Prevention of Money Laundering Act,2002

SYLLABUS

GS 3 >>> Internal Security >> Money Laundering 

REFERENCE NEWS

• Recently, the Supreme Court has supported the extensive authorities granted to the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA).
• A Supreme Court panel led by Justice Bela M. Trivedi criticized four District Collectors from Tamil Nadu for not appearing in person after being summoned under the PMLA by the anti-money laundering agency.
• The Supreme Court panel reinforced the ED's right to summon "anyone for any information" under the PMLA.

ABOUT PREVENTION OF MONEY LAUNDERING ACT (PMLA). 

• Money laundering is the process of illegally concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source.
• The Prevention of Money Laundering Act, 2002 (PMLA) is an act of the Parliament of India enacted to prevent money laundering and provide for the confiscation of property derived from money laundering.
• It aims to combat money laundering related to illegal activities such as drug trafficking, smuggling, and terrorism financing.

OBJECTIVES OF PMLA

1. Prevention- To prevent money laundering by implementing stringent measures and monitoring financial transactions.
2. Detection- To detect and investigate instances of money laundering through proper enforcement and regulatory mechanisms.
3. Confiscation- To confiscate properties derived from money laundering activities to deter offenders and disrupt illicit financial flows.
4. International Cooperation- To facilitate international cooperation in combating money laundering and terrorist financing activities.

SIGNIFICANCE OF PMLA, 2002

• Legal Framework: The Prevention of Money Laundering Act (PMLA) forms the legal structure for investigating and prosecuting significant cases like the 2G spectrum scam and the AgustaWestland case.
• Asset Seizure and Confiscation: Under the PMLA, enforcement agencies have confiscated assets worth millions of dollars in high-profile cases such as those involving Nirav Modi and Vijay Mallya.
• International Compliance: India’s compliance with Financial Action Task Force (FATF) recommendations, which the PMLA incorporates, has bolstered international cooperation, notably in the investigation of the Panama Papers scandal.
• Financial Intelligence Unit (FIU) Coordination: The FIU-India, operational under the aegis of the PMLA, collaborates with law enforcement agencies to analyze financial data and pinpoint dubious transactions, aiding in the successful prosecution of cases like the HSBC black money probe.
• Monitoring Financial Transactions: There is a compulsory mandate for banks to report high-value transactions under the PMLA, aiding in the discovery of suspicious activities, as evidenced by the INX Media money laundering case.
• Enhanced Due Diligence: Banks and other financial entities enforce strict Know Your Customer (KYC) protocols in line with PMLA regulations to forestall money laundering activities, an approach exemplified by the prevention efforts in the PMC Bank scam.
• Establishing the Source of Funds: PMLA investigations have enabled authorities to trace and confirm the origins of illegal funds, as demonstrated by the Saradha chit-fund scam.
• Deterrent to Criminals: The PMLA has had a deterrent impact, with high-profile convictions such as in the Satyam scam underscoring the effectiveness of the act in dissuading criminal activities.

