Punishment for Money laundering in India

What is money laundering?

In layman's language, it means the conversion of black money into white money i.e., converting illegally earned money into fairly earned money. Many activities can produce a huge amount of illegally earned money such as smuggling, human trafficking, prostitution, animal skin trading, illegal arms, bribery, etc. The criminals earning from these activities need to convert this money into honest earned money.

To curb this issue, the Prevention of Money Laundering Act of 2002 (hereinafter referred to as PMLA), was legislated. The definition of money laundering is given under Section 3 of the PMLA. It is an act in which a person, whether directly or indirectly, willingly or unwillingly, participates in or helps another person carry out an action involving the use, concealment, or projection of the proceeds of crime as untainted property.

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How does money laundering happen?

Placement:The first stage of money laundering involves placing money in the legitimate financial system, such as through loan repayment, gambling, dummy invoices, or blending funds. The criminal disguises the source of the black money and prevents law enforcement agencies from attracting the illegally earned money, thereby preventing the detection of the criminal.

Layering: Layering is a complex web transaction technique used to move money into the financial system, ensuring it remains undetected by government and law authorities. This method involves multiple transactions, including offshore techniques, to conceal the source and ownership of funds. Examples include real estate, gold purchasing, stock investments, and shell companies. The entire process is a sham and aimed at bluffing the law.

Integration:Laundering involves the absorption of black money into the economy through loans, dividends, and investments, a process known as integration. The money then flows back to the criminal through investments, converting it into legitimate assets.

Anti-money laundering laws and regulations in India

To forbid money laundering activities The Prevention of Money Laundering Act, 2002 (PMLA), along with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, were enacted.

Also, a Financial action task force was established to prohibit money laundering globally to which India is a signatory. Some other laws dealing with money laundering are The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, The Benami Transactions (Prohibition) Act, 1988, The Indian Penal Code, 1860 and the Code of Criminal Procedure, 1973.

Financial action task force

It is an intergovernmental body that acts as a watchdog to terrorist financing and money laundering. It has set certain rules and standards to prevent ill-gotten games. It has around 200 countries as its members. The body was set up at the G-7 Summit held in Paris in the year 1989. India became the 34th member of the FATF.

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Prevention of money laundering (maintenance of records) rules, 2005

These rules were legislated by the Central Government in consultation with the Reserve Bank of India. These rules aim to preserve transaction records, provide information, and verify client identities for banking companies, financial institutions, and mediators.

Prevention of Money Laundering Act, 2002 (PMLA)

In 1998, a bill for the prevention of money laundering was introduced in the Lok Sabha passed in 2002, and finally came into force in 2005. Since then, there have been many amendments to the Act. The Acts establish statutory bodies and special courts for money laundering offenses and implement PMLA provisions and rules.

Overview of the prevention of money laundering act, 2002 (PMLA)

The Money Laundering Act (PMLA) in India aims to combat money laundering by restricting and controlling the offense, confiscating and seizing property from illegal money, and regulating related issues. The Act defines money laundering as converting criminal proceeds into white money and mandates banking companies, financial institutions, and intermediaries to maintain client records and transaction details. It also allows the Financial Intelligence Unit-India (FIU-IND) to impose fines for non-compliance. The Enforcement Directorate (ED) is empowered to investigate money laundering matters and has the power to temporarily attach, confirm attachment, and confiscate property involved. The Act also establishes special courts in several states and Union Territories for the trial of money laundering offenses. The PMLA also includes provisions for bilateral agreements to curb money laundering and reciprocal agreements for persons convicted of the offenses. The Central Government established a Financial Intelligence Unit in 2004 to receive cash and suspicious transaction reports.

Enforcement Directorate (ED) and financial intelligence unit-India (FIU-IND)

In 1956, the Enforcement Directorate was established in New Delhi and is responsible for the foundation of the Foreign Exchange Management Act, of 1999 (FEMA) and certain conditions of PMLA. The Department of Enforcement (ED) investigates money laundering cases and prosecutes under PMLA. It operates under the Department of Revenue, while the Department of Economic Affairs handles policy under PMLA. ED has two Special Directors in Mumbai.

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Appellate tribunal

The PMLA establishes an appellate tribunal under Section 25 for State and Union Territories, with a Chairperson and two other members, to hear appeals against adjudicating authorities and other authorities established under the Act.

