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Chapter 1: Introduction

1.1 Money Laundering: An Overview • • •

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The globalization process, driven by advancements in communications and information technology, have made the international system more interactive, integrated, interrelated, and interconnected. This dynamic has unleashed the floodgates of opportunities for criminals to expand, widen and deepen their reach, become more sophisticated in their operations, and intensify their level and pace of transactions. Equipped with the power of technology, disregard for human life and values, and indiscreet ruthlessness, these criminals are able to corrupt the societies with little regard for national boundaries, state sovereignty and levels of economic development. Because of the opportunities and needs created by the global dimension of business, crimes such as fraud, counterfeiting, corruption and embezzlement have opportunities to shift from individual or family ambit to more organized and competitive global structures. Indeed, underground criminal organizations operate like multinational companies, establishing affiliates, maintaining strategic alliances, investing legitimately in foreign countries, and extending their capacities and range across regions.

Money laundering is a process where the proceeds of crime are transformed into apparently legitimate money or other assets. It is the processing of criminal proceeds to disguise its illegal origin. In simple words, it can be defined as the act of making money that comes from one source to look like it comes from another source. INTERPOL's definition of money laundering is: "any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources". The act of money laundering is done with the intention to conceal money or other assets from the State so as to prevent its loss through taxation, judgement enforcement or blatant confiscation. The criminals herein try to disguise the origin of money obtained through illegal activities to look like it was obtained from legal sources because otherwise they will not be able to use it as it would connect them to the criminal activity and the law enforcement officials would seize it. Article 1 of EC Directive defines 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 committing such an offence(s) 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.”

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The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drugtraffickers are in serious need of good laundering systems because they deal almost exclusively in cash, which causes all sorts of logistics problems. Criminal activities such as terrorism, illegal arms sales, financial crimes, smuggling, or illicit drug trafficking generate huge sums of money and criminal organizations need to find a way to use these funds without awakening suspicions about their illicit origin. The purpose of these criminal organizations is to generate profits for the group or for one of its individual members. When a criminal activity generates substantial profits, the individual or group involved in such activities route the funds to safe heavens by disguising the sources, changing the form or moving the funds to a place where they are less likely to attract attention. The logic of controlling the drug money trial is that profit motivates drug sales, and because most sales are in cash, the recipient of cash has to find some way of converting these funds into utilizable financial resources that appear to have legitimate origins. The objective of criminalizing money laundering is to take profit out of the crime. The rationale for the creation of the offence is that it is wrong for individuals and organizations to assist criminals to benefit from the proceeds of their criminal activity or to facilitate the commission of such crimes by providing financial services to them.

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1.2 Structure of Money Laundering • • • •

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Money laundering is the processing of criminal proceeds to disguise its illegal origin. Terrorism, illegal arms sales, financial crimes, smuggling, and the activities of organised crime, including drug trafficking and prostitution rings, generate huge sums. Embezzlement, insider trading, bribery and computer fraud also produce large profits and create an incentive to legitimise the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the individual or group involved in such activities route the funds to safe heavens by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generates it. In essence, the laundering enables criminal activity to continue.

1.3 Process of money laundering Money laundering is a single process however, its cycle can be broken down into three distinct stages namely, placement stage, layering stage and integration stage.

Placement Stage: It is the stage at which criminally derived funds are introduced in the financial system. At this stage, the launderer inserts the “dirty” money into a legitimate financial institution often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions. To curb the risks, large amounts of cash is broken up into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location. Layering Stage: It is the stage at which complex financial transactions are carried out in order to camouflage the illegal source. At this stage, the launderer engages in a series of conversions or movements of the money in order to distant them from their source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money's currency, and purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money. This is the most complex step in any laundering scheme, and it's all about making the origin of the money as hard to trace as possible. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

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Integration stage: It is the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy. At this stage, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures. At this point, the launderer can use the money without getting caught. It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

At each of the three stages of money laundering various techniques can be utilized. Following are the various measures adopted all over the world for money laundering, even though it is not exhaustive but it encompasses some of the most widely used methods: 1. Structuring Deposits: This is also known as smurfing9, this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid anti-money laundering reporting requirements.10 2. Shell companies: These are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.11 3. Third-Party Cheques: Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.12 4. Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

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Chapter 2: RESEARCH METHODOLOGY Money laundering is, thus, a very serious offence and it should not be taken lightly as any other local crime. This study was supposed to be limited for money laundering in Indian perspective but could not be done so as it is neither possible nor relevant to discuss the issue of money laundering without taking its international aspect as every act of money laundering involves various transactions, national and/or international, with the aim of obscuring the origin of proceeds of crime. India has taken up various Anti-Money Laundering measures to curb with this issue but the semeasures somewhere or the other have some loopholes or lacunas and thus is not fulfilling their complete purpose. Some of such problems are pointed out below: Growth of Technology: with the advent of technology at such a greater speed it has been possible for the money launderers to act on obscuring the origin of proceeds of crime by cyber finance techniques. The enforcement agencies are not able to match up with the speed of growing technologies. Lack of awareness about the problem: the issue of money laundering is growing at a very high pace. Its unawareness among the common public is an impediment for implementation of proper anti-money laundering measures. The poor and illiterate people, instead of going through lengthy paper work transactions in Banks, prefer the Hawala system where there are fewer complexities and formalities, little or no documentation, lower rates and they also provide security and anonymity. This is mainly because such people don’t know the seriousness of this crime and are not aware of its harmful after effects. Non- fulfilment of the purpose of KYC Norms: RBI has issued the policy of KYC norms with the objective to prevent banks from being used by criminals for money laundering or terrorist financing activities. However, it does not cease or abstain from the problem of Hawala transactions as RBI cannot regulate them. Further, such norms are only a mockery as the implementing agencies are indifferent to it. Also, the increasing competition in the market is forcing the Banks to lower their guards and thus facilitating the money launderers to make illicit use of it in furtherance of their crime. The widespread act of smuggling: there are a number of black market channels in India for the purpose of selling goods offering many imported consumers goods such as food items, electronics etc. which are routinely sold. The black merchants deal in cash transactions and avoid custom duties thus offering better prices than the regular merchants. After liberalization of government, though this problem has been lessened but it has not been done away with completely and still poses a threat to a nation’s economy. Lack of comprehensive enforcement agencies: the offence of money laundering is no more stuck to one area of operation but has expanded its scope include many different areas of operation. In India, there are separate wings of law enforcement agencies dealing with money laundering, cyber crimes, terrorist crimes, economic offences etc. Such agencies lack convergence among themselves. The issue of money laundering, as we have seen, is a borderless world but these agencies are still stuck with the laws and procedures of the states. Combating the offence of money laundering is a dynamic process since the criminals involved in it are continuously looking for new ways to do it and achieve their illicit motives. Moreover, since various countries are entering into multiple agreements and conventions in order 6

to strengthen their measures to combat money laundering, the money launderers are targeting and exploiting those jurisdictions which are weak and do not have sufficient laws to deal with such an offence. There is an urgent need for a definite policy of anti-money laundering. The criminals dealing with these activities do not have any particular pattern i.e. they have distinct patterns of operation. India has taken extensive measures in order to curb with the issue of money laundering. It can rightly be said that the manpower has been tripled as there is Directorate of Enforcement which leads all the money laundering cases and investigations related to it in the country; there is also Financial Intelligence Unit which tracks down and analyses the risk of money laundering through the agencies reporting to it and there is time to time up gradation of the legislative framework through the proposed changes. However, there is still a further need to increase the enforcement and take more strict actions against the persons violating them. Also, the financial institutions are required to implement additional levels of control in areas such as transaction monitoring, annual review, periodic updation of accounts etc. Moreover, cost factor also plays a very significant role in having an effective anti-money laundering egime as high costs and low budget may lead to reduced focus and thus higher risks.

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RESEARCH OBJECTIVE:1. To understand the concept of Money Laundering. 2. To recognize the preventive steps to cope up with money laundering issues. 3. To identify Anti- Money Laundering Standards prevailing in India. Qestionnaire 1. What is your Age? 2. Your Gender? 3. Do you know about MONEY LAUNDERING? 4. Money Laundering means5. Is money laundering is safe in INDIA? 6. Do you have face Anti Money laundering in EVERYDAYS LIFE? 7. Emlpoyee should be trained AML? 8. Which is the following us a High Risk Activity? 9. Which is the following is an Example of SMURFING? 10. Which is the following maybe a indicator of AM

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Chapter 3: Literature Review 3.1: Impact of money laundering on development • • •

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Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable to money laundering, as against the established financial center countries, which implement comprehensive anti-money laundering regimes. The gaps in a national anti-money laundering system are exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures. As with the damaged integrity of an individual financial institution, there is a damping effect on foreign direct investment when a country’s commercial and financial sector are perceived to be subject to the control and influence of organized crime. In time of decelerating growth, an infusion of hard currency can bolster a country’s foreign reserve, ease the hardship associated with budget tightening policies and moderate foreign indebtedness. While these are short-term benefits associated with an inflow of criminal monies, the long term effects are mostly negative. One difference between official borrowing and laundered funds is that the former can be control and regulate the economy. The possible social, economic and political effects of money laundering, if left unchecked or dealt with ineffectively, are serious. Through the process of money laundering, organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments, thus, the economic and political influence of criminal organizations can weaken the social fabric, ethical standards and ultimately the democratic institutions of society.

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What is the connection of money laundering with society at large? •

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The possible social and political costs of money laundering, is left unchecked or dealt with ineffectively, re serious. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. The economic and political influence of criminal organizations can weaken the social fabric, ethical standards and ultimately the democratic institutions of society. In countries transitioning to democratic system, this criminal influence can undermine the transition. Most fundamentally, money laundering is inextricably linked to the underlying a criminal activity that generates it. Laundering enables criminal activity to continue.

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3.2: Prevention of Money Laundering – Global Initiatives • • •

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Since money laundering is an international phenomenon, transnational cooperation is of critical importance in the fight against this menace. A number of initiatives have been taken to deal with the problem at international level. In this context, the United Nations or the Bank for International Settlements, took some initiatives in 1980s to address the problem of money laundering. However, with the creation of the Financial Action Task Force (FATF) in 1989, regional groupings, such as the European Union, Council of Europe, and organisation of American States also established anti- money laundering standards for their member countries. The major international agreements addressing money laundering include the United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances (the Vienna Convention) and Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime. The role of financial institutions in preventing and detecting money laundering has also been the subject of pronouncements by the Basle Committee on Banking Regulation Supervisory Practices, the European Union and the International Organization of Securities Commissions.

The Vienna Convention • • • •

The first major initiative in the prevention of money laundering was the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in December 1988 (popularly known as Vienna Convention). This convention laid the groundwork for efforts to combat money laundering by obliging the member states to criminalize the laundering of money from drug trafficking. It promotes international cooperation in investigations and makes extra edition between member states applicable to money laundering. The convention also establishes the principle that domestic bank secrecy provisions should not interfere with international criminal investigations.

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Council of Europe Convention • •

The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime, 1990 establishes a common policy on money laundering. It sets out a common definition of money laundering and common measures for dealing with it. The Convention lays down the principles for international cooperation among the member states, which may also include states outside the Council of Europe. This convention came into force in September 1993.

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• One of the purposes of the convention is to facilitate international cooperation as regards investigative assistance, search, seizure and • • confiscation of the proceeds of all types of criminality, particularly serious crimes, such as, drug offences, arms dealing, terrorist offences etc. and other offences which generate large profits.

