22 April 2021
1. INTRODUCTION
The Prevention of Money Laundering Act, 2002 (“PMLA”) has proven to be a revolutionary legislation and is certainly one of its kind. The nature of the statute and the utmost necessity that it be enforced in a manner that fulfils the legislative intent thereby creating economic security as well as the nation’s requirements have resulted in wide powers being granted to the Enforcement Directorate (“ED”). Although there are significant judgments that have set the law straight, both procedural and substantive, or at least strived to, a fascinating, albeit controversial judgment has been passed by the High Court of Bombay recently in Babulal Verma and Ors. vs. Enforcement Directorate and Ors (“Babulal Judgment”).[1]
While the judgment attempts to set out emphatically the true intention behind the legislation, it also sets a procedural precedent, arguably, in defiance of the Apex Court’s much celebrated judgment in P. Chidambaram vs. Directorate of Enforcement[2]. The question that the Babulal Judgment essentially explores and seeks to answer is whether a structure can remain standing when the foundation has been removed, or in the parlance of the PMLA, whether investigation by the ED can continue if the predicate offence[3] has ceased to exist.
II. THE GENESIS OF PMLA
The Delhi High Court, in M/S Mahanivesh Oils & Foods Pvt. Ltd. vs. Directorate of Enforcement,[4] has noted that the PMLA owes its inception to the joint initiatives taken by the international community to identify and curb the threats of money laundering. Since India is a signatory to several of such international initiatives, in conformity with said international opinion, the Prevention of Money Laundering Bill, 1999 was introduced which came into force in 2005 with the object to “enact a comprehensive legislation inter alia for preventing money laundering and connected activities confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating measures for combating money-laundering, etc.” The proposed legislation was understood to be “an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.”
Since its inception, key amendments have been made that not only expanded the scope and extent of the PMLA but also the powers of the ED under the same. Several amendments have been controversial in nature, especially those which enhanced the powers and independence of the authorities under the PMLA, and the same have been deliberated upon and clarified by the courts to meet the legislative intent. For instance, vide the Finance Act, 2019, Section 44 of the PMLA which deals with offences triable by Special Courts was amended to include the following explanation:
“For the removal of doubts, it is clarified that, –
-
the jurisdiction of the Special Court while dealing with the offence under this Act, during investigation, enquiry or trial under this Act, shall not be dependent upon any orders passed in respect of the scheduled offence, and the trial of both sets of offences by the same court shall not be construed as joint trial;
-
the complaint shall be deemed to include any subsequent complaint in respect of further investigation that may be conducted to bring any further evidence, oral or documentary, against any accused person involved in respect of the offence, for which complaint has already been filed, whether named in the original complaint or not.”
The above explanation clarifies that the trial of the scheduled offence is to be conducted separately and has no impact on the trial conducted by the Special court under the PMLA. This is relevant for this blog as the High Court of Bombay has relied upon the same while reaching its conclusion in the Babulal Judgment. Interestingly, the High Court of Madras, in VGN Developers P. Ltd. & Ors. vs. The Deputy Director, Directorate of Enforcement[5] stated that the amendment is merely clarificatory in nature, and therefore will apply even to trials that have been initiated prior to the amendment coming into force. Arguably, such a judgment flirts dangerously with the settled principle of no retrospective amendments to criminal legislations.
III. BABULAL VERMA & ORS. vs ENFORCEMENT DIRECTORATE & ORS.
i. Facts:
In the present matter, a First Information Report had been lodged further to a complaint by a director of the Aurangabad Gymkhana against the Applicants alleging criminal breach of trust and cheating of an amount of over INR 12 crore by issuing cheques from blocked accounts (“FIR”). Subsequently, an Enforcement Case Information Report was registered by the ED (“ECIR”) and during the course of investigation, it was revealed that the Applicants had engaged in further money laundering activities pertaining to two sets of loans from a private lender totalling an amount of over INR 3500 crore, which were diverted to construct regular residential buildings as opposed to buildings under a slum rehabilitation scheme, which was the intended purpose.
Interestingly, around a year after the registration of the FIR, the original complainant wrote to the Investigating Officer stating that the Applicants had paid the money to him, and that the complaint was made further to a misunderstanding. Resultantly, a “C” summary report was filed in the lower court, and the court held that the offences against the Applicants have been compounded. The ED, however, sought further judicial custody of the Applicants for 14 days before the Special Court to which the Applicants filed an application opposing any further remand and forthwith release. The Special Court held in favor of the ED and hence, the application was filed before the High Court of Bombay.
ii. Holding:
The High Court of Bombay held that once an offence under the PMLA is registered on the basis of a scheduled offence, it stands on its own and thereafter does not require the support of the scheduled offence. Even if the scheduled offence is compromised, compounded, quashed or the accused therein is acquitted, the investigation by the ED under the PMLA does not get affected and can continue.
iii. Reasoning and observations:
The Court in the present judgment placed a substantial reliance on the legislative intent behind the introduction of the PMLA and in furtherance, noted the Finance Minister’s statement before the Rajya Sabha while introducing the 2012 Amendment to the Finance Act to the effect that for lodging an offence under the PMLA, there must be a predicate offence and same should be connected with the proceeds of a crime. Similarly, reliance was placed on information published by the ED by way of Frequently Asked Questions on its website, and the observation in P. Chidambaram (supra) wherein the Apex Court has held that a “scheduled offence” is a sine qua non for the offence of money laundering which would generate the money that is being laundered. However, the Court has interpreted the aforesaid to mean that the registration of the predicate offence is necessary for the initiation of the investigation by the ED and thereafter, the trials would be conducted separately.
