NACIN LAW MODULE (NLSIU, BANGALURU)

THE OFFENCE OF MONEY LAUNDERING

(MODULE V)
(Assignment submitted as per requirement of PGDCL at NACIN)

SUBMITTED TO :-
MS. SUCHITRA MENON
(NLSIU FACULTY)

SUBMITTED BY :-
AYUSH GOEL
(ROLL NO. 05)

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CONTENTS

1) Introduction …………………………………………………………………………3
2) Proceeds of Crime……………………………………………………………………3
3) Stages of Money Laundering………………………………………………………...4
4) Prevention of Money Laundering – Indian Initiative………………………………..5
5) Impact of Money Laundering………………………………………………………..6
6) Judicial Pronouncement………………………………………………………….......7
7) Conclusion………………………………………………………………………...….8
8) Bibliography……………………………………………………………………...…..9

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LIST OF CASES

1. Abdul Karim Telgi and Sohail Khan vs. Union of India…………………………..7

2. Pareena Swarup vs. Union of India……………………………………………….7

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 THE OFFENCE OF MONEY LAUNDERING

INTRODUCTION
Money Laundering is a process of legalizing the illegally earned money in order to
avoid being caught during carrying on illegal acts and for avoiding taxes. It is a method
where the proceeds of crime are transformed into apparently legitimate money or other assets.
It is an act of making money from one source to look like it comes from another source.
INTERPOL's definition of money laundering is: "any act or attempted act to conceal or
disguise the identity of illegally obtained proceeds so that they appear to have originated from
legitimate sources".1 It is done to conceal money or other assets from the government so as to
prevent its loss through taxation, judgment enforcement or confiscation.

MEANING
Section 3 of Prevention of Money Laundering Act, 2002 says “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 and projecting it as
untainted property shall be guilty of offence of money laundering”.2

PROCEEDS OF CRIME
An understanding of the phrase 'Proceeds of Crime' is crucial to the understanding of the
crime of Money Laundering. The offence of money laundering (defined u/s 3 and punished
u/s 4 PMLA) is attracted only when the laundered property falls within the definition
of 'proceeds of crime'. To understand what is meant by 'Proceeds of Crime', one has to turn to
Section 2(u) of PMLA, which provides that - 'proceeds of crime' means and includes:

 Any property derived or obtained

 Directly or indirectly

 By any person

1
Interpol General Secretariat Assembly in 1995
http://www.interpol.int/Crimeareas/Financialcrime/Moneylaundering
2
Section 3 of Prevention of Money Laundering Act, 2002.

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  as a result of criminal activity

 relating to a 'scheduled offense'; or

 the value of any such property

To further add teeth to this provision, the Finance Act of 2015 has further widened the
definition of proceeds of crime and included within its ambit not only the specific property
(which is the subject matter of money laundering) or its value, but also the property-
equivalent in value held within the country (in a situation where property which is the
'proceed of crime' is taken or held outside the country). Such properties are also included
within the definition of 'proceeds of crime'. This principle of equivalence has been introduced
by the Finance Act, 2015 for the first time. To illustrate, if a person X has been accused of
having proceeds of crime in country X, in that situation, his assets in India of the same value
will qualify as 'proceeds of crime', even though these assets per se are not the 'proceeds of
crime' or in no way connected to it. This has been done with a view to enable action in those
cases where 'proceeds of crime' are taken or held outside the country and to allow action to be
taken for attachment of equivalent asset located within the country. This step appears to have
been taken in view of the increasing internationalization of crime. However, this gives rather
wide and unguided powers of attachment to the authorities under the Act, which may be
exercised arbitrarily.

STAGES OF MONEY LAUNDERING

The cycle of Money laundering can be broken down into three distinct stages namely,
placement stage, layering stage and integration stage.

PLACEMENT STAGE:

The criminally derived funds are introduced in the financial system. At this stage, the
launderer puts the “dirty” money into a lawful financial institution often in the form of cash
bank deposits. It is the riskiest stage as large amounts of cash are pretty conspicuous, and
banks are mandated to report high-value transactions. Therefore large amounts of cash is
broken up into less conspicuous smaller sums that are then deposited directly into a bank
account, or by buying a series of monetary instruments that are then collected and deposited
into accounts at another location.

