ANTI MONEY LAUNDERING LAWS IN INDIA BY - SAHANA BALARAJ & DR. SIVANANDA KUMAR
AUTHORED BY - SAHANA BALARAJ
Llm Corporate And Commercial Laws
CO-AUTHOR - DR. SIVANANDA KUMAR
Associate Professor
School of Law, CHRIST (Deemed to be) University
Introduction
Money Laundering is the process whereby the
proceeds of crime are transformed into ostensibly legitimate money or other
assets. However, in a number of legal and regulatory systems the term money
laundering has become conflated with other forms of financial crime, and
sometimes used more generally to include misuse of the financial system (involving
the things such as securities, digital currencies, credit cards, and
traditional currency) including terrorism financing, tax evasion and evading of
international sanctions. Most of anti-money laundering laws openly conflate
money laundering, with terrorism financing (which is concerned with destination
of funds) when regulating the financial system. Money obtained from certain
crimes, such as extortion, insider trading, drug trafficking, illegal gambling
and tax evasion is ‘dirty’. It needs to be cleaned to appear to have derived
from non-criminal activities so that banks and other financial institutions
will deal with it without suspicion. Money can be laundered by many methods,
which vary in complexity and sophistication.[1]”
Different countries may or may not treat tax
evasion or payments in breach of international sanctions as money laundering.
Some jurisdictions differentiate these for definition purposes, and others do
not. Some jurisdictions define money laundering as obfuscating sources of money,
either intentionally or by merely using financial systems or services that do
not identify or track sources or destinations. Other jurisdictions define money
laundering to include money from activity that would have been a crime in that
jurisdiction, even if it were legal where the actual conduct occurred[2].”
Many regulatory and governmental authorities
issue estimates each year for the amount of money laundered, either worldwide
or within their national economy. In 1996, the International Monetary Fund
estimated that two to five percent of the worldwide global economy involved
laundered money. The Financial Action Task Force on Money Laundering (FATF), an
intergovernmental body set up to combat money laundering, stated, Overall, it
is absolutely impossible to produce a reliable estimate of the amount of money
laundered and therefore the FATF does not publish any figures in this regard. [3]”
When a criminal activity generates substantial
profits, the individual or group involved must find a way to control the funds
without attracting attention to the underlying activity or the persons
involved. Criminals do this by disguising the sources, changing the form, or
moving the funds to a place where they are less likely to attract attention. In
response to mounting concern over money laundering, the Financial Action Task
Force on money laundering (FATF) was established by the G-7 Summit in Paris in
1989 to develop a co-ordinated international response. One of the first tasks
of the FATF was to develop Recommendations, 40 in all, “which set out the measures national governments should
take to implement effective anti-money laundering programmes.[4]”
Concept of Money Laundering
The money laundering cycle can be broken down into three distinct
stages; however, it is important to member that money laundering is a single
process. The stages of money laundering include the:-
1.
Placement Stage
2.
Layering Stage
3.
Integration Stage
The Placement
Stage:-
This is the movement of cash from its source. On occasion the source
can be easily disguised or misrepresented. This is followed by placing it into
circulation through financial institutions, casinos, shops, bureau de change
and other businesses, both local and abroad. The process of placement can be
carried out through many processes including:
·
Currency Smuggling– This is the physical illegal movement of currency and
monetary instruments out of a country. The various methods of transport do not
leave a discernible audit trail FATF 1996-1997 Report on Money Laundering Typologies.
·
Bank Complicity– This is when a financial institution, such as banks, is
owned or controlled by unscrupulous individuals suspected of conniving with
drug dealers and other organised crime groups. This makes the process easy for
launderers. The complete liberalisation of the financial sector without
adequate checks also provides leeway for laundering.
·
Currency Exchanges– In a number of transitional economies the liberalization of
foreign exchange markets provides room for currency movements and as such
laundering schemes can benefit from such policies.
