Money Laundering Final

MONEY LAUNDERING: INDIA AND THE WORLD

Subject: Banking and Finance

Submitted to: Dr. Vidyullatha Reddy

Submitted by:

Arushi Garg (2008 – 15)

Aishwarya Nagpal (2008 – 06)

Ipshita Ahuja (2008 – 26)

Malavika Prasad (2008 – 35)

Shuchita Thapar (2008 – 64)

National Academy for Legal Studies and Research University of Law

TABLE OF CONTENTS

Chapter I: Introduction...............................................................................................................1

Chapter II: Action at the International level to combat Money Laundering..............................3

Financial Task Force..............................................................................................................3

Basel Principles......................................................................................................................4

United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic

Substances..............................................................................................................................6

United Nations Convention against Corruption.....................................................................6

Chapter III: Anti-Money Laundering Legislations in India.......................................................8

Prevention of Money Laundering Act, 2002..........................................................................8

The PMLA Amendment Bill, 2011......................................................................................10

Chapter IV: Other Legislations Dealing with Money-Laundering..........................................12

The Foreign Exchange Management Act, 1999...................................................................12

The Benami Transactions (Prohibition) Act........................................................................13

The Narcotic Drugs and Psychotropic Substances Act, 1985..............................................14

Chapter V: The Indian Supreme Court’s Decisions on Anti-Money Laundering Measures in

India..........................................................................................................................................16

(a) Centre for PIL v. Union of India....................................................................................16

(b) Binod Kumar v. State of Jharkhand...............................................................................18

(c) Pareena Swarup v. Union of India.................................................................................19

Chapter VI: Analyis of the Ram Jethmalani PIL.....................................................................21

Chapter VII: The Reserve Bank of India and Anti-Money Laundering Measures..................30

Chapter VIII: Conclusion.........................................................................................................33

Bibliography..............................................................................................................................ii

CHAPTER I: INTRODUCTION

Money laundering refers to the conversion of money that is illegally obtained, so as to make

it appear to originate from a legitimate source.1 Article 1 of the EC Directive defines the term

money laundering as “the conversion of property, knowing that such property is derived from

serious crime, for the purpose of concealing or disguising the illicit origin of the property or

of assisting any person who is involved in the committing such an offence or offences to

evade the legal consequences of his action, and the concealment or disguise of the true

nature, source, location, disposition, movement, rights with respect to, or ownership of

property, knowing that such property is derived from serious crime”.2

Money laundering is not a single act but is in fact a process that is accomplished in three

basis steps: placing, layering and integrating of illegal proceeds.3 The first stage involves the

removal of cash from the location of acquisition and introducing it into the financial system.

The second stage is the conversion of money in as many banks as possible, especially abroad.

The third stage is the reinvesting or integrating of this money into the economy, taking the

shape of legitimate businesses.4

In countries like India, money laundering takes place through over invoicing of exports,

under invoicing of imports, investment through shell companies and extensive use of hawala

channels in the transmission of money.5 However, hawala transactions usually referred to as

‘alternative remittance system’ is the most common form of money laundering. It is the

transfer or remittance from one party to another, without the use of a formal financial

institution such as bank or money exchange and thus is an informal way of moving money

1 http://web.worldbank.org/ (last accessed on Apr. 2, 2012).2 EC Directive on Prevention of the use of the Financial System for the Purpose of Money Laundering, 1991, available at http://eur-lex.europa.eu/ (last accessed on Feb. 16, 2012).3 PETER REUTER AND EDWIN M. TRUMAN, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY LAUNDERING, 3 (Institute of Macro-Economics) available at http://books.google.co.in/books?hl=en&lr=&id=0AVwjC9TDSMC&oi=fnd&pg=PR11&dq=prevention+of+money+laundering&ots=v2Kra2y6Tb&sig=jxW29RD0WSuABBa9pOk9y5zd_EQ#v=onepage&q=prevention%20of%20money%20laundering&f=false (last accessed Apr. 9, 2012).

4 Group 2, The Economic Crime including Money Laundering: Its Legal and Financial Implications, available at http://www.unafei.or.jp/english/pdf/RS_No67/No67_26RC_Group2.pdf (last accessed on Apr.8 , 2012).5 Ibid.

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without leaving traces of records.6 Hawala transactions are popular because they are often

faster, more reliable, sometimes offer a better exchange rate, and can be much cheaper than

transfers through licensed financial institutions.7

Money Laundering is a menace because it threatens national governments and international

relations between them through corruption of officials and legal systems. It undermines free

enterprise and threatens financial stability by crowding out the private sector, because

legitimate businesses cannot compete with the lower prices for goods and services that

businesses using laundered funds can offer. Money Laundering serves as an important mode

of terrorism financing.8 Because of its devastating effects, fighting money laundering should

be a priority for all countries. At the international level to combat efforts to combat money

laundering began in 1988 with two important initiatives: The Basel Committee on Banking

Regulations and Supervisory Practices and the United Nations Convention against Illicit

Traffic in Narcotic Drugs and Psychotropic Substances. In India, the Prevention of Money

Laundering Act was enacted in 2002 in addition to the other legislations that were already in

place like the Foreign Exchange Management Act, The Benami Transactions (Prohibition)

Act. Other key players in the effort to combat money laundering are the Reserve Bank of

India, the Securities and Exchange Board of India and the Financial Intelligence Unit- India.

6 John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic Perspective, available at http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf (last accessed on Feb. 17, 2012).7https://www.interpol.int/Public/FinancialCrime/MoneyLaundering/hawala/default.asp (Last accessed Feb. 17, 2012).8 Peter J. Quirk, Money Laundering: Muddying the Macro-economy, available at http://www.imf.org/external/pubs/ft/fandd/1997/03/pdf/quirk.pdf (Last accessed Feb. 17, 2012).

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CHAPTER II: ACTION AT THE INTERNATIONAL LEVEL TO COMBAT MONEY LAUNDERING

FINANCIAL TASK FORCE

The Financial Action Task Force9 is an inter-governmental body which sets standards, and

develops and promotes policies to combat money laundering and terrorist financing.10 The

main emphasis of anti-money laundering measures remains on securing documentation of

financial flows, and critical analysis of this financial flow.11 The Force has provided forty

Recommendations and Nine Special Recommendations that provide a complete set of counter

measures against money laundering. They set out the principles for action and allow countries

a measure of flexibility in implementing these principles according particular circumstances

and constitutional frameworks.12 These Recommendations have been recognized, endorsed

and adopted by many international bodies as the international standards for combating Money

Laundering.13 FATF regularly reviews its members for compliance through annual self-

assessment exercises and periodic mutual evaluations of its members. Especially after the

attacks on the Twin Towers on September 11, 2011, the FATF has been adopting the ‘carrot-

and-stick’ approach – on one hand, the FATF has increased its interaction with critics, and on

the others, have increased the threat of punitive measures against problematic jurisdictions.14

India became the 34th member of the FATF in June 2010 after five years of being an

‘observer’.15India has amended the PMLA, 2002 and the Unlawful Activities (Prevention)

9 Hereinafter, “the FATF”.10 http://www.fatf-gafi.org/pages/0,3417,en_32250379_32236836_1_1_1_1_1,00.html, (last accessed Feb. 17, 2012).11 Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J. Crime Crim. L. & Crim. Just. 159 (1998).

12 Vijay Kumar Singh, Controlling Money Laundering in India-Problems and Perspectives, available at http://www.igidr.ac.in/money/mfc-11/Singh_Vijay.pdf (last accessed Feb. 17, 2012). 13 Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis, available at http://www.legalserviceindia.com/article/l110-Prevention-Of-Money-Laundering-Act.html, (last accessed Feb. 19, 2012).14 George Peter Gilligan, Overview: Markets, Offshore Sovereignty and Onshore Legitimacy, 36, GLOBAL FINANCIAL CRIME: TERRORISM , MONEY LAUNDERING AND OFFSHORE CENTRES, (Donato Masciandaro ed. 2004), available at http://books.google.co.in/books?hl=en&lr=&id=iXuCXUpn974C&oi=fnd&pg=PR7&dq=prevention+of+money+laundering&ots=GYZHSRcK_1&sig=rmDqoLu0D46fIcX0DWsQGDdvHJo#v=onepage&q&f=false (last accessed Apr. 9, 2012).15 India joins select club to counter financial frauds, THE HINDU, June 30, 2010, available at http://www.thehindu.com/news/article492411.ece, (last accessed Feb. 19, 2012).

