Procedural Dynamics of PMLA: In-sights from Enforcement Directorate

Introduction: The Prevention of Money Laundering Act, 2002 (PMLA), serves as a cornerstone in India’s fight against financial crimes such as money laundering and illicit wealth generation. Central to its enforcement is the Enforcement Directorate (ED), a specialized agency tasked with investigating and prosecuting offenses under the PMLA. This article delves into the procedural dynamics of the PMLA through the lens of the ED’s operations. It explores the agency’s genesis, its legal mandate, organizational structure, and the procedural framework it follows under the PMLA. By examining key questions—ranging from the origins of the ED to its scope within Indian law and its mechanisms for tackling money laundering—this analysis provides insights into how the agency addresses complex financial crimes while adhering to procedural requirements.

Research Questions

I. Where does the genesis of ED lie?

II. In what domain Enforcement Directorate can enter in Indian law?

III. What is the Structure of ED?

IV. Origin and brief of PMLA, 2002?

V. How ED functions under PMLA?

VI. Procedural aspect of PMLA, 2002 functioning?

I. Where does the genesis of ED lie?

– The origin of Ed lies back to 1st May, 1956, when an ‘Enforcement Unit’ was formed in Department of Economic Affairs for handling Exchange Control Laws violations under Foreign Exchange Regulation Act (FERA), 1947.

– It was headquatered in Delhi, headed by a Legal service Officer as the Director of Enforcement and further had 2 more branches in Bombay and Calcutta.

– In 1957, it was renamed as Enforcement Directorate and a new branch was opened in Chennai.

– In 1960, the administrative control was transferred from Department of Economic Affairs to Department of Revenue.

– FERA, 1947 was repealed and replaced by FEMA, 1999 and in tune with international Anti Money Laundering Regime.

– Further, in tune with the International Anti Money Laundering regime, the Prevention of Money Laundering Act, 2002 (PMLA) was enacted and ED was entrusted with its enforcement w.e.f. 1st July 2005. Furthermore, with the increase in number of cases relating to economic offenders taking shelter in foreign countries, the Government has passed the Fugitive Economic Offenders Act, 2018 (FEOA) and ED is entrusted with its enforcement with effect from 21st April, 2018. (Source)

II. In what domain Enforcement Directorate can enter in Indian law and what are it’s functions?

– Directorate of Enforcement is a multi-disciplinary organisation equipped with power to investigate offences of money laundering and violations of foreign exchange laws.

– For a short period of 4 years (1973-1977), the Directorate remained under administrative jurisdiction Department of Personnel and Administrative reforms.

– Presently, It is governed by/ functions under Department of Revenue under Ministry of Finance, India.

– It is also the 1st financial investigation agency of Government of India.

– ED has been given the responsibility to conduct investigation into suspected contraventions of foreign exchange laws and regulations, to adjudicate and impose penalties on those adjudged to have contravened the law.

– It’s adjudication varies according to different acts established under it, like PMLA, FEOA and FEMA.

– ED has been given the responsibility to conduct investigation into suspected contraventions of foreign exchange laws and regulations, to adjudicate and impose penalties on those adjudged to have contravened the law.

– ED cannot take an action suo One has to complain to any other agency or Police first and then ED will investigate the matter and will identify the accused.

III. What is the Structure of ED?

– ED is headed by Director of Enforcement headquatered at New Delhi.

– Further there are 5 regional offices at Mumbai, Chennai, Chandigarh, Kolkata and Delhi headed by Special Directors of Enforcement.

– The Directorate has 10 Zonal Offices each of which is headed by a Deputy Director and 11 sub Zonal Offices each of which is headed by an Assistant Director.

– Officers under ED are recruited by drawing officers from other investigation agencies, which comprises of IRS (Indian Revenue Services), IPS (Indian Police Services) and IAS (Indian Administrative Services) such as Income Tax officer, Excise officer, Customs officer, and police.

– The Delhi Special Police Establishment (DSPE) Act, 1946 (for ED) and the Central Vigilance Commission (CVC) Act, 2003 (for CV Commissioners) have been amended to give the government the power to keep the two chiefs in their posts for one year after they have completed their two-year terms.

– In November, 2021 the President of India promulgated ordinance allowing the Central Government to extend tenures of directors of ED from 2 years to 5 years. (Source)

IV. Origin and brief of PMLA, 2002?

– It was placed in Parliament in 1998, and was further referred to Standing Committee and the bill was introduced in 1999 after including all the suggestions laid by the Standing Further on assent of President it was known as Prevention of Money Laundering Act, 2002. It was sanctioned as a response to India’s commitment to Vienna Convention to deal with economic crimes like money laundering.

– On recommendation of the Financial Action Task Force (FATF) India enacted Prevention of Money Laundering Act, 2002 (PMLA), comprising of 10 Chapters and 75 sections.

– ED has been entrusted with responsibility of executing the provisions of PMLA by conduction investigation to trace the assets derived from the proceeds of crime, provisionally attach the property and to ensure protection of offenders and confiscation of property by Special court.

– The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money PMLA and the Rules notified there under came into force with effect from July 1, 2005 . Director, FIU- IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act.

– PMLA imposes an obligation over banking companies, financial institutions etc. and persons carrying a designated business to verify identity of clients, maintain records and furnish information to Financial Intelligence Unit – INDIA.

– PMLA aims act preventing money laundering and to provide seizure of properties derived from/involved in money laundering or any matter related to it. (Source)

– PMLA applies to whole of India and cases under it lies with criminal courts of

– The PMLA has been amended multiple times since its enactment to conform to the recommendations of the Financial Action Task Force (FATF), the international organisation that develops policies to combat money laundering.

