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The increasing competitiveness in the contemporary industrial society has given rise to criminality and allied offences. The ethical and metaphysical integrity of trade and finance is hampered by such economic offences. One such offence is that of money laundering, which started as an activity to disguise the illegal origin of money by criminals, smugglers, traffickers etc. and has become an inescapable part of financial arrangements all over the world undermining the integrity of banking and financial services.
Recently a special court in Bombay dealing with offences related to money laundering allowed the banks to utilize the assets of fugitive offender Vijay Mallya to retrieve the amount of loans advanced to him before he fled the country in March 2016.
The recent order is covered under the Prevention of Money Laundering Act, 2002. The order would help to restore the reputation and credibility of banking system which was deeply maligned after Mallya fled the county.
The article seeks to discuss the country’s first fugitive economic offender Vijay Mallya’s case and also explain the Prevention of Money Laundering Act, 2002.
Money Laundering and its features
- Section 3 of the Prevention of Money-Laundering Act, 2002 defines the activity of Money Laundering as “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.”
- It is an attempt to convert the illegal and unaccountable money into clean money, from a legitimate source of income. It is a criminal offense in which the money acquired is veiled as coming from a legitimised source.
- The ‘proceeds of crime’ that is mentioned in the definition refers to the fact that money laundering is dependent on other crimes which are listed as ‘scheduled offense’.
- The offense comes under a cognizable offence under which arrest could be made without a warrant.
- Activities like supply of illegal arms, drug trafficking, prostitution or smuggling which can generate huge amounts of money is generally included in the offences of money laundering.
- Money laundering involves a three stage mechanism; a usual modus operandi, to operate, by taking the following steps:
- a) Placement: This stage involves introducing the illegal income into financial system through various activities like investing in real cash, setting up shell companies, disbursing money through multiple accounts etc.
- b) Layering: In the second stage of money laundering, the money laundered is moved and spread around into various financial accounts like a bank or a business account. The process involves layering the money to hide the origin.
- c) Integration: At this stage the money is so well ingrained into the system that the offender could use it as clean money.
- The Directorate of Enforcement in Department of Revenue under Ministry of Finance is responsible for investigating cases dealing with money laundering.
Prevention of Money Laundering Act, 2002(PMLA, 2002)
- The act was passed by parliament of India in 2002 and is the fundamental legal framework in India to battle the problem of money laundering. It came into effect from July 1, 2005 due to various lacunas in original bill.
- Objective: The main objective of the legislation is to deal with the various facets of money laundering in India along with prevention of money laundering and confiscation of property related to offence of money laundering.
- Jurisdiction: The act covers under its ambit all banks, mutual funds, insurance companies and all other financial institutions. Its provisions are applicable to RBI, SEBI AND IRDA.
- FIU-IND: The Financial Intelligence Unit – India is the nodal agency monitoring the suspicious financial transactions in the country and deterring money laundering activities. It is a multi- disciplinary agency responsible for keeping a record of transactions and keeping a check on laundering.
- Punishment: The Act provides that whosoever indulges in any activity associated with money laundering would be guilty of the offence and shall be punishable with rigorous imprisonment for 3-7 years or fine or Seizure of property and records and attachment of property obtained with the proceeds of crime. Punishment can be extended to 10 years in case of offences allied to Narcotic Drugs and Psychotropic Substance Act 1985.
- Adjudication: The Adjudicating Authority is selected by the Central government and it decides whether the property seized is involved in offence of money laundering.
- Court: The Central Government, in consultation with the Chief Justice of the High Court elect courts of session as special court for trial of offences related to money laundering.
- Know Your Customer (KYC) norms: The banks under PMLA, 2002 were obligated to perform some measures for customer identification. It was to ensure smooth functioning of the system without suspicious transaction which was to be reported to authority. However the banks are obligated to keep the information strictly confidential.
- The bill has been amended 4 times to keep it at par with the global norms of the legal legislation, the most recent being the 2019 amendment.
A special court in Mumbai dealing with offences related to money laundering has allowed a consortium of various banks led by State Bank of India to utilise seized movable belonging to fugitive businessman Vijay Mallya. The seized assets comprise securities such as shares of United Breweries Holdings Ltd and hold worth estimated at Rs 11,000 crore.
The order is covered under Prevention of Money Laundering Act, 2002. The banks represented by senior counsel Rajiv Patil filed a case against the proclaimed offender to recover the loans given to him. However the court adjourned the hearing and has allowed the affected parties to appeal to Bombay high court against the order till January 18.
Vijay Mallya, former Rajya Sabha member fled the country in 2016 after committing fraud and money laundering. He took loans from various banks and left the country without paying his debts. He has been living in UK since then and is facing extradition trial brought by India.
Last year in January, he was declared a fugitive economic offender (FEO) by the PMLA court under the Fugitive Economic Offenders Act, that too as the first person to be censored under the law.
The lenders want to liquidate assets to recover over Rs 6ooo crore, the amount which was lent to former liquor baron. The Directorate of Enforcement, which is supervising the case, declared to the special PMLA court in February 2019 that it had no objection to liquidation of financial assets.
However, the lawyers representing Vijay Mallya have objected to the move claiming that court is not the appropriate authority to deal with the issue. Instead they want liquidation of assets to be done before the Debt Recovery Tribunal, which is the proper authority.
Significance of current development
Money laundering is a serious threat to the reputation and integration of the financial and banking systems. The financial institutions and government are constantly looking for new approaches to curb money laundering and allied offences. To avert such grave threats, legislations like PMLA become essential to forestall such offences.
The instant order by the Mumbai special court proved that PMLA is not a redundant statute and a well-crafted tool for keeping a check on illegal and criminal activities. Such offences malign the reputation of the finance institutions in the country and have potential to erode a nation’s economic base.
It is necessary to curb the growing menace of money laundering expanding globally through such judgements. Laundering enables criminal activity to continue and by keeping a check on it, various criminal activities are prevented.
Conclusion: Way forward
Money Laundering is a serious crime which poses a lot of threat to economic and financial constitutions and has to be addressed earnestly. The government has already established comprehensive anti-money laundering mechanisms with Enforcement Directorate taking effective measures to investigate and prevent money laundering. Additionally, the judicial system has showed activism to uphold the veracity of financial structure.
However changing paradigms require more rapid approach towards money laundering and taking strict actions against those violating the financial mechanism. For instance, with the rapid advancement of technology, new forms of laundering are forthcoming which have to be dealt with effectively. Therefore, to have an effective anti-money laundering regime, more radical approach is required on a national as well as global level.
Author: Sakshi Sethi from Rajiv Gandhi National University Of Law, Patiala.
Editor: Ismat Hena from Faculty of Law, Jamia Millia Islamia.