This article is written by Yashita Bhardwaj.
With time, the financial crime rate is increasing in India. Despite various legislations in India, financial crimes are growing at rapid speed and one amongst them is the offence of money- laundering. In common man’s language laundering can be defined as cleaning and drying of clothes similarly in money laundering the money generated through illegal activity is laundered and the stain on that money is cleared by using that money into legitimate activities. Money laundering is an organized crime in India. It is a victimless modern crime which is not against a private person but a nation at large. Money laundering is governed by the Prevention of Money Laundering Act, 2002 which punishes the offender who commits money laundering and seizes the property derived from money laundering or property purchased from the tainted money.
The agency which governs money laundering in India under PMLA, 2002 is Directorate of Enforcement (ED). Under the Prevention of Money Laundering Act, the enforcement director can investigate, search, seize, freeze or attach an asset of property derived or acquired from illegal money termed as “proceeds of crimes”. During this whole process of preventing money laundering in India, the one who suffers is the third party i.e., banks, financial institutions, secured creditors, flat owners (of building attached by ED), etc. This paper will focus on the concept of a third party, their rights and the struggle they face in between this process of attachment. This paper also focuses on the immunity given to secured creditors and their rights during attachment and the unsolved concerns of third parties.
The property received after committing a scheduled offence is called as proceed of crimes, and the process of converting tainted property (proceed of crimes) into untainted property is known as money laundering as per Prevention of Money Laundering Act, 2002. The offence of committing money-laundering is punishable with rigorous imprisonment for a term of 3yrs -10yrs as the case may be and shall also be liable with fine.
Prevention of Money Laundering Act, 2002 focuses on two major things, firstly the person who is involved in proceeds of crime or its concealment, possession, acquisition, or use and projecting it as untainted property. Secondly, the property derived from the offence of money laundering. The offence under section 3 of PMLA, 2002, is a civil sanction which runs parallel to criminal actions vis-a-vis the offence of money-laundering.
Under section 5and 8 of PMLA,2002, the proceed of crimes is attached and confiscated respectively and as per section 18 and 19 of PMLA,2002, the investigation and arrest of respective offender take place.
If any person who has the possession of proceeds of crime and likely to transfer, conceal or deal in any other manner which may lead to frustration in confiscating such proceeds of crime, then the director or officer not below the rank of deputy director is authorised to make a provisional attachment of that property for a period, not more than 180 days.
After provisional attachment, if the adjudicating authority confirms the attachment then on the conclusion of the trial of an offender, the attached property is confiscated by the central government.
Many a time, innocent third party’s property also gets attached under this process because either that property is the derivated form of the tainted property, i.e., conversion of proceeds of crimes into an untainted property, or the value of the attached property is the value equivalent to the proceeds of crime.
Third-party is the person other than the accused of the offence of money- laundering, whose property is attached by the enforcement directorate under the process of attachment of proceeds of crimes. Under PMLA 2002, the mere issuance of an order of provisional attachment or confiscation of property, cannot surpass the statutory rights of bonafide third parties. Whereas merely on the fact that a bonafide third party has a prior interest in the property, one cannot set aside the provisional attachment.
To deal with this issue, Delhi high court in 2018 under, The Deputy Director Directorate of Enforcement, Delhi vs. Axis Bank & Ors., gave the test of claiming property by the third party. While dealing with the claim of “releasing the property ” by the third party, one has to find:
- Whether such claimant has “a legitimate interest” in the property,
- Whether he had “acted in good faith”,
- Whether he had taken “all reasonable precautions” while acquiring property,
- Whether he is involved in the offence of money laundering or may have suffered a quantifiable loss as a result of money laundering.
Despite this test of claiming property, the authorities attach some properties, suspected as proceeds of crimes, based not on the fact that the value is derived from criminal activity but because there are of equivalent value as to proceeds of crime. In such cases, the authorities must draw a clear nexus or link between the person accused of the offence of money laundering on one hand and such property on the other.
- Before confirmation of provisional attachment, under section 5(4) of PMLA, 2002every person claiming or entitled to claim any interest in the property has the right to enjoyment over that immovable property.
- Third-party has the right to approach adjudicating authority before confirmation of provisional attachment to prove that such property is not involved in money- laundering and shouldn’t be attached.
- Even after confirmation of provisional order by adjudicating authority, the third party can appeal at the appellate tribunal and can seek the release of such property by proving that the said property is not derived from proceeds of crimes.
- Under section 8(8) of PMLA 2002, the remedy is available to the third-party even post confiscation order to the central government, but the burden of proving the facts is on the person who contends the claim.
- If a third- party claims that he had acquired the alternative attached property at a time around or after the commission of prescribed criminal activity, and gives cogent evidence that he has taken due diligence will acquiring the property to ensure that it wasn’t a tainted one and all the transactions were legitimate at the time of the acquisition, then the enforcement authority has no right to attach that property.
- If a third-party had acquired the deemed tainted property before the commission of scheduled the criminal activity, then the third-party has the right to satisfy its charges and property to extend of such interest of the third party will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists.
Although Section 71 of PMLA,2002 has non-obstante which says that Prevention of Money Laundering Act has an overriding effect over any other legislation but at the same time Section 26 E of SARFESI Act also has an overriding effect over any other legislation. This inconsistency between two legislation was settled in Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd, where Supreme Court held that if a non-obstante clause is contained in two legislation, then the latter one will prevail over the earlier one.
