Challenges in Enforcement of the Prevention of Money Laundering

Act, 2002.

INTRODUCTION

The Prevention of Money Laundering Act, 2002 (PMLA) is a first legislation that directly
deals with prevention and combating of money laundering. Prior to PMLA the only
legislation on the subject was Narcotic Drugs and Psychotropic Substances Act, 1985, which
contained some provision dealing with proceeds of certain drug related offences. However,
Reserve Bank of India regulates Banks and other financial institutions and Securities
Exchange Board of India regulates capital market through regulatory framework. The
Unlawful Activities Prevention Act, 1967 also contains provisions prohibiting raising funds
for terrorism or terrorist organization by making it an offence. The objective of the PMLA is
to have mechanism to confiscate property derived from or involved in money laundering
and to punish those who commit money laundering.2 The PMLA has been enacted in the
backdrop of Political Declaration and Global Programme of Action, 1998 requiring member
States to adopt national money laundering legislation and programme.3

Money Laundering
Money laundering has traditionally been considered to be a process by which criminals
attempt to hide the origins and ownership of the proceeds of their criminal activities. The
aim is to enable them to retain control over the proceeds and to provide, ultimately, a cover
for their income and wealth.
The act of money laundering is done with the intention to conceal money or other assets
from the State so as to prevent its loss through taxation, judgement enforcement or blatant
confiscation. The criminals herein try to disguise the origin of money obtained through
illegal activities to look like it was obtained from legal sources because otherwise they will
not be able to use it as it would connect them to the criminal activity and the law
enforcement officials would seize it.
The most common types of criminals who need to launder money are drug traffickers,
embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drug
traffickers are in serious need of good laundering systems because they deal almost
exclusively in cash, which causes all sorts of logistics problems. Criminal activities such as
terrorism, illegal arms sales, financial crimes, smuggling, or illicit drug trafficking generate
huge sums of money and criminal organizations need to find a way to use these funds
without awakening suspicions about their illicit origin. The purpose of these criminal
organisations is to generate profits for the group or for one of its individual members. When
a criminal activity generates substantial profits, the individual or group involved in such
activities route the funds to safe heavens by disguising the sources, changing the form or
moving the funds to a place where they are less likely to attract attention. The logic of
controlling the drug money trial is that profit motivates drug sales, and because most sales
are in cash, the recipient of cash has to find some way of converting these funds into
utilizable financial resources that appear to have legitimate origins.5 The objective of
criminalising money laundering is to take profit out of the crime. The rationale for the
creation of the offence is that it is wrong for individuals and organisations to assist criminals
to benefit from the proceeds of their criminal activity or to facilitate the commission of such
crimes by providing financial services to them.

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.
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 bank deposits. 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.
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 bank-to-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.
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.
Following are the various measures adopted all over the world for money
laundering, even though it is not exhaustive but it encompasses some of the
most widely used methods:
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 anti-money laundering reporting requirements.
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 traveller’s
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.

Overview of the Problem

Investigation of Offence of Money Laundering
The predicate offences are investigated by the agencies like Police, Custom, Securities
Exchange Board of India (SEBI), Narcotic Control Board (NCB), Crime Investigation Bureau
(CBI) under their respective Act. However, the offence of money laundering is 138
investigated by the Officers of the Directorate of Enforcement. These officers are also
authorized to initiate proceedings for attachment of property and to launch prosecution in
the designated special courts for money laundering. The enforcement of PMLA is through
the instrumentality of the Central Government. The Act specially excludes that no police
officer shall investigate an offence under this Act unless specifically authorized by the
Central Government.6 Thus, the power to investigate offence u/s 4 of PMLA is exclusively
with Enforcement Directorate. However, when there is no specific allegation about
laundering of money the offences which are mentioned in the schedule can be investigated
by the investigation agencies other than enforcement directorate. This was observed by the
Supreme Court in Binod Kumar v. State of Jharkhand and Others. 7 In this case the apex
course refused to interfere with the order of the High Court where investigation of
corruption cases was assigned to the Central Bureau of Investigation as there was no clear
allegation of laundering in the sense mentioned in the PMLA.
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 will be
exploited by launderers, who tend to move their networks to countries and financial
systems with weak or ineffective countermeasures.
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. 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.15 Most fundamentally,
money laundering is inextricably linked to the underlying criminal activity that generated it.
Laundering enables criminal activity to continue.

