Recent data from the Finance Minister reveals that since 2015, the Enforcement Directorate (ED) has taken up 5,892 cases under the Prevention of Money Laundering Act (PMLA) 2002. However, only 15 convictions have been secured so far. This raises concerns about the effectiveness of enforcement and the rising trend of money laundering in India.
About Money Laundering
Money laundering is the process of concealing the origins of illegally obtained money. It involves making such money appear legitimate. The Prevention of Money Laundering Act defines it as activities that hide the proceeds of crime or claim them as untainted property. The process occurs in three stages – placement, layering, and integration. Placement involves introducing illegal money into the financial system, often by breaking it into smaller sums (smurfing). Layering moves money through various transactions to obscure its source. Integration brings the laundered money back into the economy via assets like real estate or businesses.
Role and Origin of Laundromats
The term laundromat originated in the US, referring to financial vehicles used by organised crime to disguise illicit funds. Laundromats can be banks or financial firms that help clients launder money, evade taxes, hide assets, or transfer funds offshore. They serve as all-purpose tools for money laundering and financial crimes.
Legal Framework under PMLA
The PMLA was enacted to prevent money laundering and confiscate properties derived from crime. It places the burden of proof on the accused. Enforcement Case Information Reports (ECIRs) are sufficient to start proceedings without the need for a First Information Report (FIR). The Supreme Court has ruled that money laundering harms the financial system and national integrity. However, a scheduled offence must exist for prosecution under Section 3 of the Act.
Challenges in Enforcement
Despite stringent laws, money laundering cases are rising. Conviction rates remain very low, indicating gaps in investigation and prosecution. The law has sometimes been misused for political motives. The Supreme Court has emphasised that while property attachment can occur without a registered offence, prosecution requires a scheduled offence. Authorities must balance enforcement with protecting citizens’ rights and avoid misuse of the law.
Impact on Economy and Security
Money laundering inflates money supply, threatening monetary stability and increasing inflation. It distorts trade and financial markets. Critically, it is linked to terror financing, making it a national security concern. Effective detection and prosecution are essential to curb these risks.
International Cooperation and Measures
India has signed Double Taxation Avoidance Agreements (DTAAs) with about 85 countries. These promote exchange of financial and tax information to combat tax evasion and money laundering. The Financial Action Task Force (FATF) guidelines urge careful and transparent handling of cases to prevent misuse and improve conviction rates. Strengthening international cooperation is key to tackling cross-border laundering.
Way Forward for Enforcement Agencies
Agencies must improve investigation quality and avoid politically motivated cases. Following FATF recommendations can help ensure genuine cases are pursued. Transparency and accountability in enforcement will build public trust. Enhanced training and technology adoption can boost detection and prosecution efficiency.
Questions for UPSC:
- Point out the challenges faced by enforcement agencies in effectively implementing the Prevention of Money Laundering Act, 2002 in India.
- Critically analyse the impact of money laundering on a country’s economy and national security with suitable examples.
- With suitable examples, estimate the role of international agreements like Double Taxation Avoidance Agreements in combating money laundering and tax evasion.
- Underline the measures suggested by the Financial Action Task Force (FATF) for preventing misuse of anti-money laundering laws and enhancing conviction rates.
