This article is written by Diksha Paliwal, a student of LLM (Constitutional law). The article begins with a brief introduction to the term “money laundering”, followed by a short discussion of its effect and consequences. The latter part deals with the legislation pertaining to money laundering, along with some important case laws.
Table of Contents
As per the statistics provided by the Government of India, the Enforcement Directorate has reported around 5400 cases of money laundering in the past 17 years since the enactment of criminal law for money laundering. However, surprisingly only 23 people have been convicted till now. With a total of 5422 cases, as reported till March 2022, along with attached proceeds of crime worth Rs 1,04,702 crore approximately, the exacerbating situation of the increasing criminality of money laundering is crystal clear.
These money laundering scandals undermine the economy of the country and destabilise the entire government, directly or indirectly. In the absence of unified and stricter laws and regulations, these predators will always exploit the resources of the people with their notorious criminal minds.
The article aims to discuss in detail the noteworthy concepts of money laundering.
In layman’s language, the term “money laundering” means converting the money earned from illegal sources to legitimately earned money, i.e. to convert the black money into white. Criminals, by way of money laundering, tend to generate a copious amount of money. It is the processing of illegally earned criminal proceeds to disguise their illegal origin. These criminals have scant regard for honesty and ethical values. Therefore, they carry out these illegal activities, thus, enabling them to earn huge profits without jeopardising their source. The past few years have seen a phenomenal increase in the cases of money laundering.
Activities like sales of illegal arms, prostitution, smuggling, human trafficking, activities involving organised crime, drug trafficking, embezzlement, bribery, computer fraud scams, etc., can yield a huge amount of proceeds. However, since the proceeds generated from these activities are illegal, the criminals earning from these activities need to legitimise these ill-gotten games, and this is exactly what money laundering means.
According to the legislation enacted specifically to curb the issue of money laundering, i.e., the Prevention of Money Laundering Act, 2002 (hereinafter referred to as PMLA), money laundering is defined as an act in which a person directly or indirectly, knowingly or unknowingly gets involved or assists someone in an activity connected with the proceeds of crime that includes concealment, possession, acquisition, or use and projecting or claiming that proceeds as untainted property. This definition of money laundering is provided in Section 3 of the PMLA.
To put it simply, money laundering is the process of converting the money earned from criminal or illegal activities to white money. The Apex Court in the case of P. Chidambaram v. Directorate of Enforcement (2019), held that money laundering is the process of obscuring or hiding the illicit sources of money, where the launderer transforms the criminal proceeds earned from the illicit activities into funds, thus, making it a legitimate asset. The court further stated that money laundering poses a serious threat not only to the financial system of a country but also to its integrity and sovereignty.
The process of money laundering can be divided into three stages, namely, placement, layering, and integration stage. Let’s have a brief overview of each stage.
The first stage involves the placing of money in the legitimate financial system, hence the term placement. This can be done through repayment of loans or credit, gambling, dummy invoices, blending funds, etc. In this step, the launderer or the criminal involved in the crime of money laundering places the illegally earned money into the financial system to disguise the source of the black money. This is done to hide or prevent the attraction of law enforcement agencies to the lump sump illegally earned money.
The second stage is called layering, which involves various complex steps of web transactions, which mainly include offshore techniques. This step is done to move the money into the financial system in a complex and well-disguised manner. This step makes sure that once the money enters the legitimate financial system, it becomes almost impossible for the government and law authorities to track the activity of money laundering. These multiple transactions are done to make sure that the source and ownership of the funds remain undiscovered. The entire process is a sham and is done to bluff the law. Examples: real estate, purchasing of gold, investing in stocks, investing in shell companies,
In the third step, the black money earned from laundering is absorbed in the economy via different ways like loans, dividends, investments, etc. This step is termed integration. After this step, the money that the launderer sends into the financial system flows back to the criminal through various investments that he does. Thus, the money gets converted into legitimate assets.
Money obtained from criminal activity is bound to attract more and more crime. Also, it completely disrupts the economy of the country and threatens its stability. The potential victims of money laundering are also much more than any other similar crimes. In a country where the unequal distribution of wealth is already a hindrance to its development, the increasing criminal activities of money laundering are just like icing on the cake. Due to these reasons, it becomes of utter importance for the government to enact separate rules and regulations pertaining to these illicit activities.
The Prevention of Money Laundering Act, 2002 (PMLA), along with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, are the foremost important legislations enacted for the prohibition of money laundering activities. Apart from this, there exists an intergovernmental body Financial action task force, established for the prevention of money laundering globally, to which India is a signatory. The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, The Benami Transactions (Prohibition) Act, 1988, The Indian Penal Code, 1860 and the Code of Criminal Procedure, 1973 are some other laws which have certain provisions relating to the offence of money laundering.
