Prevention of Money Laundering Act – Meaning | Scheme | Key Provisions

The Prevention of Money Laundering Act, 2002 is a special law enacted to prevent money laundering, prohibit the use of proceeds of crime, and provide for attachment, confiscation, and punishment in respect of property derived from criminal activities. It seeks to combat the conversion of tainted or illegal money into legitimate assets by prescribing criminal liability, civil measures such as attachment and confiscation of property, and regulatory obligations on reporting entities to detect and report suspicious financial transactions.

Table of Contents

1. Need for Special Act on Money Laundering
2. Implementation of Prevention of Money Laundering Act, 2002
3. Scheme of the Prevention of Money Laundering Act
4. Provisions for Prevention of Money Laundering in the Act
5. Definition of ‘Money Laundering’

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1. Need for Special Act on Money Laundering

Money is generated in a very large scale due to crimes. These crimes cover trade in narcotics, smuggling, trade in banned/prohibited articles, antics, corruption, counterfeiting currency, gambling, trade in prohibited arms/ammunition, selling national secrets etc.

This money is required to be converted into untainted money so that it can be used in big way, as such huge quantum of money cannot be transferred and used without banking channels.

In common terminology, money laundering is understood as converting black money or Number Two money into white money or Number One money.

In brief, converting tainted money into untainted money is called ‘money laundering’.

‘Laundering’ is to switch black money or dirty money into clean money. ‘Clean money’ means money coming from known or legal sources, while ‘dirty money’ means money coming from illegal activities.

As per sub-committee on Narcotics and Terrorism of US Senate Foreign Relations Committee, ‘Money Laundering’ is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins.

As per definition adopted in Interpol General Secretariat Assembly in 1995, money laundering is any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.

Loss of tax revenue is also involved but comparatively that is minor issue.

The major issue is that the tainted money is used for funding terrorist activities. This problem has become more acute in many countries, including India, as our neighbouring countries themselves are involved in such activities.

The menace is at international level at a much larger scale.

One way to prevent serious crime is to make it difficult to convert black money into white money.

General Assembly of United Nations adopted a political declaration in June 1998, calling upon member States to adopt national money laundering legislation and programme. The present ‘Prevention of Money Laundering Act’ is passed to implement the UN resolution.

UN Security Council Resolution 1373 of 28-9-2001 empowers Security Council to enforce terms of UN Convention for Suppression of the Financing of Terrorism. The convention was proposed in 1999 and became effective from 10-4-2002.

European Union had issued new Money Laundering Directive in 2001 to amend the 1991 directive.

1.1 Why the Term ‘Laundering’

General impression is that ‘money laundering’ term is used as it converts black money into white money. It may be so, but that is not the origin of the word ‘money laundering’.

There is interesting history behind the word ‘laundering’. Al Capone, notorious mafia in USA, obtained lot of money from criminal enterprises. He established laundry machines all over USA at various public places. The machines could be used by public by putting coins.

Since this laundry business was a cash business, he was able to covert his cash into legitimate earnings and hence the name ‘money laundering’.

1.2 Process of Money Laundering

Money laundering involves three stages:

1. Placement (of hot money in financial system or retail economy)
2. Layering (separating money from its source through series of financial transactions i.e. concealing source of ownership of funds by creating layers of transactions to disguise audit trail and provide anonymity. It is now comparatively easy due to electronic funds transfer) and
3. Integrating (of hot money with legitimate money. Money is assimilated with other legitimate assets).

Popular places of money laundering are stock markets, agricultural products (as there is no income tax on agricultural income and transactions are mostly on cash basis), real estate, property market, gold and precious metals, high value consumer goods, bogus imports/exports etc.

Creating of bogus companies, showing loans or investments, false export-import invoices etc. are various methods adopted. The transactions are so large that transactions have to be routed through Banks, Financial Institutions, intermediaries etc.

1.3 Rogue Countries

The menace of money laundering has increased almost beyond control as Governments of some countries like Nigeria, Pakistan, Afghanistan etc. are themselves involved and are supporting money laundering activities and terrorism. Such rogue countries make the control over money laundering very difficult.

1.4 Rogue Banks

Like rouge countries, there are rogue banks also, which support money transfers through questionable means.

In our own country, it is widely believed that Jammu and Kashmir Bank was involved in activities of such money transfers, which had questionable origin. Of course, there are many such banks in India with different degree of ‘roughness’.

2. Implementation of Prevention of Money Laundering Act, 2002

The ‘Prevention of Money Laundering Act, 2002’ was passed on
17-1-2003. The Act was notified and became effective from 1-7-2005.

