One of the current debates relating to the Prevention of Money Laundering Act, 2002 (“PMLA”) concerns the relationship between the predicate offence and the offence of money laundering under PMLA. While the Supreme Court in 2022 declared that money laundering can only exist when the predicate offence does, the implications of quashing, dismissal, or acquittal with regard to the predicate offence on proceedings under the PMLA have been interpreted differently by various high courts. This article explores the jurisprudential development surrounding the relationship between the predicate offence and the offence of money laundering, examining the current position of the law.

Money Laundering: A Standalone Offence?

Section 2(p) read with Section 3 of the PMLA defines “money laundering.” The offence of money laundering is committed when one is involved in any process or activity connected with proceeds of a crime. The involvement could be either direct or indirect. Proceeds of crime, being an essential ingredient in the commission of money laundering, connect it to other criminal activity or a predicate offense. As per Section 2(u) of the PMLA “proceeds of crime” can be of three types: i) property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence, listed under the Schedule to the PMLA; ii) the value of such property; and iii) the property equivalent in value of the above-described property if such property is taken or held outside India. Therefore, the existence of proceeds of crime depends on the existence of a scheduled offence.

The then Finance Minister of India, Mr. P. Chidambaram, stated that the offence of money laundering is technically defined, which postulates that there must be a predicate offence, listed in the Schedule to the PMLA, for the offence of money-laundering to exist. In P. Chidambaram v. Directorate of Enforcement, the Apex Courtlaid down that a scheduled offence is a sine qua non for the offence of money-laundering to be constituted. Thus, money-laundering, despite being an independent offence, is still dependent on the existence of a scheduled offence.

Understanding the Principle of Automatic Collapse

The ‘principle of automatic collapse,’ as it has been called in academic discourses, rests on the principle that if no predicate crime or scheduled offence exists, no proceeds of crime would exist, and therefore, there can be no money laundering. Based on this, PMLA proceedings ought to be quashed when there has been an order of discharge, acquittal, or quashing in relation to the scheduled offence. In other words, closure of the scheduled offence would lead to the closure of PMLA proceedings.

This principle finds legislative backing in the 2022 decision of Vijay Madanlal Choudhary v. Union of India (“Vijay Madanlal”), where the Supreme Court laid down that when a person is finally discharged or acquitted of the scheduled offence, or the case for the scheduled offence is quashed in its entirety, then the proceedings for money-laundering against them cannot be continued. The offence of money laundering is dependent on the illegal gain of property as a result of criminal activity relating to a scheduled offence. For prosecution under the PMLA, a scheduled offence must be registered with the jurisdictional police or be pending an enquiry or trial in the form of a criminal complaint before a competent forum. It cannot be based on a notional basis or on an assumption that a scheduled offence has been committed.

A Look Back: Position Before 2022

In Babulal Verma v. Enforcement Directorate, Mumbai(“Babulal Verma”),the Bombay High Court held that the closure report in a scheduled offence does not wipe out the investigation of the Enforcement Directorate in money-laundering matters. The predicate offence is only necessary for the registration of the offence of money-laundering and not thereafter, given that money-laundering is a standalone offence under a special statute. The Kerala High Court has also held that money-laundering is a standalone offence, stating that the proceeds of crime may be from the offence itself or any other scheduled offence. Similarly, the Madras High Court has held that PMLA has self-contained procedures. The trial of the scheduled offence is distinct from the trial of the offence of money-laundering. Thus, a closure report for the predicate offence would not automatically lead to an end to the proceedings for money laundering in a special court.

On the flip side, the Delhi High Court took a contrasting view in M/s Prakash Industries Ltd. & Anr. v. Directorate of Enforcement, where it held that there is an inextricable link between the criminal activity relating to a scheduled offence and the offence of money-laundering. The court opined that it would not be logical to hold that an allegation of money-laundering would survive in the absence of an allegation of a scheduled offence. If the charge of criminal activity ceases to exist in law, a charge of money laundering would not sustain or survive. The Allahabad High Court in Sushil Kumar Katiyar v. Union of India noted that criminal activity relating to a scheduled offence is a necessary prerequisite for the existence of proceeds of crime, and thereby the existence of the offence of money laundering. It held that prosecution under Section 3 of the PMLA requires that the accused be held guilty or there be a prima facie case of money laundering against the accused. When the accused is discharged from all scheduled offences on merits, with no trial pending, a complaint under PMLA cannot survive. 

