Investigation Process in Money Laundering Matters

This article is written by Pranjali Aggarwal of the University Institute of Legal Studies, Panjab University, Chandigarh. This article deals with the Prevention of Money Laundering Act (PMLA), 2002, and its constitutional validity.

Introduction

Money Laundering refers to the process in which the money arising from criminal proceedings or activities is projected as money from legitimate sources. It is basically a procedure that conceals the origin of dirty funds from illicit sources such as drug trafficking, illegal arms supply, etc., and helps people enjoy these gains by laundering it to make it look clean so that it can be disguised as legal money. According to the United Nations Office on Drugs and Crime (UNODC) the estimated sum of money that is laundered every year globally, amounts to 2-5% of global GDP that is approximately $800 billion- $2 trillion in the current US dollars. So, the Prevention of Money Laundering Act, 2002 (PMLA) was enacted to curb and control this practice of money laundering in India.

Money Laundering in India

In India, money laundering is also referred to as Hawala transactions which gained popularity during the early ’90s. Hawala is an Arabic term that refers to the transfer of money or information between two individuals with the help of a third person. Hawala is an alternative or parallel remittance system used to facilitate the conversion of black money into white money. According to Section 3 of the PMLA,2002, money laundering is the processing of criminal proceeds (illicit profits generated from criminal acts) so that their illegal origin can be cloaked.

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The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act,2002 came into force with effect from 1st July 2005 and as stated in Preamble of the Act, its main object was to prevent money-laundering and to provide for confiscation of property derived from or involved in, money laundering and to punish those who are engaged in the commission of the offence of money-laundering. Before the introduction of PMLA, 2002 in the Indian legal regime, several enactments were used to address the menace of money laundering in India like the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,1974 (COFEPOSA), the Benami Transactions (Prohibition) Act,1988, the Indian Penal Code,1860 (IPC) and Code of Criminal Procedure,1973 (CrPC), the Narcotic Drugs and Psychotropic Substances Act (NDPS), 1985, the Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and also included demonetization of currency.

But these statutes were not specifically curated to deal with the issue of money laundering so they were inept to address the global concerns of mounting cases of money laundering. The Government of India proposed the Prevention of Money Laundering Bill 1998 in Parliament on 4th August 1998 and the Bill received assent from the President on 17th January 2003 and hence, the specific statute to deal and tackle the cases of money laundering i.e PMLA, 2002 was introduced. The Act has undergone five amendment procedures. since its enactment and the latest one being in the year 2019.

Constitutionality of PMLA challenged in various case laws

Since the inception of the Act, the provisions have been categorized as complex as well as contentious. They have been in the limelight for their conflicting interests with different Acts and the constitutionality of various provisions of PMLA,2002 has been challenged in the courts time and again in various case laws. 

The constitutionality of some provisions is discussed below:

Section 45(1)

Section 45(1) of the PMLA, 2002 dealt with the conditions of bail. This draconian provision was held to be unconstitutional and as it was in contravention with Article 14 and Article 21 of the Constitution of India in the landmark judgement of Nikesh Tarachand Shah v. Union of India (2017).

Facts of the case

The constitutional validity of Section 45(1) was challenged in this case as there were twin conditions in Section 45(1) that were to be fulfilled in addition to the provisions of CrPC,1973 in order to get the bail in cases related to an offence punishable for a term of imprisonment of more than three years under Part A of the Schedule to the Act that is:-

  1. The public prosecutor must be allowed to oppose any application for release on bail; and
  2. Where the public prosecutor opposes the application, then the court must be assured and satisfied that there accused reasonable grounds that negate the guilt of the accused and that he is not likely to commit any offence while on bail.

Contentions of the Petitioner

The provisions were considered arbitrary and thus violative of Article 14 and Article 21 because of the following reasons:-

