In a sudden twist to the meaning of the phrase ‘intention of the legislature’ the Chidambaram family is fighting a judicial battle at the Supreme Court in Vijay Madanlal v. UOI (Madanlal judgment), challenging their own legislative legacy- Prevention of Money Laundering Act, 2002 (hereinafter ‘PMLA’). Mr P. Chidambaram was instrumental in the implementation of PMLA during his stint as the Finance Minister in the erstwhile ruling party’s reign. Now, his son Karti Chidambaram filed a petition seeking a review of the Vijay Madanlal judgement on which the Supreme Court issued a notice on August 25th, 2022. The Bench headed by former CJI N.V. Ramana has decided on the following two aspects of the Madanlal judgment, upholding the provisions of the PMLA 2002, which require reconsideration:
- Finding regarding no legal requirement to provide an ECIR copy to the accused; and
- The reversal of the presumption of innocence under PMLA.
As we wait for the highly anticipated ruling in the review of the Madanlal judgment, let’s dig deeper to understand how this situation arose in the first place.
Here is a comprehensive, in-depth analysis of the Vijay Madanlal case.
Case: Vijay Madanlal Choudhary & Ors. versus Union of India & Ors.
Updated on: August 27th, 2022
Forum: Supreme Court, New Delhi, India
Bench: A M Khanwilkar J., Dinesh Maheshwari J., and C.T. Ravikumar J.
Parties
Petitioner: Vijay Madanlal Choudhary & others
Respondent: Union of India
Case No.: SLP (Crl) No. 4634/2014
Date of Judgement: July 27th, 2022
The Directorate of Enforcement (ED) is a multi-disciplinary organisation mandated to investigate economic crimes and violations of foreign exchange laws.[1] The origin of this Directorate goes back to the year 1956. The statutory functions of the Directorate include enforcement of the following Acts:
1. Prevention of Money Laundering Act, 2002 (PMLA)[2]: ED has been given the responsibility to enforce the provisions of PMLA by conducting an investigation to trace the assets derived from proceeds of crime, to provisionally attach the property and to ensure prosecution of offenders and confiscation of property by the Special court.
2. Foreign Exchange Management Act, 1999 (FEMA): ED has been given the responsibility to conduct an investigation into suspected contraventions of foreign exchange laws and regulations, and to adjudicate and impose penalties on those adjudged to have contravened the law.
3. The Fugitive Economic Offenders Act, 2018 (FEOA): This law was enacted to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts. It is a law through which the Directorate is mandated to attach properties of fugitive economic offenders who have escaped from India warranting arrest and provides for confiscation of their properties by the Central Government.[3]
Despite having powers of investigation, ED has not been classified as a ‘police agency’ like the Central Bureau of Investigation (CBI). This is also true for other specialised bodies, including the Serious Fraud Investigation Office (SFIO) and the Directorate of Revenue Intelligence (DRI), which are empowered to investigate economic offences under other legislations. These bodies are not obliged to follow the Code of Criminal Procedure Code, 1973 (CrPC).
Nearly 200 petitioners challenged the powers of these specialised investigation agencies that deal with economic offences. The earliest petitions were pending since 2014. More than 80 of these petitions dealt with the PMLA.[4]
On July 27th, 2022 the Supreme Court of India through Vijay Madanlal Choudhary & Ors. versus Union of India & Ors.,[5] decided the constitutionality and upheld the validity of certain challenged provisions which relate to the power of arrest, attachment and search and seizure conferred on the Enforcement Directorate[6] under the Prevention of Money Laundering Act, 2002 commonly known as the PMLA 2002. The judgement is instrumental in as much as it is a further restriction on the rights of the accused under the PMLA and reiterates absolute power granted to the Enforcement Directorate[7] which is already the supervising agency in money laundering proceedings.
The following points and challenged provisions of the infamous PMLA 2002 were thoroughly discussed in the Vijay Madanlal Choudhary Judgment.
- What does the term ‘Investigation’ provided under Section 2 (na) of the PMLA 2002 entail and imply?
Section 2(na) defines the term ‘Investigation’ as “includes all the proceedings under this Act conducted by the Director or by an authority authorised by the Central Government under this Act for the collection of evidence.”
The petitioners contended that ‘investigation’ is the collection of evidence provided in the Code of Criminal Procedure, 1973 (Cr.P.C.) and thus, any statements made in front of any investigative agency should be hit by Articles 20(3) [8] and Article 21 (Right to life and personal liberty) of the Constitution of India unless the proceedings are in front of an ‘adjudicating authority’ or a ‘court of law’.
However, the Apex Court observed that the expression ‘investigation’ must be regarded as interchangeable with the function of ‘inquiry’ undertaken by the authorities for submitting such evidence before the adjudicating authority. Thus, investigation under PMLA cannot be compared to the import of Investigation under Cr.P.C. Stating so, the Apex Court concluded that any act done in pursuance of an investigation conducted by the officials authorised under PMLA 2002 for the purposes of Section 2(na) would not attract the right guaranteed under Articles 20(3) and 21 of the Constitution of India.
