In brief: money laundering offences in India

Money laundering

Which government entities enforce your jurisdiction’s money laundering laws?

The Directorate of Enforcement (ED), which is under the administrative control of the Department of Revenue of the Ministry of Finance, the Indian government and the director of the Financial Intelligence Unit (FIU) under the Department of Revenue of the Ministry of Finance, has been appointed to exercise exclusive powers under specific sections of the Prevention of Money Laundering Act 2002 (the PML Act).

Additionally, section 54 of the PML Act provides that certain officers are empowered and required to assist authorities under the Act with enforcement, including:

• members and officers of recognised stock exchanges under the Securities Contracts (Regulation) Act 1956;
• income tax authorities under the Income Tax Act 1961;
• registrars and sub-registrars appointed by state governments under the Registration Act 1908;
• officers appointed in terms of certain provisions of the Narcotic Drugs and Psychotropic Substances Act 1985;
• police officers;
• officers and members of associations recognised under the Forward Contracts (Regulation) Act 1952;
• registering authorities empowered to register motor vehicles under the Motor Vehicles Act 1988;
• officers of:
  • the Customs and Central Excise Departments;
  • the Reserve Bank of India (RBI);
  • enforcement appointed under the Foreign Exchange Management Act 1999;
  • the Securities and Exchange Board of India (SEBI);
  • the Insurance Regulatory and Development Authority;
  • the Forward Markets Commission;
  • the Pension Fund Regulatory and Development Authority; and
  • the Department of Posts in the Indian government;
• officers and members of the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India; and
• officers of any other body corporate that is established under a state or central legislation, and such other officers of the central government, state government, local authorities or reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) who may be notified by a special order of the central government.

The PML Act specifically mandates assistance and cooperation between the above-mentioned authorities, since an essential element for the commission of the offence of money laundering is being involved in a process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property.

The PML Act confers the power on a special court to adjudicate on and finalise an order of attachment of property. Further, the PML Act permits the special court to direct that any property that stands confiscated to the central government be restored to a claimant with a legitimate interest in the property who, while acting in good faith, may have suffered a quantifiable loss as a result of the offence of money laundering, despite having taken all reasonable precautions. The special court has been empowered to consider the claim for restoration of such a claimant during the trial of the offence.

The PML Act provides that the appellate tribunal constituted under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act 1976 shall be the appellate tribunal for hearing appeals against the orders of the Adjudicating Authority and the director of the FIU under the PML Act.

Can both natural and legal persons be prosecuted for money laundering?

Under the PML Act, both natural and legal persons can be prosecuted for money laundering.

The term ‘person’ under the PML Act has been defined to include individuals, Hindu undivided families, companies, firms, associations of persons (whether incorporated or not), artificial juridical persons and agencies, and offices and branches owned or controlled by any such natural or legal persons. The PML Act provides for a wide range of penal actions that may be taken against persons in possession of proceeds of crime who have committed scheduled offences.

Under section 70 of the PML Act, if a body corporate (including a firm or association of individuals) contravenes any of the provisions of the PML Act, the persons in charge of the body corporate (and responsible to the body corporate for the conduct of its business) at the time of commission of the offence by the body corporate and the body corporate itself will be deemed to be guilty of the contravention of the provisions of the PML Act.

However, section 70 of the PML Act provides that persons in charge of the company will not be liable for the contravention if they are able to prove that the contravention of the PML Act by the body corporate took place without their knowledge or that they exercised all due diligence to prevent the commission of such an offence by the body corporate.

Further, where a contravention by a body corporate is attributable to any particular director, officer, secretary or manager (either on account of his or her consent, connivance or negligence), the director, officer, secretary or manager may also be prosecuted separately under the PML Act for the contravention committed by the body corporate.

What constitutes money laundering?

Offence of money laundering

Money laundering is defined in the PML Act as direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or have actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such property as untainted property.

