Indian Criminal Laws and Money Laundering: Strengthening Financial Security through Legal Measures

This article has been written by Parijat Banchhor, law student from Amity University chhattisgarh.

Abstract

Money laundering is a pervasive global problem that includes concealing the origins of illegally obtained funds, often derived from activities such as drug trafficking, corruption, and organized crime. This paper examines the role of Indian criminal laws in combating money laundering, focusing the Prevention of Money Laundering Act (PMLA), 2002, as the cornerstone of India’s legal structure. It discusses the mechanisms of money laundering, its economic, social, and political effects, and the methods used by criminals to launder money, such as fraud, accounts located abroad, and shell companies. The paper shows the importance of international initiatives, such as the Vienna Convention and the role of organizations like the Financial Intelligence Unit-India (FIU-IND) and the Enforcement Directorate (ED) in detecting and fighting financial crimes. The study also examines important legislative measures, including the amendments to the PMLA and other relevant laws, that strengthen India’s ability to combat money laundering. Ultimately, this analysis underscores the need for continuous modification and enhancement of legal frameworks to successfully address the evolving challenges posed by money laundering in a rapidly changing financial landscape.

Introduction

Money laundering is the process of illegally hiding the origin of money that is earned by illicit means such as terrorism, corruption, drug trafficking, sex work, embezzlement and gambling, and converting the money such that it may seem to be earned from legitimate source. Criminals often use this method for the converting their illicit money into licit money. It is considered as crime under many Countries Jurisdiction with different definitions as per the country. It is generally the key operation of organized crime. The money that is earned by the criminal activity is often considered as dirty and the “launders” make it look clean. It not only promotes crime but also makes it more easy for the criminals to use their money in a safe way and for other activities. As we are advancing the way of laundering is also enhancing online banking and cryptocurrencies have made it easier to transfer and withdraw money without any difficulties and detection. Prevention of this has become an international effort as it is considered as one of the most important source of terrorist funding among its targets. According to the reports of the IMF, between 2 to 5% of the World GDP comes from the global money laundering.

How it works?[1]

Money laundering all over the world works on the same principle which involves three steps placement, layering and integration.

• Placement refers to putting the “dirty money” into the legitimate financial system so that it can be cleaned later.
• Layering hides the origin of the money through a series of transaction and accounting tricks.
• Integration is the final step of laundering in this process the money is withdrawn from the legitimate account so that it can be used for criminal activities.

 Impact[2]

Their are several impacts of money laundering in India the common impacts are:-

• Economic Impacts:
  • Undermines the legitimacy of the private sector
  • Undermines integrity of financial markets
  • Loss of control of economic policy
  • Economic distortion and instability
  • Loss of revenue
  • Security threats to privatisation efforts
  • Volatility in exchange rates and interest rates due to unanticipated transfers of funds Rise of economic prices
  • Affects trade and international capital flows

• Social Impacts:
  • Increased criminality
  • Decreases human development
  • Misallocation of resources
  • Affects trust of local citizens in their domestic financial institutions
  • Declines the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities 2/4

• Political Impacts:
  • Initiates political distrust and instability
  • Criminalisation of politics

Some of the common ways of money laundering are:[3]

• Smurfing: This strategy includes splitting huge quantities of money into smaller, less suspicious amounts. The money is then placed into one or more bank accounts over time by numerous persons (smurfs) or by a single person.
• Overseas banks: Money launderers routinely transfer monies through numerous “offshore accounts” in nations with bank secrecy regulations. Hundreds of bank transactions to and from offshore banks can be involved in a complicated operation. The Bahamas, Bahrain, the Cayman Islands, Hong Kong, Panama, and Singapore are among the “major offshore centers,” according to the International Monetary Fund.
• Shell companies: These are fictional companies that operate exclusively to launder money. They collect filthy money as “payment” for apparent products or services but offer none; they just create the impression of genuine transactions using faked invoices and balance sheets.
• Investing in genuine enterprises: “Launderers will occasionally wash filthy money in otherwise legal businesses. They may utilize major enterprises, such as brokerage firms, where the dirty money mixes in easily, or they may use tiny, cash-intensive businesses, such as pubs, car washes, strip clubs, or check-cashing establishments. These firms might be “front companies” that provide an item or service but their primary aim is to clean the launderer’s money. This method typically works in one of two ways: the launderer can combine his dirty money with the company’s clean revenues, in which case the company reports higher revenues from its legitimate business than it actually earns; or the launderer can simply hide his dirty money in the company’s legitimate bank accounts in the hopes that authorities will not compare the bank balance to the company’s financial statements.”[4]
• Hawala: A separate or parallel remittance system is hawala. It exists and acts independently from or concurrently with “traditional” banking or financial channels. The bulk of money-laundering schemes involve a mix of these approaches. This crime is tough to eradicate because to the diversity of instruments accessible to money launderers.

