Tuesday, April 16, 2024

Solicitor General lists crimes that fall under the ambit of PMLA before the Supreme Court

Solicitor General Tushar Mehta on Wednesday told the Supreme Court that what all crimes come under the ambit of the Prevention of Money Laundering Act.

The SG submitted his arguments on a batch of petitions challenging the provisions of the Prevention of Money Laundering Act before the Bench comprising Justice A.M. Khanwilkar and Justice Dinesh Maheshwari. 

The SG said that criminal activity refers to all criminal acts that would constitute a predicate offence for money laundering in the country or minimum to those offences that would constitute a predicate offence.

Solicitor General, in the batch of plea against the PMLA said,

1.Designated category of offences means participation in an organised criminal group and racketeering, terrorism including terror financing, trafficking in human beings, sexual exploitation including sexual exploitation of children, illicit trafficking narcotic drugs and psychotropic substances, illicit arm trafficking, illicit trafficking in stolen another goods, corruption and bribery, fraud, counterfeiting currency, counterfeiting in privacy products, environmental crime. 

2.Environmental crime, for example, criminal harvesting, extraction of trafficking of protected species of wild life, flora and fauna, precious metals and stones, and other natural resources – this would fall under environmental law.

3.Piracy is a copyright offence – as we used to hear Dawood gang invested heavily in pirated CDs and DVDs and thousands of crores were being laundered and only the predicate offence they would be booked under would be copyright, violation of copyright. – , insider trading, market manipulation.

4. Proceeds refer to any property derived from or obtained directly or indirectly through the commission of an offence and property means corporeal, incorporeal, etc.

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The SG further said,
· This is the broad framework with which, we have to not only bring our law in tune, but we would be evaluated periodically for that purpose. 

· Global monitoring of implementation measures – it is submitted that the essential part of Financial Action Task Force (FATF) activities is assessing the progress of its members in complying with FATF recommendations.

The FATF attempts to accomplish this activity through assessment performed annually by the individual members and through mutual evaluations. As a part of an ongoing process.

FATF completes mutual evaluations of all FATF members, next evaluation due in 2023 where the entire regime of these years after the last evaluation will be evaluated. FATF has a secretariat located within OECD in Paris which among the other things services regular meetings of FATF membership. Lordships can skip that and come to mutual evaluation.

FATF conducts mutual evaluation of its members, level of implementation of FATF recommendations, on an ongoing basis. These are peer reviews (my peer will review my implementation) where members from different countries assess another country. The FATF methodology for assessing compliance with FATF recommendations and the effectiveness of AML system set out the evaluation process. Assessment focus on two areas : effectiveness and technical compliance. The emphasis of any assessment is on effectiveness.
·       A mutual evaluation report provides an in-depth description and analysis of a country’s system of preventing criminal abuse of financial system as well as focus recommendations to the country to further strengthen its system. Methodology is used by FATF, FATF style regional bodies and other assessment bodies such as IMF and world bank. They rely on this assessment. Conditions
for putting jurisdictions under an enhanced follow up when upon evaluation a country will be placed immediately into enhanced follow up if any one of the following applies – It has eight or more non-compliant or partially compliant raticks for technical compliance 

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All these 40 recommendations would be gone into, which are technical requirements, they’ll say whether non-compliant, partial or full. If more than 8, they immediately go for enhanced follow up. It is rated non-compliant or partially complaint on any one or more (recommendation 3,5,10,11,20). It has a low or moderate level of effectiveness for 7 or more of the 11 effectiveness outcomes. It has a low level of effectiveness for 4 or more of the 11 effectiveness outcomes. – countries that do not fulfill this goes into grey list.

· Jurisdictions are placed under enhanced follow up increased monitoring FATF evaluation identifies strategic deficiencies in their regimes to counter money laundering, terror financing and proliferation financing. When FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timelines and is subject to increased monitoring. This list is often externally referred to as the grey list. As of October 21, there are 23 jurisdictions that have been placed in the grey list for enhanced monitoring by FATF. These jurisdictions include countries like Cambodia, Panama, Philippines, Pakistan, South Sudan, among others. Pakistan got nominated in the grey list by FATF in June 2018 for serious deficiencies in compliance with FATF standards on terror financing and targeted financial sanctions.

