The Prevention of Money-Laundering Act, 2002 (PMLA) was enacted to combat the laundering of illicit gains derived from certain offences described as “scheduled offences” under the statute. The Supreme Court of India, in Vijay Madanlal Choudhary vs Union of India had clarified that the Enforcement Directorate’s (ED) jurisdiction is triggered only when a scheduled offence subsists; and once that offence is quashed, or the accused is discharged or acquitted, the foundation for alleging “proceeds of crime” disappears. This proposition which can be referred to as the principle of “automatic collapse” has guided decisions of several High Courts in India.
Traditionally, the courts have treated money laundering as a derivative offence, that is - no predicate crime, no money laundering. Accordingly, the High Courts across India routinely quashed PMLA proceedings where the accused had been acquitted/ discharged from the scheduled case, there was a closure of the scheduled case, or the scheduled case had been quashed. However, recent decisions illustrate that Courts sometimes take a somewhat varied approach wherein the closure of the predicate offence has not resulted in the quashing of the PMLA proceedings.
In Vijayraj Surana vs Assistant Director, Enforcement Directorate, the Madras High Court held that quashing of an FIR on technical grounds does not warrant automatic quashing of the ECIR or closure of PMLA proceedings. The Court observed that “all cases where FIR is quashed shall not automatically become a ground for quashing an ECIR. Instead, a case to case analysis is a pre requisite for deciding on the sustenance of an ECIR.” The Hon’ble Court observed that a case by case analysis would be required to determine whether the predicate offence was quashed on merits or due to some technical or procedural grounds.
Similarly, in Byappanahalli Prabhakar Rddy Kumar Babu vs Directorate of Enforcement, the predicate FIR was quashed against one individual but remained pending against other accused. The Hon’ble Telangana High Court observed that a scheduled offence may be quashed for a number of reasons, including defective investigation, procedural irregularities, etc. It further observed that “the Court will have to see whether such quash was on merits indicating that no proceeds of crime were generated or could have been generated. If the answer is yes, then proceedings under the PMLA cannot continue.” The Hon’ble Court appears to indicate that in certain cases where the quashing of the scheduled offence is not on the merits of the existence of criminal activity, it may not result in the automatic cessation of PMLA proceedings. Further, the Hon’ble Court held that PMLA proceedings against all accused could continue so long as the scheduled offence survived—even partially—because the generation of proceeds of crime had not yet been ruled out.
In Niket Kansal vs Union of India, the petitioner had been discharged in the predicate NDPS complaints and had thus challenged the consequential ECIR, summons, searches and seizures. The Hon’ble Jammu & Kashmir High Court declined to quash the ECIR outright observing that “the decision to uphold or annul an ECIR necessitates a detailed and fact-oriented examination, considering the stage of investigation, grounds for discharge, any challenges to the discharge order, evidence collected by the Enforcement Directorate, and the identification or tracing of proceeds of crime as defined in Section 2(1)(u) of the Act. A mechanical or blanket approach in treating the discharge in a FIR as conclusive for the outcome of an ECIR would contradict the objectives and framework of the PMLA and could, in certain instances, undermine the legislative intent.” The Hon’ble Court observed that the stage of investigation, the basis for discharge, the material collected by the ED and any pending challenges to the discharge order must all be considered. In effect, the Hon’ble Court treated the predicate discharge as persuasive and not conclusive.
The aforesaid decisions indicate that, in certain circumstances, the PMLA proceedings may not automatically collapse along with the predicate offence. However, the Hon’ble Supreme Court in Pavana Dibbur vs Directorate of Enforcement does provide some clarity. The Hon’ble Supreme Court reaffirmed that there are two independent routes to PMLA liability: (i) direct participation in the scheduled offence; and (ii) subsequent involvement in the concealment, possession, use or projection of its proceeds. However, the Court clarified that, where every accused in the predicate case is finally acquitted or the case is quashed in its entirety, Section 3 cannot be invoked because no proceeds of crime can exist.
Read together, these authorities suggest that where any part of the scheduled prosecution survives, the Courts may require a fact-sensitive enquiry into the ED’s material before intervening. Further, a person discharged in the predicate case may still face PMLA prosecution if the ED can show subsequent laundering activity connected to proceeds of crime generated by others. The recent decision in Niket Kansal, which holds that discharge in the predicate offence does not ipso facto invalidate the ECIR or PMLA proceedings, is presently under challenge before the Hon’ble Supreme Court of India, underscoring the unsettled nature of this issue.
In conclusion, while Vijay Madanlal Choudhary established the derivative nature of money laundering under the PMLA, recent decisions have somewhat diluted the automatic collapse principle. For practitioners, these developments carry important consequences. Defence strategy may not be able to assume that, in all circumstances, the quashing or discharge in the predicate case will automatically result in the termination of the PMLA proceedings. Courts may also consider the ED’s evidence, the stage of the predicate proceedings and the nature of the alleged laundering activity. Given the divergence in judicial approaches, it is imperative for the Hon’ble Supreme Court of India to authoritatively clarify the law.
About the authors: Aditya Malhotra is a Partner and Hrishikesh Gayakwad is an Associate at Shardul Amarchand Mangaldas & Co.
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