Context
The Prevention of Money Laundering Act, 2002 (“PMLA”), which came into force w.e.f. July 01, 2005, was enacted pursuant to India’s international obligations inter alia under the Vienna[1] and Palermo[2] Conventions, the Political Declaration and Global Programme of Action (1990)[3] adopted by the UN General Assembly, and to give effect to the recommendations made by the Financial Action Task Force (FATF) for combating money laundering (popularly known as the “Forty Recommendations”)[4].
The PMLA’s Statement of Objects & Reasons highlights the legislative intent of enacting a comprehensive legislation for preventing money laundering and confiscation of proceeds of crime, in line with India’s international obligations. In this context, it is relevant to note that Article 253 of the Constitution of India inter alia provides that Parliament has the power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body.
The ‘charging provision’ under Section 3 of the PMLA inter alia provides that 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.
The PMLA defines ‘proceeds of crime’ asany 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, or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad[5]. The 2019 amendment to the PMLA also clarified that “proceeds of crime” includes property that is 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[6].
The PMLA can be triggered only if the alleged commission of any of the offences listed in the schedules to the PMLA (referred to below as “Scheduled Offences”) has been registered with the jurisdictional police, or is pending enquiry/ trial.
As held by the Supreme Court of India (“SC”) in its recent decision in the Vijay Madanlal Choudhury case[7], prosecution under the PMLA can be initiated only if a Scheduled Offence is registered before the jurisdictional police, or is pending enquiry/ trial, including by way of a criminal complaint before the competent forum. Further, the SC also held that if the person is finally acquitted of the Scheduled Offence or the criminal case is quashed by the Court of competent jurisdiction, the charge of money laundering cannot be sustained.
The PMLA is distinct amongst various statutes dealing with transnational crimes, due to this connection between the charging provision (i.e., the money laundering offence under Section 3) and the registration of a Scheduled Offence. The first pre-condition for initiating prosecution in money laundering cases under the PMLA is the registration of an alleged offence under a completely different statute. The scope and nature of offences covered under the Scheduled Offences list accordingly has a direct impact on the type of contraventions that could be captured within the PMLA net.
Interestingly, since the passing of the PMLA in 2002, the statute has been amended 11 times, to revamp various vital aspects like the definition of ‘proceeds of crime’, list of Scheduled Offences, attachment of property, adjudication, etc. From the initial list of Scheduled Offences under only 6 legislations[8], these subsequent amendments have now populated the Scheduled Offences list to cover offences under 29 different legislations – thereby ensuring that the PMLA net is cast much wider, when compared to what was originally envisaged in 2002.
In addition to serious infractions under the NDPS Act 1985, UAPA 1967, Arms Act 1959, Prevention of Corruption Act 1988, Section 447 of the Companies Act, 2013, and others, even relatively minor contraventions under legislations like the Copyright Act, 1957, Trade Marks Act, 1999, Biological Diversity Act, 2002, Wild Life (Protection) Act, 1972, etc., have now been covered.
Despite the significant expansion of the Scheduled Offences list and the tightening of various key provisions, contraventions under the Foreign Exchange Management Act, 1999 (“FEMA”) and the Income Tax Act, 1961 (“Income Tax Act”) have been omitted from the Scheduled Offences List.
Although the FEMA was amended in 2015 to provide for imposition of criminal liability in case of acquisition of any foreign exchange, foreign security or immovable property situated outside India in a manner that contravenes Section 4 of FEMA (referred to below as the “2015 Amendment”), its omission from the Scheduled Offences list is surprising. In this article, the authors delve deeper into the legislative policy behind this unexplained, and arguably glaring omission of FEMA as a Scheduled Offence under the PMLA.
PMLA and FEMA – Legislative Background
The PMLA and FEMA Bills were both introduced in Parliament in 1998, and the parliamentary debates record that both Bills were presented as complementary to each other. Both Bills were referred to the Parliamentary Standing Committee on Finance (“PSC”) and passed after detailed deliberations[9].
As the successor to the Foreign Exchange Regulation Act, 1973 (“FERA”) (which provided for a stringent exchange control framework), the FEMA sought to liberalise the regulatory architecture and facilitate FDI and external trade. Whilst the FERA was a quasi-criminal statute, the FEMA had initially only provided for civil penalties in all circumstances, irrespective of the nature or gravity of the contravention.
In fact, even Section 47 of the FERA (which provided that no person shall enter into any contract/ arrangement which would directly or indirectly evade or avoid in any way the operation of any provision of the FERA, or any rule, direction or order made thereunder) was also not incorporated under the FEMA.
