PREVENTION OF MONEY LAUNDERING ACT, 2002

Money laundering means the conversion of black money into white money, which creates a lot of wrong ways to convert the criminal proceeds into white money by removing their illegal origin.

It is the conversion of tainted money into untainted money.

Objective of the Act:

  • To prevent money laundering
  • To confiscate the property derived from or involved in money laundering
  • To punish the people involved in the act of money laundering

Process of money laundering:-

  1. PLACEMENT – It is the first stage of money laundering where the large sum is divided into smaller sums and then introduced in the financial system either by depositing in the bank for investing in monetary instruments.
  1. LAYERING – This is the second stage of money laundering which starts after the funds have entered the financial system, This step mainly focuses on removing the illegal origin or the original character of the funds. ( by movement )
  1. INTEGRATION – It is the last stage where those smaller sums so invested are integrated and reinvested in the economy into the Real Estate, Film Industry, or Luxury Assets.

Impacts of money laundering:

  • Increase crime and corruption
  • Bribe in public offices
  • Control of government comes in private hands
  • Harms of democracy of the country.

Prevention of money laundering has been divided into two parts:-

GLOBAL INITIATIVE:

  1. Vienna Convention, 1988
    – it is UN Convention against Narcotics & Drugs. It was held in December 1988 to control the proceeds (money) through narcotics and drugs.
  2. Council of European Union, 1990
    – it was held in 1990 but actually started in September 1992. They made certain principles regarding search, seizure, and confiscation of criminal proceeds.
  3. European Union money laundering directives
    – it was issued in June 1991 and their main focus was to prevent the financial system from being used for money laundering.
    – it establishes strong internal control and obtains identification from customs and further report all suspicious transactions to the authority and also maintain a proper record for at least 5 years.
  4. Basle Committee statement of principles
    – it was issued in December 1988 for complying with the principle of International Banks.
  5. The Financial Action Task Force (FATF)
    – it was established in 1989 by the government of 7 countries. Also, G-7, it was established to monitor the progress of money laundering activities, they recommend to declare money laundering activities as a criminal offence and to directly confiscate proceeds of crime.
    – FATF is the Financial Intelligence Unit (FIU) which is a governing body that searches for suspicious transactions under this Act.
    – FIU officers are called Directors and Deputy Directors.
    – RBI, SEBI, IRDA are under FIU.
  1. United Nations Global program (UNGP)
    – this programme was introduced to create awareness and to impart training and techniques to search for money laundering activities..

INDIAN INITIATIVE:
The enactment of the prevention of money laundering Act, 2002This Act was effectively applicable from 1st July 2005

Definitions:

  1. Attachment – it means prohibition of transfer, conversion, disposition, or any type of movement in the property by the government.
  2. Investigation – the proceedings conducted by the director or any authority authorized.
  3. Cross Border Implications –  any conduct by a person outside India which constitutes an offence at that place and also in India, and proceeds of such offences are remitted to India or vice-versa.
  4. Proceeds of crime – it means any property or rights, acquired directly or indirectly, by any person, which results from any criminal activity, relating to any scheduled offences.
Scheduled offences
PART – A
Waging war against the government
Counterfeiting currency notes                                                (28 offences)
Conspiracy to commit specified offences
Arms Act, Wildlife Act, etc.
PART – B
Murder
Kidnapping for ransom
Robbery
Concealment of  stolen property ( if the total value is at least 30 lacs )
PART – C
Offences having cross border implications specified in part A or part B of schedule without any monetary limit.

Section 3 – The offence of money laundering

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a part or is actually involved in any process or activity conducted with the proceeds of crime including its concealment, possession,  acquisition, or use and projecting or claiming it as untainted property shall be guilty of the offence of money laundering.”

Section 4 – If any person has committed any of the above-mentioned offences or has become a part of it, then he shall be punished with –

  1. Normal: Rigorous Imprisonment for a term which may extend to 7 years but not less than 3 years and with fine.
    ( 3-7 years + fine )
  2. If the offence is related to Narcotic Drugs and Psychotropic Substance Act, 1985: Rigorous Imprisonment for a term which may extend to 10 years but not less than 3 years and with fine.

( 3-10 years + fine )

Treatment of Property involved in Money Laundering


Such property will be attached by the director or any other officer so authorized (but not below the rank of Deputy Director)

Such property can be attached provisionally,

(1) if there is a doubt, that it is related to criminal proceedings, or
(2) the person who has possession of such property has been charged with any schedule offence.

And they might transfer this property which will create a problem for the government for confiscation, such property can be attached provisionally for a maximum of 150 days, further, they should make a report of their offences to the magistrate and a complaint should be filed before adjudicating authority within 30 days from such attachment with the reason.

Adjudicating Authority


Composition:

An authority which is appointed by the Central Government, where there is –

  1. A Chairman, and
  2. Other members

who can hold the office for a period of 5 years or upto the age of 65 years whichever is earlier.

Process of Adjudication:

The authority may serve a notice of at least 30 days after receiving the complaint as above.

And in such notice, they may ask the person –

  1. Show the source of acquiring such property,
  2. Evidence,
  3. Give the reason why the attached property should not be confiscated.

If the person cannot satisfy them the attached property will be confiscated and all the rights related to the property will be in the hands of the Central Government.

Provision related to Banks / Financial Institutions:

Every banking company or financial institution must maintain records of specified transactions for at least 10 years from the date of the transaction with the client.

Director may call such records of transactions for enquiring either suo-moto or by any authority or application submitted to him.

On contravention of such provision:
Fine: Rs. 10,000 to Rs. 1,00,000.

Appellate Tribunal


The director or any other aggrieved person on the order of adjudication authority may refer an appeal to the appellate tribunal within 45 days from the date of order.

(Such 45 days can be extended.)

Such an appeal should be disposed of by the appellate tribunal within 6 months.

Any person aggrieved with the order of the Appellate Tribunal can file an appeal directly to the High Court within 60 days. ( can be extended on satisfaction )

# Central govt. Has the power to designate a session of Special Court after consulting with the Chief Justice of the High Court to deal with scheduled offences.

# Every offence under this Act shall be treated as Cognizable and Non-bailable.

# KYC – Know Your Customer

Guidelines issued by RBI on 29th Nov. 2004.

It is based on anti-money laundering measures applicable to all banks.

It’s objective was to prevent the banks from being used for money laundering activities intentionally or unintentionally.