Constitutional Validity of second proviso of section 5(1) of PMLA upheld. Failure to disclose “reasons to believe” would be the entire proceedings illegal-High Court
Prelude:
The offence of money-laundering is defined under Section 3 PMLA. The punishment is prescribed under Section 4 PMLA. The expression “proceeds of crime” as appearing in section 3 is the root of the offence of money-laundering. Any person who is involved in any process or activity connected with proceeds of crime‖, including its concealment, possession, acquisition, use or projecting or claiming the proceeds of crime as untainted property, is guilty of committing the offence of money-laundering.
The definition of “proceeds of crime” in Section 2 (1) (u) PMLA requires the property to be derived or obtained as a result of criminal activity relating to a scheduled offence. The Schedule to the PMLA specifies a whole range of offences which include offences under the IPC.
The trial for the offence under Sections 3 and 4 of PMLA are to be conducted before the concerned criminal court, it provides for departmental proceedings under the PMLA itself i.e. Attachment, Adjudication and Confiscation.
Under Section 5(1) PMLA, if a Director or any other officer not below the rank of Deputy Director (who is authorised by the Director for the purposes of the said provision) provisionally attach properties. The Director/officer provisionally attaching any property under Section 5(1) of PMLA within 30 days must file complaint before the Adjudicating Authority (AA).
The first proviso to Section 5(1), seeks to restrict the applicability of Section 5(1) only to such persons who are facing trial for a scheduled offence, the second proviso deals with “any property of any person”.
The second proviso to Section 5 (1) PMLA was inserted by the FA 2015. The second proviso begins with a non-obstinate clause and in effect makes it a proviso to the first proviso. The second proviso is intended to override the first proviso, subject to the conditions set out therein. The authorised officer must reach a satisfaction, to be recorded in writing, that there is a reason to believe that if the property involved in money-laundering is not attached immediately, such non-attachment is likely to frustrate proceedings under the PMLA. In other words, even pending the filing of the charge-sheet/challan under Section 173 Cr PC before the criminal court, a provisional attachment can be ordered under the second proviso to Section 5 (1) PMLA subject to the fulfilment of the conditions precedent.
The aforesaid second proviso was challenged as to its constitutionality in the petitions filed.
ABCAUS Case Law Citation:
ABCAUS 2163 (2018) (01) HC
The Challenge/Grievance:
All the writ petitions filed under Article 226 of the Constitution of India, seek prayer for declaration that the second proviso to Section 5 (1) of the Prevention of Money-laundering Act, 2002 (PMLA) is ultra vires Article 14 of the Constitution of India.
Important Case Laws Cited/relied upon by the parties:
Nikesh Tarachand Shah v. Union of India 2017 (13) SCALE 609; Union of India v. Dilip Kumar (2015) 4 SCC 421.
State of Bombay v F.N. Balsara (1951) 2 SCR 682; Shreya Singhal v. Union of India (2015) 5 SCC 1
Shayara Bano v. Union of India (2017) 9 SCC 1; Maniklal Chotalal v. M.G. Makwana AIR 1967 SC 1373.
P.T. Munichikkanna Reddy v. Revamma (2007) 6 SCC 59, K.S. Paripoornan v. State of Kerala (1994) 5 SCC 593,
State of M.P. v. G.S. Dal & Flour Mills (1992) Suppl. 1 SCC 105 and
Hitendra Vishnu Thakur v. State of Maharashtra (1994) 4 SCC 602.
Brief Facts of the Case:
The Petitioners were facing proceedings under the PMLA as a result of an Enforcement Case Information Report (ECIR) filed under Sections 3 and 4 PMLA leading to the filing of original complaints (OC) under Section 5 (5) PMLA. Consequently, provisional attachment orders had been issued under Section 5 (1) PMLA against the Petitioners. The Adjudicating Authority (AA) had served show cause notices (SCNs) under Section 8 PMLA.
Contention made on behalf of the Petitioner:
Submissions of the Petitioners on constitutional validity of second proviso to Section 5(1) PMLA were as under:
(i) Section 5(1) contemplates an attachment of the property only where a person is found to be in possession of proceeds of crime and where such proceeds of crime are likely to be concealed, transferred or dealt with, resulting in frustration of the proceedings under the PMLA relating to confiscation.
