- Object and Purpose of the Act
- Definitional Issues
- Schedule of Offences
- Powers of the Enforcement Directorate and procedure for investigation laid down under the Act
- Trial Procedure and Appellate Rights
On 27 July 2022, the Supreme Court of India in Vijay Madanal Choudhary v Union of India [SLP(Crl) 4634 of 2014], upheld the validity of various provisions of the Prevention of Money Laundering Act, 2002 (‘the Act’). Below is a summary of the findings and reasoning of the Court on key provisions of the Act.
1. Object and Purpose of the Act
One of the major points of contention before the Supreme Court is regarding the nature of the Prevention of Money Laundering statute. The Petitioners argued that the statute is penal in nature on the ground that – the object and purpose of the Act is to prevent and punish the crime of money laundering.
The Supreme Court however rejected the arguments of the petitioner and held that the statute is neither purely regulatory nor purely penal, and is a sui generis legislation with a mix of several approaches to tackle the problem of money laundering. Therefore, classifying it only as a penal statute, will defeat the purpose the Act seeks to address.
2. Definitional Issues
2.1 Proceeds of crime
The definition of ‘proceeds of crime’ was under challenge in the present proceedings, as it included within its ambit property which merely has an indirect connection with the predicate offence, or which is not obtained from the predicate offence but arises from activities incidental to the predicate offence. The Court clarified the scope of the definition by noting that only property which is derived or obtained, either directly or indirectly, as a result of offences listed in the Schedule to the Act, amounts to proceeds of crime. On the other hand, properties used in the commission of the predicate offence, but not resulting from the predicate offence, cannot be termed as ‘proceeds of crime’, even though they may be recovered or attached for the purposes of the investigation in the concerned case. In other words, every case property may not be proceeds of crime, but all proceeds of crime would be case property. The scope of the word ‘indirectly obtained’ was also explained by the Court to mean that any property obtained using direct proceeds of crime, would also be ‘proceeds of crime’
2.2 Money Laundering
A central challenge running through the petitions was whether a necessary condition to constitute the offence of money laundering is that the accused ‘projected the proceeds as untainted’ or attempted to do so. The Petitioners argued that the phrase ‘possession, acquisition, use and projecting or claiming it as untainted’ should be read to mean that there can be no money laundering without any attempt to claim it as untainted, and any other construction would result in the prosecution of innocent persons who unknowingly acquire, possess, or use proceeds of crime.
The Court rejected this interpretation, and held that mere possession, acquisition, or use without any attempt to claim it as untainted would also be an offence under Section 3 of the Act. Its conclusion was guided by the fact that the original section uses the phrases ‘any activity’ and ‘including’, which shows a legislative intent to cover all processes relating to proceeds of crime, and that the list of activities given in the Section are not exhaustive. The subsequent Explanation added to the Section further clarifies this intention. This interpretation, according to the Court, is also in line with international obligations and best practices in view of the evolving nature of money laundering as an offence, as indicated by the recommendations of the Financial Action Task Force to remove the phrase ‘projecting or claiming it as untainted’.
The Court also disregarded the Petitioner’s argument that without the requirement of projecting proceeds as untainted, there would be no separation between the predicate offence or money laundering. This is because money laundering under the Act is an independent offence dealing only with the proceeds of crime, and does not touch upon aspects of the predicate offence. Holding otherwise may mean that persons who simply physically hide the proceeds on behalf of another cannot be prosecuted.
In conclusion, the ambit of Section 3 is wider than the colloquial understanding of money laundering. Money laundering as an offence continues as long as the proceeds of crime exist, whether they are the original proceeds directly obtained from the predicate offence or as a result of other property that was directly obtained from the predicate offence. This is necessitated by the nature of money laundering, through which illegitimate money can be wired into the bloodstream of a nation, and becomes almost impossible to get back.