 International initiatives to tackle Money Laundering  

Several initiatives were launched to combat the rising cases of money laundering globally some of the major initiatives are:

The Vienna Convention[5]

It is the inception an responsibility of signatory states to criminalize money laundering. It came into action in 1998.  It laid down the work for the effort to combat money laundering by obliging the member state to criminalize the laundering of money from drug trafficking promoting international cooperation investigations and making extradition between member state. Applicable to money laundering the convention also establish the principal the domestic bank secrecy provision should not interfere with international criminal investigation.

The 1990 Council of Europe Convention

It came in November 1990, The Council Europe. It was approved by the committee of minister in September 1990 they conducted search seizure confiscation of proceeding of crime an financing of terrorism agreed criminal proceeds from their crime.

International Organization of Securities Commissions (IOSCO)

The “International Organization of Securities Commissions (IOSCO)” is a global entity including securities regulators from across the world. Its principal tasks are establishing worldwide standards for securities regulation and addressing financial crimes such as money laundering. IOSCO advocates for compliance with globally acknowledged standards, fosters information exchange among regulators, offers training and technical support to improve anti-money laundering initiatives and formulates policies to establish efficient AML frameworks. It engages with international organizations such as the Financial Action Task Force (FATF) to synchronize worldwide initiatives against money laundering in financial markets. IOSCO performs risk evaluations and advocates for openness in financial activities to preempt new dangers. This synchronized strategy is essential, as money launderers frequently take advantage of discrepancies in regulatory frameworks throughout nations.

United Nations Office on Narcotics and Crime (UNODC)

The “United Nations Office on Narcotics and Crime (UNODC)” is an international organization founded in 1997 to address illicit narcotics, criminal activities, and terrorism. It is crucial to money laundering by performing research and analysis, offering technological help, and training law enforcement and financial intelligence units. It promotes global collaboration in the fight against money laundering, aids in the establishment of standards, enhances awareness in both public and private sectors regarding money laundering risks, supports asset recovery via its Global Programme against Money Laundering, and assists nations in ratifying and executing pertinent international conventions. By offering these services, the UNODC enhances the worldwide response against money laundering, making it harder for criminals to benefit from unlawful operations.

Measures Undertaken by the Government of India to Avoid Money Laundering

Criminal Law Amendment Ordinance (XXXVIII of 1944)

The “Criminal Law Amendment Ordinance (XXXVIII of 1944)” is an older piece of legislation in India that, while not expressly meant to prevent money laundering as we understand it today, has several elements that can be beneficial in the larger fight against financial crimes. Here’s an overview of how this ordinance can aid in combatting money laundering:

1. Attachment of property: – The ordinance allows for the attachment of property suspected to be gained by criminal means. – This provision can be used to freeze assets suspected of being tied to money laundering activities, blocking their future use or transfer.
2. Special Courts: – The ordinance provides for the establishment of special courts to deal with matters relating to specified offenses. – These courts might potentially speed the legal process in instances that may entail money laundering components.
3. Burden of proof: – In certain situations, the law transfers the burden of proof to the accused to demonstrate that their property was not gained via criminal means. – This can be particularly valuable in money laundering instances since the source of funds is typically difficult to track.
4. Forfeiture of property: – The ordinance allows for the forfeiture of property earned through illicit activities. – This clause can be used to deprive criminals of their ill-gotten earnings, which is a vital tool in countering money laundering.
5. Complementary legislation: – While not as extensive or explicit as modern anti-money laundering laws, this ordinance can supplement newer legislation like the Prevention of Money Laundering Act (PMLA), 2002. – It provides additional legal tools that can be utilized in conjunction with more recent laws to establish a more strong legal framework against financial crimes.
6. Addressing predicate offenses: – The ordinance can be used to confront numerous predicate offenses that typically lead to money laundering activities. – By providing ways to address these underlying crimes, it indirectly contributes to anti-money laundering initiatives.
7. Investigative powers: – The ordinance grants some investigative rights that can be beneficial in tracing and identifying assets associated to criminal activity, including potential money laundering.

In practice, this ordinance is often utilized in conjunction with more modern and specialized anti-money laundering legislation like the PMLA, 2002, which gives a more comprehensive and up-to-date framework for fighting money laundering in its present forms. The 1944 ordinance acts as an extra tool in the legal arsenal against financial crimes, supplementing current laws and regulations tailored to meet the intricacies of modern money laundering schemes.

The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act[6]

The “Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976”, is an Indian law aimed at addressing economic crimes, primarily smuggling and foreign exchange manipulation. It provides for the seizure of unlawfully obtained properties of smugglers, foreign exchange manipulators, and their collaborators, encompassing not only the possessions of the offenders but also those held by their families and associates. The Act can be retrospectively applied to properties bought up to six years before its introduction. SAFEMA’s importance to countering money laundering is through asset seizure, deterrent impact, and destruction of criminal networks. It complements other Indian legislations like the “Prevention of Money Laundering Act (PMLA), 2002”, establishing a more comprehensive legal framework against financial crimes. SAFEMA indirectly aids to anti-money laundering efforts by tackling predicate crimes including smuggling and foreign exchange breaches. However, it has limits in directly combatting current money laundering strategies. SAFEMA is part of a wider legal ecosystem that comprises more focused and up-to-date rules and regulations designed to handle the intricacies of modern financial crimes.

Narcotic Drugs and Psychotropic Substances Act, 1985[7]

The “Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act)”, mainly aimed at reducing drug trafficking and abuse in India, also plays a key role in combating money laundering linked to drug-related crimes. The Act allows authorities to take possession and forfeit assets obtained through illegal drug activities, disrupting money laundering by confiscating illicit gains. It also gives investigators the power to trace and identify financial follows connected with drug trafficking.

An important aspect of the NDPS Act is that it presumes the accused’s guilt unless proven otherwise, which is especially useful in money laundering cases where proving intent can be difficult. The Act imposes strict penalties for financial crimes linked to drug trafficking and includes mechanisms for international cooperation, important in addressing cross-border money laundering operations. By regulating chemicals used in drug production, it indirectly stops the creation of illegal profits that may be laundered.

Importantly, offenses under the NDPS Act are recognized as “predicate offenses” under the Prevention of Money Laundering Act (PMLA), 2002, allowing authorities to seek charges for both drug-related offenses and associated money laundering. The Act facilitates financial investigations and controlled delivery methods, which help expose drug trafficking networks and their financial operations. While not a special anti-money laundering law, the NDPS Act plays a critical role in tackling illicit funds from the drug trade, adding to the broader fight against money laundering.

Prevention of Money-Laundering Act, 2002 (PMLA)

The “Prevention of Money Laundering Act, 2002 (PMLA)[8]”, is India’s main law for addressing and preventing money laundering by criminalizing the process of concealing illicitly obtained funds. It sets high standards on financial institutions to monitor, report suspicious transactions, and adhere to Know Your Customer (KYC) regulations. The Enforcement Directorate (ED) leads investigations, with authority to track, seize, and confiscate assets attached for laundering activities, including the power to attach properties during investigations. Convictions under the PMLA result in major penalties, such as imprisonment and fines, while special courts expedite the legal process. The law also facilitates international cooperation in tackling cross-border money laundering and terrorism funding. In coordination with other laws like the NDPS Act and the Income Tax Act, the PMLA provides a robust framework for combating financial crimes and improving freedom within India’s financial system by breaking illegal money movements and punishing offenders.

The 2012 Amendment to the Prevention of Money Laundering Act (PMLA) strengthened the law by broadening the meaning of money laundering, allowing attachment of assets before conviction, and increasing penalties for offenders. It expanded the list of predicate crimes and empowered the Enforcement Directorate (ED) to attach assets without a prior FIR. The amendment also enhanced international cooperation to tackle cross-border money laundering and created Special Courts to expedite trials. These changes improved India’s ability to fight money laundering and strengthened enforcement against financial crimes.

Financial Intelligence Unit-IND

The “Financial Intelligence Unit-India (FIU-IND)” plays a crucial role in fighting money laundering by gathering, analyzing, and sharing financial data with law enforcement and regulatory bodies. It collects reports from banks and financial institutions, such as Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs), to identify potential laundering activities. FIU-IND analyzes this data to uncover suspicious trends, which are then passed on to agencies like the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) for further investigation. Additionally, FIU-IND ensures financial institutions comply with anti-money laundering laws, cooperates with international FIUs to address cross-border laundering, and raises awareness through training programs. By publishing reports on emerging risks and trends, FIU-IND strengthens efforts to detect, prevent, and disrupt money laundering in India.

Enforcement Directorate (ED)

• “It is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime in India.
• One of the main functions of ED is to Investigate offences of money launderingunder the provisions of Prevention of Money Laundering Act, 2002(PMLA).
• It can take actions like confiscation of property if the same is determined to beproceeds of crime derived from a Scheduled Offence under PMLA, and toprosecute the persons involved in the offence of money laundering.”[9]

 Conclusion

India’s approach to combating money laundering is comprehensive and involves various laws and agencies that collaborate to tackle this complex challenge. Money laundering presents significant risks to economic stability, social integrity, and political credibility, highlighting the necessity for robust measures. The Prevention of Money Laundering Act (PMLA) is central to these initiatives, offering a thorough legal framework for detecting, investigating, and prosecuting money laundering activities. This law works alongside the enforcement capabilities of the Enforcement Directorate (ED) and the analytical functions of the Financial Intelligence Unit-India (FIU-IND), creating a strong defense against financial crimes.Furthermore, amendments and additional laws like the Narcotic Drugs and Psychotropic Substances Act (NDPS) and the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act further bolster India’s efforts in addressing money laundering. International collaborations and initiatives also enhance these domestic measures by aligning them with global standards. As laundering techniques become more sophisticated with advancements in technology, it will be essential to continuously update and strengthen legal frameworks to effectively combat this widespread issue and protect India’s financial system from illicit activities.

[1] “Money Laundering in India: Concepts, Effects and Legislation” (2015) 3 International Journal of Research in Humanities & Soc. Sciences 51 <https://www.raijmr.com/ijrhs/wp content/uploads/2017/11/IJRHS_2015_vol03_issue_07_11.pdf>

[2] “Money Laundering” (Drishti IAS) <https://www.drishtiias.com/to-the-points/paper3/money-laundering-1>

[3] Team C, “Money Laundering and Its Prevention – ClearIAS” ClearIAS (August 22, 2024) <https://www.clearias.com/money-laundering/#some-of-the-common-methods-of-money-laundering-are>

[4] ClearIAS Team, “Money Laundering and Its Prevention – ClearIAS” ClearIAS (August 22, 2024) <https://www.clearias.com/money-laundering/#some-of-the-common-methods-of-money-laundering-are>.

[5] Orr O and others, Vienna Convention on the Law of Treaties (2011) <https://doi.org/10.1007/978-3-642-19291-3>

[6] The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act | 1976

[7] Narcotic Drugs and Psychotropic Substances Act | 1985

[8] Prevention of Money-Laundering Act | 2002

[9]“Money Laundering” (Drishti IAS) <https://www.drishtiias.com/to-the-points/paper3/money-laundering-1>