A brief study on Prevention of Money Laundering Act, 2002

Aashima Kakkar

Money laundering is a term coined by the Mafia in the United States of America. Mafia organizations have amassed vast sums of money through extortion, gambling, and other means, and this money is presented as legal tender. Money laundering is commonly referred to as Hawala transactions in India. Money laundering is a method used by criminals to conceal the illegal source of their income.

Money is “cleaned” of its illegitimate origin and made to appear as legitimate business profits by passing it through complex transfers and transactions, or through a series of businesses. Money is invested in such a way that even investigating agencies are unable to trace the main source of wealth in the money laundering method. The person who deals with this money is known as a “launderer.” As a result, black money invested in capital markets or other ventures is returned to the legitimate money

Money laundering is done in 3 steps, namely:

1. Placement: The investment of black money in the market is the first step in this process. By having a formal or informal agreement, the launderer deposits the illegal money in the form of cash through various agents and banks.

2. Layering: The launderer hides his real income by engaging in deception. The launderer invests money in bonds, stocks, and traveler’s checks, as well as in their own bank accounts abroad. This account is frequently opened in banks in countries
that do not reveal account holders’ personal information. As a result, the ownership and source of money are concealed during this process.

3. Integration: The final stage of the process, in which the ‘laundered’ property is reintroduced into the legitimate economy OR the money is returned to the financial world as legal currency.


Money laundering can be accomplished in a variety of ways, but the most common is the formation of fictitious companies, also known as “shell companies.” Although the ‘Shell Company’ appears to be a real company, it does not exist in the real world and no production takes place there. In reality, these shell companies only exist on paper and not in reality. The launderer, on the other hand, shows large transactions in the balance sheets of these Shell Companies.

He takes out loans in these companies’ names, receives government tax breaks, fails to file income tax returns, and accumulates a large amount of black money as a result of all of these fraudulent activities. When investigating agencies or regulatory bodies want to look at financial records, they are shown fake documents to confuse them.

Other methods of money laundering are: Buying a large house, shop, or mall but showing a lower value on paper, despite the fact that the actual market value of these purchased properties is much higher. This is done in order for them to lower their tax burden. As a result, black money is amassed through tax evasion.

Prevention of Money Laundering Act, 2002

The NDA government enacted the Prevention of Money Laundering Act, 2002 (hereinafter as PMLA) to prevent money laundering and provide for the confiscation of property obtained through money laundering. Whoever directly or indirectly attempts to engage in, knowingly assists, knowingly is a party to, or is actually involved in any process or activity connected
with the proceeds of crime and projecting it as untainted property is guilty of money laundering, according to Section 3 of the PMLA.

The PMLA and the Rules promulgated under it went into effect on July 1, 2005. Banking companies, financial institutions, and intermediaries are required to verify the identity of their clients, keep records, and provide information to the Financial Intelligence Unit – India (FIU-IND) under the Act and Rules promulgated thereunder. It allows the Director of the FIU-IND to fine a banking company, financial institution, or intermediary if they or any of their officers fail to follow the Act’s
provisions as outlined above.

The PMLA authorizes certain officers of the Directorate of Enforcement to conduct investigations into money laundering offences and to seize the property involved in money laundering. The PMLA envisions the creation of an Adjudicating Authority that will have jurisdiction, power, and authority to confirm or order the confiscation of attached property. It also calls for the creation of an Appellate Tribunal to hear appeals against the Adjudicating Authority’s and other authorities’ decisions, such as the Director of the FIU-IND.

The PMLA envisages the designation of one or more courts of sessions as Special Court or Special Courts to try offences punishable under the PMLA as well as offences with which the accused may be charged at the same trial under the Code of Criminal Procedure 1973. The PMLA allows the Central Government to enter into an agreement with the government of any
country outside of India for the purpose of enforcing the PMLA’s provisions, exchanging information to prevent any offence under the PMLA or the corresponding law in force in that country, or investigating cases involving any offence under the PMLA.

