Lesson 19

Prevention of Money Laundering

INTRODUCTION

• Money laundering is the processing of criminal proceeds to disguise its illegal origin.
• Terrorism, illegal arms sales, financial crimes, smuggling, drug trafficking and prostitution,
Embezzlement, insider trading, bribery and computer fraud generate huge sums 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.
• The money so generated is tainted (Black money) and is in the nature of ‘dirty money’.
• Money Laundering is the process of conversion of such proceeds of crime, the ‘dirty money’, to
‘legitimate’ money

PROCESS OF MONEY LAUNDERING

The process of money laundering is classified into 3 stages

Stage 1 - Placement Stage 2 - Layering – Stage 3 - Integration

The launderer introduces his1. After the fund enter into the After successful
illegal profits into the financial system, the layering processing of criminal
financial system, by takes place. In this stage, the profits through the first
breaking up large amounts launderer engages in a series of two phases of the money
of cash into less conspicuous conversions or movements of the laundering process, the
smaller sums that are then funds to distance them from launderer moves them to
deposited directly into a their source. The funds might be integration. In this stage
bank account, or by channeled through the purchase the funds re-enter the
purchasing a series of and sale of investment legitimate economy. The
monetary instruments that instruments, or simply wire the launderer might choose
are later collected and funds through a series of to invest the funds into
deposited into accounts at accounts at various banks across real estate, luxury assets,
another location the globe. or business ventures.

IMPACT OF MONEY LAUNDERING ON DEVELOPMENT OF A GROWING ECONOMY

• 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.
• While these are SHORT-TERM BENEFITS associated with an inflow of criminal monies, the LONG-
TERM EFFECTS ARE MOSTLY NEGATIVE.
 WHAT IS THE CONNECTION OF MONEY LAUNDERING WITH SOCIETY AT LARGE?

• 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, 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.
• In countries transitioning to democratic systems, this criminal influence can undermine the
transition.
• Most fundamentally, MONEY LAUNDERING IS INEXTRICABLY LINKED TO THE UNDERLYING
CRIMINAL ACTIVITY that generated it. Laundering enables criminal activity to continue.

PREVENTION OF MONEY LAUNDERING – GLOBAL INITIATIVES

I. 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).
• It promotes INTERNATIONAL COOPERATION in investigations and MAKES EXTRADITION
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.

II. 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.
• This convention came into force in September 1993.
• The Convention lays down the PRINCIPLES FOR INTERNATIONAL COOPERATION among the
member states, which may also include states outside the Council of Europe.
• It facilitates 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.

III. EUROPEAN UNION MONEY LAUNDERING DIRECTIVE

• 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 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 required to report suspicious transactions.

IV. The Financial Action Task Force (FATF)

• In response to mounting concern over money laundering, the Financial Action Task Force on
Money Laundering (FATF) was ESTABLISHED BY THE G-7 SUMMIT THAT WAS HELD IN PARIS
IN 1989
• Since money laundering is an international phenomenon, TRANSNATIONAL CO-
OPERATION IS OF CRITICAL IMPORTANCE IN THE FIGHT AGAINST THIS MENACE.
• The OBJECTIVES of the FATF are
– to set standards and promote effective implementation for combating money
laundering, terrorist financing and other related threats to the integrity of the
international financial system.
– FATF works to identify national-level vulnerabilities with the aim of protecting the
international financial system from misuse
• The FATF is therefore a “POLICY-MAKING BODY” which works to generate the necessary
political will to bring about national legislative and regulatory reforms in these areas.

• The FATF MONITORS THE PROGRESS of its members in implementing necessary measures,
reviews money laundering and terrorist financing techniques and counter-measures, and
promotes the adoption and implementation of appropriate measures globally.
• The Task Force was given the RESPONSIBILITY OF REVIEWING the action which had already
been taken at a national or international level, and setting out the measures that still
needed to be taken to combat money laundering.
• In April 1990, less than one year after its creation, the FATF issued a report containing a set
of 40 Recommendations, which were intended to provide a comprehensive plan of action
needed to fight against money laundering.
• In October 2004, the FATF published a Ninth Special Recommendations, further
strengthening the agreed international standards for combating money laundering and
terrorist financing - the 40+9 Recommendations.
• Recommendations were first issued in 1990, the FATF Recommendations were revised in
1996, 2001, 2003 and in 2012 to ensure that they remain up to date and relevant.

Prevention of Money Laundering – Indian Initiatives

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 Lok Sabha. 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.

DEFINITIONS
1. Proceeds of Crime: - Section 2(1)(u)

It means any property derived, directly or indirectly

• by any person as a result of criminal activity relating to a scheduled offence or
• the value of any such property or where such property is taken or held outside the country,
then the property equivalent in value held within the country or abroad.

2. Beneficial Owner
The term Beneficial Owner under Section 2 (1) (fa) means an individual who ultimately owns
or controls a client of a reporting entity or the person on whose behalf a transaction is being
conducted and includes a person who exercises ultimate effective control over a juridical
person.

