Introduction
The concept of ‘proceeds of crime’ is central to understanding the full import of the Prevention of Money Laundering Act, 1992 (PMLA). The phrase ‘proceeds of crime’ is fairly generic and self-explanatory. However, for the purposes of the act, the phrase proceeds of crime has been given a very specific meaning which is critical because of the way the offence of money-laundering has been defined under the PMLA. A perusal of Section 3 of the PMLA will show that the phrase proceeds of crime is the fulcrum around which the offence of money laundering is balanced. The term proceeds of crime may, at first blush look to be all- encompassing, but for the purpose of the PMLA, it is exhaustively defined.
The phrase ‘proceeds of crime’ is especially important for those advocates and chartered accountants who seek to practice in the practice area of attachment and confiscation under the PMLA as the attachment and confiscation that, as provided for under the said act, is with respect to proceeds of crime.
The Offense of Money Laundering
To better appreciate the importance and role of proceeds of crime under the PMLA, it would be appropriate to first look at the offence of money laundering itself. After all, it is the definition of money laundering that gives importance to this phrase. The Offence of money laundering is defined by Section 3 of the PMLA which states: “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party 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.
Explanation— For the removal of doubts, it is hereby clarified that—
- a person shall be guilty of offence of money laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:
- concealment;
- or possession;
- or acquisition;
- or use;
- or projecting as untainted property;
- or claiming as untainted property in any manner whatsoever,
- the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.]”
The term proceeds of crime finds itself taking centre stage not only in the section itself but also the explanation thereto. A literal interpretation of the section leaves little room for doubt that for the offence of money laundering to be made out, there must be a connection with proceeds of crime. It is in fact this connection that separates the offence of money-laundering from the primary offence which generates the proceeds of crime. Therefore, the existence of proceeds of crime is essential for the existence of attachment and prosecution proceedings for the offence of money laundering made out under the PMLA.
The Supreme Court in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. 2022 SCC OnLine SC 92 has that the expression “money-laundering”, ordinarily, means the process or activity of placement, layering and finally integrating the tainted property in the formal economy of the country. The Court however observed that Section 3 of the Prevention of Money Laundering Act has a wider reach. The offence, as defined, captures every process and activity in dealing with the proceeds of crime, directly or indirectly, and is not limited to the happening of the final act of integration of tainted property in the formal economy to constitute an act of money laundering. From the bare language of Section 3 of the Act, it is amply clear that the 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. The process or activity can be in any form — be it one of concealment, possession, acquisition, or use of proceeds of crime as much as projecting it as untainted property or claiming it to be so. The involvement in any one of such processes or activities connected with the proceeds of crime would constitute an offence of money laundering. This offence otherwise has nothing to do with the criminal activity relating to a scheduled offence — except the proceeds of crime derived or obtained as a result of that crime. The Supreme Court observed that it is only such property which is derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence that can be regarded as proceeds of crime. The authorities under the Act cannot resort to action against any person for money laundering on an assumption that the property recovered by them must be proceeds of crime and that a scheduled offence has been committed unless the same is registered with the jurisdictional police or pending inquiry by way of complaint before the competent forum. The expression “derived or obtained” is indicative of criminal activity relating to a scheduled offence already accomplished.
The observations of the Supreme Court in this landmark judgement bring proceeds of crime into sharp focus with respect to the offence of money laundering. In order to better understand the offence of money laundering, it is essential to understand the concept of proceeds of crime.
Proceeds of Crime
The phrase proceeds of crime would sound to anyone who reads it as self-explanatory and for all intents and purposes it is. Generically, the phrase proceeds of crime would mean the benefit obtained from a criminal activity. This generic meaning would of course be very vague and all- encompassing and would not do for a specialised legislation such as the PMLA. Section 2(1)(u) of the Prevention of Money Laundering Act defines the term ‘proceeds of crime’. The Supreme Court in Vijay Madanlal Choudhary held that the term “proceeds of crime” needs to be construed strictly as it is one of the core ingredients constituting the offence of money laundering.
The definition reads as follows:
“proceeds of crime” means 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 [or abroad]]
[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
The relevance of ‘Proceeds of Crime’ under the Prevention of Money Laundering Act, 1992 derived or obtained as a result of any criminal activity relatable to the scheduled offence;]
The definition of proceeds of crime is extremely wide in as much as it refers to any property derived or obtained both directly and indirectly “as a result of criminal activity relating to a scheduled offence” or the value of any such property. In fact, in the definition that seems to cover as much ground as possible by using extremely wide terms such as “directly and indirectly”, the only restraint seems to be the statutory requirement that for the purposes of the PMLA, just any ‘proceeds of crime’ shall not do. Proceeds of crime for the purposes of PMLA must be as a result of criminal activity relating to a scheduled offence. This restraint is a redeeming factor and the cornerstone of every defence that can be taken up for proceedings under the PMLA, whether they be criminal proceedings with respect to prosecution or civil proceedings with respect to attachment. While the words of the section talk about property resulting from a criminal activity relating to scheduled offence, the explanation clarifies that the property may not need to be only derived or obtained from the scheduled offence but may also be directly or indirectly derived or obtained as a result of any criminal activity relatable to the scheduled offence. The import of the term “relatable to” is extremely wide and has expanded the meaning of the phrase proceeds of crime and also in turn the ambit of the offence of money laundering as provided for in Section 3 of the PMLA.