- Bail is the rule, jail is the exception?
Section 45 of PMLA 2002 requires compliance with twin conditions in order to secure bail for a person accused under PMLA 2002. The two conditions are-
- The Public Prosecutor has been given an opportunity to oppose the application for such release; and
- There should be reasonable grounds for believing that the accused is not guilty of any such offence and that the accused is not likely to commit any offence while on bail.
The petitioners in the given case contended that the aforementioned twin conditions provided to secure bail are unconstitutional as being violative of Articles 14 and 21 of the Constitution of India. The two conditions of bail impose an irrebuttable burden on the accused. When a statute provides that bail cannot be issued if there is a reasonable doubt that the accused is guilty, the moment the charges are framed, the accused loses his chance to seek bail. This clearly breaches the fundamental law of criminal jurisprudence which is Bail is the rule, jail is the exception and further imposes an absolute restriction on the Fundamental Right to Life guaranteed under Article 21. This is so much so that the provision of bail as per Section 45 of the PMLA 2002 is far more rigorous compared to the provisions of bail under Cr.P.C. Further, Section 45 also violates the right guaranteed under Article 14 of the Constitution of India as it institutes distinct laws for an essentially same act or omission. It is interesting to note that the Supreme Court has previously declared the alleged twin conditions unconstitutional in Nikesh Tarachand Shah versus the Union of India [9] in the year 2017. However, the Union Government then bought an amendment [10] to the said Section 45 in the year 2018 and the ED claimed the amendment was brought in line with the judgement given in the Nikesh Tarachand Shah case. The petitioners claimed that the said amendment undermined the Nikesh Tarachand Shah Judgement, and re-established the original twin conditions.
The Supreme Court on this above-mentioned point observed that the rigours of bail under Section 45 of PMLA 2002 even though more expansive and restricts the right of the accused to secure bail, do not impose absolute restraint on the grant of bail. The discretion vests in the Court which are not arbitrary or irrational but judicial, guided by the principles of law as provided under Section 45 of the 2002 Act.
- Tainted or Untainted Property- What makes one guilty of Money Laundering?
Section 3 of the PMLA 2002 states —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 and projecting it as untainted property shall be guilty of the offence of money-laundering.
Here, the petitioners argued that the offence of money laundering should be said as established only when the property is projected as untainted property.
The Supreme Court however rejected the petitioner’s argument that the offence of Money Laundering under Section 3 of the PMLA 2002 is attracted only if the property is projected as untainted property. The Court held that the word “and” in Section 3 of the PMLA 2002 has to be read as “or”. The Court further moved on to say that Section 3 has a wider reach, capturing every activity directly or indirectly related to money laundering and is not merely related to the final act of laundering the money. Thus, mere possession of the proceeds of crime is money laundering. The offence under Section 3 of the 2002 Act is dependent on the illegal gain of property as a result of criminal activity pursuant to a scheduled offence. However, the authorities under the 2002 Act cannot prosecute any person on a notional basis or on the assumption that a scheduled offence has been committed unless it is so registered with the jurisdictional police or before the competent forum.
- Attachment of property- First or final nail in the coffin?
The provisions laid down under Section 5 of the 2002 Act empowers the Director or any other officer not below the rank of Deputy Director authorised by the Director to provisionally attach the property involved in money laundering.
The petitioner contended against this and stated the following:
- While authorities like the Unlawful Activities Prevention Act, 2008 and the Securities and Exchange Board of India Act, 1992 can attach the property only after the conviction for predicate offences, Section 5 of the 2002 Act enables attachment of property even before conviction. This creates two different standards and two different criminal attachment proceedings for an act which is essentially the same offence.
- The ambit of sub-section (1) of Section 5 is very wide and covers not just the persons who are involved in the commission of a scheduled offence but also any person in the possession of the proceeds of crime. This, by implication, means that attachment of property can happen against a person who is not even an accused of a PMLA offence or who is being tried for any scheduled offence.
The Court however made the following observation against the above-mentioned contentions of the petitioners and went on to state that Section 5 of the 2002 Act is constitutionally valid as it provides for a balancing arrangement to secure the interests of the person and also ensures that the proceeds of crime remain available to be dealt with in the manner provided by the 2002 Act. Under Section 5 the power of provisional attachment is provided for ordinary situations and for other situations that need immediate attachment bypassing all the safeguards. Section 5(1) delineates sufficient safeguards to be adhered to by the authorised officer before issuing provisional attachment orders in respect of proceeds of crime. The Supreme Court further went on to observe that even though the second proviso of Section 5 provides the power of provisional attachment without the safeguards, it is necessary to view the urgency felt by the competent authority to secure the property and effectively prevent and regulate the offence of money laundering. However, the authorised officer cannot resort to the action of provisional attachment of property (proceeds of crime) mechanically and has to record satisfaction and reason for his belief in writing on the basis of material in his possession that if an immediate provisional attachment is foregone, the proceedings may be frustrated.