The act was amended three times between 2005 and 2012: once in 2005, once in 2009, and once in 2012. On November 24, 2017, the Supreme Court overturned a provision in the Prevention of Money Laundering Act that made it nearly impossible for a person sentenced to more than three years in prison to obtain bail if the public prosecutor objected. The provision is said to be in violation of Indian Constitutional Articles 14 and 21.

Objective of the Act

The PML Act has three main objectives in order to combat money laundering in India:

1. Money laundering prevention and control

2. Confiscate and seize property obtained through money laundering; and

3. To deal with any other money laundering issues that may arise in India.

The Act also proposes a penalty under section 4 of the Act.

Key definitions of the Act

1. Attachment: A legal order prohibiting the transfer, conversion, disposition, or movement of property.

2. Proceeds of crime: Any property derived or obtained by any person as a result of criminal activity relating to a scheduled offence, whether directly or indirectly.

3. Money Laundering: Money laundering is defined as anyone who, directly or indirectly, attempts to indulge or assist another person in any activity involving the proceeds of crime and projects them as untainted property.

4. Payment System: A system that enables a Payer and a Beneficiary to make a payment, and may include clearing, payment, or settlement services, or all of them. It includes systems that allow for the use of credit cards, debit cards, smart cards, money
transfers, and other similar transactions.

Government entities that can enforce PMLA / Jurisdiction of Government entities under PMLA

The Directorate of Enforcement (ED), which reports to the Department of Revenue, Ministry of Finance, Indian government, and the Director of the Financial Intelligence Unit (FIU), which reports to the Department of Revenue, Ministry of Finance, have been given exclusive powers under specific sections of the Prevention of Money Laundering Act 2002. (the PML Act). Furthermore, under section 54 of the PML Act, certain officers are empowered and required to assist authorities in enforcing the Act, including:
1. Officers of the Customs and Central Excise Departments
2. Officers appointed in terms of certain provisions of the Narcotic Drugs and Psychotropic Substances Act 1985
3. Members and officers of recognised stock exchanges under the Securities Contracts (Regulation) Act 1956
4. Income tax authorities under the Income Tax Act 1961
5. Officers of the Reserve Bank of India (RBI)
6. Officers of the police
7. Officers of enforcement appointed under the Foreign Exchange Management Act 1999
8. Officers of the Securities and Exchange Board of India (SEBI)
9. Officers of the Insurance Regulatory and Development Authority
10. Officers of the Forward Markets Commission 11. Officers and members of associations recognised under the Forward Contracts (Regulation) Act, 1952
12. Officers of the Pension Fund Regulatory and Development Authority
13. Officers of the Department of Posts in the Indian government 14. Registrars and sub-registrars appointed by state governments under the Registration Act 1908
15. Registering authorities empowered to register motor vehicles under the Motor Vehicles Act 1988
16. Officers and members of the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India
17. Officers of any other body corporate that is established under a state or central legislation; and
18. Such other officers of the central government, state government, local authorities or reporting entities (that is, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) who may be notified by a special order of the Central Government.

Because being involved in a process or activity connected with the ‘proceeds of crime’ (including their concealment, possession, acquisition, or use) and projecting or claiming those proceeds of crime as untainted property is an essential element for the commission of the offence of money laundering, the PMLA specifically mandates assistance and cooperation between the above-mentioned authorities.

The PMLA defines ‘proceeds of crime’ as any property (or the value of any property) derived or obtained, directly or indirectly, by any person as a result of any offence under the Indian penal statutes listed in the Schedule to the PMLA (scheduled offences); or, where such property is taken or held outside the country, the property equivalent in value held within or abroad.

In an explanation, it was clarified that “proceeds of crime” include not only property derived or obtained from scheduled offences, but also property derived or obtained directly or indirectly as a result of any criminal activity related to a scheduled offence.

Part XIV of the Finance Act 2018, which went into effect on April 19, 2018, changed thedefinition of “proceeds of crime” to include property (equivalent to the proceeds of crime) held outside of India. The predicate offences for the commission of money laundering are known as scheduled offences. As a result, if a transaction is not linked to a criminal offence, the funds associated with that transaction are not considered proceeds of crime and dealing in those funds is not considered money laundering.

