Introduction
The Prevention of Money-Laundering Act, 2002 (for brevity, “PMLA”) is India’s principal law dealing with the elusive crime of money-laundering, which employs the use of a precise legal dragnet to realise its preventive (albeit punitive) and pecuniary objectives.1 The PMLA wields stringent penal provisions to pursue and deter offenders possessing proceeds of crime. Concurrently, the PMLA also facilitates the restoration of tainted property to an innocent purchaser/legitimate interest holder by severing the cord between offenders and their ill-gotten gains derived from such proceeds.
Chapter III of the PMLA contains a robust framework of provisions guiding the attachment and confiscation of tainted properties, as well as the manner of adjudication for these actions.2 Section 8(3) of the PMLA empowers the adjudicating authority, after confirming that a property is involved in money laundering, to make an order confirming the attachment, seizure or freezing of such property.3
Vide the Finance Act, 2015, Clause 8 was inserted in Section 8 of the PMLA.4 Section 8(8) of the PMLA provides that the Special Court can direct for restoration of confiscated property, or any of its part thereof, to a claimant possessing legitimate interest in the property.5 Thereafter, vide an amendment introduced in 2018, the second proviso was added to Section 8(8) which has additionally facilitated the restoration of property to a claimant during the trial of the case if the Special Court thinks it fit.6
To give broader effect to the management and restoration of confiscated tainted properties, the Central Government, under Section 8(8) of the PMLA, introduced the Prevention of Money- Laundering (Restoration of Confiscated Property) Rules, 2016 (the RCP Rules).7 These Rules govern the manner for restoration of confiscated tainted property and the adjudication of claims seeking restoration of such confiscated property.
This article examines the procedure and the relative propriety of such procedures of attachment and restoration of confiscated property under the statutory framework of the PMLA in the context of an innocent purchaser/claimant of tainted property.
Attachment and seizure of property under the PMLA
Proceedings under the PMLA
Before adverting to the discussion on attachment and seizure, it would be useful to understand the scheme of proceedings under the PMLA. An offence of money-laundering manifests from the commission of a predicate or “scheduled offence”.8 A scheduled offence is any offence under the many criminal statutes — appended in the Schedule to the PMLA.9
Where funds are generated from the commission of a scheduled offence, such funds metamorphose into properties which are known as “proceeds of crime” under Section 2(1)(u) of the PMLA.10 The definition of proceeds of crime under the PMLA is wide and encompasses properties derived or obtained from the scheduled offence, including any property directly or indirectly linked to any criminal activity associated with the scheduled offence.
The incidence of these proceeds of crime gives rise to the offence of money-laundering.11 Section 3 of the PMLA defines the offence of money-laundering as any direct/indirect indulgence, assistance, or participation in any process or activity connected with the proceeds of crime.12
The PMLA is designed to secure the proceeds of crime, disable the offender from enjoying the fruits of their sordid gain, and deprive them of the opportunity to dissipate such properties. This is achieved through attachment, seizure or freezing of such property.
Attachment of property under the PMLA
Section 5(1) of the PMLA empowers the Enforcement Directorate (ED) to issue a written order for the provisional attachment of property.13 However, before issuing such an order, the deputy director must be convinced and possess “reason to believe” in two aspects. First, there should be grounds to suspect that any person is in possession of any proceeds of crime. Second, such proceeds should be susceptible to being concealed, transferred, or dealt with in a manner that may frustrate the proceedings relating to the confiscation of such proceeds of crime.
Section 5(4) of the PMLA provides that the attachment of an immovable property under Section 5(1) would not deprive an interested person from enjoying the attached property. The section concerned is reproduced below for reference:
5. (4) Nothing in this section shall prevent the person interested in the enjoyment of the immovable property attached under sub-section (1) from such enjoyment.
Explanation.— For the purposes of this sub-section, “person interested”, in relation to any immovable property, includes all persons claiming or entitled to claim any interest in the property.
