PMLA Interpretation - Laundering Proceeds Of Crime Can't Have Severe Penal Consequences Than Generating Such Proceeds: Sibal To Supreme Court

On Thursday, the Supreme Court continued hearing the batch of petitions on the interpretation of the Prevention of Money Laundering Act, 2002.

Appearing before a Bench comprising Justices AM Khanwilkar, Dinesh Maheshwari and CT Ravikumar, Senior Advocate, Mr. Kabil Sibal made submissions about the lacunae in the Prevention of Money Laundering Act, 2002 ("PMLA'), without directly assailing the amendments brought about in the year 2019 through the Finance Act for the time being.

Submissions made by Mr. Sibal

Mr. Sibal appeared on behalf of Mr. Karti Chidambaram, who has challenged the 2019 amendment to the PMLA for being arbitrary, unreasonable, non-compliant to the principles of due process and thus violative of Articles 14, 19, 20 and 21 of the Constitution of India.

Legislative History of Section 3 PMLA

Referring to his note that encapsulated the history of Section 3 of the PMLA, Mr. Sibal apprised the Bench that the original text of the PMLA Bill, 1999 did not mention 'and projecting it as untainted property'. However, on the Select Committee's suggestion, it was added to the proposed text, which ultimately became an Act. The scope of the provision was expanded by the amendment in 2012, wherein concealment, possession, acquisition, use, were also included as offences under the PMLA. However, the 2019 amendment by substituting 'and' with 'or' before 'projecting or claiming it as untainted property' has rendered the underlined portion of the provision otiose.

"See the left hand column that is the original PMLA Bill of 1999 that said that whosoever acquires, owns, possesses, transfers any proceeds of crime or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly or conceals or aids in the concealment of the proceeds of crime commits the offence of money laundering. Your lordships will see that 'and projecting it as untainted property' is missing in the original provision. Then is the report of the select committee. Then came an amendment in 2012, 'Whosoever directly or indirectly attempts to indulge or knowingly assist or knowingly is a party or actually is involved in any process or activity connected with the proceeds of crime" these word were added "including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of the offence of money laundering" This portion was inserted by a amendment in 2012. Then came the Finance Act where the word 'or' came after 'use' instead of 'and' by virtue of the explanation, by virtue of the Finance Act."

How to charge under Section 3 PMLA

Mr. Sibal put forth his suggestions as to who all can be charged under the PMLA and how.

"We have made some suggestions regarding the interpretation of Section 3. (before 2019 amendment) How are people to be charged under Section 3 of PMLA?".

When you look at 'directly' how will it read?

"whosoever is directly involved in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property."

Now Milords the next 'whosoever indirectly'

"whosoever is indirectly involved in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property."

Then 'whosoever knowingly assists'

"whosoever knowingly assists in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property."

Then 'knowingly is a part'

"whosoever knowingly is a part in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property."

And last is 'actually involved'

"whosoever is actually involved in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property."

He added -

"This will cover all those expressions in connection with and projecting and claiming it as untainted property. The word "projecting or claiming it as untainted property" has been there from the beginning."

The Bench enquired, "What is the distinction between 'directly attempts to indulge' and 'knowingly assist'."

Mr. Sibal explained with an example -

"Suppose I go to a bank, the bank does not accept the money, that would be an attempt. If I help that individual to actually deposit it would be assisting him."

The Bench checked with Mr. Sibal if his argument was that the core of the offence under PMLA is "and projecting or claiming it as untainted property" in consonance with the amendment recommended by the Select Committee.

" 'and projecting or claiming it as untainted property' - that is the core of the offence according to the amendment by the Select committee."

Mr. Sibal averred that without the 'and', the offence of helping to conceal proceeds of crime would also fall under the ambit of money laundering which is inconsistent with the scheme of the statute.

"If you read it as "or" then you need not project and it would still be money laundering. If I am helping in concealing with proceeds of crime and not helping him project as untainted I will not be charged with money laundering . Please appreciate, the predicate offence without proceeds of the crime is not an offence under the PMLA. If I keep proceeds of crime it is no offence, but if you read it as 'or' it is offence. Then the latter part of the provision will become redundant and the recommendation of the Select Committee becomes redundant."

No guiding principles for registration of ECIR or issuing summons

Mr. Sibal pointed out that it is crucial to determine if any proceeds of crime emanate from the schedule office and if they are projected as untainted. Moreover, the offence would fall under the ambit of PMLA only if the is notified as a scheduled offence. The extent of proceeds of crime should also be established prima facie to meet the threshold. However, it was alleged by Mr. Sibal that the ECIR does not adhere to the said requirement.

