Money laundering : a brief overview

To understand the Act better, let’s first take a look at what is meant by money laundering.

What is money laundering

Money laundering is defined as the process by which an illegal fund, perhaps, black money,
obtained from illegal activities is disguised as legal money, which is eventually portrayed to be
white money. This is done by passing the funds through several channels (the process is
discussed in brief below). The money, thus laundered, is passed on through various phases of
conversions and transfers to achieve a sort of deceptive legality and to eventually reach a
legally acceptable institution, say for instance, a bank.

Common forms of money laundering

The most common forms of money laundering are:

1. Hawala system,

2. Smuggling bulk amounts of money ,

3. Fictional loans,

4. Business involving cash-incentives,

5. Round-tripping,

6. Laundering Laundering that is trade centric,

7. Shell companies and trusts,

8. Real estate,

9. Fake invoicing,

10. Gambling, etc.

IMPACT OF MONEY LAUNDERING ON DEVELOPMENT

The impact of money laundering on the development of a nation is as stated below:

Increase in crime and corruption rate

When economic offences like money laundering attain success, criminal activities gain profit,
thus causing an increase in crime and corruption rates. Moreover, the use of illegitimate means
to gain profit, like that of bribery also rises.

Threat to reputation and international repercussions

A country might have to face serious repercussions when its reputation gets tarnished or when
it becomes known as a money laundering or terrorist financing haven. Further, even legal
businesses and companies may have to face the repercussions of such illegitimate activities;
for instance, their access to the world market may get narrower due to overly cautious
inspections and system controls.

Weakened financial institutions

Illegal activities like money laundering and terrorist financing possess the ability to harm the
peace and harmony of a country’s economic sector; further, they can also disrupt the stability
of individual financial institutions in several ways.

Compromised economy and private sector

It is common for money launderers to use ‘front companies’ to launder money. Front
companies can be defined as those companies that appear to be legitimate, thus engaging in a
legitimate business, but in actuality are controlled by criminal minds. Such companies ‘co-
mingle’ with the illegitimate funds thus obtained with legitimate funds to conceal the source
from which the illegitimate money was obtained.

ALL YOU NEED TO KNOW ABOUT THE PREVENTION OF MONEY

LAUNDERING ACT, 2002

A brief history of Prevention of Money Laundering Act, 2002

Before the enactment of the PMLA, 2002, various legislations dealt unanimously with the
problem of money laundering. Some of them are as follows:

• The Income Tax Act, 1961;

• The Conservation of Foreign Exchange & Prevention of Smuggling Activities Act

(COFEPOSA), 1974;

• The Smugglers and Foreign Exchange Manipulators Act (SAFEMA), 1976;

• The Benami Transactions (Prohibition) Act, 1988;

 • The Indian Penal Code, 1860 & the Code of Criminal Procedure, 1973;

• The Narcotic Drugs and Psychotropic Substances Act (NDPS),1985;

• Prevention of Illicit Traffic in Narcotic Drugs & Psychotropic Substances Act, 1988;

• The Foreign Exchange Management Act (FEMA),1999.

The Prevention of Money Laundering Bill was put forward in Parliament in 1998. Further, the
PMLA Bill was referred to the Standing Committee on Finance. The Standing Committee then
handed out its report to the Lok Sabha in 1999. Later, in 1999, the Government introduced the
Prevention of Money Laundering Bill, 1999, in the Parliament after including all the
suggestions laid down by the Standing Committee. Further, the Bill received the assent of the
President and came to be known as the Prevention of Money Laundering Act, 2002. The Act
became enforceable on July 1, 2005.

It is noteworthy that the PMLA was sanctioned as a response to India’s global commitment
(Vienna Convention) to combat the issue of economic crimes like money laundering. The other
conventions include:

• United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances, 1988;

• Basle Statement of Principles, 1989;

• Forty Recommendations of the Financial Action Task Force on Money Laundering,

1990;

• Political Declaration and Global Program of Action adopted by the United Nations
General Assembly in 1990.

