Thursday, July 21, 2022

Prakash Industries and Interpreting the PMLA

The Delhi High Court has passed a detailed judgment in the matters of Hi-Tech Mercantile and Prakash Industries [Order dated 19.07.2022 in WP(C) No. 14999 of 2021 ("Prakash Industries"], touching on issues pertaining to the Prevention of Money Laundering Act 2002 [“PMLA”]. Holding in favour of the Petitioners and terminating the PMLA proceedings, the High Court considered four critical issues: (i) the interplay between a scheduled offence and the PMLA proceeding; (ii) the scope of the phrase “proceeds of crime”; (iii) the breadth of attachment powers, and; (iv) the application of Article 20(1) of the Constitution of India to the PMLA context. The first two issues were held in favour of the Petitioner, the third arose due to a purported conflict between earlier orders of courts, and the fourth was decided in favour of the Respondent. 

This post is not seriously concerned with the second issue of whether an allocation of a coal block could be seen as being proceeds of crime for the PMLA. Rather, the focus here is how Prakash Industries engages with the links between PMLA proceedings and the scheduled offence, while also elaborating on the purported conflict on understanding the scope of attachment powers. It is argued here that the Court’s conclusions on the attachment powers issue are ultimately correct. However, in respect of the latter issue,  the Court has created a curious contradiction by concluding that PMLA actions and scheduled offence proceedings are inextricably linked, but Article 20(1) would sever that link. The distinctions drawn are more an exercise in sophistry, looking to the form rather than substance of the matter, and do not do justice to the scope and ambit of the constitutional guarantee of Article 20(1). 

A Quick Background
The PMLA punishes practically anything to do with “proceeds of crime”, and it defines this concept in Section 2(1)(u):

“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 or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad;

Explanation. — For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence

If the PMLA relies on proceeds of crime to come into action, then proceeds of crime in turn rely upon the commission of a scheduled offence, which is defined in Section 2(1)(y) as referred to the offences that are specified in the schedules to the PMLA.

The Axis Bank - Seema Garg Controversy on Understanding "Proceeds of Crime" [Paras 66-81]
If we return to the proceeds of crime definition, it can be separated into three limbs — (i) property that is "derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence" (read with the explanation); (ii) the "value of any such property"; (iii) where "such property is taken or held outside the country" then property "equivalent in value held within the country or abroad".

In Prakash Industries, the Court observed that there appeared to be a conflict in how the second and third limbs of the proceeds of crime definition were being interpreted by courts. It noted the Punjab & Haryana High Court's decision in Seema Garg [Order dated 06.03.2020 in PMLA O&M No. 1 of 2019] as having read the statute in a manner contrary to the Delhi High Court's earlier decision in Axis Bank [Order dated 02.04.2019 in Crl. A. 143/2018].

What had Seema Garg done? It had held that the second limb (value of any such property) bore a live link with the first limb (property derived or obtained from a scheduled offence), to the degree that it must be borne from the first limb. So, if the proceeds of crime generated from committing the scheduled offence are cash, and that cash is invested towards building a house, then that house is the kind of property that the second limb covers. As against this, the third limb could cover any property of the defendant, acquired before or after commission of the offence, which was of equivalent value to proceeds of crime identified by the prosecution. If both the second and third limbs covered any property of equivalent value, this meant that one of the two was redundant, which could not be the correct way to read the statute. 

Axis Bank differed from Seema Garg by rejecting the view that the second limb only covers property that is birthed from the first limb. Instead, it held that both the second and third limbs could cover any property which was of equivalent value. There was no redundancy because the third limb only covered cases where the proceeds of crime were taken out of India, which was beyond the scope of the second limb. Noticing the possible hardship resulting from this reading, the Delhi High Court in Axis Bank had insisted upon requiring the prosecution to give reasons why it was going past the first limb and demonstrate that the proceeds of crime derived or obtained from commission of the scheduled offence were not available.     

