Money laundering bail restrictions struck down

By Deepak Biswas and Sneha Jaisingh, Bharucha & Partners
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Money laundering, as defined under the Prevention of Money Laundering Act, 2002 (PMLA), entails a direct or indirect attempt to indulge in or knowingly assist or being a party to or being involved in any process or activity connected with the proceeds of crime. “Proceeds of crime” means any property derived or obtained, directly or indirectly, as a result of criminal activity relating to an offence set out in the schedule to the PMLA, which lists offences under 26 statutes and certain offences under the Indian Penal Code, 1860.

Deepak BiswasPartnerBharucha & Partners
Deepak Biswas
Partner
Bharucha & Partners

The penalty is severe: rigorous imprisonment for a term of three years, which may extend to seven years and a monetary penalty. Similarly, bail pending trial has been severely circumscribed. Under section 45(1) of the PMLA, the public prosecutor must have the opportunity to oppose bail and if bail is opposed, the special court must be satisfied of the existence of reasonable grounds for believing that the accused is not guilty of the offence. Contrary to the maxim “innocent until proven guilty”, the accused must satisfy the court before trial commences that they are not guilty.

Strangely, while a person arrested under the PMLA could not be released on bail without meeting the conditions prescribed by section 45, a person apprehending arrest for money laundering may be granted anticipatory bail under the Code of Criminal Procedure, 1973.

Time and again courts across India had refused to grant bail because the tests under section 45 could not be met. Challenges to refusal of bail were repelled mainly on the ground that economic offences were deep-rooted conspiracies that involved huge loss of public funds, affecting financial health of the country.

That is now history. The Supreme Court, in Nikesh Shah v Union of India, has declared section 45(1) to be unconstitutional.

Sneha JaisinghSenior associateBharucha & Partners
Sneha Jaisingh
Senior associate
Bharucha & Partners

Former attorney general Mukul Rohatgi argued for Shah that section 45(1) was arbitrary, lacked any nexus with the PMLA and was unconstitutional. Originally, section 45 dealt only with offences under the PMLA and limited offences “considered extremely heinous by the legislature” under part A of the schedule. The expansion of section 45’s scope (by 2012 amendments) to all disparate offences listed in parts A and B of the schedule, deleting the monetary thresholds, was argued to be unconstitutional. For the state, Attorney General KK Venugopal stressed the need for such stringent provisions to meet the object of unearthing black money.

While holding the section 45(1) conditions to be unconstitutional, the Supreme Court noted that after the amendments section 45 provided different results to the same offenders under different circumstances as regards bail. The court gave illustrations of this anomaly.

X, charged with an offence under the unamended part A of the schedule, may or may not have been released on bail and then acquitted or convicted. Much later, the proceeds of his crime are traced to Y, who is then charged with an offence under the PMLA. Despite not satisfying the tests under section 45(1), Y could be released on bail under the 1973 code.

Similarly, X may be charged with an offence under the PMLA and an offence under the unamended part B of the schedule. Under section 45 the unamended part B was not covered and X could be released on bail without reference to the PMLA. Again, X could be charged with an offence under the PMLA and a statute under the unamended part A of the schedule. He could obtain bail only if the tests under section 45(1) were met.

The most absurd result would be X, charged only with an offence under the unamended part A of the schedule, would have been eligible to apply for bail under the 1973 code. Yet if the money from X’s crime was traced into the hands of Y as proceeds of crime and the two were charged together, X could get bail only from the special court, not under the 1973 code, and only if he fulfilled the tests under section 45(1). The absurd result would be that X, who had nothing to do with money laundering, may be denied bail under section 45(1) although that section would not apply if X was tried alone.

The court also noted that while dealing with a bail application under section 45, a court did not apply its mind whether to the offence of money laundering was committed “but instead applies its mind whether such person is guilty of the scheduled or predicate offence”.

The judgment in the Shah case allows an accused under the PMLA to obtain bail under the 1973 code until the PMLA is amended.

Deepak Biswas is a partner and Sneha Jaisingh is a senior associate at Bharucha & Partners.

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