All you need to know about the Law relating to Money-Laundering in India

The Indian Government’s crackdown on black money continues unabated and a spate of prosecutions have been launched in the recent times under the Prevention of Money Laundering Act, 2002. This article is an attempt to demystify the law relating to money laundering in India and provide a brief overview of its scheme and operation.

1. WHAT IS MONEY LAUNDERING?

Investopedia[1]defines money laundering as The process of creating the appearance that large amounts of money obtained from serious crimes has originated from a legitimate source.”

Illegal arms sales, smuggling, and other organized crime, including drug trafficking and prostitution rings, can generate huge amounts of money. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering. The money so generated is tainted and is in the nature of ‘dirty money’. Money Laundering is the process of conversion of such proceeds of crime, that is to say the ‘dirty money’, to make it appear as ‘legitimate’ money.[2]

1.1 How is Money Laundering done? The usual modus operandi

A case of money laundering- ostensibly – appears to be an above-board legit financial transaction, however, the criminality underneath is hidden usually by a three stage process:

  1. The first stage is when the crime money is injected into the formal financial System. This is called ‘placement’;
  2. In the second stage, money injected into the system is layered and spread over various transactions with a view obfuscate the tainted origin of the money. This process is called ‘layering’;
  3. In the third and the final stage, money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving as clean money. This is called ‘Integration’.

1.2 Common forms and methods of money laundering

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 are some of the common methods of money laundering.

Indian Legal Regime on Money Laundering

In India, the specific legislation dealing with money laundering is the Prevention of Money-Laundering Act, 2002 (for short ‘PMLA’). The law was enacted to combat money laundering in India with the following objectives :

  • To prevent and control money laundering;
  • To provide for confiscation and seizure of property obtained from laundered money; and
  • To deal with any other issue connected with money-laundering in India.

Apart from the provisions of PMLA, there are other specialized provisions such as RBI / SEBI / IRDA Anti-Money Laundering regulations. Many of these authorities are bound to provide suspicious transaction reports, which are, in-turn, analyzed by Financial Intelligence Units established by the Central Government.

WHAT IS THE LEGAL DEFINITION OF MONEY LAUNDERING?

3.1 Money Laundering

The offence of ‘Money Laundering’is defined under Section 3 of the PMLA, which, for ease of understanding, can be deconstructed as:

Whosoever:

  • directly or indirectly,
  • attempts to indulge, or
  • knowingly assists, or
  • knowingly is party, or
  • is actually involved in any process, or
  • activity connected,

with the Proceeds of Crime, including its:

  • Concealment,
  • Possession,
  • Acquisition or use; and
  • Projecting or Claiming it as Untainted Property

shall be guilty of offence of Money-Laundering.

It is clear that the section is most widely worded and almost any kind of dealing with the proceeds/fruits of crime, is brought within the purview of the section and made culpable.

3.2 ‘Proceeds of Crime’

An understanding of the phrase ‘Proceeds of Crime’is crucial to the understanding of the crime of Money Laundering. The offence of money laundering (defined u/s 3 and punished u/s 4 PMLA) is attracted only when the laundered property falls within the definition of ‘proceeds of crime’.

To understand what is meant by ‘Proceeds of Crime’, one has to turn to Section 2(u) of PMLA, which provides that – ‘proceeds of crime’ means and includes:

  • Any property derived or obtained
  • Directly or indirectly
  • By any person
  • as a result of criminal activity
  • relating to a ‘scheduled offense’ or
  • the value of any such property

To further add teeth to this provision, the amendments made through Finance Act of 2015 has further widened the definition of proceeds of crime and included within its ambit not only the specific property (which is the subject matter of money laundering) or its value, but also the property-equivalent in value held within the country (in a situation where property which is the ‘proceed of crime’ is taken or held outside the country). Such properties are also included within the definition of ‘proceeds of crime’. This principle of equivalence has been introduced by the Finance Act, 2015 for the first time.

To illustrate, if a person X has been accused of having proceeds of crime in country X, in that situation, his assets in India of the same value may qualify as ‘proceeds of crime’, even though these assets per se are not the ‘proceeds of crime’ or in any way connected to it. This has been done with a view to enable action in those cases where ‘proceeds of crime’are taken or held outside the country and to allow action to be taken for attachment of equivalent asset located within the country. This step appears to have been taken in view of the increasing internationalization of crime. However, this gives rather wide and unguided powers of attachment to the authorities under the Act, which may be exercised arbitrarily.

The Interconnectedness of PMLA and ‘scheduled offence’

A reading of the above definition of ‘proceeds of crime’ also makes one more thing clear, that is extremely crucial to an understanding of the offence of Money Laundering, which is that the offence of Money Laundering is not an independent crime; it depends upon another crime, which is known as the ‘predicate offence’or ‘scheduled offence’, the proceeds of which are made the subject matter of crime of money laundering. The world over, countries include almost all serious crimes as predicate crimes for the purpose of money laundering offence, with a view to widen the ambit of prosecution.

Though it may sound rather odd, but there is some authority to hold that the offence of money laundering can be prosecuted independently of a predicate or a scheduled offence[3]. In other words, theoretically it is possible to have a PMLA prosecution even though there is no prosecution for a scheduled offence. However, it since the offence of money laundering presupposes the existence of a scheduled offence – it is hard to envision as to how such a prosecution may succeed.

