering. Any person involved in such an act shall be guilty of the offence of money laundering. 

Proceeds of crime in PMLA

This is quite possibly one of the main terms to be understood in as much as that the point is to comprehend the extent of the term money laundering within the scope of PMLA. This term is characterized within the scope of Prevention of Money Laundering Act to portray properties, resources and assets obtained out of any activity which is considered unlawful, illegal or criminal. It also includes property which is taken or held abroad.

Attachment of property in PMLA

The attachment of property involved in money laundering which is found in Section 5 of the Act, authorizes the Director or any officer who is not below the rank of Deputy director to attach the property by order if he believes that such property has a tainted means of existence.  The director is also required to forward a copy of the order along with the material in his possession to the Adjudicating Authority.

An amendment put forth by the government vide ‘The Finance Act, 2019’ excluded the stay period of 180 days permitted by court for the validity of provisional attachment orders. Further, a 30-day period is provided to take care of delay in communicating the judicial order for which previously a waiver had to be sought for by the Enforcement Directorate. 

Amendment to Section 8(3) allows the Enforcement Directorate to take 90 more days in need of filing the charge sheets. On consideration of claims, this amendment has empowered the special court to restore the assets confiscated amidst the ongoing trial, if the Court deems fit to do so. 

PMLA rules on the maintenance of records 

The RBI, in association with the Central Government gave certain rules in 2005 which sets out the measures that few bodies like banks, monetary organizations and its intermediaries, and so forth should submit to authority and directed the needed due diligence for distinguishing and checking their clients before they start or go into a business relationship with them. 

Firstly, the important rules regarding transactions are:

  • Maintain record of all transactions.
  • Furnish the same to the Director.

Secondly, the rules relating to clients are:

  • Verify the identity of its clients.
  • Identify beneficial owners, (if any).

Finally, they have to maintain a record of the documents evidencing identity of its clients and beneficial owners.

The rules likewise incorporate measures and prerequisites that such bodies should make use of while distinguishing their customers at the hour of opening an account and executing an exchange. They likewise incorporate the reports that the bodies should look for from the customer for keeping on their own record. 

The provisions laid out in PMLA have been thoroughly examined and define the terms “financial institutions” and “intermediaries” in a very wide way. The standards referenced above puts an onus on the banks, financial organizations and intermediaries to keep up the records of specific exchanges which are; 

  1. more than a prescribed value,
  2. arrangement of interconnected transactions that may in total add up to prescribed value, and
  3. dubious looking transactions (as characterized in the guidelines). There is no necessity for the exchange to have been directed in real money. 

These Rules specify that the methodology and way of upkeeping of records may be endorsed by the specific regulators of banks, financial institutions or intermediaries, specifically, the RBI and the SEBI. In such manner, 

  • RBI has given the RBI Directions for KYC Implementation for banks and financial institutions, and 
  • SEBI has laid out ‘the SEBI Anti Money Laundering Guidelines’ for intermediaries registered under the SEBI. 

RBI directions for KYC implementation 

The RBI Directions for the implantation of KYC have been given by the RBI and are materially applicable to banking organizations and NBFCs managed by the RBI. The vital reason for these instructions is the counteraction of individuals or business organizations to abuse the banks and NBFCs from being utilized for money laundering or other unlawful demonstrations, for example, terrorist financing activities. These procedures also enable the banks to know or understand their customers better and their respective financial dealings which in turn help them to manage their risks prudently. 