"There must be a definite determination if any proceeds of crime have emanated from the scheduled offence and whether these proceeds have been projected as untainted. So, if it does not relate to a scheduled offence, PMLA does not apply. If it relates to a scheduled offence then the prima facie evidence that you are claiming it as untainted property. If I keep it in my house it is not an offence under PMLA because proceeds of crime itself is not an offence. That would be under the predicate offence. The extent of proceeds of crime projected as untainted must at least be prima facie quantified to ensure that the thresholds prescribed under the PMLA Act are met. Now after the Finance Act there is no threshold. None of these requirements are adhered to in the ECIR, which are in the nature of internal documents."

As per the provision of CrPC, FIR is to be made available to the accused. However the said procedure, the Enforcement Directorate (ED) claims does not apply to internal documents like the ECIR. Therefore, when the ED summons a person, they are not aware of the allegation.

"Under CrPC the receipt of information of a cognisable offence inescapably must lead to the registration of an FIR, which ought to be made available to the accused and filed with the jurisdictional magistrate. The same is available on the public domain. However, the ED treats itself as an exception to these principles and chooses to register ECIR on his own whimps and fancies. ED claims it is an internal document and does not make available to the persons named in the ECIR. Pursuant to registration of ECIR, ED starts summoning accused persons and seek financial transactions of the accused and their family members. The accused is called upon to make statements under Section 50 which are treated as admissible in evidence. Allegation is not known to the person. There is no procedure at all under this Act."

The Bench highlighted that PMLA proceedings cannot be initiated without predicate offence and the details of the said offence are provided to the accused by way of FIR.

"Without predicate offence there cannot be PMLA. Until a predicate offence is registered there cannot be PMLA. There is a FIR for the predicate offence which is uploaded with all details."

Mr. Sibal noted the stage at which ED can be informed once it is found out that money had been put in a bank and not before that. Moreover, if the accused is a named accused ED ought not to summon him to record a statement as it would be violative of Section 25 of the Indian Evidence Act. In short, it was stated that named-accused or not, the whole procedure of summoning has not been dealt with in the PMLA statute.

"Suppose in FIR I am named, can I be called by the ED at that stage. The investigative agency investigating the predicate offence finds that that money had been put in a bank, the ED will be informed, then I can be called. If I am named, I cannot be called because I am accused. They cannot record a statement. But, there may be cases where my name is not mentioned in FIR but pursuant to investigation it is found that I am involved, I will be called by ED because at that stage I am not an accused. That whole procedure is missing in this act. Unless you apply Chapter 12 of CRPC, then the process is complete. Kindly, come to Section 160 of CrPC. Police under Section 160 can summon a witness."

"160. Police officer' s power to require attendance of witnesses.

• Any police officer, making an investigation under this Chapter may, by order in writing, require the attendance before himself of any person being within the limits of his own or any adjoining station who, from the information given or otherwise, appears to be acquainted with the facts and circumstances of the case; and such person shall attend as so required: Provided that no male person under the age of fifteen years or woman shall be required to attend at any place other than the place in which such male person or woman resides.
• The State Government may, by rules made in this behalf, provide for the payment by the police officer of the reasonable expenses of every person, attending under sub- section (1) at any place other than his residence."

Mr. Sibal added that power under Section 41 and 41A can be exercised to seek the attendance of the suspect or accused.

The Bench enquired, "Under PMLA which provision says that ED office has power to record statements."

Mr. Sibal responded, "That is Section 50."

After taking the Bench through the definition of reporting entity under Section 2(w)(a), Mr. Sibal submitted that the ED had power of the civil court under Section 13 to seek attendance of these witnesses. Summons are issued under S. 50(1) to these people for recording statements.

The Bench clarified, "At that time the purpose for all these exercises would be to impose fine."

Mr. Sibal emphasised that Section 50(1) has nothing to do with prosecution, but Section 50(2) does. Since there are no procedures laid down w.r.t issuing summons, Section 65 which says that CrPC would be applicable has to be read into the same. It is imperative that the summon states the capacity in which you have to appear before the ED.

"So, the whole procedure w.r.t summons is not set out in the act. That is why 65 says CRPC will apply. The time when a person is summoned he should be told whether he is a witness or not. You summon a person, you have an ECIR, you summon but don't not tell them why they are summoned. So once tainted becomes untainted by virtue of seeking to legitimise, then milords ED can call. Before that he cannot call. If he calls at that stage he knows if the person is an accused or witness. If he does not know then it is another matter. Therefore summons must state whether you are called in as a witness or not. Same will apply here. ECIRs are with them, nobody knows. If they name me in the ECIR, they know I am an accused, so how can I be summoned?"

