Money Laundering Issue in India

• 09 Aug 2025

For Prelims: Supreme Court, Money Laundering, Prevention of Money Laundering Act, 2002, Enforcement Directorate, Enforcement Case Information Report 

For Mains: Legal and Regulatory framework in India to combat Money Laundering, Prevention of Money-Laundering Act (PMLA), Supreme Court Judgement and its Implications

Source: TH 

Why in News? 

A report submitted by the Finance Minister in the Rajya Sabha reveals that the Enforcement Directorate (ED) has taken up 5,892 cases under Prevention of Money Laundering Act (PMLA), 2002 since 2015 but secured only 15 convictions. 

• Also, in another development the Supreme Court held that ED must follow the rule of law, urged fast-track courts for PMLA cases, and called for cryptocurrency regulation to prevent misuse without banning it. 

What is Money Laundering? 

• About: It is the process of disguising illegal proceeds from criminal activities (e.g., drug trafficking, smuggling, arms trade, embezzlement) to make them appear legitimate, enabling criminals to enjoy profits without detection.  
  • It involves changing the source, form, or location of funds to avoid scrutiny. 
• 3 Key Stages: Money laundering involves placement (introducing illicit funds), layering (disguising their origin), and integration (making them appear legitimate). 
• Key Methods: Key methods include structuring/ smurfing (splitting large cash into smaller), trade-based laundering, shell companies, and real estate investments. 

What are the Key Reasons for Rising Money Laundering Cases in India? 

• Legal and Enforcement Gaps: Misuse of Section 5 of PMLA (property attachment without registered offence) and delays in prosecution reduce effectiveness. 
• Complex Laundering Techniques: Use of digital currencies/ cryptocurrencies, fintech, and cross-border mechanisms make detection difficult. 
  • In the Rs 260 crore global cyber fraud case, the ED found that the funds were converted into cryptocurrencies like Bitcoin and USDT, which were then laundered through hawala operators and individuals in the UAE. 
• Shadow Economy & Cash-Based Sectors: High informal sector presence and lax regulation in real estate, jewellery, and luxury goods. 
• Weak Global Cooperation: Despite Double Taxation Avoidance Agreements (DTAAs) with 85+ countries, limited information sharing hampers investigation. 

What are the Key Consequences of Money Laundering? 

• Fueling Organised Crime & Terrorism: Laundered funds sustain criminal networks, drug/human trafficking and terror financing. 
• Erosion of Public Trust: Encourages corruption and weakens democratic institutions. 
• Impact on Vulnerable Groups: Diverts public funds meant for welfare, widening socio-economic inequality. 
• Economic Distortion: Undermines monetary policy, creates capital flow volatility, inflates real estate prices, deters FDI, and causes financial instability.

Laundromat 

• A “laundromat” refers to a complex web of banking channels, shell firms, and offshore accounts used to clean illicit funds. The term originated from US crime syndicates using laundromats as fronts for laundering. 

What is the Prevention of Money Laundering Act (PMLA), 2002? 

• About: PMLA, 2002 (enforced in 2005) was enacted to prevent money laundering and provide for the confiscation of property derived from such activities.  
  • It targets laundering linked to crimes like drug trafficking, smuggling, and terror financing. 
  • Enacted under Article 253 of the Constitution to fulfill international commitments. 
• Key Provisions of PMLA: 
  • Attachment, Seizure & Confiscation: The Act empowers authorities to attach, seize, and confiscate property derived from crime.  
    • These actions are overseen by an Adjudicating Authority and require the existence of a scheduled offence (offence against the state). 
  • Initiation of Proceedings & ECIR: Proceedings can be initiated based on an ECIR (Enforcement Case Information Report) filed by the ED & no FIR is required.  
    • The ECIR acts as the starting point for investigation under PMLA. 
    • The ED derives its powers under PMLA, 2002 from various sections (3, 4, 5, 16, 17 etc) to investigate, attach, seize, and prosecute offenses related to money laundering. 
  • Bail Conditions (Section 45): The accused must prima facie prove innocence and assure the court of no likelihood of reoffending to secure bail. 
  • Institutional Mechanisms: Financial Intelligence Unit (FIU-IND) receives and analyses suspicious transaction reports from banks and financial institutions. 
    • The Appellate Tribunal hears appeals against orders passed by the Adjudicating Authority. 
  • Recent Amendments Related to PMLA: 2019 amendment to PMLA, introduced of Rule 3A, allowing Special Courts to notify claimants for confiscated property after charges are framed.  
    • The 2023 amendment expanded disclosure obligations for NGOs and redefined Politically Exposed Persons (PEPs) to include prominent foreign officials, aligning with FATF standards. 
  • Global Cooperation: India has signed DTAAs with over 85 countries for: 
    • Facilitating exchange of financial and tax-related information. 
    • Enabling tracing of offshore accounts and investments. 
    • Preventing tax evasion and illegal fund transfers. 

Key Judicial Cases Related ED 

• In P. Chidambaram vs. ED, 2019, case Supreme Court (SC) held that concealing the illegal source of money impacts the financial system and threatens the sovereignty and integrity of the nation. 
• In Vir Bhadra Singh vs. ED, 2017 case, SC reiterated that FIR is not essential as ECIR is enough to proceed. 
• In Vijay Madanlal Chaudhury vs. Union of India, 2022 case, SC held that registration of a scheduled offence is mandatory for prosecution (Sec 3), but not for property attachment (Sec 5) 
  • This provision is often misused against dissenting voices or political opponents. 

What Measures Should be Taken to Tackle the Issue Money Laundering? 

• Strict Compliance with FATF Norms: Authorities must align enforcement with Financial Action Task Force (FATF) recommendations, ensuring transparency, accountability, and checks against misuse. 
• Independent &Fair Investigations: Enforcement agencies should act independently, free from political bias, ensuring genuine cases are prioritized and rights of individuals protected. 
• Strengthening Evidence Collection & Coordination: Improve financial intelligence mechanisms, inter-agency coordination (ED, FIU, Income Tax Dept.), and use of digital forensics to increase conviction rates. 
• Effective Use of DTAA Mechanisms: Enhance data exchange protocols and real-time cooperation with foreign counterparts to track illicit financial flows and plug treaty loopholes. 
• Judicial Oversight & Safeguards: Ensure greater judicial scrutiny in attachment and prosecution processes under PMLA to prevent arbitrary action and uphold due process of law.

Conclusion 

Money laundering is a grave threat to India’s financial stability and national security. While the PMLA offers a strong legal framework, its implementation is marred by delays, misuse, and low conviction rates. Combating this menace requires legal reforms, enhanced international cooperation, and strengthened institutional accountability.

Drishti Mains Question:

Discuss India’s institutional and legal measures to combat money laundering. What are the key challenges and the way forward? 

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Mains

Q1. Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (2021) 

Q2. Money laundering poses a serious threat to a country's economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace? (2013) 

Q3. India’s proximity to the two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What counter-measures should be taken to prevent the same? (2018)