UPSC GS Paper III: Internal Security, Organised Crime, Money Laundering, Hawala, PMLA

Must?Know

• Prevention of Money Laundering Act (PMLA), 2002 – enacted to combat money laundering; came into force in 2005 after amendments post-9/11 global anti-terrorism financing push.
• PMLA mandates reporting of cash transactions above ?10 lakh, suspicious transactions, and cross-border wire transfers by banking, financial, and intermediary institutions to Financial Intelligence Unit–India (FIU-IND).
• FIU-IND – established in 2004 as the central national agency for receiving, processing, and analyzing Suspicious Transaction Reports (STRs), Currency Transaction Reports (CTRs), and Cross-Border Wire Transfer Reports (CBWTRs).
• PMLA defines "proceeds of crime" under Section 2(u) – any property derived or obtained by any person as a result of criminal activity relating to a scheduled offence, including its transformation or conversion.
• Scheduled Offences under PMLA – listed in Part A, B, and C of the Schedule; Part A includes offences under IPC, NDPS Act, Corruption (PC Act), Arms Act, etc., punishable with minimum 3 years imprisonment.
• PMLA allows attachment of property under Section 5 – by Director or Deputy Director of Enforcement, if prima facie case exists, for up to 180 days, extendable with Adjudicating Authority approval.
• Adjudicating Authority under PMLA – appointed by Central Government; determines whether attached property is involved in money laundering; functions under PMLA, not CrPC.
• Appellate Tribunal under PMLA – called the Appellate Tribunal for Prevention of Money Laundering (ATPML), established under Section 26; hears appeals against orders of Adjudicating Authority and Director (Enforcement).
• Supreme Court in Vijay Madanlal Choudhary v. Union of India (2022) upheld constitutional validity of PMLA, including twin conditions of "proceeds of crime" and "scheduled offence" as not violating Article 21.
• PMLA reverses burden of proof under Section 24 – accused must prove innocence of property claimed to be proceeds of crime, a departure from general criminal law principles.
• Enforcement Directorate (ED) – primary investigating agency under PMLA; functions under Department of Revenue, Ministry of Finance.
• ED derives powers under PMLA from Section 46 – conducts search, seizure, arrest, and summoning of persons; operates independently of CrPC for investigation.
• PMLA allows arrest without warrant under Section 19 – if ED has reason to believe a person is guilty of money laundering; requires production before magistrate within 24 hours.
• Bail under PMLA – governed by Section 45; stringent conditions: court must be satisfied that the accused is not likely to commit any offence and that release won’t impede investigation; struck down in part in Nikesh Tarachand Shah v. Union of India (2018).
• Nikesh Tarachand Shah (2018) – SC struck down twin conditions under Section 45(1) as violative of Article 14 and 21; bail no longer requires dual conditions of non-repetition and non-obstruction.
• PMLA amendments in 2019 – introduced concept of "enforcement case information report" (ECIR), analogous to FIR, though not explicitly mentioned in Act.
• PMLA applies to offences committed outside India – under Section 74, if they involve Indian citizens or property located in India, in line with FATF recommendations.
• Hawala transactions – informal value transfer systems bypassing banking channels; often linked to terrorism financing and tax evasion; criminalized under PMLA if linked to scheduled offences.
• Hawala case of 1993 – involved illegal transfer of funds by J.K. Trust to fund terrorism and political corruption; led to Jain Hawala case and multiple arrests, including ministers.
• Black money – unaccounted income concealed from tax authorities; PMLA targets laundering of black money generated via tax evasion, corruption, or smuggling.
• India is a member of Financial Action Task Force (FATF) since 2010 – global watchdog setting standards for anti-money laundering and counter-terror financing; PMLA aligns with FATF Recommendations (40+9).
• PMLA allows provisional attachment of property under Section 5 – even before conclusion of trial in scheduled offence, enabling pre-conviction seizure.
• ED can provisionally attach property worth up to the value of proceeds of crime – order issued by Director-level officer, confirmed by Adjudicating Authority within 30 days.
• PMLA does not allow compounding of offence – conviction leads to imprisonment (3–7 years, extendable to 10) and fine; no settlement option unlike some economic offences.
• Mutual Legal Assistance (MLA) – India uses MLA treaties with 40+ countries to trace, freeze, and repatriate assets linked to money laundering under PMLA framework.

Difficulty Level

Intermediate – requires understanding of legal procedures, interplay with criminal law, and landmark judgments, but facts are largely statutory and structured.

Common UPSC Traps

Trap: PMLA is administered by Ministry of Home Affairs – Fact: PMLA is administered by Department of Revenue, Ministry of Finance; Enforcement Directorate functions under this department (source: DOPT directory, ED website).

Trap: Adjudicating Authority under PMLA is part of the judiciary – Fact: It is a quasi-judicial body created under PMLA, staffed by officers with legal expertise, but not part of the formal judiciary (source: PMLA, Section 4A).

Trap: Money laundering is a standalone offence under PMLA – Fact: It is dependent on a "scheduled offence"; no money laundering without predicate crime (source: Vijay Madanlal Choudhary judgment, Section 3 PMLA).