·
Securities Brokers– Brokers can facilitate the process of money laundering
through structuring large deposits of cash in a way that disguises the original
source of the funds.
·
Blending of Funds– The best place to hide cash is with a lot of other cash.
Therefore, financial institutions may be vehicles for laundering. The
alternative is to use the money from illicit activities to set up front companies.
This enables the funds from illicit activities to be obscured in legal
transactions.
·
Asset Purchase– The purchase of assets with cash is a classic money
laundering method. The major purpose is to change the form of the proceeds from
conspicuous bulk cash to some equally valuable but less conspicuous form.”
The Layering Stage
The purpose of this stage is to make it more difficult to detect and
uncover a laundering activity. It is meant to make the trailing of illegal
proceeds difficult for the law enforcement agencies. The known methods are”:
·
Cash converted into Monetary
Instruments – Once the placement is
successful within the financial system by way of a bank or financial
institution, the proceeds can then be converted into monetary instruments. This
involves the use of banker’s drafts and money orders.
·
Material assets bought with
cash then sold – Assets that are bought
through illicit funds can be resold locally or abroad and in such a case the
assets become more difficult to trace and thus seize.
After placement comes the layering stage. The layering stage is the
most complex and often entails the international movement of the funds. The
primary purpose of this stage is to separate the illicit money from its source.
This is done by the sophistical layering of financial transactions that obscure
the audit trail and server the link with the original crime.”
The Integration
Stage
This is the movement of previously laundered money into the economy
mainly through the banking system and thus such monies appear to be normal
business earnings. This is dissimilar to layering, for in the integration
process detection and identification of laundered funds is provided through
informants. The known methods used are”:
·
Property Dealing – The sale of property to integrate laundered money back into
the economy is a common practice amongst criminals. For instance, many criminal
groups use shell companies to buy property; hence proceeds from the sale would
be considered legitimate.
·
Front Companies and False Loans – Front companies that are incorporated in countries with
corporate secrecy laws, in which criminals lend themselves their own laundered
proceeds in an apparently legitimate transaction.
·
Foreign Bank Complicity – Money laundering using known foreign banks represents a
higher order of sophistication and presents a very difficult target for law
enforcement. The willing assistance of the foreign banks is frequently
protected against law enforcement scrutiny. This is not only through criminals,
but also by banking laws and regulations of other sovereign countries.
·
False Import/Export Invoices – The use of false invoices by import/export companies has
proven to be a very effective way of integrating illicit proceeds back into the
economy. This involves the overvaluation of entry documents to justify the
funds later deposited in domestic banks and/or the value of funds received from
exports.”
Origin & Background of Money Laundering
Money laundering offences have
similar characteristics globally. There are two key elements to a money
laundering offence:
1. The necessary act of laundering
itself i.e. the provision of financial services; and a requisite degree of
knowledge or suspicion (either subjective or objective) relating to the source
of the funds or the conduct of a client.
2. The act of laundering is committed in
circumstances where a person is engaged in an arrangement (i.e. by providing a
service or product) and that arrangement involves the proceeds of crime. These
arrangements include a wide variety of business relationships e.g. banking,
fiduciary and investment management.”
The requisite degree of knowledge or
suspicion will depend upon the specific offence but will usually be present
where the person providing the arrangement, service or product knows, suspects
or has reasonable grounds to suspect that the property involved in the
arrangement represents the proceeds of crime[5]. In some cases the offence may also be
committed where a person knows or suspects that the person with whom he or she
is dealing is engaged in or has benefited from criminal conduct.
Different jurisdictions define crime
predicating the offence of money laundering in different ways. Generally the
differences between the definitions may be summarized as follows:”
Differences in the degree of severity
of crime regarded as sufficient to predicate an offence of money laundering.
