Transitioning Of The Law On Money Laundering In India

The following amendments have updated the doctrinal structure of the act:

• The Prevention of Money Laundering (Amendment) Act 2012[ii]

• Finance Act, 2015 ('2015 Amendment')[iii]

• Finance Act, 2018 ('2018 Amendment')[iv]

• Finance Act, 2019 ('2019 Amendment')[v]

The pivotal aspect of the dispensation of such an act has turned out to be effective in nature as it has brought a series of measures to curb the menace of ill-gotten money and its injection into the mainstream economy in the form of legitimate assets and currency. Prior to the enactment, various regulatory agencies and governments had given a lot of thought to the disintegration of such kinds of money, because of which statutes like The Conservation of Foreign Exchange and Prevention of Smuggling Activities, 1974[vi], the Income Tax Act 1961[vii], The Benami Transactions (Prohibition) Act, 1988[viii], and the NDPS Act 1995[ix], have been engulfed in the legal fencing against illicit transactions.

Nevertheless, it was considered that the foregoing legislation was failing to meet the standards, and to hive off the inadequacies, the Prevention of Money Laundering Act, 2002 ('PMLA') was introduced. The statute came into force on July 01, 2005 and has its applicability extended to all of India, including Jammu and Kashmir.

Before dwelling into the salient features of the act and its evolution, let's briefly understand what money laundering means and the stages it engulfs.

Money laundering, in its normative form, means cleaning dirty and illicit money and injecting it back into the mainstream economy. It is usually associated with criminal activities such as trafficking, terrorism, and the sale of drugs and arms.

It generally happens in the following stages:

• Placement: The starting step is to put illicit or black money into the market by way of investment. Through various deposit channels, such money gets installed in banks.

• Layering: In this cycle, the launderer hides his real income by engaging in unethical behaviour. The money is laundered by transferring it from overseas bank accounts to investment assets including stocks, bonds, and traveller's checks. This account is frequently formed in countries where banks do not share account holders' personal information. As a result, the ownership and source of funds are concealed in this procedure.

• Integration: The final stage of reinjecting the 'laundered' money into the legitimate economy, or returning the money as legal money back into the financial world.

The Prevention of Money Laundering Act, 2002 ('PMLA') makes it an offence when an individual directly or indirectly attempts to take part or knowingly or unknowingly provides assistance in any activity related to the proceeds of crime. It includes concealment, acquisitions, possession or claiming it as untainted and shall qualify the definition of money laundering under Section 3[x].

Authority For Implementation:

The act provides a variety of powers to the adjudicating authority competent to enforce the act, which is the Directorate of Enforcement in the Department of Revenue under the Ministry of Finance.

The Financial Intelligence Unit is the central national agency under the Department of Revenue, Ministry of Finance, responsible for carrying out the processing, analysing, and disseminating of information related to any suspicious financial transaction.

Nevertheless, there are other nodal agencies that deal with the investigation of predicate offences, such as the CBI, police, SEBI, and NCB, etc.

Powers available to the Investigating Officers

The IOs under the statue are conferred with a wide array of powers, which are enlisted below:

(a) to provisionally attach 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 [Section 5][xi];

(b) to conduct a survey of a place [Section 16][xii];

(c) to conduct search of building, place, vessel, vehicle, or aircraft and seize or freeze records and property [Section 17][xiii];

(d) to conduct personal searches [Section 18][xiv];

(e) to arrest persons accused of committing the offence of money laundering [Section 19][xv];

(f) to summon and record the statements of persons concerned [Section 50][xvi].

Actions That Can Be Initiated Against The Person Involved In Money Laundering:

• Seizure and freezing of property and records and attachment of property obtained with the proceeds of crime.

• Any person who commits the offence of money laundering shall be punishable with–

• Rigorous imprisonment for a minimum term of three years, and this may extend up to seven years.
• Fine (without any limit).

Proceeds Of Crime:

Section 2(1)(u) of the Act says that if any property is derived directly or indirectly through a criminal activity that is covered under the scheduled offences under the Act, it shall be the proceeds of crime. However, this is not to be construed on a standalone basis. The guilt of the person shall be determined by a coherent reading of Section 3 with Section 2(1)(u), which says if any process or activity is performed by such individual that relates to "proceeds of crimes,"

By way of the 2015[xvii] and 2019[xviii] amendments, a clarification has been provided which says that if a property is derived or held outside India, then "proceeds of crime" would also include a property of an equivalent value situated in India or abroad. In order to widen the ambit of 'property' the 2019 Amendment has provided an explanation to the proviso 2(1)(u), to clarify that 'proceeds of crime' would now also include not only those activities listed under scheduled offences but any criminal activity relatable to the scheduled offences.

This explanation, instead of giving more meaning and dilution of confusion to the provision, has given rise to more questionable aspects. One crucial point not explained is whether the applicability of such an explanation would warrant retrospective application of the provision. Some scholars argue that while it may warrant retrospective application, which is violative of Article 20(1) of the Constitution that prohibits ex post facto application under criminal law, some believe that since such an explanation is added to the original provision, the question of retrospective application does not arise. Now, this is left to the wisdom of the Hon'ble Supreme Court and its interpretation of the letter of the law.

