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India requires adding more teeth to money laundering laws
June, 16th 2008

Indian readers need no introduction to the term "money laundering". The concept of coloured cash and cleaning procedures are familiar, but the perception of our lawmakers and citizens have been restricted to tax evasion with various laws dedicated to eradicate this phenomenon.

No serious efforts were made to identify the genesis of the problem, the sources of tainted money, accumulation, modes of channelisation into a nation's financial system - yet India is perceived to be a major centre for "hawala" transactions, and needs to assess the threat not just to its economy, but its political system and sovereignty.

The amendments to the Prevention of Money Laundering Act (PMLA), 2002, should be aimed at detecting and identifying money laundering and cross- border proceeds, with appropriate tools for deterrent and detection.

The international community has recognised the adverse consequences of cross-border money laundering movements as early as the 1980s and taken several initiatives such as the Vienna Convention (1988), dealing with drug trafficking money, and the Palermo Convention (2000) focusing on transnational crimes, none of which has been ratified by India. India is yet to become a member of the Financial Action Task Force on Money Laundering (FATF), which seeks to improve national legal systems by introduction of international standards.

Currently, India has three separate laws dealing with money laundering. The Narcotics and Psychotropic Substances (NDPS) Act, 1985, applies to proceeds of drug offences in certain limited situations, the Unlawful Activities Act (UAPA), which under a 2004 amendment, provides for raising funds for terrorism being a predicated offence and PLMA, which came into effect only when the Rules were in place in 2005, and is intended to deal with all types of money laundering.

The NDPS Act, which applies only to drug offences, does not require a conviction for the predicate offence. PMLA requires a predicate offence conviction in order to take cognisance, and the schedules to the Act include corruption, prosecution of wildlife, drug and human trafficking, but virtually ignore capital and financial markets.

India has, however, taken initiatives in the accountability and supervisory roles of regulator in financial and capital markets, which are dealt by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda). The roles are well defined, and the RBI was the first to establish the customer due diligence guidelines while Sebi's vigilance in protecting capital markets does not need elaboration. Sebi promulgated its own guidelines on anti-money laundering measures even before the RBI.

Section 12 of PMLA requires all banks and intermediaries to maintain records of all transactions, according to nature and value and report to the director - currently under the rules this includes cash transactions involving more than one million rupees, or even less if connected integrally, involving forgery or counterfeit notes or instruments or any suspicious debits, credits, payments, loans etc. In all fairness the PMLA rules pertaining to the maintenance of and verification of records for all the sectors have been in place since 2005. But the existing regimes encompassing PMLA, UAPA and NDPS have been virtually ineffective, with investigations far and few, and even lesser prosecutions and convictions till date.

Powers of confiscation, freezing and forfeiture are also largely dependant on the law providing for the predicated offence. In fact the PMLA provides for confiscation of proceeds of crime, but not of the instrumentalities used in an offence. International cooperation depends on bilateral arrangements and treaties where they exist, and letters of request in others. This is where FATF membership would provide a single window.

The proposed amendments seek to incorporate existing key provisions of the PMLA rules in recording and maintaining information and making reporting mandatory for all intermediaries, particularly for all foreign transactions. Casinos, money changers and transfer service providers, international credit card gateways are to be subjected to regulatory and reporting requirements. As of now, the latter are governed by the RBI regulations that mainly deal with their customer-related operations.

All offences pertaining to insider trading and market manipulation will also be brought into PMLA as well as smuggling of antiques, terrorism funding, human trafficking other than prostitution, and a wider range of environmental crimes.

To effectively combat cross-border money laundering, India has to make its financial systems FATF compliant, provide for better tracking measures, and incorporate proper mechanisms for investigation, prosecution, easier extradition processes, cross border applicability in foreign jurisdictions, even when the predicated offence is committed in India.

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