Anti-Money Laundering Law in India: A ‘Glocalization’ Model

Anti-Money Laundering Law in India: A ‘Glocalization’ Model Abstract The move towards harmonization of International Anti-Money Laundering (AML) regimes has attained importance during the last two decades and has been almost universally adopted by the international community. Member States of the United Nations, and Inter-governmental Organizations like the Financial Action Task Force (FATF), have criminalized money laundering, and many of them have set up specialized agencies to combat it. Money laundering is the life blood of all transnational crimes. Illicit/illegitimate money is integrated and reinvested into the legitimate financial system, which in turn facilitates commission of further transnational crimes. The term ‘glocalization’ describes the locally embedded nature of transnational crime. India’s AML law regime is a perfect example of adopting a glocalization model which is manifested through various amendments carried out to the principal Act to align it with international standards and policies. 1. INTRODUCTION Money laundering is a transnational crime which facilitates the carrying out of other transnational organized crimes. Transnational organized crime (hereinafter referred to as ‘TOC’) poses several dangers to the international community.1 Primarily, it is a threat to international peace and security.2 This type of crime has a very high capacity to expand its activities and thus is a threat to the security of countries, particularly developing countries. In order to address this threat, the international community has taken measures to ensure the stability and safety of their people, and for further development of their economies. Secondly, TOC can cause the breakdown of national financial markets. It also has far reaching impact on the revenue of a country.3 A salient feature of the TOC is huge profits accruing from the illicit activities that are laundered by the criminal entities and organizations. The cleansing of dirty money is conducted through integrating and reinvesting the illicit/illegitimate money into licit/legitimate financial system.4 A glocalization model is intended to solve global problems through adopting international measures at local level. The focus of this article is to analyze how a glocalization model has been used in addressing money laundering issues at local level, with India as its example. 2. MONEY LAUNDERING AS A TRANSNATIONAL CRIME Money laundering, though exist for a long time as a crime, has been characterized as a ‘transnational organized crime’ within the legal system during the last three decades. In a literal sense, the transnational crime of ‘money laundering’ means converting black/dirty money into white/legitimate money. In legal terms, it means converting ill-gotten money received out of illicit drug trafficking and other criminal activities by disguising its original source. Through such activities, the money is integrated into the financial system and disguised as legitimate money.5 Money laundering was initially associated with the offence of drug trafficking and organized crime and its classification was ‘proceeds of crime’. In relation to illicit drug trafficking, Article 3 (1) (b) of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (referred to as the ‘Vienna Convention’)6 deals with the concept of ‘proceeds of crime’. Increasing organized criminal activities, forced the international community to address and fight against money laundering as a transnational crime, which is considered as the life blood of all organized crimes. Money laundering is defined under Article 6 of the United Nations Convention Against Transnational Organized Crime, 2000 (referred to as the ‘TOC Convention’)7 as: (a) (i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action; (ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; (b) Subject to the basic concepts of its legal system: (i) The acquisition, possession or use of property, knowing, at the time of receipt, that such property is the proceeds of crime; (ii) Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article.8 The United Nations efforts to fight against TOC led to adoption of another important legal instrument, the United Nations Convention against Corruption, 2003 (UNCAC).9 UNCAC criminalizes not only basic forms of corruption such as bribery and the embezzlement of public funds, but also trading in influence and the concealment and laundering of the proceeds of corruption.10 Money laundering differs from the traditional form and nature of a criminal offence: because there are no direct victims, it is non-violent, applies a preventive approach, excludes the key component of a crime—mens rea, and includes participation/preparation in a criminal act as an offence. The International Anti-Money Laundering Law (referred to as ‘AML’) regime has emerged within the past two decades as an international law enforcement model, which anticipates harmonization and universalization of AML policies and laws with special emphasis on the principle of dual criminality, to be implemented at national level. 3. GLOCALIZATION MODEL: AN OVERVIEW The term ‘glocalization’ with reference to transnational crime means that these crimes are both global and local in nature and application. Hobbs coined the term ‘glocalization’ for describing the locally embedded nature of transnational crime.11 The term transnational signifies ‘law that regulates actions or events that transcend national frontiers’.12 In identifying the nature of transnational crime, both international law and domestic criminal laws become inter-dependent. On the one hand, international law focuses on mandatory obligations of the Member States as mentioned under the suppression conventions to enact domestic criminal laws and procedures in combating transnational crime.13 On the other hand, domestic criminal laws are enacted within a national jurisdiction to comply with its treaty obligations to combat crimes of international concerns. (A) Emergence of Transnational Criminal Law Transnational criminal law (referred to as ‘TCL’) has emerged in the recent past as a sub-category of international criminal law. It is described as a category of domestic crimes (such as illicit drug trafficking, trafficking in human beings, etc.) which are recognized through treaty obligations as mentioned in international suppression conventions (the Vienna Convention and TOC Convention), which are otherwise called ‘treaty crimes’14 or ‘crimes of international concern’.15 The AML regime came into existence to fight the transnational crime of money laundering. This regime consists of hard laws as well as soft laws including international conventions and recommendations. These two UN Conventions deal with criminalizing the proceeds of crime received out of illicit drug trafficking and organized crime, respectively.16 Having said that, TCL is a combination of international law and national law. The main purposes of the two suppression conventions are: (i) procedural cooperation at international level to extradite or prosecute the offenders; and (ii) substantive criminalization through enacting national legislation.17 Through procedural cooperation, States are mandated to cooperate with each other. The ‘subjects’ of TCL are primarily the participating States. Thus, TCL orders States to cooperate against certain crimes and requires them to criminalize those crimes within their territory.18 Such procedural cooperation either obliges or permits the Member State to establish territorial and extraterritorial jurisdiction over the offences that are of transnational nature and thereafter to enforce such jurisdiction through policing and adjudication. Boister opines that: Criminalisation under transnational criminal law is in many ways primarily a means to the establishment of extraterritorial jurisdiction, an instrument to apply the enforcement power of the state against alleged transnational criminals located in other jurisdictions. The territorial state’s interest in enforcement of its laws abroad may lead it to seek to convince the extraterritorial state to permit it to establish its extraterritorial jurisdiction over the particular offence. The suppression conventions provide a multilateral vehicle for the extraterritorial state to agree to permit extraterritorial jurisdiction in regard to specific crimes on recognized grounds.19 (B) Nature of Transnational Criminal Law It has also been argued that TCL is dualistic in nature, wherein the obligation to criminalize is established in international law through suppression conventions, yet it is not international criminal law, stricto sensu, because the right to criminalize and execution of criminal procedure vests with the state. In monist systems, the suppression conventions become part of the national legal system.20 The basic principle of extradition (procedural cooperation) on law enforcement is aut dedere, aut judicare (obligation to extradite or prosecute) and therefore, national criminal legal systems must be efficient enough to primarily establish jurisdiction and later on to enforce it. Hence, applying criminal laws of another sovereign State to prosecute offenders would be in violation of sovereign equality of States as well as the territorial integrity and political independence of that State. TCL is based on the principle of double criminality, which requires Member States to criminalize predicate offences within their national jurisdiction. Hence, in the event of occurrence of any transnational crime, prosecution, cooperation