Part 1 of article
In the last week of July, one of the most awaited decisions this year was pronounced in Vijay Madanlal Choudhary. The three-judge bench of the Supreme Court headed by Justice A.M. Khanwilkar (now retired) considered the constitutionality of various provisions of the PMLA (Prevention of Money Laundering Act, 2002). Most of these provisions, being deviations from the general procedural law which applies to other crimes, were assailed as being arbitrary, discriminatory, and violative of fundamental rights.
The bench, however, unanimously upheld each and every provision and amendment assailed. The basic premise of the decision is that money laundering by itself is one of the most heinous offences, comparable to terrorism and drug trafficking. The Court finds that the PMLA is a special statute, equipped with exceptions to criminal procedural law in order to combat this most heinous crime.
In an extraordinary turn of events, the Supreme Court has already issued notice in a review petition filed against the decision, less than a month after the order was passed. This article reflects on a few findings of the Court in Vijay Madanlal Choudhary and touches on the aspect of review.
Scope of the offence
Section 3 of the Act sets out the offence. The Section is widely worded, but a plain reading shows that the offence of money-laundering must have two components: (a) the money aspect, that is concealment, possession, acquisition or use of 'proceeds of crime', and (b) the laundering aspect – claiming or projecting such proceeds as 'untainted property'. It suggests that without the second aspect, the offence under PMLA is not made out.
The judgment has upturned this understanding. As per the bench, the word 'and' which separates these two components in Section 3 is to be read as an 'or' in order to give full play to the provision. In effect, concealment, possession, acquisition and use of 'proceeds of crime' all constitute independent offences of money-laundering.
The exercise of reading 'and' as 'or' (or the other way around) is not unheard of. The Court is often called upon to do so if it is the only way to give meaning to a provision. Section 3, however, in its plain meaning is not unworkable. Following the basic principle that a penal provision must be strictly construed, the Court could have chosen to not expand any further the already massive scope of the Section.
More confusion results from the Supreme Court interpreting 'and' as 'or' in this case – for example, if the Parliament had intended to use the word 'or', it could have replaced the word 'and' by an amendment. But in doing so, it would clearly not have been possible to say that concealment, possession, etc. of proceeds of crime were and had always been independent offences. On the other hand, the judicial clarification provided now risks placing that exact weapon in the hands of the ED for justifying ongoing and future prosecutions in respect of past actions (although a defence on the basis of Article 20(1) should be available to the accused).
The effect of holding 'possession' and 'concealment' to be independent offences is twofold – first, prosecution under the PMLA can be launched even in cases where the person is unknowingly in possession of property with criminal antecedents, and second, prosecution can be launched even if no action whatsoever is taken to "launder" proceeds of criminal activity from before the implementation of PMLA in 2005. The premise here is that a person commits a "continuing offence" of money laundering simply by retention of such proceeds.
Reverse burden of proof
Section 24 provides that the burden of proving that the proceeds of crime are untainted property lies on the accused – meaning that for the offence of money laundering, a person is guilty until proven innocent. The Court has found this reverse burden to be justified and in line with the objects of the Act.
The bench referred in this regard to the "foundational facts" that have to be established by the authorities initiating action, including the existence of proceeds of crime. In its view, once such facts are established, the onus of proving money laundering is reasonably discharged. Given the wide interpretation given to the offence – where the possession of proceeds of crime is itself a crime of money laundering, the reverse burden of proof practically leaves little scope for defense.
The twin conditions for bail
The conditions of bail under Section 45 are that (i) there should be reasonable grounds for believing that the accused is not guilty; and (ii) that he is not likely to commit any offence while on bail. The conditions are unusual, to say the least. For context, under the Code of Criminal Procedure, 1973 – such conditions are saved for only the most severe of crimes – those punishable by death or life imprisonment. In other cases, grant of bail depends not on any assessment of the guilt or innocence of the accused, but broadly on whether custody is essential to ensure compliance.
The 'twin conditions' in the PMLA were even struck down by a two-judge bench presided by Justice R.F. Nariman in Nikesh Tarachand Shah (2017) as they were creating discriminatory and manifestly arbitrary results, based on the nature of the 'predicate offence' instead of the offence of money laundering. The Court also noted that provisions akin to the twin conditions could only be upheld on the ground of "compelling State interest in tackling crimes of an extremely heinous nature" which was not true for all cases of money laundering.
Section 45 was thereafter amended, expanding their application from specified predicate offences to all offences of money laundering. In effect, the Parliament chose to address the defect of discrimination not by coming up with a reasonable classification for when the twin conditions should apply, but by making the conditions universally applicable. The amendment, which was ostensibly to cure the defect pointed out by the Supreme Court, only made the provision harsher and more blind.
However, the Court has now considered that the amended provision is valid. It disagrees heavily with the observations in Nikesh Tarachand which suggested that onerous qualifications on the right to bail are only justified in cases pertaining to the most heinous offences – such as those under the Terrorist and Disruptive Activities (Prevention) Act, 1987. In the Court's view, money laundering is no less heinous a crime.