V. Process of filing a complaint under PMLA.

– Acquire Information and Evidence: Before initiating a legal action, gather in-depth information and concrete evidence that substantiates your allegations concerning money laundering. This might encompass various documents, financial records, testimonies from witnesses, or any pertinent material supporting your claims.

– Identify the Relevant Authority: Ascertain the appropriate entity to receive and handle your complaint. In India, the primary body entrusted with investigating money laundering cases is the Enforcement Directorate (ED). Nevertheless, you also have the option to lodge your complaint with the nearest police station or the Financial Intelligence Unit – India (FIU-IND).

– Filing complaints with other Agencies: Individuals seeking to report matters linked to the PMLA must initially lodge their complaint with any agency or police department, excluding the Enforcement Directorate. Prior to approaching the Enforcement Directorate, it is necessary for the individual to register a complaint with another relevant agency or the police department. Following this initial step, the Enforcement Directorate assumes responsibility to investigate the matter and initiate appropriate actions against the accused. The PMLA encompasses 157 sections outlining various offenses related to money laundering. If any offense mentioned in the complaint falls within these 157 offenses specified by the PMLA, the Enforcement Directorate is empowered to directly address and act upon the complaint. Officers within the Directorate possess the authority to conduct investigations, execute searches, and seize the assets of the individual against whom the complaint has been filed.

– Filing complaints directly to the Enforcement Directorate: While direct contact with the Enforcement Directorate is prohibited, individuals can submit their complaints regarding money laundering and foreign exchange violations to the specified address: Director, Enforcement Directorate, 6th Floor, Lok Nayak Bhawan, Khan Market, New Delhi- 110003

– A person is also entitled to file an application with a court that can further refer the matter to the Enforcement Directorate to be investigated by the Enforcement Directorate agency directly.

– Prepare the Formal Complaint: Construct a comprehensive and meticulously detailed complaint outlining the specifics of your allegations. This should encompass details about the parties involved, the suspected illicit financial activities related to money laundering, and present all available supporting evidence. It’s imperative that the complaint is signed, dated, and contains your complete contact information.

– You can choose to file an anonymous complaint if you fear retaliation or security concerns. However, anonymous complaints may receive less priority compared to those with identified complainants.

– Submit the Complaint: Present the formal complaint alongside the supporting evidence to the Appropriate authority. You can do this physically by visiting the respective office or opt for electronic submission through the online portal provided by FIU-IND as provided above.

– Maintain Follow-Up and Monitor Progress: Ensure ongoing communication with the investigating authority to stay informed about the progress of your complaint. You might be asked for further information or clarifications during the investigation process. Being available for such requests can expedite the inquiry and enhance the chances of effective resolution.

VI. How ED functions under PMLA?

1. Certain Important Definations

1.1 Section 2(fa) – Beneficial owner – a person who controls a client, manages a transaction for someone else or holds a significant power over a company.

1.2 ​Section 2 (h) – Chit Fund Company – a company controlling or managing chits; chits being an agreement where people regularly contribute money, taking turns to receive the total amount determined by lot or auction.

1.3 ​Section 2 (ia) – Corresponding Law – law of any foreign country corresponding with provisions of PMLA, 2002.

1.4 Section 2 (1)(y) – “scheduled offence” means—

(i) the offences specified under Part A of the Schedule; or

(ii) the offences specified under Part B of the Schedule if the total value involved in such offences is thirty lakh rupees or more; or

(iii) the offences specified under Part C of the Schedule;

Relevant Case law u/s 2(1)(y)

J. Sekar v. Directorate of Enforcement (2022) 7 SCC 370

(Delivered on May 5, 2022)

Coram: 2-Judge Bench of HM Justices Vineet Saran and J.K. Maheshwari

The issue before the court was tenability and sustainability of criminal proceedings under the provisions of PMLA, when the FIR with respect to the scheduled offence was closed for want of evidence. It was contended that in the absence of evidence connected with the crime of scheduled offence, based on identical set of facts and circumstances of which the offences under PMLA were premised and kick-started, the prosecution under the PMLA could not be continued. Accordingly, complaint- cum-charge-sheet that was filed under Section 44(1) of the PMLA, was laid to challenge by the petitioner.

The allegations essentially were that huge amounts of unaccounted cash were deposited in bank accounts of petitioner, on the basis of which a search and seizure operation under IT Act was initiated. Huge quantities of currency notes and gold were seized, in light of which the offences under Sections 409, 420 read with Section 120-B IPC and provisions of the Prevention of Corruption Act, 1988 were registered against the appellant and two others. ED also consequentially registered ECIR after finding the commission of offences under Section 2(1)(u) read with Section 2(1)(y) of the PMLA. Subsequently, the CBI filed a closure report after a detailed investigation in predicate offences under Section 173(2) CrPC, which came to be accepted by the competent court. The High Court thereafter quashed the FIR in the remaining cases registered out of the very same set of allegations and evidence.

The appellant accordingly at this stage approached the High Court seeking quashing of the pending criminal proceeding in relation to the PMLA offences. Reliance on the behalf of the petitioner was placed on twin judgments of Radheshyam Kejriwal v. State of W.B.62 and Ashoo Surendranath Tewari v. CBI.