among law enforcement machineries of States in terms of investigation, asset recovery, and confiscation of property, and inter-state modalities such as extradition and mutual legal assistance, becomes more significant. Thus, the principle of double criminality is important as far as enforcement of AML regime is concerned. This principle specifies that a state cannot unilaterally establish extraterritorial jurisdiction over activities of individuals of another state where such laws are not enacted to criminalize the predicate offences. The two basic procedural standards which characterize modern criminal legal systems are: the principle of legality (law must be clearly communicated to individuals in advance of its imposition) and the presumption of innocence (a crime must be proven by prosecution/the state).The principle of legality (nullum crimen sine lege) is of paramount importance while discussing TCL as legality demands that mistake or ignorance of the law should be an excuse (when a person is arrested he/she needs to receive an explanation of the charges upon which the arrest is made).21 In order to respect legality, the States which seek cooperation in the suppression of a transnational crime must respect fair labelling, individuality of guilt, prohibition of retroactive application, and rights to fair trial of the individual.22 Transnational crimes are a combination of both mala in se (real crimes such as theft, murder and so on) and mala prohibita (acts that are prohibited for the protection of the public). 4. ROLE OF FINANCIAL ACTION TASK FORCE (FATF) Under the auspices of the Organization of Economic Cooperation and Development (the ‘OECD’—which comprises largely of developed countries), the Financial Action Task Force (FATF) was established in the year 1989 to address illicit drug trafficking and to draft guidelines and for criminalizing such proceeds of crime. The AML regime has evolved in the recent past as a global regulatory enforcement model. The principles enshrined in the FATF recommendations (accepted as a standard setter) in the fight against money laundering and terrorist financing are founded in banking secrecy laws and criminalization of offences through forfeiture of assets and other various penal provisions. The AML regime has been universally adopted by many of the developing countries also bringing into effect stricter compliance mechanisms. This regime consists of various criminal law principles and banking law principles. Such principles in turn derive significance from principles of dual criminality, obligation to extradite or prosecute, mutual legal assistance procedures, principles of criminal jurisdiction, and so on.23 The salient features of the AML regime, which consists of both hard law and soft law, are idiosyncratic and involve various disciplines. The benefits of implementing the Recommendations of FATF24 were highlighted, which was stated thus, in the following manner by the reports of the Indian government: (i) securing a more transparent and stable financial system that is more attractive to foreign investors, (ii) ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups, (iii) building the capacity to fight terrorism and trace terrorist money, (iv) meeting binding international obligations, and avoiding the risk of sanctions or other action by the international community, and (v) avoiding becoming a haven for criminals. The international community, had, through numerous international treaties, United Nations Security Council Resolutions and best practices, endorsed the FATF Recommendations at the highest political level. Countries with lax AML/Countering of Terrorism Financing (hereafter referred to as ‘CFT’) CFT systems are attractive to criminals because they provide an environment in which criminals can enjoy the profits of their crimes and finance their illicit activities with little fear of facing punishment. 5. INDIA’S AML LAW REGIME: A REVIEW Indian law enforcement agencies have constantly grappled with the issue of combating organized criminal activities, drug trafficking, and other major predicate offences which are primarily directed against society. India has been a breeding ground for organized criminals, drug traffickers, and terrorists due to its geographical location (being surrounded by oceans) and other factors that make India more vulnerable and exposed to dangerous criminals.25 India has time and again faced social problems due to the inter-linkages between organized criminal activities and their subsequent impact on society and financial markets. The International Narcotics Control Strategy Report by the Bureau for International Narcotics and Law Enforcement Affairs emphasizes India’s vulnerability to money laundering activities thus: India’s emerging status as a regional financial center, its large system of informal cross-border money flows, and its widely perceived tax avoidance problems all contribute to the country’s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. Historically, because of its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit country.26 Most such crimes are economically motivated except a few which are driven by passion and violence. Even in the latter, the profit motive drives a fair amount of violent crime and conversely the purely economic white collar crime has violence in its background to enforce its criminal activities. Criminal organizations, like legitimate business, are essentially organized with profit as the prime motive. The existence of criminality is the only thin line of distinction between both these spheres of activity. Problems also occur when there is a need on the part of legitimate business to guard itself from criminality from within, as well as from extraneous attack by organized crime. The profit motive can be quite ruthless, in turn engendering a tendency towards illegality and crime, if perceived necessary.27 (A) Prevention of Money Laundering Act, 2002 In India, money laundering has been conducted by offenders since time immemorial. This offence was barely recognized as such, prior to the enactment of the Prevention of Money Laundering Act (referred to as ‘PMLA’), 2002.28 This principal Act was enacted to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering. In 1999, an ‘Inter-Ministerial Committee’29 was appointed to look into all aspects of money laundering and to suggest suitable legislation. The committee suggested enactment of a comprehensive legislation to tackle this economic offence of a criminal nature. In compliance with the recommendations, the Prevention of Money Laundering Bill was finally enacted in 2002.30 (B) Salient features of the PMLA The salient features of the PMLA are provisions for monitoring banking companies, financial institutions, and intermediaries as to maintenance of records of all transactions of a prescribed value, and reporting of such transactions to the appropriate authorities within the prescribed time and the provision of Appellate Tribunals to hear appeals against the orders of the Adjudicating Authority and the authorities under this Act. Special Courts have been required to be set up in consultation with the Chief Justice of the High Court to ensure expeditious trial of the offence of money laundering, and conditions for granting of bail to the accused have been made stringent. The following are the key features of this Act: (i)  Offence of money laundering, (ii) Attachment and confiscation, (iii) Obligations of banking companies, financial institutions and intermediaries, (iv) Searches and seizure, and (v) International cooperation. (i) Offence of Money Laundering under the PMLA Section 3 of the Act defines the offence of money laundering thus: 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 the offence of money laundering.31 The punishment for the offence is defined in Section 4 of the Act, which provides for the offender to be punished with imprisonment of three to seven years and liable to a fine of up to five lakhs. This Act has been amended thrice, once in 2005 to incorporate investigative procedures, its terms and conditions; secondly in 2009 to incorporate provisions on suppression of terrorist financing; and thirdly in 2012 to bring the principal Act in line with global standards and practices in combating money laundering. (ii) Attachment and Confiscation Under the PMLA, officers are authorized to attach untainted property pending decision of adjudication and confiscation. After complying with due procedure with regard to ‘attachment’32 upon ‘reasons to believe’ by the adjudicating authority that the offender is in possession of any proceeds of crime and is committing an offence of money laundering within Section 3 of the PMLA, a confiscation order is passed. Section 8 (6) of the PMLA requires that the confiscation order shall be passed only after the adjudicating authority gives an opportunity of being heard to the person concerned. Hence, compliance with the principles of natural justice or audi alteram partem is one of the necessary factors for finalizing the confiscation order.33 (iii) Obligations of Banking Companies, Financial Institutions, and Intermediaries Banking companies, financial institutions, and intermediaries are required under the PMLA to: (i)  maintain records of all transactions for a period of 10 years as the offence of money laundering may surface years after it has been committed and keep track of the nature and value of transactions conducted be it single or ‘a series of transactions’;34 (ii) report suspicious transactions (STRs) to the