Explained | What has the Supreme Court said on PMLA’s validity?
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How did the court deal with the Enforcement Directorate’s powers? Were all challenges rejected?

July 31, 2022 03:52 am | Updated 11:21 am IST

The story so far: The Supreme Court has upheld several provisions of the Prevention of Money Laundering Act (PMLA) that deal with a wide range of issues, from what constitutes the main offence to the powers of the Enforcement Directorate (ED) and the procedure for conducting searches and seizures and effecting arrests. The manner in which the Act is being implemented has come in for much criticism in recent years, as several investigations have been opened against political functionaries opposed to the BJP. The court has given its thumbs up to what are considered ‘draconian’ provisions, rejecting strong challenges to their validity.

What is the verdict broadly based on?

Since the mid-1980s, there has been global concern over the proceeds of criminal activities such as drug-trafficking being ‘laundered’ or and used in financing terrorism. The UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances adopted in Vienna in 1988 (Vienna Convention) was the first treaty that called upon nations to adopt domestic laws to combat drug trafficking. As part of these laws, countries were asked to prohibit the conversion or transfer of property gained through dealing in narcotics to conceal its illicit origin. The Financial Action Task Force (FATF) was established in the G-7 Summit in Paris in 1989 in response to mounting concern over money-laundering. The Task Force made recommendations from time to time to strengthen laws on the subject. The UN Convention against Transnational Organized Crime of 2000 (Palermo Convention) also advocated legislative and other measures to combat organised crime, and specifically called for ‘criminalising the laundering of proceeds of crime’.

Editorial | Narrow view: On the Supreme Court’s PMLA verdict

The PMLA was enacted in 2002 but came into force in 2005. Its provisions gave effect to India’s obligations to abide by international conventions. The Union government used this background to argue that PMLA provisions as well as subsequent amendments were valid and necessary to fulfil the country’s obligations to combat the menace of money-laundering. In its verdict, the Supreme Court agreed with the government’s contention. “Every provision in the 2002 Act will have to be given its due significance while keeping in mind the legislative intent for providing a special mechanism to deal with the scourge of money-laundering recognised world over and with the need to deal with it sternly,” it said.

What was a key issue over defining money-laundering?

The offence under this law is mainly the laundering of money made through a crime. It has a three-part schedule of offences (or ‘predicate offences’) listing the various crimes such as terrorism, drug-trafficking, corruption and cheating that give rise to tainted money. A major issue raised by the petitioners arose from an explanation added in 2019 to clarify the scope of the definition of money-laundering under Section 3. They said the original wording meant that only the projection of tainted money as untainted, and its integration into the economy would constitute the offence. The ED, they argued, was registering money-laundering case solely on the basis of the original crimes without any proof that their proceeds were laundered. As a result, even transactions that date back years before the PMLA came into force were being probed for laundering.

The court rejected the challenge, holding that the explanation does not expand the scope of the original definition, and it is only clarificatory. It aims to capture every process and activity dealing with the proceeds of crime. The generation of money through crime and its integration with the formal economy are independent offences. It will be wrong to say that only upon the latter activity that the offence of money-laundering is complete. In this context, the court interpreted the conjunction ‘and’ — used between a part that spoke of ‘possession, acquisition or use’ of proceeds of crime with the part ‘projecting or claiming as untainted’ — to mean ‘or’. This reading will render holding or using the proceeds of crime as much as an offence as the projecting or converting of the proceeds into legal money or property.

At the same time, the court clarified that the offence of money-laundering is dependent on illegal gain through the original crime (the scheduled offence). If a person is discharged or acquitted in respect of the original offence, or gets the case quashed through a competent court, there can be no case of money-laundering.

What were the issues concerning investigation by the ED?

The ED works on the basis of an internal manual. It registers an ‘Enforcement Case Information Report’ (ECIR), the equivalent of an FIR in ordinary cases. The manual is not a public document, and the ED does not share the ECIR with the accused. Therefore, why and how a money-laundering probe is initiated is unknown. When a summons is issued to a person, he is unaware of the reason, but must, nevertheless, attend and answer all questions and submit the documents asked for. The petitioners argued that this left any investigation, issue of summons and decision to order a search, seizure or arrest completely at the whim of ED officials. Unlike in other criminal cases, there is no judicial oversight of the process, and the accused are forced to seek bail after arrest without knowing the exact nature of the charges against them.

The court rejected all these contentions. Its conclusions were that: the ECIR cannot be equated with an FIR; that there are sufficient safeguards in the entire process of survey, search, seizure and arrest, in as much as the law requires the officer responsible to record reasons in writing at every stage. A copy of the ECIR need not be given to the accused, but at the time of arrest, the grounds of arrest should be conveyed. In any case, the Special Court can examine the documents to decide whether the detention of the accused needs to be continued.

The court suggested that the ED may consider the desirability of informing the public through its website the scope of the authority under the Act, the measures adopted by its functionaries and the options or remedies available to the accused.

What did the court say on ED summons?

When a person is summoned by a police officer, it is known whether it is for giving a statement as a witness or an accused. However, the ED has the power of a civil court to enforce the attendance of a person summoned under Section 50. Giving a statement and producing documents are mandatory obligations and it is an independent offence not to do so, and giving a false statement amounts to perjury. Also, such a statement should be signed by the person summoned and it can be used against him in a trial. This was challenged on the ground that the section is unconstitutional as it forces people to be witnesses against themselves, something prohibited by Article 20 of the Constitution.

However, the court rejected the idea that this amounts to testimonial compulsion. Rather, ED officers were not police officers, and the proceedings related to summons, being only an inquiry related to proceeds of crime, do not amount to an investigation. Therefore, it was open to the ED to gather material without treating the person as an accused, but nevertheless prosecute him later, if the information gleaned disclosed a money-laundering offence.

How did the Court uphold the stringent bail provision?

The petitioners had challenged the validity of the ‘twin conditions’ laid down in Section 45 of PMLA for grant of bail: that the court must be satisfied that there are reasonable grounds for believing that the accused is not guilty of an offence; and that he is not likely to commit any offence while on bail. In 2018, the Supreme Court had struck down this section, as it was originally worded, on the ground that the conditions only applied to those offences listed in Part A of the Schedule attracting a prison term of three years and more, but not for the offence of money-laundering itself. However, Parliament re-enacted the section with a change: that the conditions would apply to all cases under PMLA, without any reference to the scheduled offence. The court upheld Parliament’s power to enact a provision to cure a defect highlighted by the Supreme Court. It also ruled that given the gravity of the offence of money-laundering such stringent provisions related to bail are valid.

The court did not examine arguments based on the fact that some of the amendments were introduced in the form of Money Bills, as the issue concerning the scope of Money Bills is being separately considered by a seven-judge Bench.

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