Supreme Court Clarifies Standard of Proof in PMLA Proceedings

[Raghav Bhatia is an Advocate practising at the Supreme Court of India. Hima Prajitha is an Advocate, practising before courts in Andhra Pradesh]

Recently, the Supreme Court of India in J. Sekar @ Sekar Reddy v. Directorate of Enforcement, has observed that the standard of proof in proceedings under the Prevention of Money Laundering Act, 2002 (“PMLA”) is beyond reasonable doubt and not preponderance of probabilities.

This post aims to discuss the instant judgment in the light of jurisprudential difference between beyond reasonable doubt and balance of probabilities.

Beyond Reasonable Doubt vs. Preponderance of Probabilities

In criminal proceedings, the prosecution must prove the guilt of an accused beyond reasonable doubt (see Dahyabhai Chhaganbhai Thakker v. State of Gujarat). Therefore, for one to be proven guilty of a criminal act, all elements of the guilt must be proved beyond reasonable doubt that a rational person can have. The doubt here means a doubt which is “based upon reason and common-sense” and “must grow out of the evidence in the case” (see State of Madhya Pradesh v. Dharkole).

Preponderance of probabilities is the standard of proof applicable to civil proceedings. This principle was enunciated in Charles R. Cooper v. F.W. Slade [(1857-59) 6 HLC 746], wherein it was observed that preponderance of probabilities means a “more probable and rational view of the case“. In such cases, the burden usually rests on the party alleging a particular fact, and the court gets satisfied with the occurrence of an event where the evidence suggests that the occurrence of the event was more likely than not.

It is a settled principle of law that the preponderance of probabilities is a lower degree threshold than beyond reasonable doubt (see Vinod Kumar Garg v. State). In Gurbachan Singh v. Satpal Singh, the Supreme Court had observed that “while civil case may be proved by mere preponderance of evidence, in criminal cases, the prosecution must prove the charge beyond reasonable doubt”.

Factual Background

In December 2016, the Income Tax Department, Chennai (“IT Department”) searched different premises of Sekar Reddy (“Reddy”) and seized money along with gold worth crores.

Subsequently, the Central Bureau of Investigation (“CBI”) registered a First Information Report (“FIR”) for offences under sections 120-B, 409 and 420 of the Indian Penal Code, 1860, and sections 13(2), 13(1)(c) and 13(1)(d) of the Prevention of Corruption Act, 1988 against Reddy.

Accordingly, the Enforcement Directorate (“ED”) registered offences under sections 3, 4 & 8(5) of the PMLA against Reddy. After recording the statement of Reddy, the ED subsequently found more cash, consisting of currency notes of Rs. 2000 denomination, at Reddy’s official and commercial premises.

Subsequently, the CBI filed two more FIRs against Reddy (collectively referred to as “supplementary FIRs”). However, a Special Court granted bail to Reddy.

The Adjudicating Authority under PMLA refused to confirm an order for provisional attachment passed by the Deputy Director (ED) under section 5(1) of the PMLA, observing that the allegation concerning the “change of old into new currency notes through the bank officers” was “based on speculations”.

Subsequently, Reddy filed a petition under section 482 of the Criminal Procedure Code, 1973 (“CrPC”) before the Madras High Court (“High Court”), praying for quashing of the supplementary FIRs filed by the CBI and the same was allowed. However, the High Court granted liberty to CBI to either treat the allegations contained in the supplementary FIRs “as supplementary allegations” or merge them in the first FIR filed by CBI (“main FIR”).

Concerning the search and seizure, the IT Department informed Reddy that it was satisfied that the “money so seized was accounted money”.

Further, after investigating the allegations contained in the main FIR, CBI submitted a closure report under section 173(2) of the CrPC. The Additional Sessions Judge accepted the closure report by observing that due to insufficient evidence, “nothing incriminating is found which may surface on the part of accused persons”. Therefore, out of the three cases registered by CBI, a closure report was filed in the main FIR, and the two supplementary FIRs were quashed.

Thereafter, Reddy approached the High Court under section 482 of the CrPC to quash the PMLA proceedings. However, the High Court dismissed the petition. Thus, Reddy has approached the Supreme Court in the present proceedings.

