March 2024

India’s Financial Integrity

The Prevention of Money Laundering Act (PMLA) of 2002 is a pivotal piece of legislation implemented by the Government of India to combat money laundering and associated financial offenses. Its primary objective is to curb and regulate money laundering activities through the establishment of rigorous regulatory frameworks and effective enforcement mechanisms. Key provisions of the PMLA Act encompass:

Definition of Money Laundering:

The Act defines money laundering as the process of concealing the origins of illegally obtained money, typically by transferring it through legitimate channels or investments, to disguise its illicit nature.

Money laundering is like trying to make dirty money look clean. Imagine someone gets money through illegal activities like selling drugs or stealing. They can’t just walk into a bank and put that money in their account because the bank will ask where it came from. So, they need to hide where the money really came from. Money laundering is the process of taking that “dirty” money* and making it seem like it came from a legitimate source, like a business or an investment. It involves passing the money through different transactions and accounts to make it harder to trace back to its illegal origins. So, in simple terms, money laundering is making illegal money seem legal.

*“Dirty money” refers to money that comes from illegal activities, like selling drugs, smuggling, or stealing. It’s called “dirty” because it’s earned through criminal actions and isn’t supposed to be used or accepted in regular business transactions. When people engage in money laundering, they’re trying to clean or “wash” this dirty money, making it seem like it came from legal sources. This process involves disguising the origin of the money through various transactions and channels, so it can be used without raising suspicion. So, dirty money is essentially money earned through crime, and money laundering is the process of making it look clean.

Money laundering under the PMLA Act in India involves three stages: placement (putting illegal money into the financial system), layering (moving it around through various transactions to hide its origins), and integration (using it for legal purposes to make it seem clean). The aim is to make dirty money look like it came from legal sources.

Stages in Money laundering under the Prevention of Money Laundering Act (PMLA) in India:

1. Placement: In the first stage, known as “placement,” the illegally obtained money is introduced into the legitimate financial system. This often involves converting cash proceeds from criminal activities into bank deposits, money orders, or other financial instruments. Criminals may also use methods like smurfing (breaking down large amounts of cash into smaller, less conspicuous amounts) or structuring (making multiple small deposits to avoid detection) to avoid suspicion.
2. Layering: The second stage, called “layering,” involves separating the illicit funds from their criminal source through a series of complex financial transactions. This may include transferring funds between multiple bank accounts, making international wire transfers, purchasing high-value assets like real estate or luxury goods, or investing in legitimate businesses. The goal of layering is to obscure the trail of the illicit funds and make it difficult for authorities to trace their origin.
3. Integration: In the final stage, known as “integration,” the laundered funds are reintroduced into the economy in a seemingly legitimate manner. This may involve using the laundered money to purchase assets, invest in businesses, or fund other lawful activities. By integrating the illicit funds into legitimate economic activities, money launderers seek to enjoy the proceeds of their crimes without attracting suspicion.
   

Offenses and Penalties:

The PMLA Act identifies various offenses related to money laundering, such as knowingly acquiring, possessing, or using proceeds of crime; projecting proceeds of crime* as untainted property; and assisting others in laundering money. It prescribes severe penalties#, including imprisonment and fines, for individuals and entities found guilty of such offenses.

*”Proceeds of crime” simply means the money or assets that someone makes from committing a crime. For example, if someone steals money from a bank, the money they stole is considered the proceeds of their crime. Similarly, if someone sells illegal drugs and earns money from it, that money is also considered proceeds of crime. Money laundering comes into play when people try to hide or use this money illegally earned. They might try to make it look like the money came from a legal source, so they can use it without getting caught. So, in simple terms, “proceeds of crime” refers to the money someone makes from breaking the law. According to the Prevention of Money Laundering Act (PMLA) 2002, “proceeds of crime” refers to any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offense or the value of any such property. This includes any property intended to be used or which has been used in the commission of a scheduled offense+ and represents the financial gains or benefits derived from such unlawful activities.

