Prevention of Money Laundering Act (PMLA): Importance and Concerns
Kartavya Desk Staff
#### GS Paper 3
Syllabus: Internal Security
Source: TH
Context: The article discusses the Prevention of Money Laundering Act (PMLA), which was initially aimed at combating the laundering of drug money but has expanded to include various unrelated offences over time.
Recently, the Punjab and Haryana High Court clarified that courts can release an accused of money laundering from police custody without fulfilling the conditions mandated by the Prevention of Money Laundering Act (PMLA), 2002
What is Money Laundering?
Money laundering is a process used to hide the origins of illegally obtained money, making it appear legitimate. It involves three stages:
• Placement, where illicit funds enter the financial system
• Layering, where funds are moved through complex transactions to conceal their source
• Integration, where laundered funds are reintroduced as legitimate.
Methods include structuring, trade-based laundering, shell companies, and real estate transactions.
About PMLA:
Need for Prevention of Money Laundering Act (PMLA):
• Global Urgency: Prompted by global concerns over drug trafficking, the PMLA was enacted to prevent the laundering of proceeds from drug crimes, in line with UN conventions.
• Establishment of FATF: Following the establishment of the Financial Action Task Force (FATF) in 1989, measures like the PMLA were adopted to combat money laundering worldwide.
• UNGA Resolution: A 1990 resolution by the UN General Assembly emphasized the need for legislation to prevent drug money laundering, prompting India to enact the PMLA.
• Narasimham Committee Recommendations: Recommendations from the Narasimham Committee highlighted the necessity of addressing money laundering within India’s financial system, contributing to the formulation of the PMLA.
• Adherence to International Standards: The PMLA aligns with international standards and recommendations, ensuring India’s compliance with global efforts to combat money laundering.
• Legislative Authority and Scope: Enacted under Article 253 of the Constitution (it empowers the government to make laws for implementing the international conventions), the PMLA enables India to remain in alignment with world standards on Money Laundering.
Amendment to PMLA: Recently in 2023, the Finance Ministry amended the Prevention of Money Laundering Act (PMLA) and rules in line with the recommendations of the FATF.
Recent amendments made to the Prevention of Money Laundering Act (PMLA):
• Defines PEPs (Politically Exposed Persons): Individuals who have been entrusted with prominent public functions by a foreign country, thereby bringing Indian legal uniformity in line with FATF norms
• For Cryptocurrencies: Virtual digital assets (VDA) trade has been brought under PMLA. New rules mandate crypto exchanges and intermediaries dealing in virtual assets to maintain the KYCs of their clients and report suspicious transactions to financial intelligence units.
• New rules mandate crypto exchanges and intermediaries dealing in virtual assets to maintain the KYCs of their clients and report suspicious transactions to financial intelligence units.
• Due diligence documentation requirements: It has now been extended. It now includes the submission of details such as names of persons holding senior management positions, names of partners, etc.
• Beneficial Owners’: Lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner. The term ‘beneficial owner’ refers to those with the entitlement of more than 25% of shares or capital or profit of the company, which has now been reduced to 10%.
• The term ‘beneficial owner’ refers to those with the entitlement of more than 25% of shares or capital or profit of the company, which has now been reduced to 10%.
• NPOs: Reporting entities are now required to register details of the client if it’s a non-profit organization (NPO) on the DARPAN portal of NITI Aayog.
• Clarification on Proceeds of Crime: Proceeds of Crime now encompass not only property derived from scheduled offences but also from any criminal activity related or similar to the scheduled offence.
• Redefined Money Laundering: Previously dependent on a predicate or scheduled offence, money laundering is now treated as a distinct standalone crime through an amendment.
