The Prevention of Money Laundering Act, 2002

“Hawala Transactions” the word popularly used / known in India for money
laundering. It gained popularity during early 90s when many of the politicians
were caught in its net; "Hawala" is an Arabic word meaning the transfer of
money or information between two persons using a third person.

India has been rocked by a spate of scams in the recent past, which reminds
us the days of 90’s in which these scams came into light in National media.

1992 Securities Scam - Popularly known as the Big Bull, stock broker Harshad
Mehta engaged in a massive stock manipulation scheme financed by worthless
bank receipts, which his firm brokered in "ready forward" transactions between
banks. Mehta was convicted by the Bombay High Court and Supreme Court of
India for his part in a financial scandal valued at Rs50 billion which took place
on the Bombay Stock Exchange (BSE).

1996 Fodder Scam - Known as the mother of all scandals, though the Fodder
scam had been going on for over two decades before it came to light in 1996 in
the town of Chaibasa, Bihar. The scam involved fabrication of fictitious livestock
for which fodder, medicines and animal husbandry equipment was supposedly
procured. The animal husbandry department is said to have embezzled Rs950
crores through the scheme. Hawala is an alternative or parallel remittance
system.
The Hawala Mechanism facilitated the conversion of black money into white.
The literal meaning of laundering is washing or cleaning dirty clothes. The term
money laundering is used for cleaning dirty money. It is disguising or concealing
of illicit income in order to make it appear legitimate.

So basically, all the ways to convert the black money into white money are
Money laundering. But in Money laundering, the black money must involve a
predicate crime such as the violation of Indian Penal Code, IPC, Narcotics,
Prevention of Corruption Act and Human Trafficking. This is because in India,
stashing black money is simply a civil crime involving tax evasion; money
laundering has criminal dimensions related to black money. That is why, we use
the term Dirty Money in this context. Money laundering is the processing of
criminal proceeds to disguise its illegal origin money laundering
It has 3 stages -:

 Placement: Refers to the process of transferring the proceeds from illegal

activities into financial system in a manner not detectable by governmental
authorities.
 Layering: is the process of criminal activity from their origin through many
different techniques to layer the funds.
 Integration: it is the stage at which laundered funds are reintroduced into the
legitimate source.

India become 34th country member of the financial action task force in 2010.
Established by the G-7 Summit in Paris in July 1989 to examine measures to
combat money laundering. And combating financing of terrisom defines money
laundering as the processing of criminal proceeds to disguise their illegal origin
in order to “legitimize”. FIU (Financial Intelligence unit) is the central national
agency responsible for receiving, processing, analyzing and disseminating
information relating to suspected financial transactions.

Out of 140 countries, India was ranked 70 th in 2013 by anti money laundering
(AML) base level which clearly shows that our economy is very vulnerable to
money laundering activities. Before introduction of prevention of money
laundering act (PMLA) 2002, there were many acts which directly or indirectly
helped to curb money laundering activities. They are- ITA, 1961: THE INDIANL
PENAL CODE & CODE OF CRIMINAL PRODUCER, 1973, THE NARCOTIC
DRUGS & PSYCHOTROPIC SUBSTANCES ACT 1985.

But, due to many loopholes in the existing system to crub money laundering
activities, the government came by bringing all the provisions related to money
laundering in different statues under single Act i.e. The Prevention of Money
Laundering Act, 2002

Section 3 of Prevention of Money Laundering Act states 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. Money laundering involves disguising financial assets so that they
can be used without detection of the illegal activity that produced them.

Through money laundering, the launderer transforms the monetary proceeds

derived from criminal activity into funds with an apparently legal source.
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.

The PMLA, 2012 (w.e.f 15.02.2013) further enlarged the definition of offence of
money laundering.
The new definition now would include therein the activities like concealment, acquisition,
possession and use the proceeds of crime as criminal activities; also it has removed the
existing limit of Rs 5 lakhs fine under the Act.

Now, the Act seeks to provide for provisional attachment & confiscation of
property of any person for a period not exceeding 180 days if the authority has
reason to believe that the offense of money laundering has taken place. Power
of the director-: to call for records transactions or any additional information that
may be required for the purposes of investigation. The Act seeks to make the
reporting entity, which would include a banking company, financial institution,
intermediary or a person carrying on a designated business or profession.

A) Every banking company has to follow the producer of KYC norms.

B) Maintain records of all transactions the nature and value of which may be
prescribed.

C) Whether such transactions comprise of a single transaction or a series of

transactions take place within a month.

D) Maintain records for a period of ten years from the date of cessation of
the transactions between the clients and the banking company or financial
institution or intermediary, as the case may be.

There can be punishment imprisonment upto 3-7 with fine upto 5lakhs. But in
case of offences done under NARCOTIC DRUGS and psychotropic substances
act 1985, maximum punishment can extend to 10yrs rather than 7yrs.
Money Laundering and NGO’s

India recognized the need for bringing NPOs under PMLA a bit too late. Almost
all European countries and the US brought them under the anti-money
laundering laws in the aftermath of 9/11 (September 2001). In the US and UK,
the annual accounts of registered charities are public documents and are
posted on the regulators’ websites.

There are easily over a million charitable and private organizations registered in
the country under these laws and their annual monetary transactions, through
banking and other channels, runs into thousands of crores of rupees.

“Money laundering in India was rampant through NGO’s. The majority of

industrialists and even some top Politicians were using NGOs to launder their
black money back into the country. The amendment would prove an effective
tool in the hands of authorities and would take the veil off the racket.

Charitable trusts, whether temples, churches or mosques, non-government

organizations (NGOs), educational institutions or societies, if registered as non-
profit organizations (NPOs), will not only have to disclose the source of their
funds, but also be scrutinized for large monetary transactions. The change has
been done by an amendment to the Prevention of Money Laundering Act
(PMLA) 2002, notified in the Official Gazette to bring NPOs under the purview
of the law.

Earlier, the entities that fell under the ambit of the law included only chit fund
companies, banking companies, financial institutions and housing finance
companies Real Estate. The amendment now says any company registered
under section 8 of the Indian Companies Act, 2013, and/or as a trust or society
under the Societies Act, 1860, or any similar state legislation, will be brought
under the purview of PMLA.

Now onwards, NGO’s including religious organizations will have to maintains

details of the donors under the KYC (know your customers) norms. As per the
amended rules, all transactions involving receipts by non-profit organizations of
value more than rupees ten lakhs, or its equivalent in foreign currency, shall be
subjected to the provisions of PMLA.

It is to be noted that even after so many efforts and prevailing laws, India is
among six countries being actively monitored by Interpol and International
banking watchdogs after the detection of massive money-laundering because
of inadequate internal compliance procedures.