“CRIME AND MONEY LAUNDERING – INDIAN PERSPECTIVE”

SEMINAR PAPER ON: SOCIO ECONOMIC OFFENCES

SESSION: 2020 -21

SUBMITTED AS A PART OF ‘SEMINAR II’ IN PARTIAL FULFILMENT OF

REQUIREMENT FOR THE DEGREE OF B.A.LLB.

SUPERVISED BY- SUBMITTED BY-

DR. SAGAR JAISWAL AMIYA BHUSHAN

ASST. PROFESSOR B.A.LLB, 10TH SEMESTER

DEPARTMENT OF LAW ROLL NO. 16001105

ENROLL- GGV/16/2009

DEPARTMENT OF LAW

GURU GHASIDAS VISHWAVIDYALAYA, BILASPUR (C.G.)

 CRIME AND MONEY LAUNDERING – INDIAN PERSPECTIVE

AMIYA BHUSHAN*1

Email id: - [email protected]

ABSTRACT

Money laundering can be described as a procedure, which is intended at legitimizing the

proceeds of crime. Even though criminals have tried to launder their crime proceeds ever
since decades but the term ‘money laundering’ came into existence from the practice of
1920’s Chicago Mobsters - Al Capone buying & running local laundries with their betting,
rackets & liquor profits. Money laundering has been described in a number of different
ways: money laundering is the procedure by which one conceals the existence, illegal
foundation, or illegal application of earnings, & then disguises that earnings to make it
appear legitimate; or Money laundering is the progression of taking the proceeds of criminal
activity & making these proceeds legal; or Money laundering is the act of converting money
derived from illegal activities into spends able or unpreserved form.

The purpose of this paper is to examine the term “Money Laundering,” to find the grey areas
of the Prevention of Money laundering Act and give suggestions / recommendations to
overcome such problems.

Keywords: Money laundering, Money Laundering Act, 2002

1
Student of 10th Sem, BALLB, School of Law, GGV, Bilaspur, (CG)
 INTRODUCTION

“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will
always be needed”.
- Mahatma Gandhi

Money laundering can be described as a procedure, which is intended at legitimizing the

proceeds of crime. Even though criminals have tried to launder their crime proceeds ever
since decades but the term ‘money laundering’ came into existence from the practice of
1920’s Chicago Mobsters - Al Capone buying & running local laundries with their betting,
rackets & liquor profits.2

Money laundering has been described in a number of different ways: money laundering is the
procedure by which one conceals the existence, illegal foundation, or illegal application of
earnings, & then disguises that earnings to make it appear legitimate; or Money laundering is
the progression of taking the proceeds of criminal activity & making these proceeds legal; or
Money laundering is the act of converting money derived from illegal activities into spends
able or unpreserved form.

U.S. Customs Service has given this definition of Money laundering: “Money laundering is
the procedure whereby proceeds, plausibly believed to have been derived from criminal
activity, are transported, transferred, transformed, converted or intermingled with legitimate
funds for the purpose of concealing or disguising the exact nature, resource, disposition,
movement or possession of those proceeds. The aim of money laundering process is to make
funds derived from, or associated with, illicit activity appear legitimate.”

The principle of money laundering is to decrease or eliminate the risks of seizure, forfeiture
and confiscation so that the fruits of criminal proceeds can be enjoyed without intervention
by law enforcement.

SCOPE

2
The first reported lighting of the term “money laundering” in a legal context was not until 1984 (see United
States vs. $4,255,625.39,et seq., 551 F.Supp. 314,SD Fla 1984)
Since the subject of this research has many magnitude and perspectives legally and socially.
Thus the scope of the research is very wide for further future researches. The researcher has
just focused upon the details on the legal aspects and has touched upon the Social aspects.

OBJECTIVE

Object behind this work is to get an overview regarding concept of money laundering in India
as well as across the nation and its current position in society.

METHOD OF RESEARCH

Doctrinal method is totally used in the completion of this project. The analysis of the topic is
done via help of books, websites, authentic statistics etc.

SOURCE OF DATA

The use of both the primary and secondary sources helped in the completion of the project.
Primary source includes the text book and articles. Secondary sources which includes many
websites, newspapers, etc.

RESEARCH QUESTION

The purpose of this paper is to examine the term “Money Laundering,” to find the grey areas
of the Prevention of Money laundering Act and give suggestions / recommendations to
overcome such problems. The major objectives of Money Laundering activities are:
•Revealing the source of illegally obtained money and placement, layering and integration of
such funds
•To analyze the effects of this crime on the Economy as well as the Society.
•The legislative measures adopted to fight this crime.
•To identify the grey areas of counter measures and provides suitable solutions.
•To prevent, combat and control money laundering.
•To deal with any other issue related with money laundering.
 MONEY LAUNDERING – THE CONCEPT

Money Laundering refers to the conversion or "Laundering" of money which is illegally

obtained, so as to make it appear to originate from a legitimate source. Money Laundering is
being employed by launderers worldwide to conceal criminal activity associated with it such
as drug / arms trafficking, terrorism and extortion. Robinson states that “Money laundering is
called what it is because that perfectly describes what takes place – illegal, or dirty, money is
put through a cycle of transactions, or washed, so that it comes out the other end as legal, or
clean money. In other words, the source of illegally obtained funds is obscured through a
succession of transfers and deals in order that those same funds can eventually be made to
appear as legitimate income.”

