CONSTITUTIONAL VALIDITY OF PREVENTION OF MONEY LAUNDERING ACT, 2002;

The  Prevention of Money Laundering Act, 2002 In the past when you had to open a Simple Bank account in any branch of PSU / Private Sector Bank in India, apart from filling all the particulars in the Account opening form, you had to fill a space wherein somebody known to you personally had to introduce you to bank and to sign the account opening form who already was an account holder in the said branch, this was before the days of PAN & AADHAR.

[PMLA] mandates that the investigation of the offence of money laundering be linked to the Scheduled Offences investigated by the concerned Central or State Law Enforcement Agencies. The scheme of PMLA thus necessitates inter-agency coordination to take effective action against persons who are found by the Law Enforcement Agencies to be involved in criminal activity. Such action under PMLA entails attaching and confiscating tainted assets, and prosecuting persons/entities for the offence of money laundering.

The Prevention of Money Laundering Act, 2002 came into force with effect from 1st July, 2005. The Act was amended by the Prevention of Money Laundering (Amendment) Act 2009 w.e.f. 01.06.2009. The Act was further amended by the Prevention of Money- Laundering (Amendment) Act, 2012 w.e.f. 15-02-2013.

As stated in the Preamble to the Act, it is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and to punish those who commit the offence of money laundering.

The Directorate of Enforcement in the Department of Revenue, Ministry of Finance is responsible for investigating the cases of offence of money laundering under Prevention of Money Laundering Act, 2002.

Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

WHAT IS MONEY LAUNDERING?

The goal of a large number of criminal activities is to generate profit for an individual or a group. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

Illegal arms sales, smuggling, and other organized crime, including drug trafficking and prostitution rings, can generate huge amounts of money. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering. The money so generated is tainted and is in the nature of ‘dirty money’. Money Laundering is the process of conversion of such proceeds of crime, the ‘dirty money’, to make it appear as ‘legitimate’ money.

In the PMLA, 2002, money laundering has been defined as “any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property.

HOW DOES MONEY LAUNDERING ACTUALLY TAKE PLACE?

The process of Money Laundering generally involve the following three stages :

(a) Placement:- The Money Launderer, who is holding the money generated from criminal activities, introduces the illegal funds into the financial systems. This might be done by breaking up large amount of cash into less conspicuous smaller sums which are deposited directly into a Bank Account or by purchasing a series of instruments such as Cheques, Bank Drafts etc., which are then collected and deposited into one or more accounts at another location.

(b) Layering:- The second stage of Money Laundering is layering. In this stage, the Money Launderer typically engages in a series of continuous conversions or movements of funds, within the financial or banking system by way of numerous accounts, so as to hide their true origin and to distance them from their criminal source. The Money Launderer may use various channels for movement of funds, like a series of Bank Accounts, sometimes spread across the globe, especially in those jurisdictions which do not co– operate in anti Money Laundering investigations.

(c) Integration:- Having successfully processed his criminal profits through the first two stages of Money Laundering, the Launderer then moves to this third stage in which the funds reach the legitimate economy, after getting inseparably mixed with the legitimate money earned through legal sources of income. The Money Launderer might then choose to invest the funds into real estate, business ventures & luxury assets, etc. so that he can enjoy the laundered money, without any fear of law enforcement agencies.

The above three steps may not always follow each other. At times, illegal money may be mixed with legitimate money, even prior to placement in the financial system. In certain cash rich businesses, like Casinos (Gambling) and Real Estate, the proceeds of crime may be invested without entering the mainstream financial system at all.

WHAT HAS BEEN THE INTERNATIONAL RESPONSE TO TACKLE MONEY LAUNDERING?

In response to mounting concern over money laundering, the Financial Action Task Force (FATF) on Money Laundering was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, which set out the measures national governments should take to implement effective anti-money laundering programmes. India is an active member of the FATF.

WHAT STEPS HAVE BEEN TAKEN BY THE GOVERNMENT OF INDIA TO TACKLE THE MENACE OF MONEY LAUNDERING?

