RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PATIALA

CHAPTER 1 1. INTRODUCTION Money laundering is an intentionally committed offense that signifies the conversion and transfer of assets of an illicit origin. The objective of this action consists of disguising the true origin, location, nature, disposition, movements and transfer of assets that are derived from illegal activities. Participation, support or facilitation of the realization of illegal activities, such as transfer of money of illicit origin to several bank accounts and afterwards their conversion into legal financial products, are regarded also as money laundering actions.

The money laundering techniques and the laundered money are often used for terrorist financing. The planning, logistics and acquisition of objects for terrorist actions often require a cross-border transfer of funds to the country of destination. Direct importing of cash will be avoided for the reason of strict border control more sophisticated techniques will rather be applied for quick and mostly complex transfer of funds through existing legal and illegal transfer systems and financial instruments. Electronic payment systems are generally characterized by high performance and mobility; some of them have also such important features as for example anonymity of transfer, cross-border payment possibility, cost efficiency, as well as high security of communication (confidentiality) due to the use of cryptographic procedures. Therefore, the electronic payment systems are quite suitable for the conduct of money laundering operations in every phase of the money laundering cycle.

The world has witnessed an information boom in the past two decades. The internet has been largely responsible for this information explosion. Through this medium, which has been networked to various servers, it has become possible for people in the comfort of their own homes to access information about practically anything in the world, from the various websites, through their personal computers- of which there were estimated to be one billion.1 Starting out with the information boom, e-commerce has also opened up several opportunities for trade and commerce. It is now possible to draw up contracts, letters of credits and other instruments of trade and to communicate the same on the internet, prior to communication, all of these
1

Alvin Toffler, Tomorrows Economy, India Today, 17 March 2003.

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documents can also be certified by digital signatures. Even hard copies can be scanned and contracts and other papers sent to trading partners via the internet. To make these commercial transactions secure and also to ensure the privacy of individuals, cryptography is being utilized. Like anything else in this world, the new electronic medium of the Internet is also vulnerable both as a medium and in terms of the uses to which it is put. Jurisdiction and the borderless environment are the most problematic areas of this new medium. Anonymity, by which one does not know with whom one is dealing, is another great weakness of the internet. The security offered by this system is also not foolproof, scope for breaches of security is inherent in the interconnectivity through which the system operates and there have been numerous instances of hackers breaching security and viruses corrupting and destroying data on a very large scale. In this medium of electronic impulses, one is dealing with virtual data which has been digitalized on the computers, virtual data in itself is a concept that most people have yet to come to grips with in terms of its admissibility as evidence in the context of laws currently in force. Other problems relating to data relate to corruption and loss of it due to the impermanent nature of data, i.e. it need not be kept beyond a certain period of time. This medium is also a totally unsupervised one, thus, lack of supervision is another vulnerable area, even if one has a modicum of built-in software for supervision, and this has its limitations. In any given situation human intervention is always a useful input, in this medium there is no human intervention and hence no alarms and no suspects. It is also vulnerable because of the opportunities it offers to create virtual jurisdictions in cyberspace, to establish contact and to exercise control over these virtual jurisdictions would be one of the greatest challenges with which this medium would have to contend. These vulnerabilities of the internet have lead to a new form of crime called as cyber-crime also called as computer-related crime. 1.1 DEFINITION In Black Law of Lexicon the term Money Laundering is referred to as used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its source cannot be traced.

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The Lectic Law Librarys Lexicon on Money Laundering defined it as, Conduct/acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (currency or equivalents e.g. Cheques, electronic transfers etc.) to avoid a transaction reporting requirement under State or Federal law or to disguise the fact that the money was acquired by illegal means.2 The Websters New World Finance and Investment Dictionary defines that Money Laundering is, Making money that is generated through criminal activities as if it was earned through legitimate business activities. Detecting money laundering activities is often very difficult because the money often is transferred between several accounts in order to conceal its true origins. As terrorist activities have increased, so too has the motivation for money laundering.3 A brief definition of money laundering is that it is the act of engaging in transactions designed to obscure the origin of money that has been obtained illegally.4 In India, The Prevention of Money Laundering Act, 2002 while defining it as an offence provides in section 2 (p) thereof that money laundering has the meaning assigned to it in Section 3. Section 3 as such provides that: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of the crime and projecting it as untainted property shall be guilty of offence of money laundering. Section 3 of The Prevention of Money Laundering Act, 2002 makes reference to proceeds of crime in section 2 (u) as proceeds of crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.

