PREVENTION OF MONEY LAUNDERING

ACT, 2002 (PMLA)

 Sneha Nagpal - 32
 Virendra Kamble - 21
 Gaurav Kariwala - 22
 Krupa Katira - 23
 Shruti Kolte - 24
 Abhay Kumar - 26
 MONEY LAUNDERING - IN LAYMAN'S TERMS

The Word “Laundry” means “Cleaning”.

Metaphorically, money laundering refers to “Cleaning on Money”

Money Laundering means – Any Financial Transaction which generate an

asset or a value as a result of an illegal act.
 Meaning
Any person who directly or indirectly:
• Attempts to indulge
• Assists the person who is actually involved in any process
• Is a party to the activity connected with the proceeds of crime
As the supply of illegal arms, drug trafficking, and prostitution, which can
generate huge amounts of money and projecting or claiming it as untainted
property; shall be guilty of the offence of Money Laundering
 OUTLINE OF THE ACT
• Laundromat Case – Mafia ownership of Laundromat
• In 1970 - Bank Secrecy Act
• In 1980s – Money Laundering as a crime only attracted interest basically within a
drug trafficking in this period
• In 1989 to 1993 – The United Nation noted the report submitted by Financial
Action Task Force (FATF) on Money Laundering
• In 2001 – FATF intergovernmental body developed 40 recommendation on
money laundering & 9 special recommendation on terrorist financing.
• In India – The money Laundering is popularly known as “Hawala” since 1990s
when money of the politician were caught into its net
PREVENTION OF MONEY LAUNDERING ACT -2002
Enacted By- Parliament of India in presence of NDA government
Force with effect from 1st July 2005
The act is extended to the whole of India including Jammu & Kashmir.
Objectives:-
 To prevent & control money laundering
 Prevent channelizing of money into illegal activities and economic crimes.
 To provide for confiscate & seize the property derived from money
laundering.
 To deal with any other issues connected with money laundering in India
Amendment – In 2005, In 2009 & In 2012
 Continue..
• Earning of money / obtaining any property by committing crimes, such as
extortion, insider trading, drug trafficking, illegal gambling, etc. and making it
to appear as coming from legitimate source
• Illegal process of concealing the origins of money obtained illegally by passing
it through a complex sequence of banking transfers or commercial transactions
• Some methods to do are – Smurfing/Structuring, Bulk Cash Smuggling, Cash
Intensive Businesses, Trade Based Laundering, Shell Companies/Trusts, Round
Tripping, Real Estate, Fake Invoicing, Hawala, Gambling etc.
 Stages of Money Laundering
• Placement - money derived through crime is introduced into the formal
financial system
• Layering - money so introduced into the system is layered and spread
over various transactions with a view to clear the tainted origin of the
money
• Integration - money enters the financial system in such a way that
original association with the crime is sought to be cleared so that the
money can then be used by the offender or person receiving it as clean
money
 MONEY LAUNDERING TECHNIQUES
 Bulk cash smuggling
 Smuggling cash into another country for deposit into offshore bank
 Structuring
 It is a method in which cash is broken into smaller amount
 Trade based laundering
 Invoices are altered to show a higher or lower amount
 Bank capture
 Use of a bank owned by money launderers or criminals
 Real estate laundering
 When someone purchases real estate with money obtained illegally
 Casino laundering
 An individual going into a casino with illegally obtained money
LEGAL OBLIGATION UNDER PMLA

Reporting entities
 Banking companies
 Financial institution
 Intermediaries of securities market
 OBLIGATION
Every reporting entity shall-
Maintain a record of all transaction, the nature and value of which may
be prescribed, whether such transactions comprise of a single transaction or
a series of transaction integrally connected to each other, and where such
series of transaction take place within a month
Furnish to director (FIU) within such time as may be prescribed,
information relating to such transaction whether attempted or executed, the
nature of value of which may be prescribed
Verify the identity of its clients in such a manner and subject to such
condition , as may be prescribed
 CONT.. OBLIGATION
Identify the beneficial owner, if any, of such of its clients, as may be
prescribed
Maintain record of documents evidencing identity of its clients and
beneficial owners as well as account files and business correspondence
relating to its clients for a period of five years in case of record and
information relating to transactions
Maintain the same for a period of five years after the business
relationship between a client and the reporting entity has ended or the
account has been closed, whichever is later
 POWER OF DIRECTOR
• If the director, in the course of any inquiry, Finds that a banking companies,
financial institutions or an intermediaries or any of its officers, Has failed to
comply with the provisions contained in section 12
• Then without prejudice to any other action that may be taken under any
other provision of this act,
• He may, Issue a warning in writing or
• by an order, levy a fine on such banking companies, financial institutions or
intermediaries
• From Rs.10,000 to 1 lakh rupees for each failure.
 WHETHER THESE CASES ARE RELATED TO
MONEY LAUNDERING?

