Money Laundering in India: Understanding the Laws and Measures to Combat Financial Crime

Money laundering is a global issue that has prompted governments and authorities worldwide to focus on preventing the flow of illicit funds. Tackling money laundering remains a top priority for governments and financial organisations. Legalising illicit profits has various harmful effects on administrative order and economic stability. This article discusses the laws and measures implemented in India to combat money laundering and safeguard the nation’s administrative and economic stability.

I. Anti-Money Laundering (AML) in India

AML in India is defined as a collection of policies, laws, and procedures aimed at prohibiting the practice of generating funds through illegal means. The primary laws include the Prevention of Money Laundering Act, 2002 (PMLA) and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Specialised authorities like the Reserve Bank of India, Securities and Exchange Board of India, and the Insurance Regulatory and Development Authority of India deal with money laundering issues and establish anti-money laundering standards in accordance with the PMLA and Rules.

II. Financial Action Task Force (FATF) and India’s Involvement

India became the 34th member of FATF in 2010. FATF is an intergovernmental organisation established by the G-7 Summit in 1989 and is responsible for setting global standards on anti-money laundering and combating the financing of terrorism. India is a signatory to several United Nations Conventions on anti-money laundering and against the financing of terrorism.

III. Key Anti-Money Laundering Laws in India

1. Prevention of Money Laundering Act, 2002 (PMLA): PMLA establishes a legal framework to combat money laundering in India. It focuses on the detection and regulation of money laundering, the confiscation and seizure of property obtained through laundered money, and addressing related issues. The Act sets up administration and enforcement authorities to implement its laws and guidelines, and grants them powers similar to those of civil courts to provisionally attach properties involved in an offense.
2. Prohibition of Benami Transactions Act, 1988: This Act aims to curb the practice of holding property in another person’s name for a consideration provided by the actual beneficiary. It prohibits anyone from entering into a Benami transaction and empowers the competent authority to acquire properties bought through Benami transactions without providing compensation.
3. Indian Penal Code, 1860, and the Code of Criminal Procedure, 1973: The Indian Penal Code serves as the primary substantive law for recognising and imposing punishments for various criminal acts, while the Code of Criminal Procedure is a procedural law that outlines the procedures to be followed in criminal proceedings. These laws closely relate to PMLA as many offenses in the Indian Penal Code are identified as scheduled offenses under PMLA. Additionally, Section 65 of PMLA mandates adherence to the provisions of the Code of Criminal Procedure for various proceedings outlined in PMLA.
4. Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act): This Act consolidates and amends laws relating to narcotic drugs and psychotropic substances. It provides stringent provisions for the control and regulation of operations related to these substances, the forfeiture of property derived from or used in illicit trafficking, and the implementation of international conventions on narcotic drugs and psychotropic substances. While the NDPS Act’s primary objective is not to combat money laundering directly, it indirectly affects money laundering by targeting the drug trade and trafficking that generates significant illicit funds.

IV. Enforcement Agencies and Mechanisms

1. Financial Intelligence Unit of India (FIU-IND): FIU-IND is India’s central AML coordination body, established in 2004. Its primary responsibilities include 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 global efforts to combat money laundering and terrorist financing.
2. Enforcement Directorate (ED): The ED was established in 2005 to exercise exclusive investigation and prosecution powers under PMLA. It is responsible for enforcing the provisions of PMLA, conducting investigations, attaching properties involved in money laundering, and prosecuting offenders. The ED works closely with other national and international agencies to ensure effective implementation of anti-money laundering laws and measures.

In addition to these enforcement agencies, the reporting entities (such as banks, financial institutions, and intermediaries) play a crucial role in combating money laundering. Under PMLA, they are required to maintain records, verify clients' identities through due diligence processes, identify beneficial owners for all transactions conducted with their clients, and provide information to the authorities when requested. This collaborative approach ensures a more robust and efficient system to combat money laundering and financial crimes in India.