Whether salaries drawn prior to alleged commission of PMLA offences would constitute "proceeds of crime": What Madras High Court ruled

The Madras High Court recently ruled that the salaries drawn by an employee prior to the commission of alleged money laundering activities by a company would not constitute the proceeds of a crime under the Prevention of Money Laundering Act (PMLA) (S Dilliraj and anr v. The Deputy Director, The Directorate of Enforcement). .The Court added that this would be the case, particularly if it is not alleged that the accused was employed only for the purpose of criminal activities and when the accused has not been named a beneficiary of the alleged proceeds of crime. .The Bench of Justices PN Prakash and V Sivagnanam ruled to this effect while dealing with the case of S Dilliraj and his wife, who were being prosecuted in connection with money laundering cases lodged in 2015 against the First Leasing Company of India Limited (FLCI)..Dilliraj was the Vice-President of the company between 1996 and 2007. Sometime in 2007, the Reserve Bank of India (RBI) conducted an inspection of FLCI and found serious irregularities and diversion of funds to 15 satellite companies..Things took a turn for the worse for FLCI after this news became public and the company was eventually declared a non-performing asset (NPA) in 2013..In 2015, cases were lodged against persons associated with the company by the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) for offences under Sections 120-B (criminal conspiracy) read with 420 (cheating), 467 (forgery of valuable security), 468 (forgery for the purpose of cheating), 471 (forgery-related offence) and 477-A (falsification of accounts) of the Indian Penal Code (IPC). .The cases were lodged on complaints by IDBI Bank and State Bank of India (SBI), on allegations that the company had obtained loans on the basis of fudged and hyped-up financial statements, which were then diverted to 15 shell companies floated by FLCI..Pertinently, the Court noted that these funds or the proceeds of the crime were stated to have gone into the kitty of the FLCI's former Managing Director Farouk Irani, its former Chairman AC Muthiah, and others. .Dilliraj, who had resigned from the company in 2007, was not a beneficiary of the proceeds of the crime, the Bench noted. .The allegation against Dilliraj was that as the Vice-President of FLCI from 1996-2007 he was paid salaries, incentives and perquisites from the amounts that were borrowed by FLCI from the banks based on fudged records. However, it was pointed out,"Even according to the ECIR registered by the Enforcement Directorate, FLCI was making due repayment of the credit facilities extended to them by the banks till 13.09.2013.".As such, the Court opined that unless it is the case that Dilliraj was employed for an illegal purpose such as to fabricate the companies records for business purposes, the prosecution against him was misconceived. ."Though it is true that Dilliraj is facing the music in the prosecutions that have been launched by the CBI against FLCI, AC Muthiah, Farouk Irani and others for the predicate offences of making the banks believe their records and sanction the loans, the present prosecution of Dilliraj for money laundering, in the opinion of this Court, is misconceived", the Court held..The Court further reasoned:Concededly, Dilliraj left the services of FLCI way back in the year 2007 and the salaries drawn by him from 1996 to 2007 can, by no stretch of imagination, be construed as proceeds of crime. Even in the complaint, it is stated that the working capital loan amounts that were given by various banks based on the hyped up financial statements of the company were diverted to 15 shell companies floated by FLCI and into the kitty of Farouk Irani and his family members. When the proceeds of crime had gone into the hands of fictitious companies that were floated for this purpose, there cannot be further flow of the proceeds of crime into the account of Dilliraj as salaries and perquisites. It is not the case of the CBI or the ED that FLCI was throughout engaged in criminal activities nor is it their case that Dilliraj was engaged by FLCI only to fabricate records for their business purpose. For instance, if FLCI had engaged a master forger only for the purpose of forging records for their business purposes, the salary paid to the said master forger would undoubtedly be construed as proceeds of crime and if the master forger projects his salary as untainted money, he can be prosecuted under the PMLA. But, that is not the allegation against Dilliraj in the complaint. .The Court, therefore, quashed the prosecution against Dilliraj and his wife, concluding:"In view of the above discussion, we are unable to persuade ourselves to agree with the Enforcement Directorate that the salaries and perquisites that were paid to Dilliraj (A.1) while he was in employment with FLCI would amount to proceeds of crime and any property purchased with that would stand tainted. Albeit the presumption under Section 24 of the PML Act, on facts, we hold that the impugned prosecution of Dilliraj (A.1) and his wife Kotieswari (A.2) under the PML Act is misconceived and the same is accordingly quashed.".Senior Counsel B Kumar and Advocate TR Ravi represented the petitioners. Additional Solicitor General R Sankaranarayanan assisted by Special Public Prosecutor for the ED, G Hema, appeared for the Enforcement Directorate. .Read the Judgment: