The

Menace

of

Money

Laundering,

its

dimensions

and

constitutional validity

Lord Acton once said, “ Power corrupts and absolute power corrupts absolutely”. The power given by legislation to the investigation agencies in laws like Prevention of Money Laundering Act, 2002 and MCOCA has raised a big debate regarding the validity of laws like these in democracies like India where the rule of law prevails. The failure of laws like TADA and POTA has given power to the scholars who are against such laws. The recent registration of money laundering case by Enforcement Directorate against mighty political family of Haryana, the “ Chautala’s “ and ex-CM of Jharkhand Mr. Madhu Kauda has once again brought the Prevention of Money Laundering Act, 2002 in to the light. However, this law has been a reason of controversy right from the beginning it was enacted. Many scholars have raised the debate of validity of the law in India, its constitutionality and its consonance with International Agencies. It he has been argued that the law is against the liberal principles of the Constitution of India. The misuse of the law by ruling Governments is also prevalent amongst India. In the foregoing article we shall try to study the origination of the law and its constitutional validity. We shall try to study the money laundering, its functioning and its side effects on the democracy. Then we shall try to understand the constitutional validity of the money laundering. What is money laundering: Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that let to its production. Through the process of “money laundering” a person

converts illegal money into a legal entity. 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 held guilty of the offence of money laundering. The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the process of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminals to enjoy these profits without jeopardizing their source. Most countries subscribe to the definition adopted by the United Nations Convention against Illicit Traffic in Narcotics Drugs and Psychotropic Substances ( 1988 ) ( Vienna Convention )1 and the United Nations Convention Against Transnational Organized Crime ( 2000 ) ( Palermo Convention )2 : • The conversion or transfer of property, knowing that such property is derived from any [drug trafficking] offense or offenses or from an act of participation in such offense or offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offense or offenses to evade the legal consequences of his actions; • The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offense or offenses or from an act of participation in such an offense or offenses, and;

1 2

http://www.incb.org/e/conv/1988/ http://www.undcp.org/adhoc/palermo/convmain.html

• The acquisition, possession or use of property, knowing at the time of receipt that such property was derived from an offense or offenses or from an act of participation in such offense or offenses3 A very simple definition of money laundering is that it’s the act of making money source B. Money laundering however is not crime independently, it depends upon another crime; proceed of which is the subject matter of the crime. It’s seen world wide that in advanced societies the crime becomes more economic in nature. It is an organized crime. The social and economic danger of which includes tax evasion, fiscal loss, economic poorness and terrorism etc. The term is not very old in nature, it originated firstly in U.S. in 1973 and was used in legal context firstly in 1982 in U.S. vs $ 4,255,625.394. The celebrated ways of doing money laundering are hawala and Swiss Banks apart from other ways. How money is laundered: At the initial or placement stage the launderer introduces his illegal profits/ money into the financial system. This may be done by investing the same in bulk or through several small transactions which shall be less suspicious for banks or financial institutions to report the same to government agencies. The money is then flowed from one stage to other and from one legal activity to other legal activity and the output is legal money, wherein even the launderer can pay tax and than be free for spending the same according to his own sweet will. There are three stages of money laundering:
3 4

that comes from source A look like it comes from

Vienna Convention, Art. 3 ( b ) and c (i ) and Palermo Convention, article 6 ( i )
(1982) 551 F Sup. 314, quoted in Gururaj

1.) Placement: The funds are introduced in legal financial system. The same may be done in bulk or by breaking the transactions into various smaller transactions. 2.) ) Layering: In this stage the launderer engages in various series of conversations or movement of funds to distance the same from its origination or source. The layering may be done through numerous channels, in bank accounts around the world especially in bank institutions in the jurisdictions of those countries who do not cooperate in the anti- money laundering investigations. 3.) Integration: Here the funds re-enter legitimate economy. The launderer might choose to invest the funds in real estate, luxury assets or business ventures. The money laundering is a problem since, it has necessary linkage with terrorist funding and other worldwide financial crimes, hence it is necessary to stop the same. Hence, Financial Action Task Force which is known as international standard for anti money laundering efforts gave 40 guidelines to be adopted by countries worldwide in order to control the worldwide spread of money laundering. The problem is so horrible that the World Bank has assessed that money laundering accounts for 4 to 5 percent of gross domestic product world wide. The IMF estimates the global volume of money laundering to be somewhere between $600 billion to $1.8 trillion a year. With such statistics, in India, there are absolutely no estimates regarding spending on anti money laundering measures by banks and financial institutions.

