Prevention of Money Laundering Acts in India

Prevention of Money Laundering Act, 2002:

This Act was enacted to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering. The Act extends to the whole of India including J&K.

Salient features of the Act:

  • Offence of Money laundering and Punishment.
    • Offence of money laundering means the projection of tainted money as untainted.
    • Punishment prescribe for the offence in normal crime is rigorous imprisonment for a term which shall not be less than 3 years and for that of criminal cases is rigorous imprisonment of 7 years.
  • Attachment of property involved in money laundering
    • If the Director has reason to believe that a person is in possession of property involved in money laundering or he is dealing in such property, the ED is empowered to attach the property.
  • The Act prescribes for formation of a three member Adjudicating Authority for dealing with matters relating to attachment and confiscation of property under the Act.
  • Every banking company, financial institution and intermediary is under an obligation to maintain a record for a period of 10 years and furnish information to the Director whenever it asked for.
  • The Authorities under the Act have power to enter any place for survey when the said authority has a reason to believe on the basis of material in his possession that any offence of money laundering has been committed.

The Prevention of Money Laundering (Amendment) Act, 2012:

The PMLA was enacted in 2002, but was amended thrice, first in 2005, then in 2009 and then 2012. The law became operation from Feb 15, 2013. PMLA (Amendment), 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. Some features are as follows:

  • The amendment has introduced the concept of Corresponding law to link the provisions of Indian law with the laws of foreign countries and to provide for transfer of the proceeds of foreign predicate offence committed in any manner in India.
  • It also adds the concept of ‘reporting entity’ which would include a banking company, financial institution, intermediary or a person carrying on a designated business or profession.
  • The act has provided for provisional attachment and confiscation of property of any person (for a period not exceeding 180 days). This power may be exercised by the authority if it has reason to believe that the offence of money laundering has taken place.
  • The act has conferred the powers upon the Director to call for records of transactions or any additional information that may be required for the purposes of investigation. The Director may also make inquiries for non-compliance of the obligations of the reporting entities.
  • Part B of the Schedule in the erstwhile Act included only those crimes that are above Rs 30 lakh or more whereas part A did not specify any monetary limit of the offence. The amended act has brought all the offences under Part A of the Schedule to ensure that the monetary thresholds do not apply to the offence of money laundering.
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Trends and Prevention of Money Laundering in India

Present Trend of Money Laundering in India:

With its growing financial strength, India is vulnerable to money laundering activities even though the country’s strict foreign exchange laws make it difficult for criminal to launder money. Money laundering in India has to be seen from two different perspectives, i.e., Money-laundering on international forum and money-laundering within the country. As far as the cross-border money-laundering is concerned India’s historically strict foreign exchange laws and reporting norms have contributed to a great extent to control money laundering on international forum. However, there has been a threat from informal transactions like ‘Hawala’.

According to Indian observers, funds transferred through the hawala market are equal to between 30 to 40 percent of the formal market. India has considerably stepped up its investigations into money laundering and terror funding with the number of cases under probe rising, even though a low conviction level remains a “serious effectiveness issue”.

The current status of money laundering in India can also be evaluated by looking at the Basel index prepared by the Basel Institute on governance, Switzerland. The Basel AML index scores countries on the basis of AML laws, financial regulations, political disclosure, etc. in that country. The overall score, ranges from 0 (low risk) to 10 (high risk). Out of 140 countries, India has been ranked 93 (6.05).

Prevention of Money Laundering in India:

Combating money laundering is a dynamic process because the criminals who launder money are continuously seeking new ways to achieve their illegal ends. Moreover, it has become evident to the FATF through its regular typologies exercises that as its members have strengthened their systems to combat money laundering the criminals have sought to exploit weaknesses in other jurisdictions to continue their laundering activities.

In India, before the enactment of the Prevention of Money Laundering Act 2002 (PMLA), the following statutes addressed scantily the issue:

  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  • The Income Tax Act, 1961.
  • The Benami Transactions (Prohibition) Act, 1988.
  • The Indian Penal Code and Code of Criminal Procedure, 1973.
  • The Narcotic Drugs and Psychotropic Substances Act, 1985.
  • The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

However, this was not sufficient with the growth of varied areas of generating illegal money. Money laundering was an effective way to launder the black money so as to make it white. In view of the need for the enactment of a comprehensive legislation inter alia for preventing money laundering and connected activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating measures for combating money-laundering, India took the following steps:

  • The financial intelligence unit – India (FIU-India) which is the nodal agency in India for managing the anti-money laundering ecosystem. It helps in coordinating and strengthening efforts to reduce money laundering and related crimes in India.
  • Prevention of Money Laundering Act, 2002 has been the core framework for combating it.
  • In 2010, India admitted as the 34th country member of Financial Action Task Force (FATF). This membership helped Indian enforcement agencies to exchange information and financial institutions to gain much better access to markets of other member countries.
  • Prevention of money laundering (Amendment) Bill, 2012.
  • The Enforcement Directorate carries out investigations and it is also empowered to attach property entities involved in money laundering.

Prevention of Money Laundering at International Level

Money laundering methods and techniques change in response to developing counter-measures. In recent years, there is an increase in sophisticated combinations of techniques, such as the increased use of legal persons to disguise the true ownership and control of illegal proceeds, and an increased use of professionals to provide advice and assistance in laundering criminal funds. It’s now the time for all countries to take the necessary steps to bring their national systems for combating money laundering and terrorism fianancing.