Government of India is committed to tackle the menace of Money Laundering and has always been part of the global efforts in this direction. India is signatory to the following UN Conventions, which deal with Anti Money Laundering / Countering the Financing of Terrorism;

1. International Convention for the Suppression of the Financing of Terrorism (1999);

2. UN Convention against Transnational Organized Crime (2000); and

3. UN Convention against Corruption (2003).

In pursuance to the political Declaration adopted by the special session of the United Nations General Assembly (UNGASS) held on 8th to 10th June 1998 (of which India is one of the signatories) calling upon member States to adopt Anti Money Laundering Legislation & Programme, the Parliament has enacted a special law called the ‘Prevention of Money

Laundering Act, 2002’ (PMLA 2002). This Act has been substantially amended, by way of enlarging its scope, in 2009 (w.e.f. 01.06.2009), by enactment of Prevention of Money Laundering (Amendment) Act, 2009. The Act was further amended by Prevention of Money-Laundering (Amendment) Act, 2012 w.e.f. 15-02-2013.

Constitutional Validity of Some Provisions of Prevention of Money Laundering Act, 2002

WHAT IS A ‘SCHEDULED OFFENCE’?

The offences listed in the Schedule to the Prevention of Money Laundering Act, 2002 are scheduled offences

in terms of Section 2(1)(y) of the Act. The scheduled offences are divided into two parts – Part A & Part C.

In part A, offences to the Schedule have been listed in 28 paragraphs and it comprises of offences under Indian Penal Code, offences under Narcotic Drugs and Psychotropic Substances, offences under Explosive Substances Act, offences under Unlawful Activities (Prevention) Act, offences under Arms Act, offences under Wild Life (Protection) Act, offences under the Immoral Traffic (Prevention) Act, offences under the Prevention of Corruption Act, offences under the Explosives Act, offences under Antiquities & Arts Treasures Act etc.

Part ‘C’ deals with trans-border crimes, and is a vital step in tackling Money Laundering across International Boundaries.

Prior to 15th February, 2013, i.e., the date of notification of the amendments carried out in PMLA, the Schedule also had Part B for scheduled offences where the monetary threshold of rupees thirty lakhs was relevant for initiating investigations for the offence of money laundering. However, all these scheduled offences, hitherto in Part B of the Schedule, have now been included in Part A of Schedule w.e.f 15.02.2013. Consequently, there is no monetary threshold to initiate investigations under PMLA.

WHAT ARE THE MAJOR ACTS COVERED IN THE SCHEDULE?

(a) Indian Penal Code, 1860;

(b) NDPS Act, 1985;

(c) Unlawful Activities (Prevention ) Act, 1967;

(d) Prevention of Corruption Act, 1988;

(e) Customs Act, 1962;

(f) SEBI Act, 1992;

(g) Copyright Act, 1957;

(h) Trade Marks Act, 1999;

(i) Information Technology Act, 2000;

(j) Explosive Substances Act, 1908;

(k) Wild Life (Protection) Act, 1972;

(l) Passport Act, 1967;

(m) Environment Protection Act, 1986;

(n) Arms Act, 1959.

(o) Various Acts covered in the Schedule to PMLA are given in Annexure-A

WHAT ARE THE POSSIBLE ACTIONS WHICH CAN BE TAKEN AGAINST PERSONS / PROPERTIES INVOLVED IN MONEY LAUNDERING?

Following actions can be taken against the persons involved in Money Laundering:-

(a) Attachment of property under Section 5, seizure/ freezing of property and records under Section 17 or Section 18. Property also includes property of any kind used in the commission of an offence under PMLA, 2002 or any of the scheduled offences.

(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a term which shall not be less than three years but may extend up to seven years and shall also be liable to fine [Section 4].

(c) When the scheduled offence committed is under the Narcotics and Psychotropic substances Act, 1985 the punishment shall be imprisonment for a term which shall not be less than three years but which may extend up to ten years and shall also be liable to fine.

(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or conviction of any individual.

WHAT ARE THE CIRCUMSTANCES UNDER WHICH PROPERTIES CAN BE PROVISIONALLY

ATTACHED UNDER PMLA?

