The previous post in this two-part series considered how the Supreme Court's judgment in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. [SLP Crl. No. 4364 of 2014; Judgment dated 27.07.2022 ("Vijay Madanlal Choudhary") dealt with the offence of money laundering under the Prevention of Money Laundering Act 2002 ["PMLA"]. This post turns its lens to how the judgment understood the procedural facets of that statute. It first recaps the important holdings of the Court, and then turns to a critique. As a result, this post is longer than the previous one.
The Findings on Searches and Arrest
The challenge to powers of search conferred by the PMLA primarily arose due to amendments made to Section 17 of the Act in 2019, whereby a proviso was removed. This proviso was in the nature of a pre-condition that had to be satisfied before a search action under PMLA could be undertaken, and essentially required that an investigation in respect of the scheduled offence ought to have been started. By removing this anchor of the scheduled offence, it was argued that the entire logic of the PMLA had been turned on its head.
For arrests, the argument was much simpler — Section 19 of the PMLA enabled arrests without securing the minimum safeguards that the ordinary criminal procedure under the Criminal Procedure Code 1973 ["Cr.P.C."] allowed, and thus ought to be struck down. Unlike ordinary law, there was no system in the PMLA for an arrested person to know the case against her since no First Information Report was recorded under the PMLA. If Section 19 had to be saved, then the Court ought to declare that the PMLA equivalent — a document called the Enforcement Case Information report or "ECIR" according to Petitioners — ought to be shared with the arrested person.
The Court did not find any such problem with either the search or the arrest powers. In case of the former, it upheld the amendment and held that it expressed the legislative policy (not to be questioned) of treating money laundering seriously. It made sense to de-link the PMLA process from the scheduled offence to not leave the former hamstrung in cases where there is somehow a lapse in prosecuting the scheduled offence. If anything, this enabled the Enforcement Directorate to take action and then ask the sleepy police to also take action. In respect of safeguards, and here the analysis dovetails with the Court's observations on the arrest powers, it noted that comparing the PMLA with a penal statute was incorrect since it was a sui generis law. Even though the statute had used the word 'investigation' to describe the process of the Enforcement Directorate, it was more appropriate to read it as 'inquiry' instead given the PMLA had many facets besides investigating commission of crime.
With that context, it was of the view that the PMLA had many safeguards which made any worries about abuse were unfounded: the powers could only be exercised by very senior officers, with a necessary requirement of recording reasons in writing and forwarding them to a separate authority, and by a statutory provision penalising vexatious searches or arrests. In case of arrests, the Court held that an ECIR was not a First Information Report but an internal document; anyway, a statutory requirement under Section 19 to share grounds of arrest fulfilled the need to inform a person about the case against her.
On "Section 50" PMLA Statements
Section 50 PMLA enables Enforcement Directorate officials to record statements on oath from any person. It was subjected to a limited, twinfold challenge. Firstly, that clause must be read down in terms of Article 20(3) of the Constitution of India, and secondly, that statements recorded under Section 50 ought to be hit by the bar under Section 25 of the Indian Evidence Act 1872 ["IEA"] rendering confessions to police officers inadmissible, if sought to be used at a subsequent trial.
Since the PMLA was not seen as a penal statute by the Court, and 'investigations' were 'inquiries', it was only logical for the Court to reject submissions on this front as well. The rejection of the Section 25 IEA submission was resounding, with the Court relying upon a line of precedent stretching all the way back to the mid 1960s, where similar powers for officers of other agencies acting under the Customs Act 1962 and other state laws were upheld. The Court noticed the recent judgment in Tofan Singh [(2021) 4 SCC 1] which had extended such guarantees to the Narcotic Drugs & Psychotropic Substances Act 1985 ["NDPS Act"]. As had been argued earlier on this blog, Tofan Singh carefully tailored its findings on the peculiar statutory scheme of the NDPS Act, and the Court in Vijay Madanlal Choudhary relied on this aspect to distinguish it from the PMLA context.