The Madras High Court in R. Subramanian v. CBI by Inspectotr of Police & Anr[4], considered the questions whether trial by a PMLA Court would over-ride trial by a Court which would try the predicate offences, thus making the offence of money laundering triable along with the predicate offences. The proceedings with respect to the predicate offences, which were sought to be transferred to the Special Court, were under the Indian Penal Code, 1860 and Prevention of Corruption Act, 1988. On a reading of Section 44 of the PMLA, the Madras High Court held that the proceedings for the predicate offences are independent of the proceedings under the PMLA, with Section 44 giving the option only to the Authorised Authority to file an Application seeking to commit the case related to the predicate offence to the Special Court. It further held that main object of constituting a Special Court is only speedy trial of the offences of money laundering. Therefore, if a case’s chargesheet was filed in the Court specially dealing with the predicate offences, it cannot be transferred to the Special Court under PMLA merely because the predicate offence was the basis of the offence of money laundering. Otherwise, all cases pertaining to predicate offences will have to be stayed if a complaint under PMLA is filed in the Special Court. The legislative wisdom in providing for an option of transfer of the case under Section 44 of PMLA was that it would be of the ultimate interest of the Prosecution before the PMLA Special Court to see that the charges for the predicate offences are proved so as to bring the amounts involved in the predicate offences under the ambit of ‘proceeds of crime’under PMLA. However, if investigation with respect to the predicate offences has been conducted by one specialized agency, for which a charge sheet has already been filed by it, then the evidence gathered by it cannot be same as the one gathered by the PMLA agency. Thus, it requires an independent assessment of evidence gathered during both the investigations, one for predicate offence and one as to how the money was laundered.

However, practically, an exoneration in the scheduled offence almost invariably leads to a discharge/acquittal in the PMLA case too since if the basis of scheduled offence is gone, a PMLA case logically cannot sustain as a PMLA case, simply put, is a scheduled offence + money laundering element added to it. Such exonerations are common. L&L team represented accused persons in the Aircel Maxis case where the Ld.Special Court discharged the accused in the Prevention of Corruption Act case (Aircel Maxis Telecom Case) which led to a discharge in the PMLA case too. 

The conundrum surrounding “value of any such property”

The phrase “value of any such property” featuring in the penultimate part of the definition of Proceeds of Crime is subject matter of much debate and little interpretation.

As far as the enforcement agencies are concerned, they construe the phrase value of any such property to mean the property of equivalent value, which in essence would mean that if the enforcement agency is unable to trace the proceeds of any crime to its last monetary form, it can go ahead and attach any property of equivalent value, which may have even been acquired prior to the commission of scheduled offence.

This, in our opinion, appears to be an incorrect reading of the phrase especially when the recent amendment (2015) distinctly uses the phrase “the property equivalent in value” though in the context of a property taken outside India. The intention of the legislature in using two different phrases in the same definition could not be clearer, therefore, the phrase “value of any such property” has to be construed / read in the context that it has been used and not as a synonym for phrase “the property equivalent in value”.But we may need to wait for an authoritative pronouncement or a course correction before that happens.

For instance, X is alleged to have received proceeds of crime i.e. Rs. 100 and X utilizes the said 100 Rupees to buy goods/products that were consumed by X and its family. In such an event, the investigating authority while relying on the term “value of such property” cannot go ahead and attach the computer of X (which may have been purchased before the 100 Rupees was actually received by X). This is the argument and the only interpretation that would be due process compatible.

In the next section we deal with the Schedule and the list of predicate offences.

WHAT ARE THE DIFFERENT SCHEDULED/PREDICATE OFFENCES WHICH ENTAIL PROCEEDINGS UNDER PMLA?

4.1 List of Offences

Under PMLA, commission of any offence, as specified in the Part A to Part C of the Schedule of PMLA will attract the provisions of PMLA. Some of the Acts and offences, which may attract PMLA, are enumerated herein below:

  • Part A enlists offences under various acts such as : Indian Penal Code, 1860 (including but not limited to offences against Property such Cheating, Forgery, Counterfeiting, Fraud, murder etc), Narcotics Drugs and Psychotropic Substances Act 1985, Prevention of Corruption Act 1988, SEBI Act 1992, Customs Act 1962, Foreigners Act 1946, Arms Act 1959, Antiquities and Art Treasures Act 1972, Copyright Act 1957, Trademark Act1999, Wildlife Protection Act 1872, Information Technology Act, 2000, Companies Act, 2013, Prevention of Corruption Act, 1988 amongst others.
  • Part B offences (offence under the Customs Act), provided the value of property involved is more than one crore rupees or more[5];
  • Part C deals with trans-border crimes, and reflects the commitment to tackle Money Laundering across International Boundaries.

Though the Code of Criminal Procedure governs the procedural aspects of prosecution, there are marked deviations from the standard procedure considering the special nature of the offence (including its cross border character) and slightly different process is envisaged. The offence is cognizable which means arrest can be made without a warrant.[6]There is a specialized investigative body for investigation of these offences. The Directorate of Enforcement in the Department of Revenue, Ministry of Finance is responsible for investigating the offences of money laundering under the PMLA while the a long list of officers are empowered and mandated to assist the authority in the inquiry[7]. Investigation usually begins with the registration of an Enforcement Case Information Report (also known was ECIR) which sets the investigation into motion.

This authority is empowered to carry out interim measures such as survey, search, seizure and arrest of the accused. Similarly, if an asset is found to be the proceeds of crime, the same can be confiscated and appropriated by the Government.

The ultimate object of seizure under Section 5 is provisional attachment of property, so as to prevent destruction of evidence which in turn may be produced in criminal proceedings. Upon attachment, the copy of the order by which the property was attached is sent to the Adjudicating Authority within a prescribed period.

Other authorities:

Financial Intelligence Unit – India (FIU-IND)under the Department of Revenue, Ministry of Finance is the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

The predicate/scheduled offences are separately investigated by agencies mentioned under those acts, for example – the local police, CBI, customs departments, SEBI or any other investigative agency, as the case may be.