(ii) The legislative intent, therefore, is that the exercise of the power of attachment should only be made in exceptional cases and not as a matter of routine. Confiscation will be resorted to only where the trial Court finds offences to have been committed after the conclusion of the trial and, under Section 8(5) PMLA, such criminal court may order the property ―involved in money-laundering‖ or used for the commission of money-laundering to stand confiscated to the Central Government. Therefore, only in exceptional circumstances can resort be had to attachment pending trial under the PMLA.
(iii) The attachment pending conclusion of the trial has to be only upon recording of ―reason to believe‖ that:
(a) A person is in possession of the proceeds of crime; and
(b) The proceeds of crime are likely to be concealed, resulting in frustration of proceedings relating to confiscation.
(iv) The first proviso to Section 5(1) PMLA erects a threshold bar to the exercise of the power of attachment pending conclusion of the trial. This mandates that the final report should have been forwarded to the Magistrate under Section 173 Cr PC.
(v) The second proviso to Section 5(1) PMLA cannot be interpreted in the manner that negates the safeguard contemplated under the first proviso to Section 5(1) PMLA. The expression ―any property of any person‖ occurring in the second proviso must necessarily be read as a person in possession of any proceeds of crime. Likewise, the phrase ―any property‖ has to meet the higher threshold contemplated in the latter part of the second proviso, i.e. it has to be ‘involved in money laundering‖. Further, the requirement under Section 5(1)(b) that the proceeds of crime are likely to be “concealed, transferred or dealt with” so as to frustrate the confiscation cannot be given a go-by even for invocation of the second proviso.
(vi) Unless there are strong and compelling reasons to believe that the property is “involved in money-laundering”‖, resort cannot be had to the second proviso to attach such property.
(vii) It cannot be the ipse dixit of the officer to decide when to invoke the first proviso and when to invoke the second. Unless sufficient safeguards are read into the second proviso as regards the exercise of the powers contained therein, the entire provision will be rendered arbitrary and violative of the Article 14 of the Constitution.
(viii) The second proviso to Section 5(1) PMLA, as it presently stands, is ‘manifestly arbitrary‘ as explained by the Supreme Court. the ‘right to property‘ being a human right. There can be numerous instances where resort need not be had to the powers of attachment when in fact there is no real basis, material or apprehension that the property would be concealed, transferred or dealt with in a manner that frustrates its confiscation. In other words, resort to the second proviso should be had in the rarest of rare cases.
(ix) Since the amendment is not merely procedural, but affects the substantive right of the Petitioners, it should be applied only prospectively.
Observations made by the High Court:
The Hon’ble High Court observed that what attracts Section 5(1) PMLA is the person being in possession of any proceeds of crime. That person who is in possession of proceeds of crime need not be the person who is being tried for the scheduled offences or even PMLA offences. Or he may be a person accused of a PMLA offence as described under Section 3 PMLA. That is because, under Section 3 PMLA, any person who attempts to indulge or knowingly assists or knowingly is a part of or actually involved in concealment, possession, acquisition or use and projecting a claim the property constituting a proceeds of crime as an untainted property “shall be guilty of the offence of money-laundering”. While the element of mens rea is not dispensed with, it is possible that a person who commits the offence under Section 3 PMLA is not himself or herself facing trial for any scheduled offence.
The first proviso to Section 5(1), seeks to restrict the applicability of Section 5(1) only to such persons who are facing trial for a scheduled offence, the second proviso deals with “any property of any person”. This “any person”‖could be a person in possession of proceeds of crime, which is likely to be “concealed, transferred or dealt with” in a manner that would frustrate the proceedings relating to confiscation. The second proviso, therefore, is consistent with Section 5(1) PMLA insofar as the person in possession of the proceeds of crime may not be a person who is facing trial for a scheduled offence.
The Hon’ble High Court observed that as pointed out by the Madras High Court, a person who is not accused of any offence, but who was merely come to possess, under fortunate or unfortunate circumstances, a property that represents the proceeds of crime come within the ambit of the second proviso to Section 5(1) PMLA. Therefore, the ambit of the second proviso to Section 5(1) PMLA is certainly wider than the ambit of the first proviso Section 5(1) PMLA. This explains why the second proviso has been expressly made a non-obstante clause. This is to draw a clear distinction between persons facing trial for a scheduled offence in respect of whom the investigation is complete and where a report is to be filed on the one hand and the other persons on the other hand.
According to the Hon’ble High Court, the second proviso to Section 5(1) PMLA would also cover a situation where, although a person has been suspected of committing the offence under Section 3 PMLA, the investigation is still in progress and the investigating agency has not reached a stage where it can file a report/charge-sheet under Section 173 CrPC. Such a person would also be covered by the second proviso to Section 5(1) of the PMLA.
