While recent amendments are a positive step in the direction of strengthening anti money laundering laws, the biggest challenge is to seek effective implementation of the existing enforcement mechanism and secure speedier convictions in a stipulated time frame Money laundering is the process by which large amounts of illegally obtained proceeds are made to circulate in the...
While recent amendments are a positive step in the direction of strengthening anti money laundering laws, the biggest challenge is to seek effective implementation of the existing enforcement mechanism and secure speedier convictions in a stipulated time frame
Money laundering is the process by which large amounts of illegally obtained proceeds are made to circulate in the economy as having been generated from a legitimate source. In common parlance, the process of money laundering means to effectively convert 'tainted money' or 'black money' into 'untainted money' or ‘white’ returns and encompasses any financial transaction which generates an asset, as a result of an illegal act or organised crime such as tax evasion or false accounting.
Money laundering follows a three-pronged intricate process of placement (refers to the initial point of entry where illegitimate funds are introduced into the legitimate financial system), layering (refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle) and laundering or integration (refers to the return of funds to the legitimate economy for later extraction).1
Money Laundering: Sources and impact
Tainted money may be traced to fraudulent activities including drug trafficking, terrorist activities, insider trading, bribery, computer fraud schemes and corruption. The main aim of money laundering is to give legitimacy to such illegal gains by providing a safe cover to disguise the origin of funds.
Money laundering adversely impacts the economy as it diverts resources to less productive areas. Consequently, the sub-optimal utilisation of resources causes a depressed economic growth. For instance, tax evasion results in loss of government revenue, which in turn impacts availability of funds with the exchequer for larger public good. Therefore, it is critical for any economy to establish and develop an effective mechanism to combat illegally obtained currency from circulating as legitimate assets.
Regulation and Control: Legislative framework
Recognising the seriousness of the threat posed by money laundering, and in furtherance of its commitment to implement the Political Declaration and Global Programme of Action adopted by the United Nations General Assembly2, India inter alia resolved to develop a mechanism to prevent use of financial institutions for laundering of drug related money and to enact a legislation to prevent such laundering.3 Consequently, the Indian legislature enacted the Prevention of Money Laundering Act, 2002 ("PMLA"), which made the act of money laundering a criminal offence, attracting penal consequences. The PMLA came into force from July 1, 2005, after the establishment of the Financial Intelligence Unit - India ("FIU") in November 20044. India is also a member of the Financial Action Task Force (FATF), an inter-governmental body established in 1989 to set the standards and promote measures to combat money laundering and other related threats.5
The PMLA envisages a mechanism to prevent the seepage of illicit money into the economy, while also providing for confiscation of property derived from or involved in money laundering. Under the PLMA, an 'offence of money laundering' is said to be committed 'when a person directly or indirectly attempts to indulge or knowingly assists or knowingly is party or is actually involved in any process or activity connected with the proceeds of crime and projects it as untainted property'.6
The definition of money laundering has been expanded vide an amendment in 2012 to include activities such as possession, concealment, acquisition, possession and use of proceeds of crime.
The term 'proceeds of crime' is defined to mean and include 'proceeds as a result of criminal activity relating to a scheduled offence'.
Scheduled offences narrate the specific crimes under various penal statutes, being crimes which lead to generation of large illegal funds and include criminal conspiracy, cheating, using as genuine, forged or counterfeit notes or bank notes and forgery of valuable security.
Under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, every banking company and financial institution, including an intermediary, is required to maintain records of all transactions including records of all cash transactions where the value of the transaction exceeds INR 10 lakhs or its equivalent value in foreign currency, including integrally connected series of cash transactions concluded in a month.
Banks, financial institutions and intermediaries are also mandatorily required to report all suspicious transactions including monetary transfer or remittances.
In 2009, the FATF had evaluated the legislative and administrative framework for prevention of money laundering and had identified certain shortcomings in the existing framework. In the light of the report by the FATF, the government proposed certain amendments to the PMLA and accordingly, the Prevention of Money Laundering (Amendment) Act, 2012 ("Amendment Act") was introduced and it and came into force on February 15, 2013 in order to give effect to the recommendations made by the FATF in line with international practices. We discuss some of the issues below:
Enhanced monitoring and vigilance: New Amendments
Expanded definition of the offence of money laundering
The Amendment Act makes a crucial amendment to the definition of the 'offence of money laundering' and includes 'proceeds of crime including concealment, possession, acquisition or use, as also projection and claiming of such proceeds as untainted property'. The law has been further strengthened by incorporation of provisions that permit provisional attachment of the proceeds of crime, even without conviction so long as it is proved that the offence of money laundering has taken place and the property in question is involved in money laundering. The property can be attached for a maximum period of 180 days. Provisional attachment is permitted in cases where there is reason to believe that any person in possession of proceeds of crime is likely to conceal, transfer or frustrate any proceeding relating to confiscation of such proceeds.