  • In the Prevention of Money Laundering Bill,1998 when it was put forward before the Parliament, clauses 43 and 44 of the Bill on which Sections  Section 44 and 45 of Act are based, dealt only with the offences that were elucidated under the Act itself. In the Act, the proposed provision in the Bill was completely altered and instead of only offences of the Act it was applied to Part A of the Schedule under the Act
  • When the Act was enforced, Part A of the Schedule encompassed only two offences of the IPC and nine offences of Narcotics Drugs and Psychotropic Substances Act,1985. But the Amendment of 2012, widened the applicability of Section 45 (1) to various offences as all the offences mentioned under Part B of the Schedule were transferred to Schedule A.
  • The amendment made this Act applicable to a myriad of offences which renders Section 45 (1) to be arbitrary and unreasonable as the prosecution of the accused is related to the offences committed under this Act but his bail application would be denied because of the charge of having committed a scheduled offence (as given under Part A) which include other offences also that are not covered under this Act.
  • The Act was formulated to deal with the offence of money laundering and as Section 45(1) is being applied to punish offences of other Acts, it does not comply with the nexus of the Act that was to penalise money laundering.
  • The offences that are added in Part A of the Schedule are decided on the basis of a sentence of imprisonment of more than three years but this classification does not have any reasonable nexus to the object sought to be achieved by the Act.
  • Even the principle that the accused is innocent until proven guilty is violated and it is not justified according to the Act also as no doubt Section 24 of the Act shifts the onus of proof on the accused in the offences as enumerated under Act but this Section does not apply to Section 45(1) because it deals with scheduled offences only.

Held

So this section was held to be unconstitutional and was struck down as being violative of Articles 14 and 21 as the principle guiding the criminal justice system is ‘Bail, not jail ’based on Article 21 of the Constitution. The matters in which the application of bail was pending because of the non-fulfilment. of the conditions of Section 45(1) of the Act were to be reconsidered and decided accordingly.

Aftermath of the Nikesh Tarachand Shah case

Section 45(1) of the Act was struck down in this judgement, so it was later on amended by the 2018 Amendment brought through the Finance Amendment Act 2018. But the amendment can be said to be an old wine in a new bottle. The phrase “punishable for a term of imprisonment of more than three years under Part A of the Schedule” in the section was substituted with “under this Act”. This was done in order to make the prerequisites for bail mentioned under this section apply to all the offences under this Act and not restrict only to Section 45(1).

This amendment has also been challenged and there are conflicting views presented by different High Courts. In the case of M Sivasankar v. Union of India(2021), the Kerala High Court stated that the bail conditions will be applicable after the amendment of 2018 and the judgment of Nikesh Tarachand Shah will not alter the applicability of the subsequent amendment. Contrarily, the High Courts of Bombay (Sameer Bhujbal v. Directorate of Enforcement, (2013),  Madhya Pradesh ( Vinod Bhandari v. Directorate of Enforcement, (2018), and Manipur (Okram Ibobi Singh v. Directorate of Enforcement, (2020) are of the opinion that as Section 45(1) of the Act has already been struck down in the Nikesh Tarachand Shah case, so the 2018 Amendment does not resurrect the bail pre-conditions.

This question is still to be finally decided by the court. The crucial reason for striking down the section was to shift the burden to negate his guilt on the accused and the amendment only made changes regarding the applicability of Section and not regarding this presumption. So, this matter needs to be decided by the Court.

In August 2016, the former Maharashtra Deputy Chief Minister Chhagan Bhujbal has also filed a writ petition in the High Court challenging the constitutional validity of certain provisions of PMLA,2002 and specifically challenged two Sections- Section 19 and Section 45 and after this judgment, he was granted bail by fulfilling the other requisites as decided by the court.

Section 2, 8, 23 of the Act

In the case of B Rama Raju v. Union of India and Ors (2019). the constitutional validity of Sections 2(1)(u), 8 and 23  were challenged. 

Contentions put forward by the Plaintiff

The contentions were made on the points that:

  • The property that is under the control of a person other than the person charged under the Act can also be confiscated and attached to the case.
  • The court can even attach the property that was made before the enactment of the Act if found to be acquired from illicit means.
  • The presumption under Section 23 is against the presumption of innocence in the favour of the accused 

Held

The Court decided upon this matter after considering these provisions and the object of the Act. As the Parliament has the power to retrospectively apply any Act and the presumption under Section 23 is a rebuttable presumption and the accused has a chance to disprove his guilt. So the Court stated that these provisions do not infringe any fundamental rights enshrined in the Constitution and upheld the validity of these provisions.

Section 5(1)

Several writ petitions have been filed under Article 226 of the Constitution of India to declare the second proviso to Section 5(1) of PMLA,2002 as ultra vires, unconstitutional as it is violative of Article 14,19(1)(g),  21, 300A of the Constitution. Section 5(1) deals with the attachment of the property in money-laundering and its second provision confers the power over the Enforcement Directorate to provisionally attach the properties allegedly bought from proceeds of the crime.

