New Delhi: An observation last week by the Chief Justice of India, B.R. Gavai, to state-owned corporations on the applicability of the Prevention of Money Laundering Act, 2002, has divided some of the country’s top legal minds.
On one side of this debate are lawyers who argue that action against state-owned companies is allowed under specific sections of the PMLA, 2 (1) (s) and 70, which define “persons” covered under the stringent law, and money laundering offences by companies.
On the other side are lawyers who find it “absurd” and excessive for the Enforcement Directorate (ED) to make state-owned firms an accused in a money laundering case.
Hearing a plea filed by Tamil Nadu government challenging a Madras High Court order upholding ED’s searches and actions against Tamil Nadu State Marketing Corporation (TASMAC), the CJI Thursday remarked that ED was crossing all limits and infringing on the federal structure.
Incorporated under the Companies Act, 1956, in May 1983, TASMAC is a wholly-owned corporation of the Tamil Nadu government. It holds a monopoly over the wholesale supply of Indian Made Foreign Liquor (IMFL), procures liquor from private players and sells it through retail outlets across the state.
ED launched searches on 6 March on more than 20 locations in Chennai, Thanjavur, Pudukkottai and other cities, including TASMAC’s offices, and corporate offices of distilleries. After searches were over on 8 March, the agency alleged the existence of a massive racket in the state with a nexus of distillery companies, companies involved in bottling, and TASMAC officials, leading to generation of unaccounted cash.
“Investigations reveal that distilleries systematically inflated expenses and fabricated bogus purchases, particularly through bottle-making companies, to siphon off over Rs 1,000 crore in unaccounted cash. These funds were then used for kickbacks to secure increased supply orders from TASMAC,” the agency had alleged on 15 March.
Days later, TASMAC approached Madras HC with three writ petitions seeking orders or instructions from the court to the ED to not harass TASMAC officials and declare the searches arbitrary.
In the third writ petition, both the government and TASMAC argued that ED could not investigate a money laundering case based on a predicate offence arising out of a state without the consent of the state.
They said this violated the “basic structure of federalism and separation of powers”.
But the Madras HC rejected all three petitions on 23 April. It said that allegations and complaints against TASMAC were grave and called the state government’s demand for consent “absurd” and “completely illogical and bereft of conscience”.
‘Law does not bar’ vs ‘absurdity in law’
Senior advocate and Additional Advocate General of Tamil Nadu Amit Anand Tiwari told ThePrint that the state filed the petition in the Supreme Court since the ED’s actions have several “fundamental” flaws and hence it appears as a “motivated” investigation.
“First, that the definition of a person under Section 2(1) (s) of the PMLA would not include a government-owned company, corporation or department. If it did, it would mean the government can indulge in the offence of money laundering,” he said. Section 2 (1) (s) defines “persons” under the scope of PMLA, including a company.
“Secondly, the investigation of predicate offence—in this case, cases of corruption against TASMAC officials is solely in the purview of the state and its agencies. ED cannot enquire/investigate into a predicate offence. This is precisely what they are doing. They are saying the department is indulging in corrupt practices of awarding tenders, etc., that can’t be ED’s investigation’s scope,” he further said.
In this case, he argued that a central agency has initiated an investigation against a wholly-owned government corporation. “The ED investigation has to come into the picture only after the generation of proceeds of crime, not before that. They can’t dictate the investigation into a predicate offence. This amounts to the exercise of policing power by a central agency, which is a direct threat to federalism,” he argued.
Senior Supreme Court Advocate Sidharth Luthra echoed the view, saying that a money laundering investigation against a government-owned corporation was an “absurdity”.
He said officials can be investigated under PMLA for wrongdoing, but a government-owned corporation cannot be prosecuted because any revenue it generates goes to the government.
“The basic premise of PMLA investigation is the accrual of illegally-gotten wealth from a scheduled criminal offence, simply called proceeds of crime. Whatever revenue the government-owned firm generates goes to the government, and hence it can not be termed as proceeds of crime, as it may be the case with any private limited company.
“A state-owned corporation works as the government’s commercial arm compared to a private corporation. Therefore, its activities cannot be criminal because it executes the government’s policies,” he told ThePrint.
Adding, “Prosecution of a government entity or public sector entity for transactions done by it is an absurdity in law. Errant officials can be prosecuted, and beneficiaries of the largesse due to the action of errant officials can be prosecuted, but not the corporation. A government-owned corporation can be a victim, not accused in a money laundering investigation.”
On the contrary, a senior advocate representing the ED in PMLA cases and another senior advocate argued that there was no bar in PMLA on prosecuting government-owned corporations.
“If a political party, by the virtue of being an association of persons, can be prosecuted, there is no legal bar insofar as a state corporation or a central corporation is concerned,” the advocate said, requesting anonymity.
Senior Advocate Vikas Pahwa said PMLA does not distinguish between private companies and public sector undertakings concerning liability for investigating money laundering offences. “If a state-run enterprise is found to be involved in handling the proceeds of crime, it may face investigation, attachment of assets, and prosecution under Section 70 of the PMLA, along with potential liability for its responsible officers,” he told ThePrint.
He did add the caveat that PMLA provisions should be applied against state-owned corporations with restraint and transparency based on firm evidence and constitutional principles. “However, applying a central criminal law like PMLA to wholly state-owned corporations raises significant federalism concerns. These entities often function under the direction and policy framework of the state government, and may lack the independent agency or criminal intent typically required for prosecution,” he argued.
Adding, “Thus, while the legal position permitting such prosecutions is well-established, its application to state enterprises must be exercised with restraint, transparency and a firm grounding in evidence and constitutional principles.”
(Edited by Sugita Katyal)
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