The Court held that the proceedings started based on unaccounted recovery of cash and other items were all found to have led to the findings of commission of no offence by the petitioner. It was found that the petitioner had caused no wrongful loss to the Government and the allegations thus could not be substantiated with prosecutable evidence. The Court referring to the twin judgments of Radheshyam Kejriwal v. State of W.B.64 and Ashoo Surendranath Tewari v. CBI65, held that though adjudication proceedings (civil in nature) and the criminal prosecution may go on simultaneously. However, when the allegation for both are identical and overlapping, an exoneration of the person concerned on merits in the scheduled offence, then exoneration from PMLA should also happen, if the edifice of the PMLA offences is also erected on the foundation of very same set of allegations, evidence, and facts. The court can look into allegations and materials collected in relation to predicate offences and find out whether a prima facie offence under PMLA is made out or not. Accordingly, continuation of offence in relation to ECIR registered under the PMLA was held to be unwarranted by the court and it was so quashed by the Supreme Court. The judgment by the High Court was set aside.

1.5 Section 2 (rb) – Payment system – a system authorising payment between the person paying and the person receiving under certain operations like;

a. Credit Card Operations

b. Debit Card Operations

c. Smart Card Operations

d. Money Transfer Operations

e. Other Similar

1.5 Section 2 (rc) – Payment System Operator – person including his/her overseas principal who performs payment system.

1.6 Section 2 (u) – Proceeds of Crime – it is any property obtained either personally or through someone else by a person who takes part in any crime under PMLA.

Relevant Case

The Deputy Director Directorate of Enforcement Delhi and Ors. vs. Axis Bank and Ors

the Delhi Court found that the government exercising powers under PMLA to confiscate proceeds of crimes cannot be said to be a creditor. Hence, under the PMLA, a person alleged of the offence of money-laundering cannot be said to acquire the status of debtor. Moreover, any proceeding initiated under the PMLA is not subject to challenge under proceedings undertaken under the IBC. Thus, the IBC does not overrule the PMLA and the statutes have no ‘overriding effect’ over one another.

1.7 Section 2(wa) – Reporting Entity – means a banking company or any financial

1.8 Section 2 (zb) – Value – means market value of a property on date it was bought or owned by a person.

2. Section 3 – Offence of Money Laundering – if a person who has direct or indirect involvement assists or is a part of an activity that is connected to a crime including it’s concealment, possession or acquisition will be held as guilty for the offence of money Under Section 4 the punishment for money laundering can be a rigorous jail upto 3 years minimum and can extend to 7years along penalty.

Relevant Caselaw

Sukesh Gupta v. Govt. of India32 (Delivered on February 23, 2022)

Coram: Single Judge Bench of HM Justice Shameem Akther Authored by: HM Justice Shameem Akther

Challenge was laid to the validity of the criminal proceedings instituted in pursuance of the complaint and investigation launched by the ED against the petitioner. The primary case of the petitioner was that he was never an accused in the case registered by the CBI nor originally in the said FIR, there was absolutely any whisper or allegation against the petitioner in the said FIR. The petitioner was dealing with gold as a director of the company and due to fluctuations in the Forex market, the rupee value suddenly crashed, owing to which the prices of gold also dipped downwards. He was never involved in the commission of any of the “scheduled offences” registered by the CBI and thus, could not be prosecuted under the provisions of PMLA as well. It was held that the trial of money laundering offence is an independent trial, governed by its own provisions under the PMLA, which is a special enactment. It cannot be construed that the proceedings under the PMLA are to go hand-in-hand or equated with the prosecution initiated for the commission of predicate/scheduled offences. The offence under Section 3 of the PMLA is an independent offence and it may extend even to a person who may be unconnected or may not be the actual offender of the scheduled offence but comes under the net of “offence of money laundering” under Section 2(1)(u). A person booked for a scheduled offence, but subsequently acquitted of such a scheduled offence can still be proceeded under PMLA, if it is found that he was dealing with the proceeds of crime. Prosecution can be independently initiated under PMLA only for the offence of money laundering, as it relates to any property which may directly or indirectly be derived or obtained as a result of criminal activity relatable to the scheduled offence. The process or activity contemplated under Section 3 is relatable to “proceeds of crime”, as a continuing activity. The offence of money laundering is thus, a standalone offence and trial proceedings are completely different from that of the scheduled offence. It was further argued that the competent court under the PMLA can release the property only if it is found on the conclusion of trial under PMLA that an offence of money laundering has not taken place. Registration of ECIR does not make any person an accused before the ED, nor would the provisions of Article 20(3) be attracted. Mere registration of ECIR and issuance of summons does not give rise to any cause of action, much less a reason for any person to rush the High Court for grant of anticipatory bail. A person is duty-bound to respond to summons and notices issued under Section 50(2) for giving evidence during the case. Relying on the judgment of M. Shobana v. Directorate of Enforcement33, passed by the Madras High Court, it was held that investigation into the offence of money laundering, followed by criminal prosecution should not be treated as double prosecution of the petitioner. ECIR registered by ED cannot be equated with an FIR under Section 154 CrPC. Accordingly, the Section 482 petition for quashing the criminal proceedings was dismissed by the High Court.

3. Section 5 – Attachment of Property involved in Money Laundering – the Director or any authorised officer under ED has power to temporarily seize property that is believed to be property of proceeds of crime, likely to be This seizure can last upto 180 days, extendable in certain situations and director shall provide relevant reasons to adjudicating authority. The order by Adjudicating authority ceases after 180 days or extendable days in certain cases. The person having interest in such property can still continue to enjoy it. Further within 30 days of such attachment a complain must be filed by ED before Adjudicating Authority.

4. Courts/ Tribunals where Appeal or Case Lies under PMLA

4.1 Section 6 – Adjudicating Authority – The Central Government has power to appoint an adjudicating authority to exercise it’s jurisdiction, powers and authority under PMLA. An Adjudicating Authority must consist of a bench of;

4.1.1 A chairperson

4.1.2. 2 members, out of which one shall have an experience in fields of law, administration, finance or accountancy.

