The Menace of Money Laundering, its dimensions and

constitutional validity

Lord Acton once said, “ Power corrupts and absolute power corrupts
absolutely”. The power given by legislation to the investigation
agencies in laws like Prevention of Money Laundering Act, 2002 and
MCOCA has raised a big debate regarding the validity of laws like these
in democracies like India where the rule of law prevails. The failure of
laws like TADA and POTA has given power to the scholars who are
against such laws.

The recent registration of money laundering case by Enforcement

Directorate against mighty political family of Haryana, the “ Chautala’s
“ and ex-CM of Jharkhand Mr. Madhu Kauda has once again brought
the Prevention of Money Laundering Act, 2002 in to the light. However,
this law has been a reason of controversy right from the beginning it
was enacted. Many scholars have raised the debate of validity of the
law in India, its constitutionality and its consonance with International
Agencies. It he has been argued that the law is against the liberal
principles of the Constitution of India. The misuse of the law by ruling
Governments is also prevalent amongst India. In the foregoing article
we shall try to study the origination of the law and its constitutional
validity. We shall try to study the money laundering, its functioning
and its side effects on the democracy. Then we shall try to understand
the constitutional validity of the money laundering.

What is money laundering:

Money laundering involves disguising financial assets so that they can
be used without detection of the illegal activity that let to its
production. Through the process of “money laundering” a person
converts illegal money into a legal entity. 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
held guilty of the offence of money laundering. The goal of a large
number of criminal acts is to generate a profit for the individual or
group that carries out the act. Money laundering is the process of
these criminal proceeds to disguise their illegal origin. This process is
of critical importance, as it enables the criminals to enjoy these profits
without jeopardizing their source.

Most countries subscribe to the definition adopted by the United

Nations Convention against Illicit Traffic in Narcotics Drugs and
Psychotropic Substances ( 1988 ) ( Vienna Convention )1 and the
United Nations Convention Against Transnational Organized Crime
( 2000 ) ( Palermo Convention )2 :
• The conversion or transfer of property, knowing that such property is
derived from any [drug trafficking] offense or offenses or from an act
of participation in such offense or offenses, for the purpose of
concealing or disguising the illicit origin of the property or of assisting
any person who is involved in the commission of such an offense or
offenses to evade the legal consequences of his actions;
• 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 an offense or offenses or
from an act of participation in such an offense or offenses, and;

1
http://www.incb.org/e/conv/1988/
2
http://www.undcp.org/adhoc/palermo/convmain.html
• The acquisition, possession or use of property, knowing at the time of
receipt that such property was derived from an offense or offenses or
from an act of participation in such offense or offenses3

A very simple definition of money laundering is that it’s the act of

making money that comes from source A look like it comes from
source B.

Money laundering however is not crime independently, it depends

upon another crime; proceed of which is the subject matter of the
crime. It’s seen world wide that in advanced societies the crime
becomes more economic in nature. It is an organized crime. The social
and economic danger of which includes tax evasion, fiscal loss,
economic poorness and terrorism etc. The term is not very old in
nature, it originated firstly in U.S. in 1973 and was used in legal
context firstly in 1982 in U.S. vs $ 4,255,625.394. The celebrated ways
of doing money laundering are hawala and Swiss Banks apart from
other ways.

How money is laundered:

At the initial or placement stage the launderer introduces his illegal

profits/ money into the financial system. This may be done by investing
the same in bulk or through several small transactions which shall be
less suspicious for banks or financial institutions to report the same to
government agencies. The money is then flowed from one stage to
other and from one legal activity to other legal activity and the output
is legal money, wherein even the launderer can pay tax and than be
free for spending the same according to his own sweet will. There are
three stages of money laundering:

3
Vienna Convention, Art. 3 ( b ) and c (i ) and Palermo Convention, article 6 ( i )
4
(1982) 551 F Sup. 314, quoted in Gururaj
 1.) Placement: The funds are introduced in legal financial
system. The same may be done in bulk or by breaking the
transactions into various smaller transactions.

2.) ) Layering: In this stage the launderer engages in various

series of conversations or movement of funds to distance
the same from its origination or source. The layering may
be done through numerous channels, in bank accounts
around the world especially in bank institutions in the
jurisdictions of those countries who do not cooperate in the
anti- money laundering investigations.

3.) Integration: Here the funds re-enter legitimate economy.

The launderer might choose to invest the funds in real
estate, luxury assets or business ventures.

The money laundering is a problem since, it has necessary linkage with

terrorist funding and other worldwide financial crimes, hence it is
necessary to stop the same. Hence, Financial Action Task Force which
is known as international standard for anti money laundering efforts
gave 40 guidelines to be adopted by countries worldwide in order to
control the worldwide spread of money laundering. The problem is so
horrible that the World Bank has assessed that money laundering
accounts for 4 to 5 percent of gross domestic product world wide. The
IMF estimates the global volume of money laundering to be
somewhere between $600 billion to $1.8 trillion a year. With such
statistics, in India, there are absolutely no estimates regarding
spending on anti money laundering measures by banks and financial
institutions.

