89012509-money-laundering-final.pdf

MONEY LAUNDERING: INDIA AND THE WORLD

Subject: Banking and Finance Submitted to: Dr. Vidyullatha Reddy

Submitted by: Arushi Garg (2008 – 15) Aishwarya Nagpal (2008 – 06) Ipshita Ahuja (2008 – 26) Malavika Prasad (2008 – 35) Shuchita Thapar (2008 – 64)

National Academy for Legal Studies and Research University of Law

TABLE OF CONTENTS Chapter I: Introduction ............................................................................................................... 1 Chapter II: Action at the International level to combat Money Laundering.............................. 3 Financial Task Force .............................................................................................................. 3 Basel Principles ...................................................................................................................... 4 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances .............................................................................................................................. 6 United Nations Convention against Corruption ..................................................................... 6 Chapter III: Anti-Money Laundering Legislations in India ....................................................... 8 Prevention of Money Laundering Act, 2002 ......................................................................... 8 The PMLA Amendment Bill, 2011 ..................................................................................... 10 Chapter IV: Other Legislations Dealing with Money-Laundering .......................................... 12 The Foreign Exchange Management Act, 1999 .................................................................. 12 The Benami Transactions (Prohibition) Act ........................................................................ 13 The Narcotic Drugs and Psychotropic Substances Act, 1985.............................................. 14 Chapter V: The Indian Supreme Court‘s Decisions on Anti-Money Laundering Measures in India ......................................................................................................................................... 16 (a) Centre for PIL v. Union of India .................................................................................... 16 (b) Binod Kumar v. State of Jharkhand ............................................................................... 18 (c) Pareena Swarup v. Union of India ................................................................................. 19 Chapter VI: Analyis of the Ram Jethmalani PIL ..................................................................... 21 Chapter VII: The Reserve Bank of India and Anti-Money Laundering Measures .................. 30 Chapter VIII: Conclusion ......................................................................................................... 33 Bibliography ..............................................................................................................................ii

CHAPTER I: INTRODUCTION

Money laundering refers to the conversion of money that is illegally obtained, so as to make it appear to originate from a legitimate source.1 Article 1 of the EC Directive defines the term money laundering as ―the conversion of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the committing such an offence or offences to evade the legal consequences of his action, and 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 serious crime‖.2

Money laundering is not a single act but is in fact a process that is accomplished in three basis steps: placing, layering and integrating of illegal proceeds.3 The first stage involves the removal of cash from the location of acquisition and introducing it into the financial system. The second stage is the conversion of money in as many banks as possible, especially abroad. The third stage is the reinvesting or integrating of this money into the economy, taking the shape of legitimate businesses.4

In countries like India, money laundering takes place through over invoicing of exports, under invoicing of imports, investment through shell companies and extensive use of hawala channels in the transmission of money.5 However, hawala transactions usually referred to as ‗alternative remittance system‘ is the most common form of money laundering. It is the transfer or remittance from one party to another, without the use of a formal financial institution such as bank or money exchange and thus is an informal way of moving money 1

http://web.worldbank.org/ (last accessed on Apr. 2, 2012). EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991, available at http://eur-lex.europa.eu/ (last accessed on Feb. 16, 2012). 3 PETER REUTER AND EDWIN M. TRUMAN, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY LAUNDERING, 3 (Institute of Macro-Economics) available at http://books.google.co.in/books?hl=en&lr=&id=0AVwjC9TDSMC&oi=fnd&pg=PR11&dq=prevention+of+mo ney+laundering&ots=v2Kra2y6Tb&sig=jxW29RD0WSuABBa9pOk9y5zd_EQ#v=onepage&q=prevention%20 of%20money%20laundering&f=false (last accessed Apr. 9, 2012). 2

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Group 2, The Economic Crime including Money Laundering: Its Legal and Financial Implications, available at http://www.unafei.or.jp/english/pdf/RS_No67/No67_26RC_Group2.pdf (last accessed on Apr.8 , 2012). 5 Ibid.

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without leaving traces of records.6 Hawala transactions are popular because they are often faster, more reliable, sometimes offer a better exchange rate, and can be much cheaper than transfers through licensed financial institutions.7

Money Laundering is a menace because it threatens national governments and international relations between them through corruption of officials and legal systems. It undermines free enterprise and threatens financial stability by crowding out the private sector, because legitimate businesses cannot compete with the lower prices for goods and services that businesses using laundered funds can offer. Money Laundering serves as an important mode of terrorism financing.8 Because of its devastating effects, fighting money laundering should be a priority for all countries. At the international level to combat efforts to combat money laundering began in 1988 with two important initiatives: The Basel Committee on Banking Regulations and Supervisory Practices and the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In India, the Prevention of Money Laundering Act was enacted in 2002 in addition to the other legislations that were already in place like the Foreign Exchange Management Act, The Benami Transactions (Prohibition) Act. Other key players in the effort to combat money laundering are the Reserve Bank of India, the Securities and Exchange Board of India and the Financial Intelligence Unit- India.

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John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic Perspective, available at http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf (last accessed on Feb. 17, 2012). 7 https://www.interpol.int/Public/FinancialCrime/MoneyLaundering/hawala/default.asp (Last accessed Feb. 17, 2012). 8 Peter J. Quirk, Money Laundering: Muddying the Macro-economy, available at http://www.imf.org/external/pubs/ft/fandd/1997/03/pdf/quirk.pdf (Last accessed Feb. 17, 2012).

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CHAPTER II: ACTION AT THE INTERNATIONAL LEVEL TO COMBAT MONEY LAUNDERING

FINANCIAL TASK FORCE The Financial Action Task Force9 is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing. 10 The main emphasis of anti-money laundering measures remains on securing documentation of financial flows, and critical analysis of this financial flow.11 The Force has provided forty Recommendations and Nine Special Recommendations that provide a complete set of counter measures against money laundering. They set out the principles for action and allow countries a measure of flexibility in implementing these principles according particular circumstances and constitutional frameworks.12 These Recommendations have been recognized, endorsed and adopted by many international bodies as the international standards for combating Money Laundering.13 FATF regularly reviews its members for compliance through annual selfassessment exercises and periodic mutual evaluations of its members. Especially after the attacks on the Twin Towers on September 11, 2011, the FATF has been adopting the ‗carrotand-stick‘ approach – on one hand, the FATF has increased its interaction with critics, and on the others, have increased the threat of punitive measures against problematic jurisdictions.14

9

Hereinafter, ―the FATF‖. http://www.fatf-gafi.org/pages/0,3417,en_32250379_32236836_1_1_1_1_1,00.html, (last accessed Feb. 17, 2012). 11 Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J. Crime Crim. L. & Crim. Just. 159 (1998). 10

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Vijay Kumar Singh, Controlling Money Laundering in India-Problems and Perspectives, available at http://www.igidr.ac.in/money/mfc-11/Singh_Vijay.pdf (last accessed Feb. 17, 2012). 13 Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis, available at http://www.legalserviceindia.com/article/l110-Prevention-Of-Money-Laundering-Act.html, (last accessed Feb. 19, 2012). 14 George Peter Gilligan, Overview: Markets, Offshore Sovereignty and Onshore Legitimacy, 36, GLOBAL FINANCIAL CRIME: TERRORISM , MONEY LAUNDERING AND OFFSHORE CENTRES, (Donato Masciandaro ed. 2004), available at http://books.google.co.in/books?hl=en&lr=&id=iXuCXUpn974C&oi=fnd&pg=PR7&dq=prevention+of+money +laundering&ots=GYZHSRcK_1&sig=rmDqoLu0D46fIcX0DWsQGDdvHJo#v=onepage&q&f=false (last accessed Apr. 9, 2012).

