Source: Ideas and Institutions #12
Analysis
The Supreme Court’s Judgement in the Money Laundering Case Highlights Long-standing Pathologies
The Indian Supreme Court recently handed down a judgement upholding the constitutional validity of different provisions of the Prevention of Money Laundering (PML) Act, 2002. Many parts of the law were challenged as unconstitutional, and none succeeded. The judgement has been criticized on many grounds—that it upholds the PML Act’s allegedly inadequate checks against government searches and seizures, approves blanket powers to investigators, violates due process, and enables unconstitutional self-incrimination. A close reading of the judgement reveals it to be a consequence of long-standing issues with the judicial branch.
Over the years, many judges have increasingly deviated from a strict construction of their role to write activist judgements, create completely new fundamental rights, and usurp the functioning of the legislature and the executive. A key mechanism through which this has been done is the disregard for adherence to judicial precedent. Another important mechanism has been that of reading the legal texts expansively to bring in external texts like academic papers and expert reports that support individual predilections of judges when the legal text is unambiguous.
For a long time, these tools were used to create new rights. As some argued, the Constitution could be read as a “transformative” document by judges. Now, these same mechanisms have been used to uphold a law that is being used aggressively, allegedly to target political rivals.
The PML Act has existed since 2002 but only been used aggressively recently. Between 2012-13 and 2018-19, the central government’s Directorate of Enforcement (ED), the investigative authority under the PML Act, 2002 took up an average of around 180 cases per year for investigation. From 2019-20 to 2021-22, the ED has taken up about 908 cases per year on average, quadrupling its case load. As per government data submitted in Parliament, more than two-thirds of the total PML cases have been filed in the last three years. The challenges to the law arise in the context of its aggressive use.
The Supreme Court’s judgement on the PML Act, 2002 in the case of Vijay Madanlal Choudhary & Ors. Vs. Union of India was handed down in this context. There are many obvious problems with the judgement—mainly its tenuous reasoning for upholding bad legislative drafting and the unusual deference to the executive. But these issues are symptomatic of long-standing problems in the Indian judiciary, especially the lack of interpretative discipline. Two examples from the judgement highlight this issue.
Taking the substance out of substantive due process
The petitioners assailed specific provisions in the law that allegedly violated constitutional protections. Their argument was that the process provided for in the law was arbitrary and conferred unconstitutionally wide discretion to the ED. Parts that allowed for summoning witnesses and recording their statements without giving them any information were alleged to be violating the protection against self-incrimination. The powers given to the ED to conduct searches and seizures were alleged to be arbitrary and unreasonable.
The Court said that first, the procedures in the PML Act have to be read in the context of the law’s objectives. This is a special law for an important crime, and accordingly, it has a separate, self-contained procedure. Second, it accorded high significance to the fact that powers to summon and seize property have been given to senior officers in the ED hierarchy. Third, it relied on past cases to state that there is no right to self-incrimination as long as a person had not actually been accused of a crime.
In these arguments, the court accorded a large degree of deference to the legislature and ignored the issue of whether the PML Act’s provisions met the test of substantive due process. Admittedly a nebulous concept, substantive due process has been part of the Indian constitutional landscape for close to five decades now. Courts have held that under Article 21 of the Constitution, any process has to be non-arbitrary and reasonable.
In this case, the Court ignored the implications of a legal process where wide discretionary powers for attaching property, conducting searches exist, and where those summoned do not have to be told the reasons for them being summoned. At every juncture, it held that the law contained adequate checks and balances given the specific purpose of the law.
Should judges be allowed to ignore legal standards that have developed over fifty years? Supreme Court judges have powers to explicitly agree or disagree with past decisions, but the court chose not to do so here. It is important to understand the consequences of this choice.
Had the court merely said, as others have in the past, that certain laws that deal with crimes like terrorism need to be construed with greater deference to the government, the court’s attenuated reading of due process would have applied only to laws of a similar nature.
The court instead said that not only does the law deal with a serious set of crimes, but that it also deserves distinct treatment because it is self-contained and furthers important international obligations. The government can use this as a precedent to argue for similar attenuated due process interpretations for many similar laws in the future. The lack of judicial discipline that allows judges to depart from precedent is not new. However, this judgment, along with many other recent ones, is beginning to show how an “activist” judiciary is a double-edged sword.
The mystery of Parliament’s “intent”
One of the other controversies surrounding the judgement is its willingness to interpret “and” as “or”. Briefly, the petitioners argued that Section 3 of the PML Act requires two necessary criteria to properly determine whether someone is guilty of money laundering by way of handling the proceeds of a crime. The first is that the person had to be engaged in some activity connected with the proceeds, and the second, that the proceeds of the crime be projected as untainted. The government argued that meeting these criteria would defeat parliamentary intent and restrict the scope of what constitutes money laundering.
