Background: Original Objectives of Money Laundering Legislation
The Prevention of Money Laundering Act, 2002 ('PMLA') initially emerged as a robust tool against financial crimes in India. However, it has now evolved into an instrument with far-reaching powers, raising concerns about its overreach and potential for misuse. This evolution could be traced back to the era of Pablo Escobar, the infamous 'king of cocaine,' whose empire was worth USD 30 billion (about USD 70 billion today), highlighting the dire need for stronger international policies on drug trafficking and money laundering. His reign of terror underscored the urgency of global cooperation, leading to the United Nations ('UN') Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances ('NDPS') of 19881. This was the first international instrument to address the issue of proceeds of crime that mandated countries to criminalise the act of money laundering.
Against the backdrop of political and social upheavals of the 1970s and 1980s, this convention responded to the rising demand for various narcotics, which spurred illegal production. The growing illegal drug trade became a multibillion-dollar industry dominated by powerful criminal syndicates. Consequently, in 1989, the G7 established the Financial Action Task Force2 ('FATF'), an inter-governmental body setting international standards to prevent money laundering, terrorist financing, and the proliferation of weapons of mass destruction. The FATF's mission was to ensure the effective implementation of legal, regulatory, and operational measures against these threats to the global financial system. Following the 9/11 attacks in 2001, this framework was directly linked with combating terrorist financing and transnational organised crime. Notably, a. 2 of the UN Convention against Transnational Organized Crime defines 'serious crime' as an offence punishable by a maximum deprivation of liberty of at least 4 years or a more severe penalty3. Yet, the PMLA in India has transcended this definition, encompassing a broad spectrum of offences, effectively becoming a catch-all law.
In line with the FATF's recommendations, India enacted the PMLA, which came into effect on 01.07.2005. The Directorate of Enforcement ('ED') was responsible for enforcing the PMLA provisions. India joined the FATF as a member country in 2010, further aligning its financial regulations with international standards. The enactment of the PMLA was also influenced by the political declaration by the UN General Assembly (1998) on the theme 'Countering the World Drug Problem Together'4, urging member states to establish national anti-money laundering legislation.
This article traces the evolution of the law on money laundering in India. It demonstrates how it has become a 'belagam ghoda' (unbridled horse), as celebrated lawyer Mr. Kapil Sibal[5] stated while arguing before the Supreme Court in the landmark decision of Vijay Madanlal Choudhary6.
Scheme of PMLA in India
The PMLA was introduced in India to combat money laundering, a transnational issue destabilising the world and trickling down to the nation's economy. Some of its prime objectives, recorded in the PMLA's preamble, are to prevent money laundering, confiscate properties derived from or involved in money laundering, penalise offenders, and provide for matters connected with and incidental to the act of money laundering.
Money laundering involves making illegally obtained funds appear legal. This process generally involves three stages:
- Placement: The illegal funds are introduced into the formal financial system.
- Layering: The funds are moved through various transactions to obscure their origin.
- Integration: The funds are so thoroughly layered that it becomes difficult to trace them back to the crime, allowing the offender or another recipient to use the money as if it were legitimate.
The PMLA, under s. 3, defines money laundering as: "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, including its concealment, possession, acquisition, or use, and projecting or claiming] it as untainted property shall be guilty of the offence of money laundering." This broadens the scope of the offence to include concealment, possession, acquisition, use, projecting, and claiming as untainted property.
According to s. 2(1)(y) of the PMLA, the commission of any offence mentioned in Part A and Part C of the Schedule of the PMLA will attract its provisions. Some legislations that may attract the PMLA include:
- Part A: Indian Penal Code, 1860 ('IPC'); NDPS Act, 1985; Prevention of Corruption Act, 1988 (PCA); Arms Act (AA), 1959; Copyright Act, 1957; Trademark Act, 1999 ('TM Act'), Wildlife Protection Act, 1972 (WPA), Immoral Traffic (Prevention) Act, 1956 (ITA), etc.
- Part B: Offences that are Part A offences, but the value involved is Rs. 1 crore or more.
- Part C: Cross-border offences specified in Part A, offences against property under IPC, and offences of wilful attempt to evade any tax, penalty, or interest referred to in s. 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ('BM Act').
The PMLA was created to address the generation of illegal wealth from serious crimes. The Bill introduced in Parliament initially included a wide range of offences, even minor crimes like imitation of firearms7. However, the Standing Committee recommended narrowing this scope, leading to a two-category Schedule: Part A, for serious offences like waging war against the Government of India, and Part B, for other offences generating ill-gotten money above Rs. 30 lakhs. This delineation did not make the PMLA a toothless tiger, but it should be used judiciously in case of less serious offences.