2 3

As accessed from http://www.lectlaw.com/def2/m038.htm on 21st August 2013 at 2:15 p.m. As accessed from http://www.yourdictionary.com/fiance/money-laundering on 22nd august 2013 at 3:00pm 4 As accessed from http://www.allwords.com/word-money+laundering.html on 22nd august 2013 at 3:20 p.m.

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CHAPTER 2 2. MONEY LAUNDERING AND E-COMMERCE: SOME DISTINCT ADVANTAGES Another outcome of the increasing use of E-commerce will be that the money laundering process has become much easier. Anonymity, security, speed, ease of communication, borderless trading and lack of supervision are all facets of the internet that would facilitate the process of money laundering. This new medium would also make the placement of money much easier through internet banking and through digital cash (smart cards/ cash cards) where no banks are involved. The process of layering of money and integrating the same as laundered money would also become easier through the medium of the Internet because money can pass through a greater number of jurisdictions with relative ease and speed, with all the other attendant advantages that this medium offers. Intermediaries located in financial havens, also known as facilitators, generally play a very important role in money laundering. These intermediaries are generally chartered accountants, lawyers, company formation agents and other professionals in the field of finance. This medium would do away with the need for these intermediaries and therefore make not only E-commerce but also money laundering more cost-effective and cheaper. The newness of the medium is another feature that will aid the process of money laundering. In this new electronic medium, since the rules of the game have yet to be fully laid out, especially with regard to regulations and enforcement, the process of money laundering could be greatly facilitated. Internet trading in securities is now known to be a modus operandi widely used by the money launderers to explain their proceeds of crime. In the layering and integration process, the securities markets, especially those where international trading of securities takes place, are very useful for passing off criminal proceeds as legitimate earnings from stock exchanges. Likewise, Internet gambling is increasingly being used to launder money. A number of financial havens have private Internet casinos in place. These Internet casinos are a very convenient tool for laundering money. The way in which Internet gambling is spreading, coupled with the intense competition amongst financial havens to extend this facility further, will result in more
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money being laundered using this method. Most of the servers of these Internet casinos, including the casinos themselves, are located in the financial havens, sometimes the server is in one financial haven and the casino in another. The customers of these Internet casinos can be from principal onshore centers, other financial havens or anywhere in the world. Some of the captive Internet casinos are sometime simply fronts for passing off illegal proceeds as earnings from gambling and thereby launder the same. Sometimes these casinos may be in collusion with the criminals and book their bets in a doctored manner to pass them off as casino winnings, once again with the intention of laundering the money. Reporting of suspicious transactions in which a large turnover of money takes place, such as in banks, brokerage houses, money chargers, money transmission agents and the securities market, is nowadays considered to be one of the principal tools for countering money laundering. But in this such fast-moving medium as the Internet such suspicious transaction tend to go unreported, especially when norms for reporting such transactions are not clearly laid out. Moreover intelligent reporting of suspicious transactions would always remain a remote possibility on the internet because of lack of the physical presence of human intelligence perhaps refining of software might help to some extent in expeditious analysis. Even due diligence processes such as know your customer, which again is an integral part of the fight against money laundering tend to be ignored in this new medium. CHAPTER 3 3. PROBLEMS WITH REGARD TO ENFORCEMENT Several problematic areas peculiar to law enforcement also have to be tackled in the context of this new medium of the internet. 3.1 JURISDICTION: The first problem is that of jurisdiction, in the event of an offence being committed on the Internet, which country has the jurisdiction to take cognizance. Since the Internet is a borderless world, the consensus is now veering toward the view that the country where the server is located is the one which should exercise jurisdiction to investigate and take further follow-up action in relation to a crime.

