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This article is written by Palash Bhatkoti, pursuing Certificate Course in Advanced Criminal Litigation & Trial Advocacy, from Lawsikho.com.

There are multiple unsettled issues within the Prevention of Money Laundering Act (hereinafter called as PMLA) and no issue has been more controversial than the interpretation of the term ‘Proceeds of Crime’ (POC). If you were to ask any attorney, who is defending clients who are facing charges under the PMLA about the biggest issue he is facing as of present day, his first answer would invariably be the interpretation of section 2(1)(u) of the PMLA. 

If a property is classified as “proceeds of crime” (hereinafter called as POC), then it becomes liable for attachment. Hence, through this article, I will attempt to find answers of the following three questions regarding the POC:

  1. What is the true and correct interpretation of POC?
  2. Which properties can be classified as POC?
  3. Which properties can be attached as “value equivalent or value thereof” of the POC?

How does a property become a proceed of crime? 

Before proceeding with the more technical aspects of the law, I would like to discuss this concept in the most basic form, for the understanding of the readers.

So, in a simple case, when a person commits an offence which is enlisted in the schedule of the PMLA (called as the scheduled offence or predicate offence) and generates or earns some property, the property so generated or earned becomes POC.

For Example

A person ‘X’ is engaged in the business of illegally selling cocaine, (A psychotropic substance) and earns Rs 50,00,000 by illegally selling cocaine.

Here, Mr. ‘X’ has committed an Offence under the Narcotic Drugs and Psychotropic substances Act, 1985. Now since the offences under NDPS is a scheduled offence under PMLA, thus, the amount of Rs 50,00,000 would be termed as POC.

Also, Mr. ‘X’ would be separately liable for both the offences committed under the NDPS act, as well as PMLA and can be tried together at the same trial. 

Who can classify a property as proceeds of crime?

The Enforcement Directorate (ED) is the primary investigating agency, entrusted with the enforcement of the PMLA.

Where upon receiving the information, and after conducting investigation, an officer of the ED being an officer, not below the rank of Deputy Director, has ‘reasons to believe’ that, a particular property is a POC, then it records his satisfaction in the form of ‘reasons to believe’, and provisionally attaches the property suspected to be POC.

The officer draws up a provisional attachment order (PAO) and appends his ‘reasons’ with the aforesaid order, classifying the property as POC. 

What are proceeds of crime? 

The definition of the term proceeds of crime is contained under section 2(1)(u) of the PMLA. The definition has by far been amended thrice by the legislature, but till today there isn’t an iota of clarity as to what all the properties could be considered as the POC. Although the parliament in its wisdom amended the definition at regular intervals, to plug the loopholes and establish clarity, ironically, each subsequent amendment has only aggravated the confusion. 

Therefore, to achieve clarity on the concept of the POC, it becomes incumbent upon us to analyze the definition of the POC as it originally stood along with the subsequent amendments made to it thereafter. 

Original definition of ‘proceeds of crime’ 

The definition incorporated in the 2005 Act was, “proceeds of crime, means and property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to the scheduled offence or the value of any such property

So, this was the most basic and simple definition of the term POC. It clearly stated that if any person acquires any property by committing a scheduled offence, then such property would be called POC.

Now this definition contains three important terms for interpretations:

  1. PropertyMeans 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; 
  2. Scheduled Offence the offences enlisted under the schedule of the PMLA are called scheduled offences or predicate offences; 
  3. Value of any such property- This part of the definition is the most controversial part in the whole definition of POC which is also the main agenda for discussion under this article. I will attempt to demystify its meaning in the following paragraphs. 

Interpretation of the phrase, ‘value of any such’ property 

Pre-Amendment Scenario –

Let us understand it with an example:

‘Mr. “A”, an Indian citizen and a resident of Delhi, puts out an endorsement in the local newspaper introducing an investment scheme. He invites people to invest in the same and get assured returns which would be 2% of the principal amount invested by them. However, Mr. A never intended to provide the return on investment to the investors. The investors invest huge money, in the hope of getting high returns and Mr. A receives a total investment to the tune of Rs. 50 crores. Thereafter, Mr. A, instead of remitting the promised returns to the investors, dupes them and rather purchases a house property in Delhi worth exactly the same amount of money (50 crores INR) raised through the investment.”