- Search and Seizure- A necessary step or another way of misuse of power?
Section 17 of the 2002 Act permits only the Director or any other officer not below the rank of Deputy Director authorised by him to exercise the power of search and seizure on the basis of information in his possession and having reason to believe that any person has committed some act which constitutes money-laundering or is in possession of proceeds of crime involved in money-laundering, including the records and property relating money-laundering.
The petitioners raised their objections against the set procedure under the 2002 Act. They went on to state that Section 17 of the 2002 Act does not provide for magisterial supervision which is an essential tenet of the criminal procedure and endows immense powers to the investigative authority which increases the scope of misuse of such power. The challenge is that, unlike the Cr.P.C., no safeguards for search and seizure have been envisaged under PMLA and that such wide power is being exercised without a formal FIR registered or complaint filed in respect of the scheduled offence. The provision is, thus, unconstitutional and in violation of Articles 14 and 21 of the Constitution of India.
The Apex Court on the above-raised contentions observed that Section 17 of the 2002 Act is not unconstitutional and provides for in-built safeguards, not only mandating the exercise of power by high-ranking officials, of the rank of Director (not below the rank of Additional Secretary to the Government of India who is appointed by a committee chaired by the Central Vigilance Commissioner in terms of Section 25 of the CVC Act) or Deputy Director authorised by the Director in that regard, but also to adhere to other stipulations of recording of reasons regarding the belief formed on the basis of information in his possession about the commission of the offence of money-laundering and possession of proceeds of crime involved in money-laundering. Further, such recorded reasons along with the materials are required to be forwarded by the 3 member Adjudicating Authority (appointed under Section 6 of the 2002 Act headed by a person qualified for appointment as a District Judge) in a sealed cover to be preserved for a specified period, thus, guaranteeing fairness, transparency and accountability regarding the entire process of search and seizure.
- Jail, Bail or Fail?
Section 19 of the 2002 Act envisages that the Director, Deputy Director, Assistant Director, or any other officer authorised on this behalf by the Central Government, if has material in his possession giving rise to a reason to believe that any person has been guilty of an offence punishable under the 2002 Act, he may arrest such person.
The petitioners contended that under Section 19 of the 2002 Act, unequivocal power of arrest without a warrant has been conferred.
However, on the given contention, the Apex Court observed that Section 19 has been structured with inbuilt safeguards that are required to be adhered to by the authorised officers, such as recording reasons for the notion regarding the involvement of a person in the offence of money laundering and the authorised officer has to forward a copy of the order, along with the material in his possession, in a sealed cover to the Adjudicating Authority.
- Burden of proof or is it Reverse burden of proof?
Section 24 of the 2002 Act states that when a person is accused of having committed the offence under Section 3, the burden of proving that proceeds of crime are untainted property shall be on the accused himself.
The petitioners contended that Section 24 of the 2002 Act reverses the burden of proof and falls foul of Articles 20 and 21 of the Constitution of India.
The SC observed that Section 24 of the 2002 Act deals with two situations respectively. In the first part i.e., Section 24 (a), the burden of proof as regards the person who is charged with money laundering under Section 3 of PMLA is prescribed and in clause (b) the burden of proof as regards the person who is not charged under section 3 of the PMLA is specified.
The expression used in Section 24(a) is “shall” unless the contrary is proved, presume” and this legal presumption would apply when the person is charged with the offence of money laundering and his direct or indirect involvement in any process or activity connected with the proceeds of crime, is established.
Section 24(b) of the 2002 Act, concerns a person other than the person charged with the offence of money laundering under Section 3 of the 2002 Act. In this case, the expression used in Clause (b) is “may presume”. The presumption under Section 24(b) of the 2002 Act is not a mandatory legal presumption, unlike in the case falling under Section 24(a). If the person has not been charged with the offence of money laundering, the legal presumption under Section 24(b) may or may not be invoked by the Adjudicating Authority or the Court and is rebuttable in nature. The Court further held that Section 24 has reasonable nexus with purposes and objects sought to be achieved by the 2002 Act and cannot be regarded as manifestly arbitrary or unconstitutional.
- Statement or Self-incrimination. What is it?
Section 50 of the 2002 Act states that the proceedings by the ED officials for summons, production of documents and giving evidence are in the nature of judicial proceedings akin and attracts Sections 193 and 228 of the Indian Penal Code, 1860.