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India became the 34th member of the FATF in June 2010 after five years of being an ‗observer‘.15India has amended the PMLA, 2002 and the Unlawful Activities (Prevention) Act, 1967 to bring them in line with the main recommendations of the FATF. FATF is important to India because India needs the comprehensive toolkit for law enforcement agencies to be able to track the money behind terrorist attacks and to enable India to emerge as an exporter of financial services.16

As a member of the FATF, India also accepted an enhanced responsibility as the Asia Pacific Regional Review Group Co-chair. India underwent its first Asia Pacific Group17 mutual evaluation in 2005 and a joint APG and FATF mutual evaluation in 2008.18 The FATF report suggests that while measures have been taken to curb the menace of money laundering in India, a few key recommendations need to be included for a more effective response to this problem like address the technical shortcomings in the criminalisation of both money laundering and terrorist financing and in the domestic framework of confiscation and provisional measures; a stricter sanctioning regime that allows for effective, proportionate and dissuasive sanctions for failures to comply with Anti Money Laundering requirements19 BASEL PRINCIPLES

In recognition of the vulnerability of the financial sector to misuse by criminals, the Basel Committee on Banking and Supervisory Practices issued a Statement of Principles (the ‗Basel Principles‘) in December 1988.20 This was a significant step towards preventing the use of the banking sector for money laundering purposes, as it set out a number of principles that banking institutions should comply with like: customer identification, compliance with legislation, conformity with high ethical standards and local laws and regulations, full co15

India joins select club to counter financial frauds, THE HINDU, June 30, 2010, available at http://www.thehindu.com/news/article492411.ece, (last accessed Feb. 19, 2012). 16 K.P.Krishnan, India on the FATF high table, THE ECONOMIC TIMES, August 10, 2010, available at http://articles.economictimes.indiatimes.com/2010-08-10/news/27602192_1_fatf-money-laundering-financialaction-task-force, (last accessed on Feb. 20, 2012). 17 Hereinafter, ―the APG‖. 18 Prevention of Money Laundering Act being amended, THE HINDU, July 19, 2011, available at http://www.thehindu.com/news/national/article2255685.ece, (last accessed Feb. 20, 2012). 19 Mutual Evalutaion of India, available at http://www.fatfgafi.org/document/17/0,3746,en_32250379_32236963_45582417_1_1_1_1,00.html, (last accessed Feb. 20, 2012) 20 Money Laundering Prevention, available at http://www.fincen.gov/financial_institutions/msb/materials/en/prevention_guide.html#International Money Laundering Efforts, (last accessed Feb. 20, 2012).

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operation with national law enforcement authorities to the extent permitted without breaching customer confidentiality, etc.21 Therefore, the Basel Principles stress on co-operation within the confines of the duties of client confidentiality. The compliance with these Principles represented a major self regulatory initiative within the financial sector. In 1997, in consultation with the supervisory authorities of a few non G-10 countries including India, it drew up the 25 ―Core Principles for Effective Banking Supervision‖ which were in the nature of minimum requirements intended to guide supervisory authorities which were seeking to strengthen their current supervisory regime.22 The Principles deal with aspects like permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined23; the licensing authority must have the right to set criteria and reject applications of establishments that do not meet the standards set24; banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or control in existing banks to other parties25; evaluation of a bank‘s policies and procedures related to granting of loans and making of investments 26 among other things. The Reserve bank of India had assessed its own position with respect to the Principles in 1998. The assessment had shown that most of the Core Principles were already enshrined in our existing legislation with some gaps identified mainly in the areas of risk management in banks, inter-agency co-operation with other domestic/international regulators and

21

DOUG HOPTON, MONEY LAUNDERING: A CONCISE GUIDE FOR ALL BUSINESSES, available at http://books.google.co.in/books?id=Iat3nhnv_PAC&pg=PA10&lpg=PA10&dq=basel+convention+and+money +laundering&source=bl&ots=WyYGmxaeqx&sig=wJKEq0MDNaeWunGAgbC9oSbK1Ys&hl=en&sa=X&ei=KFAT7LuEsTMrQf9mzXBw&ved=0CCoQ6AEwAA#v=onepage&q=basel%20convention%20and%20money%20laundering&f=false , (last accessed Feb. 20, 2012). 22 Kishori J Udeshi, Implementation of Basel II- an Indian Perspective, available at http://www.bis.org/review/r040611g.pdf, (last accessed March 15, 2012). 23 Principle-II of ―Core Principles for Effective Banking Supervision‖; The permissible activities of a banking company are listed in Section 6(1) of the Banking Regulation Act, 1949. Section 6(2) specifically prohibits a banking companyfrom carrying on any form of business other than those referred to in Section 6(1). 24 Principle-III of ―Core Principles for Effective Banking Supervision‖; Section 22 of the Banking Regulation Act provides that a company intending to carry on banking business must obtain a licence from RBI except such of the banks (public sector banks and RRBs), which are established under specific enactments. The RBI issues licence only after ―tests of entry‖ are fulfilled. These tests include minimum capital, ownership structure, bank‘s operating plans and controls, ability of the bank to pay its present and future depositors in full, quality of management and whether the licensing of the bank would be in the public interest. 25 Principle-IV of ―Core Principles for Effective Banking Supervision‖; Section 12(2) of the Banking Regulation Act restricts shareholders in a banking company from exercising voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the banking company. 26 Principle-VII of ―Core Principles for Effective Banking Supervision‖; Under Section 21 of the Banking Regulation Act, the RBI is charged with the responsibility of determining the policy relating to advances by banks and of giving directions to them in this regard.

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consolidated supervision.

27

Internal working groups were set up to suggest measures to

bridge these gaps. 28 A further paper was issued by the Committee in October 2001 covering customer due diligence for banks. It addressed verification and Know Your Customer (KYC) standards with a cross-border aspect. This mandates the bank to take reasonable efforts to determine their customer‘s true identity, and have effective procedures for verifying the bonafides of a new customer.29 UNITED NATIONS CONVENTION

AGAINST

ILLICIT TRAFFIC

IN

NARCOTIC DRUGS

AND

PSYCHOTROPIC SUBSTANCES

This UN Convention was one of the historic conventions inasmuch as the parties to the Convention recognized the links between illicit drug traffic and other related organised criminal activities which undermine the legitimate economies and threaten the stability, security and sovereignty of States and that illicit drug trafficking is an international criminal activity that generates large profits and wealth, enabling transnational, criminal organizations to penetrate, contaminate and corrupt the structures of government, legitimate commercial and financial businesses and society at all levels.30 The broad objective of the Programme was to strengthen the ability of Member States to implement measures against moneylaundering and the financing of terrorism and to assist them in detecting, seizing and confiscating illicit proceeds, as required pursuant to United Nations instruments and other globally accepted standards, by providing relevant and appropriate technical assistance upon request.31 UNITED NATIONS CONVENTION AGAINST CORRUPTION

The UNCAC is one of the most comprehensive anti-corruption instruments. It criminalizes money laundering32 thus making it one of the unique instruments that addresses both 27

Core Principles of Effective Banking Supervision, October 1999, available http://www.rbi.org.in/upload/publications/pdfs/10115.pdf, (last accessed Mar. 15, 2012). 28 Ibid. 29 Vijay Kumar Singh, supra note 12. 30 DOUG HOPTON, supra note 21. 31 UNODC on money-laundering and countering the financing of terrorism, available http://www.unodc.org/unodc/en/money-laundering/index.html, (last accessed Mar. 15, 2012). 32 Article 23 of the UNCAC.

at

at

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corruption and money laundering simultaneously. The scheme of the convention is premised on the fact that an effective anti-money laundering regime can make a significant contribution to the fight against corruption in at least two ways: it could help uncover evidence of criminal activity through identification of suspicious movements of financial assets, thus increasing the chances of a successful prosecution of the perpetrator of the crime; it also enables the tracing of criminal proceeds to facilitate their preservation, recovery and ultimate return to their rightful owner.

