Anti-Money Laundering Laws & Regulations In India

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Globally, money laundering is a widespread problem. In recent years, money laundering and terrorism financing have compelled governments and authorities around the world to focus on preventing the flow of illicit funds. However, tackling this issue remains a top priority for governments and financial organisations worldwide. The legalisation of illicit profits has various harmful and destructive effects. As a result of financial crimes, administrative order and economic stability deteriorate. In the past, governments have tried numerous methods to prevent money laundering. The purpose of these measures is to prevent financial crimes and safeguard the nation’s administrative and economic stability.

Anti-money laundering (AML) in India is defined as a collection of policies, laws, and/or procedures aimed to prohibit the practise of producing funds through illegal means. The Prevention of Money Laundering Act, 2002 (PMLA) and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (Rules) are the primary laws in India that ban money laundering. There are specialised authorities, such as the Reserve Bank of India/ Securities and Exchange Board of India (SEBI)/ Insurance Regulatory and Development Authority of India, that deal with money laundering issues and establish anti-money laundering standards in accordance with the PMLA and Rules.

The Financial Action Task Force on Money Laundering (FATF), an intergovernmental organisation established by the G-7 Summit in Paris in 1989 and charged with establishing global standards on anti-money laundering and combating the financing of terrorism, defines money laundering as the processing of criminal proceeds to conceal their illegitimate origin in order to legalise the illicit gains of crime. India became the 34th nation to join the Financial Action Task Force in 2010. India is a signatory to a number of United Nations Conventions on anti-money laundering and against the financing of terrorism.

The Prevention of Money Laundering Act of 2002 (PMLA) and the Narcotic Drugs and Psychotropic Substances Act of 1985 (NDPS Act) outlaw money laundering in India (amended in 2001). The 2002 Prevention of Money Laundering Act, the rules made under it, and the rules and regulations created by authorities such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) provide a comprehensive framework for India’s anti-money laundering laws.

The Preventing Financial Crime Act of 2002

The Prevention of Money Laundering Bill was proposed in the Lok Sabha in 1998, approved in 2003, and went into effect in 2005. It has undergone multiple revisions, with the most recent occurring in 2019. The PMLA selects administration and enforcement authorities to implement its laws and guidelines. Certain powers, which are quite similar to those granted to the nation’s civil courts, are granted to the PMLA to exercise the provisional attachment of properties involved in an offence.

The PMLA aims to prevent money laundering in India, and as a result, it has three primary objectives, namely:

  • In order to detect and regulate money laundering
  • Confiscate and seize the property obtained with the money that was laundered
  • To address any further issues related to money laundering in India.

Under the terms of the PMLA, the Financial Intelligence Unit of India (FIU-IND) was established in 2004 as India’s primary AML coordination body. FIU-IND is primarily responsible for receiving, analysing, processing, and disseminating information regarding suspicious financial transactions. FIU-IND also coordinates and strengthens the activities of national investigative, international intelligence, and law enforcement agencies in their pursuit of worldwide efforts to combat money laundering and the financing of terrorism. The Government of India established the Enforcement Directorate (ED) in 2005 to exercise exclusive investigation and prosecution powers under PMLA.

Other than the 2002 Prevention of Money Laundering Act, the key laws that directly or indirectly aim to prevent and combat money laundering are as follows:

The Ban on Benami Transactions Act of 1988

This law was enacted in 1988 “to ban Benami transactions and the right to recover property held Benami, and for things related or incidental thereto.”
“Benami transaction refers to any transaction in which property is transferred to one person for a compensation paid or provided by another individual;”

Section 3 of the Act prohibits anybody from engaging in a Benami transaction categorically.

The Act further stipulates that properties bought through a Benami transaction are subject to acquisition by the competent authority without any obligation to provide compensation.

The Indian Penal Code of 1860 and the Indian Code of Criminal Procedure of 1973

The Indian Penal Code of 1860 is the primary substantive law that recognises and imposes punishments for a variety of criminal acts. On the other hand, the Code of Criminal Procedure of 1973 is a piece of procedural law that outlines the procedures to be followed in criminal proceedings.

In order to better comprehend the laws against money laundering, they must also be referenced.