After investigation is complete for the offence of money laundering, a complaint is filed by the investigating authority before the Special Court, where the trial for the offence actually takes place.

Since the offence of Money laundering is inextricably connected with the predicate offence, 2013 amendments to the PMLA provide that the trial for the predicate offence as well as offence punishable under Section 4 shall be conducted by the Special Court.If court which has taken cognizance of the scheduled offence is other than the Special Court (which has taken the cognizance of the complaint of the offence of money laundering under sub-clause (b), it shall, on an application by the authority authorized to file a complaint under this Act, commit the case relating to the scheduled offence to the Special Court and the Special Court shall, on receipt of such case proceed to deal with it from the stage at which it was committed. 4

As opposed to this, the process relating to attachment of property (including its confirmation) is dealt with by the Adjudicating Authority established under the Act.

Actions that may be initiated against person laundering money

  • Attachment of property under Section 5, seizure/freezing of property and records under Section 17 or Section 18.
  • Persons (Individuals and/or juristic person such as a Company etc) found guilty of an offence of Money Laundering are punishable with imprisonment for a term which shall not be less than three years but may extend up to seven or even ten years (depending on circumstances) and shall also be liable to fine (no upper limits) [Section 4].5

Attachment of Property

The PMLA gives extremely wide powers to the authorities to attach properties suspected to be involved in Money Laundering. Section 5 of the PMLA authorises the Director or any other officer not below the rank of Dy.Director to attach property. This power is to be exercised if the authority, as specified above, has a reason to believe(and such reasons have to be recorded in writing to prevent arbitrariness), on the basis of material in their possession, that –

Any person is in possession of any Proceeds of Crime; and such Proceeds of crime are likely to be :

  • Concealed,
  • Transferred, or
  • dealt with in any manner

which may result in frustrating any proceedings relating to confiscation of such proceeds of crime.

If the aforesaid conditions are satisfied, the authority may by order in writing, provisionally attachsuch property for a period not exceeding 180 days from the date of order.

Under normal circumstances, presence of a complaint/police report against the accused for the predicate/scheduled offence, whether in India or abroad, is a necessary precondition for provisional attachment of property. This is, however, not an absolute pre-condition and in cases where immediate attachment is needed and non-attachment is likely to frustrate the proceedings, the Director or the Dy. Director, for reasons to be recorded in writing, may nevertheless go ahead with provisional attachment even with there being no prosecution qua the scheduled offence against the accused.

It may be noted that there is no provision for a prior notice of a provisional attachment and the same can come like a total bolt from the blue.

What happens post-provisional attachment ?

After provisional attachment, the Director or any other officer, has to file a complaint stating the facts of such attachment before the Adjudicating Authority, within a period of thirty days from such attachment.

Remedy

Thereafter, the person aggrieved by the provisional attachment may file his objections before the Adjudicating Authority. This is the remedy under the PMLA, however, an order without jurisdiction or suffering from any jurisdictional error may be challenged directly before the High Court by invoking Article 226 of the Constitution. The Courts have held that a mere mechanical noting that the property in question is likely to be concealed, transferred or dealt-with would not meet the requirements of Section 5(1) of the Act and such a non speaking order by a Director can be set aside in writ proceedings by the High Court if it is devoid of strong and cogent reasons6

CAN PROVISIONAL ATTACHMENT BE INVOKED AGAINST A PERSON NOT ACCUSED OF ANY SCHEDULED OFFENCE?

The answer is Yes. Provisional attachment can be invoked even against a person who is not accused of any ‘scheduled-offence’. A conjoint reading of Sections 2(s) and 2(u) reveals that reference made is to ‘any person’; this coupled with the purpose and intent of the Act, calls for a wide interpretation.

In fact, Section 5(1) second proviso specifically allows attachment of property in the hands of a third person even without there being a prosecution against that person under the PMLA. It provides that if the designated officer has reason to believe that the property in possession of such person is involved in Money-Laundering, and non-attachment will frustrate any proceedings under the Act, he can go ahead and attach the same. The essence of the matter being ‘freezing of tainted assets’ at the earliest.

However, even post attachment, the person may continue in the enjoyment of the property during the period of attachment but is prohibited from creating any third party interest in the property.

POST ATTACHMENT PROCEEDINGS.

We have already seen that after provisional attachment u/s 5 of the PMLA, the Director has to file a complaint before the Adjudicating authority. Section 8 of PMLA lays down an elaborate procedure for adjudication of a complaint under Section 5 of PMLA. It calls for a show cause notice to be issued to the offender/person from whom property has been seized, so as to give the person an opportunity to make a case against attachment/confiscation. Such a person, in order to avoid confiscation, can demonstrate the legitimate sources of his income, earning or assets, out of which or by means of which he has acquired the property attached, the evidence on which he relies and other relevant information and particulars, and to basically convince the authority as to why all or any of such properties should not be declared to be the properties involved in money-laundering and confiscated by the Central Government. Further, if any person, other than to whom a notice is issued, is claiming interest in the attached property, such a person has also been provided with an opportunity of being heard under the proviso to Section 8 (2). The Authority after giving him a hearing reaches a finding, which needless to state is open to challenge before the Appellate Tribunal.

If the Adjudicating Authority, after the enquiry, comes to the conclusion that any property is involved in money laundering, it can, by an order in writing, confirm the attachment of the property. Such attachment shall :

  1. continue during the pendency of proceedings relating to any scheduled offence before a Court; and
  2. become final after the guilt of the person is proved before the Special Court and order of such Court becomes final;
  3. after the confirmation of provisional order of attachment, the Director or any other officer authorised by him in this behalf shall forthwith take the possession of the attached property.

