A. INTRODUCTION

1. Background

1.1. United Nations Global Programme Against Money Laundering defines Money Laundering as “a process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds”[1]. As a concept, money laundering has been around for long, but strangely was not dealt directly by an act or legislations in India. However, when the nations were liberalizing their economies, a need was felt to clamp on such illegal profits that had the potential to damage economies and especially when such proceeds were routed from foreign route. Such illegal profits, because they escape the formal economy of a country and are mostly in form of cash, can have significant impact on the monetary policy and exchange rates of a country and make them more volatile, while even resulting in high inflation in some cases.[2]

1.2. The first initiative came from the international community to address the problem of money laundering. The first convention in this regard was the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988. A delegation of 106 States participated in the convention. India is a party to the convention.[3] The convention called for prevention of laundering of proceeds of drug crimes and other connected activities and confiscation of proceeds derived from such offence. Subsequently, the International community took forward the subject by establishing the Financial Action Task Force[4] and the United Nations Global Programme Against Money Laundering[5] with a view to increase effectiveness of international action again money laundering.

1.3. In the Indian context, prior to Prevention of Money Laundering Act, 2002 (“PMLA” or “Act”) coming into force, the investigating agencies and enforcement agencies had loosely used provisions of the Income Tax Act, 1961, the Benami Transactions (Prohibition) Act, 1988, the Foreign Exchange Management Act, 2000 (“FEMA“), read along with other Acts to deal with the issue of money laundering. PMLA recognises the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 which was adopted by the General Assembly of the United Nations on February 23, 1990 to which India is a signatory and the Political Declaration adopted by the Special Session of the United Nations General Assembly, which calls upon the Member States to adopt national money-laundering legislation and programme. These find reference in the preamble of the Act itself.

2. Scope & Object

2.1. The Preamble of the Act provides that it is “An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.”

2.2. The Act seeks to combat money laundering in India and has three main objectives:-

a. To prevent and control money laundering/ proceeds of crime;

b. To confiscate and seize the property obtained from the laundered money/ proceeds of crime; and,

c. To deal with any other issue connected with money laundering/ proceeds of crime in India.

B.  ATTACHMENT UNDER PMLA

3. Definitions

3.1. Section 3 of the Act defines the offence of money laundering and Section 2(1)(u) of the Act defines ‘proceeds of crime’. ‘Proceeds of crime’ mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a Scheduled Offence. Section 2(1)(u) also widens the scope by including the ‘value of any such property’ and includes property even if it is held outside the country, in which case, the property equivalent in value held within the country or abroad could be considered as ‘proceeds of crime’. Section 2(1)(u) also clarifies 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 derived or obtained as a result of any criminal activity relatable to the Scheduled Offence.

3.2. Every Scheduled Offence under the PMLA is a Predicate Offence. It may be pertinent to note that the occurrence of the Predicate Offence is a prerequisite for initiating investigation into the offence of money laundering. Section 2(1)(y) of the PMLA defines ‘Scheduled Offence’. The Scheduled Offences are divided in two parts – Part A & Part C. In part ‘A’, offences to the Schedule comprise of offences under Indian Penal Code 1860, Narcotic Drugs and Psychotropic Substances 1985, Unlawful Activities (Prevention) Act 1967, Prevention of Corruption Act 1988, etc., to name a few. Part ‘C’ deals with trans-border crimes. Prior to February 15, 2013, i.e., the date of notification of the amendment carried out in PMLA[6], the Schedule also had Part B which provided for monetary threshold of rupees one crore for initiating investigations for the offence of money laundering. However, all the offences under Part B of the Schedule have now been included in Part A of the Schedule w.e.f February 15, 2013. Consequently, as an effect of the above amendment, at present, there is no monetary threshold to initiate investigations under PMLA.

4. Authorities under the Act

4.1. It is pertinent to mention that, under the PMLA, the Directorate of Enforcement (“ED”) is the investigating agency, however, Predicate Offences are investigated by agencies such as Police, Customs, SEBI, NCB and CBI, etc. under their respective acts. If a Predicate Offence is made out, the investigating agency can notify the ED if there is apprehension of money laundering, and the ED is empowered to provisionally attach the properties which falls under the purview of proceeds of crime as defined under Section 2(1)(u). It may be noted that ED cannot act on its own till the time a First Information Report or a Regular Case (CBI registers a Regular Case instead of First Information Report) is registered highlighting the Predicate Offence. Under the provisions of the PMLA, ED is empowered to attach or provisionally attach the property obtained directly or indirectly from the proceeds of criminal activities constituting Scheduled Offence. Further, ED is also empowered to attach any other property of equivalent value of the offender on account of its link or nexus with the offence of money laundering.

5. Procedure of Attachment

5.1. It should be noted that the provisions of the Code of Criminal Procedure, 1973 (including the provisions as to bails or bonds), apply to the proceedings before a Special Court[7] and the Special Court is deemed to be a Court of Session that can try the Predicate Offence as well as the offence of money laundering. If an offence is committed under Section 3 of the PMLA, a complaint is to be made by ED to the Special Court[8], to take cognizance of offence and if the Special Court finds that the offence of money laundering has been committed, it can order that the property involved shall stand confiscated to the Central Government under Section 8 (5) of the Act.

