Project

On
Regulation of Money Laundering in India
-National & International Perspective

NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

Submitted by:
Yasha Shrivastava
BALLB (Hons.)- 13th Trimester
Roll No. 2013BALLB79
1
 Acknowledgement

It is indeed a great pleasure and a matter of immense satisfaction for me to express my deep
sense profound gratitude towards all the people who have helped and inspired me in this
project work.

First, I would like to give my gratitude to Prof. P.K Shukla for the efforts by him right from
the selection of the project to its completion. He spent her precious time whenever I was in
need of guidance.

Moreover, I would like to thank NLIU for providing opportunities and sources for learning
and eventual completion of this project.

2
 Table of Contents

1. Introduction
2. Historical evolution of Money Laundering
3. The concept of Money Laundering
4. The modus operandi of Money Laundering
5. Impact of money Laundering on Society and Economy
6. Initiatives of Regulating Money Laundering
7. Global Initiatives
8. Indian Initiatives
9. Prevention of the Money Laundering Act
10. Conclusion
11. Bibliography

3
 INTRODUCTION

Capital as such is not evil; it is its wrong use that is evil. Capital in some form or
other will always be needed.

- Mahatma Gandhi

Money laundering can be described as a procedure, which is intended at legitimizing the

proceeds of crime. Even though criminals have tried to launder their crime proceeds ever
since decades but the term money laundering came into existence from the practice of
1920s Chicago Mobsters - Al Capone buying & running local laundries with their betting,
rackets & liquor profits.1

Money laundering has been described in a number of different ways: money laundering is the
procedure by which one conceals the existence, illegal foundation, or illegal application of
earnings, & then disguises that earnings to make it appear legitimate; or Money laundering is
the progression of taking the proceeds of criminal activity & making these proceeds legal; or
Money laundering is the act of converting money derived from illegal activities into spends
able or unpreserved form.

U.S. Customs Service has given this definition of Money laundering: Money laundering is
the procedure whereby proceeds, plausibly believed to have been derived from criminal
activity, are transported, transferred, transformed, converted or intermingled with legitimate
funds for the purpose of concealing or disguising the exact nature, resource, disposition,
movement or possession of those proceeds. The aim of money laundering process is to make
funds derived from, or associated with, illicit activity appear legitimate.

The principle of money laundering is to decrease or eliminate the risks of seizure, forfeiture
and confiscation so that the fruits of criminal proceeds can be enjoyed without intervention
by law enforcement.

1
The first reported lighting of the term money laundering in a legal context was not until 1984 (see United
States vs. $4,255,625.39,et seq., 551 F.Supp. 314,SD Fla 1984)

4
BASIS OF RESEARCH
The purpose of this paper is to examine the term Money Laundering, to find the grey areas
of the Prevention of Money laundering Act and give suggestions / recommendations to
overcome such problems. The major objectives of Money Laundering activities are:
Revealing the source of illegally obtained money and placement, layering and integration of
such funds
To analyze the effects of this crime on the Economy as well as the Society.
The legislative measures adopted to fight this crime.
To identify the grey areas of counter measures and provides suitable solutions.
To prevent, combat and control money laundering.
To deal with any other issue related with money laundering.

METHODOLOGY
In the present research the methodology employed is the doctrinal.

SCOPE OF RESEARCH
Since the subject of this research has many magnitude and perspectives legally and socially.
Thus the scope of the research is very wide for further future researches. The researcher has
just focused upon the details on the legal aspects and has touched upon the Social aspects.

5
HISTORICAL EVOLUTION OF MONEY LAUNDERING

Money Laundering as an expression is one of fairly recent origin. The original sighting was
in the newspapers reporting the Watergate Scandal in the United States in 19732. The
expression first appeared in a judicial or legal context in 1982 in America in the case of US
vs. $4,255,625.393. Money Laundering as a crime attracted the interest in the 1980s,
essentially within a drug trafficking context4. The term money laundering is said to
originate from Mafia ownership of Laundromats in the United States.