Article 1 of EC Directive defines the term ‘money laundering’ as “the conversion 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 the 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
derived from serious crime”.

Thus, Money Laundering is not an independent crime, it depends upon another crime
(predicate offence), the proceeds of which is the subject matter of the crime in money
laundering. From the legal point of view, the Achilles’ heel in defining and criminalizing
money laundering relates to the so-called ‘predicate offences’ understood as the criminal
offences which generated the proceeds thus making laundering necessary. Hiding or
disguising the source of certain proceeds will of course, not amount to money laundering
unless these proceeds were obtained from a criminal activity. Therefore, what exactly
amounts to money laundering, which actions and who can be prosecuted is largely dependent
on what constitutes a predicate crime for the purpose of money laundering. Money
Laundering3 refers to the conversion or "Laundering" of money which is illegally obtained, so

3
Section 2(1) (p) of Prevention of Money Laundering Act, 2002 (hereinafter PMLA-02) defines
Moneylaundering” has the meaning assigned to it in Section 3. Section 3 provides for offence of
moneylaundering – 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
as to make it appear to originate from a legitimate source 4. Money Laundering is being
employed by launderers worldwide to conceal criminal activity associated with it such as
drug / arms trafficking, terrorism and extortion5. Robinson states that

“Money laundering is called what it is because that perfectly describes what

takes place – illegal, or dirty, money is put through a cycle of transactions, or washed, so
that it comes out the other end as legal, or clean money. In other words, the source of
illegally obtained funds is obscured through a succession of transfers and deals in order that
those same funds can eventually be made to appear as legitimate income.”
Article 1 of EC Directive6 defines the term ‘money laundering’ as “the conversion 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 the 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
derived from serious crime.

Thus, Money laundering is a process where the proceeds of crime are transformed into
apparently legitimate money or other assets. It is the processing of criminal proceeds to
disguise its illegal origin. In simple words, it can be defined as the act of making money that
comes from one source to look like it comes from another source. The act of money
laundering is done with the intention to conceal money or other assets from the State so as to
prevent its loss through taxation, judgement enforcement or blatant confiscation. The
criminals herein try to disguise the origin of money obtained through illegal activities to look
like it was obtained from legal sources because otherwise they will not be able to use it as it
would connect them to the criminal activity and the law enforcement officials would seize it.

4
Popularly this is known as making black money white.
5
S. Ganesh, Money Laundering,
6
EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991
 MONEY LAUNDERING - AN ORGANIZED CRIME

Money Laundering has a close nexus with organized crime. Money Launderers accumulate
enormous profits through drug trafficking, international frauds, arms dealing etc. Cash
transactions are predominantly used for Money Laundering as they facilitate the concealment
of the true ownership and origin of money. It is well recognized that through the huge profits
the criminals earn from drug trafficking and other illegal means, by way of money laundering
could contaminate and corrupt the structure of the State at all levels, this definitely leads to
corruption. Further, this adds to constant pursuit of profits and the expansion into new areas
of criminal activity.

Through money laundering, organized crime diversifies its sources of income and enlarges its
sphere of action. The social danger of money laundering consists in the consolidation of the
economic power of criminal organizations, enabling them to penetrate the legitimate
economy. In advanced societies, crime is increasingly economic in character. Criminal
associations now tend to be organized like business enterprises and to follow the same
tendencies as legitimate firms; specialization, growth, expansion in international markets and
linkage with other enterprises. The holders of capital of illegal origin are prepared to bear
considerable cost in order to legalize its use.

HISTORICAL EVOLUTION OF MONEY LAUNDERING

‘Money Laundering’ as an expression is one of fairly recent origin. The original sighting was
in the newspapers reporting the Watergate Scandal in the United States in 1973 7. The
expression first appeared in a judicial or legal context in 1982 in America in the case of US
vs. $4,255,625.398. Money Laundering as a crime attracted the interest in the 1980s,
essentially within a drug trafficking context 9. The term “money laundering” is said to
originate from Mafia ownership of Laundromats in the United States.

7
The action of the US President Richard Nixon’s “Committee to re-elect the President” that moved illegal
campaign contributions to Mexico, and then brought the money back through a company in Miami. It was
Britain’s newspaper Guardian that coined the term, referring to the process as “laundering”.
8
(1982) 551 F Sup. 314
9
When under UN Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances,
criminalization of the proceeds of drug related offences was provided. However, later many other crimes were
included in the purview of ‘predicate offences’ to find out a money laundering activity
Money laundering as a crime only attracted interest in the 1980s, essentially within a drug
trafficking context. It was from an increasing awareness of the huge profits generated from
this criminal activity and a concern at the massive drug abuse problem in western society
which created the impetus for governments to act against the drug dealers by creating
legislation that would deprive them of their illicit gains. The term "money laundering" is said
to originate from Mafia ownership of Laundromats in the United States. Gangsters there were
earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor. They
needed to show a legitimate source for these monies.