4.1.3 Individual will not be qualified to be appointed as a member of Adjudicating Authority in field of law unless;

4.1.3.1 He/she has qualification to be appointed as a judge of any district; or

4.1.3.2 He/she has been member of Indian Legal

4.1.4 Individual will not be qualified to be appointed as a member of Adjudicating Authority in field of finance, accountancy, or administration unless he/she has the prescribed possession.

4.1.5 It has power same as of a Civil Court

4.2 Section 25 – Appellate Tribunal – Central government established tribunal against appeals from Adjudicating Authority.

4.2.1 Chairman must be a qualified Supreme court or High court Judge.

4.2.2 Such appeal shall be dismissed within 6 months from date of filing of appeal.

4.3 Section 42 – Appeal to High Court – persons aggrieved by decision of Appellate Tribunal can file an appeal to High Court within 60 days from date of such

4.4 Section 43 – Section Special Court – Central Government in consultation with Chief Justice of High Court designate some Court of Session as Special Court for a case of money laundering.

4.5 Section 45 – conditions to be satisfied for the purpose of granting bail to an accused charged with the offence of money laundering.

Relevant Cases

1. Rajeev Sharma Directorate of Enforcement (2022) 1 HCC (Del) 66 (Delivered on January 7, 2022)

Coram: Single Judge Bench of HM Justice Mukta Gupta Authored by: HM Justice Mukta Gupta

The petitioner applied for regular bail under Section 439 CrPC read with Section 45 of the PMLA. The ECIR under PMLA came to be registered as a consequence of the FIR registered under Sections 3, 4, and 5 of the Official Secrets Act, 1923 read with Section 120-B IPC. The allegation against the petitioner was that he was working as a senior freelance journalist. He represented various newspapers including a Chinese newspaper i.e. Global Times from 2014-2016. The petitioner whilst working with this Chinese newspaper, transmitted certain information, which was sensitive, confidential, and covered by the Official Secrets Act, 1923. The said transmission of information led to the commission of offences punishable under the provisions of the Official Secrets Act. The contentions of the petitioner were essentially twofold:

(a) That the provisions under which the FIR came to be registered under the Official Secrets Act were not scheduled offences mentioned under the Schedule of the PMLA.

(b) The amount which was alleged to have been “proceeds of crime” laundered by the petitioner was admittedly less than Rs 1 crore and thus, in view of the proviso to Section 45 of the PMLA, he was entitled to be enlarged on bail.

On the first argument of offence being made out under PMLA, in view of the Official Secrets Act not being a scheduled offence, but offences under Sections 411 and 120-B IPC being scheduled offences, the Court held that the same is a matter to be dealt by the learned trial court at the stage of the trial and cannot be adjudged in bail application. The charge- sheet did not disclose the offence under Section 411 IPC, but the said plea was taken for the first time in the course of arguments. Only Section 120-B is a scheduled offence that is mentioned in the charge-sheet.

On the second issue, it was held that admittedly the amount which was received in the accounts of the petitioner and transferred to other accounts was much less than Rs 1 crore, when Section 45 comes into play; the petitioner was having deep roots in the society; the petitioner joined the investigation as and when directed prior to his arrest by the

Enforcement Directorate (ED), it was a fit case for granting bail to the petitioner. The court was primarily driven by the quantum of the amount involved being less than Rs 1 crore alleged to be laundered by the petitioner in the matter.

1. Raj Singh Gehlot Directorate of Enforcement 2022 SCC OnLine Del 643 (Delivered on March 2, 2022)

Coram: Single Judge Bench of HM Justice Manoj Kumar Ohri Authored by: HM Justice Manoj Kumar Ohri

The allegations against the applicant were that he had founded one company M/s Aman Hospitality Pvt. Ltd., which had borrowed loans from J&K Bank towards development of a hotel project. The promoters’ contribution was also pegged at a certain amount, which amount was not contributed/pooled into the company and the loan amount that was sanctioned by the bank was also diverted to other companies of the Ambience Group for repayment of their loans; for settling the loan amounts of outstanding loan amounts of Ambience Group of Companies and for meeting expenses of applicant, his family, and his friends. Eventually, the borrower company (M/s Aman Hospitality Pvt. Ltd.) defaulted, and the loans were resultantly owing to the aforementioned transactions turned into non-performing assets (NPA). An FIR accordingly came to be registered under the provisions of Sections 409, 420 RPC and 5(1)(c)/5(1)(d) read with Section 5(2) of the J&K RPC, Act for misappropriation and diversion of funds from the loan of rupees 100 crores sanctioned by the bank. Resultantly, ECIR came to be registered in view of the aforesaid FIR in raising of loan from the bank and its subsequent diversion and default in repayment.

Though the court referred to a host of judgments on consideration for the application of bail and the factors that should enter into consideration for the grant/denial of the said bail application, it was held that the accused must satisfy the additional conditions of Section 45 of the PMLA. Referring to the judgments of Moti Ram v. State of M.P.45 and Ram Govind Upadhyay v. Sudarshan Singh46, various factors to be kept into mind by the courts whilst adjudicating the bail application were discussed. The factors as aforementioned were held to be not completely exhaustive, exhausting the grounds and considerations for bail, but were always subject to applicable statutory provisions. Relying on the various judgments, especially the judgment of Y.S. Jagan Mohan Reddy v. CBI47 and P. Chidambaram v. Directorate of Enforcement48, it was held that gravity of offence is an important factor in determining whether or not to grant bail, especially in grave economic offences. The court must also consider additional factors before granting bail including the larger interest of the State or public, whether the accused is at a flight risk, apart from the existing factors of likelihood or tempering of the evidence or influencing the witnesses by the accused. The gravity of the offence and nature of the allegations levelled constitute and serve as additional tests to be also applied. Referring to the judgments of Rohit Tandon v. Directorate of Enforcement49 and State of Maharashtra v. Vishwanath Maranna Shetty50, the Court held that at the stage of considering application of bail, the court must just examine prima facie whether the accused was possessed of the requisite “mens rea”.