In Prakash Industries, the Delhi High Court agreed with its earlier orders in Axis Bank, emphasising that the view taken in Seema Garg would amount to deleting the second limb altogether. Further, it held that such a view would limit the scope of attachment powers in a manner contrary to the legislative intent behind enacting the PMLA, as the statute imagined scenarios where proceeds of crime would be layered by sophisticated means rendering them untraceable for attachment. The Court re-emphasised the safeguard of requiring the prosecution to demonstrate why it had to resort to attach anything other than the proceeds of crime so identified. 

Limiting the second limb of Section 2(1)(u) to only cover property which was birthed from the proceeds of crime generated from the scheduled offence might appear too limited a view of the law considering its intent and the ease with which the proceeds of crime might be layered in the financial system — cash can get invested in a host of financial instruments, held in the names of various persons. Moreover, it is next to impossible to prove the level of causation demanded by Seema Garg where proceeds of crime go into a bank account and merge with existing balances — if INR 5,00,000/- alleged to be proceeds of crime hits an account which already had INR 5,00,000/-, then how do we establish that the watch bought from the bank account was due to the proceeds of crime and not existing balances? Which is why the more relaxed view adopted in Axis Bank is preferable. But, the cost of adopting this view is that it brings with it the very real risks of the Enforcement Directorate simply not making the effort to trace the proceeds of crime and instead attaching legitimate assets causing undue hardship to defendants and innocent third parties. To its credit, the PMLA does provide for an agency in the form of the Adjudicating Authority to exercise oversight over what the Enforcement Directorate does and ensure that this doesn't happen. That this Authority might not be doing its job is, arguably, not a valid reason to erect limits within the statute itself.         

The Scheduled Offence and PMLA: A Peculiar Relationship
It was contended by the Enforcement Directorate in Prakash Industries (as it is contended by this agency in many other cases) that the offence of money laundering is an independent offence and unconnected to the fate of the scheduled offence. Thus, it sought to argue that even if a court discharges / acquits the accused or quashes proceedings relating to the scheduled offence, that would not affect the PMLA proceeding since the latter was an independent offence. This argument is sought to be anchored in Section 44 of the statute which provides that PMLA proceedings are not 'dependent' on the scheduled offence. 

A cursory reading of Section 2(1)(u) and the definition of the money laundering offence would be enough to reject this contention — since proceeds of crime, the beating heart of the PMLA, are expressly linked to a scheduled offence, a finding that there was no scheduled offence would naturally entail that no proceeds of crime were generated, and thus the PMLA cause of action would not lie. A finding to this effect came to be passed recently by the Supreme Court in a peculiar fact context [J. Sekar v. Directorate of Enforcement, Crl. A. No. 738 of 2022 (Order dated 05.05.2022) — not cited in Prakash Industries]. But the language of the High Court in Prakash Industries in rejecting this argument of the Directorate is more expansive and hopefully marks the end to this particular contention being raised [Paras 36-65] (till the day the statute de-links "proceeds of crime" from the scheduled offence altogether).     

While on the one hand the Delhi High Court in Prakash Industries characterised the relationship between the PMLA cause of action and a scheduled offence as 'inextricable', it curiously did not find any problems in viewing these two as stand-alone processes when it came to application of the constitutional guarantee under Article 20(1) against retrospective punishment.  

"Article 20(1):— No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence."

The issues of retrospective penalisation before the High Court in Prakash Industries were straightforward. If the PMLA itself had come into force from 2005, then could it apply to cases emanating from scheduled offences registered prior in time? And, if a specific offence itself came to be added to the schedule on date X, then could a PMLA prosecution lie in respect of the proceeds of crime for cases registered prior to X date notifying the offence as a "scheduled offence"? 

The High Court concluded that allowing a PMLA prosecution to run in both these scenarios would not violate the bar against retrospective penalisation under Article 20(1). This is because the cause of action did not stand completed on the date of the commission of the scheduled offence and generation of any proceeds of crime, since the PMLA went beyond this and punished possession or use of such proceeds at any point of time. Thus, it was more like a situation where some elements for the cause of action were being drawn from a point of time prior to the legislation coming into effect, rather than the entire cause of action having been complete before that date and its character being changed retrospectively. 

