Prevention of Money Laundering Act, 2002 (PMLA)

Prevention of Money Laundering Act, 2002 (PMLA) was enacted to fight against the criminal offence of legalizing the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds. In simple words, money laundering means converting illegally earned money into legitimate money.

What is Money Laundering?

Money laundering is defined as the process through which an illegal fund, such as black money, is obtained from illegal activities and disguised as legal money, eventually portrayed as white money. The money laundered is passed on through various channels or phases of conversions and transfers to make it legal and eventually reach a legally acceptable institution, like a bank.

Objectives of the Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002, was introduced to combat the issue of money laundering. Some of its objectives are as follows:

• Prevent money-laundering.
• Combat/prevent channelising of money into illegal activities and economic crimes.
• Provide for confiscating property derived from, or involved/used in, money laundering.
• Penalise the offenders of money laundering offences. 
• Appointing an adjudicating authority and appellate tribunal for taking charge of money laundering matters.
• Provide for matters connected and incidental to the acts of money laundering.

Common Forms of Money Laundering

Below are some of the common methods of money laundering:

• Hawala
• Bulk cash smuggling 
• Fictional loans 
• Cash-intensive businesses 
• Round-tripping 
• Trade-based laundering 
• Shell companies and trusts 
• Real estate 
• Gambling 
• Fake invoicing 

Money Laundering Offence

A person shall be guilty of the offence of money laundering when, he/she has directly or indirectly attempted to indulge, knowingly assisted, knowingly is a party, or is actually involved in one or more of the following processes or activities connected with proceeds of crime:

• Concealment 
• Possession
• Acquisition
• Use
• Projecting as untainted property
• Claiming as untainted property

Proceeds of Crime

‘Proceeds of Crime’, means and includes, any property obtained or is derived directly or indirectly as a result of criminal activity relating to a Scheduled Offence (as provided below).

List of Offences

Under PMLA, the commission of any offence, as mentioned in Part A and Part C of the Schedule of PMLA will attract the provisions of PMLA. Some of the Acts and offences, which may attract PMLA, are enumerated below:

• Part A enlists offences under various acts such as: Indian Penal Code, Narcotics Drugs and Psychotropic Substances Act, Prevention of Corruption Act, Antiquities and Art Treasures Act, Copyright Act, Trademark Act, Wildlife Protection Act, and Information Technology Act.
• Part B specifies offences that are Part A offences, but the value involved in such offences is Rs 1 crore or more.
• Part C deals with trans-border crimes and reflects the dedication to tackle money laundering across global boundaries.

Method of Operation

• The first stage is when the money derived through crime is introduced into the formal financial system called ‘placement‘.
• In the second stage, the money so introduced into the system is layered and spread over various transactions with a view to clear the tainted origin of the money and is called ‘layering‘.
• In the third and the final stage, the money enters the financial system in such a way that original association with the crime is sought to be cleared so that the money can then be used by the offender or person receiving it as clean money and this is called ‘integration‘.

Money laundering vis-à-vis syphoning of funds

Mere earning money or obtaining any property by committing a crime does not amount to money laundering, though it may amount to syphoning of funds. Obtaining or deriving any property by committing a crime which amounts to a Scheduled offence and then projecting or claiming such money or property as untainted property amounts to money laundering.

Authorities Entrusted for Investigation

The Enforcement Directorate in the Department of Revenue, Ministry of Finance, the Government of India is responsible for investigating the offences of money laundering under the PMLA. Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND is the central national agency responsible for receiving, processing, analysing, and disseminating the information relating to suspect financial transactions. It is also responsible for:

• Coordinating and strengthening the efforts of national and international intelligence,
• Investigations for pursuing the global efforts against money laundering and related crimes.

The scheduled offences are separately investigated by agencies mentioned under respective acts, for example, the local police, CBI, customs departments, SEBI, or any other investigative agency, as the case may be.

Actions that can be Initiated Against the Person Involved in Money Laundering

• Seizure/freezing of property and records and attachment of property obtained with the proceeds of crime.
• Any person who commits the offence of money laundering shall be punishable with –
  • Rigorous imprisonment for a minimum term of three years and this may extend up to seven years.
  • Fine (without any limit).

Adjudicating Authority

Under the PMLA, the Central Government has the power to appoint an adjudicating authority to exercise powers and authority conferred under this Act. An adjudicating authority must consist of a bench of:

• A chairperson
• Two other members, out of which one individual must have experience in law, administration, finance or accountancy field.

An individual in the field of law can be a member of the adjudicating authority if he/she:

• Has qualifications to be appointed as a judge of any district, or
• Has been a representative member of the Indian Legal Service and has held a post in Grade I of that service.

The bench of the adjudicating authority will operate in New Delhi and other locations as specified by the Central Government and the chairperson. 

Powers of the Adjudicating Authority

The Adjudicating authority will issue a notice to the person against whom it has received a complaint of money laundering offence under the PMLA. It can issue notice such a person calling him to indicate the sources of his/her income, earnings or assets, out of which he/she has acquired the property attached, seized or frozen by the Director appointed under this Act and to show why such properties should not be declared as properties involved in money-laundering and confiscated by the Central Government.

The Adjudicating Authority will record a finding whether all or any of the properties referred in the complaint are involved in money laundering after considering a reply from the person accused of the offence, hearing the aggrieved person and the Director and taking all evidence into account.

When the Adjudicating Authority decides that a property is involved in money laundering, the person accused of the offence will confirm in writing the attachment, seizure or frozen of the property. Such property will be released to the person entitled to receive it. 

Obligation of the Banks, Financial Institutions and Intermediaries to Maintain Records

The financial institutions, banks and intermediaries have the following obligations under the PMLA:

• To maintain records of every transaction and amount, irrespective of whether such transactions were carried on in one go or there were series of transactions having an internal connection with each other when such series occurred within thirty days.  
• To inform the Director appointed under the PMLA about such transactions within the allotted time. 
• To verify the identity of the clients. 
• To keep a record of all the documents relating to the identity of the clients and the beneficial owners, account files and business transactions relating to the clients. 

These records must be kept for 5 years from the time the transaction took place. The Director appointed under the PMLA has the power to look into the records from the bank, financial institutions, and intermediaries. If the Director finds out that the bank, financial institutions, or intermediaries have not kept the records, he/she can levy a fine ranging from Rs.10,000 to Rs.1,00,000. However, no civil or criminal case can be filed against any bank, financial institution, or intermediary. 

Over the past decades, several anti-money laundering policies have been adopted to overcome laundering. Financial institutions and governments are constantly looking for new approaches to fight against the money launderers. 

The banks and financial institutions play a pivotal role in the world of financial crime. It is important that they are properly trained on how to identify and handle money laundering. Almost every bank employee receives training in anti-money laundering, and all financial institution and banks are legally required to report any suspicious activity.

With the help of technology such as special compliance platforms, companies are now able to easily research their customers and ensure that they are not doing business with criminals.