Context
The Supreme Court upheld the constitutionality of the Money Laundering Prevention Act of 2002, as amended from time to time.
Relevance
GS Paper 3: Money-laundering and its prevention.
Mains Question
Discuss the role of emerging technologies and globalisation in money laundering. Develop national and international strategies to combat the problem of money laundering. (250 Words)
Background
- The amendments were made to the 2002 Act through Finance Acts. 240 petitions were filed in opposition to the amendments.
- The petitioners contended that the proposed amendments would violate personal liberty, legal procedures, and the constitutional mandate.
- They claimed that the process itself was punishment.
- The current Supreme Court decision was issued in response to these petitions challenging the constitutional validity of the PMLA.
What exactly is money laundering?
- Money laundering is the concealment or disguise of the identity of illegally obtained proceeds in order for them to appear to have come from legitimate sources. It is frequently involved in other, far more serious crimes such as drug trafficking, robbery, or extortion.
- According to the IMF, global money laundering accounts for 2 to 5% of global GDP.
How does money laundering work?
- It consists of three steps: placement, layering, and integration.
- Placement introduces “dirty money” into the legal financial system.
- Through a series of transactions and bookkeeping tricks, layering conceals the source of the money.
- During integration, the now-laundered money is withdrawn from the legitimate account and used for criminal purposes.
Types of Money Laundering
o Smurfing
o Bulk Cash Smuggling
o Cash-Intensive Businesses
o Trade-based Laundering
o Shell companies
o Round-tripping
o Gambling
o Black salaries
o Tax amnesties
o Transaction laundering
Impacts of Money Laundering
- Economic Impacts:
- Undermines the legitimacy of the private sector
- Undermines the integrity of financial markets o Loss of control over economic policy
- Economic distortion and instability
- Revenue loss
- Security threats to privatisation efforts
- Volatility in exchange rates and interest rates due to unexpected transfers of funds
- Economic price rise
- Affects trade and international capital flows
- Social Impacts:
- Increased criminal activity
- Reduces human development
- Misallocation of resources
- Affects local citizens’ trust in domestic financial institutions
- Degrades society’s moral and social standing by exposing it to activities such as drug trafficking, smuggling, corruption, and other criminal activities
- Political Impacts:
- Causes political distrust and insecurity
- Political criminalization
Money Laundering Prevention Act of 2002
- The PMLA was enacted to combat money laundering and to provide for the seizure of property obtained through money laundering.
- The act has undergone numerous critical changes over time in order to gain strength and meaning. The most recent amendment was made in 2019.
- For example, the definition of money laundering under the act was expanded through amendments made in 2012 and again in 2019.
Enforcement Directorate
- The Enforcement Directorate (ED) was established in 1956 as a ‘Enforcement Unit’ within the Department of Economic Affairs.
- This Unit was later renamed the ‘Enforcement Directorate’ in 1957.
- For operational purposes, it is currently under the administrative control of the Department of Revenue (Ministry of Finance).
- The ED is responsible for enforcing the Foreign Exchange Management Act, 1999 (FEMA) and certain provisions of the PMLA.
- The ED has the authority to seize the assets of those found guilty of violating FEMA.
- It has also been given the authority to conduct searches, seizures, arrests, prosecutions, and surveys in relation to PMLA offences.
- The Supreme Court upheld the key amendments to the Prevention of Money Laundering Act.
- These amendments gave the government and the ED virtually unlimited powers, including summons, arrest, and raids.
- It also made bail nearly impossible while shifting the burden of proof of innocence from the prosecution to the accused.
The main points of the decision
- Money laundering is a heinous crime that violates the country’s sovereignty and integrity. It is no less heinous than the crime of terrorism.
- As a result, the court upheld the quantum of punishment specified in the act.
- The court also held that the length of the sentence is a matter of legislative policy.
- The PMLA is a law that combats the scourge of money laundering.
- The Supreme Court ruled that the PMLA was not enacted to be used against rival politicians and dissenters.
- It is a law that was enacted in response to an international commitment.
- Concerning the introduction of amendments via Money Bills
- The Supreme Court ruled that this issue would be heard separately by a larger Bench of the Supreme Court.
- The Supreme Court upheld the ED’s power to seize and attach property under Section 5 of the Act.
- The ED had attached assets worth more than Rs 1 lakh crore until March 31, 2022.
- If the verdict had been unfavourable, the assets in question would have been released.
- Additionally, the ED would have lost the authority to carry out similar seizures as proceeds of crime.
- On not providing an ECIR to the accused, the Supreme Court ruled that it was not mandatory for the ED to provide an ECIR to the accused.
- The ECIR is an ED document that is commonly compared to the police first information report (FIR).
- The Supreme Court also held that it is sufficient if the agency discloses the reason for the arrest at the time of arrest.
- The Supreme Court upholds the PMLA’s stringent bail conditions.
- The judgement upheld the dual bail conditions in Section 45 of the Act.
- Section 45 of the PMLA made offences cognizable and non-bailable, and no person accused of an offence shall be released on bail or on his own bond unless: the prosecutor is given an opportunity to oppose the bail application; and the accused is given an opportunity to defend himself.
- There are reasonable grounds to believe that he is not guilty of such an offence and is unlikely to commit another while on bail.
- The Supreme Court overturned these two conditions in 2017, but Parliament reinstated them with an amendment in 2018.
- Statements recorded during an investigation are valid evidence, according to ED, Serious Fraud Investigation Office (SFIO), and Directorate of Revenue Intelligence (DRI) officials, not police.
- On the PMLA’s reversal of the usual burden of proof in criminal law o Section 24 of the PMLA reverses the usual burden of proof in criminal law.
- In a PMLA case, the judge must presume that the accused is guilty until he proves otherwise. This provision was upheld by the court.