Components of this transaction

  1. Predicate/Scheduled offence- Cheating (Section 420 Indian Penal Code)
  2. Original Proceeds of crime generated out of the activity- Rs. 50 crores
  3. Current status of the proceeds of crime- House Property

You may see that, though the POC originally generated was in the form of money, however, because the same money was thereafter used in buying the house, and the nature and character of the POC got changed, so now the house property becomes the proceeds of crime. 

This is exactly what the term ‘value of any such property’ means and connotes. Now the ED can only and only attach this house property being the POC and nothing more. Had the money been kept in the account and the property would not have been purchased, then the ED could have attached the bank account where the money was kept.

But, in no event, can the ED attach both the bank account and house property simultaneously. Thus, the obvious interpretation arising from this means that only the ‘value’ which is derived from the tainted property can be treated as ‘value equivalent’ and any other random property cannot be attached under the garb of POC.

Be that as it may, this was the position of the law before 2015. The obvious loophole of it was that, the offender would commit a scheduled offence, generate POC and then conveniently stack them abroad. The law enforcement agency could do nothing about it, because the act didn’t allow extra-territorial operation in such matters. This led to mounting frustration in the Indian society, since the whole idea of curbing the menace of black money was going up in smoke. 

Post Amendment Scenario 

Amendment in section 2(1)(u) [vide Finance act 2015]

The definition of POC was amended for the first time in the year 2015, to plug the loopholes which were arising due to the POC being transferred overseas. The words, “or where such property is taken or held outside the country, then the property equivalent in value held within the country” were added to the definition. 

So, the newly amended definition stood as ““proceeds of crime, means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to the 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]” .

Thus, the Parliament tried to counter the situations in which the POC are transferred or routed in foreign jurisdictions to evade the clutches of the Indian laws. The efforts of the Indian parliament were highly driven by the public sentiment which had accumulated over the years to curb the menace of black money stashed abroad. Nation jolting cases of bank frauds came to light and the government was facing embarrassment both domestically and internationally. 

Meanwhile, there were increasing cases of the fugitives who were running away from the Indian jurisdictions, only to take havens in foreign jurisdictions. Thus, the legislature brought in this amendment, empowering the Enforcement Directorate to attach the domestic properties of such offenders, which were though not the POC or the tainted property, but their ‘value’ was equivalent to the POC, which were stacked abroad. 

So let us again try to understand this with an example:

Mr. A, an Indian citizen and a resident of Delhi, puts out an endorsement in the local newspaper introducing an investment scheme. He invites people to invest in the same and get assured returns which would be 2% of the principal amount invested by them. However, Mr. A never intended to provide the return on investment to the investors. The investors invested huge money, in the hope of getting high returns and Mr. A received a total investment to the tune of Rs. 50 crores. Thereafter Mr. A instead of remitting the promised returns to the investors, dupes them and rather transfers this 50 Crore, into his foreign account in London. Thereafter, the agent of Mr. A who is sitting in London purchases a house property worth exactly the same amount of money (50 crores INR) raised through the investment and transferred to the foreign bank account in London.”

  1. Predicate/Scheduled offence- Cheating (Section 420 Indian Penal Code)
  2. Original Proceeds of crime generated out of the activity- Rs. 50 crores
  3. Current status of the proceeds of crime- House Property in London

Now, in this situation, the original POC has been transferred to London, and even been converted into a fixed asset. Now in this situation, the Enforcement Directorate (ED), can attach any other property in India belonging to Mr. A.

Since the authorities were not empowered to attach a foreign property even if it is a POC, so the parliament worked out a solution, for attaching an alternate (untainted) property of the accused in lieu of the POC, which was within the Indian territory. 

Further, Amendment in section 2(1)(u) [2018]

In the year 2018, before the ink of the 2015 amendment could dry, the parliament made another insertion in section 2(1)(u) vide an amendment. 

The 2018 amendment added the word “or abroad” to the definition of the POC. So now the definition as it stands in the present form is as follows:

“proceeds of crime, means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to the 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].

As far as I can understand, the primary objective of adding the word “abroad” was to deal with a specific case which is the infamous Punjab National Bank (PNB) scam. Although of course, the parliament in its wisdom, had a bigger picture in mind, which was to mitigate any such future roadblocks, in attaching a foreign property, but as far as the trigger point of the amendment is concerned, the alleged PNB scam was a major motivation. 

Within a span of just 4 years, India’s two biggest bank frauds had come to light – The SBI scam and the PNB scam. Whereas, the alleged main accused persons in both the respective alleged scams had left the country. This led to a hue and cry in India, and an outburst of public dissatisfaction. The Government of the day was on a tightrope, as one of its main agendas in the election manifesto, was to curb corruption and unearth black money.

