TOPIC : A CRITIQUE OF THE SUPREME COURT JUDGMENT ON THE PREVENTION OF MONEY LAUNDERING ACT (PMLA), 2002

THE CONTEXT: On 27 July 2022, a three-judge bench of the Supreme Court in Vijay Madanlal Choudhary vs Union of India, upheld vast parts of the Prevention of Money Laundering Act (PMLA), 2002 including its stringent bail conditions for economic offences that impose a reverse burden of proof on the accused. This article critically examines the Supreme Court judgment.

THE MANDATE OF THE ENFORCEMENT DIRECTORATE(ED): AN OVERVIEW

• ED is a Multi-Disciplinary Organisation under the Department of Revenue, Min of Finance mandated with the task of enforcing the Foreign Exchange Management Act, 1999 (FEMA) and Prevention of Money Laundering Act, 2002 (PMLA)
• The ED headquartered in New Delhi is headed by the Director of Enforcement. There are five Regional offices and other such zonal and subzonal offices in various parts of the country.
• It was formed in 1956 in the Department of Economic Affairs, to investigate cases of foreign exchange-related violations, a civil provision. But in 2002, after the introduction of the PMLA, it started taking up cases of financial fraud and money laundering, which were of criminal nature.
• FEMA 1999 regulates the transactions in currency, import and export of commodities, securities, purchase and sale of any kind etc.
• The main objective of FEMA is to facilitate external trade and payments. In addition to this, FEMA was also formulated to assist the orderly development and maintenance of the Indian forex market.
• Contraventions of FEMA are dealt with by way of adjudication by designated authorities of ED and penalties up to three times the sum involved can be imposed.
• The PMLA provides authority to the ED to investigate offences of money laundering and to take actions of attachment and confiscation of property
• PMLA provides for the prosecution of the persons involved in the offence of money laundering. There are 156 offences under 28 statutes which are Scheduled Offences under PMLA.
• ED also processes cases of fugitive/s from India under the Fugitive Economic Offenders Act, 2018.
• The powers of the survey, search and seizure, the search of persons, retention of property or of records, to issue summons to enforce the attendance of any person and compel him to give evidence or produce records, discovery or inspection, and the power to arrest, etc are conferred by various provisions of PMLA.
• Render cooperation to foreign countries in matters relating to money laundering etc.

GREY AREAS IN PMLA: GROUND FOR CHALLENGE

ABSENCE OF A PROCEDURE

• Unlike the CrPC which provides for a proper procedure to commence an investigation, in the PMLA there is no procedure prescribed.
• For instance, Section 154 and 155 of CrPC dealing with cognisable and non-cognisable offences but in PMLA no such procedures are prescribed and there is no registration of FIR under the Act. This violates Art 21 of the Constitution.

ENFORCEMENT CASE INFORMATION REPORT (ECIR)

• The PMLA has an internal manual where the ED officers record an ECIR- Enforcement Case Information Report. That is something that is kept by the ED to themselves and is not revealed to anybody even to the magistrate.
• This means an individual can be prosecuted without knowing why he has been proceeded against.

AUTOMATIC REGISTRATION OF CASE BY ED

• There are 156 Scheduled Offences and whenever a predicate offence is registered, the ED starts investigation under PMLA. This provides wide latitude and discretion to ED which is often misused.
• There must be something beyond the FIR under the predicate offence which needs to be established for the ED to commence the investigation.

ARTICLE 20(3)

• Section 50 of the PMLA vests the ED officers with the power of a Civil Court. But while exercising the power of summons to a person by ED, usually no reason is provided for such summons. Neither the person is informed whether s/he is summoned as a witness or as an accused nor any information is given on what predicate offence s/he is charged under.
• Secondly, the person must compulsorily answer the questions put forward by the officers and must sign the disclosure statement which is used as evidence against him in the court.
• This is a direct violation of Art 20(3) which protects individuals from self-incrimination. (No person accused of any offence shall be compelled to be a witness against himself)

ORDINARY CRIMES INCLUDED IN SCHEDULED OFFENCES

• Section 120 B dealing with criminal conspiracy is part of PMLA. The section can be applied to any offence and requires only a mere allegation.
• There is no threshold of initiating a PMLA case based on 120B. Similarly, murder is also part of PMLA, and it is doubtful why such an isolated act can be a part of PMLA.
• It is another matter if there is an organised crime activity but on its own, these offences should not be part of PMLA.

