Prevention Of Money Laundering Act: Law and Case Laws

The Author, Shweta Pathania, is a 5th year BA LLB student at Faculty of Law College, Uttaranchal University, Dehradun. She is currently interning with LatestLaws.com.

Introduction

The general idea of money laundering has evolved from ancient times and is “intertwined with the development of money and banking".^[1] In general, money laundering as the name suggests is the process through which the proceeds of crime and illicit activities are transformed into legitimate assets.^[2] According to the United Nations, Office on Drugs and Crime, a whopping $2 trillion^[3] are laundered every year. The U.S Custom and Border Protection define money laundering as “the legitimization of proceeds from the illegal activity”.^[4]

Background of the Money Laundering Act

Money laundering is a crime that only attracted interest in the 1980s, essentially within drug trafficking context. It was from an increasing awareness of the huge profits generated from this criminal activity and concern for the massive drug abuse problem in western society.^[5] In 1986, the US Money Laundering Control Act^[6] was one of the first and was soon followed by similar laws in other countries, makingmoney laundering a federal crime for the first time in history. The Vienna Convention (1988) which mostly dealt with drug trafficking, stated illegality of money laundering specifically regarding the drug trade was an important first step. Shortly after the Vienna Convention, the Financial Action Task Force (FATF) was established in 1989 at the G7 summit. The purpose of the FATF is to analyze money laundering trends and evaluate the combative steps that global governments have taken to prevent it.^[7] A special session^[8] of the United Nations held for 'Countering World Drug Problem Together' held in the UN General Assembly passed a resolution calling on member states to develop a mechanism to India, which is a signatory to some of the aforementioned measures, introduced the Prevention of Money Laundering Bill, 1999, following worldwide views.

Money Laundering in the Indian Context

The Prevention of Money Laundering Bill was passed in Lok Sabha on 4th August 1998 which further went through Parliamentary procedures and ended up failing. In 1999, the new bill was proposed in the Lok Sabha, and this bill was successfully enacted in 2002.^[9] In the Indian Act context, Section 3^[10] of the Prevention of Money Laundering Act, 2002 defines offences of money laundering as: “any individual who is directly or indirectly involved in any activity linked to the proceeds of crime and is projecting it as unrestrained property should be guilty of the offence of money laundering.”

In 2010, India came up with an action plan to improve its compliance with anti-money laundering and combatting the financing of terrorism concerning the nine core/key recommendations of FAFT. This action plan strengthens India's AML/CFT system that was embraced by FATF (Financial Action Task Force) in June 2010. The amendments were made to the Anti-money Laundering Act (AML) which included confiscation and provisional measures. AML/CFT (Combating Financing of Terrorism) compliance monitoring system has been introduced in the Indian financial system. In response to the mutual evaluation report, four inter-agencies were introduced and said to be reviewed. They are:^[11]

• AML/CFT Regulatory Framework Assessment Committee (ARFAC);
•  The Casino Sector Assessment Committee (CSAC);
• The Beneficial Ownership Assessment Committee (BOAC); and
• The Non-Profit Organisations Sector Assessment Committee (NPOC)

Amendments to Prevention of Money Laundering Act by Finance Act 2019 – Widening the scope of the Legislation^[12]

Within the purview of Section 3 which deals with the "offence of money laundering," an explanation^[13] was inserted via amendment. As per Explanation (ii) to Sec. 3, the process/activity connected to the proceeds of crime is a continuing offence. Now the term ‘proceeds of crime’ would cover one or more processes of laundering and projecting it as untainted property in any manner whatsoever.^[14]

The expression 'continuing offence' was examined by the Supreme Court in a few cases.

In Gokak Patel Volkart Ltd v. Dundayya Gurushiddaiah Hiremath, it was held, “The expression 'continuing offence' has not been defined in the Code. The question of whether a particular offence is a ‘continuing offence’ or not must, therefore, necessarily depend upon the language of the statute which creates that offence, the nature of the offence and the purpose intended to be achieved by constituting the particular act as an offence.”

In State of Bihar v. Deokaran Nenshi & another, the Supreme Court held, “A continuing offence is susceptible of continuance and is distinguishable from the one which is committed once and for all.”

Expanding the scope of Proceeds of Crime: The Supreme Court in the case of Rohit Tandon v. The Enforcement Directorate held, "concealment, possession, acquisition or use of the property by projecting or claiming it as untainted property and converting the same by bank drafts, would certainly come within the sweep of criminal activity relating to a scheduled offence. That would come within the meaning of Section 3 and punishable Under Section 4 of the Act, being a case of money-laundering."

The offence of Money Laundering is a Cognizable Offence: Through the Finance Act, in Section 45 of the PMLA, after subsection (2), the explanation was inserted provisions of Prevention of Money Laundering Act shall apply notwithstanding anything contrary contained in CrPC.^[15]

Impact of Money Laundering on the Economy: An Analysis

India has the world's seventh-largest economy with one of the highest gross domestic product, and it comes under the world’s third-largest purchasing power parity.^[16] According to official data accessed by PTI, the Enforcement Directorate (ED) has filed as many as 5,422 cases or Enforcement Case Information Reports (ECIRs) under the criminal sections of the Prevention of Money Laundering Act (PMLA) while it attached (provisionally) assets worth a whopping Rs 1,04,702 crore as part of 1,739 orders issued till March 2022.^[17]

Over the past decades, Money Laundering has emerged to be a serious threat and has turned out to be a pitfall for stagnant economic growth. In the area of the financial sector, it exercises control over a huge part of the economy to investment or incremental fixes wherein money can be laundered via institutions. It prevents laundered money from being seized by the state as the owner of these returns is typically obscure, and the personality is concealed intentionally. Another way through which money is laundered is through shell companies, a shell company is a dummy business entity which does not have a proper role, it is just formed to conceal the illegally obtained funds. These companies do not have an actual business but only serve as a means of hiding their assets. Upon the receipt of criminal proceeds, criminals may try to wash them through the financial system.^[18] This affects income distribution, contaminates legal transactions, increases the potential for reduced GDP and increases the risk of macroeconomic instability.

