India: Consequences Of The Offence Under Prevention Of Money Laundering Act, 2002 - The Draconian Mandate

Last Updated: 5 May 2017
Article by Pranshu Goel

In this present period of technological advancement, where the world economies are interdependent and resources can be exchanged between the sovereign borders seamlessly, combatting the global phenomenon of money laundering is most urgent than ever.

As already highlighted by my fellow authors in the previous articles, assistance of the sophisticated communication technology and swift flow of capital and resources outside the national boundaries, has helped the money launderers across the globe to route the proceeds of crime through different jurisdictions, thereby distancing the proceeds from its origin. The secretive way of transferring the proceeds of crime to different jurisdiction in guise of proceeds from a legal activity primarily through or from countries having strict banking secrecy and relaxed exchanged control laws is the biggest hindrance for enforcement agencies around the world to combat this menace of money laundering.

Albeit, due to the clandestine nature of money-laundering, it is difficult to estimate the total amount of money that goes through the laundry cycle, the estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.

Looking at these devastating numbers, combatting money laundering is a key concern for the nations across the globe, because of its micro and macro effect. Though, the act of money laundering may not be characterized as a crime against any particular individual, howbeit, the same is against the society as a whole because of its significant implications on the economic stability and security of a country. Money Laundering is posing more threat than ever because of its unprecedented character, its unpredictable effect on the nation's financial system and the possibility of the laundered funds being used for terrorist financing, drugs, arms and human trafficking, etc.

In quest for a definitive anti money laundering law in India, Prevention of Money Laundering Bill 1998 was introduced in the Parliament on August 4, 1998. The same was revised in the year 1999 after incorporating the recommendations of the Standing Committee on Finance. The Bill received the assent of the Hon'ble President of India and became the Prevention of Money Laundering Act, 2002 ('Act') on January 17, 2003. The Act came into force with effect from July 1, 2005.1

In furtherance of the knowledge imparted by the other respected writers, the author through this paper, highlights and pens down his views on the draconian mandate of the legislature on the consequences of the offence of money laundering activities in or pertaining to India.

Attachment

In an unprecedented approach, the Act provides for attachment of any property being any proceeds of crime even before any findings or judgment by the judiciary of occurrence of any scheduled offence and the property or proceeds of crime being generated out of such offence. Section 52 of the Act does provides power to the enforcement directorate to attach the property suo-moto, for a maximum period of 180 days, if he on the basis of the material in possession has a reason to believe that a person is in possession of any proceeds of crime and such property or proceeds of crime is likely to be concealed, transferred or dealt in any manner which may frustrate the proceedings relating to confiscation of such property later down the line.

Albeit, the First Proviso to Section 5 of the Act provides that an order for attachment, in relation to a scheduled offence, can be made only after a charge sheet has been forwarded to a Magistrate under section 1733 of the Code of Criminal Procedure, 1973, or a complaint has been filed by a person, authorized to investigate the offence mentioned in the Schedule, before a magistrate or Court for taking cognizance of the scheduled offence, as the case may be, the Act also empowers the authority to attach property/ proceeds of crime, even before submission of the police charge sheet under section 173 of the Code of Criminal Procedure, if there has been reason to believe that if the property is not attached, it is likely to obstruct any proceeding under the Act. The reason to believe must be based on some material or tangible information that aid in formation of such belief, else the whole process is liable to be negated. Hon'ble High Court of Delhi in the case of Gautam Khaitan and Anr v. Union of India W.P. (C) 8970/2014 did acknowledge the aforesaid principle and held that there is no fetter on the officer concerned in exercising his powers of provisional attachment qua such persons, prior to the filing of a charge sheet with a competent court qua scheduled offences under section 173 of the Cr.P.C., as long as he has reasons to believe, on the basis of material in his possession, that if the property, which is involved in money laundering, is not attached immediately, the non-attachment could lead to frustration of proceedings under the Act.

One of the prominent cases seen in the recent times is the case of Mr. Vijay Mallya, the Indian liquor baron, whose properties have been confiscated on the premise that such properties reflect the proceeds of crime made out of a scheduled offence. Kingfisher defaulted in repayment of loans worth Rs. 9,091. 4 crore to a consortium of banks. In such a scenario, complaints, FIRs are filed and registered against Mr. Mallya on account of fraud and/or breach of trust, thereby establishing an offence under the scheduled offences under the Act and hence invoking the provisions of provisional attachment of the property under the Act.

The idea behind provisional attachment as prescribed in sub-section (1) of Section 5 is to prevent frustration of the criminal proceeds as they might be gradually converted and transformed with a view to inject them in the economy as clean money. Before any such damage is done, the urgency of the situation requires the provisional attachment to be made. If an opportunity of hearing is given prior to the attachment, the proceeds of crime may change its hands and form and tracing therefore may become difficult. Also, having regard to the exigency of the public interest involved in attaching the property believed to be the proceeds of crime involved in money laundering, the possession of the property is not disturbed.

