Interplay between the General Law and Special Law – Cr.P.C Vs PMLA By L. Venkateswara Rao, Additional Commissioner, CESTAT, HYDERABAD

[Commissioner CESTATHyderabad]

The object of Prevention of Money Laundering Act (PMLA), 2002, is to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering.  The Act is a special Law and a self-contained code intended to address the increasing scourge of money laundering and provides for confiscation of property derived from or involved in money laundering. The Act provides a comprehensive scheme for investigation, recording of statements, search and seizure, provisional attachment and its confirmation, confiscation and prosecution.   The provisions of the Act [vide Sec.71] are enacted to have an over-riding effect [entrenched by a non-obstante provision], notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The provisions of the Act are considered to be fair, reasonable and have sufficient safeguards, checks and balances to prevent arbitrary exercise of power and/or abuse by the authorities and provide several layers of scrutiny at various stages of the proceedings.

2.    A person accused of money laundering is subjected to broadly two parallel actions: prosecution for punishment under Sec.4, for the offence of money-laundering defined in Sec.3; attachment of the property involved in money-laundering, under Sec.5 of the Act. Proceedings under each section is independent. Prior to promulgation of the Prevention of Money Laundering Act, 2002 (PMLA), there existed several laws viz., the Foreign Exchange Management (FEMA) Act, 1999, the Reserve Bank (RBI) Act, 1934, the Income Tax (IT) Act, 1961, the Conservation of Foreign Exchange and Prevention of Smuggling Activities (COFEPOSA) Act, 1974, Smugglers and Foreign Exchange Manipulators (SAFEMA) Act, 1976, Narcotics and Psychotropic Substances (NDPS) Act, 1985, Benami Transactions (Prohibition) Act, 1988 for the purpose of regulation and control of foreign currency transactions and to control smuggling and drug trafficking offences, etc. However, a specific Act to prevent money laundering and confiscation of proceeds/properties derived out of such laundering was not enacted until the year, 2005.  

3.    Money Laundering defined:

As per Section 3 of the Prevention of Money Laundering Act (PMLA), 2002, whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actively 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.  

4.    In this paper, it is proposed to examine the efficacy of the over-riding effect of the provisions of Section 71 of the Act in the light of (i) Section 19 [power of arrest of persons accused of committing the offence of money laundering] and (ii) in the context of conflict arising from General Law versus Special Law that is, whether the Prevention of Money Laundering Act, 2002 has over-riding effect on Insolvency Bank Code (IBC), Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI) and Recovery of Debts and Bankruptcy (RDB) Act as well as Cr.P.C.

5.    The Investigating Officers of the Enforcement Directorate interalia have the power to arrest persons accused of committing the offence of Money Laundering under Section 19 of the PMLA, 2002.  In this regard, the necessity to follow the procedure laid down under Sections 41 & 41-A of Cr.P.C. by the arresting officer of the Enforcement Directorate need to be examined.  

6.    Section 4 of the Criminal Procedure Code (CrPC) provides that the procedure under CrPC is applicable to all the offences under the Indian Penal Code or any other statute and Section 5 of the CrPC stipulated that procedure provided under a special statute will prevail over the procedure provided under the CrPC.  Thus, Section 4 of the Cr.P.C. provides that the procedure under the code is applicable to all the offences under the Indian Penal Code or any other Statute.  However, Section 5 of the Cr.P.C. provides that a special statute will prevail over the procedure provided under Cr.P.C.

7.    Section 65 of the PMLA:

65.    Code of Criminal Procedure, 1973 to apply – The provisions of the code of Criminal Procedure, 1973 (2 of 1974) shall apply in so far as they are not inconsistent with the provisions of this Act, to arrest, search and seizure, attachment, confiscation, investigation, prosecution and all other proceedings under this Act.  

