• The Supreme Court held that the Enforcement Directorate (ED) cannot arrest an accused under Section 19 of the Prevention of Money Laundering Act (PMLA) after a special court has taken cognisance of the complaint of money laundering.

• A bench of Justices said that when an accused appears before a court in pursuance of a summons, the agency will have to apply to the court concerned to get his custody.

• After cognisance is taken of the offence punishable under Section 4 of the PMLA based on a complaint under Section 44 (1)(b), the ED and its officers are powerless to exercise power under Section 19 to arrest a person shown as an accused in the complaint, the SC bench said.

• If the accused appears before the special court by summons issued by the court, it cannot be treated that he is in custody, it said.

• Accused who appeared before the court pursuant to the summons are not required to apply for bail, and thus twin conditions of Section 45 of PMLA are not applicable, the bench said.

• The twin conditions state that when an accused in a money laundering case applies for bail, the public prosecutor must be given an opportunity to oppose the bail application of the accused. Also, it requires the court to be convinced that there are reasonable grounds to believe the accused is not guilty and is not likely to commit any offence while on bail. 

• These conditions generally make it challenging for an accused in a money laundering case to secure bail.

What is money laundering?

• Money laundering generally refers to financial transactions in which criminals, including terrorist organisations, attempt to disguise the proceeds, sources or nature of their illicit activities. Money laundering facilitates a broad range of serious underlying criminal offences and ultimately threatens the integrity of the financial system. 

• Through money laundering, the criminal transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.

• This process has devastating social consequences. For one thing, money laundering provides the fuel for drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises.

Prevention of Money Laundering Act (PMLA)

• Prevention of Money Laundering Act (PMLA) was enacted on January 17, 2003 and brought into force on July 1, 2005. 

• The Act aims to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto. 

Two main objectives of the Act are:

i) Criminalise money laundering and provide for attachment, seizure and confiscation of property involved in money laundering.

ii) Prescribe obligations on banks, financial institutions and intermediaries relating to KYC, record keeping and furnishing reports.

• PMLA was amended in 2005, 2009, 2012, 2015, 2016, 2018 and 2019 to overcome the deficiencies and to meet the international standards on Anti-Money Laundering as prescribed by Financial Action Task Force (FATF).

• Section 3 of the PMLA criminalises the offence of money laundering related to a wide range of criminal offences listed in the schedule to the PMLA.

• These offences include participation in an organised criminal group and racketeering, terrorism and terrorist financing, illicit trafficking in narcotics drugs and psychotropic substances, illegal human trafficking, illicit arms trafficking, illicit trafficking in stolen goods, corruption and bribery, fraud, counterfeiting and piracy of products, environmental crimes, kidnapping, robbery, smuggling, extortion, forgery, piracy and insider trading and market manipulation. 

• These offences listed in the schedule are called “predicate offences” and section 3 of the PMLA states that whoever is directly or indirectly involved or associated with any process or activity connected with “proceeds of crime” related to these criminal activity will be guilty of the offence of money laundering and is liable for punishment with rigorous imprisonment of three to 10 years under section 4 of the PMLA.

• The scope of section 3 has been widened over the years following a risk based approach to ensure that each and every kind of money laundering offence is covered under the provision and the “proceeds of crime” are not enjoyed with any person who could in any way connected to the underlying criminal activity.

Enforcement Directorate

• The ED functions under the Union finance ministry and it enforces the criminal provisions of the Prevention of Money Laundering Act (PMLA), the Fugitive Economic Offenders Act that was brought by the Modi government in 2018, and the civil sections of the Foreign Exchange Management Act (FEMA).

• The ED was first established in 1956 as ‘Enforcement Unit’ under department of economic affairs  for dealing cases of violations on exchange control laws under Foreign Exchange Regulation Act, 1947 (FERA).

• In 1957, this unit was renamed as ‘Enforcement Directorate’. The administrative control of ED was transferred from department of economic affairs to department of revenue in 1960.

• The ED is headed by the director, who is not below the rank of additional secretary to the government of India.

• There are five regional offices located at Chandigarh (Northern Region), Chennai (Southern Region), Delhi (Central Region), Kolkata (Eastern Region) and Mumbai (Western Region), each headed by a special director. In addition, there is a Headquarters Investigation Unit (HIU) headed by a special director. There are zonal offices and sub-zonal offices.

Functioning of the ED and Acts

Prevention of Money Laundering Act

• The primary function of the Enforcement Directorate is administration and enforcement of the Prevention of Money Laundering Act, 2002 (PMLA) including investigation into the offence of money laundering, filing of prosecution complaint before the special court against the accused, attachment and confiscation of property involved in money laundering and carrying out international cooperation with competent authorities in foreign jurisdictions. 

• The ED has the sole jurisdiction to investigate the money laundering cases and the law enforcement agencies having the responsibility to investigate a “predicate offence”, including the state police authorities, are required to make a reference to the ED to examine the money laundering aspect of the criminal activity. 

• In certain cases, the fact that a predicate offence has taken place is also obtained from publicly available sources or on receipt of information from the Financial Intelligence Unit (FIU). 

• On receipt of the reference or information and after making certain preliminary verification, the ED registers a case and initiates investigation (Enforcement Case Information Report or the ECIR) following a risk based approach taking into consideration factors such as materiality of the offence, transnational nature of the crime, complexity of the case, the larger public interest and the availability of resources.

Foreign Exchange Management Act

• The ED is  entrusted with the implementation of the Foreign Exchange Management Act (FEMA) whose object is to consolidate and amend the law relating to foreign exchange for facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange resources. 

• The ED initiates investigations and issues Show Cause Notices (SCN) in cases where the allegations of contravention of provisions under FEMA are noticed. These SCNs upon adjudication result in imposition of penalty as well as confiscation of currency/property involved.

Fugitive Economic Offenders Act

• The Enforcement Directorate has also recently been entrusted with the implementation of the Fugitive Economic Offenders Act, 2018 (FEOA). 

• The FEOA provides for the measures to deter the fugitive economic offenders from evading the process of law in India by staying outside the jurisdiction of Indian courts and to preserve the sanctity of the rule of law in India. 

• Action under the said Act can be initiated against economic offenders who have left India so as to avoid criminal prosecution or who, being abroad, refuse to return to India to face criminal prosecution and the total amount involved in the economic offence is more than Rs 100 crore.

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