Analysis of the New Law on Money-Laundering in India

Money Laundering refers to the conversion of money which has been illegally obtained, so that it appears to have originated from a legitimate source.The term "money laundering" is said to have originated from the mafia ownership of Laundromats in the United States who earned huge amounts from extortion, gambling etc. and showed legitimate source for these monies but as a crime, money laundering became a matter of concern only in the 1980s.

Robinson, who is internationally known for his 1995 investigative tour de force, The Laundrymen has defined money laundering as “illegal money put through a cycle of transaction, so that it comes out the other end as legal money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income.”

Article 1 of the 1990 European Communities Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime has also defined “money laundering” in a similar fashion as stated above.[1] 

Money Laundering: The Current Status in India

Every year, billions of dollars are derived from drug trade and are then reinvested throughout the world by otherwise legitimate businessmen, accountants and bankers[2] and it is the increasing awareness of the huge profits generated from this criminal activity that has created the impetus for governments to legislate against such activities.

Money laundering is becoming very protuberant with the passage of time. The estimated amount of money laundered globally in one year is 2 to 5% of the global GDP (or USD 800 billion to USD 2 trillion).[3] In December, 2012, HSBC Holdings Plc. had to agree to pay a record USD 1.92 billion in fines to US authorities for getting itself involved in money-laundering issues.[4]

As far as India is concerned, in 2011-12, as many as 35 stock brokers were probed by the Securities and Exchange Board of India (“SEBI”) for possible lapses in controls related to money laundering and this led to actions being taken by stock exchanges and depositories against more than 300 market entities for violations and discrepancies related to Anti-Money Laundering (“AML”). [5] Recently, the Enforcement Directorate has been investigating an alleged Rs. 870 crore money laundering fraud by Reebok India.[6]

The current status of money laundering in India can also be evaluated by looking at the Basel AML Index prepared by the Basel Institute on Governance, Switzerland. The Basel AML Index scores countries on the basis of AML laws, financial regulations, political disclosure etc. in that country. The Overall Score, which ranges from 0 (low risk) to 10 (high risk), indicates a country’s risk level in money laundering. Out of 140 countries, India has been ranked 93rd (high risk zone with a score of 6.05) as compared to Norway having a score of 2.36.[7] This clearly shows that India, in the present-day scenario, is very vulnerable to money laundering activities and is a high risk zone.

Checking Money Laundering in India

Even though money laundering is a mammoth issue, constant efforts have continuously been taken by Indian agencies and regulators to eliminate it. The Financial Intelligence Unit- India (“FIU-India”) which is the nodal agency in India for managing the AML ecosystem, has significantly helped in coordinating and strengthening efforts to reduce money laundering and related crimes in India, while the Prevention of Money Laundering Act, 2002(“the Principal Act”) has been the core framework for combating it.

In June 2010, after a stringent evaluation by them, India was finally admitted as the 34th country member of the Financial Action Task Force (“FATF”). This membership has helped Indian enforcement agencies to exchange information and financial institutions to gain much better access to markets of other member countries by portraying that Indian financial institutions are very comparative in terms of risk management standards. The membership to FATF has also helped Indian financial services industry to recognize those areas which need scrutiny and as a result of this, financial institutions increasingly started evaluating the inherent AML risks in their products and services and taking steps to mitigate the same.

However, as a consequence of becoming a member of FATF, India has had to commit itself to bring amendments to its legislations and institutional framework to confirm to FATF standards in order to better check money laundering. Also, as stated above, the Basel AML Index also indicates that there is a need to amend the current money laundering related legislation in India. For this reason, the Prevention of Money Laundering (Amendment) Bill, 2011 had to be introduced by the Minister of Finance, Mr. Pranab Mukherjee in the Lok Sabha on December 27, 2011.

The New Law and the Proposed Changes

The bill seeks to amend the Principal Act to update the provisions for combating money laundering and terror financing. These amendments are in line with the standards set by FATF. Before being passed by the Lok Sabha, the bill was scrutinized by the Standing Committee on Finance (2011-12), headed by Shri Yashwant Sinha, which prepared a report suggesting various changes for better implementation of the new law. Most of the recommendations suggested by them became part of the Prevention of Money-Laundering (Amendment) Bill, 2012 (“2012 Bill”). The 2012 Bill finally got passed by the Lok Sabha on November 29, 2012 and by the Rajya Sabha on December 17, 2012.

Also, vide Notification No. SO 343 (E) [F.NO.P.12011/3/2009-S.O. (E.S. CELL)], dated February 8, 2013, the Central Government had appointed February 15, 2013 as the date on which the provisions of the 2012 Bill shall come into force.[8]

With these amendments, it is believed that the Principal Act would largely conform to the global standards. The following are the key amendments to the Act:

· Expanded the definition of offence of money laundering to include activities like concealment, acquisition, possession and use of proceeds of crime.

