Introduction
At the heart of the Prevention of Money Laundering Act, 2002 lies the concept of “proceeds of crime.” The entire enforcement machinery of the statute, from provisional attachment to prosecution and confiscation, is organised around this foundational concept. Yet the statutory definition of proceeds of crime under Section 2(1)(u) of PMLA, as progressively interpreted by the courts and expanded through the expanding Schedule of predicate offences, has evolved into something far broader than what the original drafters envisaged or what FATF’s model of money laundering criminalisation contemplates. This article examines the definition of proceeds of crime, the judicial approach to its interpretation, the complications introduced by downstream transactions, the problem of the ever-expanding Schedule, and the systemic risk that PMLA is being deployed as an omnibus investigative tool rather than a targeted anti-money laundering statute.
Legal Framework
Section 2(1)(u) of PMLA defines “proceeds of crime” as 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. The phrase “directly or indirectly” is the engine of interpretive expansion. On its face, it encompasses not merely the first-generation product of a predicate offence (the cash bribe received, the proceeds of drug trafficking) but also any downstream transaction where such property is reinvested or transformed.
The definition was significantly amended in 2019 to add the phrase “or the value of any such property,” which was interpreted to mean that even where the original proceeds cannot be traced because they have been dissipated or transferred abroad, a corresponding value can be attached from whatever property the accused holds. This “value of proceeds” concept substantially eases the prosecution’s burden: rather than tracing specific tainted funds through a financial chain, the ED can attach any property of equivalent value.
The “scheduled offence” is a predicate offence listed in the Schedule to PMLA. The Schedule has been expanded repeatedly through legislative amendment. As of 2025, it includes offences under the Indian Penal Code (murder, extortion, cheating, forgery), the Narcotic Drugs and Psychotropic Substances Act, the FEMA (for hawala-related violations), the Customs Act (for smuggling-related offences), the Companies Act, the Securities and Exchange Board of India Act, the Goods and Services Tax laws, the Wildlife Protection Act, and various environment-related statutes. The progressive expansion means that a very wide range of criminal activity now qualifies as a predicate offence capable of triggering PMLA jurisdiction.
Judicial Developments
The most comprehensive judicial treatment of the “proceeds of crime” definition is found in Vijay Madanlal Chourasiya v. Union of India (2022), where the Supreme Court addressed several challenges to the expansive reading of Section 2(1)(u). The Court upheld the broad interpretation of “indirectly obtained,” holding that the legislature intended to capture not merely the direct product of the scheduled offence but also the product of transactions designed to conceal or integrate such product. The Court held that money laundering, by its nature, involves layering and integration, and that a narrow interpretation of “proceeds” would defeat the statutory purpose.
The Court in Vijay Madanlal Chourasiya also addressed the question of whether the PMLA can proceed independently after the predicate offence case results in acquittal. The Court’s holding was nuanced: while a final acquittal in the predicate offence case would generally affect the viability of the PMLA proceedings, the PMLA court is not bound by the findings of the trial court in the predicate offence case and can independently assess whether the property in question constitutes proceeds of crime. This creates the possibility of parallel, potentially inconsistent adjudications.
The Supreme Court’s ruling in Arvind Kejriwal v. Enforcement Directorate (2024), arising from the Delhi liquor policy case, addressed the relationship between the predicate offence and PMLA proceedings in greater detail. The Court, while examining the legality of arrest, observed that the connection between the alleged predicate offence (corruption in awarding liquor licenses) and the asserted proceeds of crime (alleged kickbacks and their reinvestment) must be established with some specificity; it is not sufficient for the ED to assert a generic nexus without material linking the specific property to specific criminal activity. This observation, while made in the context of assessing arrest grounds, has implications for attachment proceedings as well.
The downstream transaction problem, which is essentially the question of how many transactional steps removed from the predicate offence property can be before it ceases to be “proceeds of crime,” has not been definitively resolved by any Supreme Court decision. High Courts have adopted varying positions. The Delhi High Court in some cases has held that property three or four transactions removed, where the taint is sufficiently diluted through genuinely commercial transactions, may not retain the character of proceeds of crime. However, the ED’s position consistently is that the taint travels indefinitely, and that even property acquired by a bona fide purchaser from an accused person may be liable to attachment if the accused used proceeds of crime to make the purchase.
The bona fide purchaser problem is one of the most significant practical issues in proceeds of crime jurisprudence. The PMLA does not contain an equivalent of Section 41 of the Transfer of Property Act, which protects bona fide purchasers for value without notice against prior encumbrances. The Adjudicating Authority under PMLA has in many cases confirmed attachment of property acquired by third parties who had no knowledge of the underlying criminal activity, on the ground that the property was purchased using proceeds of crime.
Contemporary Issues and Analysis
The expanding Schedule of predicate offences raises a structural concern about PMLA’s functional identity. When the Schedule included only serious offences such as drug trafficking, organised crime, and terrorism-financing-related activity, the predicate offence framework was defensible as proportionate to the anti-money laundering objective. The extension of the Schedule to include GST offences, customs duty evasion, and environmental violations has created a situation where tax disputes, commercial fraud allegations, and regulatory violations all serve as predicate offences that can trigger the full apparatus of PMLA: arrest, attachment, ED summons, and prosecution before a Special Court with inverted bail conditions.
