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Criminology

Socio Economic Offences: Nature and Dimensions Prevention of Money Laundering Act

Role Name Affiliation

Principal Investigator Prof. Bajpai NLU, Delhi

Paper Coordinator Dr. Kavita Singh Associate Professor, West Bengal National University of Juridical Sciences, Kolkata Content Writer/Author Dr. Kavita Singh Associate Professor, West

Bengal National University of Juridical Sciences, Kolkata Content Reviewer Dr. Kumar Askand

Pandey

Associate professor, RMNLU, Lucknow

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DESCRIPTION OF MODULE

Items Description of Module

Subject Name Criminology

Paper Name Socio Economic Offences: Nature and Dimensions Module Name/Title Money Laundering

Module Id

Objectives The objective of this module is:

 To introduce the concept of Money Laundering and its processes.

 To understand in details The Prevention of Money Laundering Act, 2002;

 To explain the position of the statutes and international conventions dealing with socio economic offence of money laundering across the globe and India.

 To understand the role of courts of law in curbing the menace of money laundering and its perspective;

 To elaborate upon the position India is in as per the statute and the practice;

Prerequisites General understanding of nature of socio economic offences, ingredients to commission of socio economic offences, difference of white collar crimes from blue collar crimes and fundamental principles of criminal law; basic knowledge of offences relating to coin and government stamps, relating to documents and to property marks under the Indian Penal Code, 1860.

Module Title: Money Laundering Outline:

 Introduction : Money Laundering, its Impact and processes

 Learning Outcomes

 Money Laundering as offence under the Prevention of Money Laundering Act, 2002

 Difference Between the position on the socio economic offence in India and the global economies

 Recent developments in India- Amendments and Suggestions

 Summary

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1. Introduction

Money Laundering is a socio economic offence or a white collar crime. It cannot be compared or considered as street crimes and has its own nuances. There are no victims but the impact is on the society as a whole or against nations or economies. The rule of law and governance in a particular nation is overhauled by such organised crimes. The scheme is to make profits for the doer and is performed with assistance from group of individuals working for the same objective- siphoning money illegally by hiding the money or the cash. The illegal origin is the major concern than the money involved at times for the government. This money can originate from serious criminal activities like sales of arms, smuggling, and corruption, drug trafficking, tax evasion, insider trading etcetera. Computer related fraud and microfinance dealings are the recently introduced means of procuring money and making profits. The funds are so controlled to avoid the glaring gaze of the regulators or the authorities and then the process of conversion of laundering of the money begins. Money is changed, transactions are made and channelization of funds are so created to dodge the law enforcement authorities and if done successfully it legitimises the money which is used by the doer and the proceeds are invested in the main stream of the economy as legitimately earned money. The use of the proceeds while escaping the enforcement agencies makes crime of such nature attractive.

There has been rising concerns in nations across the globe to create policies and frameworks to control and curb the crime of Money laundering. There are also efforts of resort to means and methods for

Origin or Source of Money

Legally

Records, bills, Accountability

Transparency about the sources of origin of money

Illegally

Criminal Activities : Drugs, Trafficking,

extortion, fake identities

Tax Evasion/

Frauds/

Counterfieting etc

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rigorous implementation of the law and prevalence of deterrence to indulging in activities of conversion.

Money Laundering or conversion of money is not limited to the conversion of black money to white money. The cash involved is in huge quantum and if done successfully, the owner of the money has full control over the money and its proceeds despite the absence of necessary proof of the source of generation of the amount. Though the money is obtained by illegal or illegitimate means after the conversion, it is circulated in the white market in a legitimate way, increasing the purchasing power of the criminals or persons who have initially created the corpus through illegitimate means.

As a socio economic offence, money laundering has been the concern of India since it ventured into the process of globalisation and opened itself to newer avenues. Money Laundering is crime wherein money is converted illegally and the means of procuring the currency is not legitimate. In India, money laundering is a process well known to criminals and those in “power or position” to siphon money earned by illegal acts. It involves huge amount of money procured by illegal activities like drug trafficking, terrorist activity or crimes severely affecting the society. Money Laundering affects the economy of the nation as well as the political steadiness1.

