By V. Nityanand
Published On: November 04, 2021 at 14:00 IST
The surge in cases of money laundering and other financial crimes are an indication of the fact that global mechanisms aimed at preventing such crimes are inadequate if not completely ineffective. The COVID – 19 Pandemic has only facilitated the growth in financial crimes due to the pressure it exerts on the economy.
Corporations which flourished in the past are seeking to evade taxes and retain their wealth as they have suffered huge losses in business these past few months. Lockdowns have forced people to stay at home which in brings out a new form of economy that is cashless and technological oriented. This gives hackers an upper hand as they distortion of the digital realm is something they are adept at.
As noted by several think-tanks online financial services are being misused by wrongdoers at the expense of the welfare of taxpayers. All of this calls for the institution of a mechanism at the global level which is aimed at addressing such grievances.
One such mechanism is the Financial Action Task Force.
What is the Financial Action Task Force?
The Financial Action Task Force (abbreviated as FATF) or Groupe D’Action Financiere (abbreviated as GAFI) is an Intergovernmental Organisation constituted to eradicate money laundering and, later, terrorism financing.[i] It is headquartered in Paris, France and has a membership of 39 members. Member states include – Australia, Belgium, Canada, the United States of America, Luxembourg and so on.
Its affiliations include:
- Asia/Pacific Group on Money Laundering (APG)
- Caribbean Financial Action Task Force (CFATF)
- The Council of Europe Committee of Experts on the Evaluation of Anti – Money Laundering Measures and the Financing of Terrorism (MONEYVAL)
- Financial Action Task Force on Money Laundering in South America (GAFISUD)
- The Middle East and North Africa Financial Action Task Force (MENAFATF).
FATF seeks to effectively implement legislation designed to curb ‘Financial Crimes’ and promote operational measures to prevent money laundering. The FATF was established by the G7, which is an inter-governmental political forum made up of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America. It is made up of the largest economies and affluent democracies and accounts for up to sixty per cent of the global net wealth.[ii]
What is Money Laundering and CFT?
Money Laundering is the process of accumulating vast amounts of wealth produced by engaging in fraudulent activities such as human trafficking, drug smuggling, etc. The money produced is changed into origination from legitimate sources from criminal acts. Laundering of funds is mostly disguised as legitimate financial transactions.
Combating the Financing of Terrorism (CFT) is a collection of government policies, legislation and regulations aimed at restricting financial assistance to those who are, in the eyes of the government, are criminals. Very often, government agencies seek to track down financial sources that are availed by criminals to carry out their fraudulent activities in order to prevent crimes.
CFT also goes by the name Counter Financing of Terrorism and Countering the Financing of Terrorism. The focus of CFT is on banks, businesses, charities and activities such as surveillance, controlling and reporting.
What are the lists maintained by the Financial Action Task Force?
The FATF has put forth two lists, namely – FATF Blacklist (conversely known as “Call For Action”) and FATF Greylist (conversely known as “Other Monitored Jurisdictions”).
The FATF Blacklist is composed of Non – Cooperative Countries or Territories (NCCTs) that are deemed to be uncooperative in the global war on financial crimes. Examples of countries included in the FATF Blacklist are North Korea and Iran. The list describes ‘High-Risk Jurisdictions’, which are susceptible to being utilized as hubs of financial fraud. Such jurisdictions lack legislative mechanisms aimed at tackling issues such as money laundering, terrorist financing and financing proliferation.
As the name suggests, FATF Greylist is composed of ‘Other Monitored Jurisdictions’ such as Albania, Barbados, Cambodia, Panama, and other jurisdictions subject to increased monitoring. Such Jurisdictions have committed to identifying lacunas in legislation. FATF, along with FATF Style Regional Bodies (FSRBs), keep track of progress in such jurisdictions.
The FATF Plenary holds annual meetings three times, with the last one being held in the month of June 2021. In the forum, Ghana was removed from the grey list after it completed its action plan, and a successful on-site visit by FATF assessors and Haiti, Malta, the Philippines and South Sudan were added to the grey list.
What are the Recommendations laid down by the Financial Action Task Force?
