Section 3 of The Prevention of Money-Laundering Act, 2002 (PMLA) is
the most important provision and the pivot for many other provisions of the Act.
It deals with the crucial concept of the offence of money-laundering. This
definition was recently amended w.e.f. 1st
August, 2019 by inserting Explanation to section 3.
Section 3 after such
amendment reads as follows.
3. Offence of
money-laundering
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
1[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.
2[Explanation – For the removal of doubts, it is
hereby clarified that
(i) 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 –
(a) concealment; or
(b) possession; or
(c) acquisition; or
(d) use; or
(e) projecting as untainted property; or
(f) claiming as
untainted property;
(g) in any manner whatsoever.
(ii) 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.]
Explanation
retrospectively brings a sea change
The Explanation has
been inserted in section 3 by the Finance (No. 2) Act, 2019 w.e.f. 1st August, 2019. It begins with the words
‘for the removal of doubts, it is hereby clarified that’. These words
suggest that the Explanation is intended to apply retrospectively. The
Supreme Court has held3 that an Explanation may be
added in declaratory form to retrospectively clarify a doubtful point of law and
to serve as proviso to the main section.
There are two parts in the
Explanation. While the first part seems to refine and modify the concept
of money-laundering given in section 3, the second part adds a new angle by
making the offence of money-laundering a continuous offence.
Earlier, some ambiguity
was found to exist in section 3. It was contended by the Directorate of
Enforcement that such ambiguity handicapped investigation of the money trail,
the adjudication of attachment by the PMLA Adjudicating Authority and Tribunals,
as also the trial of the offence of money-laundering under PMLA.
The handicap was created
by the words ‘and projecting or claiming it as untainted property’ in the
main part of section 3. Due to this, unless it was established in every case
that there was a further act of ‘projecting or claiming’ the
proceeds of crime as untainted property, section 3 could not be invoked. This
was a compulsory pre-condition that was required to be fulfilled due to the word
‘and’ preceding the words ‘projecting or claiming’. In other
words, money-laundering was regarded merely as projection or claiming proceeds
of crime as untainted property. This infirmity in the language of section 3
created a handicap. A person would fall in the earlier part of section 3 but
would escape the rigours of section 3 merely because it could not be
further proved in every case that he ‘projected or claimed’
the proceeds of crime as untainted property.
Explanation
(i) now seeks to remove this
lacuna by clarifying vide placement of (e) and (f) as merely one of the
processes or activities the existence of which alone no longer remains a
pre-condition to attract the charge of money-laundering.
Having regard to the said
handicap, the Government considered it necessary to widen the scope of ‘proceeds
of crime’. This was done by inserting the Explanation to section 3. The
Explanation clarified the extent to which a person is guilty of the
offence of money-laundering where he is found to have directly or indirectly
attempted to indulge or knowingly assisted or knowingly was a party to or was
actually involved in any manner whatsoever in one or more of the processes or
activities specified in section 3 Explanation (i). The following two
activities have been mentioned in the list of processes or activities in
Explanation (i):
- projecting as untainted
property,
- claiming as
untainted property.
The words in
Explanation (i), viz., ‘one or more of the following’ and
‘in any manner whatsoever’ signify that Explanation (i) is
intended to widen the scope of section 3.
1 Substituted for ‘proceeds
of crime and projecting’ by the Prevention of Money-Laundering (Amendment) Act,
2012, w.e.f. 15th February,
2013
2 Inserted by the Finance
(No. 2) Act, 2019, w.e.f. 1st August,
2019
3 Y.P. Chawla vs. M.P. Tiwari AIR 1992 SC
1360, 1362
INGREDIENTS OF OFFENCE OF MONEY-LAUNDERING
A broad analysis of
section 3 as amended shows the following ingredients:
- The persons regarded as guilty of
money-laundering – mens rea implied in the definition of
money-laundering.
- Actions must be connected with
specified processes or activities.
- Specified processes or
activities.
- Nexus of the processes or activities
with ‘proceeds of crime’.
- ‘Proceeds of crime’ – defined in
section 2(1)(u).
- Projecting or claiming proceeds of
crime as untainted property – no longer an essential ingredient of the offence
of money-laundering.
The above six ingredients
of the concept of money-laundering are reviewed as follows:
The persons regarded
as guilty of money-laundering – mens rea implied in the definition of
money-laundering
The following four types
of persons are covered in section 3:
The person who directly or
indirectly
A review of the four types
of persons mentioned above in relation to the specified processes and activities
gives rise to the question whether mens
rea or a guilty mind is implied in the definition
of money-laundering.
Mens rea is
defined in Black’s Law Dictionary (Sixth Edition) as under.
Mens rea
An
element of criminal responsibility; a guilty mind; a guilty or wrongful purpose;
a criminal intent. Guilty knowledge and wilfulness.
