UPSC CURRENT AFFAIRS – 06th August 2025
Money Laundering and the Prevention of Money Laundering Act (PMLA), 2002
Why in News?
- A report submitted by the Union Finance Minister in the Rajya Sabha states that 5,892 cases were taken up by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) 2002, since 2015. Of these cases, only 15 convictions have yet been ordered by special courts.
Introduction
- Money laundering poses a serious threat to national security, financial stability, and economic integrity.
- In India, the Prevention of Money Laundering Act (PMLA), 2002, was enacted to counter the menace.
- However, recent data presented in the Rajya Sabha highlights systemic shortcomings: only 15 convictions out of 5,892 cases taken up by the Enforcement Directorate (ED) since 2015.
- This raises questions about both the effectiveness of enforcement and the potential misuse of the law.
Understanding Money Laundering
What is Money Laundering?
- Money laundering is the process by which the proceeds of illegal activities (such as drug trafficking, corruption, or terrorism) are disguised to make them appear as legitimate income or assets.
- According to Section 3 of the PMLA, money laundering involves:
- Concealment
- Possession
- Acquisition
- Use of proceeds of crime and projecting them as untainted property.
The Three Stages of Money Laundering
- Placement: Introducing illegal funds into the financial system. This often involves “smurfing” – breaking large sums into smaller transactions to avoid detection.
- Layering: The money is moved through a series of complex transactions to obscure its origin (e.g., buying and selling assets, routing through shell companies).
- Integration: The “cleaned” money is reinvested into the economy (e.g., in real estate, businesses, luxury goods).
What is a Laundromat?
A “laundromat” refers to a network or system (often involving banks or financial institutions) that facilitates:
- Laundering proceeds of crime
- Hiding ownership of assets
- Embezzlement
- Tax evasion
- Offshore transfers
The term originated in the U.S., where criminal syndicates used laundromats as a cover for illicit transactions.
The PMLA: Origin and Objectives
The PMLA, 2002 was enacted to:
- Prevent money laundering
- Confiscate properties derived from laundered money
- Provide a framework for investigating and prosecuting such offences
India’s law aligns with the UN Political Declaration and Global Programme of Action (1990) and recommendations of the Financial Action Task Force (FATF).
Key Features:
- Burden of proof lies with the accused
- ECIR (Enforcement Case Information Report) is sufficient to start proceedings; FIR is not mandatory
- Only a scheduled offence is needed to trigger action under PMLA
Judicial Interpretations and Concerns
1. Nikesh Tarachand Shah v. UOI (2017)– Section 45 Struck Down: declared the twin conditions for bail under Section 45(1) of the PMLA as unconstitutional.
Twin Conditions under Section 45(1) (Before 2017 Judgment):
To grant bail, the court had to be:
- Satisfied that the accused is not guilty of the offence.
- Satisfied that the accused is not likely to commit any offence while on bail
The Supreme Court struck down these twin conditions as unconstitutional (Violation of Articles 14 and 21).
Reasoning:
- The right to personal liberty is a fundamental right under Article 21.
- Imposing such onerous conditions on bail even before trial begins violates the principle of presumption of innocence.
- There was no intelligible differentia between PMLA accused and others that justified this harsher treatment (violates Article 14).
2. The Parliament amended Section 45 of the PMLA through the Finance Act, 2018 and linked bail to the “offence of money laundering” rather than the “scheduled offence.”
3. Vijay Madanlal Chaudhury v. UOI (2022)–
- Hon’ble SC upheld the amendment of Section 45 by Parliament
- Reinforced the broad powers of the Enforcement Directorate in matters of arrest, search, seizure, and attachment of property.
- Enforcement Case Information Report (ECIR): The Court ruled that the ECIR, which is the ED’s equivalent of an FIR, is an internal document and it is not mandatory to provide a copy to the accused.
- The judgment upheld the reverse burden of proof under Section 24 of the PMLA, which places the onus on the accused to prove their innocence.
Current Developments:
The 2022 judgment is under review by the Supreme Court (as of 2025), mainly concerning the supply of ECIR to accused and the reverse burden provision
Current Issues and Challenges
- Low Conviction Rate
- Out of 5,892 cases taken up since 2015, only 15 convictions have occurred.
- Reflects poor quality of investigation, delays, or overreach.
- Rising Number of Cases
- Indicates that money laundering is worsening, or that PMLA is being used more broadly, not necessarily more effectively.
- Potential for Misuse
- Investigative powers under PMLA (like arrest, attachment, raids) are strong and have wide discretion.
- Risk of harassment, political targeting, and violation of individual rights.
- Lack of Checks and Balances
- ECIR is not shared with the accused.
Burden of proof reversed, often criticized as violating natural justice.
Recommendations and the Way Forward
- Strengthen Investigative Mechanisms
- Ensure timely and professional investigations by ED with proper evidence collection.
- Enhance Judicial Capacity
- Fast-track courts under PMLA need more judges and resources for quicker trials.
- Use Technology and Data Analytics
- Leverage AI and Big Data to detect suspicious transactions and money trails.
- Awareness and Training
- Build capacity of financial intermediaries, regulators, and investigators.
- Changes Needed under PMLA:
- Right to ECIR (Transparency & Natural Justice)
- Review of Reverse Burden (Section 24)
Conclusion
- Money laundering not only distorts the financial system but also endangers national security due to its links with terror financing, drug trafficking, and organized crime.
- While the PMLA is a robust law on paper, its implementation, selective use, and low conviction rate undermine its purpose.
- A balance must be struck between effective enforcement and safeguarding individual rights, ensuring that the law serves justice and not politics.
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Introduction
Economic Implications
For Indian Exporters
- These reforms reduce transaction costs and compliance hurdles
- Encourage a more competitive and efficient export environment
- Promote value addition in key sectors like leather
For Tamil Nadu
- The reforms particularly benefit the state’s leather industry, a major contributor to employment and exports
- Boost the marketability of GI-tagged E.I. leather, enhancing rural and traditional industries
For Trade Policy
- These decisions indicate a shift from regulatory controls to policy facilitation
Reinforce the goals of Make in India, Atmanirbhar Bharat, and India’s ambition to become a leading export power
Recently, BVR Subrahmanyam, CEO of NITI Aayog, claimed that India has overtaken Japan to become the fourth-largest economy in the world, citing data from the International Monetary Fund (IMF).
India’s rank as the world’s largest economy varies by measure—nominal GDP or purchasing power parity (PPP)—each with key implications for economic analysis.
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