The Judgment in V. Senthil Balaji v. State — On Arrest and ED Custody (Part One)

On 07.08.2023, a Division Bench of the Supreme Court delivered its judgment in a batch of petitions concerning the legality of the arrest and detention of V. Senthil Balaji, a Minister in the State of Tamil Nadu, by officers of the Enforcement Directorate on allegations of offences under the Prevention of Money Laundering Act 2002 ["PMLA"] [V. Senthil Balaji v. State rep. by Deputy Director & Ors., Crl. Appeal Nos. 2284-85 of 2023 (Decided on 07.08.2023) ("Balaji")]. 

The facts are recounted at the outset in Balaji, and in the orders passed by the Madras High Court [here, and here] which ultimately led to the case moving up to the Supreme Court. Rather than set them out in the same extensive, and contested, detail, for this post I will only narrate the most critical aspects of the case: (i) There was an arrest by the Enforcement Directorate, (ii) A judicial order granting custody of V. Senthil Balaji to the Directorate was passed, (iii) The Directorate could not take his custody within the first fifteen days of his arrest because of health issues forcing Mr. Balaji to be admitted to the hospital.  

Mr. Balaji and his family contended before the Supreme Court that his arrest illegal, as well as the order granting his custody to the Directorate, and even if neither of these claims were accepted then Mr. Balaji could only be sent to custody in jail since fifteen days had elapsed since his arrest. In Balaji, the Supreme Court rejected each of these contentions, and went ahead to cast doubts over the existing legal position as per which detention of an accused outside of the first fifteen days of an arrest could only be in jail and not with the investigating agency. 

Through this post and the next, an effort will be made to examine the judgment and the Court's answers. In this post, the focus is on the conclusion that the arrest was legal, and that the Enforcement Directorate could take custody of an accused during the investigation. The next post will specifically engage with how the Court in Balaji construed the relevant provisions of the Criminal Procedure Code 1973 ["Cr.P.C."] i.e., interpretation of Section 167, Cr.P.C., in respect of the nature of detention after arrest.

A Digression

Before going forward with the discussion, a digression. The opinion in Balaji is divided into sections to deal with specific issues, many of which begin with a quotation, presumably for pithily presenting to a reader the lens through which the Court viewed the issue at hand. Picking quotations, however, is a tricky path to tread; not only must we be careful about who is being quoted, but we must also be careful about not using a sentence or remark out of context. 

The quotations in Balaji, unfortunately, falter on both fronts. "All power is of an encroaching nature" is a quote used at the start of the section in the judgment which hopes to explain how the PMLA contains a set of provisions which place reasonable restrictions on the power of arrest. Not only is it wrongly attributed to Justice Frankfurter's opinion (dissenting, mind you) in Trop v. Dulles [356 U.S. 86 (1958)] — it is in fact attributed in the opinion itself to James Madison (Federalist No. 48) — but the context of this quote is entirely misplaced. The quote is a critique of state power, not a paean to it. 

Later on, a phrase attributed to Sophocles, "Law can never be enforced unless fear supports them", is used to emphasise how the PMLA itself has provisions punishing misuse of arrest powers by officers. This is a surprisingly popular phrase with Indian courts, and its proper context has been detailed elsewhere just to highlight how problematic its invocation in any judicial order within a democratic republic ought to be. And, lastly, there is a quote attributed to Benjamin Cardozo — "Justice, though due to the accused, is due to the accuser too". A remark made in the context of the problems of overturning a conviction for murder on grounds of procedural error comes to justify the vesting of greater powers with the state for restraining personal liberty during the investigation phase.

Arrest and Custody with the Enforcement Directorate

On Arrest

Mr. Balaji's arrest was challenged on a very simple point. It was contended that while the PMLA allowed for the arrest of persons by Enforcement Directorate officials under Section 19 of that Act, the procedure for such an arrest was not specific anywhere in Section 19 or other provisions of the PMLA. This silence of the PMLA required consulting the general law of the Cr.P.C., since Section 65 of the PMLA rendered the Cr.P.C. applicable wherever it was not inconsistent with anything in the PMLA. Pursuing the argument to its logical end, it was contended that since the PMLA offences were only punishable up to seven years, the Cr.P.C. arrest procedure (as explained by the Supreme Court itself) required prior notices to an accused under Section 41-A of the Cr.P.C. or specific justifications for departing from this course to jump to an arrest.

