Money Laundering, Procedure, Laws and Guidelines for anti-money laundering

Recently updated on April 13th, 2023 at 06:26 pm

Organized societies with flourishing monetary systems have been plagued by effects of money laundering (in various forms) and such societies have also been combating the same ever since. In most jurisdictions across space and time, an enduring method to ‘salvage’ one’s wealth from unwanted state action, has been the use of parallel banking or Informal value transfer systems that allowed people to move money out of the country avoiding state scrutiny. On the other hand, rulers, administrators, and governments have also been acting against such activities in some way or other sometimes, by declaring such practices to be illegal outright, and on some other times, permitting a free run with the ambitions of generating more wealth to finance the state machinery.

Money laundering is a common issue around the globe. In recent times, money laundering and terror financing have forced several governments and regulators globally to focus on stopping the illegitimate flow of funds. However, combating this problem remains a primary challenge for nations and financial institutions all over the world.

The legalization of crime revenues has numerous damaging and negative outcomes. Financial crimes result in the deterioration of the administrative order and economic stability. Governments have taken several measures from the past to prevent money laundering. The objective of these measures is to prevent financial crimes and ensure that the administrative and economic stability of the nation is maintained.

Anti-money laundering (AML) in India is described as a set of regulations, laws or procedures particularly designed to prevent the activity of generating money via illegal ways and methods. The Prevention of Money Laundering Act, 2002 (PMLA) along with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (Rules) are the principal laws that are enforced to prohibit money laundering activities in India.

There are specialised authorities that deal with the money laundering problems such as the Reserve Bank of India/ Securities and Exchange Board of India (SEBI)/ Insurance Regulatory and Development Authority of India that lay down guidelines on anti-money laundering standards following PMLA and Rules.

Anti-Money Laundering Laws & Regulations

The Financial Action Task Force on Money Laundering (FATF), an intergovernmental body introduced by the G-7 Summit in Paris in 1989 and responsible for setting global standards on anti-money laundering and combating the financing of terrorism explains money laundering as the processing of criminal proceeds to disguise their illegitimate origin to legitimize the illegal gains of crime.

In 2010, India became the 34th nation member of the Financial Action Task Force. India is one of the signatories to several United Nations Conventions which tackle anti-money laundering and countering the financing of terrorism. India has prohibited money laundering under the Prevention of Money Laundering Act, 2002 (PMLA) and also in the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) (amended in 2001).

The Prevention of Money Laundering Act 2002 coupled with the rules issued under it and the rules and regulations formed by regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) displays a broad framework for the anti-money laundering laws in India.

The Prevention of Money Laundering Act, 2002

In 1998, The Prevention of Money Laundering Bill was introduced in the Lok Sabha, passed in 2003 and came into force in 2005. It has gone through several amendments, with the last one being in 2019. Administration and enforcement authorities are chosen under PMLA to execute its provisions and rules. Certain powers are vested, which are very similar to those granted to the civil courts of the nation, to exercise the provisional attachment of properties that are involved in the offence under PMLA.

The PMLA attempts to combat acts related to money laundering in India and because of this, it has three main objectives i.e.

(i) To prevent and control money laundering

(ii) To confiscate and seize the property acquired from the laundered money

(iii) To deal with any other issue in relation to money laundering in India.

Under the provisions of the PMLA, the Financial Intelligence Unit of India (FIU-IND) was formed in 2004 as the primary body for coordinating India’s AML efforts. The primary function of FIU-IND is to receive, analyse, process and disseminate information relating to suspect financial transactions. FIU-IND also coordinate and strengthen efforts of national investigation, international intelligence and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism. In 2005, the Enforcement Directorate (ED) was introduced by the Government of India to utilize exclusive powers related to the investigation and prosecution under PMLA.

The primary legislation other than the Prevention of Money Laundering Act, 2002, which directly or indirectly focuses to curb and fight money laundering activities are as follows:

  1. The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

The act was passed in 1974 in furtherance to the government attempt to retain foreign exchange within the nation. The Act is established on the concept of Preventive Detention which, apart from being a colonial legacy, is also given explicitly in our constitution as ‘the necessary evil’ and laws exist under Article 22 of the Indian Constitution for the same reasons related to the security of the state and maintenance of public order. According to the provisions of section 10, the stipulated period of detention is 1 to 2 years.

All decisions in furtherance of the Act may be taken by the state or central government. The relevant provisions in this regard which must be taken into consideration are Section 3 (power to make orders detaining certain persons), Section 4 (execution of detention orders), Section 5 (power to regulate place and conditions of detention), and Section 11 (revocation of detention orders).

  1. The Benami Transactions (Prohibition) Act, 1988

A Benami transaction is a transaction in which property is transferred to one person for a value paid or provided by another person and often, the identity of the persons involved is concealed. This Act was passed in 1988. It is to constrain Benami transactions and the right to recover property held by the Benami. Section 3 of the Act specifically debars anyone from getting into a Benami transaction. The Act further specifies those properties obtained under the Benami transaction which are liable to be acquired by the competent authorities without any need of compensation to be payable by such authority.

  1. The Indian Penal Code, 1860 and Code of Criminal Procedure, 1973

The Indian Penal Code, 1860 is the primary substantive law that regulates a number of criminal activities and also prescribes penalties for them. The Code of Criminal Procedure, 1973 on the other hand is a part of procedural law that specify procedures to be followed in criminal cases. A number of offences under the Indian Penal Code have been recognised as being scheduled offences within the meaning explained in the PMLA. Further, Section 65 of the PMLA also specify that the provisions of the Code of Criminal Procedure are to be followed in respect of the several proceedings prescribed under the PMLA.

