Money laundering: SC upholds ED’s powers

The Supreme Court has delivered the much-awaited judgment in the Vijay Madanlal Choudhary vs Union of India case. A batch of petitions had challenged the constitutionality of provisions under the Prevention of Money Laundering Act, 2002 (PMLA), related to the Directorate of Enforcement’s (ED) powers to attach assets, conduct search-and-seizure, and arrest individuals. The apex court has upheld the constitutionality of, among other things, the provisions contained in Sections 5, 8, 17, 19, 45, 50 and 63 of the PMLA.

The issue in question

The PMLA owes its inception to international efforts against money laundering and the associated rise in cross-border crimes such as drug trafficking and terrorism.

When the bill was introduced, the then finance minister stated that the proposed law against money laundering would deal only with receipts from certain “serious, heinous” offences identified by the legislature; without a predicate offence, the PMLA could not be invoked. The ED’s powers under the Act were thus checked by other statutory prerequisites and thresholds.

However, over the years, the essence of the PMLA was lost with multiple amendments. Critics raised concerns about how the PMLA had evolved to increase the scope for abuse of powers by authorities. Most of these issues were raised before the Supreme Court in the batch of petitions in the Vijay Madanlal case.

Proceeds of crime

The apex court has opined that the PMLA was neither a purely regulatory legislation nor a purely penal law, but an amalgamation of several essential facets aimed at tackling money laundering.

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It observed that the Act could be invoked only when “proceeds of crime” are derived, directly or indirectly, as a result of criminal activity related to a scheduled offence. The authorities cannot, under PMLA, act against anyone on the assumption that the property recovered by them must be proceeds of crime and a scheduled offence has been committed, unless it was registered as a complaint before a competent forum.

Attachment of property

Originally, Section 5 of PMLA allowed attachment of property only when a charge sheet was filed in the predicate offence. In 2009, an amendment provided for attachment of property in cases where it appeared that non-attachment would lead to frustration of the entire proceedings.

It was argued before the Supreme Court that this proviso opened the door for abuse of powers, for authorities could attach anyone’s property without a charge sheet filed under the predicate offence. The apex court disagreed; it opined that there were safeguards in Section 5 to protect the interest of the accused, such as the requirement of forming an opinion and setting out the reasons of belief necessitating the attachment.

Search-and-seizure powers

Originally, the PMLA permitted search-and-seizure operations under Sections 17 and 18 only when a complaint or charge sheet was filed on a predicate offence to prevent abuse of powers. In 2019, the safeguards were completely removed.

Disagreeing with the petitioners that the 2019 amendment removed the safeguards, the apex court opined that the PMLA was a self-contained law. Section 17 was designed to allow only high-ranking officials to act in search-and-seizure operations when they are fully satisfied about the basis of the information on money laundering. Further, officials under PMLA are required to record specific “reasons to believe” prior to conducting the search-and-seizure. Lastly, authorities could be punished under Section 62 if they conduct vexatious searches.

Twin conditions for bail

The PMLA, since its origin, contained two-fold conditions for granting bail under Section 45. First, the public prosecutor had to be given an opportunity to oppose the application for the release of the accused.

Secondly, where the public prosecutor opposed the application, the court must be satisfied that there are reasonable grounds to believe that the accused is not guilty of the alleged offence and is not likely to commit any wrongdoing while on bail.

The petitioners argued that the twin conditions of bail were struck down by the Supreme Court and held to be drastic provisions that conflicted with the established norm of presuming innocence of an accused, in the Nikesh Tarachand Shah vs Union of India case.

The Supreme Court observed that the defects pointed out in the Nikesh Tarachand case were removed by Parliament through a subsequent amendment — the legislature is empowered to cure defects when a law is struck down on constitutionality.

Even otherwise, the apex court held that it did not agree with many of the observations in the Nikesh Tarachand case.

Powers to record statement

The PMLA under Section 50 gives the ED the powers of a civil court and it can summon anyone to record their statement during an investigation.

Further, the ED can require the person to tell the truth — a wilful lie would lead to punishment under Section 63. The petitioners felt this was unlike the provisions of the Criminal Procedure Code and the Indian Evidence Act, where a statement given to the police is not admissible as evidence in a court. Thus, the concern was that the PMLA violates the right against self-incrimination and the right to silence.

The Supreme Court, while stressing the unique nature of the PMLA, opined that the power entrusted to officials, though couched as an investigation, was more in the nature of ascertaining facts. The officials are required to collate information and evidence that discloses the commission of the offence of money laundering. Thus, such powers could not be compared to provisions under CrPC to determine the constitutionality of the provisions of PMLA. The apex court also stated that in the absence of such powers the officials would end up conducting a paper inquiry, which would not serve any purpose.

The ruling in the Vijay Madanlal case, upholding the constitutionality of the provisions of PMLA, can be traced to the apex court’s observation that it is in the interest of the state to provide law enforcement agencies with a proportionate and effective mechanism to deal with money laundering offences. This is only possible through a stringent law. As to whether the amendments made to PMLA by way of a finance or money bill were tenable in law, the question was left open to a larger bench of seven judges in the Rojer Mathew vs South India Bank Ltd case (on the constitutional validity of Part XIV of the Finance Act, 2017, which made rules for tribunals).

The writers are advocates at Phoenix Legal, a law firm