The Supreme Court in Vijay Madanlal Choudhary held that the definition of “proceeds of crime” in Section 2(1)(u) of the Prevention of Money Laundering Act is common to all actions under the Act, namely, attachment, adjudication, and confiscation being civil in nature as well as prosecution or criminal action. By a further explanatory amendment vide Finance (No.2) Act, 2019, an Explanation was added. The Court observed that the fact that the explanation also includes any property which may, directly or indirectly, be derived as a result of any criminal activity relatable to scheduled offence does not transcend beyond the original provision. In that, the word “relating to” (associated with/has to do with) used in the main provision is a present participle of the word “relate” and the word “relatable” is only an adjective. The thrust of the original provision itself is to indicate that any property is derived or obtained, directly or indirectly, as a result of criminal activity concerning the scheduled offence, the same be regarded as proceeds of crime. In other words, property in whatever form mentioned in Section 2(1)(v), is or can be linked to criminal activity relating to or relatable to scheduled offence, must be regarded as proceeds of crime for the purpose of the Act.
The Supreme Court further held that the definition clause in Section 2(1)(u) of the Prevention of Money Laundering Act includes any property derived or obtained “indirectly” as well. This would include property derived or obtained from the sale proceeds or in a given case in lieu of or in exchange for the “property” which had been directly derived or obtained as a result of criminal activity relating to a scheduled offence. In the context of the Explanation added in 2019 to the definition of the expression “proceeds of crime”, it would inevitably include other property which may not have been derived or obtained as a result of any criminal activity relatable to the scheduled offence. The Court concluded that “As noticed from the definition, it essentially refers to “any property” including abroad derived or obtained directly or indirectly”. This observation of the court reaffirms the extremely wide ambit of the term proceeds of crime for the purposes of PMLA.
The Supreme Court in the same judgement also observed that all properties recovered or attached by the investigating agency in connection with the criminal activity relating to a scheduled offence under the general law cannot be regarded as proceeds of crime. There may be cases where the property involved in the commission of scheduled offence attached by the investigating agency dealing with that offence, cannot be wholly or partly regarded as proceeds of crime within the meaning of Section 2(1)(u) of the Prevention of Money Laundering Act — so long as the whole or some portion of the property has been derived or obtained by any person “as a result of” criminal activity relating to the stated scheduled offence. To be proceeds of crime, therefore, the property must be derived or obtained, directly or indirectly, “as a result of” criminal activity relating to a scheduled offence. To put it differently, the vehicle used in the commission of a scheduled offence may be attached as property in the concerned case (crime), it may still not be proceeds of crime within the meaning of Section 2(1)(u) of the Act. For being regarded as proceeds of crime, the property associated with the scheduled offence must have been derived or obtained by a person “as a result of” criminal activity relating to the concerned scheduled offence. This distinction must be borne in mind while reckoning any property referred to in the scheduled offence as proceeds of crime for the purpose of the Act.
Epilogue
The Supreme Court in Directorate of Enforcement v. Padmanabhan Kishore 2022 SCC OnLine SC 1940 was seized of a curious case where it fell for consideration as to whether a bribe giver can be charged with the offense of moneylaundering.
The Supreme Court held in the context of giving a bribe that so long as the amount is in the hands of a bribe giver and till it does not get impressed with the requisite intent and is actually handed over as a bribe, the money in question would definitely be untainted money. If the money is handed over without such intent (of giving a bribe – i.e. without the requisite mens rea), it would be a mere entrustment. If the money given in entrustment is thereafter appropriated by the public servant, the offence would be of misappropriation or species thereof but certainly not of bribe. The crucial part is the requisite intent to hand over the amount as a bribe and normally such intent must necessarily be antecedent or prior to the moment the amount is handed over. Thus, the requisite intent (or mens rea) would always be at the core before the amount is handed over. If such intent has been entertained well before the amount is actually handed over as a bribe, the person concerned would certainly be involved in the process or activity connected with “proceeds of crime” including inter alia, the aspects of possession or acquisition thereof. By handing over money with the intent of giving a bribe, such person will be assisting or will knowingly be a party to an activity connected with the proceeds of crime. Without such active participation on part of the person concerned, the money would not assume the character of being proceeds of crime. The Supreme Court held that relevant expressions from Section 3 of the Prevention of Money Laundering Act are thus wide enough to cover the role played by such a person. This judgement again shows the centrality of the term proceeds of crime with respect to the offence of money laundering.
In Vijay Madanlal Choudhary, the Supreme Court held that the possession of unaccounted property acquired by legal means may be actionable for tax violation and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence and such offence is included in the Schedule of the Prevention of Money Laundering Act. As it stands today, no section of the Income- tax Act, 1961, finds itself in the schedule to the PMLA, and therefore based on the judgement of the Supreme Court, it is reaffirmed that not only is it required that the property in question is derived/obtained from an offence but it is equally important that the offence must be included in the schedule to the PMLA.
In summation, for the purposes of PMLA, it is not enough that the ‘proceeds of crime’ are in fact derived/obtained from crime or criminal activity but the criminal activity must also necessarily find itself in the schedule to the PMLA. This seems to be the only explicit restraint and safeguard that has been interwoven into the wording of the statute with respect to proceeds of crime.