The Bench asked Mr. Sibal, "Is there any discussion in the Parliament on this provision?"

Mr. Sibal responded, "Now a days parliament is mute, they never discuss."

Going back to the issue of ECIR, Mr. Sibal argued that it is unclear as to what procedure applies for registration of ECIR. He contended it is a mystery that in some cases of cheating the ED decides they are fit to be investigated and for similar offences no ECIR is registered. This is highly arbitrary and harps upon the personal liberty of an individual. Therefore, it is violative of Article 14 as well as Article 21 of the Constitution. Mr. Sibal further submitted -

"The second limb of the argument is that when you exercise powers under S. 50 you must comply with provisions under CrPC. Let me just make a broad point. Criminal Offences are either cognisable or non-cognisable. Whether this offence is cognisable or non-cognisable CrPC has to apply, Chapter12 CrPC has to apply. But in this act they do not apply 12 at all."

Offences under PMLA cognisable or non-cognisable offences

It was argued that under Section 45 the offence under PMLA is non-cognisable. However, it was pointed out that the 2019 amendment had made it cognisable. Cognisable of non-cognisable, Mr. Sibal was of the opinion that the investigation ought to take place in consonance with the provision of the CrPC.

"Whether, your lordships, hold it as cognisable or non-cognisable the investigation has to be in terms of CrPC. Originally it was cognisable, then it was amended and made non-cognisable. When it was cognisable, a chargesheet had to be filed. Those provisions were done away with in 2005. The point I am making is either non-cognisable or cognisable CrPC is to apply. But, PMLA complies with neither Section154 nor Section 155 of CrPc. Another question that looms large and what your lordships had to deal with is what happens to pending prosecution."

Offence of Money Laundering traditionally relates to narcotics money

Mr. Sibal traced out the origin and evolution of the offence of money laundering to highlight that traditionally it had been related to narcotics money. He referred to the definition of 'proceed' in the Vienna Convention, 1988 and Article 3 (a)(i), b(i) and b(ii), Article 5 to indicate the same.

"I am not denying that Parliament does not have the power to include substances other than narcotic and psychotropic substances, I am just saying what is the origin…Narcotics money converted to legitimate money so whoever assists will be charged and punished. Our Section 3 is consistent with the convention, as it originally stood."

Kindly come to the resolution that was adopted in the UN reiterated that it was related to drugs. This goes on and deals with drugs and says countries must adopt. 1998 resolution adopted by the General Assembly. India took immediate action and in 1999 the bill was drafted which was sent to the select committee.

He referred to the relevant clauses from the 40 recommendations of FATF.

"Effective money laundering enforcement programmes need multilateral cooperation…Each country should take such measures necessary including legislative ones to enable to criminalise drug money laundering as set out in the Vienna convention. Each country should consider extending the offence of drug money laundering to any crime that has a link to narcotics. What we have done is we are extending it to sections which have no relation to narcotics."

Other serious offences might be covered, but in relation to organised crimes

Mr. Sibal submitted that even if it is extended to serious offence as recommended by FATF, it would not refer to an individual act, but an organised crime.

"An alternative approach to be taken for money laundering in all serious offences. Even here when you extend to serious offence, it is not an individual act which falls under PMLA, it is organised crime that seeks to convert. That distinction is to be made."

Investigation under PMLA would commence after prima facie commission of predicate offence is established

Mr. Sibal was of the opinion that since investigation of an offence against a person under PMLA has serious consequences, it should be initiated after the predicate offence is preliminarily established.

"Registration of an offence against a person may have serious consequences, hence registration and investigation would commence only after the predicate offence investigating agency has prima facie established that the predicate offence has been committed by filing the chargesheet. Only if there exists proceeds of crime which will be determined in the chargesheet, there can be offence of money laundering by projecting such proceeds as untainted property."

He added -

"Muder is not a predicate offence until it generates proceeds of crime. The moment proceeds of crime are generated FIR is registered. When FIR is registered there is no evidence w.r.t. money laundering. According to me no proceedings will start. That and whether proceeds of crime have been generated or not has to be looked into. This would result in a chargesheet. That chargesheet may result in a closure report also."

The Bench stated that unless the PMLA categorically says that investigation will wait till filing of chagesheet, the same cannot be directed by the Court.

Mr. Sibal contended that without some prima facie evidence to suggest money laundering, a person cannot be proceeded against.