In Vijay Madanlal v Union of India (2022 SCC OnLine SC 929), the Supreme Court of India took the view that ‘and’ in section 3 of the PML Act must be construed as ‘or’ to give full effect to provisions of the PML Act. Therefore, projecting or claiming the property to be untainted is not an essential condition for the fulfilment of the provisions of section 3 of the PML Act. Pursuant to the above, a person shall be guilty of the offence of money laundering under section 3 of the PML Act if such a person is found to have directly or indirectly attempted to indulge, knowingly assisted or knowingly is a party to, or is actually involved (in any manner whatsoever) in, one or more of the following processes or activities connected with the proceeds of crime:

• concealment;
• possession;
• acquisition;
• use; and
• projecting or claiming as untainted property.

Therefore, the element of knowledge is an important component for the offence of money laundering in India; thus, a strict liability standard may not be applicable in India in the context of a money laundering offence. 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. As such, the legislative intent of Parliament in this regard is clear.

Further, the process or activity connected with the proceeds of crime is a continuing activity and continues until such a time that a person is directly or indirectly enjoying the proceeds of crime through concealment, possession, acquisition, use, or projecting or claiming it as untainted property in any manner.

Regarding section 24 of the PML Act, where there are any proceedings relating to proceeds of crime under the PML Act, in the case of a person involved in the offence of money laundering, unless the contrary is proved, it is presumed that the proceeds of crime are involved in the offence of money laundering.

The PML Act defines ‘proceeds of crime’ as any property (or the value of any property) derived or obtained, directly or indirectly, by any person as a result of any offence under the Indian penal statutes set out in the Schedule to the PML Act (scheduled offences); or, where such property is taken or held outside the country, the property equivalent in value held within the country or abroad. It has been clarified in an explanation that the term ‘proceeds of crime’ covers not only property that is derived or obtained from scheduled offences but also any property that may directly or indirectly be derived or obtained as a result of any criminal activity that is relatable to a scheduled offence.

In Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929), the Supreme Court held that this explanation is merely clarificatory in nature. The term ‘proceeds of crime’ must be construed strictly to differentiate between property that is a vehicle used for the commission of a crime and property that is derived or obtained as a result of crime. While the former does not qualify as proceeds of crime, the latter does.

Reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and 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 the proceeds as untainted property. The obligations cast on the reporting entities in terms of the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), the RBI Know-Your-Customer Directions 2016 (the RBI KYC Master Directions), and Master Circular on Guidelines on AML Standards and Combating Financing of Terrorism, and Obligations of Securities Market Intermediaries under the PML Act and Rules Framed Thereunder (the SEBI AML Guidelines) are to exercise due diligence in their dealings with clients, and to maintain and supply records of certain prescribed dealings with clients. Accordingly, although the exercise of diligence on the part of the reporting entities 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 clients.

Is there any limitation on the types of assets or transactions that can form the basis of a money laundering offence?

Determination of the commission of a scheduled offence is required to ascertain whether the offence of money laundering has been committed. For such a determination, a monetary threshold has been prescribed for certain scheduled offences (namely, Part B offences). Part B offences include offences of false declarations and false documents under section 132 of the Customs Act 1962, for which a monetary threshold of 10 million rupees has been prescribed. Accordingly, the other elements of the offence of money laundering would only be satisfied if the total value involved in the commission of such a Part B offence exceeds 10 million rupees.

No monetary threshold has been prescribed for the offences specified in Part A or Part C of the Schedule to the PML Act.

In the context of a Part A offence and an offence of cross-border implications, however, the above monetary threshold does not apply.

Generally, what constitute predicate offences?

The commission of a scheduled offence under the PML Act is an essential condition for determining whether the offence of money laundering has been committed. These include certain identified offences under the Indian Penal Code 1860, such as, inter alia:

• criminal conspiracy;
• counterfeiting;
• kidnapping for ransom;
• extortion;
• robbery;
• receiving stolen property; and
• fraud.

