“From Black to White: Demystifying the Money Laundering Process

Read Time:10 Minute, 16 Second

By: Saumil Ahuja, 2^nd yearSchool of law, Christ University, Bengaluru

Why is it in news?

The former chief minister of Jharkhand ‘Mr. Hemant Soren has been granted bail by the Hon’ble High Court of Jharkhand in the land scam case. He was accused under Money Laundering Act,2002 and after depositing the two personal bonds of 50,000 each, the special court for PMLA in Ranchi granted him the release order issuing bail. The release order of bail has been granted by the Court of Justice Rongon Mukhopadhyay He was released after the release order was sent to Birsa Munda Central jail where his brothers (Basant Soren and Kumar Saurav) were his bailers. Hemant Soren who is currently serving as President of Jharkhand Mukti Morcha, was arrested by the Enforcement Directorate and it after completing the whole investigation provided a chargesheet against Hemant and 4 other people on 30^th March.

What is Money Laundering?

“Money laundering is the process of hiding the source of money obtained from illegal sources and converting it to a clean source, thereby avoiding prosecution, conviction, and confiscation of the criminal funds”. [1]In simple language, the process of converting the black money into white money is called Money Laundering. It has been a lot in news over the past few decades and is one of the most serious financial crimes. So, in order to curb the practice, a lot of countries have come up with their anti – money laundering measures and laws.

What is the process?

As the money laundering process is very complicated because of the multiple entities can be a part of it so it is very important to point out which stage of the money laundering process is there. Although there is no exhaustive list, the process of money laundering can be divided into 3 stages: placement, layering and integration.

Placement: this is the first stage of money laundering process. in this case the dirty money is put into the financial system. This involves sending the money in bulk to offshore foreign bank accounts. This is one of the most important stages as a lot of money in bulk is transferred by the criminals to these offshore foreign accounts. Examples include: Invoice fraud and Smurfing

Layering: this is the stage where illegal money is hided and the money which is injected into the placement is transferred or divided into various accounts present within and outside the country. It is done where laws in relation to money laundering are not that strict. So, by doing so it becomes very difficult to track the sources from which the money is being laundered. Some of the examples include: taking advantage of the loopholes in the legislation, laundering the money in stock markets and other related institutions and transferring the illegal money in the real state or what we know as shell companies.

Integration: in this stage, the money so laundered into the financial system in layering process can be used as a legal tender by the criminals. The money so collected is used in the legitimate ways like purchasing of luxury goods, assets, real estate, etc. It is incredibly hard to differentiate the illegitimate from legitimate money and the authorities also find it difficult if there is no paperwork or other physical evidence. Some of the examples are: transferring money to buy the fixed assets like real estate or like jewellery and overinflating the prices in invoices.

Methods through which money laundering is done

Although, with emerging crime rate, the number of ways of laundering one is increasing but there are some common ways of doing it:

Smurfing: in this method a bulk of money is divided into small parts and transferring it into multiple bank accounts and thereby making many transactions which eventually makes it hard to detect that origin. This method is also known as restructuring.

Electronic means: criminals also can infuse malware or use means like phishing and hacking to acquire the money. Also, there are stored value cards which can be used to purchase assets by laundering money.

Offshore foreign accounts: the individuals in this method pave there money in the countries with less stringent laws or absolutely no jurisdiction over the money laundering acts. As there is no disclosure policy in those tax haven countries, people generally find it an easy way of avoiding taxes

Online currencies: online currencies such as crypto especially bitcoin have increased the chances of money laundering. Some of the cryptos don’t need KYC norms and hence difficult to detect money laundering. A huge amount of transfer of funds has been there because of it.

Provisions to combat money laundering

Global: Financial Action Task Force has been set up in 1989 by the G7 countries in order combat this menace. The USA passed The Bank Secrecy Act in 1970 so as to combat money laundering. The banks had to report any suspicious transactions which exceeded 10,000$ to the Dept. of treasury. In addition to it ‘US Patriot act’ also had been passed for the same.
Domestic: Prevention of Money Laundering Act, 2002 (PMLA) It is an act which was passed by the parliament in order to combat the practice of money laundering. In case of illegal acts like smuggling, drug trafficking and financing the terrorist activities which the act prevents, the act explicitly provides for confiscation of property. In response to the India’s global commitment which is the Vienna Convention, the PMLA was enacted. India’s commitment include: ‘United Nations Convention Against Illicit Traffic’ in ‘Narcotic Drugs and Psychotropic Substances 1988’, ‘Basle Statement of Principles, 1989’, ‘Forty Recommendations of the Financial Action Task Force on Money Laundering, 1990’, ‘Political Declaration and Global Program of Action adopted by the United Nations General Assembly in 1990’.[2] The act is applicable to include all the persons which means individuals, firms, association, companies, agency which is controlled by this process, etc.