After the ED has attached a property under Section 5(1), such attachment can be confirmed by the Court under Section 8(3) after providing an opportunity of hearing to the aggrieved party.14 Thereafter, Section 8(4) of the PMLA provides that upon the attachment being confirmed, the ED is empowered to take possession of the property so attached.15 Section 8(6) posits that the Court shall order a property to be released if, after the trial, it is found that no offence of money laundering has occurred or the property is not implicated in money laundering.16
Seizure and freezing of property under the PMLA
Section 17(1) of the PMLA empowers the ED to conduct searches or seize records or property under two circumstances. This provision triggers when the ED either possesses information or has a reason to believe that any person—
(i) has committed any act which constitutes money laundering, or
(ii) is in possession of any proceeds of crime involved in money laundering, or
(iii) is in possession of any records relating to money laundering, or
(iv) is in possession of any property related to crime.17
Thus, the ambit of persons who may undergo searches by the ED or whose property may be subject to seizure is wide. Additionally, it is not a prerequisite for an individual to be accused under Section 3 of the PMLA for the ED to initiate a search or seize records or property. Even if a person is simply in possession of any property related to crime, they are subject to Section 17.
In a case where the seizure of a property is impracticable, Section 17(1-A) allows the ED to make an order for the freezing of such property.18 Once a property or record has been frozen, it cannot be transferred without obtaining permission from the authority which has frozen the same.19
After a property is seized or frozen by an order of the ED under Section 17, the same can be confirmed by the Court in the same manner as the attachment of property under Section 8(3).
Management and restoration of attached or confiscated property
The RCP Rules delineate the procedure for the restoration of attached or confiscated property. When the offence of money-laundering has been proven subsequent to a trial, Rule 3 of the RCP Rules prescribes the manner for restoring property to a claimant.20 Rule 3-A was introduced to the RCP Rules through an amendment in 2019.21 Rule 3-A of the Rules provides for restoration of the property where a claimant seeks a remedy against attachment pending trial.
In case where the offence of money-laundering is finally proven, the Special Court is obligated to issue an order for the confiscation of property under Section 8(5) of the PMLA.22 Section 8(5) read with Section 9, posits that all rights and titles in such confiscated property vest in the Central Government without any encumbrances.23
After an order of confiscation is passed, Rule 3(1) of the RCP Rules requires the Court to invite claims from individuals possessing a legitimate interest in any part of the confiscated property.24 Additionally, Rule 3(2) of the RCP Rules specifies that if the confiscated property is insufficient to cover the losses suffered by the claimants due to the offence of money laundering, the restoration of property must be carried out on a pro rata basis.25
Where the trial of money-laundering is pending, the order confirming attachment, seizure or freezing holds the field. After charges under Section 426 of the PMLA have been framed, Rule 3-A(1) empowers the Court, in response to an application seeking restoration, to invite claims from individuals with a legitimate interest in any part of the attached, seized, or frozen property.27
Rule 3-A(2) stipulates that if the property is inadequate to compensate the claimant for the losses suffered, the restoration of the property must be carried out on a pro rata basis, pursuant to the auction of such property.28 Alternatively, the Court can allow the claimant to take custody of the property with the assurance that the property will be subsequently produced when required.29
Adjudication and rights of a claimant in tainted property
Qualifications and burden on a claimant
A conjoint reading of Section 8(8) of the PMLA and Rule 2(b) of the RCP Rules elucidates the qualification for a “claimant”.30 A claimant is defined as any innocent individual i.e. one having acted in good faith and has suffered a quantifiable loss despite adopting reasonable precautions.31
In our opinion, there are two principal shortcomings in the legal position dealing with claimants.
First, the imposition of a reverse burden of proof on the claimant is problematic. As per the proviso to Section 8(8), the opportunity of hearing is provided to an aggrieved claimant only after ED has attached the property, and such attachment is pending confirmation by the Court.32 While this means that the provision is consistent with principles of natural justice, we also have to consider that post-attachment by the ED, the burden to prove that such property was innocently purchased befalls the claimant. This application of a reverse burden is an extension of Section 2433 of the Act — a stipulation that the Court has to presume that proceeds of crime are involved in money laundering.
Subjecting a claimant to a reverse burden clause is inherently problematic and follows our second critique regarding the arbitrariness in asking a claimant to prove due diligence. If there was an incidence of money laundering by the principal offender, how is a claimant supposed to find that out? Let us take a common example to understand this predicament. A financial institution extends credit to an entity and, as security, takes a mortgage over its property. Apart from undertaking the usual due diligence involved in such transactions, it will be nigh impossible for the financial institution to figure out if such property was acquired from “proceeds of crime” in the absence of any publicly available information. As such, even a precursory look at the provisions facilitating restoration under the PMLA makes it apparent that they are manifestly arbitrary and do not provide any practicable avenues for relief to a legitimate interest holder.