The main motive for enacting such a legislation was to combat the crime of legalising the
economic gains obtained from illegal sources. This Act authorises the Indian Government and
the police officials to seize any property that they have investigated to have been earned from
illegal sources or by conducting any illegal activities.

As the name suggests, the PML Act was enacted to intercept or obstruct the issue of money
laundering. Further, the motive was to seize any property bought or obtained by carrying out
the crime of money laundering and for matters related to such an act.

OBJECTIVES OF THE PREVENTION OF MONEY LAUNDERING ACT, 2002

The Prevention of Money Laundering Act, 2002, was sanctioned with the aim of combating
the issue of money laundering. Some of its objectives are as follows:

1. To prevent and control the issue of money laundering.

2. To confiscate or take into custody any property that is likely derived from or has
involvement in cases of money laundering.

3. To penalise the offenders with the offence of money laundering.

4. For appointing the adjudicating authority and appellate tribunal for taking in charge of
matters related to money laundering.

5. To make it obligatory for banking companies, financial institutions and intermediaries

to preserve records or documents relating to financial transactions.

6. To manage any other issues related to money laundering.

Important terms to know under the Prevention of Money Laundering Act

Attachment

The term ‘attachment’ under the PMLA is defined as the interdiction of transfer, conversion,
disposition, or movement of property, as stated under Chapter III of the Act.

Beneficial owner

The term ‘beneficial owner’ under Section 2(fa) of the PMLA means a person who either
possesses or has command over a client of a reporting entity or an individual in place of whom
a transaction is being directed, and includes an individual who exercises optimum effective
power over a juridical person.

Client

Under Section 2 (ha), the term ‘client’ means an individual involved in an economic transaction
or activity with a reporting entity. This also includes any individual on whose behalf the
individual involved in the financial transaction or activity is acting.

Corresponding law

Under Section 2(ia) of the PMLA, the term ‘corresponding law’ is defined as any law of another
country equivalent to any of the clauses of the Act or those that manage the offences in that
country, similar to any of the scheduled offences.
Person

Under Section 2(s) if the PMLA, the term ‘person’ incorporates-

1. An individual,

2. A Hindu Undivided Family, that is commonly known as HUF,

3. A company,

4. A firm,

5. An association of individuals or a body of individuals, whether incorporated or not,

6. Every artificial juridical person not coming under any of the preceding sub-clauses,
and

7. Any agency, office or branch owned or controlled by any of the above persons
mentioned in the preceding sub-clauses.

Proceeds of crime

Under Section 2(u) of the PMLA, the term ‘proceeds of crime’ is defined as any property
acquired or attained, directly or indirectly, by some individual by performing any crime or
wrongdoing pertaining to a scheduled offence, or the value of any such property (or, where
such property is taken or held outside the country, then the property equivalent in value held
within the country). Later, modifications were made to the Section, and the term ‘or abroad’
was added to the definition of ‘proceeds of crime’.

Further, an explanation is added to avoid any sort of discrepancies, it states that ‘proceeds of
crime’ include property that is derived or obtained from the scheduled offence but also includes
any property that may directly or indirectly be acquired as a result of any criminal activity
having its relation to the scheduled offence.

Property

Under Section 2(v) of the PMLA, the term ‘property’ means any property or assets of every
description, whether corporeal or incorporeal, movable or immovable, tangible or intangible,
and incorporates deeds and instruments evidencing title to, or interest in, such property or
assets.
Further, an explanation is given under the said Section, stating that, in order to remove all
doubts, it is stated that the term ‘property’ incorporates any type of property used in committing
a wrong under this Act or any of the scheduled offences.

Reporting entity

Under Section 2(wa) of the PMLA, the term ‘reporting entity’ means a banking company, any
financial institution, an intermediary, or an individual conducting a designated business or
profession.

Important provisions under the Prevention of Money Laundering Act, 2002

Offence of money laundering (Section 3)

The definition of money laundering is exhaustive enough to cover most of the instances of
converting black money into white. The definition of money laundering is exhaustively covered
under Section 3 of the PMLA. It says, a person is guilty of the offence of money laundering if
he/she is found to have, directly or indirectly:

• An attempt to indulge, or

• Consciously assisted, or

• With full knowledge is a party, or

• Has an involvement in one or more of the below processes or activities associated with
proceeds of crime, namely:

• concealment, or

• possession, or

• acquisition, or

• use, or

• projecting as untainted property, or

• claiming as untainted property.

