MONEY LAUNDERING AND THE ROLE OF ENFORCEMENT DIRECTORATE – A CRITICAL ANALYSIS

Reading time : 6 minutes

TABLE OF CONTENTS

CHAPTER I
INTRODUCTION
OBJECTIVE OF STUDY
SIGNIFICANCE OF STUDY
METHEDOLOGY OF STUDY
CHAPTER II
ABSTRACT
MONEY LAUNDERING
STAGES OF MONEY LAUNDERING
Placement Stage
Layering Stage
Integration Stage
EFFECTS OF MONEY LAUNDERING ON FINANCIAL SYSTEM
GLOBAL INITIATIVES TAKEN FOR MONEY LAUNDERING
Vienna Convention
The Council of European Convention
United Nations Global Programme Against Money Laundering
MONEY LAUNDERING TECHNIQUES
Hawala
Structuring Deposits
Third Party Cheques
Credit Cards
CAUSES OF INCREASE IN MONEY LAUNDERING QND LOAS OF CONTROL
MONEY LAUNDERING REGULATION IN INDIA
PREVENTION OF MONEY LAUNDERING ACT, 2002
ENFORCEMENT DIRECTORATE
FEMA AND PMLA AND THE POWERS OF THE DIRECTORATE OVER THEM
RECENT CASES ON MONEY LAUNDERING
Punjab National Bank Case
The Kingfisher Airlines Case
The Commonwealth Scam
CHAPTER III
CONCLUSION
REFERENCES

OBJECTIVES OF THE STUDY

The Objective of the study and to choose the topic is that to,

  1. Study the situation of situation of money laundering and its effects over the financial and economic system of the country and the role of the Enforcement Directorate over, by way of the doctrinal research methodology. The research done and the data used in the paper is based and taken from the secondary and tertiary sources and not from the primary source.
  2. The basic objective was to look for the stages of money laundering, its effects on the financial system, the initiatives taken at the national and international level to curb or to lesser the cause of money laundering.
  3. Through this paper the attempt is been made to look for the elements being implemented by the government, the PMLA, Enforcement Directorate and the powers of the ED.  

INTRODUCTION

The process of disguising the source of money earned through illegal methods is known as money laundering. It’s the act of making it appear as if significant sums of money earned through major crimes like drug trafficking or terrorist activity came from a legitimate source. Money laundering is the practise of cleaning money obtained through unlawful operations such as extortion, drug trafficking, and gun smuggling. Through complicated methods of placement, stacking, and laundering, tainted money is represented as clean money.

Money laundering[1] is the process of converting or “Laundering” unlawfully obtained funds to make them look to come from a lawful source, which can also be stated as that the black money is converted into white. Money laundering is used by money launderers all over the world to hide illicit behavior such as drug and arms trafficking, terrorism, and extortion. The majority of countries working to reduce money laundering offences should establish an impartial institution to deal with such instances and turn the results into policies, rules, and laws. Money laundering is a “predicate offence,” as defined by Section 2(1) (p) of the Prevention of Money Laundering Act, 2002. Cash transactions are commonly used to launder money since they make concealing true ownership and source of funds easier. There is a constant pursuit of huge profits and expansion into new sectors of illicit activity.

The term ‘laundering’ is defined in Black’s Law of Lexicon as the investment or other movement of money flowing from racketeering, drug deals, and other criminal sources into lawful channels in order to conceal its original source. Money launderers may be found in all sectors of life, and many of them operate honestly. In most nations, however, anyone who helps a criminal wash the proceeds of his crime is considered a money launderer. This means that bankers, lawyers, accountants, car dealers, and others who allow their enterprises to be used to launder the proceeds of crime are money launderers.

