2ND INTERNAL OF ASSESSMENT OF FINANCE AND SYSTEMIC FRAUD

SYMBIOSIS LAW SCHOOL, PUNE

CARE | COURAGE | COMPETENCE | COLLABORATION

“FINANCIAL AND SYSTEMIC FRAUD”

INTERNAL ASSESSMENT II
TITLE OF ASSIGNMENT-

“CASE COMMENT ON CASE PAREENA SWARUP VS. UNION OF INDIA [(2008) 14 SCC
107] - CHARGES OF MONEY LAUNDERING UNDER THE MONEY LAUNDERING ACT

2002.”

SUBMITTED BY –
NUPUR JHOD
IX SEM, B.A. LL.B. (HONS.)

ROLL NO. 209 | DIVISION C

PRN 15010125209
SYMBIOSIS LAW SCHOOL, PUNE

GUIDED BY –

Prof. Santosh Aghav

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SYMBIOSIS LAW SCHOOL, PUNE

TABLE OF CONTENT

INTRODUCTION …………………………………………………………………………….3
ANALYSIS …………………………………………….……………………………………. 4
A. FACTS OF THE CASE ……….…………………………...……………………..4
B. BACKGROUND OF THE CASE …………… ………………………..…………5
C. CONTENTION FROM THE SIDE OF PETITON .……………………..………5
D. CONTENTION FROM THE SIDE OF RESPONDENT …………………..……6
E. OBSERVATION MADE BY THE COURT ……………………………………..7

CONCLUSION, OBSERVATION AND LOOPHOLE ….……………….………………….8

SUGGESTIONS ………………………………………………………………………………9
REFERENCE ……………………..…………………………………………………………10

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I. INTRODUCTION

In view of an urgent need for the enactment of a comprehensive legislation for preventing money
laundering and connected activities, confiscation of proceeds of crime, setting up of agencies and
mechanisms for coordinating measures for combating money laundering etc., the Prevention of
Money Laundering Bill 1998 was introduced in Parliament on 4th August, 1998. The Bill received
the assent of the President and became Prevention of Money Laundering Act, 2002 on 17th January
2003. 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.1
The impact of money laundering can be summed up into the following points:
 Potential damage to reputation of financial institutions and market
 Weakens the “democratic institutions” of the society
 Destabilises economy of the country causing financial crisis
 Give impetus to criminal activities
 Policy distortion occurs because of measurement error and misallocation of resources
 Discourages foreign investors
 Causes financial crisis
 Encourages tax evasion culture
 Results in exchange and interest rates volatility
 Provides opportunity to criminals to hijack the process of privatisation Contaminates legal
transaction.2
Since money laundering is an international phenomenon, transnational co-operation is of critical
importance in the fight against this menace3. A number of initiatives have been taken to deal with the
problem at the international level. The major international agreements addressing money laundering
include the United Nations Convention against Illicit Trafficking in Drugs 4 and Psychotropic
1
“What influence does money laundering have on economic development?” available at http://www.fatfgafi.
org/pages/faq/moneylaundering/ (accessed on 16th May 2015).
2
Syed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of Money Laundering: An
Application of the Principal-agent Model” The Pakistan Development Review, Vol. 45, No. 4, 22nd Annual General
Meeting and Conference of the Pakistan Society of Development Economists Lahore, December 19-22, 2006, pp. 1117-
1133 available at <http://www.jstor.org/stable/41260672>
3
Michael Levi, Money Laundering and Its Regulation, Annals of the American Academy of Political and Social Science,
Vol. 582, Cross-National Drug Policy (Jul., 2002), pp. 181-194.
4
Chapter-IV Money Laundering in India: An Offshoot of Drug Trafficking available at
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/18155/10/10_chapter4.pdf (accessed on 14th May 2015) Pg.

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Substances, popularly known as the Vienna Convention17 and the Council of Europe Convention on
Laundering, Search, Seizure and Confiscation of the Proceeds of Crime. The role of financial
institutions in preventing and detecting money laundering has also been the subject of
pronouncements by the Basle Committee on Banking Regulation Supervisory Practices, the
European Union and the International Organization of Securities Commissions.

II. ANALYSIS

A. FACTS OF THE CASE

1. Ms. Pareena Swarup, member of the Bar, has filed this writ petition under Article 32 of the
Constitution of India by way of Public Interest Litigation.
2. Seeking to declare various sections of the Prevention of Money Laundering Act, 2002 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 of
Articles 14, 19(1)(g), 21, 50, 323B of the Constitution of India.
3. It is also pleaded that these provisions are in breach of scheme of the Constitutional
provisions and power of judiciary.