In other words, any individual who has a direct or indirect involvement, or if he knowingly
assists or is a part of the activity that is connected to such a crime, including its concealment,
possession, acquisition, or use, and projects or declares it as untainted property, will be held
guilty of the offence of money laundering.

Punishment for money laundering (Section 4)

Under Section 4 of the PMLA, any individual who commits the crime of money laundering
will be accountable to receive a punishment that involves rigorous imprisonment up to 3 years,
which may extend to 7 years, and will also be culpable to pay a penalty.

A point must be noted that, in case if the crime in question is related to any offence specifically
mentioned under the Narcotic Drugs and Psychotropic Substances Act, 1985, the penalty may
be extended to a rigorous imprisonment of 10 years instead of 7 years.

Attachment, Adjudication & Confiscation

Attachment of property involved in money laundering (Section 5)

Section 2(v) of the PMLA defines the term ‘property’ as “any property or assets of every
description, whether corporeal or incorporeal, movable or immovable, tangible or intangible,
and includes deeds and instruments evidencing title to, or interest in, such property or assets,
wherever located”.

Further, Section 2(d) of the PMLA defines the term ‘attachment’ as “means prohibition of
transfer, conversion, disposition, or movement of property” by any direction given under the
provisions of the PML Act.”

A point must be noted that under Section 5 of the PMLA, the power of attachment has been
conceded to the director, the joint director, or any officer not below the rank of a deputy
director. The person in authority can attach property for up to 180 days, if there is a cause to
believe the property was obtained illegally or that the individual is in possession of proceeds
of crime and is charged with that crime, and proceeds of money are likely to be concealed or
transferred.

Further, such attachment must be executed in a manner prescribed under the Second Schedule
of the Income Tax Act, 1961. Moreover, the person in authority must record in writing the
reasons they believe the property was obtained through illegal means. The reason must be sent
in a sealed envelope to the adjudicating authority along with a copy of the attachment order.
After attachment, the adjudicating authority will receive the complaint, which should be filed
within 30 days.
Adjudicating authorities (Section 6)

Under Section 6 of the PMLA, the Central Government is entrusted with the authority to
appoint an adjudicating authority to exercise jurisdiction, powers and authority conferred

by or under this Act. An adjudicating authority must consist of a bench of:

1. A chairperson, and

2. Two other members, out of which one individual shall have experience in the field of
law, administration, finance or accountancy.

It is pertinent to note that, the individual will not be qualified to be assigned as a member of
the adjudicating authority in the field of law unless he has the following:

1. Has qualifications to be appointed as a judge of any district, or

2. Has been a representative member of the Indian Legal Service and has held a post in
Grade I of that service.

And the individual will not be qualified to be appointed as a member of the adjudicating
authority in the fields of finance, accountancy, or administration unless he has the prescribed
possession.

Moreover, the adjudicating authority will not be obliged to act according to the terms laid down
by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice.
Further, the adjudicating authority will be entrusted with the authority to have and follow its
own procedure.

Powers of the bench under the adjudicating authority

As stated above, the bench may consist of a chairperson with one or two members. The benches
of the adjudicating authority will sit in New Delhi and at other locations that the Central
Government along with the chairperson may specify. Further, the Central Government has the
authority to mention which areas shall be governed by the bench of the adjudicating authority
via a notification.

Further, the chairperson is entrusted with the authority to transfer a member from one bench to
another. Moreover, if the chairperson, at any stage of the case or matter, believes that the
essence of the case is such that it must be discerned by a bench involving two members, the
chairperson can transfer the case to another bench. Additionally, the chairperson or members
shall have a tenure of five years from the date of entering the office; however, any individual
who has attained the age of 65 years will not be eligible to hold office.