European Union Money Laundering Directive •

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In response to the new opportunities for money laundering opened up by the liberalization of capital movements and cross-border financial services in the European Union, the Council of the European Communities in June, 1991 issued a directive on the Prevention of Use of the Financial System for the Purpose of Money Laundering. The directive requires member states to outlaw money laundering. The member states have been put under obligation to require financial institutions to establish and maintain internal systems to prevent laundering, to obtain the identification of customers with whom they enter into transaction of more than a particular amount and to keep proper records for at least five years. The financial institutions are also required to report suspicious transactions and ensure that such reporting does not result in liability for the institution or its employees.

Basle Committee’s Statement of Principles • • •

In December 1988 the Basle Committee on Banking Regulation Supervisory Practices issued a statement of principles to be complied by the international banks of member states. These principles include identifying customers, avoiding suspicious transactions, and cooperating with law enforcement agencies. The statement aims at encouraging the banking sector to adopt common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities.

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: THE FINANCIAL ACTION TASK FORCE • • • • • • • • •

The main international body engaged in continuous and comprehensive efforts both to define policy and to promote the adoption of countermeasures against money laundering is the Financial Action Task Force (FATF). The FATF, set up by the governments of the G-7 countries at their 1989 Economic Summit, has representatives from twenty-four OECD countries, Hong Kong, Singapore, the Gulf Cooperation Council, and the European Commission. Participants include representatives from members’ financial regulatory authorities, law enforcement agencies, and Ministries of Finance, Justice and External Affairs. Representatives of international and regional organizations concerned with combating money laundering also attend FATF meetings as observers. The main tasks of the FATF are: ¾ Monitoring members’ progress in applying measures to counter money laundering. ¾ Reviewing money laundering techniques and countermeasures. ¾ Promoting the adoption and implementation of appropriate measures by nonmember countries.

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Recommendations of Financial Action Task Force • •

The Financial Action Task Force established to examine the problem of money laundering, made forty recommendations to combat the problem of money laundering. The recommendations have been classified under various heads. Some of the important heads are given below: • Declaration of laundering of monies carried through serious crimes, a criminal offence; • Workout modalities of disclosure by financial institutions regarding reportable transactions; • Confiscation of proceeds of crime; • Declaring money laundering to be an extraditable offence; and • Promoting international cooperation in investigation of money launderin

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FATF Recommendations 2012 A – AML/CFT POLICIES AND COORDINATION 1 Assessing risks & applying 2 - National cooperation and coordination

a

risk-based

B – MONEY LAUNDERING AND CONFISCATION 3 Money laundering 4 - Confiscation and provisional measures

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approach

offence

C – TERRORIST FINANCING AND FINANCING OF PROLIFERATION SRII Terrorist financing offence - SRIII Targeted financial sanctions related to terrorism & terrorist financing Targeted financial sanctions related to proliferation - Non-profit organizations D – PREVENTIVE MEASURES

9 - Financial institution secrecy laws Customer due diligence and record keeping

10 Customer 11 - Record keeping Additional measures for specific customers and activities 12 13 14 15 16 - Wire

Politically Money -

or

due

diligence

exposed Correspondent value transfer New

person bankin service technologie

on foreign

partie subsidiarie

Reliance, Controls and Financial Groups 17 Reliance 18 Internal controls and 19 - Higher-risk countries Reporting of

third branches and

suspicious transactions

20 Reporting of suspicious 21 - Tipping-off and confidentiality Designated non-financial Businesses and Professions (DNFBPs) 22 DNFBPs: 23 - DNFBPs: Other measures

Customer

due

transactions

diligence

E – TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS 24 Transparency and beneficial ownership of legal persons 25 - Transparency and beneficial ownership of legal arrangements

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– AND RESPONSIBILITIES COMPETENT AUTHORITIES AND OTHER INSTITUTIONAL MEASURES Regulation and Supervision 26 27

-

Regulation -

and

supervision Powers

of

financial of

institutions supervisor

28 - Regulation and supervision of DNFBPs Operational and Law Enforcement 29 30 Responsibilities 31 Powers of 32 - Cash couriers

Financial of law enforcement law enforcement

intelligence and investigative and investigative

units authorities authorities

General Requirements 33 34 - Guidance and feedback

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Statistics

Sanctions 35 - Sanctions G – INTERNATIONAL COOPERATION 36 International 37 Mutual legal 38 Mutual legal assistance: freezing 39 40 - Other forms of international cooperation

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and

instruments assistance confiscation Extradition

3.3: United Nations Global Programme against Money Laundering •

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Office of the Drug Control and Crime Prevention implement this programme against Money Laundering with a view to increase the effectiveness of international action against money laundering through comprehensive technical cooperation services offered to Governments. The programme encompasses following three areas of activities, providing various means to states and institutions in their efforts to effectively combat money laundering: • Technical cooperation is the main task of the Programme. It encompasses activities of creating awareness, institution building and training. • The research and analysis aims at offering States Key Information to better understand the phenomenon of money laundering and to enable the international community to devise more efficient and effective countermeasure strategies. • The commitment to support the establishment of financial investigation services for raising the overall effectiveness of law enforcement measures. The implementation of the Global Programme against Money Laundering is carried out in the spirit of cooperation with other international, regional and national organizations and institutions.

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3.4: Impact of Money Laundering in INDIA Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimes. Differences between national antimoney laundering systems will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures. The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of the society. In countries transitioning to democratic systems, this criminal influence can undermine the transition. If left unchecked, money laundering can erode a nation’s economy by changing the demand for cash, making interest and exchange rates more volatile, and by causing high inflation in countries where criminal elements are doing business. The draining of huge amounts of money a year from normal economic growth poses a real danger for the financial health of every country which in turn adversely affects the global market.15 Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue. Thus, the impact of money laundering can be summed up into the following points: Potential damage to reputation of financial institutions and market W eakens the “democratic institutions”of the society Destabilizes economy of the country causing financial crisis Give impetus to criminal activities Policy distortion occurs because of measurement error and misallocation of resources Discourages foreign investors Causes financial crisis Encourages tax evasion culture Results in exchange and interest rates volatility Provides opportunity to criminals to hijack the process of privatization Contaminates legal transaction. There are many dangerous impact of money laundering on country as well as whole world. According to McDowell and Novis (2001), there are following key effects of money laundering:

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1. Undermining of the legitimate private sector: Quirk (1997 : 7-9) stated that The use of front companies by money launderers undermines the legitimate private sector, as the motive of money launderers is not necessarily to make a profit out of operations of the front company. 2. Undermining of the integrity of financial markets: The succeeding reputational loss by financial institutions results in a loss of confidence by consumers in these affected financial institutions who may be perceived to be involved in fraudulent activities. This could also affect the reputation of a country and force investors to invest in economies that are perceived to be less exposed to the risk of money laundering. Money laundering can deleteriously impact on the truthfulness of financial markets, and also weaken the reputation of a nation. 3. Loss of control of economic policy: Reports of IMF (2003) signified that the size of the funds being laundered, and the fact that money launderers would want to launder their funds through developing economies to reduce possible detection of their schemes, can affect the inflow and outflow of funds in these countries. 4. Economic distortion and instability: Money laundering may also misrepresent capital flows, and thus destabilize the effective functioning of the world-wide economy. Castle and Lee (1999) argued that money launderers would not look at where to best invest their money based on economic principles, but rather at where it would be easier to avoid being caught or based on where the cost of avoidance was lower. 5. Loss of revenue: Many theorists such as Kovacevic (2002) and Fundanga (2003) stated that money laundering decreases the tax funds available for collection in the economy and by implication government's revenues. Consequently, governments may have to levy higher taxes in order to obtain the funds necessary to fulfill their responsibilities towards their citizens. 6. Security threats to privatization efforts: According to Chossudovsky (1999), it was observed that money launderers who are able to obtain previous government entities that are being privatised, can attempt to establish a legitimate front to launder funds. This can weaken economic reforms as money launders are not interested in operating these entities as going concerns, but rather as a channel for laundering money. 7. Reputation risk: Van Fossen (2003) asserted that nations that are competing as destinations for legitimate investments may face difficulty to do so if there is a perception that the country has a poor track record of dealing with money laundering or is seen to be a centre for money laundering. This is because legitimate investors are wary of being associated with any country that has a negative reputation.

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Other impacts of money laundering are as follows: Increased criminality: The increase in criminality is serious effect and a matter of concern in money laundering. The triumph of money launderers is the distance they create between themselves and the criminal activity producing profit, so that they can live lavish life could through this crime without attracting attention and could also go to the extent of reinvesting their profits to finance other crimes. Therefore, government, legislative act and other enforcing laws must implement policies in legal procedure to curb the crime. Social effect: Committing crime of money laundering transfers of economic power from the right people to the wrong. The good citizens and the government are dispossessed from their right, making the criminals take the benefit to flourish in their criminality. Money laundering damages the financial institution which is an important factor in the economic development of nation. In developing countries where there is no strict control, the governments have to seek further contribution from good citizens, making people suffer more and continue to be subject to poverty. Companies cannot compete with operators financed by illegal funding, labours then become jobless and the high rate of unemployment result in an increase in criminality, dissatisfaction and insecurity. The burden on the government would then increase with the need to provide security therefore reallocating resources from more productive enterprise to other areas. This reduces productivity in the real sector of the economy by diverting resources from productive areas to social sectors; crime and corruption which are on the increase would then slow down economic growth and decrease human development. Microeconomics effect: Money launderers generate and make use of companies that front for them. These companies are not interested in and but pretend to be involved in them. Usually the companies are not doing any serious business. The income generated from the company is not usually from the business but from their criminal activities. Their decisions are not usually based on economic considerations and would offer products at prices below cost price making the front companies have an unjustified competitive advantage. Legitimate businesses lose when competing, as there is no fair competition involved and results in business closures due to crowding out effect of private sector business by criminal organizations. Macroeconomic effect: There are numerous impacts of money laundering on the macroeconomic situations. These include volatility in exchange rates and interest rates due to unanticipated transfers of funds; fall in asset price due to the disposition of laundered funds; misallocation of resources in relative asset commodity prices arising from money laundering activities; loss of confidence in markets caused by insider trading, fraud and embezzlement. When businesses make less revenue and pay fewer taxes, people become unemployed and dependent on social assistance which is most times difficult to get in developing countries. When criminals use financial institution for laundering funds, this creates negative promotional and it's enough to scare banks into striving to keep criminals away from their terrain. Also banks have a risk of performing a balancing act between attracting new business and complying with the regulations and legislations. The securities markets (especially derivatives) have become the attention of money

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launderers and are posing an added risk to financial systems. Other indirect economic effects are higher insurance premiums for those who do not make fraudulent claims and higher costs to businesses therefore generating fewer profits which make it difficult to break even. According to Reilly (2008), money laundering has the ability to infiltrate the global financial system and also change economic data. Quirk (1997) in Reilly et al (2008) stated that money demand can appear to change from one country to another resulting in deceptive financial data. Income distribution also tends to be affected by money laundering because it could be redistributed from high savers to low ones, sound investments to risky ones. Due to such negative impact, policy makers have to face difficulty to devise effective responses to monetary threats and it causes difficulties in the government efforts to manage economic strategy. Sensible risks are prone to affect the reliability of banks and the management of economic policies. The prudential risk might be as a result of the corruption of the bank manager, when he/she begins to accept large sum of money from launders and this brings about non-market behaviour in the financial system. Steel (2006) affirmed that financial institutions are regarded as organizations that provide financial services to its customers or members, leaving them at the front position in the battle against money launderers. Financial institutions are not the only target the launderers use in their various schemes but they are accountable for financial dealings and for reporting any doubtful transactions. It has been cleared that the Money laundering has negative consequences on monetary development. Money laundering constitutes a serious risk to national economies and respective governments. The penetration and sometimes saturation of illicit money into legitimate financial sectors and nations accounts can intimidate economic and political constancy. Economic crimes have a disturbing effect on a national economy since potential victims of such crimes are far more numerous than those in other forms of crime. Economic crimes also have the potential of unfavourably affecting people who do not prima-facie, seem to be the victims of the crime. For example, tax evasion results in forfeiture of government income and in turn affecting the potential of the government to spend on development schemes thereby affecting a large section of the population who could have benefited from such government expenditure. A company fraud not only results in cheating of the people who have invested in that company but may also adversely affects investors' confidence and eventually the development of the economy. Legislature body has difficulty to quantify the negative economic effects of money laundering on economic development. Such activity damages the financial-sector institutions that are critical to economic growth, reduces productivity in the economy's real sector by diverting resources and encouraging crime and corruption, which slow economic growth, and can distort the economy's external sector international trade and capital flows to the detriment of longterm economic development. The Financial Sector: Financial sector may get negative effects of money laundering particularly financial institutions including banking and non-banking financial institutions and equity markets, may directly or indirectly be affected.

