The Supreme Court Judgment in the Vijay Madanlal Case has been the ‘talk of the town.’ The recent judgment has created a lot of bedlam in India. Here are the highlights of India’s Supreme Court judgment in the Vijay Madanlal case and what implications lie in the future of White Collar Crimes in India.
Conventus Law: India has been witnessing an escalation in the number of white-collar crime cases and a lot is being talked about the fabled PMLA 2002 and the Enforcement Directorate. The last few years have observed an unvarying surge in the actions taken by ED against many individuals and corporate houses. With the recent judgment given by the Supreme Court in the Vijay Madanlal case, the speculations and apprehensions of individuals and corporates have soared too. Can you please take us through the palpable situation regarding the White Collar Crimes, the Laws against them and the lionized Enforcement Directorate in India?
Shreyas Mehrotra, Counsel at AK and Partners: The Directorate of Enforcement (ED) is tasked with investigating cases of money laundering and regulatory breaches involving foreign exchange laws. ED is tasked with enforcing the provisions of Foreign Exchange Management Act of 1999 (FEMA), the Prevention of Money Laundering Act of 2002 (PMLA), and more recently the Fugitive Economic Offenders Act of 2018. The ED was established with the responsibility of securing the Proceeds of Crime under these laws. The primary responsibilities of ED are to investigate the contravention of provisions of any law resulting in financial fraud/crimes like Hawala transactions, money laundering, financing terrorist activities or others affecting the sovereignty and integrity of the nation. The ED is also authorised to prosecute suspected offenders and bring them to justice in accordance with all applicable laws. It exercises other investigative powers, such as issuance of summons, search warrants, and asset seizures, that are granted to the Income Tax Authority under the Income Tax Act of 1961. The ED also offers support to foreign states in relation to fugitive economic offenders in conjunction with the recently enacted FEOA law. It can further request reciprocal legal assistance from contracting states in relation to the confiscation of proceeds of crime and the transfer of suspects under the PMLA.
The organisational structure of the ED comprises a Director, Additional Director, Joint Director, Assistant Director and others.
In the case of Virbhadra Singh & Anr vs. Enforcement Directorate & Anr., the Delhi High Court went on to conclude that the PMLA aims to establish a mechanism for investigation and enforcement distinct from the traditional system of criminal inquiry exercised by police agencies. ED has all the necessary tools to conduct an effective investigation without the aid or assistance of the police. The ED can conduct surveys, search and seize, search persons, retain property or records, issue summons to enforce the attendance of any person and compel them to provide evidence or produce records, discovery or inspection, as well as the power to arrest, as conferred by various provisions of the PMLA. The PMLA authorities are endowed with the power to initiate a criminal prosecution, with the Court’s mandatory requirement that its cognizance be based on their complaint.
“It is undeniable that the offence of money laundering does not just affect the socio-economic fabric of our nation but also tends to have a catalytic effect on heinous offences such as terrorism and drug trafficking. However, recently there is a renewed vigour in ED cases. The records show that ED had carried out 3100 search operations between 2014-2022 whereas the figure was only 113 between 2004-2014. There is a visible 27-fold increase in ED raids. (…)”
Shreyas Mehrotra, Counsel at AK and Partners
There has been a lot of discourse about the arbitrariness of PMLA and the powers of ED under it. Would you say that is true and a line needs to be drawn?
When PMLA was enacted, it was meant for targeting proceeds of crime and money laundering arising from heinous offences under several criminal legislations in India. With time, there have been several amendments to the primary legislation and the powers of the enforcement agency under PMLA have been widened to allow more scrutiny by ED. It may not be out of place to mention that while the objective behind the wide powers of ED under PMLA may have been noble, the results have been rather regressive if we see it from the basic criminal jurisprudence point of view. The arbitrary tone of PMLA comes from the nature of the Act itself. Since it is a special act targeting a widespread menace in society i.e. money laundering, the legislature has provided special powers to ED under it. Several rationalisations have been advanced for the wide scope of powers like the low conviction rate of offences under PMLA due to administrative difficulties faced by ED in locating the source of proceeds of crime in socio-economic offences. It is with this legislative rationale in mind, that the basic provisions of PMLA like powers of arrest, search, bail and provisional attachment should be analysed.
To invoke PMLA, first, a ‘predicate/scheduled offence’ must be alleged. This condition can be satisfied by the mere registration of a first information report (FIR). Second, there must be a reason to believe that some property, i.e., proceeds of crime, has been derived or obtained from a criminal activity relating to the alleged predicate offence. From a bare reading of the provision, it would appear that there is a third condition as well – that, in addition to the activity of concealment, use, acquisition or possession, the proceeds of crime ought to be projected or claimed as untainted property. However, in the recent ruling of Vijay Madanlal v. UOI, the Supreme Court has clarified that any of the activities, i.e., concealment, possession, acquisition, use of proceeds of crime or projecting or claiming proceeds of crime as untainted, will supply the basis to invoke PMLA. This increases the spectrum of activities that could be considered money laundering as an offence under PMLA and any person, in possession of any property that the ED has a reasonable apprehension to be proceeds of crime, can be rounded up by the investigative agency. This is problematic as it greatly increases the scope of abuse of power by ED under PMLA as is the case with any law that gives wide powers.