Dismissal of any member of the adjudicating authority

The chairperson, or any other member for that matter, cannot be dismissed from the office
except by an order passed by the Central Government. The dismissal can be done only after
giving the party the opportunity to speak, thus, following the principle of audi alteram partem.

Adjudication (Section 8)

If any complaint is filed under Section 5(5) or an application is made under Section 17(4) or
Section 18(10), the individual allegedly said to have been guilty of committing the offence of
money laundering will be served with a notice of not less than 30 days asking him to submit
proof the sources from where the income, earnings, or assets were obtained and to provide a
reasonable justification for why the property must not be impounded.

After hearing from the side of the party accused of the crime, the adjudicating authority will
record its findings as to whether all or any of the properties are involved in money laundering
or not. In case the adjudicating authority reaches a decision that the property in question is
involved in money laundering, he shall state the reason and confirm it in writing about the
attachment of the property, and in case if the property is already attached, it will continue until
the order of trial becomes final. Then, if the individual is found guilty by the court, the attached
property will vest in the Central Government.

Vesting of property in the hands of Central Government (Section 9)

As stated above, when the court passes an order that the property obtained through money
laundering has to be confiscated, all the rights and titles to the said property will lie in the hands
of the Central Government, free from any encumbrances.

Further, if the special court or the adjudicating authority becomes aware that any hindrances
on the property or lease-hold interest have been created with a view to vanquish the clauses of
the Act, it may proclaim that such hindrances or lease-hold interests are void. And if it is
declared void, all the property will be vested in the hands of the Central Government free from
any hindrance or lease-hold interest.

Obligation of the banking companies, financial institutions and intermediaries

Reporting entity to maintain records (Section 12)

Under Section 12, the financial institutions, banks and intermediaries have the following
obligations to observe:

1. To maintain records of all transactions and amount as stated in the rules, irrespective of
the fact that such transactions were carried on in one go or there were series of
transactions that had an internal connection to each other when such series occur within
a span of thirty days.

2. To inform the director about any transaction within the allotted time.

3. To verify the identity of the clients in the manner thus prescribed.

4. To keep a record of all the documentation relating to identity of the clients and the
beneficial owners, along with keeping record of account files and business transactions
relating to the clients.

Further, every piece of information recorded, furnished, or verified as mentioned above must
not be revealed to the public at large. The records must be kept for a period of 5 years from the
time the transaction took place. The Central Government is given the authority to exempt any
reporting entity from reporting under Section 12.

Power of directors to levy fine (Section 13)

Under Section 13, the director has the power to call for records from the bank, financial
institutions, and intermediaries. Further, if the director, after a thorough investigation,
discovers that the bank, financial institutions, and intermediary have not adhered to the
conditions imposed under Section 12, he can levy a charge or fine ranging from ₹10,000
to ₹100,000.

No civil or criminal suit can be filed against the reporting entity (Section 14)

Under Section 14, no civil or criminal suit can be filed against any bank, financial institution,
or intermediary that provides information to the authority.

Summons, searches and seizures

Power of survey (Section 16)

It states that an authority has the capacity to enter any property or premises if they have reasons
to believe that an offence of money laundering has been committed or if they believe that
carrying out an investigation will give him an opportunity to look into the requisite records that
might aid in determining whether any illegal activity was conducted under the Act or not. The
authority has to mention the reason for carrying out the proceedings in writing, along with
recording any statement of any individual present at the place of investigation if it is beneficial
to the proceedings under the Act.

Search and seizure (Section 17)

Section 17 of the PMLA has provisions regarding the power of the officials to search for and
seize any property acquired through the offence of money laundering. Any director, joint
director, or deputy director may entrust an officer subordinate to him to perform the following
activity:

1. To get and search into any building, place, vessel, vehicle or aircraft where the authority
reckons that any records of such activities are reserved.

2. To smash open any type of lock on any door, box, locker, safe, almirah where the keys
are not accessible.

3. To seize any property obtained through such an investigation.

4. To mark the records on the property thus obtained via investigation or to make an
extract or copies of the document.

5. To make a note on the inventory of records of the property.

6. To inspect and survey if any individual is on oath or is in possession or control of any

record or property, in matters relating to any inquiry carried on under the PMLA.

