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Money laundering and Prevention of Money Laundering Act (PMLA) 2002

06 Aug 2025 GS 3 Economy
Money laundering and Prevention of Money Laundering Act (PMLA) 2002 Click to view full image
Context: A report submitted by the Finance Minister in the Rajya Sabha states that 5,892 cases were taken up by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) 2002, since 2015. Of these cases, only 15 convictions have yet been ordered by special courts. 

Current Status (As per Finance Minister’s Report)

  • Cases under PMLA (since 2015): 5,892

  • Convictions: 15

  • Conviction rate: ~0.25%

  • Overall:

    • Conviction rate is very low.

    • Indicates rising trend of money laundering.

    • Questions effectiveness of law enforcement.

What Is a Laundromat?

  • Definition: A financial structure used to launder money.

  • Functions:

    • Launder crime proceeds.

    • Evade taxes and currency restrictions.

    • Hide ownership of assets.

    • Move money offshore.

  • Often disguised as banks or financial institutions.

Three Stages of Money Laundering

  1. Placement:

    • Dirty money is introduced into the financial system.

    • Method: Smurfing (breaking large sums into smaller ones).

  2. Layering:

    • Money is moved through complex transactions or offshore accounts to obscure origin.

  3. Integration:

    • The 'cleaned' money re-enters the economy (e.g., real estate, businesses, luxury assets).

Legal Framework: Prevention of Money Laundering Act (PMLA), 2002

  • Key Provisions:

    • Burden of proof lies on the accused.

    • No FIR required; ECIR (Enforcement Case Information Report) is sufficient to begin proceedings.

    • Scheduled offence is needed for prosecution under Section 3.

    • Attachment of property under Section 5 can occur without a pre-registered case.

Notable Supreme Court Judgements

  • P. Chidambaram vs ED (2019):

    • Money laundering undermines financial stability, sovereignty, and national integrity.

  • Vir Bhadra Singh vs ED (2017):

    • ECIR is enough to start investigation; FIR not required.

  • Vijay Madanlal Chaudhury vs Union of India (2022):

    • Scheduled offence needed for prosecution.

    • But property can be attached without pre-registered case → often misused for political motives.

Double Taxation Avoidance Agreement (DTAA)

  • Signed with: ~85 countries

  • Purpose:

    • Prevent double taxation.

    • Facilitate information exchange on tax matters.

    • Enhance enforcement of tax laws.

    • Helps curb tax evasion and money laundering across borders.

Challenges

  • Rising number of cases, but extremely low convictions.

  • Potential misuse of PMLA by authorities.

  • Lack of clear prosecution mechanisms.

  • Terror funding link adds urgency to address the issue.

Recommendations to Tackle Money Laundering

  1. Strict, transparent implementation of PMLA.

  2. Prevent political misuse of investigation powers.

  3. Align fully with FATF (Financial Action Task Force) standards.

  4. Strengthen international cooperation via DTAA and global treaties.

  5. Improve investigative quality to enhance conviction rates.

  6. Use technology & data analytics for tracking suspicious transactions.

  7. Conduct periodic audits of financial institutions.



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