Challenges to the Prevention of Money Laundering Act | Judgement Summary

Expanding the definition of ‘money laundering’

Section 3 of the PMLA states that any involvement in any activity “connected with the proceeds of crime and projecting it as untainted” can constitute money laundering. According to the petitioners, for an offence of money laundering there should be (a) an activity connected to the “proceeds of crime”, and (b) the proceeds should be misrepresented as “untainted.” The attempt to show black money as white money is crucial to constitute such offence. 

The Court rejected this argument.  It held that it was not necessary to fulfil both conditions, stating that the word “and” in Section 3 should be interpreted as “or.” Thus, if there is no effort to misrepresent the “proceeds of crime” as “untainted” it can still attract an offence under PMLA. This interpretation, it said, aligned with the objective of PMLA, which was to  “penalise every process and activity dealing with proceeds of crime, not limited to the final act of integration of the proceeds into the formal economy as untainted.” 

Validating the powers of  ‘Search and Seizure’

Section 17 states that the Director of the ED has the power to authorise a “search and seizure” of any premises where they have a “reason to believe” that a person has committed money laundering, or is in possession of  “proceeds of crime”, “records relating to money laundering” or “any property” related to the crime.  Petitioners had argued that search and seizure could not be conducted without an FIR being registered in the original offence. They  contended that standard safeguards to prevent any arbitrary misuse of power, such as magisterial oversight—as found under the CrPC—were not given under PMLA.

A proviso which stated that  no search could take place  before the magistrate took cognizance of the matter was amended and removed in 2019. Petitioners had challenged this amendment as well. .

The Union argued that the Act was a “self-contained” special  legislation. They relied on  Section 71 of PMLA, which stated that PMLA had an overriding effect over other laws. 

The Court held  that Section 17 had an overriding effect over the CrPC’s procedure. It assured that there would be no arbitrary misuse of the provision as it had  some “in-built” safeguards for search and seizure. These included the requirement that the ED official must record, in writing, the reasons that form their “belief” that a money laundering offence had taken place. These safeguards, the Court said, pushed back against the possibility of abuse of power and violations of Articles 14 and 21.

On the challenge to the amendment, the Court said it will not interfere since it was based on Parliament’s wisdom.

Arrest powers are not arbitrary

Section 19 of PMLA gives the ED power to arrest if the officer has “reason to believe” on the basis of material in his possession, that the person is guilty. Petitioners argued that such a  power was arbitrary as the arrest was carried out at the inquiry stage without  a formal complaint of the “scheduled offence.” They argued that since PMLA was a penal statute, ED officers were bound to follow the CrPC.  

The Court underlined that the aim of PMLA was “not limited to provide for prosecution” of money laundering, but “mainly intended to prevent money laundering activity”. Section 19 was phrased as allowing this object to be realised. It pointed out that the Foreign Exchange Regulation Act, 1973, and the Customs Act, 1962 also allowed arrest to take place at the inquiry stage.

The Court highlighted that there were various “preconditions to be fulfilled” by the ED officers before arresting under Section 19, which acted as “safeguards.” 

These safeguards hold the ED officers accountable for their decision to arrest a person. As per Section 19: 

1. The arrest has to be on the basis of material in possession with the ED
2. There is reason to believe that the accused is guilty of the offence, with the reason recorded in writing
3. The grounds for arrest should be communicated with the accused

If the ED officer’s actions are considered “vexatious”, he can be punished under Section 62. Further, Rules framed under Section 73 prescribe the specific manner by which a copy of order of arrest is forwarded by ED officials to the “Adjudicating Authority.” The Adjudicating Authority is a body formed by the Union which confirms the attachment of properties. 

Shifting of the Burden of Proof cannot be declared unconstitutional

Section 24 states that once the prosecution proves that the accused received proceeds generated from the original ‘scheduled offence’, it is  presumed that they tried to launder the proceeds. The burden of proof is now on the accused to prove that the proceeds are not connected to money laundering. 

Senior Advocate Abhishek Manu Singhvi, for petitioners, had contended that this reversed burden of proof violated the accused’s right to liberty guaranteed under Articles 14, 19, 20 and 21. 

The Court held that Section 24 did not ‘reverse’ the burden of proof—it only ‘shifted’ the burden. It stated that the accused is required to “dispel the suspicion” if there was a “legal presumption” against them. The Court noted that the provision cannot be declared unconstitutional merely because the “burden of proof” is shifted. It was merely a rule of evidence which can be shifted.

Bail conditions pass the constitutional test

Section 45 has twin bail conditions. 

