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Money Laundering: India And The World

Submitted By

Supervised By

Devagya Jha

Dr. Radha Seshan

National Law University, Delhi


Chapter I: Introduction...............................................................................................................1
Chapter II: Action at the International level to combat Money Laundering..............................3
Financial Task Force..............................................................................................................3
Basel Principles......................................................................................................................4
United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
United Nations Convention against Corruption.....................................................................6
Chapter III: Anti-Money Laundering Legislations in India.......................................................8
Prevention of Money Laundering Act, 2002..........................................................................8
The PMLA Amendment Bill, 2011......................................................................................10
Chapter IV: Other Legislations Dealing with Money-Laundering...........................................12
The Foreign Exchange Management Act, 1999...................................................................12
The Benami Transactions (Prohibition) Act.........................................................................13
The Narcotic Drugs and Psychotropic Substances Act, 1985..............................................14
Chapter V: Analyis of the Ram Jethmalani PIL.......................................................................16
Chapter VI: The Reserve Bank of India and Anti-Money Laundering Measures....................25
Chapter VII: Conclusion..........................................................................................................28


Money laundering refers to the conversion of money that is illegally obtained, so as to make
it appear to originate from a legitimate source. 1 Article 1 of the 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.2
Money laundering is not a single act but is in fact a process that is accomplished in three
basis steps: placing, layering and integrating of illegal proceeds.3 The first stage involves the
removal of cash from the location of acquisition and introducing it into the financial system.
The second stage is the conversion of money in as many banks as possible, especially abroad.
The third stage is the reinvesting or integrating of this money into the economy, taking the
shape of legitimate businesses.4
In countries like India, money laundering takes place through over invoicing of exports,
under invoicing of imports, investment through shell companies and extensive use of hawala

1 http://web.worldbank.org/ (last accessed on Apr. 2, 2015).

2 EC Directive on Prevention of the use of the Financial System for the Purpose of Money
Laundering, 1991, available at http://eur-lex.europa.eu/ (last accessed on April 16, 2015).
LAUNDERING, 3 (Institute of Macro-Economics) available at http://books.google.co.in/books?
%20laundering&f=false (last accessed Apr. 9, 2015).

4 Group 2, The Economic Crime including Money Laundering: Its Legal and Financial
Implications, available at
http://www.unafei.or.jp/english/pdf/RS_No67/No67_26RC_Group2.pdf (last accessed on
Apr.8, 2015).

channels in the transmission of money.5 However, hawala transactions usually referred to as

alternative remittance system is the most common form of money laundering. It is the
transfer or remittance from one party to another, without the use of a formal financial
institution such as bank or money exchange and thus is an informal way of moving money
without leaving traces of records.6 Hawala transactions are popular because they are often
faster, more reliable, sometimes offer a better exchange rate, and can be much cheaper than
transfers through licensed financial institutions.7
Money Laundering is a menace because it 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. Money Laundering serves as an important mode
of terrorism financing.8 Because of its devastating effects, fighting money laundering should
be a priority for all countries. At the international level to combat efforts to combat money
laundering began in 1988 with two important initiatives: The Basel Committee on Banking
Regulations and Supervisory Practices and the United Nations Convention against Illicit
Traffic in Narcotic Drugs and Psychotropic Substances. In India, the Prevention of Money
Laundering Act was enacted in 2002 in addition to the other legislations that were already in
place like the Foreign Exchange Management Act, The Benami Transactions (Prohibition)
Act. Other key players in the effort to combat money laundering are the Reserve Bank of
India, the Securities and Exchange Board of India and the Financial Intelligence Unit- India.

5 Ibid.
6 John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic Perspective,
available at http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf (last
accessed on April 17, 2015).
7https://www.interpol.int/Public/FinancialCrime/MoneyLaundering/hawala/default.asp (Last
accessed April 17, 2015).
8 Peter J. Quirk, Money Laundering: Muddying the Macro-economy, available at
http://www.imf.org/external/pubs/ft/fandd/1997/03/pdf/quirk.pdf (Last accessed April 17,



The Financial Action Task Force9 is an inter-governmental body which sets standards, and
develops and promotes policies to combat money laundering and terrorist financing.10 The
main emphasis of anti-money laundering measures remains on securing documentation of
financial flows, and critical analysis of this financial flow.11 The Force has provided forty
Recommendations and Nine Special Recommendations that provide a complete set of counter
measures against money laundering. They set out the principles for action and allow countries
a measure of flexibility in implementing these principles according particular circumstances
and constitutional frameworks.12 These Recommendations have been recognized, endorsed
and adopted by many international bodies as the international standards for combating Money
Laundering.13 FATF regularly reviews its members for compliance through annual selfassessment exercises and periodic mutual evaluations of its members. Especially after the
attacks on the Twin Towers on September 11, 2011, the FATF has been adopting the carrotand-stick approach on one hand, the FATF has increased its interaction with critics, and on
the others, have increased the threat of punitive measures against problematic jurisdictions.14
9 Hereinafter, the FATF.
10 http://www.fatf-gafi.org/pages/0,3417,en_32250379_32236836_1_1_1_1_1,00.html, (last
accessed April 17, 2015).
11 Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J. Crime Crim. L. &
Crim. Just. 159 (1998).

