The PMLA – is the net cast too wide

The Prevention of Money Laundering Act, 2002 (‘PMLA’) has undergone multiple amendments after it was brought into operation on July 1, 2005. Most recently, the PMLA was amended through the –

  • Finance Act, 2015 (‘2015 Amendment’)
  • Finance Act, 2018 (‘2018 Amendment’)
  • Finance Act, 2019 (‘2019 Amendment’)

These amendments aimed to plug loopholes in the operation of the PMLA – to strengthen the framework for tackling money laundering. In furtherance of this objective, the 2019 Amendment has clarified the definition of “proceeds of crime” under Section 2(1)(u). Amendments were also made to Section 45, following the Supreme Court’s decision in the Nikesh Tarachand Shah[1] case – which struck down the pre-conditions for bail prescribed under Section 45(1). Over the years, the list of “scheduled offences” under Schedule I of the PMLA has also been amended significantly. Another aspect that arises in many PMLA proceedings is the admissibility of statements made to investigating officers.

In this blog, we shall examine recent developments regarding these aspects, and highlight issues where conflicting viewpoints have been taken.

Definition of “proceeds of crime”

Under Section 2(1)(u), “proceeds of crime” refers to the property derived directly or indirectly by any person, as a result of criminal activity relating to any of the “scheduled offences” covered under the PMLA. Section 2(1)(u) must be read in consonance with Section 3, which states that a person shall be guilty of the offence of money laundering if he performs any process or activity connected with the “proceeds of crime”.

Through the 2015 and 2018 Amendments, it has been clarified that if the property is taken or held outside India, then the “proceeds of crime” shall also include the property equivalent in value held within the country or abroad. The 2019 Amendment added an Explanation to Section 2(1)(u), to broaden the ambit of property that shall be part of “proceeds of crime”. It was clarified that – “”proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence”.

The use of the words “relatable to” implies that any property derived as a result of criminal activity that has a proximate nexus with any scheduled offence shall also form part of “proceeds of crime”. Another unresolved issue here is whether the insertion of the “Explanation” to clarify the definition of “proceeds of crime” shall have retrospective effect. Article 20(1) of the Constitution prohibits ex post facto application of criminal law. But, it can be argued that the “Explanation” only clarifies the original meaning of “proceeds of crime”. Along with the scope of the words “relatable to a scheduled offence”, the Supreme Court shall also have to examine whether the Explanation to Section 2(1)(u) must be given retrospective effect for pending proceedings.

List of “scheduled offences”

Under the original PMLA, 2002, the list of “scheduled offences” included provisions from 6 legislations – (i) IPC, 1860; (ii) NDPS Act, 1985; (iii) Arms Act, 1959; (iv) Wildlife Protection Act, 1972; (v) Immoral Traffic (Prevention) Act, 1956 and (vi) Prevention of Corruption Act, 1988. Through the Prevention of Money Laundering (Amendment) Act, 2012 (‘2012 Amendment’) the original schedule was substituted and replaced with a fresh schedule – that included provisions from 28 legislations.

In 2015, Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (offence of wilful attempt to evade any tax, penalty or interest) was added as a scheduled offence. The 2018 Amendment made Section 447 of the Companies Act, 2013 (punishment for fraud) a “scheduled offence” under the PMLA.

From the initial list of 6 legislations, the PMLA now includes “scheduled offences” from 30 legislations. The list now includes many offences that are comparatively less serious in nature, such as Section 63 of the Copyright Act, 1957 (infringement of copyright) and Section 103 of the Trademarks Act, 1999 (penalty for applying false trademarks).

Inclusion of non-serious offences may dilute the objective of the PMLA. Between 2012-2018, 1067 cases were filed by the Enforcement Directorate (ED) under the PMLA. As of December 2019, only 13 persons have been convicted under the PMLA, in 9 cases. This data highlights the need to streamline the applicability of this statute, and ensure targeted focus on serious offences.

Section 45 – the aftermath of Nikesh Tarachand Shah

Under Section 45(1), there were two pre-conditions for bail – (i) the Public Prosecutor has been given an opportunity to oppose the bail application; and (ii) the Court is satisfied that reasonable grounds exist for believing that the person is not guilty of the offence, and the person is not likely to commit any offence while on bail. Prior to the 2018 Amendment, the bail pre-conditions were applicable when a person was accused of an offence punishable with imprisonment for 3 years and above, under Part A of the Schedule.

In Nikesh Tarachand Shah, the Supreme Court struck down these two pre-conditions for bail, for violating Article 14 and 21 of the Constitution. One of the reasons given by the Court was that the bail pre-conditions applied to separate and distinct offences under Part A of the Schedule, and do not relate to an offence under the PMLA. By virtue of Section 45(1), the Court does not apply its mind to whether the person is guilty of the offence of money laundering, but instead determines whether the person is guilty of a “scheduled offence” under other legislations. It was also held that the bail pre-condition under Section 45(1)(ii) reverses the presumption of innocence, by mandating the Court to determine whether the accused is “not guilty” of the offence.