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Basically, these institutions facilitate concentration of capital resources from domestic savings and funds from overseas. These institutions provide impetus to furtherance of investment prospects by providing conducive environment and efficient allocation of these resources to investment projects which contributes substantially to long run economic growth. Reports signify that Money Laundering weakens the sustainability and development of financial institutions in two ways. Firstly, the financial institutions are debilitated directly through money laundering as there seems to be an association between money laundering and fraudulent activities undertaken by employees of the institutions. Likewise, with the rise in money laundering acts, major parts of financial institutions of a state are susceptible to crime by criminal elements. This strengthens the criminals of money laundering channels. This may lead to the removal of less equipped competitors and giving rise to domination. Secondly, customer trust is important to the development of comprehensive financial institutions, and the perceived risk to the growth of sound financial institutions, and the perceived risk to depositors and investors from institutional fraud and corruption. The Real Sector Money laundering harmfully affects economic development through the real sector by diverting resources to less productive activities and by facilitating domestic corruption and crime. Money laundering also performed through the channels other than financial institutions that includes more sterile investments such as real estate, art, antiques, jewellery and luxury automobiles, or investments of the type that gives lower marginal productivity in an economy. These sub optimal allocations of resource give lower level of economic growth which is a serious disadvantage to economic progress for developing countries. Criminals invest their proceeds in companies and real estate in order to make further profits, legal or illegal. Most of these investments are in sectors that are familiar to the criminal, such as bar, restaurant, prostitution. The real estate sector is the largest and most susceptible sector for money laundering. Real estate is important for money laundering, because it is a nontransparent market where the values of the objects are often difficult for approximation and it is an efficient way to place large amounts of money. The price increase in real estate is lucrative and the annual profits on real business create a legal basis for income. The real estate has the following characteristics for criminal money: 1. A safe investment 2. The objective value is difficult to assess. 3. It allows to realize "white" returns.

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The External Sector: Money laundering activities may weaken the financial growth of any nation through the trade and international capital flows. Excessive illegal capital flight from a state may be facilitated by either domestic financial institutions or by foreign financial institutions. That illicit capital flight drains scarce resources specially from developing economies. In this way, economic growth of corresponding economy is adversely affected. Money laundering negatively affects trust of local citizens in their own domestic financial institutions as well as trust of foreign investors and financial institutions in a state's financial institution which ultimately contributes to economic growth. Money laundering channels may also be related with distortions of a country's' imports and exports. As with the participation of criminal elements on the import side, they may use illegal proceeds to purchase imported luxury goods, either with laundered funds or as part of the process of laundering such funds. Such imports do not produce domestic economic activity or employment, and in some cases can theatrically reduce domestic prices, thus reducing the productivity of domestic enterprises. The reliability of the banking and financial services market place depends mainly on the perception that it functions within a framework of high legal, professional and ethical standards. A reputation for integrity is most valuable assets of a financial institution. Dangers for the reputation can happen when a country purposely declares to want to attract 'criminal money. If funds from criminal activity can be easily processed through a particular institution, either because its employees have been bribed or because the institution do not pay attention to the criminal nature of such funds, the institution could be drawn into active complicity with criminals and become part of the criminal system itself. Such network will damage the attitudes of other financial intermediaries and of regulatory authorities as well as ordinary customers.Money laundering has other dangerous consequences also. It not only impends the financial system of nation by taking away command of the economic policy from the government, but also declines the moral and social position of the society by exposing it to activities such as drug trafficking, smuggling, corruption and other criminal activities. The Global Sector Money Laundering has become a world-wide problem. Criminals target foreign authority with liberal bank secrecy laws and feeble anti- money laundering regulatory governments as they transfer illegal funds through domestic and international financial institutions often with the speed and internet transactions. This huge penetration of criminal proceeds into world market can destabilize and can have a debasing effect on those who work within the market system. The infiltration of criminals into the genuine markets can also change the balance of economic power from responsible and responsive entities to scoundrel agents who have no political or social responsibility.

23

Chapter 4: Software 4.1: Software •

Anti-money laundering software is a term mainly used in the finance and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent or report money laundering activities. Anti-money laundering guidelines came into prominence globally after the September 11,2011 attack and the subsequent enactment of the USA Patriot Act. Today, all financial institutions globally are required to monitor, investigate and report transactions of a suspicious nature to the financial intelligence unit of the central bank in the respective country.

•

There are four basic types of software addressing AML business requirements:

•

Currency Transaction Reporting (CTR) systems, which deal with large cash transaction reporting requirements ($10,000 and over in the U.S.)

•

Customer identity management systems which check various negative lists (such as OFAC) and represent an initial and ongoing part of Know Your Customers (KYC) requirements. Electronic verification can also check against other databases to provide positive confirmation of ID such as (in the UK: electoral roll; the "share" database used by banks and credit agencies; telephone lists; electricity supplier lists; post office delivery database

•

Transaction monitoring systems, which focus on identification of suspicious patterns of transactions which may result in the filing of Suspicious Activities Report (SARs). Identification of suspicious (as opposed to normal) transactions is part of the KYC requirements.

•

Compliance software to help firms comply with AML regulatory requirements; retain the necessary evidence of compliance; and deliver and record appropriate training of relevant staff.

•

An entire industry has developed around providing software to analyze transactions in an attempt to identify transactions or patterns of transactions, called structuring, which requires a SAR filing, or other suspicious patterns that qualify for SAR reporting. Financial institutions face penalties for failing to properly file CTR and SAR reports, including heavy fines and regulatory restrictions, even to the point of charter revocation.

•

These software applications effectively monitor bank customer transactions on a daily basis and, using customer historical information and account profile, provide a "whole picture" to the bank management.

24

Transaction monitoring can include cash deposits and withdrawals, wire transfers and ACH activity. In the bank circles, these applications are known as "AML software". •

Each vendor's software works somewhat differently. Some of the modules which could be present in an AML software are: •

Know Your Customer

•

Entity Resolution

•

Transaction Monitoring

•

Compliance Reporting

•

Investigation Tools

•

Delivery of AML Training

•

Customer due diligence checks, including electronic verification

•

Dissemination of AML policies and procedures.

25

4.2: Anti Money Laundering in India The aim of this paper is to study and evaluate the concept of money laundering in India and its law enforcement. Money laundering happens in almost every country in the world, and a single scheme typically involves transferring money through several countries in order to obscure its origins. The paper initially develops with the idea of money laundering along with the process and techniques used in it. Then it goes on to discuss the impact it has on a nation’s economy and otherwise. It then discusses the various initiatives taken to prevent money laundering with special emphasis on the Indian initiatives particularly focusing on the Prevention of Money Laundering Act, 2002. It discusses, with case references, the status and efforts put in by the law enforcement agencies and where they lack. An attempt is made to identify the problems or the loopholes in the law enforcement and thus suggestive measures are given in order to improve them. In level II analysis, the number of cases filed in the Supreme Court, High Courts and the Tribunals are depicted graphically with the help of different charts also indicating the grounds for filing the same. India is extensively gripped under crime of money laundering. Money laundering is usually used by criminals to hide money made through illegal act. It is the process by which huge amount of money obtained unlawfully, from drug trafficking, terrorist activity or other severe crimes. Money laundering has an unfavourable impact on economy and political steadiness of nation. It is necessary that all nations of the world must jointly device policies and adopt measures to curb act of money laundering by resorting to forceful enforcement of law Generally people consider Money laundering is the conversion of black money into white money. This takes one back to cleaning the huge piles of cash. If it is done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide an authentic cover for their source of income. Money laundering fulfils the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as the many other groups who need to avoid the kind of attention from the authorities that unexpected prosperity comes from illegal acts. These criminal tries to get money and power through criminal activities and then attempt to penetrate the legitimate society, thereby misrepresenting the terms of the compact. They create huge amount of money for the members of the enterprise and permit their associates to live extravagant lifestyles. Generally people consider Money laundering is the conversion of black money into white money. This takes one back to cleaning the huge piles of cash. If it is done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide an authentic cover for their source of income. Money laundering fulfils the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as the many other groups who need to avoid the kind of attention from the authorities that unexpected prosperity comes from illegal acts. These criminal tries to get money and power through criminal activities and then attempt to penetrate the legitimate society, thereby misrepresenting the terms of the compact. They create huge amount of money for the members of the enterprise and permit their associates to live extravagant lifestyles.

26

•

•

•

In view of an urgent need for the enactment of a comprehensive legislation for preventing money-laundering and connected activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating measures for combating money laundering etc., the Prevention of Money- Laundering Bill 1998 was introduced in the Parliament on the 4th August, 1998. The Bill was referred to the Standing Committee on Finance, which presented its report on the 4th March, 1999 to LokSabha . After incorporating the recommendations of the Standing Committee, the Government introduced the Prevention of Money Laundering Bill 1999 in the Parliament on October 29, 1999. The Bill received the assent of the President and became Prevention of Money Laundering Act, 2002 on 17th January 2003. The Act has come in force with effect from July 1, 2005.

.

27

Chapter 5: Money Laundering Act 2002

5.1: Introduction of the Act In view of an urgent need for the enactment of a comprehensive legislation for prevent in money laundering and connected activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating measures for combating money laundering etc., the Prevention of Money Laundering Bill 1998 was introduced in Parliament on 4th August, 1998. The Bill received the assent of the President and became Prevention of Money Laundering Act, 2002 on 17th January 2003. The Act has come into force with effect from

st

1 July 2005. It has been amended in 2005, 2009 and recently in 2012. The objective of the Act is to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money- laundering and for matters connected therewith or incidental thereto. 5.2:Major Provisions of the Act Definitions • Section 2 of the Act defines various terms used in the Act. Some of the important definitions are given below: Attachment •

Sub-section 1(d) defines attachment as to mean prohibition of transfer, conversion, disposition or movement of property by an order issued under Chapter III.

Proceeds of Crime •

Section 2(1)(u) defines the term ‘proceeds of crime as to mean any property derived or obtained, directly or indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.

Property •

The term ‘property used in sub-section 1(v) of Section 2 means any property or assets of every description, whether, corporeal or incorporeal, movable or immovable, tangible or intangible and includes, deeds and instruments evidencing title to, or interest in such property or assets wherever located.