Further offences are identified under:

• the SEBI Act 1992;
• the Companies Act 2013;
• the Unlawful Activities (Prevention) Act 1967;
• the Customs Act 1962;
• the Information Technology Act 2000;
• the Arms Act 1959 (relating to, inter alia, the manufacturing and selling of arms and ammunition in contravention of the Act);
• the Prevention of Corruption Act 1988;
• the Wildlife (Protection) Act 1972;
• the Immoral Traffic (Prevention) Act 1956; and
• the Narcotic Drugs and Psychotropic Substance Act 1985 (the NDPS Act).

Further, if the offence of a deliberate attempt to evade tax under section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 has cross-border implications, it is a scheduled offence under the PML Act. The commission of a scheduled offence is a prerequisite for constituting the offence of money laundering under the PML Act (see P Chidambaram v Directorate of Enforcement (AIR 2019 SC 4198)).

Scheduled offences are the predicate offences for the commission of the offence of money laundering. Accordingly, if any transaction is not linked to a scheduled offence, the funds relating to those transactions would not constitute proceeds of crime and, therefore, dealing in those funds would not amount to money laundering. The investigation of the offence of money laundering is inextricably linked to the investigation of the scheduled offence, and it is because of this that various investigative agencies have been directed in terms of the PML Act to coordinate and cooperate with the ED.

Scheduled offences and the offence of money laundering are to be tried together by a special court constituted by the PML Act that has jurisdiction over the area in which the offence has been committed. Section 43 of the PML Act provides that the central government may, in consultation with the chief justice of the relevant high court, designate one or more sessions courts as a special court. Accordingly, the commission of a scheduled offence must be alleged before the special court that is trying the offence of money laundering under the PML Act, and evidence and material relating to the scheduled offence must be placed before the special court to enable it to frame a charge in respect of the offence and to try it (see Rana Ayyub v Directorate of Enforcement (2023 SCC OnLine SC 109)).

The PML Act’s jurisdiction applies where an offence is committed by a person outside India and the offence would also constitute a scheduled offence (had it been committed in India), and any part of the proceeds of the offence have been remitted to India. Further, the PML Act’s jurisdiction also extends to situations where the scheduled offences have been committed within India and all or part of the proceeds of crime have been remitted outside India.

Are there any codified or common law defences to charges of money laundering?

There are no codified defences to the charge of money laundering other than demonstrating a lack of knowledge.

What is the range of outcomes in criminal money laundering cases?

A money laundering offence is punishable by a fine and imprisonment for a term of between three years and seven years. The maximum term of imprisonment may extend to 10 years if the proceeds of crime relate to an offence under the NDPS Act, which deals with crimes relating to narcotics. Plea bargaining is available under section 265A in terms of the Code of Criminal Procedure, 1973 (CrPC), but not for:

• offences that have been designated by the government as affecting the socio-economic condition of the country; or
• offences where the punishment prescribed by law is:
  • death;
  • life imprisonment; or
  • imprisonment for a term in excess of seven years.

The process for plea bargaining involves the accused making an application to the court and, upon the court being satisfied that the application was made voluntarily, making an order for the accused to work out a mutually satisfactory disposition of the case. This may include the accused giving compensation and other expenses to the victim during the case and thereafter.

The offence of money laundering has not yet been designated as affecting the socio-economic condition of the country. However, in Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929) the Supreme Court observed that money laundering is a heinous crime that not only affects the social and economic fabric of the nation, but also tends to promote other heinous offences, including terrorism and offences related to the NDPS Act. In light of this observation from the Supreme Court, the availability of plea bargaining for offences under the PML Act is unclear.

Under the PML Act, fines ranging from 10,000 rupees to 100,000 rupees for each failure can be imposed on a reporting entity if it has failed to maintain records or supply information in the manner prescribed under the PML Act and the PML Rules.

In addition, although the PML Act and PML Rules do not provide for the revocation of licences of reporting entities, this may be possible based on the circulars relating to know-your-customer and AML requirements issued by the regulators of the reporting entities. The RBI KYC Master Directions were issued by the RBI under section 35A of the Banking Regulation Act 1949 (which empowers the RBI to issue such general or specific directions as it may deem fit), as well as under the PML Rules. Section 35A of the Banking Regulation Act 1949, read with section 22, provides that, if a banking company does not comply with a direction validly issued by the RBI, the RBI has the power to revoke the banking licence of the banking company. Accordingly, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may be empowered to revoke the licence of the banking company.

