1

Prevention of Corruption Act, 1988

The Prevention of Corruption Act of Prevention of Corruption Act, 1988

1988, is a landmark law in India. The The Prevention of Corruption Act,
Act is aimed at combating corruption 1988 is spread across a total of 5
in public service. chapters and 37 sections describing
every rule, regulation, the
The Prevention of Corruption Act, appointment of judges, penalty, and
1988 is a law introduced to prevent punishment for the offence.
corruption and other malpractices in
India’s government and public sector The Act ensures that fair and effective
businesses. investigation is carried out without any
external influences to punish the
The Prevention of Corruption Act, people involved in these criminal
1988 was enacted by the Parliament offences.
of India for the prevention of
corruption and matters related to it. The Prevention of Corruption Act
(PCA) was enacted in 1988. It
It defines various forms of corruption. consolidated anti-corruption laws in
The Act lays down severe India. The goal was to combat corrupt
punishments for corrupt acts. practices among public servants.

In the beginning, the law was The Prevention of Corruption Act

enforced all over India except Jammu plays a crucial role in the fight against
and Kashmir, but now the state has corruption.
been added to the list too. The effectiveness of the anti-
corruption drive hinges on the
Since the introduction of the Act, no Prevention of Corruption Act.
public servants involved in
malpractice were caught. Henceforth,
it was amended in the year 2008 in
the interest of the citizens.

The Prevention of Corruption Act was

amended in 2013 and 2018. The 2018
amendment introduced stricter
penalties.
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he Act empowers the Central To know the punishments and

Government or State Government to penalties, we have to understand the
appoint special judges for any offence Law enforced in detail; to know who
punishable under this Act. can be punished and on what
grounds, which officers are eligible to
The Act covers various offenses carry out the investigation and which
related to corruption. judges are appointed for the hearing
Attempts and conspiracies to commit of these cases; also, how the officers
such offenses are also covered. and judges are appointed.
The Prevention of Corruption Act is a
deterrent to corrupt officials. Take, for example, Mr XYZ is
The law ensures that corrupt officials operating a private bank with the help
are held accountable for their actions. of a licence issued by the Reserve
Bank of India.
Since he is now registered under a
Section 17A of PC Act Government Institution, he is a
Citing Section 17A of the Act, the government servant and hence can
bench emphasized that the section's be arrested and punished on the
purpose is to shield public servants grounds of bribery or other criminal
from baseless prosecution. offences.

However, if an inquiry uncovers Therefore, any citizen who is a

wrongdoing by a public servant government servant, if caught in
involving dishonesty, legal action can malpractice, can be arrested on the
be initiated with the approval of the charges of violation of this law.
Competent Authority. Talking about the officers carrying out
the investigation,

In the case of Delhi, no officer lower

than the position of Inspector is
allowed to carry out the legal
procedures of this case.

In metropolitan cities, like Bangalore

or Kolkata, an Assistant
Commissioner of Police is appointed
to carry out the investigation process.
Everywhere else, no one, other than a
Deputy Superintendent of Police, has
permission to interfere in the
investigation.
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The Prevention of Corruption Act,

1988 (PCA) in India prescribes severe
penalties for corrupt practices. The
Act identifies four types of corruption
offenses and their corresponding
punishments.

1=The first offense under the 3=The third offense specified by the
Prevention of Corruption Act is Prevention of Corruption Act is
"Taking gratification other than legal "Taking gratification with the purpose
remuneration." of wielding personal influence with a
This offense refers to accepting bribes public servant."
or other illegal gratifications. This offense refers to using illegal
The Act provides severe penalties for gratification to gain personal influence
this offense. over a public servant.

An individual found guilty could face The Act provides penalties for this
imprisonment for 6 months and up to offense.
5 years and also be liable to pay fine. A conviction for this offense carries
imprisonment for not less than 3 years
and up to 7 years.
The offender could also be fined.

2=The second offense under the 4= The fourth and final offense under
Prevention of Corruption Act is the Prevention of Corruption Act is the
"Taking gratification with the purpose "Act of criminal misconduct by a
of influencing a public servant through public servant."
illegal and corrupt means."
This offense refers to bribing a public This offense refers to using one's
servant to influence their actions. official position to commit a criminal
The Act provides severe penalties for offense or obtain illegal gratification.
this offense. The Act provides severe penalties for
this offense.
A conviction for this offense carries
imprisonment for not less than 6 Any public servant found guilty of this
months and up to 5 years. offense may face imprisonment shall
The offender could also be fined. not be less than 1 year and up to 7
years.

The offender could also be fined.

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Punishment and Penalties imposed, Amendments to the Prevention of

they solely depend on the severity of Corruption Act, 1988
the malpractice committed. While we take a look at the history of
this law after its enforcement in 1988,
eg, some of the cases are explained it was amended twice in public
as: interest.
In the years 2013 and 2018, some
Asking for gratification other than changes were introduced to improve
legal remuneration can land you in the effect on the citizens.
prison for 6 months to 5 years if found
guilty of any corruption while the Highlights of the amendments of 2013
investigation was carried out. Bribery was introduced as a
punishable offence.
A certain amount of monetary fine can A person who is obliged to bribe
also be imposed as per your position. should report this incident to law
enforcement within 7 days to prevent
Asking for gratification to influence a themselves from the charges.
public servant, through illegal and
corrupt practices can land you in Two types of offences were added to
prison for not less than 3 years the amended criminal misconduct.
which can be expanded up to 7 years The offences are illegal enrichment
including a heavy monetary fine for accumulating wealth
altogether. disproportionate to their properties.
The amendments were made only
Grabbing gratification to utilise
after being approved by the relevant
personal influence with public
government authority to conduct any
servants can add imprisonment from
investigation regarding any offences
6 months extendable up to 5 years
allegedly conducted by public
along with a legal notice compelling
servants.
you to pay a monetary fine as well.
However, if the offender has been
arrested on the spot for taking bribes,
Act of criminal misconduct by the
then there is no requirement for
public servant can result in
approval.
imprisonment ranging
from 1 year expandable up to 7 years
The trial limit for cases under the
including a heavy monetary fine.
Prevention of Corruption Act was
fixed for 2 years if the case is
assigned to a special judge.
The period for the trial is expected to
last only 4 years and not more than
that in any case.
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Highlights of the amendments of Conclusion

2018 The Prevention of Corruption Act,
Any government official or servant will 1988 came into effect on the 9th of
end up in prison extending from 3 to 7 September 1988
years along with the imposed to safeguard the interests of citizens
monetary penalties. and protect them from being forced
into paying heavy monetary charges
The 2018 amendment made a in the name of favours, also known as
provision to safeguard the citizens bribing, which is addressed as a
who are forced into paying a bribe, punishable offence by the
the condition being reported to be Government of India.
reported to the authorities within a
week. Any citizen of India who is a
registered government official or
servant, if caught asking for an extra
Conclude amount, besides the governmental
remuneration, is addressed as a
The Prevention of Corruption Act's violation of law and a punishable
stringent provisions act as a deterrent offence.
to corrupt practices.
The Act ensures that corrupt officials
are held accountable for their actions. Conclusion
The Act has been instrumental in The Prevention of Corruption Act,
curbing corruption in India. 1988 is a crucial Indian law. The Act
The Act covers various offenses defines various forms of corruption. It
related to corruption. prescribes severe punishments to
It provides for punishments and those found guilty of corruption.
penalties for each type of offense.
The Act promotes transparency and The Prevention of Corruption Act has
accountability in public service. faced criticism and limitations.
Amendments have been made to
strengthen the legal framework.

The revised Act aims to prevent and

punish corruption. However, there are
still issues with its application and
enforcement. In the struggle against
corruption, the Act is a crucial
weapon. To ensure its successful
implementation, ongoing efforts are
required.
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FAQ
Who introduced the Prevention of What is the role of the Central
Corruption Act of 1988? Vigilance Commission in
The Government of India introduced implementing the Prevention of
the Prevention of Corruption Act of Corruption Act?
1988.
The Central Vigilance Commission
What is the objective of the was established in 1964. The Indian
Prevention of Corruption Act? Government set it up.
The Prevention of Corruption Act aims
to prevent corruption. The commission was created based
It also provides punishment for on recommendations. These
corrupt acts. recommendations came from the
The Act defines what constitutes Committee on Prevention of
corruption. Penalties include Corruption.
imprisonment and fines.
The Act establishes mechanisms for Shri K. Santhanam headed the
investigation and prosecution. committee. The commission's role is
to advise and guide Central
Government agencies.
What are the types of corruption
covered under the Prevention of
Corruption Act?
The Prevention of Corruption Act
covers various types of corruption.
These include bribery and extortion.

The Act also covers the

misappropriation of property.

Abuse of power is another type of

corruption covered.

The Act aims to prevent these types

of corruption.

Can a bribe giver be punished under

the Prevention of Corruption Act?
The Prevention of Corruption Act
considers giving a bribe a direct
offense. Such an offense can result in
punishment.
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Highlights of Amendment Act Highlights of Amendment Act

of 2013 of 2018
The PCA, 1988 has been amended
by the Prevention of Corruption Offenses/ Others Punishments
(Amendment) Bill, 2013. Bribery Imprisonment for 3-7
The government circulated certain (Taking) years; fine
further amendments in 2015 to Bribery (Giving) Imprisonment for up to
improve the law. The key changes 7 years; fine
are: Misappropriatio Covered under
Offenses/ Punishments n of property criminal misconduct
Others and possession
Taking a Public servants accepting of
bribe (2015 any undue advantage other disproportionate
amendment) than legal remuneration assets
will be penalized. Forced bribe Protected if reported to
Giving a Giving a bribe to a public payments law enforcement
bribe (2013 servant is a direct offense. agencies within 7 days
Bill) Bribe givers will be Protection for Prior approval from
punished, except if they government competent authority
give a bribe to assist law servants needed for inquiry
enforcement authorities. except in cases of on-
Criminal Six types of offenses spot bribery arrests
misconduct including abuse of Establishing Required in corruption
(previously position, use of illegal "undue cases against public
defined) means, and disregard to advantage" servants
public interest. Trial duration Maximum 2 years for
Criminal Only two offenses are bribery and corruption
misconduct retained: misappropriating cases; trial cannot
(2013 Bill) property and amassing exceed 4 years even
disproportionate assets. after delays
Investigation Prior approval from Bribe-giving Liable for
of public Lokpal or Lokayukta is commercial punishment/prosecutio
servants required before organizations n
(2015 investigating a public Charitable Exempt from coverage
amendment) servant for alleged institutions
offenses. No approval is Attachment and Powers and procedures
required if a public official forfeiture of provided
is caught accepting bribes corruption-
on the spot. accused public
servant's
The 2018 amendment act brings significant property
changes to India's anti-corruption laws.
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Limitations and Criticism The amended Prevention of

Corruption Act lacks clarity in certain
Against the Prevention of Corruption areas.
Act of 1988 The Act does not specify the
The amendments to the Prevention of concerned authority for providing
Corruption Act 1988 have faced sanctions for investigating public
several criticisms. officials.

The amendments have reduced the Some significant provisions of the old
scope of what constitutes a corrupt law have been dropped.
public official. New definitions and words have
The amended law demands evidence replaced the old provisions.
of proof of intent to commit corrupt The new provisions may take
acts. decades to be properly interpreted by
This requirement is more stringent the judiciary.
than the previous law's definition of
corruption. The Bill requires prior permission from
The previous law defined corruption the Government or competent
as obtaining any valuable thing or authority to register certain corruption
financial advantage without offenses.
considering the public interest. This requirement may give immunity
to corrupt government officers.
The provision aims to prevent
Critics argue that the amended law frivolous or politically motivated
makes it harder to prosecute investigations.
corruption cases. However, the requirement may also
The revised Prevention of Corruption limit the prosecution of corrupt
Act narrows the definition of criminal officials.
misconduct.
Only two clauses, dealing with Even after retirement, corrupt public
misappropriation and unlawful servants may require sanction for
enrichment by public servants, are prosecution.
included in the revised Act. This requirement provides corrupt
officials with another layer of
The change aims to simplify and protection.
streamline the law. Overall, the amendments have
However, the revised provisions do limitations, and critics argue that they
not cover assets acquired illegally for do not go far enough in preventing
others. corruption in public service.
This gap in the law may limit its
effectiveness in combating corruption.
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Appointment of Special Judges

Authority to Designate Special Recognizing the urgent need to
Judges: Both the Central and State address this issue, the Indian
Governments have the authority to government enacted the Prevention of
appoint Special Judges by issuing a Corruption Act of 1988 to establish a
Notification in the Official Gazette. specialized legal framework for
These judges are tasked with trying combating corruption.
the following offenses:
This Act consolidated the provisions
Any offense punishable under this of the Prevention of Corruption Act,
Act. 1947, serving as a model for its
Any conspiracy to commit, attempt to enactment and providing a more
commit, or abetment of offenses comprehensive approach to tackling
specified under the Act. corruption.

To qualify as a Special Judge, the

individual must be or have been a
Session Judge, Additional Session
Judge, or Assistant Session Judge
under the Code of Criminal
Procedure, 1973.

Offences & Penalties Under

Prevention of Corruption Act, 1988
Enacted by the Indian Parliament on
September 09, 1988, the Prevention
of Corruption Act of 1988 is a crucial
legislation aimed at combating
corruption and fostering integrity in
public administration.

Before 1988, India lacked a

comprehensive law specifically
targeting corruption, hindering
effective prosecution and encouraging
a culture of impunity.
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Money Laundering
• Money laundering is the process • In the second stage, money
by which large amounts of illegally injected into the system is layered and
obtained money is given the spread over various transactions with
appearance of having originated from a view obfuscate the tainted origin of
a legitimate source. So basically, all the money. This process is called
the ways to convert the black money 'layering“,
into white money are Money
laundering. • In the third and the final stage,
But in Money laundering, the black money enters the financial system in
money must involve a predicate crime such a way that original association
such as the violation of Indian Penal with the crime is sought to be
Code, IPC, Narcotics, Prevention of obliterated so that the money can
Corruption. then be used by the offender or
person receiving as clean money.
Illegal arms sales, smuggling, and This is called 'Integration'.
other organized crime, including drug
trafficking and prostitution rings, can
generate huge amounts of money.

• Embezzlement, insider trading,

bribery and computer fraud schemes
can also produce large profits and
create the incentive to "legitimize" the
ill-gotten gains through money
laundering. The moneys so generated
is tainted and is in the nature of 'dirty
money'.

Money Laundering is the process of

conversion of such proceeds of crime,
that is to say the 'dirty money', to
make it appear as 'legitimate' money.

• The first stage is when the crime

money is injected into the formal
financial System. This is called
‘placement’,
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as banks, casinos, shops, and other

Money Laundering is the processing businesses.
of illegitimate money to disguise its During this phase, the following
illegal origin and make it appear as techniques are employed to conceal
coming from legitimate sources. the source and ownership of the
funds.
It is the process of making the dirty
money look clean. The illegitimate Breaking up the money:
money/ Black money arises from Money is divided into smaller sums
either proceeds of corruption, and depositing it into multiple bank
proceeds of crime, or tax evasion on accounts to avoid detection.
legally earned money.
Depositing across borders:
It enables the criminal to enjoy these The cash may be transported across
profits without fear of law enforcement borders and deposited in offshore
agencies. Therefore, it is an essential financial institutions to conceal or
step in almost all types of organised disguise to purchase high-value
criminal activities such as assets, such as
drug trafficking, artwork, diamonds, and gold, which
human trafficking, can be resold later for payment by
arms smuggling, cheque or bank transfer, further
and so on. distancing the illegal proceeds from
their source.
Moreover, money laundering is also
crucial in funding terrorism activities
around the globe including in India.

Process of Money Laundering

Money laundering involves 3 stages
that finally release laundered funds
into the legal financial system.
These 3 stages are as follows:

Placement
This is the first stage of the money
laundering process when illegal funds
are first introduced into the legitimate
financial system.
It is done through several methods,
including wire transfers or depositing
money into financial institutions such
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Layering Integration
It involves multiple financial In the last stage, dirty money
intermediaries and transactions to re-enters the mainstream financial
confuse Anti-money laundering (AML) system as a legitimate transaction.
checks. This is done in the form of business
Layering money laundering is investment, purchase, or the sale of
gradually adding legitimacy to the an asset bought during the layering.
source of illicit money, making it
difficult to track. The major methods used are as
It is generally considered the most follows:
complex stage.
Property dealing
Some of the methods utilised during Front companies and fraudulent loans
this step include: Foreign bank complicity
False import/export invoices
Changing the money's currency.
Multiple inter-bank transfers.
Multiple structured deposits and
withdrawals (Smurfing)

Purchasing high-value items such as

diamonds,
Cars, or
Property.

Multiple wire transfers between

multiple accounts in different
countries.

Opening "shell" companies.

Investing in businesses that require
minimal paperwork, such as currency
exchanges, art galleries, and car
washes.
Using money "mules."
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However, they may hold bank

accounts or investments.
Methods used in Money Transaction Laundering:
Laundering It is a type of electronic money
laundering that uses e-commerce to
Money laundering involves carrying obscure transactions.
out several transactions to hide the
origin of the money. Smugglers:
This technique is the earliest form of
Some major methods/ types of money laundering, involving the
transactions carried out are as physical transport of cash across
follows: borders. This has been a favoured
method for terrorists.
Structuring or Smurfing:
A smurf evades government scrutiny Hawala:
by breaking up large transactions into It is an informal system for
a set of smaller transactions that are transferring money around the world.
each below the reporting threshold. Hawala transfers money without any
physical money actually moving.
“Mules” or cash smugglers:
A money mule is someone who Cybercrime:
accepts and transfers money from Cyber crimes such as theft of identity,
fraud victims to smuggle it across illegal access to email, and credit card
borders and deposit it into foreign fraud are being carried out to aid in
accounts. money laundering and terrorist
Some money mules are aware that activities.
they are aiding in illegal activity, but
some are not aware. Open Securities Market:
Laundering is possible due to
Gaming and Gambling sectors: instruments like hedge funds and
The susceptibility to money participatory notes which have very
laundering is high in these sectors. limited disclosures to the source.
Given its high transaction volume and
potential for anonymity, effective AML Money laundering through crypto-
measures are necessary. currencies:
Cryptocurrencies are anonymous
Shell companies: therefore the placement stage of the
These are created to obscure or hide money laundering process is often
the assets of another entity. These absent.
companies exist only on paper and
lack a physical presence, staff,
revenue, or significant assets.
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Impacts of Money Laundering 1=Threats to Internal Security

Money laundering has severe and Organised and transnational crime
extensive impacts on businesses, include money laundering in some
economies, societies, and nations. form or other.
The major impacts of money
laundering are as follows: Terror financing:
Terrorism depends on money
laundering to finance their activities.
eg, funds flow from Pakistan’s ISI to
the operatives of various terrorist
groups like
Harkat-ul-Mujahideen (HUM),
the Harkat-ul-Jihad-al- Islamic (HUJI),
the Lashkar-e-Taiba (LET) and
the Jaish-e-Mohammad (JEM)
to carry out terrorist acts against
India.

The 26/11 Mumbai Terrorist attack

was financed through Money
Laundering and Hawala.

Organised Crime:
Narcotics trade,
human trafficking,
Illegal wildlife trade, and
illegal arms trade
all thrive on money laundering.

Extremism:
Naxalism/Left Wing extremism, and
insurgency in northeast Indian states
and other areas all benefit from
money laundering.