Money laundering as a crime only attracted interest in the 1980s, essentially within a drug
trafficking context. It was from an increasing awareness of the huge profits generated from
this criminal activity and a concern at the massive drug abuse problem in western society
which created the impetus for governments to act against the drug dealers by creating
legislation that would deprive them of their illicit gains. The term "money laundering" is said
to originate from Mafia ownership of Laundromats in the United States. Gangsters there were
earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor. They
needed to show a legitimate source for these monies.

In India money laundering is popularly known as Hawala transactions. It gained popularity

during early 90s when many of the politicians were caught in its net. Hawala is an last
accessed on 8th November, 2008. alternative or parallel remittance system. The Hawala
Mechanism facilitated the conversion of money from black into white. "Hawala" is an Arabic
word meaning the transfer of money or information between two persons using a third
person. The system dates to the Arabic traders as a means of avoiding robbery. It predates
western banking by several centuries.

2
The action of the US President Richard Nixons Committee to re-elect the President that moved illegal
campaign contributions to Mexico, and then brought the money back through a company in Miami. It was
Britains newspaper Guardian that coined the term, referring to the process as laundering.
3
(1982) 551 F Sup. 314
4
When under UN Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances,
criminalization of the proceeds of drug related offences was provided. However, later many other crimes were
included in the purview of predicate offences to find out a money laundering activity

6
THE CONCEPT OF MONEY LAUNDERING

Money Laundering5 refers to the conversion or "Laundering" of money which is illegally

obtained, so as to make it appear to originate from a legitimate source6. Money Laundering is
being employed by launderers worldwide to conceal criminal activity associated with it such
as drug / arms trafficking, terrorism and extortion7. Robinson states that
Money laundering is called what it is because that perfectly describes what
takes place illegal, or dirty, money is put through a cycle of transactions, or washed, so
that it comes out the other end as legal, or clean money. In other words, the source of
illegally obtained funds is obscured through a succession of transfers and deals in order that
those same funds can eventually be made to appear as legitimate income.
Article 1 of EC Directive8 defines the term money laundering as the conversion of
property, knowing that such property is derived from serious crime, for the purpose of
concealing or disguising the illicit origin of the property or of assisting any person who is
involved in the committing such an offence or offences to evade the legal consequences of
his action, and the concealment or disguise of the true nature, source, location, disposition,
movement, rights with respect to, or ownership of property, knowing that such property is
derived from serious crime.

Thus, Money laundering is a process where the proceeds of crime are transformed into
apparently legitimate money or other assets. It is the processing of criminal proceeds to
disguise its illegal origin. In simple words, it can be defined as the act of making money that
comes from one source to look like it comes from another source. The act of money
laundering is done with the intention to conceal money or other assets from the State so as to
prevent its loss through taxation, judgement enforcement or blatant confiscation. The
criminals herein try to disguise the origin of money obtained through illegal activities to look

5
Section 2(1) (p) of Prevention of Money Laundering Act, 2002 (hereinafter PMLA-02) defines
Moneylaundering has the meaning assigned to it in Section 3. Section 3 provides for offence of
moneylaundering 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 crime and projecting it as
untainted property shall be guilty of offence of money laundering
6
Popularly this is known as making black money white.
7
S. Ganesh, Money Laundering,
8
EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991

7
like it was obtained from legal sources because otherwise they will not be able to use it as it
would connect them to the criminal activity and the law enforcement officials would seize it.

THE MODUS OPERANDI OF MONEY LAUNDERING

Money Laundering is not a single act but is in fact a process that is accomplished in three
basic steps as enumerated below9:

1. Placement: "Placement" refers to the physical disposal of bulk cash proceeds derived from
illegal activity. This is the first step of the money-laundering process and the ultimate aim of
this phase is to remove the cash from the location of acquisition so as to avoid detection from
the authorities. This is achieved by investing criminal money into the legal financial system
by opening up a bank account in the name of unknown individuals or organizations and
depositing the money in that account .

