Anti-Money Anti-Money Laundering ProvisionsLaundering Provisions

Jyotsna ChaturvediJyotsna Chaturvedi Senior AssociateSenior Associate

MAHESHWARI & CO.MAHESHWARI & CO. Advocates & Legal ConsultantsAdvocates & Legal Consultants

Telephone: 91-11-2610 1906Telephone: 91-11-2610 1906Fax: 91-11-2617 1201Fax: 91-11-2617 1201

E-mail: jyotsna@maheshwariandco.comE-mail: jyotsna@maheshwariandco.com

IntroductionIntroduction As per section 3 of the Prevention Money Laundering Act

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering”

As per Sub- Committee on Narcotics and Terrorism of US Senate Foreign Relations Committee:

“Money Laundering is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins.”

Some of the Popular PlacesSome of the Popular Places

Stock MarketsStock Markets Agricultural Products (as there is no Agricultural Products (as there is no

income tax and mostly the transactions income tax and mostly the transactions are on cash basis)are on cash basis)

Property Market Property Market Creating Bogus CompaniesCreating Bogus Companies Showing LoansShowing Loans False Export Import InvoicesFalse Export Import Invoices

Process of Money LaunderingProcess of Money Laundering

It involves three stages:It involves three stages:

Placement: placing of black money in financial system or economy

Layering: separating money from its source through series or layers of transaction to hide the main source

Integrating: with the legitimate or white money

Punishment for OffencePunishment for Offence

Imprisonment up to seven yearsImprisonment up to seven years

The same is 10 years in case of Narcotics and Drugs, The same is 10 years in case of Narcotics and Drugs, andand

Fine up to Rs 5 lacsFine up to Rs 5 lacs

In addition, the tainted property is also confiscated by the In addition, the tainted property is also confiscated by the

Central GovernmentCentral Government

Obligations of Banking Companies, Obligations of Banking Companies, FI and IntermediaryFI and Intermediary

Money Laundering will be naturally done through Money Laundering will be naturally done through Banking Companies, FI (including NBFC Companies, Banking Companies, FI (including NBFC Companies, authorised person etc.) and intermediaries of share authorised person etc.) and intermediaries of share market, hence responsibility has been cast on them market, hence responsibility has been cast on them

The above are responsible for maintaining record of all The above are responsible for maintaining record of all transactions and reporting the same to the Director transactions and reporting the same to the Director (Authority under the Act) on monthly basis. (Authority under the Act) on monthly basis.

The Identities of all the Clients are also required to be The Identities of all the Clients are also required to be verified and the records are to be maintained for 10 verified and the records are to be maintained for 10 years. years.

Maintenance of RecordsMaintenance of Records The following records are to be maintained by the Banks etc. :The following records are to be maintained by the Banks etc. :

Cash Transactions of value of more than Rs 1 million in foreign Cash Transactions of value of more than Rs 1 million in foreign currency or a Series of Transaction if total in a month exceeds the currency or a Series of Transaction if total in a month exceeds the above limitabove limit

Cash Transactions where forged or counterfeit currency or bank Cash Transactions where forged or counterfeit currency or bank notes have been used as genuine or where any forgery of a notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the valuable security or a document has taken place facilitating the transactions.transactions.

All suspicious TransactionsAll suspicious Transactions

All records of proof of identity of individual/Company/Firm should All records of proof of identity of individual/Company/Firm should also be retainedalso be retained

RBI Guidelines - KYCRBI Guidelines - KYC As per the circulars issued by RBI, Banks should have Know Your As per the circulars issued by RBI, Banks should have Know Your

Customer and anti money laundering Standards for accepting Customer and anti money laundering Standards for accepting customer, his identity, monitoring transactions and risk customer, his identity, monitoring transactions and risk management.management.

There are relaxations in case of NBFC where deposits are less than There are relaxations in case of NBFC where deposits are less than Rs 50,000 in view of deposits from low income group.Rs 50,000 in view of deposits from low income group.

