Money laundering: Act & Judgement 2019

Money laundering is a process that criminals use to hide the illegal source of their income. By passing money through complex transfers and transactions, or through a series of businesses, the money is “cleaned” of its illegitimate origin and made to appear as legitimate business profits. The origin of the term “money laundering” comes from infamous gangster Al Capone’s practice of using a chain of laundromats he owned to launder huge amounts of cash.

Why Money Laundering Happens

A major business problem of large, organized criminal enterprises – such as drug smuggling operations – is that they end up with huge amounts of cash that they need to conceal to avoid attracting investigations by legal authorities.
The recipients of such large amounts of cash also do not want to have to acknowledge it as income, thereby incurring massive income tax liabilities.
To deal with the problem of having millions of dollars in cash obtained from illegal activities, criminal enterprises create ways of “laundering” the money to obscure the illegal nature of how it is obtained.
In short, money laundering aims to disguise money made illegally by working it into a legitimate financial system, such as a bank or business.

How Money Laundering Works

Money laundering typically occurs in three phases:

Initial entry or placement is the initial movement of an amount of money earned from criminal activity into some legitimate financial network or institution.
Layering is the continuing transfer of the money through multiple transactions, forms, investments, or enterprises, to make it virtually impossible to trace the money back to its illegal origin.
Final integration is when the money is freely used legally without the necessity to conceal it any further.

Methods used for Money Laundering: Hawala, bulk cash smuggling, fictional loans, cash-intensive businesses, round-tripping, trade-based laundering, Shell companies and trusts, real estate, gambling, and fake invoicing are some common methods of money laundering.

Banks and Money Laundering

Major financial institutions, such as banks, are frequently used for money laundering. All that is necessary is for the bank to be a little lax in its reporting procedures.
The lack of regulation enforcement enables criminals to deposit large sums of cash without triggering the deposits being reported to central bank authorities or government regulatory agencies.
In the recent past, prestigious financial institutions, such as Danske Bank and HSBC, have been found guilty of assisting or enabling money laundering by failing to properly report large deposits of cash.

Financial Markets

The financial markets offer criminals a variety of avenues for converting “dirty” money to “clean” money. One of the most basic and widely used schemes is to utilize a foreign investor to get illegally obtained cash into the legitimate financial system.

Shell Companies

Shell companies are businesses that have large amounts of financing but are not directly involved in any specific business enterprise selling goods or services. The finances are used to invest in other businesses – typically, other legitimate businesses owned by the criminal organization.
The influx of cash from the foreign investor appears as an ordinary foreign investment, as the criminals are careful to avoid exposure to the fact that they have any connection with the foreign investor.
Once the money has been deposited with the shell company, the criminals can access it by having the shell company invest in another business the criminals own, perhaps by making a loan of the money to the other company.

HAWALA: (INDIA)

In hawala, funds are moved between individual “hawaladars” which collect funds at one end of the operation and other hawaladars that distribute the funds at the other end.

Cyber Crime

Cybercrimes such as identity theft, illegal access to e-mail, and credit card fraud are coming together with money laundering and terrorist activities.

Insurance Sector

If a money launderer can move funds into an insurance product and receive a payment made by an insurance company, then he or she will have made the funds appear legitimate.

Impact of Money Laundering

Once illicitly earned money enters a particular economy’s financial system, it can destabilize the economic system and indirectly promote negative social and legal ills such as tax evasion, corruption, drug trading, and terrorism.

Economic Impact Money laundering goes together with tax evasion and duty evasion (which is the non-payment of import and export duties by smuggling goods in and out of a nation).
Such activities deprive public service departments of important revenue sources.
Legal Impact Money laundering and criminal activities form a vicious cycle. The quest to legalize illicit earnings leads to money laundering, which in turn provides the required financial boost for these illegal activities to survive. There generally exists a direct relation between countries having weak anti-money laundering regulations and prevalence of such illegal and criminal activities.
Social Impact Criminal’s launder money to circulate their illicit earnings, which then provides the firepower to grow the illegal business. The social impact of strong illegal businesses includes increased drug addiction, rampant corruption, and criminals empowered with economic powers.

International bodies dealing with Money Laundering

International Money-Laundering Information Network (IMoLIN): UN-sponsored research centre that was created to assist law enforcement agencies throughout the world in the identification and pursuit of money laundering operations.
Financial Action Task Force on Money Laundering (FATF) was created as a G-7 initiative to develop more effective financial standards and anti-laundering legislation. Because money laundering is a key part of terrorist organizations that are usually funded through illegal enterprises, the FATF was also charged with directly fighting to cut off illegal cash flows to terrorists and terrorist groups.
United Nations Office of Drugs and Crime (UNODC): UNODC’s organized crime and anti-money laundering unit conducts global program against money laundering.
INTERPOL: The primary objective of the anti-money laundering unit of INTERPOL is to increase the speed of information exchange among the financial crime investigators with the aid of global financial crime units as well as financial intelligence units.
These organizations also share information on money laundering activities with global and regional financial institutions such as the International Monetary Fund, World Bank, European Central Bank, and the Asian Development Bank to combat money laundering and terrorist financing threats.
Financial intelligence units & Egmont group: FIUs provide continuous exchange of information between financial services institutions, jurisdictions, and other prosecuting authorities. Most FIUs world over are now a part of Egmont Group, which is an informal international gathering of FIUs, wherein member FIUs regularly meet to find ways to increase internal cooperation and areas of information exchange, training and the expertise sharing.

Prevention of Money Laundering Act, 2002 (PMLA)

Prevention of Money Laundering Act, 2002 was enacted to fight against the criminal offence of legalising the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds.

Objectives

Prevent money-laundering.
Combat/prevent channelising of money into illegal activities and economic crimes.
Provide for the confiscation of property derived from, or involved/used in, money-laundering.
Provide for matters connected and incidental to the acts of money laundering.

Offences

Under PMLA, the commission of any offence, as mentioned in Part A and Part C of the Schedule of PMLA will attract the provisions of PMLA. Some Acts and offences, which may attract PMLA, are enumerated below:

Part A enlists offences under various acts such as: Indian Penal Code, Narcotics Drugs and Psychotropic Substances Act, Prevention of Corruption Act, Antiquities and Art Treasures Act, Copyright Act, Trademark Act, Wildlife Protection Act, and Information Technology Act.
Part B specifies offences that are Part A offences, but the value involved in such offences is Rs 1 crore or more.
Part C deals with trans-border crimes and reflects the dedication to tackle money laundering across global boundaries.

Authorities entrusted for investigation

Enforcement Directorate in Department of Revenue, Ministry of Finance, Government of India is responsible for investigating the offences of money laundering under the PMLA.
Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the finance minister. FIU-IND is the central national agency responsible for receiving, processing, analysing, and disseminating the information relating to suspect financial transactions. It is also responsible for:
Coordinating and strengthening the efforts of national and international intelligence,Investigations for pursuing the global efforts against money laundering and related crimes.
The scheduled offences are separately investigated by agencies mentioned under respective acts, for example, the local police, CBI, customs departments, SEBI, or any other investigative agency.

Actions against persons involved in money laundering

Seizure/freezing of property, records and attachment of property obtained with the proceeds of crime.
Any person who commits the offence of money laundering shall be punishable with –
Rigorous imprisonment for a minimum term of three years and this may extend up to seven years.
Fine (without any limit).

Amendments to PMLA Act 2019

Amidst the growing number of financial crimes and high-profile cases, the 2019 Act attempts to make the existing provisions stricter and better armoured to detect suspicious transactions. Additionally, the Act, along with the other amendments, has a greater aim of targeting money laundering and terrorist financing. The 2019 Act attempts to remove the ambiguity in the existing provisions by amending eight clauses of the PMLA.

Key Features

Proceeds of crime: Expanded ambit of “proceeds of crime.” The scope now includes properties and assets created, derived, or obtained through any criminal activity related to the scheduled offence, even if it is not under the PMLA.
The 2019 Act clarifies that it would be incorrect to interpret money laundering as a one-time, instantaneous offence that ceases with the concealment, possession, or acquisition or use or projection of the proceeds of crime as untainted property or claiming it as untainted.
A person shall now be considered guilty of the offence of money laundering for as long as the said person is enjoying the “proceeds of crime” – thus, making the offence of money laundering a continuous offence.
Legislative intent here appears to be to prosecute and attach all proceeds of crime, however remotely related. A key proposed change in the definition of “proceeds of crime” would allow the ED to proceed against assets of equivalent value located even outside the country.
Empowers Enforcement directorate: Empowers ED to undertake search actions even in the absence of a report under Section 157 of the Code of Criminal Procedure, 1973 (CrPC). The 2019 Act broadens the existing powers of the ED under the PMLA provisions – by bringing Sections 17 and 18 at par with Section 19 – where there is no pre-condition to forward a report under Section 157 of CrPC or to seek warrants from the Court for making an arrest. An arrest can be made for an offence under the PMLA even in the absence of a First Information Report (FIR).
Special Courts – Also includes a crucial amendment that empowers the Special Court to restore confiscated assets to the rightful claimants even during the trial. The amended Section 8(8) now allows the Special Court, if it deems fit, to consider the claims for the purposes of restoration of such properties also during the trial. Earlier, the assets could be restored only after completion of the trial.

