By Abhinav Gour
Published On: February 19, 2022 at 16:00 IST
Introduction
In India, the conduct of money laundering-related offences has grown significantly in the past decade or two, with massive scandals being exposed regularly.
To tackle the issue, Prevention of Money Laundering Act, 2002[1] (PMLA) was enacted and notified on 17th February 2003, however, it came into force on 1st July 2005.
The Act has been amended thrice, the last time being amended by the Finance Act in 2019. The Act was enacted to prevent crimes related to money laundering and establish a legal framework for confiscating assets and property derived directly or indirectly in money laundering.
The PMLA criminalizes ‘Money laundering’ and provides for the interim attachment leading to the seizure of the ‘Criminal proceeds.’ The ‘Enforcement Directorate‘ is the nodal body charged with investigating and prosecuting the crime of money laundering.
The definition of the offence of money laundering is stated in Section 3[2] of the PMLA as follows:
“Whosoever 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 including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”
The term ‘Money laundering’ is exceedingly vast. Nearly any kind of transaction involving the ‘Proceeds of crime’ is brought within the ambit of ‘Money laundering.’
Understanding the term and the scope of ‘Proceeds of crime’ becomes critical in comprehending the crime of money laundering since it is pertinent to note that it is only when the laundered property and assets come within the scope of ‘Proceeds of crime’, then only is the offence of ‘money laundering’ attracted and for the person to be found guilty of ‘money laundering.
Further Details on Money Laundering
Proceeds of Crime
The phrase “Proceeds of crime” (from herewith referred to as POC) is at the core of the money laundering offence and is defined in Section 2(i)(u)[3] of the PMLA. The definition of the term has been revised twice- first by the Finance Act of 2015 [4]and again by the Finance Act of 2018[5].
In 2019, the definition of the term was provided with an explanation. The initial definition incorporated in the Act of 2005 defined Proceeds of crime as “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”.
This definition in laymen terms stated that, for a property to be labelled as POC, the respective property must be acquired by committing a scheduled offence. This can be understood with the help of an illustration:
- ‘A’ commits a fraud of worth Rs. 10,00,000 and purchases a car worth the same.
- Here, ‘A’ has committed an offence of fraud under the Indian Penal Code (IPC), 1860. Since crimes under IPC are listed as scheduled offences, the car would be termed a POC.
- Also, ‘A’ will be held liable for both the offences committed under IPC and PMLA and can be tried together at the Court of law.
Interpretation of Terms
To understand POC in its fullest sense, it can be further divided into three terms:
- Property
Section 2(1)(v)[6] of PMLA defines property as “any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever located”
- Scheduled Offense
The crimes listed in any part (A, B or C) of the PMLA’s schedule are known as scheduled offences or predicate offences.
- Value of any such property
By taking the same illustration as above, it can be noted that ‘A’ generated Rs. 10,00,000 by fraud and the same money was utilized in buying a car; hence there was a change in the nature of POC. After buying the car with the same Rs. 10,00,000, the car is said to be the POC and not the money.
This is what is meant by the term “Value of any such property”. The ED can now attach ‘A’s car being the POC. The ED cannot withdraw both the money and the car simultaneously. The clear implication is that only the ‘value’ obtained from the tainted property may be recognized as ‘value equal’ and that any other random property cannot be attached under the guise of POC.
This is the most contentious part of the definition. This issue will be covered later in the article with the help of judicial pronouncement.
There were loopholes that existed in this definition. An offender would generate POC by a scheduled offence and then hold or take them into foreign lands to avoid Indian Jurisdiction. In such cases, the ED was left helpless because there was no legislation behind it.
However, this was the position before 2015. To plug in the loopholes, the legislature has amended the definition twice and even inserted an explanation to expand its ambit.
Amendments in Definition
In 2015, the definition of POC was amended and expanded for the first time by including the words “or where such property is taken or held outside the country, then the property equivalent in value held within the country”.
To counter the kind of situations where POC are transferred into foreign lands to evade the Indian Jurisdiction, the amendment was enacted.
The amendment brought cases within the Act’s purview where the POC was held or taken abroad. It enabled the Enforcement Directorate to seize such criminals’ domestic assets, which were neither the POC nor the tainted property, but whose ‘value’ was similar to the POC held overseas.
This amendment also was to counter the economic offenders who were running away to foreign lands. With the help of this amendment, the legislature enabled the ED to attach those economic offenders’ domestic properties even though they were not the actual POC, but whose ‘value’ was equivalent to the POC held abroad.
Furthermore, the word “or abroad” and an explanation to the definition was inserted with the 2018 and 2019 amendment, respectively. The insertion of the term “Abroad” can be addressed to the infamous Punjab National Bank scandal.
Although the parliament, in its wisdom, had a wider picture in mind, which was to prevent any such future delays in attaching a foreign property, the alleged PNB fraud was a primary incentive for the trigger point of the legislation. With the addition of the term ‘abroad’, the ED can now directly attach the POC or any property found to be of equivalent value even in places outside India.
Subsequent to the amendments, the definition of POC stands as:
“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.”