12 Vijay Kumar Singh, Controlling Money Laundering in India-Problems and Perspectives,

available at http://www.igidr.ac.in/money/mfc-11/Singh_Vijay.pdf (last accessed April 17,
13 Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis, available
at http://www.legalserviceindia.com/article/l110-Prevention-Of-Money-Laundering-Act.html,
(last accessed April 19, 2015).
14 George Peter Gilligan, Overview: Markets, Offshore Sovereignty and Onshore Legitimacy,

India became the 34th member of the FATF in June 2010 after five years of being an
observer.15India has amended the PMLA, 2002 and the Unlawful Activities (Prevention)
Act, 1967 to bring them in line with the main recommendations of the FATF. FATF is
important to India because India needs the comprehensive toolkit for law enforcement
agencies to be able to track the money behind terrorist attacks and to enable India to emerge
as an exporter of financial services.16

As a member of the FATF, India also accepted an enhanced responsibility as the Asia Pacific
Regional Review Group Co-chair. India underwent its first Asia Pacific Group 17 mutual
evaluation in 2005 and a joint APG and FATF mutual evaluation in 2008. 18 The FATF report
suggests that while measures have been taken to curb the menace of money laundering in
India, a few key recommendations need to be included for a more effective response to this
problem like address the technical shortcomings in the criminalisation of both money
laundering and terrorist financing and in the domestic framework of confiscation and
provisional measures; a stricter sanctioning regime that allows for effective, proportionate
and dissuasive sanctions for failures to comply with Anti Money Laundering requirements19
CENTRES, (Donato Masciandaro ed. 2004), available at http://books.google.co.in/books?
ots=GYZHSRcK_1&sig=rmDqoLu0D46fIcX0DWsQGDdvHJo#v=onepage&q&f=false (last
accessed Apr. 9, 2015).
15 India joins select club to counter financial frauds, THE HINDU, June 30, 2010, available at
http://www.thehindu.com/news/article492411.ece, (last accessed April 19, 2015).
16 K.P.Krishnan, India on the FATF high table, THE ECONOMIC TIMES, August 10, 2010,
available at http://articles.economictimes.indiatimes.com/2010-0810/news/27602192_1_fatf-money-laundering-financial-action-task-force, (last accessed on
April 20, 2015).
17 Hereinafter, the APG.
18 Prevention of Money Laundering Act being amended, THE HINDU, July 19, 2011,
available at http://www.thehindu.com/news/national/article2255685.ece, (last accessed April
20, 2015).
19 Mutual Evalutaion of India, available at http://www.fatfgafi.org/document/17/0,3746,en_32250379_32236963_45582417_1_1_1_1,00.html, (last


In recognition of the vulnerability of the financial sector to misuse by criminals, the Basel
Committee on Banking and Supervisory Practices issued a Statement of Principles (the Basel
Principles) in December 1988.20 This was a significant step towards preventing the use of the
banking sector for money laundering purposes, as it set out a number of principles that
banking institutions should comply with like: customer identification, compliance with
legislation, conformity with high ethical standards and local laws and regulations, full cooperation with national law enforcement authorities to the extent permitted without breaching
customer confidentiality, etc.21 Therefore, the Basel Principles stress on co-operation within
the confines of the duties of client confidentiality. The compliance with these Principles
represented a major self regulatory initiative within the financial sector.
In 1997, in consultation with the supervisory authorities of a few non G-10 countries
including India, it drew up the 25 Core Principles for Effective Banking Supervision which
were in the nature of minimum requirements intended to guide supervisory authorities which
were seeking to strengthen their current supervisory regime. 22 The Principles deal with
aspects like permissible activities of institutions that are licensed and subject to supervision
as banks must be clearly defined23; the licensing authority must have the right to set criteria
accessed April 20, 2015)
20Money Laundering Prevention, available at
tional Money Laundering Efforts, (last accessed April 20, 2015).
at http://books.google.co.in/books?
%20convention%20and%20money%20laundering&f=false, (last accessed April 20, 2015).
22 Kishori J Udeshi, Implementation of Basel II- an Indian Perspective, available at
http://www.bis.org/review/r040611g.pdf, (last accessed March 15, 2015).
23 Principle-II of Core Principles for Effective Banking Supervision; The permissible
activities of a banking company are listed in Section 6(1) of the Banking Regulation Act,

and reject applications of establishments that do not meet the standards set 24; banking
supervisors must have the authority to review and reject any proposals to transfer significant
ownership or control in existing banks to other parties 25; evaluation of a banks policies and
procedures related to granting of loans and making of investments 26 among other things. The
Reserve bank of India had assessed its own position with respect to the Principles in 1998.
The assessment had shown that most of the Core Principles were already enshrined in our
existing legislation with some gaps identified mainly in the areas of risk management in
banks, inter-agency co-operation with other domestic/international regulators and
consolidated supervision.


Internal working groups were set up to suggest measures to

bridge these gaps. 28

A further paper was issued by the Committee in October 2001 covering customer due
diligence for banks. It addressed verification and Know Your Customer (KYC) standards with
a cross-border aspect. This mandates the bank to take reasonable efforts to determine their
1949. Section 6(2) specifically prohibits a banking companyfrom carrying on any form of
business other than those referred to in Section 6(1).
24 Principle-III of Core Principles for Effective Banking Supervision; Section 22 of the
Banking Regulation Act provides that a company intending to carry on banking business
must obtain a licence from RBI except such of the banks (public sector banks and RRBs),
which are established under specific enactments. The RBI issues licence only after tests of
entry are fulfilled. These tests include minimum capital, ownership structure, banks
operating plans and controls, ability of the bank to pay its present and future depositors in
full, quality of management and whether the licensing of the bank would be in the public
25 Principle-IV of Core Principles for Effective Banking Supervision; Section 12(2) of the
Banking Regulation Act restricts shareholders in a banking company from exercising voting
rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the
banking company.
26 Principle-VII of Core Principles for Effective Banking Supervision; Under Section 21 of
the Banking Regulation Act, the RBI is charged with the responsibility of determining the
policy relating to advances by banks and of giving directions to them in this regard.
27 Core Principles of Effective Banking Supervision, October 1999, available at
http://www.rbi.org.in/upload/publications/pdfs/10115.pdf, (last accessed Mar. 15, 2015).

customers true identity, and have effective procedures for verifying the bonafides of a new






