India: Constitutionality Of Section 5(1) PMLA (Prevention Of Money Laundering Act)

Last Updated: 18 April 2018
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

The original judgment can be accessed from:

http://lobis.nic.in/ddir/dhc/SMD/judgement/11-01-2018/SMD11012018CW53202017.pdf

In a bunch of writs being W.P.(C) 5320/2017 & other connected batch matters, decided by a Bench of Delhi High court, it has been held that

  1. The second proviso to Section 5(1) PMLA is not violative of Article 14 of the Constitution of India.
  1. The expression 'reasons to believe' has to meet the safeguards inbuilt in the second proviso to Section 5(1) PMLA read with Section 5(1) PMLA.
  1. The expression 'reasons to believe' in Section 8(1) PMLA, has to satisfy the requirement of law.
  1. There has to be a communication of the 'reasons to believe' at every stage to the noticee under Section 8(1) PMLA.
  1. The noticee under Section 8(1) PMLA is entitled access to the materials on record that constituted the basis for 'reasons to believe' subject to redaction in the manner explained hereinbefore, for reasons to be recorded in writing.
  1. If there is a violation of the legal requirements outlined hereinbefore, the order of the provisional attachment would be rendered illegal.
  1. There can be single-member benches of the Adjudicating Authority and the Appellate Tribunal under the PMLA.

The Court, with regard to the constitutionality of the second proviso to Section 5 (1) PMLA, held as under:

  1. Although the second proviso to Section 5(1) states that the property has to be involved in money-laundering and Section 5(1) states that mere possession of proceeds of crime is sufficient, the Court does not see any conflict in these expressions. When the definition in Section 3 PMLA is read with Section 2(1)(v) and the Explanation thereto, it becomes clear that the property which constitutes "proceeds of crime' is the property involved in money-laundering.
  1. The reasons to believe at every stage must be noted down by the officer in the file.
  1. While the reasons to believe recorded at the stage of passing the order of provisional attachment under Section 5(1) PMLA may not be forthwith at that stage communicated to the person adversely affected thereby, the reasons as recorded in the file have to accompany the complaint filed by such officer within 30 days before the ADJUDICATING AUTHORITY under Section 5(5) PMLA.
  1. A copy of such complaint accompanied by the reasons, as found in the file, must be served by the ADJUDICATING AUTHORITY upon the person affected by such attachment after the ADJUDICATING AUTHORITY adds its own reasons why he prima facie thinks that the provisional attachment should continue.

In the above writs, the main issue before the Hon'ble Court was the constitutionality of the second proviso to Section 5 (1) of the Prevention of Money-laundering Act, 2002 (PMLA) is ultra vires Article 14 of the Constitution of India.

Under Section 5 (5) PMLA, the Director or any other officer who provisionally attaches any property under Section 5 (1) PMLA has to mandatorily file, within a period of thirty days from such attachment, a complaint before the ADJUDICATING AUTHORITY stating the facts of such attachment. This effectively means that, within thirty days of the order of provisional attachment, the matter has to proceed before the ADJUDICATING AUTHORITY.

There are two provisos to Section 5 (1) PMLA.

Under the first proviso, no order for provisional attachment under that provision 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 (CrPC) or a complaint has been filed by a person, authorized to investigate the offence mentioned in that Schedule, before a Magistrate or a Court for taking cognizance of the scheduled offence, or a similar report or complaint has been made or filed under the corresponding law of any other country.

The first proviso to Section 5 (1), therefore, envisages the provisional attachment happening simultaneously with the filing of the challan in the criminal court for the offences under Sections 3 and 4 PMLA. In other words, the adjudication process under Chapter III and attachment of the proceeds of crime pending such adjudication process was not meant to commence earlier than the filing of a charge sheet/challan in the criminal case under Sections 3 and 4 PMLA.

Under the second proviso even pending the filing of the charge-sheet/challan under Section 173 Cr PC before the criminal court, a provisional attachment can be ordered under the second proviso to Section 5 (1) PMLA subject to the fulfilment of the conditions precedent.

There are, therefore, two parallel streams of prosecution and enforcement under PMLA:

  1. criminal proceedings before the Special Court for trial of the offences under Section 3 read with Section 4 PMLA and;
  1. the departmental proceedings before the authorities instituted under the PMLA, i.e. the Director, the ADJUDICATING AUTHORITY, and the AT, the orders of which are subject to appeal before the High Court.

Constitutional validity of the second proviso to Section 5(1)

"Proceeds of crime" under Section 2 (1) (u) of the PMLA has been defined to mean:

a) any property derived or obtained, directly or indirectly, by any person; as a result of criminal activity relating to a scheduled offence, or

b) the value of any such property, or

c) where such property is taken or held outside the country, then the property equivalent in value held within the country.