For Article 20(3) of the Constitution, the Court observed that every person summoned to give statements under Section 50 cannot be a person 'accused of an offence', again relying upon precedent which went back to the 1950s concerning powers to record statements conferred under other laws including the Companies Act 1956, the Customs Act, and the Foreign Exchange Regulation Act 1973 ["FERA"]. However, where persons under arrest were questioned, it acknowledged that the clause may apply, leaving that determination open to the peculiar facts of each case.
On Bail
In 2018, a different bench of the Supreme Court in Nikesh Tarachand Shah [(2018) 11 SCC 1] struck down Section 45 of the PMLA partially, as it then stood. This clause imposed what are popularly known as the 'twin conditions' of bail — restrictive conditions that are found in some laws which require that before granting bail the prosecutor must be heard and a court should be satisfied that (i) the accused was not guilty of the offence, (ii) the accused is not likely to commit any offence while on bail (see here for more). The reasons behind striking down these parts of Section 45, as it had been explained earlier, was not because the court had any problem with the twin conditions, but only because the manner in which the PMLA applied the conditions was found to be arbitrary — it was based on the kind of scheduled offence allegations involved, and since the legislature had completely eroded any rationality in the scheme of the schedule this made application of Section 45, in turn, arbitrary.
In 2018, Parliament sought to solve this problem by doing away with this classification based application of Section 45 altogether — now, it would apply to all cases under PMLA. This amendment to the law was challenged as unconstitutional. The Court disagreed. Firstly, it explained how nothing prevented a future legislature from remedying a defect identified in Section 45 by Nikesh Tarachand Shah. Secondly, it held that the manner in which Parliament had chosen to remedy this defect — by abandoning the classification altogether — was not unconstitutional as money laundering is exactly the kind of offence which warrants such restrictive bail conditions. At the same time, the Court noted that the twin conditions would not apply in cases of being granted bail for delays in investigation [Section 167(2) Cr.P.C.] or prosecution [Section 436A Cr.P.C.]
Critiquing the Findings on Investigative Aspects
Section 17 — The Tail Wags the Dog
Recall that the very definition of money laundering under the PMLA is intrinsically linked to a scheduled offence. It is that property which is derived or obtained by engaging in acts relating to scheduled offences which become proceeds of crime, which are the heart and soul of the PMLA. Seen from this perspective, a statutory limit on the agency concerned with money laundering to hold its hands till there was at least a suspicion of there having been a scheduled offence makes sense. At the same time, it also makes sense to not ask agencies to wait till that investigation is over to do something. This is the balance that was struck by Section 17, through a proviso which required an investigation into the scheduled offence to have begun before the Enforcement Directorate undertook searches etc.
The Court, in trusting legislative policy, has now approved a state of affairs where the tail shall wag the dog. It is justified, the Court tells us, to allow the Enforcement Directorate to proceed to ensure the system can be cleansed of money laundering. All that is rhetoric, not reasoning. No matter which you look at it, in the current scheme of things where the existence of a scheduled offence is necessary for the PMLA, letting the PMLA process begin even before anyone has alleged the commission of a scheduled offence does not stand to reason. In effect, it makes the judgment of the Directorate also determinative for deciding whether or not a scheduled offence might have been committed, which is nowhere within its mandate. Considering the plethora of scheduled offences that already exist, one can appreciate the perception that this provision allows the Enforcement Directorate to create money laundering allegations where there might not be any, for which police station will disagree with a letter from the 'very senior officers' telling them to register a case for commission of scheduled offences?
We can keep taking turns at it, but a square peg will not fit in a round hole.
Non-Existent Safeguards?
Vijay Madanlal Choudhary extols the many safeguards present in the scheme of Sections 17 to 19 of the PMLA to consign worries about abuse of powers into the dustbin. The seniority of the empowered official is supposed to allay fears of misuse, as is the existence of a provision punishing vexatious exercise of power. None of this is new: the same logic was offered when coercive powers granted under other socio-economic laws were challenged in the past. What is, nevertheless, worthy of note is the uncritical, almost loving eye, with which the view is re-affirmed by the Court. The Petitioners made submissions about the biased nature of enforcement under the Act, the inherent limits of provisions punishing abuse of power — it would require internal sanction, which rarely comes — and the paltry rate of conviction to suggest that the threat of abuse and misuse was not mitigated by the purported safeguards. The Court did not so much as blink in the face of this criticism, and its suggestion of trusting the officials would certainly leave some corners bemused, as conservative a view as that may be.
