Prevention of Money Laundering Act (PMLA)

Table of Contents

Prevention of Money Laundering Act (PMLA), 2002: Significance and Concerns

Introduction:

A batch of petitions are pending in the Supreme Court in Vijay Madanlal Choudhary & Ors Vs Union of India case that are aimed at setting out the scope and applicability, as well as test the constitutional vires of provisions under PMLA.

What is Prevention of Money Laundering Act (PMLA)?

The Prevention of Money Laundering Act, 2002 (PMLA) is a cornerstone of India’s legal framework designed to combat money laundering and allied financial crimes, and facilitate the confiscation of property derived from money laundering.
Money laundering, as per the act, is expansively defined to encompass any process or activity attempting to legitimize illegally obtained proceeds, such as those arising from criminal activities.
Enforcement of the PMLA is orchestrated by various authorities, with the Enforcement Directorate (ED) at the forefront. The ED is entrusted with investigating and prosecuting offenses under the act.

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What is money laundering?

It is a process to convert the proceeds of crimes, such as illegal arms sale, smuggling, drug trafficking, prostitution rings, embezzlement, insider trading, bribery, computer fraud schemes, etc, into legitimate money.
In India, money laundering is popularly known as Hawala transactions.

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What led to the enactment of the PMLA?

Since the mid-1980s, there has been global concern over the proceeds of criminal activities such as drug-trafficking being ‘laundered’ or and used in financing terrorism.
The UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances adopted in Vienna in 1988 (Vienna Convention) was the first treaty that called upon nations to adopt domestic laws to combat drug trafficking.
- - As part of these laws, countries were asked to prohibit the conversion or transfer of property gained through dealing in narcotics to conceal its illicit origin.
The Financial Action Task Force (FATF) was established in the G-7 Summit in Paris in 1989 in response to mounting concern over money-laundering.
The Task Force made recommendations from time to time to strengthen laws on the subject.
The Narasimham Committee on Banking Sector Reforms, commissioned by the Reserve Bank of India (RBI) in 1998, underscored the importance of addressing money laundering concerns within the Indian financial system.
The UN Convention against Transnational Organized Crime of 2000 (Palermo Convention) also advocated legislative and other measures to combat organised crime, and specifically called for ‘criminalising the laundering of proceeds of crime’.
The PMLA was enacted in 2002 but came into force in 2005. Its provisions gave effect to India’s obligations to abide by the above international conventions.

How does money laundering actually take place?

• The process generally involves three stages (not in any particular order).

a) Placement

• The first stage is placement, where the money launderer (the person who holds money generated from criminal activities) introduces illegal funds into the financial system.

• This can be done by dividing large sums into smaller ones and deposit these into various banks at different locations.

b) Layering

• The second stage is layering, where the launderer typically engages in a series of continuous conversions or movement of funds within the financial or banking system by way of numerous accounts to hide their true origin and to distance them from their criminal source.

c) Integration

• The third stage involves integration. This is the stage where the money reaches the legitimate economy, after getting inseparably mixed with legitimate money.

money laundering actually

What are the Salient Features of Prevention of Money Laundering Act?

PMLA is a comprehensive Criminal Law to counter the threat of money laundering, specifically stemming from trade in narcotics.
It has provisions to provisionally attach/ confiscate the assets derived out of the proceeds of crime.
All PMLA offences are cognisable and non-bailable.
- - Therefore, officers under the Act are empowered to arrest an accused without warrant, subject to certain conditions.
The offences of money laundering under the PMLA cannot be compounded.
- - Compoundable offenses are those offenses where, the complainant (one who has filed the case, i.e. the victim), enters into a compromise, and agrees to have the charges dropped against the accused.
PMLA also seeks to prevent money laundering by mandating record-keeping and reporting obligations imposed on banks, financial institutions and intermediaries.

a) What are proceeds of crime?