B. BACKGROUND OF THE CASE:

 The Prevention of Money Laundering Act, 2002 (hereinafter referred to as "the Act") was
introduced for providing punishment for offence of Money Laundering.
 The object sought to be achieved is by provisional attachment of the proceeds of crime,
which are likely to be concealed, transferred or dealt with in any manner which may result in
frustrating any proceedings relating to confiscation of such proceeds under the Act. The Act
also casts obligations on banking companies, financial institutions and intermediaries to

12-13.

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maintain record of the transactions and to furnish information of such transactions within the
prescribed time.5
 In exercise of powers conferred by Clause (s) of Sub-section (2) of Section 73 read with
Section 30 of the Prevention of Money- Laundering Act, 2002 (15 of 2003), the Central
Government framed rules regulating the appointment and conditions of service of persons
appointed as Chairperson and Members of the Appellate Tribunal.

C. AGRUMENT FROM THE SIDE OF PETITIONER

 It is highlighted that the provisions of the Act are so provided that there may not be
independent judiciary to decide the cases under the Act but the Members and the Chairperson
are to be selected by the Selection Committee headed by the Revenue Secretary.
 It is further pointed out that the Constitutional guarantee of a free and independent judiciary
and the constitutional scheme of separation of powers can be easily and seriously
undermined, if the legislatures were to divest the regular Courts of their jurisdiction in all
matters, entrust the same to the newly created Tribunals.
 According to the petitioner, the statutory provisions of the Act and the Rules, more
particularly, relating to constitution of Adjudicating Authority6 and Appellate Tribunal are
violative of basic constitutional guarantee of free and independent judiciary, therefore,
beyond the legislative competence of the Parliament
 . The freedom from control and potential domination of the executive are necessary pre-
conditions for the independence. With these and various other grounds, the petitioner has
filed this public interest litigation seeking to issue a writ of certiorari for quashing the above
said provisions which are inconsistent with the separation of power and interference with the
judicial functioning of the Tribunal as ultra vires of the Constitution of India.
 The petitioner has highlighted the following defects in the Adjudicating Authority Rules,
2007 and the Appellate Tribunal Rules, 20077:
1. Rule 3(3) of Adjudicating Authority Rules, 2007 does not explicitly specify the qualifications
of member from the field of finance or accountancy.

5
FATF-GAFI, Financial Action Task Force on Money Laundering. “Basic Facts about Money Laundering”, see
<www.oecd.org/fatf>.
6
Section 6 of PMLA,2007.
7
Section 25 of PMLA, 2007.

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2. Rule 4 of Appellate Tribunal Rules, 2007 which provided for Method of Appointment of
Chairperson do not give adequate control to Judiciary.
3. Rule 6(1) of Appellate Tribunal Rules, 2007 which defines the Selection Committee for
recommending appointment of Members of the Tribunal, would undermine the constitutional
scheme of separation of powers between judiciary and executives.
4. Rule 32(2) of PMLA which provides for removal of Chairperson/Members of Tribunal under
PMLA does not provide adequate safety to the tenure of the Chairperson/Members of the
Tribunal.
5. Rule 6(2) of Appellate Tribunal Rules is vague to the extent that it provides for
recommending names after "inviting applications thereof by advertisement or on the
recommendations of the appropriate authorities."
6. Section 28(1) of PMLA, which allows a person who "is qualified to be a judge of the High
Court" to be the Chairperson of the Tribunal, should be either deleted or the Rules may be
amended to provide that the Chief Justice of India shall nominate a person for appointment as
Chairperson of Appellate Tribunal under PMLA "who is or has been a Judge of the Supreme
Court or a High Court" failing which a person who "is qualified to be a judge of the High
Court."
7. The qualifications for Legal Member of the Adjudicating Authority should exclude "those
who are qualified to be a District Judge" and only serving or retired District Judges should be
appointed. The Chairperson of the Adjudicating Authority should be the Legal member.
As regards the above defects in the rules, as observed earlier, on the request of this Court, Mr. K.K.
Venugopal, learned senior counsel, Mr. Gopal Subramaniam, learned ASG as well as Ms. Pareena
Swarup who has filed this PIL suggested certain amendments in the line of the constitutional
provisions as interpreted by this Court in various decisions.