1 According to Interpol General Secretariat Assembly in 1995, 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.

Money Laundering as a socio economic offence is a menace across the globe. It is the conversion of illegally owned money through processes into legitimate money- also popularly known a “black money” into “white money”. The developed nations have been dealing with the crime through conventions and legislations- penalising the crime. The preamble of the Indian Legislation on prevention of the crime of money laundering also mentions about the Political Declaration and Global Programme of Action as adopted by the General Assembly of the United Nations and the Political Declaration in the year 1998 that called upon the member states to adopt money laundering legislation and programme. Prevention of Money Laundering Act, 2002 was the legislation to implement the resolution and declaration of the United Nations.

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Impact of Money Laundering:

Money Laundering substantially affects the economy and its development. The integrity of the financial markets of the nation is undermined and the criminal activities of laundering leads to loss of revenue, economic distortion and instability in the market, loss of control of the government on the economic policy, fall in the price of the assets of the nation, misallocation of resources, unemployment and increased criminality.2 Money Laundering also has other social and economic effects. Socially, it transfers the power of purchase and market dominance in the hands of the people who wrongly amass wealth against the right people and the criminals flourish with equitable damage to the financial institutions. The Banks are at an increased risk of business with the volatile exchange rates and unanticipated transfer of funds which gives the other financial institutions the competitive advantage. The Banks have to deal with the risks while they create new businesses and ensure compliance of the legislations and the rules of the country.

In developing countries, the norm is that strict rules do not apply and majority of the population is subject to the social evil of poverty. The government is endowed with an enhanced burden to ensure productivity in real sector despite the odds and diversion of the resources due to the money laundering activities. The economic growth slows down as the money laundering criminals create fake companies and float them in the economy creating a mirage. These fake companies are used to carry on business- a pretext under which the criminal activities continued with income generated from illegal activities projected as income of these companies creating a difference between the projected income and actual income of the economy. This imbalance leads to manipulations in the expenditure plans of the government and increases the risk of the investors and the development of the nation proportionately. For instance, tax evasion is also a socio economic offence which affects the potential development schemes of the government. Money Laundering facilitates the concentration of capital resources from domestic savings from overseas and acts as an impetus on the investment prospects of the government and the financial institutions3.

2 The money launderers reinvest the proceeds of the crime or the profits to finance other criminal activities or acts of social and financial derogation for the country.

3 The sustainability and development of the financial institutions are primarily affected by money laundering in two ways- the fraudulent activities of the employees of the institutions surfaces raising concerns of the investors and the removes the less equipped competition with dominance of certain institutions with rise in the money laundering acts and secondly the risk of the financial institutions; the risk of the depositors and investors from fraud and corruption- affects the economic development through real sectors and diverts resources to less productive activities.

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IMPACT OF MONEY LAUNDERING

Money Laundering cripples the economic development and the growth of the nation;

Integrity of the Financial Institutions is affected and raises concerns in the minds of the consumers and the investors;

In a developing nation, the menace aggravates as majority of the population is under poverty and the depravity caused by the offence creates an imbalance by diverting resources and

It leads to

 loss of revenue,

 economic distortion and instability in the market,

 loss of control of the government on the economic policy,

 fall in the price of the assets of the nation,

 misallocation of resources,

 unemployment and

 increased criminality.

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2. Learning Outcomes

After completion of this module, reader will be able to:

Understand the processes of Money Laundering

Understand the Prevention of Money Laundering Act, 2002

Analyse the work done by India in prevention of the crime as compared to the developed nations.

Critically appreciate the role of courts of law in

implementing the law and establishing the

provisions of the Act.

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3. Money Laundering as offence under the Prevention of Money Laundering Act, 2002

As per Section 3 of the Act (Chapter II- Offence of Money laundering) 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.

3.1 Statutory Framework4

The Prevention of Money Laundering Act, 2002 has ten chapters with 75 sections.

Prevention of Money Laundering Act, 2002 1. Chapter I Preliminary (Section 1& 2)

2. Chapter II Offence of Money Laundering (Section 3& 4)

3. Chapter III Attachment, Adjudication and Confiscation (Section 5, 6, 7, 8, 9, 10 & 11))

4. Chapter IV Obligations of Banking Companies, Financial Institutions and Intermediaries (Section 12, 13, 14 & 15)

5. Chapter V Summons, Searches and Seizures, Etc (Section 16, 17, 18, 19, 20, 21, 22, 23 & 24) 6. Chapter VI Appellate Tribunal (Section 25-42)

7. Chapter VII Special Courts (Section 43- 47) 8. Chapter VIII Authorities (Section 48- 54)

9. Chapter IX Reciprocal Arrangement For Assistance in Certain matters and Procedure For Attachment and Confiscation of Property (Section 55- 61)

10. Chapter X Miscellaneous (Section 62- 75) Schedule

3.2 DEVELOPMENT OF THE STATUTE:

India as a developing and mushrooming nation understood the need of enacting special legislation to curb the activities of conversion and laundering of money which was adversely affecting the economy as a

4 The Prevention of Money Laundering Act, 2002 available at http://finmin.nic.in/law/moneylaunderingact.pdf last accessed on 16.08.2016.