2019 AMENDMENTS

• The 2019 amendments have increased the powers of the ED. The offences under the PMLA became standalone crimes, and the offences have been made cognisable and non-bailable.
• It has expanded the definition of proceeds of crime which means assets not directly related to the proceeds of crime can also be attached.

THE JUDGMENT

EDs POWER OF ARREST

• The Court upheld the constitutionality of the provisions of Sections 5, 8(4), 15, 17 and 19 of the PMLA, which relate to the powers of ED’s power of arrest, attachment, search and seizure.
• However, the court rejected the notion that the ED has been given blanket powers of arrest, search of person and property and seizure. The court said there were in-built safeguards” within the Act, including the recording of reasons in writing while effecting an arrest.

REASONABLE NEXUS

• The Court also upheld the reverse burden of proof under Section 24 of the Act and said that it has “reasonable nexus” with the objects of the Act.
• Court made it clear that the State has a compelling interest in imposing stringent bail conditions for economic offences.

ENFORCEMENT CASE INFORMATION REPORT (ECIR)

• The Court also held that the ED officials are not “police officials” and hence the statements recorded by them under Section 50 of the Act are not hit by Article 20(3) of the Constitution, which guarantees the fundamental right against self-incrimination. The punishment of fine or arrest for giving false information cannot be construed as a compulsion to give statement.
• The Court further held that Enforcement Case Information Report(ECIR) cannot be equated with an FIR and that it is only an internal document of the ED. Therefore, the CrPC provisions relating to FIR will not apply to ECIR.
• Supplying ECIR is not mandatory and disclosure of grounds of arrest is sufficient. However when person is before Special Court, it can ask for records to see if continued imprisonment is necessary.

TWIN CONDITIONS OF BAIL

• The court ​​upheld the stringent twin bail conditions required under the law for granting bail to an accused. The two conditions require a court to hear the public prosecutor against the bail plea and reach a satisfaction that there are reasonable grounds to believe that the accused is not guilty of the offense and that he is not likely to commit any offence while on bail.
• However, the court said undertrials could seek bail under Section 436A of the Code of Criminal Procedure if they had already spent one-half of the term of punishment in jail for the offence prescribed in law. But, again, this is not an “absolute right” and would depend from case to case.

BURDEN OF PROOF

• Issue of the burden of proof rests heavily on the shoulders of the accused: The court upheld this provision and said that this provision did not suffer from the “vice of arbitrariness or unreasonableness”.

VACANCIES IN PMLA APPELLATE TRIBUNAL

• The Court also directed the Centre to fill up the vacancies in the PMLA Appellate Tribunal.

ABOUT AMENDMENTS

• Introduction of the amendments through Money Bills: The SC held that this issue would be separately examined by a larger Bench of the apex court.

CRITICISMS OF THE JUDGMENT

1. Sui generis PMLA: The PMLA is not a penal statute, but a sui generis one, which means that the law can, according to the Court, overlook several constitutional safeguards, including the right against self-incrimination.
2. Section 45 of PMLA: The judgement not only grants sanction to Parliament’s effort at reintroducing a law previously declared unconstitutional but also holds that the requirements for bail are by no means arbitrary or unreasonable. This is problematic for the fact that the predicate offences contained in the Schedule not only include terrorism as an offence but also the discharging of pollutants under the Environment Protection Act; penalties for applying for a false trade mark under the Trade Marks Act etc. and the present judgment makes no distinction in the extent of the crimes.
3. Test of Proportionality: The Supreme Court’s judgment in K.S. Puttaswamy vs Union of India held that fundamental rights operate not in silos, but by giving and taking meaning from each other and that any invasion of a constitutionally guaranteed freedom must satisfy a test of proportionality. This meant that every time the state impinged on a right, it had to show, among other things, that there existed not only a rational nexus between the law made by it and the objective at stake but also that it had satisfied itself that there were no less invasive means available to achieve the same aim. The present judgement in the PMLA case, the Supreme Court is somehow seen to move away from the pillars of constitutionality erected in the previous judgments and fails to protect personal liberty from draconian provisions.