Tracing the Amendments: Causes of Increased Breadth of PMLA
Since its enactment, the PMLA has undergone several amendments, particularly concerning the Schedule of offences that forms the basis of money laundering proceedings. From a schedule of 4 pages with 7 legislations and over 40 line items, it now stands at 10 pages, 30 legislations, and over 140 line items. Surprisingly, the Schedule does not include the Foreign Exchange Management Act, 1999, and the Income-tax Act, 1961, while including legislations such as the Emigration Act, 1983, Passports Act, 1967, Foreigners Act, 1946, and the Protection of Plant Varieties and Farmers Rights Act, 2001, which may not be as integral to national sovereignty or global economic stability.
The first amendment to the legislation, made in 20058, revised s. 45 of the PMLA, making the stringent twin bail conditions uniformly applicable to all offences under the act rather than only to offences listed in Part A of the Schedule. The 20099 amendment introduced a key development by including s. 120B of the IPC (criminal conspiracy) and added approximately 40 further line items to various parts of the Schedule. This amendment also broadened the scope and jurisdiction of the ED by amending ss. 8 and 17 of the PMLA.
At this point, pressure mounted on the government to make India a full-fledged member of the FATF, especially after the 2008 Mumbai attacks. Achieving full membership required India to strengthen its PMLA framework. One FATF recommendation was to remove the Rs. 30 lakh thresholds. Instead of eliminating the threshold, Parliament shifted most offences from Part B to Part A through the 201210 amendment, which also had a retrospective effect. This shift marked a significant departure from the original 'serious crime' approach of the PMLA. This amendment criminalised actions such as concealment, acquisition, and use of proceeds of crime, which were not previously addressed. The amendment replaced the original Part A, which comprised scheduled offences from only 6 legislations, with a fresh schedule encompassing offences from 28 legislations, significantly broadening the jurisdiction of the ED and the PMLA itself.
The amendments of 2015, 2018, and 2019, passed as money bills in Parliament, circumvented the Rajya Sabha, giving the Government an upper hand in securing favourable outcomes. This approach raises concerns about the intentions behind these amendments. The 201511 amendment added s. 51 of the BM Act (offence of wilful attempt to evade any tax, penalty, or interest) as a scheduled offence. In 201812, s. 45 was amended, replacing the reference to offences under Part A of the Schedule with the expression 'under this Act', making it difficult to obtain bail under the PMLA due to the applicability of twin conditions to all offences without exceptions. Additionally, s. 447 of the Companies Act, 2013 (punishment for fraud) was included as a scheduled offence under the PMLA. In 201913, an amendment added an explanation to s. 2(1)(u), broadening the definition of property considered as proceeds of crime. It clarified that proceeds of crime include property derived or obtained not only from the scheduled offence but also from any criminal activity related to the scheduled offence. This shift indicates a change in Parliament's focus, from tackling proceeds of serious crimes to targeting laundering from all types of crimes, thus turning the PMLA into an unbridled horse racing beyond its original mandate.
Judicial Tussle on PMLA
While the Supreme Court upheld the constitutional validity of the PMLA and its broad powers, these rulings underscore the PMLA's potential for misuse. The acceptance of sweeping powers for the ED, the stringent bail conditions under PMLA, and the presumption against the accused under s. 24 of PMLA often become tools for arbitrary and politically motivated actions in the country.
Nikesh Tarachand Shah (2017)14: This landmark decision challenged the implied principle under the PMLA that an accused is presumed guilty until proven guilty. The Supreme Court viewed s. 45 as a drastic provision that overturns the presumption of innocence in general criminal jurisprudence. Consequently, these provisions were struck down as unconstitutional. However, Parliament reinstated them by amending the PMLA in 2018.
Vijay Madanlal Choudhary (2022) (supra): In this case, a three-judge bench of the Supreme Court upheld the constitutional validity of certain provisions of the PMLA, which were under challenge in a batch of more than 200 individual petitions. The primary challenge was against the alternate criminal law system that the PMLA creates since the ED is kept outside the purview of the Criminal Procedure Code, 1973 ('CrPC'). As the ED is not considered 'police', it does not follow the provisions of the CrPC for searches, seizures, arrests, and attachment of properties. Statements made by an accused to the ED are admissible in court and hold substantial evidentiary value during the trial. Despite these concerns, the court upheld these sweeping powers of the ED. In this case, Mr. Kapil Sibal famously argued against the Centre, referring to the PMLA as an 'unbridled horse' that violates the provisions of as. 14 and 21 of the Constitution of India.
The Impact of Legislative Overreach
While the PMLA has victimised chief ministers, famous politicians and businessmen almost always become subjects of investigation under the PMLA. However, at the beginning of 2024, the ED issued summons to 2 farmers in Tamil Nadu for an alleged land-grabbing case15, showcasing how the broad scope of the PMLA can extend to cases far removed from its original intent. This instance highlights the potential misuse of the PMLA for political purposes rather than its intended aim of combating money laundering.
