The concept of ‘proceeds of crime’ is most vital and pervades the entire fabric of The Prevention of Money-Laundering Act, 2002 (PMLA). Previously, it was an exhaustive definition and consisted of only the following three constituents:
• Any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence;
• The value of any such property;
• The property equivalent in value held within the country or abroad (where property considered proceeds of crime is taken or held outside the country).
The erstwhile definition was found narrow and inadequate to deal with the ever-growing menace of money-laundering. Therefore, the Enforcement Directorate had consistently represented to the Government that the definition of ‘proceeds of crime’ was ambiguous. The ambiguity adversely impacted three important aspects, viz., the ability of the Directorate to investigate the money trail, the adjudication of attachments by the PMLA Adjudicating Authority and Tribunal, and also the trial of the offence of money-laundering under PMLA. Accordingly, amendment in the definition of ‘proceeds of crime’ was long called for.
RETROSPECTIVE AMENDMENT
The erstwhile definition was eventually amended by the Finance (No. 2) Act, 2019 by adding the Explanation to the definition w.e.f. 1st August, 2019. The definition of ‘proceeds of crime’ in section 2(1)(u) after such amendment reads as under:
‘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 derived or obtained as a result of any criminal activity relatable to the scheduled offence.
A review of the Explanation shows that the purpose of inserting it was to expand the parameters of ‘proceeds of crime’. The Explanation seeks to widen the scope of the definition by bifurcating the same into the following two properties as stand-alone constituents of the ‘proceeds of crime’:
• Property derived or obtained from a scheduled offence;
• Property which is directly or indirectly derived or obtained as a result of any criminal activity relatable to the scheduled offence.
From the initial words in the Explanation, ‘For the removal of doubts, it is hereby clarified that’, it is evident that the Explanation is intended to apply retrospectively.
The Supreme Court has held1 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.
‘property’ is defined in section 2(1)(v). Its specific constituents: corporeal, incorporeal, movable, immovable, tangible and intangible are self-explanatory;
‘person’ is defined in section 2(1)(s). Its constituents are largely similar to its definition in the Income-tax Act with which all of us are familiar;
‘derived’ is a term that has been interpreted in the context of the expression ‘attributable to’ in a number or tax cases. The word ‘derived’ means ‘derived from a source’, or means ‘arise from or originate in’2.
Black’s Law Dictionary (Sixth Edition) defines ‘obtain’ as ‘to get hold of by effort; to get possession of; to procure; to acquire in any way.’
‘indirect’ has been defined in Black’s Law Dictionary (Sixth Edition) as follows:
‘Not direct in relation or connection; not having an immediate bearing or application; not related in natural way. Circuitous, not leading to aim or result by plainest course or method or obvious means, roundabout, not resulting directly from an act or cause but more or less remotely connected with or growing out of it’.
The expression ‘as a result of criminal activity relatable to’ is connected with ‘scheduled offence’. The expression ‘as a result of criminal activity relatable to’ is wider in scope than the expression ‘as a result of the scheduled offence’. A property may be derived or obtained from commission of a scheduled offence. Alternatively, it may be directly / indirectly derived or obtained as a result of criminal activity relatable to a scheduled offence. Both types of properties are now clarified to be considered ‘proceeds of crime’ on a stand-alone basis.
Accordingly, it stands to reason that property and receipts arising from any and every crime are not covered in this definition. Only the following kinds of receipt and property would be covered in the definition of ‘proceeds of crime’:
• Property / receipts which are derived or obtained from the scheduled offence;
• Property / receipts which are the result of criminal activity relatable to a scheduled offence.
‘scheduled offence’ is defined in section 2(1)(y). This definition consists of Part A, Part B and Part C with a clear mention of the statutes and matters covered therein. These do not call for any interpretation.
‘value’ (of property) is defined in section 2(1)(zb) to mean the fair market value of any property on the date of its acquisition.
In view of the expanded definition of ‘proceeds of crime’, a few important aspects are reviewed as follows:
2 CIT vs. Jameel Leathers and Uppers 246 ITR 97
CONSTITUTIONAL VALIDITY OF DEFINITION OF ‘PROCEEDS OF
CRIME’
The Constitutional validity of the definition of ‘proceeds of crime’ has been examined by courts in several cases.
