Tag: #preventionofmoneylaundering

Case Number

Writ Petition (Criminal) 67/2017

Equivalent Citation

(2018) 11 SCC 1

Petitioner

Nikesh Talwar Shah

Respondent

Union of India and Ors.

Bench

Justice R. F. Nariman

Decided on

November 23, 2017

Relevant Act/ Section

Article 21 of Constitution of India, 1949; Section 45, 65 and 71 of Prevention of Money Laundering Act.

Brief Facts and Procedural History

The constitutionality of Section 45 of the Prevention of Money Laundering Act was contested in an appeal. Two requirements are imposed by Section 45 before the bond can be issued. The court must be satisfied that the prisoner was not guilty of such a crime and that he would not conduct any crimes while on release. Additionally, the prosecution must have the opportunity to oppose any motion for bail.

Judicial History

In Hussainara Khatoon v. Bihar State,¹ the Supreme Court was presented with the issues of several sub-treaties whose incarceration periods surpassed the incarceration periods required for the crimes against them. These sub-treaties made up 80% of the jail population. Following, Maneka Gandhi v. Union of India², the Court ordered the release of individuals whose prison terms had surpassed the sentence terms for their offences, in accordance with Article 21. In Mantoo Majumdar v. State of Bihar,³ the Supreme Court upheld the accused’s right to personal liberty once more and ruled that the petitioners should be released on their bail and without any sort of security because they had been imprisoned for six years while awaiting trial.

Issues before the Court

1. Whether Section 45 of the Prevention of Money Laundering Act, 2002 is unconstitutional or not?

The Decision of the Court

The senior attorney, Shri Mukul Rohatgi, argued that Section 45 of the PMLA is manifestly arbitrary, discriminatory, and in violation of the petitioner’s fundamental rights under Article 14 read with Article 21 of the Constitution when it imposes two additional conditions before the granting of the bond. He further stated that the goal was not to refuse bail to people charged with the offences listed in Part B above and that doing so would be discriminatory and a violation of Article 14 of the Constitution because it would amount to treating ‘unequals’ identically.

Additionally, according to skilled senior counsel, the three-year threshold mentioned in Section 45 of the 2002 Act is by itself arbitrary because it only refers to the predicate offence and not to the money laundering offence itself. Regarding the 2002 Act, there is no requirement for the categorization based on the quantity of money that is laundered, which might be a legitimate basis for classification. Furthermore, according to the experienced senior counsel, if the requirements of Section 45(1) are met at the bail stage, the defendants will be required to reveal their defense at a time when they are unable to do so since they were arrested and weren’t given bail at the beginning itself.

The Supreme Court took into account the discrimination brought about by (a) the classification of the offences under Section 45(1) and (b) the application of Section 45(1) to diverse circumstances with respect to the challenge under Article 14. The Supreme Court ruled that a classification based on the length of time spent in jail for a Scheduled Offence had no reasonable connection to the goal of the PMLA, which is to attach and reinvest significant sums of money obtained via criminal activity. Although the court believed that other serious crimes under the IPC (crimes with a maximum sentence of 10 years) that were not specifically mentioned in Part A could also be the source of the money or proceeds, a person accused of such a crime could still obtain bail without the need for an application of the impugned conditions.

Regarding the application of the impugned conditions, the Supreme Court, among other things, held that: Section 45(1) of the PML Act created a situation in which the same offenders in various cases might end up experiencing various outcomes in terms of the grant of bail, depending on whether or not Section 45(1) applied. This was deemed to be especially problematic because the decision to grant or deny bail had no bearing on the money laundering offence under the PML Act; rather, the denial of bail was based solely on the fact that the offence was being tried alongside the offences under Part A.

The contested conditions were arbitrary and discriminatory because they required the accused to prove that they were not guilty of “such an offence” and that they were not likely to commit “any offence” while out on bail. Even though they might demonstrate that they had good reason to think they were innocent of the money laundering charge, an accused was being denied bail for the Scheduled Offence based on the Impugned Conditions. A person might be granted anticipatory bail for the same offence of money laundering and the Scheduled Offence because the PMLA did not forbid the grant of one, but he would then be granted regular bail upon satisfying the conditions of the anticipatory bail.

