Day 17 Oral Hearing: Prevention of Money Laundering Act

Challenges to the Prevention of Money Laundering Act

On February 24th, 2022, Justices A. M. KhanwilkarDinesh Maheshwari and C. T. Ravikumar will continue hearing challenges to various provisions of the Prevention of Money Laundering Act, 2002.

The Bench has spent fifteen days hearing the petitioners argue that the provisions for bail, search and seizure and summons give the Enforcement Directorate unchecked investigative powers to the detriment of the rights of the accused. More than a hundred petitioners, most of whom are accused under the PMLA, have challenged the Act in this case.

Solicitor General (SG) Tushar Mehta began arguments on behalf of the Union government in defense of the Act yesterday. Tracing the evolution of the Act, he argued that money laundering had been recognised as a global menace. India had various international obligations to stop drug trafficking and organised crime. It was essential to stop the laundering of proceeds of these crimes. Hence he argued that the wide scope of the PMLA was warranted.

Morning Report

Mr. Mehta slowly continued to paint a broad picture of the general scope and intention of the PMLA in the first half of the day on February 24th, 2022. Right before the lunch break, Khanwilkar J pushed Mr. Mehta to focus on the petitioners’ main arguments against the Act. 

Before Khanwilkar J’s interjection, Mr. Mehta emphasised the need to look at the Act in a broader context—the Act must be seen as a complete Code meant to fulfil India’s international obligation to prevent, and not just punish, money laundering. To show that the Act is a complete Code, Mr. Mehta read out several Rules made under the Act to show the ED’s prevention function. 

Mr. Mehta further argued that Section 5 does not give the ED arbitrary powers even though it allows the ED to attach property before the police files a chargesheet in the predicate offence. The Bench asked how this can be justified since money laundering can only occur after the predicate offence is committed and generates proceeds of crimes. Nods and murmurs of silent agreement erupted across the courtroom from petitioner lawyers who had argued that the money laundering offence is parasitic in nature—it cannot exist without proof of the predicate offence. 

Mr. Mehta admitted that in most situations, the ED should not search, seize or attach property until the police had found some prima facie evidence of a predicate offence and filed a chargesheet. However, he cautioned that it would be dangerous to make this a rule, since the ED might need to act faster without waiting for the police in some situations. He argued that there were two safeguards to prevent the misuse of this power. First, the ED is required to record reasons for three assumptions before attaching property—why the officer believes the accused is in possession of proceeds of crime, why the officer believes the accused will attempt to conceal the proceeds and why there is a need for immediate action without waiting for the police. Second, Mr. Mehta argued that Section 60 and 62 of the Act mandate that any person providing false information of money laundering to the ED and any officer acting on such information without due diligence will be punished. This creates an onerous responsibility to use S 5 powers to attach property only when necessary. 

Offering a solution to the problem of charge of money laundering without charge of predicate offence, Khanwilkar J suggested that ED officers should be mandated to inform the relevant authorities when they are notified of money laundering. If the police fail to process the information and file a chargesheet on time, the ED officer will have the option to complain against them. 

Afternoon Report

To counter the public impression that ED raids are arbitrary, Mr. Mehta provided some figures to the Bench to show that the raids had resulted in large scale identification and attachment of proceeds of crime. He argued that the ED had found 57 terror cases and identified proceeds of crime worth Rs. 1249 crore from naxal financing. Further, the ED had attached propoerty belonging to criminals such as Hafiz Mohammad Sayeed (UN designated terrorist), Syed Salahuddin (Head of Hijbul Mujahideen) and Iqbal Mirchi (Mumbai blasts accused). 

The petitioners had previously argued that the mere possession or concealment of proceeds of crime is not money laundering. The definition in s3 must be interpreted to include an act projecting the proceeds to be untainted as a necessary element. Mr. Mehta argued against this interpretation. 

Mr. Mehta stated that the Financial Action Task Force (FATF), while evaluating India’s performance in preventing money laundering, had found the PMLA to be only partially compliant with India’s international obligations under the Vienna and Palermo conventions. For full compliance, India must ensure that the possession, use or concealment of proceeds of crime are punishable. 

Mr. Mehta argued that a full compliance rating is essential for the government to ensure India’s financial health in the international economy. Accordingly, unless the FATF’s interpretation led to grave arbitrariness, Mr. Mehta urged the Court to allow it. Mr. Mehta also stated that the Union government had made its intention to follow FATF’s definition clear by adding an explanation to S3 in 2019 to this effect. 

The Bench will continue to hear Mr. Mehta on March 2nd, 2022.