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The scope of Article 23 is not limited to laundering

of money and instead its focus is the conversion or transfer of property thus affecting all manner of benefits from cash, company shares etc. 34

The link between corruption and money laundering was also brought out in the recent movement for the formation of Lokpal led by Anna Hazare where initiating measures to bring back black money was seen as an integral part of the fight against corruption.

33

Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money Laundering, available at http://idec.gr/iier/new/CORRUPTION%20CONFERENCE/The%20UN%20Anticorruption%20convention%20and%20money%20laundering-INDIRA%20CARR.pdf, (last accessed Apr. 8 2012). 34 Ibid.

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CHAPTER III: ANTI-MONEY LAUNDERING LEGISLATIONS IN INDIA

PREVENTION OF MONEY LAUNDERING ACT, 2002 The Prevention of Money Laundering Act, 200235 was enacted on the 17th of June, 2003 and came into effect from the 1sts of July, 2005 with the aim of preventing money laundering and providing for the confiscation of property which had been derived from money laundering.36 The Act provides for the prosecution of individuals and legal entities indulging in money laundering, and for the confiscation and attachment of property obtained through money laundering.

The PMLA contains 75 sections divided into ten chapters, and also contains a Schedule divided into Part A and Part B.

Chapter I of the Act deals with the preliminary provisions, such as the extent of the Act and the interpretational clause. Chapter II lays down the offence of money-laundering. Section 2 is the definitional clause, however, it is Section 3 of the PMLA that defines the offense of money laundering, and makes the direct or indirect attempt to indulge or knowingly assist, or be knowingly involved in any process or activity connected with the proceeds of crime 37 an offence. The offences are divided into Parts A and B of the Schedule to the PMLA.

Section 4 of the Act lays down the punishment for money-laundering as rigorous imprisonment for a period between three to seven years, and a fine of five lakh rupees. However, if a person is convicted under Paragraph 2 of the Schedule38, the term of incarceration can be extended to 10 years. 35

36

Hereinafter, “the PMLA”.

K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in http://www.icrier.org/pdf/pptinpdf/aml_ppt_for_icrier.pdf (last visited Feb. 17, 2012).

India,

available

at

37

Proceeds of Crime is defined in Section 2 (u) of the PMLA as: (u) ―proceeds of crime‖ means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity related to a scheduled offence or the value of such property. 38 Paragraph 2 of the Schedule lists out offences under the Narcotic Drugs and Psychotropic Substances Act, 1985.

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Chapter III of the PMLA deals with the attachment, adjudication and confiscation of property. The adjudicating authority appointed by the Central Government under section 48 of the PMLA is empowered under section 5 to attach or seize property. However, the Authority is allowed to attach property for 90 days only if the person involved has committed a crime falling under the Schedule of the , and if a report has been forwarded to a Magistrate under section 173 of the Criminal Procedure Code, or if a Special Court has taken cognizance of the matter.

Chapter IV of the PMLA prescribes the obligations of banking companies, financial institutions and intermediaries. ―Banking Company‖ under PMLA includes all nationalized banks, private Indian banks and private foreign banks, all co-operative banks, the State Bank of India and Regional Rural Banks.39 ―Intermediary‖ under PMLA includes persons registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992. Section 12 (1) mandates these institutions to (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether it be in a single transaction or a series of transactions integrally connected to each other taking place under a month; (b) to furnish information of these transactions to the Director within a prescribed time period and to records of the identity of all its clients. Section 12 (2) mandates that these records be maintained for a period of 10 years. Under the provisions of Section 13, a fine may be levied by the authority prescribed by the Central Government upon such banks and financial institutions which do not comply with the provisions of Section 12.

Chapter V of the PMLA deals with provisions relating to search, summons and seizure. Section 16 lays out the power to enter any place to investigate given to Authority, while Section 17 gives the power to the Authority under the PMLA to seize any property. Under ssection 24 of the Act also puts the burden of proof on the accused to prove that the proceeds of crime are untainted property. Chapter VI of the Act contemplates the setting up of an Appellate Tribunal to hear appeals on matters adjudicated upon by the authority appointed under the Act, whereas Chapter VII lays down that special courts can be designated for trying offences under the PMLA. Chapter VIII

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Section 2(e) of the PMLA.

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contains the provisions relating to the appointment of authorities under the Act, and certain provisions relating to jurisdiction and other appointment of special officers.

Chapter IX of the PMLA deals with reciprocal arrangements for assistance in matters and also lays down the procedure for attachment and confiscation of property, whereas Chapter X contains miscellaneous provisions. THE PMLA AMENDMENT BILL, 2011

The PMLA Amendment Bill 2011 was introduced by Pranab Mukherjee in the Lok Sabha on December 27, 2011. The Bill toughens the stance on money laundering, and introduces 10 key amendments to the Act.

The Statement of Objects and Reasons states that the introduction of such an amendment was necessary since problem of money-laundering is no longer restricted to the geo political boundaries of any country, it is necessary to have a stricter enactment in place. Another reasons given for the amendment is that India has become a member of the Financial Action Task Force and Asia Pacific Group on money-laundering, and the Bill is the effort of the Indian government to bring anti-money laundering legislations at par with international standards.

There are several changes to the definitional clause under the Bill. Section 2(ia) introduced the concept of ‗corresponding law‘, linking the provisions of Indian law to the law of foreign countries. Section 2(wa) also introduced the concept of ‗reporting entity‘, which includes a a banking company, financial institution, intermediary or a person carrying on a designated business or profession. The definition of offence under section 3 of the PMLA will be expanded to include activities like concealment, acquisition, possession and use of proceeds of crime, and would also do away with the existing cap of five lakh rupees on penalties for violations under Section 4.40 Section 5 of the PMLA, dealing with provisional attachment, also stands amended, with the days of provisional attachment extended to 180 days, instead of 90 as it stands today. A new section 12 also has been inserted in the Bill, for it seeks to make all the reporting entities to keep a record of all transactions, and to verify the identities 40

A copy of the PMLA Amendment Bill can be accessed at http://www.prsindia.org/billtrack/the-prevention-ofmoney-laundering-bill-2011-2143/, (last accessed Mar. 20, 2012).

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of their customers. The time period, however, remains 10 years, however, the reporting entities can be made responsible if they do not keep or furnish the information to the Authority as and when required.41 The Bill provides for an amendment in Section 24 as well, as a presumption that the money involved in proceedings for money laundering shall be raised42, and also provides for summary attachment and confiscation of property even if there is no conviction. The Bill also contemplating merging Schedule A and B so as to erase the monetary threshold between the different kinds of offences under the PMLA.

41 42

Ibid. Id.