The petitioners contended that any statements made under Section 50 of the 2002 Act that form the basis for the Director to proceed with the attachment of property are violative of Article 20(3) of the Constitution of India. Further, Sections 63(b) and 63(c) of the PMLA impose penalties for the non-production of documents and for not signing the statements under Section 50 of the PMLA which clearly violates the safeguards against self-incrimination.
The Court made the following observations on the above-mentioned contentions:
- The ED officials are not “police officials” and hence the statements recorded by them under Section 50 of the PMLA are not hit by Article 20(3) of the Constitution of India, which guarantees the fundamental right against self-incrimination.
- Article 20(3) of the Constitution of India gets triggered if the person is compelled to be a witness against himself, which may not happen merely because of the issuance of a summon for giving oral evidence or producing documents.
- At the stage of recording a statement for the purpose of inquiring into the relevant facts in connection with the property being proceeds of crime is not an investigation for prosecution as such; and in any case, as there would be no formal accusation against the noticee and thus he would not be an accused.
- Article 20(3) or for that matter Section 25 of the Evidence Act 1872, would come into play only when the person so summoned is an accused of any offence at the relevant time and is being compelled to be a witness against himself. Therefore, Article 20(3) is not attracted at this stage under Section 50 of the PMLA.
- Further, the punishment under Section 60(3) of the PMLA for giving false information under Section 50 of the PMLA cannot be construed as a compulsion to give a statement.
- ECIR OR FIR- So same yet so different?
The petitioners contended that every FIR registered by an officer under Section 154 of the Cr.P.C.is required to be forwarded to the Jurisdictional Magistrate, however, this procedure is not being followed in ECIR [11] cases. In the present times, the ED can arrest an individual on the basis of an ECIR without informing him of its contents, which is clearly an arbitrary action and also violates the right of an individual guaranteed by the COI. The right of an accused to get a copy of the First Information Report at the early stage and the right to gain knowledge of the allegations levied is an inherent part of Article 21 of the Constitution of India.
The Supreme Court however observed that ECIR cannot be equated with an FIR under the 1973 Code. The supply of a copy of ECIR in every case to the person concerned is not mandatory. It is enough if the ED at the time of arrest discloses the grounds of such arrest. ECIR is an internal document of the ED and the fact that FIR in respect of a scheduled offence has not been recorded does not come in the way of the authorities to commence inquiry/investigation for initiating ‘Civil Action’ or ‘Provisional Attachment’ of the property being proceeds of crime.
- ED Manual or a Holy Book? What is the mystery here?
The petitioners contended that the refusal to provide a copy of the ECIR creates a block with respect to the usage of the ED Manual which brings it to getting challenged in the Court of Law. It would not be wrong to contend that the ED Manual is nothing more than a mystery for the common man. Not just a mystery but it is also in contravention of Section 4(b)(v) of the RTI Act, 2005. Thus such non-disclosure of the ED Manual is unsustainable in law as it makes the securing of pre-trial rights of an accused difficult to act on.
However, the Apex Court stood firm and went on to state that the ED Manual is not to be published and is an internal departmental document issued for the guidance of the ED Authorities but the department ought to explore the desirability of placing information on the website.
The Supreme Court through its judgment in the Vijay Madanlal case has essentially placed absolute power in the hands of the Enforcement Directorate and the biggest hit, it seems, is against the provisions of bail and the definition of money laundering that has been widened. This would certainly lead to an increase in the level of scrutiny that the ED Officials can conduct with limited remedies to the accused under the PMLA.
The story of the chase does not end here…
The Supreme Court, however, has not decided on the issue of amendments in PMLA having been made by taking recourse to the Money Bill and the same has been left to be examined by a larger bench in the case of ‘Rojer Mathew v. South Indian Bank Ltd. & Ors.’. It will be interesting to the PMLA journey that lies ahead as India is witnessing a steep rise in the number of cases of the ED rounding up companies and individuals. From 111 cases in the year 2015-2016 to 981 cases in the year 2020-2021, the rate of growth in ED cases is perpetually more than the economic growth of many developing countries.
[1] History of ED | Directorate of Enforcement
[2] Also, referred to as ‘The 2002 Act’ in the article
[3] What we do | Directorate of Enforcement
[4] Challenges to the Prevention of Money Laundering Act – Supreme Court Observer
[5] SLP(Crl.) No. 4634 of 2014
[6] Summary Of Supreme Court’s PMLA Judgement- Vijay Madanlal Choudhary Vs Union of India.
[7] For short, “ED”
[8] The Indian Constitution provides immunity to an accused against self-incrimination under Article 20(3) – ‘No person accused of an offence shall be compelled to be a witness against himself’.
[9] Writ Petition (Criminal) No. of 67 of 2017
[10] Refer to page 62 of the Gazette
[11] The first official document recorded by the Enforcement Directorate (ED) before beginning its investigation is the Enforcement Case Information Report which is popularly known as the ECIR.