Allegation alleged against Misuse of PMLA

ED does not disclose the Enforcement Case Information Report (ECIR) (an equivalent of the FIR) is considered an “internal document” and not given to the accused.
This amounts to denial of basic rights of knowledge to the accused.
Registering of ECIR is at ED’s discretion and after ECIR is registered, ED begins to summon accused persons and seeks details of all their financial transactions and of their family members.
The accused is called upon to make statements which are treated as admissible in evidence without disclosing them the charge under which they are booked by ED.
Throughout this procedure, the accused does not even know the allegation against him, as the only document which contains the allegation is the ECIR, which is not supplied to the accused persons.
PMLA does not distinguish between an accused and a witness while they are summoned. This is important because procedure under criminal law makes a distinction between the accused and a witness.
Selection of cases by ED have been politically motivated based on affirmation from the central government.

Way Forward

1. Following recommendations of FATF in domestic economic laws.

2. Empowering regulators like RBI, SEBI etc to be vigilant towards money laundering.

3. Permanent cadre of Enforcement Directorate.

4. Use of Big Data analytics, Artificial Intelligence in tackling money laundering.

5. Evolving sectoral action plans to tackle money laundering in sectors which are prone to generation of money laundering such as Narcotics, Organised Crime, Educational Institutions etc.

Judgement on PMLA act 2019

In Vijay Madanlal Choudhary vs Union of India, the apex court, upheld several provisions of the Prevention of Money Laundering Act, 2002, including those which relate to the power of arrest, attachment, and search and seizure conferred on the Enforcement Directorate (ED).

S. No.	PMLA act Provision	Issue raised under petitions	Supreme Court Judgement
1.	Section 3 – Defines money Laundering. Defines the crime as – 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.	Enlarged ambit of Section 3 under 2019 amendment which included any of the activity of concealment or possession or Acquisition individually was opposed in the petition. It can be misused against a person for mere concealment or Possession.	Section 3 has a wider reach and captures every process and activity, direct or indirect, in dealing with the proceeds of crime, and is not limited to the final act of integration of tainted property in the formal economy. The court interpreted the word “and” in the concerned laws as “or” to give full effect to the legislative intent.
2.	Section 5 lays down powers regarding provisional attachment and confiscation of properties following approval from a high-ranking ED officer if there are reasons to believe that any person is in possession of proceeds of crime. Through an amendment in 2015, the law empowered ED to make emergency attachment of properties for a period of 180 days without a preregistered criminal case.	It was argued that the powers of attachment were sweeping with no safeguards.	Before resorting to action of provisional attachment, registration of scheduled offence or complaint filed in that regard, is not a precondition.
3.	Sections 16, 17 and 18 authorise ED to enter any place of interest and conduct search and seizure	Issue were Raised – Against 2019 amendment that did away with the requirement of informing a court before search and seizure.	Court rejected the objections, noting the process of searches and seizure under PMLA is not only for the purpose of inquiring into the offence of money laundering, but also for prevention
4.	Power to Arrest – Section 19 of the Act empowers ED to make arrests after recording reasons to do so and forwarding the report to the adjudicating authority.	No arrest should take place without registration of a formal complaint	Court highlighted that PMLA intended not only to prosecute persons involved in money laundering but also prevent the crime, and the power to make arrest is quintessential to achieve this objective of the law.
5.	Summons and self-incrimination – Section 50 of PMLA authorises an ED officer to summon any person to record statements during investigation and that the person should disclose true and correct facts known to his personal knowledge, or face punishment.	It was argued that this was violative of Article 20(3), which provided protection against self-incrimination. It was also argued that ED officers should be considered police officers for the purposes of such inquiries, and therefore, statements made before them should be inadmissible as evidence.	Court rejected this contention. If the statement made by the person reveals the offence of money-laundering or the existence of proceeds of crime, that becomes actionable under the Act itself, and ED is at liberty to act against such persons.ED officers are not Police Officers.
6.	Reverse burden of proof – PMLA, in sections 24 and 45, invokes the principle of reverse burden of proof, in contrast to common law principle of “innocent until proven guilty”. A court will presume an accused to be involved in money laundering unless proved contrary.	Stands in contravention to the common law principle of “innocent until proven guilty.”	The court held that although presumption of innocence is a human right, it can be interdicted by a parliamentary law. An accused would get enough opportunity before the authority or the court to discharge his burden by showing he is not involved
7.	Section 45 – It imposes the two conditions for bail in PMLA cases — first, an opportunity for a prosecutor to oppose the bail, and second, the prima facie satisfaction of a court on the presence of reasonable grounds that the accused is not guilty of money-laundering and that he is not likely to commit any offence while on bail.	The twin provisions provide wide discretionary power to the court which needs to be satisfied about the innocence.	The court emphasised that money laundering cannot be considered less severe than terrorism, and therefore, tough bail conditions were justified.