It included any property derived or obtained directly or indirectly by any person:
- - as a result of criminal activity; or
  - relating to a ‘scheduled offence’.
Scheduled offences range from those relating to corporate fraud, terrorism, illegal trade of arms, wildlife, narcotics to bribery of public officials.
A wilful attempt to evade tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 is also a scheduled offence.

b) Extra-territorial jurisdiction for the foreign crimes

PMLA confers extra-territorial jurisdiction to the government to prosecute the offence of money laundering for ‘offences of cross-border implications.’
PMLA allows for attachment and confiscation of equivalent assets in India or overseas whenever the asset constituting the proceeds of crime is located abroad and cannot be forfeited.

Directorate of Enforcement (ED)

The Directorate of Enforcement (ED) is empowered by the Union Government to investigate and prosecute money laundering.
Directorate of Enforcement is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance.
The ED enforces the following laws: –
- - Foreign Exchange Management Act, 1999 (FEMA) – A Civil Law.
  - Prevention of Money Laundering Act, 2002 (PMLA) – A Criminal Law.
The ED has the power of a civil court to enforce the attendance of a person summoned under PMLA Act.
- - Thus, as such ED investigations and proceedings would be deemed to be judicial proceedings and the statements made to ED being admissible as evidence.
Foreign Exchange Management Act, 1999 (FEMA)
It is a Civil Law, with officers empowered to conduct investigations into suspected contraventions of the Foreign Exchange Laws and Regulations.
It can impose only financial penalties on those adjudged to have contravened the law.

What are the concerns regarding the implementation of the PMLA?

The manner in which the Act is being implemented has come in for much criticism in recent years over the possibility of misuse of the law and subversion of constitutional guarantees. Some of these issues are discussed below:

a) Broad definition of the Proceeds of Crime

The definition of the term “proceeds of crime” is excessively broad and has the potential to encompass lawful financial transactions, possibly leading to misuse of the Act.
Money-laundering in the Indian context is linked or is seen as a byproduct of a host of both grave and routine offences that are appended to the Act as a schedule. These ‘scheduled’ or ‘predicate’ offences ought to be ideally limited to grave offences such as terrorism, narcotics smuggling, corruption and serious forms of evasion of taxes and duties.
- - However, in practice, the list contains offences such as fraud, forgery, cheating, kidnapping and even copyright and trademark infringements.

b) Burden of Proof on the Accused

It transfers the burden of proof of innocence onto shoulders of the accused instead of the prosecution.
It also deprives an accused a copy of the Enforcement Case Information Report (ECIR), the equivalent of an FIR in ordinary cases.

c) Overreach by Officers

In the Supreme Court decision in Tofan Singh Vs State of Tamil Nadu, it was held that investigating officers under special statutes shall be deemed in law to be police officers.
- - As per Section 25 of the Indian Evidence Act, no confession made to police officers shall be proved against a person who is accused of an offence.
  - On the other hand, the PMLA empowers the officials of the authority concerned with the powers of a civil court under the Civil Procedure Code, 1908.
  - Thus, as such ED investigations and proceedings would be deemed to be judicial proceedings and the statements made to ED being admissible as evidence.
  - However, this provision of the Act forces people to be witnesses against themselves, something prohibited by Article 20 of the Constitution.

d) Politically motivated probes and low number of convictions

The Enforcement Directorate has also been manifestly selective in opening money-laundering probes, rendering any citizen vulnerable to search, seizure, and arrest at the whim of the executive.
Critics also point to the abysmally low number of convictions made against raids conducted by the ED.
- - - A Finance Ministry report shows that the ED conducted 1,700 raids and launched special investigations in 1,569 cases between 2011 and 2020. However, it could secure conviction in only nine of these cases.

e) Stringent Bail conditions

The Act provides for a higher threshold for the grant of bail as compared to the standard procedure under the Code of Criminal Procedure (CrPC).
Delay or denial in grant of bail was identified by the Supreme Court in the case of Satender Kumar Antil vs CBIas being a leading factor in the perpetration of injustice in our criminal justice system.

f) Arrest of person without written communication of grounds of arrest

Violating Article 22(1) of the Constitution and Section 19(1) of the 2002 Prevention of Money Laundering Act (PMLA), relying solely on verbal communication for arrest is considered inadequate.

