2022 (7) TMI 877 - HC - Money Laundering

Provisional order of attachment - Money Laundering - Conspiracy - scheduled offences - proceeds of crime - allocation of coal - allegation in the second chargesheet essentially is that PIL submitted false and forged documents in order to obtain the allocation of the coal block in question, misrepresented facts pertaining to proceedings pending before the Board for Industrial and Financial Reconstruction and thus fraudulently and dishonestly obtained the coal allocation - HELD THAT - On an overall consideration of the issues, the Court comes to record the following conclusions - A. When the offense of money laundering is described as a stand-alone offense, all that is sought to be conveyed is that it represents an independent offense and is to be tried separately in accordance with the procedure prescribed under the Act. The objective of the Act is to try charges of money laundering which entails proceeds of crime being acquired, possessed or used and/or projected as untainted property. Undisputedly, the offense of money laundering rests on the commission of a predicate offense which in turn may have resulted in a pecuniary benefit being obtained and derived. It fundamentally aims at confiscation of benefits that may be derived as a result of criminal activity and the commission of a scheduled offense. It is aimed at countering and penalising the malaise of wealth and assets acquired as a result of criminal activity B. It is evident from a reading of the Act that while the commission of a predicate offense is the precipitate step for initiation of proceedings under the Act, the offense of money laundering must be tried and established separately. It is also pertinent to observe that the predicate offense constitutes the very foundation of a charge of money laundering. The entire edifice of a charge of money laundering is raised on an allegation of a predicate offense having been committed, proceeds of crime generated from such activity and a projection of the tainted property as having been legitimately acquired. C. However, once it is found on merits that the accused had not indulged in any criminal activity, the property cannot legally be treated as proceeds of crime or be viewed as property derived or obtained from criminal activity. Since the offense of money laundering is itself premised and founded upon the commission of a crime created under an independent statute, it cannot possibly survive or subsist once the predicate offense is found to be not established and a declaration so made by a competent court. D. The description of the offense of money laundering as a stand-alone offense would not in itself infuse jurisdiction in proceedings that may be initiated under the Act even after a competent court has come to hold that no criminal offense stands committed or in situations where the accused is discharged of the offense or proceedings quashed. E. The allegation of money laundering is premised and dependent upon the commission of a criminal offence. Unless proceeds are found to have been derived or obtained from criminal activity, the question of money laundering would not arise. The Act is concerned with the commission of an offence which may have yielded revenues of profits which are then concealed and their source obfuscated. However, once the charge of commission of a scheduled offence itself comes to be annulled by virtue of a judicial declaration with a competent Court finding that an offence could not be set to have been committed it would be impermissible to assert that a person or entity has indulged in money laundering. F. Since the offence of money laundering is essentially aimed at depriving persons of the fruits and benefits that may have been derived or obtained from criminal activity, the charge is inextricably linked to criminal activity. However, once it is found that a criminal offence does not stand evidenced, the question of any property being derived or obtained therefrom or its confiscation or attachment would not arise at all and in any case, proceedings if initiated under the Act would be wholly without jurisdiction or authority. G. The Court finds that the expression proceeds of crime creates an inextricable link between criminal activity and the acquisition of property and assets as a result thereof. If the charge of criminal activity ceases to exist in law, a charge of money laundering would neither sustain nor survive. The Court thus reiterates the conclusions as drawn and recorded in Rajeev Chanana 2014 (10) TMI 436 - DELHI HIGH COURT and Gagandeep Singh 2021 (2) TMI 1262 - DELHI HIGH COURT . Consequently it must be held that once it is found by a competent court, authority or tribunal that a predicate offence is either not evidenced or on facts it is held that no offence at all was committed, proceedings under the Act would necessarily have to fall or be brought to a close. H. Turning then to Section 3 of the Act, the Court finds that the said provision would come into play only if proceeds of crime are found to have been generated. As this Court reads Section 3 it finds that the offence of money laundering has an enduring and ineffaceable link to proceeds of crime. Absent the commission of a criminal offence, the foundation of proceedings initiated under the Act would undoubtedly fall and self-destruct. I. The Court further notes that not every criminal activity falls within the ambit of Section 3. While criminal activity may represent or evidence the commission of a predicate offence under the Penal Code, it is only activity relating to the laundering of proceeds of crime which can form the subject matter of proceedings under the Act. Absent the existence of criminal activity which may have resulted in proceeds of crime having been gained or obtained, a charge under Section 3 would not sustained. J. The Court also bears in mind the language of Section 3 of the Act which links the activities and processes of money laundering to proceeds of crime. Section 3 creates an indelible link