Key features of the Act

The PMLA states what are the money laundering offences and also in furtherance impose strict penalties in the form of rigorous imprisonment or fines.

The act also gives the power to the authorities for confiscation of property in case it has been involved in the money laundering case and there is establishment of adjudicating authority who can oversee and check the proceedings

This act also requires certain entities which may include banks and financial institutions to record and report in case there is any suspicious activities to Financial Intelligence Unit.

There is also the requirement of establishment of specific authorities that can assist or help in investigating the cases related to money laundering. There is also appellate authority to which if persons are not happy with the decision of adjudicating authority, they can file appeal against it.

What are the objectives?

First of there is nothing better than prevention of money laundering acts as there is a famous quote “prevention is better than cure”. It can be done so by having stringent measures and keeping checks on transactions.

Detection is also an important objective as it sometimes as we have seen it becomes difficult to detect the origin. It can be done so by proper enforcement of regulatory mechanisms.

There is also an objective to confiscate the property in case it is found in any of the money laundering acts.

Finally, it also needs to aid the international institutes to facilitate cooperation and which can eventually prevent or combat the money laundering and terror financing acts.

What are the new amendments?

Clarification has been established on the proceeds of crime. Now, the property is not mandatory to be derived from scheduled offence as it includes the property obtained in the criminal activity which is similar to the scheduled offence.

Earlier money laundering was not seen as an independent crime but it was dependent upon other crimes which is known as scheduled offence but after the amendment the money laundering act is considered as stand – alone crime. “Section 3 of the PMLA states that if a person has been involved in the proceeds of the crime: Concealment, possession, Acquisition, Use or projecting as untainted property, Claiming as untainted property.” [3]

The amendment states that if a person is continuing to reap the fruits of his money laundering act, he / she shall be liable for his act till that time. Hence, it will be considered as continuing crime.

Concerns and misuse of the Act

Critiques have stated that the act has been misused more than being used. It has been a tool in the hands of the government to insert political pressure against the person who tries to defy the government. the process of money laundering is itself very difficult and subjected to punishment.

Another misuse of the act is that the accused is himself not aware of the act he has committed for which he has subjected to money laundering case. ECIR is not given to the accused and the information under it is also not told to the accused. ECIR is very similar to FIR.

Under PMLA there is a saying that “the accused is guilty under proven innocent” which is completely contrasting to the General Common Law.

According to Section 63 of the PMLA, there is an offence if the accused does not give any information or gives an inadequate or false information. On the other hand, making the accused forcefully to be a victim against himself is also a crime which constitutes right against self- incrimination.[4]

The most talked about provision, that is lower conviction rate. The enforcement directorate is blamed for this. It can be understood in a way that between 2005 and 2013-14 there was no conviction at all and from 2014-15 to 2021-2022 there was conviction of 23 cases out of 888 as the total number of cases.[5]

Recent judgements rendered by the Supreme Court

In the judgement Ram Kishor Arora v. Union of India,[6] rendered on December 15, 2023, the hon’ble court stated that the accused need not be informed about the grounds at the time of arrest in writing but he must be informed orally and within 24 hours of arrest he must be informed in writing. In addition to it, section 19 states that the accused must be informed about the grounds of arrest as early as possible[7]. But this judgement gives undue leverage to the ED as it is not mandatory to report the circumstances of the case in written. Moreover, the accused must be brought in front of the magistrate within 24 hours of arrest and so the ED will request the remand that it has to complete its investigation. Therefore, it will be contradictory to the provision of 24 hours.
The hon’ble supreme court in the case “Vijay Madanlal Choudhary & Ors. Vs Union of India & Ors[8]”, stated that ECIR cannot be equated with FIR and there is no need to that the ECIR should be supplied to the accused under the provisions of CRPC, 1973.

What is the way forward?

It has been found that the ED has been misusing its power so in order to maintain the checks and balances the officers for investigation under ED and adjudicating authority must work together and consensus should be there between them.

As the conviction rate is very low in this act, there should an operational vigilance and scrutiny conducted that what legislations can actually improve the conviction rate under this act.

Also knowing the ED’s powers derived from constitutional mandate the powers should be welcomed so that the speedy investigations can take place by both ED and the judiciary without any obstructions.

References

[1] The Economic Times, What is ‘Money laundering’, 1^st July, 2024

[2] Drishti IAS, Prevention of Money Laundering Act, 29^th July, 2022

[3] Prevention of Money Laundering Act 2002 § 3, No. 03, Acts of Parliament, 1908 (India).

[4] Prevention of Money Laundering Act 2002 § 63 No. 27, Acts of Parliament, 1908 (India).

[5] Drishti IAS, Prevention of Money Laundering Act, 29^th July, 2022