Introduction
Money laundering is a global problem that hurts the integrity of financial institutions and leads to all kinds of crime. Money laundering is a big concern in India since the economy is changing, there are more cross-border transactions, and financial crime is hard to understand. The Indian government knows that money laundering hurts the economy, national security, and the rule of law. Because of this, they have developed strong laws and enforcement mechanisms to fight this crime.
Money laundering is a way to hide where illegally gotten money came from so that it looks like it came from a legal source. Not only does this let criminals profit from crime, but it also lets the money from crime be used to fund other criminal activities, such drug trafficking, bribery, and terrorism. Money laundering is very hard for law enforcement, regulators, and banks to deal with since it is done in secret. A strong and concerted response is needed.
India’s response to money laundering has changed throughout time. The Prevention of Money Laundering Act, 2002 (PMLA) is the main law that India uses to fight money laundering. The PMLA sets out the rules for investigating, prosecuting, and seizing property in cases of money laundering. The PMLA also requires financial institutions and intermediaries to keep records, do their homework, and report what they find.
The Enforcement Directorate (ED) and other enforcement organisations are in charge of carrying out the PMLA’s rules. The ED looks into crimes that break the Act, takes and freezes the money made from crime, and brings the culprits to justice. Along with the agency’s work, other groups like the bank Intelligence Unit-India (FIU-IND) look through bank transaction data for signs of money laundering.
Judicial interpretation also had a big impact on how AML law was enforced and what it covered in India. To find a balance between implementing the laws effectively and protecting basic rights, courts have looked at a number of constitutional and procedural concerns that have come up because of the PMLA. Landmark decisions have made it clear what important phrases mean, what kinds of evidence can be used, and what the conditions for release and arrest are under the Act.
India has a lot of problems with stopping money laundering, even though there are laws and institutions in place to help. These include slow procedures and problems coordinating amongst law enforcement authorities, as well as the complexity of cross-border money movements. Also, the fast growth of technology and new financial products have made AML measures more complicated.
Because money laundering is an international crime, countries need to work together to stop it. India is a member of the Financial Action Task Force (FATF) and has promised to follow its advice to make the international anti-money laundering system even stronger. Bilateral and multilateral tools make it easier to share information, help each other legally, and work together to stop money laundering networks.
The goal of this research study is to give a full overview of India’s legislative systems and enforcement systems for money laundering. It will look at how the AML rules have changed over time, how well the enforcement agencies work, how the courts interpret the laws, the problems with enforcing them, and the need for countries to work together. This study seeks to help people understand how well India’s efforts to stop money laundering are working and where they may be better by looking at case studies and doing a critical analysis.
Money laundering is the act of disguising the source of money that was obtained illegally so that it seems like real money. It not only lets criminals keep the money they make from their crimes, but it also lets them do more illegal things like terrorism, drug dealing, and bribery. The secrecy of money laundering makes it very hard for law enforcement, regulators, and financial institutions to work together and take strong action.
There are usually three main steps in the money laundering process: placement, layering, and integration. Putting illegal money into the system is done by putting money into banks, making big purchases, or doing business with companies that do a lot of transactions. Some common ways to place bets in India are via buying gold, selling real estate, and using smurfing schemes. At the layering level, there are complicated transactions that try to obscure where the money came from. Money can be moved from one account to another, put into investments that are hard to understand, or sent through shell companies and international accounts. The hawala system is one of the hardest to follow. During the integration phase, the money that was laundered is put back into the economy through investments in legal enterprises, buying real estate, or giving money to political campaigns, making it look like it came from a legal source.
There are a lot of unlawful things that happen in India that lead to money laundering. These include drug and human trafficking, corruption, funding terrorism, tax fraud, cybercrime, the illicit wildlife trade, and making fake money. The “black money” economy is a term that has been used for a long time to describe unexplained wealth that includes these unlawful profits. In the real estate, construction, and jewellery industries, there is a parallel cash economy where transactions happen all the time without any records, making it easier to launder money.