Essentially, once the provisional attachment is confirmed, the final fate of the property depends on the decision of the Special Court (trying the offence under the PMLA). If the offence under PMLA stands proved, the Special Court shall order confiscation of the property to the Central Government. If the Special Court reaches the conclusion, upon conclusion of a trial, that the offence has not taken place, it shall order release of such property to the person entitled to receive it.

Appeal against confirmation of Attachment

Decisions of the adjudicating authority of first instance can be appealed to the Appellate Tribunal created under the Act.

Adjudicating Authority and Special Court – Relative scope

It is to be noted that the Adjudicating Authority under this section is concerned with questions of continuation of attachment and/or retention of property involved in money laundering and not the trial of offence of money laundering or the scheduled offence, which function falls for a judicial trial by the Special Court.

Procedure before the Adjudicating authority | Nature of the proceedings.

The Adjudicating Authority has been given vast powers of discovery, inspection, compelling production of records as per S.11 of the Act. Section 11 spells out the powers of the Adjudicating Authority in discovery of facts, Section 50 does so in respect of a Director.

Needless to state, being a quasi judicial authority, both of them have to conform to the principles of Natural Justice.

As per established principles, following duties are imposed on quasi judicial authorities :- (i) A quasi-judicial authority ought not to make any decision adverse to a party without affording an opportunity of meeting the allegations made against him; (ii) The party whose rights are to be affected should be provided with the information upon which the action is raised and the affected party should have reasonable notice of the case which he has to meet/face. Of course, an opportunity is to be provided to the affected party which must be real, reasonable and substantial too; (iii) The affected party should have the opportunity of letting in/adducing evidence which he relies upon.

The proceedings by which adjudication for confirmation of the attached property, as per Section 8, take place are civil in nature. The legislative intent insofar as the adjudicating procedure being civil in nature is made clear by Section 6(15) of the PMLA, which states that the Adjudicating Authority is not bound by the procedure laid down by the Code of Civil Procedure, 1908.

But merely because the proceedings are Civil in nature would it tantamount to Adjudicating Authority being considered as a Court for the purpose of asserting client-attorney privilege?

The Supreme Court in Kranti Associates Private limited v. Masood Ahmad Khan[8]held that the National Consumer Disputes Redressal Commission (NCDRC) could be considered a Court since it had all the trapping of a Civil Court. Since which has powers similar to the Adjudication Authority under the PMLA)

The ‘trappings of a Civil Court’ test has however been called into question by the Supreme Court itself in an earlier decision in Associated Cement Companies Ltd v P. N. Sharma[9]where the Court has held that the test is really not decisive and has to be seen together with other considerations. Even the Gujarat High Court in Foziya Samir Godil v. Union of India[10]has held that the proceedings before the AA as civil proceedings ipso facts would not grant the AA a status of a Court.

If one, however, limits the analysis to the definition of ‘Court’ under Section 3 of the Indian Evidence Act for the limited purpose of applying Section 129, a different view can be taken.  Section 3 of the Act defines Court to mean ‘all Judges and Magistrates and all persons, except arbitrators, legally authorised to take evidence.’ The definition is not exhaustive, and the second half of the definition covers all authorities which are positively authorized to take evidence. It is, therefore, possible for even an Adjudication Authority under PMLA to be considered a Court for the purposes of Section 129.

This issue came up for consideration before the Supreme Court in State of M.P. v. Anshuman Shukla[11]where the Court held that the test to determine what will be a Court under the Indian Evidence Act is to ascertain whether the authority is empowered to examine witnesses after administering oath to them. Applying this test to the Adjudication Authority under the PMLA yields an affirmative answer to the question of it being a Court.

A perusal of the provisions of the PMLA clearly shows that it is empowered to take evidence. This can be seen from a reading of Section 11(1)(b) of the PMLA which states that the Adjudication Authority (AA) has the power to enforce the attendance of any person, including any officer of a banking company or a financial institution or a company, and to examine him on oath. Section 11(1)(d) provides that the AA may receive evidence on affidavits, which clearly shows that it is an authority legally authorized to take evidence. It follows from this that Section 129 of the Indian Evidence Act may apply to proceedings before the AA.

9A. Whether an accused can be called upon to disclose documents and give statements, or can he exercise the right to silence?

Sections 11(2) & 50(3) of the PMLA make it mandatory for a person so summoned by the adjudicating authority to attend in person and bound to disclose documents as may be required, and answer such questions as are put. For the purposes of these sections, the adjudicating authority is considered a ‘court’ andproceedings ‘judicial proceedings’.

Moreover, Section 50(1) prescribes taking of affidavits on oath with respect to discovery of facts.

On a plain reading, any person will include an accused person too. Now, whether the accused can be compelled to disclose documents and disclose facts is a serious question as it makes serious inroads into the constitutional right of silence of the accused and protection from self incrimination, as guaranteed under Article 20(3) of the Constitution. However, the law as it stands makes the statement recorded before the Investigating officer under PMLA admissible in evidence before the Court.7(This, it may be noted, is in stark contrast to any other criminal prosecution where statements given to Police during investigation are not admissible in evidence during trial).

POWERS OF THE ENFORCEMENT DIRECTORATE RELATING TO SEARCH, SEIZURE AND ARREST.

10.1 Search of premises

Section 17 gives wide powers of search and seizure to the investigating agency. If the investigating agency has reason to believe (and such belief should be recorded in writing) the commission of offence under the PMLA and possession of proceeds of crime, it can enter and seize property/records etc, make an inventory of the same. The seizure memo is required to be signed by two independent witnesses.

Whereas this section provides for search of premises, Section 18 provides for search of an individual.

