Prevention of Money Laundering Act, 2002

The core statute

Chapter 2 carries 8 marks out of 50 — 16% of the paper, jointly the heaviest chapter.

Learning Objective - After studying this chapter, you should know about: Definition, objective and explanation of the concept and importance of Prevention of Money Laundering as per PMLA 2002 · The penalty provisions for violating the PMLA 2002, as per section 4 of the Act.

Prevention of Money Laundering Act (PMLA) forms the core of the legal framework put in place by India to combat money laundering. It is an act 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.

PMLA and the Rules notified there under came into force with effect from July 1, 2005.

The workbook's own sample question asks this date — July 1, 2005, not 2002.

Who implements it: Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act.

And who it binds: the PMLA and rules notified thereunder impose obligation on banking companies, financial institutions, and intermediaries and persons carrying on a designated business or profession, to verify identity of clients, maintain records and furnish information to FIU-IND.

Three obligations — verify identity, maintain records, furnish information.

2.1.1 Section 2 — the definitions

Section 2 defines terms used in the Act. The ones that matter most:

Proceeds of crime — clause (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.

And an important clarification: 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.

Note three features. The property may be obtained directly or indirectly; the value of the property counts as much as the property itself; and where the property has gone abroad, the property equivalent in value held within the country may be reached instead.

Property — clause (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.

And it reaches the instruments of the crime too: 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.

"Wherever located" — the definition is deliberately without geographical limit.

Reporting entity — clause (wa)

"Reporting entity" means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

Four categories, and a securities market firm falls in the third.

Intermediary — clause (n)

"Intermediary" means —

• (i) a stock-broker, sub-broker share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); or
• (ii) an association recognised or registered under the Forward Contracts (Regulation) Act, 1952 (74 of 1952) or any member of such association; or
• (iii) intermediary registered by the Pension Fund Regulatory and Development Authority; or
• (iv) a recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

Note the fourth limb — a recognised stock exchange is itself an intermediary for PMLA purposes, and therefore a reporting entity.

Beneficial owner — clause (fa)

"Beneficial owner" means an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.

An individual, and the test is ultimate ownership or control — which is why a chain of companies does not defeat the enquiry.

Client — clause (ha)

"Client" means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting.

Scheduled offence — clause (y)

"Scheduled offence" means— (i) the offences specified under Part A of the Schedule; or (ii) the offences specified under Part B of the Schedule if the total value involved in such offences is one crore rupees or more; or (iii) the offences specified under Part C of the Schedule.

Only Part B carries a monetary threshold — one crore rupees.

Offence of cross border implications — clause (ra)

Two limbs. (i) any conduct by a person at a place outside India which constitutes an offence at that place and which would have constituted an offence specified in Part A, Part B or Part C of the Schedule, had it been committed in India and if such person the proceeds of such conduct or part thereof to India; or (ii) any offence specified in Part A, Part B or Part C of the Schedule which has been committed in India and the proceeds of crime, or part thereof have been transferred to a place outside India or any attempt has been made to transfer the proceeds of crime, or part thereof from India to a place outside India.

Money coming in, or money going out — including an attempt.

Other definitions worth knowing

"Attachment" means prohibition of transfer, conversion, disposition or movement of property by an order issued under Chapter III.

"Transfer" includes sale, purchase, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

"Value" means the fair market value of any property on the date of its acquisition by any person, or if such date cannot be determined, the date on which such property is possessed by such person.

"Records" include the records maintained in the form of books or stored in a computer or such other form as may be prescribed.

"Investigation" includes all the proceedings under this Act conducted by the Director or by an authority authorised by the Central Government under this Act for the collection of evidence.

"Person" includes — an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, every artificial juridical person, and any agency, office or branch owned or controlled by any of the above.

"Financial institution" takes its meaning from clause (c) of section 45-I of the Reserve Bank of India Act, 1934 and includes a chit fund company, a housing finance institution, an authorised person, a payment system operator, a nonbanking financial company and the Department of Posts in the Government of India.