  1. The Narcotic Drugs and Psychotropic Substances Act, 1985

This Act was passed in 1985 with the aim of consolidation and amendment of laws relating to narcotic drugs. Keeping in line with its objectives identifies, lists, and explains several forms and types of narcotic drugs and psychotropic substances.

The Act, in its essence attempts to stop and restrict the transport and vending of narcotic and psychotropic substances and does not mention money laundering activities. It may, however, be taken into consideration that the trade of narcotic substances does generate a lot of cash for people involved in it. So much so that a noticeable portion of the money involved in drug trafficking is then mobilised to give it legitimacy or in simple words, the same money gets laundered. The NDPS Act, by working against practices involving drug trading and trafficking puts a direct restriction on the flow of money into illegitimate activities.

Beneficial Owners

Activities given effect with the ulterior motive to launder money, usually operate under a veil, which makes it necessary to have the veil lifted out of monetary transactions and identify the movement of money, and also identify the persons benefitting out of such transactions. Which is why, the term beneficial owner has been used in many places throughout the PMLA.

The term ‘beneficial owner’ is defined under section 2(1) clause (fa) of the PMLA to mean a person who ultimately owns or controls a client regarding a reporting entity, or someone on whose behalf a transaction is effected and who is meant to reap the ulterior benefits out of such transactions.

Company as a customer

Pursuant to the provisions of the section 3(a) (ii), in the event the customer is a company, the beneficial owner is the natural person/s, who, whether acting alone or together, or through one or more juridical person, has/ have a controlling ownership interest or who exercise control through other means.

And in pursuance of the above provisions the following concepts used bear the meanings attributed in the following manner.

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

The term “Control” means and includes the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. Where the customer is a partnership firm, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/ have ownership of/ entitlement to more than 15 per cent of capital or profits of the partnership. Where the customer is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/ have ownership of/ entitlement to more than 15 per cent of the property or capital or profits of the unincorporated association or body of individuals.

And the term “Central KYC Records Registry” (CKYCR) means and includes an entity defined under Rule 2(1)(aa) of the Rules, to receive, store, safeguard and retrieve the KYC records in digital form of a customer.

Payment System

The term payment system has been defined as a system that enables payment to be effected between a person making a payment (designated as a ‘payer’ in the PMLA) and a beneficiary, involving clearing, payment, or settlement service or all of them. It includes the systems enabling credit card, debit card, smart card, money transfer or similar operations.

Adjudicating Authority

The Adjudicating Authority is the authority appointed by the central government through notification to exercise its jurisdiction, powers, and authority conferred under the PMLA. It decides whether any of the property attached or seized is involved in money laundering. The Adjudicating Authority shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and subject to the other provisions of PMLA. The Adjudicating Authority shall have powers to regulate its own procedure. Presumption in inter-connected transactions Where money laundering involves 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.

Non-Profit Organizations

“Non-profit organisations” (NPO) means any entity or organisation that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a company registered under Section 25 of the Companies Act, 1956.

Reporting Entities

The PMLA further has provisions pertaining to certain units known as ‘reporting entities’ within its ambit. Within clause (wa) of section 2(1), reporting entities include banking company, financial institution, intermediary or a person who may be carrying out a business or profession specifically designated within the PMLA.

Designated Business or Profession

Within the ambit of the PMLA, certain businesses and professions and the persons associated therewith are also included within the meaning of a ‘reporting entity’. Such persons include the followings

  • A person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;
  • A Registrar or Sub-Registrar appointed under Section 6 of the Registration Act, 1908, as may be notified by the Central Government.
  • Real estate agent, as may be notified by the Central Government.
  • Dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government.
  • Person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or
  • Person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.

The above description is mentioned under the Section 2(1)(s) of the PMLA.

Procedure under the PMLA

Obligations of the Reporting Entities

The reporting entities are tasked under the provisions of the PMLA to perform the major activities mandated by the law. In their specific capacities are obligated to perform certain functions, which concisely include the followings:

  • Maintenance of records;
  • Furnish information pertaining to such records;
  • Verification of identity of its clients by carrying out due diligence procedures;
  • Identification of beneficial owner, in respect of the transactions undertaken with its various clients.

Monetary Penalties on Reporting Entity

Notwithstanding the protection of law according to reporting entities, it may also be noted that the reporting entities are also subject to vigilance and for obligatory violations, such reporting entities may also get penalised.

In accordance with the provisions of Section 13(2)(d), it may be noted that reporting entities may get penalised for non-maintenance of records or non-submission of information sought from such reporting entity. As such, 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.

Burden of Proof

The offence of money laundering as noted under section 3 of the PMLA is considered an aggravating one, and an accusation under the same shifts the onus of proof on the person accused of having committed the offence, as such.

Following the provisions as noted above, In the case of a person charged with the offence of money-laundering under section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-laundering; and (b) In the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.

Presumption of inter-connected transactions

In cases where money laundering was effected by 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.

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

Essentially, under PMLA, the burden of proof lies on the person who claims that the proceeds of crime alleged to be involved in Money-Laundering, are not involved in Money-Laundering. The presumption against the accused or any 3rd party is good enough to discharge the onus of the authorities under PMLA.

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