Cybercrime:
Cybercriminals can use modern
technology to launder money obtained
through cybercrime.
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money laundered globally in one year

is 2–5%of global GDP.
2=Economic Implications
As emerging markets open up their In some emerging markets these illicit
economies and financial sectors, they proceeds may surpass government
become increasingly easy targets for budgets, leading to a loss of control of
money laundering activities. The economic policy by governments.
major impacts are as follows:
Losing Effectiveness of Monetary
Adversely affects the Legitimate Policy:
Private Sector: Money laundering may result in
Money launderers use front inexplicable fluctuations in money
companies, which can subsidise demand and volatility of international
products and services at levels well capital flows, interest, and exchange
below market rates. rates.
The unpredictable nature of money
This results in the crowding-out of laundering leads to the loss of policy
private-sector businesses by criminal control.
organisations. Economic Distortion and Instability:
Money laundering redirects funds
It results in less profits and higher from sound investments to low-quality
costs to businesses along with higher investments.
prices to consumers. e.g. in some cases, entire
construction and hotel industries have
Affecting the Integrity of Financial been financed by money launderers.
Markets: They may abandon these industries
Large sums of laundered money may when their interests suit, causing a
arrive at a financial institution but then collapse of these sectors and
disappear suddenly, in response to immense damage to economies.
non-market factors, such as law
enforcement operations. This may Reduced confidence in markets due
lead to liquidity problems and runs on to money laundering diminishes
banks. legitimate global opportunities,
sustainable growth, and investments
Criminal activity is associated with while attracting international criminal
bank failures around the globe such organisations.
as in the case of the European Union Loss to Public Exchequer:
Bank. Money laundering adversely affects
Loss of Control of Economic Policy: government tax revenue and leads to
As per the United Nations Office on reduced spending on welfare
Drugs and Crime, the amount of
 16

measures or infrastructure
development.
This also leads to higher tax rates for
honest taxpayers.
Social Impacts Affect Stability:
Apart from adversely affecting the The social and ethical fabric of the
economy and security of the nation society will be jeopardised,
money laundering also causes severe threatening the democratic institutions
societal issues, listed as follows: of society. Further, it can fuel distrust,
protests, and anti-national activities.
Promote Crime:
There are significant social costs and Anti-Money Laundering Measures in
risks associated with money India
laundering. Money laundering is a Since 2020-21, the ED has registered
crucial process for organised 3,110 cases under the anti-money
criminals that allows drug traffickers, laundering law, and over 12,000
smugglers, etc. to expand their complaints to investigate alleged
operations. foreign exchange violations. The
following Anti-Money Laundering
Increase Fiscal burden: measures are taken:
This drives up the cost of government
due to the need for increased law
enforcement and health care
expenditures (for example, for
treatment of drug addicts) to combat
the serious consequences that result.

Rise in Corruption:
Money laundering transfers economic
power from the market, government,
and citizens to criminals.

Furthermore, the sheer magnitude of

the economic power that accrues to
criminals from money laundering has
a corrupting effect on all elements of
society.

It may even lead to the virtual

takeover of a legitimate government in
extreme cases.
 17

Customer due diligence (CDD)

requirements: The banking industry,
financial institutions, financial service
providers, gaming businesses, and
The Prevention of Money casinos have to ensure CDD
Laundering Act, 2002 (PMLA): requirements. It helps determine the
The provisions of this act apply to all customer's risk level. These
financial institutions, organisations have to conduct AML
Banks (Including RBI), checks, detect suspicious
Mutual funds, transactions of customers, and report
Insurance companies, and to authorised units.
their Financial Intermediaries.
Foreign Exchange Management Act,
It provides for the confiscation of 2000, (FEMA): It aims to prevent
property derived from, or involved in, money laundering and other illegal
money laundering which is activities related to foreign exchange
administered by: transactions. It enables regulation of
the flow of payments to and from
Financial Intelligence Unit (FIU-IND): people outside the country; regulation
FIU-IND is an independent statutory of all financial transactions involving
body under the PML Act, reporting foreign securities or exchange;
directly to the Economic Intelligence enables the RBI to place restrictions
Council (EIC) headed by the Finance on transactions from capital accounts,
Minister. etc.

It carries out verification of the identity RBI AML Guidelines: The guidelines
of clients, maintenance of records, enable Authorised Money Changers
and reporting. Businesses with AML (AMCs) that engage in the purchase
obligations report to the Financial and/or sale of foreign currency
Intelligence Unit. notes/traveller cheques to put in place
the policy framework and systems for
Enforcement Directorate (ED): the prevention of money laundering
It was formed under the Foreign while undertaking money-changing
Exchange Regulation Act of 1947. transactions. Guidelines also include
However, it has the role of enforcing Know Your Customer (KYC)
the PML Act as well apart from the requirements.
Foreign Exchange Management Act.
Benami Properties Transactions
It carries out the investigation of and (Prohibition) Amendment Bill, 2015:
prosecution of money-laundering The bill allows for the confiscation of
offences. Benami properties. A benami
 18

transaction is a property, held by one

person but the consideration for it is
paid by another.

Narcotic Drugs and Psychotropic

Substances Act, 1985: This Act does
not explicitly mention money
laundering, but it does include
provisions to seize and confiscate the
proceeds of drug trafficking.

Measures to Prevent Terror

Financing:
The Unlawful Activities (Prevention)
Act (UAPA)and amendments to the
PMLA provide provisions to designate
individuals and organisations as
terrorist entities, freezing their assets
and choking off funding.

International Cooperation:
Mutual Legal Assistance Agreements:
Mutual legal assistance agreements
facilitate the exchange of evidence
and prosecution of money laundering
cases with global dimensions.

Membership of FATF:
India has effectively used the
grouping to push for sanctions against
countries like Pakistan which was
placed in the grey list for indulging in
money laundering to fund terrorism.

India is a signatory to various

conventions of the UN: India is a
signatory to the Vienna Convention to
combat Money Laundering and other
relevant conventions of the UN.
 19

The convention mandates the

member states to criminalise the
laundering of money.
It promotes international cooperation
Anti-Money Laundering Measures and makes extradition between
at the Global Level member states possible.
The global nature of money
laundering requires global standards Other UN conventions: the UN
and international cooperation. The Transnational Organised Crime
Anti-Money Laundering measures Convention (2000), Convention for
taken at the Global Level are as Suppression of Financing of Terrorism
follows: (1999); Convention against
Transnational Organised Crime
Financial Action Task Force (FATF): (2000), and Convention against
The FATF is the global watchdog Corruption (2003) contain provisions
established at the G7 summit in Paris related to combating money
in 1989, to set standards and promote laundering.
effective implementation of regulatory,
legal, and operational measures to Asia/Pacific Group on Money
combat money laundering and Laundering: The APG is an inter-
terrorist financing. governmental organisation,
established on the lines of FATF,
consisting of 42 member jurisdictions
FATF Recommendations: from the Asia-Pacific region.
These are a set of measures that are The APG aims to ensure that
endorsed by over 180 countries. individual members effectively
implement international standards
United Nations Global Program against money laundering, terrorist
against Money Laundering, Proceeds financing, and proliferation financing
of Crime, and the Financing of related to weapons of mass
Terrorism (GPML): The GPML was destruction.
established in 1997 to help UN
member states comply with UN Eurasian Group on Combating Money
conventions and other instruments Laundering and Financing of
related to money laundering and Terrorism (EAG): The Eurasian Group
terrorism financing. is a regional body created on the lines
of FATF.
UN Vienna Convention: Money It comprises 9 countries from the
laundering has been addressed in the Eurasian region i.e. Belarus, China,
UN Vienna Convention adopted in Kazakhstan, Kyrgyzstan, India,
1988. Russia, Tajikistan, Turkmenistan, and
Uzbekistan.
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EAG is also an associate member of Customer (KYC) initiatives are at the

the FATF. heart of Anti-Money Laundering
measures in India.
FAQs
Q1. What are the steps in the money Money Laundering UPSC PYQs
laundering process? Question 1. Discuss how emerging
technologies and globalisation contribute to
money laundering.
Ans. The process involves three
Elaborate measures to tackle the problem of
major steps i.e. placement, layering, money laundering both at national and
and integration. Placement places international levels. (UPSC Mains 2021)
illegitimate money into the legitimate
financial system. Layering hides the Question 2. India’s proximity to two of the
source of the money through a series world’s biggest illicit opium-growing states
has enhanced her internal security
of transactions by making money non-
concerns.
traceable. Integration integrates the Explain the linkages between drug trafficking
money back into the market as clean and other illicit activities such as gunrunning,
money. money laundering, and human trafficking.
What countermeasures should be taken to
Q2. What is black money? prevent the same? (UPSC Mains 2018)
Ans. When the income is not declared
Question 3. Money laundering poses a
to evade taxes or hide its illegitimate serious security threat to a country’s
origin, it is termed black money. economic sovereignty.
Money Laundering is used as a What is its significance for India and what
means to convert black money into steps are required to be taken to control this
white money. menace? (UPSC Mains 2013)

Q3. What Is an Example of Money

Laundering?
Ans. Cash earned illegally by drug
smuggling may be laundered using
highly cash-intensive businesses such
as a restaurant. Here the illegal cash
is mixed with legitimate cash before
being deposited in a bank account.

Q4. What is the full form of CDD?

Ans. Customer due diligence (CDD)
includes performing background
checks and other screening on the
customer at the time of onboarding to
ensure that they are properly risk-
assessed. CDD and Know Your
 21

Scholars estimate illegal arms

transactions amount to over US$1
billion annually.
Q20. India’s proximity to two of the world’s The illegal drug trade, drug trafficking,
biggest illicit opium-growing states has or narcotrafficking is a global black
enhanced her internal security concerns.
market dedicated to the
Explain the linkages between drug trafficking
and other illicit activities such as gunrunning, Cultivation,
money laundering and human trafficking. Manufacture,
What countermeasures should be taken to Distribution and
prevent the same? Sale of prohibited drugs.

Introduction Most jurisdictions prohibit trade,

India's geographical proximity to two except under license, of many types
of the world’s largest opium-growing of drugs through the use of drug
regions—Afghanistan and the Golden prohibition laws. The think tank Global
Triangle (Myanmar, Laos, and Financial Integrity's Transnational
Thailand)—makes it vulnerable to Crime and the Developing World
drug trafficking. report estimates the size of the global
illicit drug market between US$426
This, in turn, heightens internal and US$652 billion in 2014 alone.
security challenges due to the nexus
between drug smuggling and other With a world GDP of US$78 trillion in
illicit activities such as gunrunning, the same year, the illegal drug trade
money laundering, and human may be estimated as nearly 1% of
trafficking. total global trade.

Body Consumption of illegal drugs is

Linkages between Drug Trafficking widespread globally, and it remains
and Other Illicit Activities very difficult for local authorities to
1=Gunrunning reduce the rates of drug consumption.
Arms trafficking or gunrunning is the
illicit trade of contraband small arms, Drug trafficking often goes hand-in-
explosives, and ammunition, which hand with the illegal arms trade.
constitutes part of a broad range of Criminal networks engaged in drug
illegal activities often associated with smuggling often use weapons to
transnational criminal organizations. protect their operations or finance
arms purchases.
The illegal trade of small arms, unlike
other organized crime commodities, is The inflow of illegal arms fuels
more closely associated with insurgency, terrorism, and organized
exercising power in communities crime, thereby escalating internal
instead of achieving economic gain. security concerns in India, particularly
 22

in border states like Punjab and policies, and non-governmental

Jammu & Kashmir. organizations.

2=Money Laundering Human trafficking can occur both

The profits from drug trafficking are within a single country or across
often funnelled through complex national borders. It is distinct from
financial transactions to legitimize the people smuggling, which involves the
funds, a process known as money consent of the individual being
laundering. smuggled and typically ends upon
arrival at the destination.
Laundered money not only facilitates
further criminal activities but also In contrast, human trafficking involves
destabilizes the economy by exploitation and a lack of consent,
corrupting institutions and enhancing often through force, fraud, or
the influence of organized crime coercion. Human trafficking is widely
syndicates. condemned as a violation of human
rights by international agreements
3=Human Trafficking such as the United Nations Protocol
Drug trafficking networks are to Prevent, Suppress and Punish
frequently linked to human trafficking Trafficking in Persons.
operations. Victims of human
trafficking are often forced into drug Despite this condemnation, legal
smuggling or exploitation within the protections and enforcement vary
drug trade. Additionally, drug significantly across countries.
dependency is used as a tool to Globally, millions of individuals,
control trafficked individuals, including women, men, and children,
exacerbating the cycle of exploitation. are estimated to be victims of human
‍ trafficking, enduring forced labor,
Human trafficking is the act of sexual exploitation, and other forms of
recruiting, transporting, transferring, abuse.
harboring, or receiving individuals
through force, fraud, or coercion for
the purpose of exploitation.
This exploitation may include forced
labor, sexual slavery, or other forms
of commercial sexual exploitation. It is
considered a serious violation of
human rights and a form of modern
slavery.

Efforts to combat human trafficking

involve international laws, national
 23

the people who are going to be

involved in the next stage of
withdrawing.
While drug trafficking is commonly
associated with violent crimes (such The money in the banking accounts is
as firearm offences), withdrawn and converted into other
financial crimes also play a crucial currencies,
part in the drug trafficking process. paid to other people and moved
around until its true source is difficult
To conceal any illegal activities from to trace.
authorities, drug traffickers will use
the process of Money Laundering to Finally, in the third stage, the money
convert funds raised from criminal is ‘INTEGRATED’ back into society
activities into revenue that comes and used for legitimate purposes such
from a perceived legal source. as purchasing high value property,
stocks, bonds, tourism, and so on.
Whether you have been accused of
laundering money that originated from A high amount of financial activity
drug trafficking, or have been charged between accounts is therefore a major
with failure to report suspected money sign of money laundering that could
laundering activities, consult expertise be linked to drug crime.
of a specialist criminal defence lawyer
right away. Illicit drug sales and money
laundering
What are the signs of drug trafficking When drug money has been raised, a
through money laundering? method known as ‘STRUCTURING’ is
First of all, drug traffickers will initiate used to break down the large volumes
‘PLACEMENT’, which involves of cash
placing the drug money into various that have been acquired into small
financial institutions. manageable sums.
This process generally includes
opening several bank accounts (often Other laundering methods involve
in different names), and wire transfers into different currencies,
storing varying amounts of money in the purchase of gems and other
these accounts. precious items or
jewellery, or
The second stage involves simply smuggling vast amounts of
‘LAYERING’ to create distance cash out of a country.
between the person who originally
placed the funds and
 24

Theft and robbery

Smuggling
Tax crime

What constitutes a predicate offence? Extortion

A PREDICATE OFFENCE in the Forging documents
context of money laundering occurs Piracy
when those who commit crimes, such Market manipulation (stock trading)
as drug trafficking, then launder the Terrorism
monies linked to those crimes. Cyber crime

A Predicate Offence is therefore an Can I be charged if part or all of the

offence that often comes before (and crime occurred overseas?
then enables) a crime that is greater A person can still be prosecuted for
in severity or that generates large money laundering offences under the
amounts of money Proceeds of Crime Act 2002 (POCA),
(in this case, laundering potentially even if the money laundering activity
millions of pounds in drug funds). occurred outside of the UK, so long as
a part of the criminal act or scheme to
The 6AMLD has identified 22 launder money had both harmful
predicate offences that cover cyber consequences on the UK economy
crime, financial and tax crime, and took part in the UK.
terrorism and fraud. These predicate
offences are listed below: If prosecuted, all criminal conduct will
be examined during a trial, which
Racketeering or being involved in includes overseas activity that would
organised crime have been considered an offence had
Smuggling or human trafficking it occurred in the UK.
Sexual exploitation
Drug/illegal substance trafficking Authorities worldwide are cracking
Arms trafficking down on suspected money laundering
behaviours and are doing everything
Trafficking other stolen goods in their power to prosecute where they
Corruption can.
Fraud and counterfeit currency
Counterfeiting goods
Grievous bodily harm (GBH) and
murder

Fraud
Environmental crime
Kidnapping/hostage taking
 25

Internal Security Concerns

These interconnected illicit activities
have a detrimental impact on India's
internal security.
The infiltration of drugs and arms,
along with the rise in organized crime,
weakens state institutions and poses
challenges to law enforcement.

This nexus also contributes to social

instability, as it exacerbates
crime,
violence, and
addiction in affected regions.

Conclusion
The close linkages between drug
trafficking, gunrunning, money
laundering, and human trafficking
pose a significant internal security
threat to India.

Addressing this issue requires a

multidimensional approach involving
border security, financial scrutiny,
intelligence cooperation, and societal
engagement to dismantle the nexus of
illicit activities and protect India's
security interests.

‍
 26

Bonded labour, or debt bondage,

Forced labour
Convicts leased to harvest timber

Types of trafficking Organ trade/ Organ theft

Trafficking of childre/ Child harvesting Trafficking in organs is a form of
Trafficking of children involves the human trafficking.
recruitment, transportation, transfer, the recruiter
harboring, or receipt of children for the the transporter
purpose of exploitation. Commercial the medical staff
sexual exploitation of children can the middlemen/contractors
take many forms, including forcing a the buyers
child into prostitution or other forms of
sexual activity or child pornography. Trafficking for organ trade often seeks
kidneys. Trafficking in organs is a
Child exploitation may also involve lucrative trade because in many
forced labour or services, slavery or countries the waiting lists for patients
practices similar to slavery, servitude, who need transplants are very long.
the removal of organs, illicit
international adoption, trafficking for Causes
early marriage, recruitment as child A complex set of factors fuel human
soldiers, for use in begging or as trafficking, including poverty,
athletes (such as child camel jockeys unemployment, social norms that
or football trafficking.) discriminate against women,
institutional challenges, and
Young boy shines the shoes of an globalization.
elderly man in the park
Child labour
labour, sex trafficking, or illegal

The Optional Protocol on the

Involvement of Children in Armed
Conflict seeks to prevent forceful
recruitment (e.g. by guerrilla forces) of
children for use in armed conflicts.[48]

Sex trafficking
Warning of Prostitution and Human
trafficking
Forced marriages
Labour trafficking
Unfree labour
 27

Cross-border intelligence-sharing with

countries like Afghanistan, Myanmar,
and Pakistan is critical for early
detection of drug-related activities.
Countermeasures
To address the multifaceted threats
posed by drug trafficking and related ♦ Rehabilitation & Public Awareness
illicit activities, India must adopt a Drug addiction rehabilitation centres
comprehensive strategy involving: should be strengthened, and
comprehensive public awareness
♦ Strengthening Border Security campaigns against drug abuse should
Enhanced surveillance and be promoted.
technological integration at vulnerable
border areas can help intercept drug Involving civil society in the fight
and arms smuggling. against drug trafficking is essential to
Collaboration with neighbouring reducing demand and addressing the
countries for intelligence-sharing is social impact of addiction.
also crucial to disrupting cross-border
trafficking networks. ♦ International Collaboration
India must continue to participate in
♦ Targeting Financial Networks global anti-drug initiatives such as the
Strengthening anti-money laundering United Nations Office on Drugs and
mechanisms, such as the Financial Crime (UNODC) and
Intelligence Unit (FIU), and collaborate with international bodies
to combat transnational organized
enforcing strict penalties for financial crime networks.
institutions involved in illegal
transactions can help track and
dismantle the financial networks that
fund drug operations.

♦ Intelligence and Law Enforcement

Cooperation
Coordinating efforts between different
agencies such as
the Narcotics Control Bureau (NCB), Countermeasures
the Directorate of Revenue Strengthening Border Security
Targeting Financial Networks
Intelligence (DRI), and
Intelligence & Law Enforcement Cooperation
State police forces Rehabilitation and Public Awareness
will enhance the effectiveness of International Collaboration
counter-narcotics operations.
 28

Advisory on crime against children

dated 14th July, 2010.
Advisory on missing children dated
31st January, 2012.
Advisory on Preventing and
Q:What are the measures taken by Combating cyber crime against
Government of India to Prevent and children dated 4.1.2012.
Combat Human Trafficking? Advisory on Human Trafficking as
A: Organised Crime dated 30th April,
With a view to tackle the menace of 2012.
human trafficking, Ministry of Home Advisory on Preventing and
Affairs, Government of India has combating human trafficking in India-
undertaken a number of measures dealing with foreign nationals dated
such as: 1.5.2012.
SOP to handle trafficking of children
Administrative measures and for child labour dated 12.8.2013.
interventions Advisory on MHA Web Portal on Anti
Human Trafficking dated 5.5.2014.
Anti Trafficking Cell (ATC): Anti- Advisory dated 23.7.2015 for
Trafficking Nodal Cell was set up in associating SSB and BSF in crime
the Ministry of Home Affairs (MHA) meetings.
(CS Division in 2006 to act as a focal These advisories/SOP are available
point for communicating various on MHA's Web Portal on Anti Human
decisions and follow up on action Trafficking at
taken by the State Governments to www.stophumantrafficking-mha.nic.in
combat the crime of Human Ministry of Home Affairs' scheme :
Trafficking. MHA conducts Ministry of Home Affairs under a
coordination meetings with the Nodal Comprehensive Scheme
Officers of Anti Human Trafficking “Strengthening law enforcement
Units nominated in all States/UTs response in India against Trafficking
periodically. in Persons through Training and
Capacity Building, has released fund
Advisories: To improve the for establishment of Anti Human
effectiveness in tackling the crime of Trafficking Units for 270 districts of
human trafficking and to increase the the country.
responsiveness of the law
enforcement machinery, MHA has Strengthening the capacity building:
issued following comprehensive To enhance the capacity building of
advisories to all States/UTs: law enforcement agencies and
generate awareness among them,
Advisory for preventing crime of various Training of Trainers (TOT)
human trafficking date 9.9.2009. workshops on “Combating
 29

Trafficking in Human Beings for Police

officers and for Prosecutors at
Regional level, State level and District
level were held throughout the
country.

Judicial Colloquium: In order to train

and sensitize the trial court judicial
officers, Judicial Colloquium on
human trafficking are held at the High
court level. The aim is to sensitize the
judicial officers about the various
issues concerning human trafficking
and to ensure speedy court process.

So far, eleven Judicial Colloquiums

have been held at Chandigarh, Delhi,
Himachal Pradesh, Maharashtra,
Chhattisgarh, Tamil Nadu, Andhra
Pradesh, Bihar, Uttar Pradesh,
Jharkhand and Odisha.
 30

especially developing &

underdeveloped countries are
targeted by money launderers.
ML For fighting against the menace
In today’s age, national security is strong financial control and uniform
closely linked with economic security. legal provisions must be present
It is hence pertinent to keep a close across the globe.
watch on the various threats that can
punch holes in the economy. Difference in legal provisions and the
absence of strong financial control
Smuggling or illicit trade is an ever- acts as a motivating factor for the
present and growing element that money launderers.
poses a significant threat to the Indian
economy and, by extension, the Money laundering is an International
nation’s security. phenomenon and can be checked
and eradicated by having uniform
The key to stemming the tide of illicit financial control, legal practices and
trade requires a deep understanding international cooperation.
of its impacts. Only then will the
prescriptions work. Difference in the laws relating to
money laundering provides
While military options for national opportunity acts as motivating factor
security remain prevalent, it is for the money launderers. Deterrent
economic interests that have become penal provisions along with
critical to a nation’s security. imprisonment for a longer period of
Even a strong military response time are the need of the day.
requires robust economic Thus, in the Indian context we need to
underpinnings. So, it has become have stringent legal provision and this
doubly important to understand the can be done by enhancing the
threats to the economy and enhance imprisonment provision and making it
abilities to protect the economic compatible with the developed
interests and block potential threats. nations. Here in India also as in the
An interesting phenomenon that the case of the USA
report highlighted is that the illicit we need to have a classification of
market in these five industries offences related to money laundering
expanded faster based on the degree of severity and
Conclusion dampening impact on the social,
Money laundering is not a problem economic, legal spheres of the
specific to one country rather it is a country and the punishment and fines
menace existing globally. Countries should be ranked accordingly instead
having inadequate financial controls,
 31

of having one common parameter of

punishment for all offences.

The Financial Intelligence Unit -

India (Fiu-Ind)
Impact of Money Laundering :-
The Financial Intelligence Unit - India
(FIUIND)is the nodal agency in India, Causes financial crisis
which manages the AML ecosystem Damages social fabric of the economy
and has been helping,coordinating, Deters foreign direct investment
strengthening and managing the AML Encourages tax evasion culture
ecosystem.
Increases criminal activities in the
It has significantly helped in economy
coordinating and strengthening efforts Leads to volatility in exchange rate
of national and international Leads to economic distortion and
intelligence, investigation and insatiability
enforcement agencies in pursuing the Nourishes terrorism
global efforts against money
laundering and related crimes. Undermines the legitimate private
sector
Myth Weakens democratic institution
The common myth related to the Weakens financial predictability of the
concept of money laundering is that economy
black money and laundered money
are same but it is not correct.

Black money means money which

has not been disclosed to income tax
authorities for the purpose of tax
evasion, it may be earned through
legal business but laundered money
is always crime generated proceed.
 32

India enacted to prevent money-

laundering and
to provide for confiscation of property
Before enactment of the Prevention of derived from money-laundering.
Money Laundering Act, 2002 following Prevention of Money Laundering Act,
Acts were present in India which used 2005 and the Rules first came in to
to deal scantly with the issue of force with effect from 1st July 2005.
money laundering.

The same can be shown it the help of Salient Features of the Act
the following table under the GST I. Offence of Money Laundering and
regime : its punishment
II. Attachment, Adjudication &
a) The Conservation of Foreign Confiscation
Exchange and Prevention of III. Obligations of Banking
Smuggling Activities Act, 1974. Companies, Financial Institutions and
b) The Prevention of Illicit Traffic in Intermediaries.
Narcotic Drugs and Psychotropic IV. Enforcement Paraphernalia**
Substances Act, 1988. V. Summons, Searches & Seizures
c) The Narcotic Drugs and etc.
Psychotropic Substances Act, 1985. **Adjudicating Authority
d) The Income Tax Act, 1961. Administrator
e) The Benami Transactions Appellate Tribunal
(Prohibition) Act, 1988. Special Courts
f) The Indian Penal Code and Code of Authorities under the Act :-
Criminal Procedure, 1973.

In view of an urgent need for the

enactment of a comprehensive
legislation for preventing money
laundering and connected activities,
confiscation of proceeds of crime,
setting up of agencies and
mechanisms for coordinating
measures for combating money
laundering etc.

Prevention of Money Laundering Act,

2002 was enacted and enforced.
Prevention of Money Laundering Act,
2002 is an Act of the Parliament of
 33

show cause notice to concerned

person(s) within 30 days.

After considering the response and all

Salient Features of the Act related information, the Authority can
I. Offence of Money Laundering give finality to the order of attachment
and its punishment and make a confiscation order, which
An offence of money laundering is will thereafter be confirmed or
said to be committed when a person rejected by the Special Court.
in any way deals with the proceeds of
crime. The proceeds of the crime III. Obligations of Banking
referred above include the normal Companies, Financial Institutions
crimes and the scheduled crimes. and Intermediaries.
The reporting entity is required to
The prescribed punishment is 3-7 keep a record of all material
years rigorous imprisonment for an information relating to money
offence of money laundering with fine. laundering and forward the same to
In case of an offence mentioned the Director. Such information should
under Part A, imprisonment would be preserved for 5years.
extend up to 10 years.
The functioning of the reporting entity
II. Attachment, Adjudication and will be supervised by the Director who
Confiscation canimpose any monetary penalty or
The confiscation of the property under issue warning or order audit of
the Act is dealt with in accordance accounts, if the entity violates its
with the chapter III of the said Act. obligations.

An official not below the rank of The Central Government, after

Deputy Director can order attachment consulting the Reserve Bank of India
of proceeds of crime for a period of is authorized to specify rules relating
180 days, after informing the to managing information by the
Magistrate. reporting entity.

Thereafter he will send a report

containing material information
relating to such attachment to the
Adjudicating Authority.

Section 8 details the procedure of

adjudication. After the official forwards
the report to the Adjudication
Authority, this Authority should send a
 34

IV. Enforcement Paraphernalia Special Courts –

Adjudicating Authority – The Central Government, after
The Act empowers the Central consulting the High Court is
Government to constitute an empowered to designate Court of
Adjudicating Authority having a Sessions as Special Courts.
Chairman and 2 members and define
their scope of functioning and other The Special courts can try all
terms of service. scheduled offences and that under
section 4 and also offence under
The Adjudicating Authority will section 3, but after the authority
operate through a Single or Division requests in this behalf.
bench. The Authority has been given
autonomous powers to regulate its Authorities under the Act :-
adjudicating procedure. (a) Director or Additional Director or
Joint Director
Administrator – (b) Deputy Director
The property laundered will be taken (c) Assistant Director and
care of i.e. managed after confiscation (d) Such other class of officers as
by an Administrator who will act in may be appointed for the purposes of
accordance with the instructions of this Act.
the Central Government.

Appellate Tribunal –
All appeals from an order made by the
Adjudicating Authority will lie to an
Appellate Tribunal constituted by the
Central Government. It will consist of
2 members headed by a Chairman.

An official can resign by sending his

resignation to the Central Government
thereby giving a 3 months' notice. He
can also be removed by an order
made by the Central Government on
the grounds of misbehavior or
incapacity.
 35

V. Summons, Searches and

Seizures etc.
The power of surveying and
scrutinizing records kept at any place
is conferred on the Adjudicating
Authority. The Authority may ask any
of its officials to carry on the search,
collect all relevant information, place
identification marks and thereafter
send a report to it.

The search of a person to be

conducted is allowed if it is ordered by
the Central Government.

The authority authorized in this behalf

cannot detain a person beyond 24
hours, must ensure the presence of 2
witnesses, prepare a list of things
seized signed by the witnesses and
forward the same to the Adjudicating
Authority.

A property confiscated or frozen

under this Act can be retained for 180
days.
This period can be extended by the
Adjudicating Authority after being
satisfied of the merits of the case.

The offences under the Act are to be

cognizable and non-bailable.
 36

The Impact of Money Laundering Impact on Financial System

on India's Developing Economy: Integrity:
Challenges and Solutions Money laundering undermines the
integrity of India's financial system by
Money laundering presents a allowing illegally obtained funds to
multifaceted challenge to India's enter the legitimate economy through
developing economy, with far- various channels,
reaching impacts on its financial such as
system, economic stability, Banks,
governance, and social fabric. Real estate, and
Businesses.
Various dimensions of money
laundering's impact on India and This not only damages the reputation
suggests strategies to mitigate its of financial institutions
adverse effects. but also erodes public trust in the
stability and reliability of the financial
India can address the challenges system.
posed by money laundering and
safeguard its economic development As a result, investors may become
by hesitant to participate in financial
● Strengthening anti-ML measures, markets, hindering capital formation
●Enhancing international cooperation, and economic growth.
● Promoting transparency, and
● Fostering integrity, Distortion of Economic Activities:
Money laundering often channels illicit
Money laundering, the process of funds into sectors like
concealing the origins of illegally Real estate,
obtained money, has emerged as a Hospitality, and
critical issue confronting India's Retail,
developing economy. Artificially inflating asset prices
and distorting market dynamics.
Despite efforts to combat it, money
laundering continues to undermine This distortion can lead to
the integrity of India's financial misallocation of resources, reduced
system, distort economic activities, competitiveness, and exacerbation of
reduce tax revenue, foster crime and income inequality.
corruption, impede financial inclusion,
and impose regulatory burdens. Moreover, it may create bubbles in
certain sectors, increasing the risk of
 37

economic instability and financial investor confidence and adverse

crises. effects on the economy.

Loss of Tax Revenue: Increase in Crime and Corruption:

Illicit funds laundered through various Money laundering is often associated
means often evade taxation, resulting with organized crime and corruption,
in significant losses of tax revenue for as it provides a means to legitimize
the government. This deprives the proceeds from illegal activities. The
government of funds needed for influx of laundered funds can fuel
essential public services such as criminal enterprises, perpetuate
healthcare, education, and corruption, and undermine the rule of
infrastructure development. The law. This not only poses risks to
shortfall in revenue may necessitate public safety and security but also
higher taxes on compliant citizens or deters legitimate business activities,
increased borrowing, further straining stifling economic development.
the economy.
In the case of CBI v. Ramesh Gelli
Damage to Reputation: (2015), the Central Bureau of
Persistent money laundering Investigation (CBI) investigated a
tarnishes India's reputation in the high-profile money laundering case
global financial community, deterring involving a prominent banker. The
foreign investors and reducing the case highlighted the nexus between
country's attractiveness as a money laundering, corruption, and
destination for investment. A organized crime, underscoring the
tarnished reputation can also lead to urgent need for robust law
increased scrutiny from international enforcement measures to combat
regulatory bodies and financial such activities and uphold the rule of
institutions, potentially resulting in law.
restrictions on trade and financial
transactions, further hampering Impact on Financial Inclusion:
economic growth. Money laundering practices may lead
financial institutions to adopt risk-
In the case of Reserve Bank of India averse policies, restricting access to
v. Peerless General Finance and banking services for certain
Investment Co. Ltd. (1987), the individuals or regions perceived as
Supreme Court discussed the high-risk. This exclusionary approach
importance of maintaining the hampers efforts to promote financial
reputation of financial institutions. The inclusion and economic
court emphasized that any tarnishing empowerment, exacerbating
of reputation due to money laundering disparities and hindering overall
activities could have far-reaching economic development.
consequences, including reduced
 38

areas, are often the most affected by

restrictive banking policies.
Money laundering practices, which These individuals may lack the
involve disguising the origins of necessary documentation or meet the
illegally obtained money, pose stringent requirements set by financial
significant risks to financial institutions institutions, leading to their exclusion
and the broader economy. from formal financial services. Without
access to banking services, they are
To mitigate these risks, financial forced to rely on cash transactions or
institutions often implement strict anti- informal financial channels, which are
money laundering (AML) and know less secure and offer limited financial
your customer (KYC) measures. opportunities. Barriers to Economic
While these measures are crucial for Empowerment: Limited access to
preventing illicit financial activities, banking services impedes individuals'
they can inadvertently lead to certain ability to save, invest, or access
unintended consequences, including credit, thereby hindering their
hindering financial inclusion. economic empowerment and upward
mobility. Without access to basic
Money laundering practices can financial tools like savings accounts,
impact financial inclusion: Risk- loans, or insurance, individuals are
Averse Policies: Financial institutions unable to build assets, invest in
may adopt risk-averse policies to education or entrepreneurship, or
avoid potential involvement in money cope with unexpected financial
laundering activities. shocks. This perpetuates cycles of
poverty and inequality, further
As a result, they may impose stringent widening the gap between the
requirements for opening and financially included and excluded.
maintaining bank accounts, Stifled Economic Development:
conducting transactions, or accessing Financial exclusion not only affects
financial services. These policies can individuals but also has broader
disproportionately affect individuals or implications for economic
regions perceived as high-risk, such development. When a significant
as those with limited documentation, portion of the population is excluded
irregular income sources, or residing from the formal financial system, it
in areas associated with higher levels constrains overall economic growth
of criminal activities. and stability. Limited access to credit
stifles entrepreneurship and
Exclusion of Vulnerable Groups: innovation, constrains investment in
Vulnerable populations, including low- productive sectors, and reduces
income individuals, migrants, and opportunities for wealth creation.
those living in remote or underserved
 39

of integrity and compliance in both the

As a result, countries with high levels public and private sectors.
of financial exclusion often struggle to Additionally, promoting financial
achieve sustainable economic literacy and awareness among
development and poverty reduction citizens can help mitigate the risks
goals. associated with money laundering
and enhance the resilience of India's
Regulatory and Compliance Costs: economy.
Combatting money laundering
requires financial institutions and Conclusion:
businesses to implement robust anti- Money laundering poses a formidable
money laundering measures, challenge to India's developing
including due diligence procedures, economy, with wide-ranging
transaction monitoring, and reporting implications for financial stability,
requirements. economic growth, governance, and
social cohesion.
These compliance efforts impose
significant costs on businesses, By implementing robust anti-money
including expenses related to laundering measures and promoting
technology, training, and regulatory transparency and integrity, India can
oversight. Such costs can deter mitigate the adverse effects of money
investment and innovation, laundering and safeguard its
particularly among small and medium- economic development trajectory.
sized enterprises, thereby stifling
economic growth and Concerted efforts at the national and
competitiveness. international levels are essential to
combat money laundering effectively
Mitigating Strategies: and ensure a more prosperous and
To address the challenges posed by equitable future for India.
money laundering, India must
strengthen its legal and regulatory
framework, enhance enforcement
mechanisms, and improve
international cooperation.

This includes implementing stringent

anti-money laundering laws,
enhancing transparency and
accountability in financial
transactions, investing in technology
and human resources for effective
enforcement, and fostering a culture
 40

law enforcement agencies to detect

A modus operandi (often shortened to the activities of criminals.
M.O. or MO) is an individual's habits
of working, particularly in the context For the first time, Money laundering
of business or criminal investigations, has used the activities of Mafia-owned
but also generally. It is a Latin phrase, laundry services namely Laundromats
approximately translated as 'mode (or in the US. During the 1950s, drug
manner) of operating lords and gangsters showed how they
earned their money illegally by
Introduction purchasing legitimate businesses.
Money laundering is a process used They then used these establishments
to convert illegitimate money to to launder their Illicit earnings.
appear legitimate. It has wide
repercussions for both individuals and Sources of this Money laundering
businesses. Money laundering is were usually:
carried following various crimes such
as bribery, extortion, and many more. Real estate transactions,
Money laundering is a crime that Drug trafficking,
requires the specialized skills and People smuggling,
resources of law to successfully Arms, antique, gold smuggling,
combat it. Money laundering is a Casinos & Gambling avenues (such
sophisticated business used by as Horse races & lotteries)
organized criminals to avoid getting Prostitution rings,
caught up in the cross-border flow of Financial frauds,
money. Corruption, or
Illegal sale of wildlife products and
Money laundering is a process used other specified predicate offenses.
to hide the existence of illegal sources Historical evolution
of money from illegal activities. This The basic characteristics of money
process involves identifying and laundering, which are the factors that
concealing the existence of an illegal distinguish it from other forms of
source of income to deem it as clean organized crime, are its global nature,
legitimate money. its flexibility, its ability to work
seamlessly across borders, the use of
modern technology, and the ingenuity
Though it does not directly affect of its operators. These principles of
society at large, it has indirect effects money laundering were summarized
on the state’s financial security. in a 1993 report by the United
Money laundering can be achieved Nations.
through various means. This
complexity often leads to the failure of
 41

In India, money laundering is referred

to as Hawala transactions. This is a
process where a person transfers The processing of criminal proceeds
money from one account to another in to disguise their illegal origin, in order
India. Hawala transactions are done to, legitimize the ill-gotten gains of
through a network of intermediaries crime.
known as banks. They gained
popularity during the 1990s due to the Money laundering was only applied to
influx of political corruption cases. financial transactions that were
Hawala is a type of parallel or related to organized crime groups.
alternative remittance system. However now, This definition also
covers any financial transaction that
Hawala is an Arabic word that means involves the acquisition or disposition
the transfer of money or other of an asset or value as a result of
information between two persons illegal acts.
while using a third person. The
system was used by the Arabic
traders to avoid robbery. It was Section 3 of the Prevention of Money
developed way before the evolution of Laundering Act, 2002 defines the
the western banking system. offence of money laundering as
follows:
The increasing use of sophisticated
techniques to move illicit funds across “Whosoever directly or indirectly
international financial systems has attempts to indulge or knowingly
raised concerns about the ability of assists or knowingly is a party or is
governments to fight these crimes. actually involved in any process or
activity connected with the *[proceeds
The illicit funds flowing through of crime including its concealment,
financial systems globally have possession, acquisition or use and
become increasingly sophisticated. projecting or claiming] it as untainted
The international community has property shall be guilty of offence of
acknowledged the need for better money laundering.”
multilateral cooperation in addressing
this issue. Process of Money Laundering
There are three steps in money
Even though there are many kinds of laundering, respectively:
interpretations of money laundering
the most often or commonly used is
the one by Financial Action Task
Force on Money Laundering (FATF).
It was defined as
 42

makes the final bank transfer. He

would then use the money to invest in
Placement a local business, and without getting
The first step is splitting the proceeds caught he would be able to withdraw
into smaller lots so that they can be it. This is the stage where the ‘Black
less susceptible to manipulation. money’ is indiscernible from that of
Cash generated by a crime is then the clean money.
attempted to be deposited into a
financial system. This stage is Emerging Modus Operandi for Money
delicate as it involves trying to Laundering
transform money while the whole There are many methods that come
process is more transparent. This is into light with the increase in
also vulnerable because of this technology for laundering money off
reason. the market. One of these methods is
when a large sum of money is
converted into smaller and less
Layering suspicious money is known as
Layering involves sending money Smurfing.
from one account to various other
accounts. Doing so makes it difficult
to follow. Layering is the process of Money launderers often use offshore
transferring money between different accounts to transfer money to and
accounts in a different country. The from other countries with bank
account’s value will always vary as secrecy laws. A complex scheme
long as the money is kept in a certain involving transferring hundreds of
currency. They are then used to millions of dollars from offshore
purchase high-value items such as banks.
expensive jewelry and boats and
change its initial liquidated form. The Shell companies are fake companies
dirty money that flows through the that operate without any other reason
financial system is often routed than to launder the money. They
through shell corporations. The object show dirty money as the money that
of layering is to distance the fund from is used to purchase goods or services
its origin which in turn makes it very that they do not provide. They use
difficult to trace the origin. fake invoices and balance sheets to
trick legitimate customers into
Integration transferring money.
At the integration stage, money is
brought back to the mainstream Launderers usually use investing in
economy in a legitimate-looking form. legitimate businesses to launder their
It’s usually appears as from a legal dirty money. They can choose from a
transaction. This is where the criminal wide range of establishments that
 43

deal in such things as brokerage Contamination effect on legal,

firms, restaurants, and strip clubs. financial transactions.
Money services and foreign exchange Increased volatility of International
businesses allow individuals to capital flows and exchange rates due
convert their foreign currency into to anticipated cross-border transfers.
local money. Money can also be sent Money-Laundering can have a
to other countries through these negative effect on foreign direct
transfers. These establishments also investment. It can also put a country
offer a variety of services related to in danger of becoming an organized
money transfer which makes it easy crime base.
to mask dirty money.
Money laundering would have a
Value Tampering is done when negative effect on the country’s
launderers are usually looking for economy. It would also affect the
properties that the seller has agreed patterns of consumption and savings.
to sell at a price below its true value. Money-laundering investigations are
They then accept the difference conducted when funds are stolen from
between the sale price and the victims due to crimes such as
purchase price. In this way laundering robbery, extortion, and fraud. Other
technique is that it allows a person to major issues include the excessive
hide the real value of a portion of a use of financial instruments and the
property’s value while transferring the resulting in inflation in the financial
purchase price to the seller and show markets.
that the transaction has taken place
for the sale price necessarily hiding The influx of dirty cash into certain
the black money. industries can create false demand,
which officials adjust to by adjusting
Effects and Prevention economic policy. When the money
Money laundering is a serious threat laundering process reaches a point
to the integrity of the financial system. where law enforcers start to show
It can destabilize a nation’s economy. interest, it will suddenly disappear
without a predictable economic cause
Among the negative effects of money resulting in the falling apart of the
laundering on countries is a full range economy.
of severe macroeconomic
consequences such as: Laundered money is usually not
taxed, which means the rest of us to
Unpredictable changes in money have to make up for the loss in the
demand. revenue. The negative effects of
Prudential risks to the soundness of money laundering on the economy
financial institutions and financial are difficult to determine. It is clear
systems. that those involved in this activity
 44

damage the financial institutions that unknowingly indulge in any act or

are critical to the country’s economic activity that is connected with the
growth and reduce productivity. It can proceeds of crime and that such
also distort the country’s external persons shall be entitled to be guilty
sector. of offence.

Money laundering also contributes to Section 4 of the Prevention of Money-

crime and corruption in developing laundering Act punishes persons with
economies. It is a negative sign for a prison term of not less than three
sustainable economic growth. Money years and which may extend to seven
laundering cuts costs for businesses years. The fine for such offences is
involved with criminal intent, which five lakh rupees.
can then increase the level of crime.
Money laundering can also cause Section 12 (1) provides an obligation
significant distortions in a country’s on the banks, financial institutions,
trade. and intermediaries:

On the import side, illicit proceeds are To maintain certain records related to
used to purchase luxury goods. the transactions that may be
Usually, these are used to fund prescribed, and to ensure that they
criminal activities. Such imports do are conducted in a proper manner.
not create domestic demand or To furnish information of transactions
employment, and they can artificially referred to in clause (a) to the Director
depress prices, which can reduce the within such time as may be prescribed
profitability of domestic businesses. and to

Prevention of Money Laundering Act, Verify and maintain the records of the
2002 identity of all its clients,
The existence of adequate capacity As per Section 12 (2) of the Act,
and resources to combat money records related to transactions
laundering at the national level is the between clients and financial
key to the successful implementation institutions must be maintained for a
of this strategy. decade from the date of their
cessation.
In India, the Prevention of Money-
laundering Act, 2002 was passed An effective money laundering
which came into effect on July 1, program can help minimize risks
2005. associated with money laundering
and transactions. Such a program that
As per Section 3 of the Act, Says that includes account opening controls
the Offence of Money laundering and monitoring of suspicious activity
covers those who knowingly or should be implemented.
 45

amount involved in the case was

The Reserve bank of India has issued approximately Rs. 7000 crores. The
regulations related to the Anti-Money investigation is still on. Large portion
laundering (AML) guidelines which of the money is being used to invest
were effective from March 2006. The in real estate.
Anti-Money Laundering norms require
banks to keep a record of their In 2014, the Securities and Exchange
customers’ background in order to Board of India’s probe into the multi-
prevent them from being used for million dollar Satyam scam unearthed
money laundering. that India’s biggest corporate fraud
was perpetrated. The Securities and
Case studies Exchange Board of India (SEBI) has
Russian Money Laundering Scandal ordered the disgorgement of over
In 1999, it was revealed that over $7 Rs.1,849 crore worth of unlawful
billion was moved from two Russian gains from various individuals and
banks to a US bank. The funds were companies.
then deposited into thousands of
accounts in the US. On December 8, 2014, a special court
in Hyderabad sentenced former
In total, two Russian banks deposited Satyam CEO B. Ramalinga Raju and
over $7 billion into their New York eight others to six months’
bank’s correspondent accounts. The imprisonment and a fine of Rs 5 lakh
funds were transferred to accounts of each.
shell corporations.

In February 2000, a bank employee

and his spouse were among those
who pled guilty to participating in a
conspiracy to launder money.

Satyam Fraud Case

On January 7, 2009, Ramalinga Raju,
the chairman of Satyam Computer
Services, resigned after admitting that
the company’s accounts were
falsified.

In a shocking admission, Satyam’s

Chairman Ramalinga Raju confessed
that the company’s balance sheet had
been inflated and wrong financial
reporting of 30 September 2008. The
 46

Conclusion Our education system should

Money laundering has become a inculcate the ideologies that our future
global issue. It can affect the integrity generations should not get involved in
of the financial system and can also these atrocities. Money laundering is
be the source of crime. Money not a healthy mechanism and should
laundering is a serious social and not be tolerated in our society.
political risk that businesses need to
take into account. Money laundering
is a serious and hazardous issue that
affects both the business environment
and society as a whole.

Money laundering is linked to

activities that are anti-social and
unethical. These activities can then
expand their horizon and weaken the
foundations of society. Money
laundering and terrorist financing are
complex and often have significant
issues that need to be addressed.
Money laundering has a negative
effect on economic development.
Although it is difficult to determine the
damage caused, as it is widely
believed to be not possible to
estimate the extent of money
laundering.

It is clear from the shreds of evidence

at hand that tolerating money
laundering activities can have
detrimental effects on the economy.
This is because it can encourage
crime and corruption, which can
distort the flow of both national and
international trade and disrupt long-
term economical development.
Awareness campaigns are also
needed to educate the masses about
the issue, as it affects the entire
country.
 47

lords and gangsters showed how they

Introduction earned their money illegally by
Money laundering is a process used purchasing legitimate businesses.
to convert illegitimate money to They then used these establishments
appear legitimate. It has wide to launder their Illicit earnings.
repercussions for both individuals and
businesses. Money laundering is Sources of this Money laundering
carried following various crimes such were usually:
as bribery, extortion, and many more.
Arms, antique, gold smuggling,
Money laundering is a crime that Corruption,
requires the specialized skills and Casinos & Gambling avenues
resources of law to successfully (such as Horse races & lotteries)
combat it. Drug trafficking

Money laundering is a sophisticated Financial frauds,

business used by organized criminals People smuggling
to avoid getting caught up in the Prostitution rings,
cross-border flow of money.
Real estate transactions
Money laundering is a process used Illegal sale of wildlife products &
to hide the existence of illegal sources other specified predicate
of money from illegal activities. offenses.
This process involves
IDENTIFYING and CONCEALING Historical evolution
the existence of an illegal source of The basic characteristics of money
income to deem it as clean legitimate laundering, which are the factors that
money. distinguish it from other forms of
organized crime, are its global nature,
Though it does not directly affect its flexibility, its ability to work
society at large, it has indirect effects seamlessly across borders, the use of
on the state’s financial security. modern technology, and the ingenuity
Money laundering can be achieved of its operators.
through various means. This These principles of money laundering
complexity often leads to the failure of were summarized in a 1993 report by
law enforcement agencies to detect the United Nations.
the activities of criminals.

For the first time, Money laundering

has used the activities of Mafia-owned
laundry services namely Laundromats
in the US. During the 1950s, drug
 48

In India, money laundering is referred Even though there are many kinds of
to as Hawala transactions. interpretations of money laundering
This is a process where a person the most often or commonly used is
transfers money from one account to the one by Financial Action Task
another in India. Force on Money Laundering (FATF).
It was defined as
Hawala transactions are done through
a network of intermediaries known as The processing of criminal proceeds
banks. to disguise their illegal origin, in order
to, legitimize the ill-gotten gains of
They gained popularity during the crime.
1990s due to the influx of political
corruption cases. Money laundering was only applied to
financial transactions that were
Hawala is a type of parallel or related to organized crime groups.
alternative Remittance System. However now, This definition also
covers any financial transaction that
Hawala is an Arabic word that means involves the acquisition or disposition
the transfer of money or other of an asset or value as a result of
information between two persons illegal acts.
while using a third person.

The system was used by the Arabic Section 3 of the Prevention of Money
traders to avoid robbery. It was Laundering Act, 2002 defines the
developed way before the evolution of offence of money laundering as
the western banking system. follows:

The increasing use of sophisticated “Whosoever directly or indirectly

techniques to move illicit funds across attempts to indulge or knowingly
international financial systems has assists or knowingly is a party or is
raised concerns about the ability of actually involved in any process or
governments to fight these crimes. activity connected with the
*[proceeds of crime including its
The illicit funds flowing through concealment, possession, acquisition
financial systems globally have or use and projecting or claiming] it as
become increasingly sophisticated. untainted property shall be guilty of
offence of money laundering.”
The international community has
acknowledged the need for better
multilateral cooperation in addressing
this issue.
 49

makes it very difficult to trace the

Process of Money Laundering origin.
There are three steps in money
laundering, respectively: Integration
At the integration stage, money is
Placement brought back to the mainstream
The first step is splitting the proceeds economy in a legitimate-looking form.
into smaller lots so that they can be It’s usually appears as from a legal
less susceptible to manipulation. transaction.
Cash generated by a crime is then
attempted to be deposited into a This is where the criminal makes the
financial system. final bank transfer. He would then use
the money to invest in a local
This stage is delicate as it involves business, and without getting caught
trying to transform money while the he would be able to withdraw it.
whole process is more transparent.
This is also vulnerable because of this This is the stage where the ‘Black
reason. money’ is indiscernible from that of
the clean money.
Layering
Layering involves sending money
from one account to various other
accounts. Doing so makes it difficult
to follow.

Layering is the process of transferring

money between different accounts in
a different country. The account’s
value will always vary as long as the
money is kept in a certain currency.

They are then used to purchase high-

value items such as expensive jewelry
and boats and change its initial
liquidated form.

The dirty money that flows through

the financial system is often routed
through shell corporations.
The object of layering is to distance
the fund from its origin which in turn
 50

They use fake invoices and balance

sheets to trick legitimate customers
Emerging Modus Operandi for into transferring money.
Money Laundering
A modus operandi (often shortened to Launderers usually use
M.O. or MO) is an individual's habits INVESTING IN LEGITIMATE
of working, particularly in the context BUSINESSES
of business or criminal investigations, to launder their dirty money.
but also generally.
It is a Latin phrase, approximately They can choose from a wide range
translated as 'mode (or manner) of of establishments that deal in such
operating'. things as brokerage firms,
restaurants, and strip clubs.
There are many methods that come Money services and foreign exchange
into light with the increase in businesses allow individuals to
technology for laundering money off convert their foreign currency into
the market. local money.

One of these methods is when a large Money can also be sent to other
sum of money is converted into countries through these transfers.
smaller and less suspicious money is These establishments also offer a
known as SMURFING. variety of services related to money
transfer which makes it easy to mask
Money launderers often use dirty money.
OFFSHORE ACCOUNTS
to transfer money to and from other VALUE TAMPERING
countries with bank secrecy laws. is done when launderers are usually
looking for properties that the seller
A complex scheme involving has agreed to sell at a price below its
transferring hundreds of millions of true value.
dollars from offshore banks.
They then accept the difference
SHELL COMPANIES between the sale price and the
are fake companies that operate purchase price.
without any other reason than to
launder the money. In this way laundering technique is
that it allows a person to hide the real
They show dirty money as the money value of a portion of a property’s value
that is used to purchase goods or while transferring the purchase price
services that they do not provide. to the seller and show that the
transaction has taken place for the
 51

sale price necessarily hiding the black Money-laundering investigations are

money. conducted when funds are stolen from
victims due to crimes such as
robbery, extortion, and fraud.

Effects and Prevention Other major issues include the

Money laundering is a serious threat excessive use of financial instruments
to the integrity of the financial system. and the resulting in inflation in the
It can destabilize a nation’s economy. financial markets.

Among the negative effects of money The influx of dirty cash into certain
laundering on countries is a full range industries can create false demand,
of severe macroeconomic which officials adjust to by adjusting
consequences such as: economic policy.

Unpredictable changes in money When the money laundering process

demand. reaches a point where law enforcers
start to show interest,
Prudential risks to the soundness of it will suddenly disappear without a
financial institutions and financial predictable economic cause resulting
systems. in the falling apart of the economy.

Contamination effect on legal, Laundered money is usually not

financial transactions. taxed, which means the rest of us to
have to make up for the loss in the
Increased volatility of International revenue.
capital flows and exchange rates due The negative effects of money
to anticipated cross-border transfers. laundering on the economy are
difficult to determine.
Money-Laundering can have a It is clear that those involved in this
negative effect on foreign direct activity damage the financial
investment. institutions that are critical to the
It can also put a country in danger of country’s economic growth and
becoming an organized crime base. reduce productivity.
It can also distort the country’s
Money laundering would have a external sector.
negative effect on the country’s
economy. Money laundering also contributes to
It would also affect the patterns of crime and corruption in Developing
consumption and savings. Economies.
It is a negative sign for sustainable
economic growth.
 52

Money laundering cuts costs for

businesses involved with criminal
intent, which can then increase the
level of crime.
Money laundering can also cause
significant distortions in a country’s
trade.

On the import side, illicit proceeds are

used to purchase luxury goods.
Usually, these are used to fund
criminal activities.

Such imports do not create domestic

demand or employment, and they can
artificially depress prices, which can
reduce the profitability of domestic
businesses.
 53

prescribed, and to ensure that they

are conducted in a proper manner.

Prevention of Money Laundering To furnish information of transactions

Act, 2002 referred to in clause (a) to the Director
The existence of adequate capacity within such time as may be prescribed
and resources to combat money and to
laundering at the national level is the Verify and maintain the records of the
key to the successful implementation identity of all its clients,
of this strategy.
Section 12 (2)
In India, the Prevention of Money- of the Act,
laundering Act, 2002 was passed records related to transactions
which came into effect on July 1, between clients and financial
2005. institutions must be maintained for a
decade from the date of their
As per Section 3 cessation.
of the Act,
Says that the Offence of Money An effective money laundering
laundering covers those who program can help minimize risks
knowingly or unknowingly indulge in associated with money laundering
any act or activity that is connected and transactions.
with the proceeds of crime and that
such persons shall be entitled to be Such a program that includes account
guilty of offence. opening controls and monitoring of
suspicious activity should be
Section 4 implemented.
of the Prevention of Money-laundering
Act The Reserve bank of India has issued
punishes persons with a prison term regulations related to the Anti-Money
of not less than three years and which laundering (AML) guidelines which
may extend to seven years. The fine were effective from March 2006.
for such offences is five lakh rupees.
The Anti-Money Laundering norms
Section 12 (1) require banks to keep a record of their
provides an obligation on the banks, customers’ background in order to
financial institutions, and prevent them from being used for
intermediaries: money laundering.

To maintain certain records related to

the transactions that may be
 54

million dollar Satyam scam unearthed

that India’s biggest corporate fraud
was perpetrated. The Securities and
Case studies Exchange Board of India (SEBI) has
Russian Money Laundering Scandal ordered the disgorgement of over
In 1999, it was revealed that over $7 Rs.1,849 crore worth of unlawful
billion was moved from two Russian gains from various individuals and
banks to a US bank. The funds were companies.
then deposited into thousands of
accounts in the US. On December 8, 2014, a special court
in Hyderabad sentenced former
In total, two Russian banks deposited Satyam CEO B. Ramalinga Raju and
over $7 billion into their New York eight others to six months’
bank’s correspondent accounts. The imprisonment and a fine of Rs 5 lakh
funds were transferred to accounts of each.
shell corporations.
Conclusion
In February 2000, a bank employee Money laundering has become a
and his spouse were among those global issue. It can affect the integrity
who pled guilty to participating in a of the financial system and can also
conspiracy to launder money. be the source of crime.

Satyam Fraud Case Money laundering is a serious social

On January 7, 2009, Ramalinga Raju, and political risk that businesses need
the chairman of Satyam Computer to take into account.
Services, resigned after admitting that Money laundering is a serious and
the company’s accounts were hazardous issue that affects both the
falsified. business environment and society as
a whole.
In a shocking admission, Satyam’s
Chairman Ramalinga Raju confessed Money laundering is linked to
that the company’s balance sheet had activities that are anti-social and
been inflated and wrong financial unethical.
reporting of 30 September 2008. The These activities can then expand their
amount involved in the case was horizon and weaken the foundations
approximately Rs. 7000 crores. The of society.
investigation is still on. Large portion Money laundering and terrorist
of the money is being used to invest financing are complex and often have
in real estate. significant issues that need to be
addressed.
In 2014, the Securities and Exchange
Board of India’s probe into the multi-
 55

Money laundering has a negative

effect on economic development.
Although it is difficult to determine the
damage caused, as it is widely
believed to be not possible to
estimate the extent of money
laundering.

It is clear from the shreds of evidence

at hand that tolerating money
laundering activities can have
detrimental effects on the economy.

This is because it can encourage

crime and corruption, which can
distort the flow of both national and
international trade and disrupt long-
term economical development.

Awareness campaigns are also

needed to educate the masses about
the issue, as it affects the entire
country.

