Money Laundering: Processes, Legal Framework, and Recent Reforms

Money Laundering: Processes, Legal Framework, and Recent Reforms


The article- “Questionable searches under the Money Laundering Act” from THE HINDU, delves into the controversial application and interpretation of the Prevention of Money Laundering Act, 2002 (PMLA) in the backdrop of a Supreme Court ruling, raising concerns about the overreach of central investigating agencies like the Enforcement Directorate (ED) into matters not covered by the PMLA.


GS-02 GS-03 (Government Policies & Interventions, Money Laundering)


Fugitive Economic Offenders Act, 2018 FEOA, Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 COFEPOSA.

Mains Question:

Should the Prevention of Money Laundering Act be more judiciously applied, especially in cases where central agencies like the ED extend their powers beyond the defined scope, leading to potential violations of federalism and abuse of authority? Explain. (250 words)

Money Laundering:

  • Money laundering, a complex process integral to illicit activities, involves disguising substantial funds acquired through crimes like drug trafficking or terrorist financing to make them appear legitimately sourced.
  • Criminal ventures such as arms sales, drug trade, smuggling, and cyber fraud yield substantial profits, motivating money launderers to legitimize their gains.

Stages of Money Laundering:

  • Placement: Illicit funds are first injected into the formal financial system, marking the initial stage.
  • Layering: In the second phase, the injected money undergoes layering, dispersed across various transactions to obscure its illicit origin.
  • Integration: The final stage sees the money seamlessly entering the financial system, aiming to erase any trace of its criminal association. This allows offenders to use the funds as ‘clean money.’

Prevention of Money Laundering Act (PMLA), 2002:

  • Enacted in response to India’s global commitments, the PMLA aligns with international agreements like the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988.
  • It forms a crucial part of India’s legal framework to combat money laundering, applicable to various financial entities.
  • Recent Amendments:
    • Proceeds of Crime Clarification: The definition broadens to include not only property derived from scheduled offenses but also those from activities related or similar to scheduled offenses.
    • Redefining Money Laundering: Formerly dependent on a predicate offense, money laundering is now treated as a standalone crime under Section 3 of PMLA.
    • Expanded Offenses: The amendment includes actions like concealment, possession, acquisition, and projecting as untainted property, treating them as integral to the offense.
    • Continuing Nature: Money laundering is recognized as a continuing offense until the individual benefits from its associated activities, emphasizing the prolonged accountability of offenders.

Dimensions of the Article:

  • Supreme Court’s Interpretation
  • Critique of Enforcement Directorate’s Actions
  • Federalism Concerns
  • Violation of Federalism and Constitutional Principles:

Supreme Court’s Interpretation:

  • The Supreme Court, in the case of Vijay Madanlal Choudhary and Ors vs Union of India and Ors. (2022), provided a restrictive interpretation of the Prevention of Money Laundering Act, emphasizing that its application is limited to “wrongful and illegal gain of property” resulting from criminal activity related to a scheduled offence.
  • The court asserted that the existence of “proceeds of crime” is essential for the Act’s provisions to be triggered.

Critique of Enforcement Directorate’s Actions:

  • The article criticizes the Enforcement Directorate’s (ED) actions, highlighting instances of searches, seizures, and arrests beyond its prescribed powers, as ruled by the Supreme Court.
  • The ED’s conduct has faced severe censure from the judiciary, exemplified in cases like Pankaj Bansal vs Union of India, where the court expressed dissatisfaction with the ED’s functioning and emphasized the need for probity, dispassion, and fairness.

Federalism Concerns:

  • The misuse of the Prevention of Money Laundering Act is particularly evident in states governed by the Opposition.
  • The article highlights instances where the ED, despite the Mines and Minerals (Development and Regulation) Act, 1957 not being covered by the PMLA schedule, investigates alleged illegal mining cases. This encroachment on state matters raises concerns about the erosion of federalism.

Violation of Federalism and Constitutional Principles:

  • The misuse of central investigating agencies in states governed by Opposition parties raises concerns about the erosion of federalism, a crucial aspect of India’s constitutional framework.
  • The article underscores the need to protect the basic structure of the Constitution and prevent the abuse of authority by central agencies.