Directorate of Financial Intelligence Unit, India (FIU-IND), under Ministry of Finance is empowered to implement part of the Act, relating to collecting and processing financial intelligence.

Directorate of Enforcement under FEMA is also empowered to exercise various powers under Prevention of Money Laundering Act, 2002 in respect of confiscation, arrest, punishment etc.

2.1 Amendments to Prevention of Money Laundering Act

The Prevention of Money Laundering Act has been amended from time to time. Latest amendments are made on 1-8-2019 through Finance (No. 2) Act, 2019.

The changes made w.e.f. 1-8-2019 is summarised below:

• Definition of ‘intermediary’ amended to exclude sub-broker – section 2(n) amended
• Definition of ‘person carrying on designated business or profession’ has been amended to include Inspector General of Registration and exclude Registrar and Sub-Registrar appointed under Registration Act – section 2(sa) amended
• Definition of ‘offence of money laundering’ widened to include knowingly concealment, possession, use, projecting/claiming as untainted money etc. It is also clarified that this is a continuing offence – section 3 amended
• Responsibility of reporting entity widened to undertake enhanced diligence in respect of specified transactions beyond prescribed limit, not to undertake suspicious transactions, monitor suspicious specified transactions and keep record of such transactions and their KYC for five years – section 12AA inserted
• Provision of carrying out search of premises only after forwarding a report to Magistrate has been omitted. Thus, search of can be made by authorised officer directly – section 17 amended
• Provision of carrying out search of a person only after forwarding a report to Magistrate has been omitted. Thus, search of a person can be made by authorised officer directly – section 18 amended
• Authority can close complaint even after Special Court has taken cognizance, if Authority finds that no offence has been made out – proviso to section 44(1)(b)
• Trial under scheduled offence and offence under Prevention of Money Laundering Act will be independent. It will not be joint trial – Explanation (i) to section 44(1).
• Subsequent complaint can be added to original complaint is same trial if further evidence found – Explanation (ii) to section 44(1).
• Offence under Prevention of Money Laundering Act is cognizable and non-bailable. Empowered Officer can arrest without warrant – Explanation to section 45(2) [This is given retrospective effect as drafting of section 45 was faulty].
• Formation of inter-ministerial coordination committee for inter-departmental and inter-agency coordination.

3. Scheme of the Prevention of Money Laundering Act

Money Laundering basically is knowingly dealing with proceeds of crime, directly or indirectly.

The Act provides both for civil and criminal liability.

3.1 Criminal Liability under Prevention of Money Laundering Act

Crime which results in tainted money is a separate offence
under various laws as specified in Schedule to Prevention of Money Laundering Act. These offences are punishable under those Acts. The punishment is to the person/s who is/are involved in actually committing that offence.

The offence as specified in section 4 of Prevention of Money Laundering Act is a separate offence. The punishment under section 4 of Prevention of Money Laundering Act is not only to those who are actually involved in dealing with tainted money but also on those who are knowingly involved, directly or indirectly, in dealing with proceeds of crime.

This is a criminal offence, which will be tried by special courts designated for this purpose under section 2(z) of Prevention of Money Laundering Act. The trial will be both for charges under the specific Act which is a crime and also offence of money laundering under Prevention of Money Laundering Act. However, it is not ‘joint trial’.

The Special Count is Court of Sessions which is designated as special court under section 43 of Prevention of Money Laundering Act.

Appeal against decision of Special Court lies with High Court as per powers under Code of Criminal Procedure – section 47 of Prevention of Money Laundering Act.

3.2 Civil Liability i.e. Confiscation of Tainted Property

In addition to criminal liability, the property involved in money laundering can be attached and frozen by Central Government and later confiscated.

The procedure is as follows.

Order of provisional attachment or freezing will be issued by Director, Joint Director or Deputy Director empowered under Prevention of Money Laundering Act (who is empowered under the Act) for upto 180 days – section 5(1) of Prevention of Money Laundering Act.

The director will send copy of order of provisional attachment or freezing of assets to Adjudicating Authority – section 5(2) of Prevention of Money Laundering Act.

The procedure to be followed and the forms to be used have been specified in Prevention of Money Laundering (the Manner of Forwarding a Copy of the Order of Provisional Attachment of Property along with the Material, and Copy of the Reasons along with the Material in respect of Survey, to the Adjudicating Authority and its Period of Retention) Rules, 2005.

Adjudicating Authority is appointed under section 6(1) of Prevention of Money Laundering Act.

Final order of attachment or freezing will be issued by Adjudicating Authority under section 8(3) Prevention of Money Laundering Act. This order of seizure or freezing continues till Special Court disposes of the criminal matter.

