Nov 01, 2022

Trends & Developments of White-Collar Crime 2022 (India Chapter)

Trends and Developments

Consistency with International Obligations: Are We There Yet?

In India, the primary anti-money laundering legislation is the Prevention of Money Laundering Act, 2002 (PMLA), which aims to combat money laundering and provides for the confiscation of property derived from or involved in money laundering and related matters. The PMLA has been amended multiple times since its enactment to conform to the recommendations of the Financial Action Task Force (FATF), the international organisation that develops policies to combat money laundering.

The Director of Enforcement of the Ministry of Finance (ED) is responsible for enforcing the provisions of the PMLA and prosecuting money laundering offences as defined under the PMLA. This includes conducting searches, seizures, arrests, attachments, confiscations and investigations regarding the proceeds of crime involved as well as prosecuting offenders under the PMLA for money laundering. Recently, the constitutional validity of several key provisions of the PMLA, including the prescribed investigative procedure and scope of powers vested in the ED, was challenged before the Supreme Court of India (Supreme Court), on the grounds that they were arbitrary and violated the principles of personal liberty and due process of law enshrined in Articles 14, 20 and 21 of the Constitution of India, 1950 (Constitution).

On 27 July 2022, the Supreme Court issued its much-anticipated decision in Vijay Madanlal Chaudhary & Ors v Union of India & Ors (Vijay Madanlal), upholding the constitutionality of the provisions of the PMLA which had been challenged. The Supreme Court relied heavily upon the legislative intent of the PMLA, opining that the constitutional validity of the provisions of PMLA should be considered in consonance with the special nature of the legislation which seeks to address the scourge of universal money laundering. By doing so, the Supreme Court highlighted that the PMLA was neither a pure regulatory legislation nor a pure penal legislation, but rather a sui generis legislation essential to combating the evil of money laundering.

The decision has a significant impact on the rights of individuals and corporations subject to investigation or prosecution by the ED, since it provides the ED with ample latitude to conduct an investigation under the PMLA, including the authority to arrest, without regard to the common due process safeguards typically available under Indian criminal procedure.

As a result, this article discusses the challenge to the PMLA’s provisions, as well as the rationale that the Supreme Court used to uphold its constitutional validity.

Primary grounds of challenge: undue process

The major thrust of the petitioners’ challenge was that the scope of the procedure for investigation and arrest pursuant to the provisions of PMLA is draconian. The argument was that it violates the basic tenets of the criminal justice system as well as the rights enshrined in Part III of the Constitution (which contains a Bill of Rights), in particular Articles 14, 20 and 21. The challenge was primarily focused on the following provisions of the PMLA.

The provisions of Section 5 and Section 17, read with Section 8(4), give the ED broad discretionary investigative powers, including search and seizure and attachment of property of the accused. These provisions were impugned on the grounds that they are arbitrary, and inconsistent with the safeguards which should be available to the accused under the criminal justice system. It was argued that depriving a person of their right to property at such an early stage, even without a trial, ie, without the due process of law, is unconstitutional.

As a result, Section 19, which gives the ED the power to arrest, was challenged on the grounds that it permits the ED to arrest an individual based on an Enforcement Case Information Report (ECIR) without notifying them of its contents and the reasons thereof. The argument was that this was an arbitrary act and a violation of due process under Article 21 of the Constitution since an accused has a right to be informed about the allegations made against them at an early stage, which is a fundamental tenet of due process and procedure established by law.

Section 24 sets out a reverse onus clause which imputes a presumption of guilt on the accused until it is disproved. It was challenged on the grounds that it violates Articles 14 and 21 of the Constitution, namely the right to equality and right to life and liberty, respectively. It was argued that the presumption of innocence is a human right and an inherent part of the right to a fair trial and procedure under the law.

