Prevention of Money Laundering Act ("PMLA") The New Economic Law to Tackle Economic Offences and White Collar Crimes – Challenges Before In-House Counsels

In recent years, we have witnessed a huge spike in cases of money laundering and the Enforcement Directorate ("ED") filing cases against individuals and corporates for alleged violations under the Prevention of Money Laundering Act ("PMLA" / "Act"). In-house counsel and other legal professionals need to update themselves with the nuances of this comparatively new economic law, as it can be a major risk to the organisation or individuals if necessary due diligence is not done.

Money laundering is a serious issue for any country and overall economic development. The question which comes to our mind is, what precisely is Money Laundering? The meaning of 'Money' is clear – something generally accepted as a medium of exchange, a measure of value, or a means of payment (such as US Dollars, India Rupee or any other form of legal tender). The meaning of 'laundering' as per the Collins dictionary is - to move money that has been obtained illegally through banks and other businesses to make it seem to have been obtained legally.

Money laundering is a process by which illegal money, funds or assets, are converted into legitimate money, funds, or assets, which involves large amounts. The mere earning of money in an illegal way or through a crime does not amount to money laundering. It means the conversation of such an amount into an illegitimate amount is called money laundering.

The PMLA was enacted in the year 2002 (made effective from July 1, 2005) to prevent money laundering and to provide for the confiscation, attachment, and seizure of proceeds from money laundering and related acts and matters, whether directly or indirectly.

Key provisions of PMLA

One of the key provisions of the PMLA is Sec.3 of the Act which defines the offence of money laundering. It states that, whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with proceeds of crime and projecting it as untainted property shall be guilty of the offence of money laundering. The scope of Sec.3 of the PMLA is very wide and the same was reiterated by the Hon'ble Supreme Court in the matter of Vijay Madanlal Choudhary & Ors vs Union of India & Ors. where in the Apex Court held that "The offence, as defined, captures every process and activity in dealing with the proceeds of crime, directly or indirectly, and not limited to the happening of the final act of integration of tainted property in the formal economy to constitute an act of money laundering". Sec.3 was first amended in 2013, when the expression "proceeds of crime and projecting" was substituted by the expression "proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming". The Explanation to Sec.3 inserted by way of amendment in 2019 states that any person will be found to be guilty of the offence of money laundering if such person is found to be directly or indirectly attempted or indulged or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, i.e., either concealment, possession, acquisition, use or projecting or claiming as untainted property in any manner whatsoever. Thus, involvement in any one of such process or activity connected with the proceeds of crime would constitute offence of money laundering, this is which makes the scope of Sec.3 of the PMLA very wide.

At the same time, it is not criminal activity relating to the schedule offence, unless the proceeds of crime is derived or obtained as a result of such crime/scheduled/predicate offence. The PMLA provides a detailed Schedule under which under Para A, B and C states certain specific offences which includes specific offences under the Indian Penal Code (IPC), The Narcotic Drugs And Psychotropic Substances Act, (NDPS), Explosives Substance Act, Unlawful Activities (Prevention Act) Arms Act, Wildlife Protection Act, Immoral Traffic (Prevention) Act, Prevention of Corruption Act, Customs Act, Child Labour (P&R) Act, Transplantation of Human Organs Act, Juvenile Justice Act, Water & Air Act, Environment Protection Act, SEBI & Companies Act etc.

The next most relevant and important provisions of PMLA is Sec.5 of the Act which provides for - attachment of property involved in money laundering. It states that – when the Director (on any person not below the rank of Deputy Director) /"Authorised Officer", commonly addressed/known as the Enforcement Directorate ('ED'), has reasons to believe (the reason for such belief shall be recorded in writing) on the basis of material in possession that – (a) any person is in possession of any proceeds of crime; and (b) such proceeds of crime are 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 order in writing, provisionally attach such property for a period not exceeding 180 days from the date of the order. From a bare reading of the provisions and as per the Apex Court judgement in Vijay Madanlal case (supra), before issuing a formal order, the authorised officer has to form his opinion and delineate the reasons for such belief to be recorded in writing, which indeed is not on the basis of assumption, but on the basis of material in his possession. Further u/s 5 of the Act, no order of provisional attachment can be issued until a report has been forwarded to a Magistrate under Section 173 of the Criminal Procedure Code ("CrPC") in relation to the scheduled offence, or a complaint has been filed by a person authorised to investigate the offence mentioned in that Schedule, before a Magistrate/Court for taking cognizance of the scheduled offence. In other words, filing of police report or a private complaint in relation to the scheduled offence had been made a precondition for issuing an order of provisional attachment.