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 Official not below the rank of Deputy Director can order attachment of proceeds of Crime for a period of 180 days;

 Magistrate has to be informed;

 Report has to be sent to the Adjudicating Authority;

 Procedure of Adjudication Laid Down in Section 8 of the Act;

 After the official forwards the report to the Adjudication Authority, this Authority should send a show cause notice to concerned person(s) within 30 days.

 After considering the response and all related information, the Authority can give finality to the order of attachment and make a confiscation order, which will thereafter be confirmed or rejected by the Special Court.

whole and jeopardising the rate of growth and development. The Money Laundering Bill 1998 was introduced in the Parliament in the year 1998. It was referred to the Standing committee of finance, which submitted its report in the year 1999. The recommendations were accepted and inserted in the bill and subsequently The Prevention of Money Laundering Bill was presented in the Lok Sabha in October 1999.It became the Prevention of Money Laundering Act, 2002 and came in force from the year 2005.

The Act was amended in the year 2009 and 2012.

3.3. SALIENT FEATURES OF THE ACT:

Some of the salient features of the legislation are as follows:

a. Attachment of Property: As per this act, attachment means prohibition of transfer, conversion, disposition or movement of property by an expressly issued order from the concerned and relevant authorities specified by the statute (Chapter III of the Act Section 5- 11);

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b. Proceeds from the crime: This is inclusive of property derived or obtained, either directly or indirectly by a person from an activity generally criminal in nature in relation to a scheduled offence;

c. Intermediary: The agents or mediators who felicitate the process for instance share brokers, traders, sub brokers etcetera play a major role in enabling the conversion of the money. The reporting entity is required to keep a record of all material information relating to money laundering and forward the same to the Director. Such information should be preserved for 5 years. Functioning of the reporting entity is supervised by the Director who is empowered to impose penalty, order audit of accounts and/or issue warning in any instance of violation of obligations. Central Government upon consultation with the Reserve Bank of India is authorised to specify rules to manage information of the reporting entity. ( Chapter IV of the Act- Obligations of Banking Companies, Financial Institutions and Intermediaries- Section 12- 15) d. Investigation: The Statute provides for investigation in the proceeds by the director or by an

authority to determine whether the process of money laundering has actually been converted to gather evidence as socio economic offences are difficult to be proved and the fixation of the onus of committing the crime is an uphill task;

e. Act of Money Laundering: The legislation specifies as to how whosoever directly or indirectly attempts to involve or indulge in the activity of conversion or provide assistance of any manner in connection with the crime or the proceeds of the crime by concealing, procuring or acquiring property or claiming any part of it is also held responsible and accountable;

f. Punishment: The Act lays down the punishment for the crime to be a term of imprisonment not less than three years which can be extended to seven years and fine or both (Chapter X- Section 62- 69);

g. Summons, Searches and Seizures: As per the Act, the power of conducting survey, seizure and scrutiny of records kept at any place is conferred upon the adjudicating authorities. The authority can direct any official under its authority to conduct the same and collect relevant information, place identification marks and send a report of the same to the authorities for appropriate actions.

Search of a person has to be specifically ordered by the Central Government. But the authority cannot in any situation detain the person for more than 24 hours, ensure presence of two witnesses and prepare a list of items seized which would be signed by the witnesses and be forwarded to the adjudicating authority. Property confiscated or frozen, under the Act, can be retained for 180 days

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and it can only be extended by the Adjudicating authority beyond the period upon satisfaction of merits of the case and facts. The Court or Adjudicating authority can also direct for release of the property at any point of time. There shall be a presumption of ownership of property and records recovered from the person’s possession. Burden of proof is on the accused to prove not guilty as per the provisions of this act. Offences under the act are cognizable and non- bailable (Chapter V- Section 16-24).

h. Authority to adjudicate: Central Government can appoint by gazette notification one or more person not below the rank of Joint Secretary to the Government of India as adjudicating Authority to exercise the jurisdiction, power and authority to prevent commission of the offence and recognise the offenders for the courts of law to decide the offence. These authorities are empowered to enter on sufficient and reasonable believe of commission of an offence as per the act within the limits of area assigned to them and the powers delegated upon him. The power extends to examination of accounts, inspection of books and the authorities can also order production of specific books or relevant records. Any book or record, if considered relevant for production in a proceeding, can be legitimately seized by the authorities. Adjudicating authority has the autonomy to decide the process of regulation.

