The Prevention of Money Laundering Act of 2002 (PMLA) came into force on July 1, 2005. The Act was amended in 2005, 2009, 2012, and most recently in 2019, through the Finance Act of 2019. This article examines the amendment to section 3 (definition of money laundering offence) and section 2(1)(u) (definition of proceeds of crime). These amendments came into effect from August 1, 2019.
Pre-amendment law
Section 3: The offence of money laundering is incapsulated in section 3. It reads as follows: 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 the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering.
Section 2(1)(u): The term “Proceeds of crime” is defined under section 2(1)(u) of the PMLA in the following fashion: “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.
Upon a joint reading of section 3 and section 2(1) (u) it can be said that a person involved in any process connected with deriving property from criminal activity relating to a scheduled offence including concealment or possession or acquisition or use and projecting or claiming it as untainted shall be guilty of offence of money laundering. Thus, section 3, as it stood before amendment, used the word “and”. A joint reading of old section 3 and old section 2(1)(u) leads to the conclusion that a person commits an offence of money laundering if he is involved in any process of deriving any property from criminal activity relating to scheduled offence and projecting it as untainted. Therefore, there were two conditions to complete the offence of money laundering – one, that the person is involved in any process of deriving any property from criminal activity relating to scheduled offence and second, that the person projects that derived property as untainted.
Post amendment law
New Section 3: An explanation was added in the following words: ‘‘Explanation.—For the removal of doubts, it is hereby clarified that,— (i) a person shall be guilty of offence of moneylaundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:—
(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.”. (emphasis supplied)
Therefore, the Explanation 3(i), unlike the original section, instead of using the word “and”, uses the word “or”, meaning thereby that through this Explanation, “concealment”, “possession”, “acquisition”, “use” are offences in themselves with or without the element of projection.
Second interesting point is the Explanation 3 (ii), wherein the offences of “concealment”, “possession”, “acquisition”, “use”, “projecting it as untainted property” or “claiming it as untainted property in any manner whatsoever” are made continuing offences. This was not the case in the original section.
Therefore, the Explanation 3 (i) and (ii), have not only created new offences i.e. “concealment”, “possession”, “acquisition” or “use” but have also labelled these as continuing offences.
New Section 2(1)(u) – Proceeds of crime – An Explanation to this section has been added in the following terms: “Explanation.—For the removal of doubts, it is hereby clarified that “proceeds of crime” including 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”. (emphasis supplied)
It is interesting to compare definition of “proceeds of crime” before and after Explanation. ‘Proceeds of crime’ originally included any property derived by any person as a result of criminal activity relating to a scheduled offence. After adding Explanation to it, it has included property not only derived from the scheduled offence but also any property derived as a result of any criminal activity relatable to the scheduled offence”. Therefore, the Explanation has created two separate categories- one, that the property is derived from scheduled offence and other, that the property is derived from “any criminal activity relatable to the scheduled offence” whereas the original definition had only one category i.e. “property derived from criminal activity relating to a scheduled offence”. Nowhere in the Act has “criminal activity” been defined nor have the phrases, “criminal activity relating to a scheduled offence” or “any criminal activity relatable to the scheduled offence” been explained.
Arguments
It may be argued that the Explanations to section 3 and 2(1)(u) are clarificatory in nature, create no new offence and can be applied retrospectively. To support this argument, the prosecution may rely upon Dattatraya Govind Mahajan v. State of Maharashtra, wherein the Apex court held that the orthodox function of Explanation is to explain the meaning and effect of the main provision to which it is an explanation and that it cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant, in order to suppress the mischief and advance the object of the Act it can help the court in interpreting the true purport and intendment of the enactment. It may be argued that the Explanation to section 3 only clarifies the “processes” connected with the proceeds of crime and that these processes are continuing in nature. Further, that the Explanation to section 2(1)(u) only clarifies that the proceeds of crime includes property derived from a scheduled offence or “any other criminal activity relatable to the scheduled offence”. Therefore, it can be argued that these amendments can be applied retrospectively and that with these amendments the offence of money laundering can be tried separately independent of the fact whether any scheduled offence is committed or not.
Viewpoint
There are three fundamental issues, one, whether the Explanations create new offences, second, can the offence of money laundering be applied retrospectively, and third, whether the offence of money laundering can be tried separately, independent of any scheduled offence.
Whether the Explanations have created new offences:
As per the original section 3 of the PMLA, 2013, a person commits an offence of money laundering if he is involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property. So, the person is not only to possess proceeds of crime but also to project it as untainted property to commit the offence. This view was also held by the Supreme Court in the celebrated case titled Nikesh Tarachand Shah v. Union of India wherein the Court said section 3 contains all the ingredients i.e. concealing, possessing, acquiring or using tainted property but before he can be adjudged as guilty, he must not only be involved in concealment, possession, acquisition or use but must also project or claim it as being untainted. However, in the amended section, word “or” is used. Therefore, projection as untainted property is not a condition or necessary ingredient to fulfil the offence. Mere possession, use, acquisition of alleged tainted property is an offence. Consider a case where a person is possessing or using a property allegedly derived from proceeds of crime but there is no projection or claim by him that the said property is untainted. In this case, the offence, as per original section 3, is not completed until the person projects it as untainted but is completed under the new law, which do not make projection a necessary ingredient to complete the offence. Therefore, the Explanation, in my opinion has widened the scope of section 3 considerably and is not merely clarificatory in nature. It has enlarged the original section. The Supreme Court has time and again held that Explanation is only to clarify an enactment, it cannot alter the enactment in whole or in part. The Explanations, in the present case, have substantially altered the original enactment and will be subjected to constitutional and legal challenges.
Can the amendments be applied retrospectively?