concerned authority within a specified time period; and (iii) comply with customer identification (“Know your customer” (KYC) principle.35 The provision on STRs is intended to uphold the objective of making banks and other financial institutions, whether formal or informal, to mandatorily report suspicious activity of the persons who are involved in large transactions of money which is otherwise below the prescribed ceiling.36 The provision requires banking companies, financial institutions, and intermediaries to establish a practice in order to meet the objectives and international standards of banking practices in terms of detecting the offence of money laundering. This cannot be achieved without some exceptions to the traditional banking practice of maintaining confidentiality in regard to c lient accounts. This newly established practice can be uniformly seen to have been monitored only if some penal provision is incorporated on those institutions which fail to report such suspicious activity of clients. With regard to ‘Know your customer’ (KYC) principle, the provision, read with Section 15 of the PMLA, requires the Central Government to lay down procedures and manner of maintaining and furnishing information, in consultation with the RBI. Accordingly, the RBI has set out certain guidelines for the purpose of customer identification and KYC principle’.37 (iv) Searches and Seizure The Act imposes requirements to carry out surveys, searches and seizures for the collection of materials;38 and confers the authority to conduct search of a person,39 and the power to arrest.40 Section 20 of the PMLA makes provisions regarding retention of property seized in the course of search of premises or persons. Such property can be retained only for a period of 3 months and extension of the period of retention shall be subject to the specific permission of the Adjudicating Authority upon satisfaction that the disputed property of money is involved in money laundering. After the confiscation order is passed, the release of such disputed assets can be directed. (v) International Cooperation There are detailed provisions containing exchange of information; mutual legal assistance in terms of search, arrest, seizure, forfeiture etc.; requesting investigative processes by other Contracting States; and speedy action on extradition of alleged offenders (Section 55–61 of the PMLA, 2002). Inclusion of such provisions is in compliance with international standards on international cooperation in criminal matters recognizing the transnational dimension of money laundering. 6. ANALYSIS OF PMLA (A) The Principal Act The scope of the offence of Money Laundering has been limited to the scheduled offences only, and the cut off amount for detecting the offence of money laundering has been declared as INR 30 Lakhs. These two major restrictions could be more favourable to alleged offenders, since they may enter into a series of transactions without raising any suspicion. The proviso to the defining clause of money laundering to the effect that, except in offences relating to the state or drugs, an offence can be classified as a money laundering offence only if the property involved is worth a particular amount or more, may encourage money launderers to keep the transactions below this limit and thus, to be free from the reach of law. Another major category of offences that the PMLA fails to address is those relating to white-collar crimes which are non-violent but have an adverse effect on the financial markets. These are the issues related to tax evasion, benami transactions, and banking law frauds which involve detecting the true owner of companies owned by criminal entities or business corporates who are involved in money laundering or rather cleansing money. The other aspect is that the words ‘untainted property’ as used in Section 3 of the PMLA is not specified in the Act; however there is a detailed definition of the concept of ‘property’41 given in Section 2(v) of the PMLA. The Act encompasses organized crime, terrorism etc., by reference to offences in the Indian Penal Code, 1860 (IPC) such as robbery, dacoity, etc. It is impossible to focus on these offences by way of definitions in the IPC alone. Additionally, predicate offences to money laundering offence have not been incorporated. In terms of procedural aspects of conducting investigation of the money laundering offence, the major criticism raised has been that search (upon suspicion or reason to believe) can be initiated only when charges have been filed, which could hamper investigation, though the legislative intent was to prevent harassment at the hands of the enforcement officials.42 The provisions enabling two parallel avenues of adjudication might also lead to confusion and lack of cooperation between the agencies. The Act aptly gives significance to individual rights by emphasizing the appeal procedures and provisions against vexatious prosecution. It signifies the importance attached to the protection of innocent people. The Act tries to strike a balance between individual rights and societal rights. The provisions on duties of banking companies, financial institutions, and intermediaries are in compliance with the preventive obligations set by international legal instruments, which insist on record keeping and reporting requirement. However, the PMLA exempts certain business and professions like the regulation of casinos, certain real estate agents and dealers in jewellery and stones; from its purview. The other major flaw that is evident is in the enforcement mechanism. While crimes including the predicate crimes occur at state level, the investigative proceedings can be initiated only by the Central Government. Hence, the law is ambiguous as to whether state government or central government or both can initiate proceedings upon knowledge of an offence of money laundering being committed. This Act was amended thrice, in 2005, 2009, and 2011. (B) Amendments to the Act The developments since the implementation of the Act in 2005 at both international and national levels are numerous, and paved the way for the amendment of the PMLA in 2009 with a view to addressing all the flaws that the law faced. The main thrust of the Amendment Act was to make cyber crimes and credit card related offences predicate to offence of money laundering; and thereby regulate financing of terrorism in any manifest form. The main amendment that the Bill proposed was to include, within the scope of money laundering, the predicate offences emanating from credit card frauds, debit card frauds, smart card operations, money transfer operations, etc. This could be effectuated only by also bringing certain other related professionals also under the category ‘designated business or profession’ to include carrying on activities for playing games of chance for cash or kind, and activities associated with casinos or similar activities. Through expanding the category of ‘non-banking company’ where cross-border transactions might take place, the Amendment ensured that certain payment systems were brought within scope. In compliance with preventive obligations imposed on the banking companies, financial institutions, and intermediaries; they were required to maintain records and keep track of customer identification processes for a period of 10 years from the date of transactions/date of cessation of transactions. A significant amendment has been made to Section 60 of the PMLA, which requires that where property is confiscated in India, upon request by a contracting State India should either return such property to the requesting State or compensate that State by disposal of such property on mutually agreed terms that would take into account deduction for reasonable expenses incurred in investigation, prosecution, or judicial proceedings that have lead to the return or disposal of confiscated property. The amendment to the Act in 2011 took a step towards removing the upper limit of fines which was earlier INR 5 Lakhs. The monetary threshold for detecting the offence of money laundering has been declared as INR 30 Lakhs. 7. CONCLUSION In 2002, the PMLA was passed by the Indian Parliament. The PMLA has been amended in 2005, 2009, and 2013, respectively, to comply with its international obligations. India became a member of the FATF in June 2010 and has been very prompt in implementing the FATF standards, accepting the commitments and obligations at global level on fight against money laundering, which was indeed an effort to bring India on board with strategizing AML measures. The Indian PMLA has been consistently amended to comply with the developments proposed by the global AML standard setter. Indeed, India stands as a perfect example of a glocalization model which adopts treaty crimes into crimes at national level through enacting and amending domestic legislations. Footnotes 1 Obokata explains that there are two ways of understanding organized crime: (i) as a set of actors, and (ii) as a set of activities. As a set of actors, two models have been advanced namely the corporate model (based on alien conspiracy theory) and the network model. The corporate model describes how transnational criminal enterprises, especially the Italian mafia, have a highly centralized and hierarchical corporate structure. The network model shows how organized crime is carried out by a collection or network of individuals and small groups collaborating with each other to commit various criminal activities. As a set of activities, organized crime is based on an enterprise model, meaning illegal enterprises supplying contraband good and products in illegal markets. T Obokata Transnational Organised Crime in International Law (Oxford and Portland: Hart Publishing Ltd., 2010). 