Predicate Offence Under PMLA Proceedings: A Myth or Reality?

By Mr. Nishant Shankar, Senior Associate at Chambers of MS Kalra (Gurgaon), and Mr. Vishal Singhal, Advocate at Supreme Court of India

Introduction

In today’s globalizing world, money laundering has become a catchphrase and a common area of concern for both developing as well as developed economies. Consequentially, the U.N. General Assembly has condemned the practice of money laundering in any form, urging all States to implement provisions against such crimes.

The term ‘money laundering’ is often used to signify a process whereby the origins of illegally/unlawfully fetched monies are projected as legal/lawful. India being one of the forerunners in the race to become a developed country is constantly faced with the acts of money laundering, which now has become a major area of concern for the country. Accordingly, to safeguard itself from the ill effects of money laundering, the country had brought into force a statute, in conformity with the Political Declaration adopted by the Special Session of the U.N. General Assembly in 1998,        and termed the same as the Prevention of Money Laundering Act, 2002 (“the PMLA”).

Fast-forwarding to the time after the inception of the Act, India in the year 2018 marked approximately 884 companies on high alert, on accounts of money laundering of assets worth INR 50 billion, which clearly goes to show that the enactment of PMLA has not been able to safeguard the financial interests of the Country in the manner as was projected. Moreover, PMLA has also been criticized as inherently flawed with various ambiguities and arbitrary powers flowing through the provisions.

However, as the saying goes, change is inevitable. The same stands to be true for our legal forums which continue to evolve and adapt to the volatile requirements. The Hon’ble High Court of Bombay has become one such change-maker for the proceedings under PMLA vide the case of Babulal Verma v. Directorate of Enforcement [Criminal Application (APL) No. 201/2021 with Criminal Bail Application No. 974 of 2021]. A successful precedent has been marked upon a much-contested issue concerning investigation conducted by the Directorate of Enforcement, wherein a primary/predicate offence has been quashed.

The Hon’ble High Court in its 25-pager off the beam and antithetical judgment observed and recorded that:

“Once an offence under the PMLA is registered based on a scheduled offence, then it stands on its own and it thereafter does not require the support of Predicate/Scheduled Offence. It further does not depend upon the ultimate result of the Predicate/Scheduled offence. Even if the Predicate/scheduled offence is compromised, compounded, quashed or the accused therein is/are acquitted, the investigation of ED under PMLA does not get affected, wiped away or ceased to continue”.

Considering the effects of such a precedent on a stagnant statute after almost two decades of its enactment, and the rise in the scope of the statute, it becomes necessary that the said judicial precedent be discussed and dwelled upon in a detailed manner.

Background

The initiation of the case can be traced back to a crime bearing No. 109 of 2020 registered by the City Chowk Police Station, Aurangabad under Section 406, 420 r/w. Section 34 of the Indian Penal Code, 1860, against M/s Omkar Realtors and its promoters namely, Mr. Babulal Verma and Mr. Kamal Kishore Gupta. Accordingly, an Enforcement Case Information Report bearing No. ECIR/MBZO-II/20/2020 was registered by the Directorate of Enforcement, Mumbai. The complaint thereafter was termed as a misunderstanding by the Complainant via a summary report, however, the Judicial Magistrate while accepting the report, refused to quash the proceedings.

Thereby, vide Criminal Application (APL) No. 201/2021 the Petitioners approached the High Court of Bombay. Mr. Vijay Aggarwal, Advocate appearing on behalf of the applicants placed his reliance upon the FAQs available on the website of the Directorate of Enforcement read with the speech delivered by Hon’ble Finance Minister in Rajya Sabha on 17.12.2012 coupled with well-established judicial precedents in P. Chidamabaram v. Directorate of Enforcement, (2019) 9 SCC 24; State of Punjab v. Davinder Pal Singh Bhullar, (2011) 14 SCC 770; and Hardev Motor Transport v. the State of M.P. (2006) 8 SCC 613. Mr. Aggarwal emphasized that a predicate offence is a sine qua non for the offence of money laundering and that in the event of quashing/ compounding of the predicate offence, the subsequent and consequential proceedings would eventually fall.

