Several provisions of the Prevention of Money Laundering Act had been challenged before the Supreme Court, which had heard the matter at length in February and March.
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A three-judge bench of the Supreme Court earlier today upheld various provisions of the Prevention of Money Laundering Act, 2002 ('PMLA'), thereby affirming the powers and jurisdiction of the Directorate of Enforcement ('ED'). Ruling over a batch of petitions mounting a challenge to the wide powers of the ED, the bench, comprising Justices A.M. Khanwilkar, Dinesh Maheshwari and C.T. Ravikumar, held that all the provisions under PMLA have a reasonable nexus with the objects sought to be achieved by the PMLA in preventing and regulating money-laundering effectively.
Upholding the validity of Section 3 of the Act, the bench rejected the argument of the petitioners that it is only upon projecting or claiming the property in question as untainted property that the offence of 'money laundering' would be attracted. It would mean that the mere possession of 'proceeds of crime' is also an offence of money laundering. The bench held that the expression "and" occurring in section 3 has to be construed as "or", to give full play to the said provision so as to include "every" process or activity indulged into by anyone.
The bench opined that section 3 is widely worded with a view to not only investigate the offence of money- laundering but also to prevent and regulate that offence.
The bench held that offence of money laundering is dependent on the illegal gain of property as a result of criminal activity relating to a scheduled offence. The offences listed in the Schedule to the PMLA are scheduled offences in term of Section 2(1)(y). A large number of offences have been included in the Schedule, such as offences under the Indian Penal Code, and the Narcotics, Drugs and Psychotropic Substances Act ('NDPS Act'), among others.
The bench opined that the ED couldn't prosecute any person on a notional basis or on the assumption that a scheduled offence has been committed, unless it is so registered with the jurisdictional police and/or is pending enquiry/trial, including by way of criminal complaint before the competent forum.
The bench made it clear that on receipt of such information, the jurisdictional police would be obliged to register the case by way of a first information report ('FIR') if it is a cognizable offence or as a non-cognizable offence, as the case may be.
If the offence so reported is a scheduled offence, only in that eventuality, the property recovered by the authorised officer would take the colour of proceeds of crime under Section 2(1)(u) of the PMLA.
Thus, if a person is finally discharged/acquitted of the scheduled offence or the criminal case against them is quashed by a court of competent jurisdiction, there can be no offence of money-laundering against them or any one claiming such property being the property linked to a stated scheduled offence through them.
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PMLA case timeline
November 23, 2017: In Nikesh Tarachand Shah versus Union of India & Anr., the Supreme Court declared Section 45(1) of the PMLA unconstitutional, insofar as two further conditions for release on bail are concerned, for violating Articles 14 and 21 of the Constitution.
March 29, 2018: The Parliament amended Section 45(1) of PMLA and replaced "the scheduled offence" with offences "under the [PMLA]".
May 9, 2018: Special leave petition (Criminal) filed before the Supreme Court in Vijay Madanlal Choudhary & Ors. versus Union of India.
October 27, 2021: A bench comprising Justices A.M. Khanwilkar, Dinesh Maheshwari and C.T. Ravikumar commenced hearing.
July 27, 2022: Supreme Court in its judgment in Vijay Madanlal Choudhary upheld, among other things, the power of the ED to arrest in money laundering cases. It upheld the constitutionality of the provisions of Sections 5, 8(4), 15, 17, 19 and 45 of the PMLA.
By Navdha Sharma
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However, the bench said that the ED could proceed with a standalone process under PMLA to attach and confiscate the proceeds of crime, if it has reason to believe, which is required to be recorded in writing, that the person is in possession of "proceeds of crime".
Upholding Section 5, which empowers the Director or officer not below the rank of Deputy Director of the ED for the purposes of attachment of property involved in money-laundering, the bench held that this provision provides for a balancing arrangement to secure the interests of the person as also ensuring that the proceeds of crime remain available to be dealt with in the manner provided by the PMLA.
'Proceeds of crime' means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.