+As per the Prevention of Money Laundering Act (PMLA) 2002, “Scheduled Offence” refers to a list of specific criminal offenses that are considered serious and are linked to money laundering activities. Scheduled offences are basically a list of crimes that are considered serious enough to be linked to money laundering. These crimes include things like drug trafficking, human trafficking, terrorism, fraud, bribery, and organized crime. When someone is involved in one of these scheduled offences and they try to hide or disguise the money they made from it, that’s when it becomes money laundering. So, scheduled offences are the crimes that are often connected to money laundering because they generate illegal profits that need to be cleaned up.

#Punishment / Penalties for Money Laundering

The punishment prescribed under the Prevention of Money Laundering Act (PMLA) 2002 varies depending on the specific offense committed. However, some common penalties include:

• Imprisonment: The Act provides for imprisonment for a term which shall not be less than three years but which may extend to seven years. For certain aggravated offenses or repeat offenses, the imprisonment term may be extended up to ten years.
• Fine: In addition to imprisonment, the Act also stipulates fines that may be imposed on individuals found guilty of money laundering. The fine may range from INR 5 lakhs to an amount equivalent to the value of the proceeds of crime involved in the offense.
• Confiscation of Property: The PMLA Act empowers authorities to confiscate properties and assets derived from or involved in money laundering activities. This includes properties directly linked to the offense as well as properties equivalent in value to the proceeds of crime.
• Attachment of Property: Provisional attachment of properties suspected to be involved in money laundering can be carried out during the investigation process.

It’s important to note that the punishment under the PMLA Act can vary depending on the severity of the offense, the amount of money involved, and other factors determined by the courts during legal proceedings.

Regulatory Authorities:

Under the Prevention of Money Laundering Act (PMLA) in India, there are primarily two regulatory authorities:

Enforcement Directorate (ED):

The Act establishes regulatory authorities, including the Enforcement Directorate (ED), tasked with enforcing the provisions of the Act and investigating money laundering cases. These authorities have the power to conduct searches, seize assets, and initiate legal proceedings against offenders.

The Directorate of Enforcement (ED) is responsible for enforcing the provisions of the PMLA Act. Their main role is to investigate cases of money laundering and take appropriate action against individuals or entities involved in such activities. This includes conducting inquiries, gathering evidence, and prosecuting offenders in special courts. The ED has the authority to conduct searches, freeze assets, and confiscate properties derived from money laundering activities.

Financial Intelligence Unit-India (FIU-IND):

The Financial Intelligence Unit-India (FIU-IND) is the central national agency responsible for receiving, processing, analyzing, and disseminating information related to suspicious financial transactions. Their role is to collect and analyze financial intelligence received from reporting entities, such as banks and financial institutions, and disseminate actionable intelligence to law enforcement agencies and other competent authorities. FIU-IND plays a crucial role in detecting and preventing money laundering and terrorist financing activities by facilitating the exchange of information among various stakeholders.

The Directorate of Enforcement investigates cases of money laundering and takes legal action against offenders, while the Financial Intelligence Unit-India collects and analyses information about suspicious financial transactions to help prevent and combat money laundering activities in the country.

Obligations of Reporting Entities:

Under the Prevention of Money Laundering Act (PMLA) in India, reporting entities are businesses or professions that are obligated to report certain financial transactions to the authorities. These reporting entities include:

1. Banks and Financial Institutions: This category includes banks, cooperative banks, non-banking financial companies (NBFCs), and other financial institutions that deal with money transfers, loans, and other financial services.
2. Intermediaries: Intermediaries are entities involved in financial transactions, such as stockbrokers, portfolio managers, and investment advisors, who facilitate transactions on behalf of clients.
3. Designated Non-Financial Businesses and Professions (DNFBPs): DNFBPs are businesses or professions that may be susceptible to money laundering risks. This includes entities such as casinos, real estate agents, jewelers, lawyers, chartered accountants, and company secretaries.

