Collapsing Distinctions between Scheduled Offences and the PMLA - A Cause for Concern

Just before retirement, a bench headed by Justice Ramasubramanian delivered a judgment in a batch of petitions concerning the 'cash for jobs scam' from Tamil Nadu regarding alleged irregularities during 2011 to 2015 in recruitment for public sector jobs in the state transport sector. For convenience, we will refer to the judgment by the lead petition Y. Balaji v. Karthik Desari & Anr. [SLP (Crl) No. 12779-781 of 2022 (Decided on 16.05.2022) (Y. Balaji)]. 

As it pertains to a complex set of facts and several issues, the judgment is naturally long (89 pages). But in this short post, I am concerned with only one set of the issues, which pertained to the proceedings initiated by the Enforcement Directorate (discussion starts at page 42, and court analysis from page 71). I argue that while the outcome on this issue in Y. Balaji may well be correct, the judgment has nevertheless missed a beat in not properly clarifying the relationship between the three integral concepts responsible for the operation of the Prevention of Money Laundering Act 2002 [PMLA]. 

The Mechanics of the PMLA and the Problem of Collapsing Distinctions

Section 3 of the PMLA defines the offence of money laundering. I want to focus on just the first part of this definition: "Whoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime" (Emphasis mine). Money laundering, then, requires someone to engage in "any process or activity" connected with "proceeds of crime". Section 3 goes a step further to illustratively list out by way of an Explanation (that was inserted in 2019) the various processes or activities  — concealment, possession, acquisition, use, or projecting property as untainted. 

Proceeds of Crime is not defined within Section 3, but elsewhere in Section 2(u) of the Act, and refers to any property derived or obtained by engaging in criminal activity relating to a 'Scheduled Offence'. This last phrase is a moniker for a list of offences that is set out in a Schedule to the PMLA and includes a variety of crimes from across penal statutes. 

If you go back to the definition of the money laundering offence in Section 3, it should now be clear that the offence is a 'parasitic' one. It does not exist fully independently, and requires commission of criminal activity in relation to a Scheduled Offence, which must generate Proceeds of Crime. Close attention to the framing of Section 3 is important. The offence is not punishing someone who engages with a process or activity with property that may be treated as Proceeds of Crime. Instead, it is a step removed. It requires a prior set of transactions to have occurred which lead to property being seen as Proceeds of Crime and the money laundering offence punishes the act of being involved in a separate process or activity connected with what are already Proceeds of Crime.

The difficulty arises when we look at what all constitutes a process or activity for Section 3: it includes the possession or acquisition of Proceeds of Crime. This brings us to the problem of collapsing distinctions in how the money laundering law works. On the one hand, the offence clearly requires a prior set of acts to have taken place, which led to the treatment of some property as Proceeds of Crime. On the other hand, the Section 3 offence can technically punish the possession or acquisition of Proceeds of Crime, which on first blush can easily collapse the statutory distinction between the prior set of transactions and the money laundering crime. On this uncritical reading, it is easy to artificially break down one transaction and see it as first generating Proceeds of Crime and thereafter resulting in its possession. 

Why is it a problem? Three obvious reasons stand out. First, because there could not be a clearer instance of punishing the same underlying act twice, and the idea of successive prosecutions for the same acts has been historically frowned upon as a classic exercise of state oppression, recognised in Article 20(2) of the Constitution of India proscribing double jeopardy. Second, such a reading of the statute would make every petty thief or corrupt official a money launderer by definition, which makes a mockery of the law and the offence of money laundering itself. Third, and flowing from this, is the rendering ordinary of what is an avowedly extraordinary procedural regime of the PMLA in terms of its harshness on bail and admission of prior statements to law enforcement officials. 