THE PROBLEMS IN THE FUNCTIONING OF THE ENFORCEMENT DIRECTORATE

POLITICISATION

• The ED is alleged to be targeting those political leaders who do not belong to the ruling party/parties at the Centre. Even the past cases of these leaders have been reopened in order to pressurize them either to change parties or to curb dissent.

TARGETING DISSIDENTS

• The PMLA has been misused for targeting dissident voices and thereby preventing free speech and expression.
• This has become a routine affair especially in the case of NGOs. For instance, all bank accounts of Amnesty International India were completely frozen by the Enforcement Directorate in September 2020 on the charge of the alleged violation of PMLA.

VIOLATING FEDERAL PRINCIPLES

• The division of power under the Schedule 7 of the Constitution places the responsibility for police and public order in the State List. But the power of ED to investigate cases without states consent especially in ordinary crimes is against federal principles.

SELECTIVE APPLICATION OF LAWS

• The ED has been accused of selective application of the PMLA provisions and the major money laundering scams are either not investigated or not followed up by ED.
• For instance, The Rose Valley Chit Fund Scam in Odisha, the NARADA scam in West Bengal etc seem to have missed ED radar.  One MP was seen in a video taking a bribe, ED summoned him, but nothing was heard after he switched party.

POOR PROFESSIONALISM

• A look at the last 17 years, since the criminal law was enacted, the Enforcement Directorate has filed more than 5,400 money laundering cases and it has secured conviction against just 23 persons till now. The ED’s conviction rate is as low as 0.5% even after the dramatic increase in raids.

VIOLATION OF RULE OF LAW

• ED can carry out the pre-trial attachment of property and funds just on basis of reasons to believe of the investigative authority and not concrete facts. So even without an investigation is complete, a persona can be charged, and the property can be attached just because a complaint/investigation exists against him.
• It effectively means that though a citizen is presumed not guilty, he is deprived of control over his property, when the prosecution believes that it comes from tainted money, effectively destroying lives, families, and businesses, just on the basis of investigators’ reason to believe and not on evidence.

VIOLATES ORIGINAL INTENT

• The Act gave expression to India’s commitment to the United Nations to enact domestic legislation to curb the laundering of money linked to drug trafficking. However, a series of subsequent amendments have sought to systematically dilute the cardinal intent of the Act, reducing it to an instrument of arbitrary power in the hands of the ED.

PINCH OF OPTIMISM IN THE FUNCTIONING OF THE ED

Of late, the ED has not just taken up high-profile cases, but has also actively started investigating them, filed charge sheets in many long-pending cases, attached properties in a series of cases worth Rs 58,000 crore, moved applications, and even secured extraditions. In the last 10 years, the ED has attached assets worth Rs 58,333 crore. The highest number of attachments has been made in the Sterling Biotech case, amounting to Rs 14,000 crore. Between 2005 and March 2018, the agency attached assets worth Rs 27,000 crore, of which Rs 14,000 crore, a little over 50 per cent, pertained to cases of bank fraud. Since the PMLA was enacted, more than 2,500 ECIRs have been filed in the ED, and the investigation is pending in over 1,000 cases. The agency sends letters rogatory to different countries to obtain information about individuals and entities offshore. A letter rogatory is a formal communication from a competent court to a foreign court and is processed by the Ministry of External Affairs on behalf of investigative agencies. But most of these letters go unanswered, severely affecting the investigation. In some cases, this can lead to a court dismissing a case due to a lack of evidence. In 90 per cent of cases, the money is laundered and stashed in tax havens abroad, and when ED do not get information from there, the investigation suffers.