1. There should be reasonable grounds for believing that the person is not guilty. 
2. The person won’t commit any offence on bail. 

This is different from the CrPC, where guilt is irrelevant for granting bail. Under PMLA, there is a presumption of guilt on the accused which they have to disprove to get bail.  

In an older version of the PMLA, the first condition stated that it would be presumed that the accused was guilty of the ‘scheduled offence’, and the reversed burden of proof on the accused was to disprove their involvement in the scheduled  offence. In Nikesh Tarachand Shah v Union of India (2017), a Division Bench of the Court ruled that the first condition was unconstitutional. Right after this in 2018, this condition was amended, and the new version stated that the reversed burden of proof on the accused was now to disprove their involvement in the ‘money laundering’ offence, and not the ‘scheduled offence’.

Petitioners argued that Section 45 became inoperative after Tarachand Shah. They  further argued that the 2018 amendment had not rectified the fundamental problem with the first condition, which was that it reversed the burden of proof.

The Court disagreed. It noted that Tarachand Shah had declared the twin conditions to be unconstitutional, only because the reversed burden of proof was regarding ‘scheduled offences.’ But after the Parliament’s amendment in 2018, which removed the condition,  the defect was “duly cured.” Because of this, the Court said, Section 45 got “revived.”

Further, The Court held that the bail conditions were neither arbitrary nor violative of the Constitution and had reasonable nexus with the objective of law. 

The Court did outline some safeguards. While Section 45 was stringent, it noted that it did not restrain bail. It expressed that courts are not supposed to determine the guilt of the accused while granting bail. They have to only study the material on records to derive the probability that an offence was committed. 

Unlike many other places where the Court said that PMLA overrides CrPC, here it said that certain bail-related safeguards from CrPC will apply to the Act defendants. For instance, it said that a PMLA accused has the right to file for default bail under Section 167 of CrPC. 

ED’s wide powers to attach accused’s property upheld

Section 5 of the Act states that if the ED officer has “reasons to believe” the guilt of the accused, he can provisionally attach “any property” which is connected to money laundering. The first proviso of Section 5 states that property can only be attached after a police report or private complaint regarding the “scheduled offence.”  The second proviso states that “any property” can be attached in situations where not attaching some property on an immediate, emergency basis would lead to a “frustration” of the proceedings. 

Petitioners challenged the second proviso on the ground that it violated the first proviso.  Senior Advocate Meneka Guruswamy pointed out that the PMLA was the only legislation, apart from UAPA, which allowed for attachment before the conviction stage.

The Court upheld Section 5 in entirety. It clarified that “any property” does not include all properties of the accused but only refers  to “property which appears to be proceeds of crime.”It  explained that the second proviso has an “overriding effect” on the first proviso as property is attached on an emergency basis. 

ED’s power to summon and record statements from persons does not violate the right against self-incrimination

Under Section 50 the ED can summon any person, who need not be an accused, to record their statement in an ongoing investigation. . A person can also be arrested or fined for non-cooperation and providing false information under  Section 63. Petitioners had challenged Section 50 on the ground that it violated the  right against self incrimination under Article 20(3) and due process of law under Article 21. Senior Advocate Kapil Sibal for the petitioners had argued that the accused had a fundamental right to silence.

The Court held  that the right against self incrimination is only available for an accused person. A person summoned under Section 50 was not necessarily an accused.  It clarified that Section 50 was not intended to initiate prosecution against the summoned person. It was only to facilitate the smooth obtaining of information.  It also noted that the recording of statements under Section 50 could not be considered a violation of ‘procedure established by law’ under Article 21.

ED is not bound to give a copy of ECIR to the accused

Under the Act, an accused can be arrested without a formal charge sheet. They are not  informed of the allegation and evidence against them.  An unamended version of the PMLA made it mandatory to initiate investigation  only after a chargesheet is filed. This mandate was removed  through subsequent amendments. Senior Advocates Kapil Sibal and Siddharth Luthra argued that the ED should furnish a copy of the Enforcement Case Information Report (ECIR) to the accused before starting investigation. An ECIR is a formal entry of the complaint by the ED, and is similar in format to a First Information Report. They backed this by contending that an ECIR was “akin” to an FIR.

The Court held that there can be no analogy between an ECIR and an FIR as the Act overrides CrPC. It  accepted the Union’s argument that ECIR was only an internal document created by ED before initiating penal action or prosecution against the accused. 

In partial respite to the petitioners, the Court stated that the ED is bound to inform the accused about the grounds of arrest to conform with Article 22 of the Constitution. However, it is not bound to give a copy of the ECIR since it is not mandated under the PMLA.