between property derived or obtained and criminal activity relating to a scheduled offence. It is only when it is found that a person has derived property as a result of criminal activity that the offence of money laundering can be said to have been committed. Absent the element of criminal activity, the provisions of the Act itself would not be attracted. K. On a fundamental plane, Article 20(1) raises a constitutional injunction or bar in respect of penal action against a person for an act which was not an offense at the relevant time. It is to this extent that the provisions of penal statutes are constitutionally barred from operating retrospectively. The guiding expressions of Article 20(1) are violation of a law in force and at the time of the commission of the act charged . . The Constitution thus constructs a negative command against penal action and conviction except for an offense created by a law which was in force at the time of commission of the act. L. However, an equally well settled principle relating to the retroactive application of penal provisions is that merely because a requisite or facet for initiation of action pertains to a period prior to the enforcement of the statute, that would not be sufficient to characterize the statute as being retrospective. M. It must be borne in mind that the Act with which we are concerned, penalises acts of money laundering. It does not create a separate punishment for a crime chronicled or prescribed under the Penal Code. The Act does not penalise the predicate offense. That offense merely constitutes the substratum for a charge of money laundering being raised. Accordingly, while the commission of the predicate offense may be described as the sine qua non for an allegation of money laundering being laid against a person, it is an offense created independently owing its genesis to the Act which came to be promulgated on 01 July 2005. While the commission of a predicate offense may be a condition precedent for an allegation of money laundering being laid, it is the activities of money laundering alone which would determine the validity of proceedings initiated under the Act. N. The Court thus concludes that an offense of money laundering that may be committed post 01 July 2005 would still be subject to the rigours of the Act notwithstanding the predicate offense having been committed prior to that date. As noted hereinabove, Section 3 creates an offense for money laundering. Neither that provision nor the Act is concerned with the trial of the predicate offense. Thus, any activity or process that may be undertaken by a person post 01 July 2005 in terms of which proceeds of crime are acquired, possessed or used and/or projected as untainted property would still be subject to the provisions of the Act. O. The Court exposits and reiterates the legal position to be that it is the date of the commission of the offense of money laundering and not the date of commission of a scheduled offense which is relevant and determinative. The date of inclusion of a crime as a scheduled offense would also not be determinative and the issue would have to be decided bearing in mind whether an allegation of money laundering stood committed after the Act had come into force. P. The conflict between Axis Bank 2019 (4) TMI 250 - DELHI HIGH COURT and Seema Garg 2020 (3) TMI 460 - PUNJAB HARYANA HIGH COURT arises in the backdrop of the latter holding that the expression value of any other property would not empower the Directorate to proceed against properties which may have no direct or indirect link with the proceeds of crime. Both the aforenoted decisions have admittedly taken into consideration that Section 2(1)(u) comprises of 3 limbs. Axis Bank takes into consideration a situation where a property which may be said to have a direct or indirect link to proceeds to crime is untraceable. It is in that backdrop that it held that in such a situation, property equivalent in value may also be attached. Q. The Court has found that the expression value of any such property existed from the inception of the Act itself and this aspect must, therefore, be accorded due consideration. The concept of equivalent value came to be included in Section 2(1)(u) only subsequently and to deal with exigencies where proceeds of crime had been ferreted out of the country and were held overseas. There was and even today does exist a substantive distinction between the use of the expressions value of any such property and property equivalent in value as employed in Section 2(1)(u). R. The third limb of Section 2(1)(u) which deals with property equivalent in value was always connected with an exigency where property is taken or held outside the country. If the principle enunciated in Seema Garg were to be followed, it would clearly amount to reading Section 2(1)(u) absent the expression value of any such property . That would not only violate the well settled tenets of statutory construction but would clearly amount to the Court re-writing the provision itself in a manner that it stands deprived of vital and purposive content. S. The Court while reiterating the principles laid down in Axis Bank also takes into consideration the nature of the malaise or mischief against which the Act purports to operate. It consequently finds no justification to read Section 2(1)(u) in a manner which may whittle down its apparent legislative intent and the extent of the power which it seeks to confer on the Directorate. T. Axis Bank also culled out various salutary and significant safeguards insofar as third-party interests, secured or unsecured, that may come to exist in property and thus balancing competing interests. Those safeguards clearly confer protection on a bona fide third-party interest that may come to exist in property acquired upon payment of due consideration. It also recognized the right of such a person to establish before the Adjudicating Authority that the acquisition of the interest was not intended to defeat the objectives of the Act and was a transfer