Director/Additional

Director/Joint Director Assistant Director

Deputy Director

Other Class of Officers as appointed for the purposes of this act Authorities as

per the Act

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i. Administrator: The Property laundered is taken care of i.e. managed after confiscation by an administrator who acts in accordance with the instructions of the Central Government;

j. Appellate Tribunal: Appeals from an order of the Adjudicating authority lies with the Appellate Tribunal as constituted by the Central Government under Chapter VI (Section 25- 42) of the Act.

The tribunal consists of 2 members and is headed by a Chairman. Appointment and termination of the members lies with the Central Government.

k. Special Courts: Central Government is empowered to, upon consultation with the High Court of the particular state, to designate the Court of Sessions as Special courts. These Special Courts can try all scheduled offence and offences under Section 3 and 4 can also be tried only after the authority requests for the same (Chapter VII Section 43- 47).

4. PROCESSES OF MONEY LAUNDERING5:

There are three processes involved in the offence of Money Laundering. Depending on their stage of committal these processes can be classified into:

1. Placement;

2. Layering ; and 3. Integration.

5 Paridhi Saxena, Money Laundering in India, available at http://www.nja.nic.in/4.1.%20Paper-

%20Money%20Laundering_1_%20Paridhi%20Saxena.pdf last accessed on 20.08.2016

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4.1. Placement:

This is the first step in the cycle. Currencies gained through illegal activities or unaccountable means are disposed of by the doer as immediately as possible. Such disposal is by deposition in the financial institutions, changing of the notes with currency of lower denomination, spending in retail economy or acquisition of property or immovable assets. The intention in this stage is to hide or stash away the currency without being detected by the concerned authorities and easy and quick transformation in a more acceptable means such as – gold, traveller’s cheque or real estate. Otherwise the money is deposited in multiple accounts and though numerous transactions also termed as “smurfing”. High value transactions would raise concerns and brows so the means are kept to the conspicuous lows and money is distributed without being prima facie susceptible.

4.2. Layering:

This is the secondary process where the doers of the offence or his associates seek recourse to processes of creating complicated details of origin of the funds. The layering is to design frivolous and eliminate the existing trail of origin of the money and technically conceal it with documentation and declaration of the ownership of the funds by the owner. Offset accounts, manipulation of the books, transactions of gold, over invoicing or under invoicing of the exports and imports, electronic transfers from different tax havens, bank to bank transactions, purchase of precious stones and metals are some of the commonly

PROCESS OF MONEY LAUNDERING

PLACEMENT

LAYERING INTEGRATION

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resorted to means. The transfers are disguised as payment of goods or services and given a legitimate appearance. The agenda is to dilute the origin of the money and then sieve through the illegal duties on the same money to transform its colour to “white” ultimately making the origin undetectable. It’s more of a process to channelize the funds systematically – it changes so many hands or accounts that the count of its origin is bleak and unfathomable task with the camouflage of the series of movements.

4.3. Integration:

This is the final and last stage of the process leading to the offence of money laundering. Illegal funds are induced in the market through placement and layering making it appear to be legitimately owned and in the economy as genuine income. Integration is more properly done once the illegitimate earned money in the legitimate businesses and practices. This is a process to re introduce the funds and an investment into a more prominently visible transaction is made such as luxury assets, real estate without being caught or recognised as an offender. If trapped at this stage, the doer easily escapes the onus if the authorities fail to prove beyond reasonable doubt the existence of documentation of being involved. This is the execution stage of the work involved in the previous stages.

5. International Conventions on Money Laundering:

Money Laundering is a menace being globally addressed by the developed as well developing countries.

Some developed countries have taken strong initiatives to curb and prevent the prevalence of phenomenon. Transnational cooperation and interplay of the regulatory authorities is one of the requirements for the proper implementation and realisation of the initiatives.

