Legal Articles

A Brief Insight Into Prevention of Money Laundering

1. Global Economy today is a far cry from the Friedmanite dictum “business of business was business” and when business had a singular responsibility to their shareholders. The International Monetary Fund has estimated that an aggregate amount of 2% to 5% of world’s Gross Domestic Product now comprises of Laundered Funds.*1 (World Bank Publication on Reference Guide to Anti – Money Laundering and Combating the Financing of Terrorism by Paul Allan Schott 2nd Edition).

2. The literal meaning of ‘Laundering’ is washing or cleaning dirty clothes. The term “Money Laundering” is used for cleaning “Dirty Money”. The World Bank has defined Money Laundering as the process of disguising the proceeds of crime in an effort to conceal their illicit origins and legitimize their future use. The objective is to conceal true ownership and origin of the proceeds, a desire to maintain control and a need to change the form of the proceeds.

3. Broadly, there are three Internationally recognized steps to Money Laundering namely,

Placement, which refers to physical disposal of bulk cash proceeds derived from illegal activity.

Layering, which refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions, so as to conceal the audit trail.

Integration, refers to the re-induction of the Laundered Funds back in to the economy in such a way that they re-enter the financial system as normal business funds.

4. The methods utilized for laundering are manifold & include Structuring, Bulk Cash Smuggling, Cash Intensive Businesses, Trade-based laundering, Shell companies and trusts, Round-tripping, Bank Capture, Gambling, Real Estate, Black Salaries, Fictional Loans, Hawala, False invoicing.

5. In an increasingly interconnected world, the negative effects on financial stability, macro economic performance, draining resources from productive economic activities, are global and their impact on the financial integrity and stability of countries is widely recognized.* (Proceeds of Crime, Prevention of Money Laundering Act, 2002, Law and Procedure by S. Kannan and V. Geetha 1st Edition 2017).

As such, concerted efforts are being made by governments to fight money laundering. The main International Agreements addressing money laundering are the United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention), for implementation of which the Financial Task Force (FATF) was established, and the 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime. Predicate offences have expanded from Drug trafficking as per Vienna Convention and now include all serious crimes such as Terrorism, Extortion, corruption etc.

6. The role of financial institutions in preventing and detecting money laundering has been defined by Basle Committee on Banking Supervision, the European Union, and the International Organisation of Securities Commissions.

7. Anti Money Laundering in India
In India, the Prevention of Money Laundering Act, 2002(hereinafter referred to as the Act) was brought into force in 2005 to prevent money laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto. The Act also addressed the international obligations under the Political Declaration and Global Programme of Action adopted by the General Assembly of the United Nations to prevent money laundering. The Act extends to the whole of India and came in to force w.e.f. 01.07.2005.

8(a)Section 3 defines “Money-Laundering” as follows:-
Offence of money-laundering.- Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.

Thus, u/s. 3 of PMLA, as mentioned above, the offence is said to be committed on fulfillment of any of the following three conditions:-

acquiring, owning, possessing, using or transferring proceeds of crime; or
knowingly entering into any transaction which is directly or indirectly related to proceeds of crime; or
concealing or aiding in the concealment of the proceeds of crime.

‘Proceeds of Crime’ is defined u/s. 2(u) of the Act as follows:-

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property;

Scheduled offences
Under PMLA, commission of any offence, as specified in the Part A and Part C of the Schedule of PMLA will attract the provisions of PMLA. Some of the acts and offences, which may attract PMLA, are enumerated herein below:

– Part A enlists offences under various acts such as: Indian Penal Code, 1860, Narcotics Drugs and Psychotropic Substances Act, 1985, Prevention of Corruption Act, 1988 SEBI, Customs Act, 1955, Foreigners act, Arms Act, Antiquities and Art Treasures Act, Copyright act, 1957, Trademark Act, 1999, Wildlife Protection Act, 1872, Information Technology Act, 200, amongst others.

– Part B offences (offence under the Customs Act), provided the value of property involved is more than one crore rupees or more;

– Part C deals with trans-border crimes, and reflects the commitment to tackle Money Laundering across International Boundaries.

To summarize, a person is liable to be booked under the PMLA if he is directly or indirectly connected with the proceeds of crime i.e. property derived as a result of criminal activity relating to scheduled offences only. In other words, if any property is derived through criminal or unethical activity relating to an offence not listed in Part A, B or C of the schedule of offences, the provisions of PMLA shall not be applicable.

9. Certain anomalies in the Act have been highlighted in a landmark decision of the Hon’ble Supreme Court in the case of “Nikesh Tarachand Shah Vs Union of India (2018) 11 SCC 1. Section 45 (1) of the Act, was struck down as unconstitutional. Section 45 (1) imposes two stringent conditions for grant of bail namely, (a) Public Prosecutor must be given an opportunity to oppose any application for release on bail; (b) The Court must be satisfied, where the Public Prosecutor opposes the application, that there are reasonable grounds for believing that the accused is not guilty of such an offence and that he is not likely to commit any offence while on bail.

The Supreme Court also ordered fresh trial in all cases in which bail was denied because of the above mentioned conditions.
10. Section 45 relates to Section 44 of Prevention of Money Laundering Bill 1999. In the Bill, the twin conditions for release on bail U/s 44 applied only in so far as the offences under the Act were concerned. However, the scheme changed radically under the Act. Now, both the offence of Money Laundering and the predicate offence were to be tried by the Special Court, and the bail is granted only if the twin conditions U/s 45 (1) are met, where the term of imprisonment is more than 3 years for the predicate offence. The Court took notice of the fact that clause 44 of the Bill referred only to offences U/s 3 & 4 of the Bill, whereas Section 45 of the Act does not refer to offences U/s 3 & 4 of the Act at all. Reference is made only to offences under Part A of the schedule, which are offences outside the 2002 Act.

11. The statutory scheme as originally enacted, with Section 45 in its present Avatar would lead to the same offenders in different cases having different results qua bail depending on whether Section 45 does or does not apply.

12. Amongst others, the Court took note of an interesting fact that every other Act, where these twin conditions are laid down, be it the Terrorist and Disruptive Activities (Prevention) Act, 1987 or the Narcotic Drugs and Psychotropic Substances Act, 1985, the reasonable grounds for believing that the accused is not guilty of an offence is in relation to an offence under the very Act in which such Section occurs. [See Section 20(8) of TADA and Section 37 of the NDPS Act]. It is only in the 2002 Act that the twin conditions laid down do not relate to an offence under the 2002 Act at all, but only to a separate and distinct offence found under part A of the schedule.

13. Undoubtedly PMLA 2002 was introduced to deal effectively with the menace of serious threat to financial system of India. However, Section 45 is a drastic provision and was struck down being manifestly arbitrary, discriminatory and violative of Articles 14 and 21 of the Constitution of India.

14. Money Laundering poses a serious threat not only to the financial systems of countries, but also to their integrity, sovereignty and the society. There are provisions in the Act for attachment and impounding of property/bank accounts/ill gotten money, and for punishment of persons who are involved with laundering of proceeds of crimes such as Narcotics, corruption, smuggling, arms and terrorism etc. The Act is a deterrent for the above crimes which are plaguing the society.

Leave a Comment