The center point of Section 5 is to attach every property involved in money laundering setting aside the fact that whether it is in possession of the person charged of having committed a scheduled offence or any other person, provided that it must be proceeds of crime and are likely to be concealed, transferred or dealt with in any manner, which may hinder the proceedings relating to confiscation of such crime proceeds under the Act.

The severity of the instant provision is also evident from the fact that Section 5 does not entail the principles of natural justice. Section 5 of the Act, does not specifically provide an opportunity of being heard to the affected person, prior to passing the order of such attachment. Such denial of affording an opportunity of hearing is considered as a violation of the principles of natural justice.

When the Director has a reason to believe on the basis of material in his possession that the proceeds of crime or the property involved in money-laundering has to be provisionally attached, he shall make a provisional attachment order in accordance with the Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2013 and endorse a copy of such order to all concerned including the persons in possession of the properties and the Adjudicating Authority.4

The provision under Section 5 of the Act further states that a person whose property is 'provisionally attached' shall not be barred from its enjoyment. The notion 'provisional attachment' and 'enjoyment' therefore exist simultaneously and as such it is difficult to strike a harmonious chord between the two. The Madras High Court cleared the doubt by asserting that the Government can always ensure that the proceedings for confiscation are not frustrated by retaining symbolic, legal and constructive possession of the property.5 The Court explained further that once a property is attached and necessary encumbrances are entered in the records of Sub Registrar and once a prohibitive order is also passed, no alienation can take place and therefore the provisions of the Act are not frustrated. The Karnataka High Court rules in this context that when there is an appellate remedy against the substantive order, all subsequent actions of the authority under the statutory provision will remain subject to the result of the decision that would be taken by the appellate authority. When the petitioner pleaded that there is a residential house in the property and immediate physical possession of the same would affect her rights, the Court held that the authorities shall retain the constructive possession but shall not physically dispossess them for a period of three weeks till the petitioner files the appeal before the appellate authority.6

The provision further mandates the Director or the officer attaching the property to file a complaint to the Adjudicating Authority within thirty days of such attachment. Hon'ble High Court of Delhi, while explaining the adjustment between clause (1) and (5) of section 5 lays down that though the provisional order of attachment is valid for 180 days, it is required by the designated/ authorized officer to file a complaint before the Adjudicating Authority within a period of 30 days from the date on which the attachment is ordered. Thereafter, the Adjudicating Authority issues notice on the said complaint, if it believes that the person has committed an offence under section 3 of the Act within 30 days. Through this notice, the Adjudicating Authority calls upon the addressee to indicate the sources of his income, earning or assets out of which or by means of which he acquired the property so attached along with the evidences, relevant information and other particulars on the basis of which he would prove that the property in question does not attracts the offence of money-laundering7.

Punishment for the offence of Money Laundering

Offence of money laundering is a grave felony and provides for a punishment apart from the punishment prescribed under the scheduled offence. Section 48 of the Act provides for a rigorous imprisonment9 for term of not less than three years and which may extend to seven years, to anyone who commits the offence of money laundering. However, the maximum punishment may extend to ten years, where the proceeds of crime relate to an offence specified in Part IV of the Schedule i.e. offences under the Narcotic Drugs and Psychotropic Substances Act, 1985.

The Schedule annexed to the Act lists down offences under various civil and criminal legislations which form the basis of culpability under Section 3 of the Act. The Act mentions the offence, person liable under which, shall be held guilty under Section 3 and punishable under Section 4 of the Act. Conversely, if the offence committed by a person does not fall under any of the categories mentioned under the Schedule, the proceeds of such a crime shall not be covered under the purview of 'proceeds of crime' as mentioned under Section 3 of the Act. In other words, a person shall not be guilty of the offence of money laundering until and unless the proceeds of crime, being laundered relates to a scheduled offence10. Thus, until and unless no crime under a scheduled offence has been committed, punishment for an offence of money laundering cannot arise.

A person may not be held to have committed an offence under any of the scheduled offence, however, may be held liable for punishment under the provisions of the Act if found guilty of offence of money laundering under Section 3 of the Act. Here, yourselves may recap the article of my fellow authors, where the enlarged scope of Offence of Money Laundering under Section 3 of the Act is explained. Section 3 is not only restricted to the person accused of committing a scheduled offence but includes all those persons who directly or indirectly were involved in the process of projecting the proceeds of crime as an untainted property, irrespective of the fact whether they were involved in the scheduled offence themselves or not.

