The laws of Foreign Exchange and Prevention of Money Laundering

A Research Paper
Presented to the Faculty of the
School of Management & Entrepreneurship
AURO University
Surat

In Partial Fulfilment
Of the Requirements for the Degree of
Master of Business Administration


Submitted by
ADIN VICTOR
AMITESH RAJPUT
HARDIK NAIK
PRUTHA CHOVATIYA
VANESSA PATTHARWALA
SWETA RAI

Submitted to
Dr.KIRAN GARDNER
May 2014

FOREIGN EXCHANGE AND PREVENTION OF
MONEY LAUNDERING

The Foreign Exchange Management Act (FEMA) is a 1999 Indian law "to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of foreign exchange
market in India". It was passed in the winter session of Parliament in 1999, replacing the Foreign
Exchange Regulation Act (FERA). This act seeks to make offenses related to foreign
exchange civil offenses. It extends to the whole of India.,
[1]
replacing FERA, which had become
incompatible with the pro-liberalisation policies of the Government of India. It enabled a
newforeign exchange management regime consistent with the emerging framework of the World
Trade Organisation (WTO). It is another matter that the enactment of FEMA also brought with it
the Prevention of Money Laundering Act of 2002, which came into effect from 1 July 2005.
Foreign Exchange means foreign currency and includes-
I. Deposits, credits, and balances payable in any foreign currency;
II. Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in
Indian currency but payable in foreign currency;
III. Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency.

Foreign Exchange Regulations Act (FERA) was introduced in the year 1974 with an object of
having stringent controls to conserve foreign exchange and utilize these scarce resources in the
best interest of the country. With the liberalized economic environment and increased flow of
foreign exchange to India the draconian provisions of FERA were needed to be reviewed.
Therefore, FERA was repealed and Foreign Exchange Management Act, 1999 (FEMA) was
passed. FEMA has been brought into force from 1
st
June 2000.
The preamble to FEMA reads as under:
An Act to consolidate and amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market in India.
Extent and application: The Act extends to the whole of India. Also, the Act has extra
territorial jurisdiction, and it also applies to-
a) All branches, offices and agencies outside India owned or controlled by a person resident
in India; and
b) Any contravention committed outside India by any person to whom this Act applies.

Difference between FERA and FEMA

The significant differences between FERA, 1973 and FEMA, 1999 are as under:
1. Object of the Act: The main object of FERA was to conserve the foreign exchange
resources and prevent the misuse therefore. However, the main object of FEMA is to
promote an develop the foreign exchange management of the country. In other words,
FERA sought to control foreign exchange transactions while FEMA seeks to regulate
and manage it.
2. Meaning of person resident in India: citizenship was the criterion to determine the
residential status of a person under FERA. The definition of resident in India has been
redefined in FEMA. A person residing for more than 182 days in India is a person
resident in Indias per FEMA.
3. Structure of the Act prohibition/relaxation: FERA prohibited almost all the foreign
exchange transactions unless a general or special permission was issued. However, under
FEMA, all the current account transactions are permissible except some transactions
controlled by the rules.
4. Nature of offence: The offences under FEMA shall be treated as civil wrongs whereas
under FERA offences were subject to criminal punishments also. Therefore, FERA was
held to be draconian, severe and harsh.
5. Presumption of mens rea: under FERA there was a presumption existence of guilty
mind, unless the accused proved otherwise. Under FEMA, however, the prosecution will
have to prove that a person has committed an offence.
6. Power to arrest: section 35 of FERA empowered the enforcement officers to arrest a
person, if they had reasons to believe that the person was guilty of FERA violations.
FEMA provides such power of arrest only in the following cases:Where the accused
person fails to pay the full payment of penalty within 90 days from service of notice on
him. And, where the accused person fails to furnish the security for his appearance
before the Adjudicating Authority, the Adjudicating authority may, in his discretion.
Order that the accused person be detained in the custody of an officer of the Adjudicating
Authority.
7. Compounding of offences: all the offences under FEMA are compoundable whereas
compounding was not permissible under FERA.
8. Appellate authorities: there was only one appellate authority under FERA whereas in
FEMA, there exists two appellate authorities, viz., Special Director (Appeals) and
Appellate Tribunal.
9. Right of legal assistance: the accused has a right to take the assistance of a legal
practitioner or a chartered accountant under FEMA. Under FERA, even a friend or a
relative of the person could represent the accused person before the Adjudicating
Authority.
10. Role of RBI: Reserve Bank of India has been portrayed as a facilitator under FEMA
instead of a regulator of foreign exchange under FERA.

Indian citizen leaving India for pursuing higher studies outside India- determine his
residential status

Q: Mr. Naik is an India citizen. He has been residing in India since birth. He left India on 25
th

February 2001 for pursuing business management in America for 2 years. He comes back on 24
th

February 2003. What is his residential status for the financial years 2000-01, 2001-02, 2002-03,
and 2003-04?

