Restoration of Properties under PMLA pending Trial - Quite the Quagmire

Efforts to 'restore' monies to victims of large-scale frauds using the Prevention of Money Laundering Act 2002 [PMLA] have received some attention in 2024. Simply put, the scheme works as follows (at least in most cases). Usually at the start of PMLA cases, properties allegedly involved in money laundering are frozen or attached by the authorities to prevent their dissipation. This is called a 'provisional attachment' that subsists for the duration of the trial for the alleged crime of money laundering if an Adjudicating Authority agrees with this decision in parallel proceedings (which, it almost always does). These assets are then sold off by the government, and the sale proceeds are distributed amongst victims on a pro-rata basis. Everyone goes home happy, and the law delivers justice for a change. Well, at least that is what you are supposed to be left thinking after reading about these exercises in the news.

At first, this news appeared a little strange to me. This is because I was labouring under a misconception about what the PMLA regime allowed in respect of properties attached by authorities. Till 2019, the law under Section 8 of the PMLA said that while attachments would subsist the life of the criminal trial, confiscation i.e., the actual transfer of title in the property to the government, happened only after the trial resulted in a conviction for offences of money laundering involving the assets in question. And Section 8(8) said that where the property stood confiscated, a court could consider a claim for restoration of property to a claimant who suffered a loss due to the offence. 

In this 2019 framework, then, no sales and pro-rata distributions could happen without convictions. This is not an ideal scenario in a legal system where trials take an eternity to conclude. What made it even more problematic, was that the global body responsible for reviewing anti-money-laundering compliance — the FATF — had consistently viewed this conviction-based confiscation framework as suboptimal.   

Enter amendments to the relevant regulatory regime in 2019. Section 8(8) of the PMLA was amended in 2018 and the following proviso—the legalese for a condition or exception to the norm—was inserted: "Provided further that the Special Court may, if it thinks fit, consider the claim of the claimant for the purposes of restoration of such properties during the trial of the case in such manner as may be prescribed." In other words, the restoration to claimants could happen even before conviction. The power was operationalised in 2019, through an amendment to the Prevention of Money Laundering (Restoration of Confiscated Property) Rules 2016, with insertion of Rule 3A. It lays out the procedure by which a court can exercise these powers of considering claims, and in addition to procedural compliances requires that (i) the case should have progressed to the framing of charges, and (ii) owners of the properties in question be heard before passing any orders. 

Here is the catch. The law, by which I mean Section 8 of the PMLA, still only provides for confiscation in the event of conviction at trial. And Section 9 of the PMLA further specifies that "all the rights and title" in such property shall vest in the government only after confiscation. Section 8(8) itself says that the idea of restoration flows after confiscation. So, of confiscation and transfer of title itself remains glued to the end of trials, how on earth is Section 8 conferring powers on the court to direct sale of assets for some kind of restoration to claimants pending trial? 

There are many questions which may spring to mind making this seem problematic. Let me run through a few. First, charge is meant to be a sieve through which 90% of the cases percolate onwards to trials, since the sieve is made entirely from the story crafted by the prosecution. So, in effect, there is no filter to make sure that only cases which may genuinely result in convictions are being opened up for pre-conviction sale of assets. Second, in line with this first issue, what about the very likely outcome of a case ending in an acquittal or it being quashed? Third, what about the pendency of an appeal against the attachment and its effect on any claim by the claimant? All of these questions beget no real answers from within the statute itself. 

Beyond these problems of logic and implementation, the justice-delivery proviso to Section 8(8) also brings us face to face with an old legal maxim, that the scope of an exception to the rule cannot be broader than the rule itself. In this case, it would seem that this principle is clearly violated. The rule here is the text of Section 8 PMLA, which links transfer of title to confiscation. The exception to this rule, in the form of this 2018 proviso to Section 8(8), permits transfer without confiscation. Probably this is why High Courts (here, and here) have expressed doubts about the legal soundness of the proviso in passing already. If anything, the legally proper course of action may have been to amend Section 8(7), which caters to a few situations where a trial cannot conclude due to death or the accused absconding and permits passing an order for confiscation in such cases also, to allow for a wider set of scenarios.  

Who cares, though? 

(While this post is restricted to the restoration to claimants pending a trial for money laundering, and by no means should one assume that the regime post confiscation is ideal either)

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.