Whilst the FEMA’s liberalised provisions were presented as a necessity in India’s post 1991 economic landscape, the legislative policy surrounding blanket decriminalisation of foreign exchange violations and de-linking of PMLA and FEMA (by not adding FEMA as a Scheduled Offence) did not receive universal acceptance. In fact, two Members of Parliament recorded dissent notes before the PSC, to oppose the blanket decriminalisation of all foreign exchange violations, and by referring to the views of the Enforcement Director, suggested that infraction of foreign exchange restrictions should entail criminal liability either under FEMA or under the Money-Laundering Bill, if not under both.
The deliberations in Parliament in 2002, on the draft PMLA Bill, highlighted that whilst the FERA had been replaced with the FEMA in 1999, members had raised apprehensions that the FERA could make a backdoor entry through the PMLA.
It can be argued that these apprehensions regarding PMLA bringing about a backdoor entry of FERA were unfounded, as FERA and PMLA operate in completely different fields and have a unique legislative context. While the PMLA was enacted to address international concerns regarding money laundering, the FERA was enacted at a time when the license/permit/ quota raj was at its peak, and India had not yet opened up its economy to foreign investment.
Perhaps the omission of FEMA as a Scheduled Offence was a conscious legislative policy choice made by the Govt. of India, from the perspective of promoting FDI into India, and its overall commitment to economic liberalisation.
Whilst this initial omission of FEMA as a Scheduled Offence can be justified based on the underlying rationale of promoting FDI inflows and decriminalising all forex violations, it still does not feature in the Scheduled Offence list, eight years after the FEMA was amended in 2015.
The changing paradigm post the 2015 Amendment
By way of the 2015 Amendment, Section 13 of the FEMA was amended, and a new Section 37A was introduced, which inter alia provides for imposition of criminal liability for acquisition of any foreign exchange, foreign security or immovable property outside India, in a manner that contravenes Section 4 of the FEMA. The scope of Sections 13 and 37A are detailed below:
- If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed under the proviso to Section 37A(1), he shall be liable to a penalty up to three times the sum involved in such contravention and confiscation of the value equivalent, situated in India, the foreign exchange, foreign security or immovable property[10].
- If the Adjudicating Authority, in a proceeding under Section 13(1A) above, deems fit, he may, after recording the reasons in writing, recommend for the initiation of prosecution; and if the Director of Enforcement is satisfied, he may, after recording the reasons in writing, direct prosecution by filing a Criminal Complaint against the guilty person by an officer not below the rank of Assistant Director[11].
- If any person is found to have acquired any foreign exchange, foreign security or immovable property situated outside India, that has aggregate value exceeding the threshold prescribed under the proviso to Section 37A(1), he shall be, in addition to the penalty imposed, punished with imprisonment for a term which may extend to five years and with fine[12].
- Section 37A also provides that in case of acquisition of any foreign exchange, foreign security or immovable property outside of India in contravention of Section 4, the Authorised Officer also has the power to seize the value equivalent, situated within India, of such foreign exchange, foreign security or immovable property.
(It is worthwhile to note that by virtue of Sections 13 read with Section 37A, any overseas investment made in contravention of the ODI regulatory architecture can also have criminal consequences, in addition to imposition of civil penalties and seizure of an equivalent value of foreign exchange/ foreign security/ immovable property)
For evaluating the rationale of the amendments made to the FEMA, reference may be made to the ‘Notes on Clauses’ of the 2015 Amendment, which provides that the FEMA amendments are “are consequential to the Part VII providing for the amendments to the Prevention of Money laundering Act, 2002”.[13]
While the Notes on Clauses seek to draw a link between the FEMA and PMLA amendments, FEMA was still not added as a Scheduled Offence – and the link between the two statutes could have been established only if the contravention of Sections 13 read with 37A of FEMA was added as a Scheduled Offence. A Scheduled Offence cannot be impliedly read into the scheme of the PMLA, and initiation of criminal proceedings under Sections 13 read with Section 37A cannot automatically trigger a PMLA proceeding.
Given the broader legislative objective of linking the FEMA and PMLA (which is specifically recorded in the Notes on Clauses), post the 2015 Amendment, there is no justification for keeping FEMA violations (specifically Sections 13 read with Section 37A) out of the Scheduled Offences list. Given that the Govt. of India has now moved away from its previous policy of complete decriminalisation of foreign exchange violations, there is also perhaps no justification for excluding serious FEMA violations from the ambit of Scheduled Offences under PMLA.
