Source: Indian Express
- Prelims: PMLA, Enforcement directorate
- Mains GS Paper II and III: Executive and Judiciary, Money laundering related issues.
ARTICLE HIGHLIGHTS
- The Supreme Court in Vijay Madanlal Choudhary and Ors versus Union of India, upheld the constitutional validity of the provisions of the Prevention of Money Laundering Act (PMLA).
- SC calls it a “unique and special legislation” and underlines the powers of the Directorate of Enforcement (ED) to hold inquiries, arrest people and attach property.
- The court underlined that the principle of innocence of the accused/offender is regarded as a human right but that presumption can be interdicted by a law made by the Parliament/Legislature.
INSIGHTS ON THE ISSUE
Context
Money laundering:
- Money Laundering refers to converting illegal earned money into legitimate money.
- The government does not get any tax on the money because there is no accounting of the black money. So Money Laundering is a way to hide the illegally acquired money.
- The term “money laundering” originated from the Mafia group in the United States of America. Mafia groups have made huge amounts of extortion, gambling, etc. and this money is shown as legal money.
- In India, “money laundering” is popularly known as Hawala transactions.
Working of Money laundering:
- A case of Money laundering ostensibly appears to be an above-board financial transaction, however, the criminality underneath is hidden by a three stage process:
- The first stage: when the crime money is injected into the formal financial System. This is called ‘placement’;
- The second stage: Money injected into the system is layered and spread over various transactions with a view obfuscating the tainted origin of the money. This process is called ‘layering’;
- Third and the final stage: Money enters the financial system in such a way that original association with the crime is sought to be obliterated so that the money can then be used by the offender or person receiving it as clean money. This is called ‘Integration’.
PMLA Act:
- The PMLA was introduced in 2002, ostensibly to tackle the problem of money laundering.
- It has been subject to several amendments including 2005, 2009, 2012.
- There are mainly 3 objectives of PMLA:
- To prevent and control money laundering.
- To confiscate and seize the property obtained from the laundered money.
- To deal with any other issue connected with money laundering in India.
- It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
- Money laundering has become a matter of international concern and India has undertaken several international commitments in this regard.
International versus Indian PMLA
- By-product of a host: Money-laundering in the Indian context is linked or is seen as a byproduct of a host of both grave and routine offences that are appended to the Act as a schedule.
- Overbroad offences: These ‘scheduled’ or ‘predicate’ offences ought to be ideally limited to grave offences such as terrorism, narcotics smuggling, corruption and serious forms of evasion of taxes and duties.
- However, in practice, the list contains offences such as fraud, forgery, cheating, kidnapping and even copyright and trademark infringements.
Functions:
- The Prevention of Money Laundering Act, 2002 (PMLA): ED has been given the responsibility to enforce the provisions of the PMLA by conducting investigation to trace the assets derived from proceeds of crime, to provisionally attach the property and to ensure prosecution of the offenders and confiscation of the property by the Special court.
- The Foreign Exchange Management Act, 1999 (FEMA): ED has been given the responsibility to conduct investigation into suspected contraventions of foreign exchange laws and regulations, to adjudicate and impose penalties on those adjudged to have contravened the law.
- The Fugitive Economic Offenders Act, 2018 (FEOA): It is a law whereby the Directorate is mandated to attach the properties of the fugitive economic offenders who have escaped from India warranting arrest and provide for the confiscation of their properties to the Central Government.
- Sponsoring agency under COFEPOSA: Under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA), Directorate is empowered to sponsor cases of preventive detention with regard to contraventions of FEMA.
Main issues with PMLA
- Opacity: The Enforcement Case Report (the analogue of an FIR) is not shared with the accused, either he is informed whether he is summoned as witness or accused.
- Nor the full grounds of arrest shared with the accused.
- Burden of proof on accused: when accused applies for bail. The bail cannot be granted without hearing the prosecution and the accused is required to prove their innocence to get bail.
- Under Indian conditions, the process of proving innocence is itself a punishment.
- Crime definition infinitely elastic: the definition of crime under this Act is almost infinitely elastic, what counts as money laundering crimes include everything in the kitchen sink.
- The sovereign has immense latitude to define what counts as the relevant crime.
- It can also in a classic instance of rule by law change the presumption of innocence.