The correct reading of Section 3 would be to emphasise on the two-step working of the PMLA. First, look at the transactions which lead to generation of Proceeds of Crime. If this requirement is not satisfied, then close the case here itself (logic endorsed in Vijay Madanlal Choudhary). If it is satisfied, look at whether anything was done subsequently in respect of the Proceeds of Crime by the same person, or other person. On this reading, the crime of acquiring Proceeds of Crime would make sense only when applied to a person other than one who generated the Proceeds of Crime. Otherwise we have a peculiarly odd situation where a person first generates Proceeds of Crime and then acquires the same Proceeds of Crime by doing nothing more.  

This is why, in context of the Proceeds of Crime Act 2002 in the U.K. (which contains money laundering offences for that jurisdiction), the House of Lords and later the UK Supreme Court in R. v. GH [2015 UKSC 24] has tried to tread a path which respects the statutory scheme without also setting too high a burden on the agency by whittling down the scope of possession / use based offences. It has held that the transaction generating Proceeds of Crime cannot be artificially broken up into two parts, to treat the same transaction as first generating the proceeds of crime and then resulting in its possession or use. In essence, it has consistently held against collapsing distinctions between the underlying criminal activity and the money laundering offence. At the same time though, the UK courts have controversially been content with even the slightest change of circumstance reflecting a new transaction to satisfy the offence. 

The missed Opportunity of Y. Balaji  

Now let us look at the facts in Y. Balaji. Ministers / public officials in Tamil Nadu were alleged to have taken bribes in return for promising government jobs. One could argue that the facts in Y. Balaji went much further and consisted of several transactions having taken place in respect of the bribe-money after it was first obtained, and so technically the collapsing distinctions problem did not squarely arise. But it did not stop the Court from proceeding to frame this issue for consideration: "whether without identifying the proceeds of crime or a property representing the proceedings of crime and without identifying any process or activity connected to proceeds of crime as required by Section 3, which constitute the foundational / jurisdictional fact, ED can initiate an investigation and issue summons?". The second part of that question presents the problem we are considering.

It was argued that launching an investigation under PMLA required that the agency first identify proceeds of crime had been generated, and the investigation could only concern what was done in respect of the alleged proceeds of crime. This, according to the Court, was placing the cart before the horse (Paragraphs 93-94). The Court then gives its interpretation of how Section 3 works (Paragraph 99):   

"All the three FIRs allege that the accused herein had committed offences included in the Schedule by taking illegal gratification for providing appointment to several persons in the Public Transport Corporation. In one case it is alleged that a sum of more than Rs.2 crores had been collected and in another case a sum of Rs.95 lakhs had been collected. It is this bribe money that constitutes the ‘proceeds of crime’ within the meaning of Section 2(1)(u). It is no rocket science to know that a public servant receiving illegal gratification is in possession of proceeds of crime. The argument that the mere generation of proceeds of crime is not sufficient to constitute the offence of money-laundering, is actually preposterous. As we could see from Section 3, there are six processes or activities identified therein. They are, (i) concealment; (ii) possession; (iii) acquisition; (iv) use; (v) projecting as untainted property; and (vi) claiming as untainted property. If a person takes a bribe, he acquires proceeds of crime. So, the activity of “acquisition” takes place. Even if he does not retain it but “uses” it, he will be guilty of the offence of money-laundering, since “use” is one of the six activities mentioned in Section 3." (Emphasis in original)

The Court seems to have completely missed the point for there is no appreciation of the two-step manner in which Section 3 operates. There is an undue emphasis on reading the illustrative list of activities or processes within the Explanation to Section 3, divorced from the substantive content of the provision which, at the cost of repetition, does not punish simply engaging in such activities with property that may then become Proceeds of Crime, but with property that is already Proceeds of Crime. This fatal misstep results in a whole-hearted support for collapsing the distinction between the first step of actually generating the proceeds of crime and the second step of doing something with it, as can be seen from the emphasised part in the extract above.