10.2 Search of person

If the investigating authority has a reason to believe that a person has secreted about his possession, ownership or control of the proceeds of crime, in that case the person can be searched. Before the search of a person, as per his wish, the authority shall take the said person before a Gazette officer superior in rank to the authority or a Magistrate within 24 hours excluding the time of journey. This is the safeguard laid down in S. 18(4) of the PMLA, however, strangely there is no corresponding obligation on the investigating agency to inform the person about to be searched of this valuable right. Something analogous to a Miranda warning will be apposite here.

The property seized has to be forwarded to the adjudicating authority for further orders.

10.3 Arrest

The offence is cognizable which means arrest can be made without a warrant. Section 19 gives the authority power to arrest. Standard safeguards relating to arrest apply. Every person arrested has to be produced before the Magistrate within 24 hours (excluding time of journey). The provision also mandates that such arresting official has to forward a copy of such arrest memo with the material in his possession to the adjudicating authority in a sealed envelop as per the procedure prescribed.

Apart from these, the investigating officer may summon and record the statements of persons concerned (S.50 of PMLA)

RIGHT TO BAIL

Section 45 of the PMLA makes the offence of money laundering non-bailable, which means that a person arrested is not entitled to bail as a matter of right, and bail becomes a matter of discretion for the court. If the predicate offence provides for punishment more than 3 years, then there is an embargo on release on bail, unless either the offence concerns a child, woman, sick or infirm; if not, then bail can only be granted after hearing the Prosecutor and only after the court comes to the conclusion that “there are reasonable grounds for believing that he is not guilty of such an offence and that he is not likely to commit any offence while on bail”. Now this is an extremely tall order, especially having regard to the fact that the matter is usually at a preliminary stage when the question of bail is being decided. For a court to record a finding, at that stage, that there are no reasonable grounds for believing commission of the offence is an unnaturally high threshold. Usually the prosecution will prepare the case in such a way so that it contains the basic allegations and there is a very less likelihood of it being thrown out at the very outset. Once that is done, the court, at the stage of bail, will normally not be in a position to return a finding of non-guilt in favour of the accused.

This makes serious inroads into the right & presumption of innocence in favour of the accused. An accused is presumed to be innocent till his guilt is proved beyond reasonable doubts. Pre-trial incarceration is frowned upon by law, as it carries a substantial punitive content and has a stigmatic effect. Such incarceration is not only a denial of ‘due process’ but prejudices the accused in the preparation of defence of his case.

Secondly, if in a case, the court releases the accused on bail, in view of the above findings and at the same time frames charges against him and takes the matter to trial, would not the two findings be mutually destructive of each other. These are some of the major anomalies with this provision and a serious constitutional challenge can be mounted on this provision on the above grounds.

InNikesh Tarachand[12]case, the Supreme Court declared Section 45(1) of the Prevention of Money Laundering Act, 2002 is violative of Articles 14 and 21 of the Constitution insofar as it imposed two further conditions for release of a person on bail to already prescribed mechanism under the Code  of Criminal Procedure 1973 : one, of Public Prosecutor being given the chance of opposing the Application; and two, that the Court is satisfied that there are reasons to believe that the Accused is not guilty of the offence and will not commit it while on bail. One reason for the Supreme Court to hold this was that the twin conditions laid down do not relate to an offence under PMLA at all, but only to a separate and distinct predicate offence found under Part A of the Schedule. Thus, the twin conditions would have no nexus whatsoever with a bail application which concerns itself with the offence of money laundering.

However, by way of Section 208(e)(i) of the Finance Act 2018 (Act 13 of 201), the legislature amended Section 45(1) and substituted the phrase “punishable for a term of imprisonment of more than three years under Part A of the Schedule…”with “no person accused of an offence under this Actshall be released on bail or on his own bond unless…”. Thus, the twin conditions, in light of the rephrased first sub-clause, now have nexus to the offence of money laundering. This seems to have been done with a view to render it constitutionally permissible, however, this doesn’t address to the two other major infirmities with the provision. Even after this amendment,  the presumption of innocence/due process continues tobe undermined; this expects an accused, to, at the stage of bail, prove innocence, which is especially problematic givne the presumption of guilt (quote here)………… The new amendment does not cater to these concerns. Further, by way of this amendment, the twin conditions continue to be applicable for procurement of regular bail, while not being applicable in cases of procurement of anticipatory bail.

The Delhi High Court recently in Upendra Rai v. ED (see here) has held that the above amendments would not have the effect of resurrecting Section 45 of the PMLA and the higher threshold would not apply. Other high courts have taken a similar view.

CAN A COMPANY AND ITS DIRECTORS/MANAGERS/SECRETARIES BE ACCUSED OF OFFENCE UNDER PMLA ?

Section 70 of PMLA deals with offences by Companies. It states that where a person committing a contravention of any of the provisions of this Act or of any Rule, Direction or Order made there under is a Company (“company” means a body-corporate and includes a firm or other association of individuals), in that case: every person who, at the time the contravention was committed, was in charge of, and was responsible to the company, for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall also be liable to be proceeded against and punished under PMLA. This is an instance of what is known as ‘Vicarious Liability’ where liability for the acts of the company is also attributed on the individuals heading responsible positions in the company on the premise of them being the alter egos/nerve-centers of the company.

The possible defence and exception to this is for the individual to argue and prove that the contravention took place without his knowledge/despite all due diligence.