Illustration: Mr. X, an Indian citizen, intends to convert an amount of 1 million Indian rupees (illegally earned money). This is money laundering and is committed in three processes:

First Stage: Placement- Spends in Retail; invests in retail economy; converts the currency in smaller denominations; traveller’s cheque; smurf- small transactions from numerous banks into different accounts;

Second Stage: Layering- design frivolous and eliminate the existing trail of origin of the money;

Offset accounts, manipulation of the books, transactions of gold, over invoicing or under invoicing of the exports and imports, electronic transfers from different tax havens, bank to bank transactions, purchase of precious stones and metals; transfers are disguised as payment of goods or services;

Third Stage: Integration- the money is reintroduced in legitimate transactions; the transactions are prominently visible- luxury assets, real estate; layering makes the owner legitimately capable of spending the money;

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The United Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances also known as Vienna Convention was a pioneering initiative in the subject. This convention was held in year 1988.It laid down the ground work for the schematic efforts which each member country was expected to adhere to deal with the offence of money laundering by criminalising the offence of laundering money from drug trafficking and also emphasised as to how the domestic bank secrecy provisions of a particular member nation should not hinder the international criminal investigations of the crime of money laundering. It promoted international cooperation in investigations and made extradition between member states applicable to the offence.

In 1990, Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime took place. This convention established the common policy on money laundering and set out the common measures and common definition of money to uniformly deal with the offence of money laundering. Member States were expected to cooperate and facilitate investigative assistance, search and seizure of proceeds of all types of criminal activities more particularly of serious crimes- drug offences, arms dealing, terrorist offences and other offences generating large profits.

The Basle Committee on Banking Regulation Supervisory Practices was also established in the year 1988 and it issued a statement of principles. These principles aimed at encouraging banking sector institutions to adopt common position without being hideous of the deposits of funds or assist in any manner to the exercise of laundering of funds creating financial havens. It was not restricted to any particular kind of criminal activity and any deposit, transfer or concealment of the means or origin of money was to be scrutinised. The four principles to be applied by the banking institutions were identifying the customer, compliance of the laws, cooperation with the enforcement agencies and adherence to the statement.

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6. Position in India:

India, as a developing nation exposed to the needs and requirements of liberalisation, privatisation and globalisation, has included in various legislations the provisions to curb or eliminate scope of money laundering and entrusted specific institutionalised agencies to deal with the socio economic offence. This section deals with enumeration of legislations other than Prevention of Money Laundering Act, 2002 and the regulators or enforcement agencies.

6.1. Legislations:

Major statutes before the enactment of the Prevention of Money Laundering Act, 2002, to curb and prevent the crime of money laundering and related activities were:

 The Income Tax Act, 1961

 The Conversion of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

 The Smugglers and Foreign Exchange Manipulators Act, 1976

 The Narcotic Drugs and Psychotropic Substances Act, 1985

 The Benami Transactions (Prohibition) Act, 1988 United Nations Convention against Illicit Trafficking in Drugs

and Psychotropic Substances 1988

Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime

1990

Basle Committee on Banking Regulation Supervisory Practices

1988

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 The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

 The Foreign Exchange Management Act, 2000

6.2. Regulators or Enforcement Agencies:

Financial Intelligence Unit: Financial Intelligence Unit is the nodal agency for managing the anti money laundering system in India and helps in coordination and strengthening of efforts of national and international intelligence, investigation and enforcement agencies against money laundering and related crimes. The agency acts as an interface in between the financial sector and the law enforcement agencies As per the rules of the Prevention of Money laundering Act, banks are to report of suspicious transactions and all transactions involving receipts by the non-profit organizations of value more than ten lakh rupess or its equivalent in foreign currency. Appropriate information is disseminated to the relevant intelligence/law enforcement agencies- Central Board of Direct Taxes, Central Board of Excise & Customs Enforcement Directorate, Narcotics Control Bureau, Central Bureau of Investigation, Intelligence agencies and regulators of financial sector6.