In that case introduction by another account holder having In that case introduction by another account holder having satisfactory transaction will be sufficientsatisfactory transaction will be sufficient

RBI through its circular no. 39 dated 26/06/2006 has also brought RBI through its circular no. 39 dated 26/06/2006 has also brought Authorised Money Changers to follow all the above guidelinesAuthorised Money Changers to follow all the above guidelines

SEBI Anti Money Laundering SEBI Anti Money Laundering GuidelinesGuidelines

SEBI has also issued master circular no. ISD/AML/CIR-SEBI has also issued master circular no. ISD/AML/CIR-1/2008 dated 19/12/2008 to all intermediaries on anti 1/2008 dated 19/12/2008 to all intermediaries on anti money laundering and combating financing of terrorism.money laundering and combating financing of terrorism.

As per the above circular all intermediaries should As per the above circular all intermediaries should appoint principal officer for insuring compliance with the appoint principal officer for insuring compliance with the provisions of the Actprovisions of the Act

SEBI has also given detailed guidelines about SEBI has also given detailed guidelines about maintaining records and reporting to Director (Authority)maintaining records and reporting to Director (Authority)

Insurance Regulatory and Insurance Regulatory and Development AuthorityDevelopment Authority

IRDA has also issued master circular number 22 IRDA has also issued master circular number 22 dated 24/11/2008 which includes KYC dated 24/11/2008 which includes KYC monitoring, reporting cash transactions, record monitoring, reporting cash transactions, record keeping etc.keeping etc.

DirectorDirector

The Director, Financial Intelligence Unit India, under The Director, Financial Intelligence Unit India, under Ministry of Finance has been appointed as Director Ministry of Finance has been appointed as Director under the Act.under the Act.

He can call for records from the banks, FI and He can call for records from the banks, FI and Intermediaries and impose fine if found negligentIntermediaries and impose fine if found negligent

Case LawCase Law

In In Shankarlal Agarwalla v State Bank of IndiaShankarlal Agarwalla v State Bank of India (1987), it (1987), it was held that though there is an implied term of Contract was held that though there is an implied term of Contract between banker and customer that the banker must not between banker and customer that the banker must not disclose the condition of his customer’s account except disclose the condition of his customer’s account except on reasonable and proper occasions, however on reasonable and proper occasions, however disclosure if required by law is permitted.disclosure if required by law is permitted.

Hence Banking Companies /FI/Intermediary will not be Hence Banking Companies /FI/Intermediary will not be liable in civil proceedings if they supply information liable in civil proceedings if they supply information subject there is no criminal intention in that case they subject there is no criminal intention in that case they may be liable for criminal proceedings.may be liable for criminal proceedings.

Division of WorkDivision of Work

The division of work is such that the gentleman The division of work is such that the gentleman goes to Director Financial Intelligence Unit (FIU) goes to Director Financial Intelligence Unit (FIU) under Ministry of Finance, while crooks go to under Ministry of Finance, while crooks go to Director of Enforcement under FEMA.Director of Enforcement under FEMA.

Director Financial Intelligence Unit Director Financial Intelligence Unit (FIU)(FIU)

Powers:Powers: Call for Records maintained by Banks etc.Call for Records maintained by Banks etc. Power like a civil court while making enquiry, obtaining Power like a civil court while making enquiry, obtaining

records and imposing finesrecords and imposing fines

Director of Enforcement under Director of Enforcement under FEMAFEMA

Powers:Powers: Power of Summons and examination as in judicial Power of Summons and examination as in judicial

proceedingproceeding Impounding of Records produced before themImpounding of Records produced before them Power of survey, search and seizurePower of survey, search and seizure Confiscation of PropertyConfiscation of Property

Adjudicating AuthorityAdjudicating Authority

Central Government appoints an ‘Adjudicating Central Government appoints an ‘Adjudicating Authority’ which consists of a Chairperson and two Authority’ which consists of a Chairperson and two members within Department of Revenue, Ministry of members within Department of Revenue, Ministry of Finance.Finance.