Following this decision, Section 45(1) was amended in 2018. The 2018 Amendment replaced “punishable for a term of imprisonment of more than three years under Part A of the Schedule” with the words “under this Act”. The objective of this amendment was to alter the basis of the judgment in Nikesh Tarachand Shah – by making the bail pre-conditions under Section 45(1) applicable to all offences under the PMLA, and not solely to “scheduled offences”. This amendment has also been challenged before the Supreme Court.

Meanwhile, multiple High Courts have expressed divergent views on whether the 2018 Amendment alters the basis of the judgment in Nikesh Tarachand Shah. Most recently, in M Sivasankar v. Union of India[2] (January 25, 2021), the Kerala High Court opined that by virtue of the amendment to Section 45(1), the bail pre-conditions shall continue to apply, and shall not be affected by the Nikesh Tarachand Shah decision. On the other hand, the High Courts of Bombay[3], Madhya Pradesh[4] and Manipur[5] have taken the view that the amendment to Section 45(1) does not resurrect the bail pre-conditions that were struck down in Nikesh Tarachand Shah.

It is pertinent to note that one of the reasons given for striking down the bail pre-conditions was that Section 45(1)(ii) reverses the presumption of innocence, and puts the burden of proof on the accused to prove that he was “not guilty”. The 2018 Amendment has not altered the wording of Section 45(1)(ii). Hence, at least with respect to the reversal of the burden of proof, Parliament has not altered the basis of the Nikesh Tarachand Shah decision.

Admissibility of statements made to ED

Under Section 50(4) of the PMLA, all proceedings under Section 50(2) and 50(3) (dealing with summons, production of evidence etc) shall be deemed to be a “judicial proceeding” within the meaning of Section 193 and 228 of the IPC. As ED proceedings are “judicial proceedings”, statements made before the ED are admissible as evidence. This is a departure from the general rule under Section 25 of the Evidence Act, which states that confessional statements made to a “police officer” are not admissible as evidence.

In a recent judgment in Tofan Singh v. State of Tamil Nadu[6] (‘Tofan Singh’), the Supreme Court held that the “investigating officers” under the NDPS Act, 1985 shall also be deemed to be “police officers” – within the meaning of Section 25 of the Evidence Act. It was held that the term “police officer” under Section 25 should be given a broader meaning, and does not include only the State Police Force. As the NDPS Act does not have a non-obstante clause which excludes the applicability of the Evidence Act, it was held that the investigating officers shall be bound by Section 25.

The Court also noted that adequate safeguards should be present, when special legislations (such as the NDPS Act or Customs Act) provide that confessional statements made before investigating officers are admissible as evidence. This judgment shall also have implications in the PMLA context.

Section 71 of the PMLA states that the “Act shall have overriding effect”, and shall prevail over inconsistent provisions in other legislations. By virtue of Section 71, the provisions of the PMLA shall prevail over Section 25 of the Evidence Act. While Section 25 may not be an obstacle under the PMLA, it must be noted that the Tofan Singh judgment also stated that special legislations should contain adequate safeguards – when confessional statements made to investigating officers are admissible as evidence.

As specific safeguards are absent in the wording of Section 50 of the PMLA – the Supreme Court may read in certain safeguards in future, based on the spirit of the Tofan Singh judgment.

Concluding Thoughts

In Opto Circuit v. Axis Bank[7], the Supreme Court held that freezing of bank accounts of the accused undertaken without strict compliance with the pre-conditions prescribed under Section 17 of the PMLA shall be invalid. The Court emphasized that while the objective of the PMLA is to tackle money laundering, the statute simultaneously enlists safeguards to protect the rights of the accused.

Keeping in mind the spirit of the PMLA, there is a need for the Supreme Court to clarify the legal position for other aspects as well, such as the scope of the amended definition of “proceeds of crime”, and the safeguards to be followed when statements are recorded by investigating officers. The Supreme Court also needs to urgently examine whether the amendment to Section 45(1) has altered the basis of the Nikesh Tarachand Shah decision, as this issue arises in every bail application filed before High Courts.

It is also pertinent to note that the inclusion of “scheduled offences” from 30 different legislations has made the ambit of the law rather too wide, and has diluted focus of the ED from investigating serious offences. The list of “scheduled offences” needs to be reviewed and pruned for ensuring targeted focus on serious crimes.

[1] Nikesh Tarachand Shah v. Union of India, AIR 2017 SC 5500, November 23, 2017 (Supreme Court).

[2] M Sivasankar v. Union of India, Bail Application No. 7878 of 2020, January 25, 2021 (Kerala HC).

[3] Sameer Bhujbal v. Directorate of Enforcement, Bail Appliction No. 286 of 2013, June 6, 2018 (Bombay HC).

[4] Vinod Bhandari v. Directorate of Enforcement, MCr.C. No.34201/2018, August 29, 2018 (Madhya Pradesh HC).

[5] Okram Ibobi Singh v. Directorate of Enforcement, A.B. No. 42 of 2020, December 16, 2021 (Manipur HC).

[6] Tofan Singh v. State of Tamil Nadu, 2020 SCC OnLine SC 882, October 29, 2020 (Supreme Court).

[7] Opto Circuit India Ltd v. Axis Bank, 2021 SCC OnLine SC 55, February 3, 2021 (Supreme Court).