Prevention of Money Laundering Act, 2002
Channels of Money Laundering Companies Shells Banks Property VDA
Money Laundering through Companies, Shell Companies, Bank Accounts, Property, Virtual Digital Assets and Layered Transactions
Laundering is done through the ordinary machinery of commerce: companies, bank accounts, real estate, and increasingly digital assets. Each channel has its own methods, its own warning signs, and its own legal response in the PMLA and related laws. The unifying principle is that the taint follows the money: however many times proceeds change form or pass through different hands, what they become is still proceeds of crime. This note examines the six principal channels.
The anatomy of a laundering scheme, and the red flags and legal response for each channel
1. Money Laundering by Companies
§ The company as launderer • How it happens. Proceeds are introduced as business income, share capital, loans or advances; accounts are manipulated to disguise the source. • Red flags. Turnover without real operations; funds received and paid out the same day; large unexplained share premium; related-party transactions without commercial purpose. • Liability of the company. A company is a 'person' under Section 2(1)(s) and can commit the offence under Section 3. • Liability of individuals, Section 70. Every person in charge of and responsible to the company for its business is deemed guilty, unless he proves the contravention was without his knowledge or that he exercised due diligence; and directors, managers and officers whose consent, connivance or neglect is proved are also liable. • The predicate. Fraud under Section 447 of the Companies Act, 2013 is itself a scheduled offence. |
2. Money Laundering through Shell Companies
§ Companies with no business but a purpose What they are. Companies with no significant operations or assets, used to hold or move money: often with common addresses, dummy directors, and no employees. How they launder. Accommodation entries, where a shell issues bogus invoices or loans to convert cash into cheque money; circular transactions between shells; routing of funds abroad. The legal response. Beneficial ownership rules under the PMLA and the significant beneficial owner register under Section 90 of the Companies Act look through the shell to the individual in control; the Registrar has struck off large numbers of inactive companies; and those who set up or operate shells knowingly assist in laundering. |
3. Money Laundering through Bank Accounts
§ The front door of the financial system • Methods. Structuring cash deposits below reporting thresholds; mule accounts opened in others' names or rented; dormant accounts suddenly used; rapid movement through many accounts. • Red flags. Deposits just below reporting limits; activity inconsistent with the customer's profile; third-party cash deposits. • The legal response. Know-your-customer verification under Section 11A and the Rules; cash transaction reports for cash transactions above ten lakh rupees or integrally connected series; suspicious transaction reports to FIU-IND under Section 12; and freezing of accounts during search under Section 17(1A). |
4. Money Laundering through Property Transactions
§ The favourite end point • Methods. Buying property with proceeds; recording a price below market and paying the difference in cash; holding through benami owners, relatives or companies. • Red flags. Large cash components; rapid resale; purchases by persons without visible income. • The legal response. Attachment under Section 5 and confiscation; real estate agents and Inspectors-General of Registration as notified reporting entities; the Benami Transactions (Prohibition) Act, 1988 as amended in 2016. |
5. Money Laundering through Virtual Digital Assets
§ The newest channel Methods. Converting proceeds into crypto assets; peer-to-peer trades; mixers and privacy tools; transfers through offshore exchanges outside Indian oversight. Red flags. Rapid conversion between fiat and crypto; use of unregistered platforms; transactions through mixers. The legal response. Since March 2023, persons carrying on specified activities in virtual digital assets are reporting entities under the PMLA, bound by due diligence, record-keeping and reporting, and must register with FIU-IND. FIU-IND has acted against unregistered offshore platforms offering services to Indian users. |
6. Money Laundering through Layered Transactions
§ Layering, and the law's answer to it • Methods. Many transfers with no commercial purpose; round-tripping, where money leaves India and returns as foreign investment; trade-based laundering through over- or under-invoicing; hawala. • Section 23. Where laundering involves interconnected transactions and one is proved to be involved in laundering, the rest are presumed to form part of the interconnected transactions. • The continuing offence. Each knowing step, and continued enjoyment, is within Section 3. • Cross-border tracing. Chapter IX provides for letters of request and reciprocal attachment where the layers extend abroad; Part C of the Schedule covers cross-border offences. |
7. The Principle and Its Exception
i. The taint follows the money through every change of form, owner, account or country.
ii. The exception is the bona fide third party who gave value without knowledge of the taint, whose legitimate interest the Act protects through adjudication and Section 8(8).
8. Frequently Asked Questions
How are shell companies used to launder money?
Through accommodation entries, bogus invoices and loans, and circular transactions that disguise the source of funds; beneficial ownership rules and the Companies Act register are designed to look through them.
Are company directors liable for money laundering by the company?
Under Section 70, every person in charge of and responsible for the company's business is deemed guilty unless he proves lack of knowledge or due diligence, and those whose consent, connivance or neglect is proved are also liable.
Are crypto assets covered by the PMLA?
Yes. Since March 2023, virtual digital asset service providers are reporting entities, and proceeds converted into virtual digital assets remain proceeds of crime.
What is round-tripping?
Sending money out of India and bringing it back as apparently foreign investment or loans, to disguise its source; a common layering method.