All about Money Laundering | Prevention of Money Laundering Act | PMLA

Table of Contents

1. Need for a special Act on money laundering

2. Implementation of the Prevention of Money Laundering Act, 2002

3. Scheme of the Prevention of Money Laundering Act

4. Provisions for Prevention of Money Laundering in the Act

5. What is money laundering

6. Scheduled offence

7. Punishment for offence under the Prevention of Money Laundering Act

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1. Need for a special Act on money laundering

Money is generated on a very large scale due to crimes. These crimes cover trade in narcotics, smuggling, trade in banned/prohibited articles, antics, corruption, counterfeiting currency, gambling, trade-in prohibited arms/ammunition, selling national secrets etc.

This money is required to be converted into untainted money so that it can be used in a big way, as such a huge quantum of money cannot be transferred and used without banking channels.

In common terminology, money laundering is understood as converting black money or Number Two money into white money or Number One money.

In brief, converting tainted money into untainted money is called ‘money laundering’.

‘Laundering’ is to switch black money or dirty money into clean money. ‘Clean money’ means money coming from known or legal sources, while ‘dirty money’ means money coming from illegal activities.

As per the sub-committee on Narcotics and Terrorism of the US Senate Foreign Relations Committee, ‘Money Laundering’ is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins.

As per the definition adopted in Interpol General Secretariat Assembly in 1995, money laundering is any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

Loss of tax revenue is also involved but comparatively, that is a minor issue.

The major issue is that the tainted money is used for funding terrorist activities. This problem has become more acute in many countries, including India, as our neighbouring countries themselves are involved in such activities.

The menace is at international level at a much larger scale.

One way to prevent serious crime is to make it difficult to convert black money into white money.

The General Assembly of the United Nations adopted a political declaration in June 1998, calling upon Member States to adopt national money laundering legislation and programme. The present ‘Prevention of Money Laundering Act’ was passed to implement the UN resolution.

UN Security Council Resolution 1373 of 28-9-2001 empowers the Security Council to enforce the terms of the UN Convention for Suppression of the Financing of Terrorism. The convention was proposed in 1999 and became effective on 10-4-2002.

European Union issued a new Money Laundering Directive in 2001 to amend the 1991 directive.

1.1 Why the term ‘laundering’

The general impression is that the ‘money laundering’ term is used as it converts black money into white money. It may be so, but that is not the origin of the word ‘money laundering’.

There is an interesting history behind the word ‘laundering’. Al Capone, a notorious mafia in the USA, obtained a lot of money from criminal enterprises. He established laundry machines all over the USA at various public places. The machines could be used by the public by putting coins.

Since this laundry business was a cash business, he was able to convert his cash into legitimate earnings hence the name ‘money laundering’.

1.2 Process of Money Laundering

Money laundering involves three stages—

(1) Placement (of hot money in the financial system or retail economy)

(2) Layering (separating money from its source through a series of financial transactions i.e. concealing the source of ownership of funds by creating layers of transactions to disguise the audit trail and provide anonymity. It is now comparatively easy due to electronic funds transfer) and

(3) Integrating (of hot money with legitimate money. Money is assimilated with other legitimate assets).

Popular places of money laundering are stock markets, agricultural products (as there is no income tax on agricultural income and transactions are mostly on a cash basis), real estate, property market, gold and precious metals, high-value consumer goods, bogus imports/exports etc.

Creating bogus companies, showing loans or investments, false export-import invoices etc. are various methods adopted. The transactions are so large that transactions have to be routed through Banks, Financial Institutions, intermediaries etc.

1.3 Rogue Countries

The menace of money laundering has increased almost beyond control as Governments of some countries like Nigeria, Pakistan, Afghanistan etc. are themselves involved and are supporting money laundering activities and terrorism. Such rogue countries make the control over money laundering very difficult.

1.4 Rogue Banks

Like rouge countries, there are rogue banks also, which support money transfers through questionable means.

In our own country, it is widely believed that Jammu and Kashmir Bank was involved in activities of such money transfers, which had questionable origins. Of course, there are many such banks in India with different degrees of ‘roughness’.

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2. Implementation of the Prevention of Money Laundering Act, 2002

The ‘Prevention of Money Laundering Act, 2002’ was passed on 17-1-2003. The Act was notified and became effective on 1-7-2005.

Directorate of Financial Intelligence Unit, India (FIU-IND), under the Ministry of Finance, is empowered to implement a part of the Act, relating to collecting and processing financial intelligence.

The Directorate of Enforcement under FEMA is also empowered to exercise various powers under the Prevention of Money Laundering Act, 2002 in respect of confiscation, arrest, punishment etc.

2.1 Amendments to the Prevention of Money Laundering Act

The Prevention of Money Laundering Act has been amended from time to time. The latest amendments were made on 1-8-2019 through the Finance (No. 2) Act, 2019.

The changes made w.e.f. 1-8-2019 are summarized below:

• Definition of ‘intermediary’ amended to exclude sub-broker – section 2(n) amended
• The definition of ‘person carrying on designated business or profession’ has been amended to include Inspector General of Registration and exclude Registrar and Sub-Registrar appointed under Registration Act – section 2(a) amended
• The definition of ‘offence of money laundering’ widened to include knowingly concealment, possession, use, projecting/claiming as untainted money etc. It is also clarified that this is a continuing offence – section 3 amended
• Responsibility of the reporting entity widened to undertake enhanced diligence in respect of specified transactions beyond a prescribed limit, not to undertake suspicious transactions, monitor suspicious specified transactions and keep a record of such transactions and their KYC for five years – section 12AA inserted
• Provision of carrying out a search of premises only after forwarding a report to the Magistrate has been omitted. Thus, a search can be made by an authorised officer directly – section 17 amended
• The provision of carrying out a search of a person only after forwarding a report to the Magistrate has been omitted. Thus, a search of a person can be made by an authorised officer directly – section 18 amended
• Authority can close complaint even after Special Court has taken cognizance if Authority finds that no offence has been made out – proviso to section 44(1)(b)
• Trial under scheduled offence and offence under the Prevention of Money Laundering Act will be independent. It will not be a joint trial – Explanation (i) to section 44(1).
• A subsequent complaint can be added to the original complaint in the same trial if further evidence is found – Explanation (ii) to section 44(1).
• An offence under the Prevention of Money Laundering Act is cognizable and non-bailable. Empowered Officer can arrest without warrant – Explanation to section 45(2) [This is given retrospective effect as drafting of section 45 was faulty].
• Formation of the inter-ministerial coordination committee for inter-departmental and inter-agency coordination.

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3. Scheme of the Prevention of Money Laundering Act

Money Laundering basically is knowingly dealing with proceeds of crime, directly or indirectly.

The Act provides both for civil and criminal liability.

3.1 Criminal Liability under the Prevention of Money Laundering Act

Crime which results in tainted money is a separate offence under various laws as specified in the Schedule to Prevention of Money Laundering Act. These offences are punishable under those Acts. The punishment is to the person/s who is/are involved in actually committing that offence.

The offence as specified in section 4 of the Prevention of Money Laundering Act is a separate offence. The punishment under section 4 of the Prevention of Money Laundering Act is not only for those who are actually involved in dealing with tainted money but also for those who are knowingly involved, directly or indirectly, in dealing with the proceeds of crime.

This is a criminal offence, which will be tried by special courts designated for this purpose under section 2(z) of the Prevention of Money Laundering Act. The trial will be both for charges under the specific Act which is a crime and also offence of money laundering under the Prevention of Money Laundering Act. However, it is not a ‘joint trial’.

The Special Count is Court of Sessions which is designated as a special court under section 43 of the Prevention of Money Laundering Act.

Appeal against the decision of the Special Court lies with the High Court as per powers under the Code of Criminal Procedure – section 47 of the Prevention of Money Laundering Act.

3.2 Civil Liability i.e. confiscation of tainted property

In addition to criminal liability, the property involved in money laundering can be attached and frozen by the Central Government and later confiscated.

The procedure is as follows.

Order of provisional attachment or freezing will be issued by the Director, Joint Director or Deputy Director empowered under the Prevention of Money Laundering Act (who is empowered under the Act) for up to 180 days – section 5(1) of the Prevention of Money Laundering Act.

The director will send a copy of the order of provisional attachment or freezing of assets to Adjudicating Authority – section 5(2) of the Prevention of Money Laundering Act.

The procedure to be followed and the forms to be used have been specified in Prevention of Money Laundering (the Manner of Forwarding a Copy of the Order of Provisional Attachment of Property along with the Material, and a Copy of the Reasons along with the Material in respect of Survey, to the Adjudicating Authority and its Period of Retention) Rules, 2005.

Adjudicating Authority is appointed under section 6(1) of the Prevention of Money Laundering Act.

The final order of attachment or freezing will be issued by the Adjudicating Authority under section 8(3) Prevention of Money Laundering Act. This order of seizure or freezing continues till the Special Court disposes of the criminal matter.

Appeal against order of Adjudicating Authority will lie before Appellate Tribunal constituted under Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 [SAFEMA] – section 26(1) of Prevention of Money Laundering Act.

Appeal against order of Appellate Tribunal lies before High Court both on the question of law and facts – section 42 of Prevention of Money Laundering Act.

3.3 Order of Confiscation by Special Court

After the conclusion of the Trial of the accused, if the Special Court finds that offence of money laundering has been committed, it (the special court) shall order that property involved in money laundering or which has been used for money laundering, shall be confiscated – section 8(5) of Prevention of Money Laundering Act.

After confirmation of order, some persons may have claims in respect of such confiscated property, if they had acted in good faith but suffered quantifiable loss. Such claims should apply to Special Court. The procedure to be followed has been specified in the Prevention of Money Laundering (Restoration of Confiscated Property) Rules, 2016.

After the order of confiscation by the Special Court, the property shall vest absolutely in Central Government – section 9 of the Prevention of Money Laundering Act.

If after the conclusion of the Trial, if Special Court finds that the offence of money laundering has not been committed, it (the special court) shall order the release of property – section 8(6) of the Prevention of Money Laundering Act.

4. Provisions for Prevention of Money Laundering in the Act

Though the Act talks about the ‘Prevention’ of Money Laundering, actually, there were very few provisions for ‘preventing’ money laundering.

The Prevention of Money Laundering Act mainly provided for civil and criminal punishments in respect of money laundering after the offence is already committed, which is only a deterrent to commit crime.

Provision for informing suspicious transactions was contained only in rule 8 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

However, now section 12AA of the Prevention of Money Laundering Act has been inserted to cast responsibility on the ‘reporting entity’ to undertake enhanced diligence in respect of specified transactions beyond a prescribed limit, not to undertake suspicious transactions, monitor suspicious specified transactions and keep a record of such transactions and their KYC for five years.

In addition, the Prevention of Money Laundering Act casts responsibility on ‘reporting entities’ (like banking companies, financial institutions, intermediaries and others) to furnish information. They have to inform all suspicious transactions of the Director, Financial Intelligence Unit [FIU-IND], under the Ministry of Finance.

The Act provides for KYC norms (Know Your Customer) to ensure the identity of their customers, to ensure that they are genuine, identifiable and traceable.

The ‘reporting entity’ is required to undertake ‘client due diligence’ under rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.