The Prevention of Money Laundering Act will likely need to be amended for mandatory Aadhaar-bank account linkage. The punishment for non-compliance, however, is without a doubt unconstitutional.
The central government recently announced that it shall be mandatory to link Aadhaar numbers to all non-small bank accounts, failing which, access to the bank accounts will be disabled after December 31. This requirement has been brought into the law via Prevention of Money-laundering (Maintenance of Records) (Second Amendment) Rules, 2017 which have been notified by the government under powers delegated to it by the parliament through the Prevention of Money Laundering Act, 2002 (PMLA).
As is often the case with this government, the question now is whether this new mandatory Aadhaar requirement (and the threatened punishment) is legal.
The legality of mandating Aadhaar-bank linking
The Aadhaar Act, 2016 imposes certain limitations on the type of activities for which the government can mandate the use of Aadhaar number for authentication. The pertinent part of the legislation, Section 7, states:
“The Central Government or, as the case may be, the State Government may, for the purpose of establishing identity of an individual as a condition for receipt of a subsidy, benefit or service for which the expenditure is incurred from, or the receipt therefrom forms part of, the Consolidated Fund of India (CFI), require that such individual undergo authentication, or furnish proof of possession of Aadhaar number….”
The operative words here are “receipt of a subsidy, benefit or service” where money is either appropriated or deposited in “the Consolidated Fund of India” which is basically the government’s most important account where revenue is deposited and from which the government deducts its expenses. This would cover central government schemes and services like MNREGA or issuance of passports.
Section 7 is very likely one of the reasons that the government had to get the parliament to amend the Income Tax Act to make the linking of PAN and Aadhaar numbers mandatory, rather than do it through its rule-making power under the Income Tax Act.
Although revenue from income tax is deposited in the CFI, the levy of income tax does not qualify as a “subsidy, benefit or service”. Rather, the levy of income tax is an administrative or sovereign function of the central government. However, with regard to services provided by public or private banks through bank accounts, it should be noted that this function will not be covered by Section 7 because bank accounts have no connection whatsoever to the CFI. The money deposited in a bank account is not deposited in the CFI. The balance sheets of banks are entirely different from the CFI.
The essential question now is whether the government can use its rule-making powers under the PMLA, 2002 to circumvent the limitations imposed by Section 7 of the Aadhaar Act, 2016?
The PMLA, 2002 is silent on the power of the central government to require authentication of bank customers. In such cases, courts usually invoke the principle of generalia specialibus non derogant, which basically means the provisions of a general law have to concede to a special legislation. In this case, the Aadhaar Act will trump the silence of the PMLA on the use of Aadhaar numbers and as already discussed above, Section 7 of the Aadhaar Act limits the purposes for which an Aadhaar number can be used.
Thus, for Aadhaar numbers to be mandatorily linked to bank accounts for customer authentication, the parliament has to amend the PMLA as it did with the Income Tax Act. Till then, the limitations of Section 7 of the Aadhaar Act will rule the field and the government cannot circumvent the provision by using its rule-making powers under different legislations.
Blocking access to bank accounts?
The second aspect of the Prevention of Money-laundering (Maintenance of Records) (Second Amendment) Rules, 2017 is the requirement for banks to block access to those bank accounts of those customers who do not link their Aadhaar numbers to their accounts. Rule 17(c) states:
“In case the client fails to submit the Aadhaar number and Permanent Account Number within the aforesaid six months period, the said account shall cease to be operational till the time the Aadhaar number and Permanent Account Number is submitted by the client.”
This rule is without doubt unconstitutional because the parliament did not delegate to the central government the right to block bank accounts and deprive Indian citizens of their property.
In its preamble, the PMLA (Maintenance of Records) Second Amendment Rules, 2017 clearly identifies the source of its power as “sub-section (1) read with clause (h), clause (i), clause (j) and clause (k) of sub-section (2) of section 73 of the Prevention of Money-laundering Act, 2002”. None of those provisions in Section 73 of the PMLA Act allow the central government to make rules that allow it to block access to bank accounts. Those provisions only allow the central government to make rules regarding the maintenance of financial records. Blocking access to bank accounts are akin to property seizures and will in effect violate the constitutional right to property under Article 300A.
The PMLA does have extensive provisions on attachment or freezing of assets that are suspected or proven to be the fruits of money laundering or criminal activity. However, this process is quite complicated and requires a reasoned order by certain designated officers of the central government. It is simply absurd for the government to claim powers to automatically block access to bank accounts for failing to link Aadhaar numbers to bank accounts.
Modi sarkar and rule-making powers
Over the last month, the Modi government has increasingly used its rule-making powers under various laws in a manner which is contrary to the law of the land. The first instance was the highly controversial Prevention of Cruelty to Animals (Regulation of Livestock Markets) Rules, 2016, which were notified under the Prevention of Cruelty Act. One law professor described these rules as “… a constitutional misadventure on multiple grounds involving fundamental rights, separation of powers and federalism”. The constitutionality of the rules have been challenged before the Supreme Court.
The second instance were the “Tribunal, Appellate Tribunal and other Authorities (Qualifications, Experience and other Conditions of Service of Members) Rules, 2017. These rules were notified under Section 184 of the Finance Act, 2017 and as I argued in a previous piece, these rules are most certainly in violation of the law. The Madras Bar Association has now challenged the constitutionality of these rules before the Madras high court.
The PMLA (Maintenance of Records) (Second Amendment Rules), 2017 are thus the third instance of the government overstepping its boundaries. The question now is whether the government is getting the correct legal advice with regard to its rule-making powers or is it the case that the government is feeling confident enough to ignore legal advice?
Prashant Reddy T. is a research associate at the School of Law, Singapore Management University.