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1989 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

Money Laundering in India-

A Multi-Dimensional Advent?

AASHISH CHOJARI AND DR. BHAVNA BATRA2

ABSTRACT
Money Laundering is the process of concealing the true origins of money which is

actuallyprocuredfrom illegal sources using outlawed methods or criminal activities. By

the process of Money Laundering, money obtained via illegitimate means is converted

into money that seems to have been earned through legal means. Money Laundering is an

offence recognisedalmost across the entire Globe. It is used by some people for wrongful

gains to avoid prosecution, taxes, etc.

The Paperaims to discuss what Money Laundering means and the stages that illegitimate

money i.e. "proceeds of crime" goes through before taking the form of legal "clean

money". Further, the Paper shall be attempting to throw light upon the effect of Money

Laundering on the economy. From a Statutory Perspective the Paper shall then talk

about the Legislation that deals with Money Laundering in India i.e. Prevention of

Money-LaunderingAct, 2002 (hereinafterreferred to as "PMLA, 2002") along with its

features. The PMLA, 2002 is an Act which came into effect on July 1st, 2005. The Act
deals with the prevention and adjudication thereto of the offences relating to Money

Laundering and its proceeds.

The paper shall further discussfeatures some specific provisions like the ones relating to

Arrest and Bail thereof, Attachment of Property, Adjudicating Authority, Statements made

to Enforcement DirectorateOfficials that may be used in evidence, etc. An endeavour has

been made to draw a comparison between the National Perspective and the Global

position. However, for the most part, the paper shall be confined to the Domestic

Scenario,for the sake of relevance and brevity.

Next, the Paperintends to probe into the Judicial Outreach by discussing some prominent

landmarkJudicial Pronouncementsclinched by some observationsand suggestions.

Keywords: Money Laundering, Prevention of Money LaunderingAct, 2002, India, Crime.

1Author is a student at Amity Law School, Amity University, Noida, Uttar Pradesh, India.
2 Author is an Assistant Professor at Amity Law School, Amity University, Noida, Uttar Pradesh, India.

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 1990 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

I. INTRODUCTION

The Money Laundering is increasingly becoming a world-wide menace. The goal of a large
number of criminal acts is to generate profits for an individual or a group that carries out the
operation and then use it in furtherance of various acts, legitimate or illegitimate.

Money is a unit of recognised, widely accepted medium of exchange and a tool for carrying
out transactions in an economy. It is used for sale and purchase of goods and services in an
economy. "Money is a matter of functions four, a medium, a measure, a standard, a store." 3
The word 'Laundering' literally means to rinse ,clean or to uncontaminate something. Usually,
laundering is used to refer to the process of tidying up of dirty clothes. However, when it is
used next to the word money, a term with a completely new meaning is derived.

Money Laundering, thus, refers to the process of conversion of money which is originally
obtained through tainted sources but is transformed into money that appears to have been
earned through legitimate sources. It is also to be noted that money is procured from many
different sources. "Money laundering is the illegal process of concealing the origins of money
obtained illegally by passing it through a complex sequence of banking transfers or
commercial transactions. The overall scheme of this process returns the "clean" money to the
launderer in an obscure and indirect way." 4

One may have different sources of income. However, it is imperative that these sources be
legitimate. Money laundering is the processing of these criminal proceeds to disguise their
illegal origin. This process is of critical importance, as it enables the criminal to enjoy these
profits without jeopardizing their primary source of income and utilize the funds so sourced
in furtherance of their criminal intent.

In India, the act of Money Laundering is illegal and attracts penalties, fines along with
attachment of property of the person accused of the same. The Prevention of Money-
Laundering Act, 2002 is the legislation that was enacted on July 1st, 2005 for the prevention
and the adjudication of offences related to it.