For example in some jurisdictions it is defined as being any crime that would
be punishable by one or more year imprisonment. In other jurisdictions the
necessary punishment may be three or five years imprisonment;” or
Differences in the requirement for
the crime to be recognized both in the country where it took place and by the
laws of the jurisdiction where the laundering activity takes place or simply a
requirement for the conduct to be regarded as a crime in the country where the
laundering activity takes place irrespective of how that conduct is treated in
the country where it took place[6].
In practice almost all serious
crimes, including, drug trafficking, terrorism, fraud, robbery, prostitution,
illegal gambling, arms trafficking, bribery and corruption are capable of
predicating money laundering offences in most jurisdictions.”
Tax evasion and other fiscal offences
are treated as predicate money laundering crimes in most of the world’s most
effectively regulated jurisdictions[7].
The United Nations Office on Drugs
and Crime (UNODC) conducted a study to determine the magnitude of illicit
funds generated by drug trafficking and organized crimes and to investigate to
what extent these funds are laundered. The report estimates that in 2009,
criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6
trillion) being laundered[8].”
This falls within the widely quoted
estimate by the International Monetary Fund, who stated in 1998 that the
aggregate size of money laundering in the world could be somewhere between two
and five percent of the world’s gross domestic product. Using 1998
statistics, these percentages would indicate that money laundering ranged between
USD 590 billion and USD 1.5 trillion. At the time, the lower figure was roughly
equivalent to the value of the total output of an economy the size of Spain.
However, the above estimates should
be treated with caution. They are intended to give an estimate of the
magnitude of money laundering. Due to the illegal nature of the transactions,
precise statistics are not available and it is therefore impossible to produce
a definitive estimate of the amount of money that is globally laundered every
year. The FATF (Financial Action Task Force) therefore does not publish
any figures in this regard[9].”
Evolutionary Trends of Money Laundering
As money laundering is a consequence
of almost all profit generating crime, it can occur practically anywhere in the
world. Generally, money launderers tend to seek out countries or sectors in
which there is a low risk of detection due to weak or ineffective anti-money
laundering programmes. Because the objective of money laundering is to get the
illegal funds back to the individual who generated them, launderers usually
prefer to move funds through stable financial systems. Money laundering
activity may also be concentrated geographically according to the stage the
laundered funds have reached. At the placement stage, for example, the funds
are usually processed relatively close to the under-lying activity; often, but
not in every case, in the country where the funds originate[10].”
Money laundering takes several
different forms, although most methods can be categorized into one of a few
types. These include ‘bank methods, smurfing (also known as structuring),
currency exchanges, and double-invoicing’.
a) Structuring: Often known as smurfing, this
is a method of placement whereby cash is broken into smaller deposits of money,
used to defeat suspicion of money laundering and to avoid anti-money laundering
reporting requirements. A sub-component of this is to use smaller amounts of
cash to purchase bearer instruments, such as money orders, and then ultimately
deposit those, again in small amounts.
b) Bulk cash smuggling: This involves physically smuggling
cash to another jurisdiction and depositing it in a financial institution, such
as an offshore bank, with greater bank secrecy or less rigorous money
laundering enforcement[11].
c) Cash-intensive businesses: In this method, a business typically
involved in receiving cash uses its accounts to deposit both legitimate and
criminally derived cash, claiming all of it as legitimate earnings. Service
businesses are best suited to this method, as such businesses have no variable
costs, and it is hard to detect discrepancies between revenues and costs.
Examples are parking buildings, strip clubs, tanning beds, car washes and
casinos.
d) Trade-based laundering: This involves under- or overvaluing
invoices to disguise the movement of money.
e) Shell companies and trusts: Trusts and shell companies disguise
the true owner of money. Trusts and corporate vehicles, depending on the
jurisdiction, need not disclose their true, beneficial, owner. Sometimes
referred to by the slang term rathole though that term usually refers
to a person acting as the fictitious owner rather a business entity[12].
