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Powers Of Attachment Of The Directorate Of Enforcement Under The Prevention Of Money Laundering Act, 2002

Abhinav Agnihotri and Dipan Sethi
30 March 2021 5:03 AM GMT
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The commission of offences dealing with the crime of money laundering, in India, has increased considerably in the last decade or so with huge scandals being uncovered on a regular basis. The Prevention of Money Laundering Act, 2002 ("the PMLA") though enacted and notified on 17th January 2003, came into force w.e.f. 1st July 2005 and has been amended more than once, lastly by the Finance Act, 2019. It was enacted with the objective of prevention of money laundering and for providing for confiscation of property derived from, or involved, in money laundering and for matters connected therewith or incidental thereto. This article aims to critically analyse the law laid down under the PMLA regarding attachment of properties related to the offence of money laundering by the Directorate of Enforcement ("ED") in the backdrop of the definition of "proceeds of crime" as provided under Section 2(u) of the PMLA and the various Judicial pronouncements that have interpreted the said definition.

Money laundering – Explained

Section 3 of the PMLA defines the offence of money laundering and states that, "whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party to 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". Section 4 of the PMLA provides the penal consequence i.e. punishment for the offence of money laundering.

Thus, what is relevant to keep in mind is that for a person to be guilty of the offence of money laundering the said person must be involved in any process of activity connected with the "proceeds of crime".

Attachment of property under PMLA

The ED has power to provisionally attach a property in terms of Section 5(1) of the PMLA if (apart from satisfaction of other conditions) a person is in possession of "proceeds of crime". The said attachment is confirmed by the Adjudicating Authority under section 8(3) of the PMLA and eventually is to be confiscated by the Government in terms of Section 9 of the PMLA.

The key thus, to establish an offence of money laundering or for attachment of property under PMLA is existence of "proceeds of crime". Consequently it becomes imperative to understand what is meant by "proceeds of crime" under PMLA and how the courts have interpreted it.

"Proceeds of crime" - Explained

The expression "proceeds of crime" forms the heart of the offence of money laundering and has been defined under Section 2(i)(u) of the PMLA. The definition has been amended twice, once vide the Finance Act, 2015 and thereafter vide the Finance Act, 2019. The definition as originally stood provided as follows "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". Thereafter, vide the amendment carried out in 2015 the definition of "proceeds of crime" read as follows: "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 or where such property is taken or held outside the country, then the property equivalent in value held within the country". Subsequent to the amendment carried out vide the Finance Act in 2019, an explanation to the definition of "proceeds of crime" was added which reads as follows "Explanation – 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".

The definition of proceeds of crime is divided into three parts i.e. (1) property derived or obtained (directly or indirectly) as a result of criminal activity; or (2) the value of such property as above; or (3) if the property has been "taken or held" abroad, any other property "equivalent in value" whether held in India or abroad.

Section 2(1)(v) of the PMLA defines "property" as any property or asset of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or asset, wherever located. The term "property" has been given an expansive definition under the PMLA and includes all kinds of property.

From a plain reading of the definition of proceeds of crime it appears that in order for a "property" to be "proceeds of crime" and to be liable for attachment by the ED it is essential that such property must be derived or obtained as a result of criminal activity relating to a "scheduled offence". However, the said definition also uses the expressions "value of such property" and "equivalent in value". The ED has time and again relied upon the aforesaid expressions to attach properties which admittedly are not derived or obtained by any criminal activity but are otherwise clean properties i.e. properties which have been acquired not through proceeds generated from any criminal activity. The basis for this has been that since the actual properties derived or obtained from criminal activity are not traceable or available for attachment, the ED has the power to attach any other property by relying upon the words "value of any such property". The counter argument which has been raised to this is that attachment of a clean property i.e. property admittedly not obtained from any criminal activity is not liable for attachment as the very purpose and object of PMLA is to identify and attach properties involved in money laundering and if a property is a clean property then ED has no jurisdiction to attach any such property.

In our view, this counter argument has some force in view of the following:-

(a) From a perusal of the preamble it is apparent that the PMLA has been enacted for prevention of money-laundering and for confiscation of only those properties which are derived from or involved in money laundering. The Act does not in clear terms empowers confiscation of properties which are not involved in money-laundering or not derived from any criminal activity (except in case the property considered to have been derived from criminal activity is held or taken outside the country).

(b) In terms of Section 8(1) of the PMLA once any property of any person is provisionally attached by the ED under Section 5(1) and a complaint is filed under provisions of Section 5(5), the Ld. Adjudicating Authority is required to serve a notice on the person whose properties have been attached for the purpose of explaining the sources of income, earning or assets out of which the properties attached under Section 5(1) have been acquired. Thus, the scrutiny which the Adjudicating Authority is undertake is to see if the attached is obtained cleanly or from tainted sources.

