4.

1 INTRODUCTION

The Prevention of Money Laundering Act, 20021 (hereinafter

referred as PMLA) is a first legislation that directly deals with
prevention and combating of money laundering. Prior to PMLA the
only legislation on the subject was Narcotic Drugs and Psychotropic
Substances Act, 1985, which contained some provision dealing with
proceeds of certain drug related offences. However, Reserve Bank of
India regulates Banks and other financial institutions and Securities
Exchange Board of India regulates capital market through regulatory
framework. The Unlawful Activities Prevention Act, 1967 also
contains provisions prohibiting raising funds for terrorism or
terrorist organization by making it an offence. The objective of the
PMLA is to have mechanism to confiscate property derived from or
involved in money laundering and to punish those who commit
money laundering.2 The PMLA has been enacted in the backdrop of
Political Declaration and Global Programme of Action, 1998 requiring

1 Act 15 of 2003, come into force w.e.f. 1st July 2005. The Act was
amended by PMLA (Amendment) Act, 2005; PMLA (Amendment) 2009,
w.e.f. 01.06.2009; and PMLA (Amendment) Act, 2012 (w.e.f. 15.02.2013).
2 The Prevention of Money Laundering Act, 2002, Pre-amble.

135
member States to adopt national money laundering legislation and
programme.3

The PMLA defines money laundering a process or activity

connected with proceeds of crime including its concealment,
possession, acquisition or use and projecting or claiming 4 it as
untainted property. As has already been explained in the
previous chapters of this thesis the money laundering involves
different stages as placement; layering; and integration. The
offence of money laundering as dealt under PMLA has peculiar
characteristics that it is intrinsically implicated with several
other offences which we call 'predicate offences'. The proceeds
of those crimes are involved in the commission of offence of
money laundering as defined under the PMLA. Such predicate
offences are included in the schedule to PMLA. The PMLA is
enacted to deal with 'proceeds of crime' i.e. property derived or
obtained directly or indirectly by any person as a result of
criminal activity relating to scheduled offences or the value of
any such property. 5

As such, the PMLA is a special legislation enacted by the

Parliament which sets out offences (Chapter II); manner of
investigation; attachment and adjudication (Chapter IV), the
power to summon, search, seizure and arrest (Chapter VI)
special court (Chapter VIII) and international arrangements
(Chapter IX).

3 United Nation S-17/2 resolution adopted by UN General Assembly Special

Session, held on 8-10 June 1998.
4 The Prevention of Money Laundering Act, 2002, S. 3, as amended by Act 2
of 2013 S. 3.
5 Id., S. 2 (1) (4).

136
4.2 MECHANISM TO COMBAT MONEY LAUNDERING IN INDIA
UNDER PMLA

India is a signatory so the International Convention for

Suppression of Financing of Terrorism (1999); the United Nation
Convention against Transnational Organised Crime (2000); and
United Nation Convention against Corruption (2003). India also
signed United Nation General Assembly Special Session 8-10 June
1998 which called upon member States to adopt Anti-Money
Laundering Legislation and Programme. Accordingly the PMLA was
enacted in 2002 which came into force on 1st July 2005. Thereafter
PMLA has been substantially amended in 2009 w.e.f. 1st June 2009
and again in 2012 w.e.f. 15.02.2013. These amendments have been
carried out so meet the required international standards to combat
money laundering.

As has earlier discussed in Chapter II the offence of money

laundering as defined under Section 3 of the PMLA has peculiar
characteristics as here the criminal liability is with respect to
proceeds of crime generated through predicate offences, which have
been included in the schedule to the PMLA. Such scheduled
offences are punishable under various penal statutes. Such
predicate offences are investigated by different agencies like police,
customs, SEBI, NCB, CBI etc. as provided in the respective statutes.
However the offence of Money Laundering is investigated by the
Directorate of Enforcement.

4.2.1 Investigation of Offence of Money Laundering

The predicate offences are investigated by the agencies like

Police, Custom, Securities Exchange Board of India (SEBI), Narcotic
Control Board (NCB), Crime Investigation Bureau (CBI) under their
respective Act. However, the offence of money laundering is

137
investigated by the Officers of the Directorate of Enforcement. These
officers are also authorized to initiate proceedings for attachment of
property and to launch prosecution in the designated special courts
for money laundering.

The enforcement of PMLA is through the instrumentality of the

Central Government. The Act specially excludes that no police
officer shall investigate an offence under this Act unless specifically
authorized by the Central Government.6

Thus, the power to investigate offence u/s 4 of PMLA is

exclusively with Enforcement Directorate. However, when there is
no specific allegation about laundering of money the offences which
are mentioned in the schedule can be investigated by the
investigation agencies other than enforcement directorate. This was
observed by the Supreme Court in Binod Kumar v. State of
Jharkhand and Others.7 In this case the apex course refused to
interfere with the order of the High Court where investigation of
corruption cases was assigned to the Central Bureau of Investigation
as there was no clear allegation of laundering in the sense mentioned
in the PMLA.

4.2.1.1 Investigating Agency under PMLA

The question whether on institution of case u/ss. 3/4 of the

PMLA an investigation agency other than that under PMLA can
continue with investigation and file charge sheet for other offence
under other laws (viz., Prevention of Corruption Act, 1898 and IPC)
was before the Jharkhand High Court in Hari Naryan Rai v. State of

6 See Prevention of Money Laundering Act, 2002, S. 45 (1-A).

7 2011 (3) SCC 463.

138
Jharkhand and Others.8 The petition was accused of offences under
u/ss. 406, 409, 420, 423, 424, 465 and 120 B IPC alongwith
offences under Ss. 11/13 of the Prevention of Corruption Act, 1988).
Meantime a case u/ss. 3/4 of the PMLA, 2002 was also lodged
against the petitioner/accused. But vigilance department continued
with offences under IPC and Prevention of Corruption Act and
submitted charge sheet. It was contended before the court that in
view of section 45 (1-A) PMLA, the charge sheet is liable to be
quashed. The High Court did not accept the contention that the
provisions of section 43 and 44 of the PMLA mandates that the
accused while being tried under the PMLA should also be tried for
scheduled offences by special court constituted under the PMLA and
therefore the vigilance court does not have any authority to proceed
with the trial for offences under IPC and PC Act. The court
supported the contention that section 45 (1-A) of PMLA does not
impose any restriction on any authority/investigation agency to
proceed with the matter not related to the offence under the PMLA,
rather provisions under PMLA put restriction upon a person who is
not empowered by the Central government to investigate the offence
under the PMLA.

4.2.1.2 Procedure for Investigation of PMLA Offences

The question whether the procedure prescribed under the

Code of Criminal Procedure, 1973 for investigation of cognizance
offences i.e. section 54 of the Code relating to registration of First
Information Report, sections 157 and 167 relating to investigation
section 172 relating to maintenance of case diary is required to be
followed for investigation of offences under the PMLA was before the

8 Indian Kanoon http://indiankanoon.org/1692433, (WP (Cr) No. 15 of 2010

decided on 5 April 2010.

139
Madhya Pradesh High Court in Vijay Mandal Chaundhary v. Union of
India.9 The Court observed that:

Section 71 of PMLA gives overriding effect to the Act and

provides as under:

"71. Act to have overriding effect.-The provisions of this Act

shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in
force.

Section 65 of the PMLA relates to applicability of the Cr.P.C.

and provides as under:

"65. Code of Criminal Procedure, 1973 to apply - The

provisions of the Code of Criminal Procedure, 1973 (2 of 1974)
shall apply, insofar as they are not inconsistent with the
provisions of this Act, to arrest, search and seizure,
attachment, confiscation, investigation, prosecution and all
other proceedings under this Act."

Since PMLA is a special act and the provisions of this Act have
been given overriding effect, therefore, they will prevail in case if
there is any inconsistency with the general Act. In terms of Section
65 of PMLA, the provisions of PMLA relating to arrest, search and
seizure, attachment, confiscation, investigation, prosecution and all
other proceedings under PMLA have the overriding effect and the
provisions of the Code of Criminal Procedure, 1973 (hereinafter
referred as Code) not inconsistent with the provisions of PMLA in this
regard, only are made applicable.

So far as the search and seizure is concerned, Section

16 and 17 starting with the non-obstante clause provide a detailed

9 http://indiankanoon.org/doc/9673711 paras 16-21.

140
power of survey and procedure of search & seizure. Section 19 of
PMLA provides for power to arrest. In respect of attachment, Section
5 of PMLA provides for attachment of property involved in money
laundering and for confiscation Section 8(5) of PMLA gives the
power. Section 45 of PMLA provides for the prosecution by Special
Court on complaint in writing made by the specified officer. In terms
of Section 46 of the PMLA, the provisions of Code are applicable in
the proceedings before the Special Court.

Regarding issue of investigation, the PMLA does not contain

any provision parallel to Section 154 of the Code for registration of
FIR, Section 157 of the Code relating to sending the report to the
Magistrate, Section 167 of the Code relating to the procedure when
investigation cannot be completed within 24 hours and Section
172 of the Code relating to maintaining the case diary. If the offence
is registered against a person under the PMLA then the investigation
is to be carried out by following some reasonable procedure. Such a
course is also necessary keeping in view the issue of personal liberty
and fair and proper investigation. The judgment of the Supreme
Court in the matter of State of Haryana and others v. Bhajan Lal and
others,10 also supports the petitioner's contention that unfettered
power cannot be given in respect of investigation. Though in the said
judgment it has been observed that the investigation of the offence is
the field exclusively reserved for the police officers, but the said
observation has been made in respect of offence registered under
the Indian Penal Code whereas in the present case the offence is
registered under PMLA. Under the provisions of PMLA, the
investigating officers are not the police officers but since for
investigation of offence Provisions of Code are held to be applicable,

10 (1992) Suppl. (1) SCC 335.

141
therefore, they are required to follow the same. Keeping in view the
provisions of Section 65 of PMLA and also the fact that there is no
procedure prescribed in PMLA for investigation of the offence, the
court held the opinion that the procedure which has been prescribed
under the Code is required to be followed while investigating the
offence under PMLA.11

The Prevention of Money Laundering Act incorporates two sets

of measures to counter money launderings: (i) it describes the power
and authority available with the officers enforcing the law, and (ii) it
also provides for transaction reporting regime which is administered
by a separate financial intelligence unit. The Directorate of
Enforcement is the law enforcing agency for the provisions of the Act.
As such it concerns with the investigation and prosecution of money
laundering offences. It works through officers of Income Tax,
Customs and Police Departments. Investigating officers are
specially authorized by the Central Government. The officers
specified under Section 54 of the Act are empowered and required to
assist the authorities in enforcement of this Act.

Section 54 of PMLA as amended by Act 2 of 2013 provides the

list of officers as under:

S. 54. Certain officers to assist in inquiry, etc.—The

following12 [officers and others] are hereby empowered and
required to assist the authorities in the enforcement of this
Act, namely:—

(a) officers of the Customs and Central Excise Departments;

11 Id., paras 17-21.

12 Subs. by Act 2 of 2013, S. 23 (i), for ―officers‖ (w.e.f. 15-2-2013, vide S.O.
343(E), dated 8-2-2013).

142
 (b) officers appointed under sub-section (1) of section 5 of
the Narcotic Drugs and Psychotropic Substances Act,
1985 (61 of 1985);
(c) income-tax authorities under sub-section (1) of section
117 of the Income-tax Act, 1961 (43 of 1961);
13[(d) members of the recognised stock exchange referred to in
clause (f) of section 2 and the officers of the stock
exchanges recognised under section 4 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956);]
(e) officers of the Reserve Bank of India constituted under
sub-section (1) of section 3 of the Reserve Bank of India
Act, 1934 (2 of 1934);
(f) officers of police;
(g) officers of enforcement appointed under sub-section (1)
of section 36 of the Foreign Exchange Management Act,
1999 (40 of 1999);
(h) officers of the Securities and Exchange Board of India
established under section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992);
14[(ha) officers of the Insurance Regulatory and Development
Authority established under section 3 of the Insurance
Regulatory and Development Authority Act, 1999 (41 of
1999);]
[(hb) officers of the Forward Markets Commission established
under section 3 of the Forward Contracts (Regulation)
Act, 1952 (74 of 1952);]
(hc) officers and members of the recognised association
recognised under section 6 of the Forward Contracts
(Regulation) Act, 1952 (74 of 1952);]
(hd) officers of the Pension Fund Regulatory and
Development Authority;]
(he) officers of the Department of Posts in the Government of
India;]

13 Id., S. 23 (ii), for clause (d) (w.e.f. 15-2-2013, vide S.O. 343(E), dated 8-2-
2013). Clause (d), before substitution, stood as under:
―(d) officers of the stock exchange recognised under Section 4 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956); ‖.
14 Id., S. 23 (iii) (w.e.f. 15-2-2013, vide S.O. 343(E), dated 8-2-2013).

143
 (hf) Registrars or Sub-Registrars appointed by the State
Governments under section 6 of the Registration Act,
1908 (16 of 1908);]
(hg) registering authority empowered to register motor
vehicles under Chapter IV of the Motor Vehicles Act,
1988 (59 of 1988);]
(hh) officers and members of the Institute of Chartered
Accountants of India constituted under section 3 of the
Chartered Accountants Act, 1949 (38 of 1949);]
(hi) officers and members of the Institute of Cost and Works
Accountants of India constituted under section 3 of the
Cost and Works Accountants Act, 1959 (23 of 1959);]
(hj) officers and members of the Institute of Company
Secretaries of India constituted under section 3 of the
Company Secretaries Act, 1980 (56 of 1980);]
(i) officers of any other body corporate constituted or
established under a Central Act or a State Act;
(j) such other officers of the Central Government, State
Government, local authorities or15 [reporting entities] as
the Central Government may, by notification, specify, in
this behalf.

The power to investigate money laundering offences under the

PMLA are vested in the officers of the Directorate of Enforcement.
Section 2 (na)16 defines investigation as:

'Investigation' includes all the proceedings under the Act

conducted by the Director or by an authority authorized by the
Central Government under this Act for the collection of
Evidence.

The Central Government has appointed w.e.f. 01.07.2005 the

Director of Enforcement under the Foreign Exchange Management
Act, 1999 as a Director to exercise the exclusive powers conferred
under sections 5, 6, 16, 17, 18, 19, 20, 21, 26 (1), 45, 50, 57, 60, 62,

15 Id., S. 23 (iv), for ―banking companies‖ (w.e.f. 15-2-2013, vide S.O. 343(E),
dated 8-2-2013).
16 The Prevention of Money Laundering Act, 2002, S. 2 (na) inserted by Act 20
of 2005 w.e.f. 01.07.2017.

144
63 of the PMLA Act. The Director was also authorized to
concurrently exercise powers conferred by Sections 26 (3), 26 (4), 26
(5), 29, 40, 41, 42, 48, 49 and 69 of the PMLA.17 The Central
Government also appointed w.e.f. 01.07.2005 the Director Financial
Intelligence Unit under the Ministry of Finance, Department of
Revenue as the Director of Exercise Powers under Sections 12, 13,
26 (2), 50 (1) of the PMLA. The said Director is also concurrently
exercise powers conferred by sections 26 (3), 26 (5), 39, 40, 41, 42,
48, 49 (2), 66 and 69 of PMLA.18

4.2.2 Power of Directorate of Enforcement

The PMLA, 2002 provides for different steps in the

investigation of offence of money laundering, which with relation to
proceeds of scheduled offences, mainly include:

(i) Attachment of Proceeds of Crime (S. 5)

(ii) Survey (S. 16)
(iii) Search Seizure and Freezing (S. 17)
(iv) Search of Persons (S. 18)
(v) Power to Arrest (S. 19)
(vi) Retention of Property (S. 20)
(vii) Retention of Record (S. 21)

(i) Attachment of Proceeds of Crime

The Director or other authorised officer can provisionally

attach any property derived or obtained directly or indirectly by any
person as a result of criminal activity relating to scheduled offences
or the value of such property as per procedure prescribed under
Section 5 of the PMLA.19 The Section 5 (i) of PMLA makes provision

17 GSR 441 (E) dated 1st July 2005 published in the Gazette of India, Extra Pr
II S. 3 (i) dated 01.07.2005.
18 GSR 444 (E) dated 1st July 2005 published in the Gazette of India, Extra
Pr. II S. 3 (i) dated 01.07.2005.
19 PMLA, 2002, S. 5 (1).

145
to the effect that the Director or any other officer not below the rank
of Deputy Director authorized by the Director having reasons to
believe on the basis of material in his possession, with respect to the
fact that any person is in possession of proceeds of crime and such
proceeds of crime are likely to be concealed, transferred or dealt with
in any manner, which may result in frustrating any proceedings
relating to confiscation of such proceeds of crime. The Director has
a power to make an order in writing provisionally attaching such
proceeds of crime. The period of such attachment shall not be
exceeding 180 days.20

Reason to Believe Money

The significance of 'reason to believe' for attachment of

property under the PMLA has been expounded by Mr. Rajat Jain and
Co-author with reference to case law and it has been concluded that
officer under Section 5 of the PMLA before attaching property shall
have sufficient reasons to believe that the person is in possession of
any proceeds of crime and such proceeds of crime are likely to be
concealed, transferred or dealt in any manner which may result in
frustration of the confiscation proceedings and such reasons should
be based on material available in possession of that officer. Such
reasons should not be pretense or subjective satisfaction but must
be held in goodfaith. On challenge before the court or forum it can
be seen whether there is rationale connection with material in
possession and basis of forming belief.21

20 In the original provisions of PMLA, 2002 the period was 90 days. In the
2009 Amendment it was raised to 150 day and by 2012 Amendment Act it
is 180 days.
21 Rajat Jain, Vijay Paul Dalmia and Vaish Associate Advocates "Prevention of
Money Laundering Act, 2002 (PMLA), and significance of Reason to Believe
for Attachment of Property."

146
 The Indian Penal Code, 1860 defines 'Reasons to Believe in
Section 26 as – "a person is said to have' Reason to Believe" a thing,
if he has sufficient cause to believe that thing but not otherwise.
The Supreme Court with reference to provisions of Income Tax Act,
observed that the expression reasons to believe' postulates belief and
existence of reasons for that belief. Such belief may not be based on
more suspicious it must be founded upon information.22 The reason
to believe is not purely subjective satisfaction on the part of the
officer, it must have rationale connection or an element bearing in
the formation of that belief.23 Sufficiency of reasons to believe is
open for challenge by the affected party to establish that there was in
fact no belief or belief was not bonafide belief or was based on vague,
irrelevant and non-specific information. As such the court can find
whether there is material on record on which requisite belief could be
formed by the officer and that material has rational connection with
or a line link for the formation of the requisite belief.24

The court can examine the question whether the recorded

reason having a rational connection or relevant bearing to the
formation of belief and are not extraneous or irrelevant.25 Referring
the aforesaid decisions Appellant Tribune in the Money Laundering
case held that in the facts of the case in hand there was no rational
connection or intelligent nexus between the reason and the belief.
Once the belief formed by the Respondent is found to be dissatisfying
the statutory requirement, which is a primary condition for

22 Calcutta Discount Company v. Income Tax Officer, 1961 SCR (2) 241.
23 See, M.P. Industries Ltd. v. IPC (1970) 2 SCC 32.
24 See Phool Chand Bajrang Lal v. ITO (1993) 203 ITR 456 (SC) followed in
Aslam Mohd Merchant v. Competent Authority and Others (2008) 14 SCC
186. See also Income Tax Officer v. Lakhmani Menial Das, 1976 SCR (3)
956.
25 Narayappa and Others v. CIT Bangalore, AIR 1967 SC 323. See also
Sheonath Singh v. Appellate Assistant Commission of Income Tax (Central)
Calcutta & Others, AIR 1971 SC 2451.

147
provisional attachment of property under section 5 (1) of PMLA a
valid provision attachment order cannot be said to have been
passed.26

When Provisional Order of attachment can be made?

The order of attachment can only be made when a report with

respect to scheduled offence, of which these proceeds are believed,
has been forwarded to a magistrate under Section 173 of the Code of
Criminal Procedure, 1973 or a complaint has been filed by an
authorized person before a magistrate or court.27

Presently the amendment of proviso to Section 5 (1) of PMLA

by the Finance Act, 201528 has dispensed with the requirement of
filing of police report when the concerned officer has reason to
believe, which are required to be recorded, on the basis of material in
his possession, that if such property involved in money laundering is
not attached immediately the purpose of proceeding would be
frustrated.

The law regarding attachment of proceeds of crime has

undergone material changes since the enactment of PMLA Act, 2002.

The 2009 amendment modified proviso to Section 5 (1) of the

PMLA as under:

Provided that no such order of attachment shall be made

unless, in relation to the scheduled offence, a report has been

26 Amit Pandey v. Joint Director, Directorate of Enforcement, Lucknow, FPA-

PMLA-913/LKW/2015. See also Paresha G. Shah v. State of Gujrat &
Others, http://indiankanoon.org/doc/41358673 Referred in Rajat Jain op.
cit.
27 Prevention of Money Laundering Act, 2002, S. 5 (1) Proviso.
28 The Finance Act, 2015, S. 146. Prior to this amendment the attachment
could be made subject to filing of police report under Section 173 of the
Cr.P.C., 1973.

148
 forwarded to a Magistrate under section 173 of the Code of
Criminal Procedure, 1973, or a complaint has been filed by a
person, authorized to investigate the offence mentioned in the
Schedule, before a Magistrate or court for taking cognizance of
the scheduled offence, as the case may be:

Provided further that, notwithstanding contained in clause

(b)29, any property of any person may be attached under this
section if the Director or any other officer not below the rank of
Deputy Director authorized by him for the purposes of this
section has reason to believe (the reasons for such belief to be
recorded in writing), on the basis of material in his possession,
that if such property involved in money-laundering is not
attached immediately under this Chapter, the non-attachment
of the property is likely to frustrate any proceeding under this
Act." (emphasis added)

The original provision in Section 5 (1) (b) provided provisional

attachment of proceeds of crime, if accused has been charged having
committed the scheduled offence. The proviso to this provision said.
The 2009 amendment to S. 5 (1) added proviso that notwithstanding
that person is not charged with scheduled offence the provisional
attachment can be made if the Director or other officer has reason to
believe about involvement of property as proceeds of crime and
recorded these reasons, that purpose of proceeding would be
defeated if immediate attachment is not done.

Provided that no such order of attachment shall be made

unless, in relation to an offence under:

(i) Paragraph I of Part A and Part B of the Schedule, a

report has been forwarded to a Magistrate under Section
173 of the Code of Criminal Procedure, 1973 (2 of 1974);
or

29 The Prevention of Money Laundering Act, 2002, S. 5 (1) (b)

149
 (ii) Paragraph 2 of Part A of the Schedule, a police report or
a complaint has been filed for taking cognizance of an
offence by the Special Court constituted under sub-
section (1) of section 36 of the Narcotic Drugs and
Psychotropic Substances Act, 1985 (61 of 1985).

The 2012 amendment to section 5 (1) omitted the original

clause (b) which required the accused been charged having
committed a schedule offence and further amended provisos to
section 5 (1) as under:

Provided that no such order of attachment shall be made

unless, in relation to the scheduled offence, a report has been
forwarded to a Magistrate under section 173 of the Code of
Criminal Procedure, 1973 (2 of 1974), or a complaint has been
filed by a person authorized to investigate the offence
mentioned in that Schedule, before a Magistrate or court for
taking cognizance of the scheduled offence, as the case may
be, or a similar report or complaint has been made or filed
under the corresponding law of any other country:

Provided further that, notwithstanding anything contained in

(first proviso), any property of any person may be attached
under this section if the Director or any other officer not below
the rank of Deputy Director authorized by him for the
purposes of this section has reason to believe (the reasons for
such belief to be recorded in writing), on the basis of material
in his possession, that if such property involved in money-
laundering is not attached immediately under this Chapter,
the non-attachment of the property is likely to frustrate any
proceeding under this Act. (emphasis added)

The post 2013 amendment of PMLA, i.e. amended proviso to

Section 5 (1) of PMLA gives wider powers to Director in the sense that
Director has power to attach the suspected proceeds of crime of
scheduled offences even if police report under Section 173 of the
Code of Criminal Procedure, 1973 with respect to those offences, has

150
not been filed, if he has reason to believe on the basis of material in
his possession that if such property involved in money laundering is
not attached immediately, it would frustrate the proceedings under
PMLA.30

During attachment the interested person can enjoy the

immoveable property under attachment. The complaint with respect
to that is required to be forwarded to Adjudicating Authority within
30 days. As per data available upto 30.04.2013 there have been
197 provisional orders and property of the value of Rs. 3573.73 crore
was under attachment.31

Constitutional Validity of Section 5 PMLA

In B. Rama Raju v. Union of India and Others 32 the Andhra

Pradesh High Court considered the constitutional validity of Section
5 of the PMLA. The provision was alleged to be vague and confusing
as under second proviso property of any person involved in money
laundering can be proceeded against and got confiscated. Thus, it is
not clear whether property involved in crime can be confiscated or
any property can be confiscated. The nature and degree of
involvement is also not clear. It is also not clear whether the liability
runs with the property or is only in respect of property belonging to a
person charged with committing a scheduled offence.

It was also alleged that proviso to Section 5 (1) as amended in

2009 should not have retrospective effect i.e. on the property
acquired or possessed prior to the 2009 amendment. Since
attachment and confiscation are punitive in nature, its effect could
not be retrospective. Therefore, it is unconstitutional being as

30 Id., 2002 Section 5 (1) Proviso

31 FATF, 8th Follow up Report – Mutual Evaluation of India, June 2013.
32 (2011) 164 Compcas 149 (AP): MANU/AP/0725/2011.

151
violative of Article 13, 20, and 300-A of the constitution. The
Andhra Pradesh High Court held that even the proviso to Section
5 (1) as amended and effected from 6 March 2-009, is applicable to
property acquired even prior to coming into force of the said
provision and is not invalid for retrospective penalization. The
innocent transferor can have right against the transferor. The 2009
amendment to second proviso to Section 5 (1) has cleared the
ambiguity. The property which is in the possession of persons who
are not charged with an offence under PMLA can be confiscated.
The court held that constitution of India does not prohibit a
legislative measure which targets attachment and confiscation of
proceeds of crime.

(ii) Survey

Section 16 (1) of the PMLA, 2002 deals with power of survey,

where an authority have the reason to believe and recorded these
reasons in writing that an offence of money laundering is committed,
has power to enter any place within the jurisdiction. Such authority
may inspect record, check and verify the proceeds of crime or the
transactions related to proceeds of crime. An authority during the
survey may-

(i) Place marks of identification on the records inspected by

him and make or cause to be made extract or copies
therefrom;
(ii) Make an inventory of any property checked or verified by
him; and
(iii) Record the statement of any person present in the place
which may be useful for, or relevant to any proceeding
under Act.33

33 The Prevention of Money Laundering Act, 2002 S. 16 (3).

152
 The Report of the survey needs to be sent to the adjudicating
authority.

(iii) Search Seizure and Freezing

Section 17 (1) of the PMLA empowers the Director or any other

designated authority to carry out search and seizure proceedings, if
he has reason to believe that any person has committed an act,
which constitutes money laundering or is in the possession of
proceeds of crime or records related to money laundering or is in
possession of any record relating to money laundering or is in
possession any property related to crime.34 The scope of search has
been expanded by the inclusion of provision relating to possession
any property related to crime through amendment Act 2012. Officer
making search can enter and search any building, place, vessel,
vehicle or aircraft, where he has reason to suspect that such records
or proceeds of crime ark kept. He may also break open lock of any
door, box, locker, safe, almirah or other receptacles for exercising the
powers conferred, where key thereof are not available. Such
designated officer can seize any record or property found as a result
of such search.35

Search operations are subject to the restriction that no search

shall be conducted unless, in relation to the scheduled offence, a
report has been forwarded to the magistrate under Section 157 of the
Code of Criminal Procedure 1973 (2 of 1974) or a complaint has been
filed by a person, authorized to investigate the offence mentioned in
the Schedule, before a magistrate or court for taking cognizance of
the Scheduled offence, as the case may be or in cases where such
report is not required to be forwarded, a similar report of information

34 Id., 2002 S. 17 (1) (i) – (iv) as amended by 2012 Amendments Act.

35 Id., S. 16 (1).

153
received or otherwise has been submitted by an officer authorized to
investigate a scheduled offence to an officer not below the rank of
Additional Secretary to the Government of India or equivalent being
head of office or Ministry or Department or Unit, as the case may be
or any other officer may be authorized by the Central Government of
India by notification for this purpose.36

The restriction/conditions for search are subject initiation of

investigation in the scheduled offences, whereas provisional
attachment by authority can only be made when investigation in the
scheduled offences is complete and police report under Section of the
Code has been submitted.

As a consequence of search the authority can seize any record

or property, place marks of identification, make extracts from record
and can also 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 under the
PMLA.37 The authority is required to submit an application to the
adjudicating authority for retention of record seized property.38

(iv) Search of Person

Search of person can be conducted under Section 18 (1) of the

PMLA by a person authorized by the Central Government who has
reason to believe that any person has secreted about his person or in
anything under his possession, ownership or control, any records or
proceeds of crime which may be useful for or relevant to any
proceedings under this Act.

36 Id., S. 17 (1) Proviso.

37 Id., S. 17 (1).
38 Id., S. 17 (4).

154
 Procedure for search of person requires that if any person
going to searched so requires the authority should take that person
within twenty four hours to the nearest Gazetted Officer superior in
rank to him or a magistrate.39 The said Gazetted Officer or
magistrate may all the search of person or discharge him if he sees
no reasonable grounds for search of his person.40 Search of person
is to be made in the presence of two witnesses. The authority is to
prepare the list of record or property seized in the course of search
and obtain signature of the person searched. His statement is also
to be recorded. The authority is to file an application to adjudicating
authority for retention of record or seized property.41

Section 18 (2) provides that the authority, immediately after

search forward a copy of the reasons so recorded alongwith material
found from his possession, to the Adjudicating Authority in a sealed
envelop. Search is person is also subjection to the condition that a
report u/s 157 of Cr.P.C. or a complaint has been made to the
magistrate with respect to the scheduled offence.42

(v) Arrest of Person

Section 19 (1) of PMLA provides that the officer designated by

the Central Government on the basis of material in his possession,
reason to believe (recorded in writing) that any person has been
guilty of an offence punishable under PMLA, he may arrest such
person and shall as soon as may be, inform of the grounds for such
arrest. The designated/authorized officer can immediately after
arrest of such person is required to forward a copy of the order, along

39 Id., S. 18 (1) Proviso.

40 Id., S. 18 (3).
41 Id., S. 18 (10).
42 Id., S. 18 (5).

155
with material in his possession, to Adjudicating Authority, in a
sealed envelop, in the manner as may be prescribed and such
Adjudicating Authority shall keep such order and material for such
period as may be prescribed.43 The person arrested is required to be
produced before the magistrate within 24 hours. As such offences
under PMLA are cognizable and non-believable.44

Whether Offences under PMLA are cognizable or not?

The question whether offences under PMLA are cognizable or

not came before the Madhya Pradesh High Court in Vijay Mandal
Chaudhary v. Union of India.45 It was contended before the Madhya
Pradesh High Court by 2005 amendment of section 45 of PMLA
offences under this Act are non-cognizable as now the specific
provision stating this has been omitted.46 But the Madhya Pradesh
Court observed that in terms of section 2 (c) of Code of Criminal
Procedure, 1973 cognizable offence is one in which a police officer in
terms of first schedule of Code or any law for the time being in force,
can arrest without warrant section 4 of PMLA makes the offence
punishable the offence of money laundering for term not less than 3
years which may extend to seven years. The second part of the
schedule in the Code provides that an offence punishable with three
years or more is cognizable and non-bailable.

Thus the court held that section 4 of PMLA read with Second
Schedule of Code of Criminal Procedure makes it clear that offences

43 Id., S. 19 (1) (2).

44 Id., S. 48.
45 Decided on 20 October 2015, Madhya Pradesh High Court,
http://indiankanoon.org/ doc/967311
46 Gujrat High Court in Special Criminal Application (Habeas Corpus) No.
4247/2015 has considered as stated about the procedure to be followed in
both the eventualities i.e. if the offence under PMLA is treated as cognizable
and if it is not treated to be cognizable.

156
under PMLA are cognizable offences. Section 45 (Heading) of the
PMLA also provides that offences under PMLA are cognizable and
non-bailable.

Since the second proviso to section 45 PMLA47 provides that

cognizable by the special court is to be taken on complaint needs in
writing by the Director or other authorized person, from that alone
cannot be inferred that the offences under PMLA are non-cognizable.

However, this researcher is of the view that under section 45

(1 A) no police officer is to investigate offences under PMLA and
section 71 of PMLA have overriding effect on provisions of any Act
inconsistent with provisions of PMLA therefore the power to arrest
under PMLA are to be exercised by Director and other authorized
persons as per provisions of section 9 of PMLA and initiate the
proceedings before the concerned authorities/special court.

(vi) Freezing of Property

The PMLA 2012 Amendment Act has introduced the provisions

for freezing of property. Under Section 17 (1-A) during search and
seizure proceeding it is not practicable to seize record or property the
authorized officer can make an order to freeze such property
whereupon the property shall not be transferred or otherwise dealt
with except with the permission of the officer making the order.
However, if at any subsequent time before the confiscation it
becomes practical to seize the property the authorized officer may
seize the property.48 An application is required to be made to the

47 The Prevention of Money Laundering Act, 2002, S. 45 Second Proviso.

48 Id., S. 17 (1-A).

157
adjudication authority without 30 days of freezing for retention of
property.49

(vii) Retention of Record / Property

The authority seizing any record or property or freezing any

record or property within a period of thirty days from such seizure or
freezing is required to make an application to the adjudicating
authority for retention of record or property seized or for
continuation of order of freezing if on the basis of material in his
possession reason to believe that such property is required to be
retained for the purposes of adjudication.50

The seized property or record can be retained or frozen

property may continue to remain frozen for period not exceeding 180
days from the day on which such property or record were seized or
frozen unless the Adjudicating Authority under PMLA permits
retention of such record or property beyond 180 days.51

4.2.3 Adjudicating Authority

The Adjudicating Authority as defined in Section 2 (a) of PMLA

is an adjudicating authority appointed by the Central Government,
which is exercise jurisdiction, powers and authority conferred under
PMLA.52 It has the composition of a chairperson and two other
members. It functions within the Department of Revenue, Ministry

49 Id., S. 17 (4).
50 Id., 20 (4). When the adjudicating authority is satisfied that property is
prima facia involved in money laundering and the property is required for
the purpose of adjudicating it may authorize the retention or continuation
of freezing of such property beyond the period of 180 days. Similar power
can be procedure is followed by adjudicating authority for retention of
record beyond 180 days under Section 21 (4).
51 See Ss. 20 and 21 and S. 5 (3) of PMLA.
52 Id., S. 6 (1).

158
of Finance of the Central Government with Headquarters at New
Delhi. Its jurisdiction is over whole of India.53

The Central Government had appointed an Adjudication

Authority to exercise jurisdiction, powers and authority conferred
under the Act. One member each shall be person having experience
in the field of law, administration, finance or accountancy. The
member in the field of law should be qualified for appointment as
district judge or has been member of Indian Legal Service and has
held a post of Grade I of that service. Member in the field of finance,
accounting or administration should possess the prescribed
qualifications.54

The constitutional validity of adjudicating authority, appellate

tribunal and the special courts under PMLA 2002 has been
challenged in Preena Swaroop v. Union of India55 before the Supreme
Court of India being violation of Articles 14, 19 (1), 21, 50, 323 B of
the Constitution of India. It was contended that PMLA section 6
which deals with adjudicating authority, composition, powers etc.
Section 25 which deals with establishment of Appellate Tribunal,
Section 27 which deals with composition of Appellate Tribunal,
Section 28 which deals with qualifications for appointment of
Chairperson and members of the Appellate Tribunal and Section 32
which deals with their resignation and removal and Section 40 which
deals with members are violation of the constitution.

The Supreme Court has agreed with the contention of the

petitioner that executive has taken bit by bit the judicial functions
and powers exercised by the courts. The creation of special forums

53 GSR 439 € dated 1st July 2005 published in the Gazette of India Extra Sec.
3 (1) dated 01.07.2005.
54 The Prevention of Money Laundering Act, 2002, S. 6.
55 Preena Swarup v. Union of India (2008) 14 SCC 107.

159
should not be in breach of constitutional scheme of separation of
powers and independence of judicial functions. This independence
and impartiality should not only be secured for regular courts but
also for tribunals and their members though they are not in judicial
services.

The Central Government has framed rules regulating the

appointment and condition of service of persons appointed as
Chairperson and members of Appellate Tribunal as Prevention of
Money Laundering (Appointment and Conditions of Service of
Chairperson and Members of Appellate Tribunal) Rules, 2007 and
the Prevention of Money Laundering (Appointment and Conditions of
Service of Chairperson and Member of the Adjudicating Authority)
Rules, 2007.56 Here the Selection Committee was headed by
Revenue Secreting. The following objections were raised before the
Supreme Court by the petitioner in this public interest litigation:

1. Rule 3 (3) of the Adjudicating Authority Rules, 2007 does not

explicitly specify the qualifications of member from the field of
finance or accountancy.

2. Rule 4 of the Appellate Tribunal Rules, 2007 which provided

for method of appointment of Chairperson does not give
adequate control to judiciary.

3. Rule 6 (1) of the appellate Tribunal Rules, 2007 which defines

the Selection Committee for recommending appointment of
members of the Tribunal, would undermine the constitutional
scheme of separation of powers between judiciary and
executives.

4. Section 32 (2) of PMLA which provides for removal of

Chairperson/members of the Tribunal under PMLA does not

56 Id., at p. 110 para 8.

160
 provide adequate safety to the tenure of the
Chairperson/members of the Tribunal.

5. Rule 6 (2) of the Appellate Tribunal Rules is vague to the extent

that it provides for recommending names after "inviting
applications thereof by advertisement or on the
recommendations of the appropriate authorities."

6. Section 28 (1) of PMLA, which allows a person who "is qualified

to be a Judge of the High Court" to be the Chairperson of the
Tribunal, should be either deleted or the Rules may be
amended to provide that the Chief Justice of India shall
nominate a person for appointment as Chairperson of the
Appellate Tribunal under PMLA "who is or has been a Judge of
the Supreme Court or a High Court" failing which a person
who "is qualified to be a Judge of the High Court."

7. The qualifications for legal member of the Adjudicating

Authority should exclude "those who are qualified to be a
District Judge" and only serving or retired District Judges
should be appointed. The Chairperson of the Adjudicating
Authority should be the legal member.

On behalf of Union of India the respondent informed the court

about the amendments made or proposed to be made to comply the
constitutional parameters. There are discussed, as under:

1. Issue 1: Rule 3 (3) of the Adjudicating Authority Rules, 2007

does not explicitly specify the qualifications of member from
the field of finance or accountancy.

Response of Union of India: Rule 3 (3) of the Adjudicating

Authority Rules, 2007 have been amended to specify the
"academic qualification" for the member from the field of
finance and accounting by inserting a sub-clause (b) as
follows:

(b) From among such persons, the Selection Committee shall

have due regard to the academic qualifications of chartered
accountancy or a degree in finance, economics or accountancy

161
 or having special experience in finance or accounts by virtue
of having worked for at least two years in the Finance or
Revenue Department of either the Central Government or a
State Government or being in charge of the finance or
accounting wing of a corporation for a like period."

2. Issue 2: Rule 4 of the Appellate Tribunal Rules, 2007 which

provided for method of appointment of Chairperson does not
give adequate control to judiciary.

Response of Union of India: Rule 4 of the Appellate Tribunal

Rules, 2007 has been amended to unambiguously provide
that the appointment of Chairperson shall be made on the
recommendation of the Chief Justice of India.

3. Issue 3: Rule 6 (1) of the appellate Tribunal Rules, 2007

which defines the Selection Committee for recommending
appointment of members of the Tribunal, would undermine
the constitutional scheme of separation of powers between
judiciary and executives.

Response of Union of India: Rule 6 (1) of the Appellate

Tribunal Rules, 207 has been amended to provide that the
Chairperson of the Appellate Tribunal is appointed on the
recommendation of the Chief Justice of India and the
composition of the Selection Committee to select members of
the Tribunal has been amended to provide for a Judge of the
Supreme Court, nominated by the Chief Justice of India, to be
the Chairperson of the Selection Committee.

4. Issue 4: Section 32 (2) of PMLA which provides for removal of

Chairperson/members of the Tribunal under PMLA does not
provide adequate safety to the tenure of the
Chairperson/members of the Tribunal.

Response of Union of India: Appropriate amendment to the

statute is being proposed to unambiguously provide that
Chairperson/ members appointed in consultation with Chief
Justice of India, shall not be removed without mandatory
consultation with the Chief Justice of India.

162
5. Issue 5: Rule 6 (2) of the Appellate Tribunal Rules is vague to
the extent that it provides for recommending names after
"inviting applications thereof by advertisement or on the
recommendations of the appropriate authorities."

Response of Union of India: Rule 6 (2) of the Appellate

Tribunal Rules, 2007 may be amended to deleted the words
"or on recommendation of the appropriate authorities."

6. Issue 6: Section 28 (1) of PMLA, which allows a person who

"is qualified to be a Judge of the High Court" to be the
Chairperson of the Tribunal, should be either deleted or the
Rules may be amended to provide that the Chief Justice of
India shall nominate a person for appointment as Chairperson
of the Appellate Tribunal under PMLA "who is or has been a
Judge of the Supreme Court or a High Court" failing which a
person who "is qualified to be a Judge of the High Court."

Response of Union of India: There are several Acts under

which Judges and those "qualified to be a Judge" are equally
eligible for selection like for Chairman under NDPS Act and
Safema; Judicial Member under the Administrative Tribunal
Act; Chairperson under FEMA, etc. The eligibility criteria, for
appointment as a Judge of a High Court, provided in the
Constitution of India under Article 217 (2) (b), is that the
person should have been "for at least 10 years been an
advocate of a High Court…" Furthermore, since appointment
of the Chairperson of the Tribunal under PMLA is to be made
on the recommendation of Chief Justice of India, it is expected
that an independent person would be appointed to head the
Appellate Tribunal. There is no requirement to amend either
the stature or the Rules.

7. Issue 7: The qualifications for legal member of the

Adjudicating Authority should exclude "those who are
qualified to be a District Judge" and only serving or retired
District Judges should be appointed. The Chairperson of the
Adjudicating Authority should be the legal member.

163
 Response of Union of India: Person "qualified to be a District
Judge" are treated on a par with District Judges for the
purposes of qualification for appointment as member in ATFE
under FEMA; as President of District Forum under Consumer
Protection Act, 1986, etc. The eligibility criterion, for
appointment as a District Judge, provided in the Constitution
of India under Article 233 (2), is that the person should have
been an advocate "for not less than seven years." There is no
requirement no amend either the statute or the Rules.

The court observed that the aforesaid amendments/proposed

provision would be in tune with the scheme of Constitution and
approved the same.57

4.2.4 Procedure before the Adjudicating Authority

On receipt of complaint under Section 5 (5) or an application

made under Sections 17 (4) or 18 (10) of the PMLA if the adjudicating
authority has reason to believe that any person has committed an
offence under Section 3 of PMLA or is in possession of proceeds of
crime, he may serve notice of not less than thirty days on such
person calling on him to indicate the source of his income, earning or
assets, out of which or by means of which he has acquired the
property attached under Section 5 (1) or seized or frozen under
Section 17 or Section 18 of PMLA, the evidence on which he relies
and other relevant information and particulars and to show cause
why all or any of such properties should not be declared to be
properties involved in money laundering and be confiscated by the
Central Government.58

Adjudicating Authority is to consider the reply to the notice,

give hearing to the aggressed person and the Director or other

57 Id., at p. 114 para 12.

58 The Prevention of Money Laundering Act, 2002, S. 8 (1).

164
authorized person and will decide the matter by taking into account
all the relevant material and record the finding whether the property
in question is involved in money laundering. If any other person
makes claim to such property an opportunity is given to him to prove
his claim that property is not involved in money laundering.

In case the Adjudicating Authority decides that the property is

involved in money laundering an order can be passed in writing to
confirm the provisional attachment of the property. Such
attachment would continue during the pendency of proceedings
relating to any offences under the PMLA before the court or under
corresponding law of any other country before the competent court of
criminal jurisdiction outside India. Upon confirmation of the
provisional attachment by the Adjudicating Authority the Director is
to forthwith take possession of the property attached or frozen.
Order of attachment by the Adjudicating Authority becomes final
upon an order passed of confiscation passed by the special court.

4.2.5 Confiscation of Property

(i) Where on conclusion of a trial of an offence under this Act, the

Special Court finds that the offence of money-laundering has
been committed, it shall order that such property involved in
the money laundering or which has been used for commission
of the offence of money laundering shall stand confiscated to
the Central Government.

(ii) Where the trial under this Act cannot be conducted, by reason
of the death of the accused or the accused having been
declared a proclaimed offender or for any other reason or
having commenced but could not be concluded, the Special
Court, on an application moved by the Director or a person
claiming to be entitled to possession of a property in respect of
which an order has been issued by the Adjudicating Authority
confirming the provisional attachment of the property, pass

165
 appropriate orders regarding confiscation or release of the
property, as the case may be, after having regard to the
material before it.59

4.2.5.1 Constitutional Validity of Section 8 of the PMLA

The constitutional validity of Section 8 of the PMLA was also

questioned before the Andhra Pradesh High Court60 on the ground
that scheme of adjudication set out in Section 8 (1) to (3) of PMLA
was vague, unfair and diffused and violates Article 14 of the
Constitution. Further Section 8 (4) is harsh as it deprives a person
of his property even before there are charges against that person.
Section 23 of PMLA which raises presumptions with respect to
interconnected transactions was also challenged on the ground it is
arbitrary as when one transaction is proved regarding proceeds of
crime remaining innocent transaction will also be presumed to be
provides of crime. The High Court observed that prescribed
procedure provides that Adjudicating Authority is under an
obligation to hear under Section 8 (2) of PMLA the notice and the
aggrieved persons and to take into account the relevant documents
and evidence placed before it before an order of confiscation is made
by it. The person an enjoyment of the immovable property
continues to enjoy that property till confirmation of the order of
provisional attachment. If on conclusion of trial it is found that
offence of money laundering may not taken place or that property
attached is not a proceed of crime it can released. Hence the High
Court held that provisions is Section 8 of PMLA are not violative of
the constitution and are required to achieve the objective of dealing
with tainted property or money being laundered.

59 Id., Sub-Sections (5), (6) & (7) of Section 8.

60 B. Rama Raju v. Union of India and Others (2011) 164 Compcas 149 AP.

166
4.2.6 Appellate Tribunal

The Appellate Tribunal is constituted61 by the Central

Government is to hear the appeals against the orders of the
Adjudicating Authority and the authorities under the PMLA.62 It has
a chairperson and two other members.

The Director or any person aggrieved by an order made by the

Adjudicating Authority under this Act, may prefer an appeal to the
Appellate Tribunal. Appeal has to be filed within a period of forty-
five days from the date of receipt of a copy of the order made by the
Adjudicating Authority.

However, the Director or any other officer authorized by him in

this behalf, may withhold the release of any such property for a
period of ninety days if he (Director of Enforcement) is of the opinion
that such property is relevant for the appeal proceedings under this
Act.63

However, the Director or any other officer authorized by him in

this behalf, may withhold the release of any such record for a period
of ninety days if he (Director of Enforcement) is of the opinion that
such property is relevant for the appeal proceedings under this Act.64

4.2.7 Procedure and Powers of Appellate Tribunal

(1) The Appellate Tribunal shall not be bound by the procedure

laid down by the Code of Civil Procedure, 1908 (5 of 1908) but
shall be guided by the principles of natural justice and, subject

61 GSR 439 € dated 1st July 2005, published in the Gazette Extra Pt II Sec. 3
(i) dated 01.07.2005.
62 The Prevention of Money Laundering Act, 2002, S. 25.
63 Id., S. 20 (6).
64 Id., S. 21 (5 & 6).

167
 to the other provisions of this Act, the Appellate Tribunal shall
have powers to regulate its own procedure.

(2) An order made by the Appellate Tribunal under this Act shall
be executable by the Appellate Tribunal as a decree of Civil
Court and, for this purpose, the Appellate Tribunal shall have
all the powers of Civil Court.

(3) All proceedings before the Appellate Tribunal shall be deemed

to be judicial proceedings within the meaning of Sections 193
and 228 of the Indian Penal Code, 1860 (45 of 1860) and the
Appellate Tribunal shall be deemed to be a Civil Court for the
purposes of Sections 345 and 346 of the Code of Criminal
Procedure, 1973 (2 of 1974).

4.2.8 Civil Court not to have jurisdiction

No civil court shall have jurisdiction to entertain any suit or

proceeding in respect of any matter which the Director, an
Adjudicating Authority or the Appellate Tribunal is empowered by or
under this Act to determine and no injunction shall be granted by
any court or other authority in respect of any action taken or to be
taken in pursuance of any power conferred by or under this Act.

4.2.9 Appeal to High Court

Any person aggrieved by any decision or order of the Appellate

Tribunal may file an appeal to the High Court within sixty days from
the date of communication of the decision or order of the Appellate
Tribunal to him on any question of law or fact arising out of such
order.

In exceptional cases the High Court may, if it is satisfied that

the appellant was prevented by sufficient cause from filing the appeal
within the said period, allow it to be filed within a further period not
exceeding sixty days.

168
 The High Court is understood as:

(i) The High Court within the jurisdiction of which the

aggrieved party ordinarily resides or carries on business
or personally works for gain; and

(ii) Where the Central Government is the aggrieved party,

the High Court within the jurisdiction of which the
respondent, or in a case where there are more than one
respondent, any of the respondents ordinarily resides or
carries on business or personally works for gain.

4.2.10 Special Courts

Special judicial forum has been created under the PMLA, 2002.
Brief features of these are under:

1. "Special Court" means a Court of Session designated as

Special Court under sub-section (1) of section 43.65

2. For trial of offence punishable under Section 4 of PMLA,

2002, the Central Government, in consultation with the
Chief Justice of the respective High Courts, by
notification, has designated one or more Courts of
Session as Special Court or Special Courts for such area
or areas or for such case or class or group of cases as
specified in the notifications.66

3. While trying an offence of money laundering under

PMLA, 2002, a Special Court can also to try the offences,
with which the accused may, under the Code of Criminal
Procedure, 1973 (2 of 1974), be charged at the same
time trial.67

4. An offence of money laundering punishable under

Section 4 of PMLA, 2002 and any scheduled offence

65 Id., S. 2 (z).
66 See, S. O. 1901 (E) dated 03.11.2006 and S.O. 309 (E) dated 02.03.2007.
For the State of Punjab Session Judge of Fridkot, Ferozepur, Jalandhar and
Patiala have been so notified for specified Revenue Districts of Punjab.
67 Prevention of Money Laundering Act, 2002, S. 43.

169
 connected to the offence of money laundering, is triable
by the Special Court constituted for the area in which
the offence has been committed.68

5. When cognizance of the scheduled offence is taken by a

court other than the Special Courts under PMLA, which
has taken cognizance of the complaint of the offence of
money laundering an application can be made by the
authority authorized to file a complaint under PMLA to
the trial court (which has taken cognizance of the
scheduled offence). Such court is taken required to
commit the case relating to the scheduled offence to the
Special Courts under PMLA. The Special Court, on
receipt of such case committed to it, shall proceed to
deal with it from the stage at which it is committed.69

6. The High Court can exercise, all the powers conferred by

Chapter XXIX or Chapter XXX of the Code of Criminal
Procedure, 1973 (2 of 1974), on a High Court, as if a
Special Court within the local limits of the jurisdiction of
the High Court were a Court of Session trying cases
within the local limits of the jurisdiction of the High
Court.70

From the above it is clear that the special legislative measure

has been taken to create special forum to exclusively try the offences
of money laundering and the related scheduled offences given in the
Schedule to PMLA, 2002.

4.2.10.1 Presumption and Burden of Proof in Proceedings

Relating to Proceeds of Crime

The PMLA in Section 23 raises presumption in inter-connected

transactions and provide as under:

68 Id., S. 43 (1) (a).

69 Id., S. 44 (1) (c).
70 Id., S. 47.

170
 S. 23 – Presumption in inter-connected transactions – Where
money laundering involves two or more inter-connected
transactions and one or more such transactions is or are
proved to be involved in money-laundering, then for the
purposes of adjudication or confiscation71 [under section 8 or
for the trial of the money laundering offence, it shall unless
otherwise proved to the satisfaction of the Adjudicating
Authority or the Special Court], be presumed that the
remaining transactions form part of such inter-connected
transactions.

Similarly, the Section 24 of PMLA puts burden of proof burden

to prove contrary in on the person involved against mandating and
otherwise presumption under section 23 (a) and (b) respectively as
under:

S. 24 – Burden of Proof – In any proceeding relating to

proceeds of crime under this Act :

(a) in the case of a person charged with the offence of

money laundering under section 3, the Authority or
Court shall, unless the contrary is proved, presume that
such proceeds of crime are involved in money
laundering; and

(b) in the case of any other person the Authority or Court,

may presume that such proceeds of crime are involved in
money-laundering.

The 2013 amendment of PMLA has modified the aforesaid

provision in section 24 of PMLA where for person charged with
offence of money laundering the presumption is obvious and shall be
presumed in other proceedings it may be presumed. The
unamended provision in section 24 PMLA, 2002 provided:

71 Subs. By Act 2 of 2013, S. 18, for "under section 8, it shall unless

otherwise proved to the satisfaction of the Adjudicating Authority" (w.e.f.
15.2.2013, vide S.O. 343 (E), dated 08.02.2013).

171
 "When a person is accused of having committed the offence
under section 3, the burden of proving that proceeds or crime
are in tainted property shall be on the accused."

The Supreme Court in Union of India v. Hassan Ali Khan v.

Others72 perused the preliminary facts of the case in hand in appeal
against grant of Bail by the High Court under section 439 of the
Code of Criminal Procedure, 1973 to the respondents facing
proceeding under PMLA, with respect to proceeds of crime. The
Apex Court referring section 24 PMLA observed that allegations in
the case may not ultimately be established, but having been made,
the burden of proof that the said monies were not the proceeds of
crime and were not therefore tainted shifted to Respondent/accused
under Section 24 of the PMLA, 2002.73

4.2.10.2 Constitutional Validity of Section 24 PMLA

In B. Rama Raju v. Union of India and Others,74 it was alleged

that Section 24 of PMLA is violative of Article 147 the constitution on
the ground that burden of proving that proceeds of crime are
untainted property is applicable not only to the prosecution and trial
of a person charged of committing an offence under Section 3 of
PMLA but also to proceedings for attachment and confiscation under
Chapter III of the PMLA as well. The High Court of Andhra Pradesh
held the provision in Section 24 valid by observing that in the cases
of money laundering the various strategies are involved by the
accused and the proceeds of crime undergo various transactions and
are layered into the economic system in order to show that money is
untainted money. Therefore it is right to cast the burden of proof on
the accused. In case a person is not involved in the proceeds of

72 2012 Cri. L.J. 1630 (SC).

73 Id., para 23.
74 (2011) 164 Comcas 149 (AP): MANU/AP/0125/2011.

172
crime is in possession of a property involved in interconnected
transactions, the presumption under Section 23 arises, and burden
of proof under Section 24 does not arise. In such cases, the
presumption which is to be rebutted is that property in his
possession is untainted property. The burden of proof under
Section 24 applies to trial proceedings and continues to attachment
and confiscation proceedings. The burden of proof is not cast on the
person who is not charged into offence under Section 3 of PMLA.

With respect to validity of Section 23 of PMLA the court

observed that when act of money laundering involves two or more
transactions and one or more transactions are proceed to be involved
in proceeds of crime then remaining transactions are also presumed
to be proceeds of crime unless proved otherwise when illegal money
is layered in the economic system in different transactions in is
impossible to identify the original sources of income, therefore
Section 23 is enacted an order that succeeding transactions do not
escape the provision of PMLA. However such presumption is
rebuttable. Also Section 23 is contingent upon one or more of
interconnected transactions being proved to be involved in money
laundering.

4.2.10.3 Public Prosecution for Handling Money Laundering

Cases

The provision of the Code of Criminal Procedure are applicable

before the special courts and such courts is deemed to be court of
sessions. The person conducting prosecution before the special
court is deemed to be a public prosecutor.75 However Central
Government may also appoint special public prosecutor for any case

75 The Prevention of Money Laundering Act, 2002, S. 46 (1).

173
or class of cases.76 The qualified as Public Prosecutor or Special
Public Prosecutor for money laundering cases a person must be in
practice as an Advocate for not as than seven years under the Union
or State requiring special knowledge of law on such person is deemed
to be public prosecutor within the meaning of section 2 (4) of the
Code of Criminal Procedure, 1973.

In Centre for PIL and Others v. Union of India and Others 77 the
question arose before the Apex Court whether appointment of Special
Public Prosecutor for case before special court under PMLA is only
the prerogative of the Central Government or it can be otherwise? In
2G Spectrum case the Supreme Court monitored the proceedings of
the case and has also considered to appoint a lawyer of ability,
acumen, independence and integrity as special public prosecution.
After due reference to the relevant provision of the Code of Criminal
Procedure, 1973 and PMLA, 2002 the apex court concluded that in
view of the well settled principles it cannot be held that the
expression under Section 46 (2) of PMLA can be construed to mean
that public prosecutor will be holding an employment under the
State. All that it would mean is that the Special Public Prosecutor
should be a lawyer on the penal of either the State or Central
Government.78

4.2.10.4 Bail under PMLA

There is special provision regarding grant of Bail under the

PMLA in S. 45 (1) which provides as under:

45. Offences to be cognizable and non-bailable. —

(1) [Notwithstanding anything contained in the Code of

76 Id., S. 46 (1) proviso.

77 2012 Cri.L.J. 1153 (SC).
78 Id., para 33.

174
 Criminal Procedure, 1973 (2 of 1974), no person accused of an
offence punishable for a term of imprisonment of more than
three years under Part A of the Schedule shall be released on
bail or on his own bond unless—]

(i) the Public Prosecutor has been given an opportunity to

oppose the application for such release; and
(ii) where the Public Prosecutor opposes the application, the
court is satisfied that there are reasonable grounds for
believing that he is not guilty of such offence and that he
is not likely to commit any offence while on bail:

Provided that a person who is under the age of sixteen years or

is a woman or is sick or infirm, may be released on bail, if the
special court so directs:

Provided further that the Special Court shall not take

cognizance of any offence punishable under section 4 except
upon a complaint in writing made by—

(i) the Director; or

(ii) any officer of the Central Government or State
Government authorised in writing in this behalf by the
Central Government by a general or a special order made
in this behalf by that Government.

[(1A) Notwithstanding anything contained in the Code of

Criminal Procedure, 1973 (2 of 1974), or any other provision of
this Act, no police officer shall investigate into an offence
under this Act unless specifically authorised, by the Central
Government by a general or special order, and, subject to such
conditions as may be prescribed.]

(2) The limitation on granting of bail specified in 3 [***] sub-

section (1) is in addition to the limitations under the Code of
Criminal Procedure, 1973 (2 of 1974) or any other law for the
time being in force on granting of bail.

The question whether the provision of section 45 of the PMLA,

2002 are binding on the High Court while considering bail
application under section 439 of the Code of Criminal Procedure,

175
1973 was raised before the Supreme Court in Gautam Kundu v.
Manoj Kumar.79 The criminal appeal was filed before the apex court
when High Court rejected the bail application of the appellant
accused of the offence of money laundering by observing that no
order has yet been passed by any competent Court of law that no
offence is made out against the Appellant under Section 24 of the
SEBI Act. A criminal revision praying for quashing of the
proceedings initiated against the Appellant under Section 24 of the
SEBI Act was still pending for decision before the High Court. The
Supreme Court observed that:

- There is no doubt that PMLA deals with the offence of money

laundering and the Parliament has enacted this law as per
commitment of the country to the United Nations General
Assembly. PMLA is a special statute enacted by the Parliament
for dealing with money laundering. Section 5 of the Code of
Criminal Procedure, 1973 clearly lays down that the provisions
of the Code of Criminal Procedure will not affect any special
statute or any local law. In other words, the provisions of any
special statute will prevail over the general provisions of the
Code of Criminal Procedure in case of any conflict.

- Section 45 of the PMLA starts with a non obstante clause

which indicates that the provisions laid down in Section 45 of
the PMLA will have overriding effect on the general provisions
of the Code of Criminal Procedure in case of conflict between
them. Section 45 of the PMLA imposes following two conditions
for grant of bail to any person accused of an offence
punishable for a term of imprisonment of more than three
years under Part-A of the Schedule of the PMLA: (i) That the
prosecutor must be given an opportunity to oppose the
application for bail; and (ii) That the Court must be satisfied
that there are reasonable grounds for believing that the

79 Gautam Kundu v. Manoj Kumar, Assistant Commissioner, Eastern Region,

Directorate of Enforcement (Prevention of Money Laundering Act),
Government of India, MANU/SC/1453/2015: AIR 2016 SC 106.

176
 accused person is not guilty of such offence and that he is not
likely to commit any offence while on bail.

- The conditions specified Under Section 45 of the PMLA are

mandatory and needs to be complied with which is further
strengthened by the provisions of Section 65 and also
Section 71 of the PMLA. Section 65 requires that the provisions
of Code of Criminal Procedure shall apply in so far as they are
not inconsistent with the provisions of this Act and
Section 71 provides that the provisions of the PMLA shall have
overriding effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in
force. PMLA has an overriding effect and the provisions of Code
of Criminal Procedure would apply only if they are not
inconsistent with the provisions of this Act. Therefore, the
conditions enumerated in Section 45 of PMLA will have to be
complied with even in respect of an application for bail made
Under Section 439 of Code of Criminal Procedure That coupled
with the provisions of Section 24 provides that unless the
contrary is proved, the Authority or the Court shall presume
that proceeds of crime are involved in money laundering and
the burden to prove that the proceeds of crime are not
involved, lies on the Appellant.

- Section 45 of the PMLA will have overriding effect on the

general provisions of the Code of Criminal Procedure in case of
conflict between them. As mentioned earlier, Section 45 of the
PMLA imposes two conditions for grant of bail, specified under
the said Act. We have not missed the proviso to Section 45 of
the said Act which indicates that the legislature has carved out
an exception for grant of bail by a Special Court when any
person is under the age of 16 years or is a woman or is a sick
or infirm. Therefore, there is no doubt that the conditions laid
down Under Section 45A of the PMLA, would bind the High
Court as the provisions of special law having overriding effect
on the provisions of Section 439 of the Code of Criminal
Procedure for grant of bail to any person accused of
committing offence punishable Under Section 4 of the PMLA,
even when the application for bail is considered Under
Section 439 of the Code of Criminal Procedure.

177
 Therefore the Supreme Court did not find any reason to
interfere with the order of the High Court rejecting in Bail application
of the accused. It means that even when High Court is exercising
special power to grant being under Section 439 of the Code the
restriction in Section 45 PMLA are applicable.

4.3 OTHER LEGISLATIVE MEASURES

4.3.1 Mechanism to Tackle Black Money

The countries across the world have started a concerted global

effort and as a part of global effort against black money, India has
played a proactive role in pointing out deficiencies in the assessment
of various countries by the Peer Review Group of the Global Forum.
Government is also playing an active role in ensuring that these
countries remove the deficiencies to bring more transparency. India
has joined the Task Force on Financial Integrity and Economic
Development.80

There have been endeavor to strengthen the legislative frame

work to control generation of black money in the country as well as
control the flight of such illicit fund to foreign shores. In pursuance
of this India has so far completed negotiations of 22 new Tax
Information Exchange Agreements with various tax heavens. India
has initiated process of negotiation with 75 countries to broaden the
scope of Article concerning Exchange of Information to specifically
allow for exchange of banking information and information without
domestic interest. Protocol amending our tax treaty with Switzerland
was signed on 30th August 2010 and was approved by the Swiss
Parliament on 17th June 2011.

80 www.finmin.nic.in>dept_revenue, Sept. 1, 2011.

178
 A Committee was constituted on 27th May, 2011 under the
Chairmanship of Central Board of Direct Taxes (CBDT) to examine
ways to strengthen laws to curb the generation of black money in the
country, its illegal transfer abroad and its recovery.81

4.3.1.1 Judicial Intervention

The Supreme Court of India has passed an order dated 04 July

2011 in Ram Jethmalani & Other v. Union of India.82 In this case, the
Court ordered for creation of a Special Investigation Team (SIT) with
the responsibilities and duties of investigation, initiation of
proceedings and prosecution, whether in the context of appropriate
criminal or civil proceedings, relating to cases involving stashing of
unaccounted money in foreign banks by Indians or other entities
operating in India.

The court further directed that the High Level Committee

constituted by the Union of India be forthwith appointed with
immediate effect as Special Investigation Team (SIT) and SIT so
constituted shall include Director, Research and Analysis Wing. It
has been also directed by Hon‘ble Supreme Court that the SIT be
headed by and include the two former eminent judges of the
Supreme Court namely Mr. Justice B.P. Jeevan Reddy as Chairman
and Mr. Justice M.B. Shah as Vice-Chairman.83

The Special Investigation Team constituted by the Central

Government to implement the decision of the Supreme Court, has
also expressed the views that measures may be taken to curb the

81 Ministry of Finance (CBDT) OM vide F. No. 291/15/2011-IT.

82 Writ Petition (Civil) No. 176 of 2009.
83 The Hon‘ble Supreme Court, vide paragraph 49 of the order dated 4th July,
2011, in Writ Petition (C) No. 176 of 2009

179
menace of black money. Internationally, a new regime for automatic
exchange of financial information was sought to be established. As
such new legislation in the form of the Undisclosed Foreign Income
and Assets (Imposition of Tax) Act, 2015 was enacted in 2015.

4.3.1.2 The Undisclosed Foreign Income and Assets (Imposition

of Tax) Act, 2015

This Act is also known as Black Money Act, 2015, has been
passed by Parliament84 and received the assent of the President on
26th May 2016. The Act provides a window to those stashing black
money in foreign banks to come out clean. The Act is applicable to
Ordinarily Resident taxpayers who have undisclosed foreign
income/assets. Expatriate employees, including their family
members, qualifying as Ordinarily Residents also fall under the Act's
ambit. The new Act also proposes amendments to the Prevention of
Money Laundering Act, 2002. It makes the offence of concealment of
income or evasion of tax in relation to a foreign asset a predicate
offence under the PMLA. This provision enables enforcement
agencies to attach and confiscate unaccounted assets held abroad
and launch prosecution proceedings against persons indulging in
laundering of black money.

Recognising the limitations of the existing legislation, the

legislation is brought to deal with undisclosed assets and income
stashed away abroad. This Act applies to all persons resident in
India and holding undisclosed foreign income and assets. A limited
window is given to persons who have any undisclosed foreign assets.
Such persons may file a declaration before the specified tax authority

84 The Black Money (Undisclosed Foreign Income and Assets) and Imposition
of Tax Act, 2015 (Act 22 of 2015) has come into force on 1st July 2015 vide
Notification S.O. 1791 (E) Published in Gazette of India Extra Part II, dated
01.07.2015.

180
within a specified period, followed by payment of tax at the rate of 30
per cent and an equal amount by way of penalty. Exemptions,
deductions, set off and carried forward losses etc. are not allowed
under the new legislation. Upon fulfilling these conditions, a person
shall not be prosecuted under the Act and the declaration made by
him will not be used as evidence against him under the Wealth-tax
Act, the Foreign Exchange Management Act (FEMA), the Companies
Act or the Customs Act. Wealth-tax shall not be payable on any asset
so disclosed. It is merely an opportunity for persons to become tax
compliant before the stringent provisions of the new legislation are to
be applied.85

Main Feature of the Act are as under:

(i) Concealment of income in relation to a foreign asset will

attract penalty equal to three times the amount of tax
(i.e., 90 per cent of the undisclosed income or the value
of the undisclosed asset). Failure to furnish return of
income by person holding foreign asset, failure to
disclose the foreign asset in the return or furnishing of
inaccurate particulars of such asset shall attract a
penalty of Rs.10 lakh.

(ii) The Act provides for criminal liability with enhanced

punishment. Willful attempt to evade tax in relation to a
foreign income is punishable with rigorous
imprisonment from three years to ten years and with
fine. Failure to furnish a return of income though
holding a foreign asset, failure to disclose the foreign
asset or furnishing of inaccurate particulars of the
foreign asset is punishable with rigorous imprisonment
for a term of six months to seven years. The provisions
also apply to banks and financial institutions aiding in
concealment of foreign income or assets of resident
Indians or falsification of documents.

85 See Statement of Objects and Reasons of the Bill.

181
 (iii) Second and subsequent offence is punishable with
rigorous imprisonment for a term of three years to ten
years and with fine of Rs.1 crore to Rs.25 lakh. In
prosecution proceedings, the willful nature of the default
is to presumed and it shall be for the accused to prove
the absence of the guilty state of mind.

(iv) To facilitate enquiry and investigation, authorities under

the Act have been vested with the powers of discovery
and inspection, issue of commissions, issue of
summonses, enforcement of attendance, production of
evidence, impounding of books of account and
documents.

(v) The Central Government has been empowered to enter

into agreements with other countries, specified
territories and associations outside India inter alia for
exchange of information, recovery of tax and avoidance
of double taxation.

(vi) Safeguards to prevent misuse have been embedded in

the Act. It is mandatory to issue notices and grant of
opportunity of being heard, record reasons for various
actions and pass written orders. Appeal to the Income-
tax Appellate Tribunal, and to the jurisdictional High
Court and the Supreme Court on substantial questions
of law have been provided for.

(vii) Persons holding foreign accounts with minor balances

which may not have been reported out of oversight or
ignorance have been protected from criminal
consequences.

(viii) The Act also amends Prevention of Money Laundering

Act (PMLA), 2002 to include offence of tax evasion as a
scheduled offence under PMLA.

Thus new law has enabled the Central Government to tax

undisclosed foreign income and assets acquired from such
undisclosed foreign income, and punish the persons indulging in

182
illegitimate means of generating money causing loss to the revenue.
It also prevent such illegitimate income and assets kept outside the
country from being utilised in ways which are detrimental to India‘s
social, economic and strategic interests and its national security.

This law is applicable to Ordinarily Resident tax payers who

have undisclosed foreign income/assets. Expatriate employees,
including their family members, qualifying as Ordinarily Residents
also fall under the Act. A Resident is a person who is resident in
India within the meaning of Section 6 of the Income Tax Act, 196186
i.e. who spends more than 182 days in a year in India.

Provisions of the Act apply not only to undisclosed foreign

income but also to undisclosed foreign assets (including financial
interest in any entity). Undisclosed foreign income or assets are
taxable at the flat rate of 30 percent. No exemption or deduction or
set off of any carried forward losses which may be admissible under
the existing Income-tax Act, 1961, are allowed.87

4.3.1.3 Penalties

Violation of the provisions of this Act entails stringent

penalties. The penalty for non-disclosure of income or an asset
located outside India will be equal to three times the amount of tax
payable thereon, i.e., 90 percent of the undisclosed income or the
value of the undisclosed asset.88 This is in addition to tax payable at
30%. Failure to furnish return in respect of foreign income or assets
shall attract a penalty of 10 lakh rupees.89 The same amount of

86 The Black Money (Undisclosed Foreign Income and Assets) and Imposition
of Tax Act, 2015, S. 2 (10).
87 Id., S. 3
88 Id., S. 41
89 Id., S. 42 (iii)

183
penalty is prescribed for cases where although assesses have filed a
return of income, but he has not disclosed the foreign income and
asset or has furnished inaccurate.90 If a person fails to furnish
return in relation to foreign income and asset then he shall be
punishable with rigorous imprisonment for a term which shall not be
less than six months but which may extend upto seven years.91

The above provisions also apply to beneficial owners or

beneficiaries of such illegal foreign assets Failure to furnish a return
in respect of foreign assets and bank accounts or income are
punishable with rigorous imprisonment for a term of six months to
seven years. The same term of punishment is prescribed for cases
where although the assessee has filed a return of income, but has
not disclosed the foreign asset or has furnished inaccurate
particulars of the same.

The punishment for willful attempt to evade tax in relation to a

foreign income or an asset located outside India is rigorous
imprisonment from three years to ten years. In addition, it also
entails a fine.92 Abetment or inducement of another person to make
a false return or a false account or statement or declaration under
the Act is punishable with rigorous imprisonment from six months to
seven years. This provision also applies to banks and financial
institutions aiding in concealment of foreign income or assets of
resident Indians or falsification of documents.93

The principles of natural justice and due process of law have

been embedded in the Act by laying down the requirement of
mandatory issue of notices to the person against whom proceedings

90 Id., S. 43
91 Id., S. 49
92 Id., S. 51
93 Id., S. 53

184
are to be initiated, grant of opportunity of being heard, necessity of
taking the evidence produced by him into account, recording of
reasons, passing of orders in writing, limitation of time for various
actions of the tax authority, etc.94

Further, the right of appeal has been provided for appeals to

the Income-tax Appellate Tribunal95, and to the jurisdictional High
Court96 and the Supreme Court on substantial questions of law.97

The Act also provided a one-time compliance opportunity for a

limited period to persons who have any undisclosed foreign assets
which had not been disclosed for the purposes of Income-tax. The
Central Government announced a compliance window under this Act
from 1st July 2015 to 30th September 2015.98 The requisite tax was
to be deposited by 31st December 2015. Such persons are required
to may file a declaration before the specified tax authority within a
specified period, followed by payment of tax at the rate of 30 percent
and an equal amount by way of penalty. Such persons will not be
prosecuted under the stringent provisions of the new Act.99 In
response to the window the disclosure of assets yielded 2428.4 Crore
in tax to the Government. A total 644 declarations were made under
the compliance window upto 30th September 2015, involving an
amount of Rs. 4164 Crore.100 It is also pointed out that there was a
short time frame for disclosure and understanding the Nuances of
the Black Money Act.

94 Id., S. 46
95 Id., S. 18
96 Id., S. 19
97 Id., S. 21
98 The Economic Times, ET Bureau March 01, 2016
http://economictimes.com/news/economy/budget-2016.
99 Id., See S. 3 and S. 41
100 Grant Thorton, Assocham, Black Money Act. Ignorance is not bliss!
www.grantthorton.in/globalassets

185
4.3.2 The Narcotic Drug and Psychotropic Substances Act, 1985

The statutory control over narcotic drugs was being exercised

under Opium Act, 1857, the Opium Act, 1878 and the Dangerous
Drugs Act, 1930. The provisions of these enactments were found
inadequate due to passage of time and developments in the field of
illicit drug traffic and drug abuse at national and international levels.
The Narcotic Drug and Psychotropic Substances Act, 1985 was made
effective from 16.09.1985 and amended Act of 2014 was made
effective from 01.05.20143. The Act and amended Act empowers
Central Government to permit, control and regulate the cultivation or
gathering of any portion of coca plant or production, possession of
coca leaves. In addition, cultivation on account of Central
Government of opium poppy, the production and manufacture of
opium and production of poppy straw.101

The Act empowers Central Government the sale of opium and

its derivatives from Central Government factories for export from
India or sale to State Governments or to manufacturing chemists.
The manufactured drugs do not include manufacture of medicinal
opium or any preparation containing any manufactured drug from
materials, which the maker is lawfully entitled to possess. In case of
essential narcotic drug, the state governments had granted licence or
permit under provisions of section 10 prior to commencement
Narcotic Drugs and Psychotropic Substances Amendment Act, 2014
and such licence or permit shall continue to be valid till date of its
expiry or for a period of twelve months from such commencement,
whichever is earlier. Import into India and export from India and
transshipment of narcotic drugs and psychotropic substances will
solely be under control of the Central Government.

101 narcoticsindia.nic.in

186
 The Central Government is empowered to fix from time to time
the limits within which licences may be given for cultivation of opium
poppy. Opium produce of land cultivated with opium poppy shall be
delivered by cultivators to officers authorized in this behalf by the
Central Government. Conditions of licence of opium poppy and for
production and manufacture of opium, fees charged there for,
authorities by which such licences may be granted, withheld, refused
or cancelled by the authorities and appeals against such orders shall
lie with the Central Government. The price of produced opium shall
be fixed by the Central Government. The state governments are
permitted to permit and regulate possession, transport, inter-state
import and export, warehouse, sale, purchase, consumption and use
of poppy straw, but poppy straw produced from plants from which no
juice has been extracted through lancing shall be under control of
the Central Government. The state governments have been
permitted and regulate the manufacture and possession of prepared
opium lawfully possessed by an addict registered with the state
government on medical advice for his personal consumption. The
state governments are not entitled to sale or otherwise deliver to any
person not entitled for possession of opium or its products. Any
person possesses even small quantity of opium is punishable for
term may be extended for one year and fine. Any person in
possession of opium more than prescribed small quantity shall be
imprisoned to ten years, which can be extended to twenty years and
fine of not less than one lakh rupees. Any cultivator possessing
licnece to produce opium, but illegally disposes any quantity of
produce, shall be punished for ten years and fine of one lakh rupees
and term of imprisonment can be extended to twenty years.102

102 Ibid.

187
4.3.2.1 The Foreign Exchange Management Act, 1999

The Foreign Exchange Regulation Act, 1973 was reviewed in

1993 and several amendments were enacted as part of ongoing
process of economic liberalization relating to foreign investments and
foreign trade for closer interaction with the world economy. At that
stage, the Central Government decided to repeal the Act. The
Reserve Bank of India was asked to undertake task to suggest new
legislation. A Task Force was constituted for the task, which
submitted its report in 1994. The Foreign Exchange Management
Act, 1999 came into effect from 01.06.2000. Later the Act was
amended by the Finance Act, 2015.

Under the provisions of the Act, no person shall deal in or

transfer any foreign exchange or foreign security to any person not
being an authorised person without general or special permission of
the Reserve Bank of India. Similarly, no person shall make any
payment to or for the credit of any person resident outside India in
any manner. In addition, no person shall enter into any financial
transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire any asset
outside India by any person. Under the proviso of the Act, any
person can sale or draw foreign exchange to or from an authorized
person, provided that such sale or withdrawal is in current account
transaction. The Central Government can, in public interest and in
consultation with the Reserve Bank imposes reasonable restrictions
for such transactions. Any person may sale or draws foreign

188
exchange to or from an authorized person for a capital account
transaction.103

Under export of goods and services, every exporter of goods

shall furnish to Reserve Bank of India or to such authority a
declaration in prescribed form and in specified manner, containing
true and correct material particulars including the amount
representing the full export value or if full export value of goods is
not ascertainable at the time of export, the value which the exporter,
having regard to prevailing market conditions, expect to receive on
the sale of goods in the market outside India. The exporter of goods
shall furnish to Reserve Bank of India such other information for
purpose of ensuring the realisation of the export proceeds by such
exporter. Such conditions are kept to assess the accrual of foreign
money from existing transactions and also likely foreign exchange in
further duration.

If any person contravenes any provision of the Act or

contravenes any rule, regulation, notification, direction or order
issued in exercise of the powers under the Act or contravenes any
condition, subject to which an authorization issued by the Reserve
Bank, he shall, upon adjudication, be liable for penalty up to thrice
of the sum involved in such contravention, where such amount is
quantifiable or up to Rs. 2 lakhs where the amount is not
quantifiable and where such contravention is continuing, further
penalty which may extend to Rs. 5 thousand for every day after the
first day during which the contravention continues. The property in
respect of which contravention has taken place shall include deposit

103 https://www.scribd.com

189
in bank, where such property has been converted into such
deposits.104

4.3.2.2 The Benami Transaction (Prohibition) Act, 1988

The Benami Transaction (Prohibition) Act intends to iron out

infirmities in Benami Transaction (Prohibition) Act, 1988 and
formalize procedure for determination, confiscation, prosecution and
miscellaneous requirements. The Act specifies consequences of
Benami transactions in form of confiscation of property,
imprisonment up to two years and five.105

4.4 INSTITUTIONAL MECHANISMS TO COMBAT MONEY

LAUNDERING

The responsibility for addressing the challenge of unaccounted

wealth and its consequences is jointly and collectively shared by
number of institutions of central and state governments. These
include various tax departments assigned to administer tax laws
comprising of Central Board of Direct Taxes and Central Board of
Excise and Customs. In addition, there are various regulatory
authorities undertaking supervision and policing including
Enforcement Directorate, Financial Intelligence Unit, Economic
Offences Wing of state police, Central Bureau of Investigation,
Serious Fraud Investigation Office and Narcotics Control Bureau. In
addition, there are coordinating agencies such as Central Economic
Intelligence Bureau, National Investigation Agency and High Level
Committee, which impart important role in fighting the menace of
money laundering.106 For the obvious reasons there is need to
coordination and coherence and cooperation between all these

104 https://www.rbi.org.in
105 www.prsindia.org
106 Fisher, Jonathon, Money Laundering Law and Practice, 2004.

190
functionaries. These role of main agencies and functionaries is
briefed hereinafter:

4.4.1 The Central Board of Direct Taxes (CBDT)

The Central Board of Direct Taxes, New Delhi is part of

Department of Revenue in the Ministry of finance, providing
necessary inputs for policy and planning of direct taxes in India. It is
also responsible for administration of direct tax laws through Income
Tax Department. The Central Board of Direct Taxes is statutory body
functioning under the Central Board of Revenue Act 1963 and
officials of the Board in their ex-officio capacity as division of
Ministry dealing with matters relating to levy and collection of direct
taxes. The board is headed by Chairman assisted by six members.
Various functions and responsibility of the Board are distributed
among the Chairman and member, with fundamental issues reserved
for collective decision. The Chairman along with each member is
responsible for exercising supervisory control over definite areas of
the field offices of the Income Tax Department, spread over the
country as zones and administered by eighteen cadre controlling
Chief Commissioners. Eight directorates107headed by the Director
General of Income Tax are attached to Central board of Direct Taxes
and impart significant role in liaising between the field offices and
the board. The investigating wings are headed by Director General of
income Tax Investigation.

The Director General Income Tax International Taxation is

incharge of taxation issues arising from cross border transactions
and transfer pricing. Income Tax department has offices in 740

107 Eight Directorates comprise of Director General Administration, Systems,

Vigilance, Training, Legal & Research, Business Process Re-engineering,
Intelligence and Human Resource Development

191
buildings spread over in 510 cities and towns across the country and
has over 55,000 employees.108 Income Tax Department is functional
to be a partner in nation building process through progressive tax
policy, efficient and effective tax administration with improved
voluntary compliance, achieved by creating enabling policy
environment and by augmenting revenue mobilization apparatus for
optimum revenue collection under law, while maintaining confidence
of taxpayer in the system.

Income Tax Department is primarily responsible for combating

the menace of illicit money, using its tools of scrutiny assessment, as
well as, information based investigations for detecting tax evasion
and penalizing as per provisions of the Income Tax Act, with the
objective of creating deterrence against tax evasion. It plays vital role
in preventing, generation, accumulation and consumption of
unaccounted black money, with various important features:

Policy Making: The Central Board of Direct Taxes is responsible

for assisting central government in all policy matters related to
direct taxation, amendment of law, formulation of rules and
procedures and facilitating compliance thereof. The Foreign
Tax and Tax Research division of Board is responsible for all
policy issues related to international taxation and transfer
pricing. The officers of division negotiate and renegotiate the
Double Taxation Avoidance Agreement and Tax Information
Exchange Agreement. The division also coordinates with
various international organizations like Organization for
Economic Cooperation and Development, United Nations,
Global Forum on Transparency and Exchange of information
for tax purposes, Inter-American Centre of Tax Administration
and South Asian Association for Regional Cooperation. Other
divisions of the Board deal with policy matters related to
investigations, legal amendment, litigation, audit and
administrative matters.

108 www.incometaxindia.

192
 Assessment: Determination of income of person is referred as
assessment, where primary onus of declaring individual
taxpayer by way of filing return of income, which is processed
for prima facie errors and on basis of computerized section and
definite criteria. Some returns are selected for detailed scrutiny
and verification by officers of department. Such assessment is
carried out after detailed preliminary investigations and in
cases involving substantial evasion of taxes.

Collection of Information: There are various mechanisms as

part of compliance strategy, where the Income Tax Department
receives data for detecting cases of tax evasion in respect of
transactions in bank accounts, registered immovable property
below circle rate and capital market transactions received as
annual information returns. Collected information is analyzed
to identify clandestine transactions. An integrated taxpayer
data management system is an effective tool for analysis of
data from permanent account number data base, income tax
department applications and telephone operators to unearth
unscrupulous transactions.

Collection of information involving cross border transactions:

Income tax department also receives information from foreign
tax authorities under instruments of exchange of information,
which is used by tax administration for purposes of
investigations and assessment. 109

The Central Board of Direct Taxes is policy formation agency of

the Central Government and Income Department is responsible to
address all illicit financial practices being performed within the
country. Income Tax Department had issued notification for general
public for filing income tax return but it has never been enquired
about failing persons to file return and show their income. It is
clearly visible to income tax authorities that illicit money is available
in the country in the form of properties, securities, illicit income
through various tax evasion practices and criminal activities. Money

109 Ibid.

193
remains with the people in cash or assets, but income tax
department never took efforts to attend such illicit practices. Income
from house property is visible from electricity and water bills of
houses, but no efforts could be made to trap such offenders from
payment of taxes. The existing staff of department in country is
about one hundred persons per district and department never took
any measures to attend all financial irregularities, visible to general
public but could not be traced by income tax staff.110

4.4.2 Enforcement Directorate (ED)

Enforcement directorate was established in 1956 to administer

provisions of Foreign Exchange Regulation Act 1973, which was
repealed on 31 May 2000 and replaced with the Foreign Exchange
Management Act 1999, became effective on 1 June 2000. The
enforcement directorate has been entrusted with the responsibility of
investigation and prosecution of money laundering offences and
attachment and confiscation of the proceeds of crime under the
Prevention of Money Laundering Act 2002.

Officers of directorate undertake multifaceted functions of

collection, collation and development of intelligence, investigation in
suspected cases of money laundering, attachment, confiscation or
assets acquired through commission of scheduled offences and
criminal prosecution of offenders in court of law. It enforces
provisions of the Act, aimed at promoting development and
maintenance of Indian foreign exchange market and providing for
action against persons and entities involved in international hawala
transactions. The directorate has pan-Indian character with field
offices spread over various states and regions. There is separate legal

110 https://www.oecd.org

194
wing headed by prosecutor with two deputy legal advisors and ten
assistant legal advisors. Directorate was restructured in March 2011
increasing number of offices from 22 to 39 with total strength of
officers and staff of 2063. Directorate is headquartered in New Delhi
with five regional offices, 11 zonal offices and 22 sub-zonal offices.
Directorate initiates investigations for contraventions related to
foreign exchange transactions mainly by resident Indians, involving
maintenance of bank accounts abroad with unauthorized holdings,
on the basis of specific intelligence information and takes
appropriate action as per provisions of Act.111

Directorate administers Prevention of Money Laundering Act,

containing provisions related to investigation into cases of money
laundering and powers of search, seizure, collection of evidence,
prosecution etc. having competent authority. Money laundering is
criminal offence extends to any property derived or obtained directly
or indirectly by any person, as a result of criminal activity relating to
scheduled offences. After 2009 amendment, predicate offences for
money laundering, also extended to be conducted in another
country, where the offender has shifted or transferred money for
investment in securities, property and kept in bank account which
constitute offence in that country and which constituted predicate
offence had it occurred domestically. Directorate initiates
investigations only after case registered by law enforcement agency
under any of the offences listed in the Schedule of the Act. 112

4.4.3 Financial Intelligence Unit (FIU)

Financial Intelligence Unit was established by Government of

India vide Office Memorandum dated 18 November 2004 for

111 dor.gov.in/ed
112 Ibid.

195
coordinating and strengthening efforts for national and international
intelligence by investigation and enforcement agencies in combating
money laundering and terrorist financing Financial intelligence unit
is national agency responsible for receiving, processing, analyzing
and disseminating information related to suspected financial
transactions. It is independent sanctity reporting to Economic
Intelligence Council headed union Finance Minister.
Administratively, the unit is functional under the control of
Department of Revenue, Ministry of Finance. Under Prevention of
Money Laundering Rules, reporting entities of the unit include: (a)
Cash Transaction Reports, (b) Suspicious transaction reports, (c)
Counterfeit currency reports, and (d) Non-profit organizations
transaction reports.113

Cash transaction reports and non-profit organization having

annual transactions above Rs. 10 lakhs in a month and are
submitted on monthly basis, while suspicious transactions reports
and counterfeit currency reports are transaction based and
submitted on occurrence of transactions. Financial intelligence units
receives average over seven lakh cash transaction reports and 1500
suspicious transaction reports every month.114

The director of unit is empowered under Sections 12, 12 and

66 of Prevention of Money Laundering Act to exercise powers relating
to collection and dissemination of information, while powers relating
to search and seizure were exercised by enforcement directorate,
have been delegated to Financial Intelligence Unit vide Notification
No. 5/2005 dated 1 July 2005. Section of the Act ensures availability
of information from every banking company, financial institution and

113 fiuindia.gov.in
114 Master Circular No. 152 dated July 01, 2009 - Reserve Bank of India
...https://rbi.org.in/scripts

196
intermediary reporting agencies to furnish information to Financial
Intelligence Unit and verify identity of their clients through
prescribed manner. All reporting entities are also required to
maintain and preserve records of transactions and identify the
clients for a period of ten years from maintenance of reporting entity
and enquire into cases of suspected failure of compliance with
provisions of Act and impose fine. The reporting agencies of Reserve
Bank of India, Insurance Regulatory Authority and Securities and
Exchange Board of India, which has been extended to person,
authority or government having power to license, authorize, register,
regulate or supervise activities of banking companies, financial
institutions and intermediaries. Accordingly, all regulators have
issued ‗know your clients‘ related guidelines for identifying clients
and reporting to Financial Intelligence Unit.115

4.4.4 Central Board of Excise and Customs (CBEC)

The Central Board of Excise and Customs is functional under

Department of Revenue, Ministry of Finance and deals with the tasks
of formulation of policy related to levy and collection of customs and
central excise duties, prevention of smuggling. Directorate General of
Central Excise Intelligence is apex organization functional under the
Board. It is entrusted with the responsibilities of detecting cases of
evasion of central excise and service tax. Directorate develops
intelligence in new areas of tax evasion through intelligence network
across the country and disseminates information on latest trends in
duty evasion. Directorate of Revenue Intelligence functions under
the Board and entrusted with responsibilities of collection, analysis,

115 'Know Your Customer' (KYC) Guidelines – Anti Money Laundering

...https://www.rbi.org

197
collation, interpretation and dissemination on violations of customs
laws. 116

4.4.5 Central Economic Intelligence Bureau (CEIB)

Central Economic Intelligence Bureau established in 1985

functions as nodal agency for economic intelligence under the
Ministry of Finance and entrusted the task of coordination,
intelligence sharing and investigations at national and regional
levels. Bureau functions as ‗think tank‘ on economic offences and
prepares dossiers of tax evaders, violators of economic laws and
white collar operations. It coordinates with the National Security
Council Secretariat on matters related with national and economic
security. Any information relating to money laundering, black money
and hawala transactions is shared with enforcement directorate and
director general of income tax for proper action on all accounts.
Bureau maintains constant interactions with Customs Overseas
Investigation Network offices to share intelligence information on
suspected import and export transactions. Bureau gathers evidence
through diplomatic channels from foreign customs offices and other
foreign establishments. 117 CEBI has three wings, viz.,
Administration and Coordination Wing; Economic Intelligence Wing;
and COFEPOSA Wing.118

4.4.6 Economic Intelligence Council (EIC)

The Economic Intelligence Council was established in 2003

under the chairmanship of Finance Minister and participated by
senior functionaries of various ministries, intelligence agencies,

116 www.cbec.gov.in
117 www.ceib.nic.in
118 http://www.dor.gov.in/ceib

198
Governor of Reserve Bank of India and Chairman of Security and
Exchange Board of India.

4.4.7 The Narcotics Control Board (NCB)

The Narcotics Control Board was established on 17 March

1986, functions under the Ministry of Home Affairs and
responsible for coordinated actions by various offices of central
and state governments under Narcotics Drugs and Psychotropic
Substances Act 1985, Customs, Drugs and Cosmetics Act.
Bureau has been assigned task of counter measures against illicit
drugs traffic under various international conventions and
protocols. It also assists concerned authorities in foreign
countries and related international organizations in prevention
and suppression of such traffics. The Central Bureau of Narcotics
supervises collection of opium poppy in India and issues
necessary licenses to manufactures, exports and imports of
narcotic drugs and psychotics substances.

4.4.8 Serious Frauds Investigation Office (SFIO)

Serious Frauds Investigation Office established in 2003,

functions under the Ministry of Corporate Affairs and takes up
investigation in complex cases under inter-departmental and
multi-disciplinary ramifications and substantial involvement of
public interest, in terms of monetary misappropriations or
persons affected. It also attends cases where investigation has
potential of contributing for improvement in systems, laws or
procedures. It can investigate serious cases of fraud received
from Department of Company Affairs. It can also take up cases
on its own, if its Director so decides by recording reasons. This
office makes investigations under the provisions of the Companies

199
Act and can forward the investigated reports on violation of
provisions of other Acts to the concerned agencies for prosecution
on appropriate action.119

There are also Regional Economic Intelligence Councils

(REIC) in different places in India, which are chaired by the Chief
Commissioners of Custom, Central Excise or Income Tax. The
EIC takes in account the trends economic offences strategy on
intelligence sharing and coordination. Among other functions it
reviews measures to combat economic offences coordination
among various intelligence agencies and also examines the
changing dynamics of economic offences and advises on need to
amend laws and procedure for plugging loopholes in taking
effective actions against economic offenders. The Administrative
and Coordination Wing of Central Economic Intelligence Bureau
(CEIB) acts as secretariat to the Economic Intelligence Council
(EIC).120

4.4.9 Inter-ministerial Coordination Committee on Prevention of

Money Laundering and Combating Financing of Terrorism

Inter-ministerial Coordination Committee on Prevention of

Money Laundering and Combating Financing of Terrorism was set up
in 2002 to ensure effective coordination between competent
authorities and strengthen capacity of India for implementing anti-
money laundering and combating terrorist financing measures to
meet international standards. The Committee is chaired by
Additional Secretary of Department of Economic Affairs represented
by 14 central agencies.

119 http://www.sfic.nic.in
120 http://www.ceib.nic.in/etc.htm

200
4.4.10 The National Investigation Agency (NIA) 2008

The National Investigation Agency is specialized and dedicated

investigation agency set under National Investigation Agency Act to
investigate and prosecute scheduled offences, mainly offences under
Unlawful Activities (Prevention) Act and financing of terrorism.
Agency has concurrent jurisdiction with individual states, thereby
empowering central government to probe terror attacks in any part of
the country. Officers of agency have powers, privileges and liabilities,
which police officers have in connection with investigation of
offences. Central Government has power to assign any case to the
agency for investigation. The Act provides authority for setting up of
special courts and trials to be held on day-to-day basis for quick
disposal.

