CALM-Module-2.

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Slide 1 - PMLA, 2002:

From the past few sessions, you would have clearly understood the growing manners of money
laundering and terrorist financing. The need for a global war against this economic offense needs no
further emphasis. FATF, the Global Watchdog, through its recommendations and guidelines,
provides framework ensuring all jurisdiction to have a minimum standard so that the efforts are
coordinated. In this session, we will go over the salient features of India's legislation prevention of
Money Laundering Act 2002. This understanding will help appreciate how the FATF
recommendations are enforced within the Indian legal framework and better appreciate the specific
regulations that the various regulators have issued for their intermediaries orchestrate a combined
effort against this global problem. This will also set the understanding of the need for why we need
to do what we do and how it has to be done. 4s

Slide 5 - Need for Money Laundering Act:

Critical declaration adopted by the Special Session of the United Nations General Assembly held on
8th June, 1998 called upon the Member States to adopt national money laundering legislation and
program appreciating the need for India to implement UN declaration. India enacted the Prevention
of Money Laundering Act 2002, popularly known by its acronym PMLA. The Preamble of PMLA
outlines the objectives in a crisp and comprehensive manner an act to prevent money laundering and
to provide for confiscation of property derived from or involved in money laundering and for matters
connected therewith or incidental thereto. The Preamble explains the role of India in international or
national Committee to Fight Terrorism, organized crime syndicates and major economic offenders
by targeting their financial resources. We will go over some of the important provisions of PMLA in
this session. 3s

Slide 6 - Parliamentary History of PMLA:

India has had an assorted menu of legislations to fight the menus of money laundering for many
years prior to the implementation of PMLA in 2002. The Income Tax Act , unlawful Activities
Prevention Act, 1967 the Conservation of Foreign Exchange and Prevention of Smuggling Activities
Act, 1974. Popularly known as COFEPOSA, the Indian Penal Code and Code of Criminal
Procedure, 1973. Foreign Exchange Regulation Act, FERA 1973, and its latest of version, the
Foreign Exchange Management Act, 1999 FEMA, the Benami Transactions Prohibition Act, 1988,
the Narcotic, Drugs and Psychotropic Substances Act, 1985 the prevention of illicit traffic in
Narcotic, Drugs and Psychotropic Substances Act, 1988 are some of the important legislations that
addressed the provision directly and indirectly. While these legislations served some purpose, it was
not comprehensive and the need to have a legislation that harmonized all these various acts in as far
as it relates to money laundering. Indian government introduced the Prevention of Money
Laundering Bill in 1998, which was referred to the Standing Committee of the Parliament. It was
presented in Lok Sabha and Rajya Sabha in 1999. While it was passed in the Lok Sabha in 1999,
rajya Sabha passed it in 2000. It finally received the presidential assent in the year 2002, paving the
way for the Prevention of Money Laundering Act 2002. 4s
Slide 7 - PMLA - Key Concepts:

Let us recall the definition of money laundering. As per PMLA, which we learnt in the first session
under section 3 of the act, the offense of money laundering is defined as a direct or indirect attempt,
any direct or indirect assistance, or being directly or indirectly a knowing party to or being involved
in any process or activity that is connected with the proceeds of a crime, including its concealment,
possession, acquisition or use with the intention of projecting or claiming those proceeds of crime as
untainted property. As we have seen earlier, offense of money laundering is preceded by the
commission of a scheduled offense or the predicate offense, the proceeds of which become the
subject matter of the offense of money laundering. One should understand the broader perspectives
of this definition. Proceeds of crime under the act includes any property derived or obtained directly
or indirectly by any person as a result of a criminal activity and the value of such property or the
property equivalent in value held within the country if such property is taken or held outside the
country. Recent amendments also included any other property which may directly or indirectly be
derived or obtained as a result of any criminal activity relatable to the scheduled offense, and also
continued usage of the property. The offense of money laundering not only covered the proceeds of
crime, but its concern concealment, possession, acquisition or use also became the part of the
offense of money laundering. This includes any benefits derived from the continued use of such
property. 4s

Slide 8 - PMLA Administration:

The Prevention of Money Laundering Act, along with the rules framed thereafter have come into
force with effect from 1 July 2005. There are two government departments, namely Financial
Intelligence Unit and Enforcement Directorate, which are responsible for ensuring the smooth
implementation and enforcement of the legislations. 1s Financial Intelligence Unit India was set by
the Government of India on 18th November 2004 as the central national agency responsible for
receiving, processing, analyzing and disseminating information relating to suspect financial
transactions. FIU is also responsible for coordinating and strengthening efforts of national and
international intelligence investigation and enforcement agencies in pursuing the global efforts
against money laundering and related crimes. FIU India is an independent body reporting directly to
the Economic Intelligence Council headed by the Finance Minister. The Directorate of Enforcement
was established in the year 1956 with its headquarters at New Delhi. It is responsible for
enforcement of the Foreign Exchange Management Act 2s and certain provisions under the
Prevention of Money Laundering Act. Work relating to investigation and prosecution of cases under
the PMLA has been entrusted to Enforcement Directorate. The Directorate is under the
administrative control of Department of Revenue for operational purposes. PMLA empowers certain
officers of the Directorate of Enforcement to carry out investigations in cases involving offense of
money laundering to undertake survey, search, attach, seizure, arrest, prosecution, action, et cetera,
against the property involved an offender of PMLA offense. The Enforcement Directorate also
provides and seek mutual legal assistance to all from contracting states in respect of attachment or
confiscation of proceeds of crime, as well as in respect of transfer of accused persons under PMLA.