The Financial Action Task Force ( hereinafter referred to as FATF) is a body that acts as a money laundering and terrorist financing watchdog on an international level. This is an intergovernmental body that sets standards or rules to prevent illegal criminal activities pertaining to the above-mentioned causes. The body has around 200 countries as its members. The members of FATF, in turn, make national legislation in the areas of money laundering and terrorist financing. The body was set up at the G-7 Summit held in Paris in the year 1989. India became the 34th member of the FATF.
These rules were enacted in the exercise of the powers conferred upon by the Prevention of Money Laundering Act, 2002 (PMLA), by the Central Government in consultation with the Reserve Bank of India. The purpose of enactment of these rules is for the maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information and verification of records of the identity of the clients of the banking companies, financial institutions and intermediaries.
The bill for the prevention of money laundering was introduced in the Lok Sabha in the year 1998, which was finally passed in the year 2002 and came into force in 2005. Since then, the Act has undergone several amendments. The Acts establishes various statutory bodies to implement the provisions of the PMLA and other rules framed under it. The Act also establishes special courts for the trial of offences concerning money laundering. In the latter part, the article will deal in detail with the important provisions of the PMLA.
The Act was passed in the year 1974 as an attempt to retain foreign exchange within the nation. The Act was mainly enacted with the concept of preventive detention. The relevant provisions are Section 3 (power to make orders detaining certain persons), Section 4 (execution of detention orders), Section 5 (power to regulate place and conditions of detention), and Section 11 (revocation of detention orders).
As per the Act, a Benami transaction denotes a transaction in which one person transfers a property to another, where the identity of the parties or a single party is concealed. Criminals involved in money laundering often get involved in such Benami transactions to hide their identity and the sources of the money invested in the purchase of the property. Section 3 of the Act expressly prohibits Benami transactions and declares them void.
Indian Penal Code is a primary substantive law which deals with various criminal offences and provides punishment for the same, whereas the Code of Criminal Procedure, 1973 is a procedural law which provides for the procedure to be followed in criminal cases. The Penal Code provides for various offences that are also mentioned in PMLA, and offences, when tried in court, follow the procedure laid down under the CrPC as long as they are not inconsistent with the provisions of PMLA vide Section 65 of the PMLA.
The PMLA was enacted on January 2003 and came into force in the year 2005. The Act primarily seeks to combat the offence of money laundering in India and has the following three major objectives, namely; restricting and controlling the offence of money laundering, confiscation and seizing of the property obtained from the illegal money obtained from money laundering, and to deal and regulate all the other issues connected with the offence of money laundering.
As mentioned in the previous section of this article, the PMLA in Section 3, defines the offence of money laundering. It makes any person guilty of the offence of money laundering who directly or indirectly, knowingly or unknowingly indulges in the activity of converting the proceeds of criminal activity into white money, thereby showing the source of these proceeds as legitimate.
The Act also enumerates the provision that puts an obligation on the banking companies, financial institutions and intermediaries to verify and maintain records of the identity of all the clients and complete details of the transactions as per the forms prescribed by the Financial Intelligence Unit-India (FIU-IND). It also empowers FIU-IND to impose fines on banking institutions or any other financial institutions or intermediaries in case they fail to comply with the provisions of PMLA, and the same is provided under Section 13(2) of the Act.
The act further empowers the Enforcement Directorate (“ED”) to investigate matters of money laundering and also gives ED the power to temporarily attach (Section 5), confirm attachment (Section 8(3)), and confiscate the property (Section 9) involved in money laundering. It also provides for the establishment of any adjudicating authority, appellate tribunals, and special courts for the trial of offences.
The PMLA under Section 43 provides for the establishment of special courts in several States and Union Territories for the trial of offences of money laundering. The Act provides for the appointment of adjudicating authority (Section 6), director or any other authority (Section 49), and an appellate tribunal (Section 25) to carry out the proceeding relating to the attachment and confiscation of any property obtained from money laundering.
The Act to enlarge its scope, along with the achievement of desired objectives has enumerated a provision for a bilateral agreement between the countries to curb the menace of money laundering by extending cooperation with each other. This provision is enumerated under Section 56 of the PMLA. These agreements are executed either to enforce the provisions of PMLA or for the exchange of information which shall further prevent the happening of any offence mentioned under PMLA or the corresponding laws of that country. The government can also seek assistance or assist the contracting State concerning any investigation of money laundering. Also, the PMLA has provisions for reciprocal agreements concerning persons convicted of the offences of PMLA.
After the enactment of PMLA, the Central Government also established a Financial Intelligence Unit in the year 2004, which has Director as its head. In terms of Section 12 of the Act, the organisation now receives cash transaction reports and suspicious transaction reports from financial institutions, intermediaries, etc. The Director of the Enforcement Directorate has been conferred with the power to investigate and prosecute offences under PMLA.
