Tag: Money laundering

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Proceeds of crime – Definition under the 2002 Prevention of Money Laundering Act

What is the Prevention of Money Laundering Act?

It lays the foundation of India’s legal structure to prevent money laundering. This law applies to all financial firms, banks (including the Reserve Bank of India), mutual funds, insurance firms, and their financial intermediaries. India passed the Prevention of Money Laundering Act in 2002. (Hereinafter referred to as PMLA). It defines money laundering as “any process or action involving the ‘proceeds of crime’ and presenting them as clean funds.” Section 3 of the Act defines money laundering as “anyone who explicitly or implicitly tries to engage in, purposefully assists, is a party to, or is engaged in any task or system involving proceeds of crime and the presentation of those proceeds as clean property shall be guilty of money laundering.”

As the term of ‘Money Laundering’ is fairly broad, any transaction involving ‘Proceeds of Crime’ (hence referred to as POC) is deemed a money laundering offence. Therefore, it is vital to comprehend the scope of POC in order to comprehend money laundering as defined by the Act.

2012 PMLA (Amendment) Act:

Adds the notion of ‘reporting entity,’ which encompasses banks, financial institutions, intermediaries, etc.

The PMLA of 2002 imposed a maximum punishment of Rs 5 lakh, however the amending legislation has eliminated this cap. It allows for the interim seizure and seizure of the property of anybody engaging in such actions.

Method of Money Laundry:

Money laundering involves three steps:

  • The placement of the illicit funds into the legitimate financial system is the first step.
  • In the second step, money pumped into the network is stacked and distributed over several transactions in order to conceal its tainted origin.
  • In the third and final step, money is integrated into the financial system in such a manner that its initial link with the crime is erased and it may be utilised by the offender as clean money.

Popular approaches of money laundering include:

Bulk Cash Smuggling, Cash-Intensive Businesses, Trade-Based Money Laundering, Shell Corporations and Trust, Round-Tripping, Bank Capture, Gambling, Real Estate, Black Salaries, Fictional Loans, Hawala, and False Invoicing.

Profits from Crime

The Finance Amendment Acts of 2015, 2018 and 2019 have amended the definition of “Proceed of crime” as stated in section 2(i)(u) in order to increase the effectiveness of the Enforcement Directorate’s investigations into Money Laundering.

The most difficult aspect of the Prevention of Money Laundering Act (PMLA)[1] has been the interpretation of this clause, since POC is the core of money laundering proceedings. If we ask every attorney who handles money laundering matters, “What is the greatest obstacle he or she faces under the PMLA?” The response would be a definition of “Proceeds of Crime.” Under the PMLA, the Enforcement Directorate may only seize property if it is classed as “Proceed of Crime.”

How may property be classified as “Proceeds of Crime”?

Simply said, if a person commits an offence included in the PMLA schedule as a scheduled offence or predicate offence, then any property gained or created as a result is referred to as proceeds of crime (POC). The profits of crime remain the proceeds of crime regardless of where they are kept: in the home, in a bank account, or with another person. Promoting them as “clean property,” which is the heart of the offence punished under Section 4 of the Act, requires providing an explanation for their acquisition and demonstrating that they have a legal source of income.

As an Example:

An individual is involved in the counterfeit of banknotes and has earned Rs5,000,000 as a result.

Mr. ‘A’ has violated section 489 A of the Indian Penal Code, 1860. Because the offences under the IPC are listed offences under the PMLA, the Rs 5,00,000 would be considered a POC.

Also, Mr. ‘A’ would be individually accountable for both the IPC and PMLA offences he committed and may be prosecuted for both at the same time.

The Finance Act of 2015 has broadened the term to include not just the proceeds of crime that are present in India, but also those that have been transported out of India to avoid accountability under PMLA. If a person transfers POC out of India, the equal value of property in India will be deemed POC in India. Prior to the amendment, the agency was powerless since the PMLA lacked cross-border authority.

In addition, the word ‘abroad’ was added to the definition of POC by the 2018 amendment. If the proceeds of crime from India are transmitted to a foreign state and the form of the POC is changed completely to conceal the origin of the proceeding, then any property of the accused equivalent to the value of POC abroad may also be considered POC under the definition of PMLA.

Subsequently, the Finance Act of 2019 included ‘explanation’ to the definition of ‘proceeds of crime,’ as well as assets that come under ‘proceeds of crime’ as a result of “any criminal conduct related to scheduled offence.”

Therefore, the aforesaid definition, with all of its revisions, has expanded the investigative agency’s ability to combat the scourge of money laundering under the PMLA.

Who has the authority to designate property as “Proceed of crime”?

The Enforcement Directorate (ED) is the principal investigative agency authorised to enforce the PMLA.

After getting the notification and investigating the case, if an officer of the ED not under the rank of Deputy Director has reasons to believe that a particular property is POC, then the ED records his satisfaction in the form of  ‘reasons to believe’ and provisionally attaches the property suspected to be POC.

