Analysis: Prevention of Money Laundering Act Amendment, 2019, A Step Towards ED Empowerment?

Introduction

Due to increase in financial crimes in India especially the offence of Money Laundering, The Prevention of Money Laundering Act, 2002’s (PMLA) existing requirements are being tightened by the Central Government through the Finance Act, 2019 (the 2019 Act) In light of the rising incidence of financial crimes and high-profile instances, the 2019 Act aims to tighten up the current regulations and make them more capable of spotting shaded activities. The Act also aims to combat money laundering and terrorist financing more specifically than the other amendments do. The 2019 Act modifies eight PMLA clauses to clarify the existing laws that are currently ambiguous

Section 3 of the Prevention of Money Laundering Act 2002 (“PMLA”)

  1. 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.
  2. The above definition is the result of amendment done via the Prevention of Money-Laundering Amendments Act (2012) by which the legislature had intended to further specify the term of “Money Laundering” as after the amendment the offence of money laundering did not only cover the proceeds of crime but its concealment, possession, acquisition or use also became the part of the offence of money-laundering.

Amendment of definition of Money Laundering (2019)

  1. This definition of money laundering underwent another change by the amendment act 2019 as this amendment added an explanation to the section of defining the term money laundering which stated that the person shall be accused of money laundering if in any manner whatsoever that person is involved in the: –

    (a) concealment; or
    (b) possession; or
    (c) acquisition; or
    (d) use; or
    (e) projecting as untainted property; or
    (f) claiming as untainted property,

  2. This amendment further mentioned that the person will be considered to be involved in the offence of money laundering till the time that person is getting the fruits of activities related to money laundering as this offence is of a continuing nature. Here it is also needs to be seen that the term “Proceeds of crime” has been given a broad meaning under the Prevention of Money Laundering Amendment Act 2015.

  3. The 2019 Act offers clarification to Section 3 of the PMLA to the extent that a person shall be held guilty of the offence of money-laundering if he is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly was a party or was involved in any one or more of the processes or activities included in Section 3. The 2019 Act clarifies that it would be incorrect to interpret money laundering as a one-time, instantaneous offence that ceases with the concealment or possession or acquisition or use or projection of the proceeds of crime as untainted property or claiming it as untainted. A person shall now be considered guilty of the offence of money laundering for as long as the said person is enjoying the “proceeds of crime” – thus, making the offence of money laundering a continuous offence.

  4. The 2019 Act deletes the proviso contained in Sections 17 (1) and 18 (1) and empowers the ED to undertake search actions even in the absence of a report under Section 157 of the Code of Criminal Procedure, 1973 (CrPC). The 2019 Act broadens the existing powers of the ED under the PMLA provisions – by bringing Sections 17 and 18 at par with Section 19 – where there is no pre-condition to forward a report under Section 157 of CrPC or to seek warrants from the Court for making an arrest. An arrest can be made for an offence under the PMLA even in the absence of a First Information Report (FIR).

  5. This above is the legislative attempt to helps the ED to investigate without following the procedure prescribed under Chapter XII CrPC.

  6. There is a new proviso to Section 44 (1) which has been inserted, which provides for closure of investigation in cases where no offence of money-laundering is made out. It requires filing of complaint under Section 44 (1) (b), and the relevant authority to submit a closure report before the Special Court under the PMLA.

Bail Under PMLA

  1. Section 45 of PMLA deals with the bail provision under the act which states that no person can be granted bail for any offence under the Act unless the public prosecutor, appointed by the Government, gets a chance to oppose his bail. If the public prosecutor does so, the court must be convinced that the accused was not guilty of the crime and additionally that they were not likely to commit any offence while out on bail.
  2. This condition of bail imposed by Section 45 had been previously set aside in November, 2017 by the Supreme Court of India on grounds of unconstitutionality. (Nikesh Tranchand Shah Vs. Union of India & Anr.)
  3. That an amendment has been brought to Section 45(1) which proposes uniform applicability of bail conditions, instead of only those crimes listed in its schedule that attract more than three years’ imprisonment. A further limit of INR 1 crore (USD 1,40,200) involved in the alleged offence would allow the court to apply bail provisions more leniently to less serious PMLA cases. Section 45 of the PMLA has been tweaked in order to make it difficult for launderers to get bail if the offence is cognisable. The norms empower the investigating agency to arrest without a warrant if the conditions entailed in the section are fulfilled. The amendment reads, “[It] is clarified that the expression ‘offences’ to be cognisable and non-bailable shall mean to have always meant that all offences under the Act shall be cognisable notwithstanding anything to the contrary contained in the Code of Criminal Procedure.”
  4. The Government has introduced a new Sub-Section (2) to Section 66, making it mandatory for the ED to share relevant details with other agencies in order to ensure effective information sharing in compliance with the Financial Action Task Force (“FATF”) Recommendations. There is also a suggestion to create an inter-agency task force to combat money laundering and terror financing. Another suggested change is the inclusion of Section 447 of the Companies Act in the list of scheduled offences under the PMLA, which will allow the Registrar of Companies to report suitable cases to the ED for a money laundering probe.
  5. And it is pertinent to mention that in July, 2022 the SC upheld the major amendments made to the Prevention of Money Laundering Act (PMLA),2002 which gives the government and the Enforcement Directorate virtually unbridled powers of summons, arrest, raids and makes bail nearly impossible while shifting the burden of proof of innocence onto the accused rather than the prosecution, so amendments to PMLA giving ED unbridled powers of summons, arrests, raid.

