Introduction

In general, the term “money laundering” is applied to the collection of procedures involved in legitimizing assets acquired by means that may not have been legal. Described otherwise, this entails transmuting unquote proceeds into potentially legitimate properties, and often into companies that have formed as a means of generating further revenue to fund the very ill-means from which the proceeds were first generated.

Throughout most jurisdictions today, this concept is used to conflate with certain forms of financial and business fraud, and malpractices affecting the fixed order of the monetary sector in those jurisdictions, including but not restricted to obfuscating the source of money, or even the method of producing money from a source deemed illegal in the country where the money is being used.

Background

Organized societies with prospering financial markets have been plagued by the effects of money laundering (in different forms) and since then such societies have been fighting the same. In most jurisdictions across space and time, the use of parallel banking or informal value relocates systems that allowed people to move capital out of the country avoiding state scrutiny was an enduring method to ‘save’ one’s wealth from unwanted state action.

On the other hand, leaders, executives, and government bodies have sometimes also acted against such activities in some way or other, declaring such practices to be entirely illegal, and sometimes allowing a full run with the aspirations of creating more capital to finance the state apparatus.

In that regard, an attempt is made here to understand how money laundering activities are taking place in India – a country that is rapidly emerging as an economic superpower, alongside a long history of prevailing grafting and corrupt practices at different levels. There is also an opportunity to explain the attempts being taken at the governmental and even institutional levels to combat these practices.

Although pieces of legislation have been put into effect over different periods of time, the Prohibition of Money Laundering Act of 2002 remains the most powerful law passed and applied against money laundering activities. To add to the political efforts, legal precedents have since been discussed on money laundering and the related pieces of legislation.

Anti-Money Laundering Laws in India

Since independence, the subsequent governments in India, conscious of the reality on the ground, have been proactive at various times in formulating laws and legal mechanisms to counteract the effects of money laundering and break existing networks.

In India, before the 2002 Prevention of Money Laundering Act was enacted, a number of statutes sparsely addressed the issue at issue. Some statutes like The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, The Income Tax Act, 1961, The Benami Transactions (Prohibition) Act, 1988.

Money Laundering is a global problem which no country alone can tackle. The 2011 Money Laundering Prevention (Amendment) Bill was required in view of India being a significant member of the Financial Action Task Force and taking money laundering laws into line with global standards. The same Bill is still currently awaiting in Parliament for approval.

The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 or the PMLA is a Parliament of India Act passed to discourage money laundering and to allow for the confiscation of money laundering-derived properties.

For effect from 1 July 2005, the notified PMLA and the Rules came into force. The notified Act and Rules place a duty on banking firms, financial institutions and intermediaries to verify customer identities, keep records and provide information in the specified form to the competent authorities [e.g., Financial Intelligence Unit – India (FIU-IND)] established and appointed in that regard. The Act was subsequently revised in the years 2005, 2009, and 2012.

Beneficial Owners

Activities that have an impact of the ulterior motive of stealing money typically work under a cloak that makes it possible to strip the cloak from monetary transactions and track the flow of money, as well as recognize the individuals who profit from these transactions. Therefore the term beneficial owner was used throughout the PMLA in many places.

Under section 2(1) clause (fa) of the PMLA, the term ‘beneficial owner’ is defined as a person who ultimately owns or controls a client in relation to a reporting entity, or someone on whose behalf a transaction is carried out and who is intended to reap the ulterior benefits from such transactions.

A company as a customer

Appertaining to the provisions of section 3(a)(ii), in the case that the client is a corporation, the beneficiary is the natural person / s who, whether working alone or together or by one or more legal entities, has or exercises power over ownership interest or other means.

And the following definitions used in pursuance of the aforementioned provisions carry the names as applied in the following manner.

The term “Controlling ownership interest” refers to the company concerned ownership/entitlement of more than 25% of the shares or capital or profits.

The word “control” implies and requires the power to choose a majority of the directors or influence the managerial or policy decisions, whether by way of their shareholding or management rights or shareholder agreements or voting agreements. Where the client is a partnership company, the beneficiary is the natural person(s) who, whether going to act alone or together or through one or more legal persons, owns or is entitled to more than 15% of the partnership’s capital or profits.

Where the client is an unincorporated affiliation or association of persons, the beneficiary is the natural person(s) who, whether going to act alone or together or via one or more legal persons, is entitled/owned to more than 15% of the property or capital or profits of the self-governing association or body of persons.

And the word “Central KYC Records Registry” (CKYCR) implies and involves an agency established under Rule 2(1)(aa) of the Rules for obtaining, processing, safeguarding and retrieving a customer’s KYC records digitally.

Payment System

The term payment system defined as a system that allows payment between a person making a payment (designated as a ‘payer’ in the PMLA) and a beneficiary, including or all of the clearing, payment, or settlement services.

Authority adjudication

The Adjudicating Authority is the body designated by the Central Government to practice its jurisdiction, rights, and authority granted under the PMLA by notification. It decides whether any of the annexed or seized property is involved in money laundering.

The Adjudicating Authority is not bound to refer to the Code of Civil Procedure, but they can take the reference to the principle of natural justice with respect to the PMLA provisions. The adjudicating body must have the power to control its own practice. Presumption of intertwined transactions If money laundering involves two or more intertwined transactions and one or both such transactions is or is seen to be engaged of money laundering, then it is assumed that the other transactions are part of these interconnected transactions for the purposes of adjudication or confiscation.

Non-Profit Organizations

‘Non-profit organizations’ (NPO) includes any individual or association licensed as a trust or company under the Societies Registration Act, 1860 or any equivalent State law or company registered under Section 25 of the 1956 Companies Act.

Reporting organizations

Furthermore, within its framework, the PMLA has provisions affecting some bodies classified as ‘reporting agencies.’ Under clause (wa) of section 2(1), disclosing persons include the banking firm, financial entity, broker or an individual who may be performing an explicitly specified business or occupation within the PMLA.

Designated Business or Profession[1]

Some businesses and occupations and related individuals are also included within the framework of the PMLA within the context of a ‘reporting body.’ Those persons include the following:

• The person carrying on such other activities as the Central Government that, from time to time, by notice, so appoint.

The procedure under the PMLA[2]

Under the PMLA’s provisions, the reporting entities are tasked with performing the major activities mandated by the law. They are obliged to perform certain functions within their specific capacities, which concisely include the following:

In addition to the above responsibilities, it is also the responsibility of the reporting entities to provide access to the necessary information as and when requested by a director (appointed in accordance with the PMLA provisions).

The PMLA specifically grants exclusions to reporting entities against any kind of civil or criminal proceedings for all obligations to be shouldered by a reporting entity. Such absence or exemption also extends to the heads and/or staff of the reporting entity worried.

The relevant provision in this regard occurs under section 23 of the PMLA.

Basically, under PMLA, the burden of proof falls on the person claiming that Money-Laundering does not involve the proceeds of the crime alleged to have been involved. The allegation against the victim or any third party is sufficient enough to discharge the authority’s duties under PMLA.

Even in the case of records and properties found in the possession or control of any person during a survey or search under the Act (Section 16, Section 17 and Section 18 of the PMLA), it is assumed that such records or properties belong to that person and that the contents of such records are true and that signatures and any part of such records are in the handwriting of such records, the assumptions as to the property documents are absolute, and it is the responsibility of that person to show the same otherwise.

It is clear that a person charged with an offence under Section 3 of the PMLA whose property is attached and sued for confiscation shall discharge the presumption of proof (Section 24) imposed on him by declaring the sources of his revenue, earnings or properties by which or the means by which he obtained the attached property to discharge the presumption that the property is not a proceeding.

Where a transaction involving the purchase of a property is part of interconnected transactions, it is incumbent on the person in charge, control or custody of the property to claim that the property acquired is not relevant to the practice of money laundering, but not accused of an offence under PMLA under Section 3, given that one or more of the interconnected transactions are or are found to be invalid.