Constituents of Proceeds of Crime
The PMLA’s definition of “Proceeds of crime” may be broken down to relate to three kinds of properties:
- Property derived or obtained (directly or indirectly) by a Scheduled offence;
This kind of property can be understood with the help of an illustration as provided by the High Court of Delhi while deciding the case of The Deputy Director Directorate of Enforcement Delhi and Ors. vs. Axis Bank and Ors.[7]
In the illustration, the Court stated that a bribe received by a government official in cash is a tainted property acquired ‘directly’ via dishonest means and can subsequently be term as ‘Proceeds of Crime’. However, if any property or asset is acquired with the same bribe, a POC has been ‘indirectly’ obtained. It becomes relevant to note that there has to exist a nexus between the property and the crime.
- Value of any such property
- Property ‘Equivalent in value’ held domestically, where such property is taken or held abroad
One thing that differentiates the last two properties from the first is the non-necessity of nexus between the crime and the tainted property. In some cases, it might not be possible for the ED to trace the tainted property. Prior to the amendments, the ED had no scope to attach the untainted property.
Judicial Pronouncements
- Hasan Ali vs. Union of India[8]
In the case of Hasan Ali vs. Union of India, the accused committed an offence under the Passports Act, 1967, which is listed as a scheduled offence under PMLA. The accused travelled abroad opened a bank account.
Therefore, it was deemed that the money credited in the accused’s account would be ‘property derived or obtained as a result of criminal activity relating to a scheduled offence‘. However, it was held that since the property, i.e., cash, was not earned by committing the offences under the Passports Act, 1967, it would not be termed POC.
The judgement was passed prior to the amendments and the explanation provided in 2019. Post amendments, in the same case of Hasan Ali vs. Union of India, the property would be termed as POC since the explanation widens the scope of POC by stating that it includes not only derived or obtained properties 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.
There have been certain important judicial pronouncements regarding the last two kinds of properties which become pertinent to observe.
- B. Rama Raju vs. Union of India & Ors., 2011[9]
Prior to the amendments, in the case of B. Rama Raju vs. Union of India & Ors., the Andhra Pradesh High Court held that any property acquired by bona fide means and is not related to the scheduled offence committed, then such property cannot be attached.
- The Deputy Director Directorate of Enforcement Delhi and Ors. V. Axis Bank and Ors., 2019[10]
However, post the amendments, the Court in the Deputy Director Directorate of Enforcement Delhi and Ors. Vs. Axis Bank and Ors., the Court observed that cases involving the last two kinds of properties are usually untainted since they are legally acquired.
However, in cases when the actual POC cannot be traced then, even the untainted properties are liable to attach as ‘value equivalent’.
The High Court distinguished between “tainted properties” and “deemed tainted properties,” holding that “deemed tainted properties” are those that were obtained and acquired without any connection to criminal activity but are still subject to an attachment if the tainted properties are not traceable or available for attachment.
The Court widened the scope of ED to attach even the untainted properties under PMLA when the tainted properties are unavailable. Although, this judgement has been challenged and is pending before the Supreme Court of India.
- Seema Garg vs. Deputy Director, Directorate of Enforcement, 2020[11]
The latest judgement, which involves the interpretation of POC, was held in the case of Seema Garg vs. Deputy Director, Directorate of Enforcement which the Punjab and Haryana High Court has passed.
The Court, while dealing with the second type of property, has ruled that the expression “Value of such property” does not include any property that has no direct or indirect relation to the property acquired or received by committing the scheduled offence.
It held that the so-called “Deemed tainted” properties coined by the Delhi High Court in the Axis Bank Judgement[12] cannot be attached if a direct or indirect link cannot be established between the property and the scheduled offence committed.
Conclusion
With the Punjab and Haryana High court taking a divergent view from the Delhi Court’s view in the Axis Bank Judgement, it becomes pertinent to note that there is no clear judgement by the Hon’ble Supreme Court on the issue of whether the ED can attach the properties which are untainted in the absence of the trace of tainted properties.
The issue is pending before the Supreme Court in the Special Leave Petition against the Axis Bank Judgement.
It would become interesting to see how will the topmost Court will interpret and solve the issue with the High Court’s having different views.
Edited by: Tanvi Mahajan, Publisher, Law Insider
References:
- Proceeds of Crime (last visited on February 19, 2022)
- Powers if ED under PMLA (last visited on February 19, 2022)
- Anti Money Laundering Laws (last visited on February 19, 2022)
- Proceeds of Crime (last visited on February 19, 2022)
- The prevention of money laundering Act, 2003 (Act 15 od 2003) ↑
- The prevention of money laundering (Amendment) Act,2005 (Act 20 of 2005), s.3 ↑
- The prevention of money laundering (Amendment) Act,2005 (Act 20 of 2005), s.(2)(i)(u) ↑
- Finance Act 2015 (Act 20 of 2015) ↑
- Finance Act 2015 (Act 23 of 2018) ↑
- The prevention of money laundering (Amendment) Act,2005 (Act 20 of 2005), s.(2)(i)(v) ↑
- The Deputy Director Directorate of Enforcement Delhi and Ors. V. Axis Bank and Ors., 2019 MANU/DE/1120/2019 ↑
- Hasan Ali vs. Union of India 2012BomCR(Cri)807 ↑
- B. Rama Raju vs. Union of India & Ors. (2011 SCC Online AP 152) ↑
- Id 1 ↑
- Seema Garg vs. Deputy Director, Directorate of Enforcement (2020 SCC Online P&H 738) ↑
- Id 1 ↑