Money laundering is not just a problem in the financial realm; it is a problem everywhere. It messes up markets by making prices go up and causing bubbles in asset sectors like real estate. It changes the balance between supply and demand and makes things less affordable for the average person. Also, money laundering hurts people’s faith in the financial system, raises the cost of regulation, and helps criminal groups grow. Corruption that hurts democratic institutions also happens when people steal public money and bribe politicians. Money laundering is also a serious threat to national security, especially if it is used to fund terrorist activities, as shown by the links that were found between money laundering and the investigation into the 26/11 Mumbai terror attacks.
Because technology is moving so quickly, methods of money laundering have also changed a lot. The advent of cryptocurrencies, internet wallets, online gambling, and decentralised finance (DeFi) platforms has made it harder to look into money laundering. Blockchain technology does allow for some openness, but it also allows for anonymity and worldwide transmission at the same time, which makes it harder to find. If there aren’t enough regulations in place, fintech platforms and unregulated digital financial services can also be used to launder money.
India’s legal system before the PMLA
Before the Prevention of Money Laundering Act (PMLA), 2002, came into effect, India had a patchwork of laws that were used to fight financial crime. The Income Tax Act of 1961 allowed for investigations and actions against untaxed assets, but it wasn’t clear about how laundering worked. The Foreign Exchange Regulation Act (FERA) of 1973 and the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA) of 1974 were utilised to go after people who were involved in hawala and smuggling. The Narcotic Drugs and Psychotropic Substances Act of 1985 said that property gained by drug trafficking might be taken away. They were helpful, but not comprehensive or specific enough to deal with the multifaceted and multinational nature of money laundering. The Indian Penal Code of 1860 dealt with crimes like fraud and conspiracy, but it didn’t have any explicit rules for keeping an eye on and prosecuting money laundering of illicit proceeds.
The Creation and Organisation of PMLA
India’s progress towards a stronger anti-money laundering system was also influenced by international norms created by groups like the Financial Action Task Force (FATF). As India became more globalised and exposed to more illegal cross-border financial flows, it became more and more vital to have a law against money laundering. The Prevention of Money Laundering Act, 2002, was passed for this reason. It went into effect on July 1, 2005.
The PMLA went into effect to stop and control money laundering, allow the seizure and confiscation of property that was involved in or came from laundering, and put reporting and compliance requirements on intermediaries and financial institutions. The Act is divided into numerous parts that include things like definitions, enforcement requirements, the roles of different agencies, attachment and confiscation measures, and the duties of financial institutions. Chapter I explains what “proceeds of crime” and “money laundering” are. Chapter II makes money laundering a crime under Section 3 and punishes it under Section 4. Chapter III lets the police temporarily take property that they think is being used for money laundering, while Chapter IV makes banks and other financial organisations report certain things.
Institutional and enforcement tools
The main agency in charge of carrying out the PMLA’s rules is the Enforcement Directorate (ED). It has the power to freeze, seize, and attach property, as well as arrest those who are suspected of crimes. The Financial Intelligence Unit – India (FIU-IND) works with the ED by getting, analysing, and exchanging financial information, especially suspicious transaction reports (STRs) and cash transaction reports (CTRs). The Act sets up special courts to quickly hear money laundering matters. The Chapter VI appellate tribunal system also lets anyone take legal action against ED actions.
The PMLA has also been changed several times in important ways to stay up with changes in financial systems and follow FATF rules. Changes enacted in 2005, 2009, 2012, 2015, and 2019 expanded the list of crimes, clarified words, gave law enforcement more power, and made reporting obligations stricter. The Finance Act 2019 made big changes to the way things are done, making PMLA cases criminal in character but civil in terms of proof.