2. Layering: "Layering" refers to the separation of illicit proceeds from their source by
creating complex layers of financial transactions. Layering conceals the audittrail and
provides anonymity. This is achieved by moving money to offshore bank accounts in the
name of shell companies, purchasing high value commodities like diamonds and transferring
the same to different jurisdictions. Now, Electronic Funds Transfer (EFT) has become boon
for such layering exercise. Different techniques like correspondent baking, loan at low or no
interest rates, money exchange offices, back-to-back loans, fictitious sales and purchases,
trust offices, and recently the Special Purpose Vehicles (SVPs) are utilized for the purpose of
laundering the money.

3. Integration: "Integration" refers to the reinjection of the laundered proceeds back into the
economy in such a way that they re-enter the financial system as normal business funds. The
launderers normally accomplish this by setting up unknown institutions in nations where
secrecy is guaranteed. New forms of business give a platform for integration exercise. Now a
person can start a business with just a webpage and convert his illegal money to legal by
showing profits from the webpage. There are other ways like capital market investments, real
estate acquisition, the catering industry, the gold market, and the diamond market.

9
Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan Governance of Money Laundering:
An Application of the Principal-agent Model The Pakistan Development Review, Vol. 45, No. 4, Papers and
Proceedings PARTS I and II Twenty-second Annual General Meeting and Conference of the Pakistan Society of
Development Economists Lahore, December 19-22, 2006 (Winter 2006), pp. 1117-1133 available at

8
Following are the various measures adopted all over the world for money laundering, even
though it is not exhaustive but it encompasses some of the most widely used methods.

Structuring deposits -This method is also known as smurfing. In this method large amount
of money is broken into smaller, less-suspicious amount.

Overseas banks underground/ alternative banking Money launderers often send money
through various "offshore accounts" in countries that have bank secrecy laws, meaning that
for all intents and purposes, these countries allow anonymous banking. A complex scheme
can involve hundreds of bank transfers to and from offshore banks.

Shell companies These are fake companies that exist for no other reason than to launder
money. They take in dirty money as "payment" for supposed goods or services but actually
provide no goods or services; they simply create the appearance of legitimate transactions
through fake invoices and balance sheets.

Investing in legitimate business Launderers sometimes place dirty money in otherwise

legitimate businesses to clean it. They may use large business like brokerage firms or casinos
that deal in so much money it's easy for the dirty stuff to blend in, or they may use small,
cash-intensive businesses like bars, car washes, strip clubs or check-cashing stores.

It gives an overview as to how this menace has developed into transnational business
involving various sophisticated techniques and procedures. The ill-effects of money
laundering are unimaginable and have been discussed in next section.

WHY CRIMINALS WANT TO LAUNDER PROCEEDS?

a) To increase profits
b) To appear legitimate
c) To evade taxes
d) To avoid prosecution
e) To avoid seizure of accumulate wealth.

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IMPACT OF MONEY LAUNDERING ON SOCIETY AND ECONOMY

Effects of money laundering are seen all over the world on almost all the sectors of life. More
noticeable are economic effects which are on a broader scale. Developing countries often
bear the brunt of modern money laundering because the governments are still in the process
of establishing regulations for their newly privatized financial sectors.

If left unchecked, money laundering can erode a nations economy by changing the demand
for cash, making interest and exchange rates more volatile, and by causing high inflation in
countries where criminal elements are doing business. The draining of huge amounts of
money a year from normal economic growth poses a real danger for the financial health of
every country which in turn adversely affects the global market10 Most fundamentally, money
laundering is inextricably linked to the underlying criminal activity that generated it.
Laundering enables criminal activity to continue.

The impact of money laundering can be summed up into the following points:

Potential damage to reputation of financial institutions and market

Weakens the democratic institutions of the society

Destabilises economy of the country causing financial crisis

Give impetus to criminal activities

Policy distortion occurs because of measurement error and misallocation of resources

Discourages foreign investors

. Causes financial crisis

Encourages tax evasion culture

Results in exchange and interest rates volatility

10
Chapter-IV Money Laundering in India: An Offshoot of Drug Trafficking available at
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/18155/10/10_chapter4.pdf (accessed on 14th May
2015) Pg. 12-13.

