Courts Reviewing the Precept of 'Automatic Collapse' under the Prevention of Money Laundering Act Once More

In a significant ruling, the Supreme Court of India has clarified the jurisdiction of the Enforcement Directorate (ED) under the Prevention of Money-Laundering Act, 2002 (PMLA). The case, Vijay Madanlal Choudhary vs Union of India, sheds light on when the ED's jurisdiction is triggered.

The PMLA was enacted to combat the laundering of illicit gains derived from certain offences described as "scheduled offences." The Hon'ble Court's decision reaffirms that the ED's jurisdiction is only triggered when a scheduled offence subsists.

Aditya Malhotra, a Partner, and Hrishikesh Gayakwad, an Associate at Shardul Amarchand Mangaldas & Co., authored an article on this topic. They discuss the court's stance on the quashing of scheduled offences and its impact on PMLA proceedings.

The Hon'ble Court in Byappanahalli Prabhakar Rddy Kumar Babu case indicated that in certain cases where the quashing of the scheduled offence is not on the merits of the existence of criminal activity, it may not result in the automatic cessation of PMLA proceedings. This means that PMLA proceedings can continue even if the underlying scheduled offence is quashed, provided the quashing is not due to the absence of criminal activity.

However, where every accused in the predicate case is finally acquitted or the case is quashed in its entirety, Section 3 of the PMLA cannot be invoked because no proceeds of crime can exist, according to the Supreme Court. This principle is known as the "automatic collapse."

The authors of the article also discuss the principle of "automatic collapse," stating that once a scheduled offence is quashed, or the accused is discharged or acquitted, the foundation for alleging "proceeds of crime" disappears.

In a case-by-case analysis, the Madras High Court requires a fact-sensitive enquiry into the ED's material before intervening if any part of the scheduled prosecution survives. This means that each case will be judged on its merits, and the ED's evidence will be closely scrutinised.

The recent decision in Niket Kansal is presently under challenge before the Hon'ble Supreme Court of India. The Supreme Court has not invalidated the automatic dismissal of PMLA cases under the given circumstances in the Niket Kansal case, and the matter is currently being challenged.

In conclusion, the Supreme Court's decision in Vijay Madanlal Choudhary vs Union of India provides clarity on the ED's jurisdiction under the PMLA. However, it also highlights the need for a case-by-case analysis of the ED's material and the merits of the scheduled offence.

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Courts Reviewing the Precept of 'Automatic Collapse' under the Prevention of Money Laundering Act Once More