Prosecution Of Illegal Cross-Border Money Transfers
1. Legal Framework for Cross-Border Money Transfers
Illegal cross-border money transfers generally involve moving money out of a country without following the regulatory requirements, often linked to:
Money laundering
Tax evasion
Terrorist financing
Foreign exchange violations
Key laws in India (for example, similar principles apply globally with local variations) include:
Foreign Exchange Management Act (FEMA), 1999 – Governs cross-border transfers and foreign exchange transactions. Violations can lead to penalties, confiscation of assets, or prosecution.
Prevention of Money Laundering Act (PMLA), 2002 – Criminalizes laundering of money and provides powers for attachment and prosecution.
Indian Penal Code (IPC), 1860 – Sections related to cheating (Sec. 420), criminal breach of trust (Sec. 406), and criminal conspiracy (Sec. 120B) may apply in cases of fraudulent transfers.
Income Tax Act, 1961 – Violations of tax regulations in cross-border transfers can lead to prosecution.
2. Case Laws on Illegal Cross-Border Money Transfers
Here are five detailed cases illustrating prosecution and legal reasoning:
Case 1: Enforcement Directorate vs. Satyam Computer Services (FEMA Violation Case)
Facts:
Satyam Computer Services, a major IT company, repatriated funds to overseas subsidiaries without proper FEMA approvals. The funds were routed through complicated offshore structures.
Issue:
Whether the outward remittance violated FEMA provisions, and whether the ED could attach assets.
Court Decision:
The Madras High Court upheld the ED’s action. The court ruled that any remittance without RBI permission or proper FEMA compliance constitutes a contravention, and ED can attach such funds. The decision emphasized that corporate entities must strictly follow procedural requirements, even if transactions are not “fraudulent” in intent.
Legal Principle:
Non-compliance with FEMA in cross-border transfers can lead to prosecution and attachment of funds, regardless of intent to defraud.
Case 2: State vs. Mehul Choksi & Nirav Modi (PMLA + Money Laundering)
Facts:
Mehul Choksi and Nirav Modi were involved in fraudulent loans and illegal money transfers abroad through shell companies and fraudulent letters of undertaking from Punjab National Bank.
Issue:
Whether the international transfers and conversion of funds into foreign assets violated Indian laws.
Court Decision:
The Supreme Court of India allowed the Enforcement Directorate to attach properties under PMLA. The court emphasized the use of Look-Out Circulars (LOCs) and coordinated international action to prevent dissipation of illicit funds abroad.
Legal Principle:
Illegal cross-border transfers as a part of money laundering schemes attract criminal prosecution under PMLA and IPC provisions.
Case 3: S. Ramanathan vs. Director of Enforcement (Foreign Exchange)
Facts:
A businessman allegedly remitted foreign currency abroad without RBI approval through hawala channels.
Issue:
Whether using informal channels (hawala) for cross-border transfers constitutes a violation.
Court Decision:
The Bombay High Court held that using unofficial channels for foreign remittance violates FEMA. The court upheld ED’s powers to seize money and prosecute under Section 13 of FEMA.
Legal Principle:
Even if funds are legally earned, using unapproved channels for cross-border transfer is an offense.
Case 4: State vs. Ketan Parekh (Securities & Cross-Border Funding)
Facts:
Ketan Parekh, a stockbroker, used offshore accounts to move funds illegally, violating securities and foreign exchange regulations.
Issue:
Whether transfer of funds to offshore shell companies for investment constitutes illegal remittance.
Court Decision:
The Delhi High Court held that unauthorized movement of funds abroad constitutes FEMA violations, and criminal prosecution can proceed under both FEMA and PMLA.
Legal Principle:
The nexus of cross-border illegal remittance and financial fraud invites dual prosecution under regulatory and criminal statutes.
Case 5: Directorate of Enforcement vs. UniCredit Bank (Bank Facilitating Illicit Transfer)
Facts:
An international bank was accused of facilitating illegal outward remittances by corporate clients in India, bypassing RBI reporting requirements.
Issue:
Whether banks can be held criminally liable for aiding in illegal remittances.
Court Decision:
The Kerala High Court ruled that financial institutions have a statutory duty to comply with FEMA and report suspicious transfers. Failure to do so can result in penalties and prosecution.
Legal Principle:
Banks are vicariously responsible under FEMA for illegal transfers. This ensures stricter scrutiny on cross-border transactions.
3. Key Takeaways
FEMA Compliance is Mandatory: Unauthorized remittances can attract severe penalties.
PMLA Prosecution is Common: Illegal funds transferred abroad often trigger anti-money laundering proceedings.
Bank Accountability: Banks and intermediaries facilitating illegal transfers can face prosecution.
International Cooperation Matters: Cases like Choksi/Modi show that extradition and global tracking are crucial.
Criminal Intent Not Always Required: Even unintentional violations of FEMA can lead to prosecution.
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