This UN Convention was one of the historic conventions inasmuch as the parties to the
Convention recognized the links between illicit drug traffic and other related organised
criminal activities which undermine the legitimate economies and threaten the stability,
security and sovereignty of States and that illicit drug trafficking is an international criminal
activity that generates large profits and wealth, enabling transnational, criminal organizations
to penetrate, contaminate and corrupt the structures of government, legitimate commercial
and financial businesses and society at all levels.30 The broad objective of the Programme was
to strengthen the ability of Member States to implement measures against money-laundering
and the financing of terrorism and to assist them in detecting, seizing and confiscating illicit
proceeds, as required pursuant to United Nations instruments and other globally accepted
standards, by providing relevant and appropriate technical assistance upon request.31
The UNCAC is one of the most comprehensive anti-corruption instruments. It criminalizes
money laundering32 thus making it one of the unique instruments that addresses both
corruption and money laundering simultaneously. The scheme of the convention is premised
on the fact that an effective anti-money laundering regime can make a significant contribution
to the fight against corruption in at least two ways: it could help uncover evidence of criminal
activity through identification of suspicious movements of financial assets, thus increasing
the chances of a successful prosecution of the perpetrator of the crime; it also enables the
tracing of criminal proceeds to facilitate their preservation, recovery and ultimate return to

29 Vijay Kumar Singh, supra note 12.

30DOUG HOPTON, supra note 21.
31 UNODC on money-laundering and countering the financing of terrorism, available at
http://www.unodc.org/unodc/en/money-laundering/index.html, (last accessed Mar. 15, 2015).
32 Article 23 of the UNCAC.

their rightful owner.


The scope of Article 23 is not limited to laundering of money and

instead its focus is the conversion or transfer of property thus affecting all manner of benefits
from cash, company shares etc. 34
The link between corruption and money laundering was also brought out in the recent
movement for the formation of Lokpal led by Anna Hazare where initiating measures to bring
back black money was seen as an integral part of the fight against corruption.

33 Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money
Laundering, available at http://idec.gr/iier/new/CORRUPTION%20CONFERENCE/The
%20CARR.pdf, (last accessed Apr. 8 2015).
34 Ibid.



The Prevention of Money Laundering Act, 2002 35 was enacted on the 17th of June, 2003 and
came into effect from the 1sts of July, 2005 with the aim of preventing money laundering and
providing for the confiscation of property which had been derived from money laundering. 36
The Act provides for the prosecution of individuals and legal entities indulging in money
laundering, and for the confiscation and attachment of property obtained through money
The PMLA contains 75 sections divided into ten chapters, and also contains a Schedule
divided into Part A and Part B.
Chapter I of the Act deals with the preliminary provisions, such as the extent of the Act and
the interpretational clause. Chapter II lays down the offence of money-laundering. Section 2
is the definitional clause, however, it is Section 3 of the PMLA that defines the offense of
money laundering, and makes the direct or indirect attempt to indulge or knowingly assist, or
be knowingly involved in any process or activity connected with the proceeds of crime 37 an
offence. The offences are divided into Parts A and B of the Schedule to the PMLA.
Section 4 of the Act lays down the punishment for money-laundering as rigorous
imprisonment for a period between three to seven years, and a fine of five lakh rupees.
However, if a person is convicted under Paragraph 2 of the Schedule 38, the term of
incarceration can be extended to 10 years.
35 Hereinafter, the PMLA.
36 K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in India, available at
http://www.icrier.org/pdf/pptinpdf/aml_ppt_for_icrier.pdf (last visited April 17, 2015).
37 Proceeds of Crime is defined in Section 2 (u) of the PMLA as:(u) proceeds of crime means any property
derived or obtained, directly or indirectly, by any person as a result of criminal activity related to a scheduled
offence or the value of such property.

Chapter III of the PMLA deals with the attachment, adjudication and confiscation of property.
The adjudicating authority appointed by the Central Government under section 48 of the
PMLA is empowered under section 5 to attach or seize property. However, the Authority is
allowed to attach property for 90 days only if the person involved has committed a crime
falling under the Schedule of the , and if a report has been forwarded to a Magistrate under
section 173 of the Criminal Procedure Code, or if a Special Court has taken cognizance of the
Chapter IV of the PMLA prescribes the obligations of banking companies, financial
institutions and intermediaries. Banking Company under PMLA includes all nationalized
banks, private Indian banks and private foreign banks, all co-operative banks, the State Bank
of India and Regional Rural Banks.39 Intermediary under PMLA includes persons
registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992.
Section 12 (1) mandates these institutions to (a) to maintain records detailing the nature and
value of transactions which may be prescribed, whether it be in a single transaction or a series
of transactions integrally connected to each other taking place under a month; (b) to furnish
information of these transactions to the Director within a prescribed time period and to
records of the identity of all its clients. Section 12 (2) mandates that these records be
maintained for a period of 10 years. Under the provisions of Section 13, a fine may be levied
by the authority prescribed by the Central Government upon such banks and financial
institutions which do not comply with the provisions of Section 12.
Chapter V of the PMLA deals with provisions relating to search, summons and seizure.
Section 16 lays out the power to enter any place to investigate given to Authority, while
Section 17 gives the power to the Authority under the PMLA to seize any property. Under
ssection 24 of the Act also puts the burden of proof on the accused to prove that the proceeds
of crime are untainted property.
Chapter VI of the Act contemplates the setting up of an Appellate Tribunal to hear appeals on
matters adjudicated upon by the authority appointed under the Act, whereas Chapter VII lays
38 Paragraph 2 of the Schedule lists out offences under the Narcotic Drugs and Psychotropic Substances Act,

39 Section 2(e) of the PMLA.


down that special courts can be designated for trying offences under the PMLA. Chapter VIII
contains the provisions relating to the appointment of authorities under the Act, and certain
provisions relating to jurisdiction and other appointment of special officers.
Chapter IX of the PMLA deals with reciprocal arrangements for assistance in matters and
also lays down the procedure for attachment and confiscation of property, whereas Chapter X
contains miscellaneous provisions.
The PMLA Amendment Bill 2011 was introduced by Pranab Mukherjee in the Lok Sabha on
December 27, 2011. The Bill toughens the stance on money laundering, and introduces 10
key amendments to the Act.
The Statement of Objects and Reasons states that the introduction of such an amendment was
necessary since problem of money-laundering is no longer restricted to the geo political
boundaries of any country, it is necessary to have a stricter enactment in place. Another
reasons given for the amendment is that India has become a member of the Financial Action
Task Force and Asia Pacific Group on money-laundering, and the Bill is the effort of the
Indian government to bring anti-money laundering legislations at par with international
There are several changes to the definitional clause under the Bill. Section 2(ia) introduced
the concept of corresponding law, linking the provisions of Indian law to the law of foreign
countries. Section 2(wa) also introduced the concept of reporting entity, which includes a a
banking company, financial institution, intermediary or a person carrying on a designated
business or profession. The definition of offence under section 3 of the PMLA will be
expanded to include activities like concealment, acquisition, possession and use of proceeds
of crime, and would also do away with the existing cap of five lakh rupees on penalties for
violations under Section 4.40 Section 5 of the PMLA, dealing with provisional attachment,
also stands amended, with the days of provisional attachment extended to 180 days, instead
40 A copy of the PMLA Amendment Bill can be accessed at
http://www.prsindia.org/billtrack/the-prevention-of-money-laundering-bill-2011-2143/, (last
accessed Mar. 20, 2015).