Financial Intelligence Unit (FIU)

• The Financial Intelligence Unit-India is a body under the Finance Ministry, which is responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign financial units.

What are the recommendations to prevent the possibility of misuse of the law?

In order to prevent the possibility of misuse of the law and subversion of constitutional guarantees, the following recommendations are proposed:

1 . Redefine the “Proceeds of Crime” Definition

Propose a more precise definition of “Proceeds of Crime” in the Prevention of Money Laundering Act (PMLA) to mitigate potential ambiguity that could disrupt financial operations.

2 . Reassessment of Burden of Proof

Evaluate the burden of proof on the accused, especially concerning reliance on statements from other accused or individuals.
Ensuring a reasonable burden of proof principle that balances the need for a fair trial while safeguarding fundamental rights guaranteed by the Constitution.
Consider amendments for a more equitable distribution of the burden of proof between the prosecution and the accused.

3 . Safeguards against overreach by Officers

Introduce additional checks and balances to prevent potential overreach by officers, particularly in cases involving political opponents.
Establish clear guidelines and protocols for investigative methods to protect individual rights and privacy, ensuring legally justified asset seizures and adherence to due process.
Institute an independent oversight mechanism to review and monitor the actions of law enforcement officers in money laundering cases.

4 . Review of Stringent Bail Conditions

Conduct a comprehensive review of stringent bail conditions, particularly under Section 45 of the PMLA, to assess their necessity and impact on accused individuals.
Consider aligning bail procedures for money laundering cases with those applicable to other financial crimes, eliminating perceived bias or undue hardship.

5. Periodic Review and Amendment of PMLA

Establish a periodic review mechanism to assess the effectiveness and relevance of the PMLA, addressing emerging challenges and evolving international standards.
Encourage parliamentary discussions and debates on potential amendments to the PMLA, involving legal experts, lawmakers, and representatives from financial institutions.

6 . Enhanced Independence and Transparency of Enforcement Directorate (ED)

Strengthen the independence of the Enforcement Directorate (ED) by ensuring its actions are free from political influence.
Introduce measures to enhance transparency in the functioning of the ED, including regular reporting and disclosure of cases handled, convictions secured, and actions taken.

7 . International Collaboration

Collaborate with international organizations and jurisdictions to share best practices, experiences, and expertise in combating money laundering.

Vijay Madanlal Choudhary & Ors vs Union of India

• The PMLA creates an alternate criminal law system since the ED is kept outside the purview of the Code of Criminal Procedure (CrPC).

• The ED is not considered ‘police’, and hence does not follow the provisions of CrPC for searches, seizures, arrests, and attachment of properties.

• This is significant — since the ED is not a police agency, statements made by an accused to the ED are admissible in court.

• The judgment in Vijay Madanlal Choudhary & Ors vs Union of India upheld these sweeping powers of the ED.

• The Supreme Court has posted the pleas challenging the top court decision in Vijay Madanlal Choudhary & Ors vs Union of India to July 2024.

Conclusion and way forward

Over the years, money laundering has become more frequent and sophisticated with the advent of internet-based banking and means of masked online payments making inroads into the Indian crimes leading to an increase in the quantum of money involved in such cases. This has highlighted the importance of proactively taking adequate preventive measures.
However, at the same time, the authorities should be mindful of the constitutional freedoms and rights afforded to all persons, including the accused. There is a need to set out proper procedures and standards that the concerned authorities and the investigating agencies may not derogate.
Continuous vigilance, stakeholder engagement, and a commitment to periodic review and reform are crucial to maintaining the integrity of the legal framework surrounding money laundering. Performing such a balancing act would ensure that the PMLA aligns with its objectives.
The anticipated review of select PMLA provisions by the Honourable Supreme Court of India is a positive development,and it is recommended that broader involvement from the Legislative, Judiciary, and Executive branches be actively encouraged.

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References:

Practice Questions:

Q. Analyse the key provisions of the Prevention of Money Laundering Act, 2002 (PMLA) that affect the delicate balance between combating financial crimes and safeguarding individual liberties. (Answer in 250 words)