Punishment under the act

Imprisonment: The wrongdoer can face imprisonment for not less than three years which may expand up to seven years. In some specific crime cases, it may even expand up to ten years.

Monetary Penalty: A penalty of Rs 5 lakh is also imposed on the wrongdoer in addition to imprisonment. The penalty amount varies on the severity of the offense.

Non-Bailable Offense: Money laundering is a non-bailable offense under the PMLA, meaning individuals arrested for it are not entitled to bail and may need to apply for bail in court.

Arrest without warrant: Under the PMLA, arrests can be made without a warrant, enabling law enforcement to swiftly address the situation and prevent evidence destruction or the accused's flight.

Disqualifications from Elections: The PMLA prohibits people involved in money laundering from holding public office for eight years, ensuring they cannot mishandle their influence and contest elections.

Effects of money laundering

Money laundering is a significant threat to a country's financial stability and political stability. It manages to corrupt financial institutions and facilitate corruption, crime, and illegal activities. It jeopardizes a country's development and increases the risk of macroeconomic instability. The potential victims of money laundering are more than any other crime, and it poses significant social costs and risks to the entire world community.

How to stop money laundering in India

Know your customer (KYC): Know Your Customer (KYC) is a crucial process for financial institutions, to establish and verify identity, assess risk factors, and monitor suspicious activities. In India, RBI has enacted KYC guidelines, and FIs should obtain additional KYC information periodically based on account conduct or risk categorization to serve their customers better.

Customer Due Diligence: Customer Due Diligence (CDD) is a crucial KYC process that collects and processes customer information to identify terrorist financing risks. It helps assess new customers, politically exposed persons, government records, watchlists, and sanctions screening. CDD detects money laundering techniques like layering and structuring, preventing smurfing and evading reporting limits.

Customer Transaction Screening: Banks and financial institutions are crucial in managing money transfers, as they mediate thousands of daily transactions. Even minor crimes can lead to severe consequences, fines, and loss of credibility. Screening of all customer deposits is essential.

Suspicious Activity Reporting: Bank records are frequently inspected by law enforcement for unusual behavior, aiding in the identification of money laundering perpetrators. A reliable audit trail is crucial, and compliance experts promptly address issues.

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Case laws

Vijay Madanlal Choudhary vs. Union of India (2022)

Facts of the case

The Apex Court addressed petitions challenging the constitutional validity of the Prevention of Money Laundering Act, 2002 the investigation procedure, and the High Court's decision on amended Section 45 of the Act.

Issues of the case

• Whether the PMLA's constitutional validity and arrest provisions are under scrutiny.

• Whether the 2002 Act's provisions, including search and seizure, arrest, ED manual, appellate tribunal, and bail, are under consideration for validity.

• Whether they contradict CrPC provisions.

Observation and judgment

The Apex Court ruled that the provisions of the PMLA, which differ from the CrPC, are not unconstitutional. The court emphasized that the differences are necessary to achieve the purpose of the PMLA and are in harmony with the Constitution. The court also clarified that projecting proceeds of crime as untainted property is a separate act and does not require a predicate offense. The court also interpreted Section 2(1)(na) as a contextual expression, including an inquiry procedure followed by the ED, Adjudicating Authority, and Special Court. The court also ruled that Section 3 PMLA is not limited to the projection of property as untainted and that ED officials are not police officials.

Murali Krishna Chakrala Versus Deputy Director (2022)

Facts of the case

Murali Krishna Chakrala, a Chartered Accountant, was charged under PMLA for allegedly issuing a 15CB form to his client for import payments. Five individuals were investigated for allegedly opening fake bank accounts, transferring large amounts, and transferring them abroad. The ED found 15CB forms in one of the accused's names, but the CA argued he couldn't be held guilty.

Issues of the case

Can a Chartered Accountant be held liable for the issuance of 15CB?

Observation and judgment

The Madras High Court acquitted the petitioner and ruled that a CA cannot be prosecuted under PMLA for the sincerity of a client's Form 15 CB document.

Why do you need a lawyer?

Advocates are crucial in money laundering cases for several reasons. They provide legal expertise, help clients understand their rights, prepare and present a strong defense, navigate complex legal procedures, and assure that the individual's rights are upheld throughout the legal process. Money laundering cases often involve complicated financial transactions and regulatory frameworks, making legal representation necessary to ensure a fair trial and protect the accused person's interests.

Advocate Chikirsha Mohanty

Greater Kailash - 1, Delhi
5 years

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