of 90 as it stands today. A new section 12 also has been inserted in the Bill, for it seeks to
make all the reporting entities to keep a record of all transactions, and to verify the identities
of their customers. The time period, however, remains 10 years, however, the reporting
entities can be made responsible if they do not keep or furnish the information to the
Authority as and when required.41 The Bill provides for an amendment in Section 24 as well,
as a presumption that the money involved in proceedings for money laundering shall be
raised42, and also provides for summary attachment and confiscation of property even if there
is no conviction. The Bill also contemplating merging Schedule A and B so as to erase the
monetary threshold between the different kinds of offences under the PMLA.

41 Ibid.
42 Id.



It prescribes checks and limitations on certain foreign exchange remittances. Offences under
the Foreign Exchange Management Act, 199943 are not scheduled offences under the PMLA.
The rationale behind this is that only the most violent and important crimes have been
mentioned under the PMLA since the PMLA gives massive powers of arrest to law
enforcement agencies. An example of the offenders targeted under the PMLA would be the
mafia dealing in murder, extortion, terrorism and prostitution who have immense liquid
wealth that they want to launder. Since the powers under the PMLA are so over-reaching, the
list of scheduled offences thereunder has deliberately been kept short, and FEMA offences
have been excluded from their ambit.44 Even so, money-laundering is regarded as an
egregious crime under the FEMA as well, a consideration that is especially important in the
assessment of whether or not an offence can be compounded. 45
Interestingly, the enactment of the FEMA is owed in large part to the passing of the PMLA
since it sought to relax the regulatory structure for foreign exchange, a step that was only
allowed when there was assurance that despite this relaxation, illegal transactions of drug
peddlers, terrorists, arm smugglers and other perpetrators of heinous economic crimes would
not go unpunished. 46
Among the most famous controversies involving money laundering under the FEMA is the
case filed in August, 2011, by the Enforcement Directorate against YS Jaganmohan Reddy,
son of former Andhra Pradesh Chief Minister, YS Rajasekhar Reddy. 47
43 Hereinafter FEMA.
44 FEMA and Money Laundering, available at http://www.rashminsanghvi.com/femabook6.htm (last
accessed April 07, 2015)
45RBI Circular & the compounding of contravention under FEMA , available at
http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=3036 (last accessed April 06, 2015)
46 Money Laundering under the FEMA regime, available at http://www.ieo.org/budget98/sp012.htm (last
accessed April 07, 2015)
47ED files FIR in Hyd on Money laundering and FEMA violations against YS Jagan, available at
http://telugudesam.org/tdpcms/index.php?option=com_content&view=article&id=17742 (last accessed April 07,



The word benami is Persian for property without a name.48 A benami transaction is one
where property is transferred or purchased in the name of one person but another person is
paid consideration for the transfer. It thus becomes a safe way of parking ill-gotten wealth. In
fact, the role played by benami transactions is more versatile than just that, and extends to tax
evasion, defrauding creditors and sometimes serving as a means for mafia dons to operate
through aliases.49
The Benami Transactions (Prohibition) Act, 1988,50 prohibits the purchase of property in the
name of another person who does not pay for the property, and prescribes a punishment of
upto three years for a person who commits this offence. However, the BTPA has been
considered largely ineffective and is sought to be replaced by the Benami Transactions
(Prohibition) Bill, 2011, which was introduced in the Lok Sabha last year. One of the major
reasons cited for its inefficiency was that the manner in which it had been drafted made the
formulation of rules thereunder impossible.51
However, the Bill has been subject to substantial criticism on many counts. For example, it
still allows benami transactions in the name of spouse, brother, sister or any lineal ascendant
or descendant.52 It has reduced the maximum term of imprisonment for entering into a benami
transaction from three years to two years.53 Recognising the nexus between money laundering
http://jurisonline.in/2011/09/benami-transactions-prohibition-bill-2011/ (last accessed April 08, 2015)


49 V. Kumaraswamy, But Thats Not Mine!, available at

http://www.telegraphindia.com/1110928/jsp/opinion/story_14562807.jsp (last accessed April 07, 2015)
50 Hereinafter BTPA
51 Introducing the BTPA Bill, available at http://www.caclubindia.com/news/introduction-of-the-benamitransactions-prohibition-bill-2011-9878.asp (last accessed April 07, 2015)
http://www.thehindu.com/news/national/article2369780.ece (last accessed April 07, 2015)



53 Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 A Critical Analysis, available at
http://goindocal.com/benami-transactions-prohibition-bill-2011-%2596-a-critical-analysisgo-3052.htm (last
accessed April 07, 2015)


and benami transactions, the Bill seeks to make the Adjudicating Authority and the Appellate
Tribunal established under the PMLA responsible for examining disputes around benami
transactions as well.54 This will give a chance to the accused to present his case before it goes
to the court.


