The Prevention of Money Laundering Act, 2002 (PMLA)

The Prevention of Money Laundering Act, 2002 (PMLA) was enacted to fight against the criminal offence
of legalizing the income or profits from an illegal source. The Prevention of Money Laundering Act, 2002
enables the Government or the public authority to confiscate the property earned from the illegally gained
proceeds. The chief objective of this legislation is to fight money laundering, that is, the process of converting
black money into white.

 The Act enables government authorities to confiscate property or assets earned from illegal sources
and through money laundering.

 Under the PMLA, the burden of proof lies with the accused, who has to prove that the suspect property
or assets have not been obtained through proceeds of crime.

PMLA Objectives

The basic objectives of the PMLA are:

1. Preventing money laundering.

2. Combating the channelizing of money into illegal activities and economic crimes.
3. Providing for the confiscation of property derived from or involved in money laundering.
4. Providing for any other matters connected with or incidental to the act of money laundering.

Money Laundering

Money laundering is the generic term used to describe the process by which criminals disguise the original
ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived
from a legitimate source.

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out
the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This
process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their
source.

Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking
and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and
computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten
gains through money laundering.
When a criminal activity generates substantial profits, the individual or group involved must find a way to
control the funds without attracting attention to the underlying activity or the persons involved. Criminals do
this by disguising the sources, changing the form, or moving the funds to a place where they are less likely
to attract attention.

Stages of Money Laundering

The money laundering process most commonly occurs in three key stages: placement, layering and
integration. Each individual money laundering stage can be extremely complex due to the criminal activity
involved.

1. Placement

The first stage of money laundering is known as ‘placement’, whereby ‘illegal’ money is placed into the
legal, financial systems. After getting hold of illegally acquired funds through theft, bribery and corruption,
financial criminals move the cash from its source. This is where the criminal money is ‘washed’ and disguised
by being placed into a legitimate financial system.

2. Layering

The second stage in the money laundering process is referred to as ‘layering’. This is a complex web of
transactions to move money into the financial system.

Once the funds have been placed into the financial system, the criminals make it difficult for authorities to
detect laundering activity. They do this by concealing the audit trail through the strategic layering of financial
transactions and fraudulent book-keeping.

Layering is a significantly complex element of the money laundering process. Its purpose is to create multiple
financial transactions to conceal the original source and ownership of the illegal funds.

3. Integration

The third of the stages of money laundering is ‘integration’. The ‘illegal’ money is now absorbed into the
economy, for instance via real estate. Once the ‘illegal’ money has been placed and layered, the funds will
be integrated back into the legitimate financial system as ‘legal’ tender. Integration is done very carefully
from legitimate sources to create a plausible explanation for where the money has come from.

This money is then reunited with the criminal with what appears to be a legitimate source. At this stage, it is
very difficult to distinguish between legal and illegal wealth. The launderer can use the money without
getting caught. It is extremely challenging to catch the criminal if there is no documentation to use as
evidence from the previous stages.
Provision related to offence of Money Laundering

As per Sec.3 of The Prevention of Money laundering Act, 2002:-

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
including its concealment, possession, acquisition or use and projecting or claiming it as untainted property
shall be guilty of offence of money-laundering.

Explanation- For the removal of doubts, it is hereby clarified that,-

(i) a person shall be guilty of offence of money-laundering if such person is found to have directly or
indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one
or more of the following processes or activities connected with proceeds of crime, namely:—

a. concealment; or
b. possession; or
c. acquisition; or
d. use; or
e. projecting as untainted property; or
f. claiming as untainted property,

in any manner whatsoever;

(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till
such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or
possession or acquisition or use or projecting it as untainted property or claiming it as untainted
property in any manner whatsoever.

Sec. 4- Punishment for money-laundering- Whoever commits the offence of money-laundering shall be
punishable with rigorous imprisonment for a term which shall not be less than three years but which may
extend to seven years and shall also be liable to fine.

