Money Laundering – Impact & Preventive Measures – Explained Pointwise

Money laundering is a serious offence as it has direct linkage with terror activities & organised crime. Despite the presence of stringent laws like Prevention of Money Laundering Act, 2002, the number of money laundering cases in India has been continuously increasing.

What is MONEY LAUNDERING?

• Money laundering, as defined under Section 3 of Prevention of Money Laundering Act (PMLA), is an act through which processes or activities connected to the proceeds of crimes are concealed, possessed, acquired, or used & projected as untainted property or claiming to be untainted property.
• Money laundering is the illegal process of concealing the origins of money obtained from illicit activities, making it appear to have come from legitimate sources.
• The term is said to have originated from the use of laundromats by organised crime syndicates in the USA as a cover for their crimes & under-the-table dealings.
• Money laundering primarily involves 3 distinct stages:

What are the impacts of Money Laundering?

1. Undermining Financial System Integrity and Stability: Money laundering can compromise the integrity and stability of financial institutions. Illicit funds entering the financial system can distort market mechanisms, leading to economic imbalances and even crises.
2. Reduced Tax Revenues: Money laundering allows individuals and businesses to conceal their true income, leading to a significant reduction in tax revenues for governments. This loss of public funds hinders the government’s ability to finance essential public services, infrastructure projects, and social welfare programs.
3. Impact on Monetary Stability: The sudden inflow and outflow of large, illicit funds can create unpredictable changes in money demand & supply, cause large fluctuations in international capital flows and exchange rates, and destabilize financial markets & monetary stability of the country. 
4. Fueling Criminality and Organized Crime: Money laundering is the lifeblood of criminal enterprises. By “cleaning” illicit profits, it enables drug trafficking, human trafficking, arms dealing, corruption, and other organized criminal activities to continue and expand. This directly leads to increased violence, drug abuse, and other social problems. 
5. Corruption and Weakened Governance: Money laundering often involves corruption at various levels of government and private institutions. This erodes public trust in the effectiveness and fairness of governance, contributing to a sense of injustice and disillusionment among citizens. It undermines the rule of law and democratic institutions.
6. Terror Financing: Money laundering techniques are increasingly been used to finance terrorist organizations and activities. By obscuring the source and destination of funds, it allows terrorist groups to acquire resources, plan attacks, and sustain their operations, posing a direct threat to national and international security. 

What are the initiatives taken to tackle to the issue of Money Laundering?

1. Prevention of Money Laundering Act (PMLA), 2002: PMLA was enacted to prevent money laundering and provide for the confiscation of property derived from money laundering. In line with the UN Political Declaration & Global Programme for Action (adopted by UNGA in 1990), PMLA aims to combat money laundering related to illegal activities such as drug trafficking, smuggling, and terrorism financing & to confiscate the property involved or obtained. No FIR is required to initiate proceeds under the Act, ECIR is sufficient to initiate proceedings. Only requirement as per the SC was that s scheduled offence be essential for the offence of money laundering.

2. Establishment of Financial Intelligence Unit – India (FIU-IND): Established in November 2004, FIU-IND is the central national agency responsible for receiving, processing, analyzing, and disseminating information related to suspect financial transactions. FIU-IND perform functions like:

• Collection of Information: Acts as the central reception point for various reports (CTRs, STRs, Cross Border Wire Transfer Reports – CBWTRs, etc.) from reporting entities.
• Analysis of Information: Analyzes collected information to uncover patterns suggesting money laundering and related crimes.
• Sharing of Information: Disseminates valuable financial intelligence to national intelligence/law enforcement agencies (like ED), national regulatory authorities (RBI, SEBI, IRDAI), and foreign FIUs.
• Central Repository: Maintains a national database of financial transactions.

3. Role of Enforcement Directorate (ED): ED, under the Department of Revenue, Ministry of Finance, is the primary legal authority responsible for investigating and prosecuting money laundering offenses under the PMLA. Its mandate include:

• Conducting investigations to trace assets derived from proceeds of crime.
• Provisionally attaching properties involved in money laundering.
• Ensuring prosecution of offenders and confiscation of property by Special Courts.
• Enforcing the Foreign Exchange Management Act (FEMA), 1999, and the Fugitive Economic Offenders Act (FEOA), 2018, which often have overlaps with money laundering activities.

4. Regulatory Measures by Financial Regulators: Regulatory bodies like the Reserve Bank of India (RBI) for banking, the Securities and Exchange Board of India (SEBI) for capital markets, and the Insurance Regulatory and Development Authority of India (IRDAI) for insurance, issue comprehensive Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) guidelines for entities under their purview.

5. KYC Norms: These guidelines mandate strict Know Your Customer (KYC) norms, customer due diligence (CDD), enhanced due diligence (EDD) for high-risk clients, and ongoing transaction monitoring.

6. International Cooperation and FATF Compliance:

• Implementation of FATF Recommendations: India became the 34th member of the Financial Action Task Force (FATF) in 2010, demonstrating its commitment to global AML/CFT standards. India actively works to implement the 40 FATF Recommendations, which provide a comprehensive framework for combating money laundering, terrorist financing, and proliferation financing. Regular mutual evaluations by FATF assess India’s compliance and effectiveness.
• Mutual Legal Assistance: India engages in international cooperation through Mutual Legal Assistance Treaties (MLATs) to facilitate the exchange of information and assistance in investigations and prosecutions of money laundering cases across borders.
• Double Taxation Avoidance Agreement (DTAA): India has signed DTAA with 85 countries, which helps to check money laundering. These agreements promote exchange of financial & tax-related information between tax authorities of participating countries. This facilitates enforcement of tax regulations & helps prevent illegal activities like tax evasion & money laundering.

What are the concerns regarding the PMLA Act?