5.2. However, if the ED has reason to believe (the reason for such belief to be recorded in writing basis of material in his possession), that any person is in possession of any proceeds of crime and such proceeds of crime are likely to be concealed or transferred, the ED may provisionally attach such property.[9] ED should proceed to attach a property, to the extent required, only when they have a prima facie case that the person is in possession of proceeds of crime.[10] Further, ED has to, within a period of thirty days, from such attachment; file a complaint stating the facts of such attachment before the Adjudication Authority.[11] However, it is important to note that such property, if provisionally attached, seized or frozen, can only be for a period not exceeding one hundred and eighty days from the date of the order.[12]

5.3. The ED also has the power of search and seizure provided under Section 17 of the Act to seize such proceeds of crime. Section 17 (1A) further allows that where it is not practicable to seize such record or property, ED may freeze such property. On seizing any record or property or freezing any record or property, the ED has to, within a period of thirty days from such seizure or freezing, file an application before the Adjudicating Authority requesting for retention of such record or property seized or for continuation of order of freezing[13]. Further, such property may, if seized, be retained or if frozen, may continue to remain frozen, for a period not exceeding one hundred and eighty days from the day on which such property was seized or frozen[14].

5.4. If the Adjudicating Authority decides that any property is involved in money laundering, it shall, by an order in writing, confirm that the attachment of the property shall continue during the pendency of the proceedings under PMLA.[15] Any party aggrieved by the decision of the Adjudication authority, may file an appeal before the Appellate Tribunal (PMLA)[16]. Any party aggrieved by the order of the Appellate Tribunal (PMLA) may prefer an appeal before the High Court, within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain. Further, where the Central Government is the aggrieved party, the appeal may be filed before the High Court within the jurisdiction of which the respondent, or in a case of more than one respondent, any of the respondents, ordinarily resides or carries on business or personally works for gain.[17]

C. THIRD PARTY RIGHTS IN THE ATTACHED PROPERTY

6.1. The issue of bona fide third party claiming legal rights over the property attached by the ED under PMLA was decided by the Hon’ble Delhi High Court in The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors.[18] It is important to note that the Hon’ble High Court in the said matter has also passed an interim order dated February 6, 2018, permitting Axis Bank to sell the property, by open auction, and deposit the proceeds, in the form of interest bearing fixed deposit, before the Registrar General of the High Court till the pendency of the appeal. The above interim order was issued by the Hon’ble Court on the ground that as the property attached by ED was in the nature of depreciating asset, the same should be immediately sold so that maximum value of the same may be realized at the end of the appeal.

6.2. The Delhi High Court in the above matter set the law in the judgment dated April 2, 2019 (“Judgment”) whereby it was held that rights under the acts like the RDBA, SARFAESI Act and Insolvency Code over PMLA, must co-exist and enforced in harmony, without one being in derogation of the other. Further, the Judgment observed that an order of attachment under PMLA is not illegal per se, if a secured creditor has a charge on the property, under the RDBA and SARFAESI Act, however, mere attachment of property under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor.

6.3. Further, on the issue of nexus of the attached property with offence of money laundering and third party claims in the properties attached by ED under PMLA, the Bench, inter alia, held the following:

a. That the empowered enforcement officer has the authority under PMLA to not only attach a ‘tainted property’ but also any other asset or property of equivalent value of the offender of money laundering, even if such property was not tainted at all on account of its link or nexus with the offence (or offender) of money laundering;

b. If the ‘tainted property’ is a result of criminal activity relating to a Scheduled Offence and is not traceable, or cannot be reached, or is deficient, the empowered enforcement officer may attach any other asset of the accused person provided it is near or equivalent in value to the former;

c. If the person accused of the offence of money laundering objects to the attachment, the burden of proving facts in support of such claim is to be discharged by him;

d. If the property of a person other than the one accused of the offence of money laundering, i.e. a third party, is attached and there is evidence to show that such property before its acquisition was held by the person accused, or involved in a transaction of money laundering, the burden of proving facts to the contrary so as to seek release of such property from attachment is on the person who so contends;

e. The charge or encumbrance of a third party in a property attached under PMLA cannot be treated or declared as “void” unless material is available to show that it was created “to defeat” the said law, such declaration rendering such property available for attachment and confiscation under PMLA, free from such encumbrance;

f. A party in order to be considered as a ‘bona fide third party claimant’ for its claim in a property being subjected to attachment under PMLA must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money laundering, and that it has made all compliances with the existing law;

g. If it is shown by cogent evidence by the bona fide third party claimant, staking interest in an alternative attachable property, claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken ‘due diligence’ to ensure that it was not a tainted asset and the transactions indulged in, were legitimate at the time of acquisition of such interest;

h. If it is shown by cogent evidence by the bona fide third party claimant, staking interest in an alternative attachable property claiming that it had acquired the same at a time anterior to the commission of the proscribed criminal activity, the property to the extent of such interest of the third party will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists, subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party;

i. If the order confirming the attachment has attained finality, or if the order of confiscation has been passed, or if the trial of a case under Section 4 PMLA has commenced, the claim of a party asserting to have acted bona fide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.