  • The Court in the case of J Sekar v. Union of India (2017) held that this proviso is not against Article 14 as it does not confer excessive or disproportionate powers that will be rendered arbitrary and the court relied on the landmark judgement of Shayara Bano v. UOI (2017). And relied on Union of India v. Dilip Kumar (2015) that ‘proviso should not be beyond the extent of the provision to which it is proviso’ and stated that in order to make the provisional attachment, firstly there should be the satisfaction that these ‘proceeds of crime’ can be concealed or transferred and thus it will hamper the confiscation process of the property. This provides the safeguard for the proviso 2 of Section 5(1).
  • The validity of this proviso with reference to Article 19(1)(g) was decided in the judgement of FFR Software Pvt. Ltd v. Union of India (2012)  and it was decided that it does not violate any provisions of Article 19(1)(g) 
  • In Smt. K. Sowbaghya v. Union of India (2016) it was held that as the confiscation of property as per this proviso is only for the limited time period and the order of attachment is to be submitted to Adjudicating Authority immediately and the validity of the provisional attachment is to be confirmed by the Authority. So the proviso is not violative of Article 14, Article 21 and 300-A as reasonable safeguards are provided so that no arbitrariness can be witnessed.

So through these series of judgements over the years, it can be stated that the second proviso to Section 5 (1) does not infringe the rights as articulated under Article 14, Article19 (1)(g), Article 21 and Article 300-A of the Constitution of India.

Section 17,18

After the Amendment of 2019, the provisions of Section 17(1) and 18(1) have been deleted, as a result, the scope of powers of the officers of the Enforcement Directorate (ED) widened. Now ED can initiate search procedures against the accused or search premises without any report being forwarded to the magistrate under Section 157 of CrPC,1973. This power will surely increase the sufferance of the accused at the whims of the officer. The constitutional validity of these provisions is to be decided by the court.

Sections 19(1) and 24 of the Act

Section 19 of the Act deals with the powers of arrest and Section 24 of the Act deals with the burden of proof. These provisions were challenged in the case of Rajbhushan Omprakash Dixit v. Union Of India & Anr (2018)

Facts of the case

  • The investigating agency had booked Sterling Biotech’s directors Chetan Jayantilal Sandesara, Dipti Chetan Sandesara, Rajbhushan Omprakash Dixit, Nitin Jayantilal Sandesara and Vilas Joshi, and Chartered Accountant Hemant Hathi, former director of Andhra Bank Anup Garg and other unidentified people in connection with the money laundering case and attached assets worth Rs 4701 in this case.
  • Rajbhushan Dixit was sent to the custody of ED for 11 days.
  • He filed the writ petition of Habeas Corpus and questioned the validity of Sections 17, 18, 19 and 24 of the Act.

Contentions put forward by the Plaintiff

  • It was pleaded that the procedure prescribed under Chapter XII of CrPC was not adhered to despite the order of the Supreme Court in the case of Ashok Munilal Jain v. Assistant Director, Directorate of Enforcement (2017).  Thus, his arrest is against Articles 14, 21 and 22 of the Constitution and is also against the guidelines laid down in the landmark judgment of DK Basu v. the State of West Bengal (1997).
  • Thus, challenging the constitutional validity of powers of arrest under Section 19 which are arbitrary of the guidelines of DK Basu.
  • Section  24 was questioned for shifting the burden of proof on the accused to disprove his guilt which is contrary to the cardinal principle that ‘accused is always considered innocent”.

Held

The Court relied on the judgement of Moin Akhtar Qureshi v. the Union of India (2017) and said that the provision of Section 19(1) does not comply with the principles of the Constitution and thus are to be reconsidered by a larger bench.

Section 44 (1) (a) and Section 44 (1)(b) 

A Petition has been filed challenging Section 44(1)(a) and 44(1)(b) on the grounds that

  • Section 44(1)(a) deprives the accused of rights enunciated under CrPC,1973 like the right to be tried by the magistrate of first-class, right of the first appeal as per Section 374(3) of CrPC, Right of Revision to the High Court (as per section 401 CrPC). Thus, it is pleaded to be against Article 21 of the Constitution.
  • Section 44(1)(b) is considered to be against Articles 14 and 21 of the Constitution as the petitioner contends that the grounds on which the authority can transfer the case to the Special Court are not explicitly mentioned, thus conferring wide and unfettered powers.