The requirement of filing complaint (in matters relating to a scheduled offence, a search can
be carried out only after a report has been sent to a magistrate or if a complaint is filed by any
authority that has been entrusted with the power to make inquiries in matters relating to a
scheduled offence before a magistrate) has been removed by the 2019 Finance Act. In matters
where the property cannot be seized, the authority has the power to make an order to freeze
such property. After a property is searched and seized or frozen as per the order, the officer
must forward a copy of the reasons so recorded, along with any material in his hands, to the
adjudicating authority in a sealed envelope in a manner described in the Act.

Search of persons (Section 18)

Section 18 that has provisions on the authority to search an individual states that if any
authorised official has grounds to believe that any person has suppressed any person or
anything under his custody, ownership, or control, any activity of a crime that may be helpful
or relevant to any proceedings under the PMLA, the person in power will have the capacity to
search such an individual and seize records of any such property.

Power to arrest (Section 19)

It deals with the power to arrest a person, states that any director, deputy director, assistant
director, or any other officer has the power to arrest a person on behalf of the central
Government by general or special order. An individual can be arrested by the concerned
authority if such authority had on the basis of the proof has reason to believe that-

• The individual is guilty of an offence punishable under the PMLA, and

• The reason for such a belief has been duly recorded in writing.

Steps to be followed by the authority after arrest

After the arrest, the authority has to follow the following measures:

1. To inform the arrested individual about the reasons for the arrest.

2. To share a copy of the detention order along with the material in his possession to the
adjudicating authority.

3. To produce the individual held guilty of the offence of money laundering in front of the
special court or judicial magistrate or a metropolitan magistrate as the case may be
within 24 hours of the arrest.

A plain reading of Section 19 of the PMLA would make it evident that there is no requirement
under this Section to receive an arrest warrant from the court before taking the individual guilty
of the offence of money laundering into custody. Simply put, if the provisions of Section 19
are met, the officer in authority can arrest the individual without a warrant.

Please note: While arresting an individual for the offence of money laundering, it is irrelevant
to consider whether such an offence is cognizable or non-cognizable under the PMLA.
However, there are dissenting judgements of high courts on this matter, and the matter is now
up for discussion in the Apex Court.

Retention of property (Section 20)

Under Section 20 of the PMLA, any property that is expropriated during the investigation may
persist to be in the possession of the official in power, or in case if such a property is frozen, it
may persist to remain frozen for a period not going beyond 180 days from the date the official
expropriated or froze the property in question. Further, once the property is frozen or seized
for 180 days, it will be given back to the individual from whom it was confiscated or frozen;
however, the adjudicating authority has the authority to keep possession or allow to continue
to freeze the property even after 180 days if they have reasons to believe that the property
is prima facie involved in money laundering. Furthermore, after the order of seizure has been
passed, the court or the adjudicating authority has to release all property other than the one
having its involvement in the money laundering case.

Retention of records (Section 21)

Under Section 21 of the PMLA, if the investigating officer believes that there is a rationale to
prolong the 180 days term for seizure or freezing of records, he can do so under the PML Act.
However, it must be noted that the copies of the records can be acquired on request. Further,
on expiration of 180 days, the records must be returned to the individual from whom they were
seized or the court or adjudicating authority ordered to freeze them; however, after passing an
order of seizure, the adjudicating authority has the power to order the release of the records to
the individual from whom such records were confiscated. Further, when an order for releasing
the record has been made, the director or the officer in authority has the power to hold back the
release of records for a period of 90 days from the date of the order if they have reasons to
believe that such a record is important for making an appeal.

Penalties under Prevention of Money Laundering Act, 2002

The authority has the power to initiate action against any individual found guilty of having
committed the offence of money laundering. Some of the penalties are as follows:

1. Freezing or seizing cash, bank accounts, investments, property and records and/or any
attachment of any property that was bought via illegitimate means.