The PMLA, as a special criminal law, deviates markedly from the general criminal procedure under the CrPC, and the ED operates outside the usual procedures of the CrPC in several crucial aspects. Special criminal laws like the PMLA alter standard procedures to handle crimes with significant impact: the accused is presumed guilty until proven innocent, bail is not a rule, but jail is, and the ED is not required to share the enforcement case information report ('ECIR')16 with the accused, and self-incriminating statements to ED officers are admissible. The Supreme Court has upheld these deviations as necessary to combat exceptionally heinous crimes.
The dilution of PMLA provisions critically impacts arrest and bail. Following the 2012 amendment, even minor crimes, such as cheating under s. 420 of the IPC were moved to Part A, subjecting offenders to a harsher bail regime where bail is denied unless the accused can prove their innocence, at least at the prima facie level. Under Part B, general bail rules would have applied. Still, the amendments have had an effect in that PMLA allows for the imprisonment of individuals for non-serious crimes without court intervention, increasing the risk of political misuse.
Where Do We Stand Today?
Considering the transformation of PMLA—what was once a strategic trump card against money laundering has now morphed into a trump card with unchecked powers. Originally created to prevent, detect, and punish money laundering offences, the PMLA aimed to tackle figures like Pablo Escobar, who exploited weak policies on drug trafficking and money laundering to amass immense wealth and influence. However, this same PMLA has controversially been used to issue summons against senior citizen farmers in Tamil Nadu in an alleged land-grabbing case, highlighting potential misuse.
The debate over widening the scope of scheduled offences under the PMLA and its consequences is not new. Over time, legislative amendments have broadened its scope to the point where offences under the Unlawful Activities (Prevention) Act, 1967, are treated at par with infringement cases under the TM Act. Instances, where the ED appears to target opposition leaders, undermine institutional impartiality and foster arbitrariness. According to recent government submissions before the SC, the ED has investigated 4,700 cases under the PMLA since its inception, with annual investigations surging from 111 in 2015-16 to 981 in 2020-2117. While the PMLA is a special law with extraordinary powers, its routine application risks severe prejudice to the rights and liberties of individuals.
A probable way forward is to categorise scheduled offences based on their seriousness. Serious offences that impact society on a larger scale should be under Part A, and lesser offences from other legislations should fall under Parts B and C, limiting the ED's powers and aligning the rights of the accused with those of the CrPC. Additionally, the legal status of the ED as police officers and their accountability in sharing ECIR and recording statements needs clarification by the court. Establishing accountability for investigating agencies is crucial to prevent the misuse of powers. Clear guidelines and accountability measures are essential to ensure that the PMLA serves its intended purpose without becoming an instrument of misuse. Without such measures, the seizure of properties and prolonged custody of accused individuals, who may eventually be acquitted, results in unnecessary physical, mental, social, and economic harassment. Establishing these guidelines and accountability measures is essential to maintaining the PMLA's integrity and preventing misuse.
Footnotes
1 https://www.unodc.org/pdf/convention_1988_en.pdf
2 https://www.fatf-gafi.org/en/the-fatf/who-we-are.html
3 A. 2(b), UN Convention Against Transnational Organized Crime, Turin, 22-23 February 2002. (Adopted by the General Assembly on 15.11.2000 (excerpts)).
4 https://press.un.org/en/1998/19980610.ga9423.html
5 'How PMLA lost its procedural fairness, Counsel explains to the Supreme Court' (2022) The Leaflet, 2 February. Available at: https://theleaflet.in/how-pmla-lost-its-procedural-fairness-counsel-explains-to-the-supreme-court/
6 Vijay Madanlal Choudhary v. Union of India, 2021 SCC OnLine SC 3286.
7 Sekhri, A. (2024) 'PMLA: From Prosecuting Drug Lords to Going after Critics and Farmers?', Supreme Court Observer, 25 January. Available at: https://www.scobserver.in/journal/pmla-from-prosecuting-drug-lords-to-going-after-critics-and-farmers/
8 The Prevention of Money-Laundering (Amendment) Act, 2005. No. 20 of 2005 [21.05.2005].
9 The Prevention of Money-Laundering (Amendment) Act, 2009. No. 21 of 2009 [06.03.2009].
10 The Prevention of Money-Laundering (Amendment) Act, 2012. No. 2 of 2013 [03.01.2013].
11 The Prevention of Money-Laundering (Amendment) Act, 2015. No. 22 of 2015 [w.e.f. 01.04.2016].
12 The Finance Act, 2018. No. 13 of 2018 [28.03.2018].
13 The Finance Act, 2019. No. 7 of 2019 [21.02.2019].
14 Nikesh Tarachand Shah v. Union of India, (2018) 11 SCC 1
16 Vijay Madanlal Choudhary, supra
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