28

Intermediary •

The term intermediary under sub-section 1(n) of Section 2 has been defined as to mean a stock broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment advisor, and any other intermediary associated with securities make and registered under Section 12 of the SEBI Act, 1992.

Investigation • •

Sub-section 2(1)(a) defines investigation to include all the proceedings under the Act conducted by the Director or by an authority authorized by the Central Government under this Act for the collection of evidence.

Money Laundering •

•

•

Section 3 of the Act states that whoever, acquires, owns, possesses, or transfers any proceeds of crime or knowingly enters into any transaction which is related to proceeds of crime directly or indirectly or conceals or aids in the concealment of the proceeds of crime, shall be guilty of offence of money laundering. Section 4 provides that any person who commits the offence of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and also liable to fine which may extend to five lakh rupees. However, where the proceeds of crime involved in money laundering relates to any offence specified under the Narcotic Drugs and Psychotropic Substances Act, the punishment may extend to rigorous imprisonment for ten years.

Attachment of property involved in money laundering •

•

Where the Director or any officer not below the rank of Deputy Director authorised by him, has reason to believe on the basis of material in his possession that any person is in possession of any proceeds of money laundering; such person has been charged of having committed a scheduled offence and such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime, such officer may by order in writing, provisionally attach such property for a period not exceeding 150 days from the date of the order, in the manner provided in the Second Schedule of the Income-tax Act, 1961. Every order of attachment shall cease to have effect after the expiry of ninety days from the date of the order or on the date of the order made by the Administrating Officer finding the person interested is not prevented from the enjoyment of property attached. ‘Person interested in relation to any

29

•

immovable property includes all persons claiming or entitled to claim any interest in the property. The Director or any other officer who provisionally attaches any property shall, within a period of 30 days from such attachment file a complaint, stating the facts of such attachment before the Adjudicating Authority.

30

Adjudicating Authority • •

Section 6 empowers the Central Government to appoint, by notification, one or more persons not below the rank of Joint Secretary to the Government of India as Adjudicating Authority to exercise the jurisdiction, powers and authority conferred on or under the Act.

Adjudication • •

•

Section 8 dealing with the adjudication provides that on receipt of a complaint from the Director or any other officer who provisionally attaches any property or an application made by such officer for retention of seized record or property, the Adjudicating Authority may, on reason to believe that any person has committed an offence of money laundering, serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the property attached or seized, the evidence on which he relies and other relevant information and particulars and show cause why all or any of such property should not be declared to be the properties involved in money laundering and confiscated by the Central Government. Where a notice specifies any property as being held by a person on behalf of any other person, a copy of such notice shall also be served upon such other person. Similar notice is required to be served on all persons when such property is held jointly by more than one person.

Vesting of Property in Central Government • •

•

Section 9 provides that an order of confiscation made, in respect of any property of a person, vests in the Central Government all the rights and title in such property free from all in cumbrances. The Adjudicating Authority after giving an opportunity of being heard to any other person interested in the property attached or seized is of the opinion that any encumbrances on the property or lease hold interest has been created with a view to defeat the provisions of the Act, it may, by order declare such encumbrances or lease hold interest to be void and thereupon the property shall vest in the Central Government free from such encumbrances or lease hold. However, this provision shall not discharge any person from any liability in respect of such encumbrances which may be enforced against such person by a suit for damages

31

5.3 SALIENT FEATURES OF THE ACT I. Offence of Money Laundering and its punishment An offence of money laundering is said to be committed when a person in any way deals with the proceeds of crime22. The proceeds of the crime referred above include the normal crimes23 and the scheduled crimes 24.25 The prescribed punishment is 3- 7 years rigorous imprisonment for an offence of money laundering with fine.26 In case of an offence mentioned under Part A27, imprisonment would extend up to 10 years. II. Attachment, Adjudication and Confiscation The confiscation of the property under the Act is dealt with in accordance with the chapter III of the said Act. An official not below the rank of Deputy Director can order attachment of proceeds of crime for a period of 180 days, after informing the Magistrate. Thereafter he will send a report containing material information relating to such attachment to the Adjudicating Authority.29 Section 8 details the procedure of adjudication. After the official forwards the report to the Adjudication Authority, this Authority should send a show cause notice to concerned person(s) within 30 days. After considering the response and all related information, the Authority can give finality to the order of attachment and make a confiscation order, which will thereafter be confirmed or rejected by the Special Court. III. Obligations of Banking Companies, Financial Institutions and Intermediaries The reporting entity is required to keep a record of all material information relating to money laundering and forward the same to the Director. Such information should be preserved for 5 years.30 The functioning of the reporting entity will be supervised by the Director who can impose any monetary penalty or issue warning or order audit of accounts, if the entity violates its obligations.31 The Central Government, after consulting the Reserve Bank of India is authorised to specify rules relating to managing information by the reporting entity.32 IV. Enforcement Paraphernalia □ Adjudicating Authority - The Act empowers the Central Government to constitute an Adjudicating Authority having a Chairman and 2 members and define their scope of functioning and other terms of service. The Adjudicating Authority will operate through a Single or Division bench. The Authority has been given autonomous powers to regulate its adjudicating procedure.33 □ Administrator - The property laundered will be taken care of i.e. managed after confiscation by an Administrator who will act in accordance with the instructions of the Central Government.

32

Punishment for money-laundering[ The act prescribes that any person found guilty of money-laundering shall be punishable with rigorous imprisonment from three years to seven years and where the proceeds of crime involved relate to any offence under paragraph 2 of Part A of the Schedule (Offences under the Narcotic Drugs and Psychotropic Substance Act, 1985), the maximum punishment may extend to 10 years instead of 7 years. Powers of attachment of tainted property Appropriate authorities, appointed by the Govt of India can provisionally attach property believed to be "proceeds of crime" for 180 days. Such an order is required to be confirmed by an independent Adjudicating Authority. Adjudicating Authority[ The Adjudicating Authority is the authority appointed by the central government through notification to exercise jurisdiction, powers and authority conferred under PMLA. It decides whether any of the property attached or seized is involved in money laundering. The Adjudicating Authority shall not be bound by the procedure laid down by the Code of Civil Procedure,1908, but shall be guided by the principles of natural justice and subject to the other provisions of PMLA. The Adjudicating Authority shall have powers to regulate its own procedure.

Presumption in inter-connected transactions Where money laundering involves two or more inter-connected transactions and one or more such transactions is or are proved to be involved in money laundering, then for the purposes of adjudication or confiscation, it shall presumed that the remaining transactions form part of such inter-connected transactions. Burden of proof A person, who is accused of having committed the offence of money laundering, has to prove that alleged proceeds of crime are in fact lawful property Appellate Tribunal An Appellate Tribunal is the body appointed by Govt of India. It is given the power to hear appeals against the orders of the Adjudicating Authority and any other

[

authority under the Act. Orders of the tribunal can be appealed in Appropiate High Court (for that jurisdiction) and finally to the Supreme Court Special Court Section 43 of Prevention of Money Laundering Act, 2002 (PMLA) says that the Central Government, in consultation with the Chief Justice of the High Court, shall, for trial of offence punishable under Section 4, by notification, designate one or more Courts of Session as Special Court or Special Courts for such area or areas or for such case or class or group of cases as may be specified in the notification.

33

FIU-IND Financial Intelligence Unit – India (FIU-IND) was set by the Government of India on 18 November 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIUIND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister □ Appellate Tribunal - All appeals from an order made by the Adjudicating Authority will lie to an Appellate Tribunal constituted by the Central Government .It will consist of 2 members headed by a Chairman.36 An official can resign by sending his resignation to the Central Government thereby giving a 3 months’ notice. He can also be removed by an order made by the Central Government on the grounds of misbehavior or incapacity. □ Special Courts - the Central Government, after consulting the High Court is empowered to designate Court of Sessions as Special Courts.38 The Special courts can try all scheduled offences and that under section 4 and also offence under section 3, but after the authority requests in this behalf. □ Authorities under the Act - There shall be the following classes of authorities for the purposes of this Act, namely: (a) Director or Additional Director or Joint Director, (b) Deputy Director, (c) Assistant Director, and (d) such other class of officers as may be appointed for the purposes of this Act.40

V. Summons, Searches and Seizures etc. The power of surveying and scrutinizing records kept at any place is conferred on the Adjudicating Authority. The Authority may ask any of its officials to carry on the search, collect all relevant information, place identification marks and thereafter send a report to it. The search of a person to be conducted is allowed if it is ordered by the Central Government. The authority authorized in this behalf cannot detain a person beyond 24 hours, must ensure the presence of 2 witnesses, prepare a list of things seized signed by the witnesses and forward the same to the Adjudicating Authority. A property confiscated or frozen under this Act can be retained for 180 days. This period can be extended by the Adjudicating Authority after being satisfied of the merits of the case. The Court or the Adjudicating Authority can subsequently also order the release of such property. There shall be a presumption of the ownership of property and records recovered. from a person's possession.44 The burden of proof will be on the accused to prove that he is not guilty of an offence under this Act.

34

The offences under the Act are to be cognizable and non-bailable.

The Act consists of 10 chapters containing 75 sections and 1 schedule divided in 5 parts. Chapter I contain section 1 and 2 which deals with short title, extent and commencement and definitions. Chapter II contain section 3 and 4 which provide for offences and punishment for money laundering. Chapter III has sections 5-11 which provide for attachment of property, adjudication and confiscation. Chapter IV has

35

sections 12-15 which deals with obligations of banking companies, financial institutions and intermediaries. Chapter V has sections 16-24 which relates to summons, searches, seizures, retention, presumptions etc. Chapter VI has sections 25-42 which deals with the establishment, composition, qualifications, powers and procedures etc of the Appellate Tribunal. Chapter VII has sections 43-47 which deal with Special Courts and Chapter VIII has sections 48-54 which provide for various authorities under the Act their appointment, powers, jurisdiction etc. Chapter IX has sections 55- 61 which deals with reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property. Chapter X has sections 62-75 which deals miscellaneous provisions including punishments, cognizance of offences, offences by companies etc. • • • • • • • • •

• 0

The Prevention of Money Laundering Act, 2002 consists of ten chapters containing 75 sections and one Schedule divided into five parts. Chapter I containing section 1 and 2 deals with short title, extent and commencement and definitions. Chapter II containing sections 3 and 4 provides for offences and punishment for money laundering. Chapter III (Section 5-11) provides for attachment, adjudication and confiscation. Chapter IV (Sections 12-15) deals with obligations of banking companies, financial institutions and intermediaries. Chapter V (Sections 16-24) relates to Summons, Searches and Seizures etc. Chapter VI (Sections 25-42) provides for composition, procedure, power, jurisdiction etc. of the Appellate Tribunal. Chapter VII (Sections 43-47) deals with Special Courts. Chapter VIII (Sections 48-54) provides for various authorities under the Act, their appointment, powers, jurisdiction etc. Chapter IX (Sections 5561) deals with reciprocal arrangement for assistance in certain matters and procedure for attachment and confiscation of property. Chapter X containing Sections 62-75 deals with miscellaneous provisions including punishment for, vexatious search, false information etc., cognizance of offences, and offences by companies, among others.

