The Prevention of Money Laundering Act, 2002

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Money Laundering

Process by which illegal funds and assets are converted into legitimate funds and assets.

The Need for Money Laundering Act 

  • —Part of International / National commitment to fight terrorism, Organized Crime Syndicates, major economic offenders by targeting their financial resources.
  • PMLA, 2002 fills the gap in the Criminal Justice System where attachment of proceeds of crimes was very difficult in the existing Major Criminal Acts.

The FATF

  • —Established by the G-7 Summit in Paris in July 1989 to examine measures to combat money laundering.
  • —An inter-governmental body whose purpose is to establish international standards and promote national and international policies to combat money laundering (ML) and terrorist financing (TF).

Membership of FATF

  • —The 36 members (34 countries and 2 regional bodies) of the FATF and the members of  EIGHT FATF-style regional bodies (FSRBs) have all directly committed to implement the FATF standards.
  • —The Gulf Cooperation Council is a member of the FATF.
  • —The European Union is a member of the FATF.

The role of the FATF

  • 40+9 Recommendations (the FATF standards) :  Establish international standards to combat money laundering and terrorist financing.
  • Mutual evaluation system : Assess compliance with the FATF standards.
  • Typologies work : Study methods and techniques of money laundering (ML) and terrorist financing (TF). 

Objectives of FATF Standards

  • Provide a comprehensive set of measures to enable all countries to implement effective anti-money laundering (AML) / counter-terrorist financing (CFT) systems that will protect the world-wide financial system from misuse by organised crime and terrorist financiers.
  • Foster good governance and longer term economic development

Overview of the standards

The 40 Recommendations

  • —Legal systems: criminalisation of money laundering, international cooperation.
  • ——Comprehensive set of preventative measures to be taken by financial institutions and non-financial businesses and professions (customer due diligence, record keeping).
  • —Institutional framework and other measures (reporting of suspicious transactions, compliance, regulation and supervision, sanctions).
  • —International cooperation: mutual legal assistance, extradition, information sharing.

The 9 Special Recommendations on Terrorist Financing

  • Ratify United Nations instruments.
  • Criminalise terrorist financing.
  • Freeze and confiscate assets.
  • Report suspicious transactions.
  • International cooperation.
  • Protect against abuse of alternative remittance systems and abuse of non-profit organisations.
  • Ensure originator information on wire transfers
  • Detect cash couriers.

FATF issued revised Recommendation in Feb 2012 . The new recommendations are 40 in numbers and subsumes the earlier 40+9 recommendations

Parliamentary History of the Law

  • —The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998.
  • —Referred to Standing committee on finance on 05-08-1998.
  • —The committee submitted its report on 04-03-1999.
  • —The bill was presented in Rajya Sabha on 08-03-1999.
  • —The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999.
  • —The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999.
  • —Rajya Sabha referred the bill to Select committee.
  • —The committee finalised its report on 24th July, 2000.
  • —The present act after being passed by both the houses received the assent of the president on 17th January, 2003.

Preamble to PMLA 2002

“An Act to prevent money laundering and to provide for confiscation of property derived from, or involved in money laundering and for matters connected or incidental thereto”

PMLA 2002: Key Concepts

  • Offence of Money Laundering – attempt to indulge or knowingly assist or knowingly is a party or is actually involved in any process or activity connected to proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property .
  • Proceeds of Crime - Assets obtained as a result of Criminal activity related to Scheduled OffenceMoney-Laundering1

 

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Scheduled Offences

—Schedule to PMLA has 156 Offences under 28 criminal acts :

  • Indian Penal Code (IPC)— ; Narcotic Drugs And Psychotrophic Substances Act (NDPS) ; Unlawful Activities (Prevention) Act (UAPA) ; Explosive Substances Act
  • Arms Act ;  Wild life Protection Act ; Immoral Traffic Act; Prevention of Corruption Act ; The Explosive Act ; SEBI Act ; Customs Act ; Bonded Labour System (Abolition) Act ; Child Labour (Prohibition and regulation) Act ; Trans Plantation of Human Organ Act ; The Juvenile Justice Act ; The Emigration Act ; The Passports Act ; The Foreigners Act ;
  • The Copyright Act ; The Trade Marks Act ; The Information Technology Act ; The Biological Diversity Act ; The Protection of Plant Varieties And Farmers Right Act ; The Environmental Protection Act ; The Water (Prevention and Control of Pollution) Act ; The Air (Prevention and Control of Pollution) Act.

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Salient Features

  • Effective provisions for attachment and confiscation of proceeds of crime
  • Provisions for Overseas investigations and attachment of properties abroad
  • Special Courts set up by Government across the Country for prosecution
  • Provision for disclosure by banks, financial institutions and intermediaries – Financial Intelligence Unit (FIU)
  • Burden of proof on accused to prove that proceeds of crime are untainted
  • Statements recorded by ED Officers admissible as evidence

The PMLA Partnership

  • Action under PMLA results in depriving offender of proceeds of crime.
  • It is an additional tool in the hands of LEAs investigating economic offences and other organized crimes including terrorist, drug crimes
  • Co-ordination among law enforcement agencies enforcing the Scheduled Offences and the ED can be effective deterrent to Organized Crime Syndicates.
  • Evidence gathered during PMLA investigations can supplement the case of prosecution in the case of predicate offence

Trade Based Money Laundering

There are three main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy :

  • use of the financial system;
  • physical movement of money (e.g. through the use of cash couriers);
  • through the physical movement of goods through the trade system.

Trade-based money laundering is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins. In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. Moreover, trade-based money laundering techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail.

How it is possible

The international trade system is subject to a wide range of risks and vulnerabilities due to:

  • The enormous volume of trade flows,
  • The complexity associated with (often multiple) foreign exchange transactions and recourse to diverse financing arrangements;
  • The additional complexity that can arise from the practice of mixing illicit funds with the cash flows of legitimate businesses;
  • The limited recourse to verification procedures or to exchange customs data between countries.
  • Research suggests that most customs agencies inspect less than 5 percent of all cargo shipments entering or leaving their jurisdictions.

Examples of Trade-Based Money Laundering

  • over- and under-invoicing of goods and services;
  • multiple invoicing of goods and services;
  • falsely described goods and services.

Indicators and Trends

  • Items priced well over or under market value
  • Mismatch between customer and items ordered
  • Business transfers made for no apparent reason
  • Third-party financing
  • Packaging inconsistent with contents
  • Routing is circuitous or economically illogical.
  • Size or weight of goods is inconsistent with contents

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Practice Questions
Q1
Q.no:-1/5
 

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