Scheduled Offences

The Prevention of Money Laundering Act, 2002 ('PMLA'), the scheduled offences had provisions from six different legislations, including the Indian Penal Code 1860[xix], NDPS Act, 1985; Arms Act, 1959[xx], Wildlife Protection Act, 1972[xxi], Immoral Traffic (Prevention) Act, 1956[xxii] and Prevention of Corruption Act, 1988[xxiii].

Vide the (Amendment) Act, 2015 ('2015 Amendment'), this original schedule was altered and replaced with a new list containing offences from 28 different legislations.

Through the foregoing Amendment, Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015[xxiv] (offence of wilful attempt to evade any tax, penalty, or interest) was included in the list. While the 2018 Amendment has made Section 447 of the Companies Act, 2013 (Punishment for Fraud) an offence under the revised scheduled offences list.

Comparatively, lesser serious crimes have also been mentioned in the new list, including but not limited to Section 63 of the Copyright Act, 1957[xxv] (infringement of copyright) and Section 103 of the Trademarks Act, 1999[xxvi] (penalty for applying false trademarks).

An amusing and disturbing fact is that the inclusion of such offences has made the Act supposedly less effective. In the period between 2012 and 2018, around 1067 cases were registered by the Enforcement Directorate (ED), while only convictions were obtained in about 9 cases up till December 2019. These statistics show that a focused and targeted approach is warranted for the authorities to make the act more fruitful and effective.

Conditions Of Bail

Under the original Act, there were two preset conditions for bail. One was that the Public Prosecutor was conferred with the opportunity to oppose the application of bail; and secondly, that the Court is satisfied with the fact that there exist reasonable grounds for believing that the accused has not committed the charged offence and that the accused is unlikely to commit any offence while released on bail.

Prior to the 2018 Amendment, the bail pre-conditions were applicable when the offence alleged carried a punishment of a minimum of three years and above under Part A of the Schedule.

Nikesh Tarachand Shah Vs. Union Of India[xxvii]

The Hon'ble Supreme Court, in the foregoing case, examined the constitutional validity of Section 45 of the Prevention of Money Laundering Act, 2002, which imposed two conditions for the grant of bail where an offence punishable by a term of imprisonment of more than 3 years under Part A of the Schedule to the Prevention of Money Laundering Act, 2002 was committed.

Section 45(1) of the Prevention of Money Laundering Act, 2002, insofar as it imposes two additional requirements for bail release, was found to be "unconstitutional" because it violated Articles 14 and 21 of the Indian Constitution. The Supreme Court said that "Section 45 is a severe measure that turns on its head the presumption of innocence that is fundamental to a person accused of any offence," adding that "indiscriminate application of the provisions of Section 45 will undoubtedly violate Article 21 of the Constitution."

Following the decision of the Hon'ble Apex Court, the provision was amended by 2018 (Amendment). It replaced "punishable for a term of imprisonment of more than three years under Part A of the Schedule" with the words "under this Act". The objective behind this amendment was to cater to the judgement in Nikesh Tarachand Shah by making bail conditions applicable for all the offences under the PMLA, not only for scheduled offences.

Contentious Powers Of The Enforcement Directorate ;Power To Record Confessional Statements;

Under Section 25 of the Evidence Act, 1872[xxviii], confessional statements made to any "police officer" are not to be construed as admissible evidence. The scope of this definition was widened by the recent interpretation of the Hon'ble Supreme Court in the case of Tofan Singh v. the State of Tamil Nadu[xxix]. The Court held that not only state police but also investigating officers under the NDPS Act should be covered under the bracket of Section 25 of the Evidence Act. The rationale given by the court was that the NDPS Act does not have a non-obstante clause in order for it to exclude the applicability of the Evidence Act.

So far as the Prevention of Money Laundering Act, 2002 ('PMLA') is concerned, under Section 50(4) of the Act, all proceedings under Section 50(2) and (3) would be regarded as judicial proceedings, making confessional statements before the ED admissible.

By virtue of Section 71[xxx] of the Act, which says that the "Act shall have overriding effect", the PMLA overrides the Evidence Act and its provisions. Nevertheless, while the PMLA has an overriding effect over other legislation, the Tofan Singh judgment makes it crucial for special legislation like the PMLA to have adequate safeguards in place while confessional statements are recorded before the authorities.

Freezing Of Assets

In another Supreme Court judgement, which is Opto Circuit vs Axis Bank[xxxi], the Court held that the freezing of assets or bank accounts of the accused without adhering to the strict compliance prescribed under Section 17 of the Act is to be rendered invalid.

While the Prevention of Money Laundering Act, 2002 ('PMLA'), is a modernized tool for freezing assets, disintegrating illicit money and punitively disregarding illegitimate transactions from the mainstream economy, the Act has time and again been crippled by various contradictions.Being a special legislation, it ought to provided more clarification and adequate safeguards for the accused.

The convictions have been really low in proportion to the number of investigations started and allegations made. On the other hand, the Hon'ble Supreme Court needs to address the urgent need to examine whether Section 45(1) of the Act has altered the basis of the ruling given in Nikesh Tarachand Shah as it makes the aspect of bail a contentious issue. Another contentious issue is the inclusion of offences in the scheduled list from 30 different legislations, as it has made the applicability of the statute too broad, resulting in a lack of target focus for serious offences.

More clarity on the PMLA's practical implementation and involvement, particularly the property attachment clause, is expected. The 2019 Amendment strengthens its Rules and attempts to compel authorities to monitor financial crimes, uncover them, and prevent them by exposing problematic operations, rather than playing the game discreetly.

Views are personal.