Under Section 45, a twin bail condition is provided for offences under the PMLA, under which, before granting bail to an accused, a public prosecutor must be given an opportunity to oppose the bail application, and the accused must prove prima facie that they are not guilty even before trial and satisfy the Court that they will not commit any further offences. First, Section 45 was challenged on the ground that the twin bail condition stipulated therein was struck down by the Supreme Court in Nikesh Tarachand Shah v Union of India & Anr (2018) inter alia on the grounds that the presumption of guilt on the accused enshrined in the provision was unconstitutional. Later, the same provision was revived in 2019 by an amendment to the PMLA, but without addressing the underlying constitutional defects. Second, it was contended that the twin bail condition is manifestly arbitrary, since it violates the right of presumption of innocence, which is a fundamental tenet of the legal procedure. Third, Section 45 was challenged on the grounds that there are no existing checks and balances against the exercise of discretion by the ED, and a person is disentitled to apply for bail as soon as charges are framed under PMLA, which effectively constitutes preventive detention without following any legal procedures.

Section 50 gives the ED the power to summon and compel an accused to make statements under penal threats, which are admissible as evidence. This was challenged on the ground that the safeguards available under the criminal justice system were not extended to the accused under the PMLA, thereby violating Article 20 of the Constitution as well as fundamental rights of the accused regarding investigative procedures. In this regard, the petitioner argued that such investigative procedures were manifestly arbitrary because during the process, the accused might well be unaware of the allegations raised against them. Further, it was argued that since the ED exercises similar powers as the police, the investigation carried out by ED should be subject to the safeguards available under general criminal procedural law, specifically the Code of Criminal Procedure, 1973 (CrPC).

Significant findings of the Supreme Court

The Supreme Court clarified at the outset that the definition of money-laundering under Section 3 of the PMLA must be interpreted broadly. In this regard, the petitioners argued that the offence of money laundering under Section 3 is qualified by a two-fold requirement, namely involvement in any process or activity related to proceeds of crime, as defined by Section 2(1)(u) of the PMLA, and projecting or claiming the proceeds of crime to be untainted property. In rejecting this contention, the Supreme Court held that such an interpretation would undermine the efficacy of the legislative intent behind Section 3. The court held that any activity or process undertaken by anyone, including projecting or claiming the property as untainted property, constitutes an offence of money-laundering on its own.

In addition, the Supreme Court discussed that the legislature intended to enact a preventive statute and not merely a penal statute against money laundering. According to the Supreme Court, due to the difficulties that arise once illegitimate money is integrated into the economy, it cannot accept a simplistic argument or the view that Section 3 should only be enforced once the money has been laundered. It was, however, clarified that an accused cannot be proceeded against for money-laundering under the PMLA, de hors the commission of a predicate offence as specified in Part A, Part B and Part C of the Schedule to the PMLA, ie, a scheduled offence, which is a pre-requisite for Section 3 to apply. The court further held that an acquittal or discharge of an accused in a predicate offence/scheduled offence would also terminate the proceedings concerning money laundering under the PMLA.

Findings in relation to “proceeds of crime”

A pre-requisite for attachment of any property under the PMLA is that the property sought to be attached must fall within the purview of “proceeds of crime” as defined under Section 2(u) of the Act. The Supreme Court held that existence of “proceeds of crime” is quintessential and in the absence of “proceeds of crime”, no prosecution can be initiated under the PMLA. It was also noted that only such property, which is derived or obtained directly or indirectly, because of criminal activity relating to a predicate offence/scheduled offence, can be regarded as “proceeds of crime” under the PMLA. In this regard, the Supreme Court clarified that the term “indirectly” under Section 2(u) refers to property derived or obtained from sale proceeds or in exchange of the property which had been directly derived or obtained because of the underlying criminal activity.

Pertinently, the Supreme Court highlighted that the ED cannot invoke the PMLA on an assumption that the property recovered by them must be “proceeds of crime” and a predicate offence/scheduled offence has been committed. It was further held that there must exist a nexus of the “proceeds of crime” with the commission of the scheduled offence being investigated. In this regard, it was noted that before issuing a formal order of provisional attachment of property under Section 5 of the PMLA, the authorised officer has to form his opinion and delineate the reasons for such belief to be recorded in writing, which indeed is not on the basis of assumption, but on the basis of material in his possession. These findings of the Supreme Court impute onus on the ED to satisfy itself of existence of “proceeds of crime” as well as its nexus with the alleged predicate offence/scheduled offence.