The applicant had deep roots in the society; he was not arrested under the scheduled offence and the charge-sheet came to be filed without arrest, thus overall, in view of the statement of the witnesses recorded under Section 50 of the PMLA, and documents collected during the investigation, the applicant was otherwise entitled for grant of bail. But the court however denied bail solely on the grounds of the accused failing to meet the twin tests of Section 45 of the PMLA. It was found that the applicant had successfully diverted and converted the loan amount received from the bank for ulterior purposes. The court in such cases have to be strict, accordingly in light of the parameters of Section 45, the bail application of the applicant was rejected.

2. Directorate of Enforcement V.C. Mohan 2022 SCC OnLine SC 452 (Delivered on January 4, 2022)

Coram: 2-Judge Bench of HM Justices A.M. Khanwilkar and C.T. Ravikumar

The challenge was laid to the judgment and order of Telangana High Court, through which anticipatory bail was granted to the respondent, accused in offences concerning PMLA. The judgment of the High Court granting anticipatory bail was set aside on the ground that it dealt with the said prayer as if it was a prayer in connection with ordinary offences under IPC, 1860. Even though the offence under PMLA is dependent on the predicate offence mentioned in the Schedule to the PMLA, it does not mean that it does not ipso facto imply that the bail is also to be governed by the very same considerations of ordinary/normal offences. Section 45 comes into play immediately in such circumstances, when once the prayer for anticipatory bail is made in connection with offences under PMLA. Even though the application is under Section 438 CrPC, however, the interplay and consideration of Section 45, PMLA must not only be reflected but duly considered whilst adjudicating the said anticipatory bail application. Accordingly, the judgment of the High Court was set aside and the matter remanded/restored back to be disposed off afresh on merits by the High Court.

Procedural

Initiation of Investigation – When the Directorate of Enforcement receives information regarding a scheduled offence, which is a predicate offence for money laundering under the Act, it is authorised to launch an inquiry under Section 17 of the PMLA.

Inquiry and Investigation – Based on information obtained from other organisations like the CBI, FIU, EOW, Income Tax Authorities, and other authorities, the Enforcement Officer queries and investigates the Accused/Suspected and any other individual.

5.3 Section 16 – power of survey – authorities have power to enter a place where they have reason to believe an offense under section 3 has They can inspect records, check for proceeds of crime, and gather relevant information. After the inspection, they must send the reasons and material to an Adjudicating Authority. The authorities can also mark records, create inventories, and record statements of individuals present, all for the purpose of facilitating proceedings under the Act.

5.4 Section 17 – Search and Seizure -. based on information, to investigate money laundering-related offenses authorities can authorize officers to search premises, seize records or property, and examine individuals under They can also freeze property if seizure is not immediately possible. The reasons and materials collected must be sent to an Adjudicating Authority. If evidence is likely to be concealed, a search can be conducted without prior authorization. Within 30 days, the authority must file an application for retaining seized property or continuing freezing orders.

Relevant Caselaw

Rajesh Kumar Agarwal v. Directorate of Enforcement, Delhi

An Enforcement Case Information Report (ECIR) was filed against the appellant, for acting as a mediator and helping two people in providing tax evasion to a set of corporate entities. A search was conducted at appellant’s office under Section 17(1) of Prevention of Money Laundering Act, 2002 on the strong belief that records/documents relating to money laundering could be recovered from his office. Pursuant to seizure of requisite property and documents, the respondent filed an application under Section 17(4) of the Act for retention of the seized property until pendency of the proceedings. The said application was allowed by the Adjudicating Authority. Aggrieved thereby, instant appeal was filed.

5.5 Section 18 – search of Persons – an authority authorized by the Central Government to search and seize records or proceeds of crime from a person if they have reason to believe it’s relevant to proceedings under this The authority must follow specific procedures, including providing witnesses during the search, recording the statement of the person searched, and submitting a request to retain seized items within 30 days before the Adjudicating Authority. Searches must also respect gender privacy. If requested, the person searched can be taken before a higher-ranking officer or a Magistrate within 24 hours.

5.6 Section 19 – power to arrest – certain officers, including the Director, Deputy Director, and Assistant Director, can arrest a person if they have reason to believe that person committed an offense under PMLA. The arrested person must be informed of the grounds for arrest. After the arrest, the officer must provide a copy of the order and related material to the Adjudicating Within 24 hours, the arrested person must be presented before a Judicial Magistrate or a Metropolitan Magistrate, with travel time excluded from the 24-hour period.

5.7 Section 20 – Retention of property – the retention of property seized or frozen under certain sections of the It allows property to be retained or frozen for up to 180 days for adjudication purposes. The Adjudicating Authority can extend this period if it believes the property is linked to money laundering. After confiscation, a Special Court can release property not involved in money laundering. However, the Director can withhold release for 90 days if it’s deemed relevant to appeal proceedings under the Act.

5.8 Section 24 – Burden of Proof – In proceedings related to proceeds of crime under this Act, there are presumptions in place. For a person charged with money laundering (under section 3), it’s presumed that the proceeds of crime are involved in money laundering unless proven otherwise. For other individuals, the Authority or Court may presume such involvement unless shown otherwise.

Vijay Madanlal Chaudhary & Ors v Union of India

3 judge benches: Justice A.M. Khanwilkar, Justice Dinesh Maheswari, Justice C T.