CONTENTION FROM SIDE OF RESPONTENT

 The respondent-Union of India has filed counter affidavit repudiating the claim of the
petitioner. The Department highlighted that the impugned Act has not ousted the jurisdiction
of any courts and sufficient safeguards are provided in the appointment of officers of the
Adjudicating Authorities, Members and Chairperson of the Appellate Tribunal.

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 Also contended that they have carefully verified the provisions of the Act and the Rules,
particularly, relating to constitution and selection of Adjudicating Authorities, Members and
Chairperson of the Appellate Tribunal.
 Considering the stand taken by the petitioner with reference to those provisions, they
requested Mr. K.K. Venugopal, learned senior counsel, to assist the Court. Pursuant to the
suggestion made by the Court, Mr. K.K. Venugopal and Mr. Gopal Subramaniam, learned
Additional Solicitor General, discussed the above issues and by consensus submitted certain
proposals.
OBSERVATION MADE BY THE COURT

The Court said that it is necessary 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. While creating new avenue of judicial forums, 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. 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.8 The Court maintained the basic structure of the Constitution which includes separation of
powers and independence of judiciary and did not allow the Executive to act beyond their powers
curbing the judicial powers.
Ratio Decidendi:
"Constitutional scheme of separation of powers undermined if legislatures divest regular courts of
their jurisdiction and entrust them to newly constructed Tribunals not entitled to similar protection
afforded to regular courts under Constitution."

8
Kumar S. Vijay. (2009) “Controlling Money Laundering in India –Problems and Perspectives” Mumbai, INDIA pg. 11.

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CONCLUSION, OBSERVATION MADE FROM CASE & LOOPHOLE

Money laundering is, thus, a very serious offence and it should not be taken lightly as anyother local
crime. The offence of money laundering is an offence of a grave nature. A person indulged in it
cannot escape from the hands of the law. If such an offence is committed, strict actions will be taken.
Also, the successfully Court maintained the basic structure of the Constitution which includes
separation of powers and independence of judiciary and did not allow the Executive to act beyond
their powers curbing the judicial powers.
India has taken up various Anti-Money Laundering measures to curb with this issue but these
measures somewhere or the other have some loopholes or lacunas and thus is not fulfilling their
complete purpose. Some of such problems are pointed out below:
1. Growth of Technology is very fast and agencies are not competent to match their speed.
2. Lack of awareness about the problem: the issue of money laundering is growing at a very
high pace. Its unawareness among the common public is an impediment for implementation
of proper anti-money laundering measures. The poor and illiterate people, instead of going
through lengthy paper work transactions in Banks, prefer the Hawala system where there are
fewer complexities and formalities, little or no documentation, lower rates and they also
provide security and anonymity. This is mainly because such people don’t know the
seriousness of this crime and are not aware of its harmful after effects.
3. RBI has issued the policy of KYC norms with the objective to prevent banks from being used
by criminals for money laundering or terrorist financing activities. However, it does not cease
or abstain from the problem of Hawala transactions as RBI cannot regulate them. Further,
such norms are only a mockery as the implementing agencies are indifferent to it. Also, the
increasing competition in the market is forcing the Banks to lower their guards and thus
facilitating the money launderers to make illicit use of it in furtherance of their crime.9
4. The offence of money laundering is no more stuck to one area of operation but has expanded
its scope include many different areas of operation. In India, there are separate wings of law
enforcement agencies dealing with money laundering, cyber crimes, terrorist crimes,
economic offences etc. Such agencies lack convergence among themselves. The issue of
money laundering, as we have seen, is a borderless world but these agencies are still stuck
with the laws and procedures of the states.

9
Money laundering: RBI takes note, http://sify.com/finance/fullstory.php?id=13656127.

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Combating the offence of money laundering is a dynamic process since the criminals involved in it
are continuously looking for new ways to do it and achieve their illicit motives. Moreover, since
various countries are entering into multiple agreements and conventions in order to strengthen their
measures to combat money laundering, the money launderers are targeting and exploiting those
jurisdictions which are weak and do not have sufficient laws to deal with such an offence. 10 There is
an urgent need for a definite policy of anti-money laundering. The criminals dealing with these
activities do not have any particular pattern i.e they have distinct patterns of operation.
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. However, there is still a further need to increase the enforcement and take more
strict actions against the persons violating them.11
Also, the financial institutions are required to implement additional levels of control in areas such as
transaction monitoring, annual review, periodic updation of accounts etc. Moreover, cost factor also
plays a very significant role in having an effective anti-money laundering regime as high costs and
low budget may lead to reduced focus and thus higher risks.