2 ibid 227. 3 JR Barry ‘Protecting the Financial System from Abuse: Challenges to banks in Implementing AML/CFT Standards’ [2005] J Money Laundering Control 9, 48–61. 4 The modus operandi of laundering money by transnational criminal organizations consists of three stages: placement, layering and integration. On the other hand, to wipe out the evidence of the ill-gotten money, money launderers use three methods to transform the illicit funds to legitimate funds: (i) Placement—physical introduction of proceeds of crime into the legitimate financial system, such as depositing bulk cash derived from criminal activities into a more portable or suspicious form, and then getting those proceeds into a mainstream financial system. This step of money laundering is the most difficult and vulnerable one because the profits out of these criminal activities are hard cash that is bulky, non-concealable, and noticeable by anyone; (ii) Layering—which involves disguising the origins of proceeds of crime by creating layers of financial transactions. This process ensures that there are a series of financial transactions that in their frequency, complexity and volume often resemble legitimate financial activity. It is carried out by wire transfer, or movement of funds placed in a financial or banking system by way of numerous accounts in an attempt to hide the true origins of the funds. One of the key aspects of this process is that the layering transactions cross several national borders, either physically or electronically or through corporate structures involving entities in a number of different countries; (iii) Integration—the process of reintroducing these funds into the economy as legitimate funds, such as investing in real estate. N Boister An Introduction to Transnational Criminal Law (Oxford: Oxford University Press, 2012). 5 INTERPOL defines money laundering as ‘any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources’ available at http://www.interpol.int/Crime-areas/Financial-crime/Money-laundering. 6 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances [1988] UNTS 27627. 7 United Nations Convention against Transnational Organized Crime [2000] 40 ILM 33 (2001). 8 TOC Convention (UN) Article 6. 9 United Nations Convention against Corruption [2003] 43 ILM 37 (2004). 10 RR Babu ‘Combating Public Corruption in India and the United Nations Convention Against Corruption’ in B M Patel (ed.), India and International Law, Vol. II (Martinus Nijhoff Publishers 2008). 11 Boister (n.4) 7; R Hobbs ‘Going Down the Glocal: The Local Context of Organised Crime’ [1998] The Howard Journal of Criminal Justice 37, 407, 407–419. 12 PC Jessup Transnational Law (New Haven: Yale University Press, 1956). 13 The international conventions that obligate States to suppress certain activities and criminalize them under domestic criminal legal system are known as ‘suppression conventions’. EA Nadelmann ‘Global Prohibitory Regimes: The Evolution of norms in International Society’ [1990] International Organization 44, 479. 14 N Boister ‘Transnational Criminal Law?’ [2003] Eur J Int Law 14, 953, 975–976. 15 MC Bassiouni ‘An Appraisal of the Growth and Developing Trends of International Criminal Law’ in J Dugard and C. van den Wyngaert (eds.), International Criminal Law and Procedure (Dartmouth Aldershot 1996); N Boister and RJ Currie Routledge Handbook Transnational Criminal Law (Routledge New York 2015). 16 The AML regime also includes soft laws also such as FATF Recommendations (the soft law Anti-Money Laundering/Countering of Financing of Terrorism (AML/CFT) regime consists of 40 + 9 FATF Recommendations on suppression of terrorist financing), which have been universally recognized by the international community. 17 Boister and Currie (n 15) 16. 18 Above n 3. 19 Boister and Currie (n 15) 17. 20 Above n 4. 21 N Lacey ‘Legal Constructions of Crime’ in M Maguire, R Morgan and R Reiner (eds.) The Oxford Handbook of Criminology (London: Oxford University Press, 2007). 22 Above n 4. 23 G Stessens Money Laundering: A New International Law Enforcement Model (Cambridge: Cambridge University Press, 2000). 24 FATF is an inter-governmental organization established in 1989 under the auspices of OECD to address illicit drug trafficking and draft guidelines to criminalize such proceeds of crime. It drafted 40 recommendations in 1990 which incorporated preventive and repressive approach combining banking and criminal law principles so that financial institutions could be exonerated from criminal liability while tracking the illicit money laundered by transnational criminal organizations. 25 D Cox Handbook of Anti-Money Laundering (Sussex: John Wiley & Sons Ltd, 2014). 26 See ‘International Narcotics Control Strategy Report’ http://www.state.gov/documents/organization/102588.pdf [2008] (31 December 2016). 27 S Singh ‘The Risks to Business Presented by Organised and Economically Motivated Criminal Enterprises’ [2007] J Financial Crime 14, 79. 28 The preceding legislation that addressed the issue of money laundering in India was Narcotics and Psychotropic Substances Act, 1985 which criminalized the proceeds of drug related crimes. Various predicate offences mentioned in the PMLA 2002, had been dealt within the Indian Penal Code, 1860, Arms Act, 1959, Narcotics and Psychotropic Substances Act, 1985, Prevention of Corruption Act, 1988. The Preamble to PMLA makes it clear that it was introduced to give effect to the Resolution S-17/2 adopted by the United Nations General Assembly at its 17th Special Session on the 23 February 1990 as also the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8–10 June 1998 calling upon the Member States to adopt national legislation and programmes to combat money laundering. 29 For the details of the discussions and presentations by various committee members of the Inter-Ministerial Committee on Money Laundering see http://rajyasabha.gov.in/book2/reports/petition/116threport.htm. 30 F A Julian ‘The Global regime on Anti-Money Laundering’ in K N C Pillai and F A Julian (eds.) Prevention of Money Laundering – Legal and Financial Issues (New Delhi: Indian Law Institute, 2008). 31 PMLA 2002 (India) Section 3. 32 As per Section 2 (d) of the PML Act, 2002, attachment means ‘prohibition of transfer, conversion, disposition or movement of property by an order issued under Chapter III’. 33 See Prevention of Money-laundering (the manner of forwarding a copy of the order of Retention of seized property along with the material to the Adjudicating Authority and the period of its Retention) Rules, 2005 and Section 5 of the PMLA 2002 which specify the safeguards the enforcement officers have to take before the property is attached/confiscated. 34 PMLA 2002 (India) Section 12 (1) (a) and (2). 35 PMLA 2002 (India) Section 12 (1) (c). 36 PMLA 2002 (India) Section 12 (1) (b). 37 The following are the Guidelines of the RBI issued in compliance with Section 15 read with Section 12 (1) of the PMLA 2002: Guidelines on―Know Your Customer’ norms Applicable to Banks; Know your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)—Wire Transfers; Know your Customer (KYC) Guidelines—Anti-Money laundering Standards For All Non- Banking Financial Companies, miscellaneous Non-Banking Companies, and residuary Nonbanking Companies; Revised―Know your Customer Guidelines for NBFCs; Simplified KYC procedure for opening accounts by NBFCs; Adherence to Know your Customer (KYC) guidelines by NBFC and persons authorized by NBFCs including brokers/agents; Guidelines on Anti-Money Laundering programme for Insurers; and Guidelines on Anti-Money Laundering Standards to All Intermediaries registered with SEBI under Securities and Exchange Board of India, 1988 (India) Section 12. 38 If any person has committed any act which constitutes money-laundering, or is in possession of any proceeds of crime involved in money-laundering, then any authorized officer can, (i) enter and search any building, place, vessel, vehicle, or aircraft where such records or proceeds of crime are kept; (ii) break open the lock of any door, box, locker, safe, almirah, or other receptacle where the keys thereof are not available; (iii) seize any record or property found as a result of such records; (iv) place marks of identification on such record or make or cause to be made extracts or copies therefrom, (v) make a note of inventory or such record or property, (vi) examine on oath any person who is found to be in possession or control of any record or property, in respect of all matters relevant for the purposes of any investigation. 39 A personal search can be undertaken only after a report has been sent to the magistrate under Section 173 of the Criminal Procedure Code 1973. Upon finding a suspect, the investigating officer has to write a report before undertaking personal search. In case of search of a suspected offender under the Narcotics Drugs and Psychotropic Substances Act, 1985 the investigating officer is also required to make a similar report before proceeding to investigate the report. Under the PMLA 2002, the director or authority has to make a similar report. 40 PMLA 2002 (India) Proviso to Section 19. 41 Above n 24. 42 Above n 30. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Statute Law Review Oxford University Press

Anti-Money Laundering Law in India: A ‘Glocalization’ Model

Statute Law Review , Volume Advance Article – Apr 18, 2018