The Divisional Bench comprising Justice S. Abdul Nazeer and Justice Aniruddha Bose has listed the matter for further hearing.

Pleas yet to be decided by the Court on the constitutionality of PMLA, 2002

  • Former Union Minister P Chidambaram’s son and Congress MP Karti Chidambaram has challenged the constitutional validity of the PMLA as amended in 2019 and sought to declare it to be void, ultra vires, and unconstitutional. He stated that the procedure prescribed under PMLA is arbitrary, unreasonable and thus violative of  Articles 14,19, 20 and 21 of the Constitution of India. The contentions to prove this Act unconstitutional revolves around excessive and arbitrary power exercised by ED in respect of deciding whether the offence is a predicate offence or not, the procedure followed for attachment, adjudication and possession of properties by the ED which according to the petition can be done on the belief of ED even though the investigation is still not concluded regarding predicate offence. Also, Section 3 of the Act was challenged to be against Article 20(2) because it is being contended by the petitioner in the INX Media case that he is being punished for the offence which does not exist as an offence when he committed it. 
  • The former Chief Minister of Jammu and Kashmir and People’s Democratic Chief Mehbooba Mufti has challenged the constitutional validity of Section 50 of the PMLA, 2002 as it violates the provisions of Article 20(3) of the Constitution and sought to declare it as void and inoperative. Section 50  confers powers to the authorities i.e. ED regarding summons, to produce documents or to give evidence. And the persons summoned by the ED are bound to answer all the questions posed and even produce all the documents that are being asked for thus it is being challenged in the plea to contravene the privilege of self-incrimination given by the Constitution.
  • The Supreme Court in the recent case of Vijay Madanlal Choudhary & Ors. versus Union of India & Ors (2021), after allowing the stay order on arrest in the cases under PMLA, 2002, has decided to take up all the matters challenging the constitutional validity and other discrepancies regarding the Act, which are pending before the court. The Solicitor General Tushar Mehta has prepared the list of the questions of law to be deliberated upon concerning PMLA. The questions to be decided regarding the constitutional validity of the Act are as follows:-
    1. Whether Section 45(1) after the Amendment of 2018 is unconstitutional?
    2. Whether the judgment given in the Nikesh Tarachand case has been overruled by the amendment i.e. whether amendment (2018) revives the existence of dual conditions in order to secure bail.
    3. In case it is decided that the twin conditions are resurrected, whether the non-application of twin conditions to anticipatory bail as held in the judgment of 2018 is correct?
    4. Whether shifting the onus of proof on the defendant vitiates one’s fundamental rights?
    5. Whether the reliance on the statement given during investigation to officers of the Enforcement Directorate amounts to self-incrimination and thus infringes Article 20(3) of the Constitution.
    6. Whether attachment of property as per provisions of PMLA is violative of Article 300A(Right to Property)
    7. Whether Sections 17 and 18 after the Amendment are considered unconstitutional?
    8. Whether Section 19 of PMLA enumerating the powers of arrest is against Articles 14 and 21 of the Constitution?
    9. Whether on the ground that the constitutional validity of some provisions has been challenged in the court, can the court provide the benefit of no coercive order to the accused without considering the merits of the case?

Conclusion

There are batches of pleas that are pending in the court challenging the constitutional validity of the Prevention of Money Laundering Act (PMLA),2002. Since the inception of the Act there exist several lacunas and inconsistencies in the provisions of the Act because of which it has always been in the limelight. No doubt amendments have been made to tighten the loopholes that existed but they were not able to fulfil the purpose for which they were incorporated and instead raised several questions. 

In my opinion, the Act in some cases take stringent actions and provides enormous powers to the Authorities under the Act so that the issue of black money in the country can be combated but natural justice should be kept in mind and the provisions should be made in the interest of the public at large and not to exploit them. Moreover, this Act is fairly new and still, a lot of interpretations have to be done by the court over time. And the Court’s decision to take up the matter and decide all the existing controversies is surely awaited which will provide a clear picture of the provisions. The Court will act judiciously, keeping all the principles of natural justice and the principles enunciated in the Constitution and thus will interpret the Act in a way so that there is no arbitrary exercise of the power and the Act remains constitutionally compatible.

 References

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