The agency can investigate offences under specific Acts

mentioned in the Schedule, including Atomic Energy Act 1962,
Unlawful Activities Prevention Act 1967, Anti-hijacking Act 1982,
Suppression of Unlawful Acts against Safety of Civil Aviation Act
1982, The South Asian Association for Regional Cooperation
(Suppression of Terrorism) Act 1993, Suppression of Unlawful Acts
against Safety of Maritime Navigation and Fixed Platforms on
Continental Shelf Act 2002, Weapons of Mass Destruction and their
delivery systems (Prevention of Unlawful Activities) Act 2005 and
offences under chapter VI and sections 489 A to E of the Indian
Penal Code. A High Level Committee under Revenue Secretary has
been entrusted responsibility to coordinate investigations under
different laws in matters related to illicit generation of funds within

201
country and their flow for illegal parking in foreign jurisdiction by
Indian citizens.121

4.4.11 Central Bureau of Investigation (CBI)

The Central Bureau of Investigation is apex investigation

agency of the country, functions under the Department of Personnel,
Ministry of Personnel, Pension and Public Grievances, Government of
India and handles broad category of criminal cases including cases of
corruption and fraud committed by public servants, economic crimes
and other specific crimes involving terrorism, bomb blasts,
sensational homicides, kidnappings and underworld crimes. Bureau
plays important role in international cooperation relating to mutual
legal assistance and extradition matters. Ministry of Home Affairs is
central authority for mutual legal assistance in criminal matters and
the Ministry of External Affairs functions as nodal agency for
extradition matters.122

Under the Constitutional provisions of India, police and public

order are issues of state jurisdiction. Every state and union territory
has its own police force, performs normal policing duties and also
has specialized units to combat economic offences. The economic
offences wing of police functions under administrative control of
states, is entrusted with the responsibility of investigation of serious
economic offences and offences having inter-state ramifications. It is
also mandated to interact, assist, guide district police in matters
related to financial crimes, prevention and detection measures.
Various Economic Offences Wings of states police are typically
involved in attending specific criminal issues occurring within the
jurisdiction of any State:

121 www.anti-moneylaundering.org
122 www.cbi.gov.in/

202
 (a) Anti-fraud and cheating section attends company
frauds, bank frauds, frauds of non-banking financial
companies, state tax frauds and income tax related
frauds.

(b) Anti-land and building racket section tackles cooperative

group housing frauds, cases against land mafia, frauds
by builders, land related bank frauds involving double
mortgage, fake documents, frauds related to pre-launch
schemes, illegal sale of government land etc.

(c) Anti-forgery section has been entrusted with

responsibility of forgery of document, wills admission
related frauds, visa related frauds, job rackets,
manpower export rackets etc.

(d) Anti-criminal breach of trust section handles multi-level

marketing frauds, export-import related frauds, chit-
fund frauds, tax evasion related frauds, state trading
frauds, corporate frauds involving criminal breach of
trust.

(e) Intellectual property rights and trademark section is

responsible for infringement of copyright, audio-visual
piracy, software piracy, spurious drugs and fast moving
consumer goods, book piracy, trademark offences,
violation of trademarks in the manufacturing sector.

(f) Anti-cyber section attends data theft, identity theft,

credit card frauds, online obscenity and pornography,
phishing hacking, social network related complaints.123

From the aforesaid discussion it is clear that for an effective

combating mechanism with respect to money laundering sufficient
institutional mechanism is there are the State and National level.
What is required is to understand the gravity of the problem and also
the intricate processes of money laundering.

123 timesofindia.indiatimes.com

203
4.5 OTHER MECHANISMS

In addition to legislation and institutional measures there is

also need to check economic malpractices. Some measures to check
such practices are discussed as under:

4.5.1 Direct Payment into Bank Accounts of Payees

The Ministry of Finance has amended rules with effect from

01.04.2012, where all ministries and departments are required to
make all payments above Rs. 25,000/- to suppliers, contractors,
grantee or loanee institution into bank account of payee. All
payments to government servants need to be credited into bank
account directly. Similarly, all payments towards settlement of
requirement, terminal benefits of government servants need to be
credited into bank account of the employee. Such measures have
been deemed necessary to maintain transparency in monetary
transactions from government. In addition, persons receiving funds
from government may be made accountable for payments of their
taxes over the income. All the monetary transactions are audited by
Accountant General, designated as Controller of Accounts of the
central and state government ministries and departments to assess
validity of payments.

4.5.2 Unique Identity – Aadhar

Unique identity of Indian citizens has become mandatory and

more than one hundred crores persons have received these cards in
the country. Now the system has been introduced in payments of
Mahatma Gandhi National Employment Guarantee Act, old age
pension, widow and disability persons and scholarships to be made
directly in to payee account in bank stating Aadhar Number. All

204
subsidies are credited into bank accounts of beneficiaries, which has
enabled to maintain transparency in financial transactions and
reaching the benefits to eligible persons. Provision of Aadhar has
also been extended in payment to subsidy to farmers under various
schemes implemented through non-government organisations for
ensuring benefits to reach eligible persons.

4.5.3 Check on Cash Flow

In the Indian economy there is large volume of cash flow.

Cash transaction made for illegal activities are not easy to trace.
Cash is also stalked in large amounts. Such amounts are ultimately
undervalued and paid in cash. Therefore large scale cash
transaction not only affects the economy by evasion of taxes but also
pose security threats. Government of India has taken a major step
demonetize the high value currency notes to unearth the
unaccounted cash. The further steps to restrict and limit the value
of cash transaction are also welcome and there should be effective
follow up action for violations.

4.6 REPORTING REGIME UNDER PMLA

The PMLA, 2002 which came into force w.e.f. 01.07.2005

imposed obligation of record keeping on banking companies,
financial institutions and intermediaries. The supervision of
financial institutions is with three main agencies namely the Reserve
Bank of India (RBI); the Securities and Exchange Board of India
(SEBI); and Insurance Regulatory and Development Authority (IRDA).
RBI is responsible to supervise banking business and non-banking
financial institutions. SEBI regulates licencing and supervision of
Stock Exchanges, market intermediaries, depositories and
custodians and collective investment schemes. IRBA regulates and

205
promote proper growth of insurance sector. The PMLA, 2002 put
obligations on Banking Companies, Financial Institutions and
intermediaries to maintain record and furnish the prescribed
information to the concerned authorities. The Rules124 in this
regard were framed under the PMLA 2002 as 'The Prevention of
Money Laundering (Maintenance of Records and Value of Transactions
the Procedure and Manner of Maintenance and the Time for Furnishing
Information and Verification and Maintenance of Records of the
Identity of clients of the Banking Companies, Financial Institutions
and Intermediaries) Rules 2005.125 These rules came into force on
01.07.2005 along with the PMLA, 2002.

4.6.1 Report to FIU-IND

Under the Reporting Regime the information is required to be

transmitted to the Financial Intelligence Unit, an apex body for
coordinating Anti-Money Laundering efforts, established under the
Ministry of Finance.126 FIU-IND is an independent body reporting
directly to the Economic Intelligence Council (EIC) headed by the
Finance Minister. This is a central national agency responsible for
receiving processing, analyzing and disseminating information
relating to suspected financial transactions. FIU-IND is also
responsible for coordinating and strengthening efforts of national
and international intelligence, investigations and enforcement
agencies in pursuing the global efforts against money laundering and
related offences. Thus, the FIU-IND unit manages the data and
deciphers it into intelligence to be used by various agencies.

124 The Prevention of Money Laundering Act, 2002, S. 12.

125 The Title of the Rules has been changed vide, GSR 481 dated 24th June
2011 as 'The Prevention of Money Laundering (Maintenance of Records)
Rules, 2005.
126 Set up by the Government of India vide OM dated 18th November 2004.

206
4.6.2 Regional Economic Intelligence Council

Apart from the specific inputs provided by FIU-IND on

transactions suspected of being related to money laundering, the
main forum for co-ordination and cooperation among various
agencies dealing with economic offences available to the Directorate
of Enforcement is the Regional Economic Intelligence Councils
(REICs). The REICs, constituted in 1996, are the nodal regional
agencies for ensuring operational coordination amongst different
enforcement and investigation agencies dealing with economic
offences in their respective regions. These REICs are located at 18
regional centers throughout the country and consist of designated
officers of CBDT, CBEC, CBI, ED, heads of related agencies of the
Union and State Governments in the region, RBI, SBI, Registrar of
Companies, etc. The REICs not only share information related to tax
matters but also cover all areas of economic intelligence focusing on
real time dissemination of information. The functioning of the REICs
is coordinated by the Central Economic Intelligence Bureau (CEIB)
which is under the administrative control of the Department of
Revenue, Ministry of Finance. The CEIB acts as the nodal agency for
economic intelligence. As the Directorate of Enforcement is a member
of the REIC, it would be useful if the platform provided by them is
also utilized to coordinate among agencies in cases which are
suspected to be linked with money laundering. Further, owing to the
complexity of cases involved, it would also be useful if the FIU-IND,
apart from disseminating agency specific information, furnishes
overall region-centric information to the CEIB for disseminating it to
the respective REICs with a view to expanding the information
regime.

207
 Banks, Financial Institution and financial intermediaries are
required to submit Cash Transactions Reports (CTR) and Suspicious
Transaction Report (STR) to FIU-IND. The formats for reporting
transactions to FIU-IND were notified by March 2006. Apart from
furnishing information about transactions the Regulations provide
for verification of clients in the prescribed manner.

The PMLA, 2002 introduced the reporting regime with regard

to financial transactions as envisaged in the Act and the rules
thereunder. The regulations include maintenance of record of
prescribed transactions, furnishing information to FIU-IND in the
prescribed format, and verification of clients in the prescribed
manner. A reporting entity is required to furnish to FIU-IND, inter
alia, monthly information relating to cash transactions of value of
rupees ten lakhs or its equivalent in foreign currency, series of
integrated cash transactions valued below rupees ten lakhs or
equivalent foreign currency taking place in a month; information on
transactions which appear to be complex or which raise the
suspicion of involving proceeds of crime, within seven days of being
satisfied regarding this. FIU-IND analyses these reports and
disseminates the information to appropriate enforcement/intelligence
agencies.

The recipients of such information are the Ministry of Home

Affairs, Research & Analysis Wing, Intelligence Bureau, National
Security Council Secretariat, Central Board of Direct Taxes, Central
Board of Excise & Customs, Directorate of Enforcement, Narcotics
Control Bureau, Central Bureau of Investigation, Reserve Bank of
India, Securities and Exchange Board of India and Insurance
Regulatory Development Authority.

208
4.6.3 Inclusion of New Reporting Entities

Presently, under Section 2 (wa) PMLA added by 2012

amendment reporting entity various (i) Financial Institution as
defined in S. 2 (i); (ii) Banks company defined in section 2 (e) and (iii)
Intermediaries as defined under S. 2 (n). All banking companies
including private foreign banks, co-operative banks, RRBs, financial
institutions including insurance companies, hire-purchase
companies, chit funds, non-banking financial companies and
intermediaries127 mentioned in Section 12 of SEBI Act constitute a
reporting entity. The definition of 'person carrying designated
business means:

(i) a person carrying on activities for playing games of

chance for cash or kind, and includes such activities
associated with casino;

(ii) a Registrar or Sub-Registrar appointed under section 6

of the Registration Act, 1908 (16 of 1908) as may be
notified by the Central Government;

(iii) real estate agent, as may be notified by the Central

Government;

(iv) dealer in precious metals, precious stones and other

high value goods, as may be notified by the Central
Government;

(v) person engaged in safekeeping and administration of

cash and liquid securities on behalf of other persons, as
may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central

Government may, by notification, so designate, from
time to time.

127 Intermediaries could include stock brokers, sub brokers, share transfer
agents, banker to an issue, trustee to a trust deed, registrar to an issue,
merchant bank, underwriter, portfolio manager, investment advisor or any
other intermediary associated with security market and registered with
Security Exchange Board of India (SEBI), PMLA S./ 2 (n) (i).

209
 The Prevention of Money Laundering (Amendment) Act, 2009
included Financial intermediaries like full-fledged money changers,
money transfer service providers such as Western Union and
International Payment gateways including VISA and Master Card.128
Casinos are brought under the reporting regime of enforcement
authorities.129 The PMLA 2012 Amendment Act130 created more
reporting entities with enhanced responsibilities with respect to
Know Your Client (KYC) obligations on various entities beyond Banks
and financial institutions. Particularly real estate transactions are
also brought under the PMLA purview.

The above amendments/inclusion in the definitions is said

to be radical and much needed move which brought all real estate
agents, dealers in precious metals and stones and the gambling
industry within the ambit of PMA and subjected to then to the
KYC and other reporting requirements. 131 The 2012 Amendment
of PMLA deleted the definition of 'Designated Business and
Profession' as it was in Section 2 (ja) and introduced new
definition of 'person carrying on designated business or
profession.' This includes casino operators, Registrar or Sub-
Registrar appointed under section 6 of the Regulation Act 1908,
the real estate agent and dealer in precious metals and stones as
reporting entities.132 Here the payment system includes payment
gateways like Visa and Maestro Card. Authorised person is
money transfer service provider.

128 The Prevention of Money Laundering Act, 2002, S. 2 (rb)

129 Id., 2 (jb)
130 Act 15 of 2013.
131 Arun Srivastava, Mark Simpson, Nina Moffatt (General Eds.), International
Guide to Money Laundering Law and Practice, Bloomsburg Fourth Edition
(2013), Aparna Vishwanathan, "India" Chapter 24, pp. 805-806.
132 Prevention of Money Laundering Act, 2002, S. 2 (sa).

210
4.6.4 Reporting Obligations

The PMLA, 2002 section 12 requires the reporting entities viz.,

Banking Company, Financial Institution and Intermediary to
maintain record of all transactions including information relating to
such transactions as are prescribed to the Director and also to verify
and maintain the records of the identity of all the clients. The time
period for these records is returned to five year from the earliest ten
years after 2012 amendment as per recommendation of the FATF.
The nature and value of transaction required to be reported are
prescribed. Such transactions include both attempted or executed.
There is also need to identify beneficial owner. 133 A new provision
as section 12 A has been added by 2012 amendment which provided
that the Director may call from any Reporting entity any of the
records or any additional information as he consider necessary. The
Director can hold inquiry or audit of the reporting entity. The
Director may impose fine on the entity or its designated director or
employee for failure to comply with the directions which shall not be
less than Rs. 10,000/- but may extend to Rs. One lac for each
failure.134

133 Id., 2002, S. 12 (1)

(a) maintain a record of all transactions, including information relating to
transactions covered under clause (b), in such manner as to enable it to
reconstruct individual transactions;
(b) furnish to the Director within such time as may be prescribed,
information relating to such transactions, whether attempted or
executed, the nature and value of which may be prescribed;
(c) verify the identity of its clients in such manner and subject to such
conditions, as may be prescribed;
(d) identify the beneficial owner, if any, of such of its clients, as may be
prescribed;
(e) maintain record of documents evidencing identity of its clients and
beneficial owners as well as account files and business correspondence
relating to its clients.
134 Id., S. 13.

211
 There is immunity to the Director and employers of the
Reporting entity against liability in any civil or criminal proceedings
for furnishing any information regarding their clients to the
Director.135 This PMLA provision in section 14 is in conformity with
Recommendation 14 of the FATF which provided for giving protection
to Directors, officers and employees of the Reporting entities from
any breach of contract or law while reporting suspicious transaction
to FIU. The procedure and manner of maintaining and furnishing
information is given in circular issued by the Reserve Bank of
India.136

4.6.5 Obligations of Reporting Entities

Basic obligations of reporting entities are (a) maintenance of

record and (b) furnishing Information.

4.6.5.1 Maintenance of Record

The maintenance of proper record is essential so as to, if need

be, the individual transactions can be reconstructed with
information as to amounts and communes involved alongwith
necessary evidence for prosecution of persons who are alleged to
have criminal behavior an d involved in money laundering. As such
authentic audit trait should be available with respect to beneficial

135 Id., S. 14.

136 The RBI, vide a series of circulars commencing on 15 February 2006,
issued its rules requiring maintenance of records of transactions by
commercial banks, cooperative banks, and regional rural banks. On 1st
July 2012, the RBI issued a Master Circular to all Scheduled Commercial
Banks, Financial Institutions and Co-operative Banks with regard to Know
Your Customer, Anti-Money Laundering and Combating of Financing of
Terrorism. Banks, financial institutions and intermediaries must also
verify and maintain records of the identity of all clients in the manner
prescribed as per the KYC norms discussed below. SEBI has also issued
guidelines and circulars on anti-money laundering since 2006 which
impose record keeping, reporting and KYC obligations on intermediaries.

212
owner; amounts involved; source of funds; mode of deposit or
withdrawal; identity of the persons; and the like.

4.6.5.2 Maintenance of Record of Transaction

Rule 3 (1) of the A-F presents the requirement of maintenance

of record of transactions as under:

(A) all cash transactions of the value of more than ten lakh rupees
or its equivalent in foreign currency;

(B) all series of cash transactions integrally connected to each

other which have been individually valued below rupees ten
lakh or its equivalent in foreign currency where such series of
transactions have taken place within a month and the monthly
aggregate exceeds an amount of ten lakh rupees or its
equivalent in foreign currency;

(BA) all transactions involving receipts by non-profit organisations

of value more than rupees ten lakh, or its equivalent in foreign
currency;

(C) all cash transactions where forged or counterfeit currency

notes or bank notes have been used as genuine or where any
forgery of a valuable security or a document has taken place
facilitating the transactions;

(D) all suspicious transactions whether or not made in cash and

by way of-

(i) deposits and credits, withdrawals into or form any

accounts in whatsoever name they are referred to in any
currency maintained by way of-

(a) cheques including third party cheques, pay orders,

demand drafts, cashiers cheques or any other
instrument of payment of money including
electronic receipts or credits and electronic
payments or debits, or

(b) travellers cheques, or

(c) transfer from one account within the same

banking company, financial institution and

213
 intermediary, as the case may be, including from
or to Nostro and Vostro accounts, or

(d) any other mode in whatsoever name it is referred

to;

(ii) credits or debits into or from any non-monetary

accounts such as d-mat account, security account in
any currency maintained by the banking company,
financial institution and intermediary, as the case may
be;

(iii) money transfer or remittances in favour of own clients or

non-clients from India or abroad and to third party
beneficiaries in India or abroad including transactions
on its own account in any currency by any of the
following-

(a) payment orders, or

(b) cashiers cheques, or
(c) demand drafts, or
(d) telegraphic or wire transfers or electronic
remittances or transfers, or
(e) internet transfers, or
(f) Automated Clearing House remittances, or
(g) lock box driven transfers or remittances, or
(h) remittances for credit or loading to electronic
cards, or
(i) any other mode of money transfer by whatsoever
name it is called;

(iv) loans and advances including credit or loan substitutes,

investments and contingent liability by way of-

(a) subscription to debit instruments such as

commercial paper, certificate of deposits,
preferential shares, debentures, securitized
participation, inter-bank participation or any other
investments in securities or the like in whatever
form and name it is referred to, or

(b) purchase and negotiation of bills, cheques and

other instruments, or

214
 (c) foreign exchange contracts, currency, interest rate
and commodity and any other derivative
instrument in whatsoever name it is called, or

(d) letters of credit, standby letters of credit,

guarantees, comfort letters, solvency certificates
and any other instrument for settlement and/or
credit support;

(v) collection services in any currency by way of collection of

bills, cheques, instruments or any other mode of
collection in whatsoever name it is referred to.

(E) all cross border wire transfers of the value of more than five
lakh rupees or its equivalent in foreign currency where either
the origin or destination of fund is in India;

(F) all purchase and sale by any person of immovable property

valued at fifty lakh rupees or more that is registered by the
reporting entity, as the case may be.

The maintenance of record also extend to (1) Know Your Client

(KYC). The Know Your Client norms are set to prevent bank and
financial institutions from misuse by criminals for money laundering
under the Banking Regulation Act, 1949 the RBI issued KYC norms
on 16th August 2002. These were revised in 2004 in the context of
FATF Recommendations with respect of Customer Due Diligence
(CDD) for Banks by Basel Committee on Banking Supervision on 1st
July 2018 the RBI issued a master circular on Anti-Money
Laundering Standards and KYC particularly on Combating Terrorist
Financing (CFT) and obligations of Banks under PMLA.137 There are
following four elements of KYC regulations:
(i) customers acceptance policy;
(ii) customers identification procedure;
(iii) monitoring of transaction; and
(iv) risk management

137 RBI/2002 – 13/45 DBOD AML BC No 11/14.001/2012 dated 2 July 2012-

The RBI regulations are applicable to all commercial banks regional rural
banks, financial companies, primary cooperative banks and authorized
money changers.

215
(i) Customer Acceptance Policy (CAP)

Recommendation 5 of FATF requires that banks should

identify their customers through independent source documents and
verify their identity while opening their accounts or carrying out any
transaction. Banks are also required to periodically update the
customer identification including photographs. The data is
supposed to be update once in five years for low risk category and in
two years for high or medium risk category customers. Unique
customers identification code is provided by the Reserve Bank of
India for monitoring track record.138 While opening an account for
trusts banks are need to take precaution to verify the identity of
trustee, the settlers of trusts, beneficiaries and signatories. As per
RBI guidelines the customers are categorized Banks are required to
take specific measures for customer identification as per RBI
circulars. These categories are:

(i) Walk-in-customers
(ii) Salaried employees
(iii) Trust/nominee or fiduciary accounts
(iv) Accounts of companies and firms
(v) Client accounts opened by professional intermediaries
(vi) Accounts of Politically exposed Persons ('PEPs') resident
outside India
(vii) Accounts of non-face-to-face customers
(viii) Accounts of proprietary concerns
(ix) Accounts with introduction
(x) Operation of bank accounts and money mules
(xi) Bank no longer knows the true identity139

(ii) Monitoring of Transactions

Keeping in view Recommendation 11 of the FATF the Reserve

Bank of India requires the Banks to understand normal or abnormal

138 RBI Master Circular KYC/AML/CFT-PML obligation of Banks under PMLA,

2002, Clause 21.46, 2 July 2012.
139 Id., See Clause 2.5 (1) – (viii), 2.6, 2.8 and 2.9.

216
activities of the customers. The extent would depend upon risk
sensitivity of the account like complex, unusually large or unusual
pattern of the transaction. As such key indicators can be set by the
banks keeping in view various risk factors.

Further the Bank Management is required to ensure effective

KYC programme by prescribing due procedure and implementation,
supervision, training, internal audit, independent evaluation. Banks
are required to inform and educate the customers in a proper
manner about the objection of KYC. In compliance of FATF
Recommendation 8, the RBI guidelines require the Banks to pay
special attention to money laundering threats arising from new
technologies including internet banking and electronic cards140 with
respect to anonymity and non-face to face business relationship.

The RBI has also issued guidelines for Authorised Money

Changers (AMCs) with respect to identification of customers,
reporting of suspicious transactions, appointing of reporting officer,
tracing, maintenance of record and audit of transaction.141

Securities Exchange Board of India (SEBI) in 2006 has also

issued guidelines with respect to adoption of anti-money laundering
measures. Further a master circular has been issued in December
2010142 with respect to know your customer (KYC) and anti-money
laundering and combating terrorist financing. The guidelines aimed
at intermediaries registered under Section 12 of the SEBI Act, 1992
and in compliance of FATF Recommendation. The intermediaries
are required to ensure proper policy framework and designation of
'Principal Officer' to comply with PMLA. These measures including

140 RBI/2008-09/72/DMOD.AML.BC. No. 12/14.01.001/2008-09 1 July 2008.

141 RBI A.P. (DIR Series) Circular No. 18, 2 December 2005.
142 Master Circular CIR/ISD/AML/3/2010 dated 31 December 2010.

217
proper identification, maintenance of records, internal audit, testing
system for detecting suspected transactions, evaluating the adequacy
of generated exception reports of large or irregular transactions.

The Customer Due Diligence (CDD) measures focus on

identification of chests including beneficiary, verification of identity
through independent source documents, data or information and
scrutiny of accounts and transactions. Additional guidelines have
been issued by SEBI and RBI143 in January 2013 for identification of
beneficial ownership of securities account. The SEBI and RBI
guidelines are with respect to clients other than individuals or trusts;
clients which are a trust; and listed clients.

(iii) Customer Acceptance Policy for Intermediaries

SEBI guidelines require all registered intermediaries to develop

Customer Acceptance Policy (CAP) by Identifying the types of clients
who are likely to pose money laundering or terrorist financing
threats. Fictitious and anonymous accounts are to be avoided.
Risk factors are determined keeping into account location of chest;
nature of business activity; and mode of payment. There can be
lose, medium and high risk categories. Identity of the person can be
matched with person of known criminal record. There can be clients
of special category (CSC) like non-resident clients; high network
clients; trusts; chantin; NGOs; companies with close family
shareholdings; politically exposed persons of foreign origin; current
or former head of state and high profit politicians. Special category
also include clients in high risk countries where existence of money
laundering controls is suspected, there is universal banking secrecy,

143 SEBI, Circular, CIR/MIRSD/2/2013, dated 24 January 2013; RBI,

RBI/2012-2013/395 UBD.BPD. (PCB) Cir. No. 34/14.01.062/2012-2013,
dated 28 January 2013.

218
corruption is prevalent or narcotic production is there, or countries
known for heaves/spouses of international terrorism etc. The SEBI
guidelines prescribe the specific procedure for acceptance of
clients.144 Irrespective of the amount of investment made by clients
no minimum threshold or exception is available to registered
intermediaries from obtaining the minimum information/documents
from clients as stipulated in the PML Rules/SEBI circulars regarding
the verification of records of the identity of clients.145

Therefore, the SEBI guidelines follow the RBI KYC regulations

with respect to customer acceptance procedures, customer
identification procedures and monitoring of transactions.

(iv) Preserving Information and Reporting

The records maintained by the financial institutions or other

financings are required under RBI and SEBI guidelines to be made
available to auditors and also to RBI, SEBI, Stock Exchanges, FIU-
IND and other relevant authorities. These records are required to be
kept for five years as per Section 12 (3) of PMLA. The transaction of
suspicious nature are required to be reported to the appropriate law
enforcement authority. The suspicious transaction is defined in
clause 2 (g) of the PML (Maintenance of Records) Rules 2005 as
suspicious transaction:

1. "suspicious transaction" means a transaction referred to in

clause (h), including an attempted transaction, whether or not
made in cash, which to a person acting in good faith-
(a) gives rise to a reasonable ground of suspicion that it may
involve proceeds of an offence specified in the Schedule
to the Act, regardless of the value involved; or

144 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 5.2.1, 31 December

2010.
145 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 5.5.3, 31 December
2010.

219
 (b) appears to be made in circumstances of unusual or
unjustified complexity; or
(c) appears to have no economic rationale or bona fide
purpose; or
(d) gives rise to a reasonable ground of suspicion that it may
involve financing of the activities relating to terrorism;
Explanation: Transaction involving financing of the activities
relating to terrorism includes transaction involving funds
suspected to be linked or related to, or to be used for
terrorism, terrorist acts or by a terrorist, terrorist organization
or those who finance or are attempting to finance terrorism.

The transaction is debited in clause 2 (h) as –

1. "transaction" means a purchase, sale, loan, pledge, gift,

transfer, delivery or the arrangement thereof and includes-
(i) opening of an account;
(ii) deposits, withdrawal, exchange or transfer of funds in
whatever currency, whether in cash or by cheque,
payment order or other instruments or by electronic or
other non-physical means;
(iii) the use of a safety deposit box or any other form of safe
deposit;
(iv) entering into any fiduciary relationship;
(v) any payment made or received in whole or in part of any
contractual or other legal obligation;
(vi) any payment made in respect of playing games of chance
for cash or kind including such activities associated with
casino; and
(vii) establishing or creating a legal person or legal
arrangement.

A list of circumstances which may be in the nature of

suspicious transaction is also gives. SEBI master circular146

(a) clients whose identity verification seems difficult or

clients that appear not to cooperate;

146 SEBI Master Circular CIR/ISD/AML/3-2010 Clause 10.2 (a) – (g).

220
 (b) asset management services for clients where the source
of the funds is not clear or not in keeping with clients
apparent standing/business activity;
(c) clients based in high-risk jurisdictions;
(d) substantial increases in business without apparent
cause;
(e) clients transferring large sums of money to or from
overseas locations with instructions for payment in cash;
(f) attempted transfer of investment proceeds to apparently
unrelated third parties;
(g) unusual transactions by CSCs and businesses
undertaken by offshore banks/financial services,
businesses reported to be in the nature of export-import
of small items.

The detail of records of transaction with respect to their nature

and value is given in rule 3 (1) (A-E) of the PML (Maintenance of
Record) Rules 2005. Rule 7 prescribe the procedure and manner of
furnishing information. Monthly statements are required to be
furnished by the reporting entity to the Director by 15th of every
month with respect to transaction referred in clauses 3 (1) (A) (B)
(BA) (C) and E. These are:

(A) Cash transaction of Rs. More than ten lakh;

(B) Series of transaction in one month of aggregate value of
more than Rs. Ten lakh;
(BA) receipt by non-profit organization of value more than
Rs. 10 lakhs
(C) Cash transactions with forged currency or value security
or document;
(E) Cross border wire transfer of value more than Rs. 5 lakh

With respect to suspicious transactions member in Rule 3 (1)

(D) the information is required to furnished with 7 days of getting
satisfied that it is suspicious. Quarterly statements are required to
be given with respect to transaction referred in rule 3 (1) (E)
(Purchase or sale of property of value of fifty lakh or more).

221
4.6.6 Non-Inclusion of Professionals

The Recommendation 20 of FATF laid down record keeping and

reporting requirement on professional and non-financial business
which pose money laundering and terrorist financing risks. The
PMLA has not yet included these professions like lawyers and
accountants even after the 2012 amendment of this Act. Though,
these are considered to pose low risk for money laundering on the
basis of two risk assessments. However the PMLA should bring
additional Designated Non-Financial Business Professional (DNFBPs)
to make the combating regime more meaningful and effective.

4.7 CONCLUSION

India has recently developed anti-money laundering regime

keeping in view the international developments and requirements.
The Prevention of Money laundering Act, 2002 is the first legislative
measure which has directly dealt with menace of money laundering
in India. Though there are some specific provision in the Narcotic
Drugs and Psychotropic Act, 1985 and the Unlawful Activities
Prevention Act, 1967, where proceeds of crime and terrorist financing
are identified and counter measures are provided. Indirect
provisions are also there is various fiscal legislation and the recent
one is the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015.147 However, the PMLA is a special
legislation which defines offence of money laundering, prescribes
procedure for investigation, attachment, adjudication, confiscation of
proceeds of crime and other related matters like reciprocal
arrangement with other countries to deal with the matters related to
money laundering.

The mechanism to combat money laundering as provided

under PMLA is distinct in view of the peculiar nature of process of

147 Act 22 of 2015.

222
money laundering, where proceeds of crime are generated through
certain predicate offences and are converted into ostensible
legitimate earning. Therefore, PMLA has provided a specific
procedure for survey, search, freezing and attachment of proceeds of
crime believed to be involved in money laundering. Specialised
investigating and adjudicating authorities deal with attachment and
confiscation of proceeds of crime. Special judicial forum has also
been created for trial of offence of money laundering and the related
offences.

To combat money laundering in an effective manner there is a

need of viable reporting regime where various financial institutions
are required to furnish timely information to the enforcement
agencies. The specific obligations have been cast upon the reporting
entities and new entities have also been added through amendments
in PMLA. There is also requirement to maintain record as
prescribed. The amendment in PMLA and PML Rules have
expanded the ambit of reporting requirements, still there are gaps as
certain professionals like lawyers, accountants etc. have not yet been
included.

PMLA has been amended in 2005, 2009, 2013 and 2015 with
an objective to conform to the international standards in combating
money laundering. With the result of these amendments the India
has been admitted as member of FATF in 2010 with certain
conditions. Thereafter, in 2013 as per 8th follow up report of mutual
evaluation of India, it has been found that India has almost became
largely compliant to the desired international standards in having
combating mechanism in place, for money laundering. Still there
are certain gaps in the legal framework and implementation, which
have been explored and discussed in the next chapter.
…

223