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3.2 ENACTMENT OF SUITABLE LAWS: Law enforcement is also greatly hampered due to the fact that in most of the countries there are no laws to deal with computer crimes, or even to regulate this new and fast moving medium. Moreover cyber crimes have not yet been comprehensively identified to codify a criminal code for effective policing of the internet is therefore still a long way off. 3.3 DIFFICULT TO PROVE: Criminal Intention or Mens Rea, which is one of the essential requirements to treat an act as a crime, is very difficult to prove in this electronic medium. 3.4 ADMISSIBILITY OF EVIDENCE: Since one is dealing with virtual data, the question of its admissibility as evidence is yet to be resolved. The virtual nature of data also poses other problems with regard to effective law enforcement. Even the assets in this new medium which are of an intangible nature tend to confound law enforcement when it comes to search and seizure of such assets. Since the computerized networked environment is a totally new and unfamiliar medium, ways for conducting searches and seizures within it have yet to be fully devised by law enforcement. 3.5 RIGHT TO PRIVACY AND USE OF CRYPTOGRAPHY: The right of privacy in this electronic medium is another issue around which a great debate is raging. Some argues that the right of privacy is absolute, which of course is a totally untenable position. 3.6 TECHNOLOGY AND CHANGING ROLE OF JUDICIARY: The Judiciary would also have to lend itself to change in this fast-moving new electronic medium of the internet. Once new crimes are detected, new laws come into force to deal with them and a regulatory framework is put into place to deal with several other issues, the courts would have to move into a different gear altogether. The concept of E-courts would have to be put into place to deal with the problems thrown up by this new medium. Such E-courts are already functioning in Singapore and in them virtual data stored on computers is admissible evidence so also are the dispositions of witnesses through video conferencing under certain circumstances. CHAPTER 4 4. MONEY LAUNDERING AND INDIA

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4.1 CENTRAL AUTHORITY FOR REPORTING Financial Intelligence Unit India (FIU-IND) is an independent body to report directly to the Economic Intelligence Council headed by the Finance Minister. FIU-IND is a central agency of a government that: i. Receives financial information pursuant to country's anti-money laundering laws; ii. Analyzes and processes such information; and iii. Disseminates the information to appropriate national and international authorities, to support anti-money laundering efforts. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is not a regulatory authority. Its prime responsibility is to gather and share financial intelligence in close cooperation with the regulatory authorities including Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA). 5 FIU-IND processes and analyses financial information received by it and disseminates actionable intelligence in appropriate cases to relevant enforcement agencies. 4.2 OTHER ANTI-MONEY LAUDERING REGULATORS Though the authority to combat money laundering is FIU-IND, Reserve Bank of India (RBI) & Securities and Exchange Board of India (SEBI) have also taken steps to prevent money laundering. RBI has laid down anti-money laundering guidelines for banks and other financial institutions. Similarly SEBI has also prescribed certain requirements relating to Know Your Customer (KYC) norms for financial intermediaries in securities market to combat money laundering. 4.3 LAWS REGARDING ANTI-MONEY LAUNDERING

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4.3.1 Prevention of Money Laundering (Amendment) Act 2013 (PML (Amendment) Act, 2013) 4.3.2 Prevention of Money Laundering (Amendment) Act 2005 (PML (Amendment) Act, 2005) 4.3.3 Prevention of Money Laundering Act 2002 (PMLA 2002) It forms the core of the legal framework put in place by India to combat money laundering. PMLA 2002 came into force with effect from July 1, 2005. It imposes an obligation on banking companies, financial institutions and intermediaries to verify the identity of clients maintain records and furnish information to FIU-IND. It empowers the Director, FIU-IND to impose fine on any banking company, financial institution or intermediary for failure to comply with the obligations of maintenance of records, furnishing information and verifying the identity of clients.6 The amount of fine may vary from ten thousand rupees to one lakh rupees for each failure. 4.3.4 Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (PMLA Rules). The PMLA Rules specify the procedure and manner for maintenance and retention of records. As per Rule 3 of the PMLA Rules every banking company, financial institution and intermediary shall maintain a record of: i. All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency,