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INITIATIVES FOR REGULATING MONEY LAUNDERING

CONVENTIONS AND DIRECTIVES TO COUNTER MONEY LAUNDERING: -

GLOBAL INITITATIVE

Since money laundering is an international phenomenon, transnational co-operation is of

critical importance in the fight against this menace. A number of initiatives have been taken
to deal with the problem at the international level. The major international agreements
addressing money laundering include the United Nations Convention against Illicit
Trafficking in Drugs and Psychotropic Substances, popularly known as the Vienna
Convention and the Council of Europe Convention on Laundering, Search, Seizure and
Confiscation of the Proceeds of Crime.

THE VIENNA CONVENTION It was the first major initiative in the prevention of money
laundering held in December 1988. This convention laid down the groundwork for efforts to
combat money laundering by obliging the member states to criminalize the laundering of
money from drug trafficking. It promotes international cooperation in investigations and
makes extradition between member states applicable to money laundering. The convention
also establishes the principle that domestic bank secrecy provisions should not interfere with
international criminal investigations11.

THE COUNCIL OF EUROPE CONVENTION This convention in 1990 establishes a

common policy on money laundering. It sets out a common definition of money laundering
and common measures for dealing with it. The Convention lays down the principles for
international cooperation among the member states, which may also include states outside the
Council of Europe. One of the purpose of this convention is to facilitate international
cooperation as regards investigative assistance, search, seizure and confiscation of the
proceeds of all types of criminality, particularly serious crimes such as drug offences, arms
dealing, terrorist offences etc. and other offences which generate large profits.

BASLE COMMITTEES STATEMENT OF PRINCIPLES- In December 1988, the Basle

Committee on Banking Regulations and Supervisory Practices issued a statement of
principles which aims at encouraging the banking sector to adopt common position in order
to ensure that banks are not used to hide or launder funds acquired through criminal activities.

11
United Nations Convention Against Illicit Traffic In Narcotic Drugs And Psychotropic Substances, 1988
available at http://www.unodc.org/pdf/convention_1988_en.pdf.

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The Statement of Principles does not restrict itself to drug-related money laundering but
extends to all aspects of laundering through the banking system, i.e. the deposit, transfer
and/or concealment of money derived from illicit activities whether robbery, terrorism, fraud
or drugs. It seeks to deny the banking system to those involved in money laundering by the
application of the four basic principles namely, identifying the customer, compliance with the
laws, cooperation with Law Enforcement Agencies and adherence to the Statement

THE FINANCIAL ACTION TASK FORCE (FATF) The FATF is an inter-governmental

body established at the G7 summit at Paris in 1989 with the objective to set standards and
promote effective implementation of legal, regulatory and operational measures to combat
money laundering and terrorist financing and other related threats to the integrity of the
international financial system.12 The FATF has developed a series of Recommendations that
are recognised as the international standards for combating money laundering and the
financing of terrorism. They form a basis for a co-ordinated response to these threats to the
integrity of the financial system and help ensure a level playing field. In April 1990, it issued
a report containing a set of Forty Recommendations, which were intended to comprehensive
plan of action needed to fight against money laundering. In October 2001, it issued the Eight
Special Recommendations to deal with the issue of terrorist financing. In October 2004, it
published a Ninth Special Recommendation, further strengthening the agreed international
standards for combating money laundering and terrorist financing13

UNITED NATIONS GLOBAL PROGRAMME AGAINST MONEY LAUNDERING

GPML was established in 1997 with a view to increase effectiveness of international action
again money laundering through comprehensive technical cooperation services offered to
Governments. The programme encompasses following 3 areas of activities, providing various
means to states and institutions in their efforts to effectively combat money laundering: 1.
Technical cooperation is the main task of the Programme. It encompasses activities of
creating awareness, institution building and training. 2. The research and analysis aims at
offering States Key Information to better understand the phenomenon of money laundering
and to enable the international community to devise more efficient and effective

12
Kathryn L. Gardner, Fighting Terrorism the FATF Way, Lynne Rienner Publishers, Vol. 13, No. 3 (July
Sept. 2007), pp. 325-345
13 Ibid

12
countermeasure strategies. 3. The commitment to support the establishment of financial
investigation services for raising the overall effectiveness of law enforcement measures.