Case Laws

Narendra Mohan Singh and Another v. Directorate of Enforcement[3], in the instant case, it was submitted on behalf of the petitioners (i.e., Narendra Mohan Singh and Ankita Singh), that that “to establish an offence of money laundering, it is essential that the persons, charged, should have directly or indirectly attempted to indulge or knowingly assisted or knowingly been a party or actually involved in any process or activity connected with proceeds of crime.” Further, it was contended that whereas, in terms of Section 2(u) of PML Act, “proceeds of crime” means property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence and the scheduled offence in terms of the definition given under Section 2(1)(y) of the PML Act, happens to be the offence under Part A, Part B and Part C of the schedule, but the allegation against the petitioners of projecting a sum of Rs. 1 crore as untainted money, is never the subject matter of the charge sheet submitted by the CBI and, therefore, any prosecution under Section 3 of the PML Act against the petitioners would not be maintainable as for prosecuting a person under PML Act, the precondition is that one should involve himself in the process or activities connected with the proceeds of crime and the proceeds of crime be derived or obtained because of criminal activity relating to the scheduled offence. But, here in the case as has been stated above, the charge upon which cognizance has been taken under the PML Act, that never forms part of the charges upon which CBI has submitted charge sheet.

And in furtherance of the above, it was further submitted that the PMLA after amendment could not be given retrospective effect as the statute, which affects substantive rights is always presumed to be prospective in operation unless made retrospective.

Refuting the contentions stated hereinabove the Hon’ble Jharkhand High Court adjudged that whereas questions were raised over the maintainability of the supplementary complaint on the premise that the provisions as contained in Section 44 (1)(b) and 45 of the PML Act, refers to ‘a complaint’. Even if such reference is there of ‘a complaint’, it never prevents of filing of the supplementary complaint as the reference of a complaint has been made in those provisions in the context that whenever a complaint filed by an authority authorized, the court may take cognizance over it. And therefore, it was also decided that there was no illegality with the order taking cognizance.

Sarosh Munir Khan v. The Deputy Director[4]

In this case, it was held that a concerned adjudicating authority operating under the provisions of the PMLA, can pass an order confirming “provisional attachment”, once it has considered that the material on record including material or evidence furnished in response to the notice issued under Section 8(1), the subsequent reply furnished in response thereto, and taking all and other relevant material into consideration, a finding gets recorded that the property or so much of it, is involved in money-laundering.

Rama Raju, S/ o B. Ramalinga Raju v. Union of India (UOI)[5]

In this case, it was held that section 24 shifts the burden of proving that proceeds of crime are untainted property onto a person(s) accused of having committed the offence under Section 3. In response to a notice issued under Section 8(1) and qua the legislative prescription in Section 24 of the Act the person accused of having committed the offence under Section 3 must show with supporting evidence and material that he has the requisite means by way of income, earnings or assets, out of which or by means of which he has acquired the property alleged to be proceeds of crime. Only on such showing would the accused be able to rebut the statutorily enjoined presumption that the alleged proceeds of crime are untainted property.

Questions & Answers

Ques 1. What is the objective of PMLA?

Ans. The PMLA seeks to combat acts pertaining to money laundering in India and in view of this, it mainly has three main objectives:

• To prevent and control money laundering
• To confiscate and seize the property obtained from the laundered money; and
• To deal with any other issue connected with money laundering in India.

Ques 2. What are the monetary penalties on the reporting entities set?

Ans. As such, section 13(2)(d), monetary penalties can be imposed on defaulting reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each instance of failure.

Ques 3. Presumption of inter-connected transactions?

In cases where money laundering was effected by the involvement of two or more inter-connected transactions and one or more such transactions is or are proved to be involved in money laundering, then for the purposes of adjudication or confiscation, it shall be presumed that the remaining transactions form part of such inter-connected transactions.

[1] Section 2(1)(s) of the Prevention of Money Laundering Act.

[2] Section 12 of the Prevention of Money Laundering Act.

[3] Cr. M.P. No. 2686 of 2013.

[4] [534/MUM/2013].

[5] (2012) 1 MLJ 419.