ABSTRACT

Money laundering is the practise of concealing the source of funds obtained via unlawful means. It is the act of making it look as if large quantities of money obtained via big crimes such as drug trafficking or terrorism originated from a legal source. Despite the fact that financial institutions help launder billions of dollars, fake hard currency money may be propagated without their assistance. It’s utilised by corrupt officials and individual criminals to hide their illegal sources of income and profit without disclosing their identity. Money laundering is intrinsically related to organised crime because it allows large quantities of money to be amassed through international fraud and human trafficking. The majority of nations seeking to eliminate money laundering offences should create an independent body to investigate such cases and incorporate the findings into policies, regulations, and laws.

India’s government has long been a part of worldwide efforts to combat the threat of money laundering.

MONEY LAUNDERING

Money laundering is the process of converting illegal money proceeds into legal money proceeds by concealing their criminal origins through a series of multiple transactions bouncing through shell companies and limited partnerships, resulting in an untraceable web of purchase orders and transaction reports, scrubbing the ill-gotten money and making it useful to the ultimate beneficiary. The term money laundering is defined under the U.S Custom and Border Protection[2] as “the legitimization of proceeds from the illegal activity.” The International Monetary Fund (IMF) defines money laundering as a “process in which assets generated or obtained by criminal activities are concealed or moved to create a link between the crime and the assets which is difficult to understand.”

However, there is no clear definition of money laundering in India under any act or law, but Section 3 of the Prevention of Money Laundering Act, 2002 states that anyone who directly or indirectly attempts to engage in, knowingly assists in, or is a party or is actually involved in any process or activity connected with the [proceeds of crime, including their concealment, possession, acquisition, or use, and projecting or claiming], is guilty of money laundering.

STAGES OF MONEY LAUNDERING

When it comes to the vast diversity of methods used by money launderers to conceal their illegal riches, there are certain commonalities. Three common characteristics discovered in laundering activities are the need to conceal the origin and actual ownership of the proceeds; the necessity to maintain control of the proceeds; and the requirement to change the form of the proceeds in order to reduce the massive amounts of cash created by the initial illicit action. Money laundering is divided into three steps.

  1. Placement Stage: The first stage is the physical disposal of cash. With his ill-gotten wealth, the launderer joins the banking system. This is accomplished by depositing the funds in domestic banks or other types of official or informal financial organisations. It requires depositing all ill-gotten gains in banks and financial institutions. These are then turned into money orders, cash bank deposits, and small-amount DDs to avoid detection by financial intelligence unit managers and financial crimes investigative analysts (demand drafts). This is done by breaking large quantities of money into smaller, less apparent sums, which are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.). The money is usually transported over borders and deposited in foreign banks, or it is used to buy high-value objects like artwork, aircraft, and precious metals, which may then be resold to get payment by check or bank transaction.
  • Layering Stage: In order to disguise the original source and isolate it from the unlawful sources, the person involved utilises money to participate in a series of continuing transactions or movements of cash inside an economy via a financial or banking system, via many accounts. Money launderers can move funds through a variety of routes, including a network of bank accounts scattered throughout the globe, particularly in jurisdictions that refuse to help with anti-money laundering investigations. The audit trail is masked, and layering provides anonymity. The launderer makes a sequence of conversions or transfers to isolate the funds from their source. The funds could be channelled through the purchase and sale of investment instruments such as bonds, stocks, and traveler’s checks, or the launderer could simply wire the funds through a series of accounts at different banks around the world, particularly in jurisdictions that do not cooperate in anti-money laundering investigations.
  • Integration Stage: The act of returning laundered funds to the economy in such a way that they may be utilised as legal corporate funds again is referred to as “integration.” The most common method used by money launderers is to set up unidentified entities in nations where confidentiality is guaranteed. New business models provide a framework for integrating integration experiments. As a result, integration is the process of withdrawing funds from legal accounts that are ready to be utilised for legal transactions and purchases. Following that, money deposits, wire transfers, and valuable assets are made locally or in the unlawful enterprise’s home state. It is injected and reintroduced into the legal economy, making it look as though it originated from a legitimate source, but there is no way to trace it back to its original source.