Similarly, sections 45K and 45L read with section 45IA(6) of the RBI Act 1934 provide that, if a non-banking finance company (NBFC) fails to comply with the provisions of a direction issued by the RBI (including, for instance, the RBI KYC Master Directions), the RBI is empowered to cancel the registration of the NBFC.

Among its other powers, section 11B of the SEBI Act 1992 empowers the SEBI to regulate the securities market by any measures it deems fit and to cancel the licence of an intermediary for non-compliance with the directions issued by the SEBI, including, for instance, the SEBI AML Guidelines.

Describe any related asset freezing, forfeiture, disgorgement and victim compensation laws.

Provisional attachment

The PML Act provides for the provisional attachment of any property that is the proceeds of crime, pending a final confirmation by the Adjudicating Authority under the PML Act. The term ‘property’ has been defined very broadly to mean any property or assets of every description, whether corporeal or incorporeal, movable or immovable and tangible or intangible, and it includes deeds and instruments evidencing title to, or interest in, such property or assets wherever located. Further, the term ‘property’ includes property of any kind used in the commission of an offence under the PML Act or any scheduled offence.

The PML Act also envisages the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, such right of attachment also extends to property (equivalent to the proceeds of crime) held outside India.

In terms of section 5 of the PML Act, if the ED has reason to believe, based on the materials in its possession, that a person is in possession of the proceeds of crime and those proceeds are likely to be concealed, transferred or dealt with in any manner that may result in the frustration of any proceedings relating to the confiscation of those proceeds, then the ED, by an order in writing, may provisionally attach such property for a period of 180 days from the date of the order or until a confirming order is passed by the Adjudicating Authority under section 8(2) of the PML Act (whichever is earlier). An order of provisional attachment can be made only after a report has been forwarded to a magistrate under section 173 of the CrPC in relation to a scheduled offence or a complaint has been filed before a magistrate for taking cognisance of the scheduled offence. The PML Act was amended to clarify that, in computing the 180-day period for provisional attachment of the property, the period during which the proceedings are stayed by the relevant high court is excluded and a further period not exceeding 30 days from the date of order of vacation of the stay order is counted.

The PML Act does not define or explain the term ‘reason to believe’. However, the construction of the phrase may be aided by the definition of the term in section 26 of the Indian Penal Code 1860, wherein it is provided that a person may have reason to believe something if there is sufficient cause to believe it, but not otherwise. The courts have held that reason to believe does not mean a purely subjective satisfaction and the belief must be held in good faith (see Income Tax Officer v Lakhmani Mewal Das ([1976] SCR (3) 956)). It is up to the courts to examine the reasons for a belief, and to ascertain whether such reasons are relevant and not extraneous to the matter in question.

It has been held by the courts (albeit not in the context of the PML Act, but in the context of other statutes) that a mere doubt or suspicion cannot constitute a reason to believe. Following provisional attachment under section 5 of the PML Act, the ED (or an officer authorised in this regard) is required to forward the material in its possession along with the provisional attachment order in a sealed envelope to the Adjudicating Authority in accordance with the procedure prescribed in the Prevention of Money Laundering (the Manner of Forwarding a Copy of the Order of Provisional Attachment of Property along with the Material, and Copy of the Reasons along with the Material in respect of Survey, to the Adjudicating Authority and its Period of Retention) Rules 2005. The PML Act specifically permits a person interested in the ‘enjoyment’ of immovable property to enjoy the immovable property that has been attached.