The establishment of the Enforcement of Directorate was done in the year 1956 with New Delhi as its headquarters. The ED is responsible for the enforcement of the Foreign Exchange Management Act, 1999 (FEMA) and certain provisions of PMLA. It does work relating to the investigation of cases of money laundering and prosecution under PMLA. The ED works under the control of the Department of Revenue for operational purposes; the policy aspects of the FEMA, its legislation and its amendments are within the purview of the Department of Economic Affairs. However, issues pertaining to any aspects of policy under PMLA are dealt with by the Department of Revenue. Prior to the enactment of FEMA, the ED enforced rules and regulations under FEMA. Currently, ED has two Special Directors at Headquarters and one Special Director in Mumbai.
The ED is assigned the following below-mentioned functions, namely;
The Government of India established the Financial Intelligence Unit – India in the year 2004. The FIU-IND acts as a central national agency set up for the purpose of receiving, processing, analysing and disseminating information relating to suspect financial transactions. Apart from this, it is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies to eradicate the increasing laundering of money and other related crimes. It is an independent body which reports straight to the Economic Intelligence Council (EIC) headed by the Finance Minister.
The PMLA, under Section 25 provides for the establishment of an appellate tribunal by the Central Government for its State and Union Territories. Section 28 of the Act provides for the qualification of the appointment of the members for the tribunal. It comprises of Chairperson and two other Members. The tribunal is constituted to hear the appeals against the adjudicating authority and any other authorities established under the Act.
Section 4 of the PMLA provides for the punishment of the offence of money laundering. It provides that a person guilty of money laundering will be punished with imprisonment of 3 years which may extend to 7 years, along with a fine. Also, imprisonment shall be rigorous. However, it is to be noted that in cases concerning the offences under Narcotic Drugs & Psychotropic Substances Act, 1985, the person shall be punished with rigorous imprisonment which may extend to 10 years rather than 7 years.
Section 5 of the PMLA provides for the provision of the attachment of property involved in money laundering. The Section provides that Director, Joint Director or Deputy Director is empowered to attach the property for 180 days which is involved in money laundering. Provided that the Director, Joint Director or Deputy Director shall have reasons to believe that such a person is under the possession of criminal proceeds. This attachment is done in the manner prescribed in Schedule second of the Income-tax Act, 1961. The reasons that the authority believes shall be in writing, and the order concerning such attachment shall be seal covered. After such attachment, a complaint will be lodged before the adjudicating authority within 30 days.
After the property has been confiscated for the offence of money laundering, such property shall, from there and then, vest in the Central Government as provided under Section 9 of PMLA. Thus, after confiscation, all the rights and titles of the property shall be of the government.
Money laundering poses a serious threat to the financial stability of a country along with disturbing political stability. It tends to erode the financial institutions, which are often regarded as the pillar of the economic prosperity of a country. One can imagine how adversely this will affect the economic growth of a country. It facilitates a smooth way to corruption, crime and other illegal activities at the cost of jeopardising a country’s development. Not only this, it even increases the risk of macroeconomic instability. These effects though difficult to quantify, have a very disturbing effect. The potential victims of these crimes are much more than any other crime. The effects of money laundering are not attributable to economic losses only; it also has significant social costs and risks. It paves the way for criminals to carry out horrifying illegal activities like drug trafficking, human trafficking, terrorism, etc. This crime poses a serious threat not just to a country but to the entire world community.
In the present case, the Apex Court dealt with a bunch of petitions which challenged the constitutional validity of the provision of the Prevention of Money Laundering Act, 2002, along with the procedure followed in the Act. Apart from these some of the petitioners also challenged the investigation procedure followed by the ED as per the provisions of this Act. Also, some petitioners have also assailed to the Apex Court, against the decision rendered by the High Court while considering the efficacy of amended Section 45 of the 2002 Act, which was challenged by the petitioners.
The Apex Court held that just because the provisions of arrest are not similar to that of CrPC, it cannot be held unconstitutional. It further stated that the provisions of arrest are equally stringent and of higher standards, as provided in the CrPC. the reason behind the variations in the provision of the two laws is there to achieve the purpose of the PMLA. The court held that the provisions are in harmony with the Constitution.
The court while dealing with the issue of projecting of proceeds of crime as untainted property stated that, ‘projecting’ or ‘claiming’ the crime proceeds as untainted property is a separate act which involves indulging in money laundering, and there is no need to couple it with concealment, possession, acquisition, or use of proceeds of crime. The court also held that in order to proceed against an individual accused of committing offences under PMLA, is a predicate offence.
The Court while considering Section 2(1)(na), held that the term “expression” used in it is contextual and is to be given an expansive meaning and it should be such that it includes an inquiry procedure followed by the Authorities of ED, the Adjudicating Authority, and the Special Court. It also stated that the term “investigation” used under the Section 2(1)(na) is to include inquiry by the adjudication authorities as well. The court further stated that the expression added in Clause (u) of Section 2(1) of the 2002 Act, does not travel beyond the main provision and is in consonance with it.