While the provision allows for a demonstration that necessary steps were exercised before investing or buying part of the property, nevertheless standards have not been carefully or adequately defined. Such an apprehension was underscored by the sweep of the ruling of the Delhi High Court in Enforcement Directorate v. Axis Bank.34
In this case, while dealing with the burden under Section 8(8) of the Act, the Court determined that the burden to be discharged by a claimant can be distinguished based on the timing of their purchase. In this respect, the Court noted that:
171.1. … If it is shown by cogent evidence by the bona fide third-party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted 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” (e.g. taking reasonable precautions and after due inquiry) to ensure that it was not a tainted asset and the transactions indulged in were legitimate at the time of acquisition of such interest.35
Following the ruling in Axis Bank36, the burden on a claimant who has purchased property prior to the commission of the scheduled offence is lesser than a later purchaser. When a claimant has purchased a property around or after the commission of the predicate offence, the burden of due diligence extends to a comprehensive inquiry into the legitimacy of transactions to determine the status of the asset between tainted and otherwise. This is a far stretch, as it would require every claimant to investigate the possibility of a money laundering offence before purchasing any property.
Additionally, it is axiomatic that an anterior purchase of property before the proceeds of crime are placed, integrated, or layered in a property should be understood as innocent. However, the legislative framework fails to distinguish between an innocent anterior and posterior purchaser of tainted property. Therefore, the reverse onus of burden has to be discharged by a claimant even if their investment predated the integration of proceeds in a tainted property.
There is yet another problem with the qualifications of a claimant. If, for example, the part concerning due diligence is understood to fail in an application, would it effectively mean that the claimant should have known about the money-laundering and should have been privy to the proceeds of the crime? Alternatively, if the burden of due diligence is met, but the first qualification regarding good faith fails, does it not follow that the claimant is guilty of aiding the offence of money-laundering?
In such a case, the failure on the part of a claimant to prove their case against attachment or confiscation throws them in a pit of uncertainty, which might even end up implicating the claimant. This will likely act as a disincentive and compel innocent purchasers to avoid recuperative litigation and bear the brunt of their losses, rather than pursue a case which may end up with their implication for the offence of money laundering.
Remedies against attachment of a property
In view of the PMLA, attachment of a property prohibits the transfer, conversion, disposition, or movement of property pursuant to an order of attachment.37 Section 2(d) of the Act, which defines “attachment”, does not distinguish between attachment by the ED, and an order confirming such attachment by the Court. Therefore, even for the purposes of attachment done by the ED, the prohibition on dealing with the attached property creeps in and prevents a claimant from dealing with the property in any manner whatsoever.
Once a property has been attached by the ED, such attachment can continue for a period of 180 days or until a date when such attachment is confirmed under Section 8(3), whichever is earlier.38 At such stage, the only right available to the accused and the claimant is to continue enjoyment of property if it is immovable.39 However, Section 8(4) states that once attachment or freezing is confirmed, the ED is empowered to take possession of the property.40 So, the opportunity to continue enjoyment of right in an immovable property is effectively discretionary in the hands of the ED.
The scope of “pendency of the proceedings” under Section 8(3)(a) of the PMLA
Section 8(3) of the PMLA enables the Court to confirm the attachment, seizure or freezing by the ED.41 While confirming either of these actions of the ED, the Court has to record the duration of such attachment, seizure or freezing. As per clause (a) of Section 8(3), the attachment of the property by the ED can continue for a period of 365 days or during the pendency of the proceedings relating to any offence under the Act.42 Or, as per clause (b) of Section 8(3), the attachment may become final after an order of confiscation is passed. Thus, Section 8(3) is a beneficial provision which enables the Court to order the restoration of property in case the investigation continues beyond one year.
The scope of “pendency of proceedings relating to any offence under the Act” under Section 8(3)(a) came for the Delhi High Court’s consideration in Mahender Kumar Khandelwal v. Enforcement Directorate.43 Liberally interpreting the scope of this section, the Court clarified that proceedings in relation to the section would not apply to proceedings under a scheduled offence wherein the appellant and other persons have not been named or where the proceedings do not relate to confiscated property. As per the Court, the sweep of the section only applies to proceedings related to an offence under the PMLA.
Observing that the accused-appellant was not named in the auxiliary scheduled offence, coupled with the lapse of time in the matter under the PMLA, the Delhi High Court ordered that the attached property must be released if the statutory period of 365 days is over. In its judgment, the Delhi High Court also extended its affirmation to the approach adopted by the Punjab and Haryana High Court in Seema Garg v. Enforcement Directorate.44 In Seema Garg45, in a similar factual matrix, the Punjab and Haryana High Court vacated the provisional attachment and ruled that an appellant is entitled to the benefit of 365 days’ time period while the investigation is pending.