Thus, in B. Rama Raju vs. Union of India (2011) 12 taxmann.com 181 (AP), the vires of the definition of ‘proceeds of crime’ in section 2(1)(u) was called in question on the following ground:
‘Section 2(u) of the Act defines “proceeds of crime” expansively to include property or the value thereof, derived or obtained, directly or indirectly, as a result of criminal activity relating to scheduled offence even if in the hands of a person who has no knowledge or nexus with such criminal activity allegedly committed by others. The expansive definition thus inflicts grossly unreasonable consequences on innocent persons and is, therefore, unconstitutional offending Articles 14, 20, 21 and 300A of the Constitution’. [Emphasis supplied.]
After examining various aspects, the Andhra Pradesh High Court held that section 2(1)(u) which defines the expression ‘proceeds of crime’ is not unconstitutional.
Similarly, in Alive Hospitality & Foods vs. Union of India (MANU/GJ/1313/0013), it was contended before the Gujarat High Court that the definition of ‘proceeds of crime’ was too broad and, therefore, arbitrary and invalid. While rejecting this contention, the High Court made the following observations:
‘The contention that the definition of “proceeds of crime” [section 2(u)] is too broad and is therefore arbitrary and invalid since it subjects even property acquired, derived or in the possession of a person not accused, connected or associated in any manner with a crime and thus places innocent persons in jeopardy, is a contention that also does not merit acceptance’. [Emphasis supplied]
Likewise, in Usha Agarwal vs. Union of India (MANU/SIK/0040/2013), the High Court of Sikkim held that the definition of ‘proceeds of crime’ has the object of preventing and stemming criminal activities related to money-laundering at its very inception and could not be considered arbitrary.
TAINTED PROPERTIES HELD OUTSIDE INDIA – DEEMED
‘PROCEEDS OF CRIME’
In several cases, it is found that properties derived or obtained by committing a scheduled offence are taken away and held outside India. In such situations, the question arises whether the Enforcement Directorate can initiate proceeding against any property of the accused which is held in India to the extent of the value of the proceeds of crime held overseas. This question was addressed by the Delhi High Court in Abdullah Ali Balsharaf vs. Directorate Enforcement (2019) 101 taxmann.com 466 (Delhi). The High Court held that the Enforcement Directorate would be entitled to initiate proceedings against any property held in India to the extent of the value of the ‘proceeds of crime’ held overseas.
It may be noted that the definition of ‘proceeds of crime’ was amended by the Finance Act, 2015 w.e.f. 14th May, 2015 which inserted the words ‘or where such property is taken or held outside the country, then the property equivalent in value held within the country’. Thus, the conclusion of the Delhi High Court is consistent with the said amendment.
In Deputy Director vs. Axis Bank (2019) 104 taxmann.com 49 (Delhi), the Delhi High Court considered a similar situation and came to the same conclusion by making observations to the following effect:
‘The empowered enforcement officer has the authority of law in PMLA to attach not only a “tainted property” – that is to say a property acquired or obtained, directly or indirectly, from proceeds of criminal activity constituting a scheduled offence – but also any other asset or property of equivalent value of the offender of money-laundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money-laundering’. [Emphasis supplied.]
CLAIM OF BANK – A VICTIM OF FRAUD – CANNOT BE
DEFEATED EVEN IF PROPERTY REPRESENTS ‘PROCEEDS OF CRIME’
In Indian Bank vs. Government of India (2012) 24 taxmann.com 217 (Madras), the question before the Madras High Court was whether the claim of a bank that was a victim of fraud committed by its borrower can be defeated on the ground that the property represented ‘proceeds of crime’?
While answering this question in the negative, the High Court explained the material facts and rationale underlying its conclusion as follows:
• Nationalised banks are the victims of a fraud committed by the company and its officers. It is the banks’ money which has actually been made use of by the company and its directors to buy properties in their names. Where do these victims stand vis-a-vis the accused in such cases?
• The PMLA, thus, not only seeks to punish the offenders, but also seeks to punish the victims of such offences.
• Section 8(6) and section 9, which seek to punish the victims of crime along with the accused, appear to be a disincentive for the victims.
• For the victims of crime, there would virtually be no difference between the accused and the Central Government, as in any case they would have to lose their property to either of the two.
• If the order of adjudication made by the Adjudicating Authority becomes final, after the conviction of the company and its directors by the criminal Court, the Central Government would confiscate such property in terms of section 8(6). Thereafter, the property would vest in the Central Government free of all encumbrances u/s 9. In other words, the banks, who were the victims of fraud, may have to lose the property to the Central Government for no fault of theirs except that they were defrauded by the company.