Role of Reserve Bank of India in Prevention of Money Laundering: As the lender of last resort and the banker’s of bank, the offence of conversion of money in the developing nation was causing steady depletion of resources. The Reserve Bank of India introduced and laid down standards and procedures to increase transparency and decrease the conversion on sly. Master circulars were issued introducing the Know Your Customer (KYC), Anti Money Laundering (AML) and Combating of Financing of Terrorism (CFT) as obligatory and mandatory provisions in compliance to the provisions of the Prevention of Money Laundering Act, 2002. The Banks are advised to follow a procedure to identify their customers and obtain legitimate proof of their identity which would assess their creditability and also monitor transactions from particular accounts and the nature of the dealings. This will also ease the responsibility of the authorities who can by monitoring accounts and transactions deal with the offence or ascertain the persons involved.

7. Remarkable Judgments of Courts of Law in India:

In B. Rama Raju, s/o B. Ramalinga Raju versus Union of India7 a writ petition was filed challenging provisions of the Prevention of Money Laundering Act, 2002 and its amendments. The provision under

6 For details please see The Prevention of Money Laundering ( Amendment) Bill, 2011, Standing Committee on Finance (2011-2012); 56th Report of the Ministry of Finance.

7 [2011] 108 SCL 491 (AP); Centre for Public Interest Litigation versus Union of India (2011) 1 SCC 560.

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Section 2(1)8 was challenged. The issue in the case was whether property owned by or in possession of a person, other than the person charged of having committed a scheduled offence under the act was liable to be confiscated or attached in proceedings and in this context the validity of Section 2(1) was challenged. The Court held that the object of the statute was to prevent money laundering and connected activities and confiscation of the “proceeds of the crime” and prevention of legitimization of the money earned through illegal or unaccountable means through scrupulous investments to acquire moveable or immoveable properties or by the process of layering. “Proceeds of Crime” is an expandable term as per the act and thus would cover the property owned by the person, other than the person charged with scheduled offence and was equally liable to attachment or confiscation as per Chapter III of the Act.

In this particular case, retrospective operation of Section 5 of PMLA 2002 was also challenged as to whether the provisions of the second proviso of Section 5 was applicable to the property acquired prior to the enforcement of the provisions and is so, whether provision is invalid for retrospective penalization.

The court held that huge quantum of illegally acquired property vitiates the rule of law and unravels the fragile integrity of the public officials and State actors threatening the sovereignty of the nation.

Parliament is the authority to legislate statutes and the legislation provided for forfeiture of proceeds of crime as produce of specified criminality and thus the provisions of the second proviso of section 5 were applicable to the property acquired even prior to coming in force of the particular provision and even so were not invalid for retrospective penalization.

Furthermore, the procedure of acquisition of the property under Section 8 of the PMLA 2002 was also challenged as to whether the provisions of Section 8 were invalid for procedural vagueness and for exclusion of mens rea in acquisition of the property and for enjoining deprivation of possession of immovable property even before the guilt was concluded or the conviction in prosecution for an offence as per the Act. The court held that the object and scheme of the Act has to be cumulatively considered and Section 8 cannot be held invalid for vagueness or incoherence as to onus and standard of proof.

Section 8(4) of the Act enjoins deprivation of possession of immoveable property before any conviction as valid.

Section 23 of the Act provides for Presumption in respect of inter connected transactions was and was also challenged as to whether such presumption was unreasonable, excessive or disproportionate.

The court held that Section 23 enjoins the rule of evidence and rebuttable presumption which are considered essential and necessary for the utmost realisation purposes of the Act and therefore the validity of the provision was upheld.

8 Section 2(1) under Chapter III of the Prevention of Money Laundering Act, 2002 deals with the attachment and confiscation of property.

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Shift of the burden of proof under Section 3 and 24 of the PML Act 2002 was also challenged.

The issue for consideration was whether shift/imposition of the burden of proof under Section 24 was arbitrary and invalid and was applicable to only offences in trial under section 3 of the Act. The Court held that where the property is in ownership, control or possession of person not accused of having committed the an offence under Section 3 and the property is part of a series of transactions inter connected a part of the crime of money laundering , then the presumption under Section 23 comes into operation and not the inherence of the burden of proof under Section 24 Therefore any person other than the accused of having committed a scheduled offence under Section 3 of the Act cannot be imposed with the burden as per Section 24 of the Act. But if the person is accused under Section 3, the burden lies and cannot be avoided.

In Abdul Karim Telgi ( most commonly known as the The Fake Stamp Paper or Telgi Scam)9 the court did not in verbatim apply to the case language or provisions of the statute i.e. the Prevention of Money Laundering Act, 2002 but examined the activities of the accused in details along with the loss and damages caused to the government. It then observed that the punishment for such crime should be in proportion to the criminal act. Thus the doctrine of proportionality was discussed and elaborated upon.