The Act provides for confiscating sale proceeds from selling any narcotic drug or
psychotropic substance, and for the seizure of any goods used to conceal such drugs, and also
provides for the forfeiture of any illegally acquired property. Offences under the Narcotic
Drugs and Psychotropic Substances Act, 1985 find a place in Paragraph 2 of Part I of the
Schedule to the PMLA.55 It is feared that the conferral of extensive powers by the Supreme
Court in August, 2011 on the Special Investigation Team set up to unearth black money will
destabilise the whole structure that has been set up by money laundering laws such as the
NDPS Act.56


Amended in 2008, the Act empowers the Central Government to seize and attach funds and
other financial assets or economic resources held by engaged in or suspected to be engaged in
terrorism and prohibit any individual or entity from making any funds, financial assets or
economic resources or related services available for the benefit of these individuals under
Section 51 A. As on March, 2011, 11 out of the 1269 cases being investigated by the
Enforcement Directorate in connection with money laundering fell under the Unlawful

54 Bill for Stricter Control Over Benami Deals Introduced, available at http://www.businessstandard.com/india/news/bill-for-stricter-control-over-benami-deals-introduced/446310/ (last accessed April 08,
55 Synopsis: PMLA 2002, available at http://www.caclubindia.com/articles/prevention-of-money-laundry-act2002-a-synopsis-10646.asp (last accessed April 07, 2015)
56Hasan Ali and Money Laundering, available at http://articles.timesofindia.indiatimes.com/2011-0825/india/29926312_1_black-money-money-laundering-act-hasan-ali-khan (last accessed April 08, 2015)


Activities (Prevention) Act, 196757.58 More amendments were announced last year to bring
the UAPA in line with FATF standards59 as well as Indias other international obligations.60
While this commitment has been reaffirmed ever since the announcement was first made,61 no
concrete action seems to have been taken on this front.

57 Hereinafter UAPA.
58Anti Money-Laundering Framework, India, available at
http://socialissuesindia.wordpress.com/2011/09/08/anti-money-laundering-framework-in-india/ (last accessed
April 08, 2015)
59 Vikash Yadav, PMLA 2002: Re-engineered, available at http://www.rediff.com/business/report/indiatweaking-laws-to-check-money-laundering/20110719.htm (last accessed April 07, 2015)

60 Money laundering law to be modified: Mukherjee news, available at http://www.domainb.com/economy/general/20110719_mukherjee.html (last accessed April 07, 2015)
http://www.thehindu.com/news/national/article2659600.ece (last accessed April 08, 2015)






This landmark case in the area of money laundering law marks the only real attempt of the
Supreme Court to actively curb money laundering, by mandating efficacious measures. The
facts of the case arise in the following background.
The cases of Hasan Ali and his accomplice Tapuria stand out as particularly egregious
instances of the lack of implementation of the money-laundering laws in India. Hasan Ali, 53year-old, son of Hyderabad Excise Officer is known to have unaccounted money to the tune
of Rs. 20,000 to 35,000 crore. His account at the Swiss Bank, UBS holds up to USD 8 billion,
and he is liable for a tax default of about Rs. 50,000 crore in India.
A Writ petition was filed in ___ based on reports in the media and scholarly articles,
regarding the lack of action taken by the State authorities in countering the large sums of
unaccounted money in foreign banks, particularly those in jurisdictions that are tax havens
with strong privacy laws. The main contention was that the fundamental rights of the people
under Articles 21, 14, 19 were violated by selectively disregarding such large scale tax
evasion on the part of persons like Hassan Ali.
The Petition
The Petitioners contended that such a dereliction of duty to enforce the tax default on the part
of State authorities reflects a complete lack of control over unlawful activities of two kinds,
one, tax evasion and two, those criminal activities that are funded by the black money
economy. Moreover, such black money in swiss banks was laundered and rerouted back into
India for illegal activities, thus contributing to the creation of networks of international
finance. Large scale criminal activities like terrorism, arms smuggling, narcotic trade and
similar activities which are fuelled by the black economy are also detrimental to the security
and integrity of India. The petitioners also contended that this money was quite likely to be
62 2011(6) SCALE 691


that of powerful persons and the lack of action on the part of the State indicated gross apathy
towards prosecution of individuals.
Particularly, Hassan Ali Khan & Tapuria had been served with an Income Tax demand to the
tune of Rs. 40,000 crore and 20,580 crore respectively. The Enforcement Directorate (ED)
had, in 2007, reported that Hassan Ali indulged in dealings amounting to USD 1.6 billion
between 2001-05. The ED also carried out a raid in Hassan Alis Pune residence, which led to
the discovery of evidence of deposits of USD 8.04 billion with UBS Bank, Zurich.
Despite this, however, no investigation had been commenced by the State into the matter. The
petitioners had contended that the Union of India had faltered on several levels:
a) Both Hassan Ali and Tapuria were in India and hence falling within the jurisdiction of
Indian Courts and investigative authorities
b) Union of India, despite repeated RTI applications, was not divulging information
regarding the Indian account-holders in Swiss Banks
c) The Swiss Bank, UBS, Zurich, one of the biggest wealth management companies in
the world, had in particular, fallen in bad light with the Indian authorities as it was
involved in several untoward scams earlier in the decade.
On this premise and based on the specific arguments advanced by the Petitioners, there were
two main issues were sought to be addressed by the Court:
1) Whether the Supreme Court must constitute a Special Investigation Team (SIT) under
a former Supreme Court Judge to monitor investigations cases of black money
2) Whether the Court must mandate that the Union must endeavour to first obtain and
then disclose the list of Indian bank account holders in banks in Liechtenstein
Arguments of the Petitioners:
Re: Constitution of SIT
The petitioners argued that an SIT ought to be constituted under the supervision of former
Supreme Court judges to continually monitor investigation and prosecution of black money
Re: Disclosure of bank account information in banks in Liechtenstein


The council for the Petitioners submitted that a few years ago, an employee of a bank in
Liechtenstein had offered to divulge names of bank account holders to the government of
Germany. Germany had secured these names on had consequently initiated proceedings
against 600 individuals. The government of Germany had also offered the list of names to
other countries if they chose to initiate prosecutions against these individuals, outside the
framework of the Indo-German Double Tax Avoidance Agreement. In this light, it was
unclear why, despite several RTI applications, the Union had not revealed the names of these
account holders. Moreover, no steps to recover moneys or punish these individuals had been
taken so far.

