What is Money Laundering?
- Money laundering refers to the process of making illegally obtained money appear legal or “clean.”
- As per Section 3 of the Prevention of Money Laundering Act (PMLA), 2002, it involves concealing or projecting criminal proceeds as untainted property.
- It often funds illegal activities including terror financing, corruption, and organized crime.
Relevance : GS 3(Internal Security)
Three Stages of Money Laundering:
- Placement:
- Illicit cash is introduced into the financial system (e.g., depositing small sums into various accounts — “smurfing”).
- Layering:
- Funds are moved through complex transactions to hide their origin (e.g., shell companies, offshore accounts).
- Integration:
- Money re-enters the economy as apparently legitimate through investments in real estate, businesses, or luxury goods.
About PMLA, 2002:
- Enacted in line with UN resolutions to prevent money laundering and confiscate tainted property.
- The Act puts the burden of proof on the accused, not the prosecuting agency.
- Enforcement Case Information Report (ECIR), not an FIR, is sufficient to initiate proceedings (SC upheld in Vir Bhadra Singh v. ED, 2017).
Enforcement and Conviction Data:
- Between 2015 and 2023, ED initiated 5,892 cases under PMLA.
- Only 15 convictions have been secured — a conviction rate of approximately 0.25%.
- Signals poor outcomes in securing justice despite rising investigations.
Issues with Implementation:
- Rising number of cases indicates growing financial crime or overreach in enforcement.
- Supreme Court in Vijay Madanlal Chaudhury v. Union of India (2022) clarified:
- A “scheduled offence” is necessary to initiate prosecution under PMLA Section 3.
- But property can be attached even without a criminal case being registered — leading to misuse.
Misuse of PMLA: A Cause for Concern
- Critics allege political misuse of PMLA to target dissenters and opposition leaders.
- The law allows ED vast discretionary powers with minimal judicial oversight.
- ED is not bound to share the ECIR with the accused, limiting defense preparation.
Global Context: The ‘Laundromat’ Model
- Origin: Term derived from laundromats used by US crime syndicates to legitimize illicit earnings.
- A laundromat refers to shell networks that:
- Clean dirty money,
- Evade taxes,
- Hide ownership,
- Fund illicit operations.
International Case Studies: China’s Overseas Operations
- In April 2023, the US FBI arrested two operatives in New York linked to China’s Ministry of Public Security (MPS).
- They were charged with acting as agents for the Chinese government and obstructing justice.
- Highlights how covert financial operations can blend with political espionage.
- In contrast, countries with stronger economic ties with China (e.g., Mongolia, Serbia) have shown little public action on such covert programs.
- Suggests that national security concerns can be sidelined for geopolitical convenience.
Global Financial Action: FATF & DTAA
- Financial Action Task Force (FATF):
- International watchdog on money laundering and terror financing.
- Recommends robust enforcement, transparency, and global cooperation.
- Double Taxation Avoidance Agreements (DTAA):
- India has signed DTAAs with ~85 countries.
- Facilitates tax info exchange, helps track illegal cross-border flows.
- But DTAA enforcement and cooperation gaps remain.
Economic Impacts of Money Laundering:
- Weakens financial institutions by encouraging non-transparent transactions.
- Fuels inflation and distorts asset prices due to excess illicit liquidity.
- Undermines monetary policy and economic integrity (SC in P. Chidambaram v. ED, 2019).
Key Takeaways:
- While legal mechanisms under PMLA exist, their implementation suffers from low conviction rates, procedural opacity, and allegations of misuse.
- Strengthening ED’s accountability, judicial oversight, and adherence to FATF norms is essential.
- Global cooperation through FATF and DTAA must be institutionalized beyond paperwork to tackle transnational laundering networks effectively.