The issue has a simple answer. Amendments to the law have added an explanation to this section that make it clear that this is indeed an “or”. It is therefore unclear why the court chose to get into the issue of the intent of Parliament. But it did, and its examination of intent sought to validate that even in its unchanged form, “or” would have meant “and”. This issue is important since the way the court examines legislative intent underscores the consequent havoc of the lack of discipline in judicial interpretation.
The court states that because of the law’s purpose and context, any defect in the law that leads to restricting its scope should be interpreted in a manner that removes the defect. The court cites a number of precedents where previous judgements have, in fact, interpreted “and” to mean “or”, in order to uphold what they deemed legislative intent. It cites parliamentary speeches and debates, parliamentary committee reports, and international deliberations to justify that the legislative intent of the PML Act is to provide a broad definition of the meaning of money laundering.
However, it also cites extracts from Parliament’s Select Committee report—The Select Committee of the Rajya Sabha had pointed out that if even mere possession of money/property out of the proceeds of a crime were to be punishable, then this “may lead to harassment of innocent persons who bona fide and unknowingly deal with the persons who have committed the offence of money laundering . . .” Accordingly, the phrase “and projecting it as untainted property” was added to the initial definition in the 2002 Act.
Even as the court cites this extract, it neatly ignores the implications of this evidence that clearly contradicts its reasoning. This highlights the problems with reliance on intent, especially when the text is unambiguous. Important issues like what evidence of intent should be relied upon and how contradictory pieces of evidence should be reconciled are completely sidestepped. The consequence is that judges are free to cherry-pick sources as per their convenience.
So far, such judicial behavior has been celebrated for its instrumentality in promoting progressive ideas. Now, however, there should perhaps be a realization that the underlying mechanisms that enable constitutional activism can also be used to undermine constitutional values. The chief mischief of the PML Act is not that the executive finds it easier to convict people for money laundering, but that out of the 5422 cases the ED has taken up for investigation, it has prosecuted people in 992 cases. It has managed to get convictions in only twenty-three cases out of these 992.
The aggressive use of the law, coupled with the low conviction rate, points to the fact that achieving high conviction rates is not its aim. A judicial interpretation hewed closely to the legal text and to judicial precedent would perhaps have addressed such overzealous behavior. The fact that this did not happen should force us to consider:
- What judicial norms are necessary to ensure that the judiciary maintains a greater degree of discipline in interpretative techniques?
- What is the price being paid for celebrating judicial activism in India, and what are going to be its long-term consequences? So far, have the benefits been worth the risks?
—By Anirudh Burman
Review
What Elites and Development Can Do for Each Other
Development is a problem of adaptation. As Albert Hirschman argued in his critique of the balanced-growth approach recommended by some economists, development is about changing what exists rather than superimposing something completely different. So, no recipes or “best practices” can be prescribed without a proper understanding of context-specific realities.
This way of thinking about development can be seen in a number of works published in recent years—Brian Levy’s Working with the Grain (2014), Jerry Hough and Robin Grier’s The Long Process of Development (2014), Yuen Yuen Ang’s How China Escaped the Poverty Trap (2016), Lant Pritchett, Kunal Sen, and Eric Werker’s Deals and Development (2017), among others—even though they differ in the aspects of reality they emphasize. In his recent book Gambling on Development: Why Some Countries Win and Others Lose, Stefan Dercon focuses on the role of the elites.
Dercon observes that although much attention is paid to specific blueprints for development, successful countries appear to have pursued quite a diverse set of policies. Some enablers of growth and development are known—macroeconomic stability, investment in infrastructure and human capital, a reasonable environment for private investment, allowing the market to play a central role but with a suitable role for the state, focusing on international trade, and avoiding firms or families excessively cashing in on connections to the state, etc. But there does not seem to be any one particular cost-free path to development, and different ingredients have been deployed differently by countries in a time-varying manner.
Successful countries were able to experiment and learn from their mistakes. Dercon suggests that this calls for a better understanding of why some countries implemented sensible policies, while others never did. Ignorance about suitable policies seems too simplistic an explanation, as finding good advice is usually not that difficult. In his view, the answer lies in the presence of a development bargain, which he defines as “an underlying commitment to growth and development by members of a country’s elite”. The elites are “the people within the fabric of society, the economy, and politics who make decisions or can disproportionately influence them”. In his view, the key to development is a shared commitment of the elites.
Dercon deploys the language of game theory to describe an elite bargain as “an agreement that defines the nature of cooperation—a so-called cooperative equilibrium. It is a deal on the division of the gains (the pay-offs) from this political ‘game’.” If the deal among the elite is credible, it will lead to limited violence, social order, and political stability. However, all elite bargains are not development bargains. Dercon suggests that three conditions need to be satisfied by a development bargain.