Arguments of the Respondents

Re: Constitution of SIT
The Solicitor General responded to the arguments of the Petitioner by submitting that the
Union of India had done everything in their power towards prosecution and investigation of
black money cases. While they had no principal objection against the submission of the
petition, they argued that a Court monitored investigation was permissible but OK but not a
SIT. They submitted that there was already a High Level Committee constituted under the
Dept of Revenue in the Ministry of Finance, which was a body that was capable of exercising
all the functions and powers sought to be entrusted to the SIT proposed by the Petitioners.
Moreover, the Respondents submitted that cases of money laundering necessarily involve
many jurisdictions as these bank accounts were located in different countries with laws and
Double Tax Avoidance Agreements that protected the privacy of these account holders.
Re: Disclosure of bank account information in banks in Liechtenstein
The Solicitor General responded to the case of the Petitioners by submitting that the list of
names of bank account-holders in the possession of the Indian Government were obtained
through the DTAA with Germany, as Germany had specifically asked the Union of India to
take the said information through the DTAA. The DTAA specifically contained a prohibition
on disclosure of information obtained through the DTAA, through its confidentiality clause.
Any actions on the part of the Union in breach of this DTAA would jeopardize Indias
relations with Germany,

Moreover, the disclosure of the names of all the account-holders would be in gross violation
of the right of privacy of individuals who were using these Swiss Bank accounts for
legitimately earned money, thus falling outside the purview of a potential investigation or
prosecution for money laundering. The State argued that even if it were to disclose this list,
only those names of persons against whom investigation had been commenced and
proceedings had been initiated would be disclosed.
Re: Constitution of the SIT
The Supreme Court recognized that although a High Level Committee had been set up with
extensive powers, the charge-sheet of Hassan Ali had not even been vetted by this committee,
nor was the Committee monitoring the investigation and ensuring speedy progress. Moreover,
the Court opined that while these matters may actually be spread over several jurisdictions,
even as regards those persons within Indian jurisdiction, against whom sufficient evidence
exists in the hands of the Indian authorities, the Government had not done enough.
Thus, the Court held that the Union of India ought to constitute an SIT with very broad
powers of investigation and prosecution of black money cases. The SIT would be required to
constantly report developments to the Supreme Court. It would comprise of all the members
of the High Level Committee along with the Director of the Research and Analysis Wing
(RAW), viz.:

Director, RAW
Two former judges of the SC
Secretary, Department of Revenue, as the Chairman;
Deputy Governor, Reserve Bank of India;
Director (IB);
Director, Enforcement Directorate;
Director, CBI;
Chairman, CBDT;
DG, Narcotics Control Bureau;
DG, Revenue Intelligence;
Director, Financial Intelligence Unit; and

Re: Disclosure of bank account information in banks in Liechtenstein


Article 26(1) of the DTAA (on Exchange of Information) on confidentiality of information

exchanged under the DTAA reads as follows:
The competent authorities of the Contracting States shall exchange such
information as is necessary for carrying out the provisions of this Agreement.
Any information received by a Contracting State shall be treated as secret in the
same manner as information obtained under the domestic laws of that State and
shall be disclosed only to persons or authorities (including courts and
administrative bodies) involved in the assessment or collection of, the
enforcement or prosecution in respect of, or the determination of appeals in
relation to, the taxes covered by this Agreement. They may disclose the
information in public court proceedings or in judicial proceedings.
Thus, it was clear that Article 26 of the DTAA governed only exchange of information that
was undertaken for the purpose of carrying out the provisions of the Agreement. Since the
list of names of bank account holders in Liechtenstein was not information necessary for
carrying out provisions of the Indo-German DTAA, the Court held that Liechtenstein was
not covered within the ambit of the Indo-German DTAA. The Court also held that the fact
that Germany asked India to treat the information as granted under Article 26 of the DTAA is
Moreover, there was no bar of secrecy imposed on disclosing such information for the
purpose of court proceedings. The Court struck down the argument of the Union that these
court proceedings were limited to merely tax proceedings, on the basis that such a reading of
Article 26(1) would render the last sentence in the Article redundant. For this, the Court cited
Article 31 of the Vienna Convention on the Law of Treaties to state that the treaty should be
interpreted so as to give the words used its ordinary meaning.
The Court also pre-empted arguments on part of the State that the burden of establishing case
against black money would lie on the Petitioners, thus requiring petitioners to produce
information on bank accounts harbouring black money, by holding that the burden of
protecting fundamental rights lay on the State. The State would thus be required to obtain and
disclose all information towards the prosecution of black money cases, in order to uphold the
fundamental rights of the rest of the honest tax-paying individuals.

On the right to know under Article 19(2), the Court recognized that the countervailing right
to privacy of the bank account holders was a fundamental right read into Article 21 by the
Supreme Court in case law. This fundamental right to privacy guaranteed to persons ensures
within its ambit that human beings free of public scrutiny if they are acting in conformity
with law. Therefore, the right of persons under Article 32 to petition the court in public
interest against money laundering must be balanced by the right under Article 21 of
account holders in Swiss Banks. Therefore the Court held that the State tax authorities
cannot be mandated to disclose account details of all account holders, even in the absence of
investigation to reveal that the account holders are suspected offenders under the PMLA.
Governments Response to the Judgment
The establishment of the SIT with unprecedented powers to investigate in this case was not
reacted to positively by the Centre, and specifically, the Finance Ministry.
Attorney General Goolam Vahanvati, presenting the Centres case before a bench consisting
of Justices Kabir and Nijjar, requested a modification of the terms of creation of this body,
claiming that it would result in the ultimate destabilization of a large number of probe
mechanisms set up under different laws including the NDPS Act, the IT Act, the FEMA and
others by creating a super-force, especially one with a composition as limited as that of the
SIT,. This argument stemmed from the fact that such members as the RBI Deputy Director
were expected to take up duties as heavy as investigating the majority of all money
laundering cases in the country, despite clearly having their own functions to discharge. 63
Further, concerns were related about the fitness of certain members, such as the RAW
Director, being a nameless, faceless entity, to sit at the helm of a court-appointed body. The
Centre took strong objection to the fact that an extremely high-level, extremely powerful
body, with multi-jurisdictional operation would render redundant several legislatively created
committees and bodies, could be created without any parliamentary consideration. The plea
was objected to on the grounds that it was a review in disguise, and the necessity of the body
was created by the slow movement at the centre.64
63 Don't make black money SIT a super force: Centre tells SC, available at
http://articles.timesofindia.indiatimes.com/2011-08-25/india/29926312_1_black-moneymoney-laundering-act-hasan-ali-khan (last accessed April 09, 2015)

