The Prevention of Money Laundering Act, 2002 [“the Act”] provides for a special procedure to deal with the offence of money laundering. The procedure is bereft of safeguards and impinges greatly on the liberty of any person targeted under the statute, when compared to the procedure provided in the Code of Criminal Procedure, 1973 [“CrPC”]. Various provisions of the Act were constitutionally challenged in a batch of petitions, of which the lead case is Vijay Madanlal Choudhary v Union of India (SLP (Crl) 4634/2014). The Supreme Court, while upholding the constitutionality of the provisions challenged, stressedon the exceptional nature of the offence and the threats it poses to the integrity and sovereignty of our country, by placing reliance on the statement of objects and reasons of the Act. This article analyses this claim of exceptionalism in light of how the Act defines money laundering vis-a-vis how it is understood in international conventions and other jurisdictions, and argues that money laundering, as defined under the Act, cannot be considered to be an exceptional offence that justifies an exceptional procedure.
Since money laundering is a subsequent offence, it requires proceeds of crime from a prior or predicate offence. A predicate offence is, thus, a sine qua non for proceeds of crime to exist or money-laundering to occur. Internationally, predicate offences, and thus money-laundering, has been defined in the context of narcotics trade and organised crime, as these crimes regularly generate proceeds that are laundered into the economies of developing countries. The Petitioners, in the constitutional challenge before the Supreme Court, argued that the Act covers an arbitrarily wide range of predicate offences, dissociated from the original intent of the Act but this was rejected by the SC in favour of legislative deference.
Therefore, the claim to exceptionalism of the Act is examined in the present article with reference to the nature of predicate offences covered by the Act. In the absence of any discernible guiding principle that protects interests that money laundering as a separate offence was meant to protect, it is argued that money laundering as it is defined under the Act cannot be labelled as an exceptional offence.
The excessive power of the investigating authority without adequate safeguards, under the Act, has been justified by the Union on account of the exceptionalism of money laundering. This section will provide an overview of these exceptional procedures, before going on to discuss whether money laundering, as defined in the Act, is an exceptional offence in the following section.
The definition of money laundering, as given in Section 3 of the Act, was under review in Vijay Madanlal Choudhary. The SC has largely accepted the Union’s argument that money laundering is an independent continuous offence which is committed by the mere possession of proceeds of a crime. The Union successfully argued that projecting the proceeds of a crime as untainted property is not an essential requirement for the offence of money laundering and that the mere possession of proceeds of crime is enough to constitute the offence of money laundering. The Union had further argued that money laundering is an offence independent of the outcome of proceedings regarding the predicate offence. This was however partly rejected by the SC, which noted that if the proceedings under the predicate offence are quashed then the proceedings under the Act will also fall. Investigation into money laundering can still take place without the conclusion of a complaint of a predicate offence. Lastly, the Union successfully argued that money laundering is a continuous offence that continues till activities related to proceeds of crime such as concealment, possession, use, etc. (mentioned in section 3) continue. This potentially makes it an offence with retroactive effect as new offences can be added to the list of predicate offences and as long as proceeds from it are still in a person’s possession, they can be guilty of money laundering.
ED officers enjoy wide powers of arrest as they can arrest any person who they have reasons to believe is guilty of an offence under the Act. This power of arrest lacks the safeguards present in the CrPC which provides specific purposes for which a person can be arrested. Under the CrPC, the reasons for arrest are examined by a Magistrate at the time of production (sections 41 and 167) whereas the reasons of an ED officer are not scrutinised by any judicial officer. Even when applying for bail, the accused has the onus of proving that they are not guilty of any offence under the Act. Whereas bail under CrPC for a non-bailable offence requires consideration of multiple factors such as the nature of accusation and degree of involvement, including the flight-risk, criminal antecedents of the accused, etc., and is based on the principle that bail is the norm and jail the exception. Bail under the Act requires the applicant to prove that there are reasonable grounds to believe that they are not guilty of the offence. This reverses the burden of proof and makes jail the norm and bail the exception.
Other notable powers of the ED include the power to attach property of any person for a period of 180 days. The person whose property has been attached has to show cause the property is not involved in money laundering. If the attachment is confirmed, it can continue up to a period of 365 days. This would also allow the ED to take possession of the property alleged to be involved in money laundering without having the burden of proving that the property is involved in money laundering.