Our education system should

inculcate the ideologies that our future
generations should not get involved in
these atrocities. Money laundering is
not a healthy mechanism and should
not be tolerated in our society.
 56

Corporate crime Embezzlement

Introduction - Corporate crime refers It occurs when individuals within a
to unlawful activities committed by corporate entity misappropriate funds
corporations or individuals within a entrusted to them for personal gain.
corporate entity for the purpose of
This can involve executives diverting
achieving financial gain, often at the
company funds into personal
expense of
accounts or employees skimming
ethical standards,
cash transactions.
legal regulations, and
societal well-being. Embezzlement schemes can be
sophisticated, involving the
This type of criminal behavior can manipulation of financial records to
manifest in various forms, ranging conceal the illicit activities.
from fraud and embezzlement
to environmental violations and Environmental Crimes
antitrust offenses. Some corporations engage in illegal
Understanding the different types of practices that harm the environment,
corporate crime is essential for both such as improper disposal of
legal authorities and the general hazardous waste, pollution, or
public to address and prevent such violating environmental regulations.
activities. These activities not only pose a threat
to the ecosystem but also
Types of Corporate Crime compromise public health. Companies
Fraud involved in such offenses may face
Fraudulent activities are among the legal consequences and damage to
most common types of corporate their reputation.
crime. Antitrust Violations
Antitrust laws aim to promote fair
This includes financial fraud, where competition and prevent monopolistic
companies engage in deceptive practices. Corporate crimes in this
practices to category include price fixing, bid
manipulate financial statements, rigging, and market allocation.
inflate profits, or
misrepresent their financial health Price fixing occurs when competitors
to investors and stakeholders. agree to set prices at a certain level,
eliminating price competition.
Insider trading, a form of securities Bid rigging involves collusion among
fraud, involves trading stocks based competitors to manipulate the bidding
on non-public information, giving process, undermining the principles of
individuals unfair advantages in the a free market.
stock market.
 57

Bribery and Corruption FAQs

Bribery and corruption within most common corporate crimes?
corporations involve the exchange of The most common corporate crimes
money, gifts, or favors to influence include
decision-makers or gain an unfair fraud,
advantage in business dealings. embezzlement,
insider trading,
This unethical behavior can extend to environmental violations,
dealings with public officials, antitrust violations,
jeopardizing the integrity of bribery,
government institutions and fostering corruption, and
a culture of corruption. money laundering.
Money Laundering These offenses involve
Money laundering involves disguising deceptive financial practices,
the origins of illegally obtained money, misappropriation of funds,
making it appear legitimate. illegal stock trading,
Corporations may engage in money environmental harm,
laundering to conceal the proceeds of anti-competitive behavior,
their criminal activities, posing a unethical influence, and
significant challenge for law disguising the origins of illegally
enforcement agencies attempting to obtained money.
trace and seize illicit funds. Addressing these crimes is crucial for
maintaining integrity in the business
Conclusion world and protecting the interests of
Addressing and preventing corporate stakeholders and the public.
crime requires a comprehensive
understanding of its various forms. What is the corporate crime?
Legal authorities, regulatory bodies, Corporate crime refers to illegal
and the public must work activities committed by corporations
collaboratively to enforce existing or individuals within a corporate entity
laws, enact new regulations, and for financial gain,
promote ethical business practices. often involving fraudulent practices,
embezzlement, insider trading,
By holding corporations accountable environmental violations, antitrust
for their actions, society can strive for offenses, bribery, corruption, and
a fair and transparent business money laundering.
environment that benefits both These actions
stakeholders and the broader Compromise Ethical Standards,
community. Legal Regulations, and
Societal Well-Being.
 58

What are the different types of white-

collar crime?
White-collar crime encompasses
various non-violent, financially
motivated offenses typically
committed by individuals, businesses,
or government professionals.

The main types include

Fraud,
Embezzlement,
Insider Trading,
Ponzi Schemes,
Money Laundering,
Bribery, and
Identity Theft.

These crimes are characterized by

Deceit,
Concealment, or
Violation of Trust and
are typically committed for Financial
Gain.

What are the two main types of

crime?
The 2 main types of crime are
violent crime and non-violent crime.

Violent crimes involve the use of force

or threat of force, causing harm to
individuals, such as assault, robbery,
and murder.

Non-violent crimes, on the other hand,

do not involve physical harm and
include offenses like fraud, theft, and
white-collar crimes.
“Corporate frauds have increasingly
disrupted the stability of the Indian
economy, Affecting
Investor Trust,
 59

Corporate Governance, and cases that reverberate across the

Economic Growth. Indian economy.

The analysis explores various factors Corporate fraud is broadly defined as

contributing to corporate fraud, illegal activities undertaken by
including individuals or companies to
regulatory gaps, deceive stakeholders,
weak internal controls, and manipulate financial statements,
the complexity of financial markets. evade taxes, or
gain unfair financial advantages.
Consequences of such frauds range
from financial losses and reduced These fraudulent practices undermine
foreign investment to long-term investor confidence,
impacts on employment and GDP. destabilize financial markets, and
damage the reputations of the
regulatory responses and the need for affected companies and
reforms in corporate governance, the larger corporate ecosystem.
accounting standards, and ethical
practices. India, as one of the fastest-growing
emerging economies, has witnessed
reforms and enforcement substantial inflows of both domestic
mechanisms can mitigate corporate and foreign investment in recent
frauds, years.
restore market integrity, and
support sustainable economic growth However, cases of corporate fraud in
in India”. companies such as Satyam, IL&FS,
and others have highlighted
I. INTRODUCTION: vulnerabilities within the regulatory
Corporate frauds represent a and governance frameworks in India.
significant and growing threat to the
stability and credibility of economies Such instances have exposed
worldwide, and India is no exception. loopholes in the oversight
mechanisms and pointed to issues
such as ineffective internal controls,
inadequate risk management
practices, and ethical lapses at the
management level.
In recent decades, instances of
corporate fraud have become more The consequences of corporate fraud
frequent and complex, often involving are far-reaching, impacting not only
large corporations and high-profile the companies involved but also
 60

investors, employees, shareholders, Indian economy, posing serious risks

and the economy as a whole. to financial stability, investor trust, and
economic growth.
The economic implications of
corporate fraud in India are Despite efforts to strengthen
significant, affecting multiple sectors corporate governance and regulatory
and stakeholders. oversight, India has seen a rise in
cases of corporate misconduct
Fraud-related financial losses can involving financial misrepresentation,
diminish investor confidence, lead to embezzlement, insider trading, and
stock market volatility, and reduce unethical practices.
foreign direct investment, impeding
economic growth. High-profile scandals in major
corporations have highlighted
Furthermore, these incidents can weaknesses in both internal controls
have a lasting effect on job security, and regulatory frameworks, exposing
industry reputation, and GDP, vulnerabilities that allow for the
underscoring the need for a strong misuse of corporate power and
regulatory response. In response to resources.
these challenges, India has taken
several steps to strengthen its The recurring nature of these frauds
regulatory frameworks, including not only impacts individual companies
reforms in corporate governance, but also has broader economic
stricter enforcement of accounting implications.
standards, and enhanced Financial losses from corporate fraud
whistleblower protections. contribute to stock market volatility,
reduced foreign investment, job
Nevertheless, corporate fraud insecurity, and a decline in the overall
continues to be a pressing issue, trust of investors and stakeholders.
requiring a thorough understanding of
its root causes, impacts, and the These issues underscore the need to
reforms necessary to mitigate future address both the underlying causes of
occurrences. corporate fraud and the shortcomings
of the current regulatory landscape.

I.I STATEMENT OF THE PROBLEM: The purpose of this study is to

Corporate fraud has become an critically examine the causes,
increasingly pressing issue within the consequences, and potential reforms
 61

related to corporate frauds in India,

with a view to understanding their
impact on the Indian economy. By
analyzing high-profile cases and
identifying systemic vulnerabilities,
this study aims to explore how
corporate fraud undermines economic
growth, disrupts market stability, and
erodes investor trust.

Additionally, this study seeks to

evaluate the effectiveness of current
regulatory frameworks and
governance practices, highlighting
both achievements and areas
requiring improvement.

Through this analysis, the study will

provide recommendations for
strengthening regulatory oversight,
enhancing corporate governance, and
fostering a culture of transparency
and accountability within Indian
corporations.

The ultimate goal is to contribute to

the development of a robust
framework that mitigates the risk of
corporate fraud, thereby promoting a
more resilient and trustworthy
economic environment in India.
 62

Consequences of Corporate Crime Similarly, if a company produces and

sells unsafe products, it can put
The consequences of corporate crime consumers at risk of injury or even
can be far-reaching and affect various death.
stakeholders: These social impacts can have long-
Economic Impact: lasting consequences for the affected
Corporate crime can lead to communities, including health
significant financial losses for problems, decreased quality of life,
investors, customers, and employees. and a loss of trust in corporations and
It can also undermine public trust in regulatory bodies.
the economy.
Public Health and Safety:
When a corporation engages in When corporations engage in illegal
fraudulent activities, such as cooking activities, public health and safety can
the books or insider trading, it can be compromised. For example, the
result in investors losing their hard- production and distribution of
earned money. counterfeit drugs can have severe
consequences for public health.
Customers may also suffer financial
losses if they purchase faulty products Counterfeit medications may not
or services from a deceitful contain the necessary active
corporation. ingredients, leading to ineffective
Furthermore, the employees of the treatment or even worsening of the
company may face job losses or condition. In some cases, counterfeit
reduced benefits due to the financial drugs have been found to contain
implications of corporate crime. All harmful substances that can cause
these factors combined can have a serious harm or death.
detrimental effect on the overall Furthermore, when corporations cut
economic stability of a country or corners on safety measures or fail to
region. comply with regulations, it can result
in workplace accidents, environmental
Social Impact: disasters, or the release of hazardous
Corporate crime can harm substances into the environment,
communities, especially when it posing risks to public health and
involves environmental violations or safety.
the production of unsafe products.
When a corporation disregards
environmental regulations, it can lead
to pollution, destruction of natural
habitats, and adverse effects on the
health of nearby residents.
 63

Loss of Confidence: In addition to financial penalties,

Corporate crime erodes public trust in corporations may also face civil
corporations and institutions, making lawsuits from affected parties seeking
it more challenging to maintain a compensation for damages.
functioning and fair business
environment. When a corporation is Moreover, the individuals responsible
involved in illegal activities, it for the corporate crime may face
tarnishes its reputation and the criminal charges, which can result in
reputation of the industry as a whole. imprisonment if found guilty.

This loss of confidence can have a These legal consequences not only
ripple effect, affecting not only the have financial implications for the
corporation involved but also other corporation but can also lead to long-
businesses operating in the same term damage to its reputation, making
sector. It can lead to a decrease in it harder to attract investors,
consumer confidence, reluctance to customers, and talented employees.
invest, and a general skepticism
towards the corporate world. Prevention and Control of Corporate
Crime
Restoring public trust and confidence
after a corporate crime incident can Efforts have been made to prevent
be a long and arduous process, and control corporate crime:
requiring significant efforts from the
company, regulators, and other Regulatory Frameworks:
stakeholders. Governments enact laws and
regulations to govern corporate
Legal Consequences: behavior and deter illegal activities.
Corporations found guilty of corporate Strong and effective regulations can
crime can face fines, lawsuits, and help prevent corporate crime.
reputational damage. Individuals
involved may also face criminal Corporate Governance: Implementing
charges and imprisonment. robust corporate governance
practices, such as transparency,
When a corporation is caught accountability, and ethical standards,
engaging in illegal activities, it can can help prevent corporate crime.
face hefty fines imposed by regulatory
authorities. Whistleblower Protection:
Encouraging & protecting
These fines aim to penalize the whistleblowers who expose corporate
company for its wrongdoing and serve wrongdoing can help uncover and
as a deterrent for future misconduct. prevent corporate crime.
 64

Law Enforcement: This includes implementing strong

Strengthening law enforcement financial controls, conducting regular
agencies’ capacity to investigate and audits, and ensuring that employees
prosecute corporate crime is crucial are aware of reporting mechanisms
for effective prevention and control. for suspected wrongdoing.

Public Awareness and Education: Furthermore, collaboration between

Raising awareness about corporate different stakeholders is essential in
crime and its consequences can preventing and controlling corporate
empower individuals and communities crime.
to detect and report illegal activities.
This can involve partnerships
between government agencies, law
However, it is important to note that enforcement, regulatory bodies, and
prevention and control of corporate industry associations.
crime requires a multi-faceted
approach that goes beyond these By working together, these
measures. stakeholders can share information,
exchange best practices, and
One key aspect is the establishment coordinate efforts to combat corporate
of a strong ethical culture within crime.
organizations. This involves fostering
a sense of integrity, honesty, and Another important aspect is the role of
accountability among employees at all technology in preventing and
levels. detecting corporate crime.
Advancements in data analytics,
Organizations should prioritize ethics artificial intelligence, and machine
training and education programs to learning can help identify patterns of
ensure that employees are aware of fraudulent behavior and detect
the ethical standards expected of potential risks.
them.
Companies should invest in advanced
This can include regular workshops, technological solutions and regularly
seminars, and online training modules update their systems to stay ahead of
that address various ethical dilemmas evolving criminal tactics.
and provide guidance on making
ethical decisions. Lastly, the legal and regulatory
frameworks need to continuously
In addition, companies should evolve to keep up with the changing
establish robust internal controls and nature of corporate crime.
risk management systems to detect
and prevent corporate crime.
 65

This requires regular reviews and

updates to ensure that laws and
regulations are effective in deterring
and punishing offenders.

In conclusion, preventing and

controlling corporate crime requires a
comprehensive approach that
encompasses regulatory frameworks,
corporate governance, whistleblower
protection, law enforcement, public
awareness, and education.

However, it is important to recognize

that this is an ongoing process that
requires continuous efforts,
collaboration, and adaptation to
effectively combat corporate crime.
 66

Notable Case Studies of Corporate The scam highlighted vulnerabilities in

Fraud in India PNB’s internal controls and banking
protocols. Investigations by the ED
Satyam Scandal (2009) and CBI uncovered systematic
The Satyam scandal, often termed collusion by bank employees and led
“India’s Enron,” exposed massive to the freezing of Nirav Modi’s assets
corporate governance failure. worth ₹2,400 crore. Extradition cases
Founder Ramalinga Raju confessed against the accused were filed in the
to forging financial statements, UK and other countries.
inflating the company’s assets to
₹7,000 crores, and reporting fictitious The scam badly damaged PNB’s
cash balances to mislead the reputation and led to regulatory
investors. The fraud came to light changes, such as close monitoring of
through Raju’s letter written to the LoUs and interbank processes.
board admitting to the irregularities,
which later triggered a massive fallout Kingfisher Airlines Scam (2012)
in the IT sector of India. Investigations Kingfisher Airlines’ bankruptcy
by the SFIO and CBI resulted in legal revealed systemic financial
action. SEBI debarred Raju from mismanagement and loan defaults of
entering the securities market; ₹9,000 crore. Alleged by the
instead, they imposed great fines. chairman of the airline to have
siphoned away the funds meant for
The court finally pronounced the operating the airline to his own
imprisonment for a term of seven personal accounts and other
years on him. It is evident that such ventures.
scams affected investors’ confidence.
Corporate governance resulted in When Kingfisher Airlines defaulted on
reforms in India along with strict its loan, it was quite heavy stress on
monitoring in auditing. the banking system. CBI and ED
pursued the case and Mallya was
Punjab National Bank Scam, 2018 declared as a Fugitive Economic
The PNB scam, one of India’s largest Offender through the Fugitive
banking frauds, involved jeweler Nirav Economic Offenders Act, of 2018.
Modi and his uncle Mehul Choksi ₹11,000 crores worth of assets got
orchestrating a fraudulent scheme to attached and were put in the auction
siphon off over ₹13,000 crore through to recover his dues. The case
fake Letters of Undertaking (LoUs). highlighted lapses in the banking
system’s appraisal mechanisms for
risk and higher accountability towards
lending.
 67

Challenges in Combating Conclusion

Corporate Frauds Corporate fraud is an evolving
However, corporate fraud in India menace that poses a severe threat to
through legislation faces some more India’s Economic Stability,
challenges in the form of the complex Investor Confidence, and
structure within which the offenders Business Ethics.
can easily conceal fraudulent
activities. Cases like Satyam, PNB, and
Kingfisher Airlines portray the
The long time required between devastating impact of fraudulent
investigation, trial, or even final practices on stakeholders and the
judgment is followed by economy at large.
misappropriated funds taken back.
Furthermore, They point to the critical need for a
robust regulatory framework,
Limited Whistleblower Protections: proactive enforcement, and stronger
Employees are reluctant to report corporate governance mechanisms.
fraud due to the fear of retaliation.
Despite its advances in combating
Technological Advancements: corporate fraud with legal measures
Fraudsters use sophisticated tools such as the Companies Act, SEBI
that usually outpace regulatory efforts, regulations, and the PMLA, there are
making it even more challenging to still much larger issues to be
combat such frauds. addressed including the delay in
justice delivery, the use of advanced
Recommendations technologies by fraudsters, and weak
Regular forensic audits can help whistleblower protection.
identify discrepancies early.
Strengthening legal protections for Addressing these challenges
whistleblowers can encourage demands a multi-pronged approach
reporting. that includes mandatory forensic
audits, leveraging AI and machine
Leveraging AI using technology learning for fraud detection, improving
integration for pattern recognition and whistleblower safeguards, and
fraud detection. expediting legal processes. Hence,
Fast-tracking fraud cases, including through a corporate culture based on
investigation, trial, and even final transparency and accountability with
judgment to ensure timely justice. an active, watchful, and vigilant
system of regulation, India can
develop a corporate environment free
from fraud.
 68

Regulatory Authorities of India Enforcement Directorate (ED)

The regulation and implementation of The ED investigates money
anti-fraud measures in India are dealt laundering and foreign exchange
by various specialized agencies and violations, focusing on tracing and
regulatory authorities: confiscating proceeds of crime.

Serious Fraud Investigation Office

(SFIO)
The SFIO is a multi-disciplinary
agency under the ministry of
corporate affairs. It involves
investigating and prosecuting cases of
intricate corporate fraud.

Securities and Exchange Board of

India (SEBI)
The SEBI regulates and controls the
securities market. To ensure the
transparency and observance, it
prevents such market-related frauds
as an insider trading and price
manipulation.

Reserve Bank of India (RBI)

The central bank regulates fraud in
the banking and financial sectors by
putting measures in place to curb
irregularities and protect the interests
of depositors.

Central Bureau of Investigation (CBI)

The CBI deals with cases of
corruption and economic offenses
involving high-profile cases. In most
cases, it collaborates with other
agencies to conduct comprehensive
investigations.
 69

Legal Framework to counter Information Technology Act, 2000

Corporate Frauds in India As digital transactions and operations
India has enacted various legal and grow, the IT Act plays a very
regulatory measures to combat important role in resolving cyber
corporate fraud. These laws aim at fraud. It is an act that includes frauds
the detection, deterrence, and like hacking, impersonation, and
punishment of malpractices with forgery of corporate digital
accountability in the corporate setups. documents.

Prevention of Corruption Act, 1988 Companies Act, 2013

This Act criminalizes bribery and The Companies Act, of 2013, is the
corruption, focusing on unethical primary law that governs corporate
practices in the public and private affairs in India.
sectors. It has been amended to
include indirect forms of bribery and to Section 447: Defines corporate fraud
cover both givers and takers of bribes. and prescribes strict punishments
including imprisonment of up to ten
SEBI (Prohibition of Insider Trading) years along with heavy fines. The
Regulations, 2015 monetary limit for prosecution under
These regulations issued by the this section is 10 Lakh or the
Securities and Exchange Board of company’s overall turnover whichever
India (SEBI) help curb insider trading. is lower. The minimum punishment is
There are disclosures, prohibition six months which may extend to ten
against the misuse of unpublished years,
price-sensitive information, and a
heavy hand of penalties upon Section 211: Creates the Serious
violations. Fraud Investigation Office (SFIO), an
investigation agency that would deal
Prevention of Money Laundering Act, with complex cases of corporate
2002 (PMLA) fraud. The SFIO is responsible for
The PMLA addresses the laundering investigating corporate frauds. The
of illicit funds by enabling the seizure SFIO is led by a director who must be
and confiscation of properties a Joint Secretary to the Government
obtained through fraudulent means. It of India. The SFIO also has experts in
is a prime tool in tackling financial various fields, including banking,
fraud and ensuring that proceeds from corporate affairs, taxation, and law
illegal activities do not find their way
into the formal economy. Section 206: Authorizes the Registrar
of Companies (ROC) to investigate
companies suspected of fraudulent
practices or non-compliance with the
law.
 70

Corporate fraud is a significant threat eg, a company may use fictitious

that undercuts the integrity of the sales to inflate its revenue, delay
business environment and breaks the expense recognition, or omit its
confidence of investors, employees, liabilities on the balance sheet to
and stakeholders. create an artificially favorable position.