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

PREVENTION OF MONEY LAUNDERING – GLOBAL INITIATIVES

 THE VIENNA CONVENTION
 THE COUNCIL OF EUROPE CONVENTION
 BASLE COMMITTEE’S STATEMENT OF PRINCIPLES
 THE FINANCIAL ACTION TASK FORCE (FATF)
 UNITED NATIONS GLOBAL PROGRAMME AGAINST MONEY LAUNDERING

PREVENTION OF MONEY LAUNDERING – INDIAN INITIATIVES

  The Income Tax Act, 1961
 The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,
1974 (COFEPOSA)
 The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)  The
Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)
 The Benami Transactions (Prohibition) Act, 1988
 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act,
1988
 The Foreign Exchange Management Act, 2000, (FEMA)

Arguments or Main discussion related to identified issues

Reporting Obligations
To make the PMLA more effective in terms of detecting and preventing money laundering
and other financial crimes, the 2019 Act  introduces greater and more nuanced reporting
obligations for the reporting entities, who will now have to do a detailed authentication with
regard to transactions that look suspicious or carry a high risk of money laundering or terror
financing.

The 2019 Act inserts Section 12AA, which mandates authentication of the clients
undertaking specified transactions. These include requiring every reporting entity to take
additional steps to examine a client’s ownership and financial position, including sources of
funds of the client, prior to the commencement of each transaction.

The focus of the amendment is to enhance due diligence conducted by the regulators,
requiring reporting entities to take additional steps to record the purpose behind
conducting the specified transaction and the intended nature of the relationship between
the transacting parties. In cases where the client fails to fulfil the conditions as stated in the
provision, the reporting entity shall not allow the specified transaction to be carried out.

To detect dubious transactions, where any specified transaction or series of specified

transactions undertaken by a client are considered suspicious or likely to involve proceeds
of crime, the reporting entities are required to increase the future monitoring of the
business relationship with the client, including greater scrutiny of transactions in such
manner as may be prescribed by law, including Aadhaar-based verification and
authentication. It further mandates that such information obtained while applying the
enhanced due-diligence measures under Section 12AA shall be maintained for a period of
five years from the date of the transaction between a client and the reporting entity – which
further raises concerns regarding data storage and protection, as well as raises concerns
over customer’s right to privacy.

The Government has introduced a new Sub-Section (2) to Section 66, making it mandatory
for the ED to share relevant details with other agencies in order to ensure effective
information sharing in compliance with the Financial Action Task Force (“FATF”)
Recommendations. There is also a suggestion to create an inter-agency task force to combat
money laundering and terror financing. Another suggested change is the inclusion of Section
447 of the Companies Act in the list of scheduled offences under the PMLA, which will allow
the Registrar of Companies to report suitable cases to the ED for a money laundering probe.

Own critical analysis of law/regulation/case laws related to your topic

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

 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 match up with the
speed of growing technologies.

 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. This is mainly because such people don’t know the
seriousness of this crime and are not aware of its harmful after effects.

 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 it in furtherance of their crime.

 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 merchants deal in cash
transactions and avoid custom duties thus offering better prices than the regular merchants.
After liberalization of government, 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.

 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.

Suggestions for identified issues

Section 45 of the PMLA Act provides that no person can be granted bail for any offence
under the Act unless the public prosecutor, appointed by the Government, gets a chance to
oppose his bail. If the public prosecutor does so, the court has to be convinced that the
accused was not guilty of the crime and additionally that they were not likely to commit any
offence while out on bail. The excessive bail conditions imposed by Section 45 had been
previously set aside in November, 2017 by the Supreme Court of India on grounds of
unconstitutionality.

In a move to de-link PMLA proceedings from those in scheduled offences pursued by other
agencies, an amendment has been brought to Section 45(1) which proposes uniform
applicability of bail conditions, instead of only those crimes listed in its schedule that attract
more than three years’ imprisonment. A further limit of INR 1 crore (USD 140,200) involved
in the alleged offence would allow the court to apply bail provisions more leniently to less
serious PMLA cases. Section 45 of the PMLA has been tweaked in order to make it difficult
for launderers to get bail if the offence is cognisable. The norms empower the investigating
agency to arrest without a warrant if the conditions entailed in the section are fulfilled. 

Conclusion
The mechanism to combat money laundering as provided under PMLA is distinct in view of
the peculiar nature of process of money laundering, where proceeds of crime are generated
through certain predicate offences and are converted into ostensible legitimate earning.
Therefore, PMLA has provided a specific procedure for survey, search, freezing and
attachment of proceeds of crime believed to be involved in money laundering. Specialised
investigating and adjudicating authorities deal with attachment and confiscation of proceeds
of crime. Special judicial forum has also been created for trial of offence of money
laundering and the related offences. To combat money laundering in an effective manner
there is a need of viable reporting regime where various financial institutions are required to
furnish timely information to the enforcement agencies. The specific obligations have been
cast upon the reporting entities and new entities have also been added through
amendments in PMLA. There is also requirement to maintain record as prescribed. The
amendment in PMLA and PML Rules have expanded the ambit of reporting requirements,
still there are gaps as certain professionals like lawyers, accountants etc. have not yet been
included.
REFERENCES

Introduction

1 Act 15 of 2003, come into force w.e.f. 1st July 2005. The Act was amended by PMLA
(Amendment) Act, 2005; PMLA (Amendment) 2009, w.e.f. 01.06.2009; and PMLA
(Amendment) Act, 2012 (w.e.f. 15.02.2013). 2 The Prevention of Money Laundering Act,
2002, Pre-amble.

1 Paridhi Saxena, Student, 4th Year, BA.LLB. (H), Hidayatullah National Law University,
Raipur. 2 Interpol General Secretariat Assembly in 1995 http://www.interpol.int/Crime-
areas/Financial-crime/Moneylaundering 3 David A. Chaikin “Investigating Criminal &
Corporate Money Trails”. in The Money Laundering and Cash Transaction Reporting edited
by Brent Fisse, David Fraser and Graeme Coss. North Ryde, NSW: Law Book Co. Pp 257-293.
(1992).

4 FATF-GAFI, Financial Action Task Force on Money Laundering. “Basic Facts about Money
Laundering”, see 5 Michael Levi, Money Laundering and Its Regulation, Annals of the
American Academy of Political and Social Science, Vol. 582, Cross-National Drug Policy (Jul.,
2002), pp. 181-194. 6 http://www.int-comp.org/what-is-money-laundering

7 Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of
Money Laundering: An Application of the Principal-agent Model” The Pakistan Development
Review, Vol. 45, No. 4, Papers and Proceedings PARTS I and II Twenty-second Annual
General Meeting and Conference of the Pakistan Society of Development Economists
Lahore, December 19-22, 2006 (Winter 2006), pp. 1117-1133 available at 8 http://www.fatf-
gafi.org/pages/faq/moneylaundering/

9 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. 10 National Drug
Intelligence Center (August 2011). "National Drug Threat Assessment" (PDF). p. 40. 11Arvind
Giriraj and Prashant Kumar Mishra, Money Laundering: An Insight Into The Modus Operandi
With Case Studies http://www.skoch.in/images/stories/security_paper_knowledge/Arvind
%20Giriraj%20and%20Prashant%20Ku mar%20Mishra%20-%20Money%20Laundering.pdf
(accessed on 14 May 2015). 12 Kumar S. Vijay. (2009) “Controlling Money Laundering in
India –Problems and Perspectives” Mumbai, INDIA pg. 11. 13 "National Money Laundering
Threat Assessment" (PDF). December 2005. p. 33
http://www.dea.gov/pubs/pressrel/011106.pdf (accessed on 14 May 2015)

OVERVIEW
14 “What influence does money laundering have on economic development?” available at
http://www.fatfgafi.org/pages/faq/moneylaundering/ (accessed on 16th May 2015). 15 Chapter-IV
Money Laundering in India: An Offshoot of Drug Trafficking available at
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/18155/10/10_chapter4.pdf (accessed
on 14th May 2015) Pg. 12-13.

6 Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of Money
Laundering: An Application of the Principal-agent Model” The Pakistan Development Review, Vol.
45, No. 4, 22nd Annual General Meeting and Conference of the Pakistan Society of Development
Economists Lahore, December 19-22, 2006, pp. 1117-1133 available at

Also following links have been used for relevant information

 https://shodhganga.inflibnet.ac.in/bitstream/10603/200014/11/11_chapter%204.pdf
 https://indiaforensic.com/certifications/critical-analysis-of-prevention-of-money-laundering-
act/
 https://corporate.cyrilamarchandblogs.com/2019/09/finance-act-2019-prevention-money-
laundering-act-amendment/
 http://kb.icai.org/pdfs/PDFFile5b2780d4bf42a8.02107843.pdf
 http://www.nja.nic.in/4.1.%20Paper-%20Money%20Laundering_1_%20Paridhi
%20Saxena.pdf
 https://www.mondaq.com/india/Government-Public-Sector/847384/PMLA-Amendment-
2019-Plugging-The-Loopholes