Mr. Anil Singh, ASG, appearing on behalf of the Directorate of Enforcement, Mumbai expressed his opposing views and stated that the alleged offence pertained to a serious crime, involving Rs. 410 Crores. It was further asserted that once an ECIR was registered, the base/predicate/Scheduled Offence was not required thereafter, for bringing an offence under PMLA to its logical end.

The learned ASG placed reliance on Radha Mohan Lakhotia v. Deputy Director, PMLA, 2010 SCC OnLine Bom 1116; VGN Developers P. Ltd. V. Deputy Director, ED, MANU/TN/6087/2019; Eastern Institute for Integrated Learning in Management University v. Joint Director, ED, 2019 SCC OnLine Sikk 143; and Smt. Usha Agarwal v. Union of India,  2017 SCC OnLine Sikk 146 to argue that the offence under Section 3 of the act is an independent offence.

Ratio Decidendi

The Hon’ble High Court in a historic manner, applied the maxim, Ut Res Magis Valeat Quam Pereat”, along with the Elementary Rules of Interpretation, and disposed of the Criminal and Bail Applications, while recording the following reasons:

  1. The statute must be construed in a manner that it is effective and workable, and not entirely brought to an end from the interpretations of the Court.
  2. A plain reading of Section 3 and Section 4 of the PMLA indicates that the person charged with the offence of ‘Money Laundering’ need not necessarily be charged of having committed a Scheduled Offence.
  3. The offence under PMLA is self-contained and stand-alone and independent of a predicate offence.
  4. Hypothetically, ‘an accused’ in a predicate/scheduled offence is generally influential, and gets the base offence compromised or compounded, to avoid further investigation by ED, which may put an end to the investigation, and run contrary to the legislative intent of the statute.

Analysis

The judgment although holding the means to bring about a historic change raises several questions and ambiguities in the implementation and interpretation of the Statute as a whole.

It is apparent that the Hon’ble High Court has failed to consider the wholesome picture of the issue at hand. Similarly, such issues have been answered by various other High Courts across the Country. The Hon’ble Karnataka High Court in the case of M/s. Obulapuram Mining Company Pvt. Ltd. V. Joint Director, Directorate of Enforcement, 2017 SCC OnLine Kar 2304, held that ECIR was liable to be quashed when offences did not fall under the ‘Scheduled offences’. Furthermore, even the Hon’ble Delhi High Court in the case of Rajiv Channa v. Deputy Director, Directorate of Enforcement, 2014 SCC OnLine Del 4889, held that the acquittal of a person charged with the scheduled offences under PMLA, ipso facto, shook the foundation of an offence of money laundering, as the same cannot be considered as an independent offence. Thus, the flaw in this historic judgment passed by the Hon’ble Court of Bombay is evident from its sole reliance upon the judgments substantiating its prejudice towards the accused.

The Hon’ble High Court interestingly at Para 13 of the Judgment, has taken a prejudicial view that hypothetically the accused is highly influential, despite no such observations made by the Ld. Special Court. The Hon’ble Court instead of following its duty to rely on the legislative intent of the act as observed in K.P. Varghese v. Income Tax Officer, AIR 1981 SC 1922, has acted completely contrary to the said precedent.

Further, the Application of Ut Res Magis Valeat Quam Pereat, in the present matter is unfound when the Applicants never challenged the constitutional validity of the Statute. The High Court while interpreting the provisions of Law, should have restricted itself to a harmonious construction of the Statute, and complied with the precedents set by the Hon’ble Supreme Court of India on the strict interpretation of penal statutes, PMLA being a penal statute.

Conclusion

A plain reading of Section 3, and 4 r/w, Section 2 (u) of the PMLA, states that the offence of Money Laundering is not a stand-alone offence but is based on the commission of a predicate offence, thereby making it amply clear that a predicate offence is a pre-requisite for proceedings under the PMLA [P. Chidambaram (Supra)].

Although the errors/ flaws in the judgement are apparent on the face of it, the impact of the same can only be incurred from the future developments on similar cases under PMLA, which are likely to be challenged before the Apex Court of the Country. At that point of time, the backtracking of the developments, arising out of this controversial judgment would be a sight to behold and is bound to bring further developments in the decade’s old statute.