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Abstract

Abstract The move towards harmonization of International Anti-Money Laundering (AML) regimes has attained importance during the last two decades and has been almost universally adopted by the international community. Member States of the United Nations, and Inter-governmental Organizations like the Financial Action Task Force (FATF), have criminalized money laundering, and many of them have set up specialized agencies to combat it. Money laundering is the life blood of all transnational crimes. Illicit/illegitimate money is integrated and reinvested into the legitimate financial system, which in turn facilitates commission of further transnational crimes. The term ‘glocalization’ describes the locally embedded nature of transnational crime. India’s AML law regime is a perfect example of adopting a glocalization model which is manifested through various amendments carried out to the principal Act to align it with international standards and policies. 1. INTRODUCTION Money laundering is a transnational crime which facilitates the carrying out of other transnational organized crimes. Transnational organized crime (hereinafter referred to as ‘TOC’) poses several dangers to the international community.1 Primarily, it is a threat to international peace and security.2 This type of crime has a very high capacity to expand its activities and thus is a threat to the security of countries, particularly developing countries. In order to address this threat, the international community has taken measures to ensure the stability and safety of their people, and for further development of their economies. Secondly, TOC can cause the breakdown of national financial markets. It also has far reaching impact on the revenue of a country.3 A salient feature of the TOC is huge profits accruing from the illicit activities that are laundered by the criminal entities and organizations. The cleansing of dirty money is conducted through integrating and reinvesting the illicit/illegitimate money into licit/legitimate financial system.4 A glocalization model is intended to solve global problems through adopting international measures at local level. The focus of this article is to analyze how a glocalization model has been used in addressing money laundering issues at local level, with India as its example. 2. MONEY LAUNDERING AS A TRANSNATIONAL CRIME Money laundering, though exist for a long time as a crime, has been characterized as a ‘transnational organized crime’ within the legal system during the last three decades. In a literal sense, the transnational crime of ‘money laundering’ means converting black/dirty money into white/legitimate money. In legal terms, it means converting ill-gotten money received out of illicit drug trafficking and other criminal activities by disguising its original source. Through such activities, the money is integrated into the financial system and disguised as legitimate money.5 Money laundering was initially associated with the offence of drug trafficking and organized crime and its classification was ‘proceeds of crime’. In relation to illicit drug trafficking, Article 3 (1) (b) of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (referred to as the ‘Vienna Convention’)6 deals with the concept of ‘proceeds of crime’. Increasing organized criminal activities, forced the international community to address and fight against money laundering as a transnational crime, which is considered as the life blood of all organized crimes. Money laundering is defined under Article 6 of the United Nations Convention Against Transnational Organized Crime, 2000 (referred to as the ‘TOC Convention’)7 as: (a) (i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action; (ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; (b) Subject to the basic concepts of its legal system: (i) The acquisition, possession or use of property, knowing, at the time of receipt, that such property is the proceeds of crime; (ii) Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article.8 The United Nations efforts to fight against TOC led to adoption of another important legal instrument, the United Nations Convention against Corruption, 2003 (UNCAC).9 UNCAC criminalizes not only basic forms of corruption such as bribery and the embezzlement of public funds, but also trading in influence and the concealment and laundering of the proceeds of corruption.10 Money laundering differs from the traditional form and nature of a criminal offence: because there are no direct victims, it is non-violent, applies a preventive approach, excludes the key component of a crime—mens rea, and includes participation/preparation in a criminal act as an offence. The International Anti-Money Laundering Law (referred to as ‘AML’) regime has emerged within the past two decades as an international law enforcement model, which anticipates harmonization and universalization of AML policies and laws with special emphasis on the principle of dual criminality, to be implemented at national level. 3. GLOCALIZATION MODEL: AN OVERVIEW The term ‘glocalization’ with reference to transnational crime means that these crimes are both global and local in nature and application. Hobbs coined the term ‘glocalization’ for describing the locally embedded nature of transnational crime.11 The term transnational signifies ‘law that regulates actions or events that transcend national frontiers’.12 In identifying the nature of transnational crime, both international law and domestic criminal laws become inter-dependent. On the one hand, international law focuses on mandatory obligations of the Member States as mentioned under the suppression conventions to enact domestic criminal laws and procedures in combating transnational crime.13 On the other hand, domestic criminal laws are enacted within a national jurisdiction to comply with its treaty obligations to combat crimes of international concerns. (A) Emergence of Transnational Criminal Law Transnational criminal law (referred to as ‘TCL’) has emerged in the recent past as a sub-category of international criminal law. It is described as a category of domestic crimes (such as illicit drug trafficking, trafficking in human beings, etc.) which are recognized through treaty obligations as mentioned in international suppression conventions (the Vienna Convention and TOC Convention), which are otherwise called ‘treaty crimes’14 or ‘crimes of international concern’.15 The AML regime came into existence to fight the transnational crime of money laundering. This regime consists of hard laws as well as soft laws including international conventions and recommendations. These two UN Conventions deal with criminalizing the proceeds of crime received out of illicit drug trafficking and organized crime, respectively.16 Having said that, TCL is a combination of international law and national law. The main purposes of the two suppression conventions are: (i) procedural cooperation at international level to extradite or prosecute the offenders; and (ii) substantive criminalization through enacting national legislation.17 Through procedural cooperation, States are mandated to cooperate with each other. The ‘subjects’ of TCL are primarily the participating States. Thus, TCL orders States to cooperate against certain crimes and requires them to criminalize those crimes within their territory.18 Such procedural cooperation either obliges or permits the Member State to establish territorial and extraterritorial jurisdiction over the offences that are of transnational nature and thereafter to enforce such jurisdiction through policing and adjudication. Boister opines that: Criminalisation under transnational criminal law is in many ways primarily a means to the establishment of extraterritorial jurisdiction, an instrument to apply the enforcement power of the state against alleged transnational criminals located in other jurisdictions. The territorial state’s interest in enforcement of its laws abroad may lead it to seek to convince the extraterritorial state to permit it to establish its extraterritorial jurisdiction over the particular offence. The suppression conventions provide a multilateral vehicle for the extraterritorial state to agree to permit extraterritorial jurisdiction in regard to specific crimes on recognized grounds.19 (B) Nature of Transnational Criminal Law It has also been argued that TCL is dualistic in nature, wherein the obligation to criminalize is established in international law through suppression conventions, yet it is not international criminal law, stricto sensu, because the right to criminalize and execution of criminal procedure vests with the state. In monist systems, the suppression conventions become part of the national legal system.20 The basic principle of extradition (procedural cooperation) on law enforcement is aut dedere, aut judicare (obligation to extradite or prosecute) and therefore, national criminal legal systems must be efficient enough to primarily establish jurisdiction and later on to enforce it. Hence, applying criminal laws of another sovereign State to prosecute offenders would be in violation of sovereign equality of States as well as the territorial integrity and political independence of that State. TCL is based on the principle of double criminality, which requires Member States to criminalize predicate offences within their national jurisdiction. Hence, in the event of occurrence of any transnational crime, prosecution, cooperation among law enforcement