[FAQs] on Proceeds of Crime under the Prevention of Money Laundering Act (PMLA)

Section 2(1)(u) of the Prevention of Money Laundering Act defines the term ‘proceeds of crime’. It reads as follows:

“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;

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 held that the definition of “proceeds of crime” in section 2(1)(u) of the Prevention of Money Laundering Act is common to all actions under the Act, namely, attachment, adjudication and confiscation being civil in nature as well as prosecution or criminal action. By further amendment vide Finance (No. 2) Act, 2019, Explanation has been added which is obviously a clarificatory amendment. That is evident from the plain language of the inserted Explanation itself. The fact that it also includes any property which may, directly or indirectly, be derived as a result of any criminal activity relatable to scheduled offence does not transcend beyond the original provision. In that, the word “relating to” (associated with/has to do with) used in the main provision is a present participle of word “relate” and the word “relatable” is only an adjective. The thrust of the original provision itself is to indicate that any property that is derived or obtained, directly or indirectly, as a result of criminal activity concerning the scheduled offence, the same be regarded as proceeds of crime. In other words, property in whatever form mentioned in section 2(1)(v), that is or can be linked to criminal activity relating to or relatable to scheduled offence, must be regarded as proceeds of crime for the purpose of the Act.

In 2019, an Explanation was added to section 2(1)(u) of the Prevention of Money Laundering Act that states—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.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that the Explanation added in 2019 in no way travels beyond that intent of tracking and reaching upto the property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence. Therefore, the Explanation is in the nature of clarification and not to increase the width of the main definition “proceeds of crime”. The definition of “property” also contains Explanation which is for the removal of doubts and to clarify that the term property includes property of any kind used in the commission of an offence under the Prevention of Money Laundering Act or any of the scheduled offences.

The Court held that the Explanation inserted in 2019 is merely clarificatory and restatement of the position emerging from the principal provision [i.e., section 2(1)(u) of the Prevention of Money Laundering Act].

The Offense of money laundering is defined by section 3 of the Prevention of Money Laundering Act which states:

Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the [proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money laundering.

Explanation.—For the removal of doubts, it is hereby clarified that,—

(i) a person shall be guilty of offence of money laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:—

(a) concealment;

(b) or possession;

(c) or acquisition;

(d) or use;

(e) or projecting as untainted property;

(f) or claiming as untainted property.

in any manner whatsoever,

(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that the expression “money laundering”, ordinarily means the process or activity of placement, layering and finally integrating the tainted property in the formal economy of the country. However, section 3 of the Prevention of Money Laundering Act has a wider reach. The offence, as defined, captures every process and activity in dealing with the proceeds of crime, directly or indirectly, and not limited to the happening of the final act of integration of tainted property in the formal economy to constitute an act of money laundering.

From the bare language of section 3 of the Act, it is amply clear that the offence of money laundering is an independent offence regarding the process or activity connected with the proceeds of crime which had been derived or obtained as a result of criminal activity relating to or in relation to a scheduled offence. The process or activity can be in any form — be it one of concealment, possession, acquisition, use of proceeds of crime as much as projecting it as untainted property or claiming it to be so. The involvement in any one of such process or activity connected with the proceeds of crime would constitute offence of money laundering. This offence otherwise has nothing to do with the criminal activity relating to a scheduled offence — except the proceeds of crime derived or obtained as a result of that crime.

The Supreme Court observed that it is only such property, derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence which can be regarded as proceeds of crime. The authorities under the Act cannot resort to action against any person for money laundering on an assumption that the property recovered by them must be proceeds of crime and that a scheduled offence has been committed, unless the same is registered with the jurisdictional police or pending inquiry by way of complaint before the competent forum. The expression “derived or obtained” is indicative of criminal activity relating to a scheduled offence already accomplished.

The Explanation stating that a person being involved in concealment, or possession or acquisition or use or projecting as untainted property or claiming as untainted property in any manner whatsoever shall be guilty of the offense of money laundering and also making the process or activity of Money laundering a continuing activity, has been inserted into the Act in 2019 (w.e.f. 1-08-2019).