What perhaps ameliorates the problem is that Y. Balaji did not involve facts where there was nothing other than the first transaction of allegedly obtaining the bribe money. The Court could have arrived at the same outcome of there being a cause of action for the Enforcement Directorate without doing violence to the clear text of Section 3. Doing so would necessarily have required revisiting a more problematic precedent which, surprisingly, found no mention within Y. Balaji — the decision in Directorate of Enforcement v. Padmanabhan Kishore [SLP (Crl.) 2668 of 2022 (Decided on 31.10.2022)] rendered by a Three Justices' Bench in October 2022. 

Unlike Y. Balaji, the facts in Padmanabhan Kishore presented the collapsing distinctions problem much more starkly. A public servant was caught red-handed while accepting a bribe. This single act not only led to a prosecution for corruption offences, but also triggered a money laundering prosecution. The Madras High Court held that the money laundering prosecution could not be sustained as the facts had to reflect that an accused had done something with the proceeds of crime. The Supreme Court reversed, concluding that moment that bribe money exchanged hands it became Proceeds of Crime for the PMLA, and in one single movement it also satisfied the requirement under Section 3 of the PMLA of being in 'possession' of Proceeds of Crime. The decision, much like Y. Balaji, committed the same error in being blinded by the list of activities / processes mentioned in Section 3 without considering it in context of the overall text of the provision. 

Conclusion

It is appropriate to return to R v. GH here, where the UK Supreme Court recognised the likely harms that could follow from its reading of the law, and noted that:

"A thief is not guilty of acquiring criminal property by his act of stealing it from its lawful owner, but that does not prevent him from being guilty thereafter of an offence under one or other, or both, of those sections by possessing, using, concealing, transferring it and so on. The ambit of those sections is wide. However, it would be bad practice for the prosecution to add additional counts of that kind unless there is a proper public purpose in doing so ... The courts should be willing to use their powers to discourage inappropriate use of the provisions of POCA to prosecute conduct which is sufficiently covered by substantive offences, as they have done in relation to handling stolen property." (Emphasis mine)

Since there is no prosecutorial discretion in India of the kind available in the UK, the above observation leaves only courts as possible bulwarks against oppressive use of the PMLA given its intended breadth of coverage. Y. Balaji was a good opportunity for the Court to take up that mantle and start the long road to making the application and implementation of PMLA a reasonable exercise again. Unfortunately, because of how the Supreme Court looked at the issues, it failed to recognise the harms that followed by collapsing distinctions between the underlying offence and the PMLA altogether. One can only hope that whenever the next such opportunity arises, the Court pays close attention to not just the Explanation to Section 3 but the entirety of that provision, so as to restore the two-step process which is clearly endorsed by the statute itself. 

Old Wine in New Bottles? — The Judgment in Vijay Madanlal Choudhary (Part Two)

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.         

Guest Post: Revisiting the Term, "Reason to Believe", in Section 8(1) of the PMLA

(This is a guest post by Ishita Khurana)

Introduction

The Prevention of Money Laundering Act, 2002 (hereinafter, ‘PMLA’ or ‘the Act’) is a Special Statute enacted by the Legislature for the purposes of, inter alia, penalising the offence of money-laundering and confiscating the proceeds of crime projected as untainted money, traceable directly or indirectly to a scheduled offence. A mixture of civil and criminal provisions, its special stature is upheld with the aid of sections of reverse burden of proof, presumption in inter-connected transactions and the creation of quasi-judicial bodies with a rigorous system of inter-act appeals. Due to its special status, the internal safeguards become all the more vital to maintain its integrity and smooth functioning, with an emphasis on accountability of its adjudicatory bodies, traceable throughout the act, characterised with provisions demanding mandatory formation of ‘reason to believe’ prior to initiating its power of attachment, search or seizure of property, etc.

One such provision is that of Adjudication as under Section 8 of the Act, wherein the Adjudicating Authority (hereinafter, ‘AA’), on receipt of a complaint under Section 5(5) post-attachment of certain properties, or applications made under Sections 17(4) or 18(10), firstly, issues a show cause notice (hereinafter, ‘SCN’) based on the formation of ‘reason to believe’, secondly, pass an order regarding whether the said properties are involved or not in money laundering after considering the prescribed materials and testimonies, and thirdly, confirm the attachment, retention or freezing of such properties or perform related functions as laid down in the Act.