(i) Where the Director, or any other officer not below the rank of Deputy Director authorised by the Director has reasons to believe (the reason for such belief to be recorded in writing), on the basis of material in his possession, that—

(a) any person is in possession of any proceeds of crime and

(b) such proceeds of crime or likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime he may, by an order in writing, provisionally attach such property for a period not exceeding 180 days from the date of the order, in such manner as may be prescribed.

(ii) No such order of attachment shall be made unless, in relation to the scheduled offence, a report has been forwarded to a Magistrate under section 173 of the Code of Criminal Procedure, 1973, or a complaint has been filed by a person authorized to investigate the offence mentioned in the Schedule, before a Magistrate or court for taking cognizance of the scheduled offence, as the case may be or a similar report or complaint has been made or filed under the corresponding law of any other country.

(iii) Further any property of any person may be attached, if the Director or any other officer not below the rank of Deputy Director authorized by him has reason to believe (reasons for such belief to be recorded in writing), on the basis of material in his possession, that if such property involved in money laundering is not attached immediately the non-attachment of the property is likely to frustrate any proceedings under this Act [Section 5].

HOW LONG THIS ORDER OF PROVISIONAL ATTACHMENT OF PROPERTY WILL REMAIN IN

FORCE?

Every order of provisional attachment shall cease to have effect after 180 days from the date of the order, if no order is passed by the Adjudicating Authority under PMLA that the said property is involved in money- laundering.

However, within said 180 days, if the Adjudicating Authority, by an order, records a finding that properties are not involved in money laundering, the order of provisional attachment shall cease to have effect from the date of such order of the Adjudicating Authority [Section 5(3)].

LETS’ CONSIDER SOME JUDGEMENTS CHALLENGING CONSTITUTIONAL VALIDITY OF

PMLA,2002

KEY TAKEAWAYS:

  • THE PMLA which came into force in 2005 was enacted to prevent money laundering and to provide for confiscation of property derived from money laundering.
  • The provisions of PMLA were challenged on the grounds of their vagueness and ambiguity, however there were good reason / legislation intent / sufficient safeguards for which they stood constitutionally valid.
  • The Section 45 of PMLA held to be unconstitutional by the Supreme Court as it was noted to be infringing the Article 14 and 12 of the Constitution.
  • The Vijay Madanlal Choudhary vs Union of India which is a proceeding challenging the PMLA is being currently adjudicated by the Supreme Court.

IMPORTANT PROVISIONS:

Section 2(y)(ii)- Defines the phrase “scheduled offence”.

Section 2(u)- Provides definition of “proceeds of the crime”.

Section 5 – Provides for Attachment of property involved in money-Laundering.

Section 8- Outlines adjudication following a provisional attachment under section 5(1) and a complaint under section 5(5).

Section 23- Presumption where inter-connected transactions has occurred is outlined.

Section 24- Outlines Burden of Proof.

Section 45- Offences under PMLA are cognizable and non-bailable.

Section 50- Outlines Adjudicating Authorities power relating to summons, production of documents and evidences.

Section 63- Punishment for false information and failure to provide information is specified.

Section 66- Outlines disclosure of information.

1. B. Rama Raju v. Union Of India, 2011 SCC Online AP 152 In the case the petitioner had appeared before the Adjudicating Authority who had passed an order affirming the petitioners’ property attachment. Before the HC of Telangana provisions of PMLA such as Sections 5(1), 8(1), 8(2), 8(3), 8(4), 23 and 24 were challenged.Section 2(u) had outlined an expansive definition of “proceeds of crime” which was said to have inflicted gross and unreasonable consequences on innocent persons as it infringed Articles 14, 20, 21 and 300 – A of the Constitution.

Section 5(1) of the Act was challenged on the ground that- the phrase “involved in money-laundering” was vague and ambiguous. The nature or degree of involvement within the ambit of the phrase was not evident. It was further not evident whether the liability was in regards with the property or only in respect of property belonging to a person charged with committing offense under the Act. The provision was alleged bereft of guidelines consistent and commensurate with the serious consequences those followed. The Scheme of adjudication that was laid down in section 8(1) to (3) was said to be vague, unfair, diffused and infringing article 14 of the Constitution.

