Explanation of – Definition of Section 3 of the Prevention of Money Laundering Act

Podcast on Explanation of – Definition of Section 3 of the PMLA

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Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA)¹ defines the offense of money laundering. According to this section, anyone who, directly or indirectly:

• Attempts to engage in

• Knowingly assists

• Knowingly participates in

• Is actually involved in

any process or activity connected with the proceeds of crime, including:

• Concealment

• Possession

• Acquisition

• Use

• Projecting it as untainted property

• Claiming it as untainted property

is guilty of the offense of money laundering.

The explanation provided within the section further clarifies its scope:

• A person is guilty of money laundering if they are found to have engaged in one or more of the listed processes or activities connected with proceeds of crime.

• The process or activity connected with proceeds of crime is a continuing activity, lasting until the person benefits from the proceeds of crime through any of the means mentioned above (concealment, possession, etc.)

• Section 3 comprises of two essential limbs, namely, (i) involvement in any process or activity; and (ii) connection of such process or activity to the proceeds of crime. The expression “proceeds of crime” is defined in Section 2(1)(u) to mean 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 such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad. The scope of Section 3 of PMLA was expounded in the case of Rana Ayyub v. Directorate of Enforcement ²

• The Hon’ble Supreme Court in the case of Satyander Kumar Jain v. Directoreate of Enforcement ³ relied upon the observations in Vijay Madanlal Choudhary v. Union of India ⁴ in order to expound the contours of Section 3 of PMLA. It held that- the offence of money laundering under Section 3 has a “wider reach”. The offence as defined captures every process and activity in dealing with proceeds of crime, directly or indirectly, and is not limited to the happening of the final act of integration of tainted property in the formal economy to constitute an act of money-laundering. 

• The Hon’ble Supreme Court drew a parallel with undisclosed income and the trigger of Section of PMLA. The Hon’ble Court held that Section 3 of PMLA will not be invoked solely on the ground that the there exists undisclosed income. The expression “proceeds of crime” under PMLA must be satisfied to attract Section 3 of PMLA. 

  
  

Therefore, Section 3 of the PMLA casts a wide net, criminalizing a range of actions related to the proceeds of crime, even beyond the act of laundering itself.

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¹ 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. [Explanation.—For the removal of doubts, it is hereby clarified that, — (i) a person shall be guilty of offence of money-laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely— (a) concealment; or (b) possession; or (c) acquisition; or (d) use; or (e) projecting as untainted property; or (f) claiming as untainted property, in any manner whatsoever; (ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.] 

² [2023 4 SCC 357]

³ (2024) 6 SCC 715

⁴ (2023) 12 SCC 1

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FAQ of Section 3 of the Prevention of Money Laundering Act

1. What is money laundering?

Money laundering is the process of disguising the illegal origins of money obtained through criminal activities. It involves making the "dirty" money appear "clean" or legitimate, making it difficult to trace back to its criminal source.

2. What are the key stages of money laundering?

Money laundering typically involves three stages:

• Placement: Introducing the illegal funds into the financial system, such as depositing small amounts of cash into various bank accounts or purchasing assets like real estate or luxury goods.

• Layering: Creating complex layers of financial transactions to obscure the trail of the money. This might involve transferring funds between multiple accounts, across borders, or through shell companies.

• Integration: Reintroducing the laundered money into the economy as apparently legitimate funds. This could involve investing in businesses, purchasing high-value assets, or using the money for everyday expenses.

3. What are the common methods used for money laundering?

Money launderers employ various methods, including:

• Smurfing: Depositing small amounts of cash below reporting thresholds across multiple accounts.

• Structuring: Breaking down large transactions into smaller ones to avoid scrutiny.

• Shell companies: Using fake or inactive companies to hide the true ownership of assets.

• Trade-based laundering: Over- or under-invoicing goods in international trade to move money across borders.

• Casinos and gambling: Using gambling venues to deposit cash and withdraw winnings as seemingly legitimate funds.

4. What are the consequences of being involved in money laundering?

Money laundering is a serious criminal offense with severe consequences, including:

• Imprisonment: Lengthy prison sentences, depending on the severity of the crime.

• Fines: Substantial financial penalties, often exceeding the amount of money laundered.

• Asset forfeiture: Confiscation of assets acquired with laundered funds.

• Reputational damage: Significant harm to personal and business reputation.

5. Who can be held liable for money laundering?

Individuals and businesses involved in any stage of money laundering can be held liable, including:

• Criminals generating the illegal proceeds.

• Individuals assisting in the laundering process, such as accountants, lawyers, or financial professionals.

• Businesses knowingly facilitating money laundering activities.

6. What are the specific offenses related to money laundering?

• Directly or indirectly attempting to indulge in money laundering: This includes planning or initiating actions to conceal or legitimize the proceeds of crime.

• Knowingly assisting in money laundering: Providing support or aid to someone engaged in money laundering activities.

• Being a party to money laundering: Actively participating in or associating with the laundering process.

• Actually being involved in any process or activity connected with the proceeds of crime: Engaging in actions related to concealing, possessing, acquiring, using, or legitimizing criminal funds.

7. What does it mean to "project or claim" proceeds of crime as "untainted property"?

This refers to presenting illegally obtained assets as if they were acquired through legitimate means. This could involve disguising the source of funds, creating false documentation, or using complex financial transactions to obscure the true ownership of assets.

8. Is money laundering considered a "continuing activity"?

Yes, the process or activity connected with proceeds of crime is considered ongoing until the individual no longer benefits from the concealment, possession, acquisition, use, or projection of the illegal funds as untainted property. This means that liability for money laundering persists as long as the individual continues to enjoy the benefits of the laundered money.