The court held that Section 3 PMLA is not limited to the projection of property as untainted. It stated that the term “and” is to be read as “or”. Also, the provision has to be given a wide interpretation. While considering Section 50 of the Act, the court stated that the procedure under it is to be treated as an inquiry and not an investigation. The court further went on to say that the ED officials are not “police officials” and hence the statements recorded by them under Section 50 of the Act are not hit by Article 20(3) of the Constitution. Also, ECIR is not an FIR. The court further held Sections 4, 5 8, and 45 of the PMLA as valid and thus rejected the contentions of the petitioners that they are not in accordance with the law.
Murali Krishna Chakrala, a Chartered Accountant and the petitioner in the present case was charged under the PMLA. In this case, the petitioner was asked to issue a relevant form to his client. The client herein was required to pay for imports. The petitioner, after reviewing of documents, issued form 15CB, in his client’s favour.
The ED investigated five persons, and the allegations against these persons were that they opened fake bank accounts, submitted fraud bills of entry, transferred huge amounts in those fraud accounts, and then transferred them to several people abroad to make these transactions legal, for importation.
In the interregnum period of investigation, the ED found some 15CB forms in the name of one of the five accused from a CA. However, the CA contended that he could not be held guilty of money laundering for mere form issuance.
Can a Chartered Accountant be held liable for the issuance of 15CB?
The Madras High Court acquitted the petitioner and held that a CA could not be prosecuted under PMLA for the ingenuousness of a document submitted by the client for the issuance of Form 15 CB.
In the present case, the petitioner, Narendra Kumar Gupta was held guilty of abatement in the offence of money laundering in an international trade base, where he received the proceeds of crime in his Hong Kong Company’s bank account, thereby causing loss of foreign exchange to the tune of Rs. 22.60 Crores. However, Narendra Kumar contended that he just became a victim of one criminal-minded person, namely, Sukhjeet. He said that he was asked to sign some documents by Sukhjeet on the pretext that they were necessary for company work. Also, the petitioner said that the other three accused got bail in the same matter on stringent conditions, and thus, he also deserved bail on the same conditions.
However, the ED pleaded before the court that he must not be granted bail since the petitioner cannot plead ignorance of his actions, and also, he is responsible for the activities of his own company as per Section 70 of PMLA.
Whether the court, under such conditions should grant bail to the petitioner after considering all the provisions of PMLA?
The Madras High Court stated that the petitioner herein was not implicated as an accused as per the FIR lodged by the ED. The court also observed that the ED failed to prove any direct link between the petitioner and the office committed. The court granted bail to the petitioner and stated that as per PMLA, there could not be any commission of the offence of money laundering if no direct proceeds of crime were recovered. The court also said that a person could not be denied bail on mere suspicion and half baked investigation.
The offence of money laundering is the conversion of ill-gotten money to white money. The Prevention of Money Laundering Act of 2002 was enacted by the legislature as an umbrella legislation to curb the increasing issue of the offence of money laundering. Even though prima facie the offence does not seem to be dangerous, however, it is a serious offence which adversely affects the stability of the country and, most importantly, disturbs the economy. The offence of money laundering not only threatens the government but also destroys international relations. It increases terrorist activities and poses a serious threat to the banking system. Money laundering is a global problem and needs to be curbed with cooperation between countries.
However, the current legislation lacks a proper procedure to deal with the offences of money laundering. As quoted by the Apex Court also, the scheme under PMLA excludes the application of a provision of CrPC. Although Section 65 of PMLA provides for the application of CrPC, provided it is not inconsistent with the PMLA. We need a proper procedure for the better implementation of the provisions of PMLA.
The Act does not provide for any provision that mandates the supplying of the report to the prospective accused, although it provides for the recording of the Enforcement case information report. However, some law experts and jurists consider that the absence of mandatory providing of reports jeopardises the right to life and liberty provided under Article 21 of the Indian Constitution.
The Apex Court, in a catena of decisions, has held that the court shall opt for stringent conditions while granting bail to the person charged for the offence under PMLA as per Section 45 of PMLA; two conditions of grant of bail are provided, namely, the public prosecutor must be heard, and secondly, the court feels that there exist reasonable grounds to believe that the person is not guilty of the alleged offence.
The Apex Court has held that Section 19, which deals with the powers of arrest, is not at all unconstitutional and has reasonable nexus with the purposes and objectives of the Prevention of Money Laundering Act, 2002. The Bench headed by Justice A M Khanwilkar, comprising Justices Dinesh Maheshwari and C T Ravikumar, held that the provision does not suffer from the vice of arbitrariness.
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