Slide 9 - PMLA Administration:

We saw that the Financial Intelligence Unit and the Enforcement Directorate play a very important
role in ensuring the implementation and enforcement of the provisions of PMLA in India. While we
have a separate session to go into the details of the FIU, this slide depicts the role of Enforcement
Directorate in the process of investigation. As you can see, any investigation in relation to money
laundering, either arising from prosecution of any scheduled offense originating from the various
courts of law or the FIU itself, is referred to the Enforcement Directorate. The entire investigation of
the money laundering case, attachment and confiscation of the proceeds of crime is handled by the
Enforcement Authority. In June 2021, you would have read about the Enforcement Directorate
handing over Rupees 9300 crores, or $1.2 billion to various banks, being the assets confiscated,
attached, and recovered following the due process by the Adjudicating Authority. 4s

Slide 10 - PMLA - Multi Agency Perspective:

The Prevention of Money Laundering Act 2002 is a specific act in relation to money laundering
arising from the various scheduled offenses committed under various other acts. This slide is an
attempt to show the multi agency engagement that is coordinated by the Enforcement Directorate
with the various nodal agencies and regulators for those predicate offenses. Enforcement Directorate
brings together the various agencies and regulators in relation to investigations of money laundering.
This usually involves violations of multiple legislations across different government agencies. The
coordinated effort by the Enforcement Directorate brings about not only the efficiency and effect
effectiveness, but Expedits the prosecution of the offenders too. 2s

Slide 11 - Legal Obligations to FIU:

PMLA has introduced the concept of reporting entities wide an amendment in 2012 to include
banking companies, financial institutions, intermediaries, and certain other professionals. 1s These
reporting entities have an obligation for verification and maintenance of various records. The records
relate to the identity of all its clients and all their transactions. Further, the entities shall furnish such
information of such transactions in prescribed form to the Financial Intelligence Unit as required
periodically or as and when requested. Later in this course, we will go into the details of the
institutions in different sectors as regards their role in safeguarding against money laundering and
their suspicious reporting. To FIU, the reporting entities furnish various periodic transaction reports
or suspicious transactions and activity to the FIU. However, the FIU, in turn, routes any information
requests relating to reports filed or other general queries from the reporting entities through the
respective regulators. Any further investigation, if needs to be taken, is handed over to the
Enforcement Directorate. In the next few slides, we will go over the definitions of certain
institutions. 1s As per PMLA 3s

Slide 12 - Financial Institution under PMLA:

Financial Institution as per PMLA refers to financial institutions and non banking financial
institutions as defined in Section 45 I of the RBI Act. These largely cover the development
institutions initiated by the government for various designated purposes that have fueled the
economic growth of India. This also includes the insurance companies that are now regulated by the
Insurance Regulatory and Development Authority of India and the Housing Finance companies. Chit
funds have been there for many years to help the marginalized and underserviced segments of the
society. Chit Funds in India are governed by the Chit Funds Act. Under this act, the Chit Fund
businesses can be registered and regulated only by the respective state governments. 1s Regulator of
Chit funds is the Registrar of Chits appointed by respective state governments. Keeping with the
changing dynamics, new class of reporting entities are added from time to time. Such entities like
authorized persons or money changers, payment system operators and Indian posts have been added
to the original list of reporting entities. 4s

Slide 13 - Banking Company under PMLA:

Banking companies are, simply put, are any institution that provides banking facilities. It has a range
of intermediaries that include nationalized banks and private banks both Indian foreign banks. State
bank of India the Banking Behemoth which recently merged its various associate companies with
itself is a different species of nationalized bank given its sheer size, reach and significance. The role
of the regional rural banks. Various cooperative banks whether state cooperative or district
cooperative level banks come under the purview of banking companies and through this come under
the PMLA. This segment of banking used to be the easy route for money laundering given their role,
geographical reach, manual nature of operations, etc. 4s

Slide 14 - Intermediary under PMLA:

Securities and Exchange Board of India plays a crucial role in the enforcement of PMLA. These
intermediaries to the capital markets may be used and abused by the money launderers to legitimize
the proceeds of crime. These intermediaries are also source of certain predicate offenses like
frontrunning, insider trading and market manipulation. All the intermediaries, ranging from the
exchanges depositories to the broking institutions, custodians and the mutual funds have reporting
obligations. By bringing all the intermediaries under the Purview, there is an obligation for each of
these entities to perform some oversight in relation to enforcement of PMLA. 3s

Slide 15 - Designated Business or Profession under PMLA:

Earlier, money laundering was considered more as an issue impacting the banking industry and those
handling cashbased transactions. However, over the many years, through various detailed study and
new typologies that emerged, it is not just the financial institutions that are targeted, but other
players too. With increased regulations and implementation of technology driven controls, financial
institutions cannot be the only means to launder money. Certain individuals carrying on designated
business or profession have obligations to report under PMLA. Designated Nonfinancial Businesses
and Professions, popularly known by its acronym, DNFBP includes casinos, gatekeepers like
accountants, lawyers, corporate and trust service providers, amongst others. Much of the
requirements of financial institutions are applicable to the DNFBP two. The PMLA includes casinos,
dealers and precious metals, gems, arts and crafts, registrar and subregistrar under the Registration
Act of 19 six, which deals with property registrations. Recently, real estate agents have been brought
under the scope of PMLA by notifying them as persons carrying on designated businesses or
professions. Please note that the DNFBP does not specifically mention about casinos only, but the
entire gaming industry. It covers any person or organization carrying on activities for playing games
of chance for cash or kind and includes such activities associated with casino. This includes not just
physical outlets, but virtual gaming activities too. 4s

Slide 16 - Obligations of Reporting Entities:

There are a few obligations cast upon the reporting entities by the PMLA. We will briefly go over
these to understand what is expected. PMLA requires the appointment of a designated director and a
principal officer. Between the two of them, the entire responsibility of overseeing and
implementation of compliance to PMLA rests. The reporting entity should communicate name,
designation, and address of the designated director and principal officer to FIU on their appointment
or any changes thereafter. The reporting entity shall formulate and implement a client's due diligence
program to determine true identity of clients. Further, they shall identify the client by verifying the
documents and obtain information on the purpose and intended nature of the relationship. 1s This
shall be done at the time of commencement of the relationship and thereafter, based on their risk
assessment or any alerts triggered. Determining the beneficial owner is an important expectation
from the reporting entity. Determining whether a client is acting on behalf of a beneficial owner and
identifying the beneficial owner is a minimum expectation. Necessary documents after ascertaining
the authenticity relating to identity, address, nature of business, et cetera, shall be taken at the time of
commencement of the relationship and at the time of any change in beneficiary or authorized per.
The enforcement agencies and regulators may require information about any client or entities
associated with an individual from time to time. 1s This may be in followup to their suspicious
reporting or otherwise. The reporting entity shall evolve, implement and maintain suitable
mechanism to furnish such information quickly and accurately. Similarly, the reporting entity shall
examine transactions of clients on an ongoing basis and ensure that they are consistent with the
business and risk profile. Any deviations shall be investigated and suspicious transactions reported.
There are various reports that need to be filed on a timely and periodic basis. These relate to cash
transactions, cross border nonprofit organizations, and counterfeit currencies or forged documents.
These shall be reported in specified formats within defined timelines. The reporting entity shall
maintain record of all transactions that allows reconstruction of individual transactions, including the
nature of transaction, the date and parties involved, other than the amount and currency. Further,
client identification documents, transactions and suspicious transactions sections reported shall be
maintained for a period of five years. 1s If the business relationship has ended between a client and
the reporting entity or the account has been closed, records shall be held for a period of five years
thereafter. We have seen quick highlights of the obligations of the reporting entity cast upon by
PMLA. You will see some of these discussions during the various later sessions. 3s

Slide 17 - Salient Features of PMLA:

Let us recap the salient features of PMLA obligating the various intermediaries to report to FIO
helps get a view on the launderer as he or she tries to launder the proceeds of crime. The launderer
tries different geographies asset classes, et cetera. That it might have been very difficult with Siloed
approach. Reporting to the FIU helps the agency to have a holistic view. PMLA has made
attachment and confiscation of property easier by empowering the officials. 1s Property in the
overseas locations can also be attached with property of equivalent value based in India. Whether
tainted or not, the act provides for setting up of special codes across the country for effective and
expeditious disposal of various cases. By casting the burden of proof on the launderer that the
proceeds of crime are not tainted has made the case that much more difficult for the launderers. The
launderers used to retract many statements provided during the investigations that used to stall the
proceedings. Now the statements made by the enforcement officers being admitted as evidence has
again helped better outcomes. While there is a lot that need to be done for quicker disposal of cases
and confiscation of properties, the PMLA is getting more effective these days. The return of over
Rupees 9300 crores to various banks within three years arising out of proceeds of crime attached
from Vijay Malia, Nirav Modi and Mihul Choksi is a classic example. 2s