The Finance Act, 2019 (the 2019 Act) is the Central Government’s endeavour to tighten the gaps around the existing provisions of the Prevention of Money Laundering Act, 2002 (PMLA). Amidst the growing number of financial crimes and high-profile cases, the 2019 Act attempts to make the existing provisions stricter and better armoured to detect suspicious transactions. Additionally, the Act, along with the other amendments, has a greater aim of targeting money laundering and terrorist financing. The 2019 Act attempts to remove the ambiguity in the existing provisions by amending eight clauses of the PMLA.
Crime and Punishment
In cases of money laundering, a major ambiguity exists in the PMLA’s clause concerning what constitutes ‘proceeds of crime’. This ambiguity, the Directorate of Enforcement (ED) has contended, adversely affects its ability to investigate the money trail, the adjudication of attachments before the PMLA Adjudicating Authority and Tribunals, as well as the trial of the offence of money laundering under PMLA.
In considering the ED’s views of the PMLA, the Government, through these amendments, has made the anti-money laundering laws stricter by expanding the ambit of the “proceeds of crime”. The scope now includes properties and assets created, derived, or obtained through any criminal activity related to the scheduled offence, even if it is not under the PMLA. This is aside from the existing definition, which covers any direct or indirect attempts to indulge or knowingly assist or knowingly participate or actual involvement in any process or activity connected with the proceeds of crime, including its concealment, possession, acquisition or use and projecting or claiming it as untainted property. A property will be considered as tainted if it relates to any offence on the basis of which a PMLA case has been initiated.
Furthermore, the 2019 Act offers clarification to Section 3 of the PMLA to the extent that a person shall be held guilty of the offence of money-laundering if he is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly was a party or was actually involved in any one or more of the processes or activities included in Section 3. The 2019 Act clarifies that it would be incorrect to interpret money laundering as a one-time, instantaneous offence that ceases with the concealment or possession or acquisition or use or projection of the proceeds of crime as untainted property or claiming it as untainted. A person shall now be considered guilty of the offence of money laundering for as long as the said person is enjoying the “proceeds of crime” – thus, making the offence of money laundering a continuous offence.
The legislative intent here appears to be to prosecute and attach all proceeds of crime, however remotely related. A key proposed change in the definition of “proceeds of crime” would allow the ED to proceed against assets of equivalent value located even outside the country.
The 2019 Act deletes the proviso contained in Sections 17 (1) and 18 (1) and empowers the ED to undertake search actions even in the absence of a report under Section 157 of the Code of Criminal Procedure, 1973 (CrPC). The 2019 Act broadens the existing powers of the ED under the PMLA provisions – by bringing Sections 17 and 18 at par with Section 19 – where there is no pre-condition to forward a report under Section 157 of CrPC or to seek warrants from the Court for making an arrest. An arrest can be made for an offence under the PMLA even in the absence of a First Information Report (FIR).
It is evident that the legislative attempt here is to remove the ED’s difficulties in investigation by removing the necessity to follow the provisions of Chapter XII CrPC, which could be perceived as cumbersome. However, this may be highly susceptible to misuse and likely to face legal challenge for legislative overreach despite the inbuilt safeguards in the PMLA. The amendments are to effectively clarify that the officers of the ED do not require the powers of police under the CrPC for investigation and that the prevailing misconception that Chapter XII of the CrPC applies is inconsistent with the object and intent of Section 65 of the PMLA.
In the Lok Sabha, the Minister for Finance mentioned that a proviso would be inserted to ensure that where a case exists in one court and the hearings are going on, and, simultaneously, there are proceedings happening in a different court– the two proceedings cannot be clubbed together and treated as one.
Furthermore, a new proviso to Section 44 (1) has been inserted, which provides for closure of investigation in cases where no offence of money-laundering is made out. It requires filing of complaint under Section 44 (1) (b), and the relevant authority to submit a closure report before the Special Court under the PMLA.
The Government has also brought changes to Section 5(1) to exclude the period of stay granted by a Court from the 180-day limit for the validity of provisional attachment orders and also to provide a further period of not more than 30 days to take care of delays in communication of judicial orders. Earlier, the ED had to seek a waiver.
The proposed Section 8(3) of the Act gives 90 more days to the ED to file charge sheets, after confirmation of attachment orders by the adjudicating authority. The existing provision does not allow even a single day after the orders are confirmed. The 2019 Act also includes a crucial amendment that empowers the Special Court to restore confiscated assets to the rightful claimants even during the trial. The amended Section 8(8) now allows the Special Court, if it deems fit, to consider the claims for the purposes of restoration of such properties also during the trial. Earlier, the assets could be restored only after completion of the trial.
Section 45 – Old Wine, New Bottle
Section 45 of the PMLA Act provides that no person can be granted bail for any offence under the Act unless the public prosecutor, appointed by the Government, gets a chance to oppose his bail. If the public prosecutor does so, the court has to be convinced that the accused was not guilty of the crime and additionally that they were not likely to commit any offence while out on bail. The excessive bail conditions imposed by Section 45 had been previously set aside in November, 2017 by the Supreme Court of India on grounds of unconstitutionality.
