Supreme Court Quashes Money Laundering Case Due to Lack of Evidence: J. Sekar vs. Directorate of Enforcement (5 May 2022)

LEGAL ISSUE: Whether a money laundering case can proceed when the predicate offense is not proven and the source of funds is explained.

CASE TYPE: Criminal Law, Prevention of Money Laundering Act (PMLA)

Case Name: J. Sekar @ Sekar Reddy vs. Directorate of Enforcement

Judgment Date: 5 May 2022

Date of the Judgment: 5 May 2022

Citation: (2022) INSC 466

Judges: Justices Vineet Saran and J.K. Maheshwari

Can a money laundering case stand if the predicate offense (the original crime that generated the money) is not proven? The Supreme Court of India recently addressed this critical question. This case revolves around allegations of money laundering against J. Sekar, where the underlying predicate offense was closed due to lack of evidence. The Supreme Court, in a judgment authored by Justice J.K. Maheshwari, ultimately quashed the money laundering case, emphasizing the need for proof beyond a reasonable doubt.

Case Background

The case began with the Income Tax Department conducting searches on the premises of J. Sekar Reddy, the Managing Partner of M/s SRS Mining, on December 8 and 9, 2016. The searches led to the seizure of significant amounts of cash and gold. Following this, the Central Bureau of Investigation (CBI) registered a case against J. Sekar and others on December 19, 2016, for offenses under the Indian Penal Code and the Prevention of Corruption Act, 1988. The Enforcement Directorate (ED) also initiated a case under the Prevention of Money Laundering Act, 2002 (PMLA) on the same day, suspecting money laundering.

Subsequently, the CBI filed a closure report in the main case (RC MA1 2016 A0040) on September 25, 2020, stating a lack of sufficient evidence. The Income Tax Department also closed its investigation after being satisfied that the seized cash was accounted for and taxes were paid. Despite these closures, the ED’s case under PMLA continued, leading J. Sekar to file a petition in the High Court of Madras to quash the proceedings, which was dismissed.

Timeline

Course of Proceedings

The High Court of Madras dismissed J. Sekar’s petition under Section 482 of the Criminal Procedure Code (Cr.P.C.), which sought to quash the PMLA proceedings. The High Court held that the money laundering offense is independent of the predicate offense. It also noted the seizure of Rs. 33 crores in Rs. 2000 denomination notes, which occurred during demonetization, as a key factor.

The High Court rejected the argument that the closure of the CBI case for lack of evidence should lead to the quashing of the PMLA case. The High Court relied on the seizure made by the I.T. Department, including the currency notes of Rs. 2000 denomination, in the context of demonetization.

Legal Framework

The key legal provisions involved in this case are:

• Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA): Defines the offense of money laundering.
• Section 4 of the PMLA: Prescribes the punishment for money laundering.
• Section 5(1) of PMLA: Empowers the authorities to provisionally attach property involved in money laundering.
• Section 5(5) of PMLA: Provides for the Adjudicating Authority to confirm or reject the provisional attachment order.
• Section 8(1) of PMLA: Deals with the issuance of show cause notices regarding attached property.
• Section 2(1)(u) of PMLA: Defines “proceeds of crime”.
• Section 2(1)(x) and 2(1)(y) of PMLA: Defines the scheduled offences.
• Section 482 of the Criminal Procedure Code (Cr.P.C.): Grants inherent powers to the High Court to prevent abuse of process.
• Section 173(2) Cr.P.C.: Deals with the submission of a police report after investigation.

The PMLA was enacted to combat money laundering by targeting the proceeds of crime. It defines money laundering as the process of concealing or disguising the origins of illegally obtained money, making it appear legitimate. The Act provides for the attachment and confiscation of property involved in money laundering.