2. This offence is punishable with-

• A minimum of 3 years of rigorous imprisonment and a maximum period of 7 years, or

• A fine.
 3. If the crime of money laundering has drugs or any substances involved or has any
relation to the Narcotic Drugs and Psychotropic Substances (NDPS) Act, 1985, the
penalty can go up to 10 years, along with a fine.

Authorities that can investigate under Prevention of Money Laundering Act, 2002

Enforcement Directorate

The enforcement directorate in the Department of Revenue, Ministry of Finance, the

Government of India, has the authority to investigate matters of money laundering in India
under the PMLA.

Financial Intelligence Unit- India (FIU-IND)

The Financial Intelligence Unit- India (FIU-IND) under the Department of Revenue, Ministry
of Finance, is an autonomous body that reports directly to the Economic Intelligence Council
(EIC). The EIC is headed by the Finance Minister. FIU-IND is a central agency with the
responsibility of receiving, processing, analysing, and disseminating information in matters
related to suspicious economic transactions. It is also responsible for:

1. Corresponding and building up the efforts of national and international intelligence,

2. Carrying out inquiries for pursuing the global efforts against money laundering and
connected offences.

Agencies

The scheduled offences are individually investigated by agencies mentioned under the
respective Acts, for instance, the local police, CBI, customs departments, SEBI, or any other
investigative agency, as the needs of the case may be.

Criticism of Prevention of Money Laundering Act, 2002

Some provisions in the PMLA, 2002, are recognised to be quite problematic and controversial
right from the beginning. They have often been in the spotlight or in the news, considering their
competing interests with several acts. On numerous occasions, the courts have questioned the
constitutionality of several provisions under the PMLA.

Vast power vested in the hands of the authorities

There are numerous challenges made in court to question the constitutional validity of the
PMLA, 2002. The Act has had numerous shortcomings and disparities since its inception.
There is no doubt that several amendments were carried out to close the loopholes, but the
effort was not fruitful. The Act, in some cases, takes harsh steps and provides the authorities
with vast power for combating the issue of black money in the nation, however, the provisions
thus enacted should be made in the interest of the public instead of exploiting them, and thus
the views of the courts on this subject matter will be highly awaited.

Lack of transparency

There is a lack of transparency in the ED under the PML Act. Even the Enforcement Case
Information Report, commonly known as the ECIR, which is an equivalent of the FIR, is said
to be an ‘internal document’ and not provided to the accused. The ECIR can be filed on the
whims and fancies of the ED as opposed to the principles and practises set under the criminal
procedure law.

Attachment of property

In the case of B. Rama Raju v. Union of India and Ors. (2019), a challenge was made to the
constitutional validity of sections 2(1) (u), 8, and 23. The argument was based on the issue that
property that is under the control of another individual other than the one charged under this
Act can also be seized and attached to the case. The court also has the authority to attach
property that was obtained via illegitimate means before the Act came into force. It was stated
that the presumption under Section 23 is against the presumption of innocence in favour of the
individual accused of committing such an offence.

Thus, after thoroughly looking at the provisions and the purpose of the Act, the Court made a
decision that the aforementioned provisions are not in violation of any of the fundamental rights
of the Constitution, hence the Court declared the sections to be legitimate.

Being used for ordinary crimes

It has been alleged that PMLA is said to have been pulled into the investigation process of
ordinary crimes, and assets of non-guilty victims have also been attached by the authorities.

Some provisions have no relation to narcotics or organised crimes whatsoever

The PMLA was enacted with a view to counter the danger of money laundering, especially in
matters related to the trade in narcotics. At present, the offences enumerated in this Act are
exceedingly overbroad and, in several cases, have no relation to narcotics or organised crime.

Amendments carried out in the Prevention of Money Laundering Act, 2002

The 2012 Amendment

The PMLA (Amendment) Act, 2012, implemented the following changes:

1. The concept of ‘reporting entity’ was added. It included a banking company, a financial
institution, an intermediary, etc.

2. The 2002 Act had an upper limit of fine of up to ₹5 lakhs; however, the 2012
amendment removed such limitation.

3. The 2012 amendment provisional attachment and confiscation of property of any

individual who had been involved in such activities.