Like most countries in the World, in India too the offence of Money Laundering is a serious
one. It attracts criminal prosecution, liability, fines as well as penalties. The Act also talks
about attachment of property of the accused at the stage of investigation only. It is not
necessary that the so attached property is procured with or after procurement of proceeds of
crime. To understand the topic fully, it is imperative to understand why people launder

3
http://www.economicsdiscussion.net/money/functions-money/top-4-functions-of-money-discussed/17254
4
Oxford English Dictionary (3rd ed.). Oxford University Press. September 2005

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 1991 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

money. These include:

* accumulating wealth

* avoiding tracking of funds

* tax evasion

* higher profits

* legitimise funds

II. A THOUGHT PROVOKING PROBE INTO MONEY LAUNDERING

The objective of various criminal activities is to generate profit for an individual or a criminal
organisation. Money Laundering is the processing of disguising these criminal proceeds from
their illegal source. Criminal activities like illegal arms sales, smuggling, and other organized
crime, like drug trafficking, prostitution rings, and even some offences against body like
murder can generate huge amounts of money. Embezzlement, insider trading, bribery, etc can
also generate huge amounts of profits and give the incentive to "legitimize" the illegal gains
through the process of money laundering. The money so generated is tainted and is in the
nature of 'dirty money'." Money Laundering is the process of conversion of such proceeds of
crime, the 'dirty money', to make it appear as 'legitimate' money." 5

In the PMLA, 2002, Money Laundering has been defined as "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." 6

Article 1 of the draft European Communities (EC) Directive of March 1990 defines it as
-

"the conversion or transfer of property, knowing that such property is derived from serious

crime, for the purpose of concealing or disguising the illicit origin of the property or of

assisting any person who is involved in committing such an offence or offences to evade the
legal consequences of his action, and the concealment or disguise of the true nature, source,
location, disposition, movement rights with respect to, or ownership of property, knowing

that such property is derivedfrom serious crime."?

shttp://www.enforcementdirectorate.gov.in/fas_on_pmla.pdf
6
Sec. 3, Prevention of Money Laundering Act, 2002, No. 15, Acts of Parliament, 2003
7
Article 1 of the draft European Communities (EC) Directive of March 1990

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1992 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

(A) Development of Money Laundering

The Money Laundering Process can be divided in three steps.:

1) Placement

The first stage of the process of Money Laundering is called 'Placement'. It involves the
physical disposal of cash or money obtained via illegal methods. Here, the launderer injects
his illegitimate profits into the financial system. This placement is accomplished by
depositing the cash in domestic banks or in other types of formal or informal financial
institutions. This may be done by breaking up the entire amounts of cash, which is usually
large into less conspicuous smaller sums that are then deposited directly into a bank account,
or by purchasing a series of monetary instruments like cheques, money orders, etc. Then, the
cash is siphoned off across countries for deposit in foreign financial institutions, or used to
buy high-value goods, such as artwork, aeroplanes, and precious metals and stones, that can
then be resold for payment by cheque or bank transfer.

2) Layering

The Second stage of the money laundering process is layering. The launderer in this stage
engages in a series of movements or transactions of the funds to distance them from their
actual source. The funds may be channelled through the sale and purchase of investment
instruments such as a series of bank accounts, bonds, stocks, and traveller's cheques. This is
done in those jurisdictions that do not cooperate in anti money laundering investigations and
are tax havens. In some instances, the launderer might disguise the transfer as payments for
goods or services, thus giving them a legitimate appearance. A number of rotations to slush
funds are given through banks and this complex layer of financial transactions are carried out
to completely hide the illicit proceeds from their true source and mislead the investigating
agencies in case an investigation of the same is initiated. The assets so procured are then
further resold and the proceeds procured from the sale are then invested in main stream assets
like real estate and other legitimate businesses, particularly in the leisure and tourism
industries. This process is often carried out with the help of "Shell companies" i.e. paper
companies/bogus companies. These Shell Companies then serve as a front and are registered
in offshore havens where anti money laundering treaties are not complied with at the Global
level. They are often also called 'Tax Havens' where the tax rates are nil or very low and
governments of such countries don't enquire about the source of funds from such companies.
Shell Companies are a common tool in the layering phase.