· Removed the upper limit of fine of Rs. 5 Lakhs.

· Expanded the scope and duration of Attachment of property to 180 days

· Introduced the concept of Reporting Entity

· Increased the powers of the Director to call for records and conduct inquiries

· Provided that special courts can release property in case of decision by a foreign court

· Clarified that prosecution extends not only to individuals but to Companies as well

· Deleted the monetary threshold that applied to the offence of money-laundering

The Proposed Changes:

1. The definition of Offence of money-laundering has been expanded [Section 3]

The Principal Act stated that whoever indulges in any activity connected with proceeds of crime and projects it as untainted property shall be guilty.

Therefore, the Principal Act does not criminalize concealment, possession, acquisition and use of the proceeds of crime, a fact which was revealed by FATF during mutual evaluation of India. Also, Article 6 of Palermo Convention (United Nations Convention against Transnational Organized Crime) requires that such activities should also be criminalized in order to better control money laundering. Hence it has been proposed by the 2012 Bill that the definition of the offence of money laundering should be expanded to include the abovementioned activities as well. By this amendment, the actions of placement, layering and integration that are usually assumed to constitute money laundering are included within the scope of the definition.

2. The upper limit for fine has been removed [Section 4]

The Principal Act provided for a penalty of fine which may extend to five lakh rupees as punishment for money-laundering. This amount appeared to be disproportionately low, given the gravity of the offence of money laundering and therefore, the 2012 bill has removed the upper limit of such fine. After the amendment, the quantum of fine proportionate to the gravity of the offence will be determined by the court on a case to case basis. The limit of Rs.5 lakh is therefore proposed to be deleted altogether.

The Standing Committee has also suggested that the courts could consider a percentage of the amount of money laundered as fine for the offence. This would ensure that each offender has to pay a fine according to the gravity of his offence.

3. Scope and duration of Attachment of property expanded [Section 5]

The Principal Act provided that the person from whom property is attached must have been charged of having committed a scheduled offence. It is proposed that this provision should be deleted as property may come to rest with someone, who has nothing to do with the scheduled offence or even the money-laundering offence. The 2012 Bill proposes to expand the scope of attachment by stating that any proceeds of crime which are even likely to be concealed or transferred can be attached. The 2012 bill further proposed that if any proceeds are to be used for any purpose which will frustrate the confiscation of proceeds of crime, then such property will also be attached.

Further, the Principal Act provided for attachment of property for 150 days. The 2012 Bill has proposed to increase the same to 180 days.

4. The concept of Reporting Entity and Beneficial Owner introduced [Section 12]

The Principal Act provided for banking companies, financial institutions and intermediaries to maintain records of the transactions they sanction. The 2012 Bill proposes that a new concept of “reporting entity” should be introduced which would maintain records of various transactions sanctioned by banking companies and financial institutions etc. It is also proposed that these entities would identify their clients and the client’s beneficial owners [Clause 2 (1) (c) and (d)]. For this purpose, reporting entity has been defined in 2012 bill to include banking companies, financial institutions, intermediaries and persons carrying on designated business or profession [Clause (wa) of Section 2]. Further, persons carrying on designated business or profession have also been defined to include persons carrying on activities for playing games of chance, real estate agents and dealers of precious metal and precious stones etc. [Clause (sa) of Section 2]

This clearly shows that the 2012 Bill mandates many other categories of persons to maintain records, unlike the mandate in the Principal Act. This expansion to other categories of persons would ensure reporting of many such transactions which earlier would have gone unnoticed.

Also, a very significant step taken towards amending the Principal Act is not only expanding the categories of persons required to maintain records but also the kind of records that have to be maintained i.e. the maintenance of records of beneficial owner. The FATF had released a Mutual Evaluation Report (“MER”) in June 2010, on the basis of findings of which, India was admitted as a member of FATF. One of the deficiencies highlighted by MER during evaluation of India was the lack of identification and verification of beneficial ownership of legal persons. Since the Principal Act did not have any provision, the Government of India had to prepare and submit an action plan to FATF stating that it would take appropriate measures to bring the same within the ambit of law. Post this, 2012 Bill proposed that a reporting entity should identify and maintain records of the “beneficial owner” of their clients. It can therefore be clearly noticed that if beneficial owners are identified and their records are maintained, the chances of money laundering would be strictly reduced.

On an analysis of the aforementioned sections, it can be noted that the 2012 Bill in its present form does not impose any obligation on clients, and it casts responsibility only on the reporting entities to ascertain “beneficial ownership‟. The Standing Committee, however, was of the opinion that clients as well should be required to declare beneficial ownership while undertaking transaction with the bank as considering the large volume of transactions, which banks are required to deal with, it may not be practically possible for them to ascertain “the beneficial owners”.