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CHAPTER IV: OTHER LEGISLATIONS DEALING WITH MONEY-LAUNDERING

THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999

It prescribes checks and limitations on certain foreign exchange remittances. Offences under the Foreign Exchange Management Act, 199943 are not scheduled offences under the PMLA. The rationale behind this is that only the most violent and important crimes have been mentioned under the PMLA since the PMLA gives massive powers of arrest to law enforcement agencies. An example of the offenders targeted under the PMLA would be the mafia dealing in murder, extortion, terrorism and prostitution who have immense liquid wealth that they want to launder. Since the powers under the PMLA are so over-reaching, the list of scheduled offences thereunder has deliberately been kept short, and FEMA offences have been excluded from their ambit.44 Even so, money-laundering is regarded as an egregious crime under the FEMA as well, a consideration that is especially important in the assessment of whether or not an offence can be compounded. 45 Interestingly, the enactment of the FEMA is owed in large part to the passing of the PMLA since it sought to relax the regulatory structure for foreign exchange, a step that was only allowed when there was assurance that despite this relaxation, illegal transactions of drug peddlers, terrorists, arm smugglers and other perpetrators of heinous economic crimes would not go unpunished. 46 Among the most famous controversies involving money laundering under the FEMA is the case filed in August, 2011, by the Enforcement Directorate against YS Jaganmohan Reddy, son of former Andhra Pradesh Chief Minister, YS Rajasekhar Reddy. 47 43

Hereinafter ―FEMA.‖

44

FEMA and Money Laundering, available at http://www.rashminsanghvi.com/femabook6.htm (last accessed April 07, 2012) 45

RBI Circular & the compounding of contravention under FEMA , available at http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=3036 (last accessed April 06, 2012) 46

Money Laundering under the FEMA regime, available at http://www.ieo.org/budget98/sp012.htm (last accessed April 07, 2012) 47

ED files FIR in Hyd on Money laundering and FEMA violations against YS Jagan, available at http://telugudesam.org/tdpcms/index.php?option=com_content&view=article&id=17742 (last accessed April 07, 2012)

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THE BENAMI TRANSACTIONS (PROHIBITION) ACT The word ‗benami‘ is Persian for ‗property without a name‘.48 A benami transaction is one where property is transferred or purchased in the name of one person but another person is paid consideration for the transfer. It thus becomes a safe way of parking ill-gotten wealth. In fact, the role played by benami transactions is more versatile than just that, and extends to tax evasion, defrauding creditors and sometimes serving as a means for mafia dons to operate through aliases.49 The Benami Transactions (Prohibition) Act, 1988,50 prohibits the purchase of property in the name of another person who does not pay for the property, and prescribes a punishment of upto three years for a person who commits this offence. However, the BTPA has been considered largely ineffective and is sought to be replaced by the Benami Transactions (Prohibition) Bill, 2011, which was introduced in the Lok Sabha last year. One of the major reasons cited for its inefficiency was that the manner in which it had been drafted made the formulation of rules thereunder impossible.51 However, the Bill has been subject to substantial criticism on many counts. For example, it still allows benami transactions in the name of spouse, brother, sister or any lineal ascendant or descendant.52 It has reduced the maximum term of imprisonment for entering into a benami transaction from three years to two years.53 Recognising the nexus between money laundering and benami transactions, the Bill seeks to make the Adjudicating Authority and the Appellate Tribunal established under the PMLA responsible for examining disputes

48

Meghna Bhaskar, Benami Transactions (Prohibition ) Bill, 2011 , available http://jurisonline.in/2011/09/benami-transactions-prohibition-bill-2011/ (last accessed April 08, 2012)

at

49

V. Kumaraswamy, But That’s Not Mine!, available at http://www.telegraphindia.com/1110928/jsp/opinion/story_14562807.jsp (last accessed April 07, 2012) 50

Hereinafter ―BTPA‖

51

Introducing the BTPA Bill, available at http://www.caclubindia.com/news/introduction-of-the-benamitransactions-prohibition-bill-2011-9878.asp (last accessed April 07, 2012) 52

Bill for stricter control of benami transactions introduced, http://www.thehindu.com/news/national/article2369780.ece (last accessed April 07, 2012)

available

at

53

Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 – A Critical Analysis, available at http://goindocal.com/benami-transactions-prohibition-bill-2011-%2596-a-critical-analysisgo-3052.htm (last accessed April 07, 2012)

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around benami transactions as well.54 This will give a chance to the accused to present his case before it goes to the court.

THE NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985

The Act provides for confiscating sale proceeds from selling any narcotic drug or psychotropic substance, and for the seizure of any goods used to conceal such drugs, and also provides for the forfeiture of any illegally acquired property. Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985 find a place in Paragraph 2 of Part I of the Schedule to the PMLA.55 It is feared that the conferral of extensive powers by the Supreme Court in August, 2011 on the Special Investigation Team set up to unearth black money will destabilise the whole structure that has been set up by money laundering laws such as the NDPS Act.56

THE UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967 Amended in 2008, the Act empowers the Central Government to seize and attach funds and other financial assets or economic resources held by engaged in or suspected to be engaged in terrorism and prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of these individuals under Section 51 A. As on March, 2011, 11 out of the 1269 cases being investigated by the Enforcement Directorate in connection with money laundering fell under the Unlawful Activities (Prevention) Act, 196757.58 More amendments were announced last year to bring

54

Bill for Stricter Control Over Benami Deals Introduced, available at http://www.businessstandard.com/india/news/bill-for-stricter-control-over-benami-deals-introduced/446310/ (last accessed April 08, 2012) 55

Synopsis: PMLA 2002, available at http://www.caclubindia.com/articles/prevention-of-money-laundry-act2002-a-synopsis-10646.asp (last accessed April 07, 2012) 56

Hasan Ali and Money Laundering, available at http://articles.timesofindia.indiatimes.com/2011-0825/india/29926312_1_black-money-money-laundering-act-hasan-ali-khan (last accessed April 08, 2012) 57

Hereinafter ―UAPA.‖

58

Anti Money-Laundering Framework, India, available at http://socialissuesindia.wordpress.com/2011/09/08/anti-money-laundering-framework-in-india/ (last accessed April 08, 2012)

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the UAPA in line with FATF standards59 as well as India‘s other international obligations.60 While this commitment has been reaffirmed ever since the announcement was first made,61 no concrete action seems to have been taken on this front.

59

Vikash Yadav, PMLA 2002: Re-engineered, available at http://www.rediff.com/business/report/indiatweaking-laws-to-check-money-laundering/20110719.htm (last accessed April 07, 2012) 60

Money laundering law to be modified: Mukherjee news, available at http://www.domainb.com/economy/general/20110719_mukherjee.html (last accessed April 07, 2012) 61

Govt mulls White Paper on black money: Finance Ministry, http://www.thehindu.com/news/national/article2659600.ece (last accessed April 08, 2012)

available

at

15

CHAPTER V: THE INDIAN SUPREME COURT’S DECISIONS ON ANTI-MONEY LAUNDERING MEASURES IN INDIA

Since the PMLA is fairly recent, the apex court has not had the opportunity to explore its contours too much. Most of the litigation has deal with the procedural aspects of the PMLA as opposed to the substantive crime of money laundering. Some instances of the manner in which the apex court has dealt with the PMLA are given below.

(A) CENTRE FOR PIL V. UNION OF INDIA62 This case dealt with investigation in the 2G spectrum scam. This issue that came up before the Court was the appointment of a Special Public Prosecutor, to conduct the prosecution on behalf of the CBI and the Enforcement Directorate (―ED‖) under the PMLA. The Court emphasised a great deal on the peculiar factual matrix of this case, pointing out that court intervention had been solicited on a large scale in the case on the behest of both the parties. As a consequence of this, the Court had directed and monitored CBI investigation and ordered a special court to be set up. Owing to the sensitive nature of this case, the Court felt that in the matter of appointment of the Special Public Prosecutor (―SPP‖), utmost fairness and objectivity should be observed. Mr. K.K. Venugopal, learned senior counsel for CBI and ED was asked to suggest certain names. Mr. U.U. Lalit‘s name was suggested and accepted with unanimity by counsels for all the parties. However, this case arose when the Union Government went back on its word and suggested that it had the sole discretion to make the appointment of the SPP. For this purpose, its argumentation was two-fold. The first point made by it was that the appointment of the SPP was the ―prerogative‖ of the Union, and this power could not be abridged. Secondly, it placed a reliance on Section 46(2) of the PMLA.

