This was launched in April, 2006 by
Jayant Thakur. The aim of this column was to introduce Securities laws to the
readers. After covering the basics, the aim was changed to cover updates along
with analysis. Selection of topics and analysis is done on the basis of
relevance to accounting and tax aspects.
New laws, court and SAT decisions are covered in this space. Jayant
Thakur says: ”Writing this feature helps and even forces me to read each
development and analyse it for readers, thus adding to my knowledge too.” Well,
reading it gives the same effect too!
APPLICABILITY OF MONEY LAUNDERING LAW TO SECURITIES LAWS VIOLATIONS
There was a recent report in the media that
action against certain persons, who allegedly carried out price manipulation on
stock exchanges, was initiated under money laundering laws. If found guilty,
such persons would face additional and stringent punishment that could actually
be more than the punishment for even the original violation.
This is an eye
opener over how a few forgotten and dormant provisions can be used to levy fairly
serious criminal punishment in connection with violations of Securities Laws.
The parties face at least three years prison, and this is in addition to all
the action of penalty, debarment, prosecution, etc., they may face under
Securities Laws.
What can also be seen is that such action is
possible not just for price manipulation, but even for violation of several
other Securities Laws such as insider trading, takeovers, etc., and also for a
wide variety of corporate frauds under the Companies Act, 2013.
This raises several issues. What are these
provisions in money laundering laws that provide for punishment for such
securities and corporate laws? What type of such securities laws violations and
corporate frauds are covered? What is the additional criteria that makes such a
securities/corporate laws violation into a money laundering laws violation too?
Is it possible that the mere fact of indulging in such a violation will most
certainly result into violation of money laundering law? And thus, effectively,
result in double punishment?
WHAT IS ‘MONEY LAUNDERING’?
Money laundering is often confused with
laundering for tax purpose whereby money on which income-tax has not been paid
(‘black money’) is laundered and brought into books (ie converted into ‘white
money’). Money laundering, as defined and described under the Prevention of
Money Laundering Act, 2001 (“the Act”), is different. It is converting money
earned from certain serious crimes into money shown as earned in other manner.
For example, money earned through selling narcotic substances is shown as
monies earned from, say, sale of steel. The tainted money thus becomes
untainted. This camouflaging constitutes the offence of money laundering.
Interestingly, income-tax may be paid on such earnings. Just the source gets
camouflaged – or rather changed into a different colour. The punishment for such conversion – i.e., money
laundering – could be in the range of least 3 years prison upto 7 or even 10
years. This is apart from fine that may be levied.
WHAT ARE THE ‘CRIMES’ COVERED?
The Act lists certain crimes in respect of
which, the act of disguising the proceeds of such crimes is considered to be
the offence of money laundering. Hence, it is necessary to understand and list
what are such crimes.
Originally, the intention appears to list
only certain serious crimes such as drug dealing, terrorism, arms dealing, etc.
However, over the years, many more crimes have been added. Now the
offences/violations under various laws that are covered are in the hundreds.
Many of such crimes are what are referred to as white-collar crimes. In this
article, we will focus on four of them – insider trading, price
manipulation/fraud in securities markets, takeovers of companies and related
and corporate frauds. As we will see, these categories themselves have multiple
sub-categories.
Insider
trading
This
includes things like dealing in securities on the basis of unpublished price
sensitive information, sharing of such information, etc. The provisions
relating to insider trading are quite broadly defined. These include who are
‘insiders’, what is price sensitive information, what type of transactions or
actions deemed to be insider trading, etc.
Price
manipulation/fraud
Broadly stated, this includes manipulating
price of securities on stock exchanges, indulging in various types of unfair
practices, fraud, etc. These offences are defined generally and to add to that,
a long list of specific items has been listed which are deemed to fall under
this category.
Substantial
Acquisition of Shares and takeovers
The SEBI Takeover Regulations provide for
certain provisions to keep a check on change of control in a company. These are
broadly two. One is acquisition of shares or voting rights beyond a particular
limit without making an open offer. The second is acquiring shares beyond
certain specified limits without making disclosures.