It may be argued that the offence of money laundering is a continuing offence and thus can be applied retrospectively. However, this argument is debatable in view of the judgements of various courts. For example, the Delhi High Court in Mahanivesh Oils & Foods Pvt. Ltd. V. Directorate of Enforcement [WP (C) 1925/2014] held that once integration is done, the proceeds of crime are available with the criminals as untainted money and the process of money laundering is over at this integration stage. The court said, unless such act is committed after the Act came into force, offence of money laundering would not be made out. This judgment of Delhi High Court was challenged by the enforcement of directorate before the Division Bench, which stayed the Single Bench order and the matter is still pending wherein the next date of hearing is in September 2020. It is interesting to note that while this issue is sub judice before the Division Bench of the Delhi High Court, these amendments have been brought in, apparently, to support prosecution. There are judgments of other High Courts that say that the offence of money laundering is not a continuing offence. To ascertain whether the offence of money laundering is a continuing offence, one will have to see what is a “continuing offence”. The observations on “continuing offence” by the Supreme Court play a vital role here. The Apex court in Balakrishna Sevalram Pujari Waghmare v. Shree Dnyaneshwar Maharaj Sansthan [AIR 1959 SC 798] observed that section 23 of the Limitation Act refers to a continuing right and not a continuing wrong. A continuing wrong is essentially one that creates a source of continuing injury as opposed to one that was complete and makes the doer liable for such continuance. A completed injury would not be a continuing wrong even though it might give rise to continuing damage. From this perspective, in my opinion, in the case of money laundering, the offence is completed after integration of “proceeds of crime” is reached even though the damage continues from that offence. Therefore, in the light of the Supreme Court judgement, in my opinion, the offence of money laundering is not a continuing offence and cannot be applied retrospectively. However, it is to be seen how the Division Bench of the Delhi High Court sees this issue and if this issue will knock the doors of the Apex court.
Can the offence of money laundering be tried and the accused be punished under section 4 independent of commission of a scheduled offence or any other offence?
From the Explanation to section 2(1)(u), it can only be said that the offence of money laundering is committed if proceeds of crime including property derived from a scheduled offence are “concealed” or “possessed” or “used” or “acquired” or “projected as untainted” or “claimed as untainted”. Even though the Explanation states that offence of money laundering is committed when “proceeds of crime” is generated from any criminal activity relatable to the scheduled offence, this phrase requires much clarity. Also, common sense says that since the words used are “criminal activity related to a scheduled offence”, it inherently means that there must be a commission of a scheduled offence or for that matter any other offence in order to sustain offence of money laundering. Therefore, the offence of money laundering cannot exist in isolation. Though the offence under section 3 of the PMLA is a separate offence punishable under section 4 but it relates to the proceeds of crime, the genesis of which, at present, is a scheduled offence. The offence of money laundering can only be alleged if the proceeds of crime are derived unlawfully, whether by committing a scheduled offence or from “any criminal activity relatable to the scheduled offence”. As such, it is dependent upon commission of an offence and the prosecution will have to prove this offence to try an accused under section 3 of the PMLA. There could also be a situation where an accused “X” is charged with a scheduled offence and a co-accused “Y” is charged with money laundering offence only for handling the proceeds of crime on behalf of accused “X”. This could be one example where proceeds of crime are generated from any criminal activity relatable to the scheduled offence. However, in this situation also, the accused “X” will have to be proven guilty of the scheduled offence to try co-accused of the money laundering offence. If the accused “X” is acquitted of the scheduled offence it would amount to no proceeds of crime, thereby, nullifying the case against the co-accused “Y”. On the flip side, suppose in a theft case, if the accused “X” is found guilty of theft, he is convicted and sentenced for the offence but if evidence appears that the co-accused “Y” bought the stolen property by paying adequate consideration/ amount in good faith not knowing the property to be stolen, then the co-accused “Y” may not be charged for the money laundering offence.
This aspect may also be analysed by examining UK’s Proceeds of Crime Act of 2002. As per this Act, a person is guilty of money laundering offence if he (a) conceals criminal property or (b) disguises criminal property or (c) converts criminal property or (d) transfers criminal property or (e) removes criminal property from England and Wales or from Scotland of from Northern Island under section 327. He is guilty of offence also when he (a) acquires criminal property or (b) uses criminal property or (c) has possession of criminal property under section 329. Under this Act, Criminal property (which is equivalent to Proceeds of crime in PLMA) is defined in section 340(3) – Property is criminal property if (a) it constitutes a person’s benefit from criminal conduct or it represents such a benefit in whole or in part and whether directly or indirectly and (b) the alleged offender knows or suspects that it constitutes or represents such a benefit. Criminal conduct is defined in section 340(2) – Criminal conduct is conduct which (a) constitutes an offence in any part of the United Kingdom or (b) would constitute an offence in any part of the United Kingdom if it occurred there. On the basis of these definitions under the UK law, one can say that a person is guilty of money laundering offence in UK if he conceals or disguises or converts or transfers or removes or acquires or uses or possess any property derived by conduct that constitutes an offence in any part of the UK. Thus, the UK Act is not dependent upon a scheduled offence unlike the PMLA but requires prosecution to prove that the property in question is a criminal property to sustain the offence of money laundering.
Coming back to the PMLA, had ‘proceeds of crime’ been defined to include “property derived from scheduled offence or by committing any act or by conduct that constitutes an offence in any part of India”, then the PMLA could have operated with or without commission of a scheduled offence. But the usage of words “criminal activity relatable to scheduled offence” apparently makes the PMLA dependent, directly, or indirectly, on commission of a scheduled offence, failing which the offence of money laundering cannot exist or tried. In my view, if a person is acquitted of a scheduled offence, automatically, the offence under the PMLA ceases to exist.
Adv. Rohan Garg is Partner, Fox Mandal & Co.