The response of the Government to this groundbreaking judgment of the Supreme Court was
the filing of a recall petition in Jethmalani v. UOI65 before Altamas Kabir and S. S. Nijjar, JJ.
It was argued by the State that the cases cited by the Judges in the judgment of Ram
Jethmalani v. Union of India66, in the matter of constitution of the SIT were incorrect, as these
cases did not actually constitute SITs ultimately. The State thus prayed that the Court modify
the order to remove that part of the order that mandates the constitution of the SIT.
The Court however held that this petition was essentially a review petition, and therefore the
Supreme Court was precluded from hearing a petition for modification or recall.
Critique and Conclusion
A very important area of law where constitutional values frequently come in friction with
each other is that of court directed investigations. This has picked up pace in the recent
years as evidenced by the Courts ordering of a C.B.I investigation (Nandigram firing
incident for instance),appointing an S.I.T (Gujarat fake encounter case) as well as constituting
an SIT in the Jethmalani PIL. Ordering an investigation and supervising it are primarily
executive functions and not judicial functions, as investigation comes under Police which
is a state subject under law and order (Entry 2, List II) of the Seventh Schedule of the Indian
Constitution. Where the court decides to direct or supervise an investigation through the
constitution of an SIT, it takes up the mantle of the executive, which may prima facie be a
violation of the principle of separation of powers67. Moreover, since law and order is a state
subject, directing and overseeing investigations comes under the legitimate, constitutional
domain of the states powers. Thus a court ordered investigation through an SIT is also in
breach of the principle of federalism.
However, it is submitted that where the issue is a gross violation of fundamental rights, the
court must do everything it can to ensure a free and fair investigation, if needed supervise it.
64 Govt struggles with its many committees on black money, available at
http://www.indianexpress.com/news/govt-struggles-with-its-many-committees-on-b/819876/., (last accessed
April 07, 2015)

65 2011(10)SCALE753
66 2011(6) SCALE 691

67 Ram Jethmalani v. Union of India, 2011 (4) UJ 2237 (SC).


That is precisely what happened in State of West Bengal v. C.P.D.R 68, where the court first
held that there had been a complete abrogation of fundamental rights and under such
circumstances, the court thought it appropriate to order a C.B.I investigation. Citing
Minnerva Mills69, the court observed:
Three Articles of our Constitution, and only three, stand between the heaven of
freedom into which Tagore wanted his country to awake and the abyss of
unrestrained power. They are Articles 14, 19, 21 and 31 C has removed two sides
of that golden triangle which affords to the people of this country an assurance
that the promise held forth by the preamble will be performed by ushering an
egalitarian era through the discipline of fundamental rights, that is, without
emasculation of the rights to liberty and equality which alone can help preserve
the dignity of the individual.
Articles 14 and 19 do not confer any fanciful rights. They confer rights which are elementary
for the proper and effective functioning of democracy. They are universally regarded by the
Universal Declaration of Human Rights. The court in the past that opined that if Articles 14
and 19 are put out of operation, Article 32 will be drained of its life blood. Ours is a
controlled Constitution; in that sense, Articles 14, 19, 21 represent the foundational values
which form the basis of the rule of law, the essence of which is a part of Basic Structure 70.
These are the principles of constitutionality which form the basis of judicial review apart
from the rule of law and separation of powers71. Going along these lines, it may be concluded
that where fundamental rights in their essence are infringed to the extent that there is an
absolute abrogation of their existence, the court must, if it considers necessary, order and
direct/ supervise an investigation. The power of judicial review being an integral part of the
basic structure of the Constitution, no Act of Parliament can exclude or curtail the powers of
the Constitutional Courts with regard to the enforcement of fundamental rights 72. This
therefore does not amount to infringement of either the doctrine of separation of power or the
federal structure.
Moreover, it is submitted that this case displays several consequentialist justifications
despite the above criticisms. Hassan Alis offences have finally been investigated. In the
68 C.P.D.R, AIR 2010 SC 1476
69 Minnerva Mills, 1980 AIR 1789 (Supreme Court), at 74.
70 Coelho, (2007) 2 SCC 1.
71 Coelho, 2007) 2 SCC 1.
72 Minnerva Mills, 1980 AIR 1789 (Supreme Court).

meantime, his bail application was granted by the Bombay HC but this order was set aside by
Supreme Court in late 2011.73

73 Union of India v. Hassan Ali Khan, 2011 (11) SCALE 302




The Reserve Bank of India74 has introduced guidelines, taking from powers sourced to the
Section 35A of the Banking Regulation Act, 1949 and Rule 7 of the Prevention of Money
Laundering ( (Maintenance of Records of the Nature and Value of Transactions, the
Procedure and Manner of Maintaining and Time for Furnishing Information and Verification
and Maintenance of Records of the Identity of the Clients of the Banking Companies,
Financial Institutions and Intermediaries) Rules, 2005 to reduce financial frauds and identify
money-laundering transactions.75 These are applicable to both banks and NBFCs under
separate notifications. These guidelines are known as the Know Your Customer (KYC)
norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism
(CFT) standards, where we can see that the need to Know Your Customer is derived from the
aims of combating money laundering, and financing to terror organizations. These standards
were first laid down in a preliminary form in 2002, but they have been altered frequently
since then, and they are compiled in the form of two master circulars released every year on
July 1, 2011, with a sunset clause of one year. The most recent guidelines Know Your
Customer 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), as well as the paper issued on Customer Due
Diligence (CDD) for banks by the Basel Committee on Banking Supervision. 76 Under these
guidelines, a foreigner in India may remit USD 2500 for his/her individual purposes.77