The FATF formulated Forty Recommendations on Money Laundering and Nine Special Recommendations on Terrorism Financing that set the foundation for the war on financial crimes at the international stage. These recommendations are flexible enough to be incorporated by various jurisdictions in accordance with their constitutional frameworks.
Some of the groups involved in the organization of the above mentioned recommendations include – Money Laundering and Confiscation, Terrorist and Beneficial Ownership of Legal Persons and Arrangements, Powers and Responsibilities of Competent Authorities, International Cooperation and so on. The Forty Recommendations are deemed to be the primary policies on combating money laundering and cover the criminal justice system, law enforcement, international cooperation and financial system and its regulation.
How are the Recommendations implemented?
Intergovernmental institutions such as the FATF play a crucial role in combating white-collar crimes by regulating the financing of terrorism.[iii] For a country to implement the FATF recommendations effectively, it must do the following things:
- Investigation and Prosecution of Money Laundering and Terrorist Financing – For this, it must provide law enforcement agencies and prosecutorial authorities with training. Countries must also equip authorities with adequate resources and powers.
- Deprivation of Criminal Proceeds and Illicit Resources – Criminal Assets, upon identification, must be frozen, seized and confiscated.
- Implementation of effective measures for detection and prevention of Money Laundering and Terrorist Financing – Personals in both financial and non-financial sectors must implement the necessary anti-money laundering (AML) and combating financing terrorism (CFT) measures such as – customer due diligence, record keeping and suspicious transaction reporting. Customer Due Diligence involves preventing criminals from maintaining anonymity or false identities through the identification of customers and maintaining adequate records of their businesses and transactions so as to differentiate between illegal and legal activities. Record-Keeping involves the identification of customer records that can be accessed with ease by the authorities and tracing of customer transactions. Suspicious Transaction Reporting involves monitoring customer relationships and reporting suspicious transactions to the financial intelligence unit for analysis and further dissemination to law enforcement authorities.
- Enhancement of transparency of legal persons and arrangements – This involves making information concerning ownership of legal persons and arrangements accessible to the authorities.
- Implementation of Mechanism to facilitate cooperation and coordination of Anti-Money Laundering (AML) and Combating Financing Terrorism (CFT) measures at both national and international level – This involves ensuring that there are no safe havens for wrongdoers through the implementation of mechanisms for effective cooperation between member – states while investigating and prosecuting money laundering and terrorist financing.
The pandemic has negatively impacted the Indian workforce and the overall economy. While the well-to-do sections of the Indian Society have managed to bounce back to a certain extent, if not completely, the same cannot be said for the more impoverished sections of the Indian Society.
Affluent sections have a colossal amount of savings to fall back on, while poverty-stricken sections like daily wage workers depend on the remuneration, they receive on a given working day. Due to Governmental regulations, employers have been shutting down business operations, thus stripping the labourers of their only source of income. Households are no longer employing domestic servants out of fear of contracting the virus.
Many of these labourers happen to be unskilled and migrate to metropolitan areas in search of employment. Because of the pandemic’s negative impact on the employment rate, they are left with no reason to stick around and choose to go back to their native towns and villages. They are trapped in a vicious cycle of poverty with no scope of any relief.
Individuals are now turning to crime to make ends meet—for instance, investors and business owners, by concealing the existence of funds, are evading debts incurred on their failing companies.[iv]
What are the Statutes regulating Money Laundering in India?
The Prevention of Money Laundering Act of 2002[v] is the primary legislation to regulate money laundering. The act provided punishment of imprisonment from three years to seven years, and crimes related to paragraph 2 of Part A of the Schedule (Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985) are punishable by imprisonment of 10 years. Before the Act of 2002, several legislations were in place to counter money laundering, such as
- Conservation of Foreign Exchange and Prevention of Smuggling Activities Act of 1974 (COFEPOSA)[vi]
- Benami Transactions (Prohibition) Act of 1988[vii]
- Indian Penal Code,1860[viii]
- Code of Criminal Procedure of 1973[ix]
- Narcotic Drugs and Psychotropic Substances Act of 1988[x]
- Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act of 1988[xi]
What are the Case Laws relating to Money Laundering in India?