The aspect of mens rea has been
subject of intensive debate before Courts under Income-tax law in respect of
penal provisions. The Supreme Court has held4 in a number of tax cases that a penal
provision must be strictly construed and that mens rea is a
necessary ingredient for the imposition of penalty.
Under the criminal law,
too, unless it is found that the accused had the guilty intention to commit
crime, he cannot be held guilty of committing the crime. Thus, mens rea is
considered an essential ingredient of criminal offence5. The nature
of mens rea
may be implied in a statute creating an offence if the object and the wordings
of the provisions of the statute so suggest.
The
Parliamentary debate on the Money-Laundering Bill, 1999 shows that the word
‘knowingly’ did not exist in the definition of
money-laundering. Hence, the
Parliamentary Committee observed that without the word ‘knowingly’, the
provision creating liability for money-laundering was harsh and could result in
a situation where anyone who unintentionally commits the offence of
money-laundering will be regarded as guilty. To avoid such a situation, the
Committee recommended adding the word ‘knowingly’ to indicate that mens rea is an
essential ingredient of the definition of the offence of money-laundering. Thus,
where there is prima facie evidence of a guilty state of mind, the
accused will have the opportunity to disprove the allegation of offence by
presenting satisfactory evidence of honesty of his belief in the action that he
undertook innocently. This principle is now incorporated in section 24 (burden
of proof) that was amended w.e.f. 15th
February, 2013 to provide that in the case of a person not charged with the
offence of money-laundering, the mandatory opportunity to prove the contrary is
not available to such person. This is evident from the absence of the words
‘unless contrary is proved’ before the word ‘presume’ in section
24(b).
Accordingly, all four
types of persons who directly or indirectly
would be guilty
of money-laundering on the premise of their attempt, knowledge and actual
involvement. Section 24 gives such person an
opportunity to prove that he did not commit the offence of money-laundering as
defined in section 3.
‘Attempt – connotation
of’
The expression ‘attempt
to indulge in’ in the main part of section 3 and the newly-inserted
Explanation is suggestive of the intention to widen the scope of the
definition of ‘offence of money-laundering’ in section 3.
The wording of section 3,
particularly the expression ‘directly or indirectly’ and the expression ‘attempt
to indulge in’, leaves no doubt that even where the attempt does not reach the
stage of completion of the action for which the attempt was made, the charge of
offence u/s 3 would be attracted in the same way as if the criminal act was
consummated.
What constitutes an
attempt is indeed a mixed question of law and fact and it depends on the
circumstances of each case to ascertain whether an attempt was made. When the
word ‘attempt’ is juxtaposed with the word ‘prepare’, it is clear that attempt
begins after the preparation is complete.
Actions must be
connected with specified processes or activities
To attract the guilt of
offence of money-laundering in section 3, it must be established that the
above-mentioned actions of the person were linked to the specified processes or
activities.
Specified
processes or activities
The following processes or
activities connected with proceeds of crime are covered by section 3
• concealment
• possession
• acquisition
• use
• projecting as untainted
property
• claiming as untainted
property.
The concepts underlying
the above processes and activities may be reviewed as follows:
The first process
or activity connected with the proceeds of crime is concealment.
Black’s Law Dictionary (Sixth Edition) defines ‘concealment’ as
follows:
To
conceal. A withholding of something which one knows and
which one, in duty, is bound to reveal. Concealment implies intention to
withhold or secrete information so that one entitled to be informed will remain
in ignorance.
The second process
or activity connected with proceeds of crime is possession. The
word ‘possession’ is defined in Black’s Law Dictionary (Sixth
Edition) as follows:
Possession. Having control
over a thing with the intent to have and to exercise control.
The term ‘possession’ has
been examined by Courts in a number of decisions. A reference may be made, in
particular, to the following decisions:
- Union of India vs. Hassan Ali
Khan (2011) 14 taxmann.com 127 (SC);
- Radha Mohan Lakhotia vs. Dy. Director (2010) (5) Bom. Cr 625;
- Hari Narayan Rai vs. State of Jharkhand (2011) (6) R Cr
1415;
- Vikash Kumar Sinha vs. State of Jharkhand (2011) (2) J Cr 395 (Jhr).
The third process
or activity connected with proceeds of crime is
acquisition.
The word ‘acquisition’ is
derived from the word ‘acquire’ which is defined in Black’s Law
Dictionary (Sixth Edition) as under:
To
gain by any means, usually by one’s own exertions; to get as one’s own; to
obtain by search, endeavour, investment; practice or purchase; receive or gain
in whatever manner; come to have, to become owner of property; to make property
one’s own; to gain ownership of.
The term ‘acquisition’ has
also been examined by Courts in various decisions. A reference may be made, in
particular, to the following:
- State of
Maharashtra vs. Mahesh P. Mehta 1985 CrLj 453 (Bom.);
- Devilal Ganeshlal vs. Director
1982 CrLj 588 (Bom.).
The fourth process
or activity connected with the proceeds of crime is use. The term
‘use’ is defined in Black’s Law Dictionary (Sixth Edition)
as under:
To make use of; to convert
to one’s service; to employ; to avail oneself of; to utilise; to carry out a
purpose or action by means of; to put into action or service, especially to
attain an end.