POSITIVES IN THE JUDGEMENT:

• The court in its order made it clear that the mere the provisional attachment order passed under the Act does not mean that the property stands confiscated; and until and order of confiscation is formally passed, there is no reason to take the possession of such property. It is hoped that the ED will now refrain from issuing notices asking persons whose assets are attached to vacate their properties before a confiscation order is passed by the trial court.
• As per the judgment, not everyone in possession of ‘proceeds of crime’ can be prosecuted, but only those concerned in any process or activity. The practice of making every person whose assets are attached as an accused, and prosecuting them merely because they are relatives of the main accused person and are holding an asset given to them by the main accused, will now hopefully stop.

THE WAY FORWARD:

• The safeguards: The PMLA is a code dealing with money laundering and ED officers investigating under this Act are not police officers, and as such, not bound by the restrictions applicable to the police under the Code of Criminal Procedure. ED is staffed by senior officers and that such officers are assumed to be fairer in their conduct than the regular police. PMLA also incorporates penalties against erring officers for vexatious search. Such safeguards must be strengthened to combat any misuse.
• Predicate offence: While affirming its powers, the court has however reiterated the procedural limitations of this Act, including the necessity of a predicate offence before a prosecution for money laundering can be launched. A predicate offence is one mentioned in the schedule to the PMLA, which is the crime which gives rise to the ‘proceeds of crime’, which are then laundered. The clear reinforcement by the Supreme Court of the necessity of a predicate offence is going to help in circumscribing the misuse of the ED’s power. There must be a consensus between the adjudicating authority and the officers of ED to abide by the constitutionality of this provision under PMLA, making the investigation more lucid.
• The due process: In a system where the average person approaching the average police station does so without any great hope for justice, it is due process which is the most urgent need to protect the life and liberty of the poorest and most helpless. The ED, in a perverse democratisation, has brought this fear to the high and mighty. The reforms, to affect the need for due regulation of the ED and all other agencies performing investigative and penal functions might end this phase of misuse of agencies like the ED for political vendetta.
• Operational Vigilance: There must be a constant scrutiny over the operations of the Enforcement Directorate and current disposition whether this clarification will improve the conviction rate (which is right now less than half a percent). And if there will be any lacunas in the operative part, change is the law of nature, these gaps can be filled either through suitable legislation, executive action or revised order of the apex court.

THE CONCLUSION: The ED is a weapon frequently used by the government against its opponents and critics. The judgement has failed to protect citizens at a time when executive excess using that weapon is often visible. The draconian provisions of the PMLA challenge and override many fundamental rights of citizens, and it is wrong that such provisions, prone to much misuse, are allowed to continue on the statute book.India’s criminal justice system is built on a set of axioms that are inherent to the basic precepts of justice and fairness. These include the idea that a person is presumed innocent until proven guilty; the court has held that the presumption of innocence until proven guilty can be interdicted by a law made by Parliament/Legislature. The judgement raises many concerns and needs to be reviewed by the court.

Mains Practice Questions:

1. PMLA is part of a global response to organised crime. Whether the recent Supreme Court judgment fails to protect the personal liberty from draconian provisions? Critically analyse.
2. The Supreme Court judgement upholding the stringent provisions of the Prevention of Money Laundering Act (PMLA), 2002, weakens many rights of citizens and the safeguards provided by law against executive excess. Comment.
3. By upholding self-Incrimination and the presumption of guilt, the court has put the personal liberty of citizens at risk. Critically analyse the Supreme Court judgment on the provisions of Prevention of Money Laundering Act (PMLA), 2002
4. India’s proximity to the two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What counter-measures should be taken to prevent the same? (2018)
5. Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (2021)

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