The Money Laundering Act

If you have been watching the news lately, you must have come across the term “Pandora Papers”, which shook the world with its report regarding all the rich families or businessmen with their tax evasion practices and many controversial names were a part of this report. Know More about the Money Laundering Act in this article.

But, there is a thin line difference between ‘tax evasion and ‘money laundering which is illegality. Where you earn money by illegal means and attract criminal liability, and then concealing those funds by transferring those funds into anonymous accounts oversees or through complicated financial transactions which may mislead anyone who tries to audit the transactions and trace their origin, is known as ‘Money Laundering’. 

These funds are proceeds from illegal activities such as trafficking, drugs, robbery or extortion, etc. The person who manipulates these funds is called a ‘launderer’ and the main aim of these transactions is to link these proceeds to a legal source and converting this black money into a legit currency.

‘Money Laundering’ defined under PMLA

To control this offense the Government of India passed an Act named ‘Prevention of Money Laundering Act’ in 2002. As per section 3 of this Act, money laundering is defined as whoever is involved directly or indirectly in any criminal activity such as drug or human trafficking, smuggling of arms, etc and any revenue generated via that activity and then disguising the proceeds as untainted property, shall be guilty of the offense of ‘money laundering.

This has been in news recently circling Jacqueline Fernandez and Nore fatehi of Bollywood, an investigation to which is still ongoing. Apart from these recent discoveries, the acts of Nirav Modi PNB Bank fraud, BOFORS scandal, SAHARA chit fund scam are a few of the reputed cases that shook the entire nation.

Money Laundering Process

Money Laundering is a 3-fold process:

1. Placement: The very first part of the process is placing the illegal proceeds into the market by way of investment. The launderer deals with certain agents or banks to assist him in investing this money into the financial system and make certain deposits with them.

2. Layering: In this stage as the name suggests the launderer tries to move the funds as far as he can from the source. To pursue this, the launderer invests in stocks, real estate, incorporates shell companies in different countries, or deposit their money in foreign accounts, especially in countries that do not disclose the identity of the account holder such as Swiss Bank in Switzerland.

3. Integration: This is the final stage where the launderer now withdraws his funds by legitimate transactions and can now transact using the legit currency.

Types of Money Laundering practices in India

1. Incorporating Shell companies: This is a very common method to make your illegal money legit. These companies exist only on paper and just act as an investment by the launderer or a deposit box to store their illicit money. No production takes place in such companies, the launderer shows huge amounts of funds procured from these companies as loans which hence, helps him in evading taxes. By the method of layering, a huge pile of transactions is created as a hoax to perplex the investigating agencies.

2. Purchase of Real Estate properties in Tax Haven countries: Tax Haven countries are those where there is either no or very less income tax or commercial tax charged, which attracts these launderers to invest in their economy in return for these tax benefits.

3. Deposit of funds into Foreign Banks: Launderers prefer to deposit their illegal proceeds in foreign banks especially those that do not disclose any of the personal information of the account holder so that the source of money cannot be traced. 

4. Trade-based Money Laundering: Launderers usually invest in some business with overpriced purchase invoices to smuggle the money and convert it into legal currency. For eg. in auction sales or art exhibitions, etc.

Other methods include the Hawala system, Credit Card laundering, Round-tripping, Casinos, Gambling, disguising the source as agricultural income, paying cash salaries, etc. These methods of money laundering are not exhaustive.

Prevention of Money Laundering Act, 2002

Under this Act, the offenses are defined as scheduled offenses which are further divided into three parts including different types of offenses.

Part A includes Indian Penal Code, 1860, Narcotic Drugs and Psychotropic Substances Act, 1985, Explosive Substances Act, 1908, Unlawful Activities (Prevention) Act, 1967, Arms Act, 1959, Wild Life (Protection) Act, 1972, Prevention of Corruption Act, 1988, the Companies Act, 2013 and the Customs Act, 1962.

Part B includes all the offenses defined above but the value involved is 1 crore or more.

Part C talks about trans-border offenses and establishes the objective of the Act towards combating this menace globally.

Regulatory Authorities

  • The Enforcement Directorate seated in the Department of Revenue under the Ministry of Finance has been bestowed with the duty to look into the matters or offenses related to money laundering.
  • Apart from this a new unit has been set up by the Ministry of Finance called ‘Financial Intelligence Unit’ whose job is to act as a watchdog over suspecting transactions, furthermore, this unit will also join global forces and assist in the investigation against offenses related to money laundering in India and the rest of the world.

Other agencies that investigate matters related to money laundering are SEBI, CBI, Customs Department, Local Police, and any other as the case may be.

Points to remember:

To hear the matters related to money laundering an Adjudicating Authority and Appellate Tribunal has also been set up by the Central Government under this Act. And this Act has an overriding effect over all other Acts, in case any law lies inconsistent with this Act, the statute stated in this Act shall prevail. No Civil courts have the power to hear any case related to Money Laundering as per section 67 of this Act.


In case any person is held under this offense:

– he/she will be charged with imprisonment for a period of a minimum of 3 years, which may extend to up to 7 years under the PMLA Act.

– In case the offense falls under the NDPS Act, then he/she may be charged with imprisonment for up to 10 years.

– In case, a company is booked under PMLA Act for money laundering, then every employee shall be held responsible for the offense and will be punished accordingly as defined under section 70 of the Act.

– Any property or asset linked to the illegal trades or transaction shall be seized by the investigating agency.

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