Balaji held that this contention was based on a flawed premise, since Section 19 did in fact lay out how the arrest was to be carried out. The PMLA had, in the words of the Supreme Court, a "comprehensive procedure" [para 32] and a "different and distinct methodology [compared to Cr.P.C.]" [para 33] in place on the matter, which meant that resort to the Cr.P.C. would not be permissible as it would create a conflict between the two regimes. A clause which merely (i) lists the officer capable of exercising arrest powers, (ii) reiterates constitutional mandates about informing a person about grounds of arrest and their timely production before court, and (iii) specifies one procedural aspect (sending a copy of the arrest order in a sealed cover to another authority) is a "comprehensive procedure" [This becomes "rigorous procedure" in para 82]. There could not be a lower threshold to cross. Curiously enough, at a subsequent place in the judgment [para 67], the Court says that "Section 19 of the PMLA, 2002 supplemented by Section 167 of the CrPC, 1973 does provide adequate safeguards to an arrested person" leaving one further in doubt as to the comprehensive nature of Section 19.  

The Court offers supporting arguments to justify the interpretive choice being made in Balaji. The Court notes that introducing a requirement of issuing a notice prior to arrest, as under Section 41-A of the Cr.P.C., "might seriously impair the ongoing investigation" by placing a person in the "know-how" [para 33]. In any event, the Court notes Section 41-A was never seen as being applicable to anything other than minor offences [para 37]. Both lines of argument are deeply concerning. In seemingly restricting the scope of Section 41-A to so-called minor offences not only does the Court add context to the text of the statute which is notably absent — the provision does not restrict itself to minor offences, but all offences that are punishable with terms up to seven years in prison — but the Court also betrays its own recent history where it was using this provision to strike a fairer bargain between investigative needs and individual liberty. In promoting secrecy of investigations as a justification for arrest, the Court conflates the presumed need to be discreet about ongoing investigations with the entirely separate issue of considering what are proportionate intrusions into personal liberty to safeguard state interests. We have on display the classic anti-terror / serious crime gambit — the executive raises the stakes so high that courts are cowered into thinking that nothing other than completely sacrificing individual liberty to secure the state's interests is acceptable, lest the very state perish.  

On Custody

Which then brings us to the issue of what happens after arrests of persons. Here, as in most other cases, the Enforcement Directorate sought to take custody of the accused for purposes of investigation. However, the "comprehensive procedure" on arrest which the Court extolled in Balaji was surprisingly silent on such matters, requiring a reference to the general law under the Cr.P.C. 

This meant turning to Section 167 Cr.P.C., and that provision presented a slight issue. Section 167 permits court-sanctioned custodial detentions of persons after their arrest, and says that persons may either be detained in custody of the court by being placed in jail, or in the custody of the investigating agency by being placed in the lockup area that an agency would have. Unfortunately, the provision does not use the phrase "investigating agency", and instead refers specifically to "police custody" on this matter. This is where the problem arises: the Enforcement Directorate, much like many other central agencies, does not want its officers to be called "police" and nor is not seen as "police" in the eyes of courts. But if the Directorate has no police officers, then how can Section 167 which permits "police" custody allow a person to be detained by this agency's officials?

Convincing argument, or mere sophistry? Balaji concluded it was the latter, but without offering any clear reasons. At one place, the Court held that since Section 167 refers to detention in "such custody" as is considered fit by the judge, this would permit detention with agencies other than police as well [paras 45, 55, 85]. At another place, the Court concluded that since Section 167 was indeed applicable to the PMLA context to determine the maximum time of detention post arrest, its provisions permitting the detention of persons in the custody of the agency also had to be applied [paras 26, 70, 83]. And, briefly, the Court also hinted that this issue had already been considered in respect of other agencies in this fashion such as the Customs Act 1962, albeit those specific statutes specifically permitted treating officials as police officers for purposes of seeking custodial detention [para 82].  