• Salman khan hunt blackbuck?

• Salman khan kill people by car (Hit and run case)?
• Doctor remove kidney of a person and sold out with asking the person?
• Intake or selling of drugs?
• Factory is continuously doing air pollution and water pollution?
• Salman khan hunt blackbuck
Offences under the wild life (protection) Act,1972
Section 51 read with Section Hunting of wild animal is an offence
9

• Salman khan kill people by car (Hit and run case)?

Offence under Indian Penal code

Section 302 Murder

• Doctor remove a kidney of a person and sold out with asking the person
Offence under the Transplantation of human organ act 1994 (42 OF 1994)
Section 18 Punishment for removal of human organ without authority.

Section 19 Punishment for commercial dealings in human organs.

Section 20 Punishment for contravention of any other provision of this

Act.
• Factory is doing air pollution and water pollution

OFFENCES UNDER THE WATER (PREVENTION AND CONTROL OF POLLUTION) ACT, 1974 (6
OF 1974)
Section 41(2) Penalty for pollution of stream or well.
Section 43 Penalty for contravention of provisions of section 24.
OFFENCES UNDER THE AIR (PREVENTION AND CONTROL OF POLLUTION) ACT, 1981 (14 OF
1981)
Section 37 Failure to comply with the provisions for operating industrial plant.

• Intake of drugs
OFFENCES UNDER THE NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985 (61
OF 1985)

Section 15 Contravention in relation to poppy straw.

Section 16 Contravention in relation to coca plant and coca leaves

Section 17 Contravention in relation to prepared opium.

Section 18 Contravention in relation to opium poppy and opium
 PUNISHMENT FOR MONEY LAUNDERING

• Whoever commits the offence of Money laundering

• shall be punishable with rigorous imprisonment for a term which
shall not be less than 3 years
• But which may extend to 7 years and
• shall also be liable to fine Rs 5lakh.
 WHAT ARE THE MAJOR ACTS COVERED IN THE
SCHEDULE?
• Indian Penal Code, 1860;
• NDPS Act, 1985;
• Unlawful Activities (Prevention ) Act, 1967;
• Prevention of Corruption Act, 1988;
• Customs Act, 1962;
• SEBI Act, 1992;
• Copyright Act, 1957;
• Trade Marks Act, 1999;
• Information Technology Act, 2000;
• Explosive Substances Act, 1908;
• Wild Life (Protection) Act, 1972;
• Passport Act, 1967;
• Environment Protection Act, 1986;
• Arms Act, 1959.
• Various Acts covered in the Schedule to PMLA are given in Annexure-A.
 Agency administers the Prevention of Money
Laundering Act

• The Directorate of Enforcement in the Department of Revenue,

Ministry of Finance.
• Financial Intelligence Unit - India (FIU-IND) under the
Department of Revenue, Ministry of Finance.
 International response to tackle Money
laundering

• Establishment of FATF (Financial action task force in G-7 Summit.

• The primary task of this task force is to develop

recommendations.

• India is active member of FATF.

 CASE STUDY - KINGFISHER
 The Enforcement Directorate (ED), which is investigating money laundering charges
against Vijay Mallya, under Prevention of Money Laundering Act (PMLA)
 Report was filed by CBI. ED has also investigated the overall financial structure of
Kingfisher.
 It is also looking whether some of this money was sent abroad illegally.
 The agency has also written to the 17 bank group led by State Bank of India that lend
money to the grounded airline and then moved to debt recovery tribunal
 ED has also sent official requests seeking details of investigations conducted by the
Income tax and Service tax departments.
 IMPACT?
• Potential damage to reputation of financial institutions and market