Findings in relation to wide discretionary investigative powers upon the ED of search and seizure and attachment of property

The Supreme Court upheld the constitutionality of Section 5 and Section 17 read with Section 8(4) of the PMLA. In doing so, it considered whether the registration of a complaint/report concerning a predicate offence/scheduled offence is a pre-requisite to initiating actions of provisional attachment or searches and seizures under Sections 5 and 17 respectively, and it concluded that the answers is no. It was held that once the ED has satisfied itself based on reasons recorded in writing that the accused is in possession of “proceeds of crime”, it can proceed with provisional attachment or search and seizure under Sections 5 and 17 respectively, even without a pre-registered complaint/report in relation to the underlying predicate offence/scheduled offence.

The Supreme Court also held that sufficient safeguards have been provided in the PMLA, which are equally stringent and of higher standard, which protect against any arbitrary exercise of powers by the ED. It was further held that the provisions of the PMLA have an overriding effect on the safeguards available under the CrPC in light of the express provisions under Sections 65 and 71 of the PMLA. It noted, if any action taken by the authorised officer is deemed vexatious, their actions can be prosecuted and punishable under Section 62 of PMLA, and a constitutional challenge to these powers cannot be accepted.

Findings in relation to the powers of arrest under the PMLA

The Supreme Court upheld the powers of arrest bestowed upon the ED under Section 19 of the PMLA. Accordingly, it ruled that the ECIR, which is an internal document of the ED and not a statutory document, need not be provided to the accused, and that the disclosure of reasons during arrest was sufficient. In doing so, the Supreme Court distinguished between ECIR and FIR, highlighting that there is no corresponding provision in the PMLA requiring formal registration of an offence of money laundering as in the case with registration of FIR under the CrPC.

Consequently, the Supreme Court held that under Section 19 of the PMLA, upon arrest, as soon as may be, when the accused is informed about the grounds for such arrest, the mandate of Article 22(1) of the Constitution is satisfied, and therefore the accused’s fundamental rights are not violated. It was also opined that Section 19 provides stringent safeguards, such as that an arrest can only be made by an ED official with high ranking, who must also record reasons for arresting the accused for money laundering in writing. In addition, the accused should be informed of the grounds for their arrest, a copy of the order along with relevant materials should be sent to the Adjudicating Authority under PMLA, and an arrested individual is required to be produced before the special court under PMLA within 24 hours of their arrest. Due to these reasons, the provision does not suffer from the vice of arbitrariness. However, the Supreme Court, did not discuss the manner or method in which the grounds for arrest should be communicated to the accused upon arrest.

Findings in relation to the twin condition of bail under Section 45 and the reverse burden of proof under Section 24

The Supreme Court upheld the twin condition for grant of bail stipulated under Section 45 on the ground that the provision was reasonable and was directly related to the underlying objective and purpose of the PMLA, namely, to combat the menace of money laundering with transnational implications, including impacting the financial systems and sovereignty and integrity of nations. Also, it was clarified that the twin condition is applicable equally to anticipatory bail in relation to offences under the PMLA.

With respect to the constitutionality of the reverse burden of proof/reverse onus clause imposed on the accused under the PMLA, the Supreme Court noted that the same was necessary in light of the recommendations made by FATF in 2012. In this regard, it was noted whether such a burden on the accused is legal or evidentiary, depending upon the statute and its purpose. The legal presumption under Section 24, the Supreme Court held, applies only when the prosecution succeeds in establishing at least three basic or foundational facts: first, that the criminal activity relating to a scheduled offence has been committed; second, that the property in question has been derived or obtained, directly or indirectly, by any person as a result of that criminal activity; and third, the person concerned is, directly or indirectly, involved in any process or activity connected with the said property being “proceeds of crime”. It was noted that on establishing these foundational facts in accordance with Section 24, a legal presumption would arise that the “proceeds of crime” are being used for the purpose of money-laundering. In the event the accused had no causal connection to such proceeds of crime and could disprove their involvement in any process or activity associated with them by providing evidence in this regard, the legal presumption would be rebutted. In any case, since the burden on the accused would be only an evidentiary burden, it can be discharged by the accused by producing evidence of the facts that are within their personal knowledge. Therefore, it was held that as long as the accused is entitled to rebut the presumption that they have violated the provisions of the PMLA, such a legal provision cannot be regarded as manifestly arbitrary or unconstitutional.