As a result, the investigation of money laundering is inextricably linked to the investigation of the scheduled offence, and as a result, various investigative agencies have been directed by the PMLA to coordinate and cooperate with the Directorate of Enforcement. Scheduled offences and money laundering offences are proposed to be tried together by a special court established by the PML Act and having jurisdiction over the area where the offence was committed.

The central government, in consultation with the Chief Justice of the relevant High Court, may designate one or more sessions courts as special courts under Section 43 of the Act. As a result, the commission of a scheduled offence must be alleged
before the special court that is trying the money laundering offence under the PMLA, and evidence and material relating to the scheduled offence must be presented to the special court in order for it to frame a charge and try the offence.

The PMLA was amended by the Finance Act 2015, which included the replacement of the Adjudicating Authority with a special court that will be able to adjudicate and finalize a property attachment order. In addition, the PMLA contains a provision that allows a special court to order that any property confiscated by the central government be returned to a claimant with a legitimate interest in the property who, acting in good faith, may have suffered a quantifiable loss as a result of the money laundering offence, despite taking all reasonable precautions.

During the trial of the offence, the special court has been given the authority to consider the claim for restoration of such a claimant. The appellate tribunal established under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act 1976 has been deemed to be the appellate tribunal for hearing appeals against the Adjudicating Authority and the director of the FIU under the PML Act, as amended by the Finance Act 2016.

Punishment in criminal Money Laundering cases

Money laundering is punishable by imprisonment for a period of three to seven years, as well as a fine. If the proceeds of crime are related to an offence under the Narcotics Drugs Psychotropic Substances Act (hereinafter as NDPS Act) which deals with crimes relating to narcotics, the maximum sentence may be extended to ten years. Plea bargaining is permitted under the Code of Criminal Procedure, 1973 (CrP.C), but not for the following offences:
1. Offences that the government has identified as affecting the country’s “socio- economic condition”
2. Offenses for which the following penalties are imposed by the law:
o death
o or life in prison
o a sentence of more than seven years in prison

Money laundering has not yet been designated as a crime that affects the country’s “socio- economic condition,” so it is not eligible for plea bargaining. Furthermore, because the maximum penalty for money laundering is seven years in prison (except in the case of proceeds of crime arising from an offence under the NDPS Act), plea bargaining should be an option.

In this regard, if Indian courts treat the PMLA as a socio-economic statute, similar to corruption laws and other statutes, plea bargaining may not be an option. The accused makes an application to the court, and the court, if satisfied that the application
was made voluntarily, issues an order directing the accused to work out a mutually satisfactory resolution of the case, which may include the accused paying the victim compensation and other expenses during the case and afterwards.

If a reporting entity fails to maintain records or supply information in the manner prescribed by the PML Act and the Prevention of Money Laundering Rules, (hereinafter as PML Rules) fines ranging from 10,000 to 100,000 rupees per failure can be imposed under the PMLA. Furthermore, while the PMLA and PML Rules do not allow for the revocation of reporting entity licenses, this may be possible based on KYC and AML circulars issued by thereporting entities’ regulators.

The RBI KYC Master Directions were issued under section 35A of the Banking Regulation Act 1949 (hereinafter as the BR Act), as well as the PML Rules. Section 35A the BR Act empowers the RBI to issue such general or specific directions “as it may deem fit.” Section 35A of the BR Act, read with section 22, states that if a banking company fails to comply with a validly issued RBI direction, the RBI has the authority to revoke the banking company’s license. As a result, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may have the authority to revoke the company’s license.

Similarly, the Reserve Bank of India Act 1934, sections 45K and 45L read with section 45 IA (6), provide that if a Non-Banking Financial Company (NBFC) fails to comply with the provisions of a direction issued by the RBI, such as the RBI KYC Master Directions, the RBI has the authority to cancel the NBFC’s registration. Section 11B of the SEBI Act, 1992, for instance, empowers the SEBI to regulate the securities market through any means it sees fit and to revoke an intermediary’s license for
non-compliance with the SEBI’s directives, such as the SEBI AML Guidelines.

Amendment to PMLA through Finance Act, 2019

Prior to the amendment of the PMLA in 2019, there was no provision in the entire act to address such a situation, which resulted in several instances where the person seeking to be prosecuted under the PMLA had already been discharged or acquitted of the charge of commission of the Predicate Offense. The following are some examples of this:

The Delhi High Court quashed an ECIR filed by the ED on the grounds that the RC (FIR in Prevention of Corruption Cases) filed by the CBI on the basis of which the ECIR was filed had already been quashed by the High Court in Arun Kumar Mishra v. Directorate of Enforcement

The Delhi high court held in Rajiv Chanana v. Dy. Director of Enforcement that after a person is acquitted of a scheduled offence, his trial for an offence under section 3 of the PMLA will not survive, observing that it is difficult to imagine how a trial for money
laundering could continue when the fundamental basis, that is, the commission of a scheduled offence, has been fudged.

This aforementioned order of the Delhi High Court was further challenged by the Enforcement Directorate in Dy. Directorate of Enforcement v. Rajiv Chanana via intra- court appeal in the Delhi High Court, where certain sections of the PMLA were given by a single judge while dealing with the question of attachment of properties by the Enforcement Directorate, which is being treated as a precedent and same should not be repeated.

Though an appeal against the attachment of property was pending before the appellate authority in this case, the respondent’s counsel gave a Division Bench time of 8 weeks for the appellate authority to finally adjudicate the appeal against came up for hearing, it was contended by Ld. ASG, that in the impugned order, interpretation of his consent, on instructions, for the
court to overrule the findings of Ld. Single judge and the attachment.

Following the aforementioned decisions, came Ajanta Merchants Pvt. Ltd. v. Directorate of Enforcement, where the Delhi High Court quashed proceedings under section 3 of the PMLA, primarily on the grounds that the RC registered by the CBI had already been quashed by the High Court, and that ED had no cogent material in its possession for the prosecution
under section 3, as well as ordering properties to be provisionally seized.

In Sushil Kumar Katiyal v. Union of India 15 , a summoning order issued under section section 3 of the PMLA for the 151 offence was challenged in Allahabad High Court on the grounds that when the accused has been discharged from the Predicate Offense and the order of discharge has also reached finality, such summoning under section 3 is illegal. The Allahabad High Court, relying on the abovementioned judgments of Ajanta Merchants and Rajiv Chanana held that because no trial for a scheduled offence was pending on the date the complaint was filed and the summoning order was issued under section 3, the impugned summoning order was voidable.

In Janata Jha v. AD, Directorate of Enforcement 16 , on the other hand, Orissa High Court took a different stance than the Delhi and Allahabad High Courts. The Orissa High Court held that the PMLA is a special statute with overriding effect on the statute dealing with the Predicate Offense, and that proceedings under the PMLA can continue even if an accused person is discharged from the Predicate Offense. The court refused to quash the proceedings.

In the case of Sultana Begum v. Prem Chand Jain 17 , the Supreme Court stated:

“15. On a conspectus of the case-law indicated above, the following principles are clearly discernible:
(1) it is the duty of the courts to avoid a head-on clash between two sections of the Act and to construe the provisions which appear to be in conflict with each other in such a manner as to harmonize them.
(2) The provisions of one section of a statute cannot be used to defeat the other provisions unless the court in spite of its efforts, finds it impossible to effect reconciliation between them.
(3) It has to be borne in mind by all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is the essence of the rule of “harmonious Construction”.
(4) The courts have also to keep in mind that an interpretation which reduces one of the provisions as a “dead letter” or “useless lumber” is not harmonious construction
(5) To harmonize is not to destroy any statutory provision or to render it otiose.”

Thus, after much deliberation and many more judgements, the Finance Act, 2019 made many much needed changes as stated below:
1. Added an explanation to Section 2 (u): The position of ‘proceeds of crime’ is clarified in this Explanation. ‘Proceeds of crime’ will now be understood to refer to any property derived or obtained, directly or indirectly, from an activity related to scheduled offences.
2. Explanation of Section 3: Section 3 of the PMLA refers to “money laundering offences.” According to the Explanation under Section 3 added:
o Concealment
o Possession
o Acquisition
o Use
o Projecting as untainted property
o Claiming it as untainted property, in any manner, is a person’s direct involvement or knowingly a party to one or more of the following processes, connected with the ‘proceeds of crime’.

The Explanation also states that the process or activity related to criminal proceeds continues until a person directly or indirectly benefits from the proceeds of the crime. As a result, the entire process/activity involving proceeds of crime is a continuous
offence. The above Explanation was added in response to the Financial Task Action Force’s (FATF) observation that the concealment, possession, acquisition, and use of proceeds of crime had not previously been criminalized under Section 3 of the PMLA.

1. The proviso to Sections 17(1) and 18(1) has been removed: By removing the above proviso, the authorized officer under the PMLA now has the authority to enter any property for the purpose of conducting a search and seizure, as well as a search of any
person, even if no scheduled offence has been reported to a Magistrate or other
competent authority.
2. The PMLA’s Section 44 has been amended: The provisions for offences that can be tried by Special Courts are found in Section 44 of the PMLA.
o A proviso has been added to Section 44(1)(b) of the PMLA, which requires the submission of a “Closure Report” after the investigation is completed. It states that if no money laundering offence can be found after an investigation, the authority must file a “Closure Report” with the Special Court. It aids in the closure of cases in which the investigation has been completed but no offence has been discovered.
o Section 44 (1) (d) of the PMLA has been amended to include an explanation, giving the Special Court exclusive jurisdiction over scheduled offences. The Special Court’s trial for scheduled offences is to be distinguished from any other trial for the same scheduled offence, according to the Explanation. It is not to be regarded as a joint trial.
o “Complaint” also includes any subsequent complaint that arises as a result of further investigation against any accused person, according to the Explanation. It will apply to all individuals, whether or not they were named in the original complaint.

3. An Explanation has been added to Section 45(2) of PMLA: The offence of money laundering is a cognizable and nonbailable offence, according to this Explanation. As a result, an authorized officer can detain the defendant without a warrant. The above
amendments to the PMLA provide much-needed clarity on various aspects of money laundering that have yet to be addressed. It could be said that the authorities now have more control over investigation and closure as a result of these amendments.

However, the most important question to consider is whether these amendments will be retroactively applicable. Courts, it is hoped, will be able to shed some light on the matter in the future through litigation that may arise during the trials of such cases.
Extra – territorial jurisdiction under PMLA

In cases where the offence has cross-border implications, the PMLA grants extraterritorial jurisdiction for the prosecution of money laundering. This can be the case if any proceeds of crime arising from a predicate offence committed in India have been remitted or attempted to be remitted outside India, or if the predicate offence has been committed outside India and any proceeds arising from it have been remitted to India later.

When the asset constituting the proceeds of crime is taken and held abroad and cannot be forfeited, the PMLA allows for the attachment and confiscation of assets of equivalent value in India or abroad. PMLA gives the government the authority to enter into reciprocal agreements with other countries for the purpose of enforcing PMLA’s provisions and exchanging information for
the prevention of any offence under PMLA or the corresponding law in force in that country, as well as for PMLA investigations. MLATs (Mutual Legal Assistance Treaties) have beensigned by the Indian government with 39 countries so far.

Limitation period under PMLA

In relation to money laundering, the PMLA does not specifically provide for a limitation period. As a result, the general criminal procedure law will apply. There is no limitation period for offences punishable by imprisonment for more than three years under Section 468 of the CrP.C. Thus, there is no limitation period for offences punishable under the PMLA. As a result, the Directorate of Enforcement can bring a case against someone for money laundering after any number of years.


Money laundering is a significant threat to countries’ financial systems, as well as their integrity and sovereignty. Certain laws, such as the PMLA, have been enacted to counteract such threats. The above examination of the PMLA reveals that, despite its good intentions, the Act compromises the fundamental principles of natural justice, fair trial, and due process.

In its eagerness to combat black money, the Act infringes on fundamental rights and liberties. Some of the Act’s provisions are legally and jurisprudentially dubious and may fail to pass constitutional muster. Because the Act is relatively new, the Hon’ble Courts are expected to interpret/strike/read-down these provisions in such a way that the Act is less prone to arbitrary exercise of power and its operation is constitutionally compatible.

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