Introduction & Summary
India has progressively fortified its regulatory and enforcement framework to combat the severe threats posed by money laundering and terror financing. At the core of this framework lies the Prevention of Money Laundering Act (PMLA), 2002, a robust legislation that empowers specialized agencies to track and confiscate illicit funds. This module comprehensively details the key provisions of PMLA, including its controversial aspects like the reverse burden of proof. It further elucidates the critical roles of the Financial Intelligence Unit – India (FIU-IND) in analyzing suspicious transactions and the Enforcement Directorate (ED) in investigating and prosecuting money laundering offenses. The module also outlines specific measures aimed at combating the financing of terrorism (CFT), underscoring India's commitment to cutting off the financial lifeline of criminal and terrorist enterprises.
6.4.1 Prevention of Money Laundering Act (PMLA), 2002
Purpose
Enacted to prevent money laundering, confiscate property derived from illicit activities, and align with international obligations (e.g., FATF recommendations).
Definition of Money Laundering (Sec 3)
Any process or activity connected with 'proceeds of crime' (derived from scheduled offences) and projecting it as untainted property.
Punishment (Sec 4)
Rigorous imprisonment for 3 to 7 years, extendable up to 10 years in cases involving proceeds of crime related to narcotic drugs, plus fine.
Powers of Attachment/Confiscation
- Provisional Attachment (Sec 5): ED can attach for 180 days.
- Adjudication (Sec 8): Authority confirms attachment.
- Confiscation (Sec 9): Property confiscated if found guilty.
Adjudicating Authority (Sec 6)
Independent quasi-judicial body to confirm or reject provisional attachment orders issued by the ED.
Appellate Tribunal (Sec 25)
Hears appeals against orders of the Adjudicating Authority and other authorities under the Act.
PMLA has been amended multiple times to strengthen its provisions and align with evolving FATF standards.
- 2005, 2009, 2012 Amendments: Primarily focused on expanding the list of scheduled offences, enhancing reporting requirements, and strengthening international cooperation.
- Recent Amendments (e.g., Finance Act 2019):
- Expanding Definition of Proceeds of Crime: Clarified that proceeds of crime include not only property derived from the scheduled offence but also any property derived or obtained "directly or indirectly" as a result of criminal activity related to the scheduled offence.
- Powers of ED: Enhanced ED's powers, including deeming the offence of money laundering to be a continuing offence.
- Non-Bailable Offences: Reinforced that offences under PMLA are non-bailable, making it extremely difficult for accused persons to get bail.
- Wide Powers to ED: Criticized for granting excessive powers of search, seizure, and arrest, potentially leading to misuse or harassment.
- Reverse Burden of Proof (Sec 24): A highly contentious provision. If a person is found in possession of proceeds of crime, the burden of proving that such proceeds of crime are not involved in money laundering lies on the accused (i.e., presumption of guilt unless proven innocent). Seen by critics as violating 'innocent until proven guilty' and human rights.
- Human Rights Concerns: Concerns about prolonged detention without trial, harshness of bail conditions, and potential for politically motivated cases.
- Low Conviction Rates: Despite a significant increase in cases, the conviction rate has remained very low, raising questions about investigative quality and ultimate efficacy.
Judicial Scrutiny (Vijay Madanlal Choudhary & Ors vs Union of India, 2022)
The Supreme Court largely upheld the constitutional validity of various stringent provisions of PMLA, including ED's powers and the reverse burden of proof, affirming the need for a robust law to combat money laundering.
However, the judgment also stressed the need for strict compliance with the due process of law.
6.4.2 Financial Intelligence Unit – India (FIU-IND)
Mandate
Established in 2004 as the central national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspicious financial transactions to relevant intelligence and enforcement agencies.
Reporting Entities
A wide range of entities are mandated under PMLA to report suspicious transactions to FIU-IND:
- Banks and Financial Institutions: Public and private banks, co-operative banks.
- Intermediaries: Stock brokers, mutual funds, insurance companies, payment system operators.
- Designated Non-Financial Businesses and Professions (DNFBPs): Real estate agents, jewelers, casinos, dealers in precious metals/stones, etc.
Types of Reports Received
- STRs (Suspicious Transaction Reports): Transactions suspected to be related to money laundering or terror financing.
- CTRs (Cash Transaction Reports): All cash transactions exceeding a specified limit (e.g., ₹10 lakhs).
- NTRs (Non-Profit Organisation Transaction Reports): Reports on suspicious transactions involving NPOs.
- CCRs (Counterfeit Currency Reports): Reports on detection of fake currency.
Role in FATF Assessments & International Exchange
- FATF Compliance: Crucial for India's compliance with FATF recommendations, providing data and analysis for mutual evaluations.
- Egmont Group: Member of the Egmont Group of Financial Intelligence Units, facilitating international information exchange to combat transnational money laundering and terror financing.