The Sui Generis Argument is Flawed
The idea that the PMLA is not a penal law but a sui generis law is central to much of the Court's reasoning in Vijay Madanlal Choudhary. This is the justification for holding it unnecessary to bring the PMLA at par with other penal statutes in terms of procedural safeguards conferred upon persons who may get entangled in the PMLA process.
The previous post explored this argument from the perspective of how the civil and criminal machinery within the PMLA operated while comparing it with other laws. It argued, that the PMLA did not allow for its civil process to live independent of its criminal process; indeed, without a prosecution for the offence, the civil action would die a natural death sooner rather than later. So the idea that PMLA also deals with inquiries ending in civil consequences is a half-baked truth at best.
We need to return to that comparative perspective and now look at the PMLA together with the other kinds of socio-economic offences that have been passed over time, to assess the Court's reasoning when it comes to procedural safeguards regarding questioning persons. It is difficult to take stock of all such laws passed at the state and central levels, but it would suffice if we take note of some primary central ones — the Customs Act 1962 (preceded by the Sea Customs Act of 1878), the Companies Acts of 1956 and 2013, the Foreign Exchange Regulation Act 1973 ["FERA"]. Vijay Madanlal Choudhary draws comparisons between the PMLA and these laws, for which the Supreme Court has repelled legal challenges in the past by holding that the questioning of persons under those laws is for an inquiry unlike criminal investigation, to hold that the PMLA ought to be treated similarly.
This comparison is flawed, because while the Customs Act, or FERA, or even the Companies Act, allow officers to file a civil action for penalties at the end of an inquiry, there is no such option in the PMLA. So, in case of the former, the idea that powers to question people or even arrest them are not necessary linked to a future prosecution has at least some legs to stand on because that outcome is statutorily possible. Of course, this does not address the problem in deciding whether procedural safeguards that are relevant during an inquiry should apply basis how an inquiry ends, and whether Article 20(3) should not apply to questioning and Section 25 IEA should not apply in the cases where the inquiry does result in a criminal prosecution. For the PMLA, there is no such possibility; a standalone civil action cannot last beyond 180 + 365 days. What's more, the PMLA is linked to the fact of a crime, and thus any inquiry where persons accused of that prior offence are called, are already placed very differently from individuals suspected of customs duty evasion.
The theoretical sophistry that the Court had been able to rely upon in the past with FERA or the Customs Act is simply not available to it when it comes to the PMLA, where without the criminal action nothing survives. Yet, somehow, this distinction has escaped the Court's attention, and it applied judgments decided in context of other laws.
The few grains that the Court does throw towards procedural safeguards, it fails to flesh out. Imagine that earlier judgments on Article 20(3) and statements to officers under socio-economic laws did not clearly say that an arrested person ought to be treated differently. Vijay Madanlal Choudhary does this much, at least, but in a rather half-hearted manner. Secondly, in refusing to share the ECIR with an arrested person, the Court finds that the clause requiring sharing grounds of arrest would do the job. It would have helped if the Court could stress upon the manner of sufficiency required in these grounds if it was treating them as a substitute for being supplied a copy of the ECIR itself. In practice, it is all too common for the agency to simply state that a person is arrested for committing a Section 3 PMLA offence, nothing more and nothing less. By fleshing out the nature of grounds, the Court could have prevented this from continuing. Now, it would fall upon the High Courts to, hopefully, breathe some life into this clause.
A point, also, about Tofan Singh would be in order. The Court has held that the judgment was unique to the NDPS Act context and could not be extended to the PMLA. This is, undoubtedly, correct. As had been noted at the time, Tofan Singh was unlikely to provide any succour beyond the NDPS Act because of how the Court went about examining the issue then. Still, the manner in which Vijay Madanlal Choudhary suppresses the points of similarity between the NDPS Act and PMLA is rather striking. For instance, it is nowhere mentioned how the NDPS Act also has confiscation mechanisms in place, much like the PMLA.
