Resolving the Riddle: Retrospectivity Of PMLA

A vexed issue on the retrospective applicability of the Prevention of Money Laundering Act (PMLA) is pending before multiple High Courts of the country today and is yet to be conclusively answered by the Supreme Court.

The question is “Whether PMLA shall apply to allegations of money laundering committed before the enactment coming in force on 01.07.2005. Whether by its very nature, it's a ‘committed offence’ or a ‘continuous offence’, whose date of commission keeps shifting everytime it’s committed by its perpetrator thus rendering a debate on its retrospective applicability a futile endeavor?”

This article seeks to highlight the divergent views that various High Courts have taken.

It is being widely argued that if an offence of money laundering has been committed prior to July 1, 2005, the same cannot be brought within the dragnet of PMLA in view of the constitutional bar under Article 20(1) of the Constitution of India. Article 20(1) reads thus:

“20. Protection in respect of conviction for offences

(1) No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.”

A Constitution Bench of the Supreme Court in the matter of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh had an occasion to closely examine and interpret Article 20(1). It was a case where the Indian Penal Code (IPC) was adopted in the erstwhile State of Vindhya Pradesh on September 11, 1949, whereas the IPC offences alleged were committed on March 8, 1949 and April 11, 1949 respectively. It was argued on behalf of the State that what is prohibited is the conviction for the offence, but not the trial thereof. The five-judge Bench held that the Vindhya Pradesh Act, as adopted on August 9, 1948, shall not apply to the petitioners as the phrase ‘law in force’ implies a law actually in force/existence when the act or crime was committed and not ‘a law deemed to have been in force.’

In the matter of Mahipal Singh v. CBI, the Supreme Court went a step ahead, holding that even though the principle of ‘retroactive laws’ permits applicability of any law subsequently enacted to events and antecedents prior to its enactment/notification, such categories of enactment are prescribed under Article 20(1). The dispute arose out of the applicability of the Maharashtra Control of Organised Crime Act (MCOCA) to accused persons who had committed a string of offences prior to the notification of Section 3 of MCOCA. Certain chargesheets were filed prior to the provisions being enforced, which required a minimum number of chargesheet filings of specified offences against the accused.

In the said context, it was held by the Supreme Court that an act which is not an offence on the date of its commission or the date on which the commission came to the knowledge of the investigating agencies cannot be treated as an offence only because of certain procedural events that occurred later on. There may not be any impediment in complying with the procedural requirements later on, in case the substantive ingredients of the offence are satisfied. However, to bring the act within the mischief of penal provision is not permissible. The substantive ingredients constituting the offence must exist on the date the crime is committed or detected. The prosecution of the accused under Section 3 MCOCA was thus held to be unsustainable by the Supreme Court.

A penal law that comes into force subsequent to the commission of a chain of acts constituting the offence cannot even apply if one of the stages essential to the execution of the offence has been committed or acted prior to the notification of such penalising provisions.

One of the earlier judgments that dealt head-on with the issue of retrospective applicability of PMLA came from a single-judge bench of the Delhi High Court in the matter of M/s Mahavinesh Oils & Foods Pvt Ltd v. Directorate of Enforcement. The financial transactions and their mobility in the accounts took place sometime between 2003 and 2005 in relation to offences under Sections 403, 409, 420, 120B of the IPC alleged therein. It was argued in the petition challenging the provisional attachment orders under Section 5, PMLA that since the alleged activity of generation, acquisition and possession of ‘proceeds of crime’ as a result of criminal activity took place prior to July 1, 2005, registration of the Enforcement Case Information Report (ECIR) was clearly impermissible.

The High Court, falling back upon Article 20(1) and precedents, held that the petitioner cannot be subjected to the rigors of prosecution for money laundering. It was held that on the date on which financial proceeds of criminal activity were generated, placed in the accounts and were being laundered, the accused were clearly not having knowledge of the same being an offence under ‘any law in existence,’ which, therefore, cannot bind them. The Court opined that the occurrence of a scheduled offence is a ‘substratal condition’ for giving rise to any proceeds of crime. Though offences under Schedules A and B did exist prior to July 1, 2005, there was indisputably no ‘law in force’ which statutorily prescribed an offence of money laundering empowering ED to attach and confiscate proceeds of crime derived from criminal activity.

This judgment was thereafter taken in appeal before the Division Bench, which, as an interim measure, directed that the judgment of the single-judge may not be treated as precedent for any prospective disputes. The appeal remains pending till date.

Recently, the Delhi High Court in the matter of Prakash Industrues Ltd & Anr v. Directorate of Enforcement had an occasion to delve again into the issue. A single-judge held that applying Sections 3 and 4, PMLA to financial transactions and activities anterior or prior to July 2005 would subject the offender of the scheduled crime/offence to a greater punitive measure than what could be inflicted at the time when the scheduled offence was committed.