EFFECTS OF MONEY LAUNDERING ON FINANCIAL SYSTEM:-

  1. The financial system’s integrity, as well as its professional and ethical standards, are been jeopardised.
  2. The Bank of Credit and Commerce International (BCCI), which has been dubbed the “Bank of Criminals and Crooks International,” the institution gets lured into active participation with criminals and becomes a part of the criminal network itself.
  3. The International Monetary Fund (IMF) has issued a warning concerning unexplained swings in money demand, dangers to bank stability, and contamination of legal financial operations.
  4. Due to unplanned cross-border money movement, the international flow of capital and exchange rates will become erratic.
  5. Money launderers frequently relocate their operations to nations and financial systems with weak or inefficient anti-money laundering laws.

GLOBAL INITIATIVES TO PREVENT MONEY LAUNDERING:-

Money laundering is a worldwide problem that requires international collaboration to address. Attempts to solve the problem at the international level have been made in a number of ways.

  1. Vienna Convention: National bank secrecy regulations shall not hamper international criminal investigations, according to the Vienna Convention of 1988. This treaty established the groundwork for anti-money laundering measures by forcing member nations to make money laundering from drug trafficking illegal. It promotes international cooperation in investigations and allows member governments to extradite money laundering suspects.
  2. The Council of European Convention: This 1990 convention provides a unified money laundering policy. It establishes a standard definition of money laundering as well as standard ways to combat it. The Convention establishes the foundations for international cooperation among member nations, which may include countries not affiliated with the Council of Europe. The purpose of this convention is to facilitate international cooperation in the areas of investigative assistance, search, seizure, and confiscation of the proceeds of all types of criminality, particularly serious crimes such as drug trafficking, arms trafficking, terrorism, and other high-profit crimes.
  3. United Nations Global Programme Against Money Laundering: The Global Programme against Money Laundering (GPML) was established in 1997 with the purpose of improving the effectiveness of international anti-money laundering efforts by providing countries with comprehensive technical assistance. The project is divided into three areas of operation, each of which provides countries and organisations with distinct instruments to assist them in efficiently combating money laundering:
  4. It includes tasks such as raising awareness, establishing institutions, and providing training.
  5. The goal of the study and analysis is to provide key information to states so they may better comprehend the issue of money laundering and design more efficient and effective countermeasure methods.
  6. The pledge to assist the creation of financial investigation services in order to improve the overall efficacy of law enforcement.

MONEY LAUNDERING TECHNIQUES:-

  1. Hawala: A form of alternative remittance system is Hawala. It exists and operates either independently or in conjunction with traditional banking and financial channels. It was created in India before western banking systems arrived, and it is today the most extensively utilised remittance system. Hawala networks do not physically transport money. A resident of Indian descent in the United States who is conducting business and wishes to send money to his family in India might engage in a hawala transaction.  The individual has the choice of sending money through a legitimate banking system or through the hawala system.
  2. Structuring Deposits: Smurfing refers to the practise of splitting large quantities of money into smaller, less suspicious amounts. This smaller value must be less than $10,000 in the United States, which is the threshold at which banks must report transactions to the government. The money is then transferred over time to one or more bank accounts, either by a group of people or by a single person.
  • Third party Cheques: Counter cheques or banker’s draughts drawn on a number of different institutions are utilised, and they are cleared through a number of different third-party accounts. Third-party checks and traveler’s checks are commonly obtained with the profits of crime. Because many countries’ currencies are negotiable, establishing a relationship to the source money is challenging.
  • Credit cards: Clearing credit and charge card balances at various bank counters. These cards are cross-border compatible and may be used for a number of applications. To acquire assets, pay for services or products received, or join a worldwide network of cash dispensers, for example.

The list continues on, and many tactics are difficult to categorise into a single laundering phase. The method of operation changes with each complaint of a crime, because they can be caught at any point.

