Syllabus
GS Paper 2 and 3 – Important Aspects of Governance, Transparency and Accountability, Challenges to Internal Security through Communication Networks, Role of Media and Social Networking Sites in Internal Security Challenges, Basics of Cyber Security; Money-Laundering and its prevention.
Context
The enforcement of the Prevention of Money Laundering Act, 2002, has sparked concerns, particularly following the Supreme Court of India’s unconventional interpretation in the case of Vijay Madanlal Choudhary and Ors vs Union of India and Ors, and the apprehensions about disproportionate application and alleged misuse of its provisions.
Source
The Hindu | Editorial dated 22 – December 2023
What is Money Laundering?
- Money laundering involves disguising the origins of large sums of money from criminal activities, such as drug trafficking or terrorism, to make them appear legitimate.
- Money laundering is a significant financial crime, prompting the implementation of anti-money laundering measures to prevent and combat such illicit practices.
Stages of Money Laundering:
- Placement:
- Money launderers inject crime proceeds into the financial system, often by depositing funds into accounts registered with anonymous corporations or professional intermediaries.
- Layering:
- Injected money is moved through various transactions in different accounts, both within the same country and in jurisdictions with less stringent anti-money laundering laws. This complexity makes it challenging to trace the funds’ source.
- Transactions may involve the purchase of tradable assets such as expensive cars, artwork, and real estate.
- Integration:
- Well-placed and layered money re-enters the financial system, erasing its original association with criminal activities. Laundered funds are used as if they originated from legitimate sources, undermining legal consequences.
- Criminals may invest clean money in legal businesses, fabricate invoices, or establish fake charities, even assuming roles on boards of directors with inflated salaries.
Impacts of Money Laundering:
- Economic Disruption:
- Money laundering distorts the economy by artificially inflating asset prices and causing misallocation of resources.
- Tax Revenue Erosion:
- Money laundering results in the loss of tax revenue for the government, as illegal funds evade taxation.
- Significant impact on funding public services and infrastructure development.
- Security Threats:
- Money laundering poses security risks by funding terrorism and other illegal activities.
- Example: The 2008 Mumbai attacks were partly funded through money laundering.
- Loss of investor confidence:
- Money laundering harms the reputation of banks, financial institutions, and countries.
- This leads to a loss of investor confidence and reduced economic activity.
- Corruption and Organized Crime Nexus:
- Money laundering is closely linked to corruption and organized crime, undermining the rule of law.
Major Government Interventions:
- Prevention of Money Laundering Act (PMLA) 2002:
- Enacted to prevent and confiscate property linked to money laundering.
- Financial Intelligence Unit (FIU):
- Established by the Indian government to receive, analyze, and disseminate information on money laundering.
- Identifies suspicious financial transactions to curb money laundering.
- Enforcement Directorate (ED) Empowerment:
- ED, a law enforcement agency, enforces economic laws and counters economic crimes in India.
- Investigates money laundering cases under PMLA.
- International Cooperation:
- India signed international agreements, including the United Nations Convention against Corruption and FATF recommendations.
- Facilitates cooperation with other nations in preventing and investigating money laundering cases.
Vienna Convention on Money Laundering:
- Historical Significance:
- Initiated in December 1988, the Vienna Convention marked a pivotal moment in the global fight against money laundering.
- Criminalization of Money Laundering:
- The convention established a framework obliging member states to criminalize money laundering stemming from drug trafficking activities.
- International Cooperation Emphasis:
- Promotes collaboration among member states in investigations related to money laundering.
- Facilitates the extradition process between member countries for offenses linked to money laundering.
- Addressing Bank Secrecy:
- Acknowledges the principle that domestic bank secrecy provisions should not impede international criminal investigations.
- Highlights the importance of transparency in combating cross-border money laundering activities.
Prevention of Money Laundering Act (PMLA):
- Enacted to address the escalating issue of money laundering in the country.
- The PMLA empowers the government and public authorities to confiscate assets linked to alleged culprits.
- Established in 2002, the PMLA has undergone substantial amendments in recent years to enhance its effectiveness in countering money laundering cases.
- Applicable to every individual, including business owners, partnerships, organizations, corporations, and all associated offices or branches, the PMLA covers a broad spectrum of entities.
- The PMLA grants the government the authority to seize assets and properties acquired through money laundering or other illicit means.
- As per the PMLA, it is the responsibility of the accused to prove that any properties or assets obtained were not acquired through criminal activities.
Prevention of Money Laundering Act (PMLA) 2002 Overview:
- Enactment and Implementation:
- Enacted in January 2003, the PMLA and its accompanying Rules came into force on July 1, 2005.