S.70(2) further provides that if the contravention has took place with the consent or connivance of, or is attributable to any neglect on the part of any Director, Manager, Secretary or other Officer of any Company, such Director, Manager, Secretary or other Officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

OBLIGATIONS OF BANKING COMPANIES, FINANCIAL INSTITUTIONS AND INTERMEDIARIES

Under Section 12 of PMLA, there is a mandate on all Banking Companies, Financial Institutions and Intermediaries to maintain records of all transactions, including information relating to transactions for a period of 5 years, in such manner as to enable the investigating agency/Court to reconstruct individual transactions and find out criminality. The aforesaid agencies are required furnish to the concerned Authorities under PMLA, all information relating to such transactions, whether attempted or executed; the nature and value of such transactions; verify the identity of its clients and the beneficial owner, if any; and maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

TRIAL OF PMLA OFFENCE AND SCHEDULED OFFENCE

Since the offence of Money laundering is inextricably connected with the scheduled offence, 2013 amendments to the PMLA provide that the trial for the predicate offence as well as offence punishable under Section 4 shall be conducted by the Special Court. If a Court which has taken cognizance of the scheduled offence is other than the Special Court (which has taken the cognizance of the complaint of the offence of money laundering under sub-clause (b), it shall, on an application by the authority authorised to file a complaint under this Act, commit the case relating to the scheduled offence to the Special Court and the Special Court shall, on receipt of such case proceed to deal with it from the stage at which it was committed. 9However, this by itself should not be construed to mean a joinder or clubbing of trial. The simultaneous trial in both the cases by the same court is an expedient to reduce delays. Needless to state, both the cases are independently tried and decided on the basis of evidence in each case. The trial of scheduled offence and PMLA offence is to be conducted by the same court – only for the sake of expediency.

The interconnectedness of PMLA and ‘scheduled offence’

It would be a truism that the offence of Money Laundering is inextricably linked with the scheduled offence and, logically, an exoneration in the latter should, by itself, lead to an acquittal/discharge for the offence of money laundering too. This view seems not only just and legal but also deserves to be adopted for its eminent common-sense, for if there is no scheduled offence, there cannot be any ‘proceeds of crime’ either, as the ‘crime’ in the phrase ‘proceeds of crime’ is nothing but the scheduled offence. In other words, the Special Court trying the PMLA case cannot conclude, without the scheduled offence being proved, that some property associated with that offence is tainted as ‘proceeds of ‘crime. For something to be ‘proceeds of crime’ there has to be a crime in the first place. Any other view would make the two judgments mutually inconsistent, absurd and contradictory. Therefore, an acquittal/discharge in the predicate/scheduled offence should ipso factolead to exoneration in the PMLA offence too. In fact, since it is the same Court which tries both the scheduled offence and the PMLA case (arising out of the scheduled offence), a discharge/acquittal in the scheduled offence itself leads to a discharge/acquittal for the PMLA offence too. A conclusive decision by the Hon’ble Supreme Court is required on the matter so as to settle the issue.

It may be noted that this provision cannot be construed to mean that the Enforcement Directorate (the investigating body under the PMLA) can investigate into the scheduled offences also. Investigation for each of the offences is to be done by agency(agencies) authorized under the respective acts. Investigation by an agency other than ED for an offence under PMLA may open the entire investigation (and its result) to challenge, this may however be subject to the assistance that the Enforcement Directorate can obtain under Section 54 of the Act.

EVIDENCE, PRESUMPTIONS AND BURDEN OF PROOF

Keeping in view the difficulty of investigation in complex cases like money laundering, PMLA makes a departure from the standard rule of presumption of innocence and raises certain presumptions. This is an application of the ‘doctrine of reverse burden’. Such provisions, needless to say, make the defence of a PMLA case quite challenging.

15.1 Presumption of property being tainted property

Section 24 of the PMLA casts the burden of proving that (alleged) proceeds of crime are not involved in Money Laundering on the Accused. This prima facie appears harsh, but on a deeper scrutiny it seems that this section will not relieve the prosecution of its responsibility of making a specific allegation that the monies that are allegedly being laundered are earned by committing a particular schedule offence or offences under the PMLA and are, therefore, proceeds of crime. The section cannot be read so as to obviate the requirement for the prosecution to prove these foundational facts. Any other view shall seriously undermine the fairness of the process, as one has to keep in mind that negative proof (proof of innocence, as opposed to proof of commission), by its very nature, is extremely difficult to be established. It is always easier to prove a positive, than a negative. The language of Section 24 (a) demonstrates that a person should be ‘charged’ for an offence under Section 3, in order for the presumption to follow. Charge has to be read to mean a specific charge and not a vague and omnibus allegation. However, once that charge is made, the accused will have justify that the property is not tainted with vice. This can be done by making it reasonably probable that the property is legitimately acquired by lawful means. He can disclose his sources of Income, Earnings or Assets, out of which or means by which he has acquired the property attached. As per fairly established principles of standard of proof, the accused does not have to prove all this to the hilt or beyond all reasonable doubt, but on a standard of preponderance of probability, that is to say, that it is more probable that the property is above board, than not.

15.2 Presumption in inter-connected transactions

Where proceeds of crime are layered through plural transactions, the intent to camouflage the source of the property as a derivative of criminality renders it difficult to identify the succeeding transactions as relatable to the initial proceeds of crime. It is for this reason and to effectuate the purposes of the Act that Section 23 incorporates the presumption that where money-laundering involves two or more connected transactions and one or more such transactions is/are proved to be involved in money-laundering, then for the purposes of adjudication or confiscation under Section 8, it shall, unless otherwise proved to the satisfaction of the adjudicating authority, be presumed that the remaining transactions form part of such interconnected transactions i.e., involved in money-laundering as well. (Section 23 of PMLA).

