PayPal, which began India operations in November 2017, has been hit by Rs. 96 Lakh penalty by the Financial Intelligence Unit (FIU) for alleged contravention of the anti-money laundering law and accused of ‘concealing’ suspect financial transactions and abetting “disintegration” of India’s financial system. Calling the contraventions “deliberate and willful”, the Financial Intelligence Unit (FIU) in a scathing 27-page order issued on December 17 held the company guilty on three broad counts.
The primary charge against PayPal is the company’s failure to register itself as a “reporting entity” with the FIU. The FIU had asked PayPal in March 2018 to register as a reporting entity to record all its transactions in India. Despite the order, PayPal declined to register as a reporting entity, saying that it is compliant with the Reserve Bank of India guidelines for Online Payment Gateway Service Provider (OPGSP) or a payments intermediary which is not covered under the PMLA.
”Money laundering” is concealing or disguising the identity of illegally obtained proceeds and converting illegally earned money into legitimate money. The offense of Money Laundering is defined under Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA).
The Directorate of Enforcement (ED), which is under the administrative control of the Department of Revenue, the Ministry of Finance, the Indian government, and the director of the Financial Intelligence Unit (FIU) under the Department of Revenue of the Ministry of Finance has been appointed to exercise exclusive powers under specific sections of the Prevention of Money Laundering Act 2002 (the PML Act).
Under the PMLA, both natural and legal persons can be prosecuted for money laundering. The term ‘person’ under PMLA includes individuals, companies, firms, associations of persons (whether incorporated or not), artificial juridical persons and agencies, offices, and branches owned or controlled by any such natural or legal person. According to the International Monetary Fund (IMF), global money laundering is estimated between 2 to 5% of the world’s GDP. Under section 3 of the PML Act, the following actions are tantamount to the offense of money laundering:
• a direct or indirect attempt to indulge in any process or activity that is connected with the proceeds of crime (including its concealment, possession, acquisition, or use), with the intention of projecting or claiming those proceeds of crime as untainted property;
• any direct or indirect assistance in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition, or use) and projecting or claiming those proceeds of crime as untainted property, provided that assistance is knowingly given;
• and being, directly or indirectly, a knowing party to or being involved in any process or activity connected with the proceeds of crime (including its concealment, possession, acquisition, or use) and projecting or claiming those proceeds of crime as untainted property.
The term ‘Proceeds of Crime is an essential ingredient of Money-Laundering and is defined under Section 2(u) of PMLA. The term means and includes any property derived or obtained Directly or indirectly. It was observed in the case of Hasan Ali Khan v. Union of India,  11 SCR 778, that an offense is committed under the PML Act only when an attempt is made to demonstrate a legitimate source of earning with respect to a tainted property, namely with respect to proceeds of crime.
Money laundering is a single process. However, its cycle can be broken down into three distinct stages namely, the Placement stage, the Layering stage, and the Integration stage. At the placement stage, the launderer deposits the illegal money through different agents and banks in the form of cash by having a formal or informal agreement. At the layering stage, the launderer deposits funds to investment instruments such as bonds, stocks, and traveler’s checks or in their bank accounts abroad. This account is often opened in banks of those countries which do not reveal the details of their account holders.
Finally, at the integration stage, the laundered property is re-introduced into the legitimate economy or, returning the money back into the financial world as legal money. At each of the three stages of money laundering various techniques can be utilized, such as Structuring also called Smurfing, Bulk Cash Smuggling, Cash Intensive Businesses, Trade based Laundering, Shell companies, etc. to bring the money back into circulation.
Section 70 of PMLA deals with offenses by Companies. It states that where a person committing a contravention of any of the provisions of this Act or of any Rule, Direction or Order made there under is a Company (“company” means a body corporate and includes a firm or other association of individuals), in that case: every person who, at the time the contravention was committed, was in charge of, and was responsible to the company, for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall also be liable to be proceeded against and punished under PMLA.
The Code of Criminal Procedure governs the procedural aspects of prosecution. The offense is cognizable which means an arrest can be made without a warrant. Investigation usually begins with the registration of an Enforcement Case Information Report (also known as ECIR) which sets the investigation into motion. The authority is empowered to carry out interim measures such as survey, search, seizure, and arrest of the accused. Similarly, if an asset is found to be the proceeds of crime, the same can be confiscated and appropriated by the Government.