Also, the Standing Committee had recommended in their report that if the reporting entities are not able to find the beneficial owner then there should be an obligation upon the reporting entity to not to open the relevant client’s account. It is worth noting that in spite of the standing committee suggesting that, in those cases where beneficial owner cannot be identified, an account should not be opened, the bill does not have any provision with regard to the same. Therefore, currently no action will be taken even if beneficial owner is not identified in any case. This renders the new provision otiose.

Further, it is proposed in 2012 Bill that reporting entity has to report even an attempted transaction. These provisions have been proposed by 2012 Bill to cut down suspicious transactions from the very beginning.

5. Director’s power to call for records and conduct inquiries [Section 12A]

In order to make sure that reporting entities comply with Section 12 requirements, the 2012 Bill proposes that the director will have the power to call for any records from reporting entities and will also have the power to make inquiries for non-compliance of reporting entities to the obligations cast upon them.

6. Penalty for non-compliance by reporting entity, its designated director or any of its employees (Section 13)

If a reporting entity or its designated director on the Board or any of its employees does not comply with the obligations under the 2012 Bill, a monetary penalty extending upto one lakh rupees for each failure can be imposed upon them.

7. Freezing of property [Section 8 and Section 17A]

The Principal Act provided for attachment of property after the charge sheet u/s 173 CrPC has been filed in scheduled offence case and seizure of property after FIR u/s 157 CrPC has been filed in scheduled offence case. However, in a number of situations it may not be practicable to file charge sheet or FIR to attach or seize property as this may happen after a prolonged gap and chances of disappearance of proceeds of crime cannot be ruled out. To obviate this problem, the 2012 Bill provides for freezing such property, so that it can be seized or attached and confiscated later.

8. Burden of Proof on accused [Section 24]

The 2012 Bill states that in the proceedings relating to money laundering, the funds shall be presumed to be involved in the offence, unless proven otherwise by the person charged with the offence.

9. Release of the property by special court in case of decision by foreign court [Section 58A]

The Principal Act did not have any provision regarding release of property by a special court. Thus, the 2012 Bill proposes to expand the powers of special courts by suggesting that where on conclusion of trial in a criminal court outside India under the corresponding law of any other country, such court finds that the offence of money-laundering has not taken place or the property in India is not involved in money-laundering, the designated Special Court may on an application moved by a concerned person order release of such property. This power is purely discretionary due to the presence of the word “may” suggesting that the local court in India will still have power to decide matters on its merits, even when the person is acquitted by an overseas court. For this purpose, the 2012 Bill proposes to introduce the concept of ‘corresponding law’ to link the provisions of Indian law with the laws of foreign countries [Clause (ia) of Section 2].

10. Clarification that prosecution extends to Companies as well [Section 70]

The Principal Act did not clearly provide for the prosecution of companies and thus to remove doubts, the 2012 Bill proposes to add an explanation to Section 70 to state that a company can be prosecuted irrespective of whether an individual has been prosecuted or not. Hence, prosecution or conviction of legal juridical person is not contingent on prosecution of any individual.

11.  Monetary threshold does not apply to the offence of money-laundering [Schedule I]

Part B of the Schedule in the Principal Act included only those crimes that are above Rs. 30 lakh or more whereas Part A did not specify any monetary limit of the offence. The 2012 Bill proposes to bring all the offences under Part A of the Schedule to ensure that the monetary thresholds do not apply to the offence of money laundering. 

CONCLUSION:

As the 2012 Bill becomes effective from February 15, 2013, what remains to be seen now is the effective implementation of the same. In India it is not very uncommon to see amendments being made to legislations to make them fall in line with global standards, but in practicality we never see these laws being effectively implemented. The need of the hour in India is not just to have stringent laws against money laundering but also to ensure that the law is being properly followed by one and all. Therefore, as stated above, where on the one hand we see the US Government levying penalty on HSBC to pay USD 1.92 billion, on the other hand we see the Government of India taking no action at all against HSBC, despite it being a clear case of money laundering. Further, besides HSBC, the US has imposed a fine of USD 667 million on Standard Chartered, ING Bank (USD 619 million), Credit Suisse (USD 536 million), Royal Bank of Scotland (USD 500 million) and Barclays as well. Hence, very clearly, it is time for the Indian Government to wake up from their deep slumber and start scrutinizing the miscreants more pertinently.

On the part of financial institutions, it is imperative that they regularly assess money laundering risks in their products/services/transactions/delivery channels as well as evaluate if their current policies and procedures mitigate those risks. It is further of utmost importance that under the new law, the financial institutions ensure proper customer identification procedures including identification of beneficial ownership and politically exposed persons. However, while monitoring and identifying of these procedures is important, establishing an efficient client data updation process is also equally vital.