6.4.3 Enforcement Directorate (ED)
Mandate
A multi-disciplinary organization primarily mandated to investigate offences of money laundering under the PMLA and violations of the Foreign Exchange Management Act (FEMA), 1999.
Powers
- Summons: Can summon any person suspected to have information relevant to an investigation.
- Search and Seizure: Power to conduct searches of premises and seize documents or property.
- Provisional Attachment of Property: Can provisionally attach property for 180 days.
- Arrest: Can arrest persons believed to be guilty of money laundering.
Recent High-Profile Cases & Impact
ED has been actively pursuing numerous high-profile cases involving politicians, corporate entities, and individuals across various sectors (e.g., alleged corruption cases, bank frauds, illegal mining, drug trafficking, terror financing linkages).
Its aggressive enforcement has led to significant provisional attachments and confiscations of properties, disrupting the financial backbone of criminal enterprises. Its actions have often generated significant media attention and political debate due to the high-profile nature of its investigations.
6.4.4 Combating Financing of Terrorism (CFT) Measures
Dedicated Cells & Coordination
- Establishment of dedicated Counter-Terrorism Financing (CTF) Cells within investigative agencies (e.g., NIA's CTF cell) and intelligence agencies.
- Formation of a CTF Cell in the Ministry of Home Affairs (MHA) to coordinate efforts against terror financing.
- Seamless intelligence sharing among financial intelligence units (FIU-IND), intelligence agencies (IB, RAW), and enforcement agencies (ED, NIA).
Freezing of Assets of Designated Terrorists
- Under UAPA (Unlawful Activities (Prevention) Act), government has powers to freeze, seize, or attach properties of designated terrorist organizations and individuals.
- India actively implements UN Security Council Resolution 1267 sanctions, which require member states to freeze assets of individuals and entities designated as terrorists by the UN.
Summary Table: Regulatory & Enforcement Framework
| Agency/Act | Legal Basis | Primary Mandate | Key Powers/Functions | Note |
|---|---|---|---|---|
| PMLA, 2002 | Act of Parliament | Legal framework against Money Laundering (ML) | Defines ML, Punishment, Attachment, Confiscation, Reverse Burden of Proof | SC upheld key provisions in 2022 |
| FIU-IND | MHA (2004) | Financial Intelligence (receiving, analyzing, disseminating STRs, CTRs) | STR/CTR/NTR/CCR processing, FATF compliance, Egmont Group | Nodal for financial intelligence |
| Enforcement Directorate (ED) | PMLA, FEMA | Investigation & Prosecution of ML and FEMA violations | Summons, Search, Seizure, Arrest, Provisional Attachment | Primary ML/FEMA enforcement agency |
| CFT Measures | UAPA, UNSCR 1267 | Combating Financing of Terrorism (CTF) | Dedicated cells, Intelligence coord, Asset Freezing of designated terrorists | Integrated with AML framework |
Mains-ready Analytical Notes
Constitutional Validity and Misuse of PMLA
Arguments for Stringency: Necessary due to sophisticated, transnational nature of ML/TF; aligns with FATF; effective deterrent. (SC's 2022 judgment largely upheld).
Arguments for Concerns: Violates fundamental rights (Right to Liberty, presumption of innocence); prolonged incarceration; potential for political misuse; low conviction rates despite high cases.
FIU-IND's Efficacy and Data Overload
While FIU-IND receives a massive volume of reports, concerns exist about its capacity to effectively analyze this data, identify actionable intelligence, and disseminate it promptly to enforcement agencies, avoiding data overload.
Coordination Challenges
Despite formal mechanisms, practical coordination and seamless intelligence sharing between various agencies (FIU-IND, ED, CBI, NIA, state police, Customs) remain a challenge due to bureaucratic silos, turf wars, and lack of common platforms/training.
International Cooperation Gaps
Challenges in obtaining timely and sufficient information from foreign jurisdictions (especially tax havens), difficulties in extradition, and variations in legal systems hinder transnational money laundering investigations.
Historical/Long-term Trends & Impact
Post-9/11 Strengthening
PMLA and FIU-IND were established post-9/11, reflecting a global impetus to strengthen AML/CFT regimes.
FATF-driven Reforms
Subsequent amendments to PMLA and strengthening of FIU-IND and ED's mandates have been largely driven by FATF recommendations and mutual evaluation processes.
Increased Enforcement Action
A clear trend of increased enforcement action by ED under PMLA, with a significant rise in cases, provisional attachments, and arrests, reflecting a more aggressive stance.
Technological Adaptation & Asset Recovery
The framework continuously adapts to counter new methods (cryptocurrencies, online platforms) and focuses on asset recovery, hitting criminals financially.
Real-world/Data-backed Recent Examples
PFI Ban and ED/NIA Probes (2022)
Following the ban on Popular Front of India (PFI), the ED actively investigated alleged large-scale money laundering and terror financing by PFI, resulting in multiple arrests and attachments of properties.