74 Hereinafter, the RBI.

75 For a detailed guide on the KYC procedures, refer to

76 Ibid.
77Ajay Shaw, Evaluating Indias Money Laundering Legislations, available at http://www.antimoneylaundering.org/asiapacific/India.aspx (last accessed April 08, 2015)


These guidelines essentially require banks to lay down their own specific sets of policies and
standards in compliance with a fairly comprehensive list of incorporations to be made. They
prescribe also circumstances which would lead to the general levels of diligence required
being enhanced or reduced, based on circumstances present.
Banks are required to follow KYC policies incorporating four major elements78:79
(a) Customer Acceptance Policy;
Under this head, it is required that no account be opened anonymous or in a fictitious name,
parameters of risk perception be well-defined, circumstances of agency be clear and risk
profile creation be done amongst other requirements.
(b) Customer Identification Procedures;
The policy approved by the Board of the bank must be such that it should clearly spell out the
Customer Identification Procedure to be carried out at different stages, and where there is
suspicion of money laundering or terrorist financing, a full-scale due diligence must be
carried out. Further, periodic updation of databases must be done.
(c) Monitoring of Transactions;
Banks are required to consistently review the transactions being undertaken in order to
establish reasonable patterns, and hence to be able to notice aberrant interactions. Further,
updating of risk categorization must be done in time periods not exceeding 6 months.
(d) Risk Management
Under this, banks must create adequate internal supervisory and auditing processes to deal
with the need to cover proper management oversight, systems and controls, segregation of
78 Master Circular Know Your Customer (KYC) norms / Anti-Money Laundering (AML)
standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA,
2002, available at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/72CY300611F.pdf (last
accessed April 06, 2015)
79 Supra N. 2.


duties, training and other related matters by explicitly allocating responsibility within the
bank for ensuring that the banks policies and procedures are implemented effectively.
The RBI has been stringently enforcing both the KYC guidelines and the AML guidelines,
and fined several co-operative banks for violating these guidelines.80
In addition to this, they have also come up with a circular under the PMLA to regulate the
activities of NBFCs, Miscellaneous Non-Banking Companies (MNBCs) and Residuary NonBanking Companies (RNBCs) in connection with money laundering. 81 These mandate
keeping records transactions exceeding a certain value, as well as reporting all suspicious
transactions to the Financial Intelligence Unit in India. Suspicious activities include inter alia
transactions that do not make economic sense, activities not consistent with the customers
business and provisions of insufficient or irregular information. However, these have been
criticized in many instances as not being sufficiently friendly to those who live in the
unorganized sector; to combat this, in March this year, the RBI released a notification
relaxing their norms with respect to verification processes for low-income persons. Now, in
case a person who intends to keep not more than Rs. 50,000 in his account, and not more than
Rs. 1 lakh in all accounts combined, wishes to open an account, he may be verified by the
process of being introduced by some other person who has been fully verified through KYC
The principles followed by the RBI also include the requirement to Know Your
Employee.83 For instance, an employee who leads a lavish lifestyle that cannot be supported
by his payscale may require extra vigilance from the employer.

80 RBI penalises MNSBL for violating anti-money laundering rules, ZEE NEWS, available at
http://zeenews.india.com/business/finance/rbi-penalises-mnsbl-for-violating-anti-moneylaundering-rules_31358.html (last accessed April 07, 2015)
81 Master Circular, KYC Guidelines, Anti Money Laundering Standards, PMLA, 2002 - Obligations of NBFCs
available at http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6575 (last accessed April 05,
82 KYC norms to get friendlier for NBFCs, FINANCIAL EXPRESS, available at
http://www.financialexpress.com/news/kyc-norms-to-get-friendlier-for-nbfcs/145693/0 (last accessed April 08,
83 Ibid.




While it is clear that money laundering has been a major issue both nationally and
internationally, the success of money laundering measures globally seems to have been rather
high perhaps indicative of the priority which this project has been given. The national
scenario However, larger questions have been asked recently that of whether focusing on
money laundering as an end in itself is sufficient, and whether it is performing its task of
coming close to ending terrorist funding or any other aims it is suspected to be channelled
into.84 The problem is exacerbated by the difficulty of adequately assessing the incidence of
money laundering by its nature, since it exists outside the boundaries of the law, any
assessment is necessarily vague. Newer modalities of laundering money are being uncovered
every day, and the innovativeness of the schemes only is enhanced.
It is suggested that the major problem in catching money laundering today is a failure of
intelligence and coordination unfortunately, these are also two of the most complex areas
for improvement to be made, overlapping as they do with civil liberties. In this, a balance
needs to be struck always keeping in mind the end purpose, and the freedoms guaranteed in
our constitutional scheme.

84 Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering, and
the War on Terrorism, available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1678682,
(last accessed Apr. 8, 2015).


Books referred



CENTRES, (Donato Masciandaro ed. 2004).

MONEY LAUNDERING, 3 (Institute of Macro-Economics).
Articles referred

Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis.

Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering,
and the War on Terrorism.

Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money

John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic


K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in India.

K.P.Krishnan, India on the FATF high table.

Kishori J Udeshi, Implementation of Basel II- an Indian Perspective.

Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J.

Crime Crim. L. & Crim. Just. 159 (1998).

Peter J. Quirk, Money Laundering: Muddying the Macro-economy

Vijay Kumar Singh, Controlling Money Laundering in India-Problems and


Yatish Yadav, Madhu Koda and associates laundered staggering Rs 3536 crore.

Ajay Shaw, Evaluating Indias Money Laundering Legislations

Meghna Bhaskar, Benami Transactions (Prohibition ) Bill, 2011

V. Kumaraswamy, But Thats Not Mine!

Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 A Critical Analysis

Vikash Yadav, PMLA 2002: Re-engineered

Vishwas Kumar, SC, CBI court reserve PC fate for Feb order
Miscellaneous Sources

Core Principles of Effective Banking Supervision, October 1999, Reserve Bank of


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