INDIAN INITITATIVES

In India, before the enactment of Prevention of Money Laundering Act, 2002 (PMLA) the
major statutes that incorporated measures to address the problem of money laundering were:

The Income Tax Act, 1961

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
(COFEPOSA)

The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)

The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)

The Benami Transactions (Prohibition) Act, 1988

The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

The Foreign Exchange Management Act, 2000, (FEMA)

PREVENTION OF MONEY LAUNDERING ACT, 2002

In view of an urgent need for the enactment of a comprehensive legislation for preventing
money laundering and connected activities, confiscation of proceeds of crime, setting up of
agencies and mechanisms for coordinating measures for combating money laundering etc.,
the Prevention of Money Laundering Bill 1998 was introduced in Parliament on 4th August,
1998. The Bill received the assent of the President and became Prevention of Money
Laundering Act, 2002 on 17th January 2003. The Act has come into force with effect from
1st July 2005. It has been amended in 2005, 2009 and recently in 2012. The objective of the
Act is to prevent money-laundering and to provide for confiscation of property derived from,
or involved in, money-laundering and for matters connected therewith or incidental thereto14.

14
Satapathy, Money Laundering: New Moves to Combat Terrorism, Economic and Political Weekly, Vol. 38,
No. 7 (Feb. 15-21, 2003), pp. 599-602.

13
SCHEME OF THE ACT

The Act consists of 10 chapters containing 75 sections and 1 schedule divided in 5 parts.
Chapter I contain section 1 and 2 which deals with short title, extent and commencement and
definitions. Chapter II contain section 3 and 4 which provide for offences and punishment for
money laundering. Chapter III has sections 5-11 which provide for attachment of property,
adjudication and confiscation. Chapter IV has sections 12-15 which deals with obligations of
banking companies, financial institutions and intermediaries. Chapter V has sections 16-24
which relates to summons, searches, seizures, retention, presumptions etc. Chapter VI has
sections 25-42 which deals with the establishment, composition, qualifications, powers and
procedures etc of the Appellate Tribunal. Chapter VII has sections 43-47 which deal with
Special Courts and Chapter VIII has sections 48-54 which provide for various authorities
under the Act their appointment, powers, jurisdiction etc. Chapter IX has sections 55-61
which deals with reciprocal arrangement for assistance in certain matters and procedure for
attachment and confiscation of property. Chapter X has sections 62-75 which deals
miscellaneous provisions including punishments, cognizance of offences, offences by
companies etc.

SALIENT FEATURES OF THE ACT

Offence of Money Laundering and its punishment

An offence of money laundering is said to be committed when a person in any way deals with
the proceeds of crime15. The proceeds of the crime referred above include the normal
crimes16 and the scheduled crimes17 . 18
The prescribed punishment is 3-7 years rigorous

15
Section 2(u) of the Act: 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 or where such property is
taken or held outside the country, then the property equivalent in value held within the country
16
Crimes which are not mentioned specifically in the schedule of the Act
17
The crimes which are mentioned in the Part A and Part B and now Part C (added in PML Bill -08) of the
Schedule attached to the Act, if the total value involved in such offences is thirty lakh rupees or more (this limit
has also been removed under PML Bill 08)
18
Section 3 of the PMLA

14
imprisonment for an offence of money laundering with fine19. In case of an offence
mentioned under Part A20, imprisonment would extend up to 10 years21.