The important disjunctive or occurring between the expression 'the value of any such property' in (b) above and the expression in (c) where such a property is taken or held outside the country. On the contrary, the qualifying word such' in (b) refers to the earlier portion in (a) viz., property derived or obtained, directly or indirectly, by 'any person' as a result of criminal activity relating to a scheduled offence.

The above definition is to be read with Section 2(1)(b) which defines property' to mean any property or assets of every description, whether corporeal or incorporeal, moveable or immoveable, tangible or intangible including title to or interest in such a property and their assets, wherever located.

The Explanation to Section 2(1)(b) defines property to mean property of any kind used in the commission of an offence under the PMLA itself or of any scheduled offence.

Therefore, the expression value of any such property' would be a value equivalent to the value of a property derived or obtained directly or indirectly by any person as a result of criminal activity. The property itself may no longer be available but the equivalent value of such a property, whether held in cash, etc., would be available for attachment.

Section 5(1) of PMLA is attracted when only "if the person" is in possession of any proceeds of crime.

That person who is in possession of proceeds of crime need not be the person who is being tried for the scheduled offences or even PMLA offences, or he may be a person accused of a PMLA offence as described under Section 3 PMLA. Under Section 3 PMLA, any person who attempts to indulge or knowingly assists or knowingly is a part of or actually involved in concealment, possession, acquisition or use and projecting a claim the property constituting a proceeds of crime as an untainted property, shall be guilty of the offence of money-laundering. While the element of mens rea is not dispensed with, it is possible that a person who commits the offence under Section 3 PMLA is not himself or herself facing trial for any scheduled offence.

The first proviso to Section 5(1), seeks to restrict the applicability of Section 5(1) only to such persons who are facing trial for a scheduled offence. In case of such persons, until a challan/charge-sheet/final report is filed in the criminal court under Section 173 CrPC or cognizance is taken of the scheduled offence by a Magistrate before whom a complaint was filed, no provisional order of attachment can be made under Section 5(1) PMLA.

However, the second proviso deals with, any property of any person. This "any person" could be a person in possession of proceeds of crime, which is likely to be concealed, transferred or dealt with in a manner that would frustrate the proceedings relating to confiscation. The second proviso, therefore, is consistent with Section 5(1) PMLA insofar as the person in possession of the proceeds of crime may not be a person who is facing trial for a scheduled offence.

It has been pointed out by the Madras High Court in Dr. V.M. Ganeshan v. Joint Director (supra), there are three categories of persons who come within the ambit of the second proviso to Section 5(1) PMLA:

(i) person who is not accused of any offence, but who was merely come to possess, under fortunate or unfortunate circumstances, a property that represents the proceeds of crime;

(ii) person against whom a complaint is lodged, but the investigation is not yet complete and a final report under Section 173 of the Code of Criminal Procedure not yet filed; or

(iii) a person who is accused of committing an offence and against whom a final report has been filed under Section 173 of the Code of Criminal Procedure before the competent Court.

The second proviso to Section 5(1) PMLA would also cover a situation where, although a person has been suspected of committing the offence under Section 3 PMLA, the investigation is still in progress and the investigating agency has not reached a stage where it can file a report/charge-sheet under Section 173 CrPC. Such a person would also be covered by the second proviso to Section 5(1) of the PMLA.

It has been held in the above case that the main ground of attack on the second proviso to Section 5(1) of the PMLA is its alleged manifest arbitrariness, however, the Court did not agree that the Section is unconstitutional on the following grounds:

  1. Firstly, the mere possibility that a provision may be abused is not a ground to strike it down under Article 14 of the Constitution. The law in this regard has been explained in a number of decisions. Illustratively, reference may be made to Sushil Kumar Sharma v. Union of India (supra) where it was observed as under:

In Mafatlal Industries Ltd. and Ors. v. Union of India and Ors., [1997] 5 SCC 536, a Bench of 9 Judges observed that mere possibility of abuse of a provision by those in charge of administering it cannot be a ground for holding a provision procedurally or substantively unreasonable.

In Collector of Customs v. Nathella Sampathu Chetty, [1962] 3 SCR 786 this Court observed:

"The possibility of abuse of a statute otherwise valid does not impart to it any element of invalidity." It was said in State of Rajasthan v. Union of India, [1977] 3 SCC 592 "it must be remembered that merely because power may sometimes be abused, it is no ground for denying the existence of power. The wisdom of man has not yet been able to conceive of a Government with power sufficient to answer all its legitimate needs and at the same time incapable of mischief."