The Supreme Court briefly addressed the challenge to the conditions under Article 21 after a lengthy discussion on the challenges to the impugned conditions based on Article 14, specifically whether the conditions, which reversed the presumption of innocence, violated the fundamental right to personal liberty. The impugned conditions, according to the Supreme Court, are “dramatic measures that make substantial intrusions into the fundamental right to personal liberty” and can only be supported on the basis of a “compelling state interest in confronting crimes of an exceedingly heinous kind.”

It may be important to note that the Supreme Court was not required to decide whether the contested conditions actually met the requirements of a “compelling state interest,” as it could ex facie invalidate the contested conditions on the grounds that they infringed the accused’s constitutional right to equality. Following the ruling in the Maneka Gandhi case⁴, Article 21 now provides protection not only from executive action but also from legislation that robs a person of his or her life and personal freedom.

While the Supreme Court’s decision, in this case, is significant and the inconsistent nature of the pre-bail conditions under the PMLA provided a compelling argument for their elimination, it may be worthwhile to speculate whether the Supreme Court would have reached the same conclusion regardless of whether the pre-bail conditions were constitutional (especially in cases involving economic offences).

It was clear that the Supreme Court could have reached no other judgement given the scheme of the Scheduled Offences under the PML Act. It is still unclear if an economic offence like money laundering requires severe or harsh provisions like the Impugned Conditions and whether the state has the authority to restrict an individual’s rights in such circumstances. Therefore, the Supreme Court did not specifically consider the justiciability of the pre-bail conditions, such as the Impugned Conditions, in the instance of economic offences.

It was contended that the phrase “there are reasonable grounds to believe that you are not guilty of such a crime” in Section 45 should be interpreted as the Court’s initial determination of a defendant’s responsibility. Second, the wise Attorney General asserts that when the bonus is generally provided concerning offences in general and referred to the State of UP through C.B.I. v. Amarmani Tripathi⁵ for this reason, the requirements stipulated in Section 45 (1) (ii) are there in a different form. The astute Attorney General claims that Section 45 is unarguable when read in accordance with the principle of harmonious construction. Its foundation was Section 24 of the PMLA, which reversibly shifts the burden of proof, and it heavily cited Gautam Kundu⁶.

In the case of individuals charged with fraud in connection with a company’s affairs, take into consideration the provisions of Section 212(6) of the Companies Act, 2013, which also foresees restrictions similar to the impugned conditions. It is highly unlikely that a constitutional challenge to such pre-bail conditions would be upheld on the basis that they are inherently excessive and unreasonable, especially in light of the Supreme Court’s prior declaration that “economic offences need to be viewed seriously and considered as grave offences affecting the economy of the country and posing a serious threat to the financial health of the nation.”⁷ As a result, it is currently unclear and pending court clarification whether the pre-bail requirements (similar to the impugned conditions) are legitimate and justiciable in the context of economic offences.

It was clear that the Supreme Court could have come to no other judgement given the (inaccurate) list of offences included in the PMLA Act. The question of whether economic crimes like money laundering required harsh or contentious conditions and if the state might restrict a person’s rights in such cases is still open.

Pre-bail conditions’ constitutionality was decided by the Supreme Court in the instant case, and inconsistent interpretations of their scope and applicability under the anti-money laundering law presented a compelling argument. It may be worthwhile to analyze if the Supreme Court would have deleted the conditions otherwise fiercely contested except for the ambiguity produced by the Amendment Act, 2012, given the finding about the legitimacy of the conditions prior to bail (particularly in economic crimes).

Citations

1. AIR 1979 SC 1360.
2. AIR 1978 SC 597.
3. AIR 1980 SC 846.
4. AIR 1978 SC 597.
5. (2005) 8 SCC 21.
6. (2015) 16 SCC 1.
7. Rohit Tandon v. The Enforcement Directorate, 2017 SCC online SC 1304.

This article is written by Sanskar Garg, a last-year student of School of Law, Devi Ahilya University, Indore.

