Misuse of Money


The Enforcement Directorate (ED) has been in the news these days more than the crime and criminals. The Government under its current regime has been extensively using the services of the Enforcement Directorate in numerous cases. The number of raids by this particular law enforcement agency has increased as much as 27 times since 2014, as compared to the same from 2004 to 2014. The agency has conducted as many as 3,010 raids attaching cash and property worth INR 99,356 crore in the latest 8 years. While these searches to investigate cases of money laundering show the Government’s commitment to preventing money laundering and improving systems for gathering financial intelligence, the conviction rate of the agency as compared to the number of raids it conducts, portrays a quite different picture. This is one reason why many have also raised questions about the functioning of the Enforcement Directorate. In this article let’s understand what is enforcement directorate and how it differs from the other legal agencies.

What is Enforcement Directorate (ED)?

In 1956, an ‘Enforcement Unit’ was formed under the Department of Economic Affairs for handling Exchange Control Laws violations under the Foreign Exchange Regulation Act (FERA). This was the first version of the Enforcement Directorate. Thereafter, the agency has become a multi-dimensional organisation and investigates various economic offences. When any offence is registered by a local police station with proceeds of crime over and above INR 1 crore, the police officer forwards the details to the Enforcement Directorate and involves them. The Directorate of Enforcement (ED), commonly known as the Enforcement Directorate, is headquartered in New Delhi. It has five regional offices – Mumbai, Chennai, Chandigarh, Kolkata, and Delhi. The agency also has numerous zonal and sub-zonal offices.

When money is earned through illegal means such as smuggling, trafficking, illegal sales, bribery, embezzlement, insider trading, prostitution rings, fraud schemes, theft and robberies, etc. the proceeds become tainted and are termed black money. The criminals usually park the money somewhere, so they are not answerable to anyone in the country. When such money is converted to appear legitimate, the conversion is known as Money Laundering. According to the Reserve Bank of India, there are three broad ways of laundering money – 1) Placement which refers to the physical disposal of bulk cash proceeds derived from illegal activity, 2) Layering which refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions, concealing the audit trail with anonymity, 3) Integration which refers to re-injection of the proceeds into the economy in a way that they re-enter the financial system as normal business funds.

Simply, the illegal money is taken away from the source it was earned from and then brought back into the financial system through small deposits. These funds move across several accounts through several banks across different locations. Numerous layers of transactions are built to disguise the source of money. Ultimately, the money is used to buy real assets like property, and gold and the gains are made on these assets. At times, shell companies are created and money is moved through them by making fake bills and invoices. Structuring, Bulk Cash Smuggling, Cash Intensive Businesses, Trade-based laundering, Shell companies and trusts, Round-tripping, Bank Capture, Gambling, Real Estate, Black Salaries, Fictional Loans, Hawala, False invoicing, etc. are the common methods of money laundering. The enforcement directorate works to recover all such money and prosecute the people involved.

What differentiates the local police and the Enforcement Directorate (ED)?

When a bank is robbed, the local police station will be the first authority to investigate the crime. However, as the investigation goes on, if it is learnt that the thief took all the money and kept it in his house, neither spending it nor transferring it, then the crime is only theft and the Enforcement Directorate won’t interfere as the amount has been already seized by the police. However, if the stolen amount is used to purchase properties and the illegal money is somehow legalised, or if the money is given to someone else to buy properties in different parts of the country, then the money is laundered. This is where the Enforcement Directorate steps in, to look into the layering, and thereafter attachment of properties to recover the money. If the stolen money can be recovered as it is, the police officers are involved. However, if the money has been converted or transferred, the enforcement directorate is involved to recover the money either by attaching the properties or assets involved, or the other properties and assets of the people who committed the crime.

What are the functions of the Enforcement Directorate (ED)?

The Enforcement Directorate operates to achieve the objectives of four important economic laws in India.

  1. The Prevention of Money Laundering Act, 2002 (PMLA) – The PMLA was enforced to prevent money laundering and allow the seizure of property or arresting of those involved in money laundering and related matters. The Enforcement Directorate enforced the requirements of this law by conducting investigations in purchases of assets acquired from illegal funds, attaching illegal assets, and ensuring the prosecution of perpetrators.
  2. The Foreign Exchange Management Act, 1999 (FEMA) – The FEMA law was introduced as a citizenship law to facilitate foreign exchange and payments, and for the preservation of the Indian foreign exchange market. The enforcement directorate is in charge of investigating the charges of violations of foreign trade laws and regulations and prosecuting and fining the guilty. Earlier, the Foreign Exchange Regulation Act, 1973 (FERA) used to provide the powers and control the foreign exchange in India, however, in 1999, a new law was brought in the form of FEMA which replaced the FERA law.
  3. Refugee Economic Crimes Act, 2018 (FEOA) – The FEOA law was enacted to prevent economic offenders from escaping India’s legal process by staying outside the jurisdiction of the Indian Judicial System. This law allows the Enforcement Directorate to attach the buildings of refugee economic criminals who escape India and also authorizes their arrest and seizure of their property.
  4. Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA) – The Enforcement Directorate also works as a funding agency under the COFEPOSA law. It is empowered to fund preventive detention cases related to FEMA violations.

How does the Enforcement Directorate operate?

The Enforcement Directorate has the power to survey and search and seizure under the PMLA law. The Enforcement Directorate is powered to directly carry out search and seizure without calling the person for questioning. They need not summon the person first and then start with the search and seizure. The Enforcement Directorate searches for property and seizures of money and documents, once the officials have investigated and found that money has been laundered. The authorities decide based on the search and seizure whether the people involved need to be arrested or not. After arrest, the Enforcement Directorate has to file the prosecution complaint or charge sheet. In respect of attachments, the Enforcement Directorate is required to submit an attachment order to the Courts for further action. These courts are Special Courts under the Prevention of Money Laundering Act. These courts take the proceedings further and adjudicate the case.

The properties attached are provisional, meaning the same is not sealed entirely and can be continued to be used. If properties include factories, hotels, restaurants, etc. which are involved in businesses set up in India, they are allowed to continue operating as before including tax consultancy services. It is the title of the property which cannot be transferred or sold until the case is decided. For example, in 2018, the ED attached the Holiday Inn Hotel at Delhi’s Airport in connection with the Air India case. However, the hotel continues to operate as usual while the case continues. The profits earned during such period also go to the Government, if the court decides in favour of the ED. Movable assets such as vehicles are sealed or transferred to Government warehouses. Jewellery and artefacts are sealed and kept with the State Bank of India. The court can order on an interim basis for the proceeds to be distributed to the victims of the crime. For example, the proceeds recovered from Vijay Mallya have been distributed to the banks while the case is still not decided.