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 LAYERING STAGE:

At this stage the complex financial transactions are carried out in order to camouflage the
illegal source. The launderer engages in a number of conversions or movements of the money
in order to make a distance from their source. It may consist of several bank-to-bank
transfers, wire transfers between various accounts in various names in various countries,
making deposits and withdrawals to continually vary the amount of money in the accounts,
also in different money's currency, and also purchasing high-value items such as houses,
boats, diamonds, cars etc. It's all about making the origin of the money as hard to detect as
possible. Often the launderer might disguise it as payments for goods or services, thus giving
them a legal appearance.

INTEGRATION STAGE:

In the final stage the ‘laundered’ property is again introduced into the legitimate economy.
He may choose to invest the funds into real estate, luxury assets, or some business ventures.
It's difficult to catch a launderer if there is no proper documentation during the previous
stages. Some of the measures adopted all over the world for money laundering are:

1. Structuring Deposits/ Smurfing: A method of placement whereby cash is broken

into smaller deposits of money to defeat suspicion of money laundering and avoid
anti-money laundering reporting requirements.
2. Shell companies: These are fake companies that exist for no other reason than to
launder money. They receive "payment" for supposed goods or services but in realty
provide no goods or services; they make them appear legitimate transactions through
fake invoices and balance sheets.
3. Third-Party Cheques: Cheques or drafts are drawn on different institutions are used
and cleared via various third-party accounts. Often third party cheques and traveler’s
cheques are purchased. As these are negotiable in many countries, the nexus with the
source money is difficult to establish.
4. Bulk cash smuggling: Cash is physically smuggled to another jurisdiction and
deposited in a financial institution, such as an offshore bank, where there is greater
bank secrecy or less rigorous enforcement.

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PREVENTION OF MONEY LAUNDERING – INDIAN
INITIATIVES
The major statutes incorporated to address the problem of money laundering are:

 Prevention of Money Laundering Act, 2002

 The Income Tax Act, 1961
 The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,
1974 (COFEPOSA)
 The Smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)
 The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)
 The Benami Transactions (Prohibition) Act, 1988
 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic
 Substances Act, 1988
 The Foreign Exchange Management Act, 2000, (FEMA)

Prevention of Money Laundering Act, 2002 is the most effective statute against
Money Laundering. The Act has come into force with effect from 1st July 2005. It has been
amended in 2005, 2009 and recently in 2012. The objective of the Act is to prevent money-
laundering and to provide for confiscation of property derived from, or involved in, money-
laundering and for matters connected therewith or incidental thereto.

IMPACT OF MONEY LAUNDERING

Launderers always look for new routes for laundering of their funds. Developing
economies having inadequate controls are particularly vulnerable as established countries
implement comprehensive anti-money laundering regimes. Differences between national
anti-money laundering systems are exploited by launderers. They tend to move their
networks to those financial systems which have with weak or ineffective countermeasures.
The drainage of huge amounts of non-tax paid money every year from normal economic
growth poses a real danger for the financial health of every country which in turn adversely
affects the global market. Money laundering is inextricably linked to the underlying criminal
activity that has generated it. Laundering enables criminal activity to sustain.

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Thus, the impact of money laundering can be summed up into the following points:

 Causes potential damage to reputation of financial institutions and market

 It weakens the “democratic institutions” of the society
 It destabilizes economy of the country causing financial crisis
 Impetus to criminal activities
 Cause policy distortion occurs because of measurement error and misallocation of
resources
 It discourages foreign investors
 It causes financial crisis
 It encourages tax evasion culture
 Exchange and interest rates volatility
 Opportunity to criminals to hijack the process of privatization
 It contaminates Legal transaction.