Ans: Financial year 2000-01, Mr. Naik resided in India for the whole year in the preceding
financial year. Mr. Naik is a person resident in India for the financial year.
Financial year 2001-02, he resided in India for more than 182 days in the present financial year
2000-01. Therefore, he is a person resident in India for the financial yea 2001-2002.
Financial year 2002-03, Mr. Naik did not reside in India at all in the presenting financial year
2001-02. Therefore, he shall be a person resided outside in India.
Financial year 2003-04, Mr. Naik, resided for less than 183 days in the presenting financial year
2002-03. Therefore, he shall be a person resident in India.
Regulation and management of foreign exchange
Restrictions on dealing in foreign exchange and foreign securities-
a) Restrictions on dealing: No person shall deal in or transfer any foreign exchange or
foreign security to any person not being an authorized person.
b) Restriction on payment: No person shall make any payment to or for the order of any
person resident outside India in any manner.
c) Restrictions on receipts: No person shall receive, otherwise through an authorized person,
any payment by order or on behalf of any person resident outside India in any manner.
d) Acquisition etc. of assets outside India: No person shall enter into any financial
transaction in India as consideration for or in association with acquisition or creation or
transfer of a right to acquire, any asset outside India by any person.

Adjudicating Authority:
The appropriate Adjudicating Authority deals with the process by which a contravention of
any provision of the Act, rule, regulation, notification, direction or order issued under the
Act. The central government has been empowered to appoint the Adjudicating Authority who
shall hold the inquiry in the manner prescribed under the Act.
Duties of the Adjudicating Authority:
1. Every Adjudicating Authority shall endeavor to dispose of the complaint within 1
year from the date of receipt of the complaint. If the complaint is not disposed of
within 1 year, authority shall record the reasons for the same.
2. The Adjudicating Authority shall give a reasonable opportunity of being heard to the
person against whom a contravention of the Act is alleged.

Penalties for contravention:
a) When levied Where any person contravenes any provisions of the Act, rule, regulation,
notification, direction or order issued under the Act.
Where any person contravenes any condition subject to which an authorization is issued
by the Reserve Bank.
b) Amount of penalty:
1. Where the amount involved in contravention is quantifiable, the penalty may
levied upto three times the sum involved in the contravention.
2. Where the amount involved in contravention is not quantifiable, the penalty upto
rupees 2,00,000 may be levied.
3. Where any contravention is continuing one, further penalty not exceeding rupees
5,000 per day may be levied.
c) Penalty payable upon adjudication Penalty shall become payable only upon
adjudication section 14.



Consequences of failure to pay penalty:
Imprisonment: if any person fails to make full payment of the penalty imposed on him
within 90 days from the date of service of notice on him, he shall be liable to civil
imprisonment.
Term of imprisonment
I. Where the demand raised in the penalty order exceeds Rs. 1 Crore, the
imprisonment may extend upto 3 years.
II. In any other case, the imprisonment may exceed upto 6 months.
Release of defaulter on payment: The defaulter shall be released, where the amount
mentioned in the warrant has been paid to the officer in charge of the civil prison.

Case on FERA and FEMA

1. FEMA Case on Ramdevbaba:
The Enforcement Directorate has filed cases under the Foreign Exchange Management Act
against Yoga guru Baba Ramdev and a multitude of trusts run by him.
The cases were registered on the basis of a RBI report and inputs from abroad on a string of
'suspicious' financial transactions undertaken by Ramdev's trusts, said an ED official.
Properties under ED's scanner include an island located in Scotland that was gifted to Ramdev by
a wealthy couple of Indian origin who claims to be his followers. ED had last month asked
British authorities to share records of the purchase of The Little Cumbrae Island, an island of
about 900 acres, which serves as the yoga guru's base abroad. The NRI couple from Scotland
who gifted the island two years ago hold a more than 7% stake in one of the biggest companies
in the yoga guru's multi-crore empire.
ED officials claim they have found evidence that Ramdev and his trusts received unauthorised
financial assistance from the US, New Zealand and Britain. The agency had also approached
officials in Madagascar. ED's probe is aimed at tracking the flow of money and transactions
through various trusts floated by Ramdev, including the PatanjaliYogpeeth Trust, Divya Yoga
Mandir Trust and Bharat Swabhiman Trust.
Ramdev, in his reaction, said he has not done anything wrong or illegal. "I have not done
anything wrong or illegal. During my two-decade-long public life, I have replied to all questions
raised about me with ample proof," Ramdev told reporters in Haridwar.
He said he is yet to get a notice from the Enforcement Directorate and he would reply to it once
he receives it. The Enforcement Directorate's move has invited charges of political witch-hunt.
"The timing of the case is suspect. If the government had all this information, why did they not
file a case earlier," asked VedPratapVaidik, a Ramdev associate.
Yoga guru Ramdev was arrested by the Delhi Police around midnight on June 6 from the
Ramlila Grounds, after a crackdown ordered on him and his followers. The Yoga guru was
caught by a police team as he made his way out of the venue in the garb of a woman. He was
released the next day after being taken to Hardwar, which houses the headquarters of the trusts
run by him.









