Table of Contents
What is Money Laundering?
Out of the various kinds of financial crimes, money laundering is most common. Money laundering is the practice of concealing the ownership of money via the use of illicit means by putting in illegal funds(or black money) into a series of deals and transfers, which results in letting out clean or legal income back into the hands of the launderer. When an offender, gains excessive profits out of illegal activity, to hide the profits, they disguise the source or change the form of the profit so that they are less likely to attract attention, this allows them to benefit without jeopardizing their source. Money laundering is used all around the world to conceal unlawful activities such as drug/arms trafficking, terror funding, and extortion etc. Such activities destroy the social fabric of the nation and weaken the democratic institution. Crime funding usually finds its origin in money -laundering activities and thus to reduce criminal activity, it is necessary to implement anti-money laundering schemes in every nation.
Process of Money Laundering
There are three Stages of Money-laundering:
i. Placement or the Initial Stage: In this stage the launderer puts in the illegal profits into the financial system, as the profits are excessive in nature, they are put in small and divided forms by using other accounts at different locations, cheques, bonds, and other monetary instruments.
ii. Layering Stage or the Second Stage: As now already the money has entered the financial system, the launderer tries to disassociate the money from the source, thus they perform a series of conversions or moves. The money may be channeled through the purchase and sale of financial items, or the launderer could simply transfer the cash through a number of accounts at different banks throughout the world or they may disguise the transfers as payments of goods and services to appear legitimate. This use of widely dispersed accounts for laundering is particularly common in nations that refuse to cooperate with anti-money laundering investigations like North Korea and Iran.
iii. Integration Stage or the Final Stage: In this stage, the money is reintroduced into the economy to seem to be from legitimate sources. This assists the criminal in cleaning up the illicit money, investing it, and benefiting from it. As a result, by the integration stage, distinguishing between lawful and illegitimate is increasingly difficult. The ‘dirty’ money eventually re-enters the mainstream financial system as a lawful transaction after passing through various laundering processes. This money is commonly shown as a company investment, acquisition, or sale of an asset acquired during the layering stage (second stage).This prevents the launderers from getting caught by the legal system.
History of Anti-Money Laundering Regimes in the World
There were several regimes undertaken by countries around the world, but the first step was taken by the USA and then other countries followed. When money laundering and other economic issues got recognition, there was a need for global cooperation and thus many United Nations conventions focused on anti-money laundering legislation. Some of them are as follows:
Bank Secrecy Act,1970 of USA:First step taken by a country against Money laundering was by the United States of America under the Bank Secrecy Act of 1970,which aided in the prevention and detection of laundering activities, this act was based on training the employees against such activities, emphasizing on the due diligence of a customer, focusing on appointing a compliance officer for Anti-money laundering (AML) program and implementing effective internal checks and regulations to keep a track of the transactions and suspicious client activity to detect money-laundering and other related crimes.
United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988  : became the first international convention to tackle the problem of illicit proceeds and to urge states to make money laundering a criminal offence.
Financial Action Task Force,1989  : As money-laundering activities became widespread and prevalent, there was a need for a worldwide watchdog and an Anti-Money Laundering (AML) institution, thus in 1989 FATF or the Financial Action Task Force was established by the G-7 in Paris. This institution set certain standards and developed policies to be followed by its member countries to combat money laundering. FATF generated lists to keep a track of the nation which launders money as well as funds terrorists, these were as follows-i) Grey list – which consists of countries, which are considered as a “ safe haven” for money-laundering and terror financing activities to which FATF issues a warning to prevent the country from entering into the blacklist. The countries who remain on the grey list are more likely to get boycotted by other nations, they may face difficulty getting sanctions or loans from institutions like International Monetary Fund or the World Bank. ii)Black list -this list consists of countries that are non-cooperative and do not follow the international regulations of AML.
United Nations Convention Against Transnational Organised Crime,2000(UNTOC) : Adopted by the General Assembly on 15 November 2000,this convention is a significant step in the fight against transnational organized crime. It focuses on preventing participation in an organized criminal group, money laundering associated with corruption, and obstruction of justice. States that ratify this document agree to a range of measures against anti-transnational organized crime such as legal aid, the implementation of new and broad frameworks for extradition, law enforcement cooperation to assist national authorities to take action. India ratified this UN convention in 2011 and agreed to its standards stated in Article 7 of UNTOC- which made it necessary for its signatories to have an administrative, legal, and financial regulatory body dedicated to Anti-money laundering which keeps up with the domestic as well as international standards. States should establish a financial intelligence unit at the national level which implements instruments to collect, analyze the information regarding potential money laundering and maintains sub regional, regional, national as well as global cooperation to combat Money-laundering.
