- Prelims: PMLA, Enforcement directorate, Virtual Asset Service Providers (VASPs), FATF etc
- Mains GS Paper II and III: Executive and Judiciary, Money laundering related issues.
ARTICLE HIGHLIGHTS
- The enforcement of the Prevention of Money Laundering Act, 2002 has caused much consternation especially after its unusual interpretation by the Supreme Court in Vijay Madanlal Choudhary and Ors vs Union of India and Ors.(2022).
INSIGHTS ON THE ISSUE
Context
Money laundering:
- Money Laundering refers to converting illegal earned money into legitimate money.
- The government does not get any tax on the money because there is no accounting of the black money. So Money Laundering is a way to hide the illegally acquired money.
- The term “money laundering” originated from the Mafia group in the United States of America.
- Mafia groups have made huge amounts of extortion, gambling, etc. and this money is shown as legal money.
- In India, “money laundering” is popularly known as Hawala transactions.
Working of Money laundering:
- A case of Money laundering ostensibly appears to be an above-board financial transaction, however, the criminality underneath is hidden by a three stage process:
- The first stage: when the crime money is injected into the formal financial System. This is called ‘placement’;
- The second stage: Money injected into the system is layered and spread over various transactions with a view obfuscating the tainted origin of the money. This process is called ‘layering’;
- Third and the final stage: Money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving it as clean money. This is called ‘Integration’.
PMLA Act:
- The PMLA was introduced in 2002, ostensibly to tackle the problem of money laundering.
- It has been subject to several amendments including 2005, 2009, 2012.
- There are mainly 3 objectives of PMLA:
- To prevent and control money laundering.
- To confiscate and seize the property obtained from the laundered money.
- To deal with any other issue connected with money laundering in India.
- It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
- Money laundering has become a matter of international concern and India has undertaken several international commitments in this regard.
Vijay Madanlal Choudhary and Ors vs Union of India and Ors.(2022):
- The Supreme Court limited its application to “on the wrongful and illegal gain of property as a result of criminal activity relating to a scheduled offense”.
- It held that “the property must qualify the definition of “proceeds of crime” under Section 2(1)(u) of the 2002 Act”.
- The authority of the Authorized Officer to prosecute any person for the offense of money-laundering gets triggered only if there exists proceeds of crime within the meaning of Section 2(1)(u) of the 2002 Act and further it is involved in any process or activity”.
- The Court held that “Not even in a case of existence of undisclosed income and irrespective of its volume
- The definition of ‘proceeds of crime’ under Section 2(1)(u) will get attracted
- unless the property has been derived or obtained as a result of criminal activity relating to a scheduled offense.
- The law thus declared by the Court, binds on all under Article 141:“If the offense so reported is a scheduled offense.
- The property recovered by the Authorized Officer would partake the color of proceeds of crime under Section 2(1)(u) of the 2002 Act
- The Court declared: “Absent existence of proceeds of crime, as aforesaid, the authorities under the 2002 Act cannot step in or initiate any prosecution”.
Court’s stand on ED:
- The chronology of events reflects rather poorly, if not negatively, on the ED’s style of functioning.
- The ED, mantled with far-reaching powers under the stringent Act of 2002, must be seen to be acting with utmost probity, dispassion and fairness.
- The ED failed to exercise its powers. The Court added,
- No consistent and uniform practice seems to be followed
Pavana Dibbur vs The Directorate of Enforcement, 2023:
- It addressed key aspects of the PMLA:
- Section 3: unless proceeds of crime exist, there cannot be any money laundering offense
- To constitute any property as proceeds of crime, it must be derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offense
- Because, the existence of “proceeds of crime” is “sine qua non” for the offense under Section 3 of the PMLA.
Issues with role of ED:
- The Mines and Minerals (Development and Regulation) Act, 1957 is not covered by the Schedule of the PMLA Act and offenses in relation thereto are not “Scheduled Offenses”.
- The ED in these States is conducting inquiries with respect to the alleged illegal mining of sand, a minor mineral under the control of States and not the Union.
- The Mines Act has extensive provision to curb evasion and enables penalty and prosecution for any illegal extraction of minerals.
- But that power is with the State government.
- In Jharkhand, the ED purportedly registered an enforcement case against an MLA of the ruling party and his associates based on certain first information reports (FIR) filed by some persons.
- Court delivered the judgment transferring the police cases to the CBI.
- This raises questions about the abuse of authority by central investigating agencies and the abuse of the process of court being permitted all along.
Way Forward
- Federalism is a part of the basic structure of the Constitution of India, but its foundation is being slowly chipped away through such processes.
- If mines and minerals are not part of “scheduled offenses” and in a case where “proceeds of crime” are non-existent
- Courts should not allow such investigations to be carried out by the CBI and the ED.
- Even as India spearheads global coordination, ushering greater oversight on the domestic virtual digital assets ecosystem could provide much-needed assurance to everyday users as well as regulators.
- A progressive regulatory framework will instill the animal spirit in India’s innovation economy and establish India’s virtual digital assets leadership.
- A lot like how Rolls-Royce rekindled the British manufacturing industry in the early 20th century.
QUESTION FOR PRACTICE
Discuss how emerging technologies and globalization contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels(UPSC 2021) (200 WORDS, 10 MARKS)
India’s proximity to the two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What counter-measures should be taken to prevent the same?(UPSC 2018) (200 WORDS, 10 MARKS)
