Today, I’m going to look at a fascinating case that is progressing through the courts in India. We don’t yet have a judgment and are relying on media reports and the judgment in the lower court but it is so important that it’s worth being aware of it – and its implications.
The case is to be heard by the Supreme Court of India on appeal from the Karnataka High Court. The report in the Economic Times on 11 October, 2021 is headlined ″SC to examine if ED can attach ancestral assets as ‘proceeds of crime’ in money laundering cases.″ The SC is the Supreme Court and the ED is the Enforcement Directorate. The Enforcement Directorate is India’s Financial Intelligence Unit which is a combined FIU and investigation and prosecution agency with considerable powers in relation to financial crime. Particularly relevant in the context of this case is that it is also India’s agency for the freezing, seizing and confiscation of assets derived from criminal proceedings, so called ″asset recovery.″
The facts of the predicate crime are not important but the question of what assets may be attached under counter-money laundering laws has taken a fascinating turn.
First we need a bit of Indian law to understand the terminology. Ancestral Property is a concept in Hindu law which is recognised by the national courts. It applies to ″immovable assets.″ Such property rights traditionally accrue to up to four generations through the male lineage, according to various sources. Since 2005, daughters have had the same rights as sons. There is no primogeniture i.e. it doesn’t pass to the eldest surviving son. Instead, the rights to it pass to all issue (children) equally at birth. So as each child is born, that dilutes the share of those who came before. Moreover, it doesn’t pass according to the will. Although the rights exist, they have to be claimed.
That sounds simple enough but there are, of course, complications. First is that the rights accrue on the birth of generations one, two, three and four.
So if a man has five children, that’s five claims. If each of them has five claims, that’s a total of 30 claims and so on. It’s bit like that puzzle about putting grains of rice on a chess board.
If we take it to the fourth generation, each with five children, we are talking about a lot of claims.
I am not going to go into the endless complexities: it really is far, far too complicated and, in any case, once the point is established the detail doesn’t affect us here.
The point is that certain property can be subject to valid claims based upon civil rights even though those rights are not documented.
Perhaps a trust lawyer would relate this to a trust which has not vested: I’d like to see an analysis of that question because I don’t know the answer.
There is one further point: the property must be ″undivided″ which means that it has not been divided in law. This can be compared to the English law concept of Tenants in Common and Joint Tenants. This I do know about. By default, when more than two people buy a house, for example, they own it as ″joint tenants″ which means they both own all of it and equally gain the benefits and suffer the losses and, on the death of one, the other owns it absolutely. However, sometimes owners don’t want to own it equally and so they must ″sever″ the joint tenancy and declare that the property is owned as ″tenants in common.″ When this happens, they benefit and suffer according to the shares they have declared and on the death of one, his share in the property is disposed of according to his will or intestacy.
Under the Hindu system, all those with a claim hold the property as joint tenants. But if a holder of the property declares that his offspring will take his share in specific proportions, then that will be taken as breaking the ancestral property chain. But a new chain starts.
In 2016, in Uttam v Saubhag Singh and others in the Indian Supreme Court applied several sections of the Hindu Succession Act as amended and decided that, where a holder of ancestral property dies intestate, the heirs take the property as tenants in common not as joint tenants.
In the notes, there are links to a very helpful article at Housing.com and to the judgment in Uttam v Singh.
So, with all of that in mind, the question that the Enforcement Directorate is putting before the Supreme Court is whether a person’s interest in Ancestral Property can be attached.
To reach that point, something else must be considered. The something else is common to all counter-money laundering laws around the world: that of commingling of funds and the principle of ″in whole or in part, directly or indirectly, represents″ the proceeds.
I think that my listeners will already be familiar with those aspects of the law and that I don’t need to explain that here.
What we do need to look at is this: where a confiscation or surrender order is made, we know that it can attach to anything in the ownership of the person against whom it is made on the basis that his entire wealth is contaminated by the proceeds by applying the principles of commingling and ″in whole or in part…″.
We know that, in some circumstances, trusts can be broken and the assets seized. The leading case, at least so far as profile is concerned, on this is in relation to US taxation is that of the Wyly brothers.
We also know that proceeds can be traced into trusts and can be subject to confiscation.
The question in the Indian case is slightly different: it is not a trust in the sense that it is known to e.g. Common Law, even though the ways of holding the property (joint tenants or tenants in common) are now expressed in a way that originates. in English law. It’s actually from Equity which is derived from Ecclesiastical Law, not the Common Law but let’s not take that diversion.
