Why in News: A report tabled in the Rajya Sabha revealed that 5,892 cases have been registered under the Prevention of Money Laundering Act (PMLA), 2002 since 2015, but only 15 convictions have been achieved.
Money Laundering
- Under Section 3 of the PMLA, money laundering refers to activities related to proceeds of crime, which are concealed, acquired, possessed, or projected as untainted property.
It usually occurs in three stages:
- Placement: Illegally acquired money is introduced into the financial system.
- Layering: Complex transactions obscure the origin of the money.
- Integration: The money is reintroduced into the economy through legitimate channels like real estate or business.
Present Scenario in India
According to a report presented in the Rajya Sabha:
- 5,892 cases have been registered under PMLA since 2015.
- Only 15 convictions have been achieved.
- Enforcement Case Information Reports (ECIRs) were issued in most cases.
This low conviction rate raises two major concerns:
- Ineffective implementation of the law.
- Rising trend of money laundering, despite the legal framework.
Methods Used in Money Laundering
1. Structuring/Smurfing:
- Breaking large transactions into smaller ones to avoid detection.
2. Money Mules:
- Individuals who transfer money, often across borders—knowingly or unknowingly aiding laundering.
3. Gaming and Gambling:
- High cash flow and anonymity make it easy to convert illicit cash into legal earnings.
4. Shell Companies:
- Paper-only firms used to hide ownership and transfer funds without raising suspicion.
5. Transaction Laundering:
- Fake e-commerce sites process illegal money through legitimate-looking transactions.
6. Cash Smuggling:
- Physically moving money across borders—still used by terror groups and traffickers.
7. Hawala:
- Informal network to transfer money without actual physical movement, hard to trace.
8. Cybercrime:
- Includes identity theft, fraud, phishing—used to generate or clean illegal money.
9. Securities Market:
- Use of opaque instruments like P-notes and hedge funds to hide source of funds.
10. Cryptocurrencies:
- Anonymous and decentralised, enabling laundering without traditional banking systems.
Modern Systems of Laundering: Laundromat
- The term ‘laundromat’ originates from criminal syndicates using laundromats as fronts to legalise illicit earnings.
- Today, it represents multi-functional financial entities, often global in nature, that facilitate tax evasion, asset concealment, and illicit fund movement. These can involve banks, shell companies, or financial service providers operating across jurisdictions.
Challenges and Concerns
a) Low Conviction Rate
- The huge gap between registered cases and convictions points to weak investigation, prosecution, and judicial delays.
b) Political Misuse
- The Supreme Court has flagged misuse of PMLA for political purposes (e.g., Vijay Madanlal Chaudhury v. UOI, 2022), where property attachment can happen without a prior criminal case.
c) Procedural Issues
- Burden of proof lies on the accused; ECIRs can be filed without FIRs (Virbhadra Singh v. ED, 2017), raising concerns of abuse.
d) Terror Financing Link
- Money laundering funds terrorism and organised crime, demanding strict yet fair enforcement.
Anti-Money Laundering Measures in India
1. Key Laws
PMLA, 2002: Core law to prevent money laundering; allows confiscation of tainted property.
FEMA, 2000: Regulates foreign exchange transactions.
Benami Transactions Act: Confiscation of properties held in someone else’s name.
NDPS Act, 1985: Seizure of assets from drug-related crimes.
UAPA: Freezing assets of terrorist individuals/organisations.
2. Main Institutions
FIU-IND: Analyses suspicious transactions, reports to Economic Intelligence Council.
ED: Investigates and prosecutes cases under PMLA and FEMA.
RBI: Issues AML/KYC guidelines to banks and money changers.
3. Sectoral Measures
Customer Due Diligence (CDD): Mandatory for banks, financial institutions, casinos, etc., to verify identity and report suspicious activity.
RBI Guidelines: Enforce KYC norms and AML policy for money changers and forex dealers.
4. International Cooperation
MLATs: Agreements for cross-border evidence sharing and investigation.
FATF Membership: India uses it to push global AML actions (e.g., grey-listing Pakistan).
UN Conventions: India is a signatory to global treaties like the Vienna Convention.
Measures to Strengthen the System
a) Improved Implementation of PMLA
- Strengthen coordination between ED, police, tax departments, and financial intelligence units.
- Ensure time-bound investigation and trial of cases to improve conviction rates.
b) Preventing Abuse of Law
- Establish independent oversight mechanisms to prevent misuse.
- Ensure actions under PMLA are based on objective criteria, not political motivations.
c) FATF Recommendations
- Adopt global best practices from the Financial Action Task Force (FATF), such as:
- Risk-based supervision
- Transparency in beneficial ownership
- Stronger due diligence by financial institutions
d) Capacity Building
- Invest in training of investigators, prosecutors, and judicial officers.
- Employ forensic accounting, AI tools, and international cooperation for complex investigations.
e) Strengthening International Cooperation
- Utilize Double Taxation Avoidance Agreements (DTAAs) with over 85 countries to track illegal offshore transactions.
- Encourage automatic exchange of financial information under international treaties.
Conclusion
Money laundering threatens both the economy and national security. Though India has strong laws, the key lies in fair and effective enforcement. The focus must shift from case numbers to convictions, and from political use to legal integrity, to truly tackle the menace.
UPSC Relevance
GS Paper II (Governance, Polity):
- Role of enforcement agencies (ED, CBI, etc.)
GS Paper III (Internal Security & Economy):
- Challenges of money laundering and terror financing
Mains Practice Question:
Q. Discuss the impact of money laundering on national security and economic stability. Suggest institutional reforms to strengthen enforcement without compromising procedural fairness.