Relying on the above principle it was held in Punjab National Bank vs. The Deputy Director, Directorate of Enforcement, Raipur that SARFAESI Act, would prevail over the PMLA as the amendment of overriding effect in the SARFAESI Act came later and is also a special Act to secure the assets and interests of banks and other financial institutions.
Secured creditor is a creditor in favour of whom security interest is created. The rights of secured creditors to realize secured debts should be given priority over all the government dues and debts including taxes, cesses and revenues due to the Central, State or Local Government. For recovery of government dues, no mortgaged property with the secured creditor can be attached. The Enforcement Directorate cannot claim the right to attachment over the property of individual who is suspected as an offender under PMLA,2002, if the banks have already created prior rights over that property through lending or mortgaging the property and there is no direct or indirect nexus between the proceeds of crime and the property.
The mortgaged property or asset is security to the loans and can never be subjected to attachment, especially when they acquired or purchased before the commission of the scheduled offence. If an innocent third-party is a “secured creditor” and claims security interest over the attached asset or the property of an accused charged with the offence money-laundering or of any other person who is involved in the process of money laundering, such third party has superior rights over that property or asset than any other person and the attachment by enforcement directorate is restricted to such part of the value of an asset or property which is in excess of the claim of the secured creditor.
To uphold the rights of bonafide claimants (secured creditors), the Hon’ble High Court in Regional Office v. The Joint Director Directorate of Enforcement (2019), held that:
- The date of commission of Money Laundering offence under PMLA is the “cut-off date”. If any Bank has secured interest over that property prior to the cut-off date then it is a bonafide claimant or secured creditor and Section 8 of PMLA,2020 cannot defeat the statutory rights of the claimant.
- During the sale of attached immovable property, the priority should be given to secured creditors to realize their dues and then if any balance is left, the balance should go the Directorate of Enforcement.
- In order to claim the statutory rights under Section 13 of the SARFAESI Act, the banks must prior register the mortgage charge of secured creditors qua the mortgaged immovable property.
- If any actions were taken under the SARFAESI Act, prior to the commission of an offence under PMLA,2002, then those actions will remain valid and the interest of secured creditors will remain protected by it.
Despite various rights and remedies available to the third party under PMLA,2002, there are some cases in which bonafide third parties still suffer. The third party stucks in between this process of attachment because they have certain claims in the property. For example:- when the sales deed is incomplete, or somebody has taken loan against that property, or when the party has done only the part payment. The ED attaches the whole property derived from the proceeds of crime or the value equivalent to the proceeds of crime and leaves the property of those parties which have a bonafide interest in that property. But in cases where sales deed is incomplete or only the half payment is done by the party to the accused to have a bonafide interest in the property, the whole property gets attached because the accused is still the owner of that property.
Let’s understand this with help of an illustration:
Mr. Thapper is charged with the offence of Money Laundering of Rs. 5 Crore and Enforcement Directorate (ED)made an attachment of a building worth Rs. 3 Crore owned by Mr. Thapper. This building has various flats owned by different parties. Now, let’s understand the concept of the third party with two cases, in the first case Mrs Thakur the registered flat owner in whose name sales deed has been transferred claims her property from the ED and in the second case Mr. Sharma who has done the part payment to the accused to purchase the flat in that building claims his property from the ED. Now, as per the rights and remedies available to third parties under PMLA, if a third party proves that he/she has a bonafide interest in the property and has acquired that property without any process of money laundering than ED is obligated to set aside that property from attachment order but this can happen only when the party is the registered owner or has absolute ownership over the property. Therefore, in the first case, Mrs. Thakur can claim the rights over the property but in second case Mr. Sharma cannot claim from ED to aside their flat from attachment order because they don’t have the absolute ownership over the property (because only the payment has been done by Mr. Sharma).
So, when the party doesn’t have absolute ownership over the property then ED can attach his/her property and they can’t claim rights over the property as they aren’t the absolute owners of that property. Under such circumstances, innocent third parties suffer, who have given part/half payment to the accused whose property has been attached. They can’t claim from ED because they aren’t the registered owners and can’t claim the ownership from the accused of money laundering as only the part payment has been done yet.
The only right which the concerned third party has in such cases is under section 8(8) of PMLA 2002, where the bonafide claimant can file an application before the Special Court, and after being satisfied by the claims of the third party, the Special Court can direct the central government to indemnify the loss being suffered by him despite taking every reasonable precaution. Other than this remedy, third parties can also initiate a civil suit against the accused of money laundering, for non-performance of a sales agreement.
Money laundering is a serious threat to the financial system as well as to the integrity and sovereignty of the country. The objective behind the Prevention of Money Laundering Act 2002, is to obviate this threat and eliminate or prevent money laundering and penalize related criminal activities in the country. Every attachment should be made while keeping this aim in mind and should be done by upholding all the rights of the bonafide third party.
Although innocent third parties suffer a lot due to attachment orders made by ED under PMLA 2002, but they have various provisions to prove their innocence and claim their legitimate rights from the officials and the courts. Yes, it is a challenge for third parties to prove their innocence when they claim their interest in the property but still, they have sufficient remedies to indemnify their loss and initiate their rights.
Money Laundering in any country affects the nation at large and the money involved in it is of the citizens. So, more strict actions should be taken by the enforcement agencies while keeping in mind the rights of third parties and the whole process from attaching the property to confiscation and the ultimate conviction of an accused should be regulated through fast-track courts. Since almost every money laundering case involves third parties and in due process of attachment orders, their rights also get infringed so a separate panel or tribunal should be created to review their matters on urgent basis and the adjudicating authority and special courts should only listen to the matter related to an accused.
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