Corporate
frauds
U/s. 447,
recently introduced vide the Companies Act, 2013, several types of acts/omissions
are deemed to be frauds and punishable under that provision quite strictly.
Once again, the main section 447 describes frauds very widely and generally. If
an act or omission falls under this description, it is fraud. However, there
are several other provisions under the Act that deem certain acts/omissions as
frauds u/s. 447.
Others
There are many
other white collar offences listed as specified offences for the purposes of
money laundering. It is possible that in many cases, corporate frauds or
securities related frauds may get covered in such other categories too.
However, this article focuses on the four items listed above.
THE SPECIFIED OFFENCE HAS TO BE PROVED FIRST
The first step has to be to prove the
original offence itself. For example, there has to be an offence of, say, price
manipulation. It is only when this offence is proved that there can be any
question of alleging that there was money laundering.
THERE HAS TO BE PROCEEDS OF SUCH OFFENCES
Money laundering obviously cannot exist without there
being some proceeds of such crime. In case of price manipulation, for example,
the profits made through such dealings is the proceeds of crime.
WHEN AND HOW WOULD SUCH OFFENCES ALSO RESULT IN MONEY LAUNDERING?
The offender may make some earnings from any
of the specified acts. If he shows these earnings as derived from a different
source, he would have committed the offence of money laundering.
PROVING THAT THERE HAS BEEN MONEY LAUNDERING
To determine whether the offence of money laundering has
taken place, a clear link would has to be established between the proceeds of
crime and the earnings/assets that were shown after such disguising.
DIFFICULTIES IN PROVING MONEY LAUNDERING IN CASE OF SECURITIES/ CORPORATE OFFENCES
It
is difficult enough to prove securities/corporate offences but let us say that
is done. The question, however, is how does one prove that (i) such person has
earned money from such offences (ii) he has disguised the proceeds of such
offences?
The difficulties are particularly compounded
in case of securities/corporate offences. In most of such cases, even if the
income is shown without any modification of source, proving money laundering
would be difficult. This is explained by several examples below.
Take a case, however, first of a case where
it may be possible to prove money laundering. Take a case of price manipulation
by the so-called ‘operator’. Such person may indulge in price manipulation in
shares. He enters into false transactions that result in rise of the price of
the shares. He is paid ‘fees’ for carrying out such activity. He records it as
fees for some other ‘consultancy’ or the like. Underlying papers show that he
did receive such fees and that it was disguised as having come from other
legitimate source. The offence of money laundering is thus proved.
However, take an example of a CFO who comes
to know that his employer company is going to declare good financial results.
He buys the shares at a particular price and then, after the news become public
and the price of the shares rise, he sells the shares at a higher price. The
offence of insider trading might be easily proved here. However, how does one
prove the offence of money laundering here? The CFO may have shown the income
as from capital gains in his books of accounts and tax returns. There is no
disguising involved here.
Similar is the case of price manipulation
where profits are made by buying shares at a low price, then indulging in price
manipulation/fraud, and then selling at a high price. Even if the offence of
price manipulation/fraud is proved, the income is still arising from gains on
sale of shares.
Violation of SEBI Takeover Regulations may
also have similar issues.
Then there is a
whole long list of frauds falling generally u/s. 447 and in many of such cases
too, such issues may arise.
WHAT IS THE PUNISHMENT?
The punishment
for money laundering is stringent. Generally stated, the punishment may range
from three years to seven years imprisonment. In effect, it calls for
punishment that is more strict than even the original offence.
CONCLUSION
It is possible
that the recent invoking of money laundering law in such white collar crimes is
to make an example in serious cases. This would create an added disincentive on
such people and also people who help them in disguising their earnings.
However, these white collar offences are large in number and varying in
intensity. In most cases, even the punishment for the original offence is
relatively mild. Often, a token penalty is levied. If the law relating to money
laundering is frequently used, then the consequences would be far more serious.
I submit that the list of offences covered here should be narrowed down only to
serious cases and there should be added conditions to be satisfied to invoke
the provisions relating to money laundering. 