In India money laundering is popularly known as Hawala transactions. It gained popularity

during early 90’s when many of the politicians were caught in its net. Hawala is an last
accessed on 8th November, 2008. alternative or parallel remittance system. The Hawala
Mechanism facilitated the conversion of money from black into white. "Hawala" is an Arabic
word meaning the transfer of money or information between two persons using a third
person. The system dates to the Arabic traders as a means of avoiding robbery. It predates
western banking by several centuries.

Money Laundering as a crime attracted the interest in the 1980s, essentially within a drug
trafficking context. It was from an increasing awareness of the huge profits generated from
this criminal activity and a concern at the massive drug abuse problem in western society
which created the impetus for governments to act against the drug dealers by creating
legislation that would deprive them of their illicit gains.

THE MODUS OPERANDI OR PROCESS OF MONEY LAUNDERING

Money Laundering is not a single act but is in fact a process that is accomplished in three
basic steps as enumerated below10:

1. Placement: "Placement" refers to the physical disposal of bulk cash proceeds derived from
illegal activity. This is the first step of the money-laundering process and the ultimate aim of
this phase is to remove the cash from the location of acquisition so as to avoid detection from
the authorities. This is achieved by investing criminal money into the legal financial system
10
Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of Money Laundering:
An Application of the Principal-agent Model” The Pakistan Development Review, Vol. 45, No. 4, Papers and
Proceedings PARTS I and II Twenty-second Annual General Meeting and Conference of the Pakistan Society
of Development Economists Lahore, December 19-22, 2006 (Winter 2006), pp. 1117-1133 available at
by opening up a bank account in the name of unknown individuals or organizations and
depositing the money in that account .

2. Layering: "Layering" refers to the separation of illicit proceeds from their source by
creating complex layers of financial transactions. Layering conceals the audittrail and
provides anonymity. This is achieved by moving money to offshore bank accounts in the
name of shell companies, purchasing high value commodities like diamonds and transferring
the same to different jurisdictions. Now, Electronic Funds Transfer (EFT) has become boon
for such layering exercise. Different techniques like correspondent baking, loan at low or no
interest rates, money exchange offices, back-to-back loans, fictitious sales and purchases,
trust offices, and recently the Special Purpose Vehicles (SVPs) are utilized for the purpose of
laundering the money.

3. Integration: "Integration" refers to the reinjection of the laundered proceeds back into the
economy in such a way that they re-enter the financial system as normal business funds. The
launderers normally accomplish this by setting up unknown institutions in nations where
secrecy is guaranteed. New forms of business give a platform for integration exercise. Now a
person can start a business with just a webpage and convert his illegal money to legal by
showing profits from the webpage. There are other ways like capital market investments, real
estate acquisition, the catering industry, the gold market, and the diamond market.

SOME TECHNIQUES OF MONEY LAUNDERING

At each of the three stages of money laundering various techniques can be utilized. It is really
not possible to enlist all the techniques of Money Laundering exercise; however, some
techniques are illustrated for the sake of understanding:

 Hawala – Hawala is an alternative or parallel remittance system. It exists and operates

outside of, or parallel to 'traditional' banking or financial channels. It was developed
in India, before the introduction of western banking practices, and is currently a major
remittance system used around the world. In hawala networks the money is not moved
physically. A typical hawala transaction would be like a resident in USA of Indian
origin doing some business wants to send some money to his relatives in India. The
person has option either to send the money through formal channel of banking system
 or through the hawala system. The commission in hawala is less than the bank
charges and is without any complications for opening account or visit the bank, etc.
The money reaches in to the doorstep of the person’s relative and the process is
speedier and cheaper.
 Structuring Deposits – Also known Smurfing, this method entails breaking up large
amounts of money into smaller, less-suspicious amounts. In the United States, this
smaller amount has to be below $10,000 -- the dollar amount at which U.S. banks
have to report the transaction to the government. The money is then deposited into
one or more bank accounts either by multiple people (smurfs) or by a single person
over an extended period of time.
 Third-Party Cheques – Utilizing counter cheques or banker’s drafts drawn on
different institutions and clearing them via various third-party accounts. Third party
cheques and traveller’s cheques are often purchased using proceeds of crime. Since
these are negotiable in many countries, the nexus with the source money is difficult to
establish.
 Credit Cards – Clearing credit and charge card balances at the counters of different
banks. Such cards have a number of uses and can be used across international borders.
For example, to purchase assets, for payment of services or goods received or in a
global network of cash-dispensing machines.