15.3 Presumption in cases of records/property found in possession of person

A presumption is raised that property/records/documents found, seized from the possession or control of a person actually belong to such person (from whom they are seized) and the contents of such records are true. Further, there is also a presumption as to the records being in the handwriting/signatures of the person from whose possession they are seized. Due to the operation of the presumption, the onus, once again, is on accused to rebut the same. (Section 22 of PMLA)

Extra-territorial application of PMLA

PMLA confers extra-territorial jurisdiction for prosecution of money laundering in cases in which there are implications of the offence being cross-border in nature. This can be so in cases when any proceeds of crime arising out of a predicate offence committed in India have been remitted or attempted to be remitted outside India, or when the predicate offence has been committed outside India and any proceeds arising out of that thereafter may have been remitted to India. PMLA allows for attachment and confiscation of assets of equivalent value in India or abroad whenever the asset constituting the proceeds of crime is taken and held abroad and cannot be forfeited.

PMLA empowers the Government the authority to enter into reciprocal arrangements with other countries for enforcing the provisions of PMLA, and for the exchange of information for the prevention of any offence under PMLA or under the corresponding law in force in that country or for investigation under PMLA. Up until today, the Indian government has executed Mutual Legal Assistance Treaties (MLATs) with 39 countries.

Possibility of compounding or Plea bargaining the offence under PMLA

The offence of money laundering under PMLA cannot be compounded (compromised) because CrPC does not specify offence of money laundering as a compoundable offence and there is nothing in PMLA to the contrary. As regards plea bargaining, the accused may apply for plea bargaining for PMLA offences punishable with up to seven years of imprisonment. Plea bargaining implies that, upon mutual agreement between the victim, the accused and the prosecution, the accused pleads guilty and the Court thereafter may impose a lenient sentence. Plea bargaining is impermissible for the scheduled offence relating to narcotics, since the same is punishable with 10 years’ imprisonment. Also, plea bargaining is impermissible for socio-economic offences[13]and it is quite possible that the government may in future notify the offence of money-laundering as a socio-economic offence owing to its very nature

Limitation period if any applicable to PMLA

PMLA does not specifically provide for a limitation period in relation to the offence of money laundering. Therefore, the general law of criminal procedure will apply. Under Section 468 of the CrPC, there is no limitation period for offences punishable with imprisonment of more than three years, hence, for offences punishable under the PMLA, there is no limitation period. ED, therefore, can initiate a prosecution for an offence of money laundering after any number of yers.

Even w.r.t the offences/enforcement action relating to Reporting Entities (“RE”)

There is no limitation period under the PMLA for Financial Intelligence Unit (FIU-IND) to bring an enforcement action for non-compliance by Res.

19. Cryptocurrency -PMLA interplay

There is no law with respect to the interplay between cryptocurrencies and their involvement in the offence of money-laundering. RBI’s circular dated April 6, 2018 (“RBI Circular”) banned all entities regulated by RBI which include banks, financial institutions, non-banking financial institutions, payment system providers, etc. from dealing in, or facilitating any dealings in, crypto-currencies. The Supreme Court of India has been approached to urge the executive wing to clarify the policy on legality of cryptocurrency in India, including for the stated concern that cryptocurrency use is in, or posses, violation of the PMLA. The constitutional validity of the RBI Circular has also been challenged. However, it may be noted that non-compliance with the Circular has not been made a scheduled (predicate) offence under the PMLA.

20 Fugitive Economic Offenders Act

 The Fugitive Economic Offenders Act, 2018 (“FEO Act”) provides for measures to deter FEOs from evading the process of law in India by staying outside the jurisdiction of Indian courts. An FEO is any individual against whom a warrant for arrest in relation to a Scheduled Offence, as provided for in the FEO Act (“FEO-scheduled offence”), has been issued by any Court in India, who has left India so as to avoid criminal prosecution; or being abroad, refuses to return to India to face criminal prosecution. The offence of money-laundering under the PMLA is an FEO-scheduled offence. The proceeds of crime in relation to the FEO-scheduled offence of money-laundering may be attached or confiscated as per a separate regime provided under the FEO Act, which is in addition to the PMLA regime itself.

Conflict between PMLA and Insolvency & Bankruptcy Code, 2016

Applicability of Moratorium

The Insolvency & Bankruptcy Code, 2016 (“IBC”) provides for a period of moratorium under Section 14, during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the defaulting debtor under the Code. However, in cases where a moratorium under IBC is already underway, an order by the Adjudicating Authority confirming the provisional attachment of property of the defaulting debtor is not debarred.[14] Insofar as the provisions of PMLA relate to proceeds of crime and the penalty under PMLA results in confiscation of property derived from laundering of money related to the criminal incidents, the moratorium under Section 14 of IBC may be inapplicable to proceedings under PMLA[15]; therefore, it appears that, the penal action under PMLA can operate simultaneously with the proceedings under IBC and either of the proceedings do not over-ride the other.

Co-existence of PMLA and IBC proceedings involving third party interest

PMLA conceives the possibility of creation of third-party interest even in untainted property by a person accused of money laundering with the ulterior motive “to frustrate” or “to defeat” the objective of law against money-laundering. However, there may be cases where the interest has been created in favour of a bona fide third party, with it having no association with either the scheduled offence or the offence of money laundering. In cases where the third-party had acquired interest in the untainted prior to the commission of the scheduled offence forming basis of money laundering proceedings, and the untainted assets are attached by the enforcement authority for the reason that these assets are equivalent in value to the tainted assets which were derived or obtained as a result of the scheduled offence, then a third-party having a legitimate interest may approach the Adjudicating Authority to seek its release. The release has to be sought by the third-party by showing that the interest in such property was acquired bona fideand for lawful (and adequate) consideration alongwith there neither being an intent to acquire the untainted property to frustrate the process of law nor the person claiming third party interest had any connection with the offence of money laundering. In this scenario if the third-party is a secured creditor and has initiated action as per law for enforcement of its interest, then the PMLA attachment, though being valid and operative, takes a back-seat, thus allowing the bona fide third-party secured creditor to enforce its claim. Post-disposal of the claim, the remainder of the value of the untainted property will be made available to the enforcement authority for the purposes of PMLA.[16]

In cases where the third-party interest was created at a time around or after the commission of the scheduled offence, then the bona fidethird party will have the additional burden to prove that it has exercised due diligence, having taken all reasonable precautions, at the time of acquisition of such interest. In both the cases, the authority which has the jurisdiction to entertain and inquire into claims of the third-party and consequently grant relief is either the Adjudicating Authority or the Special Court under the PMLA.

