GROWING SIGNIFICANCE OF PREVENTION OF MONEY LAUNDERING ACT, 2002

It is therefore, of utmost importance to understand PMLA and its growing significance not only for the professionals in practice but for those in industry as well.

In this article, we have attempted to provide a brief overview of the Law and recent developments relating to PMLA.

SYNOPSIS
1. Background
2. Object of pmla
3. Meaning of money laundering
a) proceeds of crime
b) meaning of the terms ‘property’, ‘person’ ‘offence of cross border implications’
c) scheduled offences
d) major acts covered in the schedule
4. Process of money laundering
5. Impact of money laundering
6. Steps taken by govt. Of india to prevent the menace of money laundering
7. Some recent cases where pmla is invoked
8. Flow of events under pmla
9. Obligations of the reporting entities
10. Possible actions which can be taken against persons / properties involved in money laundering
11. Invocation of pmla against professionals
12. Reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property
13. Conclusion

1. Background
Money-laundering has been a huge challenge for the international community for quite some time. Moneylaundering poses a serious threat not only to the financial and banking systems of countries, but also to their integrity and sovereignty. To obviate such threats, international community has taken various initiatives.

Some of the major initiatives taken by the international community, from time to time, to obviate such threats have been as follows:—

a) the United Nations [UN] Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which India is a party, called for prevention of laundering of proceeds of drug crimes and other connected activities and confiscation of proceeds derived from such offence.

b) the Basle Statement of Principles, enunciated in 1989, outlined basic policies and procedures that banks should follow in order to assist the law enforcement agencies in tackling the problem of money laundering.

c) the Financial Action Task Force [FATF] established at the summit of seven major industrial nations, held in Paris from 14th to 16th July, 1989, to examine the problem of money-laundering had made forty recommendations, which provided the foundation material for comprehensive legislation to combat the problem of money laundering. The recommendations were classified under various heads. Some of the important heads are –

i. declaration of laundering of monies carried through serious crimes a criminal offence;

ii. to work out modalities of disclosure by financial institutions regarding reportable transactions;

iii. confiscation of the proceeds of crime;

iv. declaring money-laundering to be an extraditable offence; and

v. promoting international co-operation in investigation of money laundering.

d) the Political Declaration and Global Programme of Action adopted by UN General Assembly by its Resolution No. S-17/2 of 23rd February, 1990, inter alia, called upon the member States to develop mechanism to prevent financial institutions from being used for laundering of drug related money and enactment of legislation to prevent such laundering.

e) the UN in the Special Session on Countering World Drug Problem Together concluded on the 8th to the 10th June, 1998 had made another Declaration regarding the need to combat money laundering. India is a signatory to this Declaration.

2. Object of pmla
As stated in the Preamble to the Act, it is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and to punish those who commit the offence of money laundering.

3. Meaning of money laundering
The goal of a large number of criminal activities is to generate profit for an individual or a group. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

Illegal arms sales, smuggling and other organized crimes, including illicit gambling and betting drug trafficking and prostitution rings, can generate huge amounts of money. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through 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. Section 2(p) of the PMLA provides that ‘“moneylaundering” has the meaning assigned to it in section 3.’

Section 3 of the PMLA provides for Offence of Moneylaundering as follows:

‘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.”

a) PROCEEDS OF CRIME – Section 2(1)(u) “
“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.”

b) MEANING OF THE TERMS ‘PROPERTY’, ‘PERSON’ ‘OFFENCE OF CROSS BORDER IMPLICATIONS’
“(v) “property” means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever located;”

Explanation.—For the removal of doubts, it is hereby clarified that the term “property” includes property of any kind used in the commission of an offence under this Act or any of the scheduled offences;”

“(s) “person” includes;—

(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses;”

“(ra) “offence of cross border implications”, means –

(i) any conduct by a person at a place outside India which constitutes an offence at that place and which would have constituted an offence specified in Part A, Part B or Part C of the Schedule, had it been committed in India and if such person 2[transfers in any manner] the proceeds of such conduct or part thereof to India; or

(ii) any offence specified in Part A, Part B or Part C of the Schedule which has been committed in India and the proceeds of crime, or part thereof have been transferred to a place outside India or any attempt has been made to transfer the proceeds of crime, or part thereof from India to a place outside India.

Explanation.—Nothing contained in this clause shall adversely affect any investigation, enquiry, trial or proceeding before any authority in respect of the offences specified in Part A or Part B of the Schedule to the Act before the commencement of the Prevention of Money-laundering (Amendment) Act, 2009.”

c) SCHEDULED OFFENCES

The offences listed in the Schedule to the PMLA are scheduled offences in terms of section 2(1)(y) of the Act. The scheduled offences are divided into three parts – Part A, B & C.