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ii. All series of cash transactions integrally connected to each other which have been valued below rupees ten lakhs or its equivalent in foreign currency where such series of transactions have taken place within a month, iii. All cash transactions were forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions, and, iv. All suspicious transactions whether or not made in cash. The records of all transactions are required to be maintained by every banking company, financial institution and intermediary for a period of ten years from the date of cessation of the transactions with their clients. Under these rules. A suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith i. Gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime, or ii. Appears to be made in circumstances of unusual or unjustified complexity; or iii. Appears to have no economic rationale or bonafide purpose; or iv. Gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism. 4.3.5 Foreign Exchange Management Act, 1999. It prescribes checks and limitations on certain foreign exchange remittances. 4.3.5 Benami Transactions (Prohibition) Act, 1988. It prohibits transactions in which property is transferred to one person for consideration paid or provided by another person. 7

4.3.6 Narcotics, Drugs and Psychotropic Substances Act, 1985. It provides for confiscating sale proceeds acquired in relation to any narcotic drug or psychotropic substance and any goods used to conceal such drugs. It provides for forfeiture of any illegally acquired property.

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4.3.7 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988. It authorizes detaining persons to prevent illicit traffic in narcotic drugs and psychotropic substances. 4.3.8 RBIs Know-Your-Customer Guidelines for Money changers. It was introduced by The RBI applicable to banks in India to reduce financial frauds and identify moneylaundering transactions.8 Under these guidelines, a foreigner in India may remit USD 2500 for his/her individual purposes. A money changer is allowed to pay Rs. 50,000 in cash. Any amount exceeding this limit shall be paid only by means of cheque/D.D./P.O. etc or credited directly to the beneficiarys bank account. Before, remitting money to a foreigner the money changer is required to conduct Customer Identification. 4.3.9 SEBIs Guidelines for Anti-Money Laundering Measures. The Securities and Exchange Board of India (SEBI) has published guidelines for capital market intermediaries under the PMLA 2002. The guidelines concern all intermediaries registered with SEBI a grouping that includes institutional investors, brokers and portfolio managers. 4.3.10 IRDAs Guidelines for Anti-Money Laundering Programme for Insurers. IRDA issued anti-money laundering guidelines applicable to insurers. Insurers are also required to maintain records of their transactions under these guidelines. IRDA has relaxed these guidelines for general insurers, under which these guidelines applies only when claims payout/premium refund cross a threshold of INR 100,000. CHAPTER 5 5. CONCLUSION Money laundering is serious threat to global financial system and good governance. It is also boosting international crimes and terrorist activities. In this regard, most of the governments have already enacted statute to combat money-laundering activities. In this regard, the effort of
8

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the Indian Government in enacting the Prevention of Money Laundering Act 2002 is most timely, appropriate and appreciable.

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BIBLIOGRAPHY ACTS REFERRED Benami Transactions (Prohibition) Act, 1988 Foreign Exchange Management Act, 1999 Money Laundering And Terrorism (Prevention) (Amendment) Act, 2013 Narcotics, Drugs and Psychotropic Substances Act, 1985. Prevention Of Money Laundering (Amendment) Act 2009 Prevention of Money Laundering (Amendment) Act 2005 Prevention of Money Laundering Act 2002 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 SITES REFERRED www.anti-moneylaundering.org www.caclubindia.com www.digitalcommons.law.umaryland.edu www.fatf-gafi.org www.icai.org www.legal-dictionary.thefreedictionary.com www.legalpundits.com www.money.howstuffworks.com www.oecdobserver.org www.timesofindia.indiatimes.com

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