Introduction of new concepts to enhance reporting and monitoring
The Amendment Act has also introduced the concept of a 'reporting entity', which term includes banking companies, financial institutions, intermediaries or persons carrying on designated business or profession. Accordingly, every reporting entity is necessarily required to verify and maintain records of the identity of all clients. Every reporting entity is compulsorily required to maintain a record of all transactions, including information relating to transactions irrespective of whether the same have been attempted or executed. Additionally, the reporting entities are required to verify the identity of their clients, identify the 'beneficial owner'7 (if any) of such of its clients and maintain their records. The Amendment Act also empowers the Director, FIU to call for records of transactions or any additional information that may be required for the purpose of making inquiries and conduct audits for non-compliance in order to, inter alia, reconstruct individual transactions.
Introduction of the concept of corresponding law
Another significant change in the existing statutory regime is the insertion of a new provision in the PMLA (Section 58 A), which is applicable to trials in criminal courts outside India under the corresponding law8 of any other country. Under the Section, if a foreign court establishes that the offence of money laundering has not taken place or that the property in India is not involved in money laundering, then the Indian court will be mandatorily required to release the said property. Essentially, this provision has an effect of curtailing the powers of the local courts in India, which ordered the confiscation/attachment of such property based in India. The provision does not permit the Indian courts to decide the matter on its merits, irrespective of acquittal by an overseas criminal court.
Stricter punitive measures and penalties
Violation of the provisions of the PMLA attract rigorous punitive implications which range from imprisonment for a term of not less than three years, extendable to seven years (or ten years, where the proceeds of crime involved in money laundering relates to any offence specified under paragraph 2 of Part A of the Schedule) and may include liability of a monetary fine of '5 lakh9.
One of the most significant changes of the Amendment Act has been the omission of Part B of the Schedule appended to the PMLA, which prior to its amendment, only included those crimes, where the total value of the offence was above INR 30 lakh. In comparison to offences under Part B, Part A did not specify any monetary limit of the offence. The Amendment Act brings all the offences under Part A of the Schedule to ensure that the monetary thresholds do not apply to an investigation into an offence of money laundering. Additionally, the statutory amendment has removed the upper limit of the disproportionately low amount of INR 5 lakhs that could be imposed as a fine for an offence under the PMLA. These punitive provisions have now been amended to provide for an imposition of fine proportionate to the gravity of the offence, to be determined by the courts. The punitive measures have been further strengthened by creating a presumption against the accused in a case of violation of the statutory provisions.10 Accordingly, in any proceedings relating to proceeds of crime under the PMLA, unless the contrary is proved, it is presumed that such proceeds of crime are involved in money laundering.
Know Your Customer: Key to prevent money laundering
India’s central bank, the Reserve Bank of India, which controls monetary policies, issues circulars and guidelines on know your customer ("KYC") norms, anti-money laundering ("AML") and combating of financing of terrorism ("CFT"). RBI has the power to issue these guidelines under the Banking Regulation Act, 194911 and the PML Rules. These RBI guidelines cast an additional obligation on banks and financial institutions to comply with such KYC/AML/CFT mandates while simultaneously complying with the statutory obligations under the PMLA. The primary focus of these guidelines is to prescribe standards for customer identification procedures, customer acceptance policies and monitoring transactions of suspicious nature and report such transactions to appropriate authority as a measure of risk management.12 The RBI also issues indicative guidelines on customer identification requirements for walk-in customers, opening and closing of accounts of politically exposed persons of foreign origin, non face-to-face customer or accounts operated by companies and proprietary concerns.