·  FATF black list has been issued to be non-cooperative in the global fight against money laundering and terrorist financing, calling them uncooperative countries or territories. FATF describes high risk jurisdiction subject to call for action as having significant strategic deficiencies in their regimes to counter money laundering, terrorist financing and financing of proliferation. For all countries identified as high risk, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence against these countries. And in the most serious cases, countries are called upon to apply counter measures to protect the international financial system from the ongoing money laundering, terrorist financing and proliferation financing risks emanating from the country. As of 21st February 2020, only 2 countries were on the FATF black list i.e., North Korea and Iran. So, complete financial sanctions

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About the Consequence – even though the list does not lead to any legal consequences, it means that the countries have failed to prevent international money laundering and, terrorist financing, and hence, on a global watchlist. Thus, even though the adding to the grey list does not imply any economic sanctions per se, it serves as a signal to the global financing and banking system about heightened risk in transactions with the country in question.

On getting grey listed, the country’s rating gets downgraded by global bodies. Thus, this impacts the bond and credit market of the country. It particularly impacts the banking and financial sector of the country as international banks and other intermediary financial institutions are likely to demand a higher level of due diligence from the banking and financial sector of grey listed countries.

It also affects cross border capital flows especially for the trade sector as other countries look over grey listed countries with a lot of speculation. Documentary requirements for export and import payments, such as letter of credit, may become more challenging to fulfill, potentially raising cost and hampering business for companies engaged in trade.

A recent study by the IMF reported that greylisting cuts capital inflow by an estimated 7.6% of GDP while FDI and portfolio of laws are also hit. The economy gets affected adversely due to lack of investment opportunities and this takes a toll to the financial needs of the country. The borrowing capacity of the country gets affected adversely. The country is deemed as a high risk country which also affects the tourism sector. There comes the problem of enhanced economic pressure like degrading currency value, trade deficit and rise in inflation.

Bench – how much value should be given to all this while considering constitutional validity?

SGI – we’ll have to consider independently

Bench – The interpretation of provision, maybe usefulness is there but when we are talking about constitutional validity, what are the fundamental rights and how the protection is afforded under our Constitution is more
relevant or apprehension about undervaluing or undergrading a country?

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SGI – It would be our fundamental rights, our constitutional principles, which would ultimately be the decisive factor.

Bench – Even the convention recognises that fact, as per your domestic norms. 

SG- My Lord, why I read this is because when I come to the interpretation of Section 3, there are certain changes which we made and for that matter in other sections also were amended to get in tune with the assessment that was done. 
Justice AM Khanwilkar- That we understand but this valuation does not make sense.
SG- Correct, My Lord the only purpose is if we fail to fulfill these recommendations for eight plus, what will be the impact. Therefore, if Your Lordships are satisfied that we made the provisions or we amended the provisions vis-a-vis to make sure that eight plus grading is maintained and if it is otherwise not contravening Article 14, then Your Lordships will have a different look at it. 
Justice AM Khanwilkar- Alright, do you want to link it with a compelling requirement of the compelling necessity.
SG- Yes, I’m respectfully submitting My Lord that it may be over-pitching, which I’m avoiding but my respectful submission is that the traditional standards which are lordship could. 
Justice AM Khanwilkar- Were these conventions before the parliament when the law was made or the amendments were made?

