Prevention of Money Laundering Act 2002 (PMLA): Goals, Methods, and Functionality

Last Updated : Oct. 18, 2023, 12:07 p.m.

The Prevention of Money Laundering Act of 2002 (PMLA) was passed to combat the crime of making money or benefitting from legitimate sources. The Prevention of Money Laundering Act of 2002 (PMLA full form) gives the government or a public authority the right to seize any property acquired using the profits of illicit activity. Simply explained, money laundering is the act of converting illegally obtained cash into legitimate money. The Prevention of Money Laundering Act, 2002 (PMLA) acts as a financial watchdog, preventing illegal financial activity and preventing the flow of contaminated funds through our banking systems.

How Does Money Laundering Work?

Money laundering is the process by which an illicit sum of money, such as “black money,” is obtained by unlawful means, covered up as legal tender, and then presented as “white money.” To make the money lawful, it must pass through several stages of conversion and exchanges before it can be transferred to a bank or other legally recognised entity. Understanding the PMLA and its ramifications is crucial when addressing financial laws.

Money laundering is the practice of hiding the sources of money obtained from illicit operations. It is sometimes represented as a gloomy shroud worn over criminal activity. It’s a covert procedure that masks the genuine nature of the money and makes it seem legal. Prevention of Money Laundering Act provides the idea that monies are pure, much like smoke and mirrors. It is the result of widespread worries about the effects this financial sleight of hand has on the entire world. A defence created by law to strengthen India’s banking sector is the PMLA.

The 2002 Prevention of Money Laundering Act and its Goals

The Prevention of Money Laundering Act of 2002 was introduced to address the problem of money laundering. Some goals are mentioned below:

• Stop the laundering of money.
• Fighting against or halting the flow of cash into illegal and commercial activity.
• Permit the seizure of assets used, implicated, or produced through money laundering.
• Punish individuals who engage in money-laundering offences.
• Establishing a court of appeals and a decision-making body to handle cases of money laundering.
• Make plans for problems arising from and connected to money laundering operations.

The Function of the Designated Authorities

The PMLA full form is frequently mentioned in discussions about financial ethics to emphasise legal requirements. The following functions highlight the role and importance of the PMLA in preventing and addressing money laundering activities.

• Appointing designated authorities as attentive watchmen.
• Monitoring bank transactions for suspicious activity.
• Spotting suspected money laundering activities.
• Taking necessary steps to address money laundering suspicions.
• Closely observing and scrutinising transactions.
• Identifying peculiar or suspect behaviour in transactions.
• Stopping and identifying money laundering operations.
• Ensuring legal requirements related to financial ethics are emphasised and followed.

Typical Methods of Money Laundering

Here are a few typical ways that money is laundered:

• Bulk cash smuggling in the hawala
• Hypothetical loans
• Cash-strapped enterprises
• Round-tripping Laundering based on trade.
• Phoney businesses and trusts
• Housing-related gambling
• False invoices

List of Offences

The PMLA’s provisions will apply if any of the offences listed in Part A and Part C of the Schedule are committed. Below is a list of some of the Acts and crimes that may result in PMLA:

1. Part A- The Indian Penal Code, the Narcotics Drugs and Psychotropic Substances Act, the Prevention of Corruption Act, the Antiquities and Art Treasures Act, the Copyright Act, the Trademark Act, the Wildlife Protection Act, and the Information Technology Act are just a few of the laws that are listed as crimes.
2. Part B- Identifies crimes that fall under the Part A classification but have a value of Rs 1 crore or above.
3. Part C- Focuses on transnational crimes and demonstrates the commitment to combat money laundering across international borders.

The government passed the PMLA, and its complete text reveals what the law’s main goal was.

Methods of Operation

• The introduction of illicitly obtained funds into the official financial system, often known as “placement,” is the first stage.
• In the second step, sometimes known as “layering,” the money that has been injected into the system is divided up over several transactions to obscure its tainted source. Understanding the PMLA’s relevance in the financial industry is facilitated by education.
• The third and final step is termed “integration,” and it occurs when the money enters the banking system in a way that its earlier connection to the offence is attempted to be disregarded so that the offender or recipient may utilise it as clean money.

The PMLA captures the core of a thorough legal system to combat money laundering.

Reporting Mechanism

Reporting methods are essential in the battle against money laundering. Banks, lenders, and other organisations covered by PMLA are required to alert the appropriate authorities about any questionable transactions. This shared accountability is a vital component of the prevention strategies against money laundering. For individuals who disobey its rules, the PMLA has a strong message. There are strict penalties for breaking the rules or failing to follow them. These punishments act as a deterrence, highlighting the value of adhering to the law exactly.

Money Syphoning Versus Money Laundering

Although it may be considered money syphoning, the simple act of making money or acquiring property through criminal activity does not constitute money laundering. Money laundering is the act of obtaining or acquiring any property via the commission of a crime that constitutes a Scheduled Offence and then portraying or claiming such money or property as pristine property.

Conclusion

A beacon that illuminates the way to financial integrity is the Prevention of Money Laundering Act, 2002 (PMLA). It demonstrates India’s dedication to stopping money laundering and maintaining the integrity of its financial system. PMLA will continue to strengthen our economic foundations and guarantee a safe and successful financial future with careful execution and teamwork. Companies are now able to readily investigate their clients and verify that they are not making contact with criminals thanks to the internet, such as specialised compliance systems.