In Part A, offences to the Schedule have been listed in 28 paragraphs and it comprises of offences under Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, Explosive Substances Act, Unlawful Activities (Prevention) Act, Arms Act, Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act, the Prevention of Corruption Act, the Explosives Act, Antiquities & Arts Treasures Act etc.

Prior to 15th February, 2013, i.e. the date of notification of the amendments carried out in PMLA, the Schedule also had Part B for scheduled offences where the monetary threshold of rupees thirty lakhs was relevant for initiating investigations for the offence of money laundering. However, all these scheduled offences, hitherto in Part B of the Schedule, have now been included in Part A of Schedule w.e.f 15.02.2013. Consequently, there is no monetary threshold to initiate investigations under PMLA.

The Finance Act, 2015, w.e.f. 14-5-2015 has again inserted section 132 of the Customs Act, 1962 relating to false Declaration, false documents etc. in Part B.

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

Every Scheduled Offence is a Predicate Offence. The Scheduled Offence is called Predicate Offence and the occurrence of the same is a pre requisite for initiating investigation into the offence of money laundering.

d) MAJOR ACTS COVERED IN THE SCHEDULE
(i) Indian Penal Code, 1860;
(ii) N arcotic Drugs and Psychotropic Substances
Act, 1985;
(iii) Unlawful Activities (Prevention ) Act, 1967;
(iv) Prevention of Corruption Act, 1988;
(v) Customs Act, 1962;
(vi) SEBI Act, 1992;
(vii) Copyright Act, 1957;
(viii) Trade Marks Act, 1999;
(ix) Information Technology Act, 2000;
(x) Explosive Substances Act, 1908;
(xi) Wild Life (Protection) Act, 1972;
(xii) Passport Act, 1967;
(xiii) Environment Protection Act, 1986;
(xiv) Arms Act, 1959.
(xv) The offence of wilful attempt to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

4. Process of money laundering

Money laundering is a single process. However, its cycle can be broken down into three distinct stages namely, placement stage, layering stage and integration stage.

a) Placement Stage: It is the stage at which criminally derived funds are introduced in the financial system. At this stage, the launderer inserts the “dirty” money into a legitimate financial institution often in the form of cash deposits in banks. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions. To curb the risks, large amounts of cash is broken up into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

b) Layering Stage: It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. At this stage, the launderer engages in a series of conversions or movements of the money in order to distant them from their source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may consist of several bankto- bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money’s currency, and purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money. This is the most complex step in any laundering scheme, and it’s all about making the origin of the money as hard to trace as possible. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

c) Integration stage: It is the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy. At this stage, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures. At this point, the launderer can use the money without getting caught. It’s very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

The above three steps may not always follow each other. At times, illegal money may be mixed with legitimate money, even prior to placement in the financial system. In certain cash rich businesses, like Casinos (Gambling) and Real Estate, the proceeds of crime may be invested without entering the mainstream financial system at all.

The Process of money laundering may be explained simply by way of diagram as follows:

1. Structuring Deposits: This is also known as smurfing. This is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid antimoney laundering reporting requirements.

Smurfs – A popular method used to launder cash in the placement stage. This technique involves the use of many individuals (the “smurfs”) who exchange illicit funds (in smaller, less conspicuous amounts) for highly liquid items such as traveller cheques, bank drafts, or deposited directly into savings accounts. These instruments are then given to the launderer who then begins the layering stage. For example, ten smurfs could “place” $1 million into financial institutions using this technique in less than two weeks.

2. Shell companies: These are fake companies that exist for no other reason than to launder money. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.

3. Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and travellers’ 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.

4. Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

5. Impact of Money laundering
Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimes. Differences between national anti-money laundering systems are being exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective counter measures.

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of the society as is evident in many countries in Latin America. In countries transitioning to democratic systems, this criminal influence can undermine the transition.

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. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue and flourish.

Thus, 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

Policy distortion occurs because of measurement error and misallocation of resources

Discourages foreign investors

Encourages tax evasion culture

Results in exchange and interest rates volatility

Provides opportunity to criminals to hijack the process of privatization

Contaminates legal transaction.

Results in provision of financial support toTerrorists activities

6. Steps taken by govt. of india to prevent the menace of money laundering

Government of India is committed to tackle the menace of Money Laundering and has always been part of the global efforts in this direction. India is signatory to the following UN Conventions, which deal with Anti Money Laundering / Countering the Financing of Terrorism:

1. International Convention for the Suppression of the Financing of Terrorism (1999);

2. UN Convention against Transnational Organized Crime (2000); and

3. UN Convention against Corruption (2003).

In pursuance to the political Declaration adopted at the special session of the United Nations General Assembly (UNGASS) held on 8th to 10th June 1998 (of which India is one of the signatories) calling upon member States to adopt Anti Money Laundering Legislation & Programme, the Parliament has enacted PMLA. This Act has been substantially amended, by way of enlarging its scope, in 2009 (w.e.f. 01.06.2009), by enactment of PML (Amendment) Act, 2009. The Act was further amended by PML (Amendment) Act, 2012 w.e.f. 15-02-2013.