 – Background of the case

1. Prevention of Money Laundering Act (PMLA) was formulated in the year 2002 and has undergone many changes over the The PMLA was enacted in response to India’s global commitment (Vienna Convention) to combat the menace of money laundering. These include:

1.1 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988

1.2 Basel Statement of Principles, 1989

1.3 Forty Recommendations of the Financial Action Task Force on Money Laundering, 1990

1.4 Political Declaration and Global Program of Action adopted by the United Nations General Assembly in 1990

2. CASE DESCRIPTION

2.1 The Prevention of Money Laundering Act, 2002 (PMLA) is enforced by the Directorate of Enforcement (ED), a financial investigation agency within the Department of Revenue of the Union Government. The ED is authorised to issue summonses, get statements, make arrests, conduct searches, and take property to conduct investigations.

2.2 Despite possessing investigative authority, the ED is not considered a “police agency.” This holds true for additional specialised organisations as well, such as the Serious Fraud Investigation Office (SFIO) and the Directorate of Revenue Intelligence (DRI), who are permitted to investigate economic violations by other laws. These organisations are not required to abide by the 1973 Code of Criminal Procedure (CrPC).

2.3 Nearly 200 petitioners questioned the authority of these specialised investigation teams that focus on financial The earliest pending petitions date back to 2014. The PMLA was the subject of more than 80 of these petitions. These included applications submitted by various politicians accused of money laundering, including former Jammu and Kashmir chief minister Mehbooba Mufti, former Punjab MP Sarwan Singh Phillaur, and Lok Sabha member Karti Chidambaram.

3. Issues – the following provisions of the PMLA were challenged before the Court:

3.1 Sections 5 and 8(4), which provide the ED broad discretionary authority to seize the accused’s property, have been criticised as being arbitrary because they go against the rules intended to protect the accused.

3.2 Section 17 gives the ED broad authority to access and search suspected property without a judge’s consent. Sections 19 and 24, which provide the ED the authority to make arrests and suppose an accused person is guilty until proven innocent, were also challenged for exempting the ED from obeying the rules of criminal procedure.

3.3 The presumption of innocence typically granted to accused parties under criminal law is removed under Section 45 of the Act. The accused must establish beyond a reasonable doubt that they are innocent and convince the court that they won’t commit another crime before being granted bail. The PMLA’s “twin bail conditions” are at the heart of this case. In the interesting case of Nikesh Tarachand Shah Union of India (2017), the SC ruled that this clause was invalid. In 2018, the Union government changed the clause. According to the ED, this modification brought the clause into compliance with Nikesh Tarachand Shah. According to the petitioners, the change invalidated the judgement and reinstated the initial twin criteria.

3.4 It was argued that Section 50, which authorises the ED to force suspects to make self-incriminating statements under threat of a fine, violates the suspects’ fundamental rights under Article 20 of the The petitioners argued that the investigative agencies effectively wield police authority and therefore be required to always adhere to the CrPC. Importantly, because the ED is not a police organisation, any statements made by the accused to ED personnel during an inquiry may be used against him or her in court.

4. Major issues before the court

This is a very important judgment. It overruled one 2- judge bench judgment Nikesh Tarachand Shah judgment. From current events perspective also, it is important. From exam point of view important issues are:

4.1 Bail

4.2 Self-incrimination

4.3 Burden of proof

4.4 search/seizure / arrest

4.5 PMLA is a standalone

4.6 Period of attachment

4.7 Interpretation of proceeds of crime

4.8 Legal compulsion to give (Source)

Key points from SC Judgement

1. Does projecting proceeds of crime as untainted property amount to an offence under the PMLA when such projection is not coupled with concealment, possession, acquisition, or use of proceeds of crime?

The SC determined that “projecting” or “claiming” the proceeds of crime as untainted property is a separate act of engaging in money laundering and is not required to be done in conjunction with hiding, possessing, obtaining, or using the proceeds of crime. A predicate offence, or an offence from which proceeds of crime were created, had to have been reported to the jurisdictional police or the appropriate venue in order to move forward against a person accused of violating the PMLA.

2. Could properties which are alleged to be proceeds of crime be attached, provisionally or otherwise, without registration of predicate offence?

The SC ruled that unlike criminal proceedings3, under the PMLA, registration of the predicate offence is merely a requirement for starting an action for provisional attachment of possessions. However, only evidence in the officer’s possession that indicates a person is in possession of criminal proceeds may serve as the foundation for a property attachment action. All of an accused person’s properties cannot be attached; only those that appear to be the proceeds of crime may be.

3. Attachment of a property, once confirmed, can continue to subsist for a period of 365 days, or during the period of pendency of criminal proceedings in or outside India. However, the statute is silent on what would be the status of a property attached provisionally, when a complaint seeking confirmation of attachment is not filed within 365 days.

When a property is provisionally attached, the PMLA’s enforcement arm, the Enforcement Directorate (or “ED”), has 30 days to file a complaint with the adjudicating body asking for confirmation of the attachment. Although the Act specifies that an order confirming attachment may exist for 365 days, it also specifies that such an order may exist while a criminal prosecution is ongoing. Given that the ED is required by the PMLA to file a complaint requesting confirmation of provisional attachment within 30 days, there is no cause for concern about the repercussions of failing to file the complaint within the required 365-day period.

4. Is a person accused of money laundering liable to give up possession of property attached, provisionally or otherwise?

When a property is confirmed to be subject to an order for provisional attachment, the property is not actually taken until a formal order for confiscation is made. Any order for possession of property prior to the passing of a formal order of confiscation that is only based on the confirmation of a provisional attachment order is an exception, not a norm, and must be evaluated on a case-by-case basis.

