Supreme Court clarifies the scope of Section 3 of the Prevention of Money Laundering Act, 2002: Pavana Dibbur vs. Directorate of Enforcement (29 November 2023)

Introduction

Date of the Judgment: 29 November 2023
Citation: 2023 INSC 1029
Judges: Abhay S. Oka, J., Pankaj Mithal, J.
Can a person be prosecuted for money laundering if they are not accused of the original crime that generated the money? The Supreme Court of India recently addressed this critical question in a case involving allegations of money laundering. The court examined whether the definition of “proceeds of crime” under the Prevention of Money Laundering Act, 2002 (PMLA) extends to individuals who were not involved in the original criminal activity but are accused of handling the money generated from it. This judgment clarifies the scope of the PMLA and its implications for those accused of money laundering. The judgment was authored by Justice Abhay S. Oka, with Justice Pankaj Mithal concurring.

Case Background

In 2011, Alliance Business School (ABS) purchased a property in Bengaluru for ₹13.05 crores. This property is referred to as the ‘First Property.’ On July 1, 2013, the appellant, Pavana Dibbur, bought the First Property from ABS for ₹13.5 crores. Subsequently, Madhukar Angur, accused no. 1, purchased another property, referred to as the ‘Second Property.’ On June 29, 2019, Pavana Dibbur purchased the Second Property from Madhukar Angur for ₹2.47 crores.

From 2010 to 2015, Pavana Dibbur’s husband was the Vice-Chancellor of Alliance University, and she also briefly held the same position. On November 11, 2017, a First Information Report (FIR) was filed against Madhukar Angur, alleging he collected ₹107 crores from students by falsely claiming to be the Chancellor of Alliance University. These funds were deposited into the account of Srivari Education Services and later transferred to Madhukar Angur’s account.

Based on these FIRs, the Directorate of Enforcement (ED) registered an Enforcement Case Information Report (ECIR) on October 16, 2020, against Madhukar Angur, his wife, and others, alleging money laundering under Section 3 of the PMLA. The ED alleged that Pavana Dibbur conspired with Madhukar Angur by executing nominal sale deeds for the First and Second Properties to benefit him and facilitated the siphoning of university funds through her bank accounts. The ED attached both properties on September 27, 2021, and filed a complaint before the adjudicating authority on October 13, 2021, naming Pavana Dibbur as the fifth defendant.

Timeline:

Course of Proceedings

The Special Court for PMLA Cases at Bengaluru took cognizance of the complaint filed by the ED on March 17, 2022. Pavana Dibbur then filed a petition before the High Court of Karnataka at Bengaluru under Section 482 of the Code of Criminal Procedure, 1973 (Cr.PC), seeking to quash the complaint. The High Court dismissed her petition on September 27, 2022, relying on the Supreme Court’s decision in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. [(2022) SCC Online SC 929]. The High Court held that the allegations against the appellant warranted a trial and refused to quash the complaint.

Legal Framework

The case revolves around the interpretation of the Prevention of Money Laundering Act, 2002 (PMLA), specifically Section 3, which defines the offense of money laundering. Section 3 of the PMLA states:

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually 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.”

The term “proceeds of crime” is defined under Section 2(1)(u) of the PMLA as:

“any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property”

The explanation to this clause clarifies that it includes property derived not only from the scheduled offense but also any property derived from criminal activity related to the scheduled offense. A “scheduled offense” is defined under Section 2(1)(y) as the offenses specified under Parts A, B, and C of the Schedule to the PMLA.

The court also considered Section 120A and 120B of the Indian Penal Code (IPC). Section 120A defines “criminal conspiracy” as an agreement between two or more persons to commit an illegal act or an act that is not illegal by illegal means. Section 120B provides the punishment for criminal conspiracy.

Arguments

Appellant’s Submissions:

• First Property: The appellant argued that the First Property, acquired on July 1, 2013, could not be linked to the proceeds of crime because it was purchased before the alleged scheduled offense (collection of funds from students) which occurred between January and November 2017.

• Second Property: The appellant contended that she had sufficient funds from her disclosed income under the Income Declaration Scheme, 2016, to purchase the Second Property. She declared an undisclosed income of ₹26,42,54,193 and paid ₹11,89,08,385 towards income tax and penalty.

• No predicate offense involvement: The appellant argued that since she was not named as an accused in any of the chargesheets related to the scheduled offenses, she could not be prosecuted for money laundering under Section 3 of the PMLA. She cited paragraphs 251-253 of the Vijay Madanlal Choudhary judgment, which stated that if an accused in the scheduled offense is acquitted, they cannot be prosecuted under PMLA.

• Section 120B of IPC: The appellant argued that Section 120B of the IPC (criminal conspiracy) alone, without any other scheduled offense, cannot sustain a charge under the PMLA. She contended that the conspiracy must be to commit a scheduled offense for the PMLA to apply.

