Money Laundering: A Serious Financial Crime and Challenges for India

Reference

Money laundering is a global financial crime in which complex processes are used to make illegally earned money look legitimate. To prevent this in India, the Prevention of Money Laundering Act (PMLA), 2002 is in force but recent statistics raise questions about its effectiveness.

What is a Laundromat

• Definition: A laundromat is a financial system set up by banks or financial service providing companies. It is used to legalize the money obtained from crime, hide the ownership of property, evade taxes, or transfer money abroad.
• Origin: The term originated from organised crime syndicates in the US using laundromats as a cover for illegal activities.
• Use: It is used for tax evasion, embezzlement of company funds, and transferring illegal money offshore.

Money Laundering: Modus Operandi

• Definition: As per Section 3 of PMLA, money laundering is the process of concealing, possessing, acquiring or using money obtained from crime and presenting it as legitimate property.
• Impact: The Supreme Court in P. Chidambaram vs Enforcement Directorate (2019) held that concealing the source of illegal money affects the financial system, sovereignty and integrity of the country. It increases the money supply which has a negative impact on inflation and trade.

Three stages of money laundering

1. Placement: Illegal money is introduced into the financial system. Large amounts of money are broken down into smaller amounts (smurfing) to avoid suspicion. Example: cash deposits, small transactions.
2. Layering: Money is moved through various investments and transactions to obscure its source. Example: transfer to foreign accounts, use of shell companies.
3. Integration: Money is brought back into the financial system as legitimate assets. Example: real estate, business, or wealth creation.

About PMLA

• Introduction: The Prevention of Money Laundering Act, 2002 was enacted in January 2003 and came into force from July 1, 2005. It aims to prevent money laundering, confiscate property obtained by crime, and address related matters.
• Key Provisions
  • Section 3: Defines money laundering as an offence.
  • Section 4: Imprisonment of 3 to 7 years on conviction and up to 10 years for offences related to narcotic drugs.
  • Section 5: Gives the Enforcement Directorate (ED) the power to temporarily attach property obtained by crime for 180 days which must be confirmed by an independent adjudicating authority.
  • Section 17 and 18: Power of search and seizure, which can be applied even without an FIR after the 2019 amendment.
  • Section 45: Strict bail conditions, which were declared unconstitutional by the Supreme Court in 2017.
  • Presumption of innocence: The burden of proving innocence is on the accused.
  • Financial Intelligence Unit (FIU-IND): Established in the year 2004, the unit is responsible for receiving, analysing and disseminating information on suspicious financial transactions.
• Controversy: The Supreme Court retained the provisions of PMLA in 2022 but called for a review of provisions such as not providing a copy of the Enforcement Case Information Report (ECIR) and reversal of the presumption of innocence.

Finance Minister's report on PMLA

• Statistics: The Finance Minister told the Rajya Sabha that from 2015 to 2025, the ED registered 5,892 cases under PMLA but only 15 resulted in convictions. This shows a conviction rate of less than 0.5%.
• Concerns:
  • The low conviction rate raises questions about the effectiveness of the implementation of the law.
  • The increase in money laundering cases shows that the government has been unable to control this crime.
• Criticism: Lawyers argue that PMLA is misused to target political rivals and dissidents as its complex process is itself a form of punishment.

Benefits of Double Taxation Avoidance Agreement (DTAA)

• Introduction: India has signed DTAA with around 85 countries, which promotes exchange of tax and financial information.
• Benefits:
  • Exchange of information: DTAA helps in sharing financial information between tax authorities of countries which makes it easier to track tax evasion and money laundering.
  • Prevention of illegal money transfer: It brings transparency in international transactions which can prevent illegal money transfer to offshore accounts.
  • International cooperation: It strengthens global efforts against financial crimes.
• Limitations: Despite DTAA, challenges remain in completely preventing money laundering and more reforms are needed.

Government Initiatives to Combat Money Laundering

• Implementation of PMLA: Effective from the year 2005, this law is designed to prevent money laundering and confiscate property obtained by crime.
• Establishment of FIU-IND: Established in the year 2004, this unit monitors suspicious transactions and coordinates with international intelligence agencies.
• Special Courts: Under PMLA, criminal cases are tried and tried by the courts.
• Powers of ED: The Enforcement Directorate has been given wide powers to search, seize and attach property.
• International cooperation: India has adopted the recommendations of the Financial Action Task Force (FATF) and cooperates with 85 countries through the DTAA.
• Training of personnel: FIU-IND trains employees against money laundering and terror financing.
• Overseas units: The establishment of Income Tax Overseas Unit (ITOU) in Mauritius and Singapore has helped in keeping an eye on illegal money.

Challenges

• Low conviction rate: Only 15 convictions in 5,892 cases show the weakness of implementation of PMLA.
• Misuse of law: The Supreme Court admitted that PMLA is being used for political purposes to target opponents and political rivals.
• Procedural ambiguity: Not providing a copy of ECIR to the accused and reversing the presumption of innocence puts personal liberty at risk.
• Third party harm: Property of third parties such as banks, financial institutions and landlords is seized or confiscated by mistake, affecting the innocent.
• International complexities: Despite DTAA, there is lack of cooperation in sharing information in some countries.
• Link to terror financing: Money laundering finances terrorist activities, which is a threat to national security.

Way forward

• Adherence to FATF recommendations: FATF guidelines should be strictly followed to handle money laundering cases carefully and prevent misuse.
• Procedural reforms: Providing a copy of ECIR to the accused and restoring the presumption of innocence will protect personal liberty.
• Independent monitoring: An independent authority should be established to monitor the powers of ED.
• Technological advancement: Tools like blockchain and AI should be used to track illegal transactions.
• Increasing international cooperation: Agreements should be made with more countries to make DTAA more effective and speed up the process of sharing information.
• Legal amendment: Clear provisions should be added to PMLA to protect the rights of third parties.
• Prevention of political misuse: The law should be used only for real financial crimes, not political vendetta