For the purpose of this article, the author will be limiting her discussion to sub-section (1) of Section 8, wherein we are concerned primarily with the occurrence, need and implication of the expression, ‘reason to believe’ with respect to the scheme of the Act, and whether a non-inclusion of the explicit need to record and communicate the said reason to the concerned noticee strips the teeth off its intended purpose.

Traditional Approach: Reasons Not Recorded 

Section 8(1) states that when the AA receives either a Section 5(5) complaint or an application under Section 17(4) or Section 18(10), if it has reason to believe that any person has committed an offence under Section 3 or is in possession of proceeds of crime, he may serve a SCN of not less than thirty days on such a person to justify his acquiring the concerned properties attached, seized or frozen under the respective provisions, along with relevant evidence or documentation, such that the said properties aren’t involved in money-laundering, liable to be confiscated. The term, ‘reason to believe’, unlike other sections, isn’t followed by the requirement of it being recorded in writing, neither is it indicated as to what shall be the basis of forming such reason (unlike the expressions, ‘material’ or ‘information’ in possession, found in other sections). Traditionally, it has been interpreted to mean a procedural formality wherein the only material available is the unilaterally sent complaint/application and the attached documents, by the concerned ED officers, spinning a one-sided story, and therefore, an order under Section 8(1) is not typically an adjudication order separately worthy of being challenged under Section 26, but rather a procedural notice to initiate involvement of the other side in the proceedings.

The AA is the competent authority to raise grievance pertaining to SCN issued under Section 8(1), which may be appealable under Section 26 in exceptional circumstances of great hardship involving abuse of law, injustice, irreparable loss and great prejudice on the face of the record and material available. A mere non-recording of fresh reasons, however, has been held to not qualify as a viable ground for appeal, until the AA fails to decide such a contention as per law, upon which the final order then be challenged in appeal.

While many a times various High Courts have mentioned the issuance of the said notice on reasons conceived by the AA, most either equated these as a rightful reproduction of the reason recorded in writing at the stage of provisional attachment [or under Sections 17(1) or 18(1)], or completely omitted mentioning the said reasons. In Brizo Reality Co. Pvt. Ltd. v. Aditya Birla Finance Ltd. [2014 (4) Mh. L.J. 849], the Court held that a notice under Section 8(1) incorporating the complaint in its entirety (including attached documents), along with the reasons recorded at the previous stage, is in itself sufficient ‘reason to believe’, warranting an SCN to be issued. Furthering the reasoning, one could argue that if, on the basis of the facts disclosed in the said enclosures, the AA isn’t convinced of valid reasons existing, he has the discretion to not issue the notice at all, when read in light with the words, ‘if’ and ‘may’ used in the provision. The very act of issuing indicates a formulation of such reason, as required. Recording it, in this case, isn’t a requirement of the said provision of a special act, carefully worded differently from its other provisions, and therefore, stating the fulfilment of this condition is sufficient compliance in itself.

Explaining how the importance of ‘reason to believe’ isn’t compromised while doing away with the need to record it, the Madras High Court has previously observed that the AA should not issue a notice automatically as an obligation, but after ensuring the existence of one of the two conditions as stipulated in the provision. An absence of such a reason shall result in no notice being issued, and a consequent lapse of provisional attachment order within the statutory time-limit. This ensures an application of mind on part of the AA, irrespective of its subsequent recording and communication or not. An enclosed attachment order incorporating most of such reason to believe is sufficient.