A question that needs to be asked (especially with the now-enlarged scope of money-laundering) is whether every case of money-laundering is so inherently heinous and a "threat to the sovereignty and integrity of the country" that the accused regardless must remain in custody if it merely seems that they are guilty. Remember that while making its mind on this question, the court is also by law required to presume the accused guilty. Effectively, all of this makes bail under the PMLA an improbability at best. To make things worse, the Court explicitly finds that even when exercising writ jurisdiction in PMLA matters, the courts must apply these conditions.
The bench has also upheld various powers of the ED inter alia in relation to search and seizure, attachment of property, powers of arrest, summons, production of documents, etc., finding in respect of each power that it is subject to sufficient safeguards and has reasonable nexus with the purposes and objects sought to be achieved by the PMLA.
Importantly, the bench has also clarified that authorities under the PMLA are not police officers, and that proceedings under Section 50 (summons, production of documents, taking of evidence etc.) are inquiries and not "investigations". Production of Enforcement Case Information Report (ECIR) is also not required, and it is sufficient if the grounds of arrest are disclosed at the time of arrest. Statements recorded by the authorities have also been clarified to not be hit by Article 20(3) (right against self-incrimination) or Article 21 of the Constitution of India. In effect, the ED is validated as an authority having all police powers, but not subject to the same limitations.
Part 2 of article
In the first part of our article on PMLA, authors Kumar Visalaksh (Partner) & Ajitesh Dayal Singh (Associate), considered the constitutionality of various provisions of the PMLA (Prevention of Money Laundering Act, 2002), against the backdrop of the recent verdict of the Supreme Court in the Vijay Madanlal Choudhary matter. Part two of our article discusses what this crucial decision by the Supreme Court holds for industry going forward.
What comes next
There are two different things to be said about this decision. The first pertains to the findings on the various powers of the ED. While one may have hoped for a different result, these findings will most likely not make a change to the ED's approach. In the end, all the Court has done is accord its approval to the statute which carved out these powers, and which the ED was already enjoying. The second is a more discomforting thought, stemming from the possibility (and history) of misuse.
The PMLA makes exceptions to the established laws of evidence and procedure for an important sovereign purpose, viz. threats to the sovereignty and integrity of India. By equating money laundering to terrorism and drug trafficking, etc., the PMLA seems to have taken a different direction altogether. For example, after the 2019 amendment, the exceptions from the law (viz., the much higher standard for bail and reverse burden of proof) can be made for terrorists and copyright infringers alike. The PMLA has lost sight of the basic proportionality which holds criminal law together and makes it sensible.
At the end of the day, the PMLA is a penal statute, aimed at meting out punishment for money laundering. Money laundering is only punishable with a maximum of seven years imprisonment (ten, in cases of NDPS offences). Clearly then, even the substantive provisions of the PMLA do not consider money laundering to be a crime with the same magnitude as offences under the TADA or UAPA (punishable by death or life imprisonment), and for good reason. How is there any proportionality then in equating money laundering to such offences when it comes to procedure?
Ironically, while upholding such extreme measures reserved for the worst crimes, the Court has found that the PMLA is "neither a pure regulatory legislation nor a pure penal legislation", but an 'amalgam'. It is another matter that the amendments to the PMLA were moved as money bills, the validity of which is still pending before the Supreme Court. All in all, the larger meaning given to money laundering and the unqualified approvals to the reverse burden and bail provisions, together risk creating something quite disconnected from money laundering, i.e., a tool to bully and harass.
Notably, on August 23rd, the ratio of Vijay Madanlal Choudhary (on interim confiscation of property) was doubted in a decision authored by the Chief Justice in Ganapati Dealcom Pvt. Ltd., stating that much scope had been left for arbitrary application. Shortly thereafter, when the review petition was listed before and taken up by the bench comprising the Chief Justice along with Justice Maheshwari and Justice Ravikumar (who had both joined Justice AM Khanwilkar in Vijay Madanlal Choudhary), he observed that the bench was prima facie convinced that at least two of the issues raised in the instant petition require consideration, viz., the reverse burden of proof and the ECIR is not required to be provided to the accused.
For the time being, the Supreme Court has chosen not to reconsider the decision completely. Some important grounds on which review has otherwise been sought are already captured in our analysis above, such as the improper reading the word 'and' as 'or', and the absurdity resulting from treating money-laundering as a "continuing offence". Review has also been sought on the ground that the validity of the amended sections (such as on the scope of the offence and twin-conditions for bail) could not have been decided without first considering whether such amendments can be brought about as money bills.
Regardless, even a limited outcome of in the review petition will create an interesting space for PMLA practice. At the pace things are currently proceeding, one may not have to wait too long.
This article has been published in Taxsutra
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