8.    Section 71 of the PMLA:

71.    Act to have over-riding effect – The provisions of this Act shall have over-riding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

   Section 65 provides that the provisions of CrPC will apply to PMLA proceedings provided they are not inconsistent with the provisions of PMLA and according to Section 71, PMLA will have an over-riding affect in case of any inconsistency with any other Law.  Thus, in case of any inconsistency between the PMLA and CrPC provisions, the PMLA provisions will prevail over the CrPC provisions.  

9.    Section 65 and 71 of the PMLA appears to have been carved out from Sections 4 & 5 of the Cr.P.C in spirit.  When Section 65 provides that the provisions of Cr.P.C. will apply to PMLA proceedings as long as they are not inconsistent with the provisions of PMLA, Section 71 stipulated that it will have an over-riding affect in case of any inconsistency with any other law.   

10.    In the course of explaining the scope of Sections 65 & 71 of the PMLA, the Supreme Court in ROHIT TANDON VERSUS THE ENFORCEMENT DIRECTORATE [2017 (11) TMI 779 - SUPREME COURT] has observed as follows:

2. “There is no doubt that PMLA deals with the offence of money laundering and the Parliament has enacted this law as per commitment of the country to the United Nations General Assembly. PMLA is a special statute enacted by the Parliament for dealing with money laundering.

1. Section 5 of the Code of Criminal Procedure, 1973 clearly lays down that the provisions of the Code of Criminal Procedure will not affect any special statute or any local law. In other words, the provisions of any special statute will prevail over the general provisions of the Code of Criminal Procedure in case of any conflict. 
2. Section 45 of the PMLA starts with a non obstante clause which indicates that the provisions laid down in Section 45 of the PMLA will have overriding effect on the general provisions of the Code of Criminal Procedure, in case of conflict between them. Section 45 of the PMLA imposes following two conditions for grant of bail to any person accused of an offence punishable for a term of imprisonment of more than three years under Part­A of the Schedule of the PMLA: 
   1. That the prosecutor must be given an opportunity to oppose the application for bail; and 
   2. That the Court must be satisfied that there are reasonable grounds for believing that the accused person is not guilty of such offence and that he is not likely to commit any offence while on bail. 
3. The conditions specified under Section 45 of the PMLA are mandatory and needs to be complied with which is further strengthened by the provisions of Section 65 and also Section 71 of the PMLA. Section 65 requires that the provisions of Cr.P.C. shall apply in so far as they are not inconsistent with the provisions of this Act and Section 71 provides that the provisions of the PMLA shall have overriding effect not withstanding anything inconsistent therewith contained in any other law for the time being in force. PMLA has an overriding effect and the provisions of Cr.P.C. would apply only if they are not inconsistent with the provisions of this Act. Therefore, the conditions enumerated in Section 45 of PMLA will have to be complied with even in respect to an application for bail made under Section 439 of Cr.P.C. That coupled with the provisions of Section 24 provides that unless the contrary is proved, the Authority or the Court shall presume that proceeds of crime are involved in money laundering and the burden to prove that the proceeds of crime are not involved, lies on the appellant”. (Emphasis supplied)

In the above citation, it is evidently clear that the provisions of the CrPC will be squarely applicable to PMLA proceedings as long as there is no inconsistency between them.  And in case of any inconsistency, between these provisions, the PMLA will over-ride the CrPC.  In the case of Gautham Kundu Vs. Directorate of Enforcement also, the Apex Court upheld the over-riding powers of the PMLA over the CrPC provisions. 

11.    In this regard, the relevancy of procedures stipulated under Section 41 and 41-A of the CrPC pertaining to arrest of a person under the provisions of PMLA i.e., whether these procedures needs to be followed for making an arrest under PMLA may have to be examined.

Section 41: When police may arrest without warrant- 

1. Any police officer may without an order from a Magistrate and without a warrant, arrest any person-

1.  who commits, in the presence of a police officer, a cognizable offence
2. …….

2. the police officer is satisfied that such arrest is necessary – 

to prevent such person from committing any further offence.