3. Schedule of Offences
As discussed above, money laundering refers to engaging, directly or indirectly in any activity relating to proceeds of a crime. Crime, or the ‘predicate offence’, that forms the sine qua non for the existence of proceeds of crime or money laundering, specifically refers to the offences listed in the Schedule to the Act. The Schedule covers offences under a wide variety of statutes in three Parts. Part A covers twenty-nine enactments, including the Indian Penal Code, 1860; Bonded Labour System (Abolition) Act, 1976; Environment Protection Act, 1986; and Information Technology Act, 2000. Part B deals with offences under the Customs Act; and Part C relates to offences with cross-border implications. Various petitioners had challenged the validity of various offences, which had been inserted into the Schedule by way of amendments in 2009, 2013, 2015, and 2018, on the ground that several of these offences are not sufficiently grave or have no transnational implication.
The Court upheld the validity of these additions to the Schedule by way of amendments by holding that the designation of any offence as ‘predicate offence’ is a matter of legislative prerogative. Further, the Court held that some of these predicate offences may be minor or compoundable, but the Legislature possesses the authority and wisdom to determine if the proceeds of these crimes pose a threat to the economic stability and sovereignty of the nation, and thus, has the power to criminalize the same. The Court itself did not enquire into the question of whether proceeds from minor offences can pose a significant threat to the nation. Moreover, as the Act does not seek to punish any of the predicate offences but proceeds thereof, the difference in the gravity or compoundability of predicate offences is irrelevant.
4. Powers of the Enforcement Directorate and procedure for investigation laid down under the Act
4.1 Enforcement Crime Information Report /First Information Report
The procedure for commencing investigation is not laid down under the Act nor does the Act provide a similar provision, like that of the Code of Criminal Procedure, 1973 (‘CrPC’) (under Section 154) for registration of an offence of money laundering. The Enforcement Directorate (‘ED’), the investigation agency under the Act, registers an Enforcement Case Information Report (‘ECIR’), an internal document (required under the ED manual) to register an offence of money laundering to commence investigation.
The Petitioners contended the following: the Act does not provide any guiding procedure to commence investigation; an ECIR is similar to an FIR and hence the safeguards available to an accused at the time of registration of FIR (furnishing the copy of the FIR to the accused) should also apply in the case of an ECIR; investigation under the act can commence only after it is prima facie shown that the predicate offence was committed i.e by the filing a charge sheet under Section 173 of CrPC in the schedule offence.
The Supreme Court in the present case held – (i) The Act is a suis generis legislation providing for sui generis procedure and hence as per Section 65 of the Act, the procedure provided under the Act takes precedence over the procedure laid down in the CrPC. (ii) ECIR is not a statutory document like that of an FIR and hence it is not mandatory to furnish a copy of the ECIR to the accused. (iii) The ECIR is required only to initiate penal action and not a civil action. Therefore, civil action (viz. commencement of inquiry and attachment under Section 5) can commence even before registration of an ECIR. (iv) The requirement of providing the ECIR to an individual apprehending arrest can be done away with because the grounds of arrest are provided to him after arrest.
4.2 Enforcement Directorate Manual
The Enforcement Directorate Manual is an internal manual maintained by the Enforcement Directorate and used by the officers of the Directorate. It provides the procedure to be followed to implement the Act and is not accessible to the general public.
Petitioners contended that the ED Manual, which is a detailed manual consisting of the procedure to be followed during investigation under the Act (including the registration of an ECIR) should be made available to the general public as the individuals accused under the Act must be made aware of the procedure they are subjected to at the time of investigation.
The Supreme Court held that the ED Manual is an internal document and hence cannot be published. However, it recognised that there was a need to disseminate basic information to persons concerned. Therefore the Court suggested that the Department ought to explore the possibility of placing certain necessary information on its website including information about the scope of the authority under the Act, measures to be adopted and the options/remedies available to the persons concerned before the Authority and the Special Court etc.
4.3 Attachment proceedings
Section 5 empowers the Authority (under Section 48) under the Act to attach any property involved in money laundering. The second proviso under the Section states that ‘any property’ of ‘any person’ can be attached if non-attachment of the property involved in money laundering would frustrate the proceedings under the Act.
The Petitioners argued that – (i) The second proviso under Section 5 is ultra vires the main section insofar as it permits emergency attachment ‘of any property’ of ‘any person’ independent of the existence of a scheduled offence. This is in total disregard to the safeguard provided under the first proviso i.e attachment cannot be made unless a police report under Section 173 or a private complaint is filed in relation to the scheduled offence. (ii) No procedural safeguards are provided at the time of provisional attachment.
The Court held that the second proviso was enacted to ensure that the property in question is not dispensed with. It further stated that the interest of the individual is secured by certain procedural safeguards provided under Section 5(2), 5(3), 8(1) to 8(8) of the Act; including the requirement that the authority must be satisfied that unless the property is attached immediately, the confiscation proceedings under the Act would be frustrated.
4.4 Possession proceedings
Section 8 of the Act broadly deals with the period of attachment provided under the Act.
The Petitioners’ broad grievance was about the period of attachment specified under Section 8(3)(a) (365 days) and the modality of taking possession of the property under Section 8(4) of the Act (the authority can take possession of the property once the provisional attachment of property is confirmed before a formal order of confiscation is passed).
The Court however rejected the Petitioners’ challenge to Section 8 but clarified that under Section taking possession of the property in question before a formal order of confiscation is passed, under Section 8(4), should be done only in exceptional situations and must be considered on a case-to-case basis.
4.5 Search and Seizure
Under the Act, the Director or any other officer not below the post of a Deputy Director (authority under Section 48) can conduct search and seizure of a premise or property if he has reason to believe that an offence under the Act has been committed.
The Petitioners in the present case argued that search and seizure cannot be conducted in the absence of an FIR being registered in a scheduled offence. Further, the safeguards available to an accused under CrPC (including the safeguard of Magisterial oversight at the time of conducting search and seizure) which checks the arbitrary exercise of power by the authority is not available to an accused under this Act. The safeguard of such Magisterial oversight is envisaged under the Seizure Rules, 2005 and not under the parent Act. Hence, the Petitioners sought clarification from the Court that the Seizure Rules, 2005 insofar it provides for the safeguard of Magisterial oversight is not ultra vires section 17 and 18 of the Act.
The Supreme Court held – (i) Since the nature of the offence requires swift action to ensure that the proceeds of crime are available to be dealt with, the authorities can conduct search and seizure before registering an FIR for the scheduled offence because they can contemporaneously send information to the jurisdictional police under Section 66(2) of the Act to register an FIR for the scheduled offence. (ii) The interests of an individual is secured by the following inbuilt safeguards such as – (a) search and seizure is conducted by a high-ranking official, (b) the official should provide reasons in writing disclosing the information in his possession that has led them to believe that an offence under the Act has been committed, (c) the same should be forwarded to an Adjudicating Authority in a sealed envelope. The Act also provides an additional inbuilt safeguard that if the search and seizure was conducted without proper reasons in writing, the official will be punished for vexatious search under Section 62 of the Act. (iii) With regard to the Seizure Rules 2005, the Supreme Court held that if the rules are inconsistent with the provisions of the Act, the Act must prevail.
4.6 Search of person
If an authority, authorised by the Central Government, has reason to believe that an individual owns, controls or possesses any proceeds of crime relevant to any proceedings under the Act, they are empowered to search the individual and seize records or property useful for the proceedings.
The Petitioners contended that search of a person without judicial oversight is an arbitrary exercise of power by the Enforcement Directorate.
The Court held that provisions of judicial oversight provided under Section 157 of CrPC are not applicable while dealing with an inquiry or investigation under the Act, and that the Act provides inbuilt safeguards [under Section 18(2) to 18(9)], including the provision that e search must be conducted by a high-ranking official only when there are reasons in writing.
The Act provides that an authority (under Section 48) has the power to arrest if he has reason to believe, based on the material in his possession, that a person is guilty of an offence under this Act.
