Prevention of Money Laundering Act
Source: Indian Express
GS II: Policies and Developmental Studies; GS III: National Security and Challenges
What is discussed under the Prevention of Money Laundering Act?
- Money Laundering Act, 2002
- Know Your Customer (KYC)
Why in News?
- The Supreme Court rejected an appeal by Trinamool Congress leader and former chairman of the West Bengal Board of Primary Education, Manik Bhattacharya.
- He was arrested by the Enforcement Directorate (ED) on suspicion of money laundering in relation to alleged irregularities in the 2014 Teachers Eligibility Test, which was used to hire primary school teachers.
Money Laundering Act, 2002
- In 1998, the Prevention of Money Laundering act was first presented to Parliament.
- The Standing Committee on Finance was handed the bill, and it was reported to Lok Sabha in 1999.
- The Government proposed the Prevention of Money Laundering Bill, 1999 in the Parliament after taking the Standing Committee’s recommendations into consideration.
- The President gave his approval to the bill, which thereafter became the Prevention of Money Laundering Act of 2002.
- The Act became operative on July 1, 2005, and is now in operation.
Money Laundering
- Money laundering is the process of turning illegally obtained money into authorized ones.
Objectives of the Money Laundering Act, 2002
- To stop and regulate money laundering.
- To seize and destroy any assets related to or used in money laundering.
- To impose a penalty for the money-laundering offence.
- To identify the Adjudicating Authority and Appellate Tribunal to handle the money-laundering-related issue.
- To impose record-keeping requirements on banking organisations, financial institutions, and intermediaries.
- To address any additional money laundering-related issues in India.
Process of Money Laundering
- Placement Stage:
Photo by Sasun Bughdaryan on Unsplash - The placement stage is the point at which “dirty” money or criminal earnings are first introduced to the financial system.
- Layering Stage:
- The layering step is the most difficult and frequently involves the transfer of money across borders.
- This stage’s main goal is to detach the illicit funds from their source.
- This is accomplished by the intelligent layering of financial transactions, which hides the audit trail and breaks the connection to the initial crime.
- Integration Stage:
- In the concluding phase, the cash is given back to the offender through sources that appear to be trustworthy.
Know Your Customer (KYC)
- According to the Know Your Customer (KYC) Standards/Anti Money Laundering Measures guidelines released by the RBI on November 29, 2004, all banks are expected to implement a thorough policy framework including KYC Standards and AML Measures.
- RBI issued KYC regulations that apply to all banks.
- Banks may better serve their customers and responsibly manage their risks by using KYC to get to know and understand their clients’ financial interactions.
- The following four crucial components should be incorporated by banks when drafting their KYC policies:
- Customer Acceptance Policy.
- Customer Identification Procedures.
- Monitoring of Transactions.
- Risk management.
Need for KYC
- Banks must get identity information for entities in order to:
- Verify the entity’s or person’s legal status.
- Check the identification of the signatories with permission.
- Check the identities of the account’s Beneficial Owners and Controllers.
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