Findings in relation to investigative powers of the ED under Section 50 of the PMLA

The Supreme Court upheld the constitutionality of Section 50 of the PMLA as well as the power of the ED to summon any person to record their statement during an investigation. It was held that the ED does not have police powers and therefore is not mandated to prescribe to the investigative procedure adopted by the police under the CrPC. In this regard, the Supreme Court decided that summons issued under Section 50 of the PMLA are not in furtherance of an investigation for prosecution since there is no formal accusation against the person summoned at that relevant stage. Accordingly, the Supreme Court held that the procedure prescribed under Section 50 of the PMLA does not violate the mandate of Articles 20(3) and 21 of the Constitution.

Notably, the Supreme Court clarified that if such statements are recorded subsequent to the arrest of an accused, the protection granted under Article 20(3) of the Constitution in relation to testimonial compulsion would apply and such statement would not be proved against the accused. This protection is, however, weakened by the Supreme Court’s decision that if the statements recorded evince the existence of proceeds of crime or money laundering, they may be used for further investigation under the PMLA, which may lead to the prosecution of the concerned person.

View in relation to validity of the amendments to the PMLA

In addition to the constitutional validity of various provisions of the PMLA, the petitioners had also challenged the amendments to the PMLA made vide the Finance Act 2019 as being unconstitutional. Noting that this issue is pending consideration in view of the reference order passed in Rojer Mathews v South Indian Bank (“Rojer Mathew”), the Supreme Court left this question open to be examined along with or after the decision of the larger bench (seven judges) of the Supreme Court in the case of Rojer Mathew. The decision on the validity of the Finance Act, as and when taken, would have substantial bearing on the findings made in Vijay Madanlal, as the Finance Act being struck down as being unconstitutional would render several provisions, such as twin condition for bail stipulated in Section 45 of the PMLA, inoperable.

Conclusion

The Supreme Court’s decision is significant for ongoing and future investigations under the PMLA. There is no gainsaying that the judgment will have an impact on the rights of the accused persons, which are substantially curtailed under the PMLA as compared to the CrPC. The Supreme Court has upheld the wide investigative, arrest and attachment powers of the ED on the grounds that such an arrangement is necessary to combat the menace of money laundering, and there are sufficient safeguards available under the PMLA that maintain a balancing arrangement to secure the interests of the person whilst ensuring that the proceeds of crime remain available for dealing in the manner specified in the PMLA.

Notably, the Supreme Court has accepted a plea seeking a review of two issues decided in the Vijay Madanlal judgment. The first issue is the finding that the ECIR to the accused person is not mandatory under the PMLA, and the second issue is the presumption of guilt conferred on the accused person, as opposed to presumption of innocence, under Section 24 of the PMLA. It will be interesting to see what view the Supreme Court will take in the review petition as it will have substantial bearing on the rights of accused persons under the PMLA, especially since the presumption of innocence is a golden thread that runs throughout all criminal proceedings. Although the controversy surrounding the constitutionality of the ED’s powers under the PMLA remains an active issue as a result of the review petition, the decision of the Supreme Court in Vijay Madanlal will guide future investigations conducted by the ED. The findings of the Supreme Court will also act as a safety-valve for aggrieved persons in circumstances wherein the ED initiates action without a nexus between the alleged predicate offence/scheduled offence and the alleged “proceeds of crime” or takes actions under the PMLA even though the alleged predicate offence/scheduled offence itself has been closed.

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