In a move to de-link PMLA proceedings from those in scheduled offences pursued by other agencies, an amendment has been brought to Section 45(1) which proposes uniform applicability of bail conditions, instead of only those crimes listed in its schedule that attract more than three years’ imprisonment. A further limit of INR 1 crore (USD 140,200) involved in the alleged offence would allow the court to apply bail provisions more leniently to less serious PMLA cases. Section 45 of the PMLA has been tweaked in order to make it difficult for launderers to get bail if the offence is cognisable. The norms empower the investigating agency to arrest without a warrant if the conditions entailed in the section are fulfilled. The amendment reads, “[It] is clarified that the expression ‘offences’ to be cognisable and non-bailable shall mean to have always meant that all offences under the Act shall be cognisable notwithstanding anything to the contrary contained in the Code of Criminal Procedure.”
To make the PMLA more effective in terms of detecting and preventing money laundering and other financial crimes, the 2019 Act introduces greater and more nuanced reporting obligations for the reporting entities, who will now have to do a detailed authentication with regard to transactions that look suspicious or carry a high risk of money laundering or terror financing.
The 2019 Act inserts Section 12AA, which mandates authentication of the clients undertaking specified transactions. These include requiring every reporting entity to take additional steps to examine a client’s ownership and financial position, including sources of funds of the client, prior to the commencement of each transaction.
The focus of the amendment is to enhance due diligence conducted by the regulators, requiring reporting entities to take additional steps to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transacting parties. In cases where the client fails to fulfil the conditions as stated in the provision, the reporting entity shall not allow the specified transaction to be carried out.
To detect dubious transactions, where any specified transaction or series of specified transactions undertaken by a client are considered suspicious or likely to involve proceeds of crime, the reporting entities are required to increase the future monitoring of the business relationship with the client, including greater scrutiny of transactions in such manner as may be prescribed by law, including Aadhaar-based verification and authentication. It further mandates that such information obtained while applying the enhanced due-diligence measures under Section 12AA shall be maintained for a period of five years from the date of the transaction between a client and the reporting entity – which further raises concerns regarding data storage and protection, as well as raises concerns over customer’s right to privacy.
The Government has introduced a new Sub-Section (2) to Section 66, making it mandatory for the ED to share relevant details with other agencies in order to ensure effective information sharing in compliance with the Financial Action Task Force (“FATF”) Recommendations. There is also a suggestion to create an inter-agency task force to combat money laundering and terror financing. Another suggested change is the inclusion of Section 447 of the Companies Act in the list of scheduled offences under the PMLA, which will allow the Registrar of Companies to report suitable cases to the ED for a money laundering probe.
PMLA v IBC
The Act does not adequately address the issue of attachment of property between the PMLA and the Insolvency and Bankruptcy Code (IBC). The process of attachment of property under the PMLA often collides with the Corporate Insolvency and Restructuring Process (CIRP) under the IBC and is likely to frustrate the very objective of CIRP. Although this is yet to be finally decided by the Courts where it is pending judicial determination.
In March, 2019, the PMLA Appellate Tribunal held that the IBC overrides the PMLA and, as per Section 14 (1) (a) of the IBC, the moratorium on any kind of proceedings shall be imposed, particularly with regard to the attachment of the property. It further held that the ED established under the PMLA Act had no jurisdiction in respect of the properties and assets in the current civil proceedings of the corporate debtor undergoing CIRP. The tribunal had held that third parties, banks in this case, which have legitimately created rights such as a charge, lien or other encumbrances, have a superior claim over such properties.
By contrast, while deciding the batch of appeals by the ED, the Delhi High Court in April, 2019, held that the PMLA prevails over the IBC when it comes to the attachment of properties obtained as “proceeds of crime”. The court said the Prevention of Money Laundering Act, Recovery of Debt and Bankruptcy Act (RDBA), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) and the IBC must co-exist and be enforced in harmony with the PMLA.
On the other hand, in the case relating to Rotomac Global Pvt. Ltd., the National Company Law Appellate Tribunal (NCLAT) has said that the Prevention of Money Laundering Act, 2002 gets invoked simultaneously with the IBC and that neither of the laws has an overriding effect over the other.
The NCLAT, citing the provisions of the PMLA, said it relates to “proceeds of crime” and the offence relates to “money-laundering”, resulting in the confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
“Thus, as the ‘Prevention of Money Laundering Act, 2002’ or provisions therein relates to ‘proceeds of crime,’ we hold that Section 14 of the Insolvency and Bankruptcy Code is not applicable to such proceeding,” the NCLAT held.
Further clarity is needed with regards to the practical implementation and implication of the PMLA, especially in relation to the provision on attachment of property. The 2019 Act widens the ambit of the Act and endeavours to push the regulating authorities to monitor, detect and prevent future financial crimes by flagging suspicious transactions and clients, instead of playing the part of a silent spectator.