MONEY LAUNDERING

Money Laundering is the process of taking dirty funds and converting it into clean funds.
Dirty funds are criminally-derived proceeds which are then converted into other assets so that
they can be reintroduced into legitimate commerce in order to conceal their true origin or
ownership clean funds
There are three stages in money laundering:

1. Placement
2. Layering
3. Integration

Placement

Placement is the first stage in money laundering where the cash proceeds of criminal activity
enter into the financial system. This is most critical stage for any money launderer as the
criminal can effectively mask his dirty funds by commingling his clean funds and create an
aura of legitimacy.
Examples of Placement include:
Depositing into bank accounts via tellers, ATMs, or night deposits
Changing currency to cashiers checks, bankers drafts or other negotiable instruments
Exchanging small notes/bills for large notes/bills
Smuggling or shipping cash outside the county

Layering

Layering is the second stage in money laundering where attempts are made to distance the
money from its illegal source through layers of financial transactions.
Examples of Layering include:
Sending funds to different onshore and offshore bank accounts
Creating complex financial transactions
Loans and borrowing against financial and non-financial assets

Integration

Integration is the third stage of money laundering. This stage involves the re-introduction of the
illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation for
the funds.
Examples of Integration include:
Buying businesses
Investing in luxury goods
Buying commercial property
Buying residential property















THE PREVENTION OF MONEY LAUNDERING ACT, 2002


Prevention of Money Laundering Act is Indian law passed in 2002 to prevent money
laundering and to provide for confiscation of property derived from money-laundering.

Overview

The Prevention of Money Laundering Act (PMLA), 2002 was enacted in January, 2003. The Act
along with the Rules framed there under have come into force with effect from 1st July, 2005.
Sec. 3 of PMLA defines offence of money laundering as 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 and projecting it as untainted property
shall be guilty of offence of money-laundering. It prescribes obligation of banking companies,
financial institutions and intermediaries for verification and maintenance of records of the
identity of all its clients and also of all transactions and for furnishing information of such
transactions in prescribed form to the Financial Intelligence Unit-India (FIU-IND). It empowers
the Director of FIU-IND to impose fine on banking company, financial institution or
intermediary if they or any of its officers fails to comply with the provisions of the Act as
indicated above.

PMLA empowers certain officers of the Directorate of Enforcement to carry out investigations in
cases involving offence of money laundering and also to attach the property involved in money
laundering. PMLA envisages setting up of an Adjudicating Authority to exercise jurisdiction,
power and authority conferred by it essentially to confirm attachment or order confiscation of
attached properties. It also envisages setting up of an Appellate Tribunal to hear appeals against
the order of the Adjudicating Authority and the authorities like Director FIU-IND.

PMLA envisages designation of one or more courts of sessions as Special Court or Special
Courts to try the offences punishable under PMLA and offences with which the accused may,
under the Code of Criminal Procedure 1973, be charged at the same trial. PMLA allows Central
Government to enter into an agreement with Government of any country outside India for
enforcing the provisions of the PMLA, exchange of information for the prevention of any
offence under PMLA or under the corresponding law in force in that country or investigation of
cases relating to any offence under PMLA.

Objective
The PML Act seeks to combat money laundering in India and has three main objectives:
To prevent and control money laundering
To confiscate and seize the property obtained from the laundered money; and
To deal with any other issue connected with money laundering in India.

Offence of money-laundering

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 and
projecting it as untainted property shall be guilty of offence of money-laundering.

Punishment for money-laundering

Whoever commits the offence of money-laundering shall be punishable with rigorous
imprisonment for a term which shall not be less than three years but which may extend to seven
years and shall also be liable to fine which may extend to five lakh rupees: Provided that where
the proceeds of crime involved in money-laundering relates to any offence specified under
paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the
words which may extend to seven years, the words which may extend to ten years had been
substituted.