Section 41- A Notice of appearance before police officer – 

1. The police officer shall, in all cases where the arrest of a person is not required under the provisions of sub-section (1) of Section 41, issue a notice directing the person against whom a reasonable complaint has been made, or credible information has been received, or a reasonable suspicion exists that he has committed a cognizable offence, to appear before him or at such other place as may be specified in the notice.  
2. Where such a notice is issued to any person, it shall be the duty of that person to comply with the terms of the notice.
3.   In the case of ARNESH KUMAR VERSUS STATE OF BIHAR & ANR [2014 (7) TMI 1143 - SUPREME COURT] the Hon’ble Supreme Court issued several guidelines to all the State Governments to instruct its police officers not to automatically arrest in cases and under Section 498A of the IPC or Section 4 of the Dowry Prohibition Act also in such cases where offence is punishable with imprisonment for a term which may be less than seven years or which may extend to seven years; whether with or without fine.  

12.    Section 19 of PMLA:

Power to arrest- If the Director, Deputy Director, Assistant Director or any other officer authorized by the Central Government, on the basis of material in his possession, has reasons to believe (the reason for such belief to be recorded in writing) that any person has been guilty of an offence of money laundering, he may arrest such person and shall inform him, the grounds of arrest.  The Director, Deputy Director, Assistant Director, or any other officer shall, immediately after arrest of such person, forward a copy of the order along with the material in his possession, to the Adjudicating Authority in a sealed envelope, in the prescribed manner, and such Adjudicating Authority shall keep such order and material for such period, as may prescribed.   

12.1    The officer making an arrest should satisfy the following condition:

1. The officer should have a reason to believe that the person has been guilty of an offence under PMLA. 
2. The reasons to believe should be based on material which should be in the officer’s possession. 
3. The reasons to believe should be recorded in writing.
4. The grounds should be recorded in writing.   

13.    Section 45 of the PMLA:

45.    Offences to be cognizable and non-bailable – Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person accused of an offence under this Act, shall be released on bail or on his own bond unless –

i) the public prosecutor has been given an opportunity to oppose the application for such release; and 

ii) where the public prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail;

Provided that a person, who is under the age of sixteen years, or is a woman or is sick, or is accused either on his own or along with other co-accused of money laundering a rupees may be related on bail, if the special court so directs.

14.    It is pertinent to mention that in the matter of Nikesh Tarachand Shah Vs. Union of India, the Hon’ble Supreme Court in the matter of NIKESH TARACHAND SHAH VERSUS UNION OF INDIA AND ANR. [2017 (11) TMI 1336 - SUPREME COURT] examined the Constitutional validity of Section 45 of the Prevention of Money Laundering Act, (PMLA), 2002 pertaining to offences to be cognizable and non-bailable.  The Apex Court observed that the said section imposes two conditions for granting bail viz, that is firstly opportunity to public prosecutor for opposing bail application and secondly, satisfaction of court that there are reasonable grounds for believing accused not guilty of an offence and not likely to commit any offence while on bail, is violative of Articles 14 and 21 of the Constitution of India and therefore struck down the same holding it unconstitutional.  This decision made the Government of India to revise and reframe the Section 45 of the PMLA, 2002, in the amendments brought out in the year, 2019.  By the said amendment, PMLA offence has been made a cognizable offence, which will empower the competent officer to arrest an offender, without warrant.  

15.    Section 19 of the PMLA, specifically, provides for the manner and procedure for arrest of a person who is accused of committing an offence of money laundering.  Section 19 of the PMLA is a special provision governing arrest of persons accused of committing an offence of money laundering.  The general power and procedure of arrest provided under Section 41, 41A of the CrPC are not applicable to a special statute which envisages a different procedure. 

15.1    However, a question has been raised about the possible misuse of Section 19 of the PMLA, and as to the safeguards required to be taken against misuse.  