"What are we concerned with here. You protect the property under S.5, make attachment, seize the property. Now the question arises whether it has been claimed as untainted property. In the FIR, I will know whether I am involved or not. I can take remedies under the act. No chargesheet is filed at that stage. Some prima facie evidence should be there for money laundering to have been committed. In the customs act contraband can be seized…So prima facie acts are committed. In this act there are no goods to be seized - this is the problem. This is an amorphous provision. This is an allegation. See difference between this and the other act. Now comes the question of claiming this as tainted or untainted. That will be the heart of the offense. Then an investigation will take place.

The Bench remarked, "Then you modify the submission. Investigation will be initiated after the chargesheet is filed."

Mr. Sibal pointed out that the original PMLA contained a safeguard of filing chargesheet before investigation began, which had been diluted by subsequent amendment.

"The original PMLA Act contained a safeguard of filing chargesheet before investigation is carried out. The power of provisional attachment and search and seizure can be exercise only after a chargesheet had been filed. These safeguards which were there originally have now been diluted."

He submitted -

"Now, Milords this is how it goes, investigation takes place and a chargesheet is filed. In the meantime there is prima facie evidence to show tainted property is claimed to be untainted, FIR is filed, investigation takes place and ultimately chargesheet or complaint is filed. But if you attach properties prior to that, the proceeds have already been attacked so far as offence is concerned, now you want to attach all other properties.

Consequences for laundering proceeds of crime cannot be more severe than the consequences for generating proceeds of crime

Mr. Sibal highlighted -

"No offence of PMLA can exist if there is no generation of proceeds of crime. The consequence that would befall an accused for laundering proceeds of crime cannot be more severe than the consequences suffered by them for generating proceeds of crime.

For eg: Take 420 offence. For the predicate offence I can get bail, but for money laundering I have to go through Section 45 twin conditions. Far more onerous. This is strange. The consequential bail conditions are more stringent than the original bail condition. For eg. A to obtain Rs. 100 by cheating B, predicate offence is compounded under Section 420. This should be extended to money laundering w.r.t this Rs. 100."

Mr. Sibal submitted that in some cases though the predicate offences are bailable offences, the moment they fall under money laundering they are non-bailable and the twin bail conditions are imposed, in derogation of Article 14.

Acts of individual cannot be subject matter of PMLA

According to Mr. Sibal PMLA would apply to organised crimes and scams, where the whole purpose of the activity is to generate tainted money later projected as untainted.

"Acts of individuals cannot be the subject matter of PMLA until it is based on some organised activities like the Telgi scam, or other scams. The whole purpose of the activity is to generate tainted money and project it as untainted money".

He added -

"The objective is not prevention of crime, but prevention of laundering. This is why we need to strike down part of the Schedule."

The Bench noted that, "Section 3 says 'process or activity connected' and not 'act'. Which is in continuum and is multiple acts."

Mr. Sibal reiterated, "A single individual act can never be money laundering."

Overbroad list of scheduled offences

It was asserted, that the original schedule which comprised limited offence have been expanded to include offences which did not have rational nexus to objects and reasons of PMLA and therefore is in violation of Article 14.

"In the original schedule they were limited. Now all kinds of things are included. Environment Protection Act, IT Act, offences under Foreigner Act, Passport Act - how is that a scheduled offence. Immigration Act, Copyright Act. Everyday there are proceedings for infringement of copyright…If there is a whole organised racker going on you can apply. Milords kindly see for the environment protection act - penalty for discharging pollutants in excess of prescribed standard. How are you going to apply this?"

Surprised, the Bench asked, "What is the proceeds of crime in that case?"

Mr. Sibal responded, "I don't understand. NGT recently passed an order that the authority will take action under PML. This will lead to other kinds of extortion by the authority."

"I believe it is these kinds of laws that have interfered with economic progress in India. People feel that tomorrow the ED will come after me, why should I do business here", Sibal said.

PMLA cannot be a stand alone offence

Mr. Sibal emphasised that the legislative intent of PMLA is to stem the flow of money laundering especially from narcotics. He referred to Mr. Yashwant Sinha's speech in the Lok Sabha while introducing the statute -

"The point I am making is that we have picked up certain offences which are heinous, as I said in the beginning, which are of very serious nature. We are bringing this legislation on money-laundering so that receipts from those crimes and properties acquired as a result thereof, are dealt with under this Act. At the present moment, we have no legislation which will deal exclusively with this particular subject. So, we are bringing this Bill."