However, it must not be construed that the mechanism under IBC prevails over that of PMLA, for both the legislations having different objectives. Proceedings under PMLA and IBC co-exist, each to be construed and enforced in harmony, without one being in derogation of the other.

The conflicting issues arising between IBC and PMLA have been laid to rest by the Insolvency And Bankruptcy Code (Second Amendment) Bill, 2019 which has added a new provision, Section 32A. It provides immunity to a Corporate Debtor undergoing insolvency from any liability for an offence committed before the insolvency process. More importantly from a PMLA angle, it ringfences the assets of such Corporate Debtor from any action in respect of an offence committed prior to the commencement of the insolvency process. An explanation to the provision clarifies that ‘action’ includes attachment, seizure, retention or confiscation of such property. It is amply clear that the amendment seeks to remedy the mischief of the ED throwing a spanner in the works by attaching assets which were contained in an Information Memorandum and formed the basis of a Resolution Applicant’s (RA) bid. The amendment will hopefully provide the insolvent company a chance to start with a clean slate and increase the chance of more bids from RA’s who will not have the Damocles sword of attachment hanging above them.

Having said that, the proposed amendment should not be perceived as providing a safety route to unscrupulous promoters since Section 32A itself disallows such immunity if the assets are transferred to a previous promoter of the company or a related party or to anyone who the Investigation Authority may perceive to have abetted the crime or conspired in the commission of the offence. Further, the IBC contains strong disqualification provisions which prevent a promoter from bidding for his company again by coming in through a revolving door. Therefore, the proposed amendments have struck a balance between the legitimate expectation of the RA who has bid for the company’s assets with a legitimate expectation of gaining them and the authority of the ED to probe and punish for offences under the PMLA. The proposed amendment should also encourage the ED to go after the assets of the promoters especially when PMLA does not limit attachment to just the tainted assets but extends it to property equivalent in value. This will protect both the public interest in bringing the offenders to book and the interests of the RA’s in bidding for a Corporate Debtor.

PUNISHMENT UNDER PMLA

Section 4 of PMLA prescribes the punishment for Money-Laundering as under:

  • Rigorous Imprisonment for a term
  • which shall not be less than 3 years, but
  • which may extend to 7 years/10 years, and
  • shall also be liable to fine.

A notable feature is that there is no upper limit on the fine that may be imposed for an offence under the PMLA. The obvious intent is for the fine imposed to be commensurate to the nature and extent of offence committed and the money laundered.

  1. CONCLUSION

Money laundering poses a serious threat not only to the financial systems of countries, but also to their integrity and sovereignty. To obviate such threats, certain legislations including PMLA, have been enacted. The above analysis of the PMLA manifests that the Act, although extremely well intentioned, compromises on the fundamental principles of natural justice, fair trial and due-process. In its enthusiasm to fight black money, the Act transgresses upon basic rights and liberties. Some of the provisions under the Act are legally and jurisprudentially unsound and tenuous and may not pass constitutional muster. Since the Act is fairly new, it is expected that the Hon’ble Courts would interpret/strike/read-down these provisions in such a manner, so as to make the Act less prone to arbitrary exercise of power and ensure that its operation is constitutionally compatible.


[1]http://www.investopedia.com/terms/m/moneylaundering.asp

[2]FAQ on Money Laundering Act, Enforcement Directorate, Government of India (http://www.enforcementdirectorate.gov.in/faqs_on_pmla.pdf)

[3]Sushil Kumar Katiyar vs. Union of India & Another 2016 SCC OnLine All 2632

[4]Crl. OP. No. 6703 of 2019; Crl.MP. No. 3709 of 2019 pronounced on 09.04.2019

[5]While Part A also includes the offences under Customs Act, 1962 – but both offences are distinctly prosecuted under the Customs Act.

[6]Chahagan Chandrakant Bhujbal v. Union of India, 2016 SCC OnLine Bom 938.

[7]See Section 54 of the PMLA.

[8](2010) 9 SCC 496

[9]AIR 1965 SC 1595.

[10]2014 SCC OnLine Guj 3417

[11](2008) 7 SCC 487.

[12]Nikesh Tarachand Shah vs. Union of India and Anr. (2018) 11 SCC 1

[13]The Central Government has by S.O. 1042(E), dated 11thJuly, 2006 has determined the offices, for the purposes of 265A (1) of CrPC, which effect the socio-economic conditions of the Country.

[14]Varrsana Ispat Limited vs. Deputy Director, Directorate of Enforcement – NCLAT – 493 of 2018

[15]Ibid. at Para 12

[16]The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors., Crl. A. 143/2018 & Crl. M.A. 2262/2018, at High Court of Delhi at New Delhi

*Special thanks to my colleagues Vibhor Jain, Abhishek Ghai, Siddharth Jain, Siddhant Bajaj, Sujoy Sur, Ishan Dewan and Taahaa Khan for their research and inputs.

2 Replies to “All you need to know about the Law relating to Money-Laundering in India”

  1. Sir, I wanted to know, since 302 IPC is also a predicated offence, how it is interconnected with the offence of money laundering? I would appreciate if you could clear my doubt with a hypothesis.

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    1. In a murder which does not have a financial angle to it, there may not be any proceeds of crime and therefore no money laundering offence

      Like

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