5. The provisions for search and seizure of property and search of persons under PMLA are arbitrary and drastic, especially given that the ED is empowered to act without registration of predicate offence.

The SC ruled that the PMLA’s provisions for property searches and person searches have built-in safeguards because they not only require that only senior officials exercise their authority but also that they adhere to procedures that ensure fairness, transparency, and accountability throughout the search and seizure process. In contrast, any police officer may proceed under the Code of Criminal Procedure, 1973 (“CrPC”) based solely on an accusation or suspicion of committing a predicate offence. Additionally, the PMLA’s search and seizure procedures serve both the objective of preventing money laundering as well as the purpose of conducting inquiries into the same.

6. The provisions pertaining to arrest under the PMLA are contrary to the corresponding provisions under CrPC and are therefore, arbitrary, and referred to a host of judgments on consider

It was decided that the protections offered by the PMLA and the requirements the ED must meet before making an arrest are stricter and of a higher calibre than those in the CrPC. The provisions for arrest do not become invalid simply because they do not perfectly mirror CrPC. The variances are reasonably related to the goal that the PMLA is meant to accomplish.

7. The burden of proof to show that the proceeds of crime are untainted lies on the persons alleged to have committed offence under the This is contrary to the settled principle that an individual is innocent until proven guilty.

The PMLA’s provision on burden of proof in actions involving proceeds of crime applies to both civil-natured proceedings before the Adjudicating Authority regarding the seizure of properties and criminal proceedings before the Special Courts. According to the PMLA, there is a presumption of guilt based on the fact that money laundering involves the proceeds of crime; nevertheless, the accuser has the right to refute this assumption by presenting proof that is in his possession. Such a legal presumption is reasonably related to the PMLA’s legislative objectives.

8. When a predicate offence triable before a Magistrate is transferred to a Special Court (which is on par with a Sessions Court) dealing with the proceedings under PMLA, it takes away the right of one appeal or revision from an accused, especially for an individual who is an accused only in the predicate offence, and not under referred to a host of judgments on consider

According to the SC, who agreed with the petitioners’ concerns, a trial for a predicate offence may be unfair to a defendant who is only charged with a predicate offence and not with money laundering. As a result, he would miss his chance to present one appeal or revision to a higher venue. However, the SC is not required to intervene in this matter or to reevaluate the validity of the PMLA’s Special Courts provisions. Even though the complaint is valid, it should be resolved directly before the Special Court in an application made by the ED to transfer the prosecution of the underlying offences to itself. Further, such applications must be considered by the Special Courts on a case-to-case basis.

9. The provisions for bail are unconstitutional given that accused must satisfy twin conditions which are contrary to the provisions of Further, the twin conditions are arbitrary and unconstitutional.

The following two requirements must be met when requesting bail under the PMLA:

(i) the accused must demonstrate that they are not guilty of the crime at face value, and (ii) there is no threat that they would commit the crime while out on bail. The restrictions also apply to anticipatory bails.

The Court is not compelled to record a finding that the accused did not violate the PMLA under item (i) above. At this point, the Court is simply needed to decide based on a broad range of probabilities and is not compelled to analyse the evidence in detail.

The provision is reasonable and has direct nexus with the purposes and objects sought to be achieved by the PMLA and does not suffer from the vice of arbitrariness or unreasonableness.

10. Statements given to the ED, or production of documents in response to summons, etc. is admissible as evidence in criminal proceedings. Further, PMLA prescribes punishment for providing false information, or failure to give information, etc. to ED officers. This is unconstitutional and is contrary to the canon of criminal jurisprudence which protects accused persons from self-incrimination.

The procedures carried out in response to a summons are more akin to “inquiry” than “investigation.” An individual who is summoned is not a “accused.” The person called cannot make use of the constitutional protections against self-incrimination that are available to a “accused” at the time the summons is issued. The ED officers are not police officers, either. As a result, the statements they recorded are admissible evidence in criminal cases. However, the constitutional protections against self- incrimination are accessible if a person makes a statement following a formal arrest by the ED. This is true because when someone is arrested, they become a “accused.” Additionally, the authority granted to ED by the Code of Civil Procedure, 1908 is comparable to that granted to a civil court during the trial of a lawsuit when it comes to summonses, the production of documents, the taking of testimony under oath, etc. These broad powers have a direct connection to the goals and objectives of the PMLA, which is to prevent money laundering.

11. Initially, the scope of PMLA was limited to serious offences, such as terrorism, operations of drug syndicates, etc. Over the years, the list has expanded to include even offences which are non-cognizable, compoundable, or minor This not only dilutes the purpose of PMLA, but also has become a tool to harass accused persons.

The SC ruled that prosecution under the PMLA is restricted to property derived or earned through specified criminal activity and is not related to the nature of criminal activity or the predicate offence per se. As a result, it doesn’t matter whether illegal action is significant or little, cognizable, or not.

12. Enforcement Case Information Report (ECIR) which is a document prepared by the ED detailing the offences must be provided to an accused as a matter of right, like a first information report (FIR) under CrPC.

Unlike a FIR, an ECIR is not a statutory document, according to the SC, and unlike the provisions relating to FIR in the CrPC, there is no requirement in the PMLA for the ED to register an ECIR or provide a copy of it to the accused. It is sufficient if the ED immediately informs the individual of the reasons for the arrest now of the arrest.