Therefore, it is important to relate the provisions of this Bill to the Schedule which we have mentioned. If we delink it from the Schedule, then all and every offence can be brought within its ambit, but that is not the intention of this legislation. The intention is to confine it to certain serious, heinous offences and that is why, we have decided to enumerate the offences under various Acts in this Schedule."

Mr. Sibal also relied on the Speech of the Finance Minister in 2012.

"we must remember that money-laundering is a very technically-defined offence. It is not the way we understand 'money-laundering' in a colloquial sense. It is a technically-defined offence. It postulates that there must be a predicate offence and it is dealing with the proceeds of a crime. That is the offence of money-laundering. It is more than simply converting black-money into white or white money into black. That is an offence under the Income Tax Act………………. So, it is a very technical offence. The predicate offences are all listed in the Schedule. Unless there is a predicate offence, there cannot be an offence of money-laundering…"

He added that speeches of ministers while introducing a statute are valid tool for interpretation.

Mr. Sibal argued that it is trite law that scheduled offence was sine qua non for offence of money laundering. One cannot have a standalone offence for money laundering in absence of a scheduled offence.

The Bench clarified, "Before proceeds of the crime, the crime has to be there."

Mr. Sibal pointed out that the 2019 Amendment says that it is a standalone offence.

"The ED has argued that insertion of Explanation 1 in Section 44(1)(d) by Finance Act 2019 has clarified the position that trial under PMLA will proceed irrespective of orders even that of acquittal in the scheduled offence…How does this show that it is a stand alone offence if the man says there is no proceeds of crime. If there is no proceeds for crime then how can they proceed under PMLA. It is dependent on scheduled offence."

The Bench enquired, "In a case where the sole accused dies, trial abates, what will happen to the PMLA case?"

Mr. Sibal was of the view that -

"Proof will still have to be met. In Rajiv Gandhi Bofors matter the proceedings went on after he passed away. It had to be rationalised."

Whether the officers of ED are police officers

Mr. Sibal argued that penal statutes are distinct from a regulatory statute and the officers of ED would be police officer.s Referring to regulatory statutes and the NDPS Act, which is a penal statute, he attempted to distinguish between the two.

"Our basic proposition is that this is a penal statute. A statute which deals with both prevention and punishment. There are several statutes in law which are not penal statutes, where the officers exercising power in the context of investigation under customs act are deemed not to be police officers. The object of the customs act is to collect customs duty. They make sure no contraband is brought. They do not check the luggage of each individual. Intention is not detection. These are regulatory statutes in contradistinction to penal statutes. This court had on several occasions when confronted by the admissibility of statement recorded before such officers, came to the conclusion that it is admissible and not hit by Section 25 of IEA, This applies to most of the regulatory statutes. Take the railway protection force, which in order to protect railway property if they record statements they are not police officers. The same is with excise duty. I might tell your worship also that originally that was the case, now a lot more power is given to customs officers. The two indicia to determine if a person is not a police officer -

1. Primary objective of the act should be regulatory;
2. What is submitted is not a chargesheet but a complaint.

These are the two elements in regulatory statutes your lordships have held that such officers are not police officers."

As far as the NDPS Act it is not a regulatory statute. It is a purely penal statute. Justice Nariman, concluded that it being a penal statute the statement recorded before officers would be hit by Section 25. PMLA is a penal statute."

The Bench pointed out, "Statutes can be both penal and regulatory."

Mr. Sibal put forth the scheme of the statute to argue that PMLA is a penal statute and therefore the officers referred to in the statute are police officers.

"Primary object in customs is regulatory though it lays down punishment as well. Central Government can authorise a police officer to conduct PMLA. But, surprisingly if ED does the same thing he is not considered to be a police officer. Money laundering is defined in Section 2(p); 2(u) defines proceeds of crime; Section 4 is punishment for money laundering. Section 17 is power to search and seizure which is also a part of investigation. These all are in penal statutes. Search for a person is dealt with in Section 18, power of arrest is Section 19. These are all powers under CrPC, nothing to do with regulation. Then the reverse burden of proof in Section 24. This happens only when the charge is framed. Then comes the constitution of special courts in Section 43. The predicate offence trial takes place in the same court. Section 50 is used to record statements. This is used indirectly in the predicate offence case. Under Section 45(1)(A) Central Govt. can ask police officers to investigate. Then Section 46, applicability of CrPC. Now, kindly see what is regulatory about it? It is a pure penal statute, then the question does not arise; these are police officers."

The matter will be next heard on 01.02.2022.

[Case Title: Vijay Madanlal Choudhary v Union of India & connected matters]

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