There have been judgments that have differed with the Delhi High Court's views on the topic. The Karnataka High Court took a contrary view, favouring retrospectivity of PMLA prior to July 2005. In the matter of DA Paul v. Union of India & Ors [2020 SCC OnLine Kar 4995: (2021) 1 KCCR (SN 23) 35], it was held that money laundering under PMLA is a ‘continuing offence,’ and as such, the question of it being ‘retrospective’ in its effect does not arise. In the case of ‘continuing offence’, (as opposed to a ‘committed offence’), the period of consummation of financial gains by the utilization of proceeds of crime and ploughing them in a way that tainted money goes into the economy and comes out as an untainted one is a chain of actions and deeds.

The High Court held that ‘laundering’ under Section 3 conceives the offence from the stage of generation of money to its implanting in the economy, followed by its rotation through multiple layers. This is all an ongoing and continuous activity, which makes it distinct from an ordinary ‘committed offence’. The relevant date is thus not only the date of acquisition of illicit money, but also all the subsequent dates on which such money has been processed, channelized and eventually filtered to be projected as untainted. In view thereof, it was held that the question of ‘retrospective’ application of law would not make much of a difference for provisions under PMLA.

Subsequently, a single-judge bench of the Karnataka High Court in the matter of JSW Steel Limited v. Deputy Director, Directorate of Enforcement, declined to interfere with the prosecution under PMLA in relation to the offence of money laundering committed prior to July 2005. While taking such a view, the High Court took note of divergent views of two different benches in two different judgments passed previously, holding that PMLA falls in the category of a ‘continuing offence’ instead of being a ‘committed offence.'

On the same lines, some other High Courts have also held that generation, acquisition and possession of proceeds of crime and money laundering being ongoing continuous activities, there cannot be a unipolar date locking the activity of money laundering, which by its very nature gets spread and stretched over lengthier phases of time.

A single-judge bench of the Andhra Pradesh High Court in SP Gupta v. Union of India held that Article 20 indicts only conviction or sentence under an ex-post facto law, but not the trial thereof. Such a trial cannot ipso facto be held to be unconstitutional. The plea of the petitioners seeking protection under Article 20 was turned down by the Andhra Pradesh High Court.

A similar view has been taken by a single-judge bench of the Kerala High Court in the matter of AK Samsuddin v. Union of India, wherein it was held that the time of commission of scheduled/predicate offences is not relevant in the context of prosecution, but what is relevant is the time of commission of the act of money laundering. Whenever the offence or act of money laundering is undertaken, PMLA stands attracted. The challenge was thus repelled by the High Court.

However, in both the above cases, the real issue was not when the offence of money laundering was committed, but that when the predicate/scheduled offence was committed, it was not included in the Schedule appended to PMLA. Thus, their ratio also must be interpreted in the said backdrop.

A three-judge Bench of the Supreme Court in Vijay Madanlal Choudhary v. Union Of India held last year that for constituting an offence of money laundering under Sections 3 and 4, there must be a ‘preceding criminal activity/offence’ under the scheduled/predicate offence as a result of which the proceeds are generated. Sans criminal activity, there would be no existence of offences under PMLA as also proceeds of crime under Section 2(1)(u) of the Act, 2002. The linkage with the predicate offence or proceeds of crime is a must. If, as a result of such criminal activity under scheduled/predicate offences, proceeds of crime under Section 2(1)(u) are generated, then even though the predicate/scheduled offence was committed prior to its introduction or initiation in the Schedules, PMLA would be attracted.

Money laundering being a ‘stand-alone independent offence’ independent of the predicate/scheduled offence, what matters is the date of money laundering, which determines the applicability of Sections 3, 4 & 5 for prosecution and attachments under PMLA. Thus, the Supreme Court held that it would be of no difference when the predicate/scheduled offence was committed, but what matters for applying PMLA is the date when proceeds of crime are generated, placed, integrated and layered in the economic system of the country.

Though the Supreme Court was not confronted with the issue of ‘retrospective applicability’ of PMLA, the observations have provided an obvious resolution to the ongoing debate.

Summing up, if on the date of generation and circulation of proceeds of crime, the PMLA was not in existence, there can be no presumption of any activity of laundering. The money may have been generated and existed prior to the inception of PMLA, but it cannot be black-labeled as proceeds of crime, because in light of Article 20(1), as per ‘law in existence’, the said activity of dealing with 'POC' was not an offence nor known to its perpetrators to have the requisite mens rea. Clearly, the view taken by the Delhi High Court in the matter of Prakash Industries appears to be in sync with the observations of the Supreme Court in Vijay Madanlal Choudhary.

As Vijay Madanlal Choudhary completes one year of its inception, with the passage of time, many of its ardent critics do also agree that the judgment lent far more clarity to the haze which was existing across the country prior to it.

Nevertheless, the time is ripe for the Supreme Court to step in to resolve the riddle surrounding retrospective application of PMLA to financial transactions, anterior to its enactment. This requires indulgence at the earliest to protect a large number of such unconstitutional prosecutions across the country.

Siddharth R Gupta is a practicing advocate at the Supreme Court of India.