The concept of “judicial” has likewise changed the PMLA’s reach and scope. The Supreme Court upheld certain controversial parts of the PMLA in the case of Vijay Madanlal Choudhary v. Union of India (2022). These included the ED’s power to arrest people and without letting the accused see the ECIR. The Court said these powers were permissible since money laundering is a complicated and secret crime. However, the decision caused a lot of discussion regarding weakening procedural protections and shifting the burden of proof, which many people say goes against the principles of natural justice and criminal law. The Schedule of Offences is one thing that sets the PMLA apart. It has grown throughout time to encompass a wide range of predicate offences. Part A lists major crimes like terrorism, corruption, drugs, fraud, and trafficking in people; Part B lists economic crimes that go over a certain amount; and Part C lists crimes that happen across borders. Because it covers so many areas, the ED can start PMLA cases against crimes that are already being pursued under other laws. This makes the Act complete and useful.
India has also increased its cooperation with other countries since it knows that money laundering is a worldwide problem. India is a member of the FATF and has signed a number of UN accords, therefore it has promised to follow international rules. India can work with other countries to find stolen money, send suspects back to India, and freeze assets overseas thanks to the MLATs, extradition agreements, and information exchanges.
Money laundering may have a huge effect on the political and economic stability of any country. The change from a diffuse legal system to a statutory system in the PMLA is a big change in both policy and law in India. The Act and the work of the ED and FIU-IND show how serious India is about fighting financial crime. also, there are also problems, such as the mounting backlog in the courts, worries about civil liberties, and the fact that money laundering tactics are becoming more advanced. India’s fight against money laundering will only be successful if its institutions are made stronger, its actions are made more open, and it is held accountable. Enforcement that is fair and follows the finest standards in the world would be very important to protect the rule of law and financial integrity as India becomes more and more involved in the world economy. Placement, layering, and integration are the three most important steps in money laundering. It starts with making money illegally by doing bad things. These include stealing money, paying someone off, not paying taxes, smuggling, or any other type of financial crime. The first step, placement, begins as soon as the illegal money is obtained. This is when the money is put into the economy. You can do this by depositing modest amounts of money into bank accounts or buying things with the money and then selling them.
The second step after placement is layering, which is meant to hide where the money came from. It is done by a series of complicated transactions, including as moving money from one account to another, sometimes even across borders, using shell companies, or buying costly goods. The goal is to separate the money from its illegal source and make it harder to find. A lot of the camouflage happens here, and it often happens between places with strict financial secrecy rules.
Finally, the tainted money gets to the point where it can be mixed in. The money is now back in the legal economy, but it’s pure money this time. The offender can now spend the money however they want—on business, real estate, or a luxury lifestyle—without anyone being suspicious. Integration closes the loop by letting filthy money enter the legitimate economy.
Big Money Laundering Scandals in India
India has seen a lot of big money laundering incidents in the past that involved famous people and a lot of money. These schemes show how corruption and flaws in the system have allowed illegal money transfers to thrive.
The 2010 Commonwealth Games (CWG) fraud, in which more than ₹70,000 crores were stolen, is the most well-known scam in recent history. People who were supposed to get money to help Indian athletes grow and improve instead got it through inflated contracts and kickbacks. Companies with more bureaucracy were preferred above those with greater quality at lower prices. Suresh Kalmadi was the Chairman of the Organising Committee at the time, and his close friends, like Lalit Bhanot and V.K. Verma was accused in the case. The defendants were additionally charged with criminal conspiracy, forgery, cheating, and other crimes under the Indian Penal Code, as well as several sections of the Prevention of Corruption Act.
The 2013 Saradha Group financial scandal was another well-known scam. It was a standard Ponzi scheme. The Saradha Group had taken in more than ₹2,500 crores from 1.7 million small investors in West Bengal, Assam, and other states by promising large profits. The investors didn’t know that the money they were getting back was coming from new investors. When the scheme fell apart, a huge investigation began. Sudipto Sen, the founder, was arrested and taken away with other political figures. The Supreme Court thereafter entrusted the inquiry to the Central Bureau of inquiry (CBI), which shows how big and severe the scam really is.