CASES on Money Laundering

1. HSBC to pay $1.9 billion U.S. fine in money-laundering case
In December 2012, multinational banking institution HSBC was penalized a record $1.92 billion
by the United States for violating laws designed to prevent money laundering and other illegal
financial activity. HSBC was under consistent suspicion and twice given warnings and orders to
strengthen its anti-money laundering programs by the U.S. between 2003 and 2010 but failed to
make the proper adjustments. The $1.92 billion penalty, issued under the Bank Secrecy Act, was
handed down after a report and subsequent investigation that confirmed the bank had set up
offshore accounts for drug cartels and suspected criminals in Jersey. HSBC banking executives
admitted to laundering as much as $881 billion dollars.
Events
From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators and
operated under a written agreement to correct the deficiencies of their operational practices so it
agreed to enhance its anti-money laundering program to achieve adequate compliance with the
Bank Secrecy Act.
Between 2006 and 2010, Money laundering risks associated with doing business with certain
Mexican customers were ignored, compliance issues at HSBC Mexico were overlooked, and a
BSA-adequate anti-money laundering program was not implemented. The Court notes four
significant HSBC Bank USA failures:
1. HSBC failed to obtain and maintain due diligence on HSBC Group Affiliates.
2. HSBC failed to adequately monitor over $200 trillion in wire transfers between 2006 and
2009 from customers in nations classified as standard or medium risk ($670 billion
in wire transfers specifically from HSBC Mexico).
3. HSBC Bank USA failed to adequately monitor billions of dollars in U.S. banknote
purchases.
4. HSBC Bank USA failed to provide proper staffing and resources necessary to maintain
an effective anti-money laundering program.
As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations
of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money
laundering program, failure to establish due diligence, and involvement in the laundering of over
$881 billion.

2. Hawaii to pay $1.3 million in money laundering case

Section:
708A-1 Title
708A-2 Definitions
708A-3 Money laundering; criminal penalty
Thomas Ky, who owns the popular Assaggio restaurants in Hawaii, has admitted to
laundering more than $1 million in illegal gambling proceeds through his restaurants on
Oahu and has agreed to forfeit more than $1,3 million to the federal government.
The Honolulu Star-Advertiser reports Ky pleaded guilty to one count of money
laundering on Thursday in U.S. District Court in Honolulu; he faces a maximum sentence
of 20 years in prison and a fine of twice the value of the money laundered when he is
sentenced in May.
The newspaper reports a total of 21 people have already pleaded guilty for their roles in
the gambling operation, including five who pleaded guilty to laundering money through
Ky.

3. HASAN ALI 8 billion money laundering case
It was in March 2011 when curtains were raised from one of the biggest Hawala scams that
took place in India. The culprit, Hasan Ali, who was the mastermind behind this 8 billion
worth of scam agreed to the fact the money that he had been hovering, belonged to some of
the top business men and bureaucrats of India. The politicians were not second to their
involvement in this scam. Through a parallel banking network, Hasan Ali had been pumping
in the black money of the aforementioned into the Indian stock market, as confirmed by the
UBS, Barclays and Credit Suisse banks. The money was also brought in through
participatory notes and FDIs. Ali, smartly identified the loop holes in the regulatory policies
of SEBI which made it impossible to trace back the money. Upon revealing this, Ali was
remanded on custody for four days of the Enforcement Directorate. From 1990 to 2000, Ali
expanded his empire to a humungous scale, helping him build contacts with the top notch
strata of politics and business world. However, Ali denied any direct contact with any of the
aforementioned and did not reveal any names it the investigators. On similar grounds, it was
discovered that Ali had been handling accounts in Saudi Arab and was also associated to
Adnan Khashoggi, an international arms dealer. The money in Alis accounts jumped almost
ten folds when the American Gov. started freezing transfers of money amongst various
banks, after the 9/11 attack. Even after considering the revelations made by Ali, the
investigators believe that this matter has a lot of grey areas and there are many questions yet
to be answered. Since then, Hasan Ali has been behind the bars after his last bail petition
being rejected in October 2013.
Conclusion
As government of India and with united anti money laundering bodies, the result of money
laundering and other elicit activities have been reduced and it has to be vanish. Its our
(people) duty to know and understand the consequences of this kind of illegal activities, if we
arent aware and we commit it by knowingly or unknowingly we will be consider as the part
of the this illegal activities. To avoid all this speculation and tantrums of committing elicit
social and economical affective traits.









References:

1. http://sevenpillarsinstitute.org/case-studies/hsbc-money-laundering-case-too-big-to-fail-
does-not-mean-too-big-to-jail
2. http://articles.economictimes.indiatimes.com/2011-09-02/news/30105901_1_yoga-guru-
ramdev-money-and-transactions-bharat-swabhiman-trust
3. http://articles.economictimes.indiatimes.com/2013-03-07/news/37532004_1_hasan-ali-
khan-fresh-grounds-justice-r-c-chavan
4. http://www.staradvertiser.com/news/breaking/209246671.html
5. http://indiankanoon.org/search/?formInput=money%20laundering%20act%20
6. http://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act