Provided that where the proceeds of crime involved in money-laundering relates to any offence
specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if
for the words “which may extend to seven years”, the words “which may extend to ten years” had been
substituted.
Impacts of Money Laundering

1. Economic Impacts:

 Undermines legitimacy of private sector

 Undermines integrity of financial markets
 Loss of control of economic policy
 Economic distortion and instability
 Loss of revenue
 Security threats to privatisation efforts
 Volatility in exchange rates and interest rates due to unanticipated transfers of funds
 Rise of economic prices
 Affects trade and international capital flows

2. Social Impacts:

 Increased criminality
 Decreases human development
 Misallocation of resources
 Affects trust of local citizens in their domestic financial institutions
 Declines the moral and social position of the society by exposing it to activities such as drug
trafficking, smuggling, corruption and other criminal activities

3. Political Impacts:

 Initiates political distrust and instability

 Criminalisation of politics

The impact of money laundering on the development of a nation are severe and extensive. It can create global
and local impacts for businesses, economies, and societies. The negative effects of money laundering on the
development are quite numerous. Money laundering damages financial sector institutions that are critical for
economic growth of a nation, promoting crime and corruption that slow economic growth and reducing
efficiency in the real sector of the economy. The impact of money laundering can be categorized in following
heads:-
Effect on money demand

It occurs more frequently in countries where the risk of money laundering is minimal. In economies where
there are no regulations on laundering, where there is a system that stores bank or customer information,
where banking secrecy is strictly enforced. The cash inflows and outflows are easy for launderers. With the
rapid and uncontrolled inflow of money to the country, the consumption rates and especially luxury
consumption are increase. However, there may be significant increases in exports, imports, foreign payments
deficit, inflation, interest, and unemployment rates. These instabilities in demand for money caused by black
money will naturally affect the monetary policy negatively.

Effect on growth rates

Real sectors can suffer significantly from financial instability in the country. As a result, foreign investors
have become crucial for companies. However, it isn't easy to attract foreign investors to the country in money
laundering countries. Because the price instability caused by black money in the financial system will affect
the credibility of the economy in the external environment. If the legal money escapes from entering the
country, it will result in investment rates not increasing. So there will occur a long-term sustainable growth
decline.

Effect on income distribution

Severe losses caused by black money to sources of income cause significant problems in the financial
system's functioning. These problems experienced by the economy also have social consequences. One of
the most critical damages of black money to be determined is its negative effect on income distribution.
Although the negative impact of the decline in income sources and the differentiation in income distribution
is difficult to measure, it is also challenging to compensate for social damage. The gap between individuals
in terms of income distribution increases the tendency to commit crimes and makes money attractive.

Also, since the money adversely affects competition, those operating in the registered sector are punished
somewhat. Since tax evasion is common in informal economies, the tax burden of those operating in the
official sector increases, and income distribution is adversely affected.

Effect on tax revenues

Revenue from taxes has the most significant share in public revenues. If this income is low, it will raise the
possibility that public revenues will not meet the public expenditures, and if this possibility occurs, budget
deficits will occur. Income generated by black money is earnings that countries do not tax. These gains will
result in reductions in tax revenues.
Effect on financial institutions

Sudden changes may occur in the assets and liabilities of financial institutions that are unknowingly used in
money laundering, which will create a risk for the institutions. The news of money laundering of these
financial institutions draws the attention of the public authority. In that case, the pressure on auditing for
these institutions will increase, and the institution's reputation will be damaged.

Important definitions under PMLA, 2002

(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a
result of criminal activity relating to a scheduled offence or the value of any such property [or where such
property is taken or held outside the country, then the property equivalent in value held within the country
or abroad];

Explanation.—For the removal of doubts, it is hereby clarified that "proceeds of crime" include property not
only derived or obtained from the scheduled offence but also any property which may directly or indirectly
be derived or obtained as a result of any criminal activity relatable to the scheduled offence;

(Scheduled offences means the list of offences mentioned in the schedule of this Act.)

