Introduction:

The Madras High Court, in a significant ruling, clarified that under the Prevention of Money Laundering Act (PMLA), properties acquired even before the commission of a scheduled offense could be attached if the criminal activity is conducted outside the country. The court emphasized that it is not necessary for the properties sought to be attached to have been purchased from the proceeds of crime. The court was hearing a petition filed by M/s. Sterling Futures and Holidays Ltd. challenged the provisional attachment order issued by the Enforcement Directorate (ED) and the subsequent complaint under the PMLA. The ruling underscored the scope of the PMLA in dealing with offenses committed outside India and addressed key concerns about the prosecution of companies under the act.

Petitioner’s Counsel:

The petitioner, M/s. Sterling Futures and Holidays Ltd., represented by advocate Nithyash Natarajan of Sri Law Associates, challenged the complaint lodged by the Enforcement Directorate under the PMLA. The core argument of the petitioner revolved around the concept of vicarious liability. It was contended that the company could not be held liable for the actions of its shareholders or other individuals involved in the alleged criminal activity. The petitioner asserted that the offenses, if any, were committed by individuals associated with the company and that the company itself could not be prosecuted for the actions of its shareholders.

The counsel further argued that the properties in question were purchased much before the alleged commission of the offense and, as such, could not be attached under the PMLA. Since the properties were not acquired from the proceeds of the alleged financial fraud or other criminal activities, the provisional attachment order was unjustified. The petitioner also contended that Section 70 of the PMLA could not be used to hold the company vicariously liable for offenses committed by individuals, including shareholders.

The petitioner further argued that the attachment order was not in line with the PMLA’s provisions, which require that the properties attached must be derived from criminal activity. Since the properties in question were acquired prior to the scheduled offense, the petitioner claimed that the ED’s attachment was beyond the scope of the PMLA. Moreover, the company argued that the petition filed under Section 482 of the Criminal Procedure Code (CrPC) was maintainable, as the provisional attachment order was issued without proper grounds and in violation of the company’s rights.

Respondent’s Counsel:

On behalf of the Enforcement Directorate, Additional Solicitor General of India, Mr. AR.L. Sundaresan, assisted by Special Public Prosecutor Mr. Cibi Vishnu, submitted that there was prima facie evidence of money laundering involving the petitioner company. The respondents argued that the properties could be attached even if they were acquired prior to the commission of the scheduled offense if the offense took place outside India. The ED maintained that the PMLA allows for the attachment of properties equivalent in value to the proceeds of crime held abroad, even if the properties in India were not directly purchased from the proceeds of crime.

The ED further argued that the petition filed under Section 482 of CrPC was not maintainable, as the petitioner should have approached the Appellate Tribunal under Section 26 of the PMLA to challenge the provisional attachment order. The respondents contended that the present petition was an attempt to bypass the proper appellate remedy provided under the PMLA and urged the court to dismiss the petition.

Addressing the issue of vicarious liability, the ED pointed to Section 70 of the PMLA, which clearly states that a company can be prosecuted independently of its shareholders. The respondents rejected the petitioner’s contention that the company could not be held liable for the alleged offenses committed by its shareholders. They argued that the prosecution of a company under the PMLA does not require the prior prosecution or conviction of any individual. The ED emphasized that the company itself was involved in the financial fraud, and as such, it could be prosecuted under the PMLA.

Court’s Judgment:

The Madras High Court bench, comprising Justice SM Subramaniam and Justice V Sivagnanam, dismissed the petition and upheld the provisional attachment order. The court delivered a detailed judgment clarifying the application of the PMLA in cases where criminal activity takes place outside India and how properties acquired prior to the scheduled offense can be attached.

• Properties Purchased Before the Offense Can Be Attached:

The court made it clear that under the PMLA, properties purchased prior to the commission of a scheduled offense can still be attached if the criminal activity took place outside the country. The court noted that the purpose of this provision was to ensure that properties equivalent in value to the proceeds of crime held abroad could be attached within India, even if the properties were not acquired directly from the proceeds of crime. This interpretation expands the reach of the PMLA, allowing authorities to attach properties within India to compensate for criminal activities conducted abroad.

The bench observed that the intention behind this provision is to prevent the laundering of money by attaching properties of equivalent value in India, ensuring that perpetrators do not escape liability for offenses committed outside the country. Therefore, the court ruled that the provisional attachment order was valid, even though the properties were purchased before the alleged offense.

• Prosecution of Companies under Section 70 of PMLA:

The court also addressed the petitioner’s argument regarding vicarious liability, ruling that Section 70 of the PMLA expressly allows for the prosecution of companies. The court pointed to Explanation (2) of Section 70, which clarifies that the prosecution or conviction of a company is not contingent upon the prosecution or conviction of any individual. The court rejected the petitioner’s claim that the company could not be held vicariously liable for the alleged offenses committed by its shareholders.

The court held that the company itself could be prosecuted for offenses under the PMLA, regardless of whether individual shareholders or directors were prosecuted. The court emphasized that the law allows for the prosecution of a company as a separate legal entity, and thus, the petitioner’s argument ran counter to the clear provisions of the PMLA.

• Prima Facie Case for Prosecution:

The court also noted that there was a prima facie case for prosecuting both the individuals and the company. The CBI had registered an FIR under Sections 120B and 420 of the Indian Penal Code and Section 13 of the Prevention of Corruption Act, alleging financial fraud. This constituted a scheduled offense under the PMLA, leading the ED to issue the provisional attachment order. Given the nature of the allegations and the evidence presented, the court ruled that there were sufficient grounds to proceed with the prosecution under the PMLA.

• Appellate Remedy under Section 26 of PMLA:

While dismissing the petition, the court noted that the merits of the provisional attachment order could not be adjudicated in the present case. The court advised the petitioner to approach the Appellate Tribunal under Section 26 of the PMLA to challenge the attachment order. The court emphasized that the proper forum for challenging the attachment was the tribunal, and the petition Under section 482 of CrPC was not maintainable.