Attachment, Adjudication and Confiscation

The confiscation of the property under the Act is dealt with in accordance with the chapter III
of the said Act. An official not below the rank of Deputy Director can order attachment of
proceeds of crime for a period of 180 days, after informing the Magistrate. Thereafter he will
send a report containing material information relating to such attachment to the Adjudicating
Authority22. Section 8 details the procedure of adjudication. After the official forwards the
report to the Adjudication Authority, this Authority should send a show cause notice to
concerned person(s) within 30 days. After considering the response and all related
information, the Authority can give finality to the order of attachment and make a
confiscation order, which will thereafter be confirmed or rejected by the Special Court.

Obligations of Banking Companies, Financial Institutions and Intermediaries

The reporting entity is required to keep a record of all material information relating to money
laundering and forward the same to the Director. Such information should be preserved for 5
years23. The functioning of the reporting entity will be supervised by the Director who can
impose any monetary penalty or issue warning or order audit of accounts, if the entity
violates its obligations24.The Central Government, after consulting the Reserve Bank of India
is authorised to specify rules relating to managing information by the reporting entity25.

Enforcement Paraphernalia Adjudicating Authority - The Act empowers the Central

Government to constitute an

Adjudicating Authority having a Chairman and 2 members and define their scope of
functioning and other terms of service. The Adjudicating Authority will operate through a

19
Section 4 of the PMLA
20
These deal with the offences under the Narcotic Drugs and Psychotropic Substances Act, 1985, Sections 15,
16, 17,18, 19, 20, 21, 22, 23, 24, 25A, 27A, 29.
21
Proviso to Section 4 of the PMLA
22
Section 5 of the PMLA
23 Section 12 of PMLA.
24 Section 13 of PMLA
25 Section 15 of PMLA

15
Single or Division bench. The Authority has been given autonomous powers to regulate its
adjudicating procedure.26

Administrator - The property laundered will be taken care of i.e. managed after confiscation
by an Administrator who will act in accordance with the instructions of the Central
Government.27

Appellate Tribunal - All appeals from an order made by the Adjudicating Authority will lie to
an Appellate Tribunal constituted by the Central Government.28 It will consist of 2 members
headed by a Chairman.29 An official can resign by sending his resignation to the Central
Government thereby giving a 3 months notice. He can also be removed by an order made by
the Central Government on the grounds of misbehaviour or incapacity.30

Special Courts - the Central Government, after consulting the High Court is empowered to
designate Court of Sessions as Special Courts.31 The Special courts can try all scheduled
offences and that under section 4 and also offence under section 3, but after the authority
requests in this behalf.32 Authorities under the Act - There shall be the following classes of
authorities for the purposes of this Act, namely: (a) Director or Additional Director or Joint
Director, (b) Deputy Director, (c) Assistant Director, and (d) such other class of officers as
may be appointed for the purposes of this Act.33

Summons, Searches and Seizures etc.

The power of surveying and scrutinizing records kept at any place is conferred on the
Adjudicating Authority. The Authority may ask any of its officials to carry on the search,
collect all relevant information, place identification marks and thereafter send a report to it.34
The search of a person to be conducted is allowed if it is ordered by the Central Government.
The authority authorized in this behalf cannot detain a person beyond 24 hours, must ensure

26
Section 6 of PMLA.
27
Section 10 of PMLA
28
Section 25 of PMLA.
29
Section 27 of PMLA
30
Section 32 of PMLA
31
Section 43 of PMLA
32
Section 44 of PMLA
33
Section 48 of PMLA
34
Section 16 of PMLA.