The Petitioners contended that arrest cannot be effected before a formal complaint in a scheduled offence and that the basic safeguards available under the CrPC (including safeguard under Section 41A of CrPC) to an individual at the time of arrest is not available to an individual under this Act
The Court held that the purpose of the Act is three-fold: to prosecute the offence of money laundering, prevent money laundering and confiscate proceeds of crime. Therefore, an arrest can be effectuated even before an FIR/complaint is registered for a scheduled offence. The Court referred to similar provisions in other fiscal legislations like the Foreign Exchange Regulation Act, 1973 (FERA) and Customs Act to justify the power of arrest at the inquiry stage. Further, the Court held that the Act envisages in-built safeguards for an individual who is arrested; by mandating that – (i) reasons for arrest are recorded in writing (ii) on arrest, the individual is informed of the grounds of arrest (iii) copy of the arrest order and material in possession of the ED is sent to the Adjudicating Authority in a sealed cover, amongst other safeguards.
Section 50 of the Act provides the Director (authority under Section 48) the power to summon any person and record his statement during the course of investigation. It also mandates that the person should disclose true and correct facts known to his personal knowledge in connection with the subject matter of investigation.
The Petitioners contended that the power provided to the director under Section 50 of the Act is in violation of an individual’s fundamental right against self-incrimination.
The Court held that an individual’s right against self-incrimination is not violated because – (i) The summons under Section 50 is issued in connection to the inquiry regarding proceeds of crime which may have been attached and pending adjudication before the Adjudicating Authority. Such inquiry is undertaken to inquire into relevant facts in connection to the proceeds of crime and the individual’s involvement, in order to initiate civil action viz attachment and not criminal action of prosecuting an individual. It is therefore not in the nature of an investigation for prosecution and hence there is no formal accusation against the person summoned. (ii) The authority compelling the statement is not a ‘police officer’ (the Court differentiated the present case from Toofan Singh because NDPS was a penal statute).
4.9 Punishment under Section 63
Section 63 of the Act prescribes punishment for maliciously providing false information.
The Petitioners contended that by way of Section 63, an individual is under threat, and is compelled to provide statements under Section 50.
The Court however held that section 63 is an enabling provision and without it, no meaningful purpose is served to combat the offence of money laundering. Therefore, the section is neither unreasonable nor arbitrary.
Section 45 of the Act (post-2018 amendment) provides that two conditions must be satisfied in order to secure bail: (a) the public prosecutor is heard on the question, and (b) there are reasonable grounds for believing the accused is not guilty of the offence of money laundering and is not likely to commit any offence while out on bail. In other words, the accused must prove his innocence in order to secure bail, which is contrary to the general bail requirements under CrPC. This provision was challenged as being violative of Article 21 and unreasonable insofar as it reverses the presumption of innocence even before the trial and practically eliminates the chances of securing bail. These onerous conditions, it was argued, were not justified, and were additionally violative of the two-bench decision in Nikesh Tarachand Shah (2017).
In 2017, the division bench in Nikesh Tarachand Shah had found the erstwhile Section 45, which made the grant of bail contingent upon whether the predicate offence was punishable with three years of imprisonment or more, to be manifestly arbitrary as it had no nexus with the objectives of the Act, and created a distinction between the offences under Section 3 on the basis of the predicate offence. The provision was then amended to its current form, and the reference to the predicate offence was removed.
The Supreme Court in the present case held that the entire provision was not struck off by virtue of the 2017 judgment, but merely rendered inoperative. Thus, it was open to the Legislature to amend the section in order to cure its defects. The Court further held that irrespective of the dictum in Nikesh Tarachand Shah, the twin conditions were reasonable and necessary in view of the threat posed by the offence in light of the concerns expressed by the international community about money laundering and the competence of the Parliament to understand the needs of the people. Similar conditions have also been upheld in other special legislations created to address serious threats, like TADA and NDPS. The Court further relied on the judgments in Kartar Singh and Usmanbhai Dawoodbhai Memon, where the Apex Court had upheld similar twin conditions on account of the seriousness of the offence and the fact that the CrPC itself provides for similarly onerous conditions for offences punishable with death or imprisonment for life under Section 437(1)(i). The Court also went a step further to note that the judgment in Nikesh Tarachand Shah was incorrect insofar as it held that (a) the judgment in Kartar Singh would be inapplicable to the Act, and (b) the offence of money laundering is less heinous than the offence of terrorism sought to be tackled under TADA. Any doubts about the Parliament’s perception of the threat or severity of the offence is not a ground for judicial review. Overall, the twin conditions for bail were a necessary and ‘proportionate effective mechanism’ to deal with the scourge of money laundering.