First, there should be durable political and economic deals among the elite, especially on peace and stability. Development takes a long time, and conflict and instability shorten the horizons of decision-making. For instance, foregoing consumption to invest requires a hopeful outlook toward the future, which requires some peace and stability. For this, the politics of the development bargain should be real and credible, and people should believe in it. Even when power changes hands, the bargain should continue without any major disruptions.
Second, there should be a mature and sensible state that finds a balance between what it should do and what it can do. To make progress, at any given point in time, the state should take up a role commensurate with its capabilities. So, while in some high state capacity contexts, an activist developmental state may be suitable for some time; in other contexts, it is better for the state to play a smaller role.
Third, decision-makers should be able to learn from mistakes and correct course. All successful countries have some mechanisms to correct course when growth and development are flagging. Since there is no recipe that is destined to work, development always involves a gamble by the elites that may or may not pay off. Even with the best intentions, development requires both virtu and fortuna. If success is not seen, confidence in leaders may be eroded. So, it is a risk for the elites. A development bargain allows for risk-taking and learning from failures.
When does such a development bargain emerge? Dercon highlights four factors that may (but not necessarily) enable the emergence of such a bargain. First, skills and ideas of particular leaders can help create a development bargain by making risky political deals and working with a competent group implementing the economic deal. While leaders are necessary for gaining and maintaining the support among the powerful, many others are also involved. Politically savvy technocrats often play an important role in supporting this process. Second, emergence from conflict or other extreme events can sometimes help shape a development bargain by creating the incentives for more cooperative behavior. Third, a quest by the elite to gain legitimacy by delivering on development can help strike a development bargain. Fourth, the foresight among the elites that a better economic deal is likely to result from pursuing growth and development can help create the bargain.
None of these factors can straightaway lead to a development bargain. It will take effort to create and sustain it. Leadership skills are needed to “craft national narratives, build legitimacy, and persuade leading groups in society to choose the longer-term gains of growth and development over the immediate economic gains.”
Dercon’s perspective can be understood by the emphasis he places on certain drivers of development.
First, he thinks that while global markets often make it challenging for poor countries to succeed, the main challenges for development are within those countries. So, while he agrees with economists like Joseph Stiglitz and Dani Rodrik on the challenges posed by the way the global markets work, he emphasizes the opportunities that can be and have indeed been exploited by many poor countries to succeed.
Second, he argues that specific policies that nurture growth and development are important, but what is more important is how the policies are made and implemented by those in power. The essential constraint, in his view, lies in these processes, which reflect the bargain among elites.
Third, he strongly de-emphasizes path dependence and suggests that “the choices made by today’s political and economic elite matter a great deal.” While history matters, the agency of people matters a lot more right now. Progress has been achieved in unlikely places because their elites made the right choices.
Fourth, while he agrees with those like Douglass North, who highlight the importance of so-called “good institutions” for long-term growth and development, he suggests that countries can harness seemingly weak institutions to achieve better outcomes in the near term.
The book is an important contribution to the literature on the politics of development. Dercon avoids the common mistake of focusing too much on reforms of formal institutions and policies, and instead allows one to consider the invisible and informal settlement that underpins the political economy. While Dercon’s theory seems too top-down, the reality in many societies is that there are top-down restrictions that make growth and development difficult. And development bargains may indeed be required to shift away from such a situation.
We can see much resonance with Dercon’s arguments in India’s development journey. The foresight about a better economic future was generated in the 1970s and 1980s by various thinkers who advocated for reforms. A crisis created an opportunity that was grabbed by a few leaders, supported by a team of technocrats. India embraced a more open and market-oriented economy, but this was a gamble. Various leaders who participated in coalition governments played a role in creating and sustaining the development bargain, often cutting deals to move things forward. As the benefits became clear over the years, more elites were convinced of the merits of the approach. However, it seems that the bargain was disrupted in the 2010s, and it is not clear whether a new bargain has taken its place.
The development bargains seem to be inherently fragile, especially in democracies. By definition, elite bargains are unseen and must be inferred. Their implicit nature makes them uncomfortable for democracies, which do not like opacity and do not want to admit that elites exist. Since the pursuit of development is a gamble, things may go wrong, and when they do, there is a strong political incentive for those with lesser share in power to use this failure to mobilize against the incumbents. They have an incentive to “oppose, expose and depose.” Further, because of the opacity of the bargain, it becomes easy to blame the whole system, feeding myriad forms of populism. What’s more, the unsavory aspects of the bargain may be closely tied to the developmental aspects. For instance, some rent-seeking may go hand in hand with developmental pursuits, and stopping the former may also stop the latter. No wonder countries find it difficult to sustain episodes of rapid growth.
—By Suyash Rai