Prevention of Money Laundering Act, 2002
Proceeds of Crime: Complete Note
Everything in the PMLA turns on one expression: proceeds of crime. It is the object of the offence under Section 3, the target of attachment under Section 5, and what is confiscated on conviction. Its definition in Section 2(1)(u) is wide: it reaches property derived directly or indirectly from criminal activity relating to a scheduled offence, its value, and where the property has gone abroad, property of equivalent value. But it has a hard edge: without a scheduled offence, there are no proceeds of crime at all. This note examines every part of the definition and the questions it raises.
The family tree of proceeds of crime, the questions of timing, ownership and proof, and three concepts that differ
1. The Definition and Its Ingredients
§ Section 2(1)(u), in substance Proceeds of crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence, or the value of any such property, or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad. Explanation (2019). Proceeds of crime include property not only derived or obtained from the scheduled offence, but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence. |
§ Essential ingredients • Property, in the wide sense of Section 2(1)(v): of every description, wherever located. • Derived or obtained by any person: the accused need not be the one who committed the crime. • Directly or indirectly: the original money, and what it becomes. • As a result of criminal activity relating to a scheduled offence: the essential link. • Or its value, or equivalent property: where the tainted property itself is unavailable or abroad. |
2. Direct and Indirect Proceeds
Kind | Meaning | Examples |
|---|---|---|
Direct proceeds | The property obtained by the crime itself | The bribe; the money taken by fraud; the price paid for drugs |
Indirect proceeds | What the direct proceeds are converted into, or generate | A flat bought with the bribe; shares bought with fraud money; interest and profits earned on criminal capital |
Proceeds converted into another asset | A change of form does not remove the taint | Cash turned into gold, land or virtual digital assets |
Proceeds used to acquire immovable property | The property acquired is itself proceeds, in whole or in the proportion funded by the crime | A house bought partly with a bribe |
Proceeds deposited in bank accounts | The balance representing the deposit is proceeds; an account may be frozen or attached | A deposit of cash from a scheduled offence |
Layered proceeds | Passing through many hands or accounts does not wash the taint | Transfers through shell companies and foreign accounts |
3. Value, Equivalent Value and Property Abroad
§ When the tainted property itself cannot be reached • Value of proceeds. The definition includes 'the value of any such property', so where the original property has been consumed, sold or cannot be traced, property representing its value may be treated as proceeds. • Property held outside India. Where the proceeds have been taken or are held abroad, property of equivalent value within India or abroad may be attached. This was introduced in 2015 and extended in later amendments. • Substitute or equivalent property. This is property that was never itself tainted, but stands in for tainted property that has gone beyond reach. It is the most contested part of the definition, because it can reach assets acquired lawfully. • Valuation. Value is fair market value on the date of acquisition, or of possession where acquisition cannot be dated, under Section 2(1)(zb). |
4. Property Relatable to the Scheduled Offence, and the Question of Timing
§ Before and after the scheduled offence Property acquired after the offence, with its proceeds, is proceeds of crime in the ordinary sense. Property acquired before the offence cannot have been derived from it, and is not proceeds of crime in the direct sense. It may, however, be reached as property of equivalent value where the actual proceeds are abroad or cannot be found. High Courts have differed on how far this extends, and courts have insisted that the equivalent-value route be used only where its conditions are met. The 'relatable' Explanation brings in property derived from criminal activity connected with the scheduled offence, but does not dispense with the need for a scheduled offence and a real link to it. |
5. Clean, Tainted and Intermingled Property
Property | Treatment |
|---|---|
Clean property | Acquired from lawful sources; not proceeds of crime, save as equivalent value where the statutory conditions are met |
Tainted property | Derived from criminal activity relating to a scheduled offence; proceeds of crime |
Intermingled property | Where tainted money is mixed with clean money in one asset or account, the tainted portion is proceeds; the investigation must trace the flow, and the burden in s. 24 operates once the foundation is laid |
6. Third Parties and Bona Fide Purchasers
§ Property in other hands • Any person. The definition covers property derived or obtained 'by any person', and Section 5 permits attachment of proceeds in anyone's possession, so a relative or associate holding tainted property is not beyond reach. • The bona fide purchaser. A person who acquired the property for value, in good faith, without knowledge of the taint, has a legitimate interest the Act recognises. Such a person may contest attachment before the Adjudicating Authority, and Section 8(8), with its 2018 proviso, provides for restoration of confiscated property to claimants with a legitimate interest who suffered loss. • Secured creditors. In Deputy Director, Directorate of Enforcement v. Axis Bank (2019), the Delhi High Court held that the ED's power of attachment is not defeated by prior security interests, but that bona fide third parties with legitimate interests, such as banks that lent before the crime, must be protected and their claims considered. |
7. The Burden of Proving the Nexus
§ Who proves what The ED's foundation. The ED must first establish the scheduled offence and a link between the property and the criminal activity relating to it. Proceeds of crime cannot be presumed in the air. Section 24. Once that is done, in proceedings relating to proceeds of crime, it is presumed, in the case of a person charged, that the proceeds are involved in money laundering, unless the contrary is proved; and for others, the authority may presume so. Section 23. Where laundering involves two or more interconnected transactions and one or more is proved to be involved in laundering, the remaining transactions are presumed to form part of the interconnected transactions. Vijay Madanlal Choudhary (2022). The Supreme Court upheld these presumptions, emphasising that they arise only after the foundational facts are established. |
8. Three Concepts Distinguished
Concept | Meaning | Consequence |
|---|---|---|
Proceeds of crime | Property derived from criminal activity relating to a scheduled offence, s. 2(1)(u) | The object of s. 3; attachable and confiscable |
Property involved in money laundering | The proceeds, together with property used in the laundering process | Confiscable on conviction under s. 8 |
Property used in the commission of the crime | The instruments of crime, such as a vehicle or computer; brought within 'property' by the Explanation to s. 2(1)(v) | May be attached and confiscated as property involved |
📖 Vijay Madanlal Choudhary v. Union of India, 2022 SCC OnLine SC 929 The Supreme Court held that the definition of proceeds of crime is not so wide as to cover every property that is unaccounted or undisclosed. Property is proceeds of crime only if it is derived or obtained as a result of criminal activity relating to a scheduled offence. The authorities cannot proceed on the assumption that a scheduled offence has been committed unless it is registered or a complaint is pending before a competent forum. |
9. Frequently Asked Questions
What are proceeds of crime?
Property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence, or its value, and where the property is held abroad, equivalent property within India or abroad, under Section 2(1)(u).
Is property acquired before the crime proceeds of crime?
Not in the direct sense, since it was not derived from the crime. It may be reached only as property of equivalent value where the actual proceeds are abroad or cannot be found, and courts have scrutinised that use closely.
Is unexplained wealth proceeds of crime?
Not by itself. The Supreme Court held in Vijay Madanlal Choudhary that property is proceeds of crime only if derived from criminal activity relating to a scheduled offence.
Is a bona fide purchaser protected?
The Act recognises legitimate interests. A purchaser for value in good faith without notice may contest attachment, and Section 8(8) provides for restoration to claimants with a legitimate interest who suffered loss.