Further, the Court held that the phrase used in the Section is ‘bail’, and in view of various pronouncements that bail and anticipatory bail stand on the same footing, the issue of anticipatory bail would be governed by Section 45. Section 438 of the CrPC would have no application, as Section 45 begins with a non-obstante clause. However, here an exception is carved out that if a person has undergone pre-trial detention in relation to money laundering for a period extending up to half of the maximum punishment prescribed therein, Section 436A of the CrPC would be applicable and the accused may be entitled to be released on bail. This provision has been inserted in view of the right to a speedy trial, which is a core aspect of Article 21. If this right is violated through a prolonged trial, the accused is entitled to the remedy of ‘default bail’.
5. Trial Procedure and Appellate Rights:
5.1 Jurisdiction and powers of special courts:
Under Section 43 read with Section 44 of the Act, offences under Section 3 are triable only by a Special Court constituted under the Act. Section 44 further defines the contours of the jurisdiction of such Special Court– these provisions were challenged by the Petitioners.
5.1.1 Trial of Scheduled Offence:
Section 44(1)(a) mandates that both the offence of money laundering and the related predicate offence would be triable by the Special Court established under the Act. The Petitioners had contended that various predicate offences arise out of special statutes that provide trial before special courts constituted under the relevant special statute, thereby resulting in a conflict between the Act and such other special legislation.
The Court resolved the latter concern by reading the provision to mean that in a situation where a special enactment provides for the trial of the predicate offence by another specially constituted court, both the trials for money laundering and predicate offence will proceed independently before their respective Special Courts, but in the same area where the offence of money laundering was committed. Thus, the offence will not be tried by the Special Court under the Act, in such a situation. The proviso to Section 44(1)(a) was further read down by the Court to provide that in a situation where the trial of the predicate offence began in another area prior to the Special Court under the Act being constituted, then it may not be open to the Special Court to transfer the case to its area. Thus, the proviso was held to be a directory rather than a provision, which would be exercised by the court in its discretion based on all relevant factors. This is because money laundering itself is treated as an independent offence, and thus, is subject to an independent trial.
5.1.2 Trial of Predicate Offence by the Special Court:
Section 44(1)(c), in distinction to Section 44(1)(a), allows the court which has taken cognizance of the scheduled offence to commit the schedule offence to the Special Court taking cognizance of the offence of money laundering, upon an application made by the ED. Thus, it may result in a trial of the predicate offence by the same Special Court trying the offence of money laundering under the Act. This provision was challenged to be violative of Articles 14 and 21 on the grounds that (i) No reasons are required to be submitted by the ED for its request, nor is the Special Court, seized of the predicate offence, required to give reasons for allowing such request. (ii) Several of the predicate offence are triable in accordance with the CrPC, which provides for the right of appeal from the Magistrate to the Sessions Court, and this right is not available if the trial is brought within the jurisdiction of the Special Court under the Act. (iii) The provision allows for committal of the case to the Special Court irrespective of the stage of the proceedings before the court seized of the predicate offence.
The last issue was resolved by the Court reiterating that an application for committal of the case to the Special Court ought to be allowed only after weighing all the relevant factors, rather than mechanically. The court must also keep in mind that the trial for both offences must be proceeded with independently, irrespective of whether the same court or different courts try the predicate offence and offence of money laundering. With regard to the accused right to appeal, the Court considered the right of appeal from the Magistrate to the Sessions Court. This matter was settled in the case of Kalyan Singh which held that taking away these rights of appeal (arising out of the CrPC) does not violate Article 21, as the CrPC itself envisages the possibility of taking away these rights under Section 407(1)(a)(iv) read with Section 407(8). Therefore, this additional right to appeal is not an inviolable right and can be reduced by way of a statutory provision. However, the Court acknowledged that it would be oppressive for a person who is charged with the predicate offence alone (and not with money laundering) to be tried under the Act and be subjected to the loss of their right to appeal before the Sessions Court. In such a situation, the relevant court may examine the request for transfer on a case-by-case basis after examining all aspects of the matter. Thus, in view of these interpretations, the Court found the clause to be constitutionally sound.