"Person carrying on designated business or profession" means a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino · the Inspector-General of Registration as notified · a real estate agent as notified · a dealer in precious metals, precious stones and other high value goods as notified · a person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons as notified · or a person carrying on such other activities as the Central Government may, by notification, so designate.

"Precious metal" means gold, silver, platinum, palladium or rhodium or as notified; "precious stone" means diamond, emerald, ruby, sapphire or as notified.

"Payment system" means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them — including the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations.

"Special Court" means a Court of Session designated as Special Court under sub-section (1) of section 43.

"Corresponding law" means any law of any foreign country corresponding to any of the provisions of this Act or dealing with offences in that country corresponding to any of the scheduled offences.

2.1.2 Section 3 — the offence

This section gives the definition of 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.

The workbook's sample question asks which section defines the offence — section 3.

And the Act lists six processes or activities. A person is guilty if 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.

Note "one or more" — any single one of the six suffices.

And the offence does not end when the laundering is done: 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.

A continuing offence, for as long as the enjoyment continues.

The section map

Section 14 is worth noticing — it protects a reporting entity, its directors and employees from civil or criminal proceedings in certain cases, which is what makes honest reporting safe.

2.1.3 Section 4 — the punishment

As per Section 4 of the PMLA 2002, "Whoever commits the offence of money-laundering is punishable with rigorous imprisonment for a term which will not be less than three years but which may extend to seven years and shall also be liable to fine.

Three to seven years, rigorous imprisonment, plus a fine — and the workbook's sample question asks exactly this range.

With one aggravated case: 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.

Paragraph 2 of Part A raises the maximum to ten years. The minimum of three years is unchanged.

2.1.4 Section 5 — provisional attachment

As prescribed under Section 5 of the Act, where the Director or any other officer not below the rank of Deputy Director authorised by the Director for the purposes of this section, has reason to believe (recorded in writing), on the basis of material in his possession, that--

(a) any person is in possession of any proceeds of crime; and

(b) such proceeds of crime 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 of crime.

— may, by order in writing, provisionally attach such property for a period not exceeding one hundred and eighty days from the date of the order, in such manner as may be prescribed.

Four requirements to note: the officer must be not below the rank of Deputy Director; the belief must be recorded in writing; it must rest on the basis of material in his possession; and the attachment lasts not exceeding one hundred and eighty days.

And recall what attachment means — prohibition of transfer, conversion, disposition or movement of property.

2.1.5 Section 12 — records

(1) Every reporting entity is required to—

• (a) maintain a record of all transactions, 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.
• (c) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

The workbook's sample question asks what section 12 requires — all of the above.

Note "whether attempted or executed" in clause (b). An attempted transaction is reportable.

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

The retention periods:

(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 (c) 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.

Both five years, but measured differently — transaction records from the date of the transaction; identity records from the end of the relationship or account closure, 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.

2.1.6 Section 56 — agreements with foreign countries

(1) The Central Government may enter into an agreement with the Government of any country outside India for: (a) enforcing the provisions of this Act; (b) exchange of information for the prevention of any offence under this Act or under the corresponding law in force in that country or investigation of cases relating to any offence under this Act, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) The Central Government may, by notification in the Official Gazette, direct that the application of this Chapter in relation to a contracting State with which reciprocal arrangements have been made, shall be subject to such conditions, exceptions or qualifications as are specified in the said notification.

2.2 Records and reports to FIU-IND

For effective implementation of the Act, maintenance and reporting of records is an important requirement.

Under the PML Rules, Rule 3 – Maintenance of records of transactions, the reportable transactions are:

(a) All cash transactions of the value of more than rupees 10 lakh or its equivalent in foreign currency.

(b) All series of cash transactions integrally connected to each other which have been individually valued below rupees ten lakhs or its equivalent in foreign currency where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of ten lakh rupees or its equivalent in foreign currency.

That second limb catches smurfing — individually small, integrally connected, aggregating above ten lakh within a month.

(c) All transactions involving receipts by non-profit organisations of value more than rupees ten lakh, or its equivalent in foreign currency.