Taken separately, or all together, it is difficult to remain convinced by the reasons offered by the Court for concluding that the terms of the PMLA, read together with the Cr.P.C., permit officials of the Directorate of Enforcement to obtain custodial detention of arrested persons. With respect to "such custody" in Section 167(1), it is rather surprising that in a judgment where the Court repeatedly insists upon reading provisions as a whole, on this aspect the Court was more than willing to read one phrase in isolation because it helped prop up its conclusions. Section 167(1) certainly refers to "such custody", but reference to the remainder of the provision makes it apparent that this is a binary between "police" and "court" / "judicial" custody. Reliance upon the 37th Report of the Law Commission on this issue by the Court [para 55] was entirely misplaced, firstly because it considered Section 167 as it was in the 1898 Code which did not contain the remaining clauses clarifying the binary choice before a court today, and secondly because the relevant para of that Report equated "such custody" as being outside of an investigative agency, which is certainly not what the Court in Balaji sought to conclude.

There is no gainsaying that in respect of the several other central agencies, earlier decisions of the Court had permitted custodial detention of an accused to be granted to them. This included even the Directorate officials. Unfortunately, there is equally no disputing the fact that the relevant provisions in those statutes were differently worded than the PMLA. Surely, a "comprehensive" and "rigorous" statutory procedure on the matter of arrests could not have accidentally been left ominously silent on this crucial issue of what happens after an arrest? Where on the one hand the Court emphasises relying upon the plain text of laws to infer legislative intent, one wonders why the same standards do not apply when it was confronted with a clear distinction between the PMLA on the one hand, and earlier laws on such matters on the other.  

If the Court was of the view that Parliament had erred in not repeating the same formula of older laws in the PMLA, it was nevertheless bound to follow the law is it stood or offer strong reasons for filling up what it saw as a gap. It did neither in Balaji.    

Contrary to what Balaji seems to portray, applying Section 167 Cr.P.C. together with Section 19 PMLA without necessarily permitting custodial detention of persons with Enforcement Directorate officers was far from being a strained or piecemeal way of applying both statutes together. Might it have been intended by Parliament to deny the agency investigating PMLA offences custodial detention, because such cases are the product of investigations done by other agencies where accused persons would likely have been arrested and questioned in custody? Considering that arrest powers under PMLA are pegged at a higher threshold than the Cr.P.C. — which the Court in Balaji agrees with — to permit arrest only where officers have reasons to believe a person is guilty of an offence, perhaps Parliament intentionally decided to not permit persons being detained in investigative custody with an agency which already has enough material to conclude the person is guilty of the crime?

The House that Vijay Madanlal Choudhary Built

Balaji comes barely a year after the Supreme Court had decided various issues in context of the PMLA in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. [2022 SCC OnLine 929 ("VMC")] [Discussed on the Blog here and here]. At the heart of VMC was the Court's finding that the PMLA was not a penal or civil statute but a 'sui generis' legislation. On the strength of this finding the Court constructed a defence of the PMLA's validity, including its provisions on arrest and bail. As argued elsewhere, this defence was high on rhetoric and low on reasoning, deploying phrases like 'sui generis' to evade critical scrutiny of the law and support vesting broad powers with the executive. How does anyone but the creator and framer of a 'sui generis' know what it needs and what it doesn't?  

The 'sui generis' argument could not be tested before the bench in Balaji which was of lesser strength than VMC, but its shadow loomed large over the arguments being made here, and in a sense foretold the result. Because the PMLA is a 'sui generis' regime, even patently limited procedures can appear "comprehensive" and "rigorous" to a Court because these might be exactly what a 'sui generis' regime needs. 

Balaji thus offers a good glimpse of the house that VMC has built for dealing with any future challenges to how the PMLA operates. Persons contesting the government are essentially with an onerous handicap, as the goalpost itself is a perpetually shapeshifting, 'sui generis' one.

Conclusion

The Court in Balaji upheld a reading of the PMLA and the Cr.P.C. which permits Enforcement Directorate officials to arrest persons without notice and in the absence of any compelling justification behind such an arrest without notice. It also upheld a reading of the laws which permit the detention of arrested persons in the custody of Directorate officials. In doing so, it has only reiterated how most courts had been applying the law and not shaken up the status quo to any great extent. What is more interesting is the rather timid set of reasons the Court was able to muster in support of its conclusions. In effect, this is perhaps the state of things to come for all things PMLA, where 'sui generis' can help sustain anything and everything under this statute.

The next post considers the Court's conclusions on a different issue, the interpretation of Section 167 of the Cr.P.C., where the Court has taken big strides towards upsetting the status quo. 

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.