These bearings require banks and NBFCs to set up arrangements and prerequisites to establish the right identity of their client, evaluating the danger looked upon or faced by every client and sorting them dependent on it, upgrading their due diligence methods and systems as a rule and surprisingly further for the supposed high risk customers, different methodology for managing various kinds of transactions and furthermore concocting a powerful instrument for announcing such transactions to the Financial Intelligence Unit (FIU)

The SEBI Anti Money Laundering Guidelines

The SEBI Anti Money Laundering Guidelines have been given by the SEBI and are relevant to SEBI-registered intermediaries. These rules puts an obligation on such delegates to institute policies and strategies to aid the battle against eradicating money laundering, which ought to incorporate the correspondence of such gathering approaches which identify with the anti-money laundering and unlawful exercises, for example, terrorist financing to all people and representatives associated with taking care of client account data, securities exchanges, client acceptance policy and CDD measures (counting necessities for legitimate recognizable proof); the proper keeping of record; and collaboration with the important law requirement specialists (counting the ideal divulgence of data). It has been asserted that the enactment, when upheld, was at that point obsolete for the necessities of the now-blasting development pace of the economy.

Amendment to anti-money laundering law

Last year, post the budget session, the Parliament, via Finance Act, 2019 posted different amendments to the then present various financial laws of the nation, which included PMLA too. The Finance Act, 2019 – (Part XIII) had recorded amendments with respect to the Prevention of Money Laundering Act, 2002 (PMLA) by way of publishing the Prevention of Money Laundering  (Maintenance of Records) Rules, 2019. 

It aims to fix holes and tending to address ambiguities in the process of tax evasion under money laundering. These included augmenting the extent of “continues of wrongdoing” to incorporate properties and other assets acquired, made, determined, or got through any crime identified with the PMLA offense and explaining the proceeding with nature of the money laundering offense (that is, commission of the offense will run however long the guilty party is appreciating the returns of the criminal activity). 

The key takeaway in this is amidst the increasing number of monetary violations, that is finance related crimes, the amendments to the PMLA endeavor to make the current anti-money laundering regime stringent and better protected to distinguish dubious transactions, thereby establishing a healthy environment for investment.

The key amendments to be noted are mentioned below.

Explanation to Section 3

  • This Section relates to offenses of money laundering.
  • This explanation criminalizes the concealment, possession, acquisition and use of proceeds of crime.
  • The explanation was added based on the observation of FATF – Financial Task Action Force.
  • Accordingly, it makes the process or activities which are in connection to the proceeds of the crime as a ‘continuing offense’. 

Proviso to Section 17(1) and 18(1) omitted

BEFORE OMISSION

AFTER OMISSION

No search could be conducted unless it is in relation to a scheduled offense.

Enables the Authorized officer to conduct search and seizure on any suspected property.

Requires forwarding a report to a Magistrate for taking cognizance of a scheduled offense.

Entering a property can be done even in the absence of reporting to a magistrate or any other competent authority

Addition to Section 44

The insertion of the provision after subsection (1) clause (b) mentions that the 

  • Adjudicating authority has to file ‘closure report’ before special court (which takes cognizance of the offense).
  • It is an obligation of the Adjudicating authority.
  • Closure report to be filed after conclusion of the investigation.
  • It is for closing the cases in which no offense was found upon completing the investigation.

The insertion of the explanation after Section 44(1)(d) mentions:

  • The special court need not be dependent upon any other order passed in relation to the scheduled offense.
  • The trial of both the offenses shall not be construed as a joint offense.

Explanation to Section 45(2)

  • Clarification of the offense of money laundering as a ‘cognizable’ and ‘non-bailable offense’.
  • ‘Arrest without a warrant’ of the accused by the authorized officer.
  • Therefore, such accused is not entitled to bail as a personal right
  • Made bail as an issue of discretion in the hands of the Court.
  • Bail can be granted only after hearing the prosecutor and after court concludes that there are sufficient reasons to believe that no such offense was committed nor will be committed whilst on bail.

Reporting obligations

Section 12AA titled Enhanced due diligence inserted by the amendment mandates the authentication of clients who are undertaking specific transactions. 

  • Authenticate identity of the client via AADHAAR based verification.
  • Reporting entity to examine client’s ownership.
  • Check the client’s financial position by identifying the source of each transaction.
  • Take steps to record the purpose behind the specified transaction.
  • Relationship between the parties involved in the transaction to be recorded.
  • Information to be maintained by the reporting entity for 5 years from date of such transaction.