It means deliberate acts of deception Insider Trading

or unethical practices on the part of Insider trading is defined as a
companies or their representatives situation where an individual within an
with the ultimate aim of achieving organization actually uses non-public
undue financial or personal benefits. and material information to trade for
personal gain.
In India, corporate fraud has led to It means not only having an unfair
immense financial losses, reputational advantage but also distorting the
damage, and legal battles, integrity of financial markets.
necessitating stringent measures to
prevent and address such activities. eg, an executive who learns about an
upcoming merger or acquisition may
This article delves into the various purchase shares of the company
types of corporate fraud, the existing before the information becomes
legal framework, regulatory public, reaping substantial profits
authorities, and prominent case once the news is announced.
studies, along with recommendations
to strengthen the fight against Siphoning of Funds
fraudulent practices. Siphoning off funds refers to the
diversion of company assets or
Types of Corporate Fraud resources for personal or
Accounting Fraud unauthorized purposes. Often, this
Accounting fraud involves type of fraud will leave creditors,
manipulating or misrepresenting a investors, and other stakeholders at a
company’s financial statements to disadvantage because the financial
inflate profits, concealing losses, or health of the company deteriorates.
deceiving stakeholders.
A classic example is where corporate
This type of fraud usually ends up executives transfer funds to unrelated
portraying inaccurate representations businesses or personal accounts
of a company’s financial health, which under the guise of business expenses
makes the wrong investment or fictitious transactions.
decisions for shareholders or lending
institutions.
 71

Tax Evasion
Companies involved in tax evasion What is the most common crime
intentionally alter records, understate committed by corporations?
income, overstate expenditures, or Environmental crimes are the most
establish shell companies to avoid common type of corporate crime. It is
paying taxes that the government is important to remember, however, that
legally entitled to. This not only affects individuals rather than companies
government revenues but also puts initiate crimes.
an uneven playing field for honest
businesses. They may do so on behalf of a
corporation, but a human hand is
eg, some corporations under-invoice always involved in corporate crime.
exports or over-invoice imports to
avoid tax liability while simultaneously Corporate crime, sometimes called
engaging in capital flight. white-collar crime, is crime committed
by individuals on behalf of a business.
Bribery and Corruption The corporate crime definition
Bribery and corruption relate to indicates clearly that corporate crimes
unethical practices whereby people or are committed by individuals to
companies use monetary or other benefit the companies that employ
incentives to influence decisions or them, although the individuals
get undue advantage in business involved may themselves profit from
transactions. such acts.
This could come in the form of Criminologists have proposed several
winning government contracts through theories of corporate crime. The first
bribery, manipulation of regulatory formal explanation for corporate crime
clearances, or avoiding detection was put forward by criminologist
through bribing officials holding Edwin Sutherland in 1939.
powerful positions.
His Theory of Differential Association
What are some examples of corporate suggests that criminal behavior
crime? occurs when individuals associate
One example of corporate crime with others who view criminal acts in a
involved Royal Caribbean Cruise positive light.
Lines practice of dumping oil, a
violation of environmental laws. Sutherland also claims that criminal
behavior occurs only if individuals are
Another example occurred when in an environment where most
Beech Nut made false claims associates do not view criminal
regarding the ingredients in its apple behavior in a negative way.
juice.
 72

Some criminologists have criticized Lesson Summary

the Theory of Differential Association, Corporate crime is crime committed
noting that it fails to consider other by individuals on behalf of a business.
causes such as depression and drug Corporate crimes can occur in a
abuse. Sutherland's theory also fails variety of ways: violations of
to account for differences among environmental law, bribery, false
individuals. claims, corporate fraud, and other
methods.
Corporate Crime Examples
Corporate crime examples are Typically, individuals are looking for
plentiful and take many forms. personal financial benefits that may
Violation of environmental laws, be available as a result of higher
bribery, false claims, and corporate company profits. Even well-known
fraud are a few examples of corporate companies such as Royal Caribbean
crime; types of white-collar crimes are Cruises, Rite Aid, Beech Nut, and
limited, of course, only by the WorldCom can find themselves
criminal's imagination. embroiled in criminal activity.

Causes of Corporate Crime T

What are the causes of corporate
crime? Greed, desperation, and
opportunity in the corporate
environment can lead to corporate
crime. Many factors can lead to white-
collar crime, including:

Inadequate training can lead workers

to commit crimes if they do not
understand the legalities of their
tasks.
 73

In simple language, corporation functions of corporations in society.

means a group of individuals who Over the past century, the concept of
come together to do business. a corporation has shifted from the
Corporation is the creation of law, a idea of an enterprise headed by an
business entity recognized by law. entrepreneur who both owns and
Although, English law establishes the drives ongoing concern, to an
origins of the modern corporation in organization where stock ownership
the fourteenth century, some differs from the corporation’s control
authors[1] believe that the origins of of affairs the latter is being managed
the corporation can be traced back to by a professional, hiring and self-
the twelfth century, or perhaps to bureaucratic. Furthermore, the role of
Roman law, the judicial person is said individual shareholder has changed
to have been recognized. Sir Henry from part-owner to investor, and its
Main suggested that a type of importance has diminished in large
corporate (personally opposed) corporations where the most
responsibility lay at the very heart of important shareholders are collective
the primitive legal system. The society units. Shareholder attachment to the
was not what it is currently believed to corporation is becoming secondary
be, a collection of individuals. In fact, and indirect, reflecting the fact that
and looking at the men joining it, it corporations serve a wide variety of
was an aggregation of families. interests other than shareholders,
including their employees, customers,
The law recognized this system of and the community at large. And
small independent corporations. subsequently, it has been seen that
Corporations are of two kinds: “Corporations can at this point don’t
be identified with a solitary
Corporation Aggregate, and homogeneous gathering of people. Its
Corporation Sole. choices and activities are
A corporation total is a corporate body consequential and responsible for a
with a membership of several complex set of interests and clashing
individuals. It is formed by the quantity claims”[3]. This is a more significant
of individuals known as shareholders, change for the reasons for criminal
pooling their resources known as law and the inconvenience of
capital to begin with and it serves the corporate criminal liability on
common interest of all shareholders corporations.
and one is a profit earner.[2] It was
the Industrial Revolution of the In today’s economic and social
seventeenth century and the reform of structure, a corporation has functional
the transport system, which brought structures, it is permanent, large,
previously unforeseen changes not formal, complex and goal-oriented,
only in the size and structure of and has a decision-making structure.
corporations, but also in the role and
 74

While not all corporations share the

trait of large-scale operations
involving multiple individual
participants, it ought to be noted that
small corporations generally do not
pose the same problems for
prosecution as larger ones.

Furthermore, the social importance of

an organization’s policies and
decisions increases with the
magnitude of its resources, thereby
damaging the large capacity of large
organizations. It has also been
observed that large corporations
create disaster situations.

Findings
This paper attempts to identify a
range of discrete variables that can be
termed interstitial in the sense that
they can accompany a variety of
theoretical hypotheses, locate
themselves in the space left in
between the different approaches
while providing supplementary
analytical foci.
Ignorance,
Entitlement,
Reverse keynesianism,
Recklessness,
Efficiency and

The finance curse

may offer additional angles from
which the causation of financial crime
can be observed. Sociological and
criminological arguments,
 75

BANK FRAUD
Introduction
Bank fraud is a growing menace in
India, posing significant threats to
financial institutions, customers, and
the economy.

The banking sector is the backbone of

India’s economic stability,
facilitating commerce,
trade, and
personal financial management.

However, with the rapid

advancements in technology and the
increasing reliance on digital banking
systems, the landscape of fraud has
become more complex and
sophisticated.

Such fraudulent activities also bring

about financial losses that are not just
monetary terms but also erode public
trust in the banking system,
jeopardizing economic growth.

Therefore, bank fraud needs to be

addressed with a robust combination
of preventive mechanisms, legal
frameworks, and public awareness to
protect the integrity of the financial
system and ensure customer safety.
 76

Types of Bank Fraud in India Loan Frauds

Bank fraud comes in various forms, Loan frauds are when people or
ranging from simple deceit to intricate companies misrepresent information
schemes that exploit technological to get a loan. Corporate loan fraud
loopholes. Each type has unique includes inflation of valuations by
implications for banks, customers, businesses or providing false
and regulatory bodies. documents to acquire large loans,
which is a major impact on India’s
Cheque Fraud banking sector. In those cases, the
Cheque fraud is one of the most defaulters always divert or siphon the
traditional forms of banking fraud. It funds, and NPAs put pressure on the
involves the alteration of physical banking system and reduce its ability
cheques by changing the payee’s to lend.
name, amount, or forging signatures.
Such frauds not only affect the Cyber Frauds
intended flow of funds but also Cyber fraud is a broad term that
damage the reliability of cheque- includes phishing emails, malware
based transactions. The ease with attacks, SIM cloning, and hacking
which fraudsters can forge signatures through unauthorized access. Cyber
or counterfeit cheques poses a fraud has increased with the growing
significant challenge for banks, digital payment options and mobile
especially in ascertaining the banking. These types of fraud take
authenticity of each transaction. advantage of people’s unawareness
of using technology properly and the
Identity Theft limitations of digital literacy, making
Identity theft in banking is achieved this area crucial for banks to focus on,
when fraudsters obtain information cyber security.
like Aadhaar numbers or PAN details,
through which they log into bank ATM Frauds
accounts or obtain loans and credit ATM fraud involves the use of
cards issued in other people’s names. skimming devices to clone ATM cards
The financial consequences of and steal sensitive information from
identification theft often prove such users. In this kind of fraud,
disastrous for its victims-they include fraudsters sometimes fit hidden
erased savings and swelling liabilities. cameras to capture PINs as
This particular kind of fraud has been customers use ATMs. This type of
on the increase with the increasing fraud directly affects individual
online digitalization of banking account holders and intensifies the
services and the susceptibility of clamor for banks to enhance the
personal data kept online. security of ATM operations.
 77

Money Laundering
Money laundering uses banking
channels to cover the source of
money from illicit activities, making it
appear legitimate. Fraudsters use
multiple transactions to avoid
detection, and this complicates the
tracing and seizure of such funds by
financial institutions and law
enforcement. This type of fraud
affects the banking system and fuels
other criminal activities.

Ponzi Schemes & Investment

Frauds
Ponzi schemes attract victims through
promises of high returns on
investments. These schemes pay
returns to earlier investors using
money from new investors, thus
creating a cycle that eventually
collapses. Investment frauds like
these exploit the trust of individuals
and contribute to huge financial
losses.

Forgery & Counterfeit Documents

Submission of forged documents, like
false identity proofs, income
certificates, or property papers, for
getting loans or to make transactions
is the most common fraud. These
activities increase the liability of
fraudulent banking and also increase
the chances of non-repayment.
 78

How to prevent a Bank Fraud? Enhancing Cybersecurity

Preventing bank fraud is done through Robust cybersecurity is an essential
a proactive effort that involves tool to safeguard digital banking
integrating technology, sound systems. Banks are using measures
institutional vigilance, and public such as 2FA, encryption technologies,
education. The goal of preventive and biometric verification in current
measures should involve banks as times to enhance online transaction
well as customers. It can be done by security.
better integration of the below-
mentioned suggestions: They also need advanced fraud-
detection systems with AI/ML
Better KYC Norms capability, which can identify real-time
Know Your Customer (KYC) patterns to prevent unauthorized
regulations help banks verify the access.
identity of customers and prevent
fraudulent accounts. With stringent Internal Controls of Banks
KYC norms and periodic re- The necessity of fraud prevention
verification, banks can reduce the risk involves having tight internal controls
of identity theft and unauthorized in place, such as regular audits,
activities. segregation of duties, and other
oversight mechanisms. Banks should
Collaboration Among Banks also establish specialized fraud risk
Banks must collaborate and share management teams to monitor
information about fraudulent entities transactions and investigate
and patterns of fraud. This collective irregularities.
approach can prevent fraudsters from
exploiting vulnerabilities in different Fraud Risk Management Systems
banks. Implementing fraud risk management
systems that integrate data analytics
Customer Education and monitoring tools can help banks
Public awareness lies at the core of detect and respond to fraudulent
fraud prevention. Banks must conduct activities quickly. These systems
educative programs on secure enable real-time tracking of
banking practices, such as keeping suspicious transactions, minimizing
PINs private, avoiding suspicious the damage caused by fraud.
links, and being cautious of phishing.
Enhancing Cybersecurity
There is a huge difference in the Better KYC Norms
success rate of fraud attempts on Customer Education
well-educated customers. Internal Controls of Banks
Fraud Risk Management Systems
Collaboration Among Banks
 79

Recent Trends and Notable Cases Such incidents point out the urgent
of Bank Fraud in India need for banks to secure
Bank fraud in India has evolved with communication channels and educate
advancements in technology and customers about safe digital
shifts in the economic and regulatory practices.
landscape.
Loan Scams and Increasing NPAs
Recent trends highlight the increasing Indian banks are facing a tremendous
sophistication of fraud schemes and increase in the problem of Non-
underline systemic weaknesses. Performing Assets (NPAs). Loan
Integrating notable cases into these scams mainly contribute to this
trends provides a clearer problem. Cheating borrowers inflate
understanding of their implications valuations, provide forged documents,
and the challenges in tackling them. and divert sanctioned loans for
purposes other than the stated ones.
Escalation of Cyber Frauds Post-
COVID-19 Case in Point: The Vijay Mallya
The pandemic led to a significant Kingfisher Airlines scam
increase in cyber fraud cases as The Kingfisher Airlines loan default of
digital banking experienced a sharp over Rs. 9,000 crores is one of the
rise. The scammers exploited the lack biggest cases of corporate loan fraud.
of digital literacy among users, who Here, the loans were allegedly
were duped through phishing emails, diverted to personal accounts, and no
fraudulent apps, and malicious links recoveries could be made from the
into divulging personal banking banks. This case exposed the
information. weaknesses in credit assessment
procedures and the complicity of
Case Study: The SIM-Swap Scams financial institutions in sanctioning
During the COVID-19 period, several risky loans. It led to increased due
customers fell prey to SIM-swap diligence processes among banks
frauds where fraudsters pretended to and regulators.
be account holders and received
duplicate SIM cards. They used them Insider Collusion
to intercept OTPs and siphon money. Insider collusion frauds often remain
For example undetected for years because
employees with access to sensitive
eg, cases in metropolitan cities such information manipulate systems and
as Mumbai and Delhi brought into the bypass security protocols.
open how tech-savvy fraudsters could
outsmart even cautious users.
 80

Case in Point: The Punjab National Complex Securities and Financial

Bank (PNB) Fraud Instrument Fraud
The Nirav Modi-Mehul Choksi PNB Most often, fraudsters use intricate
scam is one of the most noted scams financial instruments and systemic
in India, a Rs. 11,400 crore scam. A loopholes in banking and capital
nexus between the bank officers and markets to conduct scams that create
the accused helped them draft and extensive financial loss.
issue fraudulent Letters of
Undertaking without adequate Case Study: The Harshad Mehta
collaterals. This again reflected the Securities Scam
weakness in the internal controls and The 1992 Harshad Mehta scam
also highlighted a requirement for brought to light how systemic
better oversight mechanisms inside loopholes in banking processes could
banks. be exploited to manipulate financial
markets.
Corporate Mismanagement on the
Rise Mehta used fraudulent bank receipts
Corporate mismanagement and to inflate stock prices, causing
unethical practices in lending have massive losses to banks and
repeatedly led to large-scale fraud. In investors. The scam led to significant
such cases, the top executives reforms, including the establishment
misuse their authority to approve of the Securities and Exchange Board
dubious transactions. of India (SEBI), to ensure stricter
regulation of financial markets.
Case in Point: The ICICI Bank-
Videocon Scandal
Chanda Kochhar, the former CEO of
ICICI Bank, had been accused of
granting loans amounting to Rs. 3,250
crores to Videocon for what she is
accused of garnering in return for
certain personal benefits.

Investigation shows that there were

conflicts of interest and unethical
practices at the top level of
management. This case highlights
transparency, ethics, and
accountability by high-level officials in
a bank.
 81

What Legal Actions can be taken The Negotiable Instruments Act, 1881
Against Bank Fraud? This act provides redressal for
India’s legal framework offers robust cheque-related fraud and ensures
mechanisms to address and penalize accountability for dishonored cheques
banking fraud. These legal provisions and forged instruments.
ensure accountability and act as
deterrents for fraudulent activities. The Companies Act, 2013
Corporate frauds, particularly those
Indian Penal Code, 1860 (IPC) involving misrepresentation or misuse
The IPC provides a foundation for of funds, are dealt with under this act
prosecuting various forms of fraud. and ensure accountability among
Sections like 406 (criminal breach of corporate entities.
trust), 420 (cheating and dishonestly
inducing delivery of property), and What is the Role of Investigative
468 (forgery for cheating) are Agencies in case of a Bank Fraud?
frequently invoked in bank fraud Several investigating agencies
cases. scrutinize bank fraud cases in India
and bring the perpetrators to justice.
The Banking Regulation Act, 1949 The CBI is in charge of high-profile
This act enables the RBI to regulate cases, particularly large-scale
banking activities and ensure steps corporate fraud.
are taken against fraudulent practices.
It ensures risk-adjusted standard The Enforcement Directorate probes
procedures for banks, too. money laundering activities while
cybercrime cells focus their efforts on
The Information Technology Act, 2000 ‘Cyber Frauds.’ The Serious Fraud
With the emergence of cyber fraud, Investigation Office probes many
the IT Act has become a very frauds in corporate.
important tool. Sections such as 43
and 66 deal with unauthorized access
and identity theft, providing penalties
and safeguards against cybercrimes
in banking.

