Decoding The Evolution Of The Prevention Of Money Laundering Act And Its Harsh Provisions

Under the PMLA, the onus of proving one’s innocence has shifted from the department to the accused -- you are guilty until you prove otherwise.

This is not how the law was envisaged, but this is what it has come to be. Before we delve into this transition, rather the evolution of the PMLA into its current form, some definitional clarity is in order.

Money laundering, as the Interpol defines it, is concealing or disguising the origins of illegally obtained proceeds as that they appear to have originated from legitimate sources. 

The word ‘laundering’ came about when Italian mobster Al Capone set up launderettes at various public places wherein coins were used by the public to operate them-and since this was a cash business, he was able to show his proceeds of crime as legitimate income. Dirty money was literally being laundered.

The Genesis

The PMLA was enacted in 2002. The statement of objects and reasons, when the bill was introduced, highlighted India’s commitments under international laws wherein there was a clear recognition about the threat that money-laundering poses to the financial systems, their integrity and the sovereignty of nations.

The international commitments made under the UN Convention against Illicit Traffic in Narcotic Drugs & Psychotropic Substances primarily pertained to preventing laundering of proceeds of drug crime, drug related money.

As is well known, India’s geographical location wedged as it is between the Golden Crescent and the Golden Triangle makes it vulnerable to illicit flow of drugs. India was a participant and signatory to all the conventions mentioned in the statement of objects. 

Article 253 of the Indian Constitution empowers Parliament to make any law for implementing any treaty or convention -- for giving effect to international agreements. The seventh schedule at List 1 (the Union list) at serial 13 explicitly makes it clear that matters relating to participation in international conferences and implementing of decisions made thereat are within the Union's powers.

The bill was accordingly passed, and clearly the purpose was to address concerns of prevention of laundering of proceeds of drug crimes. PMLA thus came into force from July 1, 2005. Subsequently, substantial amendments were introduced in 2009, 2013 and 2019.

The amendments were brought as per the statement of objects presented to Parliament at the relevant times to address concerns raised by the Financial Action Task Force (FATF) in its periodical evaluation of the country’s preparedness to address Money Laundering ( ML)  as also developments in the international community to enlarged the scope of money laundering offences to ‘the widest range of predicate offences’. Specific mention was made of the United Nations Convention against Transnational Organized Crime (Palermo Convention). 

The amendments were also carried out, especially those in 2019, to plug loopholes or more specifically overturn pronouncements by the courts. It should be noted that these amendments were brought by governments and political parties across the aisle and after due consideration by Standing Committees.

Incidentally they were all brought about by taking recourse to the Finance Bill/Money Bill route, which has since been challenged and is pending for consideration before a larger bench of the Supreme Court.

Suffice it to say these amendments changed the character of PMLA significantly, expanded its scope from much beyond dealing with proceeds of drug related crimes and made it the harsh law which it is today.

Wider Reach

The law as it stood (and stands) after these amendments defining money laundering has a ‘wider reach’ than what was mentioned at the outset of this article. It captures every process and activity in dealing with the proceeds of crime, directly or indirectly, and not limited to the final act of integration into the formal economy.

The processes include concealment, possession, acquisition, use or projecting or claiming as untainted property. The process connected with the proceeds of crime has been held to be a ’continuing activity’ -- till such time a person enjoys the proceeds or projects or claims it as untainted property.  

Proceeds of crime has been defined to mean any property obtained directly or indirectly not only derived from the scheduled offence but also any property which may directly or indirectly be derived because of any criminal activity relatable to the scheduled offence.

The offences listed in the schedule to the PMLA are scheduled offences. The schedule of offences itself is in three parts -- Schedules A, B and C.

Schedule A offences range from provisions under the India Penal Code, the Narcotics Drugs & Psychotropic Substances Act (NDPS), Arms Act, Wildlife Protection Act, Immoral Traffic (Prevention) Act, Prevention of Corruption Act, to offences under the Protection of Plant varieties & Farmers Rights Act, Air (Prevention & Control of Pollution) Act , Biological Diversity Act ,Transplantation of Human Organ Act.

The specific offence of false declaration under the Customs Act falls under Schedule B, and Schedule C deals with transnational crimes. Every scheduled offence is a predicate offence-the occurrence of a predicate offence is the trigger for initiating investigation.

The officers of the Directorate of Enforcement (ED) have been vested with the powers to initiate investigations under PMLA. These include powers of provisionally attaching property derived, directly or indirectly, from any criminal activity relating to a scheduled offence, including assets of equivalent value located even outside the country.

It should not be forgotten that various legislations already exist to deal with attachment/confiscation/forfeiture of proceeds of crime -the Wildlife (Protection) Act, The Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Act, NDPS Act, Prevention of Corruption Act. 

The ED officer also has powers of search, seizure, summon and arrest. The ED officer can  initiate search operations even in the absence of a report under Sec 157 of the Code of Criminal Procedure ( CrPC) ( section 157 stipulates that in cognizable cases it is the duty of the officer-in-charge to send a report to the Magistrate and then proceed to investigate).

No warrant too is required from the Court for making an arrest. An arrest can be made even in the absence of an FIR. That brings us to one of the most discussed provisions of PMLA-Sec 45 relating to bail.

Cognisable, Non-bailable Offences

Offences under PMLA are cognizable and non-bailable. What Sec 45 stipulates is that no person accused of an offence under PMLA shall be released on bail unless the Public Prosecutor has been given an opportunity to oppose the application for release and the Court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence, and he is not likely to commit any offence while on bail.

These provisions impose a huge burden on the courts -- a burden which is difficult to discharge since at the time of arrest, no charge sheet is filed and the Court will only have to go by the submissions of the ED.

Invariably what this means is that bail is denied. These provisions were held unconstitutional and violative of Article 14 (equality before law) and Article 21(protection of life and personal liberty) by the Supreme Court (SC) in Nikesh Tarachand Shah vs Union of India (2018). The 2019 amendments restored this provision.

All the amendments that substantially expanded the powers of ED under PMLA were challenged in the SC through a Special Leave Petition. A three-judge bench of the SC headed by Justice A.M.Khanwilkar in its decision dated July 27,2022 disposed of 241 petitions and upheld  most of the amendments.

A major challenge in the petitions was that the definition of money laundering ( section 3 of PMLA) imposes two separate conditions, which have to be satisfied -- namely to indulge or knowingly assist or knowingly be a party or be actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and project or claim it as untainted property, to be guilty of offence of money laundering.

The SC has, however, held that  the expression “and” occurring in Section 3 has to be construed as “or”. The SC upheld the bail conditions prescribed  under Sec 45 as being ‘reasonable ‘ and having a direct nexus with the purpose and objectives of the PMLA.

In other words, bail shall not be considered unless the Court is satisfied that the accused is innocent. It will require a very brave judge to arrive at such a conclusion even before a charge sheet is filed.

Thus, it is that arrestees under PMLA do not get bail and continue to be interned. The SC decision is a thumping validation of the extensive powers vested with the ED. 

PMLA thus is an extraordinary Act -- having regulatory, preventive, and penal provisions. The decisions of the Courts while dealing with petitions relating to bail and attachment of property under PMLA will have to be viewed in this background.

It can be argued that the PMLA has travelled a long way from its initial purpose of focus on drug related proceeds of crime. But then this appears to be the legislative intent.

With great power comes great responsibility. The ED will have to act with restraint and ensure that it does not become vulnerable to accusations of misuse of its powers. After all, credibility is of critical importance to all enforcement agencies.

(The author is former Chairman of Central Board of Indirect Taxes and Customs (CBIC). Views expressed are personal)