13. The ‘ED Manual’ which details the internal processes followed by the ED must be made public to ensure transparency.

The ED Manual is a series of administrative orders in the form of a departmental internal document. Since these administrative instructions are for the internal guidance of ED officials and deal with complex matters pertaining to mode and manner of investigation, an accused person or member of the general public is not permitted access to them. However, through the judgement, the SC implores the executive to outline and publish a document embodying the PMLA’s procedures to inform all parties involved and be useful.

14. Vacancies in the ED Appellate Tribunal which, inter alia, deals with challenges to attachment of properties, have stifled speedy disposal of This has rendered the proceedings as meaningless and oppressive.

The complaint that there are vacancies on the Appellate Tribunal cannot be used as a justification for challenging the legality or effectiveness of PMLA’s provisions. However, the SC compelled the executive to make the required adjustments in this regard through the judgement.

15. Punishment for money-laundering prescribed under the PMLA is disproportionate compared to the punishment prescribed for predicate offences.

The punishment stipulated by the PMLA is for the crime of money laundering and not for the commission of predicate offences, and it is independent of the type of predicate offences.

JUDGEMENT

1. Scope of word “investigation” u/s 2(1) clause (na) of PMLA, 2002 – As per para. 28 of the judgment, the Hon’ble judges contended to expand the ambit of word “Investigation” and that investigation can be interchanged with the word ‘inquiry’ undertaken by the authorities for its consideration for confirmation of attachment.

2. Can properties recovered or attached by investigative agency in connection with criminal activity relating to a scheduled offence under general law be regarded as “proceeds of crime” u/s 2(1)(u) of PMLA, 2002 ? – NO, to be proceeds of crime, the property must be derived or obtained “as result of” criminal activity to a scheduled offence under Under para 31 it is stated “…To be proceeds of crime, therefore, the property must be derived or obtained, directly or indirectly, “as a result of” criminal activity relating to a scheduled offence. To put it differently, the vehicle used in commission of scheduled offence may be attached as property in the concerned case (crime), it may still not be proceeds of crime within the meaning of Section 2(1)(u) of the 2002 Act. Similarly, possession of unaccounted property acquired by legal means may be actionable for tax violation and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence and such offence is included in the Schedule of the 2002 Act. For being regarded as proceeds of crime, the property associated with the scheduled offence must have been derived or obtained by a person “as a result of” criminal activity relating to the concerned scheduled offence.”

3. Can authorities take action against any person for money laundering on assumption? – NO, as per paragraph 33 “The authorities under the 2002 Act cannot resort to action against any person for money-laundering on an assumption that the property recovered by them must be proceeds of crime and that a scheduled offence has been committed, unless the same is registered with the jurisdictional police or pending inquiry by way of complaint before the competent forum.”

4. Can action be taken when person is acquitted by court of the scheduled offence?

4.1 The Supreme Court ruled that even if the arrest provisions differ from those in the CrPC, they cannot be declared unconstitutional. The statement went on to say that the CrPC’s arrest provisions are just as strict and of greater standards. The two laws’ different provisions differ from one another to accomplish the PMLA’s goals. The court determined that the clauses adhere to the Constitution.

4.2 When addressing the issue of projecting criminal proceeds as clean property, the court ruled that there was no need to also charge the concealment, possession, acquisition, or use of criminal proceeds because “projecting” or “claiming” criminal proceeds as clean property involves engaging in money The court further declared that a predicate offence must have been committed to proceed against a person accused of violating the PMLA.

4.3 When addressing Section 2(1)(na), the Court found that the term “expression” employed therein is contextual and is to be given a wide meaning, and that it should be such that it encompasses an inquiry procedure followed by the Authorities of ED, the Adjudicating Authority, and the Special Additionally, it was declared that the adjudication authorities’ inquiries were also included in the definition of “investigation” as defined in Section 2(1)(na). The court additionally ruled that the phrase added to Section 2(1) of the 2002 Act’s Clause (u) does not go beyond the primary provision and is consistent with it.

4.4 The court decided that Section 3 PMLA is not just about portraying property as pure. It claimed that the word “and” should be interpreted as the word “or”. The clause must also be given a broad interpretation. The court ruled that Section 50 of the Act’s procedure should be viewed as an inquiry rather than an investigation. The court continued by stating that because the ED officials are not “police officials,” Article 20(3) of the Constitution does not apply to the comments they recorded under Section 50 of the ECIR is not a FIR, either. The court further held Sections 4, 5 8, and 45 of the PMLA as valid and thus rejected the contentions of the petitioners that they are not in accordance with the law.

– CONCLUSION

The Hon’ble Delhi High Court has acknowledged and is now enforcing the fig leaf provided in the VMC Case, holding that the ED, under the PMLA, cannot prosecute anyone on a hypothetical basis or on the assumption that a scheduled offence has been committed, unless it has been so registered with the jurisdictional police and/or is the subject of an ongoing investigation or trial, including by way of criminal complaint before the competent forum. The VMC Case has increased the reach and powers of the ED. No one can be charged with money laundering if the person is ultimately cleared of the scheduled offence or the criminal case against him is dismissed by a court with sufficient jurisdiction. This includes anyone who asserts that the property in question is the property connected to the offence through him. The Hon. Delhi High Court has also quashed the ED’s claims that, even though it may later approach a government agency to register a predicate offence after conducting a provisional attachment or search, this does not imply that the ED can move forward without a predicate offence. The Hon’ble Supreme Court recently dismissed a Special Leave Petition in the case of Directorate of Enforcement v. State of Maharashtra & Ors., wherein the ED had challenged a ruling by the Bombay High Court that held that the ED cannot intervene or challenge a closure report for a predicate offence. This makes the decision more significant.

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Author: Sarthak Kohli is a final year law student from Vivekananda Institute of Professional Studies, affiliated to GGSIPU university