The Role is granting Permission to Director for :The Role is granting Permission to Director for : retention of records or property retention of records or property confiscation of seized propertyconfiscation of seized property

Adjudicating Authority Contd.Adjudicating Authority Contd.

Procedure :Procedure :

Adjudicating Authority Regulations, 2006 prescribes Adjudicating Authority Regulations, 2006 prescribes procedures to be followed by adjudicating authority in procedures to be followed by adjudicating authority in respect of application forms, summons, examination of respect of application forms, summons, examination of

witnesses and orderswitnesses and orders..

Appeal to Appellate Tribunal Appeal to Appellate Tribunal against order of Adjudicating against order of Adjudicating

AuthorityAuthority Appeal can be made to Appellate Tribunal established Appeal can be made to Appellate Tribunal established

under the Act. [section 26(1)].under the Act. [section 26(1)].

It should be filed in 45 days.It should be filed in 45 days.

It should be decided within 6 months. [section 26(6)].It should be decided within 6 months. [section 26(6)].

Tribunal will consist of Chairperson and two other Tribunal will consist of Chairperson and two other members. Director of Enforcement under FEMA has also members. Director of Enforcement under FEMA has also been empowered to file appeal to Appellate Tribunal been empowered to file appeal to Appellate Tribunal against order of Adjudicating Authority.against order of Adjudicating Authority.

Procedure for appeal to TribunalProcedure for appeal to Tribunal

Appeal against order of Adjudicating Authority or Director Appeal against order of Adjudicating Authority or Director will be to Appellate Tribunal in form prescribed under will be to Appellate Tribunal in form prescribed under Prevention of Money Laundering (Appeal) Rules, 2005.Prevention of Money Laundering (Appeal) Rules, 2005.

Appeal shall be accompanied with prescribed appeal Appeal shall be accompanied with prescribed appeal fees in form of demand draft payable to Registrar, fees in form of demand draft payable to Registrar, Appellate Tribunal, New Delhi.Appellate Tribunal, New Delhi.

Appeal to High CourtAppeal to High Court

Further appeal can be made to High Court within 60 Further appeal can be made to High Court within 60 days. Appeal can be both on question of law and days. Appeal can be both on question of law and question of facts. [section 42].question of facts. [section 42].

Civil Court will have no jurisdiction in matters which Civil Court will have no jurisdiction in matters which Director, Adjudicating Authority or Appellate Tribunal is Director, Adjudicating Authority or Appellate Tribunal is empowered under the Act. It cannot grant injunction in empowered under the Act. It cannot grant injunction in respect of any action taken under the Act. [section41].respect of any action taken under the Act. [section41].

Search, seizure, impoundingSearch, seizure, impounding

Director can authorise a person to search of any Director can authorise a person to search of any building, place, vessel, vehicle or aircraft where he has building, place, vessel, vehicle or aircraft where he has reason to suspect that records relating to money reason to suspect that records relating to money laundering or proceeds crime are kept.laundering or proceeds crime are kept.

Section 18(1) empowers Central Government to Section 18(1) empowers Central Government to authorise a person to order search of a person. Director authorise a person to order search of a person. Director of Enforcement under FEMA has been authorised for of Enforcement under FEMA has been authorised for this.this.

Contd.Contd.

The Prevention of Money Laundering (Forms, Search The Prevention of Money Laundering (Forms, Search and seizure and the manner of forwarding the reasons and seizure and the manner of forwarding the reasons and materials to the Adjudicating authority, impounding and materials to the Adjudicating authority, impounding and custody of records and the period of retention) Rule and custody of records and the period of retention) Rule 2005 gives relevant provisions on the various 2005 gives relevant provisions on the various procedures. procedures.