The obligations of reporting entities under the PMLA Act are as follows:

• Customer Due Diligence (CDD): Reporting entities are required to conduct thorough customer due diligence procedures to verify the identity of their customers. This includes obtaining identification documents, verifying the authenticity of the information provided, and assessing the risk associated with the customer’s transactions.
• Record Keeping: Reporting entities must maintain records of transactions, accounts, and customer identification data for a specified period as prescribed by the regulatory authorities. This helps in monitoring and auditing transactions and provides evidence in case of investigations.
• Reporting of Suspicious Transactions: Reporting entities are obligated to report any suspicious transactions or activities to the Financial Intelligence Unit-India (FIU-IND). This includes transactions that are inconsistent with the customer’s known profile, have no apparent economic or lawful purpose, or are unusual in nature.
• Compliance with Regulations: Reporting entities must comply with the guidelines, regulations, and directives issued by the regulatory authorities regarding anti-money laundering (AML) and counter-terrorism financing (CTF) measures. This includes implementing internal policies, procedures, and controls to prevent money laundering activities within their operations.

Reporting entities have to verify the identity of their customers, keep records of transactions, report any suspicious activities to the authorities, and follow the rules and regulations set by the government to prevent money laundering and terrorist financing.

Attachment and Confiscation of Properties:

Attachment and confiscation of properties under the Prevention of Money Laundering Act (PMLA) in India are legal actions taken by enforcement authorities to seize assets or properties that are believed to be proceeds of crime or are involved in money laundering activities. Here’s a simple explanation of the role of enforcement authorities regarding attachment and confiscation:

• Attachment of Properties: Enforcement authorities, such as the Directorate of Enforcement (ED), have the power to provisionally attach properties during the investigation stage if they have reason to believe that the properties are linked to money laundering activities. This means that the authorities can temporarily freeze or hold these properties to prevent them from being transferred, disposed of, or used during the investigation process.
• Confiscation of Properties: If, after the investigation, it is established that the properties are indeed proceeds of crime or were involved in money laundering, the enforcement authorities can initiate confiscation proceedings. This involves permanently seizing the properties and transferring ownership to the government. Confiscation proceedings may take place alongside criminal proceedings against the accused individuals or entities.

The role of enforcement authorities, such as the Directorate of Enforcement, is to gather evidence, conduct investigations, and present a case before the Adjudicating Authority or Special Court to prove that the properties in question are proceeds of crime or were involved in money laundering activities. If the court is satisfied with the evidence presented, it may order the confiscation of the properties, thereby depriving the offenders of the illicit gains derived from their criminal activities.

In summary, enforcement authorities have the responsibility to provisionally attach properties suspected of being linked to money laundering during the investigation stage and to initiate confiscation proceedings against those properties if they are found to be proceeds of crime or involved in money laundering activities.

International Cooperation:

The PMLA Act facilitates cooperation and information exchange between Indian authorities and their counterparts in other countries to combat transnational money laundering and related offenses effectively. It enables the sharing of financial intelligence and mutual legal assistance in investigations and prosecutions.
In simple terms, the PMLA Act allows India to work together with other countries to fight against money laundering and similar crimes that happen across borders. Here’s an example to explain this:

• Let’s say there’s a case of money laundering involving an individual who moves illegal money from India to another country, like the United States. Under the PMLA Act, Indian authorities can cooperate with law enforcement agencies in the United States to share information and evidence related to the case. They can exchange details about bank accounts, transactions, and suspects involved in the illegal activity.
• This cooperation helps both countries to track down criminals, seize their assets, and bring them to justice. By working together, they can effectively tackle transnational crimes like money laundering, which often involve moving money across different countries to hide its illegal origins.

Role of FATF:

The Financial Action Task Force (FATF) plays a crucial role in facilitating cooperation and information exchange between countries to combat transnational money laundering and related offenses effectively.

• FATF is like a global watchdog that sets standards and guidelines for combating money laundering and terrorist financing. It monitors and evaluates countries’ efforts to implement these standards and encourages them to improve their anti-money laundering (AML) and counter-terrorism financing (CTF) measures.
• FATF conducts assessments of countries’ AML/CTF regimes and identifies areas where improvements are needed. It also provides guidance and technical assistance to help countries strengthen their systems for combating financial crimes.
• One of the key roles of FATF in the context of cooperation and information exchange is to promote international cooperation among its member countries. It encourages countries to share information and coordinate their efforts to track down criminals and disrupt illicit financial flows across borders.
• FATF also works closely with international organizations, such as the United Nations (UN), Interpol, and the World Bank, to address global challenges related to money laundering and terrorist financing.