Enforcement Directorate and PMLA

The Enforcement Directorate has to ensure the enforcement of certain provisions of the Prevention of Money Laundering Act which is one of the main objectives upon which it was originally set up. It was established in the year 1956 and has its headquarters in New Delhi. It has five regional officers in Chennai, Mumbai, Delhi, Kolkata and Chandigarh which are headed by Special Directors of Enforcement. The Enforcement Directorate plays a crucial role against the combat of corruption in the country. 

Role and powers of ED

The Enforcement directorate, which is a law enforcement agency, has the power to investigate offenses in relation to money laundering. In addition, they are enabled with powers to proceed with the attachment and confiscation of property, assets if the same is obtained out of the proceeds of crime. The Enforcement Directorate is responsible for the prosecution of the individuals involved in the crime. 

Another significant function which is beyond the boundaries of the country is rendering and seeking cooperation with foreign authorities in association with money laundering and restitution of assets. The Enforcement Directorate can summon any person to either submit any evidence or to produce required records that are needed during the investigation period or for any proceedings conducted under this Act. An explanation added to Section 45 of the Act by the Finance Act, 2019 empowers the Enforcement Directorate officers to arrest an accused without a warrant as it notified PMLA offenses to be cognizable and non-bailable.

Conclusion 

The activities relating to money laundering have been widespread and rampant in the Indian culture, regardless of best endeavors of the Government of India and public authorities to stop such practices. Through legislation, managerial and administrative bodies and proficient controllers who work energetically in such a manner, the conflict on money laundering activities keeps going on. Notwithstanding, it might very well be noticed that albeit such exercises might be placed under tight restraints at a domestic level, it could be observed that such practices are never limited to the bounds of a solitary jurisdiction. Limitations at a specific purview, urge launderers to move base to another jurisdiction which may give a cordial climate for their exercises to flourish. Data uncovered in ‘the Panama Papers leak’ is one brilliant illustration of how liberal rules in certain jurisdictions may really be impeding the interests of another locale and individuals living there. Illegal money laundering has inferences, which are out and out being serious. It could be noticed that assets acquired by unlawful methods, for legitimization may, once authorized, be of course utilized for personal stakes of the recipients, who may not generally mean well at the top of the priority list. Wrongdoing can just generate more wrongdoing – and the endless loop would just proceed. 

Though consistent checks should be kept on money laundering activities, it is noteworthy that stringent economic and tax collection approaches have a method of getting projected as being corrective on fair individuals with genuine business interests. Furthermore, consequently, one of the better approaches to stop such money laundering practices might be for governments to bring such genuine interests into certainty and give them insurance and certain advantages, which may inside and out prevent individuals from taking part in illegal tax money laundering activities through and through. Taxation reforms could be one such positive development anticipated in the future towards eradicating money laundering. 

References

  1. http://www.legalservicesindia.com/law/article/1472/5/Prevention-Of-Money-Laundering-Act-2002-Key-Amendments-Brought-In-By-The-Finance-Act-2019-
  2. https://corporate.cyrilamarchandblogs.com/2019/09/finance-act-2019-prevention-money-laundering-act-amendment/
  3. https://www.enforcementdirectorate.gov.in/functions.html?p1=1186171531818185079
  4. https://www.taxmanagementindia.com/visitor/detail_act.asp?ID=36965
  5. https://www.mondaq.com/india/money-laundering/1025468/anti-money-laundering-legislation-in-india
  6. https://www.icsi.edu/media/webmodules/Economic_Business_and_Commercial_Laws.pdf
  7. https://resource.cdn.icai.org/62479bos50542-cp4.pdf
  8. https://www.barandbench.com/columns/amendments-to-pmla-by-finance-act-2019-widening-the-scope-of-the-legislation
  9. https://blog.ipleaders.in/money-laundering-prevention/

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