As such, it can be observed that the laws have a close relationship with PMLA. A variety of offences in the Indian Penal Code have been identified as scheduled offences according to the PMLA.

In addition, section 65 of the PMLA stipulates that the provisions of the Code of Criminal Procedure must be adhered to for the various proceedings outlined in the PMLA.

The Narcotic Drugs and Psychotropic Substances Act of 1985

Sometimes known as the NDPS Act, is a federal statute that regulates controlled substances.
This Act was enacted in 1985 for the purposes of consolidation and amendment of laws relating to narcotic drugs, to make stringent provisions for the control and regulation of operations relating to narcotic drugs and psychotropic substances, to provide for the forfeiture of property derived from or used in illicit traffic in narcotic drugs and psychotropic substances, and the implementation of the provisions of the International Convention on Narcotic Drugs and Psychotropic Substances.

In accordance with its aims, this Act recognises, lists, and characterises a variety of narcotic drugs and psychotropic substances. Likewise, there are numerous crimes that have been identified as such.

Despite the fact that the Act’s primary objective is to prevent and restrict the transport and sale of narcotic and psychotropic substances, and does not specifically address money laundering, it should be noted that the trade in narcotic substances generates a substantial amount of cash for those involved. To the extent that a significant amount of the money involved in drug trafficking is then used to legitimise it, i.e., it is laundered.

By acting against drug trade and trafficking techniques, the NDPS Act places a direct limit on the flow of money into illegal operations.

As a result, violations of the NDPS Act are listed as planned violations under the PMLA.

The 2002 Money Laundering Prevention Act

The Prevention of Money Laundering Act, 2002, or PMLA, is a law passed by the Indian Parliament to prohibit money laundering and provide for the confiscation of property gained through money laundering.

The PMLA and Rules promulgated thereunder entered into force on July 1, 2005. The Act and Rules notified thereunder require banking companies, financial institutions, and intermediaries to verify the identity of clients, maintain records, and provide information in prescribed form to the competent authorities formed and appointed in this regard [for example, the Financial Intelligence Unit – India (FIU-IND)]. Subsequently, the Act was revised in 2005, 2009, and 2012

Methodology under the PMLA

Under the terms of the PMLA, the reporting bodies are obligated to carry out the primary actions prescribed by the law. In their respective roles, they are required to carry out the following responsibilities.

  • Maintain records; Provide information regarding such records.
  • Verification of the client’s identification through due diligence methods;
  • Identification of the beneficial owner for all transactions conducted with its numerous clients.
  • The aforementioned requirements are outlined in section 12 of the PMLA.
  • In addition to the aforementioned responsibilities, reporting companies must also give directors with access to required information when requested (appointed under the provisions of the PMLA).
  • The pertinent provisions are contained in Section 12A of the PMLA.
  • The PMLA clearly exempts reporting bodies from any type of civil or criminal procedures for all of the responsibilities they are required to fulfil. This exclusion or exemption also applies to directors and/or staff of the reporting company in question.

CONCLUSION:

Despite the government's best attempts to curb such practises, money laundering has become widespread in Indian society. The battle against money laundering continues through law, administrative organisations, and efficient regulators who work ceaselessly in this respect. Despite the fact that such actions can be curbed on a national scale, it is important to emphasise that they are never confined to a single jurisdiction. Restrictions in a specific jurisdiction encourage money launderers to relocate to another jurisdiction that may be more accommodating to their activities. The information released by the Panama Papers leak exemplifies how liberal policies in some jurisdictions may be damaging to the interests of another jurisdiction and its inhabitants. The repercussions of money laundering are nothing short of grave. Once illicitly obtained monies have been legitimised, they may be used for the beneficiaries' vested interests, who may not always have the best intentions. Crime can only breed more crime, and the terrible cycle would continue indefinitely.
While a constant vigil must be kept on money laundering, it should also be remembered that stringent economic and taxation policies have a tendency to appear punitive to honest persons with genuine commercial interests. As a result, one of the most effective methods for preventing money laundering may be for governments to take such legal interests into confidence and provide them with protection and certain benefits, thereby discouraging individuals from engaging in money laundering operations. Tax reforms might be one such positive development.

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