Money Laundering - Process and PMLA for UPSC

Money Laundering and Terror Finance: Stages, Laws, and Enforcement

Money laundering hides the origin of illicit funds—whether from corruption, organised crime, or terror financing—and reintroduces them as “clean” assets. India’s framework (PMLA, ED, FIU, RBI/SEBI norms) targets placement, layering, and integration of dirty money, and aligns with FATF standards to curb terror finance. This note explains how laundering works, key laws, oversight bodies, and emerging fronts like crypto.

How Laundering Works: Three Stages

1. Placement: Injecting illicit cash into the financial system—smurfing small deposits, cash purchases, bogus invoices.
2. Layering: Complex transfers to obscure origin—shell companies, round tripping via tax havens, trade-based laundering (over/under-invoicing), and hawala networks.
3. Integration: Re-entry as clean assets—real estate, luxury goods, “consulting” income, lottery wins, investments.

Legal Framework in India

• Prevention of Money Laundering Act (PMLA) 2002: Targets proceeds of crime tied to scheduled offences; empowers attachment/confiscation; ED investigates and prosecutes.
• Burden and bail: Reverse burden on accused to explain legitimate sources; “twin conditions” make bail stringent.
• Designated offences: Expanding schedules cover corruption, narcotics, arms, frauds, wildlife crime, cyber offences, and more.
• Amendments: 2023 changes widened reporting entities to cover crypto/virtual digital asset service providers, chartered accountants/company secretaries when handling financial transactions, etc.

Institutions and Oversight

• Enforcement Directorate (ED): Investigates PMLA cases, attaches assets, prosecutes.
• Financial Intelligence Unit (FIU-IND): Receives and analyses suspicious transaction reports (STRs) and cash transaction reports (CTRs) from reporting entities; shares intel with agencies.
• Regulators: RBI, SEBI, IRDAI enforce KYC/AML obligations for banks, securities intermediaries, insurers; penalties for non-compliance.
• Courts/tribunals: Adjudicating Authority and PMLA Special Courts handle attachments and trials; appeals lie to the Appellate Tribunal and higher courts.

International Standards and FATF

• FATF (Paris): Sets global AML/CFT standards and mutual evaluations; greylisting/blacklisting impacts capital flows.
• India’s status: FATF member; aims to stay compliant ahead of next mutual evaluation. Pakistan exited the grey list in 2022; monitoring continues for some jurisdictions.
• UN designations: 1267/1373 sanctions require asset freeze/travel ban/arms embargo on listed individuals/entities; domestic UAPA lists add national designations.

Terror Financing Linkages

• Funds from drugs (Golden Crescent/Triangle), extortion, counterfeit currency, charity front organisations, and hawala move to terror groups.
• Trade-based laundering (fake invoices), cash couriers, and informal value transfer systems (hawala) evade banks.
• Crypto is increasingly used to move value; blockchain analytics and VASP reporting are critical.

Trade-Based and Hawala Risks

• Under/over-invoicing: Misdeclaring value/quality/quantity to move money across borders under guise of trade.
• Phantom shipments: Fake bills of lading/invoices with no actual goods.
• Hawala: Informal value transfer without physical movement of cash; relies on trust networks, often linked to diaspora corridors.
• Countermeasures: Better customs–FIU coordination, data analytics on trade anomalies, beneficial ownership transparency for import/export entities.

Crypto and New Frontiers

• VASPs must do KYC, maintain records, file STRs/CTRs under PMLA; exchanges face enforcement for AML lapses.
• Privacy coins, mixing services, and cross-chain swaps complicate tracing; cooperation with foreign exchanges and analytics tools is key.
• Online gaming and digital assets can be misused for layering; regulators monitor high-risk segments.

Compliance and Reporting

• KYC, beneficial ownership, PEP (politically exposed persons) risk checks, and ongoing monitoring are mandatory for reporting entities.
• Banks/securities intermediaries must file STRs for suspicious patterns, not only for cash thresholds.
• Real estate dealers, jewelers, casinos (where applicable), and professionals handling client funds are brought into the reporting net to close vulnerabilities.

Beneficial Ownership and Shell Companies

• Opacity in company ownership enables layering; shell firms across jurisdictions hide controllers.
• India requires beneficial ownership disclosure for companies/LLPs; banks must verify KYC of ultimate beneficial owners.
• Global cooperation and registries improve tracing; enforcement targets masterminds, not just name-lenders.

Case Implications of FATF Lists

Greylisting raises borrowing costs and can trigger capital flight; Pakistan’s experience (2018–2022) led to tighter enforcement and reforms before exit. Blacklisting severely restricts banking ties (e.g., Iran, DPRK). India’s compliance drive and mutual evaluation readiness aim to avoid any such reputational/financial risk.

Challenges and Safeguards

• Striking balance: Strong powers vs due process—courts scrutinise ED action; need for timely charge sheets and fair trials.
• Capacity: Skilled financial investigators, forensic accounting, and cross-border coordination are essential.
• Data quality: STR usefulness depends on quality; over-reporting low-value alerts can bury real signals.

Judicial and Rights Perspective

• Attachment/seizure powers are intrusive; clear linkage to proceeds of crime must be shown.
• Timely filing of prosecution complaints and trials safeguard against prolonged uncertainty.
• Courts have upheld strong powers but emphasise safeguards against arbitrary action.

Way Forward

• Upgrade analytics at FIU and banks to detect complex layering (network analysis, AI models) while protecting privacy.
• Faster mutual legal assistance and information sharing with foreign counterparts; pursue beneficial owners, not just shell fronts.
• Strengthen regulation of gatekeepers (company formation agents, professionals) and high-risk sectors (real estate, gems).
• Public awareness and industry training to detect red flags (fake invoicing, sudden high-value deals, mule accounts).

Takeaway: Money laundering and terror finance thrive on weak compliance and slow coordination. PMLA/FATF-aligned rules, empowered investigators, and better analytics can choke illicit flows—but must operate with transparency, accountability, and speed to be both effective and fair.