The officer drafts a provisional attachment order (PAO) and attaches his “reasons” to it, designating the property as POC.

Confiscation and attachment of property

Under the PMLA, there is a comprehensive procedure of attachment and seizure of “Proceeds of crime.” The inquiry first starts with a “provisional attachment” of the property. This is the first phase, following which an adjudicating officer is appointed to conduct an inquiry and confirm the property as POC. Upon establishing the accused’s guilt, the POC is thereafter definitively confirmed. The three levels of property attachment are- “provisional attachment” under Section 5; (ii) “confirmation of attachment” under Section 8(3); and (iii) “confiscation” under Section 8(3). (b).

Confirmation of property attachment

Subsequently, upon the filing of a complaint, adjudicating personnel are expected to analyse all relevant case facts and determine whether or not the temporarily attached property is implicated in money laundering. Upon investigation, if the adjudicating official is certain that the item in question is Criminal Proceeds, he or she might issue an order “confirming” the attachment of property.

“Provisional attachment” of criminal process

According to section 5 (1) of the PMLA, if the director or any officer not under the position of deputy director has grounds to suppose that the property in question is POC and the individual engaged  in a scheduled offence, and such POC can be concealed or transferred, that would further frustrate the proceeding, the director or officer may order temporary attachment of material in possession for a period not to exceed ninety days from the date of the order, in accordance with the second schedule of the Income Tax Act.

No such order of attachment shall be issued unless the document of the scheduled offence has been relayed to a Court under section 173 of the Code of Criminal Procedure, 1973, or a claim has been filed by a person authorised to investigate a scheduled offence before a Magistrate or court having jurisdiction over scheduled offences.

Confiscation of possessions

At the end of the trial, the special court hearing the money laundering case is convinced that a money laundering offence has been committed. The court may then order the forfeiture of the contested property.

Conclusion

The phrase “criminal proceeds” is central to all instances of money laundering. Therefore, the Enforcement Directorate’s decision of POC must adhere to fair and reasonable legal norms. The language and spirit of the applicable section’s interpretation must be followed while evaluating the POC.

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Global Initiatives to Prevent Money Laundering

Money laundering is the unlawful process of presenting “dirty” money as legitimate rather than ill-gotten and there is a die-hearted need to prevent money laundering. Money laundering is explained in Article 1 of the European Communities Directive and Convention on the Laundering, Search, and Confiscation of the Proceeds of Crime as the conversion of property knowing that certain property is derived from serious crime, concealing or disguising the illicit origin of the property, or supporting any person who is engaged in committing such offences. Money laundering may also be defined as the practice of making it appear as though significant sums of money gained through major crimes came from a lawful source. Money laundering is also specified in Section 3 of the Prevention of Money Laundering Act, 2002.

In India, money laundering is carried out via a traditional practice known as ‘Hawala.’ Hawala is an alternate system in which “financial services, historically functioning outside the normal banking sector, where value or assets are transferred from one geographical place to another” are provided. Transactions through Hawala take in effect without any governmental oversight, making it simpler for people to make deposits and withdrawals through ‘hawala dealers’ instead of financial organizations.

Impact of Money Laundering

  1. Throws away international investment
  2. creates financial crisis
  3. The impact on currency and interest rate volatility
  4. Promotes a culture of tax avoidance
  5. Give a boost to illegal activity
  6. Negative effects on the financial markets’ and institution’s image

Global efforts to prevent money laundering and terrorism funding

Money laundering is not a new phenomenon; instead, it is an international one. Many international agreements address money laundering, and various projects have been launched to address this global issue.

  • The United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances, 1988 – The Vienna Convention

This event took place in December 1988 and was one of the earliest initiatives aimed to prevent money laundering. The primary goal of this convention is to establish efforts to counter money laundering by requiring member states to criminalise the laundering of money from drug trafficking (Article 6), as well as to promote international cooperation in investigations, prosecutions, and jurisdictions (Article 7) and to make extradition between member states possible (Article 6). Furthermore, it established a concept that local banking secrecy rules should not interfere with international criminal investigations.

  • The Basel Committee on Banking Regulation and Supervisory Practices

In December 1988, the Basel Committee on Banking Regulations and Supervisory Practices declared its intention to promote the banking sector to take a consistent approach to guarantee that banks are not used to hide or launder money obtained via illicit or unlawful activity. However, that statement does not limit itself to any drug-related money laundering; instead, it extends to laundering through financial systems, including deposit, transfer, and any form of concealment of money from drugs, terrorism, fraud, and so on. It also concentrates on the sector wherein the individual will not be permitted to utilise any financial system that is involved in any type of money laundering.

  • The council of Europe Convention

It creates a common policy on the subject of money laundering, provides a common description of money laundering, and provides means for dealing with it. It also establishes certain international collaboration among member nations, which may include governments not affiliated with the Council of Europe. The key objective of this agreement is to improve international cooperation in the areas of investigative assistance, search, seizure, & confiscation of the revenues of all sorts of criminal activity, including drug trafficking, terrorist crimes, and arms trafficking.