The Prevention of Money Laundering

Act, 2002 (PMLA)
The PMLA has a very important role
in combating financial crimes. It
mandates the reporting of suspicious
transactions. It facilitates the tracing
and seizure of laundered funds.
 82

Top Bank Frauds In India: After gathering your personal

list of some information, the scamster will hack
Bank Account Scams into your account and steal your
1. Automatic Withdrawal Scams money in no time.
2. Phishing Scams
3. Charity Scams Scam 3 - Charity Scams
4. Overpayment Scams Charity scams are emotional ways to
5. Cheque-Cashing Scams influence naive people to donate their
6. Government Masquerader Scams money. Through such a scam,
fraudulents take the benefit of
Scam 1 - Automatic Withdrawal people’s empathy by impersonating
Scams charitable organisations.
Automatic withdrawal scams are
among the most common bank frauds People often fall for such scams as
in India. In such a scam, you might they directly trigger emotions. Misled
receive either a call, SMS, postcard, people end up donating to such fake
etc., stating you have won a prize or charities and lose their money to
an exciting offer. scammers.
Next, the scammer will demand the
bank details and ask for the numbers Scam 4 - Overpayment Scams
mentioned below your cheque. Such scams are often targeted
towards sellers operating their
The moment the scammer avails of business online.
the banking details, they put it in a
demand draft and file with the bank. Scammers pose as buyers and send
Once the bank receives the same, it off a cheque (a fake one) as their
will transfer the sum of money from payment for a price that is higher than
your account to the scammer. it should be. Next, they will demand a
refund of the difference via online
Scam 2 - Phishing Scams mode.
Phishing scams are mostly done via
mediums such as SMS and e-mail But, since the original payment was
directed to a link. fake, now, while repaying, the seller
Through such fraud, scammers send ends up losing the refund money and
clickbait messages that resemble the price of the product sold.
official bank messages. Such links
may ask you to fill in personal
information, including your mobile
number, account number, OTP, etc.
 83

Scam 5 - Cheque-Cashing Scams Conclusion

This is another emotion-triggering Bank fraud is a multi-faceted issue
scam that crooks often undertake. requiring concerted efforts from all
stakeholders, including
Here’s an example to understand this banks,
- Mr John was just coming out from customers,
the bank and was suddenly regulators, and
approached by a person asking if he law enforcement agencies.
could help him cash a cheque as he
doesn’t have an account in that bank. Increasing sophistication in fraud calls
John decides to help him as he can for effective
deposit the cheque and withdraw preventive measures,
cash from the bank. Post the clearing advanced technological solutions, and
process, the cheque didn’t clear, and stringent legal frameworks.
the funds were held against John’s
account. Banks must focus on
Security & Transparency,
This is one of the most common bank while customers should be
fraud cases in India that has trapped Vigilant & Informed.
many victims.
Legal provisions and investigative
Scam 6 - Government Masquerader mechanisms in India provide a strong
Scams foundation to address fraudulent
Frauds in banking sector by activities, but
impersonating a government official Continuous improvement is essential
has been quite common. Herein, a to avoid emerging threats.
scammer calls up, claiming you’ve
won a lottery that requires some fees By adopting a comprehensive
or tax payment to process the prize approach, India can protect its
money further. banking system, restore public
confidence, and ensure economic
On denial, the scammer threatens to stability in the long run.
file a complaint on non-payment of
tax/fees. People often fall for such
fake claims and end up paying the
sum.
This fraud has happened to numerous
people across the country due to less
awareness.
 84

How to Prevent Bank Frauds in 6=Never Pay to Redeem Prizes

India Never pay any sum to redeem any
Preventing banking fraud is crucial. lottery or prize
Not only does it lead to loss of money,
but a sense of distrust in banking 7=Do Not Engage over the Phone
operations, too. Never engage scammers on the call,
even if they cite themselves as
Here is how to spot and report bank government officials
frauds in India-
Ways to Prevent Bank Frauds in India 8=Be Cautious on the Internet
Before clicking on any emails or links,
1=Don’t Share Your Personal inspect the URL, brand name,
Information spelling, etc., as it may be a malware
Never share your account numbers,
passwords, social security numbers, 9=Be Careful Over the Call
credit card numbers or any You should never share sensitive
unidentified OTPs with anyone unless details over the phone unless you
you trust him/her trust the person. Also, check your
surroundings before you share any
2=File a Complaint information
Never fail/delay to file a bank fraud
complaint if you fall prey to a scam 10=Closing Remarks
Offline and Internet banking fraud
3=Never Cash a Cheque for Other have been persisting in India for many
People decades. Despite several educational
You should never cash a cheque for initiatives from the government and
an unknown person many banks, people often fall prey to
bank fraud.
4=Be Attentive
Read and examine the received Here, we have covered the common
messages, e-mails, chats properly bank scams in India, but there are
before clicking on any link or calling many more that one should be careful
any unknown number claiming you about.
have won a cash prize On a closing note, we would
recommend you stay attentive, never
5=Double-check share your bank or personal details
You should always verify unsolicited with a third party, inspect the
cheques with your bank before messages you receive thoroughly,
cashing and avoid engaging in any acts that
seem malicious.
 85

Law relating to banking Fraud in E-Banking Fraud:

India.By Indian Legal Solution Online Banking is also known as Net
Legal Articles Banking, Internet Banking, E-banking,
or Virtual Banking is an electronic
Fraud: payment system. It is one method of
Fraud is defined as any behavior by banking in which transactions are
which individual goals for conducted electronically on a secure
achievement of unscrupulous website operated by the institution
preference over another and over the internet.
illegitimate loss to the other and
illegitimate causality to the other Internet banking provides you the
either by way of secretion of benefit of time-saving, secured
substantiality or otherwise. amount, Mobile recharge and online
shopping.
Fraud is defined under section 421 of
the Indian Penal Code and Section 17 Measurers from Prevent Internet
of the Indian Contract Act. Banking are:

Fraud considered as cheating, Direct Precautions

concealment, forgery-counterfeiting Use personal Computer and Mobile
and breach of trust. Install Firewall and Antivirus
Always install from trusted store
Bank Fraud:
Bank fraud can be defined as a Browse Precautions
corrupt illegal act by an individual or Google Chrome
configuration to illegitimate striving to Mozilla Firebox
possess or receive money from a Apple Safari
bank or financial institution.
Let’s take a look at several types of Private Windows helps in tracking
bank fraud which exist, pursue by how protection
these types of activities can be Use the Virtual Keyboard
blocked. Type bank website address
Make a payment on HTTP
One of the greater responsibilities that Never Save Password
a bank or financial association has to Get Logout
protect the exclusive right of the
financial association by engaged hard Disable autoFill
to protect the commercial value that Scam Email( Beneficiary Added)
holds it. In order to do so, the bank or Scam Email( Impersonation)
financial institution must be assured to Deliberate Compromise
address the issue of bank fraud. Card usage on unsecured websites
Mishandling Login details etc.
 86

Number of Bank Frauds occurs in Legal Entity Identification is 20 digital

today’s era are: global reference number which
uniquely identifies foundation is the
Bank frauds which effects number of regulator of legal entity identification.
banks financial status and trust
towards society in providing loans and Advantages of Legal entity identifier
recovery of money, Bank frauds are are:
Accounting fraud, demand draft fraud,
remotely created check fraud, Identification of transaction in the
uninsured deposits, bill discounting whole country.
fraud, duplication or skimming of card Improves the accuracy and quality of
information, cheque kiting, forget or financial data.
fraudulent documents, Forgery and Tracking transactions enable.
altered cheques, Fraudulent loan Identify across pin.
application, fraudulent loans, empty
ATM deposits, Fictitious Bank
Inspectors, Identity theft or
impersonation, Money Laundering,
Payment Card Fraud, Booster
Cheques, Stolen Payment cards,
Phishing and Internet Frauds, Prime
Bank fraud, Rogue Traders, Stolen
Checks, Wire Transfer Frauds etc ,
generally these frauds occur in our
country.

Reserve Bank of India introduced

some guidelines for protection of this:

Different geographical areas were

situated it is very difficult to check
money laundering transactions, to
solve this problem reserve bank of
India introduced legal entity identifier,
it checks and prevents banking fraud
in India, Reserve bank of India has
mandated a phase-wise
implementation of Legal entity
identification for all borrowers of
banks in India.
 87

Recent Banking frauds in India: knowledge letter of the undertaking

On 5 February 2018, Punjab National being issued. Punjab National bank
Bank, that it had been deducted suspects employees at overseas
unauthorized transactions of rupees branches of these banks also acted in
280.70 crores, at one of its Mumbai connivance with its own employees,
branches, the bank reported these adequate checks not done by other
incidents to central bureau banks before approving transactions.
investigation and conducted an
internal investigation as well. In Just Modus operandi of Nirav Modi Fraud:
10 days Punjab national bank a
magnitude of the bank. The companies emphatically
stretched the assessment of
Nirav Modi fraud, diamonds with the mollified animus to
Nirav Modi running a business of the usefulness of high credit facilities
gems and jewelry, the case of fraud from the money mongers and also to
inflicts by 3 companies in this indicate the security coverage
prescient have been analyzed, the available with money mongers. Gem
companies inhabit a business of and jewelry sector avails credit
diamonds and jewelry, the companies facilities to these companies
have taken away credit facilities from increased their credit dispensation.
bank under alliance arrangement led There should have been some
by one of the banks. Fraud is much division related through limits on such
bigger 11,400 crores precise, the type of credit exposure.
bank has issued 200 unauthorized
notes. It requires pre sanctioned Jewelry sector units may also be
credit limit and at least 100% cash asked to furnish a monthly declaration
margin with issuer bank. to its lenders’ bank declaring details of
all transactions financial agreement
Some Banks issued credit facilities on contract entered into by its
the basis of the letter of undertaking, subsidiaries with their business
letter of undertaking means promise associations.
taken by the local bank to foreign
bank and other bank gives credit to a Manufacturing Sector fraud: The
supplier who would supply amount, cases of frauds perpetrated by 5
custom has long-distance relationship companies to carry out the functioning
with the bank that sanctions amount in assembling the pharmacy, textile,
on that basis. ferrous metals, pharmaceuticals
products and various dimensions of
Due to carelessness, Robert steels products.
management system, control failure
Punjab national bank suffers from risk
mitigation factor, without bank
 88

Modus operandi of Manufacturing Reserve Bank observed:

Sector: The latest commercial determination
One of the company had exported the Report by Reserve Bank of India in
goods adjacent shipping bills and had June 2018 theorize that the banking
discounted export bills on different system has proclaimed around 6,500
dates, since bill was long outstanding, instances involving fraud of around Rs
the lead bank requisite commissioner 30, 000 crores in the concluding
of custom duty to verify the foundation fiscal. Several other banking frauds
of these bills, mismatch was found in which were reported afterward have
products mentioned in LC invoice raised several questions about the
documents and products mentioned ability of the Public Sector Banks to
as per books of company. contain these situations.

The companies had circumvented the The gross Net Profit Assessment ratio
banking system underhanded of anticipated commercial banks could
activities such as manipulated books rise to 12.2 percent by March 2019
of accounts, removal, deficiency, and from 11.6 percent in March 2018, as
disposing of deposit stocks without evoked by the Reserve Bank of India.
the bank observation. Without an apprehension, a
chronological progressive system
Vijay Maliya Fraud: which is transpicuous and highly
Vijay Maliya take 1500 crore from adequate can lead to a commercial
bank as a personal guarantee, healthier banking system of the
meeting of 9000 crore loan with country.
Kingfisher Airlines, Vijay Mallya read
to do settlement by paying 6600
crores to bank but banks are not
ready to accept it, Problems facing by Conclusion:
Kingfisher companies facing problems According to my perspective, Banking
of no strong management with companies prevent bank frauds
Kingfisher airlines, in the airline through Automatic Card lost,
industry it faces profit margin loss and Automatic Card Pin, preserve data
government also provide fund to Air from wrong websites, person preserve
India. from unsafe suffering, CVV Number,
Warning from free data and preserve
it from unsafe suffering.
 89

Banking Frauds and Law in India: Banking Laws and Regulations

The realm of banking, despite being India's banking laws form a
built on trust and financial security, comprehensive framework aimed at
isn't immune to fraudulent activities. In preventing, detecting, and penalizing
India, as elsewhere, instances of bank fraudulent activities within the banking
frauds in banking law have surfaced, sector. Some key legislations include:
posing significant challenges to the
financial system and undermining 1=Banking Regulation Act, 1949:
public trust. Regulates and supervises banks'
To combat these, India has functioning, ensuring sound banking
established robust banking laws and practices, governance, and financial
regulations. stability.
Types of Bank Frauds 2=Prevention of Money Laundering
Bank frauds in India encompass Act, 2002 (PMLA):
various deceitful activities, such as: Focuses on curbing money laundering
Loan Fraud: activities and enforcing stringent
Falsification of documents, measures for reporting suspicious
misrepresentation of facts, or transactions.
diversion of funds obtained as loans.
3=Information Technology Act, 2000:
Forgery: Addresses cybercrimes, providing
Fabricating or altering documents, legal provisions for cyber offenses,
signatures, or identities to gain including hacking, data breaches, and
unauthorized access to funds or digital frauds.
accounts.
Cyber Frauds: The Securitisation and Reconstruction
Unauthorized online transactions, of Financial Assets and Enforcement
phishing, hacking, or malware attacks of Security Interest (SARFAESI) Act,
targeting banking systems. 2002:
Enables banks to expedite the
Embezzlement: recovery of non-performing assets by
Misappropriation of funds by insiders enforcing the security without court
or employees through manipulation of intervention.
accounts or transactions.

Money Laundering:
Concealing the origins of illegally
obtained money by making it appear
legitimate.
 90

Role of Regulatory Bodies Measures to Combat Frauds

Regulatory bodies like the To combat bank frauds effectively,
Reserve Bank of India (RBI), banks in India have implemented
Securities and Exchange Board of several preventive measures:
India (SEBI), and
Central Bureau of Investigation (CBI) Risk Management Systems:
play pivotal roles in overseeing Banks have adopted robust risk
banking operations and investigating management systems to identify,
frauds. assess, and mitigate various risks,
including fraud.
The RBI, as India's central bank,
ensures compliance with banking Technological Upgrades:
regulations, conducts inspections, and Investments in advanced
issues guidelines to prevent cybersecurity measures and
malpractices. technologies to secure digital
transactions and prevent cybercrimes.

Conclusion Fraud Monitoring Cells:

Bank frauds pose a significant threat Establishing dedicated cells to
to the stability and trust in the banking monitor and investigate suspicious
sector. However, India's regulatory transactions, enabling swift action
framework, supported by vigilant against potential frauds.
oversight and technological
advancements, aims to curb these Customer Awareness Programs:
fraudulent activities. Educating customers about safe
banking practices, including
The collaborative efforts of regulatory awareness about phishing, online
bodies, banks, and customers are security, and reporting suspicious
crucial in safeguarding the integrity of activities.
the financial system and maintaining
public confidence in India's banking
sector.

To know more about banking frauds

and accurate information, it is
advisable to consult an experienced
legal advisor for banks.
 91

Prevention of Frauds (v) Routine

ways by which frauds can be averted: The bank's system, routine and
procedures should be meticulously
(i) Recruitment and Selection followed. The manual of instructions
The right type of persons with and the circulars are the outcome of
necessary qualifications and aptitudes wide experience of men and matters,
should be recruited. Selection of which the head office has acquired
officers should be carefully made on over a long period.
the basis of qualifications, experience,
performance, efficiency and (vi) Supervision and Audit
reputation. The checking of books and registers
Adequate training to staff at all levels should be done regularly by the
should be provided. authorized officer. The godowns
should be inspected without notice.
(ii) Private Lives of Staff Audit of bank branch is must.
The private lives of staff should be
watched, difficult though it may be. A (vii) Unscrupulous Parties
member of the staff who is a habitual The bank should be careful in
borrower or lives beyond his means accepting new customers, particularly
can be one who may ultimately let the borrowers. The customer, who has
bank down. been noticed to follow undesirable
practices or is known to have
(iii) No Undue Reliance committed a fraud, should be avoided.
No undue reliance should be placed It is good for the bank to follow the
on bank's staff. Explanations should maxim, “once bitten, twice shy.
not be too readily accepted. So that
vested interests are not created, (viii) Danger Signals
agents, clerical staff and officers Particular attention must be paid to
should be transferred periodically the accounts wherein the debt
from branch to branch balance usually remains very near the
sanctioned limit or the drawing limit.
(iv) Basic Honesty
No bank official should think of When the borrowers cheques start
accepting presents and bribes from bouncing with reasons like, “exceeds
the borrowers in the belief that arrangement” or “effect not cleared
everything is safe and nothing would present again” or when there is a very
go wrong. The financial position and poor turnover in the account and
dealings of a borrower who invites securities charged, start bank officers
bank officials too often for drinks and have to the watchful.
dinners or sends them presents
should be closely watched.
 92

(ix) Vigilance FAQs

Vigilance means alertness or What are the 2 basic types of frauds?
watchfulness. This is a mental state The two fundamental types of fraud
and applicable to rank and file. are:
Vigilance is an integral part of the Misrepresentation: Providing false
managerial function. The preventive information or withholding relevant
vigilance should ensure that: details.
a) The business is planned and Concealment: Intentionally hiding
conducted with proper system and information that could impact a
procedures keeping in view corporate transaction or agreement.
vision.
b) Transactions are properly How many bank frauds are there?
authorized and appraised. The exact number of bank frauds
c) Assets safeguarded and liabilities fluctuates annually due to evolving
controlled; minimize the risk of losses tactics and reporting variations,
arising out of irregularities, making an exact count challenging to
fraud. pinpoint.
d) Accountability and records provide
complete, accurate and timely Which bank has the highest frauds?
information. Fraud statistics can vary yearly and
e) Finally, the bank officer‟s eyes and across institutions, making it difficult
ears have to be everywhere. They to definitively identify a single bank as
cannot afford to be lethargic, consistently having the highest
complacent or negligent in the number of fraud cases.
discharge of their duties.

Basic Honesty
Danger Signals
No Undue Reliance

Private Lives of Staff

Recruitment and Selection
Routine

Supervision and Audit

Unscrupulous Parties
Vigilance
 93

Fraud Management in Banking: Phishing: In a phishing attack, a

Detection, Prevention & More scammer reaches out to an individual
over email, text, or even a phone call
Banking fraud — is one of the most posing as their banking institution.
persistent issues financial institutions
and their customers face and poses a Scammers’ ultimate goal is to
serious threat to all parties involved. convince their target to click a link that
loads malware, ransomware, or
As banking systems have moved spyware onto their computer or to
online, so too has fraud, with provide personally identifying
fraudsters developing their own information.
digitized methods of stealing
customers’ identities and gaining Phishing — which is a form of social
access to their personal accounts. engineering — is often a gateway to
Under these conditions, it’s little other forms of banking fraud,
wonder that 96% of banking providing criminals with a point of
customers surveyed say that security entry from which they can execute
and fraud protection is either a subsequent attacks.
“somewhat” or “very” important factor
when choosing a bank. Phishing is not only incredibly
common, but it’s also highly
To fight fraud in digital spaces — successful since scammers are often
thereby securing the loyalty of existing able to mimic legitimate institutions
customers and generating new with alarming accuracy. What’s more,
business — banks must leverage phishing not only poses a threat to
innovative technology to enhance banking customers, but also to
their financial fraud detection and financial institutions themselves:
prevention strategies.
Bank employees are a popular target
Common Examples of Banking Fraud for scammers trying to gain access to
One of the most frustrating things internal systems, and phishing attacks
about banking fraud is that it can take are a leading cause of corporate data
many forms, with new schemes breaches.
emerging daily. After all, if there’s one
thing fraudsters excel at, it’s pivoting. Identity theft:
Listed below are some of the most Perhaps the most basic form of fraud,
common forms of fraud (at present) in identity theft refers to any crime that
the banking industry: involves someone wrongfully
obtaining another person’s personally
identifying information — such as their
name, phone number, or address —
and using it for fraudulent purposes.
 94

In many cases, criminals will use a proceeds, sources or nature of their

banking customer’s stolen identity to illicit activities.”
take ownership of that customer’s
online account in what is known as an In addition to funding illicit — and
account takeover attack. potentially dangerous — activities,
money laundering compromises the
Credential theft: integrity of the financial services
Another basic form of fraud, credential marketplace and risks drawing banks
theft involves stealing a banking into criminal networks. Any institution
customer’s information. However, the found party to money laundering —
scope of the attack extends beyond a even unknowingly — could find itself
customer’s personally identifiable subject not only to reputational
information into more confidential damage and loss of goodwill but also
information, such as their ID number, legal and regulatory sanctions.
password, card credentials, or Social
Security number. As with identity Application fraud:
theft, fraudsters often use these With application fraud, a scammer
stolen credentials to stage an account applies for a loan or line of credit with
takeover. a bank using a stolen or synthetic
identity. Once approved, the scammer
Wire fraud: will initially use the account in the
Wire fraud broadly describes the use expected way, making smaller
of telecommunications or the internet purchases and scheduled repayments
to defraud individuals, often across to create the illusion of normal
state or national borders. In the account usage and gain access to
United States, wire fraud is a federal new products and/or higher lines of
crime investigated by the Federal credit.
Bureau of Investigation. In the
financial services sector, scammers Eventually, the fraudster will make a
trick banking customers into sending series of large purchases with no
funds via wire transfer, often posing intention of repayment before
as a family member or friend in urgent disappearing without a trace, leaving
need of financial assistance. the bank on the hook for the bill.
Application fraud is sometimes known
Money laundering: as accounting fraud or account
A form of fraud that impacts banks opening fraud.
directly, the U.S. Department of the
Treasury describes money laundering
as “financial transactions in which
criminals, including terrorist
organizations, attempt to disguise the
 95

While this list is a good starting point

for understanding banking fraud —
and fraud management in banking —
it’s essential to remember that
fraudsters’ methods are constantly
evolving. To that end, here are some
emerging forms of fraud to watch out
for:

Fraud as a Service:
A growing number of cybercriminals
are offering their services up to the
highest bidders in what’s known as
Fraud as a Service. Other offerings in
the Fraud as a Service “marketplace”
include fraud training tutorials for
would-be threat actors and access to
specialized tools and malicious
software programs.

Biometrics spoofing:
Although implementing biometric
authentication is a smart way to
enhance banking fraud protection
(more on that soon enough),
fraudsters have already started to find
ways around these security
measures.

With biometrics spoofing, criminals

use banking customers’ photos, video
clips, and even stolen fingerprints to
spoof their identities for verification
purposes and gain access to their
accounts.
 96

Bank Fraud Detection and Compared to rules-based engines, AI

Prevention Technology is highly adaptable, enabling banks to
To successfully combat fraud, banks easily pivot their fraud management
must beat cybercriminals at their own strategy based on new and emerging
game, which requires making threats. And finally, AI offers far
advanced technology part of their first greater accuracy than manual or
line of defense — technology such as: rules-based fraud detection,
significantly reducing the rate of false
Artificial intelligence: positives and providing banking
Traditionally, banks and other customers with a better overall
financial institutions have relied upon experience.
fraud monitoring solutions with rules-
based engines to detect fraudulent Machine learning:
transactions generated by risky IP Machine learning, a subset of AI, is a
addresses or multiple transactions powerful tool for fraud prevention in
taking place within quick succession the banking industry. Machine
on a new account. The problem with learning enables fraud monitoring and
this approach is that the rules on detection systems to “learn” from
which these engines operate are: behavioral data, consortium data, and
other internal and external data
Hard-coded, which means they’re sources and adapt accordingly.
unable to adapt to evolving threats
Binary, which means they’re unable to The result is that banks are better
accommodate the complexity of a able to navigate the increasingly
wide variety of input variables and are complex fraud landscape and deliver
prone to false positives more proactive protection to their
Unable to detect fraud in real-time, customers and their assets.
only flagging fraudulent transactions
after a financial loss occurs

Artificial intelligence (AI) is the key to

overcoming these challenges. AI-
based fraud monitoring systems can
ingest and parse massive quantities
of data — a must, given the high
volume of transactions banks process
each day — and detect fraudulent
activity in real-time.
 97

Biometric authentication: Advanced analytics:

Biometric authentication is an Financial institutions process
identification technique that relies on hundreds — even thousands — of
a customer’s unique physical transactions each day, each of which
characteristics, such as their voice, generates data. When analyzed using
facial features, or fingerprints, to verify advanced data science techniques,
their identity. Each of these customer and transaction data can be
characteristics is known as biometric incredibly potent, enabling banks to
data. gain a 360-degree view across the
business, enhance operational
Biometric authentication has quickly efficiency, and engage in predictive
become a popular security measure fraud detection.
with financial institutions because
customers’ biometric data cannot be
stolen, forgotten, or lost. Although
fraudsters can spoof a customer’s
biometric data, it is far more
challenging to do so than it is to steal
their identity or credentials. To get the
greatest value out of biometric
authentication, banks should pair it
with other technologies and controls
to create a truly multi-layered security
strategy.

Two-factor and/or multi-factor

authentication: Artificial intelligence:
Two-factor (2FA) and multi-factor Machine learning:
authentication (MFA) are identification Biometric authentication:
techniques that require banking 2-factor and/or multi-factor authentication:
customers to provide two or more Advanced analytics:
pieces of evidence to verify their
identity. 2FA and MFA are fairly
standard security measures that, like
biometric authentication, should be
layered with the other technologies
shown here to create a
comprehensive anti-fraud strategy.
 98

What Is Bank Fraud Detection and Host regular fraud awareness

Prevention? training.
Bank fraud detection and prevention Bank employees are a popular target
refers to the collective policies, for cybercriminals — particularly for
protocols, procedures, and phishing attacks and other forms of
technologies financial institutions social engineering — so it’s essential
leverage to protect their assets, to educate staff about recognizing
systems, and customers against potential fraud and what to do if they
fraud. suspect that they’ve been
compromised.

Detection includes any activities Be on the lookout for internal

related to fraud.
Threat monitoring, With banking fraud, sometimes the
Account monitoring, call comes from inside the house.
Behavioral profiling, and Employees can expose their
Proactive risk identification. employers to substantial risk, whether
accidentally — for example,
On the prevention side, unknowingly clicking a phishing link or
it includes any proactive measures using an easy-to-guess password —
related to threat mitigation, or intentionally.
such as developing internal controls,
conducting employee training, and Fraud awareness training can go a
implementing multi-layered security. long way toward preventing accidental
fraud, but institutions need to be on
Be on the lookout for internal fraud. high alert for intentional fraud and
Create a database of known threats. keep a close watch on employees
Develop multi-layered security systems. who:
Educate banking customers. Have access to accounts without a
Host regular fraud awareness training. legitimate business purpose
Monitor transactions in real time Frequently access or monitor a
customer’s account without a
6 Strategies for Fighting Fraud in legitimate business purpose
Banking Process transactions outside of work
In addition to investing in the proper hours
tools and technology, financial Have unusual transfers on their
institutions can take the following general ledger
measures to support bank fraud Transfer funds from customer
detection and prevention: accounts to their personal accounts
Make excessive transfers or cash
deposits
 99

Create a database of known For transaction monitoring to be

threats. successful, banks must first develop
It’s crucial that banks be aware of and behavioral profiles that establish a
on the lookout for active and baseline for each customer’s normal
emerging threats. By collecting fraud activity. Once an institution has
data from internal and external created a behavioral profile for a
sources, banks can gain a customer, it can monitor that
comprehensive view of the fraud customer’s transactions against the
landscape and make more informed baseline and proactively flag any
risk decisions. Financial institutions anomalous (and potentially
can also use such a database to fraudulent) activity.
support fraud awareness training and
enable employees to recognize a Develop multi-layered security
broader range of potential threats. systems.
A successful bank fraud prevention
Educate banking customers. and detection strategy should be
Customer fraud awareness is every multi-faceted and include
bit as important as employee fraud administrative, physical, and technical
awareness and can help a bank’s controls:
customers protect themselves against At the administrative level, institutions
would-be threat actors. Adding should develop policies, procedures,
educational resources to an existing and guidelines that reduce their
knowledge base, similar to what Wells exposure to risk, such as security
Fargo has done with its Fraud education and awareness programs
Education Library, can be an effective and password management policies.
means of keeping customers in the
know.
At the physical level, institutions
And customer education shouldn’t should instate tangible security
end at fraud: Banks should also make measures, such as restricting access
customers aware of advanced to specific computer programs and
security measures, such as 2FA or data files and cross-checking asset or
MFA and biometrics authentication, to liability values against those
increase their likelihood of opting in. documented in control records.

Monitor transactions in real time. At the technical level, institutions

Transaction monitoring is not only should implement technology that will
essential to comply with Know Your reduce their risk exposure, such as
Customer standards and Anti-Money firewalls, anti-virus and anti-malware
Laundering laws, it’s also an effective software, and AI-powered fraud
way to detect fraudulent activity. monitoring systems.
 100

• Whosoever:directly
orindirectly,attemptstoindulge, or
• In India,the knowinglyassists,or
specificlegislationdealingwith money knowinglyisparty,or isactually involved
launderingis the PreventionofMoney- inany process, or activity connected,
laundering Act,2002 (for with the Proceedsof Grime, including
short'PMLA').The law was its :
enactedtocombatmoneylaunderinginIn • Concealment,
diaandhasthreemainobjectives • Possession,
• • Acquisitionoruse;and
•
Topreventandcontrolmoneylaundering
; ProjectingorClaimingitasUntaintedPro
• perty
• shallbeguiltyofoffenceofMoney-
Toprovideforconfiscationandseizureof Laundering.
property obtained fromlaundered
money; and 'PROCEEDS CRIME'
• • To understand what is
meantby'Proceeds of Grime', one has
Todealwithanyotherissueconnectedwit to turn to Section 2(u) of PMLA,which
hmoney-launderinginIndia. providesthat - 'proceeds of crime'
• Apartfromtheprovisions means and includes:Any
ofPMLA,thereareotherspecialisedprovi propertyderivedor obtained Directlyor
sionssuch indirectlyBy any personas a resultof
asRBI/SEBI/IRDAantimoneylaunderin criminalactivityrelatingto a
gregulations.Manyoftheseauthorities 'scheduledoffense',or the value of
arebound anysuch property.
toprovidesuspicioustransactionreports •
, which arein-turn
analysedbyFinancialIntelligenceUnitse Tofurtheraddteethtothisprovision,theFi
stablishedbytheCentral Government. nanceActof 2015hasfurther
widenedthedefinitionofproceedsofcrim
HHflTISTHELEGflLOEFIEITIOE0Y eandincludedwithinitsambitnot
UOEEYLflFEOERIEG? onlythespecificproperty(whichisthesub
• jectmatterofmoney
laundering)orits ruine,but also
Theoffenceof'MoneyLaundering'is theproperty-equivalentin value held
definedunderSection3 ofthe PMLA, within the country (in asituation where
which, foreaseofunderstanding,can propertywhich is the'proceed ofcrime'
bedeconstructedas : is taken or held outsidethe country).
 101

• Suchpropertiesare also by agencies mentioned under those

includedwithinthe acts, for example - the local police,
definitionof'proceeds of crime'. This GBI, customs departments, SEBI or
principleof equivalencehas been any otherinvestigativeagency,asthe
introducedby the FinanceAct,2015for casemaybe.
the firsttime. •

flVTH0RITIESEETRVSTEOTO Afterinvestigationiscompleteforthe
INVESTIGATE/PR05ECVTEVNORRT offenceofmoneylaundering,a
HEPRLA? complaintis filed bythe
There investigatingauthoritybeforethe
SpecialGourt, wherethe trial forthe
isaspecialisedinvestigativebodyforives offenc actuallytakes place.
igaionoftheseoffences.The
DirectorateofEnforcementlI1theDepart flCTI0NSTHflTHflYBEINITIflTEO
mentofRevenue,MinistryofFinanceis flGflINSTPEflS0NLflFNOEflINGN0R7
responsibleforinvestigatingtheoffence ¥?
sofmoneylaunderingunderthePMLA. •
Investigationusuallybeginswiththeregi
strationO AttachmentofpropertyunderSection5,s
anEnforcementGaseInformation eizure/freezingofproperty
Report(alsoknownwasYGIR)whichset andrecordsunderSectionlZorSection1
stheinvestigationintomotion. 8.
This authorityis •
empoweredtocarryoutinterim
measuressuch as survey,search, Persons(IndividualsanWorjuristicpers
seizureand arrestof the onsuchasaGompanyetc)
accused.Similarly,ifanassetisfoundto foundguiltyofanoffenceofMoneyLaund
betheproceedsof crime,the eringarepunishablewith
samecanbeconfiscatedandappropriate imprisonmentfor atermwhichshall
dbytheGovernment. notbeless than threeyears but may
FinancialIntelligenceUnit- India(FIU- extend uptoseven or even tenyears
IND)undertheDepartmentofRevenue, (dependingon
Ministry of Financeisthe circumstances)andshallalsobeliabletof
centralnationalagencyresponsiblefor ine(noupperlimits) [Section 4].
receiving,processing,analyzingand
RTTRCHMENTOFPROPERTY.
disseminatinginformationrelatingtosus •
pectfinancialtransactionstoenforceme
ntagenciesandforeignFIUs. ThePMLAgivesextremelywidepowerst
• The predicate/scheduled o theauthoritiesto attach
offences are separatelyinvestigated propertiessuspectedtobeinvolvedin
 102

Money laaundering. Section 5of the •

PMLAauthorisesthe
Directororanyotherofficernotbelowthe Whereasthissectionprovidesforsearch
rankof Dy.Directorto attach property. of premises,Section18 providesfor
Thispoweristo beexercisediI searchof an individual.
theauthority, • Azrest
asspecifiedabove,hasareasontobeliev • The offenceis
e(andsuchreasons havetobe cognizablewhichmeansarrestcanbem
recordedinwritingtopreventarbitrarines adewithouta warrant.Section 19
s),onthebasisofmaterialintheirpossessi givesthe authority powertoarrest.
on, that - Standard safeguardsrelating
• Any pexsonis in possessionoC toarrestapply.
any 6xoceedsoC Everypersonarrestedhasto
Cxizrte;andsuch6xoceedsoCcxizrteax beproducedbeforethe
eIz3celytobe: Magistratewithin 24 hours
• Concealed, (excludingtime of journey).
• Transferred,or Theprovisionalso mandatesthatsuch
• dealtwithinanymanner arrestingofficialhastoforward a copyof
• such arrestmemo with the materialin
his possessionto the
whichzrtayxesultinCxustxatinganyproc adjudicatingauthorityinasealedenvelop
eedingsrelatingto confiscation aspertheprocedureprescribed.
oCsuchproceeds oCcxizrte .

POWERSOF
THEENF0RCEXEE£OIRECTORATE
REEATIEGTOSEARC8,SEIZUREAE0
ARREST. • Section 45of thePMLA
• Searchofpremises makestheoffence of money
• Section17giveswidepowersof launderingnon- bailable,whichmeans
searchand seizureto the thata personarrestedisnot entitledto
investigatingagency.Ifthe bailas a matter ofright,
investigatingagencyhasreasontobeliev andbailbecomesa matter
e(andsuchbeliefshouldberecordedin ofdiscretionforthe court.
writing)the •
commissionofoffenceunderthe
PMLAand possessionof proceedsof Ifthepredicateoffenceprovidesforpunis
crime, it can enter and hmentmore than3years,
seizeproperty/records etc, makean thenthereisanembargoonreleaseonbai
inventoryofthe same. l,unless eithertheoffence concerns
Theseizurememoisrequiredtobesigne achild,woman,sickorinfirm;ifnot,thenba
dbytwoindependentwitnesses. ilcanonlybe
 103

grantedafterhearingtheProsecutorand such mannerasto enablethe

onlyafterthecourtcomes to the investigatingagency/Gourtto
conclusionthat"these axe reconstructindividualtransactionsandfi
reasonablegrounds for nd out criminality.
believingthatheisnotguiltyof suchan • The
offenceandthatheisnotlikelyto aforesaidagenciesarerequiredfurnisht
commitanyoffencewhileonbail". o the concerned
AuthoritiesunderPMLA,allinformationr
CflNflC0NPflNYflNDITS elatingtosuchtransactions, whether
DIRECTORS/MANAGERS/SECRETA attempted or executed; the nature and
RIESBEACCUSEDOFOFFENCEVNO value of such transactions; verifythe
ERPULfl? identityof its clientsand the
• SectionZ0 of PMLA dealswith beneficialowner,if any;and
offencesby Gompanies.Itstates maintainrecord documents
thatwherea person committinga evidencingidentityof its clientsand
contraventionof any of theprovisionsof beneficialowners as well as
thisActor ofany Rule,Directionor accountfilesand business
Ordermadethereunderis a correspondence relatingto its clients.
Gompany(company"meansabody-
corporateandincludesafirmor E¥I0EECE,
otherassociationofindividuals),inthatca PRESFUPTIOESflE08FR0¥EOFPRO
se:everypersonwho,at OF
thetimethecontraventionwas • Keepingin
committed,was in chargeof, and was viewthedifficultyofinvestigationincompl
responsibleto the company, forthe excases like money laundering,PMLA
conductof thebusiness makes a departurefrom the standard
ofthecompanyas wellas thecompany, rule of presumptionof innocenceand
shallbedeemedtobeguiltyofthe raises certain presumptions. This isan
contraventionandshallalsobeliabletobe applicationof the 'doctrineof
proceededagainstand reverseburden'.Such provisions,
punishedunderPMLA. needlesstosay,makethe defenceofa
PMLA case quitechallenging.
OBLIGATIONSOFBASHINGC0HPA8I
ES,FIN£N$IALINSTITUTIONSflN0INT
ERNEDIflRIES

• UnderSectionl2of PMLA,there
isa mandateonallBanking Gompanies, Section4ofPMLAprescriJoesthepunish
FinancialInstitutionsandIntermediaries mentforMoney-Laundering as under:
tomaintain records of all transactions, • RigorousImprisonmentforaterm
including informationrelatingto
transactionsfor a periodof 5 years, in
 104

• passconstitutional muster.Sincethe
Act is fairlynew, itis expected thatthe
whichshallnotbelessthan3years,but Hon'bleGourts would
• interpret/strike/read-downthese
provisionsin such a manner, so as to
whichmayextendtoZyears/10years,an make the Act less proneto
d arbitraryexerciseof powerand
• shallalsobeliabletofine. ensurethatits operationis
• A constitutionallycompatible.
notablefeatureisthatthereisnoupperlimi
tonthefinethatmay beimposedforan
offenceunderthePMLA.Theobviousint AMENDM8NTRULES,2D1Z
entisfor thefineimposed • The GentralGovernmenthereby
tobecommensuratetothenature makesthe
andextent of followingfurtheramendmentsto
offencecommittedandthemoneylaunde thePreventionof Money —
red. laundering(MaintenanceofRecords)
Rules,2005,namely:-
• 1.
(1)TheserulesmaybecalledthePreventi
onofMoney-laundering(Maintenance
Moneylaunderingposesaseriousthreat ofRecords)FifthAmendmentRules,201
notonlyto the financialsystems of 2.
countries,butalsoto theirintegrityand •
sovereignty.
• To obviatesuch threats, (2)Theyshallcomeintoforceonthedateo
certainlegislationsincludingPMLA, ftheirpublicationinthe OfficialGazette.
havebeenenacted. • InthePreventionofMoney-
• Theaboveanalysisof the PMLA laundering(MaintenanceofRecords)Ru
manifeststhatthe Act, les,2005,inrule
althoughextremelywell (i)insub-
intentioned,compromiseson the rule(4),aftertheproviso,thefollowingexp
fundamentalprinciplesof lanationshallbeinserted,
naturaljustice,fairtrialanddue-process. namely:-
In its enthusiasmto fightblackmoney, “Explanation.-Obtaining acertified
the copy byreportingentityshall
Acttransgressesuponbasicrightsandlib meancomparingthe
erties. copyofofficiallyvaliddocumentsoprodu
• Some ofthe cedbytheclient with theoriginaland
provisionsundertheActarelegallyand recordingthesameOI1thecopybytheaut
jurisprudentially unsound and horizedofficerofthereportingentityina
tenuousandmay not mannerprescribed by theregulator.”;
 105

• (ii)insub- • Provided further that the client

rule(18),thefollowingprovisosshallbein shall submit updated officially valid
serted,namely:— document with current address within
a period of three months of submitting
the above documents.”.
i›academy

• “Providedthatin caseof
officiallyvalid documentfurnishedbythe
clientdoes
notcontainupdatedaddress,the
followingdocumentsshallbedeemedto
be officiallyvaliddocumentsforthe
limitedpurposeof proofofaddress:-
a) utilitybill which is not more than
twomonths oldofany service provider
electricity,telephone,post-
paidmobilephone,pipedgas,waterbill);
•

(b)propertyorMunicipaltaxreceipt;
(c) pensionor
familypensionpaymentorders(PPOs)is
suedto retired employees
byGovernmentDepartmentsor
PublicSector Undertakings,ifthey
containthe address;
(d) letter of allotmentof
accommodationfrom employer
issuedby State Governmentor
GentralGovernment
Departments,statutoryor regulatory
bodies,
publicsectorundertakings,scheduledco
mmercialbanks,
financialinstitutionsand
listedcompaniesand leaveand
licenseagreementswith such
employers allotting
ofticilAaccommodation;