Director, Additional Director can issue summons to a Director, Additional Director can issue summons to a person to attend at his office along with documents person to attend at his office along with documents prescribed. They also have the powers to impound the prescribed. They also have the powers to impound the documents so provided. However, records cannot be documents so provided. However, records cannot be kept beyond three months without approval of Directorkept beyond three months without approval of Director

Retention of seized propertyRetention of seized property Property seized can be retained by authorised officer.Property seized can be retained by authorised officer.

The property can be retained for a period of three months The property can be retained for a period of three months from end of the month in which property is seized, the from end of the month in which property is seized, the details being required to informed to Adjudicating Authoritydetails being required to informed to Adjudicating Authority

Director of Enforcement under FEMA has been empowered Director of Enforcement under FEMA has been empowered to retain such property as per Notification No. GSR 441 (E) to retain such property as per Notification No. GSR 441 (E) dated 1-7-2005.dated 1-7-2005.

The seized property is required to be returned to person The seized property is required to be returned to person from whom it was seized, unless Adjudicating Authority from whom it was seized, unless Adjudicating Authority permits retention of property beyond this period [section permits retention of property beyond this period [section 20(1)].20(1)].

Provisional attachment of PropertyProvisional attachment of Property

Property involved in money-laundering can be Property involved in money-laundering can be provisionally attached [section 5(1)].provisionally attached [section 5(1)].

Authority appointed under the Act (Director, Joint Authority appointed under the Act (Director, Joint Director or Deputy Director) can provisionally attach Director or Deputy Director) can provisionally attach property upto 180 days (brought by amendment act, property upto 180 days (brought by amendment act, 2009), if he has reasons to believe that such person is in 2009), if he has reasons to believe that such person is in possession of proceeds or crime, he is charged with that possession of proceeds or crime, he is charged with that crime and the proceeds of money are likely to be crime and the proceeds of money are likely to be concealed or transferred.concealed or transferred.

Contd.Contd.

Such order can be made only after report is forwarded or Such order can be made only after report is forwarded or a complaint is filed before a Magistrate or court for taking a complaint is filed before a Magistrate or court for taking cognizance of the scheduled offence.cognizance of the scheduled offence.

Director of Enforcement under FEMA has been Director of Enforcement under FEMA has been

empowered to attach the property, vide Notification No. empowered to attach the property, vide Notification No. 441 (E) dated 1-7-2005.441 (E) dated 1-7-2005.

‘‘Attachment’ means prohibition of transfer, conversion, Attachment’ means prohibition of transfer, conversion, disposition or movement of property by an order issued disposition or movement of property by an order issued under Chapter III of the Act. under Chapter III of the Act.

Receipt, Management and disposal Receipt, Management and disposal of confiscated propertiesof confiscated properties

If Adjudicating Authority decides that the property is If Adjudicating Authority decides that the property is involved in money laundering, he can order that the involved in money laundering, he can order that the property shall be attached, or if already attached, the property shall be attached, or if already attached, the attachment will continue till order of trial court becomes attachment will continue till order of trial court becomes final.final.

If the person is found to be guilty, the Authority shall If the person is found to be guilty, the Authority shall confiscate the attached property after giving opportunity confiscate the attached property after giving opportunity of hearingof hearing

The property ordered to be confiscated by Adjudicating The property ordered to be confiscated by Adjudicating Authority will vest absolutely in Central Government. Authority will vest absolutely in Central Government.

Arrest of personArrest of person

Director, Deputy Director or any other officer authorised Director, Deputy Director or any other officer authorised by Central Government can arrest a person, if he has by Central Government can arrest a person, if he has reason to believe that he is guilty of offence punishable reason to believe that he is guilty of offence punishable under the Act.under the Act.