f) Round tripping: Here, money is deposited in
a controlled foreign operation offshore, preferably in a tax
heaven where minimal records are kept, and then shipped back as an FDI,
exempt from taxation. A variant on this is to transfer money to a law firm or
similar organization as funds on account of fees, then to cancel the retainer
and, when the money is remitted, represent the sums received from the lawyers
as a legacy under a will or proceeds of litigation.
g) Bank capture: In this case, money launderers or
criminals buy a controlling interest in a bank, preferably in a jurisdiction
with weak money laundering controls, and then move money through the bank
without scrutiny[13].
h) Casinos: In
this method, an individual walks into a casino with cash and buys chips, plays
for a while, and then cashes in the chips, taking payment in a check, or just
getting a receipt, claiming it as gambling winnings.
i)
Other gambling: Money is
spent on gambling, preferably on higher odds. The wins are shown if the source
for money is asked for, while the losses are hidden.”
j) Real estate: Someone purchases real estate with
illegal proceeds and then sells the property. To outsiders, the proceeds from
the sale look like legitimate income. Alternatively, the price of the property
is manipulated: the seller agrees to a contract that under-represents the value
of the property, and receives criminal proceeds to make up the difference.
k) Black salaries: A company may have unregistered
employees without a written contract and pay them cash salaries. Dirty money
might be used to pay them.
A goal of money laundering is to be
able to use the dirty money for private consumption. If unable to use it
openly, the traditional way to keep the dirty money near is hiding it as cash
at home or other places. A more modern method is a credit card connected to a
tax haven bank.”
Anti-Money Laundering Laws in India-PMLA
The Prevention of Money Laundering
Act (PMLA), 2002 was enacted in January, 2003. The Act along with the Rules
framed thereunder have come into force with effect from 1st July, 2005. Sec. 3
of PMLA defines offence of money laundering as whosoever directly or indirectly
attempts to indulge or knowingly assists or knowingly is a party 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. It prescribes obligation of banking companies, financial
institutions and intermediaries 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). It empowers the Director of FIU-IND 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 as
indicated above and as stated in the facts and the statements as specified
herein[15].
PMLA empowers certain officers of the
Directorate of Enforcement to carry out investigations in cases involving
offence of money laundering and also to attach the property involved in money
laundering. PMLA envisages setting up of an Adjudicating Authority to
exercise jurisdiction, power and authority conferred by it essentially to” confirm attachment or
order confiscation of attached properties. It also envisages setting up of
an Appellate Tribunal to hear appeals against the order of the Adjudicating
Authority and the authorities like Director FIU-IND.
PMLA envisages designation of one or
more courts of sessions as Special Court or Special Courts to try the offences
punishable under PMLA and offences with which the accused may, under the Code
of Criminal Procedure 1973, be charged at the same trial. PMLA allows
Central Government to enter into an agreement with Government of any country
outside India for enforcing the provisions of the PMLA, exchange of information
for the prevention of any offence under PMLA or under the corresponding law in
force in that country or investigation of cases relating to any offence under
PMLA[16].”
Recent
developments and changes in PMLA
The PMLA (Amendment) Act, 2012 has
enlarged the definition of money laundering by including activities such as
concealment, acquisition, possession and use of proceeds of crime as criminal
activities. ‘Criminal intent is the main ingredient of any offence’ under money
laundering.”
The chances of harassment would still
have been negligible had the government not proposed to change yet another
provision of the same Act. Till last month, money-laundering crimes with the
exception of serious ones like terrorism were taken up only when the money
involved was Rs. 30 lakh or above. And that’s why there have been only 165-odd
cases of money laundering so far.
But the amended version of the Act
has removed the threshold. That means all money-laundering offences, big or
small, will now be taken up for investigation. If someone makes a small profit
by violating Sebi Act or Environment Protection Act or even Air (Prevention and
Control of Pollution) Act, the offender will be booked for money laundering.
Till last month, laundering money by violating 24 such acts was considered a
crime under PMLA only when the proceeds of crime used to be Rs 30 lakh and
more.