Crucial Role Played by PMLA:
Role | Examples
Legal Framework | The PMLA provides a legal basis for investigating and prosecuting cases such as the 2G spectrum scam and the AgustaWestland case
Asset Seizure and Confiscation | Enforcement agencies, under the PMLA, have seized assets worth millions of dollars in cases like the Nirav Modi and Vijay Mallya frauds
International Compliance | India’s adherence to FATF recommendations, as mandated by the PMLA, has facilitated international cooperation in cases like the Panama Papers scandal
Financial Intelligence Unit (FIU) Coordination | The FIU-India, established under the PMLA, coordinates with law enforcement agencies to analyze financial data and detect suspicious transactions, contributing to successful prosecutions in cases like the HSBC black money probe
Monitoring Financial Transactions | Mandatory reporting of high-value transactions by banks under the PMLA has led to the detection of suspicious activities, as seen in cases like the INX Media money laundering case
Enhanced Due Diligence | Banks and financial entities, under PMLA regulations, conduct rigorous KYC checks to prevent money laundering e.g., PMC Bank scam
Establishing the Source of Funds | Through PMLA investigations, authorities have been able to establish the source of illicit funds, as seen in cases like the Saradha chit-fund scam
Deterrent to Criminals | High-profile convictions, such as in the Satyam scam, serve as examples of the deterrent effect of PMLA enforcement.
Challenges with PMLA Enforcement:
• Definition of “Proceeds of Crime”: Some argue it’s overly broad, risking the inclusion of lawful transactions.
• Inclusion of Non-Drug Offences: PMLA encompasses offences beyond its original focus, diluting its purpose.
• The burden of Proof on Accused: Critics find the burden of proof unreasonably high, potentially impacting fair trials.
• Concerns of Overreach: E.g., Opposition political parties have alleged misuse of PMLA by ED to arrest party authorities including the sitting CM of Delhi
• Stringent Bail Conditions: In 2018, the Supreme Court found aspects of the PMLA bail provision unconstitutional in Nikesh Tarachand Shah vs Union of India, citing violations of Articles 14 and 21. However, in 2022, the Court upheld the validity of key provisions empowering the Enforcement Directorate (ED) to arrest, conduct searches, seizures, and attach proceeds of crime.
• However, in 2022, the Court upheld the validity of key provisions empowering the Enforcement Directorate (ED) to arrest, conduct searches, seizures, and attach proceeds of crime.
• Lack of Written Communication for Arrest: Arrests without written communication violate constitutional rights. Challenges in PMLA Enforcement:
• Complex Legal Procedures: Legal intricacies can lead to delays and inefficiencies in prosecution.
• Inadequate Training and Resources: Enforcement agencies may lack the necessary resources for effective implementation.
Reforming PMLA, 2002: Key Suggestions
• Parliamentary Committees: Recommended periodic reviews and amendments to the PMLA to address emerging challenges and ensure its relevance and effectiveness.
• Refinement of “Proceeds of Crime” Definition: Define “Proceeds of Crime” precisely to avoid ambiguity.
• Reassessment of Burden of Proof: Evaluate the burden of proof, ensuring fairness and constitutional rights.
• Safeguards Against Officer Overreach: Establish oversight to monitor law enforcement actions.
• Review of Stringent Bail Conditions: Streamline bail procedures without compromising investigations.
• Periodic Review and Amendment: Establish a mechanism for periodic review and amendment of PMLA.
• Enhanced Independence and Transparency of ED: Improve reporting and disclosure of ED activities.
• Public Awareness and Education: Conduct campaigns to educate the public on PMLA’s purpose and procedures.
• Consultative Approach: Engage in open dialogues to address concerns and gather diverse perspectives.
Conclusion:
The PMLA serves as a critical tool in India’s arsenal against money laundering. However, to fully leverage its potential, addressing the challenges in its implementation is essential. By strengthening the framework and execution of the PMLA, India can more effectively combat the complex and evolving nature of money laundering.
Insta Links:
• EDITORIAL ANALYSIS: Questionable searches under the Money Laundering Act
Mains Link:
Discuss how emerging technologies and globalization contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (UPSC 2021)