36

Chapter 6: Data Analysis, Interpretation and presentation The number of cases filed under the Prevention of Money Laundering Act, 2002 in various High Courts and the Supreme Court individually are:

S. No.

Name of Courts

No.

of

1

Supreme Court

20

2

Allahabad High Court

3

3

Andhra

13

Pradesh High

4

Court Bombay High Court

5

Calcutta High Court

3

6

Delhi High Court

16

Gujarat High Court

3

8

Himachal Pradesh High

2

9

Court

20

10

Karnataka High Court

2

11 12

Madras High Court Orissa High Court

10 4

13

Patna High Court

1

14

Punjab &

7

20 0

N…

Jharkhand High Court

Haryana

The table can be depicted in the following chart:

37

13

1

Supreme Court

Allahbad High Court

Andhra Pradesh High Court

Bombay High Court

Calcutta High Court

Delhi High Court

Gujarat High Court

HimachalPradesh High Court

Jharkhand High Court

Karnataka High Court

Madras High Court

Orissa High Court

Patna High Court

Punjab& Haryana High Court

20

18

16

14

12

10

8

6

4

2

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

38

The number of cases filed in the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 from the year 2009 till 2014 are:

Year No. of Cases

2009

2010

8

5

2011 14

2012 3

2013

2014

19

13

The table can be depicted in the following chart where the total number of cases filed during the aforementioned period is 62.

20 18 16 Year

14

2009 12

2010

10

2011

8

2012 2013

6

2014 4 2 0 1

2

3

39

4

GROUNDS OF FILING CASES Some of the various grounds under which the cases related to PMLA, 2002 have reached the Supreme Court, various High Courts and Tribunals are:

S. No.

Grounds

No. of Cases

1

Appeal

16

2

Bail Granted

8

3

Attachment of Property

14

4

Burden of Proof

19

5

Constitutionality of the Act

39

6

Public Interest Litigation (PIL)

20

This table can be depicted in terms of percentage with the help of following chart: Grounds for filing Cases under PMLA, 2008

6 29%

1 5%

2 9% 3 14%

4 19%

5 24%

40

QUESTIONNAIRE 1. What is your AGE? AGE 18-30 30-40 40-50 50-60

Percentage % 86 6 2 2

Count 58 8 2 2

90 80 70 60 Percentage%

50

Count 40 30 20 10 0 18-30

30-40

40-50

41

50-60

2.

Your Gender? Choices Male Female

Percentage% 60 40

Count 40 30

60 50 40

Male 30

Female

20 10 0 Percentage%

Count

42

3. Do you know about MONEY LAUNDERING? Choices Yes NO

Percentage% 95 5

Count 63 7

100 90 80 70 60 50 40 30 20 10 0

43

4. Money Laundering means-

Choices Conversion of assets to invest in laundromals Conversion of money which is illegally obtained to make the legitimate Conversion of cash to gold Conversion of assets into cash to make them legitimate

Percentage % 64.4

Count 8

27.3

61

0

0

8.3

1

Conversion of assets into cash to make them legitimate

Conversion of cash to gold Series2 Series1

Conversion of money which is illegally obtained to make the legitimate Conversion of assets to invest in laundromals 0

10

44

20

30

40

50

60

70

5. Is Money Laundering is safe in INDIA?

Choices Yes No

Percentage% 0 100

Chart Title 29.4

100%

45

Count 0 70

6.Do you face Money Laundering in yours EVRYDAY Life?

Choices Yes No

Percentage% 74.8 25.2

Count 64 6

Count

1 2

46

7. Employee should be trained in AMl? Choices Yes No

Percentage% 68.5 31.5

Count 55 15

Chart Title 29.4

100%

47

8.

Which is the following is a High Risk Activity?

Choices Money transfer to Unknown Third Party A/C A loan from home Improvements Printing a statemenfor a customer.

Percentage 76.2

Count 66

23.8

4

0

0

Chart Title

2 100%

48

9.Which is following is an example of Smurfing? Choices A drug dealer asking a stranger to invest with drug money A broker buying Dollar with Rupees Wiring money to a foreign country

Percentage% 29.4

Count 58

2.8

4

5.6

8

3 15% 2 7%

1 78%

49

10. Which is the Following maybe a indicator of AML?

Choices

Percentage%

Count

Paying by credit card

18.84

8

Expensive policie taken out and cancelled

being 4.76 tehn

4

Insurance being taken out a 10 property

6

Money being withdrawn 66.4 from different cash machine

52

Money being withdrawn from different cash machine Insurance being taken out a property Series1

Expensive policie being taken out and tehn cancelled

Paying by credit card

0

10

50

20

30

40

50

60

70

Chapter 7: CASE STUDIES Article 1.Money laundering charges against Monger gunrunner NEW DELHI •

The infamous illegal firearms industry of Monger in Bihar is now under the scanner of agencies for money laundering and suspected terror funding. In a first, the Enforcement Directorate has registered cases of money laundering against gunrunners and mafia from Bihar's Monger district.

•

Pistols from the district have also been found to be used by operatives of Indian Mujahedeen.

•

The ED has recently registered two cases under provisions of the Prevention of Money Laundering Act (PMLA) against pistol makers and a handpicked team of the agency is currently touring the area under Bihar Police protection to unravel the black money and stash funds involved in this illegal business

•

The infamy of these easily accessible and cheap illegal weapons with criminal gangs and terror outfits had prompted the ED to take cognizance of a Bihar Police FIR in this context and register its own case -- an Enforcement Case Information Report (ECIR). Bihar DGP Abhyanand had also written to the ED headquarters in Delhi sometime back to deploy their action and not only crackdown on these illegal units on the bank of the Ganges but also choke their funds and stifle their monetary resources.

"The ED has been brought into the picture as so far police action was only putting the 'karigars' and some gang leaders who run this business behind bars for some time. They came back in circulation sooner or later and the vicious cycle of illegal arms manufacturing and smuggling gets started again," sources privyto the development said. With the assets of these people, howsoever large or small, seized and attached under money laundering laws, the person is deprived of the benefits of his ill- gotten funds and also helps build a water-tight legal case against them, the sources said "The agency will probe the proceeds of crime under PMLA and take possession of assets of wrongdoers and criminals in a time-bound manner," they said.

51

Article 2.Commodity exchange may have flouted money laundering, forex laws Enforcement Directorate •

National Spot Exchange Limited (NSEL) may have violated money laundering laws, a report submitted to the finance ministry by the Enforcement Directorate (ED) has indicated. It has also said that there are indications of violation of foreign exchange rules. ED was one of the two working groups that was looking into the payment crisis on the commodity exchange.

•

"The ED has finalised its report and submitted it to the finance ministry. The report speaks about detected violations in a few instances and necessary regulations that possibly were not complied with," a source privy to the development said.

•

Sources said once the finance ministry and a panel of secretaries - headed by economic affairs secretary Arvind Mayaram - go through the contents of the report; legal action could be initiated against those involved in NSEL's operations. ED, according to sources, could register cases under the Prevention of Money Laundering Act (PMLA) and may also launch a preliminary inquiry to probe forex violations under the Foreign Exchange Management Act (FEMA). The ED has prepared the report after obtaining data from the Income Tax department and the Forward Markets Commission (FMC) which have probed and gleaned through the exchange's finances. The I-T had conducted surveys on two dozen entities that were involved in the exchange last month.

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The role of be obtained,

few individuals belonging to NSEL, whose names could not figure report.

in

the

status

The other working group probing the same case has been constituted under a RBI deputy governor. NSEL, promoted by Jignesh Shah-led Financial Technologies (India) Ltd, is facing the problem of settling Rs 5,600 crore dues to 148 members/brokers, representing 13,000 investor clients, after it suspended trade on July 31 on the government direction.

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Article 3.SEBI inspects brokers on money laundering, terror funding •

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Stepping up its fight against laundering and terror funding through capital markets, SEBI inspected more than 200 stock brokers and sub-brokers during the last fiscal to check any possible non-compliance. This marks a significant jump from total 81 brokers and sub-brokers on whom such inspections were carried out during the previous fiscal 2011-12.

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Without disclosing the names of the entities that were inspected, SEBI has said it carried out 162 stock brokers and 39 sub-brokers during 2012-13, up from 69 brokers and 12 sub- brokers during the previous year.

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"The focus of the inspections included themes such as compliance of norms regarding Anti-money Laundering, settlement of accounts of clients on timely basis, segregation of clients and proprietary funds/securities, KYC norms, clearing operations, etc," SEBI said in its latest report to the Government of India for 2012-13. SEBI said it has been taking steps to prevent money laundering and terrorist financing through the securities markets.

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To further strengthen the existing framework and to tackle the risk presented by the misuse of complex legal structures, such as, companies, partnerships, trusts etc, in facilitating money laundering or financing of terrorism, SEBI has made it mandatory for market intermediaries to identify and verify the beneficial owner of funds.

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"Money laundering is globally recognized as one of the largest threats posed to the financial system of a country. The fight against terrorist financing is another such emerging threat with grave consequences for both the political and economic standing of a jurisdiction.

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"Rapid developments and greater integration of the financial markets together with improvements in technology and communication channels continue to pose serious challenges to the authorities and institutions dealing with anti- money laundering and combating financing of terrorism (AML and CFT)," SEBI said. The Prevention of Money Laundering Act, 2002 (PMLA) was amended in December 2012 to make the legislative and administrative framework of the country more effective and capable of handling new evolving threats in the areas of money laundering and financing of terror.

•

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SEBI said it has included the AML/CFT risks as part of its inspection of market intermediaries, such as stock brokers, depository participants and mutual funds. •

The regulator said that it carried out 40 special purpose inspections of stock brokers to check their compliance with the AML/CFT framework. Further, 35 inspections of stock brokers and six depository participants focusing on compliance with KYC norms were carried out in 2012-13.

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Article 4. SEBI finalizing new anti-money laundering guidelines

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Regulator SEBI is finalizing new Anti-Money Laundering guidelines covering entities such as brokers and mutual to put in place stronger checks against possible cleansing of funds through capital markets. The guidelines, expected to be ready within a few weeks, will replace SEBI's existing AML/CFT (Anti Money Laundering and Combating the Financing of Terrorism) standards, which first came into effect about 10 years ago and saw the last major amendments in late 2010, a senior official said. While SEBI is of the view that a strong defense mechanism already exists in the Indian market regulatory system against any possible money laundering or terror financing activities, a review has become necessary to consolidate the various initiatives undertaken by it and the government over the years on this front, he added. Besides, certain changes and additional safeguards might be necessary to tackle the new challenges thrown forward by the technological and market advances and to harmonise the guidelines with new standards set by global bodies like FATF (Financial Action Task Force). SEBI may also consult the practices followed by its peers in some other countries to understand the best regulatory framework for AML/CFT regulations. The SEBI guidelines require all market intermediaries, including brokers, MFs, merchant bankers, depositories, depository participants, portfolio managers and investment advisors, to adhere to specified client dealing procedures and maintain records for regulatory or investigative references. The market entities are also required to seek certain specific disclosures from their clients to address the concerns of money laundering and suspicious transactions.

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•

Some steps taken to check money laundering activities in the capital market include a strict KYC (Know Your Client) regime, mandatory requirement of PAN (Permanent Account Number) and in-person verification of clients.

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The existing SEBI guidelines in this regard are mainly based on the PMLA Act of 2002 and the further amendments to it in 2005 and again in 2009. The review will also take into account the new FATF standards on anti-money laundering measures. FATF is the global standard-setter in the fight against money laundering, and the financing of terrorism.

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Over the past 20 years, FATF has been developing compliance mechanisms to help the countries ensure compliance with its standards and it would begin a new round of global evaluation and monitoring process in 2014.

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While the data for the latest fiscal is not available, 35 stock brokers had come under SEBI's scanner in the 2011-12 fiscal for possible lapses in controls related to money laundering and terror financing.