The most recent precedent confirming this line of thought appears to be G. Gopalakrishnan v. The Deputy Director. The Court drew a distinction between the interpretation of ‘reason to believe’, as occurring in Section 8(1) vis-à-vis Section 5(1), since the latter provides for an explicit recording of reason in writing unlike the former. The notice of Section 8(1) is based on the subjective satisfaction derived from the previously recorded reasons found in the complaint and its enclosures, which are self-explanatory. When R/w the procedure contemplated under the Adjudicating Authority (Procedure) Regulations 2013, no mandatory requirement of recording reasons afresh is contemplated at this stage and the notice so issue is legally sound; the subsequent failure to record and communicate reasons to the noticee thereof would not, therefore, vitiate proceedings, as per the traditional approach.

Understanding the Roots of Reason to Believe 

The term, ‘reason to believe’, is not defined anywhere in the PMLA. To understand its interpretation when read with the provisions of the Act, its origin, meaning and evolution over the years through judicial precedents needs to be understood. It is defined in Section 26 of IPC, as a sufficient cause to believe a thing and not otherwise. Such a belief is expected to be bona fide and based on information or material available on record, which in turn has a rational nexus or a live link to the formation of the requisite belief. Further, the Apex Court has held in plethora of cases that it is equally the duty of a quasi-judicial authority, as that of a judicial court, to always record reasons in support of its conclusion, especially whenever such authority is exercising some sort of a discretionary power. Moreover, ‘reason to believe’ has to be distinguished from mere suspicion. Recording of reasons reassure an application of mind in exercising discretion, as well as fulfils the sought-after objective of justice not only being done, but appearing to have been done as well.

The prima facie formation of belief should be rational, coherent and not ex facie incorrect or contrary to what is on record. Extended in the context of Section 8(1), it doesn’t mean the said reason has to be in agreement with the complaint/application it is relying on, it rather indicates a thorough perusal of the said documents with an application of mind so as to not act as a mere rubber-stamp, but to derive its reasoning from the content, irrespective of the earlier conclusion arrived at by the concerned authority. Further, issuing of notice in a standard pro forma manner has been decried and it is expected to include material particulars and a distinguishable application of mind. A notice issued without delving into the material and recording valid reasons has also been held as invalid in law, capable of vitiating proceedings.

The evolving affect the term has in practice when used in similarly drafted special acts can be traced through judgements like Biswanath Bhattacharya v. UOI [(2014) 4 SCC 392], wherein with respect to an absence of a statutory need to communicate reasons recorded, a distinction was made between the cases of Ajantha Industries and S. Narayanappa, the former holding communication mandatory, and the latter holding otherwise, which was preferred due to various appeal and review provisions safeguarding the rights of an aggrieved, not warranting a mandatory requirement being read into a lacuna. Similarly, the case of Dr. Partap Singh held, when a search warrant was issued without recording ‘reason to believe’ under Section 37, FERA, 1937, that it is not mandatory to state the grounds inducing reasonable belief in the warrant as long as enough material was relied on. Moreover, such a duty to record reasons, when absent from the section itself, and the general provisions of the Act, cannot be read into it as mandatory. In Aslam Mohd. Merchant v. Competent Authority, while judging upon the validity of an SCN issued under Section 68-H, NDPS Act, the Court observed that a mere requirement of formulating ‘reason to believe’ calls for such reasons to appear on the face of the notice or available through the materials being relied upon. The latter half of the observation, therefore, allows for incorporation of said reason through attached documents, such as a POA in a parallel PMLA matter.

Changing Dynamics around the Concept

The landmark judgement of the Delhi High Court, J. Sekar v. UoI [2018 SCC Online Del 6523], changed the understanding of the term, ‘reason to believe’ in the PMLA in an unprecedented manner. It observed that the inclusion of the term in Section 8(1) casts an equally important onus as envisaged under Section 5(1), for the AA to independently apply its mind while issuing SCN. Only when these reasons are expressed clearly can their legality and validity be tested by a reviewing authority, unlike in case of a mere mechanical reproduction of the words in the statute. An SCN is incomplete without the AA adding its own reasons as to how one of the two conditions laid down in the sub-section are being prima facie fulfilled. A subsequent communication of the said reasons to the noticee is also vital since a failure to disclose would amount to an illegality, unfixable vide Section 68 of the Act, rendering the entire proceedings illegal. This, read in light with Section 8(2) which provides for seeking a reply from the aforementioned noticee, shall also vitiate his right to natural justice, since a lack of access to the said reasons will hamper the noticee filing an effective reply.