Judicial Approach Post Vijay Madanlal Case

The Madras High Court in Vijayraj Surana v. Assistant Director observed that there could be multiple grounds for quashing a First Information Report (“FIR”). Not all grounds of quashing an FIR would warrant quashing the Enforcement Case Information Report (“ECIR”) under the PMLA against the individual. The court laid down that quashing of ECIR based on quashing of the FIR relating to the scheduled offence would be justified only when the quashing of the FIR was on the substantive ground of absence of a prima facie case. Where the FIR is quashed due to procedural irregularities or after a chargesheet is filed, the PMLA proceeding would not automatically be quashed.

The Telangana High Court has held that a court can refuse to quash proceedings under the PMLA despite quashing of the FIR on the predicate offence when the issue of the existence of proceeds of crime is pending, and the accused is prima facie involved. In this case, there were multiple accused. The proceedings under the scheduled offence was quashed against one of the accused. The court refused to quash the PMLA proceedings against them since the scheduled offence still exists. A similar conclusion was arrived at by the Supreme Court in Pavana Dibbur v. The Directorate of Enforcement, where the court explained that there are two types of liabilities under PMLA: one, where there is direct participation by the accused in the scheduled offence; and two, where there was subsequent involvement. The court, however, added that when every accused of the scheduled offence is acquitted, the case gets quashed in its entirety and the proceeds of crime can no longer exist. In such cases, the PMLA proceedings should also be quashed.  

The Jammu and Kashmir High Court explained that a detailed and fact-oriented examination is required to determine whether an ECIR needs to be quashed post-quashing of the FIR for the scheduled offence. The court elaborated that the stage of investigation, grounds for discharge, challenges to the discharge order, evidence collected by the Enforcement Directorate, and other relevant considerations are factors relevant to deciding whether to continue the PMLA proceeding.

Analysis

Prior to 2022, various high courts had taken differing views on the connection between the two offences and their implications. While the Bombay, Kerala, and Madras High Courts separated the offence of money-laundering from the scheduled offence, making the consideration of the scheduled offence necessary only at the registration stage, the Delhi and Allahabad High Courts did not subscribe to this view. There was uncertainty surrounding whether the link between the scheduled offence and the offence of money laundering is broken the moment proceedings under PMLA begin.

The 2022 decision in Vijay Madanlal established the need for the existence of a predicate offence for an offence under the PMLA to be made out. This made the existence of a scheduled offence necessary not only at the pre-registration stage, as held in the Babulal Verma, but also at the post-registration stage. Thus, there must be a link to proceeds of crime or a scheduled offence at all stages of a PMLA proceeding. This led to various high courts quashing the proceedings under PMLA once the FIR for the scheduled offence is quashed. However, this straightjacket approach has not been followed by all high courts, which have looked beyond the mere quashing of an FIR to allow the quashing of proceedings under the PMLA.

Thus, the position of law now is clear on the font that an offence under PMLA cannot be separated from the predicate offence at any stage. However, the exact situations where the PMLA offence would survive despite acquittal, dismissal, or quashing of the scheduled offence are still not crystallized and are evolving through judicial analysis.

Conclusion & Way Forward

Following Vijay Madanlal, the proceeds of crime relating to a scheduled offence remain the central element for any action under the PMLA at all stages of the proceeding. Thus, the judicial approach suggests that a PMLA proceeding ought to be quashed if the scheduled offence does not survive in any way, or if there is no prima facie existence of the scheduled offence. At the same time, the courts have recognized that a more nuanced approach may be required when analyzing whether the quashing of an FIR or the dismissal of an accused warrants quashing the PMLA proceedings. When the scheduled offence may still exist and the quashing of the FIR was merely on technical grounds, or when the complaint of the scheduled offence against the co-accused remains in existence, or in other similar situations, the court may refuse to quash the PMLA proceeding. It may be helpful if the Supreme Court provides guidelines on when PMLA proceedings should continue despite the quashing of an FIR, acquittal, or discharge of the accused in the scheduled offence. The decision in Vijay Madanlal is currently undergoing review before the Supreme Court, and the jurisprudence surrounding the effect of quashing, discharge, or acquittal in the scheduled offence on the proceedings under PMLA is still evolving.