Analysing the Position of the Prevention of Money Laundering Act, 2002 in Combating Financial Crimes in India

Introduction

Money laundering has been a much serious crimes for ages which affect not only the government or a few businesses but affects every common man who keeps his share of income to pay taxes. It refers to the process of concealing the source of the original source of that income. It is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.[1] Such money is not only generated illegally and by illicit sources such money is used to fund illegal activities such as drug trafficking and terrorist activities.

Prevention of money laundering is not only a matter of concern for India or any other developing but also equally affects the developed countries as well.In that regard Agarwal and Agarwal (2006, 2004) estimated from forecasts,regression analyses, and taken from economic intelligence units, that global money launderingamounts to more than 2.0 to 2.5 trillion US$ annually or about 5-6% of World GDP in 2006 (44,444trillion US$ in 2006) to be contrasted against an observed figure of US$ 500 billion to one trillion in2004 (Agarwal and Agarwal (2004)) within the banking sector only. These figures can tell us about thevolume of illicit activities and the importance of curbing money laundering for the overall growth of anation[2].India has always been proactive in attempting to combat such crimes. With that view a specific legislation called the ‘Prevention of Money Laundering Act was passed by the Indian Parliament in year 2002.

To ensure fairness, the offenses under PMLA are investigated by a special body called the Enforcement Directorate in the Department of Revenue, Ministry of Financewhich is appointed by the central government, or by the Financial Action Task Force which is appointed to carry out investigations in such cases only.According to section 43 of the act, the trial of such cases is done in a court of sessions which the central government may in consultation with the Chief Justice designate as a special court.The offenses under PMLA are cognizable and it is almost impossible to get bail in such cases until the judge is convinced that the accused is innocent. This implies that offenses under PMLA are significantly serious.

How does Money Laundering take place?

Money laundering is a serious crime which involves misrepresentation of the source of funds which are obtained illegally. Such activities are carried out in several steps to reduce the probability of being caught. There are mainly three steps involved;

Placement i.e. introduction of the funds into the financial system.
Layering i.e. separating the illicit money from its source by complex layers of financial transactions.
Integration i.e. integrating or mixing illicitly obtained funds with legitimate funds so as to disappear from their original source.

Placement:

This is the initial stage of money laundering wherein illegally obtained or illicit funds are introduced into the financial market. It can be done through various methods, some of which are enumerated below;

Structuring: Also known as smurfing wherein the illicit funds are broken into small amounts and deposited in various bank accounts.
Commingling Funds: In this method, the illicit funds are mixed with legitimate funds.
Cash-intensive Businesses: In this method, businesses that generally operate in cash are used to mix illicit funds into legitimate funds.
Currency Exchanges: In this method, large amounts are converted into foreign currency.

Layering:

This stage involves the separation of illicit funds from their sources so as to unable the authorities to track their sources. This may be done through several methods;

Wire Transfers: In this method, the money is transferred into several other bank accounts across different countries.
Shell Companies and Trusts:This method is the most common one. Under this, shell companies are created whose ownership is hard to find. Then, the money is transferred into their bank accounts.
Purchasing Assets: In this method, high-value assets including gold and assets are purchased with illicit funds so as to convert cash into assets.
Multiple Bank Accounts: This method involves opening various bank accounts in different names and different jurisdictions.

Integration:

This is the final stage of money laundering wherein the laundered money is integrated into the legitimate economy. The illicit funds are inseparably mixed with the money obtained from legitimate sources. The launderer then invests such money in stocks, to buy real estate, etc. He then fearlessly enjoys such money.

It is important to note that the three stages don't need to be followed in order. At times, it is possible that the money may be invested even prior to its introduction in the financial market.

Money Laundering as an offence

Section 3 of the Prevention of Money Laundering Act makes money laundering a punishable offense. The section has a much wider scope which makes attempting to indulge orknowingly assisting in any process of activity connected to money laundering a punishable offence.

The explanation in the section further expands on the liability and clarifies that any person who knowingly conceals, possesses, acquires, uses, or projects the untainted property or claims over the untainted property shall be guilty of the offense of money laundering.

Section 4 of the act prescribes the punishment for money laundering which is rigorous imprisonment for a term which shall not be less than three years but whichmay extend to seven years and shall also be liable to fine.

Duties of Banking Companies and Intermediaries

The Prevention of Money Laundering Act was enacted with the objective of preventing money laundering and confiscation of the property derived from it. In that regard, Banks and financial institutions play an important role; thus, Chapter IV extending from Section 12 to 15 lays down the obligations of the banking companies, financial institutions, and Intermediaries.

