Taxmann’s Guide to Foriegn Exchange Management Act, 1999

FEMA and Money Laundering

Chapter VI

6.1 Are the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA) connected ?!

Apparently, certain lobbies were preventing FEMA replacing FERA unless and until PMLA was passed. Some persons believed that while FX offences would attract lower penalties under FEMA, they would be covered by PMLA.

This belief does not seem to be correct.

6.2 The purpose of PMLA is to prevent the mafia from investing their wealth into the economy and acquiring control over the economy. Converting their dirty wealth into official wealth is called “Money Laundering”.

The dirty money is called “Proceeds of Crime” (POC).

Anything becomes Proceeds of Crime if the crime alleged is a crime specified in the schedule to the PMLA. If an offence is a crime under a particular law which is not listed in the schedule; then the gains of that offence are not POC. They are not dirty money as far as PMLA is concerned.

6.3 For example, Mr. A does not pay income-tax on his income of say Rs. 1,00,000. The entire amount is black money. He has gained Rs. 33,333 in income-tax. However, an offence under Income-tax is not covered in the PMLA schedule. Hence neither Rs. 33,333 nor Rs. 1,00,000 is covered by PMLA. Any attempt in converting the black money into white is NOT money laundering.

6.4 Similarly, sales tax, excise or octroi evasion is not covered under PMLA.

6.5 Similarly, offences under FEMA are not listed in the PMLA schedule. This means that an offence under FEMA is not covered by the PMLA.

This was the position right from the stage of introduction of PMLA bill, 1998.

In other words from inception, the two laws are independent.

6.6 There is a specific reason for selecting only the most violent / important crimes under PMLA. The mafia dealing in murder, extortion, terrorism and prostitution have immense liquid wealth. With this power of wealth, they get best of the professional and physical (arms and goondas) support. This help can prevent action being taken against the mafia. Hence PMLA gives massive powers of arrest and deeming provisions to the statutory authority under PMLA.

Under normal circumstances, such massive powers have to be restricted, to be used only against the most dangerous criminals. The powers are draconian. If they are used against ordinary criminals, they loose their significance and sharpness. Corrupt statutory officers can be more dangerous than criminals - as far as the common man is concerned.

To prevent such a crisis, the list under PMLA schedule has to be kept a careful, short list.

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