Attached Properties under PMLA
ED's annual reports consistently show the attachment of properties worth thousands of crores under PMLA, indicating the scale of financial crime being targeted.
FIU-IND's STRs
FIU-IND processes millions of STRs and CTRs annually, leading to actionable intelligence for various enforcement agencies.
Operation Dhvast (NIA, May 2023)
NIA's recent operation targeting the 'terror-gangster-drug smuggler nexus' explicitly involved cutting off financial lifelines, demonstrating the integrated approach of AML/CFT efforts.
Current Affairs and Recent Developments (Last 1 Year)
SC's PMLA Judgment (July 2022)
The landmark Vijay Madanlal Choudhary & Ors vs Union of India judgment upheld the constitutional validity of the PMLA's key provisions, significantly boosting ED's powers.
G20 Consensus on Crypto Regulation
India, as G20 president, pushed for a global regulatory framework for cryptocurrencies and virtual assets, acknowledging their misuse for ML/TF, aligning with FATF's recommendations.
FATF Plenary Sessions
FATF continues mutual evaluation rounds; India's compliance is crucial. Recent plenaries focused on emerging risks like virtual assets.
ED's Focus on Online Gaming/Betting
ED has intensified investigations into money laundering through online gaming and betting platforms, freezing significant assets and making arrests, showing responsiveness to new methods.
UPSC Previous Year Questions (PYQs)
Prelims MCQs (2021)
Which of the following bodies is empowered to deal with offences of money laundering and violations of foreign exchange laws in India?
- (a) Financial Intelligence Unit - India (FIU-IND)
- (b) Central Economic Intelligence Bureau (CEIB)
- (c) Directorate of Revenue Intelligence (DRI)
- (d) Enforcement Directorate (ED)
Answer: (d) Enforcement Directorate (ED)
Prelims MCQs (2018)
The term "FATF" (Financial Action Task Force) is often seen in the news in the context of:
- (a) Countering nuclear proliferation.
- (b) Combating money laundering and terror financing.
- (c) Regulating international trade disputes.
- (d) Promoting financial inclusion in developing countries.
Answer: (b) Combating money laundering and terror financing.
Original MCQs for Prelims
Question 1
Which of the following powers is NOT a key provision granted to the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA), 2002?
- (a) Provisional attachment of property involved in money laundering.
- (b) Summons to any person suspected to have relevant information.
- (c) Power to conduct search and seizure of documents and property.
- (d) Power to declare an organization as a 'terrorist organization'.
Answer: (d)
Explanation: The power to declare an organization as a 'terrorist organization' primarily rests with the Central Government under the Unlawful Activities (Prevention) Act (UAPA), not with the ED under PMLA. The other three are key powers of the ED under PMLA.
Question 2
The "Reverse Burden of Proof" provision under Section 24 of the Prevention of Money Laundering Act (PMLA), 2002, implies that:
- (a) The Enforcement Directorate (ED) must prove that the accused is guilty of money laundering.
- (b) The accused must prove that the property involved is not tainted by money laundering.
- (c) The Adjudicating Authority is solely responsible for determining the guilt or innocence.
- (d) The Supreme Court automatically reviews all convictions under PMLA.
Answer: (b)
Explanation: The reverse burden of proof shifts the onus onto the accused to demonstrate that the proceeds of crime or property are untainted, rather than the prosecution having to prove their involvement in money laundering.
Original Descriptive Questions for Mains
Question 1: PMLA - Stringency vs. Civil Liberties
"The Prevention of Money Laundering Act (PMLA), 2002, has been central to India's fight against financial crimes, but its stringent provisions and the wide powers granted to the Enforcement Directorate (ED) have sparked significant debate. Critically analyze the arguments for and against the stringency of PMLA, and suggest reforms to balance its effectiveness with the protection of civil liberties."
(Hint: Structure your answer with Introduction, Arguments for Stringency, Arguments Against Stringency, Judicial Scrutiny, and Suggested Reforms. Focus on points like necessity, FATF alignment, human rights, reverse burden, low conviction rates, and suggestions for stronger oversight, capacity building, and speedy trials.)
Question 2: FIU-IND's Role and Challenges
"The Financial Intelligence Unit – India (FIU-IND) plays a pivotal role in India's AML/CFT regime, yet faces significant challenges in keeping pace with the evolving methods of illicit financial flows. Evaluate the mandate and functions of FIU-IND and discuss the measures required to enhance its effectiveness in combating money laundering and terror financing."
(Hint: Cover FIU-IND's mandate, functions (receiving, processing, analyzing, disseminating reports), challenges (data overload, skill gap, technological lag, coordination), and measures (tech upgrade, HR development, legal framework, international engagement, proactive analysis).)