Despite J. Sekar being stayed by the Supreme Court, it continues to hold precedential value, and is arguably binding in similar cases in future (of third parties), since the order is of an interim nature, not undermined unless finally set aside in appeal. 

In another case, Advantage Strategic Consulting, the Court briefly held that ‘reason to believe’ has to be recorded and communicated at every stage, including under Section 8(1), as a legal requirement, which when violated, will render the proceedings illegal. The term casts an onerous duty on the AA, for which it should be held accountable.

Shedding new light on the relevance of the term’s inclusion in the provision, a February 2020 Calcutta HC judgement, Excel Powmin [2020 SCC OnLine Cal 384] held that a recorded ‘reason to believe’ also forms part of the ‘materials on record and relevant information’ that the noticee relies upon while filing a reply in defense. Recording the same without AA applying its mind, or an absence of recording it altogether, is a factor strengthening the noticee’s defence. This becomes all the more relevant since the noticee has no remedy in law against the illegality of the notice itself until the culmination of trial, whereas this issue affects the very root of the proceedings. Moreover, unlike other statutes, PMLA has the principle of reverse burden of proof, making it impossible for the noticee to discharge the burden unless it has access to the allegations and said reason to believe. Therefore, to fulfill the intent and purpose of the Special Act, the recording and subsequent communication of ‘reason to believe’ has to be read into the provision. A mere adoption of the reason attributed at the stage of §5(1) is improper, defeating the objective of ensuring an independent application of mind and exercise of discretion as per jurisdiction vested under law.

Conclusion: Identifying Some Issues and Suggesting Some Answers

The recent evolution in the interpretation of the term, ‘reason to believe’ as found in Section 8(1) is nothing short of a game-changer. Seemingly trivial, this technical development of having to record and communicate reasons when not explicitly provided for in the section, has the power to vitiate proceedings in totality, on failure to abide by it. When talking in context of a Special Act where time is of the essence to ensure justice and the rightful protection of the nation’s wealth, it is of great consequence. It also raises the important issue of the conformity with principles of natural justice and the rights of a noticee who may eventually be innocent of a grave offence penalised under the Act.

As opposed to the traditional approach, the newly conceived reasoning is better embedded and substantiated in the contemporary dynamics of the relevant fields of law, however, in an attempt to tie loose ends, it is appropriate to discuss possible roadblocks at this juncture.

Firstly, as briefly discussed in Excel Powmin, the defect of not recording reasons may be construed as a mere irregularity, fixable when read with §68 of the Act. Turning to the keywords of the argument, ‘in conformity with the intent and purpose of the Act’, it may be argued that the mere omission fails to vitiate the operation of the notice, going by the bare text of the Act, which doesn’t cite it as a legal requirement. That, failure to comply with a technicality shouldn’t be allowed to deny the Enforcement Directorate to initiate proceedings against a potential offender and/or confiscate laundered property. On the other hand, it is contended that not recording and subsequently communicating the ‘reason to believe’ to the noticee thereof is in itself what defeats the intent and purpose of the Act, not curable under Section 68 PMLA adheres to the principles of natural justice, therefore, the noticee’s right to be heard under natural justice gets vitiated if (s)he’s denied access to the said reason at this stage. Hence, the omission is too grave to be treated as a mere irregularity, and holds greater consequences.