The cap of 365 days in detaining an attached property is a symbiotic safeguard against fetters of the ED’s sequestration. The ED is duty-bound to timely investigate a matter. Any delay in the course of the investigation should not inure to the disadvantage of the accused. Allowing protraction of attachment during the pendency of ancillary matters would inconvenience an accused without any rational basis.
Constitutional vires of Section 8(4) of the PMLA
A 3-Judge Bench of the Supreme Court in Vijay Madanlal Choudhary v. Union of India (Vijay Madanlal Chaudhary) had the occasion to deal with a challenge to the constitutional validity of Section 8(4) of the PMLA.46 Clarifying that the attachment under Section 5(1) is merely notional, the Court emphasised that even if an order confirming the attachment under Section 8(3) is passed, the property does not stand confiscated until an order of confiscation is passed.47 The Court ruled that before such an order of confiscation is passed, the right to enjoy the property under Section 5(4) continues.48 Additionally, it was held that the ED should refrain from effecting actual possession of the property as a rule before a formal order for confiscation is issued.49
The Court in Vijay Madanlal Chaudhary50 advised against taking possession prior to confiscation, as a matter of rule, because of the possibility that the accused may eventually be acquitted — in which case the property would stand released. However, it would be preferable to introduce sufficient safeguards in the statute to ensure that proper effect is given to the ruling of the Supreme Court.
The ruling in Vijay Madanlal Chaudhary51 to the extent that “possession under Section 8(4) can be resorted to only by way of an exception and not as a rule” is a welcome change. However, in our humble view, there should be a prescribed minimum standard and only upon meeting it should the ED be allowed to take possession of a property pending trial of the subject offence. Otherwise, an accused or a third-party legitimate interest holder would have any real right to the property only when the accused finally stands acquitted.
(Im)practical remedies against attachment under the PMLA?
Pending trial, two distinct remedies are available to a claimant under Rule 3-A(2).52 The first of these is pro rata distribution. As per this rule, the Court can direct for auction of property and have pro rata distribution from the proceeds of such auction. This remedy is theoretically imprudent and logistically impractical. Moreover, after the judgment in Vijay Madanlal Chaudhary53, it may not be consistent with the object of the PMLA to auction a property pending trial. It would be useful for the Government to revisit this clause because Vijay Madanlal Chaudhary54 has ruled that property pending trial and before confiscation should not be unnecessarily interfered with because of the possibility of subsequent acquittal of the accused.
Second, the claimant can seek custody of the property pending trial.55 This can only be suitable in cases when there is an element which aids the predictability of the outcome of the offence of money laundering. If the offence of money laundering is eventually proved, it is difficult to determine whether an innocent claimant would be in a better-off position if he seeks restoration during or after trial.
So far, third parties have been successful in obtaining the restoration of attached properties in cases where property did not qualify as proceeds of crime but was attached by the ED.56 In this respect, courts have noted that a property wherein a third party also possesses interest can only be attached, seized or frozen when such property is derived from proceeds of crime.57 Thus, a property belonging to an accused cannot be attached for as value equivalent if a third party has an interest in the same. This is a vital distinction which needs to be introduced and underscored in the statutory framework. In its absence, there is nothing to prevent the common practice of ED attaching properties as value equivalent despite the fact that third parties possess a legitimate interest in such property. In our humble view, at the very minimum, sufficient safeguards are required to be introduced with alacrity to prevent attachment as “value equivalent” wherein legitimate third-party interests are involved as it is tantamount to being condemned sans an offence by the third-party interest holder.
Further, the beneficial provision as contained in the second proviso to Section 9 cannot by any stretch of imagination be held to be an efficacious remedy, especially in instances where the attachment is made on the basis of “value equivalent” to the proceeds of crime.58
Concluding remarks
The PMLA was enacted in 2002. However, owing to the many contentious issues in the Act, it was notified much later in 2005. Between 2005 and 2016, there was practically no guidance on the management and restoration of attached or confiscated property. The Rules governing restoration during the pendency of the trial were introduced as recently as in 2019. However, the procedures still fail to provide effective remedies in cases of an innocent claimant seeking restoration during or after the completion of trial for the offence of money laundering.