validly made upon payment of due consideration. U. Axis Bank further held that in order to uphold action that the Directorate may take against alternative attachable property was one which established a nexus or link between such properties on the one hand and the person accused of money laundering. It further propounded the test that in such a case it would have to be found that the person accused of money laundering had an interest in such property at least till the time of engagement in the proscribed criminal activity from which a pecuniary interest had been derived or obtained. It also held that the date or period of commission of criminal activity would be liable to be treated and recognized as the cut off. V. These tests as spelt out in Axis Bank adequately safeguard third party interests. Seema Garg while proceeding to hold to the contrary appears to have brushed aside and downplay the imperative of a fair balance being struck and thus ignoring the need and criticality of empowering the Directorate to proceed against other properties in a situation where tainted property is untraceable. For the reasons recorded in the body of this judgment, the Court finds itself unable to agree with the reasoning assigned in Seema Garg. The principles articulated in Axis Bank are reiterated. W. An allocation of coal cannot possibly be viewed as amounting to proceeds of crime per se. That document at best enabled the holder thereof to obtain a mining lease. Viewed in that backdrop it cannot be said that the allocation of coal is property as contemplated under the Act. It is pertinent to note that the Act essentially seeks to confiscate properties and assets that may be derived or obtained from criminal activity and which may then be concealed. It is thus evident that it is only gains that may have been obtained by the utilization of the allocation which could have possibly been viewed as proceeds of crime. X. It is the gains that may be obtained from criminal activity which are concealed or projected to be untainted that can form the subject matter of the offense under the Act. The allocation of a coal block in itself did not give rise to any monetary gains. It was only when the same was utilized that the question of illegal gains would have arisen. Y. The impugned proceedings rest on the second chargesheet which bids us to restrict scrutiny upto 04 September 2003 when the allocation came to be made. The proceedings under the Act thus cannot travel beyond the gamut of that chargesheet. The allegations of money laundering would thus have to be cabined and fenced in upto that date. This since the offense is stated to have been committed and completed on 04 September 2003. Thus, any event or offense that may have been allegedly committed post that date would clearly fall beyond the pale of scrutiny for the purposes of adjudging the validity of the impugned proceedings. Z. This aspect represents a critical pinion in this case since the criminal activity on which the allegation of money laundering is constructed and raised is the allocation of the coal block. As noted above, there is no allegation that any illegal monetary gains were derived or obtained as on 04 September 2003. This coupled with the fact that the allocation itself would not represent proceeds of crime leads the Court to the unescapable conclusion that the impugned proceedings are rendered patently illegal. AA. The Court has additionally taken into consideration the fact that the first chargesheet and which dealt with allegations of the allocation having been utilized for the purposes of extracting coal, the diversion of the mined mineral for unlawful gain, the acquisition of properties from the profits so earned and other related allegations already stands quashed. As long as that judicial declaration holds the field, the Court would have to necessarily acknowledge that no criminal activity was indulged in. BB. The show cause notice and the provisional orders of attachment proceed on the basis that the profits derived from criminal activities post 04 September 2003 and the properties acquired directly as a result thereof are liable to be attached under the Act. However, and as this Court has found activities post 04 September 2003, cannot form the foundation for the initiation of proceedings under the Act since the chargesheet itself stands restricted to events which occurred up to the date of allocation only. Since for reasons recorded in the body of the judgment, it has already found that the allocation would not constitute proceeds of crime and that in light of the decision of the Court of 05 September 2014, it cannot be said that the petitioner indulged in any criminal activity, the attachment is rendered unsustainable. CC. The argument based on possession of property and the right of the Directorate to consequently attach the same is clearly rendered unsustainable when viewed in light of the fact that those properties are not treated as untainted or permissibly attachable property constituting property equivalent in value to any such tainted properties. The allegations in the show cause notice are that these properties constitute proceeds of crime in themselves and are thus tainted property. As has been found in the judgment since the chargesheet bids us to restrict scrutiny of events only up to 04 September 2003, the impugned action could have been sustained if it had been found that proceeds of crime had been derived upto that date. That is clearly not the allegation leveled. Insofar as acquisitions made post that date and the coming into force of the Act is concerned, it is faced with the specter of the first chargesheet having already been quashed. The judgment of the Court quashing those proceedings compels and constrains the Court to acknowledge that no criminal activity was indulged in. Viewed from that perspective also, the Court comes to the conclusion that the submissions advanced by the respondents based on the aspect of continued possession is also liable to negatived. Petition allowed.

