The recent years have witnessed a significantly larger number of money laundering and foreign exchange violation cases in India according to the Directorate of Enforcement (ED). Between the years 2019-20 and 2021-22, the directorate registered 14,143 cases under the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA), as opposed to only 4,913 cases from 2014-15 to 2016-17. The highest number was reported in the year 2021-22.
Understanding the Foreign Exchange Management Act, 1999
The legal administration of foreign exchange transactions in India falls under the purview of the Foreign Exchange Management Act (FEMA), 1999. This act, effective from June 1st, 2000, classifies all transactions involving foreign exchange into either capital or current account transactions.
Current account transactions refer to those conducted by an Indian resident that do not alter his/her assets, liabilities or contingent liabilities outside India. These transactions mainly feature payments related to foreign trade and travel, education, and other similar expenses.
Capital account transactions are those where the resident’s assets or liabilities outside India change either by increase or decrease. Investments in foreign securities and acquisition of immovable property outside India stand as examples for this category.
FEMA, 1999 defines a ‘person resident in India’ under Section 2(v) with a few exceptions as someone who has stayed in India for over 182 days during the preceding financial year. This definition also encompasses any person or corporate body registered or incorporated in India and offices, branches or agencies in India owned or controlled by a person resident outside India.
Insights into the Prevention of Money Laundering Act, 2002
India has implemented the Prevention of Money Laundering Act (PMLA), 2002, to combat money laundering. All financial institutions, banks (including RBI), mutual funds, insurance companies, and their financial intermediaries are subject to this act’s provisions.
The PMLA (Amendment) Act, 2012 expanded the concept of ‘reporting entity’ to include banking companies, financial institutions, and intermediaries. While PMLA, 2002 capped fines at Rs 5 lakh, the amendment removed this upper limit and provisioned for provisional attachment and confiscation of properties belonging to anyone involved in such activities.
Previous Year Questions on FEMA and PMLA in UPSC Civil Services Examination
In a past UPSC Civil Services Examination, candidates were asked to identify which group of items gets included in India’s foreign-exchange reserves. The correct answer was foreign-currency assets, gold holdings of the RBI and Special Drawing Rights (SDRs).
The examination also posed questions on emerging technologies and globalisation contributing to money laundering and the measures taken at national and international levels to tackle this problem. Another question focused on the linkages between drug trafficking and other illicit activities like gunrunning, money laundering, and human trafficking due to India’s proximity to two major illegal opium-growing states.
Foreign Exchange Reserves are retained by a central bank in foreign currencies. For India, these reserves consist of Foreign Currency Assets, Gold, SDRs, and the Reserve Tranche Position with IMF. This presents a foundation for understanding the steps taken by India to manage foreign exchange transactions and prevent money laundering.