The issue is exacerbated by the fact that in addition to the wide scope of activities under the definition of money laundering in the PMLA, the ED has been provided with wide powers of arrest, bail, search, seizure and attachment. Under Section 5 of PMLA, ED can attach property in cases where it appears that non-attachment would lead to frustration in proceedings. Originally, the PMLA permitted search-and-seizure operations under Sections 17 and 18 only when a complaint or charge sheet was filed on a predicate offence to prevent abuse of powers. In 2019, the safeguards were completely removed. And, through the Vijay Madanlal judgement, the Supreme Court has upheld the wide powers of search and seizure. Moreover, there are stringent conditions for bail and there is no provision for providing a copy of the enforcement case information report (ECIR) to the accused. Perhaps, the final nail to the coffin is the reverse burden of proof that is present under PMLA which means that the accused is presumed guilty unless he/she rebuts this presumption.
In this light, it is understandable why there is so much chatter about the arbitrariness of PMLA and the powers of ED. Although the object behind the enactments is noble and much required, it is undeniable that there is a lot of scope of abuse of power under the Act. However, the Supreme Court in a revision petition filed against the Vijay Madanlal judgment, has agreed to review certain aspects of the judgement. It would be interesting to see how the Supreme Court rules on the issues at hand and if it restricts the powers of ED or makes a provision for slightly objective guidelines on the powers of ED under the Act.
According to you, is there a need for a stringent law like PMLA for controlling the menace of money laundering in India?
It is undeniable that the offence of money laundering does not just affect the socio-economic fabric of our nation but also tends to have a catalytic effect on heinous offences such as terrorism and drug trafficking. However, recently there is a renewed vigour in ED cases. The records show that ED had carried out 3100 search operations between 2014-2022 whereas the figure was only 113 between 2004-2014. There is a visible 27-fold increase in ED raids.
Perhaps, in this light, with Vijay Madanlal judgment, the Court is attempting to carve out a balancing arrangement to secure the interests of the accused and also ensure that the proceeds of the crime remain available to be dealt with in the manner provided by the 2002 Act.
However, it needs to be kept in mind that there are special bodies that have previously been enacted throughout the history of criminal law in India; such as the Central Bureau of Investigation (CBI) under the Delhi Special Police Establishment Act, 1946 or the Securities Exchange Board of India (SEBI) under SEBI Act, 1992 that conducts an investigation for far-reaching offences like Insider Trading among many others. The CBI or the SEBI are not the only organizations fighting grave economic offences. The Government strived and established other prominent bodies such as the SFIO and the EOW cells in the Police. The Serious Fraud Investigation Office is a statutory corporate fraud investigating agency in India. It is primarily set up to investigate corporate frauds of very serious and complex nature. The authorisation of SFIO is limited to investigating frauds related to a company under the Companies Act. Further, the EOW wing of the Police department, better known as the Economic Offences Wing is a specialized Unit of the Police that exclusively investigates economic crimes involving large scale frauds invoking huge money with wide ramifications. The Economic Offences Wing takes up cases pertaining to financial and economic frauds, land and building rackets, multi-level marketing fraud, bank frauds, intellectual property rights and other kinds of economic offences. Investigation is carried out in complicated and intricate IPC offences, and other offences under various Central Acts. Economic Offences Wing maintains close liaison with various government, semi government departments, Ministries of Finance, Commerce, Corporate Affairs, etc, RBI, FIU, CEIB, SEBI and other regulating institutions. The Economic Offences Wing takes up the cases involving an amount not less than Rs. 3 crore.
However, despite the special status of all these agencies, no blanket powers have been vested upon them. With that in mind, it makes very little logical sense to award such discretionary powers to ED. What is problematic is that no good justification has been provided for these powers as well. Resultantly, the powers entrusted upon the ED are many a times also (mis) used for settling personal and political scores, thereby muddying the waters.
An often-cited reason for such stringent laws for money laundering is a low conviction rate in PMLA prosecutions. However, a low conviction rate is not a good enough justification for such stringency when the same standard is not followed for other similarly placed statutes.
Having said that, not all is bleak. The Supreme Court has issued notice in the review petition filed against the Vijay Madanlal judgement and is contemplating reconsideration of a few aspects of the judgement like the reverse burden of proof and the provision of ECIR. So, the larger effect of the judgement is yet to be seen. We hope that a balancing act between the rights of an accused and the need for specialised criminal law is restored by the Supreme Court of India.
1 – ECIR is a document recording the charges against the accused under PMLA.