Under Second Proviso to Sec.5 of the Act, which is an exception to the First proviso, the Authorised Officer has the option to attach the property immediately (without following the procedure under the first proviso) The Authorised Officer has to record his satisfaction and reason for his belief in writing on the basis of material in his possession that the property (proceeds of crime) involved in money laundering if not attached "immediately", would frustrate proceedings under the Act. The Act provides for further safeguard considering the urgency felt by the competent authority to secure the property to effectively prevent and regulate the offence of money laundering.

An offence of money laundering is dependent on the wrongful and illegal gain of property as a result of criminal activity relating to the scheduled offences provided under the Act. It is concerning the process or activity connected with such property, which constitutes offence of money-laundering. The property must qualify the definition of "proceeds of crime" under Section 2(1)(u) of the Act.

What constitutes "proceeds of crime"?

Sec.2(1)(u) of PMLA defines "Proceeds of Crime" as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad. The explanation to the definition classifies that 'proceeds of crime' would include property not only derived from the scheduled offence, but any property which may indirectly or directly be derived as a result of any criminal activity relatable to the scheduled offence.

The definition of "proceeds of crime" has three aspects: (i) property derived or obtained as a result of criminal activity relating to predicate /scheduled offence; or (ii) the value of any such property; and (iii) if the property derived from criminal activity is taken or held outside the country, then the property equivalent in value whether held in India or abroad.

The Hon'ble High Court of Delhi while dealing with the aforementioned three kinds of attachable properties, referred to the first as "tainted property" i.e. the properties where prima facie the source is traceable. This would also include the properties acquired or obtained using the tainted property as consideration. The second and third category were ordinarily to be treated as "untainted property" which have come within the ambit of the section because of the involvement of their owner in the proscribed criminality and because the tainted assets are not traceable or those found are not sufficient to fully account for the pecuniary advantage thereby gained. It was held that "for such untainted properties (held in India or abroad) to be taken away, the rider put by law insists on equivalence in value".

In order to confirm the provisional attachment order, it is imperative that some sort of assessment as to the value of wrongful gain is made by the specified criminal activity unless the same is impossible at such stage. The confiscation is to be restricted to the value of the illicit gains from the crime. The word "such property" used in the second part is unclear and undefined as compared to the term "equivalent in value" used in the third part which has a much clear and specific connotation. There is potential for multi-layered conflicts between the accused, a third-party and the ED/State. In such case where the possibility of conflict, involving interest of a third party, comes in for which the bonafides of the acts through which the third party may have acquired interest in the targeted property as regards the lawfulness and adequacy of the consideration for such acquisition, would require scrutiny. It was also held by the Hon'ble Delhi High Court that "in the opinion of this court, if the enforcement authority under PMLA has not been able to trace the "tainted property" which was acquired or obtained by criminal activity relating to the scheduled offence for money laundering, it can legitimately proceed to attach some other property of the accused, by tapping the second (or third) above-mentioned kind provided that it is of value near or equivalent to the proceeds of crime. But, for this to be a fair exercise, the empowered enforcement officer must assess (even if tentatively), and re-evaluate, as the investigation into the case progresses, the quantum of "proceeds of crime" derived or obtained from the criminal activity so that proceeds or other assets of equivalent value of the offender of money laundering (or his abettor) are subjected to attachment to such extent, the eventual order of confiscation being always restricted to take over by the Government of illicit gains of crime, the burden of proving facts to the contrary being on the person who so contends."

The lawful interest of a third party which may have acted bonafide and with due diligence, cannot be put into jeopardy. If there is no direct / indirect involvement of any person or property with the proceeds of the crime nor there is any aspect of knowledge in any person with respect to involvement or assistance nor the said person is a party to the said transaction, then it cannot be said that the said person is connected with any activity or process with the proceeds of the crime.

