Is Money Laundering an Independent Offence?

[Udayan Tandan was formerly a legal consultant at the Enforcement Directorate and currently practices law at New Delhi. R. Harikrishnan was formerly a law clerk to Hon’ble Justice A. K. Patnaik, Supreme Court of India and currently practices law at the High Court of Kerela. The authors also wish to extend gratitude to Ms Chayanika Saxena for her invaluable and generous support in drafting this article.]

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“Behind every great fortune lies a great crime”             

 -Balzac

Money Laundering is the process of conversion of the proceeds of crime or the ‘dirty money’, to make it appear as ‘legitimate money.’ Money laundering is thus the use of money obtained out of a criminal activity. If so, once the Court finds that there is no criminal activity, can there still be the offence of money laundering? In other words, is money laundering an ‘independent’ ‘stand-alone’ offence? This post seeks to address this question.

Legislative Scheme of the Prevention of Money Laundering Act, 2002

The Government of India, recognizing the threat posed by money laundering to the financial integrity of the nation enacted the Prevention of Money Laundering Act, 2002 [hereinafter ‘PML Act’] which was assented by the President on 17-01-2003. The offence of money laundering is defined in Section 3 as “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.” Under Section 2(u), “proceeds of crime” is defined to mean “any 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.

A plain reading of Section 3 and Section 2(u) of the PML Act would indicate that to constitute money laundering:

  1. There should be a property that is obtained directly or indirectly as a result of a criminal activity relating to a scheduled offence;
  2. A person should be involved in any activity relating to the concealment, possession, acquisition or use of the said property;
  3. A person should project or claim such property as untainted property.

The scheme of the Act mandates that pre-requisite for initiating an investigation into the offence of money laundering is the registration of a “predicate offence”. Predicate offence(s) are offences listed in the Schedules ‘A’ to ‘C’ to the PML Act. The scheduled offences listed in Schedule ‘A’ to the Act, comprise of offences under twenty-eight legislations including Indian Penal Code, Narcotic Drugs and Psychotropic Substances, Explosive Substances Act, Unlawful Activities (Prevention) Act, Arms Act, among others. Schedule ‘B’ to the PML Act list offences under the Customs Act if the total value involved in such offences is one crore rupees or more. Schedule ‘C’ deal with offences having cross-border implications.

Is Money Laundering an Independent Offence?

A reading of Section 3 of the PML Act shows that the offence of money laundering is inextricably linked to the proceeds of crime. So, if the accused is acquitted of the alleged Scheduled Offence, will it be possible to continue the prosecution of the offence of money laundering? This is a question that has resulted in a divergence of views from the various High Courts.

The Orissa High Court’s decision in Janata Jha v. Asst. Director, Directorate of Enforcement[1] was one of the first decisions that considered this question. The facts were that the accused was involved in large-scale smuggling of iron ores and acquired huge properties through illegal means and also through extortion. Accordingly, he was prosecuted. Finding that scheduled offences under the PML Act have been involved, the Directorate of Enforcement, Bhubaneswar registered an ECIR.  The accused was later acquitted of the offences under the Indian Penal Code. It was contended that the continuation of prosecution under the PML Act 2002 will amount to double jeopardy. Repelling the aforesaid contentions, the Court held that even if the accused has been acquitted of the charges framed against him in the sessions trial, a proceeding under the PML Act 2002 cannot amount to double jeopardy, where the procedure and nature of proof (the ‘reverse’ burden of proof in Section 24) are totally different from a criminal proceeding under the Indian Penal Code.

The Karnataka High Court in K. Sowbhagya v. Union of India[2], also held that money laundering is an independent stand-alone offence. This was on the reasoning that, although, under sections 3 & 4 of the PML Act, it is not possible to envision an offence under PML Act as a ‘stand-alone’ offence without the guilt of the offender in the Scheduled offence being established, the expression “proceeds of crime” has been defined to include “property” of all kinds as defined under clause (v) of Section 2(1). Hence, it is possible to extend the definition of ‘proceeds of crime’ to property used in the commission of an offence under the Act or any of the Scheduled offences. Thus, money laundering can also be treated as a ‘stand-alone’ offence, de hors, a scheduled offence, if circumstances warrant.