Trap: ECIR is defined in PMLA – Fact: ECIR is an internal Enforcement Directorate document analogous to FIR; not mentioned in PMLA or rules (source: ED guidelines, 2019 amendment debates).

Practice MCQs

Question: Under the Prevention of Money Laundering Act, 2002, which of the following best describes the role of the Financial Intelligence Unit–India (FIU-IND)?
A) It investigates cases of money laundering and files prosecution.
B) It adjudicates on the attachment of properties suspected of being proceeds of crime.
C) It is the central national agency responsible for receiving and analysing financial intelligence.
D) It hears appeals against orders of the Enforcement Directorate.
Answer: C
Explanation: FIU-IND is the central agency for processing STRs, CTRs, and CBWTRs under PMLA; it does not investigate or adjudicate.
Why others fail: A is wrong because investigation is done by ED, not FIU-IND.

Question: The constitutional validity of the Prevention of Money Laundering Act was recently upheld by the Supreme Court in which of the following cases?
A) Maneka Gandhi v. Union of India
B) Kartar Singh v. State of Punjab
C) Vijay Madanlal Choudhary v. Union of India
D) A.K. Gopalan v. State of Madras
Answer: C
Explanation: In 2022, the Supreme Court upheld PMLA’s provisions including reverse burden of proof in Vijay Madanlal Choudhary.
Why others fail: A is a 1978 case on Article 21; unrelated to PMLA.

Question: Which of the following is NOT a scheduled offence under Part A of the Schedule to the PMLA?
A) Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985
B) Offences under the Arms Act, 1959
C) Offences under the Companies Act, 2013
D) Offences under the Indian Penal Code related to counterfeiting currency
Answer: C
Explanation: Companies Act offences are not listed in Part A of PMLA Schedule; they may fall under Part C if involving fraud above ?1 crore.
Why others fail: D is correct as IPC Section 489A is a scheduled offence.

Question: Under PMLA, the burden of proof lies with the accused in proving that the property in question is not proceeds of crime. This provision is located in:
A) Section 24
B) Section 45
C) Section 5
D) Section 19
Answer: A
Explanation: Section 24 of PMLA reverses the burden of proof, requiring the accused to prove innocence of property.
Why others fail: Section 45 deals with bail conditions, now modified post-2018 SC judgment.

Question: The Appellate Tribunal for Prevention of Money Laundering hears appeals from orders of:
A) Only the Adjudicating Authority
B) Only the Director (Enforcement)
C) Both the Adjudicating Authority and the Director (Enforcement)
D) The Special Court constituted under PMLA
Answer: C
Explanation: Section 26 of PMLA empowers the Appellate Tribunal to hear appeals from both Adjudicating Authority and ED orders.
Why others fail: A and B are incomplete; C is comprehensive and correct.

Question: Which of the following statements about hawala transactions is correct?
A) Hawala is illegal per se under Indian law.
B) Hawala becomes an offence under PMLA only when linked to a scheduled offence.
C) Hawala operators are exempt from reporting under PMLA if transactions are below ?50 lakh.
D) Hawala is regulated by the Reserve Bank of India under FEMA.
Answer: B
Explanation: Hawala is not inherently illegal, but becomes punishable under PMLA when connected to predicate crimes like terrorism or tax evasion.
Why others fail: A is incorrect because hawala mechanism is not banned, only its misuse is penalized.

Question: The Enforcement Directorate derives its investigative powers under PMLA primarily from:
A) Section 17
B) Section 46
C) Section 5
D) Section 24
Answer: B
Explanation: Section 46 grants ED powers of search, seizure, arrest, and enforcement under PMLA.
Why others fail: Section 17 deals with summoning; not the primary source of investigative power.

Last?Minute Revision

• PMLA enacted in 2002, enforced from 2005.
• FIU-IND established in 2004.
• ED functions under Department of Revenue, Ministry of Finance.
• PMLA Schedule has 3 parts: A (serious offences), B (FATF list), C (fraud > ?1 crore).
• Section 2(u) defines "proceeds of crime".
• Section 3: Offence of money laundering.
• Section 4: Punishment – 3 to 7 years (up to 10 for terrorism).
• Section 5: Provisional attachment of property.
• Section 19: Power of arrest by ED.
• Section 24: Reverse burden of proof.
• Section 26: Appellate Tribunal under PMLA.
• Section 45: Bail provisions – twin conditions struck down in 2018.
• Nikesh Tarachand Shah v. UoI (2018) – invalidated Section 45(1) twin conditions.
• Vijay Madanlal Choudhary v. UoI (2022) – upheld PMLA constitutionality.
• Adjudicating Authority decides on property attachment.
• Special Court under PMLA tries money laundering cases.
• ECIR – Enforcement Case Information Report; not in PMLA text.
• India became FATF member in 2010.
• Hawala case linked to 1993 serial blasts.
• FATF 40 Recommendations + 9 Special Recommendations on Terror Financing.
• PMLA applies extraterritorially under Section 74.
• No compounding of offence under PMLA.
• FIU-IND is not an investigative agency.
• PMLA requires a predicate offence.
• Bail under PMLA is stricter than CrPC.
• ED cannot initiate prosecution without public prosecutor.