The Court opined that the provisions of the act which had clearly and unambiguously enabled the initiation of proceedings for attachment and individual confiscation of property in possession of the person who was not an offender under PMLA did not violate the provisions of the Constitution including Article 14, 21 and 300- A and where operative proprio vigore.

The presumption under Section 23 of the Act was considered gross, unreasonable, excessively disproportionate and placed an irrational burden upon the accused thus violating Article 14 and 300-A. In M. Narsinga Rao v State of A.P. 2001, it was held that the presumption was just an inference of a certain fact drawn from other proved facts and was not the final conclusion drawn.

Under Section 24 of PMLA, the burden of proof laid upon the accused was considered vague and contradictory . Section 102 of Indian Evidence Act 1872 stated that the burden of proof in a proceeding was upon the person who would fail if no evidence was presented from either side. The petition was therefore dismissed without any merit.

2. Gorav Kathuria vs Union Of India 2016 The Petitioner had alleged that offence under section 132 of the Customs Act 1962 fell within the ambit of Scheduled Offence specified in Part B of the Schedule would attract offence under section 3 of PMLA and would be punishable under Section 4 of the Act. The petitioner challenged the Section 2(y)(ii) of PMLA where after amendment the monetary threshold was enhanced from “Rs. 30 lakhs or more” to “Rs. one crore or more”. He had further stated that the amendments to the Act which came into effect in 2015 were unconstitutional and Ultra vires and even contrary to the objectives of PMLA. Section 45(1) of PMLA imposed the limitation on the grant of bail and was considered erroneous.

The issue was not whether offences under PMLA are bailable or not. It was rather the twin conditions imposed vide Section 45(1) for granting bail in cases of PMLA. Section 71 of PMLA had outlined that the said limitations under Section 45(1) had an overriding effect over the provisions of bail in CrPC. The intention of the legislation was to put persons who committed any scheduled offence under Part A in a class distinct from those offenders who could be dealt with under the normal bail provisions CrPC. Thus, the offenders falling within this group were singled out for special treatment by enforcing stringent twin conditions as per Section 45(1) of PMLA. No question of any discriminatory treatment should arise as legislative intent was to create a reasonable intelligible differentia in the classification of offenders.

3. In Organo Chemical Industries v. Union of India, it was stated that a legislation should not be mechanically interpreted from the words rather its intention must be found by reading it wholly. The “Statement of Objects and Reasons” which was incorporated in Para 3(j) in the Prevention of Money-laundering (Amendment) Bill, 2011 had recorded that the only object of the amendment was to overcome the monetary threshold limit of Rs. 30 lakhs.

The High Court of Punjab and Haryana had dismissed the writ petition holding the constitutional validity of PMLA.

4. Nikesh Tarachand Shah vs. Union of India (UOI) and Ors. (23.11.2017 – SC): MANU/SC/1480/2017 The constitutional validity of Section 45 of PMLA was challenged in the appeal. Section 45 of PMLA had imposed two conditions for granting bail for offence under Part A of the Schedule to the PMLA which were that when the Public Prosecutor was given an opportunity to oppose the bail application, the Court reasonably believed that:

a. The accused was not guilty of the offence and

b. The accused would most likely not commit the offence while they are on bail.

The said provision was manifested as arbitrary, discriminatory and violative of the Petitioner’s fundamental rights Under Article 14 read with Article 21 of the Constitution. It had drastically turned on its head presumption of innocence which was fundamental to a person accused of any offence. In the Magna Carta, in Clause 39, provision for bail is provided. In Gudikanti Narasimhulu v. Public Prosecutor, 1978, it was held that the issue of bail related to liberty, justice, public safety and burden of the public treasury.

Leave was granted in the case and Section 45(1) of PMLA was declared unconstitutional as it violated Articles 14 and 21 of the Constitution of India. The cases where the bail had been denied by the Court under the twin condition of Section 45 of PMLA were to be set aside. The SC directed respective Courts to take up the cases at earliest and give fresh decision. The Court provided that decision noting that accused were languishing in jail and the non-granting of their bail involved their personal liberty.

5. Srs Mining vs Union Of India & Ors. 2018 –The writ petition filed under Article 226 of the Constitution of India challenged the second proviso to Section 5 (1) of PMLA on the ground that it was ultra vires Article 14 of the Constitution of India.

