Money Laundering refers to the conversion of money which has been
illegally obtained, so that it appears to have originated from a
legitimate source.The term "money laundering" is said
to have originated from the mafia ownership of Laundromats in the
United States who earned huge amounts from extortion, gambling etc. and
showed legitimate source for these monies but as a crime, money laundering became a matter of concern only in the 1980s.
Robinson, who is internationally known for his 1995 investigative tour de force, The Laundrymen has
defined money laundering as “illegal money put through a cycle of
transaction, so that it comes out the other end as legal money. In other
words, the source of illegally obtained funds is obscured through a
succession of transfers and deals in order that those same funds can
eventually be made to appear as legitimate income.”
Article 1 of the 1990 European Communities Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime has also defined “money laundering” in a similar fashion as stated above.[1]
Money Laundering: The Current Status in India
Every year, billions of dollars are derived
from drug trade and are then reinvested throughout the world by
otherwise legitimate businessmen, accountants and bankers[2] and it
is the increasing awareness of the huge profits generated from this
criminal activity that has created the impetus for governments to
legislate against such activities.
Money laundering is becoming very protuberant with
the passage of time. The estimated amount of money laundered globally in
one year is 2 to 5% of the global GDP (or USD 800 billion to USD 2
trillion).[3] In December, 2012, HSBC Holdings Plc. had to
agree to pay a record USD 1.92 billion in fines to US authorities for
getting itself involved in money-laundering issues.[4]
As far as India is concerned, in 2011-12, as many as 35 stock
brokers were probed by the Securities and Exchange Board of
India (“SEBI”) for possible lapses in controls related to money
laundering and this led to actions being taken by stock exchanges and
depositories against more than 300 market entities for violations and
discrepancies related to Anti-Money Laundering (“AML”). [5] Recently,
the Enforcement Directorate has been investigating an alleged Rs. 870
crore money laundering fraud by Reebok India.[6]
The current status of money laundering in India can also be evaluated by looking at the Basel AML Index prepared by the Basel Institute on Governance, Switzerland. The
Basel AML Index scores countries on the basis of AML laws, financial
regulations, political disclosure etc. in that country. The
Overall Score, which ranges from 0 (low risk) to 10 (high risk),
indicates a country’s risk level in money laundering. Out of 140
countries, India has been ranked 93rd (high risk zone with a score of
6.05) as compared to Norway having a score of 2.36.[7] This
clearly shows that India, in the present-day scenario, is very
vulnerable to money laundering activities and is a high risk zone.
Checking Money Laundering in India
Even though money laundering is a mammoth issue,
constant efforts have continuously been taken by Indian agencies and
regulators to eliminate it. The Financial Intelligence Unit- India
(“FIU-India”) which is the nodal agency in India for managing the AML
ecosystem, has significantly helped in coordinating and strengthening
efforts to reduce money laundering and related crimes in India, while
the Prevention of Money Laundering Act, 2002(“the Principal Act”) has been the core framework for combating it.
In June 2010, after a stringent evaluation by them, India was finally admitted
as the 34th country member of the Financial Action Task Force (“FATF”).
This membership has helped Indian enforcement agencies to exchange
information and financial institutions to gain much better access to
markets of other member countries by portraying that Indian financial
institutions are very comparative in terms of risk management standards.
The membership to FATF has also helped Indian financial
services industry to recognize those areas which need scrutiny and as a
result of this, financial institutions increasingly started evaluating
the inherent AML risks in their products and services and taking steps
to mitigate the same.
However, as a consequence of becoming a member
of FATF, India has had to commit itself to bring amendments to its
legislations and institutional framework to confirm to FATF standards in
order to better check money laundering. Also, as stated above, the
Basel AML Index also indicates that there is a need to amend the current
money laundering related legislation in India. For this reason, the
Prevention of Money Laundering (Amendment) Bill, 2011 had to be
introduced by the Minister of Finance, Mr. Pranab Mukherjee in the Lok
Sabha on December 27, 2011.
The New Law and the Proposed Changes
The bill seeks to amend the Principal Act to
update the provisions for combating money laundering and terror
financing. These amendments are in line with the standards set by
FATF. Before being passed by the Lok Sabha, the bill was scrutinized by
the Standing Committee on Finance (2011-12), headed by Shri Yashwant
Sinha, which prepared a report suggesting various changes for better
implementation of the new law. Most of the recommendations suggested by
them became part of the Prevention of Money-Laundering (Amendment) Bill,
2012 (“2012 Bill”). The 2012 Bill finally got passed by the Lok Sabha on November 29, 2012 and by the Rajya Sabha on December 17, 2012.
Also, vide Notification No. SO 343 (E) [F.NO.P.12011/3/2009-S.O.
(E.S. CELL)], dated February 8, 2013, the Central Government had
appointed February 15, 2013 as the date on which the provisions of the
2012 Bill shall come into force.[8]
With these amendments, it is believed that the
Principal Act would largely conform to the global standards. The
following are the key amendments to the Act:
· Expanded the definition of offence of money
laundering to include activities like concealment, acquisition,
possession and use of proceeds of crime.
· Removed the upper limit of fine of Rs. 5 Lakhs.
· Expanded the scope and duration of Attachment of property to 180 days
· Introduced the concept of Reporting Entity
· Increased the powers of the Director to call for records and conduct inquiries
· Provided that special courts can release property in case of decision by a foreign court
· Clarified that prosecution extends not only to individuals but to Companies as well
· Deleted the monetary threshold that applied to the offence of money-laundering
The Proposed Changes:
1. The definition of Offence of money-laundering has been expanded [Section 3]
The Principal Act stated that whoever indulges in any activity
connected with proceeds of crime and projects it as untainted property
shall be guilty.
Therefore, the Principal Act does not criminalize concealment,
possession, acquisition and use of the proceeds of crime, a fact which
was revealed by FATF during mutual evaluation of India. Also, Article 6
of Palermo Convention (United Nations Convention against Transnational
Organized Crime) requires that such activities should also be
criminalized in order to better control money laundering. Hence it has
been proposed by the 2012 Bill that the definition of the offence of
money laundering should be expanded to include the abovementioned
activities as well. By this amendment, the actions of placement,
layering and integration that are usually assumed to constitute money
laundering are included within the scope of the definition.
2. The upper limit for fine has been removed [Section 4]
The Principal Act provided for a penalty of fine which may extend to five lakh rupees as punishment for money-laundering. This amount appeared to be disproportionately low, given the gravity of the offence of money laundering and therefore, the 2012 bill has removed the upper limit of such fine.
After the amendment, the quantum of fine proportionate to the gravity
of the offence will be determined by the court on a case to case basis.
The limit of Rs.5 lakh is therefore proposed to be deleted altogether.
The Standing Committee has also suggested that the courts could
consider a percentage of the amount of money laundered as fine for the
offence. This would ensure that each offender has to pay a fine
according to the gravity of his offence.
3. Scope and duration of Attachment of property expanded [Section 5]
The Principal Act provided that the person from whom property is
attached must have been charged of having committed a scheduled offence.
It is proposed that this provision should be deleted as property may
come to rest with someone, who has nothing to do with the scheduled
offence or even the money-laundering offence. The 2012 Bill proposes to
expand the scope of attachment by stating that any proceeds of crime which are even likely to be concealed or transferred can
be attached. The 2012 bill further proposed that if any proceeds are to
be used for any purpose which will frustrate the confiscation of
proceeds of crime, then such property will also be attached.
Further, the Principal Act provided for attachment of property
for 150 days. The 2012 Bill has proposed to increase the same to 180
days.
4. The concept of Reporting Entity and Beneficial Owner introduced [Section 12]
The Principal Act provided for banking companies,
financial institutions and intermediaries to maintain records of the
transactions they sanction. The 2012 Bill proposes that a new concept of
“reporting entity” should be introduced which would maintain records of
various transactions sanctioned by banking companies and financial
institutions etc. It is also proposed that these entities would identify
their clients and the client’s beneficial owners [Clause 2 (1) (c) and
(d)]. For this purpose, reporting entity has been defined in 2012 bill
to include banking companies, financial institutions, intermediaries and
persons carrying on designated business or profession [Clause (wa) of
Section 2]. Further, persons carrying on designated business or
profession have also been defined to include persons carrying on
activities for playing games of chance, real estate agents and dealers
of precious metal and precious stones etc. [Clause (sa) of Section 2]
This clearly shows that the 2012 Bill mandates many
other categories of persons to maintain records, unlike the mandate in
the Principal Act. This expansion to other categories of persons would
ensure reporting of many such transactions which earlier would have gone
unnoticed.
Also, a very significant step taken towards
amending the Principal Act is not only expanding the categories of
persons required to maintain records but also the kind of records that
have to be maintained i.e. the maintenance of records of beneficial
owner. The FATF had released a Mutual Evaluation Report (“MER”)
in June 2010, on the basis of findings of which, India was admitted as a
member of FATF. One of the deficiencies highlighted by MER during
evaluation of India was the lack of identification and verification of
beneficial ownership of legal persons. Since the Principal Act did not have any provision, the Government of India had to prepare and submit an action plan to FATF stating
that it would take appropriate measures to bring the same within the
ambit of law. Post this, 2012 Bill proposed that a reporting entity
should identify and maintain records of the “beneficial owner” of their
clients. It can therefore be clearly noticed that if beneficial owners
are identified and their records are maintained, the chances of money
laundering would be strictly reduced.
On an analysis of the aforementioned sections, it can be noted
that the 2012 Bill in its present form does not impose any obligation on
clients, and it casts responsibility only on the reporting entities to
ascertain “beneficial ownership‟. The Standing Committee, however, was
of the opinion that clients as well should be required to declare
beneficial ownership while undertaking transaction with the bank as
considering the large volume of transactions, which banks are required
to deal with, it may not be practically possible for them to ascertain
“the beneficial owners”.
Also, the Standing Committee had recommended in their report that
if the reporting entities are not able to find the beneficial owner
then there should be an obligation upon the reporting entity to not to
open the relevant client’s account. It is worth noting that in spite of
the standing committee suggesting that, in those cases where beneficial
owner cannot be identified, an account should not be opened, the bill
does not have any provision with regard to the same. Therefore,
currently no action will be taken even if beneficial owner is not
identified in any case. This renders the new provision otiose.
Further, it is proposed in 2012 Bill that reporting entity has to
report even an attempted transaction. These provisions have been
proposed by 2012 Bill to cut down suspicious transactions from the very
beginning.
5. Director’s power to call for records and conduct inquiries [Section 12A]
In order to make sure that reporting entities comply
with Section 12 requirements, the 2012 Bill proposes that the director
will have the power to call for any records from reporting entities and
will also have the power to make inquiries for non-compliance of
reporting entities to the obligations cast upon them.
6. Penalty for non-compliance by reporting entity, its designated director or any of its employees (Section 13)
If a reporting entity or its designated director on
the Board or any of its employees does not comply with the obligations
under the 2012 Bill, a monetary penalty extending upto one lakh rupees
for each failure can be imposed upon them.
7. Freezing of property [Section 8 and Section 17A]
The Principal Act provided for attachment of property after the
charge sheet u/s 173 CrPC has been filed in scheduled offence case and
seizure of property after FIR u/s 157 CrPC has been filed in scheduled
offence case. However, in a number of situations it may not be
practicable to file charge sheet or FIR to attach or seize property as
this may happen after a prolonged gap and chances of disappearance of
proceeds of crime cannot be ruled out. To obviate this problem, the 2012
Bill provides for freezing such property, so that it can be seized or
attached and confiscated later.
8. Burden of Proof on accused [Section 24]
The 2012 Bill states that in the proceedings
relating to money laundering, the funds shall be presumed to be involved
in the offence, unless proven otherwise by the person charged with the
offence.
9. Release of the property by special court in case of decision by foreign court [Section 58A]
The Principal Act did not have any provision regarding release of
property by a special court. Thus, the 2012 Bill proposes to expand the
powers of special courts by suggesting that where on conclusion of
trial in a criminal court outside India under the corresponding law of
any other country, such court finds that the offence of money-laundering
has not taken place or the property in India is not involved in
money-laundering, the designated Special Court may on an application
moved by a concerned person order release of such property. This power
is purely discretionary due to the presence of the word “may” suggesting
that the local court in India will still have power to decide matters
on its merits, even when the person is acquitted by an overseas court.
For this purpose, the 2012 Bill proposes to introduce
the concept of ‘corresponding law’ to link the provisions of Indian law
with the laws of foreign countries [Clause (ia) of Section 2].
10. Clarification that prosecution extends to Companies as well [Section 70]
The Principal Act did not clearly provide for
the prosecution of companies and thus to remove doubts, the 2012 Bill
proposes to add an explanation to Section 70 to state that a company can
be prosecuted irrespective of whether an individual has been prosecuted
or not. Hence, prosecution or conviction of legal juridical person is not contingent on prosecution of any individual.
11. Monetary threshold does not apply to the offence of money-laundering [Schedule I]
Part B of the Schedule in the Principal Act included
only those crimes that are above Rs. 30 lakh or more whereas Part A did
not specify any monetary limit of the offence. The 2012 Bill proposes
to bring all the offences under Part A of the Schedule to ensure that
the monetary thresholds do not apply to the offence of money
laundering.
CONCLUSION:
As the 2012 Bill becomes effective from February 15, 2013, what
remains to be seen now is the effective implementation of the same. In
India it is not very uncommon to see amendments being made to
legislations to make them fall in line with global standards, but in
practicality we never see these laws being effectively implemented. The
need of the hour in India is not just to have stringent laws against
money laundering but also to ensure that the law is being properly
followed by one and all. Therefore, as stated above, where on the one
hand we see the US Government levying penalty on HSBC to pay USD 1.92
billion, on the other hand we see the Government of India taking no
action at all against HSBC, despite it being a clear case of money
laundering. Further, besides HSBC, the US has imposed a fine of USD 667
million on Standard Chartered, ING Bank (USD 619 million), Credit
Suisse (USD 536 million), Royal Bank of Scotland (USD 500 million) and
Barclays as well. Hence, very clearly, it is time for the Indian
Government to wake up from their deep slumber and start scrutinizing the
miscreants more pertinently.
On the part of financial institutions, it is imperative that they
regularly assess money laundering risks in their
products/services/transactions/delivery channels as well as evaluate if
their current policies and procedures mitigate those risks. It is
further of utmost importance that under the new law, the financial
institutions ensure proper customer identification procedures including
identification of beneficial ownership and politically exposed persons.
However, while monitoring and identifying of these procedures is
important, establishing an efficient client data updation process is
also equally vital.
[1]http://conventions.coe.int/treaty/en/Treaties/Html/141.htm
[2]http://en.wikipedia.org/wiki/Jeffrey_Robinson
[3]United Nations Office on Drugs and Crime (http://www.unodc.org/unodc/en/money-laundering/globalization.html
[4]http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211
[5]http://timesofindia.indiatimes.com/business/india-business/Sebi-probes-35-brokers-for-money-laundering/articleshow/16330146.cms
[6]http://www.indianexpress.com/news/briefly-business-reebok-case-ed-begins-money-laundering-probe/1026781
[7]http://index.baselgovernance.org/Index.html#ranking
[8]http://casansaar.com/notification-detail/Prevention-of-Money-Laundering-Amendment-Act-2012-effective-from-15-2-2013/989.html.
No comments:
Post a Comment