(v) “property” means any property or assets of every description, whether corporeal or incorporeal, movable
or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in,
such property or assets, wherever located;

Explanation.—For the removal of doubts, it is hereby clarified that the term “property” includes property of
any kind used in the commission of an offence under this Act or any of the scheduled offences;

(za) “transfer” includes sale, purchase, mortgage, pledge, gift, loan or any other form of transfer of right,
title, possession or lien;

Adjudicating Authority

Sec. 6- Adjudicating Authorities, composition, powers, etc.-

(1) The Central Government shall, by notification, appoint an Adjudicating Authority to exercise jurisdiction,
powers and authority conferred by or under this Act.

(2) An Adjudicating Authority shall consist of a Chairperson and two other Members:

Provided that one Member each shall be a person having experience in the field of law,
administration, finance or accountancy.
(3) A person shall, however, not be qualified for appointment as Member of an Adjudicating Authority,-

(a) in the field of law, unless he-

(i) is qualified for appointment as District Judge; or

(ii) has been a member of the Indian Legal Service and has held a post in Grade I of that
service;

(b) in the field of finance, accountancy or administration unless he possesses such qualifications, as
may be prescribed.

(4) The Central Government shall appoint a Member to be the Chairperson of the Adjudicating Authority.

Powers of adjudicating authority regarding summons and production of evidences

Sec. 11- Power regarding summons, production of documents and evidence, etc.-

(1) The Adjudicating Authority shall, for the purposes of this Act, have the same powers as are vested in a
civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the following matters,
namely:—

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking company or a financial
institution or a company, and examining him on oath;

(c) compelling the production of records;

(d) receiving evidence on affidavits;

(e) issuing commissions for examination of witnesses and documents; and

(f) any other matter which may be prescribed.

(2) All the persons so summoned shall be bound to attend in person or through authorised agents, as the
Adjudicating Authority may direct, and shall be bound to state the truth upon any subject respecting which
they are examined or make statements, and produce such documents as may be required.

(3) Every proceeding under this section shall be deemed to be a judicial proceeding within the meaning of
section 193 and section 228 of the Indian Penal Code.
Reporting Entity

A reporting entity is a section of an enterprise that has the obligation to prepare external financial reports for
the benefit of parties with an interest in its operations, such as suppliers and investors. The term “accounting
entity” can be used in a similar way.

The goal of the reporting entity is to understand the financial situation and analyse the results. This is
necessary when making further decisions. The reporting entity reasonably expects the existence of users who
rely on the entity’s general purpose financial statements for information that will be useful to them for making
and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group
comprising a parent and all of its subsidiaries.

Example of a reporting entity is a big private firms with external shareholders who have access only to the
annual financial statements and educational organizations.

Role of Reporting in maintain records

Sec. 12- Reporting entity to maintain records.-

(1) Every reporting entity shall-

(a) maintain a record of all transactions, including information relating to transactions covered under clause
(b), in such manner as to enable it to reconstruct individual transactions;

(b) furnish to the Director within such time as may be prescribed, information relating to such transactions,
whether attempted or executed, the nature and value of which may be prescribed;

(e) maintain record of documents evidencing identity of its clients and beneficial owners as well as account
files and business correspondence relating to its clients.

(2) Every information maintained, furnished or verified, save as otherwise provided under any law for the
time being in force, shall be kept confidential.

(3) The records referred to in clause (a) of sub-section (1) shall be maintained for a period of five years from
the date of transaction between a client and the reporting entity.

(4) The records referred to in clause (e) of sub-section (1) shall be maintained for a period of five years after
the business relationship between a client and the reporting entity has ended or the account has been closed,
whichever is later.

(5) The Central Government may, by notification, exempt any reporting entity or class of reporting entities
from any obligation under this Chapter.