16
the presence of 2 witnesses, prepare a list of things seized signed by the witnesses and
forward the same to the Adjudicating Authority.35 A property confiscated or frozen under this
Act can be retained for 180 days. This period can be extended by the Adjudicating Authority
after being satisfied of the merits of the case. The Court or the Adjudicating Authority can
subsequently also order the release of such property.36 There shall be a presumption of the
ownership of property and records recovered from a person's possession.37 The burden of
proof will be on the accused to prove that he is not guilty of an offence under this Act. 38 The
offences under the Act are to be cognizable and non-bailable.39

ANTI MONEY LAUNDERING STANDARDS RBI issued Master Circular on Know

Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating of
Financing of Terrorism (CFT)/ Obligation of banks under Prevention of Money Laundering
Act, 2002 and Banks were advised to follow certain customer identification procedure for
opening of accounts and monitoring transactions of a suspicious nature for the purpose of
reporting it to appropriate authority. These KYC guidelines have been revisited in the context
of the Recommendations made by the Financial Action Task Force (FATF) on Anti-Money
Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Banks have
been advised to ensure that a proper policy framework on KYC and AML measures with the
approval of the Board is formulated and put it place. The Objective of KYC Norms/ AML
Measures/ CFT Guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering or terrorist financing activities.
KYC procedures also enable banks to know/ understand their customers and their financial
dealings better which in turn help them manage their risks prudently.

THE FINANCIAL INTELLIGENCE UNIT - INDIA (FIU-IND) While the Prevention of

Money Laundering Act (PMLA) 2002, forms the core framework for combating money
laundering in the country, The Financial Intelligence Unit - India (FIUIND) is the nodal
agency in India for managing the AML ecosystem and has significantly helped in
coordinating and strengthening efforts of national and international intelligence, investigation
and enforcement agencies in pursuing the global efforts against money laundering and related

35
Section 18 of PMLA
36
Retention of Property u/s 20 of PMLA
37
Presumption as to records or property in certain cases u/s 22 PMLA
38
Section 24 of PMLA
39
Section 45 of PMLA.

17
crimes. These are specialized government agencies created to act as an interface between
financial sector and law enforcement agencies for collecting, analysing and disseminating
information, particularly about suspicious financial transactions. In terms of the PMLA
Rules, banks are required to report information relating to cash and suspicious transactions
and all transactions involving receipts by non-profit organizations of value more than rupees
ten lakh or its equivalent in foreign currency to the Director, FIUIND in respect of
transactions. It receives prescribed information from various entities in financial sector under
the Prevention of Money Laundering Act 2002 (PMLA) and in appropriate cases
disseminates information to relevant intelligence/ law enforcement agencies which include
Central Board of Direct Taxes, Central Board of Excise & Customs Enforcement Directorate,
Narcotics Control Bureau, Central Bureau of Investigation, Intelligence agencies and
regulators of financial sector. FIU-IND does not investigate cases.

JUDICIAL PRONOUNCEMENTS

THE FAKE STAMP PAPER OR TELGI SCAM40 The syndicate led by Abdul Karim
Telgi used the chemically washed stamps and thus reintroduced the used stamp papers back
into the system simply by washing them in the chemicals so as to remove the original
contents. This was made possible because of the loophole in the system where there was no
branding of new stamps and the used stamp papers were not cancelled. Also, the receipt used
by Central Stamp Office does not have any security features so his allowed the accused to
replicate them and show them as a genuine copy in order to convince the customers.
Additionally, he cultured officials at the Security Press in Nashik, where stamp papers were
printed. With their participation he used government machinery to print stamp paper and
eventually bought some of the machinery and started counterfeiting on his own. The trial
court held that evidences show that Abdul Karim Telgi hired an office at City Centre, Indore
and he also took apartment on rent and was carrying on business of sale of fake Government
revenue papers causing loss to the Government and corresponding gain to himself. The Court
thus, found the accused guilty of the offences and sentenced him to various terms of
imprisonment. The accused filed an appeal to the High Court against the order of the Trail
Court. While dismissing the appeal the Court held that considering the making out of a
consummate crime and resultant loss caused to the public revenue by sale of fake, counterfeit
stamp papers, adhesive stamps, non-judicial stamp papers, Appellant has caused substantial

40
Abdul Karim Telgi and Sohail Khan vs. Union of India, through CBI, 2014(2)JLJ136

18
loss to the Government and corresponding gain to himself by his 'white collar' crime. It was
an economic crime which has cascading effect. This is one of those exceptional cases where
the law should come down with heavy hands to deal such kind of persons who are a menace
to the Society.