Secondly, if reasons are to be recorded and communicated under Section 8(1), the noticee shall also get the opportunity to challenge it while filing its defence under Section 8(2). However, the authority hearing the matter will be the same as the one issuing the notice, therefore, it is incompetent to question its own application of mind and hold the reasons arrived by it as prima facie defective. This violates the second principle of natural justice, nemo judex in causa sua. Legally indisputable, there may lie a procedural solution, wherein the SCN under Section 8(1) is issued by a separate Bench than that hearing the matter and passing the requisite order under Section 8(2), as has been previously directed by the Mumbai Appellate Tribunal. Although, for its effective implementation, an amendment in the appropriate Rules and Regulations providing for the same is required, until which it remains a powerless suggestion. Considering it an independently appealable order won’t resolve the issue in totality, while being cumbersome.

The current position remains captured in a sea of uncertainty, until there’s a conclusive judgement on the point by the Apex Court. In the recent times, the waves seem to suggest an inclination towards the newer interpretation of the provision in favour of the rights of the noticee and to promote greater accountability of the adjudicating body, yet, the practice isn’t uniform among subordinate courts. However, the true essence of a Special Act remains toothless if the value carried by expressions like ‘reason to believe’ isn’t realised and implemented with all its force. The mention of the term in Section 8(1) remains a mere formality if not supplemented by its recording and communication, creating a doubt on the wisdom of the legislature in including it in the first place while drafting the provision. On the other hand, if its interpretation is widened, it’ll also add an additional internal safeguard, to protect and forward the intent with which the PMLA was enforced. Any further confusion regarding the same should be resolved in the near-future, since the issue remains sub-judice in the Supreme Court, as an SLP against the judgement initiating these waves of change.

Attachment of Property, Freezing Orders, and PMLA Investigations: The Need for Reasonable Exclusions

In almost any prosecution, the property used to commit a crime becomes case property (a murder weapon). In some kinds of prosecutions, this extends to locking down the site of criminal acts (a brothel or a gaming house). There are also other prosecutions, such as those for money laundering, where a major focus is on identifying the property generated from criminal acts (flat bought by public servant from bribe money). 

Countries across the world take the view that for effective deterrence of crime, law enforcement must also have powers to take away the proceeds of crime besides prosecuting the criminal act itself. In India, this translates into empowering law enforcement agencies with ability to pass orders for attachment / freezing of assets, to restrain anyone from altering / transferring property that is identified as part of the proceeds of crime. The pre-eminent example of this attachment / freezing order regime in India is the Prevention of Money Laundering Act 2002 ["PMLA"]. 

Broad Powers 

Currently, Section 5 of the PMLA confers upon investigating officers a power to provisionally (for upto 6 months) attach property which is believed to be "proceeds of crime" [Or property that is "involved in money laundering", which may or may not be understood to mean a different thing]. To appreciate the breadth of this power, take a look at how Section 2(u) of the PMLA defines the phrase "proceeds of crime"

"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;

[Emphasis mine] 

 

Keeping aside the fact that the exact scope of this definition is still uncertain even to courts and is almost infinitely broad, there are three key takeaways from the definition: (i) Proceeds of crime can either be the actual property obtained through criminal activity or its value; (ii) The criminal activity itself need only be relatable to a scheduled offence [the list of predicate offences which allow invoking the PMLA].

What we have, then, is a power conferred upon investigating officers to take away almost any asset or property that they can show as having links to the alleged acts of criminality in a case. For example, it means the agency can issue warrants of attachment of a house, as the accused would have invested some money in building / buying the house which will be shown to bear a link to the alleged acts of criminality that are connected to the scheduled offence. And where the property itself is not identifiable, then it would probably trigger an attachment order qua certain amounts lodged in bank accounts.  

