Bhaskar Vishwajeet
(Associate, Chandhiok & Mahajan)
Recently, the Delhi High Court, in Adnan Nisar v. Directorate of Enforcement, held that offences committed under foreign laws can qualify as predicate offences under the Prevention of Money Laundering Act, 2002 (PMLA) if cross-border implications are identified and proceeds of crime have moved in to India.
Briefly, a person reported to U.S. Authorities that crypto-currencies in excess of $500,000 had been fraudulently transferred from their virtual currency wallet to an account hosted by a crypto-exchange platform based in India. Herein, the Court dealt with crimes concerning wire fraud and money laundering under American law — attempting to trace them to India. The matter originated from a letter by the United States Justice Department (DoJ) to the Enforcement Directorate (ED), requesting Mutual Legal Assistance (MLA) as the accused was an Indian National.
The ED determined that the offences under investigation by the DoJ correspond to section 75 of the Information Technology Act, 2000, and sections 420 and 424 of the Indian Penal Code (IPC) — provisions described in the Schedule of the PMLA. As a result, the ED initiated an ECIR for further investigation, search and seizure against the accused and their virtual accounts hosted in India.
Cross Border Implications and Predicate Offences
Arguing against the bail application, the ED claimed that the scheduled offence had been committed in the United States and the MLA clearly stipulated the corresponding Indian law under which the Indian National was criminally liable. Furthermore, they submitted that the crypto-currencies were transferred fraudulently from the victim’s wallet to a virtual account hosted in India — thereby presenting cross-border implications.
The court analysed the expression “offence of cross border implications” under section 2(1)(ra) PMLA, eventually culling two offence-categories from the text. First, when any offence is committed outside India and qualifies as an offence in Parts A, B or C of the PMLA Schedule and the proceeds are transferred to India; and second, when a scheduled offence takes place in India and the proceeds travel outside India. For the sake of clarity, the first category can be termed ‘inward’, while the second, ‘outbound’.
In this case, the court applied the ‘inward’ implication, stating that the only difficulty in applying the first offence-category concerned the global inapplicability of offences under Part A of the PMLA Schedule or the IPC. To address this dilemma, the bench referred to the definition of “corresponding law” in section 2(1)(ia). Corresponding law would mean any law of any foreign country dealing with the offences of that country which correspond to the offences in the PMLA Schedule. Additionally, section 2(2) PMLA creates a deeming fiction where the corresponding law of a foreign country will be read into the PMLA Schedule.
Put together, the above-mentioned interpretations will spell clear liability under the PMLA and fall squarely under the bracket of predicate offences when an offence is committed in a foreign country, under the laws of that country, and has cross-border implications through the transfer of proceeds into India.
An Unintended Implication for Crypto-asset Disputes in the PMLA?
The bail applicants argued, secondarily, that the MLA requested limited assistance to the extent that the accused’s virtual account (hosted in India) be seized and frozen. The ED, however, had lodged an ECIR to initiate an exclusive investigation in India for an offence committed on foreign soil.
The court reiterated the position in chapter IX and section 60 of the PMLA, stressing the reciprocal obligations (by India) towards contracting states (states with treaty-based reciprocal arrangements with India). It is clear that section 60 PMLA allows latitude for the ED to conduct an inquiry, investigation or survey related to the attachment, seizure, freezing or confiscation of property in India. Summarily, an authoritative request from U.S. agencies, through the MLA, empowers the ED to do everything required, including arresting an accused post lodging a case under sections 3 and 4 PMLA, to gather all available evidence. This power is only reinforced when read with the inward implication as mentioned earlier.
Interestingly, this part of the judgement has, indirectly, hinted towards equating virtual accounts related to crypto-assets as property. The ED’s investigation in this case was vindicated by the court because it was in furtherance of a U.S. Seizure warrant authorizing the restraint of the entire contents of the relevant virtual account hosted in India. This is similar to the approach adopted by English courts to determine jurisdiction in disputes concerning crypto-assets.
In Ion Sciences v. Persons Unknown, Ion Sciences and their management were victims of an alleged initial coin offering (ICO) fraud. They claimed that they transferred Bitcoin believing that they were investing in a genuine crypto-currency instrument, only to realize it was all illegitimate. As in Adnan Nisar, the transferred Bitcoin in Ion Sciences was deposited in accounts held by crypto-currency exchanges. Ion Sciences requested a worldwide freezing order against persons unknown and disclosure orders (known as Bankers Trust Orders) against the crypto-currency exchanges to disclose confidential documentation concerning their proprietary claim for fraud.
The judge in Ion Sciences stated that “there is at least a serious issue to be tried” that Bitcoin and other crypto-assets are property under English common law. Traditionally, the law of the place where the property is located is relevant for proprietary claims. As for tortious claims, the place where the damage took place will be accounted. While this jurisprudence is still under development, the court in Adnan Nisar appears to have made an equivalent statement to treat crypto-assets as property that can be investigated, searched through and seized by the ED. This might pave the way for more authoritative judicial constructs about crypto-assets, particularly in the realm of white-collar criminal laws.
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