• Weakens the “democratic institutions” of the society

• Destabilizes economy of the country causing financial crisis

• Give impetus to criminal activities

• Policy distortion occurs and misallocation of resources

• Discourages foreign investors

• Causes financial crisis

• Encourages tax evasion culture

•Provides opportunity to criminals to hijack the process and Contaminates legal

 AVIATION SCAM – DEEPAK TALWAR
 Enforcement Directorate arrested close aid of corporate lobbyist Deepak Talwar inside a
Delhi court in a money-laundering case related to negotiations allegedly favoring foreign
private airlines and causing loss to state-owned Air India.
 Deepak Talwar was deported from the UAE in connection with the money-laundering case.
 The agency had claimed that entities directly or indirectly controlled by the accused
received exorbitant amounts from Qatar Airways, Emirates and Air Arabia and submitted a
chart of a total of USD 60.54 million allegedly received by firms directly or indirectly
owned by Deepak Talwar between April 23, 2008 and February 6, 2009
 The Delhi High Court dismissed the bail plea of lobbyist Deepak Talwar, arrested by the
Enforcement Directorate in a money laundering case. Talwar was booked by the ED and the
Central Bureau of Investigation (CBI) in criminal cases of corruption, while the Income Tax
Department charged him with tax evasion.
 CRITICAL ANALYSIS OF PMLA
• Act sufficient ?
Putting the accused behind bars for money laundering crimes and attaching their properties
for unlimited years is a solution to curb this menace in the society? Somewhere, my brain
says “no”.
• Reasonable grounds for believing
Section 45 of the Act, the Supreme Court, in the case Nikesh Tarachand Shah vs Union of
India, recently held that imposing such harsh conditions on grant of bail violates the
fundamental rights of Articles 14 and 21 of the Constitution, guaranteeing right to equality
and right to personal liberty.
• Person X deposits tainted money in Y’s Account, then Y will also be punished
• Under Section 5 of the PMLA, a director or any officer not below the rank of deputy
director, who is authorised by such director, has the power to provisionally confiscate the
property if such officer has the reason to believe –
 MONEY LAUNDERING: A SNAPSHOT
Global Estimates:
• Between 2 and 5 % of Global GDP (IMF, 1998)
• Between $590bn and $1.5tn per year (FATF)
• $1.6tn (United Nations Office on Drugs and Crime, 2009)
Money Laundering in India
• Out of 140 countries, India has been ranked 93rd in the
AML Basel Index 2013
• As per, National Institute for Public Finance and Policy
(NIPFP) between 1997-2009 the flow of illicit money was
around 0.2 -7.4 % of India's GDP.
• As per, National Council Applied Economic Research
(NCAER) black money between 1980 and 2010 amounts to • Has demonetization failed in its objective?
$490 billion.
Demonetization:
• Report on black money estimated that a large
chunk of unaccounted money was within India
• Report may have been among the factors that
prompted the Narendra Modi government to
carry out demonetization
• Political parties were apparently unwilling to
make the report public since it covered a time
both were in power
• As per RBI's report 99.3 % of the demonetized
currency has returned to the banking system.
 CHALLENGES?
• Developing political will at senior levels of government.

• Tighter AML can be costly and reduce resources from other needs.

• Building capacity in developing countries for investigation and prosecution.

• Knowing your client is not always easy. Knowing your client’s client is difficult to
impossible.

• Coordination among countries law enforcement, financial intelligence units,

regulators, and judiciaries.

• Application of AML regime in a cash based economy.

•Unwillingness of people - digital economy

 SUGGESTIONS
Customer Acceptance -
Transactions Monitoring-
• Ensure acceptance of only legitimate and bona fide customers​
• Monitor customers accounts and transactions
• Issue of mechanism to verify ID​ to prevent or detect illegal activities.
• Issue of Multiple accounts​
• Issue of Mechanism to verify financial details​
• Transactions inconsistent with customers
• Issue of list of suspects/criminals/unwanted elements​ profile (business)​
• Awareness and training of staff • Unexplained transfers between multiple
accounts with no rationale​
Customer Identification- • Sudden activity in dormant accounts​
• Ensure that the customers are properly identified to understand
Risk Management-
the risks they may pose.​
• Implement processes to effectively manage
• Background check of new customer​ the risks posed by customers trying to misuse
facilities.
• Background check of existing clients​ • Categorization of customers:
• Issue of List of suspects/criminals/unwanted elements​ high/medium/low risk
• Constant interaction between front desk and
• Match from global watchlist the compliance team required​
• Awareness and training of staff • Awareness and training of staff
• Housing Finance Companies​
Foreclosure of home loan accounts by substantial cash payments (Rs 20 Lakhs)​
• Insurance Companies​
Doubtful source of large premium​
• Mutual Funds​
Multiple investments below Rs. 50,000 by same individual without PAN​
• Multiple Folios​ and their relation
• Identification of transactions inconsistent with customers’ profile - Number/Value/turnover
• Single identification for all
• Risk profile upgradation (every 15 days)
• Identification of unusual activity compared with past transactions​
• Identification of Suspicious background or links with known criminals​
• ​Treaties from tax heaven countries on enhanced exchange of information