INTRODUCTION

Money laundering seriously jeopardises nations’ financial systems as well as their integrity and sovereignty. The international community has taken some actions to eliminate these threats. It has been thought that we urgently need comprehensive legislation to stop money laundering and related activities. The Prevention of Money-laundering Bill, 1998 was introduced in Parliament to accomplish this goal. The Standing Committee on Finance received the bill and reported it to the Lok Sabha on March 4, 1999. The Standing Committee’s recommendations were broadly accepted by the Central Government, and they were included in the aforementioned Bill along with some other desired adjustments. The Prevention of Money Laundering Act, 2002 was passed by parliament on January 17, 2003, but it has yet to be implemented in its entirety.

The term “money laundering” refers to the process of cleaning or hiding the source of money that was obtained illegally. Money laundering, according to the law, is the process of processing money obtained illegally through a legitimate business or sending it to a foreign bank so that when it returns, no one will be able to tell that it was obtained illegally. Money earned through illegal activities like extortion, drug trafficking, the supply of firearms, organised crime, etc. is cleaned during the money laundering process. It typically involves three steps. A criminal first enters the formal financial system with the stolen funds (Placement). Second, to prevent the origin or original identity of the crime money from being lost or disappearing, the money that has been injected into the financial system is layered or spread out across several transactions with the financial system (Layering). Thirdly, the money is incorporated into the financial system in such a way that the initial connection to the crime is completely lost, and the criminal and his accomplices can use the money because they receive it as clean money (Integration).

Additionally, the offence of money laundering includes:

● The greater proportion of investment goes back into illegal activity.

● The overall transactional cost of engaging in money laundering is significantly lower

● There is a greater pressing need to use clean liquidity to finance such reinvestment.

● Larger disparities between expected real returns from illegal and legal activity.

● The initial volume of illegal income that needs to be cleaned up is greater.

HIGHLIGHTS OF THE PREVENTION OF MONEY LAUNDERING ACT, 2002

Section 3 of the PMLA says 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 proceeds of crime and projecting it as untainted property shall be guilty of the offence of money laundering. The penalties for the offences listed in Paragraph 2 of Part A of the Act are outlined in Section 4 of the Act. The relevant Act sections have granted the Director of the Financial Intelligence Unit (FIU-IND) and Director (Enforcement) exclusive and concurrent powers to carry out the Act’s provisions.

The creation of a special court with the status of a session court for the prosecution of offenders under Section 4 of the act is discussed in Section 43 (1) of the act. The special courts are authorised by Section 43(2) of the Act to try offences other than those listed in Subsection (1), which the accused may be charged with under the Code of Criminal Procedure, 1973, at the same trial. Section 44 addresses offences that can be tried in specialised courts.

CHALLENGES

The PMLA has undergone numerous amendments (in the years 2015, 2018, and 2019) designed to close the gaps in how it operates. However, the following clarifications of persistent legal ambiguities are provided:

● The 2019 Revision clarified how “proceeds of crime” are defined in section 2 (1)(u). According to the law, “proceeds of crime comprise property not only deducted or acquired from the listed offence but also any property which may directly or laterally be deducted or acquired as a result of any felonious exertion related to the listed 2 offence.” The requirement for an “explanation” to define what is meant by “proceeds of crime” still raises the question of whether or not it will have a retroactive impact.

● From a list of six statutes at the beginning, the PMLA currently includes “scheduled offences’ ‘ from thirty more statutes. There is a growing concern that adding less serious offences could undermine PMLA’s core purpose. The ED filed 1067 cases using the PMLA between 2012 and 2018. Only 13 people had been found guilty under the PMLA in 9 cases as of December 2019. These numbers demonstrate the need to simplify the statute’s implementation and give major offences more attention.

● All actions under Sections 50 (2) and 50 (3) are presumed to be “judicial processes” under Section 50 (4) of the PMLA, as defined by Sections 193 and 228 of the Indian Penal Code. Since ED proceedings are now considered “judicial proceedings,” any statement made prior to ED may be used as support. The general norm stated in Section 25 of the Substantiation Act, which states that confessional remarks made to a police officer are not acceptable as substantiation in a court of law, is not supported by this, nevertheless.

