Offence of money laundering
Money laundering is defined in the PML Act as direct or indirect attempts to indulge or knowingly assist or knowingly become a party to or have actual involvement in the process or activity connected with the proceeds of crime and projection of such property as untainted property. Under section 3 of the PML Act, actions deemed to construe the offence of money laundering under the PML Act in India include:
- a direct or indirect attempt to indulge in any process or activity that is connected with the proceeds of crime (including its concealment, possession, acquisition or use), with the intention of projecting or claiming such proceeds of crime as untainted property;
- any direct or indirect assistance of any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such proceeds of crime as untainted property, provided such assistance is knowingly given; and
- being, directly or indirectly, a knowing party to or being involved in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such proceeds of crime as untainted property.
Further, in the case of Hasan Ali Khan v Union of India, the Bombay High Court has held that an offence is committed under the PML Act only when an attempt is made to demonstrate a legitimate source of earning with respect to a tainted property, namely, with respect to proceeds of crime. In terms of section 24 of the PML Act, where there are any proceedings relating to proceeds of crime under the PML Act, unless the contrary is proved, it shall be presumed that the proceeds of crime are involved in the offence of money laundering.
The PML Act sets out certain specific offences that are referred as ‘scheduled offences’ under the PML Act. These scheduled offences are further sub-divided into three categories, namely, Part A, Part B or Part C offences. The commission of any Part A offence constitutes a scheduled offence, the commission of a Part B offence constitutes a scheduled offence only if the total value involved in such offence is equal to or greater than 10 million rupees, and Part C offences are those that have cross-border implications and are specified in Schedule A, or are considered as offences against property under the Indian Penal Code 1860 (IPC).
To constitute an offence of money laundering under section 3 of the PML Act, a person must knowingly assist or knowingly be a party to any process or activity connected with the proceeds of crime and in the projection or claiming of such proceeds of crime as untainted property, or be involved in concealing, acquiring or using such proceeds of crime. Therefore, the element of knowledge is an important constituent for the offence of money laundering in India, and thus a strict liability standard may not be applicable in India in the context of an offence of money laundering. In this regard, one may note that the term ‘knowledge’ was specifically inserted into section 3 of the PML Act after deliberations over the draft bill in parliament prior to the passing of the PML Act. Therefore, the legislative intent of the Indian parliament in this regard seems quite clear.
Obligations of banks, financial institutions and other intermediaries under the PML Act
Chapter IV of the PML Act sets out the obligations of banks, financial institutions and other intermediaries, including stockbrokers, share transfer agents, merchant bankers, underwriters, portfolio managers and investment advisers. Such intermediaries also include, among others, the following:
- a person carrying out activities for playing games of chance for cash or kind, including such activities associated with casinos;
- a registrar who records transactions relating to immovable property;
- a notified real estate agent,
- a dealer in precious metals, precious stones and other high-value goods, as may be notified by the central government; and
- a person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the central government.
The recently introduced section 11A of the PML Act prescribes therein the manner in which every banking company, financial institution and intermediary is required to verify the identity of its clients and the beneficial owner (ie, an individual who ultimately owns or controls a client or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person).
Further, under section 12 of the PML Act, every banking company, financial institution and intermediary is required to:
- maintain a record of all transactions (which may comprise single individual transactions or a series of transactions that are integrally connected to each other, provided that such series of transactions take place within a period of one month) of such nature and of such value as prescribed from time to time;
- furnish information relating to the aforementioned transactions to the enforcement authorities under the PML Act (see question 3 for the enforcement authorities under the PML Act); and
- maintain a record of documents evidencing the identity of its clients, their beneficial owners as well as account files and business correspondences relating to its clients.
Further, the principal officer of a bank, financial institution or intermediary has an obligation to furnish information in relation to any transaction or series of transactions (even where such transactions are not of the nature or value as prescribed above) to the enforcement authorities under the PML Act within the prescribed time periods if such principal officer is of the view that the transactions are of a nature that defeats the objects of the PML Act.
The record-keeping obligations continue for a period of five years from the date on which the transactions are concluded between the client and the reporting entity or the date of account closure. It may be noted that under section 14 of the PML Act, no civil or criminal proceedings may be initiated against the reporting entity for divulging records of transactions to the enforcement authorities under the PML Act in accordance with the provisions of section 12 of the PML Act. The enforcement authorities under the PML Act have the power to call for the records required to be maintained by the reporting entity under the PML Act, or to make such inquiries in this regard as they may deem fit, including by having their accounts audited and by making the reporting entities as well their directors liable for non-compliance.
In the event of a failure by any of the above entities in complying with the requirements under section 12 of the PML Act, a fine may be imposed on such entities from a minimum amount of 10,000 rupees, potentially increasing up to 1 million rupees for each failure. It should be noted that banks, financial institutions and other intermediaries can be prosecuted or pursued for money laundering offences committed by their clients if it can be demonstrated that they were aware of the commission of a scheduled offence, knowingly became recipients of the proceeds of crime and projected such proceeds as untainted property. In this regard, it is useful to note that the obligations cast on banks, financial institutions and intermediaries in terms of the PML Act, the PML Rules, RBI KYC Master Directions and the SEBI AML Guidelines are to exercise due diligence in their dealings with clients, and to maintain and furnish records of certain prescribed dealings with clients. Accordingly, although the exercise of diligence on the part of banks, financial institutions and intermediaries does not constitute a defence under the PML Act and the PML Rules, it may be used as a factor in demonstrating the lack of knowledge of the commission of money laundering by their client.
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