Prevention of Money Laundering Act

Money laundering is a global threat to economic sovereignty where money generated illegally is then legalised and brought into day to day transactions. It involves three stages: Placement, Layering, and Integration. To counter this comprehensively, India introduced the Prevention of Money Laundering Act (PMLA) in 2002. The Act defines money laundering offences, outlines obligations for financial entities, and empowers enforcement bodies. Amendments in 2012, 2019, and 2023 expanded the Act's scope. The government has taken steps, such as bringing the Goods & Services Tax Network under PMLA also to combat money laundering.

Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets. Money laundering involves three steps. Firstly Placement i.e. introducing cash from illegal means into the financial system. Then Layering i.e. Carrying out complex financial transactions to camouflage the illegal source. Lastly, Integration i.e. Acquiring and returning the wealth generated to the launderer.

India is ranked 70th out of 141 countries in the Anti-Money Laundering (AML) Basel Index, 2020. Money laundering threatens economic sovereignty and can cause financial crises. It encourages tax evasion culture and leads to exchange and interest rates volatility. It also supplements criminal activities. Globally foreign investors are discouraged, reputation of the government and financial institutions is not only damaged but investment rating is even downgraded. To tackle this, the Prevention of Money Laundering Act was enacted in 2002.

Methods used for money laundering can be many. Dirty money is scrubbed clean through hidden channels like tax havens, secret salaries, and digital currencies. Hawala, a trust-based transfer system, bypasses banks, while round tripping uses tax havens to turn black money white. Trade gets twisted in Trade-Based Money Laundering, where criminals manipulate values to disguise illegal gains as legitimate profits.

• Objective: To prevent and control money laundering. To confiscate and seize the property obtained from the laundered money.
• Defines Money Laundering: Section 3 of PMLA defines offence of money laundering as whosoever directly or indirectly attempts to or knowingly assists or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering. This is a wide definition so that everyone who is part of the process can be brought to justice.
• Obligations for Financial Reporting Entities: The Act prescribes obligation of banking companies, financial institutions and intermediaries (called ‘Reporting Entities’) for verification and maintenance of records of the identity of all its clients and also of all transactions and for furnishing information of such transactions in prescribed form to the Financial Intelligence Unit-India (FIU-IND).
• Enforcement Bodies Empowered under PMLA-
  • Enforcement Directorate: to carry out investigations in cases involving offence of money laundering and also to attach the property involved in money laundering
  • Financial Intelligence Unit-India (FIU-IND): empowered to impose fine on banking company, financial institution or intermediary if they or any of its officers fails to comply with the provisions of the Act.
  • Special Courts: PMLA envisages designation of one or more courts of sessions as Special Court or Special Courts to try the offences punishable under PMLA
  • Appellate Authority: to hear appeals against the order of the Adjudicating Authority and the authorities like Director FIU-IND

• 2012: It was amended to widen the definition of "proceeds of crime" and to remove the grey areas and ambiguity in the Act.
• 2019: To treat money laundering as a stand-alone crime on its own, rather than a connected schedule offence. It authorised search and seizure of property and persons without registration of any FIR or chargesheet but merely a formal warrant from appropriate authorities.
• 2023:
  • Define “Politically Exposed Persons”: People who have prominent public service roles like government, military, foreign, judicial, party, public company officials.
  • Increased Scrutiny: Reporting entities (banks) to record financial transactions of such Politically Exposed Persons and NGOs.
  • Holding Chartered accountants & company secretaries Accountable: for money laundering activities.
  • Regulating Crypto: Know Your Customer (KYC) made mandatory for crypto exchanges and dealings in virtual digital assets.

• The government brought the Goods & Services Tax Network (GSTN) under PMLA, allowing crucial data sharing to combat tax evasion and money laundering more effectively. This empowers investigative agencies to tackle financial crimes with greater precision.
• Securities and Exchange Board of India Act, 1992 (SEBI Act): The SEBI Act regulates the securities market in India. It also contains provisions to prevent money laundering through the securities market.
• Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act): The NDPS Act prohibits use of narcotic drugs and also contains provisions to seize and confiscate the proceeds of drug trafficking.
• Foreign Exchange Management Act, 1999 (FEMA): The FEMA regulates the flow of foreign exchange into and out of India. It also contains provisions to prevent money laundering through cross-border transactions.
• Reserve Bank of India (RBI) has issued a number of guidelines to banks and other financial institutions on how to prevent money laundering.
• Foreign Contribution Regulation Act (FCRA), 1976: was amended in 2020 for tighter control and scrutiny over receipt and utilisation of foreign funds by NGOs.
• India has entered into Customs Mutual Administrative Assistance Agreement with EU, Israel, Russia, UK, Hongkong, Maldives, Uzbekistan, Iran, Egypt, USA, China, SAARC Countries, South Korean, Australia and Brazil. These allow information sharing to maintain surveillance over suspect goods, persons or means of transport.
• The Financial Intelligence Unit (FIU-IND) signed bilateral MoUs with three countries namely Mauritius, Philippines and Brazil to facilitate exchange of intelligence on money laundering.
• Third ministerial ‘No Money for Terror (NMFT)’ conference was organized by Ministry of Home Affairs in 2022. To ensure laundered money cannot be used for terrorism by enhancing the traceability and transparency of financial flows.
• World Organisations Tackling Money Laundering: India is a member of:
  • World Customs Organisations allowing information sharing
  • United Nations Office on Drugs and Crime maintains the International Money Laundering Information Network.
  • Asia Pacific Group on Money Laundering: It works as regional anti-money laundering body
  • Financial Action Task Force (FATF) which combats money laundering and terrorism financing. They are a ‘peer review’ system and issue FATF Blacklist and Greylists with names of countries which threaten the integrity of the international financial system.

India is signatory to the following to tackle Money laundering-

• International Convention for Suppression of Financing of Terrorism (1999)
• International Convention for Suppression of Financing of Terrorism (1999)
• UNCC, 2003: United Nations Convention against Corruption
• SAARC Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1990
• Vienna Convention ( United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988) requires all countries to criminalize the laundering of money from drug trafficking

• Following Basel Committee recommendations: To ensure that banks are not used to hide or launder funds acquired through illegal activities.
• International Cooperation: Countries should criminalise money laundering and enlist all common offences so that seamless prosecution can happen in all jurisdictions.
• Awareness and education: To infuse a sense of watchfulness among masses because the public is both the frontier and battlefield to tackle it.
• Controlling Hawala transactions
• Global coordination: with INTERPOL and other international organizations.
• Promote a regional approach: To address problems, develop and maintain strategic relationships with other organizations
• Strengthening KYC norms: To know the identity of the customer and understanding the kinds of transactions in which the customer is likely to engage
• Use of AI and software to analyse transactions.

Despite the robust measures enshrined in the Prevention of Money Laundering Act 2002, globalization presents significant challenges that cannot be tackled in isolation. The interconnectedness of the global financial system creates fertile ground for criminals to exploit loopholes across jurisdictions. Shell companies hide behind legitimate facades, and tax havens offer safe havens for illicit funds e.g. Cayman Island and Panama. To truly combat money laundering, international cooperation and coordinated efforts are critical. We must dismantle the opaque structures that enable dirty money to flow freely, expose the shadowy dealings of shell companies, and pressure tax havens to adopt stricter transparency measures.