Role of Regulatory authorities like RBI and SEBI

Regulatory authorities like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) play important roles in ensuring compliance with the Prevention of Money Laundering Act (PMLA) in India.

Reserve Bank of India (RBI):

RBI regulates banks and financial institutions in India. Its role in relation to the PMLA Act involves ensuring that banks implement robust anti-money laundering (AML) measures and comply with customer due diligence (CDD) requirements. For example, RBI mandates that banks conduct Know Your Customer (KYC) checks to verify the identity of customers and monitor transactions for suspicious activities. RBI also provides guidance to banks on reporting suspicious transactions to the Financial Intelligence Unit-India (FIU-IND) as required by the PMLA Act.

Securities and Exchange Board of India (SEBI):

SEBI regulates the securities market in India, including stock exchanges, brokers, and listed companies. With respect to the PMLA Act, SEBI ensures that entities under its jurisdiction implement adequate Anti money laundering and Customer Due Diligence (CDD)** measures to prevent money laundering activities. For instance, SEBI mandates that intermediaries, such as stockbrokers and portfolio managers, conduct thorough KYC** checks on their clients before engaging in securities transactions. SEBI also requires reporting entities to maintain records of transactions and report suspicious activities to the relevant authorities in accordance with the PMLA Act.

Anti-Money Laundering (AML) measures:

In India, efforts to combat money laundering are part of the Anti-Money Laundering (AML) measures. These efforts align with the Prevention of Money Laundering Act (PMLA) 2002. Here’s a simple overview:

Identification of Criminal Activities:

AML efforts involve identifying and preventing criminal activities that generate illegal money, such as drug trafficking, corruption, or terrorism.

Customer Verification:

Financial institutions, like banks, conduct Know Your Customer (KYC)** checks to verify the identity of their customers. This helps ensure that money coming into the system is from legitimate sources.

** In India, Know Your Customer (KYC) and Customer Due Diligence (CDD) are important processes implemented to prevent money laundering as part of Anti-Money Laundering (AML) efforts.

Know Your Customer (KYC): KYC is the process of verifying the identity of customers to ensure they are who they claim to be. It helps in assessing and managing risks related to money laundering and other financial crimes.

Customer Due Diligence (CDD) as formal terminology refers to the process of verifying the identity of customers and assessing their risk profile to prevent money laundering and terrorist financing activities. CDD measures are implemented by regulated entities, such as banks, financial institutions, intermediaries, and designated non-financial businesses and professions (DNFBPs), in accordance with the requirements of the Prevention of Money Laundering Act (PMLA) and related regulations issued by regulatory authorities like the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).

In simple, CDD is a broader process that involves assessing the risk associated with a customer and establishing the source of their funds. It includes KYC as one of its components. It involves the following steps:

1. Identification: Regulated entities are required to obtain and verify the identity of their customers using reliable and independent documents, data, or information. This includes collecting details such as name, address, date of birth, and official identification numbers like Aadhaar, PAN, or passport.
2. Verification: Once customer information is collected, regulated entities must verify the authenticity of the provided information through reliable and independent sources. This may involve cross-checking identity documents with government databases or using electronic verification methods.
3. Risk Assessment: Regulated entities are required to assess the risk associated with each customer based on factors such as their business activities, geographic location, transaction patterns, and relationship with politically exposed persons (PEPs). Higher-risk customers may require enhanced due diligence (EDD) measures.
4. Ongoing Monitoring: Regulated entities must continuously monitor their customer relationships and transactions to detect any suspicious activities or changes in risk profile. This includes reviewing account activity, conducting periodic reviews of customer information, and updating risk assessments as necessary.

Monitoring Transactions:

Institutions monitor financial transactions for any suspicious activities (considered as Red Flags) might indicate money laundering. Unusual or large transactions trigger alerts for further investigation.

Reporting Suspicious Transactions:

Institutions are required to report any suspicious transactions to the Financial Intelligence Unit-India (FIU-IND) as per the PMLA Act. FIU-IND analyses these reports to detect potential money laundering activities.