With respect to the first contention, the Court struck it down, observing that the Constitution itself recognises only three concepts—rights, duties and discretion. The Court was emphatic in distinguishing last one from ―prerogative‖, saying that the implication of using the word ―discretion‖ instead of ―prerogative‖ was to ensure that the exercise of power was not unbridled. 62

Centre for PIL v. Union of India, 2011 (4) SCALE 583.

16

With respect to Section 46(2), the argument was more layered. Since the 2G case involves money laundering as well as other offences, the submission of the Union was that invocation of the PMLA procedures was unavoidable. Section 46 deals with the application of the Code of Criminal Procedure, 1973 (―CrPC‖) to proceedings before a special court that has been set up under the PMLA. According to this provision, a person shall not be qualified to be appointed as an SPP unless ―he has been in practice as an Advocate for not less than seven years, under the Union or a State.‖ However, the Court held that a person who has been an Advocate ―under‖ the Union simply means a lawyer on the panel of either the State or Central government. It does not translate to the requirement that the appointee should be an officer or employee of the union. The importance of this observation was compounded in this case because of the public element involved in the appointment of the SPP in large scale money laundering cases.

In conclusion, the Court held that Article 136, read with Article 142 empowered the Court to make the appointment of Mr. Lalit, and that the said appointment was valid.

While this reasoning of the Court is sound, it is the submission of this researcher that the Court went unnecessarily further into describing the connection between such appointments and the CrPC. For this they referred to Section 46(3) of the PMLA as per which an SPP shall be deemed to be a Public Prosecutor within the meaning of Section 2(u) of the CrPC. This last section defines the term ―Public Prosecutor‖ to mean any person appointed under Section 24 of the CrPC. The Court construed this to mean that a harmonious reading of Section 46 of the PMLA and Section 24 of the CrPC required that the requirements of the appointment procedure set out in Section 24 should be satisfied even in cases of the appointment of the SPP under Section 46. However, the purpose of a deeming provision is to include instances which would otherwise be excluded. Hence, the purpose of Section 46(3) would be to include the SPP within the meaning of a Public Prosecutor under the CrPC even if the express requirements of the statute were not complied with. While this did not make a difference to this case, since the SPP in question had been appointed in accordance with Section 24 of the CrPC anyway, this might turn out to be a confusing precedent for the future.

17

(B) BINOD KUMAR V. STATE OF JHARKHAND63

This was a case from the High Court at Ranchi. There were allegations that vast amounts of money had been amassed by certain politicians, including former Chief Minister Madhu Koda but there were no specific allegations of money laundering. The scam ran into hundreds of crores (reports suggest Koda and his associates laundered upto INR 3536 crores64) and involved investment in shares and property in India and multiple jurisdictions and required a thorough investigation of at least 32 companies. The Division Bench of the High Court had ordered that investigation be transferred to the CBI under Section 45(1A) of the PMLA. The basic issue that arose before the Court whether the High Court was empowered to make such an order, since the ED under the PMLA was already provided for as an investigating agency.

The main contention of the appellants was that money laundering falls squarely within the domain of the ED and the CBI is not entitled to encroach upon this territory since it has been clearly demarcated. Secondly, as per them, the PMLA is a self contained code and therefore it is only the ED, provided under the statute, which can investigate the crimes in question. Third, it was argued that the PMLA is a law that has been enacted under Article 253 of the Constitution to give effect to India‘s international obligations to combat money-laundering. Therefore it overrides anything that is inconsistent with it. It was also argued that the CBI had neither the expertise, nor the powers suited to investigating the crimes in question. This last contention is a direct reflection of the fact that money-laundering is a crime which involves techniques that change rapidly over time. Therefore, an especially trained agency is required for its investigation. Further, it often involves investigation in multiple jurisdictions, something the ED had been especially empowered to do as per its convenience under the CBI.

The Court however felt that it was unnecessary to deal with the question at all. The crux of its reasoning was that money laundering is not a stand-alone crime. It is committed only when gains received from some other offence are taken and attempted to be passed off as lawful gains. These other offences have been provided for as Scheduled Offences in the 63

Binod Kumar v. State of Jharkhand, 2011 (4) SCALE 109.

64

Yatish Yadav, Madhu Koda and associates laundered staggering Rs 3536 crore, INDIA TODAY, February 20, 2012, available at http://indiatoday.intoday.in/story/madhu-koda-and-associates-laundered-staggering-rs-3356crore/1/174473.html (last accessed Apr. 9, 2012).

18

PMLA. The investigation that had been handed over to the CBI was that of these other offences, and not directly that of money laundering. Hence, the order of the High Court was upheld.

(C) PAREENA SWARUP V. UNION OF INDIA65

The constitutionality of several provisions of the PMLA dealing with the Adjudicating Authorities and the Appellate Tribunal were challenged by way of this case. A large part of the case also dealt with the validity of the Prevention of Money-Laundering (Appointment and Conditions of Service of Chairperson and Members of Appellate Tribunal) Rules, 2007 and Prevention of Money Laundering (Appointment and Conditions of Service of Chairperson and Members of Adjudicating Authorities) Rules, 2007. What is interesting about this case is the fact that the Court didn‘t really have to decide any of the issues since they were resolved by consensus between the parties.

The challenge was made broadly on three grounds, in respect of all of which amendments were proposed or adopted by the Government.

First, it was argued that the Rules did not explicitly specify the qualifications of member from to be appointed to the aforementioned authorities. This was one of the simpler arguments, and the State was more than willing to accommodate the petitioner‘s concerns on this count. The amendment passed as a result of this case require that all members hold qualifications in “chartered accountancy or a degree in finance, economics or accountancy or having special experience in finance or accounts by virtue of having worked for at least two years in the finance or revenue department...or being incharge of the finance or accounting wing of a corporation for a like period.”

Secondly, it was the contention of the petitioners that the members of the authorities set up under the Act were appointed under the Revenue Secretary and therefore were not free, independent judicial officers. This was also contended to be an ―affront to judicial independence‖ because a Committee headed by the Revenue Secretary was empowered to 65

Pareena Swarup v. Union of India, 2008 (13) SCALE 84.

19

select from ―high court judges and district court judges.‖66 It was argued that the judiciary should have a greater role in the selection of the officers. To resolve this issue it was decided that an amendment would be introduced by way of which the appointment of Chairman of the adjudicating authority would be only on the recommendation of the Chief Justice of India (―CJI‖). Further, once such an appointment is made, the removal cannot be carried through without consultation with the CJI. What the Court did in effect was that it replaced the Chairman of the Selection Committee with the CJI (or a judge nominated by him).67 Experts worry that the impact of this restricted role of the Executive might be felt by way of increased expenditure on the authority on the PMLA followed by its slow decline into dysfunction.68

The most problematic contention was that the procedures under the Act led to a breach of the separation of powers between the Judiciary and the Executive. The functions of an essentially executive authority were to be evidently quasi-judicial in function. However, the Court rightly pointed out that money laundering sometimes required the kind of expertise that judicial officers did not necessarily have, so it was more plausible to have a body of experts (as provided under the PMLA) as the adjudicating authority. They further pointed out that the exercise of adjudicatory functions by executive agencies was not unheard of even within our constitutional scheme. To bolster their reasoning, they gave the example of the Narcotic Drugs and Psychotropic Substances Act, 1985.