In the B Rama Raju v Union of India (2011 164 CompCas 149(AP)) judgment, the High Court of Andhra Pradesh held that for the purposes of attachment and confiscation (which are civil and economic consequences and not penal sanctions and are distinct from the process for prosecution under the PML Act) neither mens rea nor knowledge that a property has a lineage of criminality has been statutorily prescribed as a prerequisite. Therefore, even where a person has not been charged with the predicate offence or the offence of money laundering, the authorities may, nevertheless, attach (and confiscate) property in the possession of the person if the property constitutes the proceeds of crime.

What are the limitation periods governing money laundering prosecutions?

The PML Act does not specifically provide for a limitation period in relation to the offence of money laundering. However, section 468 of the CrPC specifies the limitation periods of various categories of offences in India. Under section 468, there is no limitation period for an offence punishable with imprisonment for a term greater than three years. The CrPC defines the term ‘offence’ as ‘any act or omission made punishable by any law for the time being in force’. Consequently, the offence of money laundering under the PML Act constitutes an ‘offence’ within the meaning of the CrPC. Given that the offence of money laundering is punishable with a term of imprisonment of between three and 10 years, in accordance with the provisions of section 468 of the CrPC, there is no limitation period for the offence of money laundering.

Further, under section 468 of the CrPC, if two or more offences are being tried together, then the limitation period for each offence will be determined with reference to the offence that is punishable with the most severe punishment. Thus, if a person is prosecuted simultaneously for a scheduled offence punishable by imprisonment for a term of less than three years together with the offence of money laundering under the PML Act (which is punishable with imprisonment for three or more years), even if the limitation period for the underlying scheduled offence may have expired when considered independently, the accused person may still be tried for the scheduled offence in light of section 468 of the CrPC given that the limitation period in such a scenario for both offences would be determined based on the offence of money laundering and not the scheduled offence.

Do the money laundering laws applicable in your jurisdiction have extraterritorial reach?

The PML Act applies to the whole of India; however, its application is not restricted to proceeds of crime situated in India. The term ‘proceeds of crime' is defined under the PML Act to include any property or assets, wherever located, derived from or obtained as a result of criminal activity relatable to any of the scheduled offences. The PML Act also envisages the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, such a right of attachment also extends to property (equivalent to the proceeds of crime) held outside India.

To give effect to this limited extraterritorial application in the context of certain specified offences that may be committed abroad (which also constitute scheduled offences if committed in India) but the proceeds of which may have been remitted to India, or where the scheduled offence may have been committed in India but the proceeds of the crime are remitted abroad, section 56 of the PML Act empowers the central government to enter into reciprocal arrangements with the government of any country outside India to enforce the provisions of the PML Act and to exchange information for the prevention of any offence under the PML Act or under the corresponding law in force in that country, or for investigation under the PML Act.

The PML Act also contemplates offences of cross-border implications, which are:

• offences committed or related to conduct outside India that constitute an offence in that jurisdiction and are scheduled offences under the PML Act, and a part of or all the proceeds of crime arising from such conduct are remitted to India; or
• scheduled offences committed in India, and part of or all the proceeds of the crime have been transferred or have been attempted to be transferred from India to a place outside India.

Offences of cross-border implications are scheduled offences under the PML Act and, accordingly, the PML Act may be applicable to those offences.

Further, UN Security Council Resolution 1373 (2001) obliges countries to freeze without delay the funds or other assets of:

1. persons who commit or attempt to commit terrorist acts, or participate in or facilitate the commission of terrorist acts;
2. entities owned or controlled directly or indirectly by point (1); and
3. persons and entities acting on behalf of, or at the direction of, points (1) or (2), including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by those persons and associated persons and entities.

Each country has the authority to designate the persons and entities that should have their funds or other assets frozen. Additionally, to ensure that effective cooperation is developed between countries, countries should examine and give effect to, if appropriate, the actions initiated under the freezing mechanisms of other countries. To give effect to the requests of foreign countries under UN Security Council Resolution 1373 (2001), the Ministry of External Affairs will examine the requests made by foreign countries and forward it electronically, with their comments, to a designated officer for the freezing of funds or other assets. Freezing orders take place without prior notice to the designated persons involved.