 

Safeguards

The breadth of provisional attachment powers under the PMLA necessitates the existence of some legal safeguards to prevent undue hardship at the hands of executive officers. Enter, the three-step logic of the PMLA. The argument, essentially, is that the PMLA contains a multi-level system of safeguards to prevent abuse:*

1. First level — Provisional Attachment: Provisional attachment orders are time-barred and can only be issued if there are "reasons to believe" that property is the proceeds of crime / involved in money laundering. These reasons must be in writing. Further, such orders cannot interfere with enjoyment of immovable property;
2. Second level — Confirmation: Within thirty days of issuing a provisional attachment order, a complaint must be sent to the Adjudicating Authority which then decides whether or not to confirm the provisional order. This is an independent tribunal which operates totally separately from the criminal court. At this stage, everyone interested in the property has the chance to make their case to show why it shouldn't be attached, and a reasoned order must be passed by the Authority to justify its conclusions. This process is, again, time-bound.
3. Third level — Appeal: A right of statutory appeal before an Appellate Tribunal for Money Laundering exists for all persons aggrieved by the orders of the Adjudicating Authority.

In almost any writ petition challenging attachment orders, this is a standard response on behalf of the law enforcement agencies to argue that the matter should remain within the PMLA system and not be taken up by the court. 

The Need for Reasonable Exclusions

The three-step logic of the PMLA does offer some safeguards, in theory at least. But even so, this setup has critical design flaws. 

The broad attachment powers of the PMLA exist in a system where eventual confiscation of the proceeds of crime requires a prior criminal conviction for money laundering offences. Therefore, almost every attachment order will likely subsist for the several years that it takes for any prosecution to complete. It also means that once a person fails to secure any relief through the three-step PMLA process, she will not be entitled to any enjoyment of her own property.

While this might not be a problem for small, replaceable items, such as a watch or a laptop, it becomes an unimaginable problem where the property is a house. Or, far worse, is the situation where the property attached is money lying in bank accounts. Here, the three-step safeguards come to nought as all access to the property is gone the moment a provisional attachment order is passed. What this means, then, is that a person is rendered penniless, and crippled in her ability to sustain the long legal battle required to prove her case first before the tribunals and then later in the criminal trial. 

This is not the only drastic scenario that I can imagine. Consider, for instance, a case where money in bank accounts is attached as the actual proceeds of crime have since been sold. But now, these monies are held in the accounts of a company that has nothing to do with any money laundering allegation and offers gainful employment to hundreds of people. 

These routine examples from the world of PMLA prosecutions show just how unfair this legal regime is.  It is also squarely unconstitutional. This complete deprivation of property by passing attachment orders for the entire asset is by no means a reasonable or proportionate manner to secure state interests. If anything, it is a classic case of pursuing state interests by trampling upon the most basic rights of affected persons. 

A way to make this regime more palatable would be to start recognising reasonable exclusions from the scope of any attachment orders. For instance, allowing persons to remain in possession upon payment of rent; or allowing certain limited withdrawals to continue running a business and paying salaries; or paying lawyers' fees. These are not revolutionary ideas and are in fact already part of the law in other countries [See, e.g., Section 303Z5 of the U.K. Proceeds of Crime Act, 2002; Luis v. United States, 136 S. Ct. 1083]. By engrafting a process of recognising reasonable exclusions within the PMLA statutory framework — at the stage of provisional attachment orders for movable property and at the confirmation stage for immovable property — the core fairness and proportionality concerns would be answered to some extent. Moreover, it would also help save judicial time, as currently such reliefs are sought either through writ proceedings in High Courts or through interim orders before the Appellate Tribunal.  

Conclusions

The PMLA has not been a statute shy of legislative tinkering. Often, this has been a response to some or the other gaps being pointed out in the scheme of the Act. The absence of any reasonable exclusions from the attachment regime is as big a gap as there can be. It leads to a disproportionate deprivation of the basic rights (and needs) of innocent persons, and also wastes valuable judicial time and effort. Ergo, a happy ending? Remember, it is the hope that kills you. 

* The Three-level logic can also be used as a reference to the relief structure that exists besides the need under Section 5 for the officer to record reasons to believe. Here, the first step would be the Confirmation hearing, the second step the Appellate Tribunal, and the third would be the statutory right to move the High Court under Section 42 of the PMLA.

[This post was updated on 29.05.2020 to add a note on the three-step logic for reliefs within the PMLA]