The Indian Courts have consistently termed economic offences as a class apart, requiring to be viewed, “seriously and [to be] considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country.” Accordingly, appreciating an urgent need of a specific enactment to tackle with the emergent menace of white-collar crime, which gravely affects the fibers of country’s economic structure, the Prevention of Money Laundering Act, 2002 (“PMLA”) was enacted. The genesis of the said enactment, commenced with the introduction of the Prevention of Money Laundering Bill, 1998 (“1998 Bill”) in the Lok Sabha, “for the enactment or a comprehensive legislation, inter alia, for preventing money-laundering and connected activities confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating measures for combating money-laundering, etc.” Subsequently, the said Bill was referred to the Standing Committee on Finance, which presented its report to the Lok Sabha along with its recommendations. These recommendations and several other changes were, accordingly, incorporated in the 1998 Bill, culminating into the receipt of Presidential assent and its enactment as the Prevention of Money Laundering Act, 2002/ PMLA. As per the preamble to the said enactment, PMLA is an “Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.” Significantly, the Hon’ble Supreme Court in P. Chidambaram v. Directorate of Enforcement, while dealing with the objective of PMLA, inter alia, observed, “[i]t is realised world around that money-laundering poses a serious threat not only to the financial systems of the countries but also to their integrity and sovereignty. The Prevention of Money-Laundering Act, 2002 was enacted in pursuance of the Political Declaration adopted by the Special Session of the United Nations General Assembly held in June 1998…primarily with a view to meet out the serious threat posed by money-laundering to the financial system of the countries and to their integrity and sovereignty.”
It is trite law that the provisions under PMLA confer it with, both, civil and criminal ingredients and overtones. On one hand, there are specific provisions under the said enactment which penalize the offence of money laundering