Corporate Liability For Money Laundering Via Subsidiaries
Corporate Liability for Money Laundering via Subsidiaries
1. Legal Framework
In India, money laundering is primarily governed by the Prevention of Money Laundering Act, 2002 (PMLA). Key points related to corporate liability are:
Section 3 of PMLA – Defines the offense of money laundering:
Any person who directly or indirectly attempts, abets, or is involved in the process of acquiring, possessing, or using proceeds of crime commits an offense.
Section 2(1)(q) – Includes “person” as individuals, companies, firms, or other entities.
Corporate Liability Principles:
A company (parent or subsidiary) can be held liable if it directly participates in the laundering of proceeds of crime.
Subsidiary involvement: If a subsidiary is used as a conduit to channel proceeds of crime, the parent company can be held vicariously liable if it exercises control or benefits from the laundering.
Key legal principle: Corporate liability in money laundering is both direct (active participation) and vicarious (through subsidiaries or affiliates).
Enforcement Agencies:
Enforcement Directorate (ED) investigates and attaches properties under PMLA.
ED often examines the ownership structure, transactions between parent and subsidiary, and flow of funds to establish liability.
Key Cases on Corporate Liability via Subsidiaries
1. Sahara India Real Estate Corporation Ltd. & Ors. v. SEBI / ED
Facts:
Sahara Group raised funds through Optionally Fully Convertible Debentures (OFCDs) and allegedly transferred money across multiple subsidiaries to obscure the source of funds. ED invoked PMLA provisions for money laundering.
Legal Issue:
Can a parent company be held liable for money laundering when funds are routed through subsidiaries?
Holding:
The Supreme Court held that parent companies cannot escape liability by using subsidiaries or group companies. The court emphasized that control, decision-making, and benefit from the proceeds establish corporate liability.
Significance:
Established that corporate structures cannot be used as shields in money laundering investigations.
Key Principle:
Ownership or effective control over subsidiaries can create vicarious liability.
2. Enforcement Directorate vs Ramesh Kumar / Benami Transactions Case
Facts:
ED investigated a company allegedly channeling proceeds of illegal real estate transactions through multiple subsidiaries. The holding company claimed that it had no knowledge of subsidiary operations.
Legal Issue:
Whether knowledge of subsidiary operations is required for parent company liability under PMLA.
Holding:
The court held that actual knowledge is not always necessary; constructive knowledge or the ability to control subsidiary operations is sufficient to establish liability.
Significance:
Clarifies that parent companies cannot claim ignorance if subsidiaries are used as instruments for laundering.
3. Vijay Madanlal Choudhary v. Union of India & ED (High Court of Delhi)
Facts:
A corporate group was investigated for laundering proceeds of a real estate scam. Funds were routed through multiple subsidiaries and shell companies to obscure their origin.
Legal Issue:
Whether transactions conducted through subsidiaries can attract direct or vicarious liability for the parent company.
Holding:
Court upheld ED’s attachment of properties of parent companies based on control, flow of funds, and benefit derived.
Significance:
Reinforced that subsidiaries cannot shield the parent company from PMLA enforcement.
4. Enforcement Directorate v. Punjab National Bank (PNB) – Nirav Modi Fraud Case
Facts:
Funds fraudulently obtained from PNB were routed through multiple shell subsidiaries and offshore entities linked to the Nirav Modi group.
Legal Issue:
Can corporate entities be held liable for laundering funds through subsidiaries even if the parent claims operational separation?
Holding:
ED invoked PMLA, arguing that subsidiaries were effectively controlled by the parent group and used as conduits for laundering.
Significance:
Practical demonstration of corporate liability through subsidiaries in high-profile banking frauds.
Principle:
Liability arises where subsidiaries are instruments or facilitators of laundering, even if parent claims limited involvement.
5. Binani Industries Case – Money Laundering via Foreign Subsidiaries
Facts:
Binani Industries allegedly routed funds from India to foreign subsidiaries to hide proceeds of fraud. ED investigated under PMLA.
Legal Issue:
Whether Indian law under PMLA can extend liability to parent companies when laundering occurs via foreign subsidiaries.
Holding:
Court upheld that Indian parent companies can be held liable if they benefit from or control the foreign subsidiaries for the purpose of laundering.
Significance:
Shows that cross-border corporate structures are scrutinized under Indian money laundering laws.
6. Religare Finvest Limited v. Enforcement Directorate
Facts:
Religare Finvest allegedly moved funds through its subsidiaries to conceal non-performing loans and misappropriated funds.
Legal Issue:
Can subsidiaries’ actions bind the parent company under PMLA?
Holding:
Court emphasized that ownership, ability to exercise control, and benefit from transactions establish liability. Parent company could not escape liability by claiming autonomous subsidiary operations.
Significance:
Reiterates the principle that subsidiary operations can create direct and vicarious liability under PMLA.
Key Principles Derived from These Cases
Direct and Vicarious Liability:
A parent company is liable if it actively participates in laundering or controls the subsidiary used for laundering.
Knowledge Not Always Required:
Actual knowledge is not necessary; constructive knowledge or control suffices.
Beneficial Ownership and Control Matter:
Courts look at who benefits from transactions and who has the power to control subsidiary operations.
Cross-Border Subsidiaries Are Not Exempt:
PMLA can apply to Indian parent companies even if laundering occurs through offshore subsidiaries.
Corporate Structures Cannot Shield Liability:
Shell companies, subsidiaries, or group entities used as conduits do not absolve the parent company.
ED Powers:
Enforcement Directorate can attach properties of both parent and subsidiary under PMLA if involved in proceeds of crime.
Conclusion
Corporate liability for money laundering via subsidiaries in India has been consistently reinforced by the judiciary:
Courts consider control, benefit, and transaction flow as key indicators.
Corporate structures (subsidiaries) cannot be used as a shield.
Both Indian and foreign subsidiaries can be implicated if used to channel illicit funds.
Parent companies need robust compliance mechanisms to avoid criminal liability under PMLA.
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