The same principle should be applied while judging the involvement of any property or any person in money laundering. If the property has no direct involvement in the proceeds of the crime and has passed on hands to the number of purchasers which includes the bona fide purchaser without notice, the said purchaser who is not having any knowledge about the involvement of the said property with the proceeds of the crime nor being the participants in the said transaction ever, cannot be penalised for no fault of his. Therefore, it cannot be the scheme of the Act whereby bona fide person without having any direct / indirect involvement in the proceeds of the crime or its dealings can be made to suffer by mere attachment of the property at the initial stage and later on its confirmation on the basis of mere suspicion when the element of mens rea or knowledge is missing.

It is clear from the aforesaid scheme of the PMLA that any property can be provisionally attached under Section 5 or be seized under Section 17 or be frozen under Section 17(1A) of the PMLA. However, any such order can be passed only if the necessary checks and balances are complied with; namely, that the seizure or attachment is preceded by the concerned authority having reason to believe that such properties are proceeds of crime or are otherwise related to crime. Further, such reasons to believe must be formed on the basis of material in possession of the concerned officer and must be recorded in writing. In addition, such orders cannot be extended beyond the period of 180 days, within which the Adjudicating Authority has to examine the matter and pass an order after issuing notice to the concerned persons and after affording the concerned person full opportunity to be heard .

The Scheme of PMLA clearly provides the mechanism whereby the innocent parties can approach the Adjudicating Authority for the purposes of release of properties which have been attached in terms of the provisions of Section 5 of the Act. This can be seen by reading Section 8(1) and the proviso to Section 8(2) of the Act whereby Adjudicating Authority has to rule whether all or any of the properties referred to in the notice are involved in money laundering or not.

In light of the aforementioned, and in view of the unbridled powers ascribed to the ED by virtue of the provisions of the PMLA, if all ingredients of section 3 and 5 are met with, and the property is believed to be "proceeds of crime" likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds if crime, the same may be provisionally attached.

To summarise:

• The process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-à-vis the offence of money-laundering.

• The Authorised Officer is expected to assess, even if tentatively, the value of proceeds of crime so as to ensure such proceeds or other assets of equivalent value of the offender of money-laundering are subjected to attachment, the evaluation being open to modification in light of evidence gathered during investigation.

• It may be noted that in case of non-traceability of the tainted property, the alternate attachable property only up to the value of proceeds of crime may be attached.

• In case of involvement of third party, the third party will have the additional burden to prove that it had exercised due diligence having "taken all reasonable precautions" at the time of acquisition of such interest or creation of such charge, the jurisdiction to entertain and enquire into such claim and grant relief of release after order of attachment has attained finality, or of restoration after order of confiscation, vesting only in the special court under Section 8(7) & (8) PMLA. The due diligence is to be tested amongst others, on the touchstone of questions as to whether the party had indulged in transaction after due inquiry about untainted status of the asset or legitimacy of its acquisition.

A party in order to be considered as a "bonafide third party claimant" for its claim in a property being subjected to attachment under PMLA to be entertained must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money laundering, and that it has made all compliances with the existing law including, if so required, by having said security interest registered.

The challenge faced by in-house counsels while advising the organisation on acquisition of the property for its company is to ensure that the concerned property is related to 'proceeds of crime'.

The ED often attaches properties, which may be mortgaged with banks /financial institutions, properties which are sold to bonafide buyers for proper consideration, properties acquired way before the commission of the scheduled offence and in many cases even ancestral properties acquired and possessed even before the commencement of the PMLA itself. The Hyderabad High Court in the matter of Satyam Computers Services Ltd. vs Director of Enforcement, Government of India & Ors, held that, in the case when the "proceeds of crime" are untraceable, or have been disposed of in a manner where tracing them would be impossible, in that case, the untainted or clean properties cannot be attached.

Again, in the matter of Abdullah Ali Balsharaf & Ors. vs. Directorate of Enforcement and Ors., the Delhi High Court held that, according to the amended section 2(1)(u), if the "proceeds of crime" are held abroad, then any property of the accused person held by him in India can be attached to the extent of the value of the "proceeds of crime", held abroad. The court held that in such circumstances even the untainted property can be attached which may have been acquired prior to the commission of the offence or the PMLA itself.

Hence necessary due diligence of the property and the person concerned should be done to rule out any possibility of 'proceeds of crime'.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.