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Article 5: THE FAKE STAMP PAPER OR TELGI SCAM The syndicate led by Abdul Karim Telgi used the chemically washed stamps and thus reintroduced the used stamp papers back into the system simply by washing them in the chemicals so as to remove the original contents. This was made possible because of the loophole in the system where there was no branding of new stamps and the used stamp papers were not cancelled. Also, the receipt used by Central Stamp Office does not have any security features so his allowed the accused to replicate them and show them as a genuine copy in order to convince the customers. Additionally, he cultured officials at the Security Press in Nashik, where stamp papers were printed. With their participation he used government machinery to print stamp paper and eventually bought some of the machinery and started counterfeiting on his own. The trial court held that evidences show that Abdul Karim Telgi hired an office at City Centre, Indore and he also took apartment on rent and was carrying on business of sale of fake Government revenue papers causing loss to the Government and corresponding gain to himself. The Court thus, found the accused guilty of the offences and sentenced him to various terms of imprisonment. The accused filed an appeal to the High Court against the order of the Trail Court. While dismissing the appeal the Court held that considering the making out of a consummate crime and resultant loss caused to the public revenue by sale of fake, counterfeit stamp papers, adhesive stamps, non-judicial stamp papers, Appellant has caused substantial loss to the Government and corresponding gain to himself by his 'white collar' crime. It was an economic crime which has cascading effect. This is one of those exceptional cases where the law should come down with heavy hands to deal such kind of persons who are a menace to the Society. Observation: The Court does not blindly follows the provisions of the Act but look into the depth of the activities of the accused, the loss and damages caused to the Government and the public; and gives punishment which is proportional to the criminal act.

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Article 6: PAREENA SWARUP vs. UNION OF INDIA, In this case, the Supreme Court has determined the constitutionality of the Adjudicating Authorities and the Appellate Tribunal under the PMLA, 2002. A Public Interest Litigation was filed under Article 32 of the Constitution seeking to declare various sections of the Act such as Section 6 which deals with adjudicating authorities, composition, powers etc., Section 25 which deals with the establishment of Appellate Tribunal, Section 27 which deals with composition etc. of the Appellate Tribunal, Section 28 which deals with qualifications for appointment of Chairperson and Members of the Appellate Tribunal, Section 32 which deals with resignation and removal, Section 40 which deals with members etc. as ultra virus of Articles 14, 19(1)(g), 21, 50, 323B of the Constitution of India. It was also pleaded that these provisions are in breach of scheme of the Constitutional provisions and power of judiciary. The Court said that it is necessary to draw a line which the executive may not cross in their misguided desire to take over bit by bit and judicial functions and powers of the State exercised by the duly constituted Courts. While creating new avenue of judicial forums, it is the duty of the Government to see that they are not in breach of basic constitutional scheme of separation of powers and independence of the judicial function. The Court agreed that the provisions of Prevention of the Money Laundering Act are so provided that there may not be independent judiciary to decide the cases under the Act but the Members and the Chairperson to be selected by the Selection Committee headed by Revenue Secretary. Thus, the Court found merit in the arguments of the Petitioner and ordered to implement amended rules in the Act which can be seen by way of amendment of 2008 in the Act.50 Observation: The Court maintained the basic structure of the Constitution which includes separation of powers and independence of judiciary and did not allow the Executive to act beyond their powers curbing the judicial powers.

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Article 7: PAREENA SWARUP vs. UNION OF INDIA In this case, the Supreme Court has determined the constitutionality of the Adjudicating Authorities and the Appellate Tribunal under the PMLA, 2002. A Public Interest Litigation was filed under Article 32 of the Constitution seeking to declare various sections of the Act such as Section 6 which deals with adjudicating authorities, composition, powers etc., Section 25 which deals with the establishment of Appellate Tribunal, Section 27 which deals with composition etc. of the Appellate Tribunal, Section 28 which deals with qualifications for appointment of Chairperson and Members of the Appellate Tribunal, Section 32 which deals with resignation and removal, Section 40 which deals with members etc. as ultra virus of Articles 14, 19(1)(g), 21, 50, 323B of the Constitution of India. It was also pleaded that these provisions are in breach of scheme of the Constitutional provisions and power of judiciary. The Court said that it is necessary to draw a line which the executive may not cross in their misguided desire to take over bit by bit and judicial functions and powers of the State exercised by the duly constituted Courts. While creating new avenue of judicial forums, it is the duty of the Government to see that they are not in breach of basic constitutional scheme of separation of powers and independence of the judicial function. The Court agreed that the provisions of Prevention of the Money Laundering Act are so provided that there may not be independent judiciary to decide the cases under the Act but the Members and the Chairperson to be selected by the Selection Committee headed by Revenue Secretary. Thus, the Court found merit in the arguments of the Petitioner and ordered to implement amended rules in the Act which can be seen by way of amendment of 2008 in the Act.50 Observation: The Court maintained the basic structure of the Constitution which includes separation of powers and independence of judiciary and did not allow the Executive to act beyond their powers curbing the judicial powers.

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Article 8: UNION OF INDIA vs. HASSAN ALI KHAN & ANR. The allegation against the accused is that they have committed an offence punishable under Section 4 of the Prevention of Money Laundering Act, 2002. The said case has been registered on the basis of a complaint filed by the Deputy Director, Directorate of Enforcement on the basis of the Report based on certain information and documents received from the Income Tax Department. An investigation was also conducted under the Foreign Exchange Management Act, 1999, (‘FEMA’). Show-cause notices were issued to the accused for alleged violation of Sections 3A and 4 of FEMA for dealing in and acquiring and holding foreign exchange to the extent of Rs.36,000 crores approximately in Indian currency, in his account with the Union Bank of Switzerland. Inquiries also revealed that Shri Hassan Ali Khan had obtained at least three Passports in his name by submitting false documents, making false statements and by suppressing the fact that he already had a Passport. Based on the aforesaid material, the Directorate of Enforcement arrested the accused and produced him before the Special Judge, PMLA and was remanded in custody which was rejected and the accused was released on bail. The Union of India thereupon filed Special Leave Petition and upon observing that the material made available on record prima facie discloses the commission of an offence by the accused punishable under the provisions of the PMLA, the Supreme Court disposed of the appeal as well as the Special Leave Petition and set aside the order of the Special Judge, PMLA and directed that the accused be taken into custody. Thereafter, the accused was remanded into custody from time to time.

Observation: The offence of money laundering is an offence of a grave nature. A person indulged in it cannot escape from the hands of the law. If such an offence is committed, strict

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Article 9: ANOSH EKKA vs. CENTRAL BUREAU OF INVESTIGATION In this case, after the accused became M.L.A. and then the Minister, he acquired enormous moveable and immovable assets in his own name and in the name of his family members within a short period of three years. By his influence he got the works allotted in the name of his fictitious construction Company. Apart from that he also indulged in Money Laundering. Absolutely evasive replies were given by him and his wife about the assets. The CBI is collecting materials from different parts of the country and from outside the country also. Bail of the accused was earlier rejected twice upto the Supreme Court. However, liberty was given to renew the prayer if there is inordinate delay in completing the investigation. But from the records, it appeared that the accused himself was responsible for delaying the investigation/the trial on one pretext or the other. The supposed ground of sickness was taken on number of dates to avoid appearance in court and for remaining in hospitals for long periods. Prima facie, the accused, who claimed to be a public representative, was involved in looting and laundering enormous public money. He has not only tampered with the evidences but has been also abusing the process of law and is making contempt of the justice delivery system. Observation: The accused cannot take advantage of the wrong done by him.

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Article 10: HARI NARAYAN RAI vs. THE UNION OF INDIA The offence committed is punishable under Section 3 and 4 of the Prevention of Money laundering Act, 2002. The High Court held that it was clear that the offence under the said Act would continue till the accused continues to hold proceeds of crime and got himself involved in the process and activity connected with the proceeds of crime projecting the same as untainted property and in the present case, the accused had been attempting to convert and project the proceeds of crime in the aforesaid manner. Further, sufficient material had been collected during investigation to prove the guilt of petitioner. Section 45 of the Act provides that bail was to be granted by the Appellate Court only on the satisfaction that there were reasonable grounds for believing that the Petitioner was not guilty of such offence and that he was not likely to commit any offence while on bail. But since the allegations against the petitioner were very serious and sufficient material had come up against him, his prayer for bail was rejected. Observation: Though Section 45 of PMLA gives a provision to grant bail if the Court is satisfied that the accused is not likely to commit any act in furtherance of the offence, but it can be rejected looking into the seriousness of the offence and the material collected against the offender during investigation.

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Article 11: ARUN KUMAR MISHRA vs. DIRECTORATE OF ENFORCEMENT The CBI received information that five employees of Punjab National Bank and other persons had during the period from November, 2005 to December 2006 entered into a criminal conspiracy and made false entries in the accounts of PNB allowing deposits and withdrawal from five fictitious accounts maintained in the name of non- existent persons. By doing so, said persons misappropriated the funds of PNB and also caused a pecuniary gain to themselves or any other persons and correspondingly pecuniary loss to the PNB. The commission of the alleged offences was during the period from November, 2005 to December, 2006. Section 3 of the PMLA specifically mandates that the act of money laundering should be intentional; therefore, it has to be traced to the point of time when the actual transaction took place. The offence punishable under Section 120B IPC and Section 13 of the PC Act were inserted in the schedule of PMLA w.e.f. 01.06.2009 i.e. after the period in which the alleged offences have been committed. It is settled principle of law that the provisions of law cannot be retrospectively applied, as Article 20(1) of the Constitution bars the ex-post facto penal laws and no person can be prosecuted for an alleged offence which occurred earlier, by applying the provisions of law which have come into force after the alleged offence. Thus, the court disposed off the case stating that if the offence of money laundering is established against the petitioner in this case, then the Enforcement Directorate shall be at liberty to initiate fresh proceedings against the petitioner in accordance with law, thereafter.

Observation: If an offence is committed under any Act and needs an action, the accused shall, in no case, be held liable under the Act by a retrospective effect as it will be violative of fundamental rights enshrined in part III of the Constitution of India. Fresh proceedings may be initiated.

Article 12: SHIV KANT TRIPATHI vs. STATE OF U.P. 64

Brief facts of the case are: The petitioner lodged an F.I.R. alleging commission of certain scheduled offences, certain offences under the Prevention of Corruption Act, 1988 as well as commission of offences under Sections 3 and 4 of the Money-Laundering Act. The substance of the allegations in the FIR is that Amar Singh while holding the office of the Chairman of the Uttar Pradesh Development Council, misused his official position and awarded various Government contracts worth thousands of crores to companies owned and controlled by him and he also received kickbacks in the form of commission. It was also alleged that he indulged in Money- Laundering business by creating a web of shell companies. Thus, he was in possession of wealth disproportionate to his known sources of income and misused his position by indulging in Money-Laundering business by conspiring with other Directors, officials and statutory authorities. So far as the offences under the MoneyLaundering Act are concerned the Enforcement Directorate had completed the investigation but on the basis of materials made available during investigation, the Directorate did not find anything against Amar Singh to submit a charge-sheet and therefore, the investigation has been closed but no report has been submitted in any Court. The Court held that the Enforcement Directorate is duty bound to submit final report or charge-sheet, as the case may be, before the Court which is designated as Special Court by the Central Government in consultation with the Chief Justice of the High Court under Section 43 of the Money-Laundering Act. In the present case, admittedly after completing investigation the Enforcement Directorate has not filed the final report on the ground that there is no provision for submission of the final report under the Money-Laundering Act. Since the term 'investigation' shall also include submission of final report as defined in the Code, it was directed by the Court that if the process is issued by the Magistrate or upon a further investigation a charge-sheet is submitted in respect of any scheduled offence, the Enforcement Directorate will submit the Final Form before the designated Court so that the designated Court shall be in a position to examine the efforts made by way of investigation, the evidence collected during the investigation and find out as to whether the final report was justified or not. Observation: The judgment in this case gives us an example that the Court keep a strict check and control over the actions of the Authorities under the PMLA and direct them to do the acts which they are duty bound to do.

