Without a Predicate Offence, the charges under the Prevention of Money Laundering Act (PMLA) can not stand on it's own

Without a Predicate Offence, the Charges under Scheduled Offences of Prevention of Money Laundering Act Cannot Stand on its Own

The Supreme Court on Friday, May 17 said that the offences under The Prevention of Money Laundering Act (PMLA) are “Parasitic” and such cases cannot stand their own without a Predicate Offence.

Table of Content:

1. Introduction
2. What is Predicate Offence?
3. Definition of Proceeds of Crime
4. Some other things to know about Predicate Offenses and the PMLA
5. A Report by Hindustan Times
6. Landmark Judgments
7. Centrality of the Predicate Offence in PMLA Prosecutions
8. Suggestions and Analysis
9. Conclusion

Introduction

The Prevention of Money Laundering Act, 2002 (PMLA), was enacted to combat money laundering in India and prevent the generation and circulation of black money. The Act empowers law enforcement agencies to investigate and prosecute individuals or entities involved in money laundering, defined as the process of disguising the origin of money obtained from illicit activities, making it appear legitimate.

However, the unique structure of the PMLA requires that charges under the Act be rooted in a “predicate offence,” also known as a “scheduled offence.” This distinction has been crucial in numerous judicial interpretations, especially as Indian courts have delved into whether a standalone prosecution under PMLA is tenable without proving a predicate offence.

The Supreme Court has recently delivered several landmark judgments clarifying this nuanced relationship, underlining that charges under PMLA cannot exist independently without a scheduled offence being established.

What is Predicate Offence?

A "predicate offence" or "scheduled offence" under the PMLA refers to the primary offence from which proceeds of crime are generated. These scheduled offences are listed in the schedule annexed to the PMLA and include a variety of criminal activities such as human trafficking, drug trafficking, arms smuggling, corruption, and other serious offences under the Indian Penal Code, 1860 (IPC), and various other legislations. The essence of the PMLA is that it is designed to target the laundering of proceeds derived from these crimes.

In simple words, a Predicate offense in money laundering refers to a crime component of a larger crime. In the context of complex financial systems, any crime that leads to the generation of any monetary output would be considered a predicate offense. The broader crime would fall under money laundering or terrorism financing.

Definition of Proceeds of Crime:

Section 2 sub-section 1 clause u under Prevention of Money Laundering Act:

The definition of "proceeds of crime" in Section 2 (1) (u) of the PMLA underlines the importance of a predicate offence. Proceeds of crime mean property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. Therefore, to invoke the PMLA, it is mandatory to first prove that a scheduled offence has occurred and generating proceeds of crime.

Some other things to know about Predicate Offenses and the PMLA:

A Report by Hindustan Times

On the 17th of May, the Supreme Court distinguished as ‘parasitic’ the offences under the Prevention of Money Laundering Act (PMLA) and observed that such sleight of hand would not be possible where the offence is not supported by any predicate offence.

According to Hindustan Times, a bench of justices Surya Kant and K.V. Viswanathan mentioned the ‘absence of a predicate and scheduled offence’ and offered bail to a Chhattisgarh businessman arrested for money laundering over the non-existent coal transportation tax.

Significantly, the apex bench of the apex court suggested that imagine the embarrassment that will be faced by the ED, if ED does not name them in the existing charges of conspiracy/money laundering and yet, “compels the investigation of a money laundering case without – at the very least – thoroughly establishing the underlying criminal activity before the prosecution of the money laundering charge in a fitting case,” complies the report.

“But there must be a registered case of a predicate offence. How else can the agency take steps by itself? PMLA is a secondary offence. It is dependent upon a primary offence. It does not have its own base,” was one of the quotations from HT's bench.

S. V. Raju counsel for the government illustrated instances from prior rulings of the Supreme Court to demonstrate that while an individual may be under investigation by the ED for a money laundering offence, that individual may not be charged in respect of a scheduled offence given that “the investigations into the offence of money laundering were independent of the probe conducted by any other law enforcement agency in a predicate offence”.

Nevertheless, the bench advised, “You (ED) will be left clutching at straws if there is no predicate offence. It is submitted that there has to be a predicate offence somewhere and against someone, for you to be able to proceed under PMLA,” as quoted by the report from HT.

The matter at hand relates to the apprehension of Sunil Kumar Agarwal in October 2022. The ED had launched the investigation against the businessman on the wires of the Income tax department investigation. He was arrested after the investigative agency filed an ECIR (the equivalent of FIR in the normal criminal justice system) in Raipur, the capital city of Chhattisgarh and a related offence regarding a co-accused in Bengaluru.

The report explains that while the FIR with respect to the events in Bengaluru included allegations of Section 384 (extortion, which is a scheduled offence under PMLA), later a charge sheet was presented regarding non-scheduled offences of tampering with evidence and assault against public officers.

It called attention to the fact that “strong prima facie” case is made out for allowing bail to Agarwal as there was none predicate offence. Supreme Court also asked the ASG to furnish, “within six weeks, a statement on whether the investigation into the allegations of an illegal coal transportation levy scam was undertaken independently by the police of Chhattisgarh,” HT reported.

Landmark Judgments

• Vijay Madanlal Choudhary v. Union of India (2022)

This recent judgment by a three-judge bench of the Supreme Court is considered a significant interpretation of the PMLA's structure. The bench clarified that money laundering is a stand-alone offence under Section 3 of the PMLA. However, they also highlighted the centrality of the predicate offence to trigger an investigation under the Act.