The Delhi High Court in M/s Mahanivesh Oils & Foods Pvt. Ltd. v. Directorate of Enforcement[3] took a different view on the matter. The facts were that the accused were charged with offences under Sections 120B, 403, 409 and 420 of IPC on the basis of which a provisional attachment order was made under Section 5 (1) of the PML Act. The contention of the accused was that the offences were not scheduled offences at the time of the commission of the offence and hence there cannot be any provisional attachment. The Enforcement Directorate contended that the Act is independent of the scheduled crime giving rise to proceeds of crime.

The Court noticed that the attachment under the Act is found on the fundamental premise that the properties attached/seized “are involved in money-laundering.” A conjoint reading of Section 5(1) read with Section 2(u) of the PML Act clearly indicates that the power to attach is only with respect to the 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 such property. Thus, plainly, the occurrence of a scheduled offence is an indispensable condition for giving rise to any proceeds of crime and consequently, the application of Section 5(1). A commission of a scheduled offence is the fundamental pre-condition for any proceeding under the Act as without a scheduled offence being committed, the question of proceeds of crime coming into existence does not arise. So, where the scheduled offence itself is negated, the proceedings under the Act will come to an end.

Critical Analysis

A reading of the Act will show that the offence of money laundering is inextricably linked to the commission of a scheduled offence. This is very clear from the phraseology of Section 3 “any proceeds or activity connected with the ‘proceeds of crime.’” Under Section 2(u) “proceeds of crime” means any property obtained directly or indirectly as a result of any criminal activity. Once it is established that no scheduled offence has been committed, the link of the property with the criminal activity disappears. The offence of money laundering is thus dependent on the commission of a scheduled offence.

The decision in Janata Jha did not consider the effect of Section 3, and Section 2(u). The conclusion that money laundering is an independent offence is based on the burden of proof required to be adduced under Section 24. Section 24 is a procedural provision and can come into play once the substantive offence of money laundering is shown to exist. The substantive offence of money laundering can exist only if there is a commission of a scheduled offence. Once there is an acquittal for scheduled offence, there cannot be any prosecution for the offence of money laundering. The decision in Janata Jha, therefore, does not lay down the correct law.

The decision in K. Sowbhagya is correct to the extent it finds that it is impossible to envision the offence of money laundering as an independent offence without the guilt of the offender in the Scheduled offence being established. However, the Court erred in concluding that money laundering can be an independent offence in certain circumstances as the word ‘property’ under Section 2(v) includes property of any kind used in the commission of an offence under the PML Act or any scheduled offence. “Proceeds of crime” means the property resulting from a criminal activity relating to a scheduled offence. The property, for the purpose of the PML Act, mus therefore be one resulting from a criminal activity. So, once the court comes to the conclusion that there is no criminal activity or a scheduled offence, the property loses its tainted character. In that event, the property can no longer be treated as a proceed of the crime.

The decision in Mahanivesh Oils & Foods Pvt. Ltd. is correct and is based on a proper appreciation of the statutory scheme of the PML Act. The occurrence of a scheduled offence is the sine qua non for giving rise to any proceeds of crime and consequently, the application of the PML Act.  From the scheme of the PML Act, an investigation into the offence of money laundering can only be initiated once an FIR relating to the scheduled offence has been registered. It is only after the registration of the predicate offence, investigation can be launched by Enforcement Directorate into whether proceeds of crime generated from the scheduled offence have been laundered or not.

The main object of the PML Act is to prevent money-laundering and confiscate the proceeds of crime. In that light, there exists an indissoluble link between the PML Act and the occurrence of a crime. Although it cannot be disputed that the offence of money-laundering is treated as an offence under Section 3, which is punishable under Section 4, the offence of money-laundering relates to the proceeds of crime, the genesis of which is a scheduled offence. The irresistible conclusion flowing from the statutory scheme, therefore, is that the offence of money laundering cannot be an independent offence.

[1] 2014 Cri LJ 2556 (Orissa)

[2] WRIT PETITION NO. 14649 OF 2014 [HIGH COURT OF KARNATAKA]

[3] W.P. (C) 1925 OF 2014 [HIGH COURT OF DELHI]

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