Can PMLA really be the go-to legislation to probe financial crimes?

Several older legislations like the Black Money Act and the Benami Transactions Act have become subservient to the Prevention of Money Laundering Act now

Did you know if a company discharges toxic wastes in a public drain, that too is a money laundering offence? Or copyright infringement? Or that the language of the Prevention of Money Laundering Act (PMLA) is mostly determined by India’s obligations under an international convention?

Also, contrary to what many believe, the PMLA process in India is very similar to the US format. An accused, under the grand jury indictment, will not know the details of the case, and will be sent up for trial instead.
 

With such a laundry list, it was just a matter of time before PMLA became the go-to legislation to probe all matters of crime. Surprisingly though, the most obvious one, that of income tax evasion does not qualify as an automatic entry. It is rather the reverse — the information received from PMLA can be used by the income tax department to figure out undisclosed income. PMLA is administered by the Enforcement Directorate (ED).

In the wake of the outcry about the Supreme Court’s judgment on PMLA and the recent high-profile cases tracked under the law, it might seem that all income tax search and seizure cases get swept into the same bucket. But it is not so. The income tax act traces black money, which is essentially all income which is not reported to the tax authorities. But as Justice (Retd) Harsha N Devani, the former judge of the Gujarat High Court noted in a talk on itatonline.org “all income which is not reported to the tax authorities becomes black income even though there may have been no illegality involved in earning such income”.

It is only as recently as July, 2020 that the Central Board of Direct Taxes (CBDT) has authorised the Principal Director General of Income-tax (Systems), New Delhi to share and receive information with 10 government agencies including the ED, through the use of the National Intelligence Grid platform.

“Taxation statute and PMLA Act, have separate provisions regarding search and seizure procedures which are independent of each other. PMLA is a self-contained law which is distinct from taxation laws”, said Gaurav Dudeja, partner at legal firm Phoenix Legal.

Tax and PMLA

Without a criminal angle, the PMLA bell does not ring. Despite this safeguard, more tax cases are becoming ensnared in it. One of the reasons is that all of India’s older legislations for the sector including the Black Money Act and the Benami Transactions Act have become subservient to the PMLA. So all income tax cases that used to pull in these legislations now pull in the PMLA.

The reason why PMLA came into this numero uno position is to track money laundering. It is a crime with wide ramifications that finances even more serious ones like terrorism and drug running. India sits at a vulnerable geographical position, flanking two of the most prolific drug-producing regions of the world. It has battled terrorism for decades and now as the fastest growing economy in the world, its financial sector is a huge attraction for anyone wanting to clean up the money they’ve made from any crime by investing in it. The passage of PMLA was India’s passport to join the 37-country Financial Action Task Force (FATF) in 2010 -- the last country allowed to do so to date. The FATF is an inter-governmental body, which sets standards and develops and promotes policies to combat money laundering and terrorist financing.

At one stage India’s neighbours Pakistan, Afghanistan, Myanmar and Bangladesh were all classified as high-risk and uncooperative countries by FATF. In 2022, Myanmar and Pakistan remain at high risk, while Bangladesh has improved its position to “remain in enhanced follow-up” according to the November 2020 evaluation report.

PMLA follows from this commitment by listing out a long list of 30 types of offences that are treated as crime including those of wilful pollution and trade in wildlife. Unlike many countries, in India, ED has the sole jurisdiction to investigate money laundering cases. So any tax or police arm including the state police which investigates any of these "predicate offences", is required to make a reference to ED to examine the money laundering aspect of the criminal activity.

To arrive at this position, Parliament over the last two decades has had to amend several acts to bring them in sync with this tough regime. PMLA itself has been amended seven times by Parliament. The first amendment was in 2005 and then in 2009, 2012, 2015, 2016, 2018 and finally in 2019 to overcome the deficiencies that were repeatedly highlighted in the FATF compliance scorecard. Not just in this forum. India’s key financial sector cooperation documents with countries like USA, like the India-US Economic and Financial Partnership is predicated on “mutual cooperation on a wide range of multilateral subjects including anti-money laundering and combating financing of terrorism” (finance ministry annual report). With the current global mood in favour of a spate of sanctions on Russia, Iran and a host of other countries, the strictness of these measures will only rise.

PMLA weakness

But this also is the weakness of the Indian PMLA legislation. To make a money laundering charge stick, the offence has to be agreed upon both within India and abroad. If a court abroad demurs and lets off the party, the case made out in India too will fall apart. The special courts here have to release the wealth of the person here. It has been a decade since 2011 when a parliamentary committee under former Finance Minister Yashwant Sinha had said India must be able to bisect the domestic charges from the foreign leg. But negotiations at the FATF have not proved conclusive. As a result, convictions under the PMLA are not at all impressive.

Consequently, despite the prominence, a PMLA arrest creates, the process of concluding it is a tough one, especially if there is any linkage to foreign money. ED officials speaking strictly on the condition of anonymity said they are quite successful in collecting evidence of wrongdoing from the records of financial agencies in India but are stymied in gathering those from abroad. In the case of Vijay Mallya for instance, the ED was convinced there was a valid PMLA offence. While reneging on a bank loan is not an offence under PMLA, escaping a country subsequently, is. In cases where the charge is a domestic one, a PMLA charge sheet has to prove that the person/ entities in any process or activity are connected with the proceeds of the crime.

This is also the reason why the income tax department is not too keen to link their search and seizure cases under section 138 of the act, with PMLA. For carrying out search and seizure under PMLA, a tax officer of a rank not lower than deputy director has to record in writing that there are reasons to believe there has been the commission of an offence of money laundering.

As Dudeja notes, “while there has been increasing coordination between different governmental departments and exchange of information inter-se departments has been more fluid”, the tax officials are keener to use the lead from other governments departments including the ED to conduct their own operations.

It also does not help that the post of a full-time chairperson in the Adjudicating Authority was vacant since September 2020 and has been filled up only in January this year. The posts of two other members of the panel are still vacant.