Third-party and creditor rights: provisional attachment under §5 of the Indian PMLA, 2002
| DOI | https://doi.org/10.1108/JMLC-01-2022-0006 |
| Published date | 08 March 2022 |
| Date | 08 March 2022 |
| Pages | 609-627 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Sarthak Sethi,Kevin Davis |
Third-party and creditor rights:
provisional attachment under
§5 of the Indian PMLA, 2002
Sarthak Sethi and Kevin Davis
Department of Law, WBNUJS, Kolkata, India
Abstract
Purpose –The purpose of this paper is to considerthe effect of the Prevention of Money Laundering Act
(PMLA), 2002on the property rights of third parties, by evaluating whetherthe interpretation of the scheme of
the PMLA, 2002 resultsin a deprivation of rights, by virtue of the provisionfor the provisional attachment of
property.[AQ3] In doing so, this paper attempts to consider two sub-categories of third parties that stand
affectedby §5 of the PMLA, 2002.
Design/methodology/approach –Primarily the authors analyse diverging judgements and case law
across various highcourts to evaluate the position of law with regardsto attachment of property. To reach a
preciselegal conclusion, the authors consider the composite scheme of the PMLA, 2002 in their analysis.
Findings –It has been concluded that thereis a clear lack of judicial cohesion in the interpretation of the
PMLA, 2002, and in the absence of a judgementby the Supreme Court of India, enforcementauthorities have
failed to correctly identify the boundaries of the offence of money laundering, resulting in a dangerous
deprivationof rights.
Originality/value –This paper fills a vacuum of detailed scholarship on anti-money laundering
provisions in India, while also being contemporaneously relevant, as it considers the effects of the PMLA,
2002 on bona fideeconomic transactions and secured creditors.
Keywords Money laundering, AML, PMLA, Provisional attachment, Secured creditors
Paper type Viewpoint
1. Introduction
Money laundering is a process that involves concealing the illicit origins of income and
disguising the source of the money to make it appear legitimate and untainted [1]. The
process itself dates back thousands of years; Chinese merchants in 2000 BC, attempting to
hide their wealth, would funnel money into networks of semi-legitimate businesses across
rural provinces (Seagrave,1996). Our modern understanding of money laundering, however,
including the conceptualisationof the phrase itself, is much more recent. The term was first
referenced by an article in the Guardian on 19 April 1973, in reference to the conversion of
Republican campaign funds amidst the Watergate scandal [2]. Over a decade later, in
response to the exponential growth of narcotics trafficking, the USA adopted the world’s
first anti-money laundering(AML) legislation, in the form of the Money Laundering Control
Act, 1986, criminalisingthe activity in the specific context of drug trade [3].
Before outlining the global evolution of AML systems and regulation, this paper first
establishes the operative underpinningsof money laundering. The United Nations Office on
Drugs and Crime estimates that the annual value of laundered money is at 2%–5% of the
global gross domestic product, possibly approximating to US$2tn [4]. Conventionally,
money laundering is a tripartite process –placement, which is the transfer of illicit funds
from their source and into the financial system, is followed by layering, which involves
distancing the funds fromthe source through a set of complex, repeated transactions. Lastly,
Third-party
and creditor
rights
609
Journalof Money Laundering
Control
Vol.26 No. 3, 2023
pp. 609-627
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-01-2022-0006
The current issue and full text archive of this journal is available on Emerald Insight at:
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the funds are integrated into the formal economy through conversion into and merger with
legitimate “untainted”money(Seagrave, 1996).
The international mobility of capital, combined with globalisation and the constant
transformation of financial systems, makes money laundering an inherently dynamic
offence. Countermeasures to money laundering therefore, in the form of AML principles,
systems and legislations, have to account for this international nature, as any “unilateral”
AML approach is simply ineffective (Graycar, 2019). It is this inherent characteristic of
money launderingand its countermeasures and the need for intergovernmentalcoordination
that has resulted in the evolution of AML being a globally cohesive process, with
consistency and uniformity in its principles and adoption. The genesis of global AML lies
with the United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, 1998 (Vienna Convention) [5], which recognised that money
laundering enables “transnational criminal organisations to penetrate, contaminate and
corrupt structures of government [and] legitimate commercial and financial business”. The
Vienna Convention was rapidly followed by the Basel Statement of Principles (Basel
Committee of Banking Supervision, 1998) and the formation of the Financial Action Task
Force (FATF) (Nance, 2018). The FATF issued its Report of 40 Recommendations for
countries to counter money laundering in 1990, which are now recognised as the
foundational principles of a successful AML Regime (Financial Action Task Force, 2004).
This paper mentions the provenance of global AML to emphasise the idea that individual
domestic AML regimeshave been set up specifically flowing from this broader international
framework. More importantly,the AML ecosystem is constructed upon a broadly consistent
conceptual idea of moneylaundering and its proportionate countermeasures.
This paper examines one such domestic AML legislation –the Prevention of Money
Laundering Act, 2002 (PMLA) and its provisions for the provisional attachment of property [6].
In effect since 2005, the PMLA is India’s primary legislation to prevent money
laundering, as well as confiscate property that has been derived as a result of money
laundering, and was adopted in furtherance of the United Nations General Assembly’s
(UNGA) Political Declaration and Global Plan of Action, which called for member states
to adopt AML regulation [7]. As acknowledged by the Court in JSekarvUnionof India
[8]andAlive Hospitality & Food Pvt. L td. vUnion of India [9], the PMLA envisages a
dual-proceedings structure –criminal proceedings for the offence of moneylaundering
under §3 and §4 of the statute and civil proceedings for attachment of property. The
former is before a special court, whereas the latter involves proceedings before the
adjudicating authority under §5 and §8,as instituted under the act.
This paper, in arguing thatthe provisional attachment of property under §5 of the PMLA
leads to a deprivation of third-party and creditor rights, first recognises that there is an
absence of judicial consistency andclarity in the interpretation of the composite scheme of
the PMLA. In the absence of a unifying verdict by the Apex Court of the country, different
high courts pose diametrically opposing perspectives on what constitutes “proceeds of
crime”and what the contours of the offenceof money laundering are, as evidenced by Seema
Garg vDeputy Director, Directorateof ED (Seema Garg) and Deputy Director, Directorate of
ED vAxis Bank (Axis Bank) [10]. Simultaneously, different high courts treat property
purchased before the commission of a scheduled offence (under the PMLA) differently as
well [11] .The absence of judicial uniformityin the interpretation of the scheme of the PMLA
forms the contextual backdropof this paper.
It is important to emphasise howeverthat this paper does not question the scheme of the
PMLA or the legislative intent behind the formationor amendment of the statute. Instead, it
specifically highlights the ambiguity in its interpretation. Having highlighted the lack of a
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