5.1.3 Discharge or Acquittal in the Predicate Offence:
The Explanation (i) to Section 44(1)(d) provides that the trial for money laundering would not be dependent upon any orders passed in the trial for the predicate offence. The Petitioners argued that this may result in an absurd or contradictory situation, where the accused may be found guilty of money laundering even if there is an order of discharge or acquittal for the predicate offence. Resolving this concern, the Court held that though the trials for money laundering and the predicate offence may be independent, the proceedings in relation to money laundering must necessarily fall if there is an order of acquittal or discharge for the predicate offence.
5.2 Reversal of Burden of Proof:
In 2013, Section 24 of the Act was amended to shift the burden of proof from the prosecution to the accused in relation to the proceedings under the Act. As it stands currently, for persons charged with the offence of money laundering, the Court is mandated to presume that the proceeds of crime are involved in money laundering (Section 24(a)); and for persons not charged with money laundering, the Court may presume that the proceeds are involved in money laundering (Section 24(b)). The Petitioners’ challenge to the Section was that the shifting of the burden of proof onto the accused relieves the duty of the prosecution to prove the offence, and thereby entirely dilutes the presumption of innocence. Further, it was argued that for the reversal of the burden of proof to be constitutional, the prosecution has a duty to first prove foundational facts establishing the main elements of the crime, and this requirement is not fulfilled by Section 24.
The validity of Section 24 has now been upheld by the Court, which specifically noted that the presumption of innocence is merely a human right that can be limited by statutory provisions, as has occurred in the context of other statutes such as the NDPS Act. Moreover, the burden of proof is a rule of evidence, and so long as the accused is given an opportunity to prove his innocence, the shifting of burden is constitutional. However, before the burden can be shifted to the accused, three foundational facts must be established by the prosecution – (a) the commission of the predicate offence; (b) the property in question has been derived or obtained, directly or indirectly, as a result of the criminal activity/predicate offence; and (c) the accused is, directly or indirectly, involved in any process or activity connected with the said property. In view of the safeguard of the foundational facts and the opportunity afforded the accused to prove their innocence, the Section was found to be neither manifestly arbitrary nor lacking any reasonable nexus with the purposes and objects of the Act.
Section 4 of the Act provides for rigorous imprisonment for a term not exceeding seven years for persons found guilty of money laundering in relation to all predicate offences excluding offences under the Customs Act (Part B of the Schedule). For money laundering in relation to offences under the Customs Act, the maximum punishment that may be imposed is ten years. The Petitioners had challenged the absence of any gradation in the punishment with reference to the difference to the nature of the act committed by the principal offender vis-à-vis other offenders. Further, it was argued that the punishment is disproportionate in view of the fact that the punishment for money laundering is greater in relation to the punishment for several of the predicate offences listed in the Schedule.
This argument was rejected as being flimsy by the Court. The Court noted that Section 3 classifies participation in money laundering as a separate class of offence, independent of the predicate offence and money laundering as an offence has gradation within it. Therefore, the punishment, which has been fixed in relation to money laundering, has no nexus with the predicate offence. Therefore, neither the nature of the predicate offence nor the extent of one’s participation in the same has any bearing on the sentence for money laundering, once the commission of this independent offence is established.
5.4 Appellate Tribunal:
The Act provides for the establishment of an Appellate Tribunal under Chapter VI, to which all appeals in relation to orders of seizure, attachment, or possession of the property would lie. However, since 2019, the Tribunal has not seen any appointment; and thus, this grievance was raised by the Petitioners. The Court acknowledged the gravity of the concern raised but noted that this is not a ground for questioning the validity or efficacy of the provisions on attachment or seizure. Instead, the executive was directed to take corrective measures to ensure the continuous availability of a functional appellate forum.
Stuti Rai and Harini Raghupathy are Litigation Associates at Project 39A.