Internal Security
Module – X
Money Laundering and Terrorist Financing
Money Laundering
Money laundering is the process of transforming illegally gained money or
proceeds of crime into legitimate money and assets.
Terrorist Financing
Money Laundering shares a direct connect with terrorist financing. They
have the following in common:
• Smuggling of Counterfeit notes
• Hawala Transactions
• Proceeds of narcotics trade, trafficking and other criminal activities
• Fraudulent investments
Financial Action Task Force (FATF)
• Formed in 1989 by the G7 countries, the FATF is an intergovernmental body whose purpose is to
develop and promote an international response to combat money laundering and terrorist financing.
• The FATF Secretariat is housed at the headquarters of the OECD in Paris.
FATF’s three primary functions with regard to money laundering are:
1. Promoting the adoption and implementation of FATF anti-money laundering standards globally.
2. Monitoring members’ progress in implementing anti-money laundering measures.
3. Reviewing and reporting on laundering trends, techniques and countermeasures.
• In October 2001, FATF expanded its mission to include combating the financing of terrorism.
• FATF is a policy-making body, which brings together legal, financial and law enforcement experts to
achieve national legislation and regulatory AML and CTF reforms.
• Currently, its membership consists of 39 countries and territories and two regional organizations.
• In addition, FATF works in collaboration with a number of international bodies and organizations.
Obligations of FATF Members
• Implement relevant international conventions.
• Criminalize money laundering and enable authorities to confiscate the
proceeds of money laundering.
• Implement customer due diligence (e.g., identity verification), record
keeping and suspicious transaction reporting requirements for financial
institutions and designated non-financial businesses and professions.
• Establish a financial intelligence unit to receive and disseminate suspicious
transaction reports.
• Cooperate internationally in investigating and prosecuting money
laundering.
FATF – Impact of Non-compliance
Since 2000, FATF has maintained –
• FATF Greylist (formally called the "Other Monitored Jurisdictions")
• FATF Blacklist (formally called "Call for Action” or "Non-Cooperative Countries or
Territories")
FATF & Pakistan
• Pakistan has been placed on the FATF Greylist thrice.
• Pakistan's inclusion in the grey list can be attributed to the fact that the country's anti-
terror laws are still not in line with FATF standards and also with the latest UN resolution
2462 that pitches for criminalising terrorist financing.
• What Pakistan has mostly done in the past is detain both Masood Azhar and Hafiz Saeed
for 'apprehension' of breach of peace. The FATF seeks freezing of funds, denial of weapons
access and travel ban.
• While there were some arrests of LeT, JeM, JuD cadres, they were all apprehended under
the country's Maintenance of Public Order Act and not the Anti-Terrorism Act, 1997.
• Consequences of being in the FATF Blacklist:
1. Economic sanctions from IMF, World Bank, ADB
2. Problem in getting loans from IMF, World Bank, ADB and other countries
3. Reduction in international trade
4. International boycott
5. Implications of capital inflows to the country
FATF & Pakistan
FATF & India
The Prevention Of Money Laundering Act, 2002
• The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal
framework put in place by India to combat money laundering.
• PMLA and the Rules notified there under came into force with effect from July 1,
2005.
• Director, FIU-IND and Director (Enforcement) have been conferred with exclusive
and concurrent powers under relevant sections of the Act to implement the
provisions of the Act.
• It imposes obligations on banking companies, financial institutions and
intermediaries to verify identity of clients, maintain records and furnish
information to FIU-IND.
• PMLA defines money laundering offence and provides for the freezing, seizure and
confiscation of the proceeds of crime.
• The objective of this act is to prevent money laundering and to provide for
confiscation of property derived from or involved in money laundering.
• The Unlawful Activities (Prevention) Act, 1967 (UAPA) is the legislation to combat
terrorist financing.
The Prevention Of Money Laundering Act, 2002
• Section 3 of PMLA, 2002 criminalizes money laundering.
• “Proceeds of crime” is the property derived directly or indirectly as a result of
criminal activity relating to an offence included in the Schedule to PMLA.
• The Director, Financial Intelligence Unit – India (FIU-IND) is the relevant authority
for the purpose of the provisions relating to maintenance of records and filing of
information.
• The Directorate of Enforcement (ED) is the law enforcement authority for the
provisions relating to search, seizure, confiscation of property, prosecution, etc.
• Burden of proof: A person, who is accused of having committed the offence of
money laundering, has to prove that alleged proceeds of crime are in fact lawful
property.
• Appellate Tribunal: It is given the power to hear appeals against the orders of the
Adjudicating Authority and any other authority under the Act. Orders of the
tribunal can be appealed in appropriate High Court and finally to the Supreme
Court.
2019 Amendment to PMLA
• The amendment seeks to treat money laundering as a stand-alone crime.
• Till now Money Laundering was not an independent crime; rather depended on another crime, known as
the 'predicate offence' or 'scheduled offence', the proceeds of which are made the subject matter of crime
of money laundering.
• It also expands the ambit of “proceeds of crime” to those properties which “may directly or indirectly be
derived or obtained as a result of any criminal activity relatable to the scheduled offence.
• The most crucial amendments are the deletion of provisions in sub-sections (1) of Section 17 (Search and
Seizure) and Section 18 (Search of Persons). These provisions required the pre-requisite of an FIR or charge
sheet by other agencies that are authorized to probe the offences listed in the PMLA schedule.
• An explanation is added to Section 45 that clarifies that all PMLA offences will be cognizable and non-
bailable.
• Therefore, ED will be empowered to arrest an accused without a warrant, subject to certain conditions.
• Another vital amendment makes concealment of proceeds of crime, possession, acquisition, use,
projecting as untainted money, or claiming as untainted property as independent and complete offences
under the Act.
• Section 72 will now give power to the Centre to set up an Inter-Ministerial Coordination Committee for
inter-departmental and inter-agency coordination for operational and policy level cooperation, for
consultation on anti-money laundering and counter-terror funding initiatives.
Criticism Against PMLA & ED
• Political opposition has alleged the misuse of Centre’s authority to use ED &
the stringent provisions of PMLA as a suppressing tool against its political
opponents.
• The criticism further gains strength on the statistical background, as the
conviction rate for the persons investigated/charged under the statute is
extremely low (under 1%).
• The 2019 Amendment further enlarged the powers of the ED.
• In 2022, the Supreme Court in a landmark ruling had upheld the
constitutionality of the PMLA and read the ED’s powers to arrest and
investigate cases.
Mains PYQ (2013)
Q. Money laundering poses a serious security threat to a country’s economic
sovereignty. What is its significance for India and what steps are required to
be taken to control this menace?
Mains PYQ (2017)
Q. The scourge of terrorism is a grave challenge to national security. What
solutions do you suggest to curb this growing menace? What are the major
sources of terrorist funding?
Mains PYQ (2018)
Q. India’s proximity to two of the world’s biggest illicit opium-growing states
has enhanced her internal security concerns. Explain the linkages between
drug trafficking and other illicit activities such as gunrunning, money
laundering and human trafficking. What countermeasures should be taken to
prevent the same?