SG- Yes My Lord, the Statement of Objects and Reasons…specifies these and it has been designed to bring them in tune with the standards. I’ll read My Lord, the Statement of Objects and Reasons to show that they were in mind of the parliament but the point that I would earnestly make is that the Standards which Your Lordships will apply while analyzing or deciding the validity of any other conventional statute, they perhaps Your Lordships may not like to apply while analyzing the constitutional validity of this particular piece of Legislation.
Justice AM Khanwilkar-  We understand your concern that the background facts are equally relevant and we appreciate the purport and scope of this Act which the Parliament has made. To that extent it is fine but by striking it down being violative of Fundamental Rights the consequences will be that, so are you inviting us to go there?
SG – My Lord, I would not overpitch it to that level, I bow down. What I would respectfully urge is that if otherwise Your Lordship finds that the measures legislatively taken are taken with the view to implement the international obligation, then Your Lordship would give a little leeway to the Legislation by examining the Constitutionality. This would be an interpreted guide while Your Lordships are examining the validity. For example, if Your Lordship is examining the validity of Food Adulteration, it is completely a domestic law, we are not a part of any global network, the parameters of examination may be different and Your Lordships may consider giving a better leeway to the Legislature since it has its own implications
On Page 16, it is mentioned that the role of International Monetary Fund and World Bank also, I’ll not elaborate.

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Justice Dinesh Maheshwari- Mr Solicitor Sir, let me put it this way that at the beginning of your submission you said that so far as these ratings are concerned after the regular process of assessment by the country FATF, has it been the case that you have indicated that there was something lacking found on our country and to cover up that we had to go for those amendments of year 2013.
SG- Classificatory amendments, yes My Lords that is my case.
Justice Maheshwari- See even that will have to pass the muster of constitutionality.
SG- Certainly My Lord.
Justice Maheshwari- So what we were indicating is that consequences of grey-listing of a country will follow, but they may not be very much relevant for our purposes.
SG- I bow down, I absolutely bow down. This would only be an interpretative guide to your Lordships to give a little leeway to Parliament and may Your Lords be inciteful by understanding the amendments which we have made, that’s why we amended the provisions in the way we amended and what was the object which was sought to be achieved because the domestic object and the international object are different and therefore My Lords, if I can show that this is how we have taken care of the constitutional requirement, but the object was to meet with the international standards, then that would be a guide for Your Lordships.
Justice Dinesh Maheshwari- We both know that it is not only international obligations which have come after 1988 but even in other enactments, our own enactments also we have provided for how to deal with the ill-gotten money or the ill-gotten gains since that affects the national economy also. Hence, it is not only an international obligation, but we will have to look at the overall picture.
SG- I bow down Your Lordships but while considering the Sections, Your Lordships may bear these in mind that this is the legislative exercise purely to be undertaken.
Justice AM Khanwilkar- All you can say is that this is not an ordinary offence as it is being projected. There is a special enactment and a special offence created and that offence is not only concerning the domestic community but also the international community.
SG- Yes My Lords, I could not have formulated it in a better way and Your Lordship’s examination from the constitutional perspective may not be the same while analyzing any other conventional law which Your Lordships come across
Justice AM Khanwilkar- At international level, it is considered as good as a terrorist crime which is why an offence which will end up in punishment for only six months is also included as money laundering offence.

SG- I would like to take Your Lordships through the headings only of my submission. Other developments took place in the field of money laundering which were kept in mind by the legislator while drafting this peculiar law. It is respectfully submitted that first major initiative to give substantive expression to this approach was in December 1988, ‘Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering’ issued by the Basal Committee. Its basic purpose is to encourage the Banking Sector etc. My Lords this Report was one of the basis for the Parliament to enact the law.
It is respectfully submitted that the particularly noteworthy example of later is the text Global Money Laundering Guidelines for Private Banking, which has Wolfsberg Principles which we are following.
It is explained how the Financial Intelligence Unit plays a role in the same. The ultimate goal of money laundering operation is twofold, to conceal the predicate offences from which these proceeds are derived and to ensure that criminals can enjoy their proceeds by consuming or investing them in the legal economy. Section 3 would have some relevance to this. It is to be noted that some forms of crimes, especially financial crimes such as insider trading also automatically and immediately imply money laundering operations as the offenders will obviously try to conceal the benefits they have reaped from their criminal activities. In order to fulfill these ultimate goals, a number of intermediate goals have to be attained. Money Laundering operations generally boil down to a complex process of using the latest technology of sanitizing money in such a manner that it’s true nature is concealed thereby creating an apparent justification for controlling or possessing the laundered money, this is sometimes called money laundering in the first degree.