SUGGESTIONS

1. It is very evident, that money laundering involves activities that are international in nature and
are also at a greater level, therefore, to make a heavy impact it is necessary that all countries
should enact strict and as far as possible same laws so that the money launderers will have no
place to target in order to launder their proceeds of crime by way of weakness of jurisdiction or
the like.
2. The States have no obligation in deciding which offences should be considered as predicate
offences to money laundering there is no consensus into the international harmonizing efforts for
anti-money laundering. Thus, there is a need to enlist common predicate offences to solve the

10
Prevention of Money-Laundering Act, 2002, Press Information Bureau, Govt. of India  available
at http://pib.nic.in/newsite/erelease.aspx?relid=9941/
11
Overview(Prevention of Money Laundering), Department Of Revenue, Ministry Of Finance available
at http://dor.gov.in/overview_pml/

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problem internationally particularly keeping in mind the trans-national character of the offence of
money laundering.
3. The provision of financial confidentiality in other countries is an issue. The states are unwilling
in compromising with this confidentiality. There is a need to draw a line between such financial
confidentiality rules and these financial institutions becoming money laundering havens.
4. Apart from this, many a people are of the opinion that money laundering seem to be a victimless
crime. They are unaware of the harmful effects of such a crime. So there is a need to educate
such people and create awareness among them and therefore infuse a sense of watchfulness
towards the instances of money laundering.
5. This would also help in better law enforcement as it would be subject to public examination.
6. India has taken extensive measures in order to curb with the issue of money laundering.
However, there is still a further need to increase the enforcement and take more strict actions
against the persons violating them.
7. Also, the financial institutions are required to implement additional levels of control in areas such
as transaction monitoring, annual review, periodic updating of accounts etc. 12
8. Moreover, cost factor also plays a very significant role in having an effective anti-money
laundering regime as high costs and low budget may lead to reduced focus and thus higher risks.
9. Moreover, to have effective anti-money laundering measures there need to be a proper
coordination between the Centre and the State. For that the tussle between the two should be
removed.
10. The laws should not only be the responsibility of the Centre but it should be implemented at the
State level also. The more decentralised the law would be the better reach it will have. Therefore,
to have an effective anti-money laundering regime, one has to think regionally, nationally and
globally.

REFERENCES

BOOKS

1. M C Mehanathan, Law on Prevention of Money Laundering in India, (2017).

2. S K Sarvaria, Commentary on the Prevention of Money Laundering Act, (2017).

12
The Prevention of Money Laundering (Amendment) Bill, 2011, Standing Committee On Finance (2011-2012) (56 th
Report) Ministry of Finance (Department of Revenue) pg. 18.

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3. Dr.Shamsudin,  The Prevention Of Money Laundering Act 2002, (2018).

4. Pontell Henry N./ Gilbert Geis, International Handbook of White Collar and Corporate
Crime, New York/SPRINGER 1Ed (2007).
ARTICLES:

1. Vishal Marria (13 September 2018). "The EU's 5th Anti-Money Laundering Directive: What
Does It Mean?". Forbes. Retrieved 15 January 20.
2. Naheem, Mohammed Ahmad (5 October 2015). "Trade based money laundering: towards a
working definition for the banking sector". Journal of Money Laundering Control. 18 (4): 513–
524. doi:10.1108/JMLC-01-2015-0002. ISSN 1368-5201.
3. Financial Action Task Force. "Global Money Laundering and Terrorist Financing Threat
Assessment" (PDF). Retrieved 3 March 2011.
4. Lawrence M. Salinger, Encyclopedia of white-collar & corporate crime: A – I, Volume 1, page
78, ISBN 0-7619-3004-3, 2005.
5.  "Reserve Bank of India - Notifications". www.rbi.org.in. Retrieved 1 June 2018.
6.  "Transaction Laundering: Growing Fraud Risk for Merchants". ThreatMetrix. 26 April 2018.
Retrieved 8 January 2019.
7.  "History of Anti-Money Laundering Laws | FinCEN.gov". www.fincen.gov. Retrieved 22
February 2018.
8.  "Prevention of Money Laundering Act, 2002" (PDF). Financial Intelligence Unit (FIU-IND),
Ministry of Finance, India. Archived from the original (PDF) on 12 July 2017. Retrieved 10
October 2012.19.

ONLINE DATABASES:

1. Westlaw (www.westlawindia.com)
2. SCC Online (www.scconline.com)
3. Lexis Nexis (www.lexisnexis.com)

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