PMLA: Prospective, retrospective or retroactive?

The Prevention of Money Laundering Act, 2002 (PMLA), despite coming into force nearly two decades ago in 2005, continues to be a subject of intense legal debate. A fundamental question that persists in almost every PMLA case is whether the Act's application is prospective, retrospective or retroactive.

This ongoing debate, fuelled by a pending review of the Supreme Court's 2022 judgment in the case of Vijay Madanlal Choudhary v. Union of India highlights a critical uncertainty in India's fight against financial crime.

To fully understand the contours of this issue, it is first essential to understand the distinction between the following concepts:

i. Prospective application: A law is applied prospectively when it governs only future actions and events that occur after the law has been enacted. It does not affect actions or consequences from the past.

ii. Retrospective application: A law is applied retrospectively when it alters the legal consequences of actions that took place before its enactment. For instance, it could criminalise an act that was legal when it was committed.

iii. Retroactive application: A law is applied retroactively when it changes the effect of an existing law from an earlier date. It can be seen as a middle ground. While it does not create a new offence for a past act (like a retrospective law), it can impose new consequences or burdens on a continuing state of affairs regarding a transaction that began before the law came into effect.

The central point of conflict for the PMLA is whether its application can extend to acts committed before 2005, or before a specific offence was added to its schedule of predicate offences. This legal tussle primarily revolves around Article 20(1) of the Constitution of India, which dictates that a penal statute cannot apply retrospectively - it cannot criminalise an act or impose a penalty greater than what was in effect at the time the act was committed.

Contrary to popular misconception, money laundering is not merely about infusing unaccounted income - money undisclosed to tax authorities - into the financial mainstream. Its genesis lies in India's international obligations to combat the funding of terrorism through illicit drug money. This "drug money" was initially termed "proceeds of crime," and the drug offence itself, a "predicate offence." Over time, Parliament, as a matter of policy to meet further international commitments, significantly expanded the schedule of predicate offences. While the policy behind various additions has been the subject matter of many debates, the core principle is: if a person commits a scheduled or predicate offence and generates "proceeds of crime," then anyone dealing with these proceeds is deemed to have committed an offence under the PMLA.

A crucial amendment in 2019 clarified the "life" of the offence. The PMLA offence is "born" when proceeds of crime are generated and "dies" when the accused person no longer controls those proceeds. During this journey, it is categorised as a "continuing offence." This nuanced definition plays a pivotal role in determining the Act's applicability to individual cases.

The legal debate in the Vijay Madanlal case saw compelling arguments from both sides. Those challenging the retrospective application of the PMLA argued that a penal statute cannot apply to acts committed before it came into force, as this would violate Article 20(1). They argued that an act can only be considered an "offence" after the law prohibiting it comes into effect. Therefore, any conduct occurring before the PMLA's enforcement was merely an "act," not an "offence." It logically follows that an offence cannot be "born" before the Act's commencement and, therefore, cannot "continue" thereafter.

Arguments presented against the law's retrospective application centred on several points:

i. The prohibition against retrospective operation of criminal statutes is a constitutional imperative that should be given its widest possible interpretation. Several judgments of the Supreme Court and various High Courts have consistently opposed the retrospective application of criminal statutes, including Soni Devrajbhai Babubhai v. State of Gujarat, Mahipal Singh v. CBI and Ritesh Agarwal v. SEBI.

ii. Authorities should not be able to proceed against an accused when the predicate offence predates the PMLA's enactment or the addition of that offence to the schedule of predicate offences.

iii. The definition of "proceeds of crime" cannot be retroactively applied to properties obtained before the PMLA's commencement or before an offence was added to the schedule. A property that was not part of "proceeds of crime" at the time of a transaction cannot, by virtue of the PMLA, be retrospectively characterised as such.

iv. The concept of a "continuing offence" under the PMLA is not well-defined, unlike in other statutes such as the Companies Act, 2013; the Factories Act, 1948; the Environment Protection Act, 1986; the Income Tax, 1961, etc, where the offence is clearly described as a continuing one.

In response, the Enforcement Directorate (ED) put forth many arguments to defend the retroactive application of the PMLA, which the Supreme Court ultimately endorsed.

The ED's primary contention was that the PMLA does not punish a person for an act committed prior to the law coming into force, thereby not violating Article 20(1). Citing the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh, the ED argued that Article 20(1) prohibits conviction or sentence, but not the trial itself, for a prior act. The ED submitted that the offence of money laundering is not about punishing for the predicate offence; rather, it is a separate and independent offence of dealing with the proceeds of crime. In other words, the crime is being in possession of the proceeds of crime and hence culpability for being in possession of the proceeds of crime after the date of coming into force of the PMLA/notification of the crime as a predicate offence, would not make the PMLA retrospective in its operation.

The ED further argued that money laundering is a "continuing offence." The offence is not a single act but subsists over a period of time. Therefore, it cannot be considered to have retrospective operation. The ED referenced cases like State of Bombay v. Vishnu Ramchandra, which established that a law is not retrospective merely because a part of its requisites for action is drawn from a time antecedent to its passing. This perspective was also supported by cases like Mohan Lal v. State of Rajasthan, where the Court held that what is punishable is the possession of a prohibited article on or after the date the statute was enacted, regardless of when it was initially acquired.

The Supreme Court, in its final judgment, largely accepted the ED's arguments. The Court held that the offence of money laundering is an "independent offence" connected to the process or activity involving the proceeds of crime. As stated in paragraph 134 of the judgment, this offence has nothing to do with the criminal activity of a scheduled offence "except the proceeds of crime derived or obtained as a result of that crime."

The Court further clarified in paragraph 135 that a person can be prosecuted for money laundering even if the criminal activity (the scheduled offence) was committed before the PMLA came into force. The key is whether that person "indulges in or continues to indulge directly or indirectly in dealing with proceeds of crime...even after it has been notified as scheduled offence." It held that the offence of money laundering is not dependent on the date of the predicate offence, but on the date the person engages in the process or activity connected with the proceeds. It concluded that the 2019 amendment, which added the 'continuing offence' explanation, did not alter or enlarge the scope of Section 3, but merely clarified the existing provision.

The Supreme Court now shoulders a heavy burden as it reviews the Vijay Madanlal judgment. While reviewing the judgment, another angle may also have to be considered. Does the current position of law create an unfair advantage to a person who has spent away the proceeds of crime vis-a-vis a person who continued to hold on to it? Would such a classification, between a person who has spent the proceeds of crime and one who retains it, be a reasonable legislative classification for the purpose of Article 14 of the Indian Constitution? Per contra, can it be argued that such a classification has a reasonable nexus with the object of the PMLA, which is to target individuals who are in possession of proceeds of crime? This is an aspect which requires serious consideration by the Supreme Court.

The outcome of this review will profoundly impact the trajectory of money laundering prosecutions in India. The Court must meticulously balance the crucial societal interest in combating financial crime and preventing illicit wealth from undermining the economy, with the fundamental rights of individuals, including the principles of natural justice and the prohibition against ex post facto laws. The clarity that emerges from this review will be vital for both the prosecution and the defence, bringing much-needed certainty to a law that, despite its age, remains shrouded in interpretative ambiguity.

Anirudh Krishnan and BA Sujay Prasanna are Advocates practicing before the Madras High Court.