Description

Description: Learn about money laundering, its impact, and the recent development in the Enforcement Directorate's investigation involving the Aam Aadmi Party (AAP).

Critical Information: Money laundering is the process of disguising illegal funds as legitimate, posing a significant threat to the legal economy. In India, the Prevention of Money Laundering Act, 2002 (PMLA), along with other regulations, combats money laundering by defining offenses, establishing the Enforcement Directorate (ED), enforcing reporting requirements, and imposing penalties. The recent news revolves around the ED considering the Aam Aadmi Party (AAP) as an accused in a money laundering investigation connected to the Delhi government's excise policy. This development stems from Section 70 of the PMLA, which could encompass political parties under its anti-money laundering provisions, emphasizing the seriousness with which money laundering is addressed in India.

Money Laundering 

(Why in News?) THE ENFORCEMENT Directorate (ED) told the Supreme Court on Monday that it is “contemplating” adding the Aam Aadmi Party (AAP) as an accused in its money laundering probe linked to the Delhi government’s now-scrapped excise policy.

What is Money Laundering?

Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source. The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. 

The basic money laundering process has three steps:

1.  Placement - At this stage, the launderer inserts the dirty money into a legitimate financial institution. This is often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions.

Example: A drug dealer takes the cash he earned from selling drugs and deposits it in several small amounts into multiple bank accounts to avoid suspicion.

2.  Layering - Layering involves sending the money through various financial transactions to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts.

Example: The drug dealer transfers money between several offshore accounts, converts it into different currencies, and buys and sells stocks and bonds in various transactions to make it hard to follow the trail.

3.  Integration - At the integration stage, the money re-enters the mainstream economy in legitimate-looking form -- it appears to come from a legal transaction. This may involve a final bank transfer into the account of a local business in which the launderer is "investing" in exchange for a cut of the profits. It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

Example: The drug dealer takes the laundered funds and invests in a legitimate business or uses it to buy high-end real estate. Now, the money seems like it came from a legal source.

Why combat money laundering? 

Criminals accumulate significant sums of money by committing crimes such as drug trafficking, human trafficking, theft, investment fraud, extortion, corruption, embezzlement and tax fraud. Money laundering is a serious threat to the legal economy and affects the integrity of financial institutions. It also changes the economic power in certain sectors. If left unchecked, it will corrupt society as a whole. Fighting money laundering serves several purposes.

Rules and regulations related to Money Laundering in India

In India, money laundering is primarily governed by the Prevention of Money Laundering Act, 2002 (PMLA) and its subsequent amendments. The PMLA was enacted to combat and prevent money laundering activities. Here's a brief overview of the key laws related to money laundering in India:

•  Prevention of Money Laundering Act, 2002 (PMLA): This is the central legislation that addresses money laundering in India. The PMLA provides for the following:

  Definitions of money laundering offenses and money laundering proceeds.

  Establishment of the Enforcement Directorate (ED) to investigate and prosecute money laundering cases.

  The requirement for reporting entities (such as banks, financial institutions, and intermediaries) to maintain records and report suspicious transactions.

  Provision for attachment, seizure, and confiscation of properties involved in money laundering.

  Penalties for individuals and entities found guilty of money laundering, including imprisonment and fines.

  Legal mechanisms for international cooperation in money laundering investigations.

•  Know Your Customer (KYC) Guidelines: These are issued by the Reserve Bank of India (RBI) and other regulatory bodies to ensure that banks and financial institutions verify the identity of their customers and monitor transactions to prevent money laundering.

•  Foreign Exchange Management Act (FEMA): FEMA regulates foreign exchange transactions in India. It is essential in combating money laundering activities, especially those related to cross-border transactions.

•  Banking Laws and Regulations: Various banking laws and regulations mandate that financial institutions have robust anti-money laundering (AML) and customer due diligence (CDD) policies in place. These include the RBI's guidelines, which require banks to establish and maintain AML/CFT (Combating the Financing of Terrorism) programs.

•  Reporting of Cash Transactions: Under the Income Tax Act and PMLA, cash transactions above a specified threshold need to be reported to authorities. This helps in tracking large cash movements.

•  International Agreements: India has entered into several international agreements and treaties related to money laundering, such as the United Nations Convention against Corruption (UNCAC) and bilateral extradition treaties, which assist in cross-border investigations and asset recovery.

•  Amendments: The PMLA has undergone several amendments to align with international standards and strengthen the legal framework for combating money laundering. These amendments have expanded the definition of offenses, broadened the scope of reporting entities, and enhanced the penalties for violations.

Recent Issue

THE ENFORCEMENT Directorate (ED) told the Supreme Court on Monday that it is “contemplating” adding the Aam Aadmi Party (AAP) as an accused in its money laundering probe linked to the Delhi government’s now-scrapped excise policy.

Law under which a political party can be booked for money laundering

•  Section 70 of the stringent Prevention of Money Laundering Act deals with offences by companies. The provision states that, “Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was in charge of and was responsible to the company, for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.”

•  While a political party is not a ‘company’ incorporated under the Companies Act, 2013, the provision has a crucial explanation that could bring a political party under the ambit of the anti-money laundering law.

•  It reads: “Explanation 1[1].–For the purposes of this section (Section 70),–(i) “company” means any body corporate and includes a firm or other association of individuals;”

•  The phrase ‘association of individuals’ can include a political party. A party, according to Section 29A of the Representation of the People Act, is any association or body of individual citizens of India calling itself a political party.

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