Money laundering and cross-border enforcement

Explanation

Under the PMLA, 2002, the Enforcement Directorate (ED) has the power of provisional attachment of property that is believed to be proceeds of crime. This attachment is provisional — meaning it is temporary and must be confirmed by the Adjudicating Authority within a prescribed period. 'Proceeds of crime' is a defined term under Section 2(1)(u) of PMLA: it refers to any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. Both Pair 1 and Pair 2 are therefore correctly described. Pair 3 is incorrect: hawala transactions are not a legitimate RBI-regulated mechanism — they are informal, unregulated value-transfer systems that bypass formal banking channels and are used to move money covertly, often to launder proceeds of crime or evade tax. They are illegal under Indian law (FEMA prohibits unauthorised dealings in foreign exchange, and hawala networks facilitating money laundering are prosecuted under PMLA). In the TTD ghee adulteration case, the ED specifically alleged that payments were routed back through hawala channels — illustrating their role as instruments of money laundering rather than legitimate finance.

Explanation

All three pairs are correctly matched. First, 'round-tripping' refers to the practice of moving funds out of India — often through layered offshore entities in tax havens — and then re-routing them back into India, typically to disguise their origin, inflate valuations, or circumvent capital account regulations; this is treated as a FEMA contravention. Second, Foreign Currency Convertible Bonds (FCCBs) are hybrid debt instruments denominated in a foreign currency and convertible into equity at a future date; they are treated as external commercial borrowings under the capital account transaction provisions of FEMA, regulated by RBI guidelines. Third, the Enforcement Directorate exercises civil enforcement powers under FEMA — it can investigate foreign exchange contraventions, attach and seize assets equivalent in value to the alleged violation, and refer matters to the Adjudicating Authority; this is structurally separate from its criminal enforcement role under the Prevention of Money Laundering Act (PMLA), where prosecution in a Special Court is the endpoint. FEMA replaced FERA in 1999 precisely to shift the framework from criminal to civil enforcement for most foreign exchange violations.

Explanation

Under the Prevention of Money Laundering Act, 2002, the Enforcement Directorate may provisionally attach property believed to constitute proceeds of crime for up to 180 days without prior court approval — the attachment is an executive act of the ED, subject to later confirmation. This provisional order must then be confirmed by the Adjudicating Authority, a quasi-judicial body specifically constituted under PMLA (distinct from regular courts), which determines whether the attachment should be sustained. Prosecution of money laundering offences is conducted before PMLA Special Courts, which are designated Sessions Courts empowered to try offences under the Act and also to take cognizance of complaints filed by the ED. All three pairs correctly describe the three-tier machinery — ED (attachment), Adjudicating Authority (confirmation), and Special Court (prosecution) — that the Act sets up to pursue proceeds of crime.

Explanation

Statement 1 is correct. FATF extended its Travel Rule (originally Recommendation 16 for wire transfers) to Virtual Asset Service Providers through the 2019 amendment to its standards. VASPs must transmit originator and beneficiary identifying information alongside virtual asset transfers above the threshold, mirroring obligations on conventional financial institutions — this is the core mechanism for tracing crypto-enabled laundering across borders. Statement 2 is correct. India brought virtual digital assets within the ambit of PMLA by amending the Prevention of Money Laundering Act Rules in March 2023. This amendment designated crypto exchanges and other VASPs as 'reporting entities' under PMLA, requiring them to conduct Know Your Customer (KYC) verification and report suspicious transactions to the Financial Intelligence Unit-India (FIU-IND) — the nodal agency for receiving and analysing financial intelligence related to money laundering in India. Statement 3 is incorrect for a substantive doctrinal reason. While FATF Recommendation 15 does require member countries to assess and mitigate risks from virtual assets, FATF is an intergovernmental standard-setting body — it issues recommendations, not binding law. FATF recommendations do NOT create automatic MLAT obligations, and they certainly do not permit asset freezes without domestic court orders. Mutual Legal Assistance Treaties are bilateral or multilateral instruments that require a domestic legal process in the requested country before assets can be frozen or seized. There is no FATF mechanism that bypasses domestic judicial processes for asset freezes, even in cases of state-sponsored cybercrime. This is the crucial distinction between a 'soft law' standard-setting body (FATF) and a treaty-based enforcement mechanism (MLAT). The conflation of FATF recommendations with automatic treaty obligations is a common misconception in the context of sanctions and cross-border crypto enforcement.

Explanation

Statement 1 is false. The RBI's 2017 circular on customer protection and limiting liability covers only unauthorised (fraudulent) transactions — those initiated without the account holder's knowledge or consent. Victims who were deceived or coerced into themselves authorising a transfer are explicitly not covered by this zero-liability framework, leaving them without direct recourse under those provisions. This is a critical gap that courts and regulators have been trying to address. Statement 2 is correct. Under the Prevention of Money Laundering Act, 2002, and the rules framed thereunder, banks (as reporting entities) are obligated to file Suspicious Transaction Reports with the Financial Intelligence Unit-India when they identify transactions that are inconsistent with a customer's known profile or that raise red flags of layering or placement of illicit funds — which is precisely the mechanism relevant to catching mule accounts used to launder digital-arrest scam proceeds. Statement 3 is correct. The foundational purpose of KYC norms, as prescribed by the RBI, is to establish the identity of customers, understand the nature of their financial activity, and build a baseline 'declared profile' against which future transactions can be assessed for anomaly. This risk-profiling function is what makes KYC the regulatory foundation for detecting mule accounts — accounts whose transaction patterns deviate sharply from the holder's stated income or business profile.