6.4. Another moot issue in such situations is whether after the approval of a resolution plan under the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”), is it open for the ED to attach the assets of the corporate debtor on the alleged ground of money laundering, by the erstwhile promoters/directors/employees. The above issue was considered by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) in the recent case of JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors.[19]. It is pertinent to mention that, the ED, in the above matter, specifically submitted that under the provisions of the PMLA, ED has the power to seize the assets of the corporate debtor, even after the approval of the resolution plan under the Code. However, contrary to the stand of the ED, the Ministry of Corporate Affairs (“MCA”) submitted that the ED while conducting investigation under PMLA is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired through proceeds of crime but not the assets of the corporate debtor which would have been financed by creditors and acquired by a bona fide third party resolution applicant through the statutory process, supervised and approved by the Adjudicating Authority under the Code. Therefore, upon an acquisition under Corporate Insolvency Resolution Process (“CIRP”) by a resolution applicant, the corporate debtor and its assets are not derived or obtained through proceeds of crime under the PMLA and need not be subject to attachment by the ED after approval of resolution plan by the Adjudicating Authorities.

6.5. Subsequently, during the pendency of the above matter, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced wherein Section 32A was inserted in the Code. It is pertinent to note that Section 32A provides for Liability of Corporate Debtor for prior Offences. Sec 32A(1) states that liability of the corporate debtor for an offence committed prior to the commencement of CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence once the resolution plan is approved by the Adjudicating Authority and  if such resolution plan results in change in management and control of the corporate debtor.  Further, Sec 32A(2) provides that no action can be taken against the property of a corporate debtor in relation to the offence committed prior to the CIRP of the corporate debtor and where such property is covered under the resolution plan approved by the Adjudicating Authority thereby resulting in change in the management and control of the corporate debtor or sale of liquidation assets. Further in explanation to this section it is also provided that an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor.

6.6. The NCLAT, in the above-stated case, after taking into notice of the newly inserted section, and taking into consideration the submissions made by MCA held that Section 32A(1) and (2) clearly suggests that the ED/ other investigating agencies do not have the powers to attach assets of a ‘Corporate Debtor’, once the ‘Resolution Plan’ stands approved and the criminal investigations against the ‘Corporate Debtor’ stands abated. The NCLAT further clarified that Section 32A of the Code does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved.

7. CONCLUSION

7.1. While PMLA is a complete code in itself, and PMLA, by virtue of section 71, PMLA has overriding effect over other existing laws in matters dealing with ‘money laundering’, and ‘proceeds of crime’ relating thereto. The Delhi High Court has laid down the principles and guidelines for the purposes of preserving the legitimate claims and rights of third parties in a ‘tainted property’. The Delhi High Court has also, through its interim order, set a precedent for preservation and maximization of the value of attached property or to extract the proceeds from it in order to preserve third party claims over an attached property. Similarly, the attachment of assets during CIRP drastically affects the stakeholders of the corporate debtor. Directly or indirectly, such litigation hampers the whole process of CIRP. Accordingly, the amendment made by Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced, which further clarified the situation and paves way for a smoother and more efficient CIRP. However, the interested parties, in properties that fall within the purview of ‘proceeds of crime’, now bear the burden of proving that such properties were acquired bona fide, and that they did not have knowledge that such properties were ‘proceeds of crime’. Additionally, there is an urgent need to devise a mechanism under PMLA to ensure that the rights and claims of bona fide third party in the attached property is sufficiently protected and not frustrated.

Authors:

Vijayendra Pratap Singh, Senior Partner
Priyank Ladoia, Senior Associate
Tanmay Sharma, Associate

Footnotes:

[1] “what is money laundering?” at https://www.imolin.org/imolin/gpml.html
[2] Ibid
[3] United Nations Convention Against Illicit Traffic In Narcotic Drugs And Psychotropic Substances, 1988 at http://www.unodc.org/pdf/convention_1988_en.pdf
[4] https://www.fatf-gafi.org/about/
[5] https://www.imolin.org/imolin/gpml.html#whatis
[6] Prevention of Money-Laundering (Amendment) Act, 2012
[7] Section 44 (1) (d) of the PMLA
[8] Section 44 (1) (b)
[9] Section 5 (1) of the PMLA
[10] Bikram Chatterji & Ors. v. Union of India & Ors. (W.P. (C) No.940/2017 (Order dated December 2, 2019 and May 22, 2019)
[11] Section 5(5) of the PMLA
[12] Section 5 (1) of the PMLA
[13] Section 17 (4) of the PMLA
[14] Section 20(1) of the PMLA
[15] Section 8 (3) of the PMLA
[16] Section 26 of the PMLA
[17] Section 42 of the PMLA
[18]  (Crl. A. 143/2018)
[19] Company Appeal (AT) (Insolvency) No. 957 of 2019