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Article 13 B. RAMA RAJU, s/o B. RAMALINGA RAJU vs. UNION OF INDIA In this case, a writ petition was filed challenging certain provisions of the Prevention of Money Laundering Act, 2002 including its amendments. The provision of attachment and confiscation under Section 2(1) of the PMLA 2002 was challenged. The issue was whether property owned by or in possession of person, other than person charged of having committed a scheduled offence is liable to attachment and confiscation proceedings and if so whether Section 2(1)(u) was invalid. It was held that object of Act is to prevent money laundering and connected activities and confiscation of "proceeds of crime" and preventing legitimizing of money earned through illegal and criminal activities by investments in moveable and immovable properties often involving layering of money generated through illegal activities. Therefore, the Act defines expression "proceeds of crime" expansively to sub-serve broad objectives of Act. Thus property owned or in possession of a person, other than a person charged of having committed scheduled offence was equally liable to attachment and confiscation proceedings under Chapter III. Retrospective operation of section 5 of PMLA 2002 was also challenged. The issue was whether provisions of second proviso of Section 5 were applicable to property acquired prior to enforcement of this provision and if so, whether provision is invalid for retrospective penalization. It was held that huge quanta of illegally acquired wealth corrodes vitals of rule of law; fragile patina of integrity of some of our public officials and State actors; and consequently threatens sovereignty and integrity of Nation. Parliament has authority to legislate and provide for forfeiture of proceeds of crime which is a produce of specified criminality acquired prior to enactment of Act as well. It has also authority to recognize degrees of harm such conduct has on fabric of society and to determine appropriate remedy. Thus provisions of second proviso to Section 5 were applicable to property acquired even prior to coming into force of this provision and even so were not invalid for retrospective penalization. Procedure to acquisition u/s 8 of PMLA 2002 was also challenged. The issue was whether provisions of Section 8 were invalid for procedural vagueness and for exclusion of mens rea of criminality in acquisition of such property and for enjoining deprivation of possession of immovable property even before conclusion of guilt/conviction in prosecution for an offence of money laundering? It was held that considering object and scheme of Act, provisions of Section 8 could not be held invalid for vagueness; incoherence as to onus and standard of proof; ambiguity as regards criteria for determination of nexus between property targeted for attachment/confirmation and offence of money- laundering; or for exclusion of mens rea/ knowledge of criminality in acquisition of such property. Section 8(4) which enjoined deprivation of possession of immovable property pursuant to order confirming provisional attachment and before conviction of accused for offence of money-laundering, was valid. Presumption in respect of inter-connected transactions u/s 23 of PMLA 2002 was also challenged. The issue was whether presumption enjoined by Section 23

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was unreasonably restrictive, excessively disproportionate? It was held that Section 23 enjoins a rule of evidence and rebuttable presumption considered essential andintegral to effectuation of purposes of Act in legislative wisdom. Thus, validity of provision was upheld. Shifting of burden of proof under Sections 3 and 24 of PMLA 2002 was also challenged. The issue was whether shifting/imposition of the burden of proof, by Section 24 is arbitrary and invalid and was applicable only to trial of offence under Section 3? It was held that where property is in ownership, control or possession of person not accused of having committed an offence under Section 3 and where such property is part of interconnected transactions involved in money laundering, then and in such event presumption enjoined in Section 23 comes into operation and not inherence of burden of proof under Section 24 of Act. Therefore person other than one accused of having committed offence under Section 3 is not imposed the burden of proof enjoined by S 24. One person accused of offence under Section 3 however burden applies, also for attachment and confiscation proceedings

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Article 14: GLOBAL MONEY LAUNDERING RING OF IQBAL MIRCHI A full-blown investigation into suspected terror funding and hawala (illegal money transaction) operations of the infamous ’D’ company has been launched with the Enforcement Directorate (ED) bringing under its scanner a Rs. 3,000 crore global money laundering ring allegedly involving family members and associates of late Iqbal Mirchi— who was a right-hand man of fugitive Pakistan-based don Dawood Ibrahim. Mirchi, who died in 2013 in the UK, is suspected to have laundered and moved funds through the hawala route to purchase a host of properties in at least 10 or more countries with the help of his associates. The agency which has registered a case under the Foreign Exchange Management Act (FEMA) recently to probe the entire range of complex real estate transactions found that at least four buildings located in Mumbai were sold off by Mirchi’s family in 2010 by creating “fictitious identities” and front companies in “contravention of RBI guidelines and FEMA rules.” The agency has also issued notices to Mirchi’s widow, two sons, relatives, lawyers and business associates in connection with its investigation conducted under the Foreign Exchange Management Act (Fema). The agency has also contacted the Reserve Bank of India (RBI) to obtain records on Mirchi and his associates’ business and banking operations in India. The ED has handed over the investigation of the case to a special investigation team as it has identified numerous assets used to run the hawala rack

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Chapter 8: Effects of Money Laundering & Preventive measures taken by the Court 8.1: Obligation of Financial Institutions Obligation of Banking Companies, and Intermediaries •

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Act deals with obligations of Banking companies, financial institutions and intermediaries. Section 12 requires every banking company, financial institution and intermediary to maintain a record of all transactions, the nature and value of which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions legally connected to each other, and when such series of transactions take place within a month. These information’s are required to be furnished to the Director within such time as may be prescribed. Banks and financial institutions are required to verify and maintain the records of the identity of all its clients, in such manner as may be prescribed. The records as mentioned above are required to be maintained for a period of ten years from the date of cessation of the transactions between the clients and the banking company, financial institution or intermediary. Section 13 states that the Director may, either on his own motion, or on an application made by any authority, officer, or person, call for records of all transactions and make such inquiry or cause such inquiry to be made, as he thinks fit. In the course of any inquiry, if the Director finds that a banking company, financial institution or an intermediary or any of its officers has failed to maintain or retain records in accordance with the provisions of the Act, he may, by an order, levy a fine on such banking company, financial institution or intermediary which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure. Section 15 empowers the Central Government to prescribe, in consultation with the Reserve Bank of India, the procedure and the manner of maintaining and furnishing information for the purpose of implementation of the provisions of the Act.

Summon, Searches and Seizures, etc. •

Section 16 empowers an authority to enter, on having reason to believe that an offence under Section 3 has been committed, any place within the limits of the area assigned to him or in respect of which he is authorized. Section 16(3) requires such authority to place marks of identification on the records inspected by him and make or cause to be made extracts or copies there from, make an inventory of any property checked or verified by him and record the statement of any person present in the place which may be useful for, or relevant to, any proceedings under the Act.

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Section 18 of the Act deals with search of persons and provides that if an authority authorized in this behalf by the Central Government by general or special order has reason to believe that any person has secreted about his person or in anything under his possession, ownership or control any record or proceeds of crime which may be useful for or relevant to any proceedings under this Act, he may search that person and seize such record or property which may be useful for or relevant to any proceedings under this Act.

Retention of Property •

Under Section 20, where any property has been seized under Section 17 or Section 18 and the officer authorized by the Director has reason to believe that such property is required to be retained for the purposes of adjudication under Section 8, such property may be retained for a period of not exceeding three months from the end of the month in which such property was seized and on expiry of the period of three months the property shall be returned to the person from whom such property was seized unless the Adjudicating Authority permits the retention of such property beyond the said period. Sub- Section (4) requires the Adjudicating Authority, before authorizing the retention of such property beyond the period specified, to satisfy himself that the property is prima facie involved in money laundering and the property is required for the purposes of adjudication under Section 8. Presumption in Inter-connected Transactions •

Section 23 of the Act deals with presumption in inter-connected transactions and provides that where money laundering involves two or more transactions and one or more such transactions is or are proved to be involved in money laundering, then for the purposes of adjudication or confiscation under Section 8, it shall be presumed that the remaining transactions form part of such interconnected transactions, unless otherwise proved to the satisfaction of the Adjudicating Authority.

Appellate Tribunal • •

Chapter VI of the Act deals with Appellate Tribunal. Section 25 empowers the Central Government, to establish an Appellate Tribunal to hear appeals against the orders of Adjudicating Authority and other authorities under the Act.

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Section 42 entitles any person aggrieved by any decision or order of the Appellate Tribunal to file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law or fact arising out of such order. However,

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the High Court, if satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, may allow it to be filed within a further period not exceeding sixty days. Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the perceived risk, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information from the customer should be sought separately with his/her consent and after opening the account. Banks should ensure that any remittance of funds by way of demand draft, mail/ telegraphic transfer or any other mode and issue of traveller’s cheques for value of Rupees fifty thousand and above is effected by debit to the customer’s account or against cheques and not against cash payment.

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8.2: Special Court Sections 43 to 47 of the Act deal with provisions relating to Special Courts. Section 43(1) empowers the Central Government to designate, in consultation with the Chief Justice of the High Court, one or more Courts of Session as Special Courts or Court for such area or areas or for such case or class or group of cases as may be specified in the notification, for trial of offence punishable under Section 4. Offences Tri able by Special Courts •

Section 44(1) provides that the offence punishable under Section 4, shall be tri able only by the Special Court constituted for the area in which the offence has been committed or a special court may, upon a complaint made by an authority authorized in this behalf take cognizance of the offence for which the accused is committed to it for trial.

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Section 45 declares every offence punishable under the Act to be cognizable. It provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, a person accused of an offence punishable for a term of imprisonment of more than three years under Part A of the Schedule shall not be released on bail or on his own bond unless the Public Prosecutor has been given an opportunity to oppose the application for such release; and where the Public Prosecutor opposes the application, unless the Court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while in bail. However the special court shall not take cognizance of any offence punishable under Section 4, except upon a complaint in writing made by (i) the Director or (ii) any officer of the Central Government or State Government authorized in writing in this behalf by the Central Government by a general or special order made by that Government. Sub-section 1A inserted by Prevention of Money Laundering (Amendment) Act,2005 provides that notwithstanding anything contained in Code of Criminal Procedure, 1973 or any other provision of this Act, no police officer shall investigate into an offence under this Act, unless specifically authorized, by the Central Government by a general or special order, and subject to such conditions as may be prescribed.

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8.2.1 :Power of Central Government to Issue Directions • • •

Section 52 empowers the Central Government to issue, from time to time, such orders, instructions and directions to the authorities as it may deem fit for the proper administration of this Act. The authorities and all other persons employed in execution of the Act have been put under obligation to observe and follow such orders, instructions and directions of the Central Government. However, no such orders, instructions or directions shall be issued so as to require any authority to decide a particular case in a particular manner or interfere with the discretion of the Adjudicating Authority in exercise of his functions.

Agreement with Foreign Countries •

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Section 56 empowers the Central Government to enter into an agreement with the Government of any country for enforcing the provisions of the Act and also for exchange of information for the prevention of any offence under the this Act or under the corresponding law in force in that country or investigation of cases relating to any offence under the Act. Assistance to a Contracting State in Certain Cases Section 58 provides that, where a letter of request is received by the Central Government, from a court or authority in a contracting State requesting for investigation into an offence or proceedings under the Act and forwarding to such court or authority any evidence connected therewith, the Central Government may forward such letter of request to the Special Court or to any authority as it thinks fit for execution of such request in accordance with the provisions of the Act or as the case may be, any other law for the time being in force.