The bench was of the view that section 5 had inbuilt procedural safeguards. For example, the ED has to satisfy itself that a person is in possession of any proceeds of crime, and 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.
The bench noted that the opinion and the reasons for such belief is to be recorded in writing, which has to be on the basis of material in the possession of the authorities. It added that the authorised officer cannot resort to action of provisional attachment of property (proceeds of crime) mechanically.
The bench clarified that attachment must be only in respect of property which appears to be proceeds of crime and not all the properties belonging to concerned person who would eventually face the action of confiscation of proceeds of crime, including prosecution for the offence of money-laundering.
The bench also upheld the validity of Section 8(4) of the PMLA, which empowers the ED to take possession of the attached property. The bench, however, clarified that this provision ought to be invoked only in exceptional situations keeping in mind the peculiar facts of the case.
The bench stated that it is possible that the special court in the trial concerning the money-laundering offence may eventually decide the issue in favour of the person in possession of the property as not being proceeds of crime or for any other valid ground.
Before the special court passes such order, the bench said, it would be a case of serious miscarriage of justice, if not abuse of process, to take physical possession of the property held by such person. Besides, the bench noted that it would serve no purpose by hastening the process of taking possession of the property and then returning the same back to the same person at a later date pursuant to the order passed by the court of competent jurisdiction.
The bench also upheld the ED's power to carry out search, seizure and arrest under Sections 17, 18 and 19 respectively. The bench said that these provisions have stringent safeguards and do not suffer from the vice of arbitrariness.
The bench reasoned that section 17 not only mandates the exercise of power by high ranking officials, of the rank of Director (not below the rank of Additional Secretary to the Union Government, who is appointed by a Committee chaired by the Central Vigilance Commissioner in terms of Section 25 of the Central Vigilance Commission Act) or Deputy Director authorised by the Director in that regard, but also to adhere to other stipulations of recording of reasons regarding the belief formed on the basis of information in their possession about the commission of offence of money-laundering and possession of proceeds of crime involved in money-laundering.
Such recorded reasons, the bench added, along with the materials, is required to be forwarded to the three-member Adjudicating Authority (appointed under Section 6 of the PMLA; headed by a person qualified for appointment as District Judge) in a sealed cover to be preserved for a specified period, thus guaranteeing fairness, transparency and accountability regarding the entire process of search and seizure.
"This is unlike the provision in the [Code of Criminal Procedure] where any police officer including the Head Constable can proceed to search and seize records or property merely on the basis of allegation or suspicion of commission of a scheduled offence", the bench said.
Similar reasons were given by the court to uphold the validity of sections 18 and 19 of the PMLA.
The bench found no fault with Section 24 of the PMLA, which puts the burden on the accused to prove that proceeds of crime are untainted property. It held that this section applies to proceedings before the Adjudicating Authority regarding confirmation of a provisional attachment order, and eventually, for ordering confiscation of the attached property for vesting in the Union Government as well, to the proceedings before the special court empowered to try the offence of money-laundering.
It held that only because the burden of proof under certain circumstances is placed on the accused, the same, by itself would not render the legal provision unconstitutional.
The bench noted that the existence of proceeds of crime is a foundational fact, to be established by the prosecution, including the involvement of the person in any process or activity connected. Once these foundational facts are established by the prosecution, the onus must then shift on the person facing charge of offence of money-laundering — to rebut the legal presumption that proceeds of crime are not involved in money-laundering, by producing evidence which is within their personal knowledge. In other words, the expression "presume" is not conclusive.
The bench also noted that there are other statutes, such as the NDPS Act and the Customs Act, which also provide for the reverse burden on the accused.
The bench also upheld the validity of Section 44, which says that an offence punishable under the PMLA and any scheduled offence connected to the offence under that section shall be triable by the special court constituted for the area in which the offence has been committed: provided that the special court, trying a scheduled offence before the commencement of this Act, shall continue to try such scheduled offence.