The Rajasthan High Court in the case of Shyam Sundar Singhvi v. UOI 2020 SCC On Line Raj. 1981 held that a reading of section 3 of the Prevention of Money Laundering Act reveales that the offence of money laundering is an offence regarding the accused indulging in any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and further projecting and claiming the same to be untainted property. The definition given in section 3 of the Prevention of Money Laundering Act was later on clarified by adding Explanation and as such it did not change the basic ingredients which were required to be alleged against a person for committing an offence under section 3. The clarification which has been added was for removal of doubts perhaps due to the somewhat ambiguous definition inserted in the main provision of section 3. It was held that the Legislature if by way of amendment adds Explanation for removal of doubts, it cannot be said that a punitive provision has been inserted in the definition and the same has to be given effect from a prospective date. Therefore, the amendment would have a retrospective application.

In Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC), the Supreme Court held that the Explanation as inserted in 2019 does not entail in expanding the purport of section 3 of the Prevention of Money Laundering Act as it stood prior to 2019, but is only clarificatory in nature in as much as section 3 is widely worded with a view to not only investigate the offence of money laundering but also to prevent and regulate that offence. This provision plainly indicates that any (every) process or activity connected with the proceeds of crime results in the offence of money laundering. Projecting or claiming the proceeds of crime as untainted property, in itself, is an attempt to indulge in or being involved in money laundering, just as knowingly concealing, possessing, acquiring or using of proceeds of crime, directly or indirectly. The Court held the inclusion of Clause (ii) in Explanation inserted in 2019 is of no consequence as it does not alter or enlarge the scope of section 3 at all as the existing provisions of section 3 of the Prevention of Money Laundering Act as amended until 2013 which were in force till 31.7.2019 have been merely explained and clarified by way of Explanation vide Finance (No. 2) Act, 2019.

The definition of “proceeds of crime” as contained in section 2(1)(u) of the Prevention of Money Laundering Act states that it “means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.” It is therefore important that the phrase ‘proceeds of crime’ refers to property that is necessarily ‘derived or obtained’ ‘as a result’ from a criminal activity. This would indicate that property that is actually involved in the commission of the scheduled offense cannot be considered proceeds of crime as it would not be ‘derived or obtained as a result’ from a criminal activity. However, the property may still be considered as proceeds of crime as the definition of proceeds of crime is also extended to encapsulate “the value of any such property”. Therefore, property that is involved in the commission of the scheduled offense may very well indirectly fall into the definition of the term proceeds of crime.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that the term “proceeds of crime” needs to be construed strictly as it is one of the core of the ingredients constituting the offence of money laundering. In that, all properties recovered or attached by the investigating agency in connection with the criminal activity relating to a scheduled offence under the general law cannot be regarded as proceeds of crime. There may be cases where the property involved in the commission of scheduled offence attached by the investigating agency dealing with that offence, cannot be wholly or partly regarded as proceeds of crime within the meaning of section 2(1)(u) of the Prevention of Money Laundering Act – so long as the whole or some portion of the property has been derived or obtained by any person “as a result of” criminal activity relating to the stated scheduled offence. To be proceeds of crime, therefore, the property must be derived or obtained, directly or indirectly, “as a result of” criminal activity relating to a scheduled offence. To put it differently, the vehicle used in commission of scheduled offence may be attached as property in the concerned case (crime), may still not be proceeds of crime within the meaning of section 2(1)(u) of the Act. For being regarded as proceeds of crime, the property associated with the scheduled offence must have been derived or obtained by a person “as a result of” criminal activity relating to the concerned scheduled offence. This distinction must be borne in mind while reckoning any property referred to in the scheduled offence as proceeds of crime for the purpose of the Act.

The term proceeds of crime is defined in section 2(1)(u) of the Prevention of Money Laundering Act. This definition makes it clear that the definition of proceeds of crime with regard to the Prevention of Money Laundering Act is rooted in the commission of a scheduled offense as contemplated by the Act. The possession of unaccounted money simplicitor cannot by itself be considered proceeds of crime in the absence of the commission of a scheduled offense.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC OnLine SC 929/[2022] 140 taxmann.com 610 (SC) held that the possession of unaccounted property acquired by legal means may be actionable for tax violation and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence and such offence is included in the Schedule of the Prevention of Money Laundering Act.