- Nikesh Tarachand Shah Vs Union of India (2017)[xii]
Section 45(1) 13 of the PMLA is Unconstitutional
The constitutionality of Section 45(1) was questioned in the case of Nikesh Tarachand Shah Vs Union of India in the year 2007 for being violative of Article 14 and Article 21 of the Indian Constitution. Section 45(1) of the Act laid down two requirements that were to be fulfilled along with provisions laid down by the Criminal Procedure Code of 1973 in order to avail bail. The Supreme Court held that the aforementioned section is unconstitutional as the principle guiding the criminal system is bail as opposed to jail.
- B Rama Raju Vs Union of India and Other (2019)[xiii]
Section 23 of PMLA is Constitutional
The Supreme Court stated that since the power of retrospectively applying an act lies upon the parliament and Section 23 of the Act provides for rebuttable presumption, the aforementioned sections do not violate fundamental rights enshrined in the constitution.
- J Sekar Vs Union of India, (2017)[xiv]
Section 5(1) of PMLA is Constitutional
Prior to this judgement, several writ petitions under the writ jurisdiction of High Court guaranteed under Article 226, were filed asking for the aforementioned section to be held unconstitutional. It was held that the said section is not violative of Article 14 as it does not provide for excessive delegation of powers that are deemed to be ‘arbitrary’ in nature.
- Srimati K. Sowbaghya Vs Union of India, (2016)[xv]
Section 5(1) of PMLA is Constitutional
It was held by the Supreme Court that confiscation of property under the aforementioned is only for a limited time period. Furthermore, it was also stated that the order of attachment is to be submitted to Adjudicating Authority immediately and the validity of the same will be determined by the Authority and thus it is not beyond the scope of Article 14, Article 21 and 300-A.
- Rajbhushan Omprakash Dixit Vs Union of India and Anr., (2018)[xvi]
Section 14 of the PMLA is not a pre – requisite
It was held that there exist inconsistencies between the statutes. While under Section 41 of CRPC the Enforcement Directorate can arrest a person on ‘mere suspicion’, the provisions under Section 14 of PMLA lays down preliminary requirements that need to be followed before such arrest. Section 14 of the PMLA states that sufficient evident to form a “reason to believe” that the person is guilty is needed. As per the case, such requirement is unnecessary if Section 41 of the CRPC is already complied with.
The rise in financial criminal activities around the world has caused academicians, scholars and the public to shift their focus to addressing criminal behaviour through economic means. Modern thinkers no longer seek to understand crime through the lens of pre-established legal principles and wish to adopt a more interdisciplinary approach towards understanding crime. Economists and legal experts should collaborate often to address financial crimes. The FATF is a step in the right direction to curb financial crimes such as money laundering, which is a global phenomenon. More and more countries should become signatories to the FATF as financial crimes can be dealt in an effective manner if the fight is at a global stage.
Edited by: Aashima Kakkar, Associate Editor, Law Insider
[i] Sitharaman, Yellen discuss fighting money laundering, combating terror funding; importance of effective implementation of FATF standards, Times of India (last visited on October 16, 2021)
[ii] “FATF will fail in its duty if it delays blacklisting Pakistan for its terror sponsorship, Says Expert”, The Economic Times (last visited on October 16, 2021)
[iv] “International Standards On Combating Money Laundering And The Financing Of Terrorism & Proliferation”, FATF-GAFI (last visited on October 16, 2021)
[vi] Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, (Act 57 of 1974)
[vii] Benami Transactions (Prohibition) Act of 1988, (Act 45 of 1988)
[viii] Indian Penal Code,1860, (Act 45 of 1860)
[ix] Code of Criminal Procedure, 1973 (Act 2 of 1974)
[x] Narcotic Drugs and Psychotropic Substances Act, 1988 (Act 2 of 1989)
[xi] Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 (Act 46 of 1988)
[xii] Nikesh Tarachand Shah Vs Union of India, AIR 2017 SC 5500
[xiii] B Rama Raju Vs Union of India and Other, 2011 SCC Online AP 152
[xiv] J Sekar Vs Union of India, 2018 SCC OnLine Del 6523
[xv] Srimati K. Sowbaghya Vs Union of India, 2016 SCC Online Kar 282
[xvi] Rajbhushan Omprakash Dixit Vs Union of India and Anr., 2018 SCC Online Del 7281