Article #7

The Prevention of Money Laundering Act, 2002 (PMLA) is the basis of India’s legal system against money laundering. On July 1, 2005, PMLA and the Rules made thereunder became operative. This criminal law was passed to stop money laundering, provide for the acquisition of assets obtained by or related to money laundering, and address issues related to or incidental to money laundering. Under Chapter II, Section 3 of PMLA, money laundering is defined as an act of participating in or aiding in activities associated with the “proceeds of crime.” Any property acquired directly or indirectly by illegal means, such as drug trafficking, fraud, corruption, or forged companies, is included in this. According to the law, everyone who participates in any stage of this procedure, whether they carry out the crime personally or help launder the funds, may face money laundering charges.Section 4 defines Punishment for Money Laundering. Individuals found guilty of money laundering face rigorous imprisonment for a minimum term of three years, which can extend up to seven years. Offenders are also subject to a fine that may reach up to five lakh rupees. Under significant parts of the Act, the Director, Financial Intelligence Unit – India (FIU-IND), and the Directorate of Enforcement (ED) have been granted exclusive and concurrent authority to carry out the provisions of the Act.

Here are numerous methods for washing money. Criminals frequently change their strategies to avoid punishment. Some of the techniques, such as Structuring, also known as smurfing in launderers, use the methods of breaking down large amounts of money into smaller amounts by creating multiple bank accounts. Through this process, it becomes less suspicious. Cash-intensive businesses, where laundered money is mixed with legal money, Bulk cash smuggling, and Real estate laundering, which is very common, involve buying a property with illicit money and then selling it to mix it into the legitimate economy. Cyber laundering is a new technique that came with advancements in technology, where digital platforms such as Bitcoin, cryptocurrencies, and online banking are used to transfer the money abroad. Among these techniques are shell companies, where a fake business is created that, in reality, doesn’t exist but exists only on paper. Financial sources come through launderers who deposit illegal money into it, making it seem like a legal firm that does real work or makes products. Setting up shell companies is not illegal, but it doesn’t mean it is moral, as it hides the real identity of the person behind the money laundering and cleans the illicit money on documentation.The Pandora Papers, released by the International Consortium of Investigative Journalists (ICIJ), revealed that 12 million documents from famous individuals highlighted their involvement in money laundering, particularly through the use of shell structures. This method was also prevalent in previous scandals such as the Panama Papers in 2016 and the Danske Bank money laundering case in 2018, where shell companies played a major role. In India, although shell companies are not formally defined, they are commonly used for money laundering by creating forged companies. According to the Securities and Exchange Board of India, more than 300 companies were restrained from operating because they were used to convert black money into legal money.

The Pandora Papers, released by the International Consortium of Investigative Journalists (ICIJ), revealed 12 million documents from famous individuals who mainly practice money laundering through shell companies. These companies were also highlighted in previous reports such as the Panama Papers in 2016, and scandals like the Danske Bank money laundering case in 2018, where shell companies played a major role. In India, although shell companies are not formally defined, they are commonly used for money laundering by creating forged companies. According to the Securities and Exchange Board of India (SEBI), over 300 companies have been restrained from operating for being involved in converting black money into legal money. Furthermore, the Enforcement Directorate (ED) is authorized to investigate and seize property deemed to be the proceeds of crime and initiate criminal charges against offenders.

In the case Assam Company India Ltd. and Anr vs. The Union of India and  Ors (2016), the court clearly stated that the presence of shell companies and their potential use for illegal activities threatens the country’s economic foundation and sovereignty. Even though there is no standalone law defining or regulating shell companies, various statutes address the illegal activities that they may be involved in, such as the Income Tax Act, 1961, which targets tax evasion and provides for the scrutiny of unexplained income or investments. The Companies Act, 2013 empowers the Registrar of Companies to strike off companies that do not comply with statutory requirements or are non-operational.

In addition, the Prevention of Money Laundering Act (PMLA), 2002, includes provisions addressing offenses by companies under Chapter X, Section 70, which states that if a company and its accountable individuals violate the PMLA, they may be held guilty of the offense. This implies that both the business and its responsible individuals may be liable for any money laundering activities. However, the PMLA does not specifically address the issue of shell companies, which are often linked to illegal activities like money laundering, tax evasion, benami transactions, and round-tripping of black money. Section 3 of the PMLA states that any activity associated with the “proceeds of crime,” including property acquired through illegal means (such as through shell companies), is a punishable offense.

Further, financial institutions are required to report suspicious transactions, including those involving shell corporations, to the Financial Intelligence Unit (FIU), which plays a critical role in combating money laundering activities.