Observation: The Court does not blindly follows the provisions of the Act but look into the
depth of the activities of the accused, the loss and damages caused to the Government and the
public; and gives punishment which is proportional to the criminal act.

UNION OF INDIA vs. HASSAN ALI KHAN & ANR41. The allegation against the accused
is that they have committed an offence punishable under Section 4 of the Prevention of
Money Laundering Act, 2002. The said case has been registered on the basis of a complaint
filed by the Deputy Director, Directorate of Enforcement on the basis of the Report based on
certain information and documents received from the Income Tax Department. An
investigation was also conducted under the Foreign Exchange Management Act, 1999,
(FEMA). Show-cause notices were issued to the accused for alleged violation of Sections
3A and 4 of FEMA for dealing in and acquiring and holding foreign exchange to the extent of
Rs.36,000 crores approximately in Indian currency, in his account with the Union Bank of
Switzerland. Inquiries also revealed that Shri Hassan Ali Khan had obtained at least three
Passports in his name by submitting false documents, making false statements and by
suppressing the fact that he already had a Passport. Based on the aforesaid material, the
Directorate of Enforcement arrested the accused and produced him before the Special Judge,
PMLA and was remanded in custody which was rejected and the accused was released on
bail. The Union of India thereupon filed Special Leave Petition and upon observing that the
material made available on record prima facie discloses the commission of an offence by the
accused punishable under the provisions of the PMLA, the Supreme Court disposed of the
appeal as well as the Special Leave Petition and set aside the order of the Special Judge,
PMLA and directed that the accused be taken into custody. Thereafter, the accused was
remanded into custody from time to time.

Observation: The offence of money laundering is an offence of a grave nature. A person

indulged in it cannot escape from the hands of the law. If such an offence is committed, strict
actions will be taken.

41
[2011] 11 SCR 778.

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CONCLUSION & SUGGESTIONS

As it can be seen that money laundering involves activities that are international in nature and
are also at a greater level, therefore, to make a heavy impact it is necessary that all countries
should enact strict and as far as possible same laws so that the money launderers will have no
place to target in order to launder their proceeds of crime by way of weakness of jurisdiction
or the like. Since the States have no obligation in deciding which offences should be
considered as predicate offences to money laundering there is no consensus into the
international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist
common predicate offences to solve the problem internationally particularly keeping in mind
the trans-national character of the offence of money laundering. Furthermore, the provision of
financial confidentiality in other countries is an issue. The states are unwilling in
compromising with this confidentiality. There is a need to draw a line between such financial
confidentiality rules and these financial institutions becoming money laundering havens.
Apart from that, many a people are of the opinion that money laundering seem to be a
victimless crime. They are unaware of the harmful effects of such a crime. So there is a need
to educate such people and create awareness among them and therefore infuse a sense of
watchfulness towards the instances of money laundering. This would also help in better law
enforcement as it would be subject to public examination. Moreover, to have effective anti-
money laundering measures there need to be a proper coordination between the Centre and
the State. For that the tussle between the two should be removed. The laws should not only be
the responsibility of the Centre but it should be implemented at the State level also. The more
decentralised the law would be the better reach it will have. Therefore, to have an effective
anti-money laundering regime, one has to think regionally, nationally and globally.

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BIBLIOGRAPHY

1. HAND BOOK ON THE PREVENTION OF MONEY-LAUNDERING ACT, 2002

http://www.caaa.in/Image/pmla122014.pdf
2. GENERAL INTRODUCTION AND SCHEME OF STUDY MONEY
LAUNDERING IN INDIA
http://premieroffshore.com/wp-content/uploads/2015/10/Money-Laundering-Guide-
for-India.pdf.
3. MONEY LAUNDERING IN INDIAA
http://www.nja.nic.in/4.1.%20Paper%20Money%20Laundering_1_%20Paridhi%20Sa
xena.pdf.

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