Holding that the PMLA proceedings can subsist even in cases where the underlying scheduled offence was either prior in time to the PMLA coming into force, or the offence being incorporated into the schedule, is a conclusion which comes under some difficulty when scrutinised. Especially, if one is of the view — as the Court in Prakash Industries is — that the scheduled offence is inextricably linked to the PMLA cause of action. This is because before the coming into force of the PMLA, or Date X, the property generated by committing the crime could not be proceeds of crime, since the offence was not a scheduled offence. If the Act goes back in time to a point when the scheduled offence did not exist, it means that the properties in question were not proceeds of crime, and therefore it would not attract the terms of Section 3, PMLA. To place this in the language of Article 20(1) which prohibits punishment "for a violation of law in force at the time of the commission of the act charged as an offence", it is clear that the "act charged" in the PMLA context will always have to be read together with the concept of a "scheduled offence" which is what can lead to any proceeds of crime arising in the first place.

The second limb of Article 20(1) is also attracted here, something which the Court did not fully appreciate in Prakash Industries. Giving the PMLA retrospective effect is problematic because it would alter the nature of events completed in the past, rather than simply rely upon an acquired status or characteristic of persons or things to give the law effect. The commission of a scheduled offence which led to generation of some property is an event which, through a separate law, is sought to be saddled with additional liability.  This is unlike, say, the following scenarios:

  • A law is passed requiring persons to obtain a license for keeping alcohol at home. D has alcohol at home prior to the law being passed, and refuses to get a license. The law would, rightly, punish D for failing to get a license in respect of this alcohol which she had acquired prior to the law coming into force. The infraction here is the failure to get a license, and it would continue for each day that the person refuses to get a license. 
  • Possession of items already criminalised by an existing law is made more severely punishable by a new law. This new law would certainly apply to items possessed at a date that is prior to the law being enforced. However, it could not apply to cases already registered prior to the law coming into force. This scenario is akin to the one before the Supreme Court in Mohan Lal [(2015) 6 SCC 222] which in my view correctly noted that the NDPS Act would cover cases in which possession continued from a time prior to that Act coming into force, but incorrectly applied the Act to that specific case which had been registered prior to the NDPS Act coming into force and thus should have been governed by the Opium Act instead. 

The PMLA might be criminalising possession or use of certain items, but it is not analogous to issues of possessing alcohol without license or drugs after a law criminalises possession. This is because the PMLA relates back to a set of events (commission of scheduled offence) which when they were committed did not attract the additional penalty of inviting criminal proceedings under the PMLA against an individual. It is no better than a law which says that all persons convicted of any offence in the past will now be open to suffering additional prosecutions for having possessed or used property derived as a result of that offence. 

This issue of Article 20(1) would also prevent invoking PMLA for its attachment processes, because just how there is an inextricable link between the scheduled offence and PMLA prosecution, there is such a link between the PMLA prosecution and the attachment process. Unlike, say, the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act 1976 ["SAFEMA"] where forfeiture proceedings may use the fact of a prior prosecution but work entirely independent of such a prosecution, the proceedings of attachment and confiscation under the PMLA cannot exist independent of a criminal proceeding under the PMLA. Which is why relying on cases which term forfeiture under these parallel regimes as not being "penalties" for purposes of Article 20(1) — such as Biswanath Bhattacharya [AIR 2014 SC 1003] would be inappropriate for the PMLA context.

Conclusion
In a judgment where the High Court emphasised on the inextricable link between the scheduled offence and the money laundering offence, it has ultimately undone its own finding by enabling retrospective operation of the money laundering offence by, somehow, concluding that this link is perhaps not so inextricable after all. The latter is an erroneous view, which fails to give full import to a constitutional mandate carried in Article 20(1), and may expose countless persons to harassment by re-opening closed transactions on the strength of untested allegations by an agency. Since it has come at a time when the Supreme Court is also poised to deliver a judgment on various aspects of the PMLA, the observations of the Delhi High Court in Prakash Industries may end up having a rather short shelf life. In some respects, such an outcome might not be for the worst. Unless, of course, this judgment presages what is yet to come.

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