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Act, 1967 to bring them in line with the main recommendations of the FATF. FATF is

important to India because India needs the comprehensive toolkit for law enforcement

agencies to be able to track the money behind terrorist attacks and to enable India to emerge

as an exporter of financial services.16

As a member of the FATF, India also accepted an enhanced responsibility as the Asia Pacific

Regional Review Group Co-chair. India underwent its first Asia Pacific Group17 mutual

evaluation in 2005 and a joint APG and FATF mutual evaluation in 2008.18 The FATF report

suggests that while measures have been taken to curb the menace of money laundering in

India, a few key recommendations need to be included for a more effective response to this

problem like address the technical shortcomings in the criminalisation of both money

laundering and terrorist financing and in the domestic framework of confiscation and

provisional measures; a stricter sanctioning regime that allows for effective, proportionate

and dissuasive sanctions for failures to comply with Anti Money Laundering requirements19

BASEL PRINCIPLES

In recognition of the vulnerability of the financial sector to misuse by criminals, the Basel

Committee on Banking and Supervisory Practices issued a Statement of Principles (the ‘Basel

Principles’) in December 1988.20 This was a significant step towards preventing the use of the

banking sector for money laundering purposes, as it set out a number of principles that

banking institutions should comply with like: customer identification, compliance with

legislation, conformity with high ethical standards and local laws and regulations, full co-

operation with national law enforcement authorities to the extent permitted without breaching

customer confidentiality, etc.21 Therefore, the Basel Principles stress on co-operation within

16 K.P.Krishnan, India on the FATF high table, THE ECONOMIC TIMES, August 10, 2010, available at http://articles.economictimes.indiatimes.com/2010-08-10/news/27602192_1_fatf-money-laundering-financial-action-task-force, (last accessed on Feb. 20, 2012).17 Hereinafter, “the APG”.18 Prevention of Money Laundering Act being amended, THE HINDU, July 19, 2011, available at http://www.thehindu.com/news/national/article2255685.ece, (last accessed Feb. 20, 2012).19 Mutual Evalutaion of India, available at http://www.fatf-gafi.org/document/17/0,3746,en_32250379_32236963_45582417_1_1_1_1,00.html, (last accessed Feb. 20, 2012)20Money Laundering Prevention, available at http://www.fincen.gov/financial_institutions/msb/materials/en/prevention_guide.html#International Money Laundering Efforts, (last accessed Feb. 20, 2012).21DOUG HOPTON, MONEY LAUNDERING: A CONCISE GUIDE FOR ALL BUSINESSES, available at http://books.google.co.in/books?id=Iat3nhnv_PAC&pg=PA10&lpg=PA10&dq=basel+convention+and+money+laundering&source=bl&ots=Wy

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the confines of the duties of client confidentiality. The compliance with these Principles

represented a major self regulatory initiative within the financial sector.

In 1997, in consultation with the supervisory authorities of a few non G-10 countries

including India, it drew up the 25 “Core Principles for Effective Banking Supervision” which

were in the nature of minimum requirements intended to guide supervisory authorities which

were seeking to strengthen their current supervisory regime.22 The Principles deal with

aspects like permissible activities of institutions that are licensed and subject to supervision

as banks must be clearly defined23; the licensing authority must have the right to set criteria

and reject applications of establishments that do not meet the standards set24; banking

supervisors must have the authority to review and reject any proposals to transfer significant

ownership or control in existing banks to other parties25; evaluation of a bank’s policies and

procedures related to granting of loans and making of investments26 among other things. The

Reserve bank of India had assessed its own position with respect to the Principles in 1998.

The assessment had shown that most of the Core Principles were already enshrined in our

existing legislation with some gaps identified mainly in the areas of risk management in

banks, inter-agency co-operation with other domestic/international regulators and

consolidated supervision. 27 Internal working groups were set up to suggest measures to

bridge these gaps. 28

YGmxaeqx&sig=wJKEq0MDNaeWunGAgbC9oSbK1Ys&hl=en&sa=X&ei=-KFAT7LuEsTMrQf9m-zXBw&ved=0CCoQ6AEwAA#v=onepage&q=basel%20convention%20and%20money%20laundering&f=false, (last accessed Feb. 20, 2012).22 Kishori J Udeshi, Implementation of Basel II- an Indian Perspective, available at http://www.bis.org/review/r040611g.pdf, (last accessed March 15, 2012).23 Principle-II of “Core Principles for Effective Banking Supervision”; The permissible activities of a banking company are listed in Section 6(1) of the Banking Regulation Act, 1949. Section 6(2) specifically prohibits a banking companyfrom carrying on any form of business other than those referred to in Section 6(1). 24 Principle-III of “Core Principles for Effective Banking Supervision”; Section 22 of the Banking Regulation Act provides that a company intending to carry on banking business must obtain a licence from RBI except such of the banks (public sector banks and RRBs), which are established under specific enactments. The RBI issues licence only after “tests of entry” are fulfilled. These tests include minimum capital, ownership structure, bank’s operating plans and controls, ability of the bank to pay its present and future depositors in full, quality of management and whether the licensing of the bank would be in the public interest. 25 Principle-IV of “Core Principles for Effective Banking Supervision”; Section 12(2) of the Banking Regulation Act restricts shareholders in a banking company from exercising voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the banking company.26 Principle-VII of “Core Principles for Effective Banking Supervision”; Under Section 21 of the Banking Regulation Act, the RBI is charged with the responsibility of determining the policy relating to advances by banks and of giving directions to them in this regard.27 Core Principles of Effective Banking Supervision, October 1999, available at http://www.rbi.org.in/upload/publications/pdfs/10115.pdf, (last accessed Mar. 15, 2012).28Ibid.

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A further paper was issued by the Committee in October 2001 covering customer due

diligence for banks. It addressed verification and Know Your Customer (KYC) standards

with a cross-border aspect. This mandates the bank to take reasonable efforts to determine

their customer’s true identity, and have effective procedures for verifying the bonafides of a

new customer.29

UNITED NATIONS CONVENTION AGAINST ILLICIT TRAFFIC IN NARCOTIC DRUGS AND

PSYCHOTROPIC SUBSTANCES

This UN Convention was one of the historic conventions inasmuch as the parties to the

Convention recognized the links between illicit drug traffic and other related organised

criminal activities which undermine the legitimate economies and threaten the stability,

security and sovereignty of States and that illicit drug trafficking is an international criminal

activity that generates large profits and wealth, enabling transnational, criminal organizations

to penetrate, contaminate and corrupt the structures of government, legitimate commercial

and financial businesses and society at all levels.30 The broad objective of the Programme was

to strengthen the ability of Member States to implement measures against money-laundering

and the financing of terrorism and to assist them in detecting, seizing and confiscating illicit

proceeds, as required pursuant to United Nations instruments and other globally accepted

standards, by providing relevant and appropriate technical assistance upon request.31

UNITED NATIONS CONVENTION AGAINST CORRUPTION

The UNCAC is one of the most comprehensive anti-corruption instruments. It criminalizes

money laundering32 thus making it one of the unique instruments that addresses both

corruption and money laundering simultaneously. The scheme of the convention is premised

on the fact that an effective anti-money laundering regime can make a significant

contribution to the fight against corruption in at least two ways: it could help uncover

evidence of criminal activity through identification of suspicious movements of financial

assets, thus increasing the chances of a successful prosecution of the perpetrator of the crime;

it also enables the tracing of criminal proceeds to facilitate their preservation, recovery and

29 Vijay Kumar Singh, supra note 12.30DOUG HOPTON, supra note 21.31 UNODC on money-laundering and countering the financing of terrorism, available at http://www.unodc.org/unodc/en/money-laundering/index.html, (last accessed Mar. 15, 2012).32 Article 23 of the UNCAC.

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ultimate return to their rightful owner. 33 The scope of Article 23 is not limited to laundering

of money and instead its focus is the conversion or transfer of property thus affecting all

manner of benefits from cash, company shares etc. 34

The link between corruption and money laundering was also brought out in the recent

movement for the formation of Lokpal led by Anna Hazare where initiating measures to bring

back black money was seen as an integral part of the fight against corruption.

33 Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money Laundering, available at http://idec.gr/iier/new/CORRUPTION%20CONFERENCE/The%20UN%20Anti-corruption%20convention%20and%20money%20laundering-INDIRA%20CARR.pdf, (last accessed Apr. 8 2012).34 Ibid.

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CHAPTER III: ANTI-MONEY LAUNDERING LEGISLATIONS IN INDIA

PREVENTION OF MONEY LAUNDERING ACT, 2002

The Prevention of Money Laundering Act, 200235 was enacted on the 17th of June, 2003 and

came into effect from the 1sts of July, 2005 with the aim of preventing money laundering and

providing for the confiscation of property which had been derived from money laundering.36

The Act provides for the prosecution of individuals and legal entities indulging in money

laundering, and for the confiscation and attachment of property obtained through money

laundering.

The PMLA contains 75 sections divided into ten chapters, and also contains a Schedule

divided into Part A and Part B.

Chapter I of the Act deals with the preliminary provisions, such as the extent of the Act and

the interpretational clause. Chapter II lays down the offence of money-laundering. Section 2

is the definitional clause, however, it is Section 3 of the PMLA that defines the offense of

money laundering, and makes the direct or indirect attempt to indulge or knowingly assist, or

be knowingly involved in any process or activity connected with the proceeds of crime37 an

offence. The offences are divided into Parts A and B of the Schedule to the PMLA.

Section 4 of the Act lays down the punishment for money-laundering as rigorous

imprisonment for a period between three to seven years, and a fine of five lakh rupees.

However, if a person is convicted under Paragraph 2 of the Schedule38, the term of

incarceration can be extended to 10 years.35 Hereinafter, “the PMLA”.

36 K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in India, available at http://www.icrier.org/pdf/pptinpdf/aml_ppt_for_icrier.pdf (last visited Feb. 17, 2012).

37 Proceeds of Crime is defined in Section 2 (u) of the PMLA as:(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity related to a scheduled offence or the value of such property.38 Paragraph 2 of the Schedule lists out offences under the Narcotic Drugs and Psychotropic Substances Act, 1985.

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Chapter III of the PMLA deals with the attachment, adjudication and confiscation of

property. The adjudicating authority appointed by the Central Government under section 48

of the PMLA is empowered under section 5 to attach or seize property. However, the

Authority is allowed to attach property for 90 days only if the person involved has committed

a crime falling under the Schedule of the , and if a report has been forwarded to a Magistrate

under section 173 of the Criminal Procedure Code, or if a Special Court has taken cognizance

of the matter.

Chapter IV of the PMLA prescribes the obligations of banking companies, financial

institutions and intermediaries. “Banking Company” under PMLA includes all nationalized

banks, private Indian banks and private foreign banks, all co-operative banks, the State Bank

of India and Regional Rural Banks.39 “Intermediary” under PMLA includes persons

registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992.

Section 12 (1) mandates these institutions to (a) to maintain records detailing the nature and

value of transactions which may be prescribed, whether it be in a single transaction or a series

of transactions integrally connected to each other taking place under a month; (b) to furnish

information of these transactions to the Director within a prescribed time period and to

records of the identity of all its clients. Section 12 (2) mandates that these records be

maintained for a period of 10 years. Under the provisions of Section 13, a fine may be levied

by the authority prescribed by the Central Government upon such banks and financial

institutions which do not comply with the provisions of Section 12.

Chapter V of the PMLA deals with provisions relating to search, summons and seizure.

Section 16 lays out the power to enter any place to investigate given to Authority, while

Section 17 gives the power to the Authority under the PMLA to seize any property. Under

ssection 24 of the Act also puts the burden of proof on the accused to prove that the proceeds

of crime are untainted property.

Chapter VI of the Act contemplates the setting up of an Appellate Tribunal to hear appeals on

matters adjudicated upon by the authority appointed under the Act, whereas Chapter VII lays

down that special courts can be designated for trying offences under the PMLA. Chapter VIII

39 Section 2(e) of the PMLA.9

contains the provisions relating to the appointment of authorities under the Act, and certain

provisions relating to jurisdiction and other appointment of special officers.

Chapter IX of the PMLA deals with reciprocal arrangements for assistance in matters and

also lays down the procedure for attachment and confiscation of property, whereas Chapter X

contains miscellaneous provisions.

THE PMLA AMENDMENT BILL, 2011

The PMLA Amendment Bill 2011 was introduced by Pranab Mukherjee in the Lok Sabha on

December 27, 2011. The Bill toughens the stance on money laundering, and introduces 10

key amendments to the Act.

The Statement of Objects and Reasons states that the introduction of such an amendment was

necessary since problem of money-laundering is no longer restricted to the geo political

boundaries of any country, it is necessary to have a stricter enactment in place. Another

reasons given for the amendment is that India has become a member of the Financial Action

Task Force and Asia Pacific Group on money-laundering, and the Bill is the effort of the

Indian government to bring anti-money laundering legislations at par with international

standards.

There are several changes to the definitional clause under the Bill. Section 2(ia) introduced

the concept of ‘corresponding law’, linking the provisions of Indian law to the law of foreign

countries. Section 2(wa) also introduced the concept of ‘reporting entity’, which includes a a

banking company, financial institution, intermediary or a person carrying on a designated

business or profession. The definition of offence under section 3 of the PMLA will be

expanded to include activities like concealment, acquisition, possession and use of proceeds

of crime, and would also do away with the existing cap of five lakh rupees on penalties for

violations under Section 4.40 Section 5 of the PMLA, dealing with provisional attachment,

also stands amended, with the days of provisional attachment extended to 180 days, instead

of 90 as it stands today. A new section 12 also has been inserted in the Bill, for it seeks to

make all the reporting entities to keep a record of all transactions, and to verify the identities

40 A copy of the PMLA Amendment Bill can be accessed at http://www.prsindia.org/billtrack/the-prevention-of-money-laundering-bill-2011-2143/, (last accessed Mar. 20, 2012).

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of their customers. The time period, however, remains 10 years, however, the reporting

entities can be made responsible if they do not keep or furnish the information to the

Authority as and when required.41 The Bill provides for an amendment in Section 24 as well,

as a presumption that the money involved in proceedings for money laundering shall be

raised42, and also provides for summary attachment and confiscation of property even if there

is no conviction. The Bill also contemplating merging Schedule A and B so as to erase the

monetary threshold between the different kinds of offences under the PMLA.

41 Ibid.42 Id.

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CHAPTER IV: OTHER LEGISLATIONS DEALING WITH MONEY-LAUNDERING

THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999

It prescribes checks and limitations on certain foreign exchange remittances. Offences under

the Foreign Exchange Management Act, 199943 are not scheduled offences under the PMLA.

The rationale behind this is that only the most violent and important crimes have been

mentioned under the PMLA since the PMLA gives massive powers of arrest to law

enforcement agencies. An example of the offenders targeted under the PMLA would be the

mafia dealing in murder, extortion, terrorism and prostitution who have immense liquid

wealth that they want to launder. Since the powers under the PMLA are so over-reaching, the

list of scheduled offences thereunder has deliberately been kept short, and FEMA offences

have been excluded from their ambit.44 Even so, money-laundering is regarded as an

egregious crime under the FEMA as well, a consideration that is especially important in the

assessment of whether or not an offence can be compounded. 45

Interestingly, the enactment of the FEMA is owed in large part to the passing of the PMLA

since it sought to relax the regulatory structure for foreign exchange, a step that was only

allowed when there was assurance that despite this relaxation, illegal transactions of drug

peddlers, terrorists, arm smugglers and other perpetrators of heinous economic crimes would

not go unpunished. 46

Among the most famous controversies involving money laundering under the FEMA is the

case filed in August, 2011, by the Enforcement Directorate against YS Jaganmohan Reddy,

son of former Andhra Pradesh Chief Minister, YS Rajasekhar Reddy. 47

43 Hereinafter “FEMA.”44

FEMA and Money Laundering, available at http://www.rashminsanghvi.com/femabook6.htm (last accessed April 07, 2012)45

RBI Circular & the compounding of contravention under FEMA , available at http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=3036 (last accessed April 06, 2012)46

Money Laundering under the FEMA regime, available at http://www.ieo.org/budget98/sp012.htm (last accessed April 07, 2012)47

ED files FIR in Hyd on Money laundering and FEMA violations against YS Jagan, available at http://telugudesam.org/tdpcms/index.php?option=com_content&view=article&id=17742 (last accessed April 07, 2012)

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THE BENAMI TRANSACTIONS (PROHIBITION) ACT

The word ‘benami’ is Persian for ‘property without a name’.48 A benami transaction is one

where property is transferred or purchased in the name of one person but another person is

paid consideration for the transfer. It thus becomes a safe way of parking ill-gotten wealth. In

fact, the role played by benami transactions is more versatile than just that, and extends to tax

evasion, defrauding creditors and sometimes serving as a means for mafia dons to operate

through aliases.49

The Benami Transactions (Prohibition) Act, 1988,50 prohibits the purchase of property in the

name of another person who does not pay for the property, and prescribes a punishment of

upto three years for a person who commits this offence. However, the BTPA has been

considered largely ineffective and is sought to be replaced by the Benami Transactions

(Prohibition) Bill, 2011, which was introduced in the Lok Sabha last year. One of the major

reasons cited for its inefficiency was that the manner in which it had been drafted made the

formulation of rules thereunder impossible.51

However, the Bill has been subject to substantial criticism on many counts. For example, it

still allows benami transactions in the name of spouse, brother, sister or any lineal ascendant

or descendant.52 It has reduced the maximum term of imprisonment for entering into a benami

transaction from three years to two years.53 Recognising the nexus between money laundering

and benami transactions, the Bill seeks to make the Adjudicating Authority and the Appellate

Tribunal established under the PMLA responsible for examining disputes around benami

48

Meghna Bhaskar, Benami Transactions (Prohibition ) Bill, 2011 , available at http://jurisonline.in/2011/09/benami-transactions-prohibition-bill-2011/ (last accessed April 08, 2012)49

V. Kumaraswamy, But That’s Not Mine!, available at http://www.telegraphindia.com/1110928/jsp/opinion/story_14562807.jsp (last accessed April 07, 2012)50

Hereinafter “BTPA”51

Introducing the BTPA Bill, available at http://www.caclubindia.com/news/introduction-of-the-benami-transactions-prohibition-bill-2011-9878.asp (last accessed April 07, 2012)52

Bill for stricter control of benami transactions introduced, available at http://www.thehindu.com/news/national/article2369780.ece (last accessed April 07, 2012)53

Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 – A Critical Analysis, available at http://goindocal.com/benami-transactions-prohibition-bill-2011-%2596-a-critical-analysisgo-3052.htm (last accessed April 07, 2012)

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transactions as well.54 This will give a chance to the accused to present his case before it goes

to the court.

THE NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985 

The Act provides for confiscating sale proceeds from selling any narcotic drug or

psychotropic substance, and for the seizure of any goods used to conceal such drugs, and also

provides for the forfeiture of any illegally acquired property. Offences under the Narcotic

Drugs and Psychotropic Substances Act, 1985 find a place in Paragraph 2 of Part I of the

Schedule to the PMLA.55 It is feared that the conferral of extensive powers by the Supreme

Court in August, 2011 on the Special Investigation Team set up to unearth black money will

destabilise the whole structure that has been set up by money laundering laws such as the

NDPS Act.56

THE UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967

Amended in 2008, the Act empowers the Central Government to seize and attach funds and

other financial assets or economic resources held by engaged in or suspected to be engaged in

terrorism and prohibit any individual or entity from making any funds, financial assets or

economic resources or related services available for the benefit of these individuals under

Section 51 A. As on March, 2011, 11 out of the 1269 cases being investigated by the

Enforcement Directorate in connection with money laundering fell under the Unlawful

Activities (Prevention) Act, 196757.58 More amendments were announced last year to bring

54

Bill for Stricter Control Over Benami Deals Introduced, available at http://www.business-standard.com/india/news/bill-for-stricter-control-over-benami-deals-introduced/446310/ (last accessed April 08, 2012)55

Synopsis: PMLA 2002, available at http://www.caclubindia.com/articles/prevention-of-money-laundry-act-2002-a-synopsis-10646.asp (last accessed April 07, 2012)56

Hasan Ali and Money Laundering, available at http://articles.timesofindia.indiatimes.com/2011-08-25/india/29926312_1_black-money-money-laundering-act-hasan-ali-khan (last accessed April 08, 2012)57

Hereinafter “UAPA.”58

Anti Money-Laundering Framework, India, available at http://socialissuesindia.wordpress.com/2011/09/08/anti-money-laundering-framework-in-india/ (last accessed April 08, 2012)

14

the UAPA in line with FATF standards59 as well as India’s other international obligations.60

While this commitment has been reaffirmed ever since the announcement was first made, 61

no concrete action seems to have been taken on this front.

59

Vikash Yadav, PMLA 2002: Re-engineered, available at http://www.rediff.com/business/report/india-tweaking-laws-to-check-money-laundering/20110719.htm (last accessed April 07, 2012)60

Money laundering law to be modified: Mukherjee news, available at http://www.domain-b.com/economy/general/20110719_mukherjee.html (last accessed April 07, 2012)61

Govt mulls White Paper on black money: Finance Ministry, available at http://www.thehindu.com/news/national/article2659600.ece (last accessed April 08, 2012)

15

CHAPTER V: THE INDIAN SUPREME COURT’S DECISIONS ON ANTI-MONEY LAUNDERING

MEASURES IN INDIA

Since the PMLA is fairly recent, the apex court has not had the opportunity to explore its

contours too much. Most of the litigation has deal with the procedural aspects of the PMLA

as opposed to the substantive crime of money laundering. Some instances of the manner in

which the apex court has dealt with the PMLA are given below.

(A) CENTRE FOR PIL V. UNION OF INDIA62

This case dealt with investigation in the 2G spectrum scam. This issue that came up

before the Court was the appointment of a Special Public Prosecutor, to conduct the

prosecution on behalf of the CBI and the Enforcement Directorate (“ED”) under the PMLA.

The Court emphasised a great deal on the peculiar factual matrix of this case, pointing out

that court intervention had been solicited on a large scale in the case on the behest of both the

parties. As a consequence of this, the Court had directed and monitored CBI investigation and

ordered a special court to be set up. Owing to the sensitive nature of this case, the Court felt

that in the matter of appointment of the Special Public Prosecutor (“SPP”), utmost fairness

and objectivity should be observed. Mr. K.K. Venugopal, learned senior counsel for CBI and

ED was asked to suggest certain names. Mr. U.U. Lalit’s name was suggested and accepted

with unanimity by counsels for all the parties. However, this case arose when the Union

Government went back on its word and suggested that it had the sole discretion to make the

appointment of the SPP. For this purpose, its argumentation was two-fold. The first point

made by it was that the appointment of the SPP was the “prerogative” of the Union, and this

power could not be abridged. Secondly, it placed a reliance on Section 46(2) of the PMLA.

With respect to the first contention, the Court struck it down, observing that the

Constitution itself recognises only three concepts—rights, duties and discretion. The Court

was emphatic in distinguishing last one from “prerogative”, saying that the implication of

using the word “discretion” instead of “prerogative” was to ensure that the exercise of power

was not unbridled.

62 Centre for PIL v. Union of India, 2011 (4) SCALE 583.16

With respect to Section 46(2), the argument was more layered. Since the 2G case involves

money laundering as well as other offences, the submission of the Union was that invocation

of the PMLA procedures was unavoidable. Section 46 deals with the application of the Code

of Criminal Procedure, 1973 (“CrPC”) to proceedings before a special court that has been set

up under the PMLA. According to this provision, a person shall not be qualified to be

appointed as an SPP unless “he has been in practice as an Advocate for not less than seven

years, under the Union or a State.” However, the Court held that a person who has been an

Advocate “under” the Union simply means a lawyer on the panel of either the State or

Central government. It does not translate to the requirement that the appointee should be an

officer or employee of the union. The importance of this observation was compounded in this

case because of the public element involved in the appointment of the SPP in large scale

money laundering cases.

In conclusion, the Court held that Article 136, read with Article 142 empowered the Court

to make the appointment of Mr. Lalit, and that the said appointment was valid.

While this reasoning of the Court is sound, it is the submission of this researcher that the

Court went unnecessarily further into describing the connection between such appointments

and the CrPC. For this they referred to Section 46(3) of the PMLA as per which an SPP shall

be deemed to be a Public Prosecutor within the meaning of Section 2(u) of the CrPC. This

last section defines the term “Public Prosecutor” to mean any person appointed under Section

24 of the CrPC. The Court construed this to mean that a harmonious reading of Section 46 of

the PMLA and Section 24 of the CrPC required that the requirements of the appointment

procedure set out in Section 24 should be satisfied even in cases of the appointment of the

SPP under Section 46. However, the purpose of a deeming provision is to include instances

which would otherwise be excluded. Hence, the purpose of Section 46(3) would be to include

the SPP within the meaning of a Public Prosecutor under the CrPC even if the express

requirements of the statute were not complied with. While this did not make a difference to

this case, since the SPP in question had been appointed in accordance with Section 24 of the

CrPC anyway, this might turn out to be a confusing precedent for the future.

17

(B) BINOD KUMAR V. STATE OF JHARKHAND63

This was a case from the High Court at Ranchi. There were allegations that vast amounts

of money had been amassed by certain politicians, including former Chief Minister Madhu

Koda but there were no specific allegations of money laundering. The scam ran into hundreds

of crores (reports suggest Koda and his associates laundered upto INR 3536 crores64) and

involved investment in shares and property in India and multiple jurisdictions and required a

thorough investigation of at least 32 companies. The Division Bench of the High Court had

ordered that investigation be transferred to the CBI under Section 45(1A) of the PMLA. The

basic issue that arose before the Court whether the High Court was empowered to make such

an order, since the ED under the PMLA was already provided for as an investigating agency.

The main contention of the appellants was that money laundering falls squarely within the

domain of the ED and the CBI is not entitled to encroach upon this territory since it has been

clearly demarcated. Secondly, as per them, the PMLA is a self contained code and therefore it

is only the ED, provided under the statute, which can investigate the crimes in question.

Third, it was argued that the PMLA is a law that has been enacted under Article 253 of the

Constitution to give effect to India’s international obligations to combat money-laundering.

Therefore it overrides anything that is inconsistent with it. It was also argued that the CBI had

neither the expertise, nor the powers suited to investigating the crimes in question. This last

contention is a direct reflection of the fact that money-laundering is a crime which involves

techniques that change rapidly over time. Therefore, an especially trained agency is required

for its investigation. Further, it often involves investigation in multiple jurisdictions,

something the ED had been especially empowered to do as per its convenience under the

CBI.

The Court however felt that it was unnecessary to deal with the question at all. The crux

of its reasoning was that money laundering is not a stand-alone crime. It is committed only

when gains received from some other offence are taken and attempted to be passed off as

lawful gains. These other offences have been provided for as Scheduled Offences in the

63 Binod Kumar v. State of Jharkhand, 2011 (4) SCALE 109.

64 Yatish Yadav, Madhu Koda and associates laundered staggering Rs 3536 crore, INDIA TODAY, February 20, 2012, available at http://indiatoday.intoday.in/story/madhu-koda-and-associates-laundered-staggering-rs-3356-crore/1/174473.html (last accessed Apr. 9, 2012).

18

PMLA. The investigation that had been handed over to the CBI was that of these other

offences, and not directly that of money laundering. Hence, the order of the High Court was

upheld.

(C) PAREENA SWARUP V. UNION OF INDIA65

The constitutionality of several provisions of the PMLA dealing with the Adjudicating

Authorities and the Appellate Tribunal were challenged by way of this case. A large part of

the case also dealt with the validity of the Prevention of Money-Laundering (Appointment

and Conditions of Service of Chairperson and Members of Appellate Tribunal) Rules, 2007

and Prevention of Money Laundering (Appointment and Conditions of Service of

Chairperson and Members of Adjudicating Authorities) Rules, 2007. What is interesting

about this case is the fact that the Court didn’t really have to decide any of the issues since

they were resolved by consensus between the parties.

The challenge was made broadly on three grounds, in respect of all of which amendments

were proposed or adopted by the Government.

First, it was argued that the Rules did not explicitly specify the qualifications of member

from to be appointed to the aforementioned authorities. This was one of the simpler

arguments, and the State was more than willing to accommodate the petitioner’s concerns on

this count. The amendment passed as a result of this case require that all members hold

qualifications in “chartered accountancy or a degree in finance, economics or accountancy

or having special experience in finance or accounts by virtue of having worked for at least

two years in the finance or revenue department...or being incharge of the finance or

accounting wing of a corporation for a like period.”

Secondly, it was the contention of the petitioners that the members of the authorities set

up under the Act were appointed under the Revenue Secretary and therefore were not free,

independent judicial officers. This was also contended to be an “affront to judicial

independence” because a Committee headed by the Revenue Secretary was empowered to

65 Pareena Swarup v. Union of India, 2008 (13) SCALE 84.

19

select from “high court judges and district court judges.”66 It was argued that the judiciary

should have a greater role in the selection of the officers. To resolve this issue it was decided

that an amendment would be introduced by way of which the appointment of Chairman of the

adjudicating authority would be only on the recommendation of the Chief Justice of India

(“CJI”). Further, once such an appointment is made, the removal cannot be carried through

without consultation with the CJI. What the Court did in effect was that it replaced the

Chairman of the Selection Committee with the CJI (or a judge nominated by him).67 Experts

worry that the impact of this restricted role of the Executive might be felt by way of increased

expenditure on the authority on the PMLA followed by its slow decline into dysfunction.68

The most problematic contention was that the procedures under the Act led to a breach of

the separation of powers between the Judiciary and the Executive. The functions of an

essentially executive authority were to be evidently quasi-judicial in function. However, the

Court rightly pointed out that money laundering sometimes required the kind of expertise that

judicial officers did not necessarily have, so it was more plausible to have a body of experts

(as provided under the PMLA) as the adjudicating authority. They further pointed out that the

exercise of adjudicatory functions by executive agencies was not unheard of even within our

constitutional scheme. To bolster their reasoning, they gave the example of the Narcotic

Drugs and Psychotropic Substances Act, 1985.

While all the issues in this case were amicably resolved, one cannot help contemplate

what the fate of this petition would have been had it been allowed to take its natural course.

For one, since it is a case that often involves the abuse of public positions for money

laundering, the judiciousness of allowing a consensual settlement of sorts is something that

needs contemplation.

66 SC Grounds Anti Money-laundering Law, THE TIMES OF INDIA, December 4, 2007, available at http://articles.timesofindia.indiatimes.com/2007-12-04/india/27977119_1_authority-and-appellate-tribunal-pareena-swarup-pmla (last accessed Apr. 9, 2012).

67 Sai Vinod Nayani, State of Tribunals in India, available at http://spicyipindia.blogspot.in/2011/12/guest-post-state-of-tribunals-in-india.html (last accessed Apr. 9, 2012).

68 MJ Akbar, Babu-Friendly Tribunals, THE BUSINESS STANDARD, October 8, 2008, available at http://business-standard.com/india/storypage.php?autono=336688 (last accessed Apr. 9, 2012).

20

CHAPTER VI: ANALYIS OF THE RAM JETHMALANI PIL

RAM JETHMALANI V. UNION OF INDIA69

This landmark case in the area of money laundering law marks the only real attempt of the

Supreme Court to actively curb money laundering, by mandating efficacious measures. The

facts of the case arise in the following background.

The cases of Hasan Ali and his accomplice Tapuria stand out as particularly egregious

instances of the lack of implementation of the money-laundering laws in India. Hasan Ali,

53-year-old, son of Hyderabad Excise Officer is known to have unaccounted money to the

tune of Rs. 20,000 to 35,000 crore. His account at the Swiss Bank, UBS holds up to USD 8

billion, and he is liable for a tax default of about Rs. 50,000 crore in India.

A Writ petition was filed in ___ based on reports in the media and scholarly articles,

regarding the lack of action taken by the State authorities in countering the large sums of

unaccounted money in foreign banks, particularly those in jurisdictions that are tax havens

with strong privacy laws. The main contention was that the fundamental rights of the people

under Articles 21, 14, 19 were violated by selectively disregarding such large scale tax

evasion on the part of persons like Hassan Ali.

The Petition

The Petitioners contended that such a dereliction of duty to enforce the tax default on the part

of State authorities reflects a complete lack of control over unlawful activities of two kinds,

one, tax evasion and two, those criminal activities that are funded by the black money

economy. Moreover, such black money in swiss banks was laundered and rerouted back into

India for illegal activities, thus contributing to the creation of networks of international

finance. Large scale criminal activities like terrorism, arms smuggling, narcotic trade and

similar activities which are fuelled by the black economy are also detrimental to the security

and integrity of India. The petitioners also contended that this money was quite likely to be

69 2011(6) SCALE 691

21

that of powerful persons and the lack of action on the part of the State indicated gross apathy

towards prosecution of individuals.

Particularly, Hassan Ali Khan & Tapuria had been served with an Income Tax demand to the

tune of Rs. 40,000 crore and 20,580 crore respectively. The Enforcement Directorate (ED)

had, in 2007, reported that Hassan Ali indulged in dealings amounting to USD 1.6 billion

between 2001-05. The ED also carried out a raid in Hassan Ali’s Pune residence, which led to

the discovery of evidence of deposits of USD 8.04 billion with UBS Bank, Zurich.

Despite this, however, no investigation had been commenced by the State into the matter.

The petitioners had contended that the Union of India had faltered on several levels:

a) Both Hassan Ali and Tapuria were in India and hence falling within the jurisdiction of

Indian Courts and investigative authorities

b) Union of India, despite repeated RTI applications, was not divulging information

regarding the Indian account-holders in Swiss Banks

c) The Swiss Bank, UBS, Zurich, one of the biggest wealth management companies in

the world, had in particular, fallen in bad light with the Indian authorities as it was

involved in several untoward scams earlier in the decade.

Issues

On this premise and based on the specific arguments advanced by the Petitioners, there were

two main issues were sought to be addressed by the Court:

1) Whether the Supreme Court must constitute a Special Investigation Team (SIT)

under a former Supreme Court Judge to monitor investigations cases of black money

2) Whether the Court must mandate that the Union must endeavour to first obtain and

then disclose the list of Indian bank account holders in banks in Liechtenstein

Arguments of the Petitioners:

Re: Constitution of SIT

The petitioners argued that an SIT ought to be constituted under the supervision of former

Supreme Court judges to continually monitor investigation and prosecution of black money

cases.

Re: Disclosure of bank account information in banks in Liechtenstein

22

The council for the Petitioners submitted that a few years ago, an employee of a bank in

Liechtenstein had offered to divulge names of bank account holders to the government of

Germany. Germany had secured these names on had consequently initiated proceedings

against 600 individuals. The government of Germany had also offered the list of names to

other countries if they chose to initiate prosecutions against these individuals, outside the

framework of the Indo-German Double Tax Avoidance Agreement. In this light, it was

unclear why, despite several RTI applications, the Union had not revealed the names of these

account holders. Moreover, no steps to recover moneys or punish these individuals had been

taken so far.

Arguments of the Respondents

Re: Constitution of SIT

The Solicitor General responded to the arguments of the Petitioner by submitting that the

Union of India had done everything in their power towards prosecution and investigation of

black money cases. While they had no principal objection against the submission of the

petition, they argued that a Court monitored investigation was permissible but OK but not a

SIT. They submitted that there was already a High Level Committee constituted under the

Dept of Revenue in the Ministry of Finance, which was a body that was capable of exercising

all the functions and powers sought to be entrusted to the SIT proposed by the Petitioners.

Moreover, the Respondents submitted that cases of money laundering necessarily involve

many jurisdictions as these bank accounts were located in different countries with laws and

Double Tax Avoidance Agreements that protected the privacy of these account holders.

Re: Disclosure of bank account information in banks in Liechtenstein

The Solicitor General responded to the case of the Petitioners by submitting that the list of

names of bank account-holders in the possession of the Indian Government were obtained

through the DTAA with Germany, as Germany had specifically asked the Union of India to

take the said information through the DTAA. The DTAA specifically contained a prohibition

on disclosure of information obtained through the DTAA, through its confidentiality clause.

Any actions on the part of the Union in breach of this DTAA would jeopardize India’s

relations with Germany,

23

Moreover, the disclosure of the names of all the account-holders would be in gross violation

of the right of privacy of individuals who were using these Swiss Bank accounts for

legitimately earned money, thus falling outside the purview of a potential investigation or

prosecution for money laundering. The State argued that even if it were to disclose this list,

only those names of persons against whom investigation had been commenced and

proceedings had been initiated would be disclosed.

Judgment

Re: Constitution of the SIT

The Supreme Court recognized that although a High Level Committee had been set up with

extensive powers, the charge-sheet of Hassan Ali had not even been vetted by this committee,

nor was the Committee monitoring the investigation and ensuring speedy progress.

Moreover, the Court opined that while these matters may actually be spread over several

jurisdictions, even as regards those persons within Indian jurisdiction, against whom

sufficient evidence exists in the hands of the Indian authorities, the Government had not done

enough.

Thus, the Court held that the Union of India ought to constitute an SIT with very broad

powers of investigation and prosecution of black money cases. The SIT would be required to

constantly report developments to the Supreme Court. It would comprise of all the members

of the High Level Committee along with the Director of the Research and Analysis Wing

(RAW), viz.:

i. Director, RAW

ii. Two former judges of the SC

iii. Secretary, Department of Revenue, as the Chairman;

iv. Deputy Governor, Reserve Bank of India;

v. Director (IB);

vi. Director, Enforcement Directorate;

vii. Director, CBI;

viii. Chairman, CBDT;

ix. DG, Narcotics Control Bureau;

24

x. DG, Revenue Intelligence;

xi. Director, Financial Intelligence Unit; and

xii. JS (FT & TR-I), CBDT.

Re: Disclosure of bank account information in banks in Liechtenstein

Article 26(1) of the DTAA (on Exchange of Information) on confidentiality of information

exchanged under the DTAA reads as follows:

The competent authorities of the Contracting States shall exchange such

information as is necessary for carrying out the provisions of this Agreement.

Any information received by a Contracting State shall be treated as secret in the

same manner as information obtained under the domestic laws of that State and

shall be disclosed only to persons or authorities (including courts and

administrative bodies) involved in the assessment or collection of, the enforcement

or prosecution in respect of, or the determination of appeals in relation to, the

taxes covered by this Agreement. They may disclose the information in public

court proceedings or in judicial proceedings.

Thus, it was clear that Article 26 of the DTAA governed only exchange of information that

was undertaken for the purpose of “carrying out the provisions of the Agreement”. Since the

list of names of bank account holders in Liechtenstein was not information “necessary for

carrying out provisions” of the Indo-German DTAA, the Court held that Liechtenstein was

not covered within the ambit of the Indo-German DTAA. The Court also held that the fact

that Germany asked India to treat the information as granted under Article 26 of the DTAA is

immaterial.

Moreover, there was no bar of secrecy imposed on disclosing such information for the

purpose of court proceedings. The Court struck down the argument of the Union that these

court proceedings were limited to merely tax proceedings, on the basis that such a reading of

Article 26(1) would render the last sentence in the Article redundant. For this, the Court cited

Article 31 of the Vienna Convention on the Law of Treaties to state that the treaty should be

interpreted so as to give the words used its ordinary meaning.

25

The Court also pre-empted arguments on part of the State that the burden of establishing case

against black money would lie on the Petitioners, thus requiring petitioners to produce

information on bank accounts harbouring black money, by holding that the burden of

protecting fundamental rights lay on the State. The State would thus be required to obtain and

disclose all information towards the prosecution of black money cases, in order to uphold the

fundamental rights of the rest of the honest tax-paying individuals.

On the “right to know” under Article 19(2), the Court recognized that the countervailing right

to privacy of the bank account holders was a fundamental right read into Article 21 by the

Supreme Court in case law. This fundamental right to privacy guaranteed to persons ensures

within its ambit that human beings free of public scrutiny if they are acting in conformity

with law. Therefore, the right of persons under Article 32 to petition the court in public

interest against money laundering must be balanced by the right under Article 21 of

account holders in Swiss Banks. Therefore the Court held that the State tax authorities

cannot be mandated to disclose account details of all account holders, even in the absence of

investigation to reveal that the account holders are suspected offenders under the PMLA.

Government’s Response to the Judgment

The establishment of the SIT with unprecedented powers to investigate in this case was not

reacted to positively by the Centre, and specifically, the Finance Ministry.

Attorney General Goolam Vahanvati, presenting the Centre’s case before a bench consisting

of Justices Kabir and Nijjar, requested a modification of the terms of creation of this body,

claiming that it would result in the ultimate destabilization of a large number of probe

mechanisms set up under different laws including the NDPS Act, the IT Act, the FEMA and

others by creating a ‘super-force’, especially one with a composition as limited as that of the

SIT,. This argument stemmed from the fact that such members as the RBI Deputy Director

were expected to take up duties as heavy as investigating the majority of all money

laundering cases in the country, despite clearly having their own functions to discharge.70

Further, concerns were related about the fitness of certain members, such as the RAW

70 Don't make black money SIT a super force: Centre tells SC, available at http://articles.timesofindia.indiatimes.com/2011-08-25/india/29926312_1_black-money-money-laundering-act-hasan-ali-khan (last accessed April 09, 2012)

26

Director, being a nameless, faceless entity, to sit at the helm of a court-appointed body. The

Centre took strong objection to the fact that an extremely high-level, extremely powerful

body, with multi-jurisdictional operation would render redundant several legislatively created

committees and bodies, could be created without any parliamentary consideration. The plea

was objected to on the grounds that it was a review in disguise, and the necessity of the body

was created by the slow movement at the centre.71

The response of the Government to this groundbreaking judgment of the Supreme Court was

the filing of a recall petition in Jethmalani v. UOI72 before Altamas Kabir and S. S. Nijjar, JJ.

It was argued by the State that the cases cited by the Judges in the judgment of Ram

Jethmalani v. Union of India73, in the matter of constitution of the SIT were incorrect, as

these cases did not actually constitute SITs ultimately. The State thus prayed that the Court

modify the order to remove that part of the order that mandates the constitution of the SIT.

The Court however held that this petition was essentially a review petition, and therefore the

Supreme Court was precluded from hearing a petition for “modification” or ”recall”.

Critique and Conclusion

A very important area of law where constitutional values frequently come in friction with

each other is that of ‘court directed investigations’. This has picked up pace in the recent

years as evidenced by the Court’s ordering of a C.B.I investigation (Nandigram firing

incident for instance),appointing an S.I.T (Gujarat fake encounter case) as well as

constituting an SIT in the Jethmalani PIL. Ordering an investigation and supervising it are

primarily executive functions and not judicial functions, as ‘investigation’ comes under

‘Police’ which is a state subject under ‘law and order’ (Entry 2, List II) of the Seventh

Schedule of the Indian Constitution. Where the court decides to direct or supervise an

investigation through the constitution of an SIT, it takes up the mantle of the executive,

which may prima facie be a violation of the principle of separation of powers74. Moreover,

71

Govt struggles with its many committees on black money, available at http://www.indianexpress.com/news/govt-struggles-with-its-many-committees-on-b/819876/., (last accessed April 07, 2012)72 2011(10)SCALE75373 2011(6) SCALE 691

74 Ram Jethmalani v. Union of India, 2011 (4) UJ 2237 (SC).27

since law and order is a state subject, directing and overseeing investigations comes under the

legitimate, constitutional domain of the state’s powers. Thus a court ordered investigation

through an SIT is also in breach of the principle of federalism.

However, it is submitted that where the issue is a gross violation of fundamental rights, the

court must do everything it can to ensure a free and fair investigation, if needed supervise it.

That is precisely what happened in State of West Bengal v. C.P.D.R75, where the court first

held that there had been a complete abrogation of fundamental rights and under such

circumstances, the court thought it appropriate to order a C.B.I investigation. Citing

Minnerva Mills76, the court observed:

“Three Articles of our Constitution, and only three, stand between the heaven of

freedom into which Tagore wanted his country to awake and the abyss of

unrestrained power. They are Articles 14, 19, 21 and 31 C has removed two sides

of that golden triangle which affords to the people of this country an assurance

that the promise held forth by the preamble will be performed by ushering an

egalitarian era through the discipline of fundamental rights, that is, without

emasculation of the rights to liberty and equality which alone can help preserve

the dignity of the individual.”

Articles 14 and 19 do not confer any fanciful rights. They confer rights which are elementary

for the proper and effective functioning of democracy. They are universally regarded by the

Universal Declaration of Human Rights. The court in the past that opined that if Articles 14

and 19 are put out of operation, Article 32 will be drained of its life blood. Ours is a

controlled Constitution; in that sense, Articles 14, 19, 21 represent the foundational values

which form the basis of the rule of law, the essence of which is a part of Basic Structure77.

These are the principles of constitutionality which form the basis of judicial review apart

from the rule of law and separation of powers78. Going along these lines, it may be concluded

that where fundamental rights in their essence are infringed to the extent that there is an

absolute abrogation of their existence, the court must, if it considers necessary, order and

direct/ supervise an investigation. The power of judicial review being an integral part of the

75 C.P.D.R, AIR 2010 SC 1476

76 Minnerva Mills, 1980 AIR 1789 (Supreme Court), at ¶ 74.

77 Coelho, (2007) 2 SCC 1.

78 Coelho, 2007) 2 SCC 1.28

basic structure of the Constitution, no Act of Parliament can exclude or curtail the powers of

the Constitutional Courts with regard to the enforcement of fundamental rights79. This

therefore does not amount to infringement of either the doctrine of separation of power or the

federal structure.

Moreover, it is submitted that this case displays several consequentialist justifications

despite the above criticisms. Hassan Ali’s offences have finally been investigated. In the

meantime, his bail application was granted by the Bombay HC but this order was set aside by

Supreme Court in late 2011.80

79 Minnerva Mills, 1980 AIR 1789 (Supreme Court).

80 Union of India v. Hassan Ali Khan, 2011 (11) SCALE 30229

CHAPTER VII: THE RESERVE BANK OF INDIA AND ANTI-MONEY LAUNDERING

MEASURES

The Reserve Bank of India81 has introduced guidelines, taking from powers sourced to the

Section 35A of the Banking Regulation Act, 1949 and Rule 7 of the Prevention of Money

Laundering ( (Maintenance of Records of the Nature and Value of Transactions, the

Procedure and Manner of Maintaining and Time for Furnishing Information and Verification

and Maintenance of Records of the Identity of the Clients of the Banking Companies,

Financial Institutions and Intermediaries) Rules, 2005 to reduce financial frauds and identify

money-laundering transactions.82 These are applicable to both banks and NBFCs under

separate notifications. These guidelines are known as the Know Your Customer (KYC)

norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism

(CFT) standards, where we can see that the need to Know Your Customer is derived from the

aims of combating money laundering, and financing to terror organizations. These standards

were first laid down in a preliminary form in 2002, but they have been altered frequently

since then, and they are compiled in the form of two master circulars released every year on

July 1, 2011, with a sunset clause of one year. The most recent guidelines ‘Know Your

Customer’ guidelines have been revisited in the context of the recommendations made by the

Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on

Combating Financing of Terrorism (CFT), as well as the paper issued on Customer Due

Diligence (CDD) for banks by the Basel Committee on Banking Supervision.83 Under these

guidelines, a foreigner in India may remit USD 2500 for his/her individual purposes.84

These guidelines essentially require banks to lay down their own specific sets of policies and

standards in compliance with a fairly comprehensive list of incorporations to be made. They

81 Hereinafter, “the RBI”.

82 For a detailed guide on the KYC procedures, refer to http://rbidocs.rbi.org.in/rdocs/notification/PDFs/72CY300611F.pdf.83

Ibid.84

Ajay Shaw, Evaluating India’s Money Laundering Legislations, available at http://www.anti-moneylaundering.org/asiapacific/India.aspx (last accessed April 08, 2012)

30

prescribe also circumstances which would lead to the general levels of diligence required

being enhanced or reduced, based on circumstances present.

 Banks are required to follow KYC policies incorporating four major elements85:86

(a) Customer Acceptance Policy;

Under this head, it is required that no account be opened anonymous or in a fictitious name,

parameters of risk perception be well-defined, circumstances of agency be clear and risk

profile creation be done amongst other requirements.

(b) Customer Identification Procedures;

The policy approved by the Board of the bank must be such that it should clearly spell out the

Customer Identification Procedure to be carried out at different stages, and where there is

suspicion of money laundering or terrorist financing, a full-scale due diligence must be

carried out. Further, periodic updation of databases must be done.

(c) Monitoring of Transactions;

Banks are required to consistently review the transactions being undertaken in order to

establish reasonable patterns, and hence to be able to notice aberrant interactions. Further,

updating of risk categorization must be done in time periods not exceeding 6 months.

(d) Risk Management

Under this, banks must create adequate internal supervisory and auditing processes to deal

with the need to cover proper management oversight, systems and controls, segregation of

duties, training and other related matters by explicitly allocating responsibility within the

bank for ensuring that the bank’s policies and procedures are implemented effectively.

85 Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002, available at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/72CY300611F.pdf (last accessed April 06, 2012)86

Supra N. 2.

31

The RBI has been stringently enforcing both the KYC guidelines and the AML guidelines,

and fined several co-operative banks for violating these guidelines.87

In addition to this, they have also come up with a circular under the PMLA to regulate the

activities of NBFCs, Miscellaneous Non-Banking Companies (MNBCs) and Residuary Non-

Banking Companies (RNBCs) in connection with money laundering.88 These mandate

keeping records transactions exceeding a certain value, as well as reporting all suspicious

transactions to the Financial Intelligence Unit in India. Suspicious activities include inter alia

transactions that do not make economic sense, activities not consistent with the customer’s

business and provisions of insufficient or irregular information. However, these have been

criticized in many instances as not being sufficiently friendly to those who live in the

unorganized sector; to combat this, in March this year, the RBI released a notification

relaxing their norms with respect to verification processes for low-income persons. Now, in

case a person who intends to keep not more than Rs. 50,000 in his account, and not more than

Rs. 1 lakh in all accounts combined, wishes to open an account, he may be verified by the

process of being introduced by some other person who has been fully verified through KYC

procedures.89

The principles followed by the RBI also include the requirement to “Know Your

Employee”.90 For instance, an employee who leads a lavish lifestyle that cannot be supported

by his payscale may require extra vigilance from the employer.

87 RBI penalises MNSBL for violating anti-money laundering rules, ZEE NEWS, available at http://zeenews.india.com/business/finance/rbi-penalises-mnsbl-for-violating-anti-money-laundering-rules_31358.html (last accessed April 07, 2012)88

Master Circular, KYC Guidelines, Anti Money Laundering Standards, PMLA, 2002 - Obligations of NBFCs available at http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6575 (last accessed April 05, 2012)89

KYC norms to get friendlier for NBFCs, FINANCIAL EXPRESS, available at http://www.financialexpress.com/news/kyc-norms-to-get-friendlier-for-nbfcs/145693/0 (last accessed April 08, 2012)90

Ibid.32

CHAPTER VIII: CONCLUSION

While it is clear that money laundering has been a major issue both nationally and

internationally, the success of money laundering measures globally seems to have been rather

high – perhaps indicative of the priority which this project has been given. The national

scenario However, larger questions have been asked recently – that of whether focusing on

money laundering as an end in itself is sufficient, and whether it is performing its task of

coming close to ending terrorist funding or any other aims it is suspected to be channelled

into.91 The problem is exacerbated by the difficulty of adequately assessing the incidence of

money laundering – by its nature, since it exists outside the boundaries of the law, any

assessment is necessarily vague. Newer modalities of laundering money are being uncovered

every day, and the innovativeness of the schemes only is enhanced.

It is suggested that the major problem in catching money laundering today is a failure of

intelligence and coordination – unfortunately, these are also two of the most complex areas

for improvement to be made, overlapping as they do with civil liberties. In this, a balance

needs to be struck – always keeping in mind the end purpose, and the freedoms guaranteed in

our constitutional scheme.

91 Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering, and the War on Terrorism, available at papers.ssrn.com/sol3/papers.cfm?abstract_id=1678682, (last accessed Apr. 8, 2012).

33

BIBLIOGRAPHY

Books referred

DOUG HOPTON, MONEY LAUNDERING: A CONCISE GUIDE FOR ALL BUSINESSES.

GLOBAL FINANCIAL CRIME: TERRORISM , MONEY LAUNDERING AND OFFSHORE

CENTRES, (Donato Masciandaro ed. 2004).

Peter Reuter and Edwin M. Truman, CHASING DIRTY MONEY: THE FIGHT AGAINST

MONEY LAUNDERING, 3 (Institute of Macro-Economics).

Articles referred

Deboshree Bannerjee, Prevention of Money Laundering Act: Critical Analysis.

Eric Gouvin, Bringing out the Big Guns: The USA Patriot Act, Money Laundering,

and the War on Terrorism.

Indira Carr and Miriam Goldby, The UN Anti-Corruption Convention and Money

Laundering.

John F. Wilson, Hawala and Other Informal Payments Sytems: An Economic

Perspective.

K.P. Krishnan, Legal Regime for AML (Anti Money Laundering) in India.

K.P.Krishnan, India on the FATF high table.

Kishori J Udeshi, Implementation of Basel II- an Indian Perspective.

Mark Pieth, The Prevention of Money Laundering: A Comparative Analysis, 6 Eur. J.

Crime Crim. L. & Crim. Just. 159 (1998).

Peter J. Quirk, Money Laundering: Muddying the Macro-economy

Vijay Kumar Singh, Controlling Money Laundering in India-Problems and

Perspectives

Yatish Yadav, Madhu Koda and associates laundered staggering Rs 3536 crore.

Ajay Shaw, Evaluating India’s Money Laundering Legislations

Meghna Bhaskar, Benami Transactions (Prohibition ) Bill, 2011

V. Kumaraswamy, But That’s Not Mine!

Sanjeev Sirohi, Benami Transactions Prohibition Bill 2011 – A Critical Analysis

Vikash Yadav, PMLA 2002: Re-engineered

Vishwas Kumar, SC, CBI court reserve PC fate for Feb order

ii

Miscellaneous Sources

Core Principles of Effective Banking Supervision, October 1999, Reserve Bank of

India.

UNODC on money-laundering and countering the financing of terrorism.

iii