ANCESTRAL PROPERTY OF THE ACCUSED: PREVENTION OF MONEY-LAUNDERING ACT, 2002

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The Supreme Court considers whether the ED can seize the accused’s ancestral assets as “proceeds of crime.”

The Supreme Court has agreed to investigate whether the Enforcement Directorate can attach an accused’s ancestral estates as “proceeds of crime” under the Prevention of Money Laundering Act (PMLA), 2002. The issue was raised before the Supreme Court in response to an appeal filed by the Enforcement Directorate (ED) against a Karnataka High Court ruling holding that action under the Prevention of Money Laundering Act, 2002 cannot be pursued in relation to ancestral property.

In its October 8 ruling, an apex court panel of Justices A M Khanwilkar and C T Ravikumar gave notice to the accused on the ED’s appeal and requested a response within four weeks. Additional Solicitor General S V Raju, standing for the ED, contended that the high court made a clear error in ruling that the writ petitioners’ ancestral property could not be pursued under the PMLA. According to the ASG, the high court’s remark contradicts the definition of “proceeds of crime” under Section 2(1)(u) of the PMLA, 2002.

What exactly is ancestral property?

It is a property owned by your great-grandfather that has been passed down from generation to generation (your grandfather and father) to you without being divided by the family. As a result, the property must be four generations old and should not have been divided by the preceding three generations. To be designated as ancestral property and subject to the regulations governing ancestral property rights.

PMLA, 2002

The Prevention of Money Laundering Act, 2002 is a Parliament of India Act adopted by the NDA administration to prohibit money laundering and to provide for the forfeiture of property obtained via money laundering. PMLA and the Rules promulgated there under went into effect on July 1, 2005. The Act and the Rules notified there under require banking organizations, financial institutions, and intermediaries to authenticate the identification of their clients, keep records, and provide information in prescribed form to the Financial Intelligence Unit – India (FIU-IND).

AMENDMENTS

Adding a clarification to the meaning of “proceeds of crime” in Section 2(u) of the PMLA

The newly inserted explanation and the amended section read as under:

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [or where such property is taken or held outside the country, then the property equivalent in value held within the country {or abroad]};

[Explanation.– For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence;]

This explanation appears to be a clarification to remove any doubt that the proceeds of crime comprise not only property derived or obtained as a result of the planned offence, but also property derived or obtained as a result of any criminal behavior related to the scheduled offence.

Because the adjustment was enacted in accordance with the Finance Act of 2019, it is unclear whether it will be retroactive or prospective in nature. Given that it is merely clarifying what has already been stated in the definition of “proceeds of crime,” it is likely to have retrospective impact.

Paragraph 60 of the ruling of the High Court of Judicature for Rajasthan Bench at Jaipur in Civil Writ Petition No. 21751/2017 explains the scope of an Explanation in the statute:

Because the term “any criminal conduct” is not defined under the PMLA, it is likely to cover any activity related to the scheduled offence, such as concealment, possession, acquisition, use, projection, or claiming as untainted property, of property derived through the scheduled offence. As a result, if Person A derives Rs. 1 crore from a scheduled offence and then invests the tainted money in a bank account in order to make it untainted money, any interest made on that contaminated money will also be included in the definition of the proceeds of crime.

Proceeds of crime

The term “proceeds of crime” refers to any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence, or the value of any such property, or, if such property is taken or held outside the country, the property equivalent in value held within the country.

In its ruling, the high court dismissed proceedings filed against the first accused, noting that he died while the petitions were ongoing, and invalidated the prosecution instituted against the second accused, which was pending before the Principal Civil and Sessions Judge, Bangalore. It has also stayed attachment proceedings against petitioners’ family assets in the Mysore district.

Recent case

A charge sheet was filed against accused No.1 for offences punishable under Sections 406 (criminal breach of trust) and 420 (cheating) of the Indian Penal Code, alleging that he agreed to supply 50,000 metric tonnes of iron ore to a Government Undertaking (M/s.Mysore Sales International Limited) under two agreements.

According to the agreements, a letter of credit was issued, and Rs 1.15 crore and Rs 1 crore were paid to accused No.1’s bank account; however, after the transfer of the abovementioned amount, accused No.1 failed to produce iron ore, committing breach of trust and causing loss to M/s. MSIL Company.

A complaint was submitted under Section 3 of the PML Act, based on the above charge sheet/report, demanding prosecution of accused Nos. 1 and 2. According to the complaint, the investigations thus far have revealed that accused no. 1 criminally plotted to get a Rs 2.15 crore advance by evading having a registered mortgage on the properties offered as security.

It was also stated that the accused did not have enough monies in the bank when his cheque was submitted for payment, and that he then entered into an agreement to sell the property and transfer it to his daughter and wife. According to the complaint, the funds advanced represent the proceeds of criminal conduct related to the planned offence under the PMLA, and so are proceeds of crime.

The high court stated that the allegations in the case would only indicate that accused No.1 had failed to honour the terms of the agreements and had failed to refund the advance amount to M/s. MSIL, and that the cheques issued by him had been dishonoured. “These claims may give rise to prosecution under Sections 406 and 420 of the IPC, but it cannot be stated that accused No.1 was involved directly or indirectly in any process or action related with the “proceeds of crime” under the abovementioned acts.”  The offender must directly or indirectly attempt to engage in or knowingly assist in any activity associated with the “proceeds of crime” in order to commit money-laundering, according to the Supreme Court.

According to the high court, nothing in the complaint or charge sheet submitted against accused No.1 suggests that either accused No.1 or any other accused people were involved in the criminal conduct related to the failure to repay the advance money of Rs.2.15 crore.

“With regard to the proceedings initiated against the petitioners-accused Nos.1 to 3, a reading of the averments made therein would lead to the conclusion that the properties sought to be attached are the family properties of accused No.1″There is no evidence that the aforementioned properties were acquired through the profits of crime or in any way related to purported ‘proceeds of crime.” According to the definition in Section 2(1)(u) of the PML Act, only tainted properties can be referred to as “proceeds of crime.” “In other words, all and any property derived or received directly or indirectly as a result of criminal behaviour pertaining to the planned offence can be referred to as ‘proceeds of crime,'” the high court stated.

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