machineries of States in terms of investigation, asset recovery, and confiscation of property, and inter-state modalities such as extradition and mutual legal assistance, becomes more significant. Thus, the principle of double criminality is important as far as enforcement of AML regime is concerned. This principle specifies that a state cannot unilaterally establish extraterritorial jurisdiction over activities of individuals of another state where such laws are not enacted to criminalize the predicate offences. The two basic procedural standards which characterize modern criminal legal systems are: the principle of legality (law must be clearly communicated to individuals in advance of its imposition) and the presumption of innocence (a crime must be proven by prosecution/the state).The principle of legality (nullum crimen sine lege) is of paramount importance while discussing TCL as legality demands that mistake or ignorance of the law should be an excuse (when a person is arrested he/she needs to receive an explanation of the charges upon which the arrest is made).21 In order to respect legality, the States which seek cooperation in the suppression of a transnational crime must respect fair labelling, individuality of guilt, prohibition of retroactive application, and rights to fair trial of the individual.22 Transnational crimes are a combination of both mala in se (real crimes such as theft, murder and so on) and mala prohibita (acts that are prohibited for the protection of the public). 4. ROLE OF FINANCIAL ACTION TASK FORCE (FATF) Under the auspices of the Organization of Economic Cooperation and Development (the ‘OECD’—which comprises largely of developed countries), the Financial Action Task Force (FATF) was established in the year 1989 to address illicit drug trafficking and to draft guidelines and for criminalizing such proceeds of crime. The AML regime has evolved in the recent past as a global regulatory enforcement model. The principles enshrined in the FATF recommendations (accepted as a standard setter) in the fight against money laundering and terrorist financing are founded in banking secrecy laws and criminalization of offences through forfeiture of assets and other various penal provisions. The AML regime has been universally adopted by many of the developing countries also bringing into effect stricter compliance mechanisms. This regime consists of various criminal law principles and banking law principles. Such principles in turn derive significance from principles of dual criminality, obligation to extradite or prosecute, mutual legal assistance procedures, principles of criminal jurisdiction, and so on.23 The salient features of the AML regime, which consists of both hard law and soft law, are idiosyncratic and involve various disciplines. The benefits of implementing the Recommendations of FATF24 were highlighted, which was stated thus, in the following manner by the reports of the Indian government: (i) securing a more transparent and stable financial system that is more attractive to foreign investors, (ii) ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups, (iii) building the capacity to fight terrorism and trace terrorist money, (iv) meeting binding international obligations, and avoiding the risk of sanctions or other action by the international community, and (v) avoiding becoming a haven for criminals. The international community, had, through numerous international treaties, United Nations Security Council Resolutions and best practices, endorsed the FATF Recommendations at the highest political level. Countries with lax AML/Countering of Terrorism Financing (hereafter referred to as ‘CFT’) CFT systems are attractive to criminals because they provide an environment in which criminals can enjoy the profits of their crimes and finance their illicit activities with little fear of facing punishment. 5. INDIA’S AML LAW REGIME: A REVIEW Indian law enforcement agencies have constantly grappled with the issue of combating organized criminal activities, drug trafficking, and other major predicate offences which are primarily directed against society. India has been a breeding ground for organized criminals, drug traffickers, and terrorists due to its geographical location (being surrounded by oceans) and other factors that make India more vulnerable and exposed to dangerous criminals.25 India has time and again faced social problems due to the inter-linkages between organized criminal activities and their subsequent impact on society and financial markets. The International Narcotics Control Strategy Report by the Bureau for International Narcotics and Law Enforcement Affairs emphasizes India’s vulnerability to money laundering activities thus: India’s emerging status as a regional financial center, its large system of informal cross-border money flows, and its widely perceived tax avoidance problems all contribute to the country’s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. Historically, because of its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit country.26 Most such crimes are economically motivated except a few which are driven by passion and violence. Even in the latter, the profit motive drives a fair amount of violent crime and conversely the purely economic white collar crime has violence in its background to enforce its criminal activities. Criminal organizations, like legitimate business, are essentially organized with profit as the prime motive. The existence of criminality is the only thin line of distinction between both these spheres of activity. Problems also occur when there is a need on the part of legitimate business to guard itself from criminality from within, as well as from extraneous attack by organized crime. The profit motive can be quite ruthless, in turn engendering a tendency towards illegality and crime, if perceived necessary.27 (A) Prevention of Money Laundering Act, 2002 In India, money laundering has been conducted by offenders since time immemorial. This offence was barely recognized as such, prior to the enactment of the Prevention of Money Laundering Act (referred to as ‘PMLA’), 2002.28 This principal Act was enacted to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering. In 1999, an ‘Inter-Ministerial Committee’29 was appointed to look into all aspects of money laundering and to suggest suitable legislation. The committee suggested enactment of a comprehensive legislation to tackle this economic offence of a criminal nature. In compliance with the recommendations, the Prevention of Money Laundering Bill was finally enacted in 2002.30 (B) Salient features of the PMLA The salient features of the PMLA are provisions for monitoring banking companies, financial institutions, and intermediaries as to maintenance of records of all transactions of a prescribed value, and reporting of such transactions to the appropriate authorities within the prescribed time and the provision of Appellate Tribunals to hear appeals against the orders of the Adjudicating Authority and the authorities under this Act. Special Courts have been required to be set up in consultation with the Chief Justice of the High Court to ensure expeditious trial of the offence of money laundering, and conditions for granting of bail to the accused have been made stringent. The following are the key features of this Act: (i)  Offence of money laundering, (ii) Attachment and confiscation, (iii) Obligations of banking companies, financial institutions and intermediaries, (iv) Searches and seizure, and (v) International cooperation. (i) Offence of Money Laundering under the PMLA Section 3 of the Act defines the offence of money laundering thus: 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 the offence of money laundering.31 The punishment for the offence is defined in Section 4 of the Act, which provides for the offender to be punished with imprisonment of three to seven years and liable to a fine of up to five lakhs. This Act has been amended thrice, once in 2005 to incorporate investigative procedures, its terms and conditions; secondly in 2009 to incorporate provisions on suppression of terrorist financing; and thirdly in 2012 to bring the principal Act in line with global standards and practices in combating money laundering. (ii) Attachment and Confiscation Under the PMLA, officers are authorized to attach untainted property pending decision of adjudication and confiscation. After complying with due procedure with regard to ‘attachment’32 upon ‘reasons to believe’ by the adjudicating authority that the offender is in possession of any proceeds of crime and is committing an offence of money laundering within Section 3 of the PMLA, a confiscation order is passed. Section 8 (6) of the PMLA requires that the confiscation order shall be passed only after the adjudicating authority gives an opportunity of being heard to the person concerned. Hence, compliance with the principles of natural justice or audi alteram partem is one of the necessary factors for finalizing the confiscation order.33 (iii) Obligations of Banking Companies, Financial Institutions, and Intermediaries Banking companies, financial institutions, and intermediaries are required under the PMLA to: (i)  maintain records of all transactions for a period of 10 years as the offence of money laundering may surface years after it has been committed and keep track of the nature and value of transactions conducted be it single or ‘a series of transactions’;34 (ii) report suspicious transactions (STRs) to the concerned authority within a