The Schedule to the Act provides for twenty-nine legislations to be termed as Scheduled Offence. The provisions of the Act shall only be applicable in the scenario, wherein, the proceeds of crime relate to criminal activity pertaining to such legislations only. Income Tax Act, 1961, Foreign Exchange Management Act, 1999 does not form part of the list and hence any act of tax evasion shall not qualify for offence under the Prevention of Money Laundering Act, 2002. Having said so, the offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is a scheduled offence under the Act.

The Act shall be applicable on residents as well as non-residents even if the scheduled offence is committed outside India but the process of money laundering is executed in India and vice versa.

Since the section provides for minimum sentence to be granted by the court, it does not accord any discretion to the court for awarding any lesser than the minimum prescribed sentence, even on any special or adequate ground. In the case of State of Andhra Pradesh Vs. S.R. Rangadamppa11, where the Hon'ble High Court of Andhra Pradesh reduced the sentence below the prescribed limit, the Supreme Court held that, "We are unable to understand why the High court reduced the sentence. The statue prescribes a minimum sentence. It does not provide any exceptions and does not vest the court with any discretion to award a sentence beyond the prescribed minimum under any special circumstances. The learned judge has himself noticed that the sentence imposed is the statutory minimum. Having noticed that the statue prescribes a minimum sentence for the offence, the High Court has understandably reduced the sentence of imprisonment to less than the minimum permissible. The high Court was clearly in error in doing so."

The provisions of Section 4 providing for punishment for offence of money laundering are not retrospective in nature in as much as the charge of offence punishable under the Act cannot be levelled for transactions of projecting the proceeds of crime as an untainted property before the commencement of the Act. Hon'ble High Court of Bombay while deciding on the criminal bail matter of Hasan Ali Khan, held that a person cannot be prosecuted for an offence committed before the enactment of the Act.

Punishment for providing false or incorrect information

Provisions of the Act not only penalize and punish the person involved in the process of money laundering, but also provides for penalty and punishment in a scenario, wherein, a person acts maliciously and provide false or incorrect information/ documentation to the Authorities.

Section 63 of the Act provides for Punishment in the aforesaid scenario, but is divided into two segments, one providing for the penalty and punishment in a scenario where a person willfully and maliciously provides wrong information and other where the person, though legally bound to state the truth, refuse to answer any questions or sign any statement made by him.

Sub Section (1) to Section 63 of the Act provides for imprisonment for a term which may extend to two years or with fine upto Rs. 50,000 or both, where, a person knowingly, intentionally, with an ill intention gives false information causing an arrest or search to be made under the provisions of the Act. Thus, the provisions of the Act, also envisioned the situation of misuse of the draconian provisions of the Act for one's ulterior motives and hence provided for punishment or penalty in such a situation. Reading between the lines of the provision, would suggest that prosecution is not mandatory in such a scenario, and the court may only levy penalty in such a scenario. The provision, does not provide for the minimum quantum of the punishment nor the penalty. The provision only provides for a maximum punishment of three years imprisonment. It is at the discretion of the court in fixing the degree of punishment or penalty or both, however imprisonment cannot be for more than three years.

Furthermore, in terms of Sub Section (2) to Section 63 of the Act, the Authority is entitled to impose penalty which shall not be less than five hundred rupees but which may extend to ten thousand rupees for each default or failure by a person in respect of:

  1. Failure to provide the truth, to the concerned authority, in respect of any question or matter in relation to an offence under section 3 of the Act.
  2. Refusal to sign any statement made by him for which he is legally obliged to the authority
  3. Omission to attend or produce books of account or document in accordance of the summon issued under section 50.

The instant provision only provides for a miniscule penalty and has not laid down any punishment on such failure or deliberate refusal. However, for deliberate failure to acknowledge the summons issued under Section 50 of the Act may result into a simple imprisonment for a term which may extend to six months or fine or both in terms of the provisions of Section 174 of the Indian Penal Code, 1860.

Scheme of the Section makes it imperative for the authority to give a reasonable opportunity of being heard to the person concerned before imposing any penalty or launching any prosecution proceedings.

Penalty on Reporting Entity

Under Section 12 of the Act, all Banking Companies, Financial Institutions And Intermediaries are required to maintain a record of all transactions, including information relating to transactions for a period of 5 years, in such manner as to enable it to reconstruct individual transactions, and furnish to the concerned Authorities under the Act, 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.

The failure on the part of the reporting entity to furnish such requisite information on being sought by the Director, may lead to a monetary penalty not less than Rs. Ten Thousand but which may extend to Rs. One Lakhs for each such failure.