CAUSE OF INCREASE IN MONEY LAUNDERING AND LOSS OF CONTROL:-

There are various caused due to which the money laundering has increased, however some of them are as follows:

  • There are no agreements in place for sharing tax information with foreign countries.
  • Instant corporations are available.
  • Certain countries corporate laws allow money launderers to hide behind shell corporations.
  • Strict Bank Secrecy Laws
  • Excellent Electronic Communication
  • A government that is relatively impervious to external influences
  • A significant degree of economic dependency on the financial services sector.

MONEY LAUNDERING REGULATION IN INDIA:-

The Bureau for International Narcotics and Law Enforcement Affairs’ International Narcotics Control Strategy Report highlights India’s vulnerability to money-laundering operations as follows: “The country’s increasing prominence as a regional financial hub, its extensive system of informal cross-border money flows, and widely recognised tax evasion issues all add to India’s vulnerability to money laundering. Narcotics trafficking, illicit trade in endangered animals, trade in illegal jewels (especially diamonds), smuggling, human trafficking, corruption, and income tax avoidance are all common sources of illegal earnings in India. India has long been a drug transit nation due to its location between the heroin-producing countries of the Golden Triangle and Golden Crescent.”

Money laundering in India must be seen from two perspectives: international money laundering and domestic money laundering.

Prior to the adoption of the Prevention of Money Laundering Act 2002 (PMLA), India has only intermittently addressed the issue:

  • The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
  •  The Income Tax Act, 1961
  •  The Benami Transactions (Prohibition) Act, 1988
  •  The Indian Penal Code and Code of Criminal Procedure, 1973
  •  The Narcotic Drugs and Psychotropic Substances Act, 1985
  •  The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988

PREVENTION OF MONEY LAUNDERING ACT, 2002:-

After the Bill was approved, the Prevention of Money Laundering Act was enacted in 2002. The Act goes into force on July 1, 2005. The Act, which has a broad scope, makes it illegal to launder the proceeds of a number of crimes. The Act, which is modelled after the Illicit Justice Act of the United Kingdom, punishes anybody who knows or suspects that someone is laundering criminal proceeds and fails to report it legally accountable. Anyone who seeks to participate in, knows aids, knowingly is a party to, or is really involved in any process or action involving the proceeds of crime and portraying it as untainted property commits money laundering.

The Act is broken down into 75 parts and imposes a great deal of responsibility on financial institutions. It was suggested that a currency transaction reporting requirement be implemented, forcing banks to record all transactions worth more than Rs.10 million. Despite strong objections from the Reserve Bank of India, the Indian government included this section in the Act. Banks will also be held responsible for reporting any transactions that they believe are the proceeds of crime or otherwise suspicious.

ENFORCEMENT DIRECTORATE (ED):-

The Enforcement Directorate is an Indian government body that enforces economic laws and combats problems related to economic crime. It is also an economic intelligence organisation that is responsible for enforcing the requirements of two major laws that govern the country’s economic development. It basically deals with the FEMA (Foreign Exchange Management Act, 1999) and the PMLA (Prevention of Money Laundering Act, 2002).

ORGANIZATIONAL SETUP OF ENFORCEMENT DIRECTORATE:

ABOUT ENFORCEMENT DIRECTORATE

It is an Indian government body tasked with enforcing economic laws and combating economic crime. It also serves as an economic intelligence agency, implementing the requirements of two key laws that control the country’s economic development: –

  • Foreign Exchange Management Act (FEMA), 1999,
  • Prevention of Money Laundering Act (PMLA), 2002.

HEADQUARTER AND OTHER OFFICES

This department is under the Financial Ministry’s Revenue Department.

  • Its headquarters are in New Delhi, and the Director of Enforcement is in charge.

Mumbai, Chennai, Kolkata, Chandigarh, and Delhi are the five regional offices. Special Directors of Enforcement are in charge of these offices.