specified time period; and (iii) comply with customer identification (“Know your customer” (KYC) principle.35 The provision on STRs is intended to uphold the objective of making banks and other financial institutions, whether formal or informal, to mandatorily report suspicious activity of the persons who are involved in large transactions of money which is otherwise below the prescribed ceiling.36 The provision requires banking companies, financial institutions, and intermediaries to establish a practice in order to meet the objectives and international standards of banking practices in terms of detecting the offence of money laundering. This cannot be achieved without some exceptions to the traditional banking practice of maintaining confidentiality in regard to c lient accounts. This newly established practice can be uniformly seen to have been monitored only if some penal provision is incorporated on those institutions which fail to report such suspicious activity of clients. With regard to ‘Know your customer’ (KYC) principle, the provision, read with Section 15 of the PMLA, requires the Central Government to lay down procedures and manner of maintaining and furnishing information, in consultation with the RBI. Accordingly, the RBI has set out certain guidelines for the purpose of customer identification and KYC principle’.37 (iv) Searches and Seizure The Act imposes requirements to carry out surveys, searches and seizures for the collection of materials;38 and confers the authority to conduct search of a person,39 and the power to arrest.40 Section 20 of the PMLA makes provisions regarding retention of property seized in the course of search of premises or persons. Such property can be retained only for a period of 3 months and extension of the period of retention shall be subject to the specific permission of the Adjudicating Authority upon satisfaction that the disputed property of money is involved in money laundering. After the confiscation order is passed, the release of such disputed assets can be directed. (v) International Cooperation There are detailed provisions containing exchange of information; mutual legal assistance in terms of search, arrest, seizure, forfeiture etc.; requesting investigative processes by other Contracting States; and speedy action on extradition of alleged offenders (Section 55–61 of the PMLA, 2002). Inclusion of such provisions is in compliance with international standards on international cooperation in criminal matters recognizing the transnational dimension of money laundering. 6. ANALYSIS OF PMLA (A) The Principal Act The scope of the offence of Money Laundering has been limited to the scheduled offences only, and the cut off amount for detecting the offence of money laundering has been declared as INR 30 Lakhs. These two major restrictions could be more favourable to alleged offenders, since they may enter into a series of transactions without raising any suspicion. The proviso to the defining clause of money laundering to the effect that, except in offences relating to the state or drugs, an offence can be classified as a money laundering offence only if the property involved is worth a particular amount or more, may encourage money launderers to keep the transactions below this limit and thus, to be free from the reach of law. Another major category of offences that the PMLA fails to address is those relating to white-collar crimes which are non-violent but have an adverse effect on the financial markets. These are the issues related to tax evasion, benami transactions, and banking law frauds which involve detecting the true owner of companies owned by criminal entities or business corporates who are involved in money laundering or rather cleansing money. The other aspect is that the words ‘untainted property’ as used in Section 3 of the PMLA is not specified in the Act; however there is a detailed definition of the concept of ‘property’41 given in Section 2(v) of the PMLA. The Act encompasses organized crime, terrorism etc., by reference to offences in the Indian Penal Code, 1860 (IPC) such as robbery, dacoity, etc. It is impossible to focus on these offences by way of definitions in the IPC alone. Additionally, predicate offences to money laundering offence have not been incorporated. In terms of procedural aspects of conducting investigation of the money laundering offence, the major criticism raised has been that search (upon suspicion or reason to believe) can be initiated only when charges have been filed, which could hamper investigation, though the legislative intent was to prevent harassment at the hands of the enforcement officials.42 The provisions enabling two parallel avenues of adjudication might also lead to confusion and lack of cooperation between the agencies. The Act aptly gives significance to individual rights by emphasizing the appeal procedures and provisions against vexatious prosecution. It signifies the importance attached to the protection of innocent people. The Act tries to strike a balance between individual rights and societal rights. The provisions on duties of banking companies, financial institutions, and intermediaries are in compliance with the preventive obligations set by international legal instruments, which insist on record keeping and reporting requirement. However, the PMLA exempts certain business and professions like the regulation of casinos, certain real estate agents and dealers in jewellery and stones; from its purview. The other major flaw that is evident is in the enforcement mechanism. While crimes including the predicate crimes occur at state level, the investigative proceedings can be initiated only by the Central Government. Hence, the law is ambiguous as to whether state government or central government or both can initiate proceedings upon knowledge of an offence of money laundering being committed. This Act was amended thrice, in 2005, 2009, and 2011. (B) Amendments to the Act The developments since the implementation of the Act in 2005 at both international and national levels are numerous, and paved the way for the amendment of the PMLA in 2009 with a view to addressing all the flaws that the law faced. The main thrust of the Amendment Act was to make cyber crimes and credit card related offences predicate to offence of money laundering; and thereby regulate financing of terrorism in any manifest form. The main amendment that the Bill proposed was to include, within the scope of money laundering, the predicate offences emanating from credit card frauds, debit card frauds, smart card operations, money transfer operations, etc. This could be effectuated only by also bringing certain other related professionals also under the category ‘designated business or profession’ to include carrying on activities for playing games of chance for cash or kind, and activities associated with casinos or similar activities. Through expanding the category of ‘non-banking company’ where cross-border transactions might take place, the Amendment ensured that certain payment systems were brought within scope. In compliance with preventive obligations imposed on the banking companies, financial institutions, and intermediaries; they were required to maintain records and keep track of customer identification processes for a period of 10 years from the date of transactions/date of cessation of transactions. A significant amendment has been made to Section 60 of the PMLA, which requires that where property is confiscated in India, upon request by a contracting State India should either return such property to the requesting State or compensate that State by disposal of such property on mutually agreed terms that would take into account deduction for reasonable expenses incurred in investigation, prosecution, or judicial proceedings that have lead to the return or disposal of confiscated property. The amendment to the Act in 2011 took a step towards removing the upper limit of fines which was earlier INR 5 Lakhs. The monetary threshold for detecting the offence of money laundering has been declared as INR 30 Lakhs. 7. CONCLUSION In 2002, the PMLA was passed by the Indian Parliament. The PMLA has been amended in 2005, 2009, and 2013, respectively, to comply with its international obligations. India became a member of the FATF in June 2010 and has been very prompt in implementing the FATF standards, accepting the commitments and obligations at global level on fight against money laundering, which was indeed an effort to bring India on board with strategizing AML measures. The Indian PMLA has been consistently amended to comply with the developments proposed by the global AML standard setter. Indeed, India stands as a perfect example of a glocalization model which adopts treaty crimes into crimes at national level through enacting and amending domestic legislations. Footnotes 1 Obokata explains that there are two ways of understanding organized crime: (i) as a set of actors, and (ii) as a set of activities. As a set of actors, two models have been advanced namely the corporate model (based on alien conspiracy theory) and the network model. The corporate model describes how transnational criminal enterprises, especially the Italian mafia, have a highly centralized and hierarchical corporate structure. The network model shows how organized crime is carried out by a collection or network of individuals and small groups collaborating with each other to commit various criminal activities. As a set of activities, organized crime is based on an enterprise model, meaning illegal enterprises supplying contraband good and products in illegal markets. T Obokata Transnational Organised Crime in International Law (Oxford and Portland: Hart Publishing Ltd., 2010). 