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Paragraph 85 is very relevant and that Your Lordships may consider to apply for Article 14. It states that, it is submitted that the risk at which the legitimate business and legal economy as a whole are exposed because of money laundering is often referenced to data relating to economic volumes of dirty money that are being laundered. The International Monetary Fund and Financial Action Task Force have estimated that the scale of money laundering transactions is between 2-5 % of global GDP. Therefore requiring a different threshold for Article 14. It is further submitted that the United Nations has recently put the figure at US $ 2.1 Trillion or 3.6% of the Global GDP.

Now coming to the merits of the case, it is clear that the measures against money laundering have clearly left a embryo of drug or terrorism related offences and move beyond the same. Further the efforts against money laundering have consistently advocated into the widest range of predicate offences. This marks the end of my arguments on the basis of intention and foundation of the law.

Solicitor General Tushar Mehta proceeded with the second submission concerning the scheme of the act and pleaded to examine the statement of objects and reasons in a holistic way.

Before proceeding with hearing the second submission, the bench referred to Footnote 42 in which some author was mentioned who had given nomenclature of money laundering as a Supra National crime and asked if that paper is available here.

Solicitor denied and requested to allow him to submit the copy tomorrow. 

He further explained to the bench that the given expression is given in a global context as money laundering is not confined to one country and destroys the economy of more than one country. It rarely remains within the bounds of one country. There are only three criminal activities which have received global response: Terrorism, Money Laundering and Narcotic Druga while the rest are domestic. These three activities are in sync.

Proceeding with his second submission, Solicitor General referred to the statement of objects and reason which is mentioned in the Preamble of the act. 

It is being realised world over that Money Laundering is posing a serious threat not only to the financial system of the countries but also to their integrity and sovereignty. Some  of the initiatives taken by International committees are outlined as follows:

UN Convention against Illicit Trafficking in Narcotic Drugs and Psychotropic substances to which India is a party to which there are norms mentioned for prevention of laundering of process of drug crimes and other connected activities and confiscation proceeds;
Basel statement of Principles enunciated in 1989 outlined basic principles and procedures bank should follow in order to assist law enforcement agencies tackling the problem of money laundering; 
Financial Action Task Force held in Paris in 1989 to examine the problem of money laundering and made 40 recommendations which provide the foundation material for comprehensive legislation to combat the problem of money laundering.

The recommendations were classified under various heads Political Declaration and Global Programmer adopted by UNGA via resolution calls upon member states to develop mechanisms to prevent financial institutions from being used for laundering of drug related money and enactment of legislation to prevent such laundering UN Special Session to counter drug problem.

In view of comprehensive legislation in areas of money laundering and connected activities, confiscation of proceeds of crime, setting up of agencies, mechanism for coordinating measures combating money laundering, etc, The bill was introduced in 1998 and referred to the Standing Committee on finance which later presented reports in 1999. The recommendations were
accepted by the central govt (skipped).

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From the above, it is clear the law seeks to prevent money laundering which in plain terms means preventing legitimising money earned through illegal and criminal activities by investing  in immovable and movable properties. The need for a law under subject is focus of government world over and that of UN also because source of money laundering has threatened to wreck the foundations of states and undermine their sovereignities.

The terror outfits and smuggling gangs have been depending on money laundering to finance their operations and it is known that money for such operations are arranged and laundered. Many such illegal outfits have set up extensively legal front organisations.

The money generated through illegal activities is ultimately inducted and integrated with legitimate money and its species like movable and immovable properties. Thus, certain economic offences, commercial frauds, crimes and extortion have contributed to money laundering in a significant manner. Perpetrators of such heinous crimes should not be allowed to enjoy fruits of the money that has passed under the activity and therefore, the present enactment is intended to deprive the property.

The Solicitor General asked if the bench is till 3.25 and asked the bench’s Permission to start a new point tomorrow.

The Bench allowed it.


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