Prevention of Money Laundering Act, 2002

Published on 08 Feb 2025

India enacted the Prevention of Money Laundering Act, 2002 in response to India’s global commitment to combat money laundering. Through penalties and provisions for confiscating properties, the legislation looks to prevent the flow of money into illegal activities.

Important provisions of PMLA, 2002

• Definition of money laundering: Defined as the process through which an illegal fund is obtained from illegal activities and disguised as legal money.

• Attachment of property: The legislation empowers the law enforcement agencies for attachment of properties that are involved in money laundering. Provisional attachment is facilitated even during the time of investigation.

• Investigation agency: Enforcement Directorate is the agency responsible for enforcement of the provisions of the act. On the other hand, the Financial Intelligence Unit - India is the central agency responsible for receiving and processing financial transaction information.

• Reporting entities: Obligation is placed upon all banks and financial institutions to maintain records and to report suspicious transactions.

• Whistle-blower protection: To encourage reporting of suspicious transactions the legislation has provisions to protect the identity of whistle-blowers and witnesses.

• Changes made in 2023 amendment

• Definition of Politically Exposed Person: Individuals who have been entrusted with prominent public functions by a foreign country. 

• Control over NGO: To incorporate more disclosures by NGOs by reporting entities like financial institutions, banking companies or intermediaries.

• Definition of beneficial owner: Those with more than 10% of shares or capital or profit of the company.

• Cryptocurrencies: Mandates crypto exchanges and intermediaries dealing in virtual assets to maintain the KYC of their clients and to report suspicious transactions.

Significance of the legislation

• Curb black money: Empowers law enforcement agencies to track and confiscate assets acquired through illegal means, thereby discouraging tax evasion and corruption.

• Example: The legislation was instrumental in uncovering unaccounted wealth during the 2016 demonetization drive.

• Prevent terror financing: By tracking and freezing assets linked to terrorist activities, PMLA aids in disrupting the financial network of terrorist organizations.

• Enhance international cooperation: Aligns India with global efforts to combat money laundering and financial crime.

• Example: The legislation shows India’s commitment to Vienna convection and FATF forty recommendations.

• Regulate financial institutions: Placing stringent obligations upon financial institutions ensures they become more responsible and remain active in preventing laundering.

• Confiscate illegal gains: PMLA empowers authorities to confiscate the proceeds of crime, thus preventing diversion of funds from our economy.

• Example: Seizure of assets in the Nirav Modi case.

Concerns associated with the PMLA legislation

• Misuse for political purpose: The opposition leaders and activists have alleged that the government has used PMLA to target political opponents.

• Example: The INX media case involving Congress top leader P Chidambaram has been alleged to be politically driven.

• Ambiguity in definition: Uncertainty in interpretation of terms like ‘proceeds of crime’ and ‘money laundering’ has led to legal uncertainties and delays.

• Ambiguity regarding Enforcement Case Investigation Report: PMLA has no provision which mandates the Enforcement Directorate to prepare Enforcement Case Information Report (ECIR) before investigation or regarding submission of the same to the accused.

• Example: Recently the Supreme Court decided to review its judgment on providing ECIR to the accused.

• Data privacy concerns: Retaining extensive customer data by financial institutions to comply with the legislation and increased concerns of data breach.

• Chilling effect on charitable organizations: The stringent regulations discourage donations and thus hinder their work.

• Example: Excessive regulations over NGOs like Greenpeace International and Ford Foundation attracted criticism from the USA.

• Impact on business environment: Freezing of assets and disruption in financial operations affect the business environment and discourage investments.

• Delay in acquisition and confiscation: Legal battles have been prolonged when the case involves high profile persons.

• Example: Vijay Mallya fled India in 2016 even as a debt court in Bengaluru was set to act against him for defaulting on loans.

The PMLA act has been effective in countering laundering cases and has thus reduced the prevalence of corruption in India. But its proceedings should be made more transparent to ensure the legislation is not politically misused. There should be more flexibility to ensure that the legislation does not harm the functioning of business entities and NGOs.

Tags:
Security

Keywords:
Money laundering Organized crimes PMLA act

Syllabus:
General Studies Paper 3

Topics:
Internal Security