As a matter of abundant precaution, the government could not afford any technical hurdles in delivering on its promise and thus this amendment was the answer to it. By introducing the word ‘abroad’, the ED could now directly attach the POC or any property of its equivalent value even on foreign lands. 

Let us again understand this with an example:

Mr. A, an Indian citizen and a resident of Delhi, puts out an endorsement in the local newspaper introducing an investment scheme. He invites people to invest in the same and get assured returns which would be 2% of the principal amount invested by them. However, Mr. A never intended to provide the return on investment to the investors. The investors invest huge money, in the hope of getting high returns and Mr. A receives a total investment to the tune of Rs. 50 crores. Thereafter Mr. A instead of remitting the promised returns to the investors, dupes them and rather transfers this 50 Crore, into his foreign account in London. Thereafter, the agent of Mr. A who is sitting in London purchases a house property worth exactly the same amount of money (50 crores INR) raised through the investment and transferred to the foreign bank account in London.”

  1. Predicate/Scheduled offence- Cheating (Section 420 Indian Penal Code)
  2. Original Proceeds of crime generated out of the activity- Rs. 50 crores
  3. Current status of the proceeds of crime- House Property in London

So, in this case, the POC are transferred abroad and its nature has been converted into a fixed asset. Now the ED has two options. First it can either attach the house property acquired from the POC. Second, if the aforesaid house property has been disposed of or sold, and its proceeds are untraceable, then the ED can attach any other foreign property of the offender as ‘value thereof’.

Therefore, after analyzing all the amendments, in the definition of proceeds of crime, we can conclude that an untainted property (property not being the POC), can only be attached in the situation where the POC has been transferred abroad. It is only in these situations that an alternate property not being the POC can be attached by the ED. The alternate property could either be situated in India or anywhere else in the world. But even this doesn’t mean that the ED would not at all investigate and trace the original POC. The investigating officer has to put in efforts to first trace the POC, and if after the investigation, it is found that the POC are untraceable, only then he would go for the alternate attachable property. 

Judicial interpretations 

The PMLA being a fairly new law suffers from dearth of judicial pronouncements and because of which there are several un-settled issues of great public importance. 

With the passage of time since 2005, there was a growing discontentment, with respect to the action of the ED of attaching even the clean or untainted properties. 

As discussed above, more often than not, the ED attaches properties, which are mortgaged with third parties like banks and financial institutions, properties which are sold to bonafide buyers for proper consideration, properties acquired way before the commission of the scheduled offence and in many cases even ancestral properties acquired and possessed even before the commencement of the PMLA itself. 

All these issues came up in challenge in the following decision of the High Courts: 

Satyam Computers Services Limited V. Director of Enforcement, Government of India & others, Writ Petition No. 37487 of 2012, (31.12.2018 – Hyderabad High Court), MANU/HY/0428/2018

The Honorable High Court decided on two important issues:

  1. Can the ED attach even the untainted properties, when the actual POC have been disposed of or cannot be traced?
  2. Can the PMLA be given a retrospective Effect?

Answering the first issue, the court held that, in the case when the POC are untraceable, or have been disposed of in a manner where tracing them would be impossible, in that case, the untainted or clean properties cannot be attached.

On the second reference, the court held that, PMLA is not a statute dealing with mere procedures and evidence and rather, deals with the substantive rights of the parties. The court relied on the judgement of K.S. Paripoornan V. State of Kerela, and held that unless and until there is a specific provision in the statute itself, the substantive law cannot be given a retrospective effect.

Abdullah Ali Balsharaf & Ors. V. Directorate of Enforcement and Ors. (09.01.2019 – DELHC) MANU/DE/0051/2019

The Honorable Delhi high court was examining whether the property which was acquired prior to the PMLA coming into force, could be attached or not as ‘value equivalent’.

The court answered the reference in the affirmative and held that, according to the amended section 2(1)(u), if the POC are held abroad, then any property of the accused held by him in India can be attached to the extent of the value of the POC, held abroad. The court further observed that, in such a situation even the untainted property can be attached which may have been acquired prior to the commission of the offence or the PMLA itself. 