Cognizable Offence

Any offence in terms of the provisions of Section 3 of the Act is a cognizable and a non-bailable offence. In view of Section 2(c) of the Code of Criminal Procedure 'Cognizable Offence' is an offence for which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant. Thus, if a complaint is made against a person or the police considers that a person is involved in the proceeds of crime and reflecting the same as an untainted property, the said person can be arrested on such suspicion without any requirement of FIR, or warrant.

However, Section 45 of the Act clearly states that notwithstanding the provisions contained in the Code of Criminal Procedure, no police officer shall investigate into an offence under the Act, unless specifically authorized by the Central Government by a general or special order. The provisions of the Act have given an over-riding effect upon any other law and further explicitly mentions that any provisions of the Code of Criminal Procedure which are inconsistent with the provisions of this Act which deal with attachment, confiscation, investigation and prosecution shall not apply.

Conclusion

During the second 'Enforcement Day' function organized by Enforcement Directorate on May 1, 2014, Hon'ble President of India, Sh. Pranab Mukherjee has said: "Money Laundering is a global menace, and law enforcement agencies of all countries have to co-operate to fight it". Although, the provisions of attachment, confiscation, penalty and punishment are draconian in itself, the same are considered reasonable and warranted to protect the interest (financial) of the victim and the public at large.

Footnotes

1 In line with the recommendations received from FATF, the Act has been amended in the year 2009, 2012, 2013 and 2015.

2 Section 5:

(1) Where the Director or any other officer not below the rank of Deputy Director authorised by the Director for the purposes of this section, has reason to believe (the reason for such belief to be recorded in writing), on the basis of material in his possession, that

(a) any person is in possession of any proceeds of crime; and

(b) 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 under this Chapter, he may, by order in writing, provisionally attach such property for a period not exceeding one hundred and eighty days from the date of the order, in such manner as may be prescribed:

Provided that no such order of attachment shall be made unless, in relation to the scheduled offence, a report has been forwarded to a Magistrate under section 173 of the Code of Criminal Procedure, 1973(2 of 1974), or a complaint has been filed by a person authorised to investigate the offence mentioned in that Schedule, before a Magistrate or court for taking cognizance of the scheduled offence, as the case may be, or a similar report or complaint has been made or filed under the corresponding law of any other country:

Provided further that, notwithstanding anything contained in first proviso, any property of any person may be attached under this section if the Director or any other officer not below the rank of Deputy Director authorised by him for the purposes of this section has reason to believe (the reasons for such belief to be recorded in writing), on the basis of material in his possession, that if such property involved in money laundering is not attached immediately under this Chapter, the nonattachment of the property is likely to frustrate any proceeding under this Act.

(2) The Director, or any other officer not below the rank of Deputy Director, shall, immediately after attachment under subsection (1), forward a copy of the order, along with the material in his possession, referred to in that subsection, to the Adjudicating Authority, in a sealed envelope, in the manner as may be prescribed and such Adjudicating Authority shall keep such order and material for such period as may be prescribed.

(3) Every order of attachment made under subsection (1) shall cease to have effect after the expiry of the period specified in that subsection or on the date of an order made under subsection (2) of section 8, whichever is earlier.

(4) Nothing in this section shall prevent the person interested in the enjoyment of the immovable property attached under subsection (1) from such enjoyment.

Explanation: For the purposes of this subsection, "person interested", in relation to any immovable property, includes all persons claiming or entitled to claim any interest in the property.

(5) The Director or any other officer who provisionally attaches any property under subsection (1) shall, within a period of thirty days from such attachment, file a complaint stating the facts of such attachment before the Adjudicating Authority.

3 Section 173 CrPC: Report of police officer on completion of investigation.........

4 Rule 3 and 4 of the The Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2005.

5 A.Kamarunnisa Ghori v. The Chairperson, Prevention of Money Laundering [CDJ 2012 MHC 3104]

6 Smt. P. Vijayalakshmi v. Deputy Director, Enforcement Directorate and Adjudicating Authority, Writ Petition Nos. 29626/2011 and 29829/2011.

7 Gautam Khaitan and Anr. v. Union of India and Anr. Delhi High Court W.P.(C) 8970/2014.

8 Section 4: Punishment for money-laundering.—Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees: Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words "which may extend to seven years", the words "which may extend to ten years" had been substituted.

9 In terms of Section 53 of the Indian Penal Code, rigorous imprisonment means imprisonment with hard labour. It is legitimate to expect a prisoner sentenced to rigorous imprisonment to do hard labour, whether he consents to it or not.

10 Schedule Offence are the offences provided in the Schedule of the Prevention of Money Laundering Act, 2002

11 State of Andhra Pradesh Vs. S.R. Rangadamppa 1982 CR.L.J. 2364; AIR 1982 SC 1492

This article was first published in the April, 2017 issue of the monthly journal published by The Chamber of Tax Consultants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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