A Court examining the constitutional validity of a provision, particularly on the ground of possible abuse of the powers thereunder, has to be satisfied that there are sufficient safeguards in the provision itself as introduced by the legislature. In that regard, if the second proviso to Section 5(1) PMLA is carefully perused, it will be noticed that there are several conditionalities that will have to be satisfied before the power thereunder can be exercised:

  1. The power of provisional attachment can be exercised only by an officer of the rank not below the rank of a Deputy Director and such a Deputy Director or equivalent has to be authorized by the Director to exercise the powers.
  1. The officer has to record the reasons to believe that the property is
  1. involved in money-laundering;
  1. if not attached immediately, the proceedings of confiscation under the PMLA will be frustrated; and
  1. such belief as in (b) above has to be formed, on the basis of the material in his possession.

The fact that the Director will, therefore, have to first apply his mind to the materials on record before recording in writing his reasons to believe is certainly a sufficient safeguard to the impulsive invocation of the powers under the second proviso to Section 5(1) PMLA.

The word immediately also imports a sense of urgency into the situation that warrants exercise of the powers. The reasons to believe, as recorded by the officer must reflect this sense of immediacy which impels the officer to invoke the power. A proviso cannot be interpreted in a manner to render redundant the main provision itself. As explained in Dwarka Prasad v. Dwarka Das Saraf (1976) 1 SCC 128:

"18. We may mention fairness to counsel that the following, among other decisions, were cited at the bar bearing on the uses of provisos in statutes: Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. AIR 1959 SC 713; M/s. Ram Narain Sons Ltd. v. Asst. Commissioner of Sales Tax AIR 1955 SC 765(2); Thompson v. Dibdin (1912) AC 533; Rex v. Dibdin 1910 Pro Div 57 (4) and Tahsildar Singh v. State of U.P AIR 1959 SC 1012.

The law is trite. A proviso must be limited to the subject matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. 'Words are dependent on the principal enacting words, to which they are tacked as a proviso. They cannot be read as divorced from their context. (Thompson v. Dibdin). If the rule of construction is that prima facie a proviso should be limited in its operation to the subject matter of the enacting clause, the stand we have taken is sound. To expand the` enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.

In Union of India v. Dilip Kumar (supra), the Supreme Court reiterated, it is settled law that a proviso does not travel beyond the provision to which it is a proviso. Therefore, there has to be a satisfaction that the 'proceeds of crime' are likely to be concealed, transferred or dealt with in a manner that might frustrate the confiscation proceedings under the PMLA. This is, herefore, another safeguard as far as the second proviso to Section 5(1) PMLA is concerned."

The further safeguards are that the order of attachment by the Director or the Deputy Director, as the case maybe, is only for a period of 180 days to begin with. Further, within a period of 30 days after the passing of such order, the ADJUDICATING AUTHORITY takes over under Section 8(1) PMLA. Even under Section 8(1) PMLA, the ADJUDICATING AUTHORITY is not supposed to mechanically issue an SCN. The ADJUDICATING AUTHORITY has to apply its mind and again record the its reasons to believe that any person has committed an offence under Section 3 PMLA or is in possession of proceeds of crime. Here again, two kinds of persons are envisaged:

  1. A person who has committed an offence under Section 3 of PMLA; and
  1. A person who happens to be in possession of proceeds of crime.

The first level of safeguard by way of judicial review of an order of provisional attachment under Section 5(1) PMLA is the proceeding before the ADJUDICATING AUTHORITY under Section 8 PMLA. This is the further reason why it cannot be said that the powers under Section 5(1) read with the second proviso thereto are so wide and uncanalised or arbitrary as to warrant its striking down under Article 14 of the Constitution.

The Hon'ble Court also refused to agree that there is any manifest arbitrariness vitiating the second proviso to Section 5(1) PMLA, as contended by the Petitioners. As explained in Shayara Bano v. Union of India (supra):

Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14.‖

Hence, it was held by the Hon'ble Court that the second proviso to Section 5(1) PMLA of the PMLA is not arbitrary.

The complete judgment can be accessed from:

http://lobis.nic.in/ddir/dhc/SMD/judgement/11-01-2018/SMD11012018CW53202017.pdf

*The author, Vijay Pal Dalmia, Advocate Email: vpdalmia@vaishlaw.com Mobile: +919810081079, is a practicing lawyer in Supreme Court of India and High Court of Delhi with a standing of 32 years and also specializes in Anti Money Laundering laws (AML), White collar crimes, Cryptocurrency / Virtual currency laws.

© 2018, Vaish Associates Advocates,
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Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

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