Arguments

Appellant’s Arguments:

• The appellant argued that a pre-existing scheduled offense is necessary for invoking the PMLA, as the “proceeds of crime” are derived from such criminal activity.
• The Adjudicating Authority had refused to confirm the attachment order due to a lack of evidence, which should be considered a relevant factor.
• The appellant contended that the offense of money laundering under Section 2(1)(p) and Section 3 of PMLA was not made out.
• It was also argued that as per Section 8(1) of PMLA, a show cause notice may be issued regarding the attached property if the Authority has reason to believe that any person has committed an offense under Section 3 or is in possession of proceeds of crime.
• The appellant relied on the judgments in Radheshyam Kejriwal vs. State of West Bengal (2011) 3 SCC 581 and Ashoo Surendranath Tewari vs. Deputy Superintendent of Police, EOW, CBI (2020) 9 SCC 636, arguing that if the allegations are not sustainable in the adjudication proceedings, the criminal prosecution should not continue.

Respondent’s Arguments:

• The respondent argued that the order of the Adjudicating Authority under Section 5(5) of PMLA is subject to appeal, which was pending before the Appellate Authority. Therefore, the findings of the Adjudicating Authority are not sufficient to quash the proceedings.
• The Additional Solicitor General (ASG), appearing for the respondent, did not controvert the arguments advanced by the appellant’s counsel on merits.

The core of the appellant’s argument was that the absence of a scheduled offense and the lack of evidence connecting the seized money to any criminal activity should invalidate the money laundering charges. The appellant also relied on the fact that the Income Tax Department was satisfied with the explanation for the source of the seized money and the payment of taxes.

The respondent’s argument primarily focused on the pendency of the appeal against the Adjudicating Authority’s order, suggesting that the proceedings should continue until the appeal is decided.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the proceedings under the Prevention of Money Laundering Act, 2002 can be sustained when the scheduled offense is not made out and the source of money is explained?

Treatment of the Issue by the Court

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 heavily on the principles laid down in Radheshyam Kejriwal vs. State of West Bengal [CITATION] and Ashoo Surendranath Tewari vs. Deputy Superintendent of Police, EOW, CBI [CITATION]. The Court emphasized that if the allegations are not sustainable in the adjudication proceedings, the criminal prosecution should not continue. The Court also considered the definition of “proceeds of crime” under Section 2(1)(u) of PMLA, noting that the property seized must be connected to a scheduled offense.

The Court also considered the provisions of Section 3, 4, 5(1), 5(5) and 8(1) of PMLA, and Section 482 and 173(2) of Cr.P.C. to analyse the case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Closure of the Scheduled Offense Case: The CBI’s closure report in the main case (RC MA1 2016 A0040) due to lack of evidence was a crucial factor. The Court noted that the scheduled offense, which is the basis for the money laundering charge, was not proven.
• Satisfaction of the Income Tax Department: The I.T. Department’s letter dated 16.5.2019, which stated that the seized cash was accounted for and taxes were paid, significantly influenced the Court’s decision. This established that the seized money was not the proceeds of crime.
• Order of the Adjudicating Authority: The Adjudicating Authority’s refusal to confirm the attachment order, citing a lack of evidence and identification of any bank or bank officials involved, also played a crucial role.
• Lack of Incriminating Material: The Court observed that even after a lapse of 5 1/2 years, the Enforcement Directorate had failed to collect any incriminating material to prove the money laundering offense beyond a reasonable doubt.
• Principles of Criminal Law: The Court reiterated the principle that allegations must be proved beyond a reasonable doubt, and the court cannot proceed on the basis of preponderance of probabilities.

The Court emphasized that the burden of proof lies on the prosecution to prove the allegations beyond a reasonable doubt, and this burden was not met in this case. The Court also noted that the proceedings were initiated based on intriguing recoveries of cash and other items, which were later explained and accounted for.

Logical Reasoning

The Court considered the argument that the order of the Adjudicating Authority was subject to appeal, but rejected it, stating that remedies were also available against the order of the Appellate Authority.

The Supreme Court concluded that the chances of proving the allegations in court were bleak, and therefore, the proceedings under PMLA should be quashed. The Court emphasized that the appellant is presumed innocent until proven guilty.

The Court quoted the following from the judgment:

• “In our opinion, even in cases of PMLA, the Court cannot proceed on the basis of preponderance of probabilities.”
• “Thus, the allegation must be proved beyond reasonable doubt in the Court.”
• “Unless the allegations are substantiated by the authorities and proved against a person in the court of law, the person is innocent.”