Not only them but many other international institutions like the European Union,the Council of Europe, and Asia /Pacific Group on Money Laundering (APG),Global Programme against Money Laundering, Proceeds of Crime and the Financing of Terrorism (GPML)are working for Anti-money laundering legislation.
Money-Laundering in the Indian Context
According to the Anti Money Laundering (AML) Basel Index  As per the Base Anti Money Laundering Index, India has a score of 5.58. In 2013 itself, the Financial Action Task Force had recorded at least 1,561 cases of money laundering in India. Out of 130 countries, India was ranked 70th in the year 2020.
India is listed by the US as major money laundering jurisdiction. It also states that the low quality of the Anti-money laundering framework, as well as exceedingly high levels of corruption and bribery, are major shortcomings. However, to reduce such problems and maximize access to financial markets and investments, the government will be required to implement a coordinated and holistic strategy across the nation. History of Anti-money laundering laws in India-
The Benami Transactions (Prohibition) Act, 1988  This act defines ‘Benami’ as ‘any transaction in which property is transferred to one person for a consideration paid or provided by another person, it allows the Benami transactions to be seized by the competent authority without paying any due amount or compensation to it. Thus prohibiting Benami transactions.
Narcotic Drugs and Psychotropic Substances Act of 1985  It does not specifically address money laundering operations, but it highlights that the trafficking of narcotic drugs generates an excessive amount of hard cash and this money that gets involved in drug trafficking is then deployed to legalize it or launder it. There were several other laws as well which kept a check on Money-laundering in India before 2002 –
- The Income Tax Act, 1961
- The Indian Penal Code
- Code of Criminal Procedure, 1973
- Foreign Exchange Management Act,1999
- The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
Though these acts kept a check on Money-laundering in India, there was no such act that specifically dealt with money laundering in India. According to the United Nations General Assembly ‘s special session of 1998, it called for the member-states to have Anti-money laundering legislation and programmes and implement the rules given in the UN Declaration.
Prevention of Money-laundering Act,2002 (PMLA)  In 2002,according to the guidelines of FATF and other international organisations, an act was formed – the PMLA or the Prevention of Money-laundering Act, which was enacted in 2003 and commenced in 2005.According to The Section 3 Prevention of Money-laundering Act,2002,Money laundering is as follows-
“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is 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 the offence of money laundering.”
Objectives of PMLA:
It had three objectives:
1.Monitoring and regulating money laundering.
2.To acquire and seize property gained via money laundering;
3.To deal with any other challenges related to money laundering in India.
Provisions under PMLA:
For the prevention of Money-laundering, special courts have been formed in several states and union territories along with the setting up of adjudicating authority and appellate tribunals as per Section 6 and Section 25 of the PML act. These authorities have the power of investigation, prosecution as well as confiscation of the property or the laundered money.
Establishment of Financial Intelligence Unit, India (FIU-IND): The Prevention of Money-laundering Act,2002 required a national institution to be set up for regulating Money-laundering and thus in 2004 Financial Intelligence Unit, India (FIU-IND) was established which is an independent body reporting directly to the Finance Minister and the Economic Intelligence Council (EIC).It is considered a significant institution in charge of obtaining, analyzing, reviewing, and disseminating information about suspicious financial transactions. It receives Cash Transaction reports (CTRs),Non-Profit Organisation Transaction Report (NTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on PA purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities given in clause (s) and clause (w) of Section 2 (1), establishes a database on them and studies the pattern and trends of Money-laundering cases in the country.
PML act is considered as an exhaustive piece of legislation, the definition of money laundering, not only includes illicit funds but also has a clause of “proceeds of crime” which includes property and assets within its ambit. According to this clause, it allows the PML act to include all assets in and out of India but only if they originate from the Scheduled offences stated in the PML act.