The fifth process
or activity connected with proceeds of crime is projecting as untainted
property. It is self-explanatory.
The sixth process
or activity connected with proceeds of crime is claiming as untainted
property. This, too, is self-explanatory.
It may be noted that the
fifth and sixth activities connected with proceeds of crime have been placed in
Part (i) of the Explanation inserted in section 3 w.e.f. 1st August, 2019 to plug a loophole in the
language of section 3. Earlier, ‘projecting or claiming as untainted
property’ of proceeds of crime was a pre-condition to attract section
3.
It
was difficult to prove the existence of this fact of projecting or claiming.
This loophole has been plugged by bifurcating the projecting or claiming of
proceeds of crime as untainted property into two separate activities. The
existence of none of these two bifurcated activities is now a pre-condition to
attract the guilt of money-laundering u/s 3.
Nexus of the
processes or activities with ‘proceeds of crime’
To attract section 3 it is
necessary to establish that the specified processes or activities are connected
with the proceeds of crime. Without such a nexus of the processes or activities
with the proceeds of crime, section 3 cannot be invoked.
“Proceeds of
crime” – defined in section 2(1)(u)
The definition of
‘proceeds of crime’ in section 2(1)(u) needs to be dealt with in detail
to understand significant aspects of the definition on the basis of the legal
position considered by Courts in respect of significant aspects.
Projecting or
claiming proceeds of crime as untainted property – no longer an essential
ingredient of offence of money-laundering
All the above-mentioned
constituents of ‘proceeds of crime’ are interlinked and the presence of
any constituent in a given case will attract section 3. According to the law
prior to insertion of the Explanation to section 3
w.e.f. 1st August, 2019, even if a
single one of the above constituents was not found to exist in a given case, the
liability u/s 3 was not attracted to that case. Thus, despite the presence of
all other constituents of ‘proceeds of crime’, if there was no projection
or claiming the proceeds of crime as untainted property, the charge u/s 3 was
considered unsustainable. This position has undergone a sea change after the
insertion of the Explanation to section 3 w.e.f. 1st August, 2019 as explained in
the first paragraph.
Apart from the above six
ingredients, the following important aspects of the offence of money-laundering
may also be noted.
The offence of
money-laundering – now a ‘continuing’ offence
Explanation (ii)
adds a new dimension to the
rigours of section 3. Now, the offence of money-laundering is not to be
interpreted as a one-time offence that ceases with the processes or activities
specified in Explanation (i). The effect of Explanation (ii) is
that a person shall be considered guilty of the offence of money-laundering so
long as he continues to enjoy the proceeds of crime, thereby making the offence
of money-laundering a continuing offence.
The scope of the
Explanation is better understood when read with various amendments made
to the definition of ‘proceeds of crime’.
Definition of
“offence of money-laundering” strengthened by Explanation
– observes the
Bombay High Court
In a recent decision, the
Bombay High Court6
has dealt with the implications of the newly-inserted
Explanation w.e.f. 1st August, 2019.
In this connection, the High Court made the following significant
observations:
‘The offence of money laundering as defined in
section 3 of the PMLA is wide enough to cover an act of a person who 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. The Explanation appended to the said
section clarifies that a person shall be held guilty of the offence of money
laundering if such person is found to have directly or indirectly attempted to
indulge or knowingly assisted or knowingly is a part or is actually involved in
one or more of the following processes or activities connected with proceeds of
crime, i.e., concealment or possession or acquisition or use or projecting 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 directly or indirectly enjoys the proceeds of crime by
various acts referred to in the sub-clause (i)’.
4 Dilip N. Shroff vs. CIT 291 ITR 519
(SC): (2007) 6 SCC 329; Ram Commercial Enterprise Ltd. vs. CIT 246 ITR 568; CIT
vs. Reliance Petroproducts Pvt. Ltd. 322 ITR 158 (SC):
5 Nathulal vs. State of MP AIR 1966 SC
43
6 Dheeraj Wadhawan vs. Directorate
of Enforcement (Anticipation Bail Appl. No. 39 & 41 decided by Bombay High
Court on 12th May, 2020).
CONCLUSION
While making due diligence to report compliance with various
statutory laws, as a part of forensic audit or internal audit function as
regards compliance with the provisions of the Prevention of Money-Laundering
Act, 2002, the new definition of the offence of money-laundering in section 3 as
amended w.e.f. 1st August, 2019 will have
to be kept in mind. The compliance checklist will have to be modified
appropriately to cover all the limbs of section 3 and, in particular, the
newly-inserted Explanation.
If there is a lapse made
by a Chartered Accountant entrusted with reporting the compliance of all
statutory laws, including the Prevention of Money-Laundering Act, 2002, he may
be held liable for negligence in his professional duties.