(d) All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions.

(e) All suspicious transactions, whether or not made in cash, including attempted transactions.

(f) All cross-border wire transfers of the value of more than five lakh rupees or its equivalent in foreign currency where either the origin or destination of fund is in India.

(g) All purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity.

Three thresholds to keep separate: ten lakh (cash, NPO receipts), five lakh (cross-border wire transfers), fifty lakh (immovable property).

The deadlines

The Suspicious Transaction Report mentioned at para (e) above should be furnished within seven working days on being satisfied that the transaction is suspicious.

The information in respect of immoveable property transactions referred to in (g) above should be furnished to FIU-IND every quarter by the 15th day of the month succeeding the quarter.

All other reports need to be furnished on a monthly basis by the 15th day of the succeeding month.

Seven working days for STRs; the 15th of the following month for everything else; quarterly by the 15th for property.

And the mechanics: every reporting entity is necessarily required to furnish information to Director, FIU-IND online in a standard format prescribed for the purpose. For this purpose, the reporting entity has to register itself with FIU-IND.

2.2.1 What makes a transaction suspicious

Suspicious Transaction means a transaction (including an attempted transaction) whether or not made in cash which, to a person acting in good faith:

a) gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or

b) appears to be made in circumstances of unusual or unjustified complexity; or

c) appears to have no economic rationale or bona fide purpose; or

d) gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism.

Four independent tests, and any one suffices. Note that only (a) and (d) require a link to crime or terrorism; (b) and (c) turn purely on the transaction's own character — unusual or unjustified complexity, or no economic rationale or bona fide purpose.

And the standard is that of a person acting in good faith — not proof, and not certainty.

Designated officials

Each reporting entity has to appoint certain designated officials to implement the provisions of the Act in the reporting Organisation.

2.2.2 Principal Officer

The Principal Officer is an officer designated by a registered intermediary who should be an officer at the management level. Principal Officer is designated by a reporting entity for the purpose of Section 12 of PMLA.

Rule 7 of the PML Rules requires every reporting entity to communicate the name, designation and address of the Principal Officer to the Director, FIU-IND.

The Principal Officer would act as a central reference point in facilitating onward reporting of suspicious transactions.

Management level, designated for section 12 purposes, and the central reference point for STRs.

2.2.3 Designated Director

In addition to the existing requirement of designation of a Principal Officer, the registered intermediaries shall also designate a person as a 'Designated Director'.

Designated director is a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the PMLA Act and the Rules and includes:

• (i) the Managing Director or a whole-time Director if the reporting entity is a company.
• (ii) the managing partner if the reporting entity is a partnership firm.
• (iii) the proprietor if the reporting entity is a proprietorship concern.
• (iv) the managing trustee if the reporting entity is a trust.
• (v) a person or individual who controls and manages the affairs of the reporting entity if the reporting entity is an unincorporated association or a body of individuals, and
• (vi) such other person or class of persons as may be notified by the Government if the reporting entity does not fall in any of the categories above.

Note the difference in level. The Principal Officer is an officer at the management level handling reporting; the Designated Director is the top of the organisation, responsible for overall compliance with the obligations imposed under chapter IV.

2.3 The investigating authorities

2.3.1 Directorate of Enforcement

The Directorate of Enforcement is a multi-disciplinary organization mandated with investigation of offence of money laundering and violations of foreign exchange laws.

The statutory functions of the Directorate include enforcement of following Acts:

• The Prevention of Money Laundering Act, 2002 (PMLA).
• The Foreign Exchange Management Act, 1999 (FEMA).
• The Fugitive Economic Offenders Act, 2018 (FEOA).
• Sponsoring agency under COFEPOSA.

2.3.2 FIU-IND

FIU-IND was set by the Government of India vide O.M. dated 18th November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.

FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism.

FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

The division of labour is the point. FIU-IND receives and analyses; the Directorate of Enforcement investigates and prosecutes. And both directors hold implementing powers — Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act.