Reciprocal Arrangements for Processes and Assistance for Transfer of Accused Persons •

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Section 59(1) prescribes that where Special Court, in relation to an offence punishable under Section 4 desires that a summon to an accused person; or a warrant for the arrest of an accused person; or a summon to any person requiring him to attend and produce a document or other thing, or to produce a document or other things or to produce it; or a search warrant issued by it, shall be served or executed at any place in any contracting state, it shall send such summons or warrant in duplicate in such form, to such court, Judge or Magistrate through such authorities as the Central Government may by notification, specify in that behalf and that court, Judge or Magistrate, as the case may be, shall cause the same to be executed. Sub-Section (2) stipulates that where a Special Court, in relation to an offence punishable under Section 4 has received for service or execution, summon to an accused person; or a warrant for the arrest of an accused person; or a summon to any person requiring him to attend and produce

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a document or other things or to produce it; or a search warrant; issued by a court, Judge or Magistrate in a contracting State, it shall cause the same to be served orexecuted as if it were a summon or warrant received by it from another court in the said territories for service or execution within its jurisdiction. Where a warrant of arrest has been executed, the person arrested shall, so far as possible be dealt with in accordance with the procedure specified under Section 19 and where a search warrant has been executed, the things found in the search shall so far as possible be dealt with in accordance with the procedure specified under Section 17 or 18. However, where a summon or search warrant received from a contracting state has been executed, the documents or other things produced or things found in the search shall be forwarded to the court issuing the summon or search warrant through such authority as the Central Government may by notification specify in this behalf.

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8.2.2: Attachment, Seizure and Confiscation of Property, etc. •

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Section 60(1) provides that where the Director has made an order for attachment of any property under Section 5 or where Adjudicating Authority has made an order confirming such attachment or confiscation of any property under Section 8 and such property is suspected to be in a contracting state, the Special Court on an application by the Director or the Administrator appointed under Section 10(1) as the case may be, may issue a letter of request to a court or an authority in the contracting state for execution of such order. Section 60(2) prescribes that when a letter of request is received by the Central Government from a court or an authority in a contracting state requesting attachment or confiscation of the property in India derived or obtained directly or indirectly, by any person from the commission of an offence under Section 3 committed in that contracting state, the Central Government may forward such letter of request to the Director as it thinks fit, for execution in accordance with the provisions of the Act. Sub-Section (3) stipulates that the Director shall on receipt of a letter of request under Section 58 or Section 59 direct any authority under the Act to take all steps necessary for tracing and identifying such property.

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8.3: KYC- Know Your Customer Guidelines ‘Know Your Customer’ (KYC) Guidelines – Anti Money Laundering Standards •

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In terms of

th

the guidelines issued by the Reserve Bank of India (RBI)

on 29 November 2004 on Know Your Customer [KYC] Standards – Anti Money Laundering[AML] Measures, all banks are required to put in place a comprehensive policy Framework covering KYC Standards and AML Measures. RBI introduced KYC Guidelines for all banks. KYC enables banks to know/ understand their customers and their financial Dealings to be able to serve them better and manage its risks prudently.

Objective of KYC Guidelines • • •

• • • • • •

The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks should frame their KYC policies incorporating the following four key elements: • Customer Acceptance Policy; • Customer Identification Procedures; • Monitoring of Transactions; and • Risk management. For the purpose of KYC policy, a ‘Customer’ may be defined as: ¾ a person or entity that maintains an account and/or has a business Relationship with the bank; ¾ one on whose behalf the account is maintained (i.e. the beneficial owner); ¾ beneficiaries of transactions conducted by professional intermediaries, such As Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under The law, and ¾ any person or entity connected with a financial transaction which can pose Significant reputational or other risks to the bank, say, a wire transfer or issue Of a high value demand draft as a single transaction.

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Need for KYC •

To establish the identity of the client: This means identifying the customer and Verifying his/her identity by using reliable, independent source documents, data or Information. For individuals, banks are required to obtain identification data to verify The identity of the customer, his address/location and also his recent photograph. This Is to be done for the joint holders and mandate holders as well. For non-individuals, Banks need to obtain identification data to: • Verify the legal status of the legal person/entity • Verify identity of the authorized signatories and • Verify identity of the beneficial owners/ controllers of the account To ensure that sufficient information is obtained on the nature of employment/Business that the customer does expects to undertake and the purpose of the Account

When does KYC apply? • • •

KYC is carried out at the following stages: ¾ Opening a new account. ¾ Opening a subsequent account where documents as per current KYC Standards not been submitted while opening the initial account. • ¾ Opening a Locker Facility where these documents are not available with the Bank for all the Locker facility holders. • When the bank feels it necessary to obtain additional information from existing Customers based on conduct of the account. • When there are changes to signatories, mandate holders, beneficial owners etc. • KYC is also carried out in respect of non-account holders approaching the bank for high value one-off transactions. Banks should frame their KYC policies incorporating the following four key elements: □ Customer Acceptance Policy; □ Customer Identification Procedures; □ Monitoring of Transactions; and □ Risk Management. For the purpose of KYC policy, a ‘Customer’ is defined as: A person or entity that maintains an account and/or has a business relationship with the bank;

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□ One on whose behalf the account is maintained (i.e. the beneficial owner); □ Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law; and □ Any person or entity connected with a financial transaction which can pose significant reputational or other risk to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

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Chapter 9: Conclusion & Suggestions Conclusions Today money laundering is the one of biggest problem in cycle of economy and security of governments. In general, money laundering is called what it is because that perfectly describes what takes place -illegal, or dirty money is put through cycle of transactions, or washed, so that is comes out the other end as legal , or clean money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those some funds can eventually be made to appear as legitimate income. In past, the term "money laundering" was applied only to financial transactions related to organized crime, today its definition is often expanded by government regulations, to encompass any financial transaction which generates an assets or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. However, as money laundering technique becomes more sophisticated, so too is the technology and to fight it. Early anti-money laundering programs flagged transactions exceeding a certain amount. This proved to be ineffective because money laundering soon adjusted their schemes to avoid detection. The fight against money laundering aims at a more effective enforcement of the criminal law in relation to profit-oriented crime. It will be shown that the introduction of the two main legal devices that are used in the fight against money laundering, the confiscation of the proceeds from crime and the incrimination of money laundering , are closely linked to changes that occurred on a legal and a socio-economical level. These criminal law instruments have, however, created a momentum of their own. The most important example of how the fight against money laundering has separated itself from the background that gave rise to it is the drastic expansion of the application field of the confiscation of the proceeds from crime and the incrimination of money laundering also signifies an evolution of the norm-making process in the field of the law enforcement After the Vienna convention, one of the most important conventions was council of Europe convention. The council of Europe does not have the power, as does the EU, to bind the U.K. The enormous significance of the requirements of the council of Europe is that its membership extends too many of the areas, in particular central and Eastern Europe, in or from wMch "dirty" money is suspected to originate. The convention, in general, was perfect and it could make good way for countries that do not have laws against money laundering, such countries can take effect from convention and make acceptable laws with domestic and international effective. The Convention do not have important predicate project and deny banking and financial mle ,but this convention with extent widely meaning proceeds that derived from drug dealers to proceeds that derived from any economic advantage , covered all criminal offences.

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SUGGESTIONS These Recommendations consider fewer than 4 categories: i) Legal system ii) Measures to be taken by financial institutions and non-financial businesses and professions to prevent money laundering and terrorist finance. iii) Institutional and other measures necessary in systems for combating money laundering and terrorist finance. iv) International co-operation These are basic principles that FATF explain its aims in them. With view to legislation in some governments we can find progressive in AML The U.K has fulfilled its international obligations to create money laundering offences in several pieces of primary legislation, the criminal justice Act 1988, the Drug Trafficking Act 1994 and the Terrorism Act 2000. The POCA" ^ consolidate the provisions of the Drug Trafficking Act and the Criminal Justice Act so that the law on laundering the proceeds of drug trafficking and laundering the proceeds of other crime is contained in one piece of legislation. The POCA replaced the money laundering provisions in the Criminal Justice Act and Drug Trafficking Act. In general, the money laundering legislation in the United Kingdom ,under the proceeds of crime Act 2002 (POCA) and all of the money laundering regulations 2003 and 2007 ,is wide ranging and encompasses mere possession of criminal or terrorist property as well as acquisition, transfer, removal, use, conversion, concealment or disguise. In India, the bill, that now becomes law after receiving presidential assent, for the prevention of money laundering enact in 2002.This act filled a big gap that was against combat money laundering in India. The act was one of the few pieces of legislation that has been passed by the Indian Parliament pursuant to a United Nations Resolution. During its determent in India Parliament, India was under considerable pressure from various international forums and expert groups to enact a law to counter money laundering considering the seriousness of the problem posed worldwide. The Act introduces a revolutionary concept and defining money laundering, by adding the provision that except in offences relating to the state on drugs, an offence can be classified as a money laundering offence only if the property involved is worth INR 3 million or more. No other country in the world has such a provision in their law pertaining to money laundering. In fact, such a provision would only encourage the 1, technique known as "smurfing" in the United States where by keeping transactions blow R 3 million; one can avoid the so-called "long arm of the law". Perhaps the biggest grey area in this act is with regard to enforcement. Under the act enforcement agencies have not been specified at all. The act talk about searches, seizures, arrests, attachment, confiscation, public prosecutors and empowerment in general , in talking about empowerment , it tends to confuse it with providing assistance . It is nowhere specifically mentioned which are the agencies or authorities that can investigate cases and file charges in a count of law for offences committed under the act.

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As final conclusion, the laws against money laundering is not effective and complete.Like developed countries, another countries must enact and actual enforce these laws in dealing with money laundering. As it can be seen that money laundering involves activities that are international in nature and are also at a greater level, therefore, to make a heavy impact it is necessary that all countries should enact strict and as far as possible same laws so that the money launderers will have no place to target in order to launder their proceeds of crime by way of weakness of jurisdiction or the like. Since the States have no obligation in there is no consensus into the international harmonizing efforts for anti-money laundering. Thus, there is a need to enlist common predicate offences to solve the problem internationally particularly keeping in mind the trans-national character of the offence of money laundering. Furthermore, the provision of financial confidentiality in other countries is an issue. The states are unwilling in compromising with this confidentiality. There is a need to draw a line between such financial confidentiality rules and these financial institutions becoming money laundering havens. Apart from that, many a people are of the opinion that money laundering seem to be a victimless crime. They are unaware of the harmful effects of such a crime. So there is a need to educate such people and create awareness among them and therefore infuse a sense of watchfulness towards the instances of money laundering. This would also help in better law enforcement as it would be subject to public examination. Moreover, to have effective antimoney laundering measures there need to be a proper coordination between the Centre and the State. For that the tussle between the two should be removed. The laws should not only be the responsibility of the Centre but it should be implemented at the State level also. The more decentralized the law would be the better reach it will have. Therefore, to have an effective anti-money laundering regime, one has to think regionally, nationally and globally.

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Bibliograpghy DATA COLLECTION:Secondary source of data collected from text books, newspapers and websites. RESEARCH DESIGN:Research design is the basic framework, which provides guidelines of research process. This study helps in collection and analysis of the secondary data. RESEARCH TYPE:Descriptive •

of banking companies, financial institutions and intermediaries, Summons, Searches and Seizures etc. • The Act states that whoever, acquires, owns, possesses, or transfers any proceeds of crime or knowingly enters into any transaction which is related to proceeds of crime directly or indirectly or conceals or aids in the concealment of the procee

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