Respondent’s Submissions (Directorate of Enforcement):

• Monetary Capacity: The respondent argued that even if the appellant had the monetary capacity to acquire the Second Property, it cannot be concluded that the funds siphoned by Madhukar Angur were not used for the purchase. This issue, the respondent argued, should be decided at trial.

• Independent Offense: The respondent submitted that a person can be guilty of money laundering under Section 3 of the PMLA even if they are not an accused in the predicate offense.

• Interpretation of Schedule: The respondent contended that Section 120B of IPC is a scheduled offense and should be read as it is mentioned in the Schedule to the PMLA. They argued that the Schedule must be read as it is, and nothing can be added or subtracted from it.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the first and second properties are tainted properties and covered by the definition of “proceeds of crime” under Section 2(1)(u) of the PMLA.
2. Whether the appellant, not being an accused in the scheduled offenses, can be prosecuted for offenses under Section 3 of the PMLA.
3. Whether Section 120B of the IPC alone, without any other scheduled offense, can sustain a charge under the PMLA.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. [(2022) SCC Online SC 929] to clarify the definition of “proceeds of crime” and the relationship between the scheduled offense and the offense of money laundering. The court reiterated that the scheduled offense must exist for a money laundering case to stand and that a person need not be an accused in the scheduled offense to be prosecuted under PMLA.
• The court interpreted Section 2(1)(u) of the PMLA, which defines “proceeds of crime,” to determine if the properties in question were proceeds of crime.
• The court analyzed Section 3 of the PMLA, which defines the offense of money laundering, to determine if the appellant’s actions constituted money laundering.
• The court interpreted Section 2(1)(y) of the PMLA, which defines “scheduled offense,” to determine what constitutes a scheduled offense under the PMLA.
• The court analyzed Section 120A of the IPC, which defines “criminal conspiracy,” to determine the scope of criminal conspiracy.
• The court analyzed Section 120B of the IPC, which provides the punishment for criminal conspiracy, to determine if conspiracy alone can sustain a charge under PMLA.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a strict interpretation of the PMLA and the IPC. The Court emphasized that the offense of money laundering under Section 3 of the PMLA is dependent on the existence of a scheduled offense and proceeds of crime. The Court also highlighted that a person can be prosecuted for money laundering even if they are not an accused in the scheduled offense, provided they are involved in the process or activity connected with the proceeds of crime. However, the Court also emphasized the importance of a scheduled offense being a prerequisite for prosecution under the PMLA, and that Section 120B cannot be interpreted to include conspiracy to commit any offense as a scheduled offense.

The court emphasized the legislative intent behind the PMLA, noting that not every crime that generates proceeds of crime is a scheduled offense. The court held that the inclusion of Section 120B in the Schedule should be interpreted strictly, and it cannot be used to bring any offense under the ambit of the PMLA. The court also emphasized the principle of strict construction of penal statutes, noting that if two interpretations are possible, the one that avoids penal consequences should be adopted.

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• A person can be prosecuted for money laundering under Section 3 of the PMLA even if they are not an accused in the scheduled offense, provided they are involved in the process or activity connected with the proceeds of crime.
• The existence of a scheduled offense is a prerequisite for prosecution under the PMLA.
• Section 120B of the IPC (criminal conspiracy) becomes a scheduled offense only if the conspiracy is to commit an offense that is already included in the Schedule to the PMLA.
• The first property acquired by the appellant was not linked to the proceeds of crime, as it was purchased before the scheduled offense.
• Whether the second property was acquired with tainted money is a matter to be decided at trial.

Directions

The Supreme Court quashed the order of the High Court of Karnataka and set aside the complaint against Pavana Dibbur. The court directed that the complaint be quashed insofar as the present appellant was concerned.

Development of Law

The ratio decidendi of this case is that the offense under Section 120B of the IPC, included in Part A of the Schedule to the PMLA, will become a scheduled offense only if the criminal conspiracy is to commit an offense already included in Parts A, B, or C of the Schedule. This judgment clarifies that the offense of criminal conspiracy under Section 120B of the IPC cannot be used to bring any offense under the ambit of the PMLA. This is a departure from the interpretation that Section 120B could be used as a standalone offense to attract prosecution under the PMLA. The court emphasized that the legislative intent behind the PMLA is to target specific offenses that generate proceeds of crime and that the Schedule should not be expanded beyond what is specifically mentioned.

Conclusion

The Supreme Court’s judgment in the case of Pavana Dibbur vs. Directorate of Enforcement clarifies the scope of the Prevention of Money Laundering Act, 2002, particularly regarding the interpretation of “proceeds of crime” and the applicability of Section 3. The court held that while a person can be prosecuted for money laundering even if they are not accused in the predicate offense, the offense of criminal conspiracy under Section 120B of the IPC becomes a scheduled offense only if the conspiracy is to commit an offense already listed in the Schedule to the PMLA. The court emphasized the importance of strict interpretation of penal statutes and the legislative intent behind the PMLA. The court ultimately quashed the complaint against Pavana Dibbur, providing relief to the appellant.