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 1993 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

3) Integration

This is the final stage wherein the funds are converted into legitimate money in the economy
for extraction at a later stage. It includes investing in a company, purchasing real estate,
luxury goods, etc. This is the last stage in the process of Money Laundering. The launderer
makes illegitimate money appear to have been legally earned and accomplishes integration
of the "cleaned" money into the economy. Now, it becomes exceedingly difficult to
distinguish between legal and illegal wealth. It involves making the wealth derived from
crime appear legitimate.

III. LEGISLATIVE APPROACH

Money Laundering in India was introduced by the PMLA, 2002. Thus, it is a relatively new
concept. The PMLA, 2002 defines the Offence of Money Laundering as "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 and projecting it as
untainted property shall be guilty of offence of money-laundering." 8

The offence of Money Laundering is usually spread across borders and many countries are
involved in it. Therefore, it becomes essential to make a collective effort to fight the menace
created by it. In furtherance of this, India is and always has been part of the global efforts in
this direction. India is signatory to the following UN Conventions, which deal with Anti
Money Laundering Steps / Countering the Financing of Terrorism :

* International Convention for the Suppression of the Financing of Terrorism (1999)

* UN Convention against Transnational Organized Crime (2000)

* UN Convention against Corruption (2003)

Other initiatives taken by the international community are as follows:

* UN Convention Against Illicit Traffic in Narcotic Drungs and Psychotropic

Substances

* Basle Statement of Principles, 1989

* Financial Action Task Force, Paris, 1989

In encouragement of the Political Declaration held by the special session of the United
Nations General Assembly held in 1998 (India is one of the signatories to it) calling upon
States to enforce Anti Money Laundering Legislation and Program, the Parliament has

8
Sec. 3 of Prevention of Money Laundering Act, 2002, No. 15, Acts of Parliament, 2003

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 1994 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

instituted a law called the 'Prevention of Money Laundering Act, 2002.

IV. STATUTORY IMPLICATION

The PMLA, 2002 (Act 15 of 2003) came into effect from July 1st, 2005. The Preamble of the
Act states as follows:

" Prevent money-laundering in the very first instance;

" Provide a procedure as well as mechanism for confiscation of property derived from,
or involved in, the offence of money-laundering and

" Punish those who commit the offence of money laundering

The Directorate of Enforcement or the ED, in short in the Department of Revenue, Ministry

of Finance is responsible for investigating the cases of offence of money laundering under
PMLA, 2002. It is the Prosecuting Agency responsible for investigation of such cases. The
Financial Intelligence Unit - India (FIU-IND) under the Department of Revenue, Ministry of
Finance is the central national agency responsible for receiving, processing, analyzing and
disseminating information relating to suspect financial transactions to enforcement agencies
and foreign FIUs. Both of these agencies work hand in hand to prevent Money Laundering in
the first place and the investigation of such financial transactions in the first place.

It must also be noted that "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."9

We have, till now, understood that the offence of Money Laundering is a subsequent offence.
In other words, it means that Money gets Laundered when it already is "tainted money" i.e. it
is already a proceed of a criminal offence. Therefore, an offence under the PMLA is a
subsequent offence and not a direct one. For a person to be liable under this Act, the person
must have committed a "Scheduled Offence". For the purpose of this Act, offences which are
scheduled are those that are mentioned in the Schedule to the Act. As per the PMLA, 2002, a
"scheduled offence" means

(i) the offences specified under Part A of the Schedule; or

(ii) the offences specified under Part B of the Schedule if the total value involved in such
offences is one crore rupees or more; or

9
Sec. 2(1)(u) of Prevention of Money Laundering Act, 2002, No. 15, Acts of Parliament, 2003
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 1995 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

(iii) the offences specified under Part C of the Schedule; 10

As mentioned above, the offences listed in the schedule to the PMLA, 2002 are classified
between three parts i.e. Part A, B & C.