  • Ahmedabad, Bangalore, Chandigarh, Delhi, Lucknow, Mumbai, Patna, Srinagar, Panaji, Guwahati, Hyderabad, Kochi, Chennai, Jaipur, Jalandhar, and Kolkata are among the company’s zonal offices. Joint Director is in charge of these offices.
  • Bhuvneshwar, Kozhikode, Indore, Madurai, Nagpur, Surat, Allahabad, Raipur, Ranchi, Dehradun, and Shimla are among its sub-zonal offices. The Deputy Director is in charge of these offices.
  • Officers are recruited both directly and through attracting officers from other law enforcement agencies. As a result, it includes officers from the IRS, IPS, and IAS (Indian Administrative Services), such as income tax officers, excise officers, customs officers, and police.

The features of the Directorate are:

  • It is a financial investigating organisation that looks into situations involving money.
  • It is part of the Finance Ministry’s Revenue Department.
  • Both acts i.e. FEMA and PMLA have provisions for appeal and adjudication to settle the disputes or difficulties.
  • It conducts investigations and brings lawsuits against people who do not follow the FEMA and PMLA guidelines.
  • It is responsible for enforcing the terms of these two acts (FEMA and PMLA).
  • It has its own trial courts as well as appellate tribunals.

The directorate’s purpose was to conduct investigations into suspected FEMA violations or infringements and impose appropriate fines on the accused perpetrator. The PMLA 2002 also covers conducting investigations, tracing, attaching, and/or confiscating assets related to financial crime, as well as arresting and prosecuting criminals.

The main functions of the enforcement directorate are;

1. This was put in place on June 1, 2000, to examine any infractions of the FEMA regulations. FEMA infractions are dealt with by ED authorities who have the authority to levy fines of up to three times the amount involved.

2. To investigate money laundering offences under the provisions of the PMLA, which went into effect on July 1, 2005, and to take actions such as property attachment and confiscation if property is determined to be proceeds of crime derived from a Scheduled Offense under the PMLA, as well as to prosecute those who are involved in the money laundering offence.

FEMA AND PMLA AND THE POWERS OF THE DIRECTORATE OVER THEM:-

India’s foreign exchange market and transactions are governed by the Foreign Exchange Management Act (FEMA) of 1999. The FEMA has replaced the previous law, the FERA, to allow for a new foreign exchange management regime that is in line with the World Trade Organization’s evolving framework. It also paved the way for the Prevention of Money Laundering Act of 2002 (PMLA) to be passed.

FEMA (especially section 37) empowers the Director and Assistant Director of the Department of Education to investigate any FEMA violation. These officers can use all of the investigation powers afforded to income-tax authorities under the Income Tax Act of 1961 under the FEMA (ITA).

  • Investigate the cases of Money Laundering under section 48 and 49 of the PMLA to the Enforcement Directorate[3].
  • According to the High Court of Delhi, the ED constituted under section 36 of FEMA is empowered to exercise powers and fulfil responsibilities as specified in section 37 of the said act, which specifies the scope of such powers of the officials[4].
  • Power to Summon under FEMA to the Enforcement Directorate. The term “summons” is defined as “a call of authority to appear before a Judicial Officer” in K.J. Aiyar’s Judicial Dictionary (10th Ed. 1988). As seen by the judgment of the  Madras High Court in the case of K. A. Manshoor vs. Assistant Director, Enforcement Directorate, Government of India[5] where the court observed that, the petitioner was essentially seeking a writ of prohibition against the ED for issuing the summons while exercising their powers under Section 37 of the FEMA and Section 131 of the Income Tax Act; where the court held that, “When the Director or Assistant Director of the ED summons someone under Section 37(3) of FEMA, the person called cannot file a writ in court to oppose the ED’s summons.”

RECENT CASES ON MONEY LAUNDERING:-

Punjab national Bank Case: Money laundering charges of Rs 2.81 billion were filed against Nirav Modi and Mehul Choksi in 2018. As a result of this lawsuit, Goldman Sachs predicts that India’s economic growth would fall to 7.6% in 2019 from 8% in 2018. As a result of the lawsuit, there was an increase in bad loans, with around 65 percent of them requiring government money to be written off. It revealed that bank recapitalization will not be adequate to keep the Indian economy afloat in its current state. It was discovered that bank recapitalization will not be sufficient to keep the Indian economy viable in its current shape. A shambolic image to credit rating agencies would hurt foreign investments, commerce, and current account deficits, putting the country’s economic health at risk. As a result of the cascading effect, the rupee would decline. As a result of the scam, banks have made compliance with corporate regulations and legislation a top focus.

