Money Laundering in India: Challenges, Legal Framework & Global Cooperation

✍️ UPSC-Oriented Summary & Analysis by Suryavanshi IAS

📘 Relevant to UPSC Syllabus

GS Paper 2: Governance

Statutory, regulatory and various quasi-judicial bodies (e.g., ED)
Important aspects of governance, transparency, and accountability
Bilateral agreements and global groupings affecting India’s interests

GS Paper 3: Internal Security & Economy

Money-laundering and its prevention
Linkages of organized crime with terrorism
Effects of liberalization and globalization
International taxation and avoidance agreements

🧾 Q1: What did the Finance Minister report with respect to the number of cases under the Prevention of Money Laundering Act (PMLA)?

As per a recent report submitted in the Rajya Sabha, the Finance Minister stated:

5,892 cases have been taken up under PMLA, 2002 by the Enforcement Directorate (ED) since 2015.
Of these, only 15 cases have resulted in convictions by special courts.
Enforcement Case Information Reports (ECIRs) have been registered in all cases to initiate legal action.

🧠 Implication: Despite a powerful legal framework, the conviction rate remains extremely low (approx. 0.25%), raising concerns about the efficacy, politicization, and misuse of the law.

🔄 Q2: What are the three stages through which money is laundered?

As defined under Section 3 of the PMLA, money laundering is the process of concealing the origin of illegally obtained money so that it appears to be legitimate. The laundering typically involves three main stages:

1. 🏦 Placement

Illicit money is introduced into the financial system.
Done through breaking down large amounts into smaller deposits (smurfing) or using front companies.

2. 🔄 Layering

The money is moved through multiple transactions, investments, or shell entities, often across borders.
Aim: To obscure the audit trail and disguise the origin.

3. 🏘️ Integration

The laundered money is reintroduced into the economy via investments in:
- Real estate
- Businesses
- Luxury assets

💡 UPSC Concept Note: The Supreme Court in P. Chidambaram vs ED (2019) observed that money laundering threatens monetary stability, national security, and can fuel terror financing.

🌍 Q3: How will the Double Taxation Avoidance Agreement (DTAA) help to stop the illegal transfer of money?

India has signed DTAA with over 85 countries. These agreements aim to prevent tax evasion and money laundering by ensuring transparency and cooperation between nations.

✅ DTAA Provisions That Help:

Facilitates information exchange between tax authorities.
Prevents individuals/entities from taking undue tax advantage in two countries.
Detects and deters round-tripping, Hawala transactions, and black money parked offshore.

📌 Key Insight: DTAA acts as a tool to track illicit fund flows and supports domestic enforcement agencies like the ED and CBDT in taking cross-border action.

⚖️ Legal Provisions & Judicial Interpretations

📚 Key Provisions of PMLA, 2002:

Section 3: Defines money laundering.
Section 5: Attachment of property (even without prior registration of a criminal case).
Burden of proof: Lies on the accused.

🏛️ Important Supreme Court Judgments:

Vir Bhadra Singh vs ED (2017): No FIR needed to initiate proceedings. ECIR sufficient.
Vijay Madanlal Chaudhary vs Union of India (2022): Scheduled offence is mandatory for prosecution, but not for property attachment.
P. Chidambaram vs ED (2019): Money laundering harms sovereignty and integrity.

⚠️ Issue: These judgments have been misinterpreted/misused, sometimes to target political rivals, raising alarms over the abuse of PMLA.

🚨 Major Issues in Implementation

Challenge	Explanation
⚖️ Low Conviction Rate	15 convictions out of nearly 6000 cases
🧮 Political Misuse	Alleged targeting of opposition leaders
📈 Rising Cases	Indicates poor deterrence & rising financial crime
🌐 Weak Global Cooperation	Despite DTAA, financial secrecy havens still exist
🔁 FATF Recommendations	Not fully implemented across sectors

🧩 Way Forward

✅ Strengthen institutional capacity of ED and Financial Intelligence Unit (FIU).
🧠 Ensure due process to avoid misuse of PMLA for political vendetta.
🔄 Adopt FATF recommendations for risk-based supervision.
🧾 Digitise and integrate tax and financial data with AI-based audit trails.
🌐 Expand international collaboration via DTAAs and TIEAs (Tax Information Exchange Agreements).
⚖️ Improve the conviction rate through better evidence collection and legal training.

📚 UPSC Mains Questions to Practice (PYQs & Expected)

Year	Question
2023	Money laundering poses a serious threat to the Indian economy. Discuss the role of PMLA and ED in curbing this menace.
2020	What are the challenges in enforcement of economic and cyber laws in India? Explain with examples.
2018	Discuss the role of FATF in global financial regulation. How has India’s relationship with FATF evolved?
2016	What are the loopholes in India’s black money and money laundering frameworks? Suggest reforms.

✅ Conclusion

Money laundering is not merely an economic offence — it’s a national security threat tied to terrorism, corruption, and tax evasion. Despite powerful laws like PMLA and global cooperation through DTAA, India needs to focus on:

Effective implementation
Fair application
Judicial scrutiny
International partnerships

A robust anti-money laundering system should protect the economy without undermining civil liberties.

Suryavanshi IAS

Blog Archive

Tuesday, August 5, 2025