1. Inclusion of minor and less serious offences: Inclusion of other less serious offences in the schedule dilutes the original intent of the law. The schedule of the Act has been expanded over the years, to include even minor and non-serious offences such as copyright and trademark infringements.

2. Equates punishment for ordinary crimes with serious crimes: PMLA equates the punishment under an ordinary crime with a serious economic offence. For e.g. With the addition of The Prevention of Corruption Act, 1988 to the schedule of offences, PMLA applies with all its rigour to public servants. Thus, a public servant charged with corruption and a hard-core drug trafficker are treated alike.

3. Broad Definition of ‘Proceeds of Crime’: The broad definition of ‘proceeds of crime, provides considerable discretion to the authorities. Critics fear that this discretion, in determination of ‘proceeds of crime’, can be misused by the investigating authorities.

4. Stringent Bail Conditions: An accused is denied bail by the entire hierarchy of courts because the bail provision under PMLA state that a judge can give bail only when he is satisfied that the accused is innocent. This is against the Anglo-Saxon jurisprudence, which presumes a person innocent until proven guilty.

5. Burden of Proof of innocence on the accused: The burden of proof of innocence, on the accused, presents a prominent challenge in ensuring a free and fair trial.

6. Against the Federal principles and Basic structure Doctrine: Under the PMLA, the ED, can carry out investigation without the prior consent of the concerned State. This is unlike other central police organisations, (like CBI), which are required to obtain the consent of the state before carrying out any policing/investigating activity. This impinges the principle of federalism, which is part of the Basic Structure of the Constitution.

7. Violation of the Fundamental Rights of Accused:

1. Violation of Article 21: Under PMLA, the ED does not require disclosing the details of Enforcement Case Information Report (ECIR), which contains the allegations against the accused person. This is against the fundamental right of the accused to be informed of the charges and allegations, which is a universally recognised right, and is part of the right to life and liberty under Article 21 of the Constitution.
2. Violation of Article 14: Equating the punishment of accused of minor crimes and serious economic offence, is violation of the fundamental right to equality under Article 14 of the constitution.
3. Violation of Article 20(3): The power of the authorities to issue summons to ‘any person’ (including the accused), to give evidence or produce records during the course of an investigation is in violation of the right against self-incrimination, which is a fundamental right under Article 20(3) of the Constitution.

8. Extensive powers to the authorities: The Act grants the Enforcement Directorate (ED) extensive powers of summons, arrest, and raids. This excessive power to the authorities, can potentially lead to its misuse and overreach. SC held that to initiate prosecution under Section 3 of PMLA, registration as scheduled offence is a prerequisite, but for initiating attachment of property under Section 5, there need not be a pre-registered criminal case. This provision has often been misused by authorities with politically motivated intentions.

9. Low Conviction Rate: According the the Report submitted by the FM in the Rajya Sabha, 5892 cases were taken up by the ED under PMLA since 2015. Of these cases, only 15 convictions have been ordered by the special courts.

What have been the observations of the SC?

What should be the way forward?

1. Amend PMLA:
   • Precise Definition of ‘Proceeds of Crime’: A precise definition of ‘Proceeds of Crime’ under PMLA must be incorporated to mitigate the potential abuse of its definition by the authorities.
   • Reassessment of Burden of Proof: An amendment to PMLA which provides a more equitable distribution of the burden of proof between the prosecution and the accused, can be brought.
   • Safeguards Against Overreach by Officers: An independent oversight mechanism to review and monitor the actions of law enforcement officers must be established at the earliest.
   • Review of the Stringent Bail Conditions: The stringent bail conditions for minor and non serious economic offence must be done away with.
2. Harmonization of Laws: Ensure better harmonization and synergy between PMLA and other relevant laws (e.g., FEMA, Income Tax Act, Black Money Act, Fugitive Economic Offenders Act) to create a seamless legal framework for combating financial crime.
3. Capacity Building of Enforcement Agencies: Significantly enhance the human and technical capacity of the Enforcement Directorate (ED), FIU-IND, CBI, and other investigating agencies. This includes:
   • Specialized Training: Provide advanced training to investigators, prosecutors, and forensic auditors in financial forensics, cyber forensics, blockchain analysis, and international cooperation.
   • Adequate Staffing: Ensure sufficient staffing levels to handle the increasing volume and complexity of money laundering cases.
   • Technological Upgradation: Equip agencies with cutting-edge tools for data analytics, artificial intelligence, and cyber intelligence to trace complex financial trails across jurisdictions. 
4. Enhanced Independence and Transparency of ED: Measures like regular reporting and disclosure of cases handled, convictions secured, and actions taken, must be incorporated to enhance the transparency in ED’s functioning. These measures will ensure confidence among the public that ED is not a politicized institution.
5. Strengthening Regulatory Oversight: Empower financial regulators (RBI, SEBI, IRDAI) to impose stricter penalties and conduct more frequent and thorough audits of reporting entities to ensure compliance with AML/CFT guidelines.
6. Leveraging Technology and Data Analytics:
   1. Advanced Analytics and AI: Encourage and mandate financial institutions to deploy advanced AI and machine learning tools for real time transaction monitoring, customer risk profiling, network analysis etc.
   2. Blockchain Forensics: Develop expertise and tools for tracing illicit transactions on blockchain networks, given the increasing use of cryptocurrencies in money laundering.
   3. Data Standardization and Sharing: Promote standardization of financial data across various entities to facilitate easier analysis and sharing of information while ensuring data privacy.

Conclusion:
It is important that the authorities follow the recommendations of the FATF & ensure that money laundering cases are handled with care & caution so that misuse could be checked & genuine cases reported & investigated properly to enhance the rate of conviction & prevent the misuse of PMLA for political motives.