 Peso Broker - A drug trafficker turns over dirty U.S. dollars to a peso broker in
Colombia. The peso broker then uses those drug dollars to purchase goods in the
United States for Colombian importers. When the importers receive those goods
(below government radar) and sell them for pesos in Colombia, they pay back the
peso broker from the proceeds. The peso broker then gives the drug trafficker the
equivalent in pesos (minus a commission) of the original, dirty U.S. dollars that began
the process. The list is endless and quite a lot of techniques are not easily attributed to
one laundering phase alone. With each reporting of crime, the modus operandi
changes keeping in view the earlier detection. The money-launderers appear to be
serious researchers and the officials appear to be mere readers of research reports.
 HARMFUL EFFECTS OF MONEY LAUNDERING

In a detailed study by Unger et al. about money laundering literature they were able to
identify 25 different effects of money laundering. Unger classifies the effects of money
laundering on the basis of its gestation period within which it surfaces, under two broad
heads, i.e. short term effects of money laundering51 and long term effects of money
laundering.

Money Laundering threatens national governments and international relations between them
through corruption of officials and legal systems. It undermines free enterprise and threatens
financial stability by crowding out the private sector, because legitimate businesses cannot
compete with the lower prices for goods and services that businesses using laundered funds
can offer. There are few specific challenges which is posed by Money-laundering activities
throughout the world.

Terrorism – Terrorism is an evil which affects each and everybody. Now and then we can
find terrorist attacks being made by terrorists. These attacks definitely cannot be done without
the help of money. Money Laundering serves as an important mode of terrorism financing.
Terrorists have shown adaptability and opportunism in meeting their funding requirements.
Terrorist organizations raise funding from legitimate sources, including the abuse of
charitable entities or legitimate businesses or self financing by the terrorists themselves.
Terrorists also derive funding from a variety of criminal activities ranging in scale and
sophistication from low-level crime to organised fraud or narcotics smuggling, or from state
sponsors and activities in failed states and other safe havens. Terrorists use a wide variety of
methods to move money within and between organisations, including the financial sector, the
physical movement of cash by couriers, and the movement of goods through the trade system.
Charities and alternative remittance systems have also been used to disguise terrorist
movement of funds.

Threat to Banking System – Across the world, banks have become a major target of Money
Laundering operations and financial crime because they provide a variety of services and
instruments that can be used to conceal the source of money. With their polished, articulate
and disarming behaviour, Money Launderers attempt to make bankers lower their guard so as
to achieve their objective. Though norms for record keeping, reporting, account opening and
transaction monitoring are being introduced by central banks across the globe for checking
the incidence of Money Laundering and the employees of banks are also being trained to
recognise suspicious transactions, the dilemma of the banker in the context of Money
Laundering is to sift the transactions representing legitimate business and banking activity
from the irregular / suspicious transactions. Launderers generally use this channel in two
stages to disguise the origin of the funds first, when they place their ill gotten money into
financial system to legitimize the funds and introduce these funds in the financial system and
second, once these funds have entered the banking system, through a series of transactions,
they distance the funds from illegal source. The banks and financial institutions through
whom the ‘dirt money’ is laundered become unwitting victims of this crime.

IMPACT OF MONEY LAUNDERING ON SOCIETY AND ECONOMY

Effects of money laundering are seen all over the world on almost all the sectors of life. More
noticeable are economic effects which are on a broader scale. Developing countries often
bear the brunt of modern money laundering because the governments are still in the process
of establishing regulations for their newly privatized financial sectors.

If left unchecked, money laundering can erode a nation’s economy by changing the demand
for cash, making interest and exchange rates more volatile, and by causing high inflation in
countries where criminal elements are doing business. The draining of huge amounts of
money a year from normal economic growth poses a real danger for the financial health of
every country which in turn adversely affects the global market 11 Most fundamentally, money
laundering is inextricably linked to the underlying criminal activity that generated it.
Laundering enables criminal activity to continue.

The impact of money laundering can be summed up into the following points:

 Potential damage to reputation of financial institutions and market

 Weakens the “democratic institutions” of the society

 Destabilises economy of the country causing financial crisis

 Give impetus to criminal activities

11
Chapter-IV Money Laundering in India: An Offshoot of Drug Trafficking available at
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/18155/10/10_chapter4.pdf (accessed on 14th May
2015) Pg. 12-13.
 Policy distortion occurs because of measurement error and misallocation of resources

 Discourages foreign investors

. Causes financial crisis

 Encourages tax evasion culture

 Results in exchange and interest rates volatility

REGULATION OF MONEY LAUNDERING IN INDIA

With its growing financial strength, India is vulnerable to money laundering activities seven
though the country's strict foreign exchange laws make it difficult for criminals to launder
money. International Narcotics Control Strategy Report by Bureau for International Narcotics
and Law Enforcement Affairs emphasizes India’s Vulnerability to money-laundering
activities in following words:

“India’s emerging status as a regional financial centre, its large system of informal cross-
border money flows, and its widely perceived tax avoidance problems all contribute to the
country’s vulnerability to money laundering activities. Some common sources of illegal
proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in
illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and
income tax evasion. Historically, because of its location between the heroin-producing
countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit
country.”