- Lack of safeguard : The list of crimes included overrides similar crimes in other parts of the law.
- The code has an exceptional procedure of its own that can trump the safeguards of the Criminal Code of Procedure.
- In theory, the law provides safeguards against attaching properties, but those safeguards are weak and do not allow for even reasonable exceptions that might be necessary for your dignity or continuing with your business or livelihood.
- Mere possession of the proceeds of a crime, without any surrounding consideration of how one came to be in possession of the proceeds, makes it an offence.
- Police harassment: The state officials dealing with the case are not classed as police. But they, in some respects, have even more power than the police.
- Passed as money bill: The law itself has been enacted by dubious means as it was passed as money bill.
- One cannot determine whether the parliamentary procedure under which the law was enacted was itself proper.
- Lower conviction: The conviction rate under this law is very low, less than 0.5 per cent, but thousands of cases are registered, people arrested, and their lives are turned upside down.
- Misuse of law: The vagueness and stringent provisions of the law makes it susceptible to use against political opponents.
- Selective targeting: The Enforcement Directorate has been manifestly selective in opening money-laundering probes, rendering any citizen vulnerable to search, seizure, and arrest at the whim of the executive.
- International context: Post 9/11, there was concern with terrorist financing and arguably many international treaties actually weakened, rather than strengthened, individual rights protections.
- The goal of international treaties is laudable, but the rhetoric of international treaties is often used to override domestic rights safeguards.
- The state argued less on Indian constitutional law and more on the rhetoric of international obligations.
The Supreme Court Ruling:
Enforcement Case Information Report (ECIR):
- Enforcement Case Information Report (ECIR) cannot be equated with an FIR.
- Supplying an ECIR in every case to the person concerned is not mandatory and “it is enough if the Enforcement Directorate (ED), at the time of arrest, discloses the grounds of such arrest”.
- The ECIR is an internal document of the ED and the fact that FIR in respect of scheduled offence has not been recorded, does not come in the way of ED authorities to commence inquiry/investigation
Section 3 of PMLA Act:
- Offence under Section 3 “is dependent on illegal gain of property as a result of criminal activity relating to a scheduled offence”.
- The Authorities under the 2002 Act cannot prosecute any person on notional basis or on the assumption that a scheduled offence has been committed, unless it is so registered with the jurisdictional police and pending enquiry including by way of criminal complaint before the competent forum.
- Section 3 of the PMLA Act 2002 has a wider reach and captures that offence of money laundering is an independent offence regarding the process or activity connected with the proceeds of crime which had been derived or obtained as a result of criminal activity relating to or in relation to a scheduled offence.
Enforcement Directorate:
- The bench upheld the ED’s power under Section 5 of the Act (order provisional attachment of any proceeds of crime).
- The Court stated that Section 5 provides for a balancing arrangement to secure the interests of the person and also ensures that the proceeds of crime remain available to be dealt with in the manner provided by the 2002 Act.
- It rejected the argument that ED authorities are police officers.
- A statement recorded by them under Section 50 of the Act would be hit by Article 20(3) of the Constitution which says no person accused of an offence shall be compelled to be a witness against himself.
Way Forward
- Preventing misuse of law: The Indian government is serious about curbing money laundering so India has to focus on financial literacy education so that people are aware.
- Government needs to look into major issues concerning the lower conviction rate and make sure the law is not misused.
- Internal Checks and Balances: It is true that law has given stringent powers to the ED in dealing with the accused that can increase the possibility of political misuse.
- There must be a consensus between the adjudicating authority and the officers of ED to abide by the constitutionality of provision under PMLA, making the investigation more lucid.
- The Process Itself Should not Become Punishment: The ED’s expanded powers should be welcomed with a greater commitment to expeditiously resolve the cases, so both the judiciary and enforcement agencies can move forward with speedy trials and convictions.
- Operational Vigilance: There must be a constant scrutiny over the operations of the Enforcement Directorate and current disposition whether this clarification will improve the conviction rate (which is right now less than half a percent).
QUESTION FOR PRACTICE
- Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels(UPSC 2021)
(200 WORDS, 10 MARKS)
- India’s proximity to the two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What counter-measures should be taken to prevent the same?(UPSC 2018)
(200 WORDS, 10 MARKS)