Assessing the Revival of Section 45 Twin Conditions
Nikesh Tarachand Shah, much like Tofan Singh, dealt with the form of a problem rather than its substance (both were authored by the same judge, incidentally). Here, that problem was the twin conditions of bail.
The problem with Section 45, according to Nikesh Tarachand Shah, was that it imposed the restrictive bail conditions by creating an illogical classification between kinds of cases. It accepted that such conditions are legal and necessary where compelling state interests exist, but recognised that not every case of money laundering would be the same, and adopting a monetary threshold to gauge seriousness made sense. This logic of the threshold had been done away with, while at the same time multiplying the total number of scheduled offences manifold. This was a problem because the underlying offences were very different and since money laundering necessarily turned to the scheduled offence, the nature of that offence was not an altogether irrelevant factor for consideration.
Parliament's answer to this in the 2018 amendment was not to repair the classification, but to do away with it altogether. In Vijay Madanlal Choudhary, the Court correctly notes that its earlier judgment had pointed out an error with the form and not substance of the twin conditions, but it failed to identify exactly what that error was while upholding the legislative response to the perceived problem. In concluding that the legislature could remedy defects and restore the twin conditions to PMLA, Vijay Madanlal Choudhary is right. But here, the manner of resolving the defect was to completely undermine the logic of the judgment in Nikesh, which the Court chose not to appreciate. Instead, the Court endorsed, whole-heartedly, the abandoning of a classification-based approach and the application of twin conditions to all PMLA cases. For, we are reminded again, money laundering is a very serious offence.
There is an obvious problem with that assertion, though, because unlike other crimes, at a basic level money laundering derives its seriousness from the seriousness of the underlying scheduled offence and what kind of proceeds of crime were generated there. Yes, terrorists and drug cartels might engage in money laundering and should not get bail easily is a plausible view, but the law as it works today paints these persons with the same brush as any copyright or trademark violators who may 'derive or obtain' any property by way of their violation. Such petty offences are not rendering the financial foundations and the economic integrity of the country unstable, with all due respect. To contend that these are hypotheticals unworthy of attention because the Enforcement Directorate will not waste time on such cases is not a good enough response, because a court is required to deal with the law and not how an agency may or may not choose to enforce it in its wisdom.
This is an odious conclusion, no matter which way we look at it.
Conclusions
There are many serious problems in how the Court has justified the refusal to treat the PMLA at par with other penal laws when it comes to procedural safeguards. Vijay Madanlal Choudhary has glossed over distinctions between contexts that are gaping chasms, acting under the illusion that these are minor cracks in the edifice of its immaculate reasoning. The conclusions, at many points, are starkly incorrect on law.
At the outset of this series, it was observed that Vijay Madanlal Choudhary is a conservative decision, inasmuch as the Supreme Court has simply remained faithful to its inglorious past of taking away all semblance of safeguards to personal liberty and property when it comes to socio-economic offences. Restrictive bail conditions in independent India first came for the essential supplies law before they became famous for anti-terror laws; reverse burdens were held good in 1964 when it came to gold smuggling; the guarantee of Article 20(3) was held inapplicable till customs officials or those from the registrar of companies concluded their inquiry given the theoretical possibility that such inquiries might, till that stage, not end in prosecution. More recently, it was okay for the accused in the 2G Scam and Coal Block cases to be denied a right of appeal.
Over time, not many people have had a problem with this growing body of law developing right under our eyes, because these were confined to specific areas of activity. Even for those with left-leaning inclinations, such laws were in fact lauded because of the detrimental impact that white-collar criminals and smugglers posed to the country.
What the PMLA does, is that it weaves together all the restrictive, rights-effacing clauses from this illustrious past in one fine blanket, and it then goes a step further. It is not restricted to just the smuggler or hoarder, but to practically anyone. It is not old wine in a new bottle, contrary to what the title might suggest. In its reach and deleterious impact on basic freedoms, the PMLA is truly a sui generis law unlike any other. The judgment in Vijay Madanlal Choudhary was an opportunity to trim it down to size and prevent it from becoming another MISA from the 1970s; instead, the Court has, for now, green-lit that very outcome.
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