The Coalgate or Coal Allocation Scam (2012-13) showed that people were abusing their power when they gave out coal blocks. The Comptroller and Auditor General of India concluded that the government gave out 194 coal blocks without following competitive bidding rules between 2004 and 2009. This cost the public exchequer more than ₹1.85 lakh crores. The enquiries included high-ranking politicians and wealthy businesspeople. The Supreme Court then annulled all 214 coal block awards made after 1993. This showed how the procedure was not open and accountable.
The 2008 2G Spectrum Scam was another big financial scandal that shook the country. It involves selling the 2G licenses to telecommunications corporations for very low prices, costing the country ₹1.76 lakh crores. Time magazine called the case the second worst abuse of presidential power in the US after the Watergate incident, and it made headlines around the world.
The story of businessman Vijay Mallya and Kingfisher Airlines is perhaps one of the most well-covered money laundering instances in the last ten years. Mallya took withdrew ₹9,900 crores from Indian banks between 2007 and 2017. It is said that most of this money went to shell firms and tax havens outside of India. He put this money into private businesses, such an IPL cricket team and an F1 racing squad, while Kingfisher Airlines employees endured months without pay. Mallya ran away to the UK in 2016, and India has been attempting to bring him back ever since.
The Satyam Computer Services scam (2009), commonly dubbed as “India’s Enron,” was when founder Ramalinga Raju falsified records to make the company look like it was making ₹7,000 crores more in sales and earnings. It was a scam that used false information to trick investors, authorities, and the public for years until it was finally discovered. It was one of India’s greatest corporate frauds.
Indian banks have also been involved in huge money laundering scams. The Punjab National Bank (PNB) scam might have been the biggest of these. Between 2007 and 2017, diamond dealer Nirav Modi and his uncle Mehul Choksi stole ₹11,400–13,500 crores from the bank. They got huge loans from international branches of Indian banks by making fake Letters of Undertaking (LoUs) with the help of bank employees. In 2018, the fraud was discovered, and many people were arrested, with India asking for their return. Nirav Modi was found in London, but Mehul Choksi ran away to Antigua.
The ABG Shipyard case, which came to light in 2022, was another huge bank fraud. ABG Shipyard in Gujarat tricked a group of 28 banks out of more than ₹22,842 crores. The CBI said that money raised through loans was allegedly funnelled to linked persons and offshore companies, and that there was widespread theft and criminal breach of trust. Banks including as ICICI, SBI, IDBI, and PNB were hit hard.
The Enforcement Directorate (ED) started another campaign against political corruption and illegal assets in 2022. The National Herald case made headlines when the ED called in Congress leaders Rahul Gandhi and Sonia Gandhi. The case was about Young Indian Ltd.’s purchase of Associated Journals Ltd. and the alleged illegal transfers of assets that took place during the deal.
Bhupinder Singh Honey, the nephew of former Chief Minister Charanjit Singh Channi, was involved in the Punjab sand mining scam. More than ₹10 crores worth of cash, gold, and other expensive things were taken. Honey was charged under parts of the Prevention of Money Laundering Act (PMLA), and investigations proved that bribes were paid for government jobs.
The SSC recruitment scandal in West Bengal included Partha Chatterjee, a former education minister, and his aide Arpita Mukherjee. The ED took more over 50 crores in cash and jewellery from her house. Chatterjee disputed all of the claims, but the investigations are still going on.
Lastly, Congress MP Karti Chidambaram was also involved in the Chinese Visa scandal, which entailed bribing people to get visas for Chinese citizens. The PMLA is also looking into it, and it has led to more surveillance of money that moves across borders.
Conclusion
One of the biggest problems for the world’s financial system is money laundering. It has effects that go beyond the economic, political, and social spheres. It is a way for criminals to hide where they got their unlawful money so that it seems like clean money. Money laundering hurts the integrity of financial systems, puts national security at risk, and makes a lot of crimes possible, like terrorism, drug trafficking, corruption, tax evasion, and human trafficking.
