Prevention of Money Laundering Act, 2002: Background, Provisions, and Issues

Context

The Prevention of Money Laundering Act (PMLA), 2002 is under scrutiny as its most serious aspect is the inclusion of offences that have nothing to do with the original motive of combating the laundering of drug money.

Delhi High Court criticizes ED for Faulty Investigation in Money Laundering Case

• Recently, the Delhi High Court slammed the Enforcement Directorate (ED) for a faulty Prevention of Money Laundering Act (PMLA) Probe and said the ED must introspect steps to ensure expeditious and fair investigations.
  • The case dealt with a complaint filed by ED against five individuals for alleged commission of offences under Sections 3 and 4 of the PMLA. One of the individuals died during the trial.

Background of Prevention of Money Laundering Act (PMLA), 2002

• A Distinct Objective: The humongous volume of black money generated through international drug trafficking posed a grave threat to the economy of many countries. 
• Combat the Risk of Destabilisation: There was widespread realisation that the black money generated through the drug trade and integrated into the legitimate economy was likely to destabilise the world economy and endanger the integrity and sovereignty of nations.
• Supporting Data: As per United Office on Drugs and Crime, drug trafficking – the global illicit trade involving the cultivation, manufacture, distribution and sale of substances which are subject to drug prohibition laws is estimated to be a $32 billion industry.

Enactment of the Prevention of Money Laundering Act (PMLA), 2002

• Article 253 of the Indian Constitution: 
  • The Prevention of Money Laundering Act (PMLA) was enacted by India’s Parliament under Article 253 which empowers it to make laws for implementing the international conventions and to give effect to the Recommendations of the Financial Action Task Force (FATF) on addressing the problem of money laundering. 
  • Used to enact the Prevention of Money Laundering Act (PMLA), 2002.
• Deals With: The law on money laundering enacted under Article 253 and Item 13 of the Union list in the context of the UN resolution referred to above can only be on drug money. 
• Crime Proceeds: The PMLA revolves around the “crime proceeds” which are laundered. Not only the persons involved directly in the crime and the generation of the crime proceeds but also persons who have nothing to do with the crime but who have some involvement at a later stage in the laundering process are also guilty under this law.
  • This was considered the most serious economic crime which had the potential to destabilise the world economy and endanger the sovereignty of nations. So, there was global consensus on the need to have a tough law to deal effectively with this crime. 
• Regulating Authority: The ED is responsible for enforcing the provisions of the PMLA and investigating money laundering cases.

Provisions of the Prevention of Money Laundering Act (PMLA), 2002

• Section 3 of Prevention of Money Laundering Act: It defines the offense of money laundering.
  • The existence of a predicate offense is sine qua non to charge someone of money laundering. 
  • The investigation and prosecution of the predicate offense is done by the Central Bureau of Investigation (CBI) or the State Police.
• Section 4 of Prevention of Money Laundering Act: This section deals with punishment.
• Section 50 of the Prevention of Money Laundering Act: It provides powers of a civil court to the ED authorities for summoning persons suspected of money laundering and recording statements. 
• Prescribed Obligation: Prevention of Money Laundering Act (PMLA) prescribes the obligation of banking companies, financial institutions and intermediaries for verification and maintenance of records of the identity of all its clients and also of all transactions and for furnishing information of such transactions in a prescribed form to the Financial Intelligence Unit (FIU-IND). 

• Setting up of Authority: PMLA envisages the setting up of an Adjudicating Authority to exercise jurisdiction, power and authority conferred by it. 
  • It also envisages the setting up of an Appellate Tribunal to hear appeals against the order of the Adjudicating Authority and the authorities like Director FIU-IND.
• Special Courts: Under PMLA, Special Court or Special Courts are used to try the offenses punishable under PMLA and offenses with which the accused may, under the Code of Criminal Procedure 1973, be charged at the same trial. 
• Agreement for Central Government: It allows the Central Government to enter into an agreement with the Foreign Governments for enforcing the provisions of the PMLA, exchange of information or investigation of cases relating to any offense under PMLA.