PMLA and Attachment of Property

  1. The provisions under PMLA for attachment of properties collides with the Corporate Insolvency and Restructuring Process (“CIRP”) as prescribed under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and this is likely to frustrate the very objective of CIRP.
  2. The clarification upon the above stated relationship between PMLA & IBC is deified In Nitin Jain, Liquidator, PSL Limited. v. Enforcement Directorate (15 December 2021), the Delhi High Court ruled that the power under the PMLA to attach properties ceases to exist when an order of liquidation has been delivered under the IBC.
  3. while deciding the batch of appeals by the ED, the Delhi High Court in April, 2019, held that the PMLA prevails over the IBC when it comes to the attachment of properties obtained as “proceeds of crime”. The court said the Prevention of Money Laundering Act, Recovery of Debt and Bankruptcy Act (RDBA), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) and the IBC must co-exist and be enforced in harmony with the PMLA.
  4. On the other hand, in the case relating to Rotomac Global Pvt. Ltd., the National Company Law Appellate Tribunal (NCLAT) has said that the Prevention of Money Laundering Act, 2002 gets invoked simultaneously with the IBC and that neither of the laws has an overriding effect over the other.
  5. The NCLAT, citing the provisions of the PMLA, said it relates to “proceeds of crime” and the offence relates to “money-laundering”, resulting in the confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
    “Thus, as the ‘Prevention of Money Laundering Act, 2002’ or provisions therein relates to ‘proceeds of crime,’ we hold that Section 14 of the Insolvency and Bankruptcy Code is not applicable to such proceeding,” the NCLAT held.”
  6. Further clarity is needed with regards to the practical implementation and implication of the PMLA, especially in relation to the provision on attachment of property. The 2019 Act widens the ambit of the Act and endeavours to push the regulating authorities to monitor, detect and prevent future financial crimes by flagging suspicious transactions and clients, instead of playing the part of a silent spectator.

Overriding effect of IBC:

While recognising that both IBC and PMLA are special statutes, the NCLAT held that the IBC (enacted later in time) will override the PMLA by virtue of section 238 IBC. Section 238 IBC provides that the provisions of IBC have effect notwithstanding anything contained in any other law. Hence, the authorities under the PMLA cannot resist the handing over of the attached properties of the corporate debtor to the IRP/RP/Liquidator as that would obstruct the corporate debtor from being kept as a going concern till the resolution takes place or liquidation proceedings are completed. The NCLAT clarified that the attachment made under the PMLA will remain in force in the following two scenarios:
  1. when the application admitted under section 7 IBC is withdrawn under section 12A IBC, and
  2. the order of admission into CIRP is set aside in appeal.

Conclusion

That it is a matter of fact that under PMLA attachment can be ordered only before an attachment order is passed by NCLT under IBC proceedings, it is important to observe that under PMLA such attachment order can be passed only till the stage where in no such attachment is ordered under IBC is passed, there is no bar on attachment of any such property even if any such IBC proceedings before NCLT is being pending for attachment of such properties, the only condition is that NCLT should not have ordered any such attachment order, NCLT’s order ceases the power of courts to attach property under PMLA.

Regarding the practical application and implications of the PMLA, particularly in connection to the provision on attachment of property, further clarification is required. The 2019 Act broadens the scope of the Act and aims to encourage the regulating bodies to monitor, detect, and prevent future financial crimes by raising red flags on dubious transactions and clients rather than acting as mute observers.