The Divisional Bench in the High Court of Delhi examined the constitutional validity of the second proviso to Section 5 (1) PMLA.

The second proviso to Section 5 (1) PMLA was inserted by the amendment in 2015 which provided that the property of the accused should be attached under this section if Director or an officer above the rank of Deputy Director reasonably believed that the non-attachment of the property would likely frustrate the proceeding under PMLA.

The first proviso to Section 5(1), resisted the applicability of Section 5(1) to personas facing trial for scheduled offence and the second proviso dealt with any property of such person. The second proviso was consistent with Section 5(1) PMLA. It began with a non-obstante clause and was effectively made as a proviso to the first proviso. It was intended to have an overriding effect on the first proviso.

There was a good reason for the introduction of the second proviso to Section 5(1) PMLA and it also covers any person in possession of any proceeds of crime. A mere possibility of abuse, however, would not be a ground to strike down the provision considering it Ultra vires Article 14 of the Constitution. In Sushil Kumar Sharma v. Union of India, it was held that a Court while examining the constitutional validity of a provision on the ground of possible abuse of the powers should satisfy that there were sufficient safeguards present in the sufficient safeguards.

For the application of second proviso to Section 5(1) PMLA several conditions have to be satisfied and further judicial review was an available safeguard. Therefore, the Court was not satisfied that the second proviso to Section 5(1) of the PMLA was unconstitutional.

6. Sri Sumit Roy vs The Union Of India & Ors 2021 The petitioner was listed under Supplementary list placed after recess after the notice given to Additional Solicitor General of West Bengal. He had challenged the constitutional validity of Section 50(2), (3) and (4) of PMLA which were read with Section 24, 63 and 66 of the Act as the ultra vires of the Constitution of India. The PMLA was challenged so as to quash and to set aside the summons issued against the petition under Section 50(2) of PMLA.

In the State of Uttar Pradesh v. Kartar Singh, the Apex Court had held that when a party sought to impeach the validity of an Enactment, the burden of proof is passed upon the pleader.

In Pathumma & Ors. v. State of Kerala & Ors., a seven-Judge Bench of the SC had held that when it was evident that a Statute violated the rights of citizen conferred in Part III of the Constitution or the Act was beyond the legislative competence of the legislature, the Court could interfere. However, then it was the petitioner’s onus to prove the unconstitutionality of the statute.

The Supreme Court had noted that the petitioner was required to cooperate for the investigation conducted by the respondent Authority and he was not an accused according to the FIR. The petition was dismissed.

CONCLUSION  Over the time, there have been many proceedings against the PMLA challenging it on the grounds that it is ultra vires to the fundamental rights incorporated in the Part III of the Constitution. Most of them were dismissed except the Nikesh Tarachand Shah vs. Union of India.

The case had challenged constitutional validity of Section 45 of PMLA and succeeded. The said provision was earlier challenged by the Gorav Kathuria vs Union Of India 2016.

Section 45 in The Prevention of Money-Laundering Act, 2002

45. Offences to be cognizable and non-bailable.—

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), no person accused of an offence punishable for a term of imprisonment of more than three years under Part A of the Schedule shall be released on bail or on his own bond unless—

(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and

(ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail.

Provided that a person who is under the age of sixteen years or is a woman or is sick or infirm, may be released on bail, if the special court so directs.

Provided further that the Special Court shall not take cognizance of any offence punishable under section 4 except upon a complaint in writing made by—

(i) the Director; or

(ii) any officer of the Central Government or State Government authorised in writing in this behalf by the Central Government by a general or a special order made in this behalf by that Government.

(1A) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), or any other provision of this Act, no police officer shall investigate into an offence under this Act unless specifically authorised, by the Central Government by a general or special order, and, subject to such conditions as may be prescribed.

(2) The limitation on granting of bail specified in sub-section (1) is in addition to the limitations under the Code of Criminal Procedure, 1973 (2 of 1974) or any other law for the time being in force on granting of bail.

*******

DISCLAIMER: The above article is only for knowledge and information of readers . In case of necessity do consult with legal professionals.

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