Abdul Karim Telgi used chemically washed stamps and introduced them as stamp papers by washing away the original contents by the use of chemicals. The syndicate very well manipulated the absence of branding of new stamps and circulated the old stamps mocking the gap in the system as the used stamps were not cancelled or marked. The receipt of the Central Stamp Office does not have any security features which eased duplication of the stamps and the genuine copy of the stamps was shown to the customers to convince them of its originality. The officials of the security Press, Nashik were also tutored so as to make them participate in the process. In this manner the government machinery was used to initially print the stamp papers and subsequently similar machine was procured to counterfeit the stamps.

It was held by the trial court that there were evidences to prove that Abdul Karim Telgi was through a hired office in Indore and an apartment on rent was carrying on with the business of sale of fake government revenue papers. Such sale caused loss to the government and gain to the accused. The accused was found guilty of offences under the Indian Penal Code and sentenced to various terms of imprisonment. An appeal to the High Court against the order of the trial court was filed. The High Court dismissed the appeal and held that considering the making out of a consummate crime and the resultant loss caused to the public revenue by the sale of fake and counterfeited revenue stamps and papers. The substantial loss to the government was gain to the accused. But the court expressed how in these circumstances, it cannot be termed to be a crime but very well falls within the category of “white collar

9 Abdul Karim Telgi and Sohail Khan versus Union of India, through CBI, 2014 (2) JLJ 136

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crime”, an economic offence with cascading effect. And as an exceptional case, law should come down with heavy hands to deal with the persons as well create a deterrent effect on the society at large against such crimes.

The Supreme Court determined the constitutionality of the adjudicating authorities and the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 in Pareena Swaroop versus Union of India10. A social action litigation or PIL as generally used, under Article 32 of the Constitution was filed seeking to declare various sections of the Act- Section 6 (deals with Adjudicating authorities composition, power etc.), Section 25 (establishment of Appellate Tribunal), Section 27 ( Composition of Appellate Tribunal), Section 28 (qualifications for appointment of Chairperson and Members of Appellate Tribunal), Section 32 ( Resignation and removal) and Section 40 ( Members etc.) as ultra vires of Article 14, 19(1)(g), 21, 50 and 323B of the Constitution of India. The contentions before the court were that the provisions of the act were in breach of the scheme of the constitutional provisions and curbed the powers of the judiciary. The separation of power of the judiciary and the executive was the concern. The Court observed that there is a need to draw a line which neither the executive nor the judiciary shall cross for misguided desires nor to take over and perform judicial functions and powers of the State as exercised by the Courts.

Creation of new avenues of judicial reforms is welcome but a duty is on the government to not breach the constitutional scheme of separation of power and independence of the judicial function. It was agreed that the provisions of the PML Act are so provided wherein the independence of the judiciary will be compromised as the cases under the Act are to be decided by the Members and the Chairperson who are selected by the Selection Committee headed by the Revenue Secretary. Thus considering the merits of the case and arguments, the court ordered implementation of amended rules in the Act which were incorporated by the amendment in the Act of 2008. The Apex Court held that the basic structure of the Constitution includes separation of powers and independence of judiciary. However, it in a way encourages the executive or empowers it to act beyond their powers curbing the judicial powers.

In the case of Iqbal Mirchi11, full blown investigation was conducted for the suspected funds being catered to the terror groups and hawala operations of the company were a veil to fictitious transactions in question. The Enforcement Directorate was looking for the scam of Rs. 3 crore. This money was suspected to be laundered by the family members and associates of Late Iqbal Mirchi ( 2013).

Late Iqbal Mirchi was suspected to have used the hawala route to launder and move funds to purchase

10 (2008) 14 SCC 107

11 Iqbal Mohammed Memon versus State of Maharashtra (1996) CriLJ 2418; Hajra Iqbal Memon versus Union of India (AIR 1999 Delhi 271)

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properties in at least 10 countries and aid his associates. The law enforcement agency registered a case under the Foreign Exchange Management Act (FEMA) to probe the series of real estate transactions and revealed that four buildings in Mumbai were sold off by the family members of Iqbal Mirchi through fake identities and flouted the regulations of the Reserve Bank of India and the FEMA rules. Notice was issued by the agencies to the family members. Banking operations and records were inspected. The investigation was handed over by the Court to the special team of investigation when numerous assets and transnational dealings were discovered.