The proviso in clause (a) of sub-section (1) of section 44 is to be regarded as directory in nature and this provision is also read down to mean that the special court may exercise judicial discretion on case-to-case basis, as per the bench.
The bench upheld the twin conditions required for the grant of bail under the PMLA. Section 45, while excluding the applicability of the Code of Criminal Procedure ('CrPC'), mandates that no person accused of an offence under the PMLA shall be released on bail unless — (i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and (ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that they are not guilty of such offence and that they are not likely to commit any offence while on bail.
The bench said that the offence of money-laundering has been regarded as an aggravated form of crime "world over". It is, therefore, a separate class of offence requiring effective and stringent measures to combat its menace, it opined.
The bench further noted that though the twin conditions provided under section 45 restrict the right of the accused to the grant of bail, it cannot be said that the conditions provided under section 45 impose an absolute restraint on the grant of bail. The discretion vests in the court, which is not arbitrary or irrational but judicial, guided by the principles of law as provided under section 45.
The bench also highlighted that similar twin conditions have been provided in several other special legislation, validity whereof has been upheld by the Supreme Court as being reasonable, and having nexus with the purposes and objects sought to be achieved by the concerned special legislation. For instance, Section 43(D)(5) of the Unlawful Activities (Prevention) Act.
"We have no hesitation in observing that in whatever form the relief is couched including the nature of proceedings, be it under Section 438 of the [CrPC] or for that matter, by invoking the jurisdiction of the Constitutional Court, the underlying principles and rigors of Section 45 of the [PMLA] must come into play and without exception ought to be reckoned to uphold the objectives of the [PMLA], which is a special legislation providing for stringent regulatory measures for combating the menace of money- laundering", the bench held.
The bench, however, clarified that the twin conditions can be relaxed only in context of Section 436A of the CrPC, which provides for the maximum period for which an undertrial prisoner can be detained.
"If the trial cannot proceed even after the accused has undergone one-half of the maximum period of imprisonment provided by law, there is no reason to deny him this lesser relief of considering his prayer for release on bail or bond, as the case may be, with appropriate conditions, including to secure his/her presence during the trial", the bench held.
Upholding Section 50 of the PMLA, the bench said the process envisaged by section 50 is in the nature of an inquiry against the proceeds of crime and is not "investigation" in the strict sense of the term for initiating prosecution, and the ED officials under the PMLA are not police officers as such. It elaborated that the stage of recording of statement for the purpose of inquiring into the relevant facts in connection with the property being proceeds of crime is, in that sense, not an investigation for prosecution as such; in any case, there would be no formal accusation against the noticee. The bench also said that such summons can be issued even to witnesses in the inquiry so conducted by the ED officials. Thus, the person who is summoned cannot claim the right against self-incrimination under Article 20(3) of the Constitution.
The bench, however, clarified that if the statement is recorded after a formal arrest by the ED official, the consequences of Article 20(3) or Section 25 of the Indian Evidence Act may come into play to make it so that the same being in the nature of confession, shall not be proved against the arrestee.
The ED records an internal document called the Enforcement Case Information Report ('ECIR') without informing the accused of its contents, and the acts for which they are being investigated. The bench held that as per the special mechanism envisaged by the PMLA, an ECIR cannot be equated with an FIR under the CrPC. The bench accepted the ED's argument that ECIR is an internal document created by the department before initiating penal action or prosecution against the person involved with a process or activity connected with the proceeds of crime.
The supply of a copy of ECIR in every case to the person concerned is not mandatory; it is enough if the ED, at the time of arrest, discloses the grounds of such arrest, the bench held. It, however, asked the ED to explore the desirability of placing information on its website which may broadly outline the scope of the authority of the functionaries under the PMLA, and measures to be adopted by them, as also the options/remedies available to the person concerned before the Authority and before the special court. The bench also refused to direct ED to put its manual on the website.
Click here to view the Supreme Court's full judgment.
Our previous coverage of the hearings in the matter earlier this year is available here, here, here, here, here, here, and here.