Concluding Thoughts
Although 11 amendments have been made to the PMLA since 2002, there seems to be a lack of clarity on the legislative policy surrounding inclusion or exclusion of Scheduled Offences. It is unclear why relatively trivial offences under the Copyright Act 1957, Trade Marks Act 1999, Biological Diversity Act 2002, Wild Life (Protection) Act 1972, Antiquities and Arts Treasures Act, 1972, etc., have been included, but some vital laws like the FEMA and Income Tax Act (which are intimately connected to the central theme of money laundering) have been excluded.
The Govt. of India should accordingly have a fresh look at the Scheduled Offences List – to omit all trivial offences and include serious violations of FEMA and the Income Tax Act. Whilst the inclusion of serious FEMA violations within the scope of the PMLA would be a desirable move that is in consonance with the legislative objective of having a robust architecture to combat money laundering, the Govt. of India should simultaneously consider amendments that would provide more teeth to the FEMA.
Unlike its predecessor, the FEMA is a bare-bone statute where bulk of the regulatory architecture is formulated through rules/regulations/RBI master directions/ RBI master circulars – and any contravention of such delegated legislation is compoundable under Section 15 of the FEMA. Given that Section 47 of the FERA has been omitted from FEMA, even contractual provisions that are in contravention of FEMA are not void – and the desirability of continuing to omit this provision requires a wider debate and deeper reflection.
With regard to the erudition and courage of conviction shown by the dissenting members, it would be apposite to refer to the words of Chief Justice Hughes of the United States Supreme Court (which was famously quoted by Justice H.R. Khanna in the ADM Jabalpur case), who, in the context of dissents pronounced in a court of last resort, stated that a dissent “is an appeal to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting Judge believes the court to have been betrayed”.[14]
These observations apply with equal force to the foresight shown by the dissenting members, while highlighting the anomaly in excluding serious FEMA violations from the ambit of the Scheduled Offences list. The time is now right to act upon the prescient words of these dissenting members, and finally give them their due.
[1] United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (Vienna Convention).
[2] United Nations Convention against Transnational Organized Crime and the Protocols Thereto, Adopted by the UN General Assembly on November 15, 2000, by resolution 55/25 (Palermo Convention).
[3] The Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its 17th special session on February 23, 1990.
[4] The updated text of the FATF Recommendations are available here – FATF Recommendations 2012.pdf.coredownload.inline.pdf (fatf-gafi.org)
[5] Section 2(1)(u) of the PMLA.
[6] By way of the Finance Act, 2019, an Explanation was added to the definition of proceeds of crime under Section 2(1)(u) of the PMLA, which provides as follows – “For the removal of doubts, it is hereby clarified that “proceeds of crime” include 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”.
[7] Vijay Madanlal Choudhary v. Union of India, 2022 SCC OnLine SC 929.
[8] The original 6 legislations were the following – (i) Indian Penal Code, 1860; (ii) NDPS Act, 1985; (iii) Arms Act, 1959; (iv) Wild Life (Protection) Act, 1972: (v) Immoral Traffic (Prevention) Act, 1956; (vi) Prevention of Corruption Act, 1988.
[9] The Parliamentary Standing Committee Report on the PMLA is available here – finance_12_12_1998.pdf (eparlib.nic.in) and the Parliamentary Standing Committee Report on the FEMA is available here – finance_12_11_1998.pdf (eparlib.nic.in)
[10] Section 13(1A) of the FEMA.
[11] Section 13(1B) of the FEMA.
[12] Section 13(1C) of the FEMA.
[13] Notes on Clauses, Finance Bill, 2015.
[14] In his dissenting judgment in ADM, Jabalpur v. Shivakant Shukla, (1976) 2 SCC 521, Justice H.R. Khanna quoted the observations of Chief Justice Hughes, and held as follows – “Before I part with the case, I may observe that the consciousness that the view expressed by me is at variance with that of the majority of my learned Brother has not stood in the way of my expressing the same. I am aware of the desirability of unanimity, if possible. Unanimity obtained without sacrifice of conviction commends the decision to public confidence. Unanimity which is merely formal and which is recorded at the expense of strong conflicting views is not desirable in a court of last resort. As observed by Chief Justice Hughes [ Prohpets with Honour by Alan Barth, 1974 Ed., pp 3-6] , Judges are not there simply to decide cases, but to decide them as they think they should be decided, and while it may be regrettable that they cannot always agree, it is better that their independence should be maintained and recognized than that unanimity should be secured through its sacrifice. A dissent in a court of last resort, to use his words, is an appeal to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting Judge believes the court to have been betrayed”. The observations of Chief Justice Hughes were also quoted by Justice Nariman in K.S. Puttaswamy (Privacy-9J.) v. Union of India, (2017) 10 SCC 1.