Offences committed under Section 3 and 4 of the Prevention of Money Laundering Act, 2002 are punishable. The offence under the Act continues till the

accused continues to launder or convert the money and deal with the proceeds of the crime and is involved in any activity connected with the crime – as the accused in the present case attempted to convert and project the proceeds of crime in aforesaid manner. In this case, sufficient material was collected during the investigation and proved the guilt of the accused. Section 45 of the Act provides that bail should only be granted when the Appellate authority is convinced that the accused is not likely to commit the alleged offence. But since the allegations in the present case are

very serious and sufficient material is available, bail petition was rejected.

In Shiv Kant Tripathi versus State of Uttar Pradesh12, the petitioner lodged FIR alleging commission of offences as per the Schedule of the Prevention of Money laundering Act by an official abusing his office for profit and indulging in money laundering through web of shell companies. Despite investigation, no report was submitted by the Enforcement Directorate under the legislation. The Court observed that in such an instance wherein the Enforcement Directorate failed to file a report as the ingredient to constitute an offence under Section 3 and 4 of the PML Act, was missing despite there being evidences otherwise to prove the laundering of money, raises a responsibility on the Court to keep a strict check and control over the actions of the authorities under the Prevention of Money Laundering Act and direct them to do the acts as per the Act and in a duty bound manner.

12 2013 (6) ADJ 672

Section 45 of the Act gives the provision of bail and the court has to be satisfied that the accused is not likely to commit any act in furtherance of the offence and consider the seriousness of the offence depending on the material collected during investigation for bail. In case the Court is not satisfied with the nothing like of the accused to commit the crime, bail can be rejected.

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9. Summary

Money Laundering is the process of transforming through series of stages the proceeds of illegal or criminal activity into legitimate money. Technological modernisation and development of the economy provides for healthy grounds to flourish for such criminals. Experts and financial institutions play a major role in the processes. Socio economic offences are usually transnational therefore the issue is complicated and the difficulties manifold. Penal ways and effective enforcement paraphernalia will ensure that the provisions of the legislation are implemented effectively. Judicial authorities also play a crucial role and define the roles and extent of influence of authorities in white collar crimes which needs a level of precision and clarity to be dealt with due to the changing dynamics and more so in a developing nation like India wherein the introduction of foreign investment and commercialisation has increased in manifolds.

LIST OF RELEVANT CASES AND CITATIONS ON

PREVENTION OF MONEY LAUNDERING AND SOCIO ECONOMIC OFFENCES:

1. Pareena Swaroop versus Union of India (2008) 14 SCC 107

2. B. Rama Raju, s/o B. Ramalinga Raju versus Union of India [2011] 108 SCL 491 (AP);

3. Centre for Public Interest Litigation versus Union of India (2011) 1 SCC 560.

4. Abdul Karim Telgi and Sohail Khan versus Union of India, through CBI, 2014 (2) JLJ 136

5. Iqbal Mohammed Memon versus State of Maharashtra (1996) CriLJ 2418;

6. Hajra Iqbal Memon versus Union of India (AIR 1999 Delhi 271)

7. Shiv Kant Tripathi versus State of Uttar Pradesh 2013 (6) ADJ 672

8. Union of India versus Hassan Ali Khan & Anr [ 2011] 11 SCR 778

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Prevention of Money Laundering Act, 2002 is the specific legislation in India to combat money laundering and prevent the crime of money laundering and any related issues such as confiscation and seizure of property etcetera. It outlines the definition of the crime, the adjudicating authorities, the punishment and the duties of the financial institutions and the enforcement agencies. The Act identifies certain offences under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Arms Act, the Wildlife (Protection) Act, the Immoral Traffic (Prevention) Act and the Prevention of Corruption Act. Enforcement agencies, judicial authorities and the financial institutions play a major role in limiting the scope of commission of crime while a developing nature with increased influx of foreign investment and number of shell companies and non profit organisations provide the perfect leeway.

Regulation has to be systematic and in accordance with the nature of crime- socio economic, without victims and expertise involved. Some of the effective means of combating the crime of money laundering are – introduction of plastic money, intellectual banking, anti money laundering programmes and sensitization of the masses about the nuances of the crime so as to detection of the crime in early stages without much harm or loss to the society and adverse effect on the economic growth of the country.

References

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