In India’s counter-money laundering law there is an interesting provision: in addition to the usual commingling etc. provisions, there is also a term that, if the assets have been expatriated, confiscation can be applied to such assets as the subject of the Order has within the jurisdiction.
This includes assets which are in common ownership (in the sense that the same person owns them) but which have no other connection with the proceeds. You can see that this goes much further than the usual ″directly or indirectly″ term.
The challenge is to a High Court decision which said that only property which was tainted by criminally derived assets could be confiscated. The Economic Times quotes the following from the High Court judgment “There is no material to show that the said properties were acquired out of the ‘proceeds of crime or in any way related to alleged ‘proceeds of crime’. ″ The Enforcement Directorate said that the extended term covers it.
Is this a curiously Indian case? The answer to that is ″no.″ There is a great deal of cross-fertilisation of legislation in relation to financial crime. The extended provision is very likely to find its way into the laws of other countries.
The concept of substitution of assets has long been contentious in civil proceedings as Courts have been loathe to order ″if you can’t have this, you can take that.″
For example, where a claim for the return of a vase fails because the vase has been removed from the jurisdiction, the remedy is not to say ″so you can take that chair″ but, instead, to award a sum of money in damages, including where applicable punitive, exemplary or special damages. Where the damages are not paid, then a further application can be made for a remedy that includes e.g. appointing bailiffs who turn up, take things away and sell them to satisfy the order for damages.
But they can’t take away an interest in something. And that’s where the Indian case – albeit founded in Criminal law – reaches an impasse.
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Back to the case.
All confiscation orders in financial crime cases around the world are orders for a sum of money. Assets become relevant only insofar as they are available to settle the order for money.
Don’t get distracted, on this point, by the use of in rem orders relating to assets used in but not arising from criminal conduct nor orders for restitution which might include specific assets.
The ancestral property is not exclusively owned by the subject of the Order. Nor is any part of it. It was not found that the other persons with an interest in the ancestral property were involved in the criminal conduct.
Looking at the High Court judgment, the learned Judge made the correct decision but his reasoning was wrong. The petitioners are the other persons with an interest.
He said that the Enforcement Directorate appears ″to have proceeded to attach the ancestral properties of the petitioners on the assumption that ‘any such property’ means any property held by the offenders which could be appropriated towards the value of “proceeds of crime”.
That, it appears to me, is correct.
But he went on ″The expression ‘any such property’, in my view, could only relate to such property which is tainted by “proceeds of crime”. ″ That, on the face of it is correct because of the commingling provisions and ″in whole or in part, directly or indirectly, represents…″
Then, in my view, he misdirects himself: ″The expression, ‘any such property’ used in the definition cannot be given such a wider meaning, so as to confer right on the adjudicating authority to proceed against all and every assets standing in the name of the alleged offenders. ″
I think that it can in that anything can be applied to the settling of a court order.
Can the Ancestral Property? I think that if the offender was the sole owner, then yes: I think it would be subject to attack.
But it wasn’t in sole ownership and to allow it to fall into what we might call the offender’s criminal estate would militate against the legitimate interests of others and that is something that almost all confiscation laws expressly protect. It is on that basis that I would argue that the Enforcement Directorate’s attachment should fail.
Even then, this is far from certain: in England, a matrimonial home may be subject to an order for possession and sale – even though some of the purchase moneys were obtained entirely legally. However, what the Court cannot do is to order a sale of a co-owner’s share unless that can be shown to be tainted. In effect an order for possession and sale acts to convert the joint tenancy into tenants in common in relation to the proceeds.
This appears to correlate, broadly, to the case before India’s Supreme Court.
Yet there is one further point: the co-owners had been accused of involvement in the laundering of the proceeds of the predicate crime, a fraud. They were acquitted. That leaves open the question as to whether a conviction is required as a condition of confiscation. If the confiscation is undertaken on the balance of probabilities , then it remains open to the Court to decide whether the petitioners were involved applying that standard even though the criminal standard was not met.
That is something that the High Court did not address and, from the reports of the early part of the Supreme Court hearing it has not been raised in the opening.
We await the Supreme Court’s decision which, if it is typical of judgments in India’s senior courts, will be well reasoned and clearly presented.
Essentials: More than trade based, more than money laundering
Maltesh and others v Director of Enforcement (High Court)
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