These rules under the PMLA are significant because of the unique nature of the Act. The PMLA is one of the rare legislations which allows for provisional attachment pending final conviction. This is in sharp contrast to the scheme of proceedings under similar statutes like the Unlawful Activities (Prevention) Act, 196759 and the Securities and Exchange Board of India Act, 1992,60 which provides for attachment only when the conviction is confirmed. Additionally, under significantly different circumstances, statutes like the Terrorist and Disruptive Activities (Prevention) Act, 198761 and the Code of Criminal Procedure, 197362 provide for an order of attachment along with a proclamation that the accused is absconding.
The rules governing the restoration of property under the PMLA are still nascent. The law on money-laundering is still evolving, and after the elephantine Supreme Court judgment of Vijay Madanlal Chaudhary and judgments of different High Courts on restoration under PMLA, it is hoped that the rules will be amended to recalibrate with the Courts’ ruling to provide for adequate redressal of claimants’ grievances.
†Lawyer practising in New Delhi. Author can be reached at <onkart13@gmail.com>.
††Lawyer practising in New Delhi.
†††Final year student of law at National Law University Odisha. Author can be reached at <19ba022@nluo.ac.in>.
1. Prevention of Money-Laundering Act, 2002.
2. Prevention of Money-Laundering Act, 2002, Ch. III.
3. Prevention of Money-Laundering Act, 2002, S. 8(3).
5. Prevention of Money-Laundering Act, 2002, S. 8(8).
7. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, the word “Confiscated” omitted by G.S.R. 23(E), dt. 11-1-2019 (w.e.f. 11-1-2019).
8. Prevention of Money-Laundering Act, 2002, S. 3.
9. Prevention of Money-Laundering Act, 2002, S. 2(1)(y).
10. Prevention of Money-Laundering Act, 2002, S. 2(1)(u).
11. Prevention of Money-Laundering Act, 2002, S. 3.
12. Prevention of Money-Laundering Act, 2002, S. 3.
13. Prevention of Money-Laundering Act, 2002, S. 5(1).
14. Prevention of Money-Laundering Act, 2002, S. 8(3).
15. Prevention of Money-Laundering Act, 2002, S. 8(4).
16. Prevention of Money-Laundering Act, 2002, S. 8(6).
17. Prevention of Money-Laundering Act, 2002, S. 17(1).
18. Prevention of Money-Laundering Act, 2002, S. 17(1-A).
19. Prevention of Money-Laundering Act, 2002, S. 17(1-A).
20. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3.
21. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A.
22. Prevention of Money-Laundering Act, 2002, S. 8(5).
23. Prevention of Money-Laundering Act, 2002, S. 9.
24. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3(1).
25. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3(2).
26. Prevention of Money-Laundering Act, 2002, S. 4.
27. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A(1).
28. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A(2).
29. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A(2).
30. Prevention of Money-Laundering Act, 2002, S. 8(8); Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 2(b).
31. Prevention of Money-Laundering Act, 2002, S. 8(8); Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 2(b).
32. Prevention of Money-Laundering Act, 2002, S. 8(8); Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 2(b).
33. Prevention of Money-Laundering Act, 2002, S. 24.
37. Prevention of Money-Laundering Act, 2002, S. 2(d).
38. Prevention of Money-Laundering Act, 2002, S. 5(1).
39. Prevention of Money-Laundering Act, 2002, S. 5(4).
40. Prevention of Money-Laundering Act, 2002, S. 8(4).
41. Prevention of Money-Laundering Act, 2002, S. 8(3).
42. Prevention of Money-Laundering Act, 2002, S. 8(3)(a).
47. 2022 SCC OnLine SC 929, paras 304-305.
48. 2022 SCC OnLine SC 929, paras 304-305.
49. 2022 SCC OnLine SC 929, paras 304-305.
52. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A(2).
55. Prevention of Money-Laundering (Restoration of Property) Rules, 2016, R. 3-A(2).
56. PMT Machines Ltd. v. Enforcement Directorate, 2019 SCC OnLine ATPMLA 43; Indian Renewable Energy Development Agency Ltd. v. Enforcement Directorate, 2019 SCC OnLine ATPMLA 52.
57. PMT Machines Ltd. v. Enforcement Directorate, 2019 SCC OnLine ATPMLA 43; Indian Renewable Energy Development Agency Ltd. v. Enforcement Directorate, 2019 SCC OnLine ATPMLA 52.
58. Prevention of Money-Laundering Act, 2002, S. 9.
59. Unlawful Activities (Prevention) Act, 1967, Ch. V.
60. Securities and Exchange Board of India Act, 1992, S. 28-A.
61. Terrorist and Disruptive Activities (Prevention) Act, 1987, S. 8.