Part A consists of offences from various legislations. They range from "Criminal
13
Conspiracy"" to "Murder "12 as mentioned in the IPC, 1860 to "Punishmentfor Fraud"
under the Companies Act, 2013. Part A of the Schedule is the largest of all the parts of the
Schedule to PMLA. It contains various offences of both criminal and civil nature under
different legislations. Any proceeds so received from committing an offence mentioned
herewith would be covered within the ambit of proceed of crime as defined in the PMLA.

Part 'B' deals exclusively with Sec. 132 of the Companies Act, 2013 and will only come
within the ambit of PMLA, 2002 if it crosses a threshold of Rupees One Crore.

Part 'C' deals with trans-border crimes, and is a vital step in tackling Money Laundering
across International Boundaries.

We must understand what a Predicate Offence is."A predicate offence is a crime that is a
component of a more serious crime. For example, producing unlawful funds is the primary
14
offence and money laundering is the predicate offence."

Thus, all the Scheduled Offence are Predicate Offence. It implies that the commitment of a
Predicate Offence is a pre requisite for initiating an investigation into the offence of money
laundering. Thus, the prologue to an offence of Money Laundering is a predicate offence as
per the schedule to the act. The above mentioned predicate offences are investigated by
agencies such as Police, Customs, SEBI, NCB and CBI, etc. under their respective Acts.

V. FEATURES OF THE ACT

(A) Attachment of Property

According to Sec. 5 of the PMLA, 2002, the Enforcement Directorate may attach property of
a person in regard to whom, the Deputy Director or the Director himself/herself has reasons
to believe recorded in writing. The authorities may provisionally attach such property, which
is believed to be proceeds of crime for a period of not exceeding 180 days from the date of
such order. An amendment has been made by the Finance Act, 2018, ED can now attach any
property that is situated not only in India but abroad as well. It must also be noted that the

ioSec. 2(1)(y) of Prevention of Money Laundering Act, 2002, No. 15, Acts of Parliament, 2003
" Sec. 120B of Indian Penal Code, 1860, No. 45, Acts of Parliament, 1860
12 Sec. 302 of Indian Penal Code, 1860, No. 45, Acts of Parliament,
1860
13Sec. 447 of Companies Act, 2013, No. 18, Acts of Parliament, 2013
14
https://aml-cft.net/library/predicate-offence/

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1996 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

property so attached goes into the treasury of the Central Government and not the Prosecution
Agency i.e. Enforcement Directorate, unlike other acts.

(B) Arrest & Bail

The provisions relating to Arrest are laid down in Sec. 19. It states that the Director, Deputy
Director, Assistant Director or any other officer authorised in this behalf by the Central
Government shall make an arrest. Sec. 45 states that offence that come within the ambit of
this Act are Cognizable and Non-Bailable. It further states the conditions that are to be
fulfilled for a person to be enlarged on Bail. Sec. 45(b) clearly states that for a person accused
of an offence punishable for a term of imprisonment of more than three years under Part-A of
the Schedule shall only be released if:

* Public Prosecutor has been given opportunity to oppose such Bail Application

* Once the Public Prosecutor has opposed such application, the Court is satisfied that
there are reasonable grounds for believing that he is not guilty of such offence and
also, that such person is not likely to commit any offence while enlarged on bail.

The provisions relating to Bail under this act are very controversial as they put emphasis on
what the court believes rather what the evidence puts forth.

(C) Prosecution Agency

The prosecuting agency under the PMLA, 2002 is the Enforcement Directorate and is
responsible for gathering information relating and investigating to the offence of Money
Laundering and investigating the same. It is also responsible for making arrests, attaching
property of accused and offenders, searching and making seizures thereof.

(D) Works With FATF-FIU

The ED and the Department of Revenue, Ministry of Finance is responsible for investigating
the cases of offence of money laundering under PMLA, 2002. The FIU-IND is a body under
the Department of Revenue, Ministry of Finance that is responsible for procuring, processing,
analyzing and circulating relevant information relating to suspected financial transactions to
various investigating agencies.