● Section 71 provides an overriding effect to PMLA, nevertheless, it is important to remember that the Supreme Court stated in Tofan Singh’s decision that special legislation must include respectable protection concerning the admissibility of confessional remarks The authority of these specialised investigating organisations that focus on economic crimes has been contested by nearly 200 applicants. Since 2014, the earliest petitions have been pending.

EFFECTIVENESS

Money laundering is regarded as essential to the efficient running of global and organised crime. However, money laundering has an impact on the social, political, and fiscal health of a nation. One of the profitable outcomes of money laundering was the undermining of the legal private sector, another was the undermining of fiscal label integrity, a third was the loss of control over profitable policy, a fourth was profitable deformation and insecurity, a fifth was the loss of profit, a sixth was the traps of privatisation sweats, and a seventh was a threat to one’s reputation.

The PMLA has been made severe enough to address the threat of money laundering that results from contaminated wealth acquired via illegitimate means, notwithstanding some obstacles and legal difficulties. Many organisations, including the RBI, SEBI, banks, and others, have been enlisted to spread information about these illicit practices. The power granted to the police by the PML Act is another matter that needs to be addressed. This Act provides a check on the power of the police, just like numerous other pieces of Indian legislation. Sections 44(b) and 45(1)(A) of the PML Act categorically subordinate the role of police officers by granting the powers to make complaints and to investigate offences under this Act to the authorities designated by the Central Government, much like a confession made to a police officer or while in the custody of a police officer has no value in the eyes of the law and it cannot be proven against the accused (Sections 25 and 26 of the Indian Evidence Act, 1872, respectively).

In a case moving before the top court, the AG stated that 4,850 cases have been filed under the PMLA, 2002 since this act’s introduction. The strong framework for risk-based selection of the cases for investigation in India accounts for the country’s low case registration rate. The Directorate of Enforcement is concentrating its attention on cases involving high-value proceeds of crime and cases involving serious predicate offences involving terror financing, narcotics, corruption, an offence involving national security, etc. It is pertinent to note that the FATF recommendation does not stipulate a threshold for the selection of cases for investigation under the PMLA.

CASE LAWS

● Nikesh Talwar Shah vs. Union of India¹ – The issue of giving bail to persons who were denied bail by the court in accordance with Section 45 of the PMLA, 2002, was addressed in this case. The petitioner in this instance filed a writ petition because his fundamental right had been violated. When someone was arrested and subsequently applies for bail, the court follows a twin-condition policy for granting bail, which is discriminatory in nature. However, when someone has applied for anticipatory bail—bail before a trial has even begun—the court grants them bail. In this case, the Supreme Court overturned the discrimination and asked that the applicant re-apply for bail in the same court.

● ED vs. A. Raja² – The 2G fraud case is the infamous name for this situation. With the opening up of the investment market in 1991, numerous private sectors stepped up to facilitate and make investments in the market. To ensure effective regulation, the government established a number of acts and directives. However, the CBI accused a few employees of using a shortcut when registering their telecommunications-related enterprises. A. Raja, who served as the department’s minister at the time, was also charged with violating the Prevention of Money Laundering Act of 2002 by accepting bribes and distributing a letter of intent to a number of private companies for the purpose of granting these companies licences for unified access services. However, the court did not find them guilty, and it ordered each of the defendants to pay Rs. 5 lacs along with a surety.

CONCLUSION

Therefore, it is evident that efforts to combat money laundering have advanced beyond the early stages of crimes related to drugs or terrorism. Additionally, the fight against money laundering has continually pushed for the broadest possible scope of predicate offences to be included in domestic laws. Money laundering has been defined and understood in a more comprehensive way that no longer only requires the projection of funds and the use of clean assets. According to the international mission, every activity that has anything to do with the proceeds of crime should be made illegal.

CITATIONS

1. W.P. (Cr) 67 of 2017

2. ECIR/31/DZ/2010

This article is written by Sanskar Garg, a last-year student at the School of Law, Devi Ahilya University, Indore.