JUDICIAL PRONOUNCEMENTS
In Abdul Karim Telgi and Sohail Khan vs. Union of India,3 the syndicate led by Abdul
Karim Telgi used the chemically washed stamps and reintroduced those used stamp papers
back into the system simply by washing them in the chemicals so as to remove the original
contents. There was a loophole in the system that there was no branding of new stamps and
the used stamp papers were not cancelled. Moreover, the receipt used by Central Stamp
Office did not have any security features which allowed the accused to replicate them and
show them as a genuine copy in order to convince the customers. He cultured officials at the
Security Press in Nashik, where stamp papers were printed. He used government machinery
to print stamp paper and eventually bought some of the machinery and started counterfeiting
on his own. The trial court held that evidences show that Abdul Karim Telgi hired an office at
City Centre, Indore and he also took apartment on rent and was carrying on business of sale
of fake Government revenue papers causing loss to the Government and corresponding gain
to himself. The Court thus, found the accused guilty of the offences and sentenced him to
various terms of imprisonment. The Court looked into the depth of the activities of the
accused, the loss and damages caused to the Government and the public; and gave
punishment which was proportional to the criminal act.

3
Through CBI, 2014(2) JLJ 136.

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 In Pareena Swarup vs. Union of India,4 the apex Court has determined the
constitutionality of the Adjudicating Authorities and the Appellate Tribunal under the PMLA,
2002. A Public Interest Litigation was filed under Article 32 of the Constitution seeking to
declare various sections of the Act such as Section 6 which deals with adjudicating
authorities, composition, powers etc., Section 25 which deals with the establishment of
Appellate Tribunal, Section 27 which deals with composition etc. of the Appellate Tribunal,
Section 28 which deals with qualifications for appointment of Chairperson and Members of
the Appellate Tribunal, Section 32 which deals with resignation and removal, Section 40
which deals with members etc. as ultra vires considering Articles 14, 19(1)(g), 21, 50, 323B
of the Constitution of India. The Court said that it is important to draw a line which the
executive may not cross in their misguided desire to take over bit by bit and judicial functions
and powers of the State exercised by the duly constituted Courts. It is the duty of the
Government to see that they are not in breach of basic constitutional scheme of separation of
powers and independence of the judicial function, while creating new avenues of judicial
forums. The Court agreed that the provisions of Prevention of the Money Laundering Act are
so provided that there may not be independent judiciary to decide the cases under the Act but
the Members and the Chairperson to be selected by the Selection Committee headed by
Revenue Secretary. Thus, the Court found merit in the arguments of the Petitioner and
ordered to implement amended rules in the Act which can be seen by way of amendment of
2008 in the Act. The Court maintained the basic structure of the Constitution to ensure
separation of powers and independence of judiciary.

4
(2008) 14 SCC 107.

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CONCLUSION
Money laundering is a very serious offence and it should not be taken lightly as any
other normal crime. India has taken extensive measures in order to curb with the issue of
money laundering. It can rightly be said that the manpower has been tripled as there is
Directorate of Enforcement which leads all the money laundering cases and investigations
related to it in the country; there is also Financial Intelligence Unit which tracks down and
analyses the risk of money laundering through the agencies reporting to it and there is time to
time up gradation of the legislative framework through the proposed changes.

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BIBLIOGRAPHY
1. Interpol General Secretariat Assembly in 1995 http://www.interpol.int/Crime-
areas/Financial-crime/Moneylaundering
2. The Prevention of Money Laundering Act, 2002.
3. http://www.legalservicesindia.com/law/article/962/3/Money-Laundering-in-India
4. http://www.mondaq.com/india/x/589978/Money+Laundering/All+You+Need+To+Kn
ow+About+The+Law+Relating+To+MoneyLaundering+In+India
5. http://www.mondaq.com/india/x/634244/Money+Laundering/Is+Offence+Of+Money
+Laundering+Under+The+Prevention+Of+Money+Laundering+Act+2002+PMLA+
A+Continuing+Offence
6. http://www.nja.nic.in/4.1.%20Paper%20Money%20Laundering_1_%20Paridhi%20Sa
xena.pdf

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