Summary

Issues Involved:
1. Whether the proceedings are liable to be deferred.
2. Preliminary objection regarding the maintainability of the writ petitions.
3. Whether the allocation of coal constitutes proceeds of crime.
4. The impact of quashing of the first chargesheet.
5. Whether Article 20(1) of the Constitution is violated.
6. Money laundering as a standalone offense.
7. The conflict between Axis Bank and Seema Garg.
8. The validity of the impugned attachment and equivalent value.

Detailed Analysis:

1. Whether the proceedings are liable to be deferred:
The respondents requested deferral of the proceedings until the Supreme Court decides on the validity of various provisions of the Prevention of Money Laundering Act (PMLA). The Court noted that the issues before the Supreme Court pertain to the constitutional validity of the Act, which is not challenged in these petitions. The arguments here are fact-specific, focusing on whether the allocation of coal can be considered proceeds of crime. The Court decided not to defer the proceedings.

2. Preliminary objection regarding the maintainability of the writ petitions:
The respondents argued that the writ petitions should not be entertained as they challenge a show-cause notice, which should be addressed by the Adjudicating Authority under the Act. The Court noted exceptions to this principle, such as cases where proceedings are wholly without jurisdiction. Given that the writ petitions were initially entertained on jurisdictional grounds, the Court rejected the preliminary objection and decided to proceed with the merits.

3. Whether the allocation of coal constitutes proceeds of crime:
The Court examined whether the allocation of coal blocks to the petitioners could be considered proceeds of crime. It concluded that the allocation letter itself does not represent proceeds of crime, as it merely confers a right to apply for a mining lease. The proceeds of crime would be the financial gains derived from the utilization of the allocation, not the allocation itself.

4. The impact of quashing of the first chargesheet:
The first chargesheet, which alleged diversion of coal and illegal profits, was quashed by the Court. This quashing was not stayed by the Supreme Court. The Court held that as long as the quashing stands, it must be acknowledged that no predicate offense was committed. Consequently, proceedings under the PMLA based on the quashed chargesheet would not be valid.

5. Whether Article 20(1) of the Constitution is violated:
Article 20(1) prohibits penal action for acts that were not offenses at the time they were committed. The Court noted that the PMLA penalizes money laundering, not the predicate offense itself. The key issue is whether the act of money laundering occurred after the PMLA came into force. The Court concluded that as long as the act of money laundering occurred post-enforcement of the PMLA, proceedings would be valid, even if the predicate offense occurred earlier.

6. Money laundering as a standalone offense:
The Court clarified that while money laundering is a standalone offense, it is inherently linked to the commission of a predicate offense. If the predicate offense is not established, proceedings under the PMLA cannot survive. The Court reiterated that the offense of money laundering must be tried separately but is dependent on the existence of proceeds of crime derived from a predicate offense.

7. The conflict between Axis Bank and Seema Garg:
The Court analyzed the conflicting views in Axis Bank and Seema Garg regarding the interpretation of "proceeds of crime." Axis Bank allowed for attachment of property equivalent in value to the proceeds of crime if the actual tainted property is untraceable. Seema Garg took a narrower view. The Court reaffirmed the principles in Axis Bank, emphasizing that the PMLA aims to confiscate assets derived from criminal activity, even if the specific tainted property is untraceable.

8. The validity of the impugned attachment and equivalent value:
The Court found that the respondents did not establish that the attached properties were equivalent in value to untraceable tainted properties. The attachment was based on the assumption that the properties were directly related to money laundering, which the Court found unsustainable. The Court quashed the impugned proceedings, noting that the allocation of coal itself did not constitute proceeds of crime, and the first chargesheet's quashing invalidated the basis for the attachment.

Operative Directions:
The writ petitions were allowed, and the impugned proceedings arising from the provisional order of attachment and the show-cause notice were quashed.