The GST Council has itself acknowledged that the inclusion of GST offences in the PMLA Schedule was intended to deter input tax credit fraud, which involves substantial revenue losses. However, the consequence is that businesses involved in commercial disputes with tax authorities now face dual proceedings: an assessment and recovery proceeding before the GST adjudicating authority, and simultaneously an PMLA proceeding before the ED with the possibility of attachment and arrest. The proportionality of this dual mechanism is questionable, particularly for small and medium enterprises where a disputed tax demand, even one that is subsequently reversed on appeal, can trigger PMLA inquiry.
The “value of proceeds” concept introduces a further complication. If the accused has spent the alleged proceeds of crime, the ED can attach other property of equivalent value. This means that an accused who has long since spent whatever benefit they derived from a scheduled offence, and who has no current connection to any criminal proceeds, can have currently lawful property attached on the basis of an equivalent value calculation. The constitutional propriety of this mechanism under Article 300A (right to property) has been challenged but not definitively resolved.
The relationship between property “obtained” and property “derived” in Section 2(1)(u) also warrants attention. Property “obtained” through a scheduled offence suggests direct acquisition as a result of the criminal act. Property “derived” from a scheduled offence is broader, encompassing the product of reinvestment of original proceeds. The phrase “directly or indirectly” amplifies both these terms, creating a theoretically unlimited scope for tracing.
Comparative and International Perspective
FATF Recommendation 3 requires member countries to criminalise money laundering in accordance with the Vienna and Palermo Conventions, covering the concealment, conversion, transfer, acquisition, possession, or use of proceeds of crime, knowing that such property constitutes proceeds of crime. The FATF model contemplates a reasonably proximate connection between the predicate offence and the laundering activity. While FATF does not prescribe how many transactional steps must separate the property from the predicate offence, its guidance on predicate offences recommends a list of designated categories rather than an unlimited or excessively expansive approach.
India’s progressive expansion of the Schedule beyond what FATF’s designated categories require suggests that the PMLA Schedule is being used not merely to satisfy FATF standards but also to enhance enforcement leverage against economic offenders. The FATF’s 2023 Mutual Evaluation of India noted the breadth of India’s predicate offence framework as a point of note, while recognising that a broad approach to predicate offences is technically FATF-compliant.
The United Kingdom’s Proceeds of Crime Act 2002 employs a “criminal lifestyle” test for confiscation, allowing the court to presume that property held by a convicted defendant over the preceding six years represents proceeds of criminal activity, subject to the defendant’s right to rebut the presumption. This approach, while broad, applies after conviction and involves judicial scrutiny with a formal burden-shifting mechanism. India’s attachment mechanism under Section 5 of PMLA operates before conviction and lacks equivalent procedural protections.
Practical and Policy Implications
For legal practitioners, the most immediate consequence of the broad “proceeds of crime” definition is the difficulty in advising clients on the scope of potential PMLA liability arising from commercial disputes. A client involved in a fraud dispute under Section 420 IPC, for instance, faces not merely criminal prosecution but also PMLA attachment of all property that can be characterised as the product, direct or indirect, of the alleged fraud. Since fraud is a scheduled offence, and since the ED is not bound by the outcome of the fraud prosecution before it proceeds with attachment, the practical exposure extends well beyond the alleged benefit from the fraud.
The attachment of third-party property, particularly in the context of family members and business associates, creates a chilling effect on entirely lawful commercial activity. Banks and financial institutions are also affected; properties attached under PMLA cannot be alienated, encumbered, or disposed of, and secured creditors holding mortgages over such property find their security interest effectively subordinated to the PMLA attachment without any provision for compensation.
Suggestions and Reforms
The definition of “proceeds of crime” should be amended to introduce a requirement of proximate causation: property should qualify as proceeds of crime only where there is a direct and traceable connection to a specific scheduled offence, and where the accused either knew or had reasonable grounds to know of the tainted origin. The “value of proceeds” mechanism should be subject to a judicial confirmation requirement, with the Adjudicating Authority required to record specific findings on the dissipation of original proceeds before ordering equivalent value attachment.
The Schedule should be rationalised to remove offences that are regulatory in character and are better addressed through administrative enforcement mechanisms. GST offences and environmental violations, for instance, should be removed from the Schedule or subjected to a threshold test (attachment warranted only where the scale of the offence exceeds a specified quantum) before PMLA proceedings can be initiated.
A statutory bona fide purchaser protection should be introduced, analogous to Section 41 of the Transfer of Property Act, shielding genuinely innocent third-party purchasers who acquired property without knowledge of its tainted character.
Conclusion
The “proceeds of crime” definition under PMLA, as judicially interpreted and legislatively expanded, has become one of the most potent and least constrained enforcement tools in Indian law. While the anti-money laundering objective is legitimate and important, the combination of an expansive definition, an ever-growing Schedule of predicate offences, the value-of-proceeds concept, and the absence of robust third-party protections has created a regime whose reach exceeds what proportionate anti-money laundering enforcement requires. The risk that PMLA becomes an omnibus investigative statute available in virtually any significant economic dispute is not theoretical; it is reflected in the pattern of ED investigations across commercial, tax, and political domains. Reform is needed to restore PMLA to its proper function as a targeted instrument against the laundering of criminal proceeds rather than a universal tool of financial investigation.