Enforcement and Prosecution:

The PMLA Act empowers enforcement authorities, such as the Directorate of Enforcement (ED), to investigate and prosecute cases of money laundering. This includes seizing assets and imposing penalties on offenders.

International Cooperation:

India collaborates with other countries and international organizations, like the Financial Action Task Force (FATF), to exchange information and coordinate efforts in combating transnational money laundering activities.

Case Reference under PMLA, 2002:

The PMLA Act 2002 and Anti-Money Laundering (AML) measures are vital for keeping India’s financial system safe and secure from the dangers of money laundering and other illegal financial activities.

For example, in the case of the Enforcement Directorate (ED) vs. Hasan Ali Khan (September, 2011), the PMLA Act was instrumental in uncovering a massive money laundering scheme. Hasan Ali Khan, a Pune-based businessman, was found to be involved in laundering billions of rupees through offshore accounts. The authorities used the provisions of the PMLA Act to freeze his assets and launch a thorough investigation into his illicit financial activities.

Through stringent AML measures like customer verification, transaction monitoring, and reporting suspicious activities, the authorities were able to detect and prosecute individuals like Hasan Ali Khan who were attempting to exploit the financial system for their illegal gains.

The case of the Enforcement Directorate (ED) vs. Hasan Ali Khan is one of the most high-profile cases of money laundering in India, involving violations of the Prevention of Money Laundering Act (PMLA). Let’s delve into the details:

Hasan Ali Khan:

Hasan Ali Khan, a wealthy businessman based in Pune, Maharashtra, was accused of being involved in massive money laundering activities. He allegedly amassed billions of rupees through illegal means and maintained undisclosed bank accounts in foreign countries.

Legal Proceedings:

The Enforcement Directorate initiated an investigation into Khan’s financial dealings and uncovered a complex web of transactions involving shell companies, offshore accounts, and illicit funds. It was alleged that Khan had evaded taxes and concealed his income through various fraudulent methods.

The ED invoked the provisions of the PMLA Act to freeze Khan’s assets and conduct a thorough probe into his financial affairs. The case gained significant media attention due to the scale of money involved and the high-profile nature of the accused.

Over the course of the investigation, several incriminating pieces of evidence were unearthed, including documents, bank records, and testimonies from witnesses. Khan was arrested multiple times during the investigation and faced charges of money laundering, tax evasion, and other financial offenses.

The Hasan Ali Khan case served as a wake-up call for Indian authorities to strengthen their efforts in combating money laundering and enforcing the provisions of the PMLA Act. It highlighted the need for stricter regulations and enhanced vigilance to prevent individuals from exploiting the financial system for illicit gains.

Ultimately, the case underscored the importance of effective enforcement of anti-money laundering laws to safeguard the integrity of India’s financial system and protect it from the harmful effects of financial crimes.

Conclusion:

The PMLA Act 2002 and AML measures are essential safeguards that protect India’s financial integrity. These underscore the commitment of the Indian government to combat financial crimes and uphold the rule of law.

Imagine the financial system is like a big King’s fort, and money launderers are like mean thieves trying to break in and steal money. The PMLA Act and AML measures are like the guards and gates protecting the fort. It sets rules and tools for catching these thieves and stopping them from using the financial system for their illegal schemes.

By enforcing strict regulations and prosecuting offenders, these measures help deter criminals from using the financial system for illicit purposes, thereby ensuring a fair and transparent financial environment for all citizens.

©CS SHIKHA PUBBI
Practicing Company Secretary
Shikha Pubbi & Associates (SPCS)

Disclaimer: While the information presented in this article is based on factual sources, the interpretation and opinions expressed are solely those of the author.

Sources:

• News Papers – The Economic Times, The Hindu, Times of India, and Hindustan Times
• Legal Databases – Manupatra, SCC Online, and Westlaw India
• Financial Regulators’ Websites – Websites of regulatory authorities like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Financial Intelligence Unit-India (FIU-IND) for guidelines, circulars, and notifications related to anti-money laundering measures and compliance requirements