Flaws and Inadequacies in the Provisions and Working of the Prevention of Money Laundering Act, 2002

• Against the Fundamental Rights: 

  • Under Section 19 of the Prevention of Money Laundering Act (PMLA), the ED, while arresting a person, is merely required to furnish the grounds of arrest, and there is no requirement to disclose the contents of the ECIR (akin to an FIR), which contains the allegations against the accused person. 
    • As has been held in Vijay Madanlal Choudhary, supplying a copy of ECIR to the accused person is not mandatory. 
    • This is against the fundamental right of the accused to be informed of the charges and allegations, which is a universally recognised right, and is a part of the right to life and liberty under Article 21 of the Constitution.
    • Section 50 of the PMLA empowers the authorities to issue summons to “any person”, including the accused, to give evidence or produce records during the course of an investigation is in violation of the right against self-incrimination, which is a fundamental right under Article 20(3) of the Constitution.

• Incorporation of Various Unrelated Subjects: 

  • The UN Resolution on the basis of which the Prevention of Money Laundering Act was enacted in India spoke only about the offence of the laundering of drug money. However, the PMLA of India acquired a different character through amendments from time to time.
    • The schedule has been expanded over the years, including even minor and non-serious offences such as copyright and trademark infringements, thereby considerably expanding the scope of the PMLA.

• On Punishment: 

  • Tough laws were incorporated to deal with most serious economic crime.  However, due to various amendments, now it contains such offences which are either ordinary offences listed in the IPC or for which there are special laws in force. 
    • Example: The Prevention of Corruption Act, 1988, aimed at curbing corruption among public servants. This Act was added to the schedule of offences in 2009. The PMLA now applies with all its rigour to public servants. Thus, a public servant charged with corruption and a hard-core drug trafficker are treated alike. 

• Against the Anglo-Saxon Jurisprudence: 

  • A very disturbing thing about the PMLA is that it turns the Anglo-Saxon jurisprudence principle upside down and an accused under this law is presumed to be guilty until proven innocent.
    • Anglo-Saxon Jurisprudence: Under this principle, a person is presumed innocent until proven guilty. 
      • Presumption of innocence has been acknowledged by the FATF as one of the fundamental principles of domestic law and admitted that misapplication of FATF Standards may have affected due processes and procedural rights, including the presumption of innocence.

• Uncontrolled Discretion of Authorities: 

  • The prosecution under the PMLA can be initiated as long as an FIR in relation to a scheduled offence has been registered with the jurisdictional police, or the same is pending enquiry or trial. The lack of guidelines in this regard gives unbridled discretion to the authorities to invoke the provisions of the PMLA selectively and arbitrarily. 
    • Under the PMLA, the ED, unlike other central police organisations which are required to obtain the consent of the state before carrying out any policing/investigating activity, can carry out investigation without the prior consent of the concerned State.

• Against the Basic Structure of the Constitution: 

  • Post 2019 amendments to the PMLA, the distinction between the offence of money laundering and scheduled offence has been blurred to a great extent and has resulted in the ED investigating into the commission of the scheduled offence itself. 
    • Since there is no requirement to obtain the consent of the state, the exercise of policing power by the ED, a Central agency, within the territory of a state without its consent is against the value of federalism (a part of the basic structure of the Constitution).

• Tough on Bail: 

• • An accused will be denied bail by the entire hierarchy of courts because the bail provision contained in section 45 of the PMLA says that a judge can give bail only when he/she is satisfied that the accused is innocent. 

Supreme Court on Prevention of Money Laundering Act

• Challenge on Provisions: The constitutionality of various provisions of the PMLA were challenged before the Supreme Court on the following grounds:
  • The conditions for bail were disproportionately stringent.
  • The power conferred on the ED to issue summons, record statements, make arrests, and search and seize property was wide and open to misuse.
  • There was a total lack of procedural safeguards.
• Rejection by the Supreme Court: The challenge was rejected by the apex court in its judgment in Vijay Madanlal Choudhury vs Union of India (July 2022). 
  • Grounds: Underpinning the decision is the belief that India’s commitment to the international community to deal sternly with the offence of money laundering is sacrosanct, and even excels considerations of fundamental rights. 
• Review Petition: A review petition has been filed against the judgment, and is pending before the court.

Conclusion

While the Prevention of Money Laundering Act (PMLA) may have been well-intentioned, the inclusion of minor, non-serious offences in the schedule to its disregard for personal liberty, the PMLA raises questions about its compliance with fundamental rights and due process of law. The PMLA requires amendment to bring it in conformity with constitutional principles and ethos.