(c) Additionally, from a perusal of the Section 3 of the PMLA, which defines the "offence of money laundering", it is clear that in order to constitute the offence of money laundering, a person ought to be projecting the "proceeds of crime" as "untainted property".

Having stated the above let's examine how the courts have dealt with and interpreted the definition of "proceeds of crime" under PMLA.

Important Judicial pronouncements

1. B. Rama Raju vs. Union of India & Ors. (2011 SCC Online AP 152): In this judgment, while interpreting the definition of "proceeds of crime", the High Court of Andhra Pradesh has held that since proceeds of crime is defined to include value of any property derived or obtained as a result of any criminal activity relating to a scheduled offence, where a person satisfies the Ld. Adjudicating Authority that the property acquired is through bona fide means, such property ought to be released from attachment.

2. J. Sekar vs. Union of India & Ors. (2018 SCC Online Del 6523): The Division Bench of the High Court of Delhi while upholding the constitutional validity of the second proviso to Section 5(1) of the PMLA observed that the expression "value of any such property" would be a value equivalent to the value of a property derived or obtained (directly or indirectly) by any person as a result of criminal activity. The property itself may no longer be available but the equivalent value of such a property, whether held in cash, etc, would be available for attachment.

3. Deputy Director, Directorate of Enforcement of Delhi vs. Axis Bank & Ors. (2019 SCC Online 7845) ("Axis Bank Judgment"): The Axis Bank Judgment most elaborately and extensively deals with the definition of "proceeds of crime" and as to whether the ED can attach even "clean/untainted properties" when the "tainted properties" are not available for attachment. The High Court in this case gave a distinction between "tainted properties" and "deemed tainted properties" and held that "deemed tainted properties" are properties which may have been obtained and acquired without any connection with criminal activity but are still liable to be attached if the tainted properties are not traceable or available for attachment. In this judgment the Court gave protection to bona fide third party claimants to the extent that if the bona fide third party claimants are able to show that they acquired an interest in the property at a time anterior to the commission of the proscribed criminal activity or they are able to establish that they took due diligence to ensure that the asset attached is not a tainted asset, then the attached property can be released in favour of such bona fide third party claimants.

The Court in this case interpreted the definition of "proceeds of crime" in a manner which gave wide powers to the ED with respect to attachment of properties under the PMLA and held that the ED has powers to even attach the clean properties when the tainted properties are not available for attachment.

It is also pertinent to note that the Axis Bank Judgment
has been challenged by way of Special Leave Petition and is pending adjudication before the Hon'ble Supreme Court of India.

4. Seema Garg vs. Deputy Director, Directorate of Enforcement (2020 SCC Online P&H 738) : This is the latest judgement with respect to the issue of interpretation of the definition of "proceeds of crime" and has been passed by the Division Bench of the Punjab and Haryana High Court. The Court while dealing with the issue whether "value of such property" occurring in the definition of "proceeds of crime" includes any property of any person irrespective of source of property has held that the phrase "value of such property" does not mean and include any property which has no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e. the alleged criminal activity."

Thus, the Punjab and Haryana High Court took a divergent view from the view taken by the High Court of Delhi in the Axis Bank Judgment and has held that the clean properties and the so called "deemed tainted properties" as defined by the High Court of Delhi in the Axis Bank Judgment cannot be attached by the ED under the PMLA if they have no link, direct or indirect, with the property derived or obtained from the commission of a scheduled offence.

Conclusion

What is pertinent to note is that, though, there is no clear pronouncement by the Hon'ble Supreme Court of India which settles the issue whether the ED can attach "untainted" or "clean" properties in case the "tainted" properties are not available for attachment but, this issue is pending adjudication before the Hon'ble Supreme Court of India in the Special Leave Petition filed against the Axis Bank Judgment. As we have mentioned above, the High Court of Delhi has held that such "untainted" or "clean" properties can be attached whereas the High Court of Punjab and Haryana has held to the contrary. Since, there is no judicial pronouncement by the Hon'ble Supreme Court of India till now and there are divergent views of two different High Courts, it would be interesting to see, going forward, as to how the Courts adjudicate on the powers of the ED to attach "untainted" or "clean" properties while scrutinizing and interpreting the definition of "proceeds of crime".


Abhinav Agnihotri is an Associate Partner and Dipan Sethi is an Associate at Link Legal India Law Services. Views are personal.

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