(E) Predicate Offences

The offences that are prosecuted under the PMLA, 2002 are called Predicate Offences. A
Schedule is annexed with the act that is further divided into 3 parts. It mentions all the
offences commitment of whose would lead to the offence of Money Laundering. If a person
launders the proceeds of crime obtained from these crimes, such person would be liable for

© 2020. International Journal of Law Management & Humanities [ISSN 2581-53691

 1997 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

the offence of Money Laundering.

(F) Punishment And Penalty

Sec. 4 of PMLA, 2002 lays down the Punishment for Money-Laundering as follows. It
prescribes rigorous imprisonment for a term:

. which shall not be less than three years, but

. which may extend to 7 years or 10 years, and

. shall also be liable to fine.

The fine under PMLA is with no upper limit and it is usually proportionate to the nature and
degree of offense committed and is subject to the greatness of cash washed.

(G) Records to be Maintained By Banks And PFI

The Rules 3, 4 and 5 of PMLA (Maintenance of Records), 2005 set out the method and way
for maintenance of records. Sec. 12 of PMLA, 2002 says that each reporting entity will keep
up a record, in such a way which enables them to understand the nature and source of each
transactions. As per Rule 3, such transactions are to be reported and kept in records:

VI. JUDICIAL OVERREACH

* Nikesh Tarachand shah vs. U01"5

The above mentioned case was decided by the Hon'ble Supreme Court. The Supreme Court
ruling in this case adjudicated upon the legality of pre-bail conditions as mentioned in Sec. 45
of PMLA, 2002. This was the ruling regarding the constitutionality of the two conditions
precedent to bail (especially in case of white collared offences). In this case of the Hon'ble
Supreme Court struck down the aforementioned conditions precedent grant of bail on the
ground that the same is violating of the Article 14 and 21 of the Indian Constitution. The
Hon'ble Supreme Court thereby directed the special courts to decide bail applications without
application of the conditions contained in Sec. 45(1).

* Rajbhushan Omprakash Dixit Vs. UOI16

In the above case, the Hon'ble Delhi High Court held that the Enforcement Directorate, or ED
which is the prosecution agency under the PMLA, 2002 has to follow the provisions laid
down in CrPC, 1973. This is to be done in cases where there are no such provision mentioned
in that regard in the PMLA, 2002 itself. This has also been directed in Articles 21 and 22 of

15
AIR 2017 SC 5500
16
MANU/DE/0734/2018

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 199 8 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

the Constitution of India, 1950. In regard to the offences under the PMLA, they have to be
governed by the Cr PC, 1973, if the PMLA, 2002 is silent in that regard. This is expressly
mentioned in Sec. 65 of PMLA, 2002. It is, therefore, not at the option of the Enforcement
Directorate to choose to follow or not follow the Cr PC where the PMLA is silent.

" Shiv Kant Tripathi Vs. State of U.P. 17

The petitioner in this case lodged an F.I.R. alleging that Sh. Amar Singh erstwhile the
Chairman of the Uttar Pradesh Development Council took undue advantage of his
bureaucratic position and granted Government contracts amounting to thousands of crores to
entities of which he was the Ultimate Beneficial Owner. He also got financial kickbacks in
the guise of commission. Offences under the PCA, 1988 as well as Sec.s 3 and 4 of PMLA,
2002 were alleged. He was also accused of creating a network of various shell companies to
commit the offence of Money Laundering. Moreover, he possessed wealth that was
disproportionate to his disclosed sources of earnings. The ED conducted investigation but on
the basis of materials and knowledge procured. However, the agency could not find anything
that incriminated him so as to file a charge-sheet and therefore, closed the investigation but
no report has been submitted in Court. It was submitted that after carrying out investigation
the agency has not filed the final report stating that there is no express provision stating the
same in PMLA, 2002.

It was held that since the term 'investigation' also includes the submission of final report as
defined in CrPC, 1973. The ED will have submit the final report before the special court so
that it is in a position to thoroughly check the investigation as well as the evidence collected
decide as to whether the final report was justified or not.

