What is Money Laundering?
Money laundering involves the process of transforming illegally obtained funds into seemingly legitimate sources of income. This is typically achieved through a three-stage process:
- Placement: Initially, criminals first place the illicit funds into the financial system. This could involve depositing cash in banks, buying high-value assets, or structuring transactions to avoid detection.
- Layering: Subsequently, criminals move the laundered money through a complex series of financial transactions, often across borders, to make it difficult to trace its origin.
- Integration: Finally, the laundered funds are reintroduced into the legitimate economy, often disguised as profits from legitimate businesses.
This act recognises itself as a serious offense and outlines measures to deter and penalise such activities.
Key Provisions of the Money Laundering Act
The Act establishes a comprehensive framework for combating money laundering, including:
- Defining money laundering offenses: The Act clearly defines what constitutes money laundering and outlines the associated penalties. These penalties can include imprisonment and significant fines. (Section 3 of PMLA 2002)
- Attachment and confiscation of property: The Act empowers authorities to attach and confiscate property derived from or involved in such activities. (Section 5 of PMLA 2002)
- Obligations on reporting entities: The Act places reporting obligations on various financial institutions and intermediaries, such as banks, insurance companies, and brokers. These entities must report suspicious transactions to the Financial Intelligence Unit (FIU-IND) in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
- Customer identification and verification: The Act mandates that financial institutions conduct thorough customer due diligence (CDD) to verify the identity of their clients and identify potential money laundering risks.
Additional Measures to Combat Money Laundering
Beyond the core provisions of the Act, several other measures are in place to combat money laundering:
- Cash Transaction Reporting (CTR): Regulations require reporting large cash transactions, hindering the placement of illicit funds into the financial system.
- Suspicious Activity Reports (SARs): Financial institutions are mandated to report suspicious activity to the FIU-IND, which can then investigate and share information with law enforcement agencies.
- Public awareness: Government and financial institutions educate the public on identifying such suspicious activity.
Recent Landmark Judgement
In a 2023 landmark judgment, the Supreme Court of India clarified the scope of “proceeds of crime” under the PMLA, ruling that the ED must show a connection between the attached property and the alleged crime. This judgment has brought greater transparency and fairness to the application of the Act.
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