After the investigation is complete for the offense of money laundering, a complaint is filed by the investigating authority before the Special Court, where the trial for the offense actually takes place. Since the offense of money laundering is inextricably connected with the predicate offense, 2013 amendments to the PMLA provide that the trial for the predicate offense as well as an offense punishable under Section 4 shall be conducted by the Special Court.
PMLA does not specifically provide for a limitation period in relation to the offense of money laundering. Therefore, the general law of criminal procedure will apply. Under Section 468 of the CrPC, there is no limitation period for offenses punishable with imprisonment of more than three years, hence, for offenses punishable under the PMLA, there is no limitation period. ED, therefore, can initiate a prosecution for an offense of money laundering after any number of years.
In the case of Hari Narayan Rai v. Union Of India, it was observed by the High Court observed that the offence under sections 3 and 4 of PMLA, would continue till the accused continued to hold proceeds of crime and got himself involved in the process and activity connected with the proceeds of crime projecting the same as untainted property and in the present case, the accused had been attempting to convert and project the proceeds of crime in an aforesaid manner.
Under Section 45 of PMLA, a person arrested is not entitled to bail as a matter of right. Bail becomes a matter of discretion for the court. If the predicate offence provides for punishment of more than 3 years, then there is an embargo on release on bail, unless the offence concerns a child, woman, sick or infirm. If not, then bail can only be granted after hearing the Prosecutor and only after the court comes to the conclusion that ”there are reasonable grounds for believing that he/she is not guilty of such an offence and that he is not likely to commit any offence while on bail”.
The American online payment gateway giant, PayPal, has also been accused of concealing suspect financial transactions and abetting the disintegration of India’s financial system, in what is the first time that a digital financial services entity has been charged by the FIU, which usually looks at financial crimes at public and private sector banks. PayPal has also been said to be ”defeating and frustrating” the tenets of public interest and the provisions of the high-profile Prevention of Money Laundering Act (PMLA), which targets economic crimes, terrorist financing, and black money rackets.
The order directs the company to pay the fine within 45 days, register itself as a reporting entity with the FIU as well as appoint a principal officer and director for communication within a fortnight or by January 1, 2021. PayPal can appeal against the order at the Appellate Tribunal of the PMLA within 1.5 months, but the company spokesperson says that it is fully committed to regulatory compliance.
This is the first time that the FIU, an agency under the Union finance ministry, has undertaken punitive action against an online payment system operating in the country as it has done against public, private, and cooperative banks in the past for not following anti-money laundering procedures in keeping their financial channels clean.
Launderers are continuously looking for new routes to launder their funds. Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable as established financial center countries implement comprehensive anti-money laundering regimes. If left unchecked, money laundering can erode a nation’s economy by changing the demand for cash, making interest and exchange rates more volatile. This results in causing high inflation in countries where criminal elements are doing business.
The PML rules require that every reporting entity, at the time of commencement of an account-based relationship, verify the clients identity as well as its beneficial owners (if the client is a.ng on behalf of a beneficial owner) and obtain information on the purpose and intended nature of the business relationship; and in all other cases. It is also important to verify the client’s identity while carrying out transactions of an amount equal to or exceeding Rs. 50000 rupees, whether conducted as a single transaction/several transactions that appear to be connected or any international money transfer operations.
The PML Rules require an intermediary to obtain certain minimum documentation from a client to verify the client’s identity The nature of the documentation that is required to be obtained is in turn dependent on the nature of the client. Under section 70 of PML Act, a body corporate (including a firm or association of individuals) or the persons in charge, will not be liable for the contravention if they are able to prove that the contravention of the PML Act by the body corporate took place without their knowledge or that they exercised all due diligence to prevent the commission of such an offense by the body corporate.
Some of the high-risk customers that require enhanced due diligence include non-resident customers, high net-worth individuals, trusts, charities, firms with sleeping partners, PEPs of foreign origin, etc. The financial, legal, and reputational risks associated with being knowingly or unknowingly abetting Money Laundering can be massive. They can however be mitigated if you include AML compliance due diligence checks in your Customer and Vendor Identification Programs. It’s for problems like these that we see people often turn to SignalX.
It performs various due diligence checks, including AML compliance due diligence checks on any concerned party. To know more about the 6 Checks that you can execute on your corporate customers and vendors to stay compliant with PML laws, we recommend you read:
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