These powers under the Act can be used at any time without any formal accusation of money laundering as the Act has no provision requiring a formal accusation against a person, akin to an FIR or complaint provided in the CrPC, before commencing a criminal investigation. The Enforcement Case Information Report (ECIR), which is its functional equivalent, is not a statutory document and is not provided to the person against whom proceedings under the Act are initiated. The Union has successfully argued that in absence of a formal complaint until after the investigation is complete, persons being investigated are not in the character of an accused and do not enjoy the rights available to an accused, most notably the right against self-incrimination. ED officers are also empowered to summon any person and even compel them to make self-incriminating statements by imposing penalties
Lastly, the presumption of innocence is upended and the accused has to prove their innocence at trial rather than the prosecution having to establish guilt. Underthe Act when a person is charged with money laundering, the authority or court presumes that the proceeds of crime were involved in money laundering unless the contrary is proved.
Exceptionalism of Money Laundering
The Union justifies the above exceptional procedure based on the exceptional nature of money laundering as an offence due to the threat it poses to the macro-economic health of a nation and that it allows criminals to enjoy the fruits of their crime. The SC has accepted this argument of the Union and has noted that money laundering poses a serious threat to the financial systems, integrity, and sovereignty of our nation. Money laundering is recognised internationally as a menace and there are many binding and non-binding international legal documents calling on states to take steps to eradicate it. In fact, the Act was enacted in response to India’s legal obligations as a state party to the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 [“Vienna Convention”]. Further, many amendments to the Act have been made pursuant to evaluation of money laundering laws in India by the Financial Action Task Force (FATF). In this context, it is instructive to look at how money laundering is defined internationally and how the Act measures up to it, especially in the list of predicate offences that are included.
Money laundering under the above instruments is seen only in connection to proceeds from crimes of either sufficient gravity or those carried out by a criminal organisation. The Vienna Convention specifically deals with proceeds of drug related crimes and the UN Convention Against Transnational Organised Crime, 2004 [“Palermo Convention”] focuses on money laundering for serious offences such as organised crime, corruption, and obstruction of justice. Organised crime are offences carried out by organised criminal groups, which are defined in article 2 of the convention as a “structured group of three or more persons, existing for a period of time and acting in concert with the aim of committing one or more serious crimes or offences established in accordance with this Convention, in order to obtain, directly or indirectly, a financial or other material benefit”. The FATF recommendations also require criminalization of money laundering in accordance with the Vienna and Palermo Convention. The requirement of The FATF recommendations and the Palermo Convention that money laundering should apply to the widest range of predicate offences must be interpreted in the above context as applying to crimes by organised groups or of a similar nature.
This classification is inline with the justification of having money laundering as a separate offence. One of the main justifications is that a simple criminal investigation of the predicate offence would not detect everyone involved in an organised crime. Therefore, the recognition of money laundering as an offence separate from the predicate offence arose to better combat organised crime. The purpose of many criminal enterprises is to generate profit. However, to be able to continue using this profit, criminals must dress the proceeds from crime as legitimate income otherwise their criminal activities would be revealed. To avoid this, criminal enterprises engage in money laundering. Further organised criminal activities, such as trafficking of controlled substances or persons, have a substantial economic component so it makes sense to “follow the money” to reveal everyone involved in its commission.
The organisational requirement needs to be further qualified as involving large proceeds as well, as when Malm and Bichler tested the above objective of having money laundering as a separate offence, they found that usage of separate professional money launderers was not a common practice in the drug trafficking business in Canada. They obtained mixed results concerning the centrality of money launderers and observed that most money is self-laundered. These findings flew in the face of the objective of better investigating organized crime. Soudijn explained these observations by reasoning that most criminals, even in cases of organized crime, do not make enough money to require the services of a professional launderer. On the other hand, when case studies involving large sums of money were examined, the incidence of professional launderers was much higher. This shows that money laundering as a separate offence to detect everyone involved in organised crime is best employed when sufficiently large proceeds are involved.
The logic of applying money laundering exclusively to substantial proceeds is further justified from an economic perspective. Money laundering affects the macro-economic health of a country, and possibly also its integrity and sovereignty, however this is only possible when money laundering involves large sums relative to overall economic activity. Since money involved in predicate offences is unaccounted for, no reliable data regarding it is available. And, if the sums are large enough, they need to be accounted for when framing policies and so the non-availability of reliable data leads to inefficient policies. It has also been observed that proceeds of crime are mainly invested in risky investments. This has the risk of increasing the volatility of the economy when large sums are involved.