The term “proceeds of crime” as contained in section 2(1)(u) of the Prevention of Money Laundering Act states that it “means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.” Therefore, the statute explicitly includes any property derived or obtained even indirectly as a result of criminal activity relating to a scheduled offense within the ambit of the term ‘proceeds of crime’.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that the definition clause in section 2(1)(u) of the Prevention of Money Laundering Act includes any property derived or obtained “indirectly” as well. This would include property derived or obtained from the sale proceeds or in a given case in lieu of or in exchange of the “property” which had been directly derived or obtained as a result of criminal activity relating to a scheduled offence. In the context of Explanation added in 2019 to the definition of expression “proceeds of crime”, it would inevitably include other property which may not have been derived or obtained as a result of any criminal activity relatable to the scheduled offence. As noticed from the definition, it essentially refers to “any property” including abroad derived or obtained directly or indirectly.

Section 3 of the Prevention of Money Laundering Act states : Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering.

A bare perusal of the words used in the statute would suggest that the mere involvement of a person in any process of activity connected with the proceeds of crime including its concealment, possession, acquisition or use would not be sufficient for constituting an offense as contemplated by section 3 of the Act and that projecting or claiming the same as untainted property would be essential for the offense to be triggered. However, the Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that if such an interpretation was to be accepted, it would follow that it is only upon projecting or claiming the property in question as untainted property, that the offence would be complete. This would undermine the efficacy of the legislative intent behind section 3 of the Act and also will be in disregard of the view expressed by the Financial Action Task Force in connection with the occurrence of the word “and” preceding the expression “projecting or claiming” therein.

The Court held that it had no hesitation in construing the expression “and” in section 3 of the Act as “or”, to give full play to the said provision so as to include “every” process or activity indulged into by anyone, including projecting or claiming the property as untainted property to constitute an offence of money laundering on its own. “The act of projecting or claiming proceeds of crime to be untainted property presupposes that the person is in possession of or is using the same (proceeds of crime), is also an independent activity constituting offence of money laundering”. In other words, it is not open to read the different activities conjunctively because of the word “and”. If that interpretation is accepted, the effectiveness of section 3 of the Act can be easily frustrated by the simple device of one person possessing proceeds of crime and his accomplice would indulge in projecting or claiming it to be untainted property so that neither is covered under section 3 of the Act.

The Scheme of the Act clearly shows that the Prevention of Money Laundering Act does not merely purport to punish the offense of money laundering but also to prevent it. It would therefore be incorrect to assume that the offense of money laundering would be triggered upon the laundering of money. In fact, section 3 of the Act makes even the possession of proceeds of crime a part of the offense of money laundering. The Supreme Court has held that the giver of a bribe can be prosecuted for the offense of money laundering.

The Supreme Court in Vijay Madanlal Choudhary v. Union of India 2022 SCC On Line SC 929/[2022] 140 taxmann.com 610 (SC) held that since the initial strokes of drafting the Act, the intention was always to have a preventive Act and not simply a money laundering (penal) Act. The Court observed that if one dives deep into the financial systems, anywhere in the world, it is seen that once a financial mastermind integrates illegitimate money into the bloodstream of an economy, it is almost indistinguishable. In fact, the money can be simply wired abroad at one click of the mouse. It is also well known that once this money leaves the country, it is almost impossible to get it back. The Court refused to accept the argument and take a view that section 3 of the Prevention of Money Laundering Act should only find force once the money has been laundered as according to it, that had never been the intention of the Parliament nor international Conventions.

The Supreme Court in Directorate of Enforcement v. Padmanabhan Kishore Criminal Appeal No. 1864 of 2022 dated 31st October 2022/[2022] 144 taxmann.com 28/[2023] 175 SCL 24 (SC) held that so long as an amount is in the hands of a bribe giver, and till it does not get impressed with the requisite intent and is actually handed over as a bribe, it would definitely be untainted money. If the money is handed over without such intent, it would be a mere entrustment. If it is thereafter appropriated by a public servant, the offence would be of misappropriation or species thereof but certainly not of bribe. The crucial part therefore is the requisite intent to hand over the amount as bribe and normally such intent must neces- sarily be antecedent or prior to the moment the amount is handed over. Thus, the requisite intent would always be at the core before the amount is handed over. Such intent having been entertained well before the amount is actually handed over, the person concerned would certainly be involved in the process or activity connected with “proceeds of crime” including inter alia, the aspects of possession or acquisition thereof. By handing over money with the intent of giving bribe, such person will be assisting or will knowingly be a party to an activity connected with the proceeds of crime. Without such active participation on part of the person concerned, the money would not assume the character of being proceeds of crime. The relevant expressions from section 3 of the Pre- vention of Money Laundering Act are thus wide enough to cover the role played by such person.