Money laundering is not limited to one country; by definition, it happens across borders. As the globe becomes more connected, illegal money may be sent across borders in seconds. Because of this, it is necessary for countries to work together on both preventive and punitive measures. International groups like the Financial Action Task Force (FATF) have set up standard ways to fight money laundering and the funding of terrorism. Most countries have made these standards part of their laws, and they are very important for making sure that everyone fights this crime in the same way. However, degrees of implementation and compliance vary greatly, leaving gaps that thieves might take advantage of. This kind of unfairness shows why anti-money laundering (AML) laws need to be more strictly and consistently enforced in all areas.
India’s Prevention of Money Laundering Act, 2002 (PMLA) and other laws at the national level have been very important in the fight against this crime. The Act allows law enforcement to seize the money made from crime and gives them the right to investigate and prosecute perpetrators. Legal complications, delayed procedures, and the need to find a balance between enforcement and protecting people’s rights are all still problems for efficient prosecution. The PMLA has also grown to cover many more predicate crimes over time, but critics say that in some circumstances, its use has gone beyond its main purpose.
Technology has made it easier and harder to fight money laundering. On the one hand, digitalising finance has made it easier to track and manage things. On the other hand, it opened up new ways for criminals to launder money, such as through cryptocurrency, cyber banking, and shell corporations. To stay up with new ways of laundering money, law enforcement and regulatory organisations must continuously change their strategies and spend money on using technology. More and more, people are using artificial intelligence, blockchain, and data analytics to keep track of transactions, do due research on customers, and find activities that look suspect.
This fight also needs a lot of help from public information, business social responsibility, and ethical financial practices. Since they are the first line of defence, banks and other financial institutions must follow the rules for Know Your Customer (KYC) and Suspicious Transaction Reporting (STR). Lawyers, accountants, and real estate agents are typically middlemen, thus their jobs need to be controlled to stop them from being involved in money laundering without knowing it or on purpose.
Lastly, money laundering is a worldwide problem that affects everyone and can’t be solved on its own. It needs a coordinated response that brings together strong legal institutions, strong prosecution, international cooperation, and new technical solutions. The key to keeping the economy stable and the rule of law is a financial sector that is open, clear, and well-regulated. A lot has been done, but we need to keep being vigilant, creative, and working together to break the loops of crime and corruption that money laundering keeps going.
References
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- S. Dutta, Smurfing Schemes in India, 11 J. ECON. CRIME 77, 79-80 (2020).
- N. Patel, The Hawala System: An Indian Perspective, 10 J. ASIAN L. 89, 92-93 (2022).
- Reserve Bank of India, Circular on KYC Norms (2023), https://rbi.org.in (last visited May 30, 2025).
- S. Chatterjee, Judicial Trends in AML Enforcement, 9 INDIAN L. REV. 150, 153-54 (2022).
- Ministry of Corporate Affairs, Shell Companies and AML (2023), https://mca.gov.in (last visited May 30, 2025).
- S. Bose, AML Challenges in the Digital Age, 21 J. CYBER L. 66, 68-69 (2021).
- Directorate of Enforcement, Prosecutions under PMLA (2023), https://enforcementdirectorate.gov.in/prosecutions (last visited May 30, 2025).
- FATF, Guidance on Beneficial Ownership (2022), https://www.fatf-gafi.org (last visited May 30, 2025).
About author
Anannya Mohanty , a law student at Symbiosis Law School, has a keen interest in Alternative Dispute Resolution, Corporate Law, and Constitutional Law. With a strong passion for legal research and writing, Anannya Mohanty actively engages in exploring diverse legal issues and emerging trends. Always enthusiastic about opportunities that involve in-depth analysis, they believe that consistent legal writing significantly enhances knowledge, sharpens critical thinking, and builds a deeper understanding of complex legal frameworks essential for a well-rounded legal education.