Based on the above discussion, it is evident that money laundering as a separate crime is meant to be applied to cases of organised crime and is best applied to cases involving proceeds of large value. The requirement of large proceeds and organised crime is reflected in Anti-Money Laundering laws globally. The Money Laundering Control Act of the US has a monetary threshold of $5000 for proceeds of routine offences to qualify for money laundering (§ 1956 (7)). In Hong Kong, the matter is governed via the Organised and Serious Crimes Ordinance that has a monetary threshold of $100,000 (HKD) as well as an organisational requirements for the offence of money laundering (Section 8). The UK’s Proceeds of Crime Act applies special procedure specifically in cases of organised crime (Section 8(7)). On the other hand, Australia and Canada criminalise proceeds of all indictable offences. Regardless, in their respective money laundering laws [Canada: Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2000, s 12; Australia: Anti-Money Laundering and Counter-Terrorism Financing Act, 2006 section 5], reporting of transactions only above a threshold limit or those that are likely involved in crimes like terror financing and tax avoidance are required.
Contrary to all this, India lacks any such guiding principle as to which offences should serve as predicate offences for money laundering. The Act lists out the specific predicate offences, but there is no discernable guiding principle. Predicate offences in the Act include routine offences such as cheating and receiving stolen property, as well as more serious offences generally associated with organised criminal groups such as drug or organ trafficking, in the same manner. There is no requirement for a minimum level of organisation or threshold limit for proceeds of a crime, especially for routine offences, for inclusion as a predicate offence or for the application of the special procedure. Further, the exclusion of some offences in light of offences that are included is unclear. For e.g., robbery is included whereas theft is excluded. The only difference between theft and robbery is that robbery involves causing some physical hurt. There is no nexus between causing physical hurt during a robbery and its inclusion as a scheduled offence.
Further for some offences such as receiving stolen property, there will always be “proceeds of crime”. Their inclusion in the list of predicate offences is redundant in light CrPC provisions which deal with disposal of recovered stolen property when proceeds of such crime are not large enough to pose a threat to economic stability or when they are not carried out by organised criminal groups. Since the Union argued and SC agreed that mere possession of proceeds of crime is enough for it to qualify as money laundering, every instance of receiving stolen property, regardless of its value, becomes an instance of money laundering. The severity of the offence of money laundering is considerably diminished in light of these factors.
The claim that money laundering as defined in the Act is an exceptional offence, in light of the above discussion, cannot be accepted. Exceptional procedure is being made routine and cannot be held to be valid on grounds that money laundering is an exceptional crime. The absurdity of the India position can be demonstrated via the following illustration: Selling of first-copy books, a copyright infringement, is a predicate offence without any qualification as to proceeds generated from the activity. So if anyone sells a first-copy book for a couple of hundred rupees, the possession of the proceeds by him qualifies as money laundering under the Act and they can be proceeded against using the exceptional procedure provided for in the Act.
Acts for which departure from ordinary criminal procedure has been held to be constitutional by the SC in the past include NDPS (Reverse Onus Clause), TADA (Bail Provisions), etc. The harm that they profess to combat, on grounds of which exceptional procedure was employed, cannot be compared to the supposed threat posed by the solitary act of a person selling first-copy books for a couple of hundred rupees. Neither does the application of special procedure here aid in solving any organised crime. The usage of exceptional procedure here will serve no purpose other than to harass the person who sold the first-copy, however it is completely open to the ED to legally apply the exceptional procedure.
The Act departs substantially from ordinary criminal procedure to combat money laundering. It gives the investigative agency wide powers including powers of arrest and seizure with negligible oversight. It also takes away the rights of an accused by denying them their right against self-incrimination and imposing stringent bail prerequisites. The Act also holds the potential to retroactively criminalise acts by characterising money laundering as an independent and continuous offence, in absence of other safeguards. The justification provided by the Union and emphasised by the SC is the exceptional nature of money laundering itself.
This justification when viewed with reference to the definition of money laundering and wide list of predicate offences in the Act is lacking. Money laundering as a separate offence is best used to tackle criminal activity by organised groups involving large proceeds. One of the main justifications of introducing money laundering as a separate offence was to better investigate organised crime and detect everyone involved. Studies show that this claim holds true for crimes involving large proceeds but is not necessarily true for crimes involving smaller sums. Targeting large sums has the added reason of safeguarding the macro-economic health of a nation. However, Indian law follows no discernable policy that would limit the application of the Act to offences involving organised groups or large sums.
Instead, routine offences such as receiving stolen property and even criminal conspiracy can be treated as predicate offences for money laundering without any qualification regarding the quantity of proceeds or degree of organisation involved. Through the inclusion of routine offences in an unqualified manner, exceptional measures which might otherwise be justified in exceptional cases, are made legal routine. Accordingly, the argument that exceptional procedure is justified as money laundering is an exceptional crime cannot be accepted in the Indian context.
Pulkit Goyal is a student at National Law University, Delhi.