3. Intermediary

The term intermediary means

- 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 market and registered under SEBI Act, 1992
- intermediary registered by the Pension Fund Regulatory and Development Authority;
- a recognised stock exchange

4. Property

It means 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.

5. Reporting entity

As per Section 2(wa) “Reporting entity” means a banking company, financial institution,
intermediary or a person carrying on a designated business or profession.

Money Laundering

Section 3 of the Act states that whosoever directly or indirectly

• attempts to indulge or knowingly assists or knowingly is a party or 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 is an untainted property 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 3 years but
which may extend to 7 years and also liable to fine.
• 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 10 years.

Attachment of property involved in money laundering

1) Attachment by the Director

a) If any person is in possession of any proceeds of money laundering or is charged of having
committed scheduled offence and such proceeds of crime are likely to be concealed or
transferred resulting into difficulty in confiscation then the Director or any officer authorized
by director who shall not be below the rank of Deputy Director may attach the property.
b) Shall provisionally attach such property for period nor exceeding 180 days
c) Such attachment order, is to be forwarded by the Director or any other officer along with
material in his possession to the Adjudicating Authority immediately.
d) The Director or any other officer should file a complaint stating the facts of such attachment
before the Adjudicating Authority within 30 days of attachment.

2) Adjudication – Section 8

a) Issuing notice:
On receipt of a complaint if the Adjudicating Authority has reason to believe that any person
has committed an offence under section 3 or is in possession of proceeds of crime, it may serve
a notice of not less than 30 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 and to show cause why all or any of such properties should not be declared to be the
properties involved in money-laundering and confiscated by the Central Government.
Note –
• If there is beneficial owner, then notice shall be served to beneficial owner as well.
• where such property is held jointly by more than one person, such notice shall be served
to all persons holding such property
b) Findings by AA:
After considering the reply to the notice and hearing the aggrieved person and the Director or
any other officer and considering all relevant materials, the AA will record a finding whether all
or any of the properties referred to in the notice issued under sub-section (1) are involved in
money-laundering.
c) Attachment of the property:
Where the Adjudicating Authority decides that any property is involved in money-laundering,
the AA shall, by order in writing confirm the attachment of the property or retention of property
or record seized or frozen whereupon such attachment or retention or freezing of the seized or
frozen property or record shall –
• continue during investigation for a period not exceeding 365 days or the pendency of the
proceedings relating to any offence under this Act before a court or under the
corresponding law of any other country
• become final after an order of confiscation is passed by the Special Court.
 d) Where the provisional order of attachment made has been confirmed, the Director or any
other officer authorised by him in this behalf shall immediately take the possession of the
property attached.
e) After finishing the trial if the Special Court finds that the offence of money-laundering has
been committed, it shall order that such property involved in the money laundering or which
has been used for commission of the offence of money-laundering shall stand confiscated
to the Central Government.
f) After finishing the trial if the Special Court finds that the offence of money laundering has
not taken place or the property is not involved in money-laundering, it shall order release of
such property to the person entitled to receive it.

3) Vesting of Property in Central Government – Section 9

1) Where an order of confiscation has been made any property of a person then in such case all
the rights and title in such property shall vest absolutely in the Central Government free from all
encumbrances
2) Where the Special Court or the Adjudicating Authority, after giving an opportunity of being
heard to any other person interested in the property attached under this Chapter, or seized or
frozen is of the opinion that any encumbrance on the property or lease-hold interest has been
created with a view to defeat the provisions of PMLA Act, 2002 then it may, by order, declare such
encumbrance or lease-hold interest to be void.
Note –
nothing in this section shall operate to discharge any person from any liability in respect of such
encumbrances which may be enforced against such person by a suit for damages.
4) Appellate Tribunal – Section 25

a) 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.
b) The Appellate Tribunal constituted under Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals against the
orders of the Adjudicating Authority and the other authorities under this Act.
c) Appeal shall be made within 45 days.
d) Appellate Tribunal shall dispose the appeal within 6 months.
e) Any person aggrieved by the order of Appellate Tribunal may file an appeal with the High Court
within 60 days.

AGREEMENT WITH FOREIGN COUNTRIES – Section 56

CG has the power 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 this Act or under the corresponding law in force in that country.

ASSISTANCE TO A CONTRACTING STATE IN CERTAIN CASES – Section 58

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, 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
#Meaning: Contracting state means a state with whom we share a treaty

RECIPROCAL ARRANGEMENTS FOR PROCESSES AND ASSISTANCE FOR TRANSFER OF ACCUSED

PERSONS – Section 59

1) If the special court in India desires –

• To summon an accused person; or
• To issue warrant for arrest of accused person
• To summon any person to produce any document; or
• To issue search warrant
• attachment of any property or for freezing property or confiscation relating to a property
and such property is suspected to be in a contracting state
shall be served or executed at any place in any contracting state then 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 specify and who shall execute the same.
2) If the special court has received for service or execution of the above mentioned, Which is issued
by a court, Judge or Magistrate in a contracting State then it shall cause the same to be served or
executed 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.