The issue before the Supreme Court

Whether the standard of proof as required to be satisfied in proceedings initiated under the PMLA was satisfied in the present case?

Proceedings before the Supreme Court

At the outset, the Supreme Court noted that the proceedings against Reddy started based on recovery of cash and other items about which “the I.T. Department itself was satisfied with the recovery after investigation in the year 2019”.

Further, CBI had filed a closure report with respect to the main FIR, and the High Court had already quashed the supplementary FIRs. Therefore, it was observed “that the FIR with respect to schedule offence registered by the CBI with respect to proceeds of the crime including property attached” was also closed.

The Supreme Court rightly noted that it was only on the basis of search and seizure conducted by the IT Department and the consequent registration of FIRs by the CBI, that the ED had registered an FIR under sections 3, 4 and 8(5) of PMLA. Following this FIR, the ED (Deputy Director) passed an order under section 5(1) of the PMLA for the attachment of Reddy’s properties. However, the Adjudicating Authority did not confirm this order under section 5(5) of the PMLA and “was of the opinion that the record regarding banks and its officials who may be involved, is not on record”. Therefore, “it could not be reasonably believed” that an offence had been committed under the PMLA.

Placing reliance on Radheshyam Kejriwal v. State of West Bengal, the Supreme Court observed that when the accused has been exonerated in adjudication proceedings “on merits where the allegation is found to be not sustainable at all and the person held innocent, criminal prosecution on the same set of facts and circumstances cannot be allowed to continue, the underlying principle being the higher standard of proof in criminal cases”.

The Supreme Court then examined the facts of the case in light of the law as explained in Radheshyam Kejriwal and rightly observed that no prima facie satisfaction of the offence was proven beyond reasonable doubt in the present case as there was insufficient evidence against Reddy. Therefore, the probability of proving the allegations under the PMLA provisions was “bleak”.

Placing reliance on PMLA’s Statement of Objects and Reasons, the Supreme Court opined that in proceedings initiated under the PMLA, the standard of proof is not preponderance of probabilities. Rather, the Supreme Court, considering the stringent objectives of PMLA, held that the allegations in such cases must be proved beyond a reasonable doubt.

The Supreme Court rightly observed in the instant case that even after more than five years, no incriminating material had been collected against Reddy nor produced in the present proceedings to prove the case against him beyond reasonable doubt.

Therefore, the Supreme Court set aside the impugned judgement.

Analysis

In YS. Jagan Mohan Reddy v. Central Bureau of Investigation, the Supreme Court observed that economic offences are serious and “grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country”. Economic offences can involve, inter alia, money laundering, fraud, and insider trading.

The Statement of Objects and Reasons and the penal consequences contained in the PMLA clearly indicate that the same is to prevent money laundering, a serious economic offence. Further, under section 45 of the PMLA, all offences under the Act are cognizable and non–bailable. Therefore, the standard of proof in such criminal proceedings must be in accordance with the settled principles of criminal jurisprudence. Therefore, it has been rightly concluded that in proceedings initiated under the PMLA, the standard of proof must be beyond reasonable doubt.

Apart from PMLA, the Supreme Court, on an earlier occasion, had observed in Union of India v. Chaturbhai M. Patelthat “fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt”. This judgement has been consistently followed over the years and even recently in Leena Rego v. Laura A. Monteiro.

Recently, in Balram Garg v. Securities and Exchange Board of India (discussed here), the Supreme Court explained the evidentiary burden in insider trading cases and restricted SEBI’s ability to rely on circumstantial evidence. In this case also, a trend can be seen that the Supreme Court is attempting to define and limit the role a prosecution has in cases involving financial crime of insider trading.

As India is continuously making a case for itself as a financial hub, it is important that procedural considerations such as the role of prosecution and standard of proof must be consistent in cases involving economic offences. This will bring about consistency and prevent misuse of laws.

Conclusion

Thus, prosecutors in PMLA proceedings will now have to satisfy a higher standard of proof (i.e., beyond reasonable doubt). While this judgement does not only uphold a cardinal principle of criminal jurisprudence, it has also clarified the law at a time when more and more proceedings are being initiated under the PMLA. Therefore, the authors firmly believe that this judgement is in the right direction.

– Raghav Bhatia & Hima Prajitha

 

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