The guidelines require intensive due diligence and risk perception of customers based on parameters such as business activity, location, financial status, especially in cases where the source of funds lacks clarity and distinctness. While contravention or non-compliance of the norms and guidelines issued by the RBI attracts penalties including imprisonment and a monetary fine under the Banking Regulation Act, 1949, the RBI has given sufficient flexibility to the banks and financial institutions to frame their own guidelines and undertake reasonable measures to identify and verify the identity of beneficial owners of bank accounts, namely, the person who ultimately owns or controls a client and/or the person on whose behalf a transaction is being conducted.
Conclusion
The existing statutory regime governing anti-money laundering policies in India has sought to bring about several welcome changes in detecting unaccounted money. Though the extra-territorial applicability of the anti-money laundering laws in India is limited, as it extends only to the territory of India, the statute vests authority with the Central Government to enter into agreements with the Government of any other country for enforcing PMLA in that country as well as for exchanging information for the prevention of any offence under the PMLA. In addition to widening the expanse of the existing statute, the Amendment Act simultaneously introduces new concepts including the concept of 'corresponding law' to link the provisions of Indian law with the laws of foreign countries and to provide for transfer of proceeds of foreign offences in any manner in India.
While the recent amendments are a positive step in the direction of strengthening anti-money laundering laws, given that the Indian judicial system suffers from a backlog of pending cases, it is necessary that timelines are prescribed for completing investigation in the offences of money laundering. The biggest challenge would therefore be to seek effective implementation of the existing enforcement mechanism and secure speedier convictions in a stipulated timeframe. While all banks, financial institutions and intermediaries have established KYC and AML procedures, there is a need to intensify scrutiny of these, including customer identification procedures, identification of beneficial ownership, politically exposed persons, on-going client due diligence13. The role of various agencies entrusted with key responsibilities on monitoring and regulating anti-money laundering activities, especially the FIU and the Enforcement Directorate, is also essential and requires professionally qualified individuals to carry out these operational functions as prescribed under law. Furthermore, regular up-gradation of the law, at par with international standards, is required to ensure that financial institutions are not vulnerable to infiltration of laundered money and exploitation of the system by the mechanics of organised crime and multi-layered transactions.
In conclusion, while the legislature has sought to bring the legal regime at par with international standards, what lies ahead is the herculean task of implementing the otherwise robust regime on paper.
Footnote:
1 Tushar V. Shah, Commentary on Prevention of Money Laundering Act, 2002 (2009) at 43 and 117. 2 Adopted at the Twentieth Special Session of the United Nations General Assembly, June 10, 1998. 3 Preamble to the Prevention of Money Laundering Act, 2002. 4 The FIU is the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions. FIU is also mandated to coordinate and strengthen efforts of national and international intelligence, investigation and enforcement agencies to join hands in pursuing the global efforts to curb the menace of money laundering and other related crimes. It is an independent body and reports directly to the Economic Intelligence Council headed by the Finance Minister. 5 The Financial Action Task Force ("FATF") was established by the G-7 Summit in 1989, to develop a coordinated international response to combat money laundering. The FATF sets out standards and develops policies to combat money laundering and terrorist financing and urges nations to undertake the necessary steps and comply with its recommendations to combat laundering. 6 Section 3 of the Prevention of Money Laundering Act, 2002. 7 In terms of Rule 9 sub-rule (1A) of the PMLA Rules, the beneficial owner is the person who ultimately owns or controls a client and/or the person on whose behalf a transaction is being conducted. This is done to ensure adequate customer verification procedure before commencement of a banking relationship. Similar such concepts also emerge in screening procedures deployed for identification of politically exposed persons. 8 Section 2(ia) 'corresponding law' means any law of any foreign country corresponding to any of the provisions of this Act or dealing with offences in that country corresponding to any of the scheduled offences. 9 Amendment of Section 4 of the PMLA Act, 2002: While the PMLA levied a fine up to '5 (five) lakh, the Amendment Act removes this upper limit. The words "which may extend to five lakh rupees" shall be omitted. 10 Amendment of Section 24 of the PMLA Act, 2002; the funds shall be presumed to be involved in the offence, unless proven otherwise. 11 Section 35A. 12 RBI Master Circular dated July 2, 2012 and RBI Master Circular dated December 10, 2012 13 India Anti-Money Laundering Survey 2012 (prepared by KPMG) available at http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/AML_Survey_2012.pdf; as visited on April 2, 2013.
Disclaimer-The views expressed in this article are the personal views of the authors and are purely informative in nature.