The Hon’ble High Court opined that the main portion of Section 5(1) itself does not restrict its applicability to only such persons who are involved in the commission of a scheduled offence. It covers “any person in possession of any proceeds of crime”.
The Hon’ble High Court disagreed with the submissions advanced that the second proviso to Section 5(1) PMLA completely obliterates and renders redundant all the safeguards in the first proviso to Section 5(1) PMLA. According to the Court the submission proceeds on an incorrect interpretation of the entire scheme of Section 5(1) PMLA which has been further fleshed out by the introduction of the second proviso to Section 5(1) PMLA.
The Hon’ble High Court observed that a Court examining the constitutional validity of a provision, particularly on the ground of possible abuse of the powers thereunder, has to be satisfied that there are sufficient safeguards in the provision itself as introduced by the legislature. In that regard, if the second proviso to Section 5(1) PMLA is carefully perused, it will be noticed that there are several conditionalities that will have to be satisfied before the power thereunder can be exercised. The fact that the Director will, therefore, have to first apply his mind to the materials on record before recording in writing his reasons to believe is certainly a sufficient safeguard to the impulsive invocation of the powers under the second proviso to Section 5(1) PMLA.
The Hon’ble High Court observed that the further safeguards are provided as the order of attachment by the Director or the Deputy Director, as the case maybe, is only for a period of 180 days to begin with. Further, within a period of 30 days after the passing of such order, the AA takes over under Section 8(1) PMLA. Even under Section 8(1) PMLA, the AA is not supposed to mechanically issue an SCN. The AA has to apply its mind and again record the its reasons to believe that any person has committed an offence under Section 3 PMLA or is in possession of proceeds of crime. Further at the level of proceedings at AA level there are also several safeguards.
The Hon’ble High Court expressed ots disagreement that there is any manifest arbitrariness vitiating the second proviso to Section 5(1) PMLA or that the second proviso to Section 5(1) PMLA of the PMLA is so excessive and disproportionate so as to render it arbitrary.
Constitutional validity of the second proviso to Section 5 (1) PMLA
With respect to the constitutionality of the second proviso to Section 5 (1) PMLA, the Hon’ble High Court held as under:
(i) Although the second proviso to Section 5(1) states that the property has to be ‘involved in money-laundering‘ and Section 5(1) states that mere possession of proceeds of crime is sufficient, the Court does not see any conflict in these expressions. When the definition in Section 3 PMLA is read with Section 2(1)(v) and the Explanation thereto, it becomes clear that the property which constitutes ‘proceeds of crime‘ is the property involved in money-laundering.
(ii) The reasons to believe at every stage must be noted down by the officer in the file.
(iii) While the reasons to believe recorded at the stage of passing the order of provisional attachment under Section 5(1) PMLA may not be forthwith at that stage communicated to the person adversely affected thereby, the reasons as recorded in the file have to accompany the complaint filed by such officer within 30 days before the AA under Section 5(5) PMLA.
(iv) A copy of such complaint accompanied by the reasons, as found in the file, must be served by the AA upon the person affected by such attachment after the AA adds its own reasons why he prima facie thinks that the provisional attachment should continue.
Communication of Reasons to believe under PMLA is must
The Hon’ble High Court disagreed with the submission of the Union that there is no mandatory requirement, under Section 8(1) PMLA, to communicate to the noticee the reasons to believe and held that both, the reasons recorded by the officer passing the order under Section 5(1) PMLA and the reasons recorded by the AA under Section 8(1) PMLA should be made available to the person to whom notice is issued by the AA under Section 8(1) PMLA. The failure to disclose, right at the beginning, the aforementioned reasons to believe to the noticee under Section 8(1) PMLA would not be a mere irregularity but an illegality. A violation thereof would vitiate the entire proceedings and cause the order of provisional attachment to be rendered illegal.
It was held that although at the stage of issuance of notice under Section 8(1) PMLA all the relevant material on record which constituted the basis for reasons to believe may not be made available, if the noticee demands to see those materials on record, the AA is bound to make available all those materials on record to them. It is most likely that without such access to such material on record, the noticee will be unable to file an effective reply. Therefore, there cannot be any denial of access to the noticee of the materials on record. If there is any sensitive material, it can probably be redacted before issuing copies thereof, after noting the reasons for such redaction in writing in the file. But even such redacted material will have to be nevertheless shown to the noticee.
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