The Court held that the ED shall submit a final report, in case there is no incriminating
evidence or a charge-sheet, in case there is prima facie evidence to do the same before the
Special Court.

VII. LOOKING BEYOND

After a complete examination and exploration of the topic it is impervious to conclude that
the offence of Money Laundering is serious and austere and should be dealt with utmost
gravity and anticipation. Although Money Laundering is internationally prevalent, this paper
in its study and research has aimed to focus on the Indian perspective of the White Collared
Offence. It is important to understand that the Offence of Money Laundering is a subsequent

"2013 (6) ADJ 672

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1999 InternationalJournalof Law Management & Humanities [Vol. 3 Iss 3; 1989]

offence. This means that for an act to be called the offence of Money Laundering, there has to
be an offence that has already been committed and there is money that is "earned" as a result
of this crime. These are called Scheduled Offences or Predicate Offences and Proceed as
Crime. These proceeds undergo the process of Money Laundering and get converted into
"Clean Money" whose original source was tainted.

The legislation that deals with Money Laundering in India i.e. PMLA, 2002 has been recently
developed and goes through amendments every year, keeping in tune with the respective
Finance Act. The concept is proportionately and relatively newly recognised but is of much
relevance in the current day and age. Several cases of significant impact on the economy and
society like the Yes Bank case have gained popularity as common topics of discussion
amongst the public at large. Thus, the act has gained popularity now more than ever and its
building up to gain momentum amongst the masses. Thus, to protect the interest of various
stakeholders and the overall economy, it is of utmost importance that the offence of Money
Laundering is dealt with at the earliest stage of it being discovered. Stringent and more
checks should be put in action. Even though the act is amended every year, there is still a lot
of scope for development and expansion to unfold all the tresses.

Having regard to the serious nature of the offence, some provisions contained in the Act are
fairly strict and somewhat controversial such as the one relating to bail have even been
challenged in the Hon'ble Apex Court claiming contravention of the Articles of the
Constitution of India.

Combating the menace of Money Laundering is a complex process since the perpetrators
involved in it are continuously evolving and looking for new ways to do it and achieve their
goals. Furthermore, the perpetrators are now targeting tax havens and those jurisdictions like
Switzerland and Panamas where even if their intentions are surfaced, their detection would be
very difficult. The need of the hour is to curb Money Laundering by making it an offence
with universal jurisdiction. The domestic laws in India have taken widespread measures in
order to curb the issue of money laundering. However, there is still a further need to increase
the enforcement and take strict actions against the persons violating them.

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VIII. BIBLIOGRAPHY

Primary Sources

" Nikesh Tarachand Shah Vs. Union Of India AIR (2017) SC 5500

" Rajbhushan Omprakash Dixit Vs. Union Of India And Ors

MANU/DE/0734/2018

" Shiv Kant Tripathi Vs. State Of U.P.2013 (6) ADJ 672

" Union Of India Vs. Hassan Ali Khan & Anr (2011) 10 SCC 235

" Prevention of Money Laundering Act, 2002

Secondary Sources

" Commentary on The Prevention Of Money Laundering Act. 2002 by Dr. Samsuddin

" Commentary on The Prevention of Money Laundering Act by S K Sarvaria

" https://www.mondaq.com/india/white-collar-crime-anti-corruption-
fraud/850902/chapter-xii-of-crpc-applicable-to-pmla

" http://www.inhouselawyer.co.uk/legal-briefing/nikesh-tarachand-shah-v-union-of-
india-constitutionality-of-the-pre-bail-conditions-provided-in-the-prevention-of-the-
money-laundering-act-2002/

" https://www.outlookindia.com/newsscroll/sc-holds-stringent-bail-condition-in-pmla-
as-unconstitutional/ 1195033

" http://moneylaundering.legal/attachment.php

" http://www.enforcementdirectorate.gov.in/faqsonpmla.pdf

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