The reasons should be based on material in his The reasons should be based on material in his possession and should be recorded in writing and possession and should be recorded in writing and person so arrested is required to be produced before person so arrested is required to be produced before judicial or Metropolitan Magistrate within 24 hoursjudicial or Metropolitan Magistrate within 24 hours

Other ProvisionsOther Provisions

Special Courts to try all the offences, the appeals of Special Courts to try all the offences, the appeals of which will lie in High Courtwhich will lie in High Court

Offences are non cognizable and police officers shall not Offences are non cognizable and police officers shall not investigate the offence unless specifically authorised by investigate the offence unless specifically authorised by CG by special or general orderCG by special or general order

All the interpretation of the rules made under this Act will All the interpretation of the rules made under this Act will be referred to CG whose decision is final.be referred to CG whose decision is final.

International ScenarioInternational Scenario

The first push against banking secrecy and opaque cross The first push against banking secrecy and opaque cross border financial Dealings came after 9/11 terror attacks in border financial Dealings came after 9/11 terror attacks in US.US.

The US Patriot Act was signed for prevention of money The US Patriot Act was signed for prevention of money laundering and regular sharing Informations between FI and laundering and regular sharing Informations between FI and Authorities.Authorities.

Other Countries also passed similar laws but the focus Other Countries also passed similar laws but the focus remained mainly on tracking Terror Funding, not Tax remained mainly on tracking Terror Funding, not Tax Evasion.Evasion.

The second push came after financial crisis of 2008 in which The second push came after financial crisis of 2008 in which public anger at rich financiers alleged to have participated in public anger at rich financiers alleged to have participated in the same forced Western Govt. to initiate a crackdown the same forced Western Govt. to initiate a crackdown

Contd.Contd. 40 Countries including Switzerland were identified in grey list as 40 Countries including Switzerland were identified in grey list as

destinations which put an international pressure for more destinations which put an international pressure for more transparent sharing of tax information.transparent sharing of tax information.

The Global Forum on Transparency and Exchange of Information of The Global Forum on Transparency and Exchange of Information of Tax Purposes established in 2000 underwent serious restructuringTax Purposes established in 2000 underwent serious restructuring

As compared to only 70 tax agreements signed between countries As compared to only 70 tax agreements signed between countries between 2000 and 2008, 500 new Agreements were signed between 2000 and 2008, 500 new Agreements were signed between 2009 and 2010between 2009 and 2010

Since 2009, collection from overseas evaders are : France-$ 5.4 Since 2009, collection from overseas evaders are : France-$ 5.4 billion, UK- $ 810 million. billion, UK- $ 810 million.

Money Laundering & IndiaMoney Laundering & India $ 500 billion (Rs 22.5 lakh crore) has been spirited out of $ 500 billion (Rs 22.5 lakh crore) has been spirited out of

India since independenceIndia since independence

India’s underground economy is estimated at $640 India’s underground economy is estimated at $640 billions which is estimated to about 50% of its GDP in billions which is estimated to about 50% of its GDP in 20082008

There are at least 40 destinations that aggressively There are at least 40 destinations that aggressively solicit such funds but most popular is Swiss Banksolicit such funds but most popular is Swiss Bank

72.2% ($462 billion) of Illicit assets are held overseas, 72.2% ($462 billion) of Illicit assets are held overseas, remaining 27.8% ($178 billion) are held domesticallyremaining 27.8% ($178 billion) are held domestically

Contd.Contd.

India is one of the 15 members of Forum’s Top advisory India is one of the 15 members of Forum’s Top advisory body and have not signed any Tax Information body and have not signed any Tax Information Exchange Agreement to bring back black money from Exchange Agreement to bring back black money from abroadabroad

The Supreme Court and the Opposition parties have The Supreme Court and the Opposition parties have increased the pressure on the Government.increased the pressure on the Government.

However a big question still remains:However a big question still remains:

THE BIG QUESTION!THE BIG QUESTION!

Why there is continued inaction and why Why there is continued inaction and why the Government is taking so long to enter the Government is taking so long to enter even one Agreement where the rest of even one Agreement where the rest of world has moved on with a rapid pace?world has moved on with a rapid pace?