Money-laundering in India has to be seen from two different perspectives, i.e., Money
laundering on international forum and Money-laundering within the country. As far as the
cross-border money-laundering is concerned India’s historically strict foreign exchange laws
and reporting norms have contributed to a great extent to control money laundering on
international forum. However, there has been threat from informal transactions like ‘Hawala’.

According to Indian observers, funds transferred through the hawala market are equal to
between 30 to 40 percent of the formal market. The Reserve Bank of India (RBI), India’s
central bank, estimates that remittances to India sent through legal, formal channels in 2006-
2007 amounted to U.S. $28.2 billion. Due to the large number of expatriate Indians in North
America and the Middle East, India continues to retain its position as the leading recipient of
remittances in the world, followed by China and Mexico104. In India, before the enactment
of the Prevention of Money Laundering Act 2002 (PMLA- 02 hereinafter), the following
statutes addressed scantily the issue in question:

• The Conservation of Foreign Exchange and Prevention of Smuggling ActivitiesAct,

1974

• The Income Tax Act, 1961

• The Benami Transactions (Prohibition) Act, 1988

• The Indian Penal Code and Code of Criminal Procedure, 1973

• The Narcotic Drugs and Psychotropic Substances Act, 1985

• The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act,
1988

However, this was not sufficient with the growth of varied areas of generating illegalmoney
by selling antiques, rare animal flesh and skin, human organ, and many such varied new areas
of generating money which was illegal. Money-laundering was an effective way to launder
the black money (wash it to make it clean) so as to make it white. The international initiatives
as discussed above to obviate the threat not only to financial systems but also to the integrity
and sovereignty of the nations and the recent Hawala episode in India triggered the need for
an anti money-laundering law. In view of the urgent need for the enactment of a
comprehensive legislation inter alia for preventing money laundering and connected
activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for
coordinating measures for combating money-laundering etc., the PML Bill was introduced in
the Lok Sabha on 4th August 1998, which ultimately was passed on 17th January 2003.
However, the implementation of the same did not see the light of the day until 2005105 when
it was enforced. The time when the Act of 2002 came to be enforced it as too old to cater the
needs of Anti – Money Laundering Law.

PREVENTION OF MONEY LAUNDERING ACT, 2002

In view of an urgent need for the enactment of a comprehensive legislation for preventing
money laundering and connected activities, confiscation of proceeds of crime, setting up of
agencies and mechanisms for coordinating measures for combating money laundering etc.,
the Prevention of Money Laundering Bill 1998 was introduced in Parliament on 4th August,
1998. The Bill received the assent of the President and became Prevention of Money
Laundering Act, 2002 on 17th January 2003. The Act has come into force with effect from
1st July 2005. It has been amended in 2005, 2009 and recently in 2012. The objective of the
Act is 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 12.

SCHEME OF THE ACT

The Act consists of 10 chapters containing 75 sections and 1 schedule divided in 5 parts.
Chapter I contain section 1 and 2 which deals with short title, extent and commencement and
definitions. Chapter II contain section 3 and 4 which provide for offences and punishment for
money laundering. Chapter III has sections 5-11 which provide for attachment of property,
adjudication and confiscation. Chapter IV has sections 12-15 which deals with obligations of
banking companies, financial institutions and intermediaries. Chapter V has sections 16-24
which relates to summons, searches, seizures, retention, presumptions etc. Chapter VI has
sections 25-42 which deals with the establishment, composition, qualifications, powers and
procedures etc of the Appellate Tribunal. Chapter VII has sections 43-47 which deal with
Special Courts and Chapter VIII has sections 48-54 which provide for various authorities
under the Act their appointment, powers, jurisdiction etc. Chapter IX has sections 55-61
which deals with reciprocal arrangement for assistance in certain matters and procedure for
attachment and confiscation of property. Chapter X has sections 62-75 which deals
miscellaneous provisions including punishments, cognizance of offences, offences by
companies etc.

SALIENT FEATURES OF THE ACT

Offence of Money Laundering and its punishment

12
Satapathy, Money Laundering: New Moves to Combat Terrorism, Economic and Political Weekly, Vol. 38,
No. 7 (Feb. 15-21, 2003), pp. 599-602.
An offence of money laundering is said to be committed when a person in any way deals with
the proceeds of crime13. The proceeds of the crime referred above include the normal crimes 14
and the scheduled crimes15 . 16The prescribed punishment is 3-7 years rigorous imprisonment
for an offence of money laundering with fine17. In case of an offence mentioned under Part
A18, imprisonment would extend up to 10 years19.

Attachment, Adjudication and Confiscation

The confiscation of the property under the Act is dealt with in accordance with the chapter III
of the said Act. An official not below the rank of Deputy Director can order attachment of
proceeds of crime for a period of 180 days, after informing the Magistrate. Thereafter he will
send a report containing material information relating to such attachment to the Adjudicating
Authority20. Section 8 details the procedure of adjudication. After the official forwards the
report to the Adjudication Authority, this Authority should send a show cause notice to
concerned person(s) within 30 days. After considering the response and all related
information, the Authority can give finality to the order of attachment and make a
confiscation order, which will thereafter be confirmed or rejected by the Special Court.

Obligations of Banking Companies, Financial Institutions and Intermediaries

The reporting entity is required to keep a record of all material information relating to money
laundering and forward the same to the Director. Such information should be preserved for 5
years21. The functioning of the reporting entity will be supervised by the Director who can
impose any monetary penalty or issue warning or order audit of accounts, if the entity
13
Section 2(u) of the Act: 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 or where such property is
taken or held outside the country, then the property equivalent in value held within the country
14
Crimes which are not mentioned specifically in the schedule of the Act
15
The crimes which are mentioned in the Part A and Part B and now Part C (added in PML Bill -08) of the
Schedule attached to the Act, if the total value involved in such offences is thirty lakh rupees or more (this limit
has also been removed under PML Bill 08)
16
Section 3 of the PMLA
17
Section 4 of the PMLA
18
These deal with the offences under the Narcotic Drugs and Psychotropic Substances Act, 1985, Sections 15,
16, 17,18, 19, 20, 21, 22, 23, 24, 25A, 27A, 29.
19
Proviso to Section 4 of the PMLA
20
Section 5 of the PMLA
21
Section 12 of PMLA.
violates its obligations22.The Central Government, after consulting the Reserve Bank of India
is authorised to specify rules relating to managing information by the reporting entity 23.

Enforcement Paraphernalia Adjudicating Authority

Adjudicating Authority having a Chairman and 2 members and define their scope of
functioning and other terms of service. The Adjudicating Authority will operate through a
Single or Division bench. The Authority has been given autonomous powers to regulate its
adjudicating procedure.24

Administrator - The property laundered will be taken care of i.e. managed after confiscation
by an Administrator who will act in accordance with the instructions of the Central
Government.25

Appellate Tribunal - All appeals from an order made by the Adjudicating Authority will lie to
an Appellate Tribunal constituted by the Central Government. 26 It will consist of 2 members
headed by a Chairman.27 An official can resign by sending his resignation to the Central
Government thereby giving a 3 months’ notice. He can also be removed by an order made by
the Central Government on the grounds of misbehaviour or incapacity.28

Special Courts - the Central Government, after consulting the High Court is empowered to
designate Court of Sessions as Special Courts. 29 The Special courts can try all scheduled
offences and that under section 4 and also offence under section 3, but after the authority
requests in this behalf.30 Authorities under the Act - There shall be the following classes of
authorities for the purposes of this Act, namely: (a) Director or Additional Director or Joint
Director, (b) Deputy Director, (c) Assistant Director, and (d) such other class of officers as
may be appointed for the purposes of this Act.31

22
Section 13 of PMLA
23
Section 15 of PMLA
24
Section 6 of PMLA.
25
Section 10 of PMLA
26
Section 25 of PMLA.
27
Section 27 of PMLA
28
Section 32 of PMLA
29
Section 43 of PMLA
30
Section 44 of PMLA
31
Section 48 of PMLA
Summons, Searches and Seizures etc.

The power of surveying and scrutinizing records kept at any place is conferred on the
Adjudicating Authority. The Authority may ask any of its officials to carry on the search,
collect all relevant information, place identification marks and thereafter send a report to it. 32
The search of a person to be conducted is allowed if it is ordered by the Central Government.
The authority authorized in this behalf cannot detain a person beyond 24 hours, must ensure
the presence of 2 witnesses, prepare a list of things seized signed by the witnesses and
forward the same to the Adjudicating Authority. 33 A property confiscated or frozen under this
Act can be retained for 180 days. This period can be extended by the Adjudicating Authority
after being satisfied of the merits of the case. The Court or the Adjudicating Authority can
subsequently also order the release of such property. 34 There shall be a presumption of the
ownership of property and records recovered from a person's possession. 35 The burden of
proof will be on the accused to prove that he is not guilty of an offence under this Act. 36 The
offences under the Act are to be cognizable and non-bailable.37

ANTI MONEY LAUNDERING STANDARDS

RBI issued Master Circular on Know Your Customer (KYC) norms/ Anti-Money Laundering
(AML) standards/ Combating of Financing of Terrorism (CFT)/ Obligation of banks under
Prevention of Money Laundering Act, 2002 and Banks were advised to follow certain
customer identification procedure for opening of accounts and monitoring transactions of a
suspicious nature for the purpose of reporting it to appropriate authority. These KYC
guidelines have been revisited in the context of the Recommendations made by the Financial
Action Task Force (FATF) on Anti-Money Laundering (AML) standards and on Combating
Financing of Terrorism (CFT). Banks have been advised to ensure that a proper policy
framework on KYC and AML measures with the approval of the Board is formulated and put
it place. The Objective of KYC Norms/ AML Measures/ CFT Guidelines is to prevent banks
from being used, intentionally or unintentionally, by criminal elements for money laundering
or terrorist financing activities. KYC procedures also enable banks to know/ understand their

32
Section 16 of PMLA.
33
Section 18 of PMLA
34
Retention of Property u/s 20 of PMLA
35
Presumption as to records or property in certain cases u/s 22 PMLA
36
Section 24 of PMLA
37
Section 45 of PMLA.
customers and their financial dealings better which in turn help them manage their risks
prudently.

THE FINANCIAL INTELLIGENCE UNIT - INDIA (FIU-IND)

While the Prevention of Money Laundering Act (PMLA) 2002, forms the core framework for
combating money laundering in the country, The Financial Intelligence Unit - India
(FIUIND) is the nodal agency in India for managing the AML ecosystem and has
significantly helped in coordinating and strengthening efforts of national and international
intelligence, investigation and enforcement agencies in pursuing the global efforts against
money laundering and related crimes. These are specialized government agencies created to
act as an interface between financial sector and law enforcement agencies for collecting,
analysing and disseminating information, particularly about suspicious financial transactions.
In terms of the PMLA Rules, banks are required to report information relating to cash and
suspicious transactions and all transactions involving receipts by non-profit organizations of
value more than rupees ten lakh or its equivalent in foreign currency to the Director, FIUIND
in respect of transactions. It receives prescribed information from various entities in financial
sector under the Prevention of Money Laundering Act 2002 (PMLA) and in appropriate cases
disseminates information to relevant intelligence/ law enforcement agencies which include
Central Board of Direct Taxes, Central Board of Excise & Customs Enforcement Directorate,
Narcotics Control Bureau, Central Bureau of Investigation, Intelligence agencies and
regulators of financial sector. FIU-IND does not investigate cases.

JUDICIAL PRONOUNCEMENTS

THE FAKE STAMP PAPER OR TELGI SCAM 38 The syndicate led by Abdul Karim
Telgi used the chemically washed stamps and thus reintroduced the used stamp papers back
into the system simply by washing them in the chemicals so as to remove the original
contents. This was made possible because of the loophole in the system where there was no
branding of new stamps and the used stamp papers were not cancelled. Also, the receipt used
by Central Stamp Office does not have any security features so his allowed the accused to
replicate them and show them as a genuine copy in order to convince the customers.
Additionally, he cultured officials at the Security Press in Nashik, where stamp papers were
printed. With their participation he used government machinery to print stamp paper and
38
Abdul Karim Telgi and Sohail Khan vs. Union of India, through CBI, 2014(2)JLJ136
eventually bought some of the machinery and started counterfeiting on his own. The trial
court held that evidences show that Abdul Karim Telgi hired an office at City Centre, Indore
and he also took apartment on rent and was carrying on business of sale of fake Government
revenue papers causing loss to the Government and corresponding gain to himself. The Court
thus, found the accused guilty of the offences and sentenced him to various terms of
imprisonment. The accused filed an appeal to the High Court against the order of the Trail
Court. While dismissing the appeal the Court held that considering the making out of a
consummate crime and resultant loss caused to the public revenue by sale of fake, counterfeit
stamp papers, adhesive stamps, non-judicial stamp papers, Appellant has caused substantial
loss to the Government and corresponding gain to himself by his 'white collar' crime. It was
an economic crime which has cascading effect. This is one of those exceptional cases where
the law should come down with heavy hands to deal such kind of persons who are a menace
to the Society.

Observation: The Court does not blindly follows the provisions of the Act but look into the
depth of the activities of the accused, the loss and damages caused to the Government and the
public; and gives punishment which is proportional to the criminal act.

UNION OF INDIA vs. HASSAN ALI KHAN & ANR 39. The allegation against the accused
is that they have committed an offence punishable under Section 4 of the Prevention of
Money Laundering Act, 2002. The said case has been registered on the basis of a complaint
filed by the Deputy Director, Directorate of Enforcement on the basis of the Report based on
certain information and documents received from the Income Tax Department. An
investigation was also conducted under the Foreign Exchange Management Act, 1999,
(‘FEMA’). Show-cause notices were issued to the accused for alleged violation of Sections
3A and 4 of FEMA for dealing in and acquiring and holding foreign exchange to the extent of
Rs.36,000 crores approximately in Indian currency, in his account with the Union Bank of
Switzerland. Inquiries also revealed that Shri Hassan Ali Khan had obtained at least three
Passports in his name by submitting false documents, making false statements and by
suppressing the fact that he already had a Passport. Based on the aforesaid material, the
Directorate of Enforcement arrested the accused and produced him before the Special Judge,
PMLA and was remanded in custody which was rejected and the accused was released on
bail. The Union of India thereupon filed Special Leave Petition and upon observing that the
material made available on record prima facie discloses the commission of an offence by the
39
[2011] 11 SCR 778.
accused punishable under the provisions of the PMLA, the Supreme Court disposed of the
appeal as well as the Special Leave Petition and set aside the order of the Special Judge,
PMLA and directed that the accused be taken into custody. Thereafter, the accused was
remanded into custody from time to time.

Observation: The offence of money laundering is an offence of a grave nature. A person

indulged in it cannot escape from the hands of the law. If such an offence is committed, strict
actions will be taken.
 CONCLUSION

As it can be seen that money laundering involves activities that are international in nature and
are also at a greater level, therefore, to make a heavy impact it is necessary that all countries
should enact strict and as far as possible same laws so that the money launderers will have no
place to target in order to launder their proceeds of crime by way of weakness of jurisdiction
or the like. Since the States have no obligation in deciding which offences should be
considered as predicate offences to money laundering there is no consensus into the
international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist
common predicate offences to solve the problem internationally particularly keeping in mind
the trans-national character of the offence of money laundering. Furthermore, the provision of
financial confidentiality in other countries is an issue. The states are unwilling in
compromising with this confidentiality. There is a need to draw a line between such financial
confidentiality rules and these financial institutions becoming money laundering havens.
Apart from that, many a people are of the opinion that money laundering seem to be a
victimless crime. They are unaware of the harmful effects of such a crime. So there is a need
to educate such people and create awareness among them and therefore infuse a sense of
watchfulness towards the instances of money laundering. This would also help in better law
enforcement as it would be subject to public examination. Moreover, to have effective anti-
money laundering measures there need to be a proper coordination between the Centre and
the State. For that the tussle between the two should be removed. The laws should not only be
the responsibility of the Centre but it should be implemented at the State level also. The more
decentralised the law would be the better reach it will have. Therefore, to have an effective
anti-money laundering regime, one has to think regionally, nationally and globally.
 SUGGESTIONS

1. As we have seen earlier, money-laundering involves international activity at a greater level

hence a suggestion borrowing from the words of Interpol expert Mr. Brown would be
appropriate “the key to making an impact in money laundering is to get all of the countries of
the world to enact and enforce the same laws dealing with money laundering so the criminals
have nowhere to go.”

As it is open to the states to decide exactly which crimes would qualify as predicate offences
to money laundering, this has resulted into serious inroad into the international harmonizing
efforts of anti-money laundering law. Most countries have listed serious offences as predicate
crimes but have nevertheless, adopted different approaches to what exactly constitutes a
serious crime for the purpose180. Thus there is a need to have a common list of predicate
offences to solve the problem of crossroads, specifically keeping into mind the trans-national
character of the money laundering crime and the need for a unitary and coherent approach at
international level.

2. In order to reduce the vulnerability of the international financial system to money

laundering, governments must intensify their efforts to remove any detrimental rules and
practices which obstruct international co-operation against money laundering.

3. Offshore financial confidentiality is an issue. The states are reluctant to compromise with
their financial confidentiality. There is a need to build a balance between financial
confidentiality and this confidentiality turning to a money-laundering haven.

4. Money-laundering seems to be a victimless crime to most of the persons, however, in view

of the harmful effects of the crime discussed in the earlier part of the discussion it is need of
the day to educate people about such crimes and inculcate a sense of vigilance towards the
instances of money laundering. Once the problem is visible to the eyes of people, it would
contribute towards better law enforcement as it would be subject to public examination.

5. There is a need to sensitize the Private Sector about their role in anti-money laundering
activities. An example would be the Wolfberg principles. Anti-money laundering should not
be only the responsibility of the Government, but also the private players.

6. Continuous up-gradation and dissemination of information is necessary. FIUIND website

still does not have a link which talks about the proposed Bill of 2008 on AML. There is a
need of reviewing the AML strategies periodically. The enforcement agencies now have to
step in the shoes of money-launderers to find out their techniques of money laundering.

In the past 20 years, law enforcement authorities and FIUs in various countries have made
major progresses in identifying the ways money laundering works. However, much emphasis
continues to be placed on relatively small money laundering operations that tend to highlight
the predicate crime. There are various official reports on this aspect, but the most public
attention by far is directed to the most sensational cases.

7. There is a requirement to have a convergence of different enforcement agencies, sharing of

information is necessary.

8. It is suggested that a special cell dealing with money laundering activities should be
created on the lines of Economic Intelligence Council (EIC) exclusively dealing with
research and development of AML. This Special Cell should have link with INTERPOL

and other international organizations dealing with AML. All key stakeholders, like, RBI,
SEBI etc. should be a part of this.

9. There is a need to develop a political will to tackle the problem, so long as it will be just an
international compliance show piece, any number of laws would not serve the purpose. The
tussle between the Center and the State has to be removed for having an effective AML
regime.
 BIBLIOGRAPHY

1. HAND BOOK ON THE PREVENTION OF MONEY-LAUNDERING ACT, 2002

http://www.caaa.in/Image/pmla122014.pdf
2. GENERAL INTRODUCTION AND SCHEME OF STUDY MONEY
LAUNDERING IN INDIA
http://premieroffshore.com/wp-content/uploads/2015/10/Money-Laundering-Guide-
for-India.pdf.
3. MONEY LAUNDERING IN INDIAA
http://www.nja.nic.in/4.1.%20Paper%20Money%20Laundering_1_%20Paridhi
%20Saxena.pdf.