The 2019 Amendment

The 2019 Amendment brought with it a lot of changes. The Centre issued a circular on the
same in 2019. Since the 2002 Act needed a revamp, the following amends were carried out:

1. The ED had the authority to carry out any investigation in matters relating to money
laundering.

2. One of the most noteworthy amendments are the removal of subsections (1) of Section
17 (search and seizure) and Section 18 (search of persons).

3. Another noteworthy amendment was the introduction of explanation under Section 44.
The explanation says that the jurisdiction of the special court while dealing with the
offence of money laundering under this Act, during any investigation, enquiry or trial
under this Act, shall not be relied upon any orders passed in respect of the scheduled
offence. Further, the trial of both the offences by the same court shall not be read or
considered as a joint trial.

4. Moreover, an explanation under Section 45 of the Act makes it clear that the offences
under the PMLA will be cognizable and non-bailable. Thus, the ED is now authorised
to arrest an accused without warrant, provided some conditions are met.

5. Additionally, Section 3 of the Act was amended to make concealment of proceeds of

crime, possession, acquisition, use, projecting as untainted money, or claiming
untainted property as independent and complete offences under the Act. Such activities
are said to be continuing offences until an individual enjoys the proceeds of crime.
Must know information on the Prevention of Money Laundering (Maintenance of Records)
Rules, 2005

The Prevention of Money Laundering (Maintenance of Records) Rules, 2005, were passed by
the Central Government with the inputs given by the Reserve Bank of India. The main motives
of enacting the rules were as follows:

1. For keeping a record of the nature and value of transactions;

2. For keeping a track of the process and manner along with the time for providing
information and verifying records related to the identity kf the clients of banking
companies, financial institutions and intermediaries.

Constitutional validity of several provisions of the Prevention of Money Laundering Act, 2002

Recently, in July 2022, the Hon’ble Supreme Court, in the case of Vijay Madanlal Choudhary
vs Union of India (2022), upheld the constitutional validity of various provisions of the
Prevention of Money Laundering Act, 2022, namely- section 3, 5, 17, 18, 19, 24, 44, 45, 50

The main issue in this case was whether the aforementioned provisions under the PMLA were
constitutionally valid or not. Further, the other issue was whether provisions relating to arrest
were against the provisions laid down in the CrPC or not.

The Apex Court held that just because the provisions are not the same, this does not mean they
are unconstitutional. Further, the Court held that the aforementioned provisions are legally
valid. Moreover, the Court rejected the petitioners’ contention that the said sections are against
any provision stated in the law.

In matters relating to the constitutional validity of the aforementioned Sections, the Court
opined the following, inter alia:

1. Section 3 has a wider scope and it is not restricted to the property as untainted. Thus,
any activity connected with the proceeds of crime where the property is not disguised
as untainted can still constitute an offence of money laundering. This conclusion was
achieved by the Court by reading the word “and” as “or” in the aforementioned Section.

2. Section 5 was also held to be constitutional as it provided a balanced setting to

safeguard the interests of the public along with keeping a check that the proceeds of
crime are available to deal with in the manner described under the PMLA.
 3. Moreover, the Court held Section 19 to be constitutionally valid. It said there were no
strict measures provided under Section 19 and that there was no arbitrariness or
unconstitutionality in it.

4. Further, while referring to Section 50 of the Act, the Court asserted that the process laid
down under the Section has to be treated as an investigation in its strict sense. It also
pronounced that the ED authorities are not “police officials” as such.

Steps that can be taken against an individual involved in money laundering

Any individual found guilty of money laundering can face the following repercussions:

1. His property obtained via this illegal activity may be seized, freezed or confiscated.

2. He may have to face rigorous imprisonment from three to seven years.

3. He may be charged with a fine that has no limitation per se.

The new way forward

• Steps are needed to be taken to tackle the threat of cryptocurrency in cases of money
laundering.

• There is a dire need to sensitise the society on the ill effects of money laundering.

• Financial institutions can implement measures like conducting risk assessment before
launching any product in the market, business practice or before using any new or
developing technology.