While all the issues in this case were amicably resolved, one cannot help contemplate what the fate of this petition would have been had it been allowed to take its natural course. For one, since it is a case that often involves the abuse of public positions for money laundering, the judiciousness of allowing a consensual settlement of sorts is something that needs contemplation.

66

SC Grounds Anti Money-laundering Law, THE TIMES OF INDIA, December 4, 2007, available at http://articles.timesofindia.indiatimes.com/2007-12-04/india/27977119_1_authority-and-appellate-tribunalpareena-swarup-pmla (last accessed Apr. 9, 2012). 67

Sai Vinod Nayani, State of Tribunals in India, available at http://spicyipindia.blogspot.in/2011/12/guest-poststate-of-tribunals-in-india.html (last accessed Apr. 9, 2012). 68

MJ Akbar, Babu-Friendly Tribunals, THE BUSINESS STANDARD, October 8, 2008, available at http://business-standard.com/india/storypage.php?autono=336688 (last accessed Apr. 9, 2012).

20

CHAPTER VI: ANALYIS OF THE RAM JETHMALANI PIL

RAM JETHMALANI V. UNION OF INDIA69

This landmark case in the area of money laundering law marks the only real attempt of the Supreme Court to actively curb money laundering, by mandating efficacious measures. The facts of the case arise in the following background.

The cases of Hasan Ali and his accomplice Tapuria stand out as particularly egregious instances of the lack of implementation of the money-laundering laws in India. Hasan Ali, 53-year-old, son of Hyderabad Excise Officer is known to have unaccounted money to the tune of Rs. 20,000 to 35,000 crore. His account at the Swiss Bank, UBS holds up to USD 8 billion, and he is liable for a tax default of about Rs. 50,000 crore in India.

A Writ petition was filed in ___ based on reports in the media and scholarly articles, regarding the lack of action taken by the State authorities in countering the large sums of unaccounted money in foreign banks, particularly those in jurisdictions that are tax havens with strong privacy laws. The main contention was that the fundamental rights of the people under Articles 21, 14, 19 were violated by selectively disregarding such large scale tax evasion on the part of persons like Hassan Ali.

The Petition The Petitioners contended that such a dereliction of duty to enforce the tax default on the part of State authorities reflects a complete lack of control over unlawful activities of two kinds, one, tax evasion and two, those criminal activities that are funded by the black money economy. Moreover, such black money in swiss banks was laundered and rerouted back into India for illegal activities, thus contributing to the creation of networks of international finance. Large scale criminal activities like terrorism, arms smuggling, narcotic trade and similar activities which are fuelled by the black economy are also detrimental to the security 69

2011(6) SCALE 691

21

and integrity of India. The petitioners also contended that this money was quite likely to be that of powerful persons and the lack of action on the part of the State indicated gross apathy towards prosecution of individuals.

Particularly, Hassan Ali Khan & Tapuria had been served with an Income Tax demand to the tune of Rs. 40,000 crore and 20,580 crore respectively. The Enforcement Directorate (ED) had, in 2007, reported that Hassan Ali indulged in dealings amounting to USD 1.6 billion between 2001-05. The ED also carried out a raid in Hassan Ali‘s Pune residence, which led to the discovery of evidence of deposits of USD 8.04 billion with UBS Bank, Zurich. Despite this, however, no investigation had been commenced by the State into the matter. The petitioners had contended that the Union of India had faltered on several levels: a) Both Hassan Ali and Tapuria were in India and hence falling within the jurisdiction of Indian Courts and investigative authorities b) Union of India, despite repeated RTI applications, was not divulging information regarding the Indian account-holders in Swiss Banks c) The Swiss Bank, UBS, Zurich, one of the biggest wealth management companies in the world, had in particular, fallen in bad light with the Indian authorities as it was involved in several untoward scams earlier in the decade.

Issues On this premise and based on the specific arguments advanced by the Petitioners, there were two main issues were sought to be addressed by the Court: 1) Whether the Supreme Court must constitute a Special Investigation Team (SIT) under a former Supreme Court Judge to monitor investigations cases of black money 2) Whether the Court must mandate that the Union must endeavour to first obtain and then disclose the list of Indian bank account holders in banks in Liechtenstein

Arguments of the Petitioners: Re: Constitution of SIT The petitioners argued that an SIT ought to be constituted under the supervision of former Supreme Court judges to continually monitor investigation and prosecution of black money cases.

22

Re: Disclosure of bank account information in banks in Liechtenstein The council for the Petitioners submitted that a few years ago, an employee of a bank in Liechtenstein had offered to divulge names of bank account holders to the government of Germany. Germany had secured these names on had consequently initiated proceedings against 600 individuals. The government of Germany had also offered the list of names to other countries if they chose to initiate prosecutions against these individuals, outside the framework of the Indo-German Double Tax Avoidance Agreement. In this light, it was unclear why, despite several RTI applications, the Union had not revealed the names of these account holders. Moreover, no steps to recover moneys or punish these individuals had been taken so far.

Arguments of the Respondents Re: Constitution of SIT The Solicitor General responded to the arguments of the Petitioner by submitting that the Union of India had done everything in their power towards prosecution and investigation of black money cases. While they had no principal objection against the submission of the petition, they argued that a Court monitored investigation was permissible but OK but not a SIT. They submitted that there was already a High Level Committee constituted under the Dept of Revenue in the Ministry of Finance, which was a body that was capable of exercising all the functions and powers sought to be entrusted to the SIT proposed by the Petitioners.

Moreover, the Respondents submitted that cases of money laundering necessarily involve many jurisdictions as these bank accounts were located in different countries with laws and Double Tax Avoidance Agreements that protected the privacy of these account holders.

Re: Disclosure of bank account information in banks in Liechtenstein The Solicitor General responded to the case of the Petitioners by submitting that the list of names of bank account-holders in the possession of the Indian Government were obtained through the DTAA with Germany, as Germany had specifically asked the Union of India to take the said information through the DTAA. The DTAA specifically contained a prohibition on disclosure of information obtained through the DTAA, through its confidentiality clause.

23

Any actions on the part of the Union in breach of this DTAA would jeopardize India‘s relations with Germany,

Moreover, the disclosure of the names of all the account-holders would be in gross violation of the right of privacy of individuals who were using these Swiss Bank accounts for legitimately earned money, thus falling outside the purview of a potential investigation or prosecution for money laundering. The State argued that even if it were to disclose this list, only those names of persons against whom investigation had been commenced and proceedings had been initiated would be disclosed.

Judgment

Re: Constitution of the SIT The Supreme Court recognized that although a High Level Committee had been set up with extensive powers, the charge-sheet of Hassan Ali had not even been vetted by this committee, nor was the Committee monitoring the investigation and ensuring speedy progress. Moreover, the Court opined that while these matters may actually be spread over several jurisdictions, even as regards those persons within Indian jurisdiction, against whom sufficient evidence exists in the hands of the Indian authorities, the Government had not done enough.

Thus, the Court held that the Union of India ought to constitute an SIT with very broad powers of investigation and prosecution of black money cases. The SIT would be required to constantly report developments to the Supreme Court. It would comprise of all the members of the High Level Committee along with the Director of the Research and Analysis Wing (RAW), viz.: i.

Director, RAW

ii.

Two former judges of the SC

iii.

Secretary, Department of Revenue, as the Chairman;

iv.

Deputy Governor, Reserve Bank of India;

v.

Director (IB);

vi.

Director, Enforcement Directorate;

vii.

Director, CBI; 24

viii.

Chairman, CBDT;

ix.

DG, Narcotics Control Bureau;

x.

DG, Revenue Intelligence;

xi.