• If a property is proved to be involved in money laundering, the Adjudicating Authority has only one choice, viz., to make the attachment absolute, wait for the final adjudication by the criminal Court and either release the property to the accused if he is acquitted in the criminal Court, or confiscate the property to the Central Government if the accused is convicted by the criminal Court. Therefore, section 8 in its entirety is accused-centric and Central Government-centric. It does not take into account the plight of the victims of crime.
• In view of the inherent lacuna in the Act, I think the banks cannot be left high and dry.
• The Statement of Objects and Reasons of the Act would show that the primary object for which the Act came into existence was for prevention of laundering of proceeds of drug crimes committed by global criminals / terrorists, involved in illicit trafficking of narcotic drugs and psychotropic substances. The more the Act is used for tackling normal offences punishable under the Indian Penal Code, committed within the territories of India, the more the result would be disastrous for the victims of crime. Therefore, sections 5, 8 and 9 cannot be used by the respondents to inflict injury upon the victims of the crime.
PROPERTIES REGARDED AS NOT ‘PROCEEDS OF CRIME’
In a number of cases, Courts and Tribunals have rejected the claim of the Enforcement Directorate that a particular property is ‘proceeds of crime’. A few illustrative cases may be reviewed as follows:
(i) Mortgaged properties acquired prior to fraud – not ‘proceeds of crime’
Often, circumstances show that mortgaged properties were acquired by owners much before the alleged fraud was committed by the accused persons. In such a situation, a question that needs to be addressed is whether such properties were purchased out of the ‘proceeds of crime’ as defined in section 2(1)(u). This question was addressed in Bank of Baroda vs. Deputy Director (2019) 103 taxmann.com 30 (PMLA-AT). In that case, it was held that mortgaged properties which were acquired by owners much before the alleged fraud was committed by the accused person cannot be considered ‘proceeds of crime’.
(ii) Amount of loan received against mortgage of property – not ‘proceeds of crime’
Obtaining loan on mortgage of property is a common business transaction. Often, the allegation is made that the property mortgaged for the loan is acquired from the ‘proceeds of crime’. However, in Branch Manager, Central Bank of India vs. Deputy Director (2019) 107 taxmann.com 102 (PMLA-AT), it was held that where property was mortgaged with the bank much prior to the date of commission of the offence of money-laundering, the property so mortgaged cannot be regarded as acquired out of the ‘proceeds of crime’.
(iii) Amount of loan obtained by misrepresentation – not ‘proceeds of crime’
In Smt. Nasreen Taj vs. Deputy Director (2017) 88 taxmann.com 287 (PMLA-AT), a loan was taken for purchase of land. It was found that the land was purchased before the grant of loan. It was also found that the loan was obtained by misrepresentation in collusion with a bank employee. It was held that the amount of such loan could not be regarded as ‘proceeds of crime’. While reaching this conclusion, the High Court explained the material facts and rationale underlying its conclusion as follows:
• The complainant in the criminal case is the bank who is the victim. Had the bank not filed a criminal complaint, perhaps the conspiracy might not have been discovered.
• In a case like the present one if the security of the bank is treated as ‘proceeds of crime’ and is confiscated under the Act, in future no bank in such circumstances would make a complaint to the authorities.
• The trial in the prosecution complaint would take a number of years. The victim cannot wait for such a long period of time, although after trial and final determination the victim is entitled to recover the amount by selling immovable properties u/s 8(8).
• The intention of the Act could not have been to affect a third person or an innocent person as is sought to be done in the instant case.
• If the impugned order is correct, it would be a patently absurd situation that not only substantial securities of the Bank are not available for the benefit of the bank but are vested in the Central Government as ‘proceeds of crime’. Such a result does not advance the objects of the Act.
CONCLUSION
The recent amendment to the definition of ‘proceeds of crime’ has expanded the list of properties considered as involved in the offence of money-laundering or in a scheduled offence. Consequent to the amendment, the area of scrutiny of substantive transactions by a Chartered Accountant while reporting compliance of statutory laws, applicable to transactions involving properties, is widened substantially.
The said amendment makes it incumbent upon a Chartered Accountant to modify his checklist of forensic audit of substantive transactions to ensure that he fully complies with his reporting obligations.
Intaxication: Euphoria at getting a refund from the IRS, which lasts until you realise it was your money to start with
– From a Washington Post word contest