2 ibid 227. 3 JR Barry ‘Protecting the Financial System from Abuse: Challenges to banks in Implementing AML/CFT Standards’ [2005] J Money Laundering Control 9, 48–61. 4 The modus operandi of laundering money by transnational criminal organizations consists of three stages: placement, layering and integration. On the other hand, to wipe out the evidence of the ill-gotten money, money launderers use three methods to transform the illicit funds to legitimate funds: (i) Placement—physical introduction of proceeds of crime into the legitimate financial system, such as depositing bulk cash derived from criminal activities into a more portable or suspicious form, and then getting those proceeds into a mainstream financial system. This step of money laundering is the most difficult and vulnerable one because the profits out of these criminal activities are hard cash that is bulky, non-concealable, and noticeable by anyone; (ii) Layering—which involves disguising the origins of proceeds of crime by creating layers of financial transactions. This process ensures that there are a series of financial transactions that in their frequency, complexity and volume often resemble legitimate financial activity. It is carried out by wire transfer, or movement of funds placed in a financial or banking system by way of numerous accounts in an attempt to hide the true origins of the funds. One of the key aspects of this process is that the layering transactions cross several national borders, either physically or electronically or through corporate structures involving entities in a number of different countries; (iii) Integration—the process of reintroducing these funds into the economy as legitimate funds, such as investing in real estate. N Boister An Introduction to Transnational Criminal Law (Oxford: Oxford University Press, 2012). 5 INTERPOL defines money laundering as ‘any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources’ available at http://www.interpol.int/Crime-areas/Financial-crime/Money-laundering. 6 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances [1988] UNTS 27627. 7 United Nations Convention against Transnational Organized Crime [2000] 40 ILM 33 (2001). 8 TOC Convention (UN) Article 6. 9 United Nations Convention against Corruption [2003] 43 ILM 37 (2004). 10 RR Babu ‘Combating Public Corruption in India and the United Nations Convention Against Corruption’ in B M Patel (ed.), India and International Law, Vol. II (Martinus Nijhoff Publishers 2008). 11 Boister (n.4) 7; R Hobbs ‘Going Down the Glocal: The Local Context of Organised Crime’ [1998] The Howard Journal of Criminal Justice 37, 407, 407–419. 12 PC Jessup Transnational Law (New Haven: Yale University Press, 1956). 13 The international conventions that obligate States to suppress certain activities and criminalize them under domestic criminal legal system are known as ‘suppression conventions’. EA Nadelmann ‘Global Prohibitory Regimes: The Evolution of norms in International Society’ [1990] International Organization 44, 479. 14 N Boister ‘Transnational Criminal Law?’ [2003] Eur J Int Law 14, 953, 975–976. 15 MC Bassiouni ‘An Appraisal of the Growth and Developing Trends of International Criminal Law’ in J Dugard and C. van den Wyngaert (eds.), International Criminal Law and Procedure (Dartmouth Aldershot 1996); N Boister and RJ Currie Routledge Handbook Transnational Criminal Law (Routledge New York 2015). 16 The AML regime also includes soft laws also such as FATF Recommendations (the soft law Anti-Money Laundering/Countering of Financing of Terrorism (AML/CFT) regime consists of 40 + 9 FATF Recommendations on suppression of terrorist financing), which have been universally recognized by the international community. 17 Boister and Currie (n 15) 16. 18 Above n 3. 19 Boister and Currie (n 15) 17. 20 Above n 4. 21 N Lacey ‘Legal Constructions of Crime’ in M Maguire, R Morgan and R Reiner (eds.) The Oxford Handbook of Criminology (London: Oxford University Press, 2007). 22 Above n 4. 23 G Stessens Money Laundering: A New International Law Enforcement Model (Cambridge: Cambridge University Press, 2000). 24 FATF is an inter-governmental organization established in 1989 under the auspices of OECD to address illicit drug trafficking and draft guidelines to criminalize such proceeds of crime. It drafted 40 recommendations in 1990 which incorporated preventive and repressive approach combining banking and criminal law principles so that financial institutions could be exonerated from criminal liability while tracking the illicit money laundered by transnational criminal organizations. 25 D Cox Handbook of Anti-Money Laundering (Sussex: John Wiley & Sons Ltd, 2014). 26 See ‘International Narcotics Control Strategy Report’ http://www.state.gov/documents/organization/102588.pdf [2008] (31 December 2016). 27 S Singh ‘The Risks to Business Presented by Organised and Economically Motivated Criminal Enterprises’ [2007] J Financial Crime 14, 79. 28 The preceding legislation that addressed the issue of money laundering in India was Narcotics and Psychotropic Substances Act, 1985 which criminalized the proceeds of drug related crimes. Various predicate offences mentioned in the PMLA 2002, had been dealt within the Indian Penal Code, 1860, Arms Act, 1959, Narcotics and Psychotropic Substances Act, 1985, Prevention of Corruption Act, 1988. The Preamble to PMLA makes it clear that it was introduced to give effect to the Resolution S-17/2 adopted by the United Nations General Assembly at its 17th Special Session on the 23 February 1990 as also the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8–10 June 1998 calling upon the Member States to adopt national legislation and programmes to combat money laundering. 29 For the details of the discussions and presentations by various committee members of the Inter-Ministerial Committee on Money Laundering see http://rajyasabha.gov.in/book2/reports/petition/116threport.htm. 30 F A Julian ‘The Global regime on Anti-Money Laundering’ in K N C Pillai and F A Julian (eds.) Prevention of Money Laundering – Legal and Financial Issues (New Delhi: Indian Law Institute, 2008). 31 PMLA 2002 (India) Section 3. 32 As per Section 2 (d) of the PML Act, 2002, attachment means ‘prohibition of transfer, conversion, disposition or movement of property by an order issued under Chapter III’. 33 See Prevention of Money-laundering (the manner of forwarding a copy of the order of Retention of seized property along with the material to the Adjudicating Authority and the period of its Retention) Rules, 2005 and Section 5 of the PMLA 2002 which specify the safeguards the enforcement officers have to take before the property is attached/confiscated. 34 PMLA 2002 (India) Section 12 (1) (a) and (2). 35 PMLA 2002 (India) Section 12 (1) (c). 36 PMLA 2002 (India) Section 12 (1) (b). 37 The following are the Guidelines of the RBI issued in compliance with Section 15 read with Section 12 (1) of the PMLA 2002: Guidelines on―Know Your Customer’ norms Applicable to Banks; Know your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)—Wire Transfers; Know your Customer (KYC) Guidelines—Anti-Money laundering Standards For All Non- Banking Financial Companies, miscellaneous Non-Banking Companies, and residuary Nonbanking Companies; Revised―Know your Customer Guidelines for NBFCs; Simplified KYC procedure for opening accounts by NBFCs; Adherence to Know your Customer (KYC) guidelines by NBFC and persons authorized by NBFCs including brokers/agents; Guidelines on Anti-Money Laundering programme for Insurers; and Guidelines on Anti-Money Laundering Standards to All Intermediaries registered with SEBI under Securities and Exchange Board of India, 1988 (India) Section 12. 38 If any person has committed any act which constitutes money-laundering, or is in possession of any proceeds of crime involved in money-laundering, then any authorized officer can, (i) enter and search any building, place, vessel, vehicle, or aircraft where such records or proceeds of crime are kept; (ii) break open the lock of any door, box, locker, safe, almirah, or other receptacle where the keys thereof are not available; (iii) seize any record or property found as a result of such records; (iv) place marks of identification on such record or make or cause to be made extracts or copies therefrom, (v) make a note of inventory or such record or property, (vi) examine on oath any person who is found to be in possession or control of any record or property, in respect of all matters relevant for the purposes of any investigation. 39 A personal search can be undertaken only after a report has been sent to the magistrate under Section 173 of the Criminal Procedure Code 1973. Upon finding a suspect, the investigating officer has to write a report before undertaking personal search. In case of search of a suspected offender under the Narcotics Drugs and Psychotropic Substances Act, 1985 the investigating officer is also required to make a similar report before proceeding to investigate the report. Under the PMLA 2002, the director or authority has to make a similar report. 40 PMLA 2002 (India) Proviso to Section 19. 41 Above n 24. 42 Above n 30. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

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Statute Law ReviewOxford University Press

Published: Apr 18, 2018

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