16.    As regards the safeguards provided under Section 19 of PMLA, the Hon’ble Supreme Court in P.Chidambaram Vs. Directorate of Enforcement held as under:

33. Section 19 of PMLA deals with the power of the specified officer to arrest. Under Sub-section (1) of Section 19 of PMLA, the specified officer viz. the Director, the Deputy Director, Assistant Director or any other officer authorised in this behalf by the Central Government by general or special order, on the basis of the material in possession, having "reason to believe" and "reasons for such belief be recorded in writing" that the person has been guilty of offence punishable under the PMLA, has power to arrest such person. The authorised officer is required to inform the Accused the grounds for such arrest at the earliest and in terms of Sub-section (3) of Section 19 of the Act, the arrested person is required to be produced to the jurisdictional Judicial Magistrate or Metropolitan In order to ensure Magistrate within 24 hours excluding the journey time from the place of arrest to the Magistrate's Court. In order to ensure the safeguards, in exercise of power Under Section 73 of the Act, the Central Government has framed "The Prevention of Money Laundering (The Forms and the Manner of Forwarding a Copy of Order of Arrest of Person along with the Material to the Adjudicating Authority and its Period of Retention) Rules, 2005. Rule 3 3 of the said Rules requires the arresting officer to forward a copy of order of arrest and the material to the Adjudicating Authority in a sealed cover marked "confidential" and Rule 3 provides for the manner in maintaining the confidentiality of the contents.

34. As rightly submitted by Mr. Tushar Mehta, the procedure under PMLA for arrest ensures sufficient safeguards viz.: (i) only the specified officers are authorised to arrest: (ii) based on "reasons to believe" that an offence punishable under the Act has been committed; (iii) the reasons for such belief to be recorded in writing; (iv) evidence and the material submitted to the Adjudicating Authority in sealed envelope in the manner as may be prescribed ensuring the safeguards in maintaining the confidentiality; and (v) every person arrested under PMLA to be produced before the Judicial Magistrate or Metropolitan Magistrate within 24 hours. Section 19 of PMLA provides for the power to arrest to the specified officer on the basis of and the material in his possession and has "reason to believe" and the material "reasons for such belief to be recorded in writing" that any person has been guilty of an offence punishable under PMLA. The statutory power has been vested upon the specified officers of higher rank to arrest the person whom the officer has "reason to believe" that such person has been guilty of an offence punishable under PMLA. In cases of PMLA, in exercising the power to grant anticipatory bail would be to scuttle the statutory power of the specified officers to arrest which is enshrined in the statute with sufficient safeguards.

35. If the accused in every case is granted protection from arrest under Section 41-A of the Cr.P.C. it may significantly impair the investigation. Further, considering the object of PMLA and seriousness of economic offences, this Court is of the vie that Section 41-A of the Cr.P.C. is not applicable to arrests made under Section 19 of the PMLA. As stated above, there are enough safeguards under the PMLA to prevent illegal and arbitrary arrests. In any case, the accused always has the option of seeking anticipatory bail when he apprehends arrest or regular bail after he is arrested under Section 45 of the PMLA. At this juncture, it relevant to discuss the judgments relied upon by the accused to contend that Section 41 A of Cr.P.C. is applicable to special statutes like the PMLA.

17.    Arrest under Customs & Central Excise Acts:

Section 104 of the Customs Act, 1962, permits the officer of Customs, duly empowered by the Principal Commissioner of Customs, has reasons to believe [such reasons should be recorded in writing] that any person has committed an offence punishable under Section 132 or 133 or Section 135 or Section 135A or Section 136, he may arrest such person and as soon as, may inform him the grounds of arrest.  Even though, Customs Act, 1962, is a Special Law/ Act, the procedure under Section 41 or 41-A of the Cr.P.C. is not followed by the Customs Officer while making arrest.  Going by the same spirit it can be said that there is no requirement under PMLA also to follow the procedure under Section 41 & 41-A of Cr.P.C. by the officer of Enforcement Directorate.  

18.    Recently, the issue was heard at length by the Hon’ble High Court of Telangana in the case of Directorate of Enforcement of Hyderabad Vs. Kancherala Srihari Babu and the Court upheld the overriding powers of Section 71 of PMLA over CrPC and held that the procedure envisaged under Section 41 & 41A of the CrPC need not be followed for making arrest under the Provisions of Section 19 of PMLA by the authorized officer.  

