India: Demonetization Effects - Deposits In Bank Accounts - Proceeds Of Crime And The Honey Trap Of Money Laundering

Last Updated: 16 December 2016
Article by Vijay Pal Dalmia, Partner and Rajat Jain

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

As a measure to curb black money, money laundering, corruption and counterfeit currency in India, the Government of India has demonetized the currency notes of Rs 500 and Rs 1000. Due to the demonetization of Rs 500 and Rs 1000 notes by the Government of India, these banknotes have ceased to be legal tender with effect from 9th November, 2016, and the persons who are in possession of the demonetized currency can deposit the same in their respective bank accounts, as deposit in the bank account of the discontinued notes have become a compulsion, as no other legal alternative is left to exchange the demonetized currency.

Pursuant to the demonetization drive, there have been representations and suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy. 

Recently, the Government of India has tabled The Taxation Laws (Second Amendment) Bill, 2016, as Money Bill, in the Lok Sabha and the same was passed in the Lok Sabha. The said bill contains the provisions of Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (hereinafter referred as "PMGKL"). As per the proposed law, any person disclosing any income under the provisions of the Yojana, shall pay tax at the rate of thirty percent of the undisclosed income along with the Pradhan Mantri Garib Kalyan Cess calculated at the rate of thirty-three percent (which comes out to be 9.9%) and penalty at the rate of 10 percent. The aggregate of the tax, cess and penalty comes around to be 50 percent of the amount disclosed under the Yojana. Further, the person disclosing under the Yojana shall deposit 25 percent of the total disclosed amount in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016, wherein the amount deposited will be locked for 4 years and will bear no interest. This Yojana will give one more chance to the taxpayer to come clean and declare the right income who have failed to disclose their income as required under the Income Declaration Scheme - 2016 (http://incometaxindia.gov.in/Pages/income-declaration-scheme.aspx). Under the said Yojana, the person who has bonafidely disclosed his income and paid all the amount towards tax, cess, penalty and scheme will get immunity under the taxation under laws for the declared amount, however, the person will not get immunity under the Prevention of Money-Laundering Act, 2002 (hereinafter referred as "PMLA") and some other acts.

Money laundering is the processing of these criminal proceeds to disguise their illegal origin. The object of the PMLA is to prevent money laundering and to provide for confiscation of property derived from or involved in money laundering and punish the person for the offence of money laundering.

The amount being deposited in the bank accounts after the demonetization drive, or the amount that will get deposited under the Yojana will not get any immunity under PMLA and the provisions of PMLA will get triggered, if the deposited amount is a derivative of criminal activity which falls under the definition of "proceeds of crime", as provided under Section 2(u) of the PMLA:

"proceeds of crime" means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property 11[or where such property is taken or held outside the country, then the property equivalent in value held within the country]".

The Section 3 of the PMLA defines the offence of money laundering which states as under:

"Whosoever directly or indirectly

  • attempts to indulge or
  • knowingly assists or
  • knowingly is a party or
  • is actually involved
    • in any process or activity
      • connected with the proceeds of crime including its concealment, possession, acquisition or use

and

  • projecting or claiming it as untainted property

shall be guilty of offence of money-laundering"

To constitute an offence under section 3 of the PMLA, there are 2 essential requirements:

  • Firstly, a person should be involved in any activity relating to the concealment, possession, acquisition or use of the proceeds of crime

and

  • Secondly, that person should project or claim such proceeds of crime as untainted property.

The money laundering transaction primarily involves the following three stages which have been held to be quintessential ingredients of money laundering by High Court of Andhra Pradesh in B. Rama Raju v. Union of India, MANU/AP/0125/2011 / [2011] 164 Comp Cas 149 (AP)]:

(i) The Placement Stage: the malfeasant, who is holding the money generated from criminal activities, places the crime money into the normal financial system;

(ii) The Layering Stage: the money introduced into the financial system is layered-spread out into several transactions within the financial system with a view to concealing the origin of the original identity of the money and to make this origin/identity virtually disappear; and

(iii) The Integration Stage: the money is thereafter integrated into the financial system in such a way that its original association with crime is totally obliterated and the money could be used by the malfeasant and/or the accomplices to get it as untainted/clean money.

Further, the Hon'ble Court in the said judgment observed as under:

"Conduct of directly or indirectly attempting to indulge, knowingly assist or being a party to or actual involvement in any process or activity connected with proceeds of crime and projecting such proceeds of crime as untainted property, constitutes money-laundering. The expression 'proceeds of crime' means property derived or obtained, directly or indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any such property {Section 2(u)}. Thus, a property acquires a taint on account of being a derivative of criminal activity relating to a scheduled offence and includes the value of such property. Since placement, layering and integration are among the essential features of money-laundering, the proceeds of crime may not necessarily continue in the hands of the original malfeasant(s)".

The High Court of Jharkhand while deciding the writ petition, concerned with the provisions of PMLA, W.P.(Cr.) No.257 of 2012 along with Cr.Rev.No.920 of 2012 and with Cr.Rev.No. 699 of 2011, tilted as Binod Kumar Sinha vs. State of Jharkhand through Directorate of Enforcement (http://jhr.nic.in/hcjudge/data/7-699-2011-19022013.pdf), observed as under:

"Keeping in view the provision as is enshrined in Section 3 postulating therein that

  • whoever is connected with the proceeds of the crime
    • projecting it as untainted property

would be committing offence of Money Laundering Act, and further that

  • the proceeds of crime must have been derived or obtained, directly or indirectly by any person
    • as a result of criminal activity
      • relating to scheduled offence in terms of sub-section (u) of Section 2 of the Prevention of Money Laundering Act"

In view of the above, if a person

  • who is in possession of the money
  • which has been derived from any criminal activity which is a schedule offence, will commit an offence under the PMLA,
  • as soon as he will deposit the said money in his or her bank account or in any other person's bank account,
    • as such deposit will fall under the first stage of money laundering transaction, i.e. Placement Stage, and
    • by depositing the said money in the bank account, the person will fulfil both the ingredients required under Section 3 of the PMLA.

Once the offence has been committed under the PMLA, the PMLA Authorities may initiate appropriate proceedings under the PMLA against the person accused of an offence under PMLA, and the tenability of each proceeding initiated under the PMLA will depend on the merits of each case.

Any person who will be depositing the money under the Yojana, which the Government of India will be introducing soon, needs to assure that the said money is not falling under the definition of proceeds of crime, and if the person is undergoing trial in the Court of law for any of the scheduled offence, then that person will be disclosing the money under the Yojana at his or her own peril and there is a very strong likelihood of getting stuck in the honey trap of money laundering. 

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Authors
Vijay Pal Dalmia, Partner
Rajat Jain
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