Indian Efforts:

Money laundering has become a cause of worry in India, International

Narcotics Control Strategy Report by Bureau for International Narcotics
and Law Enforcement Affairs emphasizes India’s Vulnerability to money-
laundering activities in following words5:

“India’s emerging status as a regional financial center, its large system of

informal cross-border money flows, and its widely perceived tax
avoidance problems all contribute to the country’s vulnerability to money
laundering activities. Some common sources of illegal proceeds in India
are narcotics trafficking, illegal trade in endangered wildlife, trade in

illegal gems (particularly diamonds), smuggling, trafficking in persons,

corruption, and income tax evasion. Historically, because of its location
between the heroin-producing countries of the Golden Triangle and
Golden Crescent, India continues to be a drug-transit country.”

In order to implement the guidelines settled by FAFT6, India made

Prevention of Money Laundering Act, 2002 which is standard for anti
money laundering efforts in India. However, the act right from its
inception has been centre of controversy. The misuse of the act is
rampant by the governments in India. There are instances when
politicians have used it for their political benefits. Though the intention
was clear, it was implemented for giving value to world wide effort to
break nexus between money laundering and terrorist financing, it has
failed to gain its importance in India. Though , it has proved some what
beneficial that it has curbed the problem to some extent as it is
mandatory for the banks and other financial institutions to follow the

5
International Narcotics Control Strategy Report dated February 29, 2008
6
The Financial Action Task Force (FATF) is an inter-governmental body which sets
standards, and develops and promotes policies to combat money laundering and terrorist
financing. The Force has provided forty Recommendations and Nine Special
Recommendations that provide a complete set of counter measures against money
laundering. These Recommendations have been recognized, endorsed and adopted by
many international bodies as the international standards for combating Money
Laundering.
AML guidelines set by the act. But, a lot needs to be done to actually
make it a beneficial legislation.

With the PMLA coming into force, banks, financial institutions and
financial intermediaries will have to mandatorily report to Government
all suspicious transactions and those over Rs.10 Lakh.

As per the provisions of the Act, every banking company, financial

institution and intermediary needs to maintain a record of all
transactions, the nature and value of which is being prescribed in the
rules.

Financial institutions, including chit funds, cooperative banks and

intermediaries like stock brokers, share transfer agents, underwriters
and investment advisers were to be registered with SEBI.

The Financial Intelligence Unit (FIU-IND) was set up as a multi-

disciplinary unit for establishing links between suspicious or unusual
financial transactions and criminal activities.

The law of preventing money laundering is necessary since, the money

laundering tends to corrupt even a person who is very honest. Hence,
its social value is very high. Since, money laundering is a very
complicated process, it can not be completed without the help of
professionals like lawyers and charted accountants. Hence, it tends to
corrupt most noble professionals. Hence, it acts like a poison and
needs to be curbed in order to realize the dream of free and fair
economy. It not only disturbs the moral values, but its very dangerous
for the economy, especially the economy of developing countries like
India where the corruption is rampant around all places. The area of
money laundering is so wide that recently in a study conducted in
Canada, it came in to light that over 80% of money laundering cases
have international dimensions. Hence, it is one of the biggest
transnational threats.
Constitutionality of the Act:

The constitutionality of the act came into challenge firstly before the
Hon’ble Supreme Court in Pareena Sarup vs Union of India and others7

The question before the court was that the decision of the cases under
the act vests under the independent tribunals to be set by the
Government but not under the regular courts. It was alleged that the
act seriously undermines the doctrine of separation of power which is
the basic structure of the constitution. Hence, the same is ultra vires
being in violative of the fundamental rights guaranteed by the
Constitution of India. The Constitution guarantees free and
independent judiciary and the constitutional scheme of separation of
powers can be easily and seriously undermined, if the legislatures were
to divest the regular courts of their jurisdiction in all matters, entrust
the same to the newly created Tribunals which are not entitled to
protection similar to the constitutional protection afforded to the
regular Courts. The independence and impartiality which are to be
secured not only for the Court but also for Tribunals and their
members, though they do not belong to the `Judicial Service' are
entrusted with judicial powers. The court however, while dismissing the
writ petition directed Government of India to implement the rules as
soon as possible.

The courts have since upheld validity of the law.

Conclusion:

Stricter rules regarding bail, police custody has made the law
vulnerable to the misuse. According to Mr. Y.P.Singh, Ex IPS Officer and
criminal lawyer8, “the solution lies in accountability. While the corrupt need to
be sacked, the honest and efficient must be posted to critical positions. This,
7
CWP No. 634 of 2007
8
http://www.tehelka.com/story_main43.asp?filename=Ne230110a_law.asp
along with better professional competence would lead to draconian laws that are
a blot on our society to be repealed. “

However, the law is very important as far as curbing the money laundering is
concerned but the provisions like Section 44, which provides special provisions
for trial and bail are the cause of worry for the advocates of right to life and
liberty. The problem is justified, police has been given unlimited power, the rights
of the accused have been curtailed, but police reform is far away from reality
despite after the recommendations of the Hon’ble Supreme Court. The
menace of money laundering is highly diabolical in nature. It hits not
only at the root of a country’s financial structure but also kills its social
structure by financing anti-social activities. In order to realize dream to
make India superpower not only the law needs to be made according
to international standards but also to make the implementation of law
compatible to the international standards. Money laundering is having
international dimensions hence a very careful implementation of the
law is necessary. The act should not only be in consonance with the
international guidelines but also the Constitution of India since it is the
soul of Indian democracy.