19.    The issue viz., whether the Prevention of Money Laundering Act, 2002 has over riding effect on Insolvency Bank Code (IBC) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI) and Recovery of Debts and Bankruptcy Act (RDB) has been adjudicated by the High Court, Delhi in the matter of - The Deputy Director Directorate of Enforcement Delhi vs. Axis Bank & Ors.  

The Hon’ble Court after hearing the appellants and the opposite parties made the following conclusions:

SUMMARISING THE CONCLUSIONS

1. The process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-a-vis the offence of money-laundering.
2. The empowered enforcement officer is expected to assess, even if tentatively, the value of proceeds of crime so as to ensure such proceeds or other assets of equivalent value of the offender of money-laundering are subjected to attachment, the evaluation being open to modification in light of evidence gathered during investigation.
3. The empowered enforcement officer has  the authority of law in PMLA to attach not only a "tainted property" - that is to say a property acquired or obtained, directly or indirectly, from proceeds of criminal activity constituting a scheduled offence - but also any other asset or property of equivalent value of the offender of money- laundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money-laundering.
4. If the "tainted property" in respect of which there is evidence available to show the same to have been derived or obtained as a result of criminal activity relating to a scheduled offence is not traceable, or the same for some reason cannot be reached, or to the extent found is deficient, the empowered enforcement officer may attach any other asset ("the alternative attachable property" or "deemed tainted property") of the person accused of (or charged with) offence of money-laundering provided it is near or equivalent in value to the former, the order of confiscation being restricted to take over by the government of illicit gains of crime.
5. If the person accused of (or charged with) the offence of money-laundering objects to the attachment, his claim being that the property attached was not acquired or obtained (directly or indirectly) from criminal activity, the burden of proving facts in support of such claim is to be discharged by him.
6. The objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and Insolvency Code, the latter three legislations do not prevail over the former.
7. The PMLA, by virtue of section 71, has the overriding effect over other existing laws in the matter of dealing with "money-laundering" and "proceeds of crime" relating thereto.
8. The PMLA, RDBA, SARFAESI Act and Insolvency Code (or such other laws) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other with regard to the assets respecting which there is material available to show the same to have been "derived or obtained" as a result of "criminal activity relating to a scheduled offence" and consequently being "proceeds of crime", within the mischief of PMLA.
9. In an appeal filed by the State Bank of India the Punjab & Haryana High Court held that the PMLA prevails over the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) being aggrieved the SBI moved the Supreme Court by filing an appeal the same has been admitted by the Supreme Court. 

20.    Ramifications of the above Judgment:

The abovementioned judgment of the Hon’ble Delhi High Court and Punjab & Haryana High Court, upholding the over-riding powers of Section 71 of the PMLA, 2002 over the other IBC, SARFAESI etc., will affect the recovery proceedings initiated under the provisions of Customs and Central Excise and other Acts by the respective Departments.  During the course of recovery of a confirmed arrear by the departments of Customs and Central Excise, under their respective statutory sections, if the PMLA investigation reveals that the said arrear is also “proceeds of crime”, the PMLA authority will attach the same under Section 5 of the PMLA, 2002.  In such a situation, the recovery proceedings initiated by the Customs and Central Excise Departments will be taken aback considering the over-riding status given to PMLA provisions under Section 71 of the Act.  In view of the above, it is felt that the judgments of the Hon’ble High Courts upholding the over-riding affect of Section 71 will have far reaching consequences and may have all India ramifications with regard to recovery proceedings initiated by several tax collecting departments.  However, we may await the Hon’ble Supreme Court verdict in the appeal filed by the SBI against the Punjab & Haryana High Court decision.

(Disclaimer; Article is written by Sri.L.V.Rao in his personal capacity. Views expressed need not be of department. Author may reach at 9951191413)