7. Some recent high profile cases where PMLA is invoked

A. As per the media reports

a. Chhagan Bhujbal’s case:
Former Deputy Chief Minister of Maharashtra Mr. Chhagan Bhujbal and his family members and various real estate developer firms and other associated with them.

b. Himachal Pradesh’s Chief minister Virbhadra singh and family’s case

c. Former King Fisher Chairman Vijay Mallya’s case

d. FTIL promoter Jignesh Shah in the NSEL’s case

e. Gujarat Cadre IAS Officer Pradeep Sharma’s case

f. Zoom Developers Pvt. Ltd.’s promoters Vijay Choudhary and his co-director Sharad Kabra’s case

g. Lalit Modi’s case

h. Bank of Baroda Money laundering case

i. As per the Law reports

j. B. Rama Raju v. Union of India [2011] 12 taxmann .com 181 (AP)

k. Union of India v. Hassan Ali Khan [2011] 14 taxmann.com 127 (SC)

The number of cases filed under the Prevention of Money Laundering Act, 2002 from the year 2008 to mid-2015 in various High Courts and the Supreme Court are:

The number of cases filed in the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 from the year 2009 till 2014 are:

8. Flow of events under PMLA

The flow of events under PMLA is graphically depicted as follows:


9. Obligations of the reporting entities

Section 2(1)(wa) – “Reporting Entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession. Section 2(1)(sa) – Persons carrying on Designated Business or Profession means:-

(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii) a Registrar or Sub-Registrar appointed u/s. 6 of the Registration Act, 1908, as may be notified by the Central Government.

(iii) real estate agent, as may be notified by the Central Government.

(iv) dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government.

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

Obligations [Section 12]

(i) Every reporting entity have to maintain a record of all transactions covered as per the nature and value of which may be prescribed, in such manner as to enable it to reconstruct individual transactions;

(ii) They shall furnish to the Director (FIU) within such time as may be prescribed information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed;

(iii) They shall verify the identity of its clients in such manner and subject to such conditions as may be prescribed;

(iv) They shall identify the beneficial owner, if any, of such of its clients, as may be prescribed;

(v) They shall maintain record of documents evidencing identity of their clients and beneficial owners as well as account files and business correspondence relating to their clients for a period of five years in case of record and information relating to transactions; and

(vi) They shall maintain the same for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.

10. Possible actions which can be taken against persons / properties involved in money laundering

Following actions can be taken against the persons involved in Money Laundering:-

(a) Attachment of property u/s. 5, seizure/ freezing of property and records u/s. 17 or Section 18. Property also includes property of any kind used in the commission of an offence under PMLA, 2002 or any of the scheduled offences.

(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a term which shall not be less than three years but may extend up to seven years and shall also be liable to fine [Section 4].

(c) When the scheduled offence committed is under the Narcotics and Psychotropic Substances Act, 1985 the punishment shall be imprisonment for a term which shall not be less than three years but which may extend up to ten years and shall also be liable to fine.

(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or conviction of any individual.

11. Risk of invocation of pmla against professionals

a. As pointed out above, section 3 of the PMLA dealing with the Offence of Money-laundering provides that ‘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.” Thus, the language of Section 3 of PMLA has widest possible amplitude.

b. As per the media reports, PMLA has been invoked against the Chartered Accountant involved in the Chhagan Bhujbal case.

c. In CBI vs V. Vijay Sai Reddy Criminal Appeal No. 729 of 2013, a case relating to offence under Prevention of Corruption Act, the Supreme Court in its order dated 9th May, 2013, after analysing the facts while cancelling the bail of the respondent Chartered Accountant, observed as follows:

“26) Finally, though it is claimed that respondent herein (A-2) being only a C.A. had rendered his professional advise, in the light of the various serious allegations against him, his nexus with the main accused A-1, contacts with many investors all over India prima facie it cannot be claimed that he acted only as a C.A. and nothing more. It is the assertion of the CBI that the respondent herein (A-2) is the brain behind the alleged economic offence of huge magnitude. The said assertion, in the light of the materials relied on before the Special Court and the High Court and placed in the course of argument before this Court, cannot be ignored lightly.”

d. In order to ensure that a professional is not caught into the quagmire of PMLA it would be advisable to do a proper due diligence and KYC of the prospective clients and to ensure that one does not fall within very broad scope and contours of section 3 of PMLA. In other words, a Professional should ensure that he does not deal with clients who are engaged in various criminal activities included in the Schedule PMLA.

12. Reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property

a. Meaning of “Contracting State”
“Contracting State” means any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise [Section 55].

b. Mechanism to obtain evidence required in connection with investigation into an offence or proceedings under PMLA if such evidence may be available in any place in a contracting State

An application is to be made to a Special Court by the Investigating Officer or any officer superior in rank to the Investigating Officer and the Special Court, on being satisfied, may issue a Letter of Request to a court or an authority in the contracting State competent to deal with such request to—

(i) examine facts and circumstances of the case,
(ii) take such steps as the Special Court may specify in such letter of request, and
(iii) forward all the evidence so taken or collected to the Special Court issuing such letter of request.

Every statement recorded or document or thing received from a Contracting State shall be deemed to be the evidence collected during the course of investigation [Section 57].

c. Mechanism to provide assistance to a Contracting State

Where a Letter of Request is received by the Central Government from a court or authority in a contracting State requesting for investigation into an offence or proceedings under PMLA, 2002 and forwarding to such court or authority any evidence connected therewith, the Central Government may forward such Letter of Request to the Special Court or to any authority under the Act for execution of such request [Section 58].

d. Confiscation of the properties involved in money laundering located in India, where the offence of money laundering has been committed outside India

The properties involved in money laundering located in India, where the offence of money laundering has been committed outside India, can be ordered to be confiscated by the Special Court/Adjudicating Authority on an application moved to the Special Court/ Adjudicating Authority [Sections 58B & 62A].

e. Reciprocal arrangements for processes and assistance for transfer of accused persons

(1) A Special Court, in relation to an offence punishable under section 4 for the service or execution of a summons, a warrant or a search warrant in a Contracting State shall send such summons or warrant, in duplicate, in prescribed form to the Court, Judge or Magistrate through specified Authorities.

(2) Similarly, a summons, a warrant or a search warrant in relation to an offence punishable under section 4, received for service or execution from a Contracting State, shall be served or executed as if it were a summons or warrant received by it from another Court in the said territories for service or execution.

After execution of summon or search warrant received from a Contracting State, the documents or other things produced or things found during search shall be forwarded to the Court issuing the summons or search-warrant through the specified Authority [Section 59].

f. Attachment or seizure of the property involved in money laundering and located in the Contracting State

In such cases, after issue of an order for attachment of any property made u/s. 5 or freezing u/s. 17(1A) or confirmation of attachment by Adjudicating Authority under Section 8 or confiscation by Special Court under Section 8, the Special Court, on an application by the Director or the Administrator may issue a Letter of Request to a court or an authority in the Contracting State for execution of such order as per the provisions of corresponding law of that country [Section 60(1)].

13. Conclusion

India has taken up various Anti-Money Laundering measures to deal with this issue but these measures somewhere or the other have some loopholes or lacunas and thus are not fulfilling their intended purpose. Some of such problems are pointed out below:

a) Growth of Technology: With the advent of technology at such a greater speed, it has been possible for the money launderers to act on obscuring the origin of proceeds of crime by cyber finance techniques. The enforcement agencies are not able to catch up with the speed of growing technologies.

b) Lack of awareness about the problem: The issue of money laundering is growing at a very high pace. Its unawareness among the common public is an impediment for implementation of proper anti-money laundering measures. The poor and illiterate people, instead of going through lengthy paper work transactions in Banks, prefer the Hawala system where there are fewer complexities and formalities, little or no documentation, lower rates and they also provide security and anonymity. Thus, they become unwitting accessories. This is mainly because such people don’t know the seriousness of this crime and are not aware of its harmful after effects.

c) Non-fulfilment of the purpose of KYC Norms: RBI has issued the policy of KYC norms with the objective to prevent banks from being used by criminals for money laundering or terrorist financing activities. However, it does not cease or abstain from the problem of Hawala transactions as RBI cannot regulate them. Further, such norms are only a mockery as the implementing agencies are indifferent to it. Also, the increasing competition in the market is forcing the Banks to lower their guards and thus facilitating the money launderers to make illicit use of the banking system in furtherance of their crime.

d) The widespread act of smuggling: There are a number of black market channels in India for the purpose of selling goods offering many imported consumers goods such as food items, electronics etc. which are routinely sold. The black market merchants deal in cash transactions and avoid custom duties thus offering better prices than the regular merchants. After liberalization of the economy, though this problem has been lessened but it has not been done away with completely and still poses a threat to a nation’s economy.

e) Lack of comprehensive enforcement agencies: The offence of money laundering is no more stuck to one area of operation but has expanded its scope include many different areas of operation. In India, there are separate wings of law enforcement agencies dealing with money laundering, cybercrimes, terrorist crimes, economic offences etc. Such agencies lack convergence among themselves. The issue of money laundering, as we have seen, is a borderless world but these agencies are still stuck with the laws and procedures of the states.

Combating the offence of money laundering is a dynamic process since the criminals involved in it are continuously looking for new ways to do it and achieve their illicit motives.

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 on the Nation’s economy and Democratic Institutions. 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.