It affects the real sector^[19] in the sense that money laundering carried or performed through other channels such as real estate, art, antiques or other investment does not bring profit to the economy. For a developing country, improper division of resources results in lower levels of financial growth which result in weakening economic progress. The Education and Health sectors have to come under the wrap of money laundering activity. Corruption in addition to black money marketing has turned the situation worse encouraging the criminals to expand their illegal business. This drives up the cost of governance due to the need for increased law enforcement and health care expenditures to combat the serious consequences that result.^[20]

ABDUL KARIM TELGI CASE^[21]

 Abdul started printing fake government stamp papers. Some government officials helped to expand his business throughout India and sold his stamp papers ranging from Rs 10 to Rs 100. In 2003 the scam was realised and printed in an Indian newspapers with a reported worth of about Rs 30,000 crore. According to the Hindustan Times, Police recovered fake stamps worth Rs 2,200 crore and finally, in 2007 he pleaded guilty and was sentenced to life imprisonment.

VIJAY MALLAYA MONEY LAUNDERING CASE

In 2005 'Kingfisher Airline' was launched by him. He planned on expanding the airline globally. As per Indian rules, airlines that have been in existence for only 5 years are not allowed to fly overseas routes. Mallya decided to bypass this law by acquiring existing airlines. In 2008, Kingfisher finally got permission to operate on international routes with its first flight being from Bangalore to London. Despite its success, Kingfisher was consistently making losses since its inception. Finally, the grounding of Kingfisher Airlines in 2012 and the cancellation of its license in December 2012 put an end to the Kingfisher journey.^[22] He took a loan of rupees 900 crores from 17 Indian banks. However, he fled to London and in 2017 he submitted an extradite request to the United Kingdom government after he made his self-imposed exile clear.  He contested his extradition stating that the case against him is “politically motivated” and that the loans he defaulted on were taken to keep the now-defunct Kingfisher Airlines afloat.^[23]

BANK OF BARODA CASE

The Bank of Baroda was involved in a money laundering scandal which was said to total Rs 6000 crore from Baroda bank. The enforcement directorate arrested two business officials in this case namely Manmohan Singh and Gagandeep Singh. Both the officials were arrested under the provision of the prevention of money laundering act 2002.  They were accused of channelling large sums of money through the Ashok Vihar branch to overseas banks by the use of shell companies. The enforcement director termed this case as trade-based money laundering where these business officials were trying to evade the custom duties and taxes to gain profits and slush funds.^[24] The FIU held the Bank to be guilty of filing 63 integrally connected cash transactions in seven accounts. The FIU said the bank neglected to have a successful interior framework set up for the transfer of 8,692 alerts, recognizing and announcing suspicious exchanges, disappointed in doing compelling customer due diligence regarding 73 accounts, postponed recording of 8,822 EFT (electronic funds transfer) reports and inability to document EFT reports concerning exchanges in two separate records.^[25]

Punjab National Bank Case^[26]

The scam, alleged to have been orchestrated by diamantaires Nirav Modi and Mehul Choksi, involved fraud of over USD 2 billion. In June 2020, the ED brought back INR 1135 crores (approx. USD 147 million) worth of diamonds, pearls and other jewellery belonging to overseas entities owned by Nirav Modi and Mehul Choksi. The ED intended for this jewellery to be formally seized under the PMLA. Currently, Modi is in Wandsworth Prison in southwest London awaiting his extradition trial.^[27]

Money Laundering and Corruption Linkage^[28]

Money laundering (ML) schemes make it possible to conceal the unlawful origin of assets. Corruption is a source of ML as it generates large amounts of proceeds to be laundered. Corruption may also enable the commission of an ML offence and hinder its detection since it can obstruct the effective implementation of a country's judicial, law enforcement and legislative frameworks. When countries establish corruption as a predicate offence to a money laundering charge, money laundering arising as a corrupt activity can be more effectively addressed. When authorities are empowered to investigate and prosecute corruption-related money laundering they can trace, seize and confiscate property that is the proceeds of corruption and engage in related international cooperation.^[29]

Conclusion

Despite the seemingly proactive approach of the ED in money laundering matters, it has been a mammoth task to establish the money trail in these cases. The number of cases taken up for investigation each year in the last five years vary from 111 cases in 2015-16 to 981 in 2020-21. Over the last 20 years, more than 200 pleas are pending under PMLA.^[30] It can be concluded that the need is to have a multi-integrated approach incorporating 'block-chain' techniques because of the decentralized^[31] nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or using blockchain explorers that allow anyone to see transactions occurring live. In India, the punishment for money laundering is up to 7 years only which stands out to be unjust for causing such a devastating effect on the economy as a whole. It is suggested to make necessary amendments including confiscation of illegal property, and increasing the penal provisions for example in the United Kingdom punishment is up to 14 years. A special unit must be set up to target the abettors with strict vigilance and with aid of artificial intelligence to detect and research money laundering.  Indian government^[32] should also seek help from the Asian Development Bank which helps in countering terrorism in the financial sector and guide on anti-money laundering issues.