The Supreme Court ruled that the investigation under PMLA must be linked to a predicate offence mentioned in the PMLA schedule. If the scheduled offence itself does not stand or cannot be proved, the money laundering charges are bound to fail. This ruling underscored that the existence of proceeds of crime is contingent upon proving the commission of the scheduled offence.

The judgment further held that the PMLA's reverse burden of proof, which mandates the accused to prove their innocence, does not contravene the constitutional rights provided in Articles 20 and 21 of the Indian Constitution. However, the court reaffirmed that a money laundering prosecution cannot commence in isolation without the scheduled offence being established first.

• P. Chidambaram v. Directorate of Enforcement (2019)

In this case, the Supreme Court held that unless an offence of corruption (a scheduled offence under the PMLA) was made out, proceedings under PMLA could not proceed. The case involved former Union Minister P. Chidambaram, who was accused of laundering money through foreign investments. The Court, while granting him bail, emphasized that PMLA proceedings are predicated on the commission of a scheduled offence, and if the predicate offence fails, the money laundering charges cannot be sustained.

• Nikesh Tarachand Shah v. Union of India (2017)

In another landmark ruling, the Supreme Court struck down the two sections of the PMLA (Sections 45(1) and 45(2)), which imposed stringent bail conditions. The Court ruled that unless there is credible evidence that a scheduled offence has been committed and that the proceeds of crime from that offence were laundered, stringent bail conditions cannot be applied. In this case, the Court not only highlighted the importance of the predicate offence but also brought into question the harsh conditions under which bail is granted in money laundering cases, providing relief to the accused unless a strong prima facie case is made out regarding the predicate offence.

• Union of India v. Gautam Khaitan (2020)

This case reaffirmed that the PMLA, being a penal statute, must be interpreted strictly. The Supreme Court held that even if the proceeds of crime were laundered outside India, the existence of a scheduled offence is essential. The mere act of transferring money outside the country does not constitute money laundering unless it is proved that the money transferred is the proceeds of a scheduled offence. The Court made it clear that the prosecution under the PMLA is not automatic. It only arises once the prosecution for the scheduled offence results in a conviction or a strong prima facie case of guilt.

Centrality of the Predicate Offence in PMLA Prosecutions

The rulings of the Supreme Court collectively establish a crucial principle: without proving a predicate offence, the prosecution under PMLA cannot stand on its own. This principle is embedded in the legislative structure of the PMLA.

Ø Proceeds of Crime:

The offence of money laundering, as defined under Section 3 of the PMLA, revolves around the existence of proceeds of crime. These proceeds of crime must be the result of a scheduled offence, as per the statutory mandate. Thus, without proving that a scheduled offence generated the proceeds of crime, money laundering charges cannot be maintained.

Ø Attachment and Confiscation of Property:

Sections 5 and 8 of the PMLA empower authorities to provisionally attach and eventually confiscate property involved in money laundering. However, these powers are contingent upon proving that the property is indeed the proceeds of crime arising from a scheduled offence. If the predicate offence is not established, the attachment of property also becomes untenable.

Ø Burden of Proof:

The reverse burden of proof under the PMLA, where the accused must prove their innocence, applies only once the existence of proceeds of crime is established. Without a predicate offence, this reverse burden cannot be triggered.

Suggestions and Analysis

The interpretation of the PMLA's provisions by the Supreme Court offers several insights into the procedural and substantive safeguards provided in money laundering cases. While the PMLA is a critical tool in combating economic crimes, its misuse or overreach is equally concerning.

1. Strengthening the Predicate Offence Requirement:

The courts have rightly emphasized the importance of proving the predicate offence before invoking PMLA. However, law enforcement agencies often initiate PMLA proceedings without thoroughly investigating the scheduled offence, which can lead to prolonged trials and harassment of the accused. It is crucial that investigative agencies prioritize the scheduled offence and gather sufficient evidence before proceeding under PMLA.

2. Streamlining Bail Provisions:

Although the courts have struck down stringent bail provisions under Section 45 of the PMLA, the bail process remains complex, especially in high-profile cases. It is suggested that clearer guidelines be formulated for granting bail, balancing the need to prevent flight risk and ensuring that innocent individuals are not subjected to prolonged incarceration.

3. Strengthening Judicial Oversight:

The judiciary must continue to play an active role in scrutinizing PMLA cases, especially where the scheduled offence is not adequately proven. A robust judicial review mechanism will ensure that PMLA proceedings are not initiated arbitrarily or as a tool of harassment.

4. Capacity Building of Investigating Agencies:

To effectively investigate both the scheduled offence and money laundering, investigating agencies require advanced training and resources. Capacity building initiatives that equip officers with the skills to handle complex financial investigations can prevent frivolous PMLA prosecutions.

Conclusion

In conclusion, while the PMLA is an essential law for tackling money laundering, its efficacy hinges on the foundational requirement of a predicate offence. The courts have provided much-needed clarity in this regard, ensuring that the Act is applied judiciously and that innocent individuals are not wrongfully implicated in money laundering cases without the establishment of a scheduled offence. As law enforcement agencies continue to combat economic crimes, they must remain mindful of the Supreme Court’s interpretation and ensure that PMLA prosecutions are grounded in solid evidence of predicate offences.

Reference:

1. https://financialcrimeacademy.org/money-laundering-and-predicate-offenses/
2. https://financialcrimeacademy.org/money-laundering-and-terrorist-financing-2/
3. https://www.hindustantimes.com/india-news/sc-pulls-up-madras-hc-for-taking-land-on-lease-101707504723439.html
4. https://www.hindustantimes.com/india-news/predicate-offences-must-for-pmla-charges-top-court-101715975305329.html/