  • Financial Action Task Force on Money Laundering

FATF is an intergovernmental organisation was founded in 1989 at the G7 summit in Paris with the notion and goal of establishing high standards and promoting the efficient implementation of any legal, regulatory, and operational measures to combat the evil practise of money laundering and terrorist financing. FATF has acknowledged several suggestions that are recognised by international money laundering standards. In October 2001, 8 special recommendations were announced, and in October 2004, a 9th special suggestion was issued, discussing the improvement of international standards for fighting money laundering and terrorism funding. In 2012, the FATF Recommendations were revised.

  • Interpol

The International Criminal Police Organization was founded in 1923 and now has 194 members. With the mutual assistance of national police authorities worldwide, Interpol works to preserve global security. Interpol plays an essential role in tracking down criminals, conducting cooperative investigations, capacity development and training, and sharing and providing data access to governments. Interpol created the Interpol Money Laundering Automated Search Service (IMLASS) to aid anti-money laundering efforts by building a database and tracking, connecting, and identifying suspects and people from all countries, as well as tracking the flow of unlawful funds.

  • UN Global Program against Money Laundering

It was founded in 1997 with the goal of increasing the efficiency of all international measures to prevent money laundering via technical cooperation services provided to governments. The major objective of this programme is technical cooperation, which includes actions such as raising awareness and training and developing institutions. It also intends to aid in the creation of financial investigative services to ensure the effective operation of the laws.

Indian Legal Framework to prevent Money Laundering

  • Money Laundering Bill – India is a signatory to the United Nations Resolution, 1998, that calls on member states to take strict action against money laundering, the Indian government enacted the Prevention of Money Laundering Bill, 1999, that describes money laundering as the act of acquiring, owning, or possessing any proceeds of crime and intentionally entering into any transaction involving a crime listed in IPC, 1860. The act’s goal is to prohibit and regulate illicit financial operations involving drugs and narcotics, as well as other crimes.
  • Prevention of Money Laundering Act of 2002 – This Act was enacted in 2002 in order to prevent money laundering as well as to penalise those who benefit from it. This statute empowered our government or any other authorised public authority to seize property obtained through illicit earnings and money. In this legislation, the Financial Intelligence Unit examines all records to detect and identify any suspected transactions, and the Enforcement Directorate subsequently conducts an inquiry.
  • Prevention of Terrorism Act of 2002 – This is the Indian government’s first legal effort to combat terrorism and other connected issues. Under Section 8 of this Act, the Central Government is allowed to forfeit proceeds of terrorism regardless of whether or not the person whose possession it is seized or attached is prosecuted under the given act. It also strives to prevent terrorist operations in fact and implement seizure and blocking of cash for terrorism financing.
  • Financial Intelligence Unit – Although it is not a regulatory authority, the major function of this unit is to acquire all financial intelligence in collaboration with regulatory agencies such as the RBI, SEBI, and IRDA, as well as to monitor all suspicious transactions and report them. It is in charge of coordinating and enhancing all national and international intelligence.

Guidelines on Anti-money Laundering

SEBI Guidelines

  1. These regulations apply to SEBI-registered intermediaries.
  2. It imposes specific obligations on SEBI-registered intermediaries to implement policies and processes to support policies.
  3. It also discusses how to prevent money laundering, which will include the dissemination of anti-money laundering and illegal activity regulations, such as terrorism funding.
  4. It is in charge of customer account information, securities transactions, client acceptance policy, customer due diligence procedures, and record keeping.

RBI Guidelines

  1. These standards are applicable to all banking and non-bank financial firms regulated by the RBI.
  2. KYC Implantation (Know Your Customer).
  3. The major goal is to prevent people and businesses from misusing banks and non-bank financial institutions (NBFCs) for money laundering.

Other Initiatives to combat Money Laundering

  1. Bank Obligations – It is the legal responsibility of the banks to keep the details of consumers at the moment of creating a new account confidential as possible and to guarantee that all the details are in safe hands and that no one can misuse that information. It is also the legal duty of banks to make sure that the data sought and gathered from the customer is relevant to the perceived risk and must be sought separately with the consent of the customer.
  2. KYC Policy – The bank must create a KYC policy for each customer that includes certain fundamental aspects such as Customer Acceptance Policy, Customer Identification Procedures, Risk Agreement, and Transaction Monitoring.

Conclusion

Money laundering and terrorism funding represent a major danger to our financial well-being and also any country’s sovereignty. Terrorism funding is another big issue that appears to be nearly difficult to track down and capture because the majority of these transactions are in cash and no institutions are engaged in the process. The Prevention of Money Laundering Act, 2002 (PMLA) has been amended to include financing activities connected to terrorism. The RBI and the SEBI each has their own set of anti-money laundering principles. The FIU prefers to receive as many reports as possible in electronic form. Even though India has this PMLA Act and so many recommendations, it still has numerous high-profile money laundering instances; it just need to execute those rules and regulations appropriately in order to prevent money laundering.

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