The PMLA was enacted in 2002, but was
amended thrice, first in 2005, then in 2009 and then 2012. The 2012 version of
the amendment received president’s assent on January 3, 2013, and the law
became operational from February 15, when the finance ministry notified it.
The government’s argument is that it
had to amend the existing law once more as India became a member of the
Financial Action Task Force (FATF) in October 2010. Headquartered in Paris, the
FATF is an inter-governmental body that promotes policies to combat money
laundering and terrorist financing. And it was the FATF that pointed out a few
deficiencies in India’s anti-money-laundering legislation.”
Conclusion
Every year, huge amounts of funds are
generated from illegal activities such as drug trafficking, tax evasion, people
smuggling, theft, arms trafficking and corrupt practices. These funds are
mostly in the form of cash. The criminals who generate these funds need to
bring them into the legitimate financial system without raising suspicion. The conversion
of cash into other forms makes it more useable. It also puts a distance between
the criminal activities and the funds. The criminals who generate these funds
need to bring them into the legitimate financial system without raising
suspicion. The conversion of cash into other forms makes it more useable. It
also puts a distance between the criminal activities and the funds. ‘Money
laundering’ is the name given to the process by which illegally obtained funds
are given the appearance of having been legitimately obtained.
The goal of a large number of criminal acts is
to generate a profit for the individual or group that carries out the act.
Money laundering is the processing of these criminal proceeds to disguise their
illegal origin. This process is of critical importance, as it enables the
criminal to enjoy these profits without jeopardising their source.
Illegal arms sales, smuggling, and the
activities of organised crime, including for example drug trafficking and
prostitution rings, can generate huge amounts of proceeds. Embezzlement,
insider trading, bribery and computer fraud schemes can also produce large
profits and create the incentive to ‘legitimise’ the ill-gotten gains through
money laundering.
When a criminal activity generates substantial
profits, the individual or group involved must find a way to control the funds
without attracting attention to the underlying activity or the persons
involved. Criminals do this by disguising the sources, changing the form, or
moving the funds to a place where they are less likely to attract attention.”
[1] What is Money Laundering?,
Duhaime, Christine available at http://www.antimoneylaunderinglaw.com/
[2] The Anti-Money Laundering &
Counter Terrorism Financing Act 2006 (Australia), the Anti-Money Laundering and
Countering Financing of Terrorism Act 2009 (New Zealand), and the Anti-Money
Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance
(Cap 615) available at https://www.comlaw.gov.au/Details/C2006A00169/
[3] About the FATF, Money Laundering
FAQ, available at http://www.fatf-gafi.org/pages/faq/moneylaundering/
[4] Ibid
[5] What is Money Laundering,
International Compliance Association available at http://www.int-comp.org/what-is-money-laundering/
[6] Public Fear of Terrorism in EU
available at www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA573813.pdf/
[7] FAQ on Money Laundering,
Financial Intelligence Unit- India, available at http://fiuindia.gov.in/faq-moneylaundering.htm/
[8] About the FATF, Money Laundering
FAQ, available at http://www.fatf-gafi.org/pages/faq/moneylaundering/
[9] ACAMS, Financial Action Task
Force available at http://www.moneylaundering.com/Pages/Home.aspx/
[10] Ibid 8
[11] U.S.Money Laundering Threat
Assessment, Bulk Cash Smuggling available at http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/mlta.pdf/,
[12] Overview(Prevention of Money
Laundering), Department Of Revenue, Ministry Of Finance available at http://dor.gov.in/overview_pml/
[13] Drug Trafficking Act, 1994
available at http://www.legislation.gov.uk/ukpga/1994/37/contents/
[14] Tax amnesties turn HMRC into
‘biggest money-laundering operation in history, Ian Cowie available at http://blogs.telegraph.co.uk/finance/
[15] Ibid 13
[16] Prevention of Money-Laundering
Act, 2002, Press Information Bureau, Govt. of India available at http://pib.nic.in/newsite/erelease.aspx?relid=9941/