Offences under Prevention of Money-laundering Act, 2002 (PMLA)
PML act defines an ‘Offence’ as given in CrPC, it punishes the offence of money-laundering by imprisonment, ranging from three to ten years as given under Section 468 of CrPC. The offence of ‘money laundering,’ according to Section 3 of the PML Act, involves (a) direct or indirect engagement in specified criminal acts, i.e. the offences enumerated in Part A, Part B, and Part C of the PMLA schedule (“Scheduled Offences”). PML act does not provide for a limitation period. The PML act consists of certain prerequisites to determine whether the offence of money laundering has been committed. Scheduled offences included clauses from six different clauses -i) Indian Penal Code,1860,ii) The Arms Act,1959 iii) Prevention of Corruption Act 1988 (PCA), iv) The Wildlife (Protection) Act 1972, v) Immoral Traffic (Prevention) Act 1956 and vi)The Narcotic Drugs and Psychotropic Substance Act 1985 (the NDPS Act).
Amendments to the PMLA,2002
PML Act was amended in 2005,2009 and 2012,the 2012 bill was given President’s assent, the 2012 amendment expanded the purview of the definition of Money laundering by including activities such as concealment, acquisition, possession and use of proceeds of crime as criminal activities.
Finance Act 2015: This act allows the forfeiture or the confiscation of such assets in India. Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which refers to a deliberate attempt to evade any tax, penalty, or interest, in respect of those declared assets were added to the list of Scheduled Offences under PMLA.
Finance Act 2018: This act amended and widened the definition of “proceeds of crime” by adding that the assets could also be confiscated outside India, it also made several additions to the list of offences as stated in the PMLA,2002 by including corporate fraud, an offence under Companies Act,2013;bribing a public servant, an offence under Prevention of Corruption Act.
Finance Act 2019-This stated that not only the scheduled offences but also the offences but also any other criminal activity that is in proximity with the scheduled offences could be obtained or confiscated. Thereby broadening the scope of Section 2 of PMLA (proceeds of crime).
Punishments under Prevention of Money Laundering Act,2002
The offences under the PMLA are to be treated as cognizable and non-bailable. The specific provisions in relation thereto occur under section 45 of the PMLA. Money laundering is penalized by imprisonment for a term ranging from three to seven years, as well as a fine. If the proceeds of crime are related to the Narcotic Drugs and Psychotropic Substances Act(NDPS), the maximum sentence of imprisonment may be extended to ten years. Plea bargaining is permitted under the CrPC but not in the cases where imprisonment of more than 7 years, life imprisonment or death penalty is decided upon. Fines could range from Rs.10,000 to Rs.1,00,000.
1.Nikesh Tarachand case
In this case, the petitioner Nikesh had challenged the constitutional validity of Section 45(1) of the Prevention of Money-laundering Act,2002.This section dealt with the grant of bail which was dependent on 2 conditions – i)the Public Prosecutor has been provided with an opportunity to object to the bail application, and ii) the Court is satisfied that substantial grounds exist to believe that the individual is not guilty of the offence and is not likely to commit any offence while on bail. Bail pre-conditions existed when a person was accused of a crime punishable by imprisonment for three years or more under Part A of the Schedule under PMLA 2002.The petitioner stated that this clause of the Section was unconstitutional as it was against Articles 14 and 21 of the Indian Constitution and this was upheld by the Supreme court which struck down these preconditions. The reason stated by the court was that the bail terms related to independent and distinct offences under Part A of the Schedule and not to an offence under the PMLA. According to Section 45(1), the Court does not check whether the offence of money laundering is committed, it checks whether the individual is guilty of a “scheduled crime” under other laws.It was also determined that the bail pre-condition under Section 45(1)(ii) violates the presumption of innocence by requiring the Court to assess whether the accused is “not guilty” of the offence. Thus, these conditions were done away with.
2.Rama Raju,S/o B.Ramalinga Raju Vs Union of India
This case was about the burden of proof on the accused, where the accused is considered guilty until proven innocent which is opposed to the Indian principle of considering the accused innocent until proven guilty. This case stated that the person accused of a crime as stated in Section 3 of PMLA,2002 should prove in the court of law that he has the requisite means of income, earnings, or assets from which or through which he acquired the property alleged to be ‘proceeds of crime’. Only by making such proof would the accused be able to surmount the presumption that the claimed funds were obtained illegally.