Indian Efforts: Money laundering has become a cause of worry in India, International
Narcotics Control Strategy Report by Bureau for International Narcotics

and Law Enforcement Affairs emphasizes India’s Vulnerability to moneylaundering activities in following words5:

“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.”

In order to implement the guidelines settled by FAFT6, India made Prevention of Money Laundering Act, 2002 which is standard for anti money laundering efforts in India. However, the act right from its inception has been centre of controversy. The misuse of the act is rampant by the governments in India. There are instances when politicians have used it for their political benefits. Though the intention was clear, it was implemented for giving value to world wide effort to break nexus between money laundering and terrorist financing, it has failed to gain its importance in India. Though , it has proved some what beneficial that it has curbed the problem to some extent as it is mandatory for the banks and other financial institutions to follow the

5

International Narcotics Control Strategy Report dated February 29, 2008

6

The Financial Action Task Force (FATF) is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing. The Force has provided forty Recommendations and Nine Special Recommendations that provide a complete set of counter measures against money laundering. These Recommendations have been recognized, endorsed and adopted by many international bodies as the international standards for combating Money Laundering.

AML guidelines set by the act. But, a lot needs to be done to actually make it a beneficial legislation. With the PMLA coming into force, banks, financial institutions and financial intermediaries will have to mandatorily report to Government all suspicious transactions and those over Rs.10 Lakh. As per the provisions of the Act, every banking company, financial institution and intermediary needs to maintain a record of all transactions, the nature and value of which is being prescribed in the rules. Financial institutions, including chit funds, cooperative banks and intermediaries like stock brokers, share transfer agents, underwriters and investment advisers were to be registered with SEBI. The Financial Intelligence Unit (FIU-IND) was set up as a multidisciplinary unit for establishing links between suspicious or unusual financial transactions and criminal activities. The law of preventing money laundering is necessary since, the money laundering tends to corrupt even a person who is very honest. Hence, its social value is very high. Since, money laundering is a very complicated process, it can not be completed without the help of professionals like lawyers and charted accountants. Hence, it tends to corrupt most noble professionals. Hence, it acts like a poison and needs to be curbed in order to realize the dream of free and fair economy. It not only disturbs the moral values, but its very dangerous for the economy, especially the economy of developing countries like India where the corruption is rampant around all places. The area of money laundering is so wide that recently in a study conducted in Canada, it came in to light that over 80% of money laundering cases have international dimensions. Hence, it is one of the biggest transnational threats.

Constitutionality of the Act: The constitutionality of the act came into challenge firstly before the Hon’ble Supreme Court in Pareena Sarup vs Union of India and others7 The question before the court was that the decision of the cases under the act vests under the independent tribunals to be set by the Government but not under the regular courts. It was alleged that the act seriously undermines the doctrine of separation of power which is the basic structure of the constitution. Hence, the same is ultra vires being in violative of the fundamental rights guaranteed by the Constitution of India. The Constitution guarantees free and independent judiciary and the constitutional scheme of separation of powers can be easily and seriously undermined, if the legislatures were to divest the regular courts of their jurisdiction in all matters, entrust the same to the newly created Tribunals which are not entitled to protection similar to the constitutional protection afforded to the regular Courts. The independence and impartiality which are to be secured not only for the Court but also for Tribunals and their members, though they do not belong to the `Judicial Service' are entrusted with judicial powers. The court however, while dismissing the writ petition directed Government of India to implement the rules as soon as possible. The courts have since upheld validity of the law. Conclusion: Stricter rules regarding bail, police custody has made the law vulnerable to the misuse. According to Mr. Y.P.Singh, Ex IPS Officer and criminal lawyer8, “the solution lies in accountability. While the corrupt need to be sacked, the honest and efficient must be posted to critical positions. This,
7 8

CWP No. 634 of 2007 http://www.tehelka.com/story_main43.asp?filename=Ne230110a_law.asp

along with better professional competence would lead to draconian laws that are a blot on our society to be repealed. “ However, the law is very important as far as curbing the money laundering is concerned but the provisions like Section 44, which provides special provisions for trial and bail are the cause of worry for the advocates of right to life and liberty. The problem is justified, police has been given unlimited power, the rights of the accused have been curtailed, but police reform is far away from reality despite after the recommendations of the Hon’ble Supreme Court. The menace of money laundering is highly diabolical in nature. It hits not only at the root of a country’s financial structure but also kills its social structure by financing anti-social activities. In order to realize dream to make India superpower not only the law needs to be made according to international standards but also to make the implementation of law compatible to the international standards. Money laundering is having international dimensions hence a very careful implementation of the law is necessary. The act should not only be in consonance with the international guidelines but also the Constitution of India since it is the soul of Indian democracy.

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