Director, Financial Intelligence Unit; and

xii.

JS (FT & TR-I), CBDT.

Re: Disclosure of bank account information in banks in Liechtenstein Article 26(1) of the DTAA (on Exchange of Information) on confidentiality of information exchanged under the DTAA reads as follows: The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement. They may disclose the information in public court proceedings or in judicial proceedings.

Thus, it was clear that Article 26 of the DTAA governed only exchange of information that was undertaken for the purpose of ―carrying out the provisions of the Agreement‖. Since the list of names of bank account holders in Liechtenstein was not information ―necessary for carrying out provisions‖ of the Indo-German DTAA, the Court held that Liechtenstein was not covered within the ambit of the Indo-German DTAA. The Court also held that the fact that Germany asked India to treat the information as granted under Article 26 of the DTAA is immaterial.

Moreover, there was no bar of secrecy imposed on disclosing such information for the purpose of court proceedings. The Court struck down the argument of the Union that these court proceedings were limited to merely tax proceedings, on the basis that such a reading of Article 26(1) would render the last sentence in the Article redundant. For this, the Court cited Article 31 of the Vienna Convention on the Law of Treaties to state that the treaty should be interpreted so as to give the words used its ordinary meaning. 25

The Court also pre-empted arguments on part of the State that the burden of establishing case against black money would lie on the Petitioners, thus requiring petitioners to produce information on bank accounts harbouring black money, by holding that the burden of protecting fundamental rights lay on the State. The State would thus be required to obtain and disclose all information towards the prosecution of black money cases, in order to uphold the fundamental rights of the rest of the honest tax-paying individuals. On the ―right to know‖ under Article 19(2), the Court recognized that the countervailing right to privacy of the bank account holders was a fundamental right read into Article 21 by the Supreme Court in case law. This fundamental right to privacy guaranteed to persons ensures within its ambit that human beings free of public scrutiny if they are acting in conformity with law. Therefore, the right of persons under Article 32 to petition the court in public interest against money laundering must be balanced by the right under Article 21 of account holders in Swiss Banks. Therefore the Court held that the State tax authorities cannot be mandated to disclose account details of all account holders, even in the absence of investigation to reveal that the account holders are suspected offenders under the PMLA. Government’s Response to the Judgment

The establishment of the SIT with unprecedented powers to investigate in this case was not reacted to positively by the Centre, and specifically, the Finance Ministry. Attorney General Goolam Vahanvati, presenting the Centre‘s case before a bench consisting of Justices Kabir and Nijjar, requested a modification of the terms of creation of this body, claiming that it would result in the ultimate destabilization of a large number of probe mechanisms set up under different laws including the NDPS Act, the IT Act, the FEMA and others by creating a ‗super-force‘, especially one with a composition as limited as that of the SIT,. This argument stemmed from the fact that such members as the RBI Deputy Director were expected to take up duties as heavy as investigating the majority of all money laundering cases in the country, despite clearly having their own functions to discharge.70 70

Don't make black money SIT a super force: Centre tells SC, available at http://articles.timesofindia.indiatimes.com/2011-08-25/india/29926312_1_black-money-money-laundering-acthasan-ali-khan (last accessed April 09, 2012)

26

Further, concerns were related about the fitness of certain members, such as the RAW Director, being a nameless, faceless entity, to sit at the helm of a court-appointed body. The Centre took strong objection to the fact that an extremely high-level, extremely powerful body, with multi-jurisdictional operation would render redundant several legislatively created committees and bodies, could be created without any parliamentary consideration. The plea was objected to on the grounds that it was a review in disguise, and the necessity of the body was created by the slow movement at the centre.71

The response of the Government to this groundbreaking judgment of the Supreme Court was the filing of a recall petition in Jethmalani v. UOI72 before Altamas Kabir and S. S. Nijjar, JJ. It was argued by the State that the cases cited by the Judges in the judgment of Ram Jethmalani v. Union of India73, in the matter of constitution of the SIT were incorrect, as these cases did not actually constitute SITs ultimately. The State thus prayed that the Court modify the order to remove that part of the order that mandates the constitution of the SIT.

The Court however held that this petition was essentially a review petition, and therefore the Supreme Court was precluded from hearing a petition for ―modification‖ or ‖recall‖.

Critique and Conclusion A very important area of law where constitutional values frequently come in friction with each other is that of ‗court directed investigations‘. This has picked up pace in the recent years as evidenced by the Court‘s ordering of a C.B.I investigation (Nandigram firing incident for instance),appointing an S.I.T (Gujarat fake encounter case) as well as constituting an SIT in the Jethmalani PIL. Ordering an investigation and supervising it are primarily executive functions and not judicial functions, as ‗investigation‘ comes under ‗Police‘ which is a state subject under ‗law and order‘ (Entry 2, List II) of the Seventh Schedule of the Indian Constitution. Where the court decides to direct or supervise an investigation through the constitution of an SIT, it takes up the mantle of the executive,

71

Govt struggles with its many committees on black money, available at http://www.indianexpress.com/news/govt-struggles-with-its-many-committees-on-b/819876/., (last accessed April 07, 2012) 72 2011(10)SCALE753 73 2011(6) SCALE 691

27

which may prima facie be a violation of the principle of separation of powers 74. Moreover, since law and order is a state subject, directing and overseeing investigations comes under the legitimate, constitutional domain of the state‘s powers. Thus a court ordered investigation through an SIT is also in breach of the principle of federalism.

However, it is submitted that where the issue is a gross violation of fundamental rights, the court must do everything it can to ensure a free and fair investigation, if needed supervise it. That is precisely what happened in State of West Bengal v. C.P.D.R75, where the court first held that there had been a complete abrogation of fundamental rights and under such circumstances, the court thought it appropriate to order a C.B.I investigation. Citing Minnerva Mills76, the court observed: “Three Articles of our Constitution, and only three, stand between the heaven of freedom into which Tagore wanted his country to awake and the abyss of unrestrained power. They are Articles 14, 19, 21 and 31 C has removed two sides of that golden triangle which affords to the people of this country an assurance that the promise held forth by the preamble will be performed by ushering an egalitarian era through the discipline of fundamental rights, that is, without emasculation of the rights to liberty and equality which alone can help preserve the dignity of the individual.” Articles 14 and 19 do not confer any fanciful rights. They confer rights which are elementary for the proper and effective functioning of democracy. They are universally regarded by the Universal Declaration of Human Rights. The court in the past that opined that if Articles 14 and 19 are put out of operation, Article 32 will be drained of its life blood. Ours is a controlled Constitution; in that sense, Articles 14, 19, 21 represent the foundational values which form the basis of the rule of law, the essence of which is a part of Basic Structure 77. These are the principles of constitutionality which form the basis of judicial review apart from the rule of law and separation of powers78. Going along these lines, it may be concluded

74

Ram Jethmalani v. Union of India, 2011 (4) UJ 2237 (SC).

75

C.P.D.R, AIR 2010 SC 1476

76

Minnerva Mills, 1980 AIR 1789 (Supreme Court), at ¶ 74.

77

Coelho, (2007) 2 SCC 1.

78

Coelho, 2007) 2 SCC 1.

28

that where fundamental rights in their essence are infringed to the extent that there is an absolute abrogation of their existence, the court must, if it considers necessary, order and direct/ supervise an investigation. The power of judicial review being an integral part of the basic structure of the Constitution, no Act of Parliament can exclude or curtail the powers of the Constitutional Courts with regard to the enforcement of fundamental rights 79. This therefore does not amount to infringement of either the doctrine of separation of power or the federal structure. Moreover, it is submitted that this case displays several consequentialist justifications despite the above criticisms. Hassan Ali‘s offences have finally been investigated. In the meantime, his bail application was granted by the Bombay HC but this order was set aside by Supreme Court in late 2011.80

79

Minnerva Mills, 1980 AIR 1789 (Supreme Court).

