Published on: 20 November 2022 at 11:40 IST
The Prevention of Money Laundering Act, 2002, together with the rules issued thereunder and the rules and regulations prescribed by regulators such as the Reserve Bank of India and the Securities and Exchange Board of India, set out the broad framework for the anti-money laundering laws in India. Some of the primary rules and guidelines regulating money laundering activities in India include:
- The Prevention of Money Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules 2005, as amended from time to time, issued under the PML Act.
- The Master Circular on Anti-Money Laundering Standards or Combating Financing of Terrorism or Obligations of Intermediaries under the Prevention of Money Laundering Act 2002 and the rules framed thereunder, issued by SEBI on 4 July 2018.
- The Master Direction – Know Your Customer Direction 2016, issued by the RBI on 25 February 2016, as updated on 12 July 2018, which is the most up-to-date consolidation of the KYC guidelines and norms for all entities regulated by the RBI.
CONSTITUTIONAL VALIDITY OF CERTAIN PROVISIONS OF THE PMLA,2002
In the case of B. Rama Raju v. UOI & Ors. constitutional validity of Section 2(1)(u),5,8 and 23 were challenged. The court looked into the object of the act. The property in possession of any person other than the one who has been charged with for committing the offence can also be attached and confiscated.
With respect to the retrospective penalization the court held that the Parliament has the power to allow confiscation of property acquired by illegal means prior to the enactment of this act.
With respect to the presumption enjoined by section 23 of the Prevention of Money Laundering Act, 2002 the court held that Section 23 enjoins a rule of evidence and rebuttable presumption considered essential and integral to effectuation of purposes of Act in legislative wisdom. It’s a rebuttable and an irrebuttable presumption. Hence validity of the provisions was upheld.
In terms of sub-section (1) of section 6 of Preventions of Money Laundering Act, 2002, an Adjudicating Authority under PMLA has been constituted to exercise jurisdiction, powers and authority conferred by or under the said Act. Adjudicating Authority exercises jurisdiction, powers and authority conferred by or under the PMLA.
Where the Adjudicating Authority decides that any property is involved in money-laundering, Adjudicating Authority shall, by an order in writing confirm the attachment of the property made or retention of property or record seized.
The Adjudicating Authority is not bound by the procedure laid down in the CPC but “shall be guided by the principles of natural justice” and shall be entitled to regulate its own procedure. The role of Adjudicating Authority is to consider attachments made by authorities and grant or seized property.
The Director or any person aggrieved by an order made by the Adjudicating Authority under this Act, may prefer an appeal to the Appellate of the order made by the Adjudicating Authority. Appellate Tribunal may entertain an appeal after the expiry of the period of forty-five days if it is within that period.
IMPACT OF MONEY LAUNDERING
Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimes. Differences between national anti-money laundering systems will be
exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures.
The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.
The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of the society. In countries transitioning to democratic systems, this criminal influence can undermine the transition.
In Mahanivesh Oils & Food Pvt. Ltd. v. Directorate of Enforcement, the Hon’ble High Court of Delhi observed that money laundering involves three stages, which are as follows: –
“The first stage is Placement, where the criminals place the proceeds of crime into the normal financial system. The second stage is Layering, where money introduced into the normal financial system is layered or spread into various transactions within the financial system so that any link with the origin of wealth is lost. And, third stage is Integration, where the benefit or proceeds of crime are available with the criminals as untainted money.”
Some of the widely used forms of money laundering and related organized crime are structuring deposits, shell companies, third-party cheques, bulk cash smuggling, gambling, false accounting, embezzlement, insider trading or bribery.
TRIAL OF PMLA OFFENCE AND SCHEDULED OFFENCE
Since the offence of Money laundering is inextricably connected with the scheduled offence, 2013 amendments to the PMLA provide that the trial for the predicate offence as well as offence punishable under Section 4 shall be conducted by the Special Court.
If a Court which has taken cognizance of the scheduled offence is other than the Special Court which has taken the cognizance of the complaint of the offence of money laundering under sub-clause (b), it shall, on an application by the authority authorised to file a complaint under this Act, commit the case relating to the scheduled offence to the Special Court and the Special Court shall, on receipt of such case proceed to deal with it from the stage at which it was committed.
However, this by itself should not be construed to mean a joinder or clubbing of trial. The simultaneous trial in both the cases by the same court is an expedient to reduce delays. Needless to state, both the cases are independently tried and decided on the basis of evidence in each case. The trial of scheduled offence and PMLA offence is to be conducted by the same court only for the sake of expediency.
Section 4 of PMLA prescribes the punishment for Money-Laundering as under:
- Rigorous Imprisonment for a term
- which shall not be less than 3 years, but
- which may extend to 7 years/10 years, and
- shall also be liable to fine.