Key Takeaways

• Burden of Proof: The prosecution must prove allegations under the PMLA beyond a reasonable doubt.
• Predicate Offense: A money laundering case cannot stand if the scheduled offense is not proven.
• Source of Funds: If the source of funds is explained and taxes are paid, it weakens the case for money laundering.
• Adjudicating Authority’s Findings: The findings of the Adjudicating Authority are relevant in determining whether to continue PMLA proceedings.
• Importance of Evidence: The investigating agency must collect sufficient evidence to prove the allegations of money laundering.

Directions

The Supreme Court set aside the impugned order passed by the High Court and quashed the Enforcement Case Information Report (ECIR) CEZO 19/2016 and the related complaint.

Development of Law

The ratio decidendi of this case is that a money laundering case under the Prevention of Money Laundering Act, 2002, cannot be sustained if the scheduled offense is not proven, and the source of the funds is explained and accounted for. This judgment reinforces the principle that allegations under PMLA must be proven beyond a reasonable doubt, and it highlights the importance of the predicate offense in money laundering cases. The judgment also clarifies that the findings of the Adjudicating Authority are relevant and must be considered in determining whether to continue PMLA proceedings.

Conclusion

The Supreme Court’s decision in J. Sekar @ Sekar Reddy vs. Directorate of Enforcement (2022) INSC 466, quashing the money laundering case, underscores the importance of proving allegations beyond a reasonable doubt and the necessity of a proven predicate offense for money laundering charges to stand. The Court’s emphasis on the closure of the CBI case, the satisfaction of the Income Tax Department, and the Adjudicating Authority’s findings highlights the need for a thorough and evidence-based approach in PMLA cases.

Category

• Criminal Law
  • Prevention of Money Laundering Act, 2002
  • Section 3, Prevention of Money Laundering Act, 2002
  • Section 4, Prevention of Money Laundering Act, 2002
  • Section 5, Prevention of Money Laundering Act, 2002
  • Section 8, Prevention of Money Laundering Act, 2002
  • Section 2(1)(u), Prevention of Money Laundering Act, 2002
  • Criminal Procedure Code
  • Section 482, Criminal Procedure Code
  • Section 173, Criminal Procedure Code
  • Money Laundering
  • Scheduled Offence
  • Proceeds of Crime
  • Adjudication
  • Evidence

FAQ

Q: What is the main issue in the J. Sekar vs. Directorate of Enforcement case?

A: The main issue was whether a money laundering case can proceed when the underlying criminal offense is not proven and the source of the funds is explained.

Q: What did the Supreme Court decide in this case?

A: The Supreme Court quashed the money laundering case, stating that the prosecution had failed to prove the allegations beyond a reasonable doubt and that the predicate offense was not made out.

Q: What is a predicate offense in a money laundering case?

A: A predicate offense is the original crime that generates the money which is then laundered. In this case, it was the alleged corruption and cheating offenses.

Q: What does “proceeds of crime” mean under the PMLA?

A: “Proceeds of crime” refers to any property derived from a criminal activity. The Court noted that the property seized must be connected to a scheduled offense.

Q: Why did the Supreme Court quash the PMLA case?

A: The Supreme Court quashed the case because the CBI had closed the scheduled offense case due to lack of evidence, the Income Tax Department was satisfied with the source of funds, and the Adjudicating Authority had refused to confirm the attachment order.

Q: What is the significance of the Income Tax Department’s findings in this case?

A: The Income Tax Department’s satisfaction that the seized cash was accounted for and taxes were paid was a crucial factor in the Supreme Court’s decision, as it indicated that the money was not the proceeds of crime.

Q: What is the role of the Adjudicating Authority in a PMLA case?

A: The Adjudicating Authority is responsible for confirming or rejecting the provisional attachment of property by the Enforcement Directorate. In this case, the Adjudicating Authority’s refusal to confirm the attachment was a key factor in the Supreme Court’s decision.

Q: What does this judgment mean for future money laundering cases?

A: This judgment emphasizes that money laundering charges must be proven beyond a reasonable doubt and that the prosecution must establish a clear link between the money and a scheduled offense. It also highlights the importance of thorough investigation and evidence collection in PMLA cases.