Though there are several ongoing cases involving money laundering and other related economic crimes, the following are some of the most significant ones:
The Nirav Modi case: Nirav Modi is a fugitive businessman, the owner of the Nirav Modi chain of diamond jewelry. He has been filed under the charge of money laundering and fraud case of Punjab National Bank of more than 2 billion dollars. He has been charged by Interpol for cheating, breach of trust, criminal conspiracy, money laundering and other such charges. The three stages of money-laundering were prevalent in this case -First, the placement or the first stage, where the illegal funds are put into the financial system using fake accounts at other locations and second, the fraudulent money is tried to be disguised by channeling the money through a number of accounts at different banks throughout the world or by disguising the transfers as payments of goods and services to appear legitimate. In this case, fake Letters of Understanding(LoUs) were issued by Brady house in Mumbai for the import of pearls to the overseas Indian banks within a set deadline of 90 days, the overseas Indian banks did not share any document or information related to the information given by the Nirav Modi firms at the time of availing for credit from them with the Punjab National Bank and they neglected the RBI guidelines as well. Due to such misuse of the SWIFT network by the bank employees, the passwords and other such messages were never recorded which kept the PNB under dark and thus Nirav Modi was able to get his first fraudulent guarantee from PNB in 2011 and managed to get 1,212 more such guarantees in the next 6 years. Third, the Staging stage, where the illicit money is shown as a lawful transaction was present in this case where the funds were going into the account of Nirav Modi but it was shown as LoU to the overseas branches of the Indian banks.The scam got exposed when PNB filed an FIR with the CBI about the fraudulent LoUs and thus the scam got exposed as the bank token of the dummy companies that were used to transfer the illicit funds were recovered. Some of the properties of Nirav Modi were ceased and several employees of the bank who connived Under the case of Government of India vs Nirav Deepak Modi at the Westminster’s court, the extradition of Nirav was requested by the Indian government. His extradition to India was approved on 16th April2021,since the extradition process takes months to process, until then Nirav Modi would be imprisoned in the United Kingdom.
Anil Deshmukh case: An allegation was made by the ex-Police commissioner of Mumbai – Parambir Singh through a letter sent to the Chief Minister of Maharashtra Uddhav Thackerey against Anil Deshmukh, a senior leader of National Congress Party (NCP) accusing him of collecting protection money worth rupees 100 crores from the bar owners in Mumbai and routing bribes to his educational institutions in Nagpur. Due to these allegations, an FIR was lodged by the CBI against Anil Deshmukh and this case was registered under the Prevention of Money-laundering Act (PMLA).Deshmukh has been alleged by the Enforcement Directorate of illegal obtainment of nearly 5 crores from the bar owners, the illicit money collected was concealed as a “donation” and sent to paper companies which were utilized for the purpose of infusing the illicit funds. Currently, Anil Deshmukh is detained, nearly six months after the case was registered under PMLA, though some suspect that this might be a politically motivated arrest but the proceedings are still on. The ED will have to file a prosecution complaint against Deshmukh before January 1,2022, failing which the former minister will be given bail by default.
Hereby, we get to understand that the laws enacted in India in the early years of the twenty-first century were impotent and did not have a proper mechanism for controlling and preventing money laundering activities in India, and thus there was a need to make changes in the laws enacted to fit the needs of the society and to do away with loopholes in the laws. Several amendments have been made to the Prevention of Money-laundering Act,2002 which helped the Act to be more clear, plausible, and stringent. Even when an institution and an Act is established in the country to prohibit such actions, these laws must be updated and strengthened as the crime by each passing day increases and thus even the laws must be refined, stringent and effective, in order to meet their purpose.
In India, cases of money laundering remain unsolved, as in the case of Vijaya Mallya, an economic offender who is accused of extradition and money laundering and misappropriation. He continues to remain subject to legal penalty for his crime, which is a challenging process owing to the non-cooperation of other countries. If the cooperation and coordination amongst the countries increase, it would lead to quicker justice for the people and stricter punishment for the offender.
This article is authored by Aditi Shrivastava, student at Nirma University, Ahmedabad
What is money laundering?
Money laundering is the process of converting illegally earned money into legitimate money. It is a way to hide the illegal money. It is also known as hawala transaction.
What are the stages of money laundering?
There are three stages of money laundering- layering, placement and integration.
What are the basic money laundering offences?
There are five basic offences- tax evasion, theft, fraud, bribery, terrorist financing.
What is the basic law enacted in India to prevent money laundering?
Prevention of Money Laundering Act, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money-laundering and to provide for confiscation of property derived from money-laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005.
Is India amongst the high-risk countries of money laundering?
Yes, India falls within the category of high-risk countries.
Can a person be imprisoned for money laundering?
Yes, there are provisions which enables imprisonment up to 14 years.