Further, the Court while relying on Radha Mohan Lakhotia vs. The Deputy Director, PMLA, Department of Revenue,[6] held that an investigation into the offence of money laundering under Section 3, PMLA is not dependent upon the ultimate result of the scheduled offence and in fact, it is a totally independent investigation. On a strict interpretation of Sections 3 and 4, it can be deduced that the person against whom the ED investigation is ongoing need not necessarily be charged of having committed a scheduled offence. In fact, a scheduled offence is only needed for the registration of the ECIR, and the ultimate result of the investigation of the scheduled offence cannot have bearing on the proceedings under the PMLA.
Additionally, the Court has relied on the judgment passed by the High Court of Madras in VGN Developers (supra) wherein it was understood that a mere closure report (as was filed in the present case as well) by an investigating agency would not lead to a hurdle in the process of investigation by the ED of an offence under PMLA. This stems from the explanation added to Section 44(1)(d) of the PMLA by way of the 2019 amendment to the effect that trial of the predicate offence by the criminal courts is totally distinct and different from the trial of the offence of money laundering by the special court.
IV. A DANGEROUS PRECEDENT OR WELFARE OF THE GREATER GOOD?
In the light of the legislative intent to curb money laundering and to promote the greater welfare of the society, while the Babulal Judgment is laudable, it raises a couple of questions that may lead to ambiguity in the implementation and interpretation of the PMLA and pertinently, enlarges the possibility of misuse of power.
At the outset, the Babulal Judgment may be viewed as contradictory to the settled view on the subject. While the Court refers to the Supreme Court’s judgement in P. Chidambaram (supra) wherein it was expressly stated that a predicate offence is sine non qua for an investigation by the ED, the Bombay High Court has sought to interpret the same to mean that the registration of the scheduled offence is necessary, nothing more.
However, various High Courts have taken the view, and arguably rightly so, that an ECIR based on a predicate offence that has ceased to exist by virtue of acquittal, quashing and compounding would lead to the logical consequence of the ECIR being rendered infructuous as well. The Karnataka High Court in M/S Obulapuram Mining Company Pvt. Ltd. vs. Joint Director, Directorate of Enforcement[7] held that the ECIR was liable to be quashed since the offences of the petitioners did not fall within the ‘scheduled offences’ under the PMLA. Going a step ahead, while discussing ‘proceeds of crime’ under the PMLA, the Delhi High Court has observed in Rajiv Chanana v. Dy. Director of Enforcement[8] that the acquittal of a person of charges of a scheduled offence, ipso facto, erodes the foundation of the offence of money laundering. In the light of the aforesaid judgments, the Babulal judgment then seems squarely antithetical to the legal maxim of sublato fundamento cadit opus which means that once the foundation of the matter is removed, the structure built thereupon must fall.
Interestingly, the High Court of Bombay has delved upon a hypothetical example where an accused in a scheduled offence is ‘highly influential’ and by use of his influence ensures that the predicate offence is compromised or compounded to avoid further investigation by ED in the money laundering case, thereby defying the “intention of the legislature in enacting the PMLA.” However, the corollary to this hypothetical example is that a scheduled offence may be registered for the sole purpose of embroiling the accused in an investigation by the ED, a consequence that is likely to be misused by these very ‘highly influential’ persons.
Although in the matter of the Babulal Judgment, it is clear that a new offence came to fore during investigation by the ED, safeguards should have been provided by the Court to ensure that ED investigations are not turned into a fishing and roving inquiry. A similar factual matrix appeared in Arun Kumar Mishra vs Directorate of Enforcement[9], wherein the ECIR was lodged by the ED based on two FIRs, and while a closure report was filed in one and the petitioner was exonerated in another, a third FIR was lodged by the SIT, UP Police against the Petitioner with respect to a potential money laundering angle. The Delhi High Court, while quashing the ECIR based on the first two FIRs, observed that if an investigation into the third FIR establishes the offence of money laundering, the ED would be at a liberty to initiate fresh proceedings against the petitioner.
This should essentially imply that where a scheduled offence has ceased to exist, the ECIR ought to have been quashed and with due respect, the Bombay High Court in the Babulal Judgment should have expressly clarified that, even when the predicate offence ceases to exist, investigation by the ED can continue only if its investigation revealed offences that were beyond the predicate offence for which the initial FIR had been lodged, as was the case in the Babulal Judgment. While, the Court’s emphatic reasoning based on the intention behind the PMLA is reassuring to the extent that the weights of justice must favour the greater good of the society, the blanket ratio passed in the Babulal Judgment has the ability to create more harm than good by skirting the basic principles established by criminal jurisprudence in order to widen the net of the PMLA.
For further information, please contact:
Ankoosh Mehta, Partner, Cyril Amarchand Mangaldas
ankoosh.mehta@cyrilshroff.com
[1] Criminal Application (APL) No. 201 of 2021 and Criminal Bail Application No. 974 of 2021; 2021 SCC OnLine Bom 392
[2] (2019) 9 SCC 24
[3] Predicate/ scheduled offences are defined at section 2(y) and enlisted in the schedule to the PMLA.
[4] 228 (2016) DLT 142
[5] 2020 (1) LW( Crl) 1
[6] 2010 (5) BomCR 625.
[7] ILR 2017 KARNATAKA 1846
[8] 2015 (316) ELT 422 (Del.)
[9] 2015 SCC OnLine Del 8658