The Kingfisher Airlines Case: The Enforcement Directorate has filed a money laundering charge against liquor baron Vijay Mallya, saying that he used his airline to launder about 900 crore (US$130 million). Various Indian banks reportedly provided him with a loan of Rs 9,000 crore, which he allegedly used to acquire a controlling stake in the firm. After quitting India in March 2016, he has been living in self-imposed exile in the United Kingdom. He was also implicated in the Panama Papers and the Panama Paradise Papers for disclosing sensitive documents related to offshore investments, and the PMLA court declared him a “proclaimed offender.”

The Commonwealth Scam: The embezzlement of Rs 70,000 crore from the Commonwealth Games was one of the biggest scandals in Delhi in 2010. The suspects were charged under provisions of the Prevention of Corruption Act since the case involves cheating and criminal conspiracy. As a result of this money laundering and corruption crime, India’s reputation was damaged in the eyes of the world, and it was forbidden from participation in the Olympics, hurting future games for Indian athletes.

By such Cases there were certain conclusions drawn in order to avoid such circumstances the possible ways in order to avoid such circumstances are as follows:

  • Auditing of revenues and costs on a regular basis for international game tournaments.
  • To bear the duty, authorities must undergo a background check.
  • Implementation of RBI rules to prevent skimming of digital cards and the publication of a list of wilful defaulters.
  • Incorporation of Blockchain technology into the system to validate data each time a government official signs in.
  • Internal and external audits should be conducted at all levels of government, including branch, district, and country offices.
  • FDI regulations are strict, requiring the publication of all relevant paperwork as well as the intention to invest.
  • Dual-nationals should be closely watched.
  • The system should be streamlined and improved, allowing domestic legislation to be checked.

CONCLUSION

In India, the Hawala system of financial transactions is commonly linked to money laundering. The PMLA, enacted in 2002, is India’s main anti-money laundering law, and it must be studied in connection with the PMLA’s associated Rules, which were revised in 2013 to reflect technical advances in money laundering and reporting.

Many major financial centres have now implemented measures to prevent drug-related money laundering. Too many of the world’s most important financial centres, on the other hand, have yet to enact the requisite laws or ratify the treaty. Given recent improvements in money-laundering strategies and new baking technologies, there is also a heated discussion about whether drug-trafficking-related money-laundering laws enacted by several nations in the early part of this decade is sufficient.

Money laundering has undermined the global financial system. It reinforces the link between criminal activities and financial markets, jeopardising global peace, security, and financial stability. An spike in scams occurred in failures due to severe weaknesses in the Prevention of Money Laundering Act, 2002, which was a key step taken by the government of India for identifying and avoiding fraudulent actions involving money. One of the most noteworthy reasons of failure is corruption among officials, who functioned as the backbone of corruption procedures.


[1] Section 2(1) (p) of Prevention of Money Laundering Act, 2002 (hereinafter PMLA-02) defines Moneylaundering” has the meaning assigned to it in Section 3. Section 3 provides for offence of moneylaundering – 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.

[2] The US Custom and Border Protection is a federal agency of United States Government responsible for its internal affairs and border control and security.

[3] Vidarbha Singh and Another V. Enforcement Directorate and Another

[4] Suman Sehgal v Union of India, AIR 2006 Delhi 216, 2007 138 Comp Cas 988 Delhi, (2006) 203 CTR Del 129, 2007 73 SCL 286 Delhi

[5] AIR 2009

Author: Sudhanshu Mishra, Maharashtra National Law University, Aurangabad

Editor: Kanishka VaishSenior Editor, LexLife India

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s