80

Union of India v. Hassan Ali Khan, 2011 (11) SCALE 302

29

CHAPTER VII: THE RESERVE BANK OF INDIA AND ANTI-MONEY LAUNDERING MEASURES

The Reserve Bank of India81 has introduced guidelines, taking from powers sourced to the Section 35A of the Banking Regulation Act, 1949 and Rule 7 of the Prevention of Money Laundering ( (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 to reduce financial frauds and identify money-laundering transactions.82 These are applicable to both banks and NBFCs under separate notifications. These guidelines are known as the Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT) standards, where we can see that the need to Know Your Customer is derived from the aims of combating money laundering, and financing to terror organizations. These standards were first laid down in a preliminary form in 2002, but they have been altered frequently since then, and they are compiled in the form of two master circulars released every year on July 1, 2011, with a sunset clause of one year. The most recent guidelines ‗Know Your Customer‘ guidelines have been revisited in the context of the recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT), as well as the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision.83 Under these guidelines, a foreigner in India may remit USD 2500 for his/her individual purposes.84 These guidelines essentially require banks to lay down their own specific sets of policies and standards in compliance with a fairly comprehensive list of incorporations to be made. They prescribe also circumstances which would lead to the general levels of diligence required being enhanced or reduced, based on circumstances present.

81

Hereinafter, ―the RBI‖.

82

For a detailed guide on the KYC procedures, refer to http://rbidocs.rbi.org.in/rdocs/notification/PDFs/72CY300611F.pdf. 83

Ibid.

84

Ajay Shaw, Evaluating India’s Money Laundering Legislations, available at http://www.antimoneylaundering.org/asiapacific/India.aspx (last accessed April 08, 2012)

30

Banks are required to follow KYC policies incorporating four major elements85:86 (a) Customer Acceptance Policy; Under this head, it is required that no account be opened anonymous or in a fictitious name, parameters of risk perception be well-defined, circumstances of agency be clear and risk profile creation be done amongst other requirements. (b) Customer Identification Procedures; The policy approved by the Board of the bank must be such that it should clearly spell out the Customer Identification Procedure to be carried out at different stages, and where there is suspicion of money laundering or terrorist financing, a full-scale due diligence must be carried out. Further, periodic updation of databases must be done. (c) Monitoring of Transactions; Banks are required to consistently review the transactions being undertaken in order to establish reasonable patterns, and hence to be able to notice aberrant interactions. Further, updating of risk categorization must be done in time periods not exceeding 6 months. (d) Risk Management Under this, banks must create adequate internal supervisory and auditing processes to deal with the need to cover proper management oversight, systems and controls, segregation of duties, training and other related matters by explicitly allocating responsibility within the bank for ensuring that the bank‘s policies and procedures are implemented effectively. The RBI has been stringently enforcing both the KYC guidelines and the AML guidelines, and fined several co-operative banks for violating these guidelines.87

85

Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002, available at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/72CY300611F.pdf (last accessed April 06, 2012) 86

Supra N. 2.

87

RBI penalises MNSBL for violating anti-money laundering rules, ZEE NEWS, available at http://zeenews.india.com/business/finance/rbi-penalises-mnsbl-for-violating-anti-money-launderingrules_31358.html (last accessed April 07, 2012)

31

In addition to this, they have also come up with a circular under the PMLA to regulate the activities of NBFCs, Miscellaneous Non-Banking Companies (MNBCs) and Residuary NonBanking Companies (RNBCs) in connection with money laundering.88 These mandate keeping records transactions exceeding a certain value, as well as reporting all suspicious transactions to the Financial Intelligence Unit in India. Suspicious activities include inter alia transactions that do not make economic sense, activities not consistent with the customer‘s business and provisions of insufficient or irregular information. However, these have been criticized in many instances as not being sufficiently friendly to those who live in the unorganized sector; to combat this, in March this year, the RBI released a notification relaxing their norms with respect to verification processes for low-income persons. Now, in case a person who intends to keep not more than Rs. 50,000 in his account, and not more than Rs. 1 lakh in all accounts combined, wishes to open an account, he may be verified by the process of being introduced by some other person who has been fully verified through KYC procedures.89 The principles followed by the RBI also include the requirement to ―Know Your Employee‖.90 For instance, an employee who leads a lavish lifestyle that cannot be supported by his payscale may require extra vigilance from the employer.

88

Master Circular, KYC Guidelines, Anti Money Laundering Standards, PMLA, 2002 - Obligations of NBFCs available at http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6575 (last accessed April 05, 2012) 89

KYC norms to get friendlier for NBFCs, FINANCIAL EXPRESS, available at http://www.financialexpress.com/news/kyc-norms-to-get-friendlier-for-nbfcs/145693/0 (last accessed April 08, 2012) 90

Ibid.

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CHAPTER VIII: CONCLUSION

While it is clear that money laundering has been a major issue both nationally and internationally, the success of money laundering measures globally seems to have been rather high – perhaps indicative of the priority which this project has been given. The national scenario However, larger questions have been asked recently – that of whether focusing on money laundering as an end in itself is sufficient, and whether it is performing its task of coming close to ending terrorist funding or any other aims it is suspected to be channelled into.91 The problem is exacerbated by the difficulty of adequately assessing the incidence of money laundering – by its nature, since it exists outside the boundaries of the law, any assessment is necessarily vague. Newer modalities of laundering money are being uncovered every day, and the innovativeness of the schemes only is enhanced.

It is suggested that the major problem in catching money laundering today is a failure of intelligence and coordination – unfortunately, these are also two of the most complex areas for improvement to be made, overlapping as they do with civil liberties. In this, a balance needs to be struck – always keeping in mind the end purpose, and the freedoms guaranteed in our constitutional scheme.

91

Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering, and the War on Terrorism, available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1678682, (last accessed Apr. 8, 2012).

33

BIBLIOGRAPHY

Books referred 

DOUG HOPTON, MONEY LAUNDERING: A CONCISE GUIDE FOR ALL BUSINESSES.



GLOBAL FINANCIAL CRIME: TERRORISM , MONEY LAUNDERING AND OFFSHORE CENTRES, (Donato Masciandaro ed. 2004).



Peter Reuter and Edwin M. Truman, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY LAUNDERING, 3 (Institute of Macro-Economics).

Articles referred 

Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis.



Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering, and the War on Terrorism.



Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money Laundering.



John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic Perspective.



K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in India.



K.P.Krishnan, India on the FATF high table.



Kishori J Udeshi, Implementation of Basel II- an Indian Perspective.



Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J. Crime Crim. L. & Crim. Just. 159 (1998).



Peter J. Quirk, Money Laundering: Muddying the Macro-economy



Vijay Kumar Singh, Controlling Money Laundering in India-Problems and Perspectives



Yatish Yadav, Madhu Koda and associates laundered staggering Rs 3536 crore.



Ajay Shaw, Evaluating India’s Money Laundering Legislations



Meghna Bhaskar, Benami Transactions (Prohibition ) Bill, 2011



V. Kumaraswamy, But That’s Not Mine!



Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 – A Critical Analysis



Vikash Yadav, PMLA 2002: Re-engineered



Vishwas Kumar, SC, CBI court reserve PC fate for Feb order

ii

Miscellaneous Sources 

Core Principles of Effective Banking Supervision, October 1999, Reserve Bank of India.



UNODC on money-laundering and countering the financing of terrorism.

iii