PRESUMPTION IN INTER-CONNECTED TRANSACTIONS - Section 23

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.

OFFENCES TO BE COGNIZABLE AND NON-BAILABLE - Section 45

• Every offence punishable under the Act to be cognizable.

#Meaning: Cognizable offence means an offence in which a police officer has the authority to
make an arrest without a warrant
• No person accused of an offence under this Act shall 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.
• A person, who, is under the age of 16 years, or is a woman or is sick or infirm, or is accused
either on his own of money-laundering a sum of less than one crore rupees may be released on
bail, if the Special Court so directs

Obligation of Banking Companies, Financial Institutions and Intermediaries

• According to Section 12(1) requires every reporting entity shall—

(a) maintain a record of all TRANSACTIONS, for a period of five years as to enable it to reconstruct
individual transactions;
(b) furnish to the Director within such time as may be prescribed, information relating to such
transactions, whether attempted or executed, the nature and value of which may be prescribed.
(c) maintain record of DOCUMENTS evidencing identity (id proof) of its clients and beneficial
owners, shall be maintained for a period of 5 years after the business relationship between a
client and the reporting entity has ended or the account has been closed, whichever is later.
(d) Every information maintained, furnished or verified, shall be kept confidential.
(e) 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, he may, by an
order, levy a fine on such banking company, financial institution or intermediary.

(KYC) Norms/ (AML) Measures/ (CFT) Guidelines – Anti Money Laundering Standards

1. RBI issued Master Circular on Know Your Customer (KYC) norms/Anti-Money Laundering
(AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under
Prevention of Money Laundering Act, (PMLA), 2002 and Banks were advised to follow
certain customer identification procedure for opening of accounts and monitoring
transactions of a suspicious nature for the purpose of reporting it to appropriate authority.
2. These “Know Your Customer‟ guidelines have been revisited in the context of the
Recommendations made by the Financial Action Task Force (FATF) on Anti Money
Laundering (AML) standards and on Combating Financing of Terrorism (CFT).
3. Objective KYC/AML/CFT: To prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering or terrorist financing
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.
4. Banks should keep the information collected from the customer as confidential and
details thereof are not to be divulged for cross selling or any other like purposes.
5. Banks should frame their KYC policies incorporating the following four key elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management
6. Who is a customer?
a) a person or entity that maintains an account and/or has a business relationship with the
bank;
b) one on whose behalf the account is maintained (i.e. the beneficial owner);
c) beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
d) 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.
7. Information to be preserved by the banks
a) the nature of the transactions;
b) the amount of the transaction and the currency in which it was denominated;
 c) the date on which the transaction was conducted; and
d) the parties to the transaction
8. Banks are required to report information relating to cash and suspicious transactions and
all transactions involving receipts by non-profit organisations of value more than rupees
10 lakh or its equivalent in foreign currency to the Director, Financial Intelligence Unit-India
(FIU-IND) in respect of transactions.

MAINTENANCE AND PRESERVATION OF RECORD

(a) Banks are required to maintain the records containing information of all transactions, in a
manner that allows data to be retrieved easily and quickly whenever required or when
requested by the competent authorities.
(b) Banks should ensure that records pertaining to the identification of the customer and his
address (e.g. copies of documents like passports, identity cards, driving licenses, PAN card,
utility bills etc.) obtained while opening the account and during the course of business
relationship, are properly preserved. The identification records and transaction data should be
made available to the competent authorities upon request.
(c) Banks have been advised to pay special attention to all complex, unusual large transactions
and all unusual patterns of transactions, which have no apparent economic or visible lawful
purpose. It is further clarified that the background including all documents/office
records/memorandums pertaining to such transactions and purpose thereof should, as far as
possible, be properly recorded. Such records and related documents should be made available
to help auditors in their day-to-day work relating to scrutiny of transactions and also to
Reserve Bank/other relevant authorities.

Introduction of New Technologies – Credit cards/debit cards/ smart cards/gift cards

Many banks are engaged in the business of issuing a variety of Electronic Cards that are used
by customers for buying goods and services, drawing cash from ATMs, and can be used for
electronic transfer of funds. Banks are required to ensure full compliance with all
KYC/AML/CFT guidelines issued from time to time, in respect of add-on/ supplementary
cardholders also. Further, marketing of credit cards is generally done through the services of
agents. Banks should ensure that appropriate KYC procedures are duly applied before issuing
the cards to the customers. It is also desirable that agents are also subjected to KYC measures.

Freezing of Assets under Section 51A of Unlawful Activities (Prevention) Act, 1967

• The Unlawful Activities (Prevention) Act, 1967 (UAPA) enacted by the Parliament for the more
effective prevention of certain unlawful activities of individual and association and for
dealing with terrorist activities.
• In terms of Section 51A, the Central Government is empowered to freeze, seize or attach
funds and other financial assets or economic resources held by, on behalf of or at the
direction of the individuals or entities Listed in the Schedule to the Order, or any other person
engaged in or suspected to be engaged in terrorism.