Section 12-Reporting entity to maintain records- this section obligates the reporting entities to maintain records of all payments and transactions along with the client's identity proofs They also must furnish the reports to the directorate as and when prescribed.

The reporting entity also must keep itsmaintained, furnished, or verified information confidential unless contrary to provided by laws. They must also keep the transaction records and the client’s identity proof even after the ending of such a business relationship secured for at least 5 years.

Section 12AA-Enhanced due diligence: It is the duty of the Reporting entities to verify the identity of clients through Aadhaar authentication before starting any specified transaction. If in any case, a person cannot obtain an Aadhaar number, other prescribed methods of identity verification must be used. They must also examine the client's ownership, financial position, and the sources of their funds.

The reporting entity must also take all the necessary additional steps to document the purpose and nature of the transaction along with the relation between the transacting parties. If the specified conditions are not complied with by any client the reporting entity must not allow the transaction to proceed.

For any suspicious transaction or those likely involving proceeds of crime, the reporting entities must increase monitoring over the client's business relationship, including greater scrutiny of all future transactions.

All information obtained through enhanced due diligence measures must be maintained and should be kept secured for five years from the date ofthe transaction.

Section 13 - Powers of Director to Impose Fine: section 13 of the act endows power and authority to the director to initiate an inquiry on its own motion or on any application on any reporting entity. During such inquiry, if the director requires the audited accounts and records of any entity, he may ask for it.

With the powers endowed by the virtue of Section13(2) if any entity is found non-complying with provisions of this chapter the director may;

Issue a written warning.
Direct compliance with specific instructions.
Require periodic reports on compliance measures.
Impose a monetary penalty ranging from ten thousand to one lakh rupees for each instance of failure.

Section 14- No civil or criminal proceedings against the reporting entity, its directors, and employees in certain cases: Except for as provided in Section 13 of the act, the act provides immunity from all civil and criminal proceedings to the reporting entities, its directors and employees.

Recent developments and amendments

The Prevention of Money Laundering Act has been amended multiple times to address emerging challenges and to enhance its effectiveness in combating those challenges. Several attempts havebeen made to expand the act's scope and impose stricter penalties. These changes aim to make the Act more dynamic and adaptable to new forms of financial crimes.

Recently the act has been amended in 2023 to include practicing chartered accountants (CA), company secretaries (CS), and cost and works accountants (CWA) within the scope of the act who conduct financial transactions on behalf of their clients. This was done in response to the Chinese app scam[3].

Conclusion

The Prevention of Money Laundering Act, of 2002, has been a critical tool in India's fight against financial crimes. Though it has made commendable and significant strides in addressing money laundering, challenges remain.

Judicial interpretations have also played a crucial role in shaping its enforcement landscape. There have been numerous judicial pronouncements wherein the Indian judiciary has played a proactive role in combating the offense of money laundering along with ensuring basic human rights to the accused. For instance, in the case of Pankaj Bansal v. Union of India[4] the court held that the ED is obligated to inform the grounds of arrest to the accused.

The court also ensured in the case of V. Senthil Balaji v. State[5]that the ED does not act arbitrarily and held that Any form of violation of Section 19 of PMLA will vitiate arrest and the magistrate must ensure compliance with the mandatory requirements of Section 19[6].

The court also ensured that the grounds of bail for the accused money launderer were stringent. For instance, in the case of Directorate of Enforcement v. Aditya Tripathi[7] the court held that mere non-filing of the chargesheet is no ground for bail in money laundering.

Thus, with technological and legal advancement along with the active role of legislators and judiciary, India can win over the offense of money laundering.

[1]<https://www.raijmr.com/ijrhs/wp-content/uploads/2017/11/IJRHS_2015_vol03_issue_07_11.pdf> accessed on July 3,2024

[2]<https://www.raijmr.com/ijrhs/wp-content/uploads/2017/11/IJRHS_2015_vol03_issue_07_11.pdf> accessed on July 3,2024

[3]https://www.india-briefing.com/news/india-prevention-of-money-laundering-rules-2023-key-provisions-new-reporting-obligations-27347.html/d.

[4]2023 SCC OnLine SC 1244

[5]2023 SCC OnLine SC 934

[6]https://www.lexology.com/library/detail.aspx?g=1d959f0c-ed61-4119-9a7e-b42e0a97b93d

[7]2023 SCC Online SC 619