Money Laundering

Introduction

Money Laundering is something that’s been making headlines lately, though it is a concept as old as the earliest civilizations. Sterling Seagrave has explained in his book “Lords of the Rim” how the Chinese merchants, some 4000 years BC, were first to introduce the practice of laundering money by hiding their wealth from rulers and moving it into businesses in remote provinces. The term “Money Laundering” is said to have originated from Mafia ownership of Laundromats in the United States. Gangsters were earning huge sums in cash from extortion, prostitution, gambling and bootlegging. They needed to show a legitimate source for this money.

Alphonse Gabriel "Al" Capone was an American gangster who led a Prohibition-era crime syndicate and was later prosecuted and convicted in October 1931 for tax evasion. He states: “Money laundering is called what it is because that perfectly describes what takes place – illegal, or dirty, money is put through a cycle of transactions, or washed so that it 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 same funds can eventually be made to appear as legitimate income.”[1]

What is “Money Laundering”?

In the simplest terms, money laundering is making illegal money look legal.According to The Prevention of Money Laundering Act’s (PMLA) section 3[2]: "Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering."

Talking about the punishment, section 4 of PMLA has specified that:"Whoever 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 shall also be liable to fine…”

Also in certain offences, specified in para 2 Part A of the Schedule, the punishment may extend to 10 years.

Money Laundering Cases in India

State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat[3]: In this case the constitutional validity of certain provisions of the PMLA, 2002 such as, the attachment and confiscation of properties utilized in money laundering, was upheld by the Supreme Court.

Rana Ayyub v. Directorate of Enforcement[4]: The court held that if the proceeds of the crime were acquired in one place, concealed in another and used in a third place. The area where each of these places is located would be considered as the area where the offence of money laundering was committed.

Kewal Krishan Kumar v. Directorate of Enforcement[5]: The accused a 70 year old man had sought bail on medical grounds. The court ruled that while seeking bail on medical grounds, it is not necessary to argue on the merits of the case.

Y. Balaji v. Karthik Desari: The court laid down the essentials of section 3 of PMLA.

K.A Rauf Sherif v. Directorate of Enforcement[6]: While dismissing a transfer petition the Allahabad High Court held that lack of jurisdiction of a court to entertain a complaint cannot be a ground to order transfer of a case.

The Prevention of Money Laundering Act 2002 (PMLA)

The Prevention of Money Laundering Act (PMLA) was passed by the Parliament of India in 2002 (15 of 2003) and enforced from July 1, 2005. It was enacted with the primary purpose of preventing money laundering and combating related financial crimes in the country. The PMLA is administered by 1). Financial Intelligence Unit for verification of identity of clients, maintenance of records and reporting & 2). Enforcement Directorate for investigation of and prosecution of money-laundering offences.

The PMLA is structured into ten chapters and contains a total of 75 sections. These chapters cover various aspects of money laundering, including definitions, offences, investigation, attachment of property, and legal proceedings.

Miscellaneous concepts related to money laundering

Three-Step Process of Money Laundering

The three-step process of money laundering involves:

1. Placement: Illegally obtained funds are introduced into the financial system.

2. Layering: Funds undergo complex transactions to conceal their origin and ownership.

3. Integration: Laundered funds are reintegrated into the economy as legitimate assets.

Techniques used to bypass anti-money laundering legislation

Several techniques are employed to circumvent anti-money laundering (AML) legislation, including:

1. Structuring Transactions: Breaking down large transactions into smaller amounts to avoid reporting thresholds and detection.

2. Smurfing: Using multiple individuals to deposit or withdraw funds in small amounts to avoid suspicion.

3. Trade-Based Money Laundering: Manipulating trade transactions to disguise the movement of illicit funds.

4. Shell Companies: Creating fake companies to obscure the ownership and movement of money.

5. Use of Cryptocurrencies: Utilizing cryptocurrencies for anonymous and untraceable transactions.

6. Transaction Mixing Services: Using services that mix transactions to obfuscate the source of funds.

7. False Invoicing: Falsifying invoices or receipts to justify the movement of illicit funds.

8. Placement through Cash-Intensive Businesses: Laundering money through businesses that deal primarily in cash, such as casinos or restaurants.

9. Offshore Banking: Depositing funds in offshore accounts with lax regulations to avoid detection.

10. Integration through Investments: Investing laundered funds in legitimate assets, such as real estate or businesses, to legitimize their source.

Conclusion

Money Laundering is an act as old as time and we have discussed its history with respect to India as well. The PMLA is in the news due to charges against many politicians including the current CM of Delhi Mr Kejriwal, hence it becomes pertinent to know what is the actual meaning of “Money Laundering”. In conclusion, money laundering remains a pervasive threat to the integrity of financial systems worldwide. As elucidated by the Prevention of Money Laundering Act (PMLA), money laundering encompasses the process of disguising the origins of illegally obtained funds, often through a complex web of transactions and deceptive practices. The PMLA, along with other anti-money laundering legislation globally, serves as a crucial tool in the fight against financial crime, providing a framework for detection, investigation, and prosecution.

References

[1] Praveen Kumar. “Money Laundering in India: Concepts, Effects and Legislation”. International Journal of Research in Humanities & Soc. Sciences, Volume 3, Issue 7, 2015

[2] Section 3, The Prevention of Money Laundering Act 2002

[3] State Of Gujarat vs Mirzapur Moti Kureshi Kassab Jamat & Ors AIR 2006 SUPREME COURT 212

[4] Rana Ayyub vs Directorate Of Enforcement, WRIT PETITION (CRIMINAL) NO. 12 OF 2023

[5] Kewal Krishan Kumar v. Directorate of Enforcement BAIL APPLN. 3575/2022

[6] K.A Rauf Sherif v. Directorate of Enforcement TRANSFER PETITION (CRIMINAL) NO. 89/2023