Appeal against order of Adjudicating Authority will lie before Appellate Tribunal constituted under Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 [SAFEMA] – section 26(1) of Prevention of Money Laundering Act.

It is not necessary to wait till appeal period is over to commence proceedings with attachment as order passed by Adjudicating Authority is just like a decree of civil court, which becomes executable moment it is drawn – Syed Akeel Shah v. Directorate of Enforcement (2023) 175 SCL 494 = 145 taxmann.com 532 (J&K and Ladakh HC DB).

Appeal against order of Appellate Tribunal lies before High Court both on question of law and facts – section 42 of Prevention of Money Laundering Act.

3.3 Order of Confiscation by Special Court

After conclusion of Trial of accused, if Special Court finds that offence of money laundering has been committed, it (special court) shall order that property involved in money laundering or which has been used for money laundering, shall be confiscated – section 8(5) of Prevention of Money Laundering Act.

After confirmation of order, some persons may have claims in respect of such confiscated property, if they had acted in good faith but suffered quantifiable loss. Such claims should apply to Special Court. The procedure to be followed has been specified in Prevention of Money Laundering (Restoration of Confiscated Property) Rules, 2016.

After order of confiscation by Special Court, the property shall vest absolutely in Central Government – section 9 of Prevention of Money Laundering Act.

If after conclusion of Trial, if Special Court finds that offence of money laundering has not been committed, it (special court) shall order release of property – section 8(6) of Prevention of Money Laundering Act.

4. Provisions for Prevention of Money Laundering in the Act

Though the Act talks about ‘prevention’ of Money Laundering, actually, there were very few provisions for ‘preventing’ money laundering.

The Prevention of Money Laundering Act mainly provided for civil and criminal punishments in respect of money laundering after the offence is already committed, which is only a deterrent to commit crime.

Provision for informing suspicious transactions was contained only in rule 8 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

However, now section 12AA of Prevention of Money Laundering Act has been inserted to cast responsibility of ‘reporting entity’ to undertake enhanced diligence in respect of specified transactions beyond prescribed limit, not to undertake suspicious transactions, monitor suspicious specified transactions and keep record of such transactions and their KYC for five years.

In addition, the Prevention of Money Laundering Act casts responsibility on ‘reporting entities’ (like banking companies, financial institutions, intermediaries and others) to furnish information. They have to inform all suspicious transactions to Director, Financial Intelligence Unit [FIU-IND], under Ministry of Finance.

The Act provides for KYC norms (Know Your Customer) to ensure identity of their customers, to ensure that they are genuine, identifiable and traceable.

The ‘reporting entity’ is required to undertake ‘client due diligence’ under rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

5. Definition of ‘Money Laundering’

The related definitions are as follows.

Money Laundering – 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 including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.

Explanation – (i) For the removal of doubts, it is hereby clarified that:

(i) a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:

(a) concealment or

(b) possession or

(c) acquisition or

(d) use or

(e) projecting as untainted property or

(f) claiming as untainted property in any manner whatsoever

(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever – Section 3 of Prevention of Money Laundering Act as amended w.e.f. 1-8-2019.

The ‘Explanation’ has been inserted w.e.f. 1-8-2019. The words ‘in any manner whatsoever’ appearing in Explanation (i) apply to all clauses (a) to (f) of the Explanation (i).

The amendment made w.e.f. 1-8-2019 has been held valid in Vijay Madanlal Choudhary v. UOI [2022] 140 taxmann.com 610 (SC 3 member bench).

Proceeds of Crime – ‘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, or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.

Explanation – For the removal of doubts, it is hereby clarified that ‘proceeds of crime’ include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence – section 2(1)(u) of Prevention of Money Laundering Act. The explanation has been inserted w.e.f. 1-8-2019.

Any Bribe Given With the Requisite Intent Shall Be Considered As ‘Proceeds of Crime’ Under PMLA, 2002, Bribe Giver Can Also Be Prosecuted – Any bribe given with the requisite intent shall be considered as ‘proceeds of crime’ under PMLA, 2002. Bribe-giver can also be proceeded against for offence of money laundering u/s 3 of the PMLA, 2002 – Directorate of Enforcement v. Padmanabhan Kishore [2022] 144 taxmann.com 28 (SC).

Acquisition of bribe money is ‘proceeds of crime’ and hence money laundering – Acquisition of bribe money by a public servant qualifies as an act of money laundering, and illegal gratification represents proceeds of crime. Wherever there are allegations of corruption, there is acquisition of proceeds of crime which itself tantamount to money-laundering, since ‘use’ is one of the six activities mentioned in section 3 – Y Balaji v. Karthik Desari [2023] 150 taxmann.com 329 = 179 SCL 49 (SC).