CHALLENGES OF PMLA,2002

• Federal Principles and Investigative Authority: The Prevention of Money Laundering Act (PMLA) empowers the Enforcement Directorate (ED) to conduct investigations without the state’s prior consent. This diverges from the protocol followed by agencies like the CBI, which must obtain such consent. This practice has raised concerns about its impact on federalism, a core component of the Constitution’s Basic Structure Doctrine, potentially challenging the balance of power between the central and state governments.
• Disparity in Punitive Measures: Under the PMLA, the spectrum of crimes, from minor infringements to severe economic offenses, are subject to similar punitive measures. For instance, a public servant implicated in a minor corruption case faces the same legal severity as a major drug trafficker. This conflation of penalties for vastly different crimes raises questions about the proportionality of justice under the PMLA and potentially infringes on the right to equality enshrined in Article 14 of the Constitution.
• Presumption of Innocence and Bail Provisions: The PMLA sets stringent bail conditions that challenge the foundational legal principle of 'innocent until proven guilty.' The act stipulates that bail can only be granted if the judge believes the accused to be innocent, which effectively reverses the burden of proof and compromises the accused's right to a fair trial and the presumption of innocence.
• Rights of the Accused and Self-Incrimination: The act's provisions, which allow the authorities to summon any person, including the accused, to testify or produce documents, have raised alarms about potential violations of the constitutional right against self-incrimination under Article 20(3). Furthermore, the ED’s discretion not to disclose the Enforcement Case Information Report (ECIR) goes against Article 21, undermining the accused's fundamental right to be informed of the charges and to prepare a defense.
• Scope and Interpretation of 'Proceeds of Crime': Critics of the PMLA argue that its broad definition of 'proceeds of crime' grants excessive discretion to enforcement authorities. This flexibility in determining what constitutes proceeds of crime could potentially lead to arbitrary or discriminatory enforcement actions, affecting the due process rights of individuals.
• Expansion of Offenses and Dilution of Intent: The inclusion of minor and less serious offenses, such as copyright and trademark infringements, in the PMLA’s schedule is said to dilute the act's original purpose, which was to combat serious economic crimes. The expanding scope of the law might lead to a disproportionate focus on lesser offenses, potentially detracting from the act's effectiveness against serious financial crimes.
• Enforcement Powers and Potential for Misuse: The considerable enforcement powers granted to the ED, including issuing summons, conducting arrests, and performing raids, have raised concerns about possible misuse. These powers, if not judiciously applied, could lead to overreach and infringe upon the rights and liberties of individuals, necessitating a careful balance between effective law enforcement and the protection of civil liberties.

SUPREME COURT OBSERVATIONS

• Strict Bail Conditions: In the case of Nikesh Tarachand Shah vs Union of India (2018), the Supreme Court deemed the bail provision of the PMLA Act unconstitutional due to its violation of Article 14 and Article 21. However, this provision was later reinstated by Parliament with certain amendments. More recently, in Vijay Madanlal Choudhary vs Union of India (2022), the Supreme Court upheld the strict bail provision as reasonable and in direct connection with the purposes and objectives of the PMLA Act, affirming its constitutionality.
• ED's Overreach: The Supreme Court, in Pankaj Bansal vs Union of India, called out the inconsistencies and lack of transparency in the operations of the Enforcement Directorate. The court underscored the importance of the ED acting with fairness to avoid overstepping its bounds.
• Procedural Violations: In Pavana Dibbur vs The Directorate of Enforcement (2023), the Supreme Court observed procedural violations and misuse of the PMLA. It emphasized the need for the Enforcement Directorate and other authorities to strictly adhere to legal standards to ensure justice and prevent misuse of power.

WAY FORWARD

• Defining 'Proceeds of Crime': To prevent the misuse of authority, it’s essential to have a clear and precise definition of 'Proceeds of Crime' within the PMLA. Refining this term would provide clarity and limit the scope for discretionary abuse by the authorities in interpreting what constitutes proceeds of crime.
• Rebalancing the Burden of Proof: The PMLA could benefit from an amendment that rebalances the burden of proof, ensuring a fairer allocation of the responsibility to prove guilt or innocence between the prosecution and the defense. This change would aim to uphold the principle of 'innocent until proven guilty.'
• Implementing Safeguards Against Authority Overreach: There’s a pressing need for the creation of an independent oversight body to supervise and assess the actions of law enforcement officers. This mechanism would serve as a check against potential overreach and abuse of power.
• Revisiting Bail Conditions: The strict bail conditions, especially for less serious economic offenses, should be reconsidered. Removing excessively harsh bail conditions would align with the principle of proportionality in the legal system.
• Boosting ED's Independence and Transparency: To bolster public confidence and dispel concerns about politicization, it is important to integrate enhanced measures of accountability for the Enforcement Directorate. Regular reporting on case handling, conviction rates, and actions taken should be mandated to increase transparency and establish the ED's independence.

PRACTICE QUESTION

Q: Examine the effectiveness of the Prevention of Money Laundering Act (PMLA),2002 in preventing money laundering in India.(15M,250W)