Some steps taken to prevent money laundering at the Global level

  • United Nations Convention in 1988 against illicit Traffic in Narcotic Drugs and Psychotropic Substances is the first international legal instrument providing provisions against money laundering. Also this is the first international convention which criminalized Money Laundering.
  • UN convention against Transnational Organized crime in 2003 and UN Convention against Corruption in 2005 came into force.
    • Both convention states that money laundering should not only apply to the proceeds of drug trafficking, but should also cover the proceeds of all serious crimes.
    • Both convention urge states to create domestic supervisory and regulatory regime for banks and non-financial institutions.
    • Both conventions also call for the establishment of Financial Intelligence Units (FIUs)
  • Financial Action Task Force on Money Laundering (FATF)

In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 summit that was held in Paris in 1989. Recognizing the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member states, the European Commission and eight other countries.

The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of forty recommendations, which provide a comprehensive plan of action needed to fight against money laundering.

FATF on Money Laundering has identified certain choke points in its process. These choke points are:

  • Entry of cash into financial system
  • Transfers to and from the financial system
  • Cross border flow of cash

Some of the recommendations are:

  • Implement relevant international conventions
  • Criminalize money laundering and enable authorities to confiscate the proceeds of money laundering
  • Implement customer due diligence (e.g., identity verification), record keeping and suspicious transaction reporting requirements for financial institutions and designated non-financial businesses and professions.
  • Establish a financial intelligence unit to receive and disseminate suspicious transaction reports, and
  • Cooperate internationally in investigating and prosecuting money laundering

Money Laundering and it’s Stages

Background:

The goal of a large number of criminal acts is to generate 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 jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized 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 “legitimize” the ill-gotten gains through money laundering.

Definition:

Money Laundering is the process by which large amounts of illegally obtained money is given the appearance of having originated from a legal source.

INTERPOL’s definition of money laundering is: “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”.

Illegally obtained funds are laundered and moved around the globe using and abusing shell companies, intermediaries and money transmitters. In this way, the illegal funds remain hidden and are integrated into legal business and into the legal economy.

According to Investopedia, Money Laundering “is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.

Stages of Money Laundering:

It has three stages. They are:

  1. Placement Stage – in this stage, vast amounts of money is generated from an illegal source (like drug dealing, terrorist activity or other crimes) and it is placed into the financial system or retail economy or smuggled out of the country. The aim of this stage is to remove the cash from the location of acquisition and then transform it into other assets.
  2. Layering Stage – at this stage, complex layers of financial transactions are designed to disguise the audit trail and provide anonymity.
  3. Integration stage – in this stage, money is integrated into the legal economic and financial systems and is adopted with all other legal assets in the system.

Structuring or Smurfing, Casinos, real estate, cash intensive businesses, black salaries are some of the methods of money laundering.

(Prevention follows….)

Trivia

What is Excise Duty? Is it collected by the State Government or the Central Government? How is it different from Sales Tax?

Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called “State Excise” duty. The Excise duty on rest of goods is called “Central Excise” duty and is collected in terms of Section 3 of the Central Excise Act, 1944.

Sales Tax is different from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act of manufacture or production of goods.

Measures of Inflation: Two major measures for inflation, which are widely used, are Wholesale Price Index (WPI) and Consumer Price Index (CPI). WPI measures the increase in the prices of a fixed basket of goods prevailing in the wholesale market while CPI measures the increase in the prices of essential commodities purchased by an average consumer prevailing in the retail market. Measured weekly, WPI is the primary inflation measure in India.

Gulf Cooperation Council: Gulf cooperation council was created on May 25, 1981, the 630-million-acre (2,500,000 km2) Council comprises the Persian Gulf states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The unified economic agreement between the countries of the Gulf Cooperation Council was signed on November 11, 1981 in Abu Dhabi. These countries are often referred to as The GCC States.

Dumping: Dumping is a term that is used in financial markets as well as in international trade. In the context of buying and selling securities, dumping refers to the practice of selling large blocks of securities. More specifically, when dumping securities the seller is primarily interested in getting rid of the securities at any price. One simply dumps, or unloads, on the market with no regard to the selling price of the securities.

Dumping is also used in a commercial sense in the context of international trade. It refers to the practice of one country selling commodities or finished products in another country below cost or fair market value. Predatory dumping occurs when one nation exports goods to another nation below cost or fair market value in order to obtain market share at the expense of domestic competitors. In many cases, predatory dumping drives out domestic competition. Then, having established a dominant marketing position in the industry, the predatory dumpers raise their prices well above previous levels.

Many nations, including the United States, have enacted antidumping laws that provide for the imposition of antidumping penalties or tariffs when a case of dumping can be proven. Following the Uruguay Round of Multilateral Trade Negotiations in 1993, the General Agreement on Tariffs and Trade (GATT) contained provisions to standardize antidumping measures by different nations. Antidumping measures affect not only the practice of dumping goods into the U.S. market, they also affect the ability of U.S. companies to export goods to other countries at competitive prices.

Indo-Pakistan War of 1947: This is also called the First Kashmir War. The war started in October 1947 when the Maharajah of the princely state of Kashmir and Jammu was pressured to accede to either of the newly independent states of Pakistan or India. Tribal forces prompted by Pakistan attacked and occupied the princely state, forcing the Maharajah to sign the “Agreement to the accession of the princely state to India”. The United Nations was then invited by India to mediate the quarrel. The UN mission insisted that the opinion of the Kashmiris must be ascertained. The UN Security Council passed Resolution 47 on 21 April 1948. The war ended in December 1948 with the Line of Control dividing Kashmir into territories administered by Pakistan (northern and western areas) and India (southern, central and northeastern areas).

Monopoly: After the Stock Market crash, a buying and selling game created by Charles Darrow came to be. The first games were hand drawn on linoleum with streets from Atlantic City, N.J. as the property. He took the game to the Parker Brothers company, and Monopply was brought out for Christmas 1934. Everyone wanted to buy the games after Christmas, and Monopoly became a big success.