The Deputy Director Directorate of Enforcement Delhi and Ors. V. Axis Bank and Ors. (02.04.2019 – DELHC) MANU/DE/1120/2019 

The Honorable High Court while deciding the phrase ‘value of such property’ court deconstructed the definition of POC into three parts:

  1. Property derived or obtained (directly or indirectly) as a result of criminal activity relating to the scheduled offence;
  2. The value of any such property; and
  3. If the property of the nature first mentioned above has been taken or held abroad, any other property “equivalent in value’ whether held in India or abroad.

The court observed that, in the first case (1), there is no controversy, since the properties referred in this case are ‘tainted’ which are acquired through commission of a scheduled offence and thus liable for attachment. (Refer para 106 of the judgment)

It further held that, the cases falling under category (2) & (3) are ordinarily untainted because they are acquired through legitimate sources by the suspect (accused), but since, the actual POC are not traceable, then even these can be attached as the accused cannot be allowed to enjoy the fruits of crime by disposing them off. (Refer para 107 of the judgement

The Honorable court concluded the issues by observing that, even the untainted properties which are acquired with the legitimate source of money are liable to be attached as ‘value equivalent’. The Honorable court interpreted the term ‘such property’ so as to include even untainted property or clean property. It further held that the untainted clean property is liable to be attached as ‘deemed’ POC or alternate attachable property.

Recently the Punjab and Haryana High Court in, 

Seema Garg & Ors. V. The Deputy Director, Directorate of Enforcement (06.03.2020 – PHHC) MANU/PH/0204/2020 determined the following issues in great depth:

  1. Whether the property acquired prior to the enactment of the PMLA, ie. 1.07.2005, can be provisionally attached?
  2. Whether the phrase, ‘value of any such property’ occurring in the definition of ‘proceeds of crime’ includes any property of any person irrespective of the source of the property?

The Honorable High Court, gave a combined answer to both the issues since both the aforesaid issues are connected to the definition of POC. It began its observations by agreeing with the judgment of the Delhi High Court in Abdullah Ali Balsharaf V. Director of enforcement (supra) and held that, 2018 amendment to the definition of proceeds of crime makes it clear that, in cases where the POC are held abroad, any property of the accused, irrespective of its date of acquisition can be attached. 

With respect to the second issue of ‘value of any such property’, the court gave the following observations:

  • In the cases where the POC are not taken or held abroad and still any other property is attached, then the second and the third limb of the Definition of POC would be redundant and meaningless.
  • Had the legislature intended to include any property in the hands of any person, then the there would have been no reason to make three different limbs of the definition of POC.
  • If the ED’s contention is to be accepted, then there would have been no need to even declare a property as POC and rather, any property could be conveniently attached.
  • The provisions of the act cannot be read in isolation and the whole act is to be read in entirety. As per section 8(6) of the act, if the special court finds that the property is not involved in the money laundering, then it will order the release of the property from attachment. Hence the whole exercise of attaching an untainted property would be futile if ultimate finding of the special court is a foregone conclusion. 
  • Accordingly, the phrase ‘value of such property” doesn’t include any property which has no direct or indirect link with the scheduled offence. 

Therefore, except the judgment of the Delhi High in Axis Bank (supra), it has been a consistent view by all the three respective High Courts, that the three limbs of the definition of POC are to be read distinctly and every limb has its own purpose and significance. 

Thus, the phrase ‘value of any such property’ and ‘value equivalent’, would mean and include any property of any person only in those case, where the POC are taken or held abroad. In cases where the POC are within the country itself or when they are untraceable, but not taken abroad, then in all those cases the ED cannot take the refuge of the phrases ‘value equivalent’ and attach any other property. 

Conclusion

Thus, the decision of the Punjab and Haryana High Court in Seema Garg’s case, is the guiding force in determining as to what amounts to proceeds of crime.

No doubt that, determination of POC would also depend largely on the facts of each case, but such determination should be guided by just and fair principles of law.

The practice of attaching any property under the garb of ‘value thereof’ must be avoided at all costs. Only in cases where the POC is taken or held abroad, the ED can attach any other property.

We have to keep in mind that PMLA is not a revenue collecting statute like the Income Tax Act. The aim, objectives and rigors of PMLA are on a higher pedestal. Just because the POC are not traceable, the ED cannot proceed to attach the alternative property, especially in the absence of a statutory sanction behind it.

Even otherwise, the absence of the POC would not absolve the offender from the punishment under the act. PMLA contemplates twin liabilities i.e. civil and criminal. Civil liabilities exist in terms of attachment proceedings while the criminal liability creeps in at the time of trial. Thus, if a person is found guilty of the offence of money laundering by the special court, he will still be liable for punishment under the act. 


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