A notable feature is that there is no upper limit on the fine that may be imposed for an offence under the PMLA. The obvious intent is for the fine imposed to be commensurate to the nature and extent of offence committed and the money laundered.
THE PREVENTION OF MONEY LAUNDERING ACT, 2002 (PMLA) V INSOLVENCY AND BANKRUPTCY CODE (IBC).
The Act does not adequately address the issue of attachment of property between the PMLA and the Insolvency and Bankruptcy Code (IBC). The process of attachment of property under the PMLA often collides with the Corporate Insolvency and Restructuring Process under the IBC and is likely to frustrate the very objective of CIRP.
Although this is yet to be finally decided by the Courts where it is pending judicial determination.
In March, 2019, the PMLA Appellate Tribunal held that the IBC overrides the PMLA and, as per Section 14 (1) (a) of the IBC, the moratorium on any kind of proceedings shall be imposed, particularly with regard to the attachment of the property.
It further held that the ED established under the PMLA Act had no jurisdiction in respect of the properties and assets in the current civil proceedings of the corporate debtor undergoing CIRP.
The tribunal had held that third parties, banks in this case, which have legitimately created rights such as a charge, lien or other encumbrances, have a superior claim over such properties.
By contrast, while deciding the batch of appeals by the ED, the Delhi High Court in April, 2019, held that the PMLA prevails over the IBC when it comes to the attachment of properties obtained as “proceeds of crime”.
The court said the Prevention of Money Laundering Act, Recovery of Debt and Bankruptcy Act, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act and the IBC must co-exist and be enforced in harmony with the PMLA.
ADVERSE EFFECTS OF MONEY LAUNDERING
The adverse effects of money laundering are palpable and, if left unchecked, it can be detrimental to the socio-economic health of the country. It can weaken the social fabric of a country by its strong economic and political influence & by acquiring control over the economy through large scale investments and by bribing Government Money laundering is prejudicial to free enterprises offering goods and services at much lower prices. This proves prejudicial for private sector as it is unable to compete with the low prices offered by such enterprises.
Money laundering adversely impacts the real economy, stunts its growth and diverts its resources to encourage criminal activities and corruption. This in turn affects the country’s international trade and capital flow, which is harmful for long-term economic development of such country.
Especially in developing economies, money laundering facilitates the growth of crime and corruption which erodes the chances of sustainable growth of such countries. Also, if money launderers are not prosecuted and ‘crime pays of’ then it becomes a lucrative source of easy income. It appears more attractive to others and may encourage them to indulge in such acts.
Amongst the various threats posed by money laundering, few prominent ones are:
- Terrorism: Money laundering is one of the primary modes of financing politically and ideologically motivated terrorist activities. Various illegal means are resorted to, in order to collect funds and to thereafter use for spread of terrorist activities.
- Threat to Financial Sector Institutions: Globally, the financial sector has become a major target of money laundering activities because they provide a gamut of services and instruments that can be used to conceal the origin of funds. Money laundering leads to internal corruption and causes reputational distortions.
- Threat to Economic and Political Stability: The International Monetary Fund has expressed grave concerns about the consequences of money laundering. They have opined that such activities cause potential and palpable threat to a country’s financial stability and integrity, resulting in loss of welfare and resources. It has an overall destabilising spill-over effect on economies across the globe. Further, money laundering often adversely impacts the macro-economic analysis by providing distorted economic projections that result in volatile exchange and interest rates, unstable policy decisions, etc.
Money laundering poses a serious threat not only to the financial systems of countries, but also to their integrity and sovereignty. To obviate such threats, certain legislations including PMLA, have been enacted.
The above analysis of the PMLA manifests that the Act, although extremely well intentioned, compromises on the fundamental principles of natural justice, fair trial and due-process.
In its enthusiasm to fight black money, the Act transgresses upon basic rights and liberties. Some of the provisions under the Act are legally and jurisprudentially unsound and tenuous and may not pass constitutional muster. Since the Act is fairly new, it is expected that the Hon’ble Courts would interpret these provisions in such a manner, so as to make the Act less prone to arbitrary exercise of power and ensure that its operation is constitutionally compatible.
Our country has seen its fair share of financial scandals in the past. There is no dispute that the financial fraud and crimes are still growing at an unprecedented rate recently. While it is commendable that the Legislature is dealing this with these problems steadfastly, however, in its zeal, it cannot take measures that will invade too much into the rights and civil liberties of an individual. It is imperative that a proper balance has to be struck between the cost and benefit and while doing so, the abysmally poor financial literacy prevailing in our country cannot be overlooked.