Why in News?

• The Finance Minister reported in the Rajya Sabha that:

  • 5,892 cases have been taken up by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) 2002 since 2015.

  • Out of these cases, only 15 convictions have been secured by special courts.

• This raises serious concerns about:

  • The increasing number of money laundering cases

  • The low conviction rate

  • The effectiveness of the law in tackling such financial crimes

What is Money Laundering?

• Definition (Section 3 of PMLA):

  • Money laundering refers to any process or activity connected with the proceeds of crime where such proceeds are concealed, possessed, acquired, or used and projected as untainted property.

• It involves:

  • Disguising illegally obtained money

  • Making it appear legitimate or legal

Origin of the Term “Laundromat”

• The term comes from:

  • The use of laundromats (self-service washing facilities) by organised crime syndicates in the United States as fronts to hide illegal money

• Today, it broadly represents financial vehicles such as:

  • Shell companies or fake businesses used to:

    • Launder proceeds of crime

    • Hide ownership of assets

    • Evade taxes and currency restrictions

    • Transfer money offshore

Stages of Money Laundering

Placement

• The initial stage where illicit money is introduced into the financial system

• Techniques include:

  • Smurfing: breaking large amounts of cash into smaller deposits to avoid detection

Layering

• Funds are moved across accounts or jurisdictions to obscure their origin

• Involves:

  • Multiple complex financial transactions

  • Investments and transfers to create confusion

Integration

• The final stage where laundered money re-enters the economy appearing legitimate

• It is invested in:

  • Real estate

  • Businesses

  • Luxury goods

  • Other assets

Impact of Money Laundering

Economic Effects

• Expands money supply and distorts financial markets

• Affects monetary stability and inflation

• Impacts trade by enabling:

  • Unfair competition

  • Illegal funding

National Security Risks

• Linked to:

  • Terror financing

  • Organised crime

• Undermines:

  • The sovereignty and integrity of the nation (Supreme Court, P. Chidambaram vs ED, 2019)

International Reputation

• Weak enforcement affects:

  • India’s credibility in global financial systems

• Can invite:

  • Scrutiny from global bodies like the Financial Action Task Force (FATF)

Legal Framework in India – Prevention of Money Laundering Act (PMLA), 2002

Purpose

• To prevent and control money laundering

• To confiscate property derived from or involved in money laundering

Key Features

• Burden of Proof: Lies on the accused to prove that the money is legitimate

• Enforcement Case Information Report (ECIR): Considered equivalent to an FIR and sufficient to initiate proceedings (Vir Bhadra Singh vs ED, 2017)

• Scheduled Offences: The act of money laundering is dependent on the existence of a “scheduled offence” (predicate offence)

Judicial Interpretations

Vir Bhadra Singh vs ED (2017)

• Held that no FIR is required to initiate proceedings

• ECIR is sufficient

1. Chidambaram vs ED (2019)

• Emphasised that:

  • Concealing illegal sources of money affects sovereignty and national integrity

Vijay Madanlal Chaudhury vs Union of India (2022)

• For initiating prosecution under Section 3:

  • A registered scheduled offence is required

• However, under Section 5:

  • Property attachment can be done without a pre-registered criminal case

  • This has led to misuse by authorities

Issues with Implementation of PMLA

Low Conviction Rate

• Only 15 convictions out of nearly 5,900 cases since 2015

Increasing Cases

• The rising number of money laundering cases indicates:

  • Gaps in enforcement and deterrence

Alleged Misuse

• Cases of politically motivated misuse have been highlighted by the Supreme Court

Complex Process

• Investigation and prosecution are often:

  • Slow

  • Involve extensive financial tracking across jurisdictions

International Measures – FATF and Global Standards

Financial Action Task Force (FATF)

• An intergovernmental body that:

• • Sets global standards for anti-money laundering (AML) and counter-terrorist financing (CFT)

• Recommends:

• • Strict regulations

  • Reporting mechanisms

  • International cooperation

• India is:

• • A member of FATF

  • Expected to comply with its guidelines

Double Taxation Avoidance Agreement (DTAA) and Its Role

What It Is?

• A treaty signed between two or more countries to:

  • Avoid double taxation of the same income

• India has signed DTAA with:

  • About 85 countries

How It Helps in Preventing Money Laundering

• Facilitates:

  • Exchange of tax and financial information between participating countries

• Helps:

  • Track suspicious cross-border transactions

  • Identify illegal fund transfers

• Assists tax authorities in:

  • Identifying cases of tax evasion and related money laundering activities

Way Forward

Strengthen Enforcement Mechanisms

• Modernise investigation tools

• Use technology-driven financial tracking

Increase Conviction Rate

• Improve coordination between:

  • ED, judiciary, and police

• Ensure faster trials

Prevent Misuse

• Ensure checks and balances

• Stop politically motivated investigations

Global Cooperation

• Enhance information-sharing under DTAA

• Collaborate closely with:

  • FATF

  • Other nations

Public Awareness

• Educate:

  • Businesses

  • Financial institutions

• On compliance and reporting of suspicious transactions

Conclusion

• Money laundering remains a serious economic and national security challenge in India

• Despite stringent laws like PMLA and global agreements such as DTAA:

  • Rising cases and low convictions indicate the need for:

    • Stronger enforcement

    • Judicial reforms

    • International cooperation

• Tackling money laundering is crucial:

  • Not only for financial stability

  • But also to curb its linkages with terror funding and organised crime