- Emerged from international commitments to combat money laundering, especially with transnational implications, affecting the financial systems of nations.
- Objectives of the PML Act:
- Prevention and Control:
- Combat money laundering within India.
- Confiscation and Seizure:
- Confiscate and seize property acquired from laundered money.
- Comprehensive Scope:
- Address any other issues related to money laundering in India.
- Punishment Provision:
- The Act includes provisions for punishment under section 4.
- Prevention and Control:
- Defining Money Laundering:
- Section 3 of the PMLA defines money laundering as any attempt, assistance, or involvement in processes connected to the proceeds of crime to project it as untainted property.
- Prescribing Obligations:
- Imposes obligations on banking companies, financial institutions, and intermediaries to verify and maintain client identity records.
- Requires reporting of transactions to the Financial Intelligence Unit-India (FIU-IND).
- Empowers officers of the Directorate of Enforcement to investigate money laundering cases and attach involved properties.
- Grants authority to the Director of FIU-IND to impose fines for non-compliance.
- Proposes the establishment of an Appellate Tribunal for appeals against Adjudicating Authority decisions and those of authorities like the Director FIU-IND.
- Designates one or more courts of sessions as Special Courts to try offenses under PMLA and related offenses.
Supreme Court Judgment in Vijay Madanlal Choudhary Case (2022):
- The court’s interpretation in the judgment limited the application of the Prevention of Money Laundering Act, 2002.
- Emphasis on “wrongful and illegal gain of property” resulting from criminal activity related to a scheduled offense.
- Definition of “Proceeds of Crime”:
- Property must meet the definition under Section 2(1)(u) of the 2002 Act to qualify as “proceeds of crime.”
- Court’s emphatic declaration that the definition of “proceeds of crime” is attracted only if the property has been derived or obtained as a result of criminal activity related to a scheduled offense.
- Trigger for Prosecution Authority:
- Authority to prosecute triggered only when proceeds of crime exist and are involved in any process or activity.
- Clarification that even in cases of undisclosed income, the definition of “proceeds of crime” applies only if derived from criminal activity related to a scheduled offense.
Recent Amendments to Prevention of Money Laundering Act (PMLA):
- Proceeds of Crime definition expanded to include property derived or obtained from any criminal activity related to or similar to a scheduled offense.
- Provides a broader scope, encompassing a wider range of criminal activities beyond scheduled offenses.
- Money Laundering is treated as an independent and stand-alone crime.
- Section 3 of PMLA amended to explicitly accuse a person of money laundering if directly or indirectly involved in the proceeds of the crime.
- The person considered involved in the offense until they cease to derive benefits from activities related to money laundering.
- Recognizes the ongoing character of the crime beyond a specific point in time.
Challenges with the PMLA:
- The Act grants the government and the Enforcement Directorate (ED) extensive powers of summons, arrest, and raids.
- Despite having investigative powers, the ED is not designated as a ‘police agency,’ leading to ambiguity in its role and functions.
- The Act makes obtaining bail nearly impossible, placing the burden of proving innocence on the accused rather than the prosecution.
- Courts emphasize stringent bail conditions for economic offenses, asserting a compelling state interest.
- Criticized for an overly broad and elastic definition of crime, allowing authorities considerable discretion in determining the nature of the offense.
- Individuals undergoing trials contend that the process itself becomes a punishment, with assets subject to seizure until proceedings conclude.
- While the law theoretically provides safeguards against property attachment, critics argue that these safeguards are weak.
- The law’s enactment as a Money Bill is criticized as a subterfuge, raising concerns about the appropriateness of the parliamentary procedure employed during its passage.
What Must be the Way forward?
- Regulatory Empowerment:
- Strengthen oversight in vulnerable sectors.
- Enforce stringent compliance standards and penalties.
- Enforcement Enhancement:
- Intensify efforts in investigating and prosecuting money laundering.
- Establish specialized units, allocate resources, and ensure inter-agency coordination.
- Global Collaboration Improvement:
- Foster international collaboration for joint investigations.
- Enhance information sharing, establish extradition agreements, and fortify legal assistance treaties.
- Technological Solutions:
- Deploy technology to prevent money laundering.
- Employ advanced software, algorithms, artificial intelligence, and blockchain for transparent financial transactions.
- Awareness Promotion:
- Raise awareness among the public, businesses, and financial institutions.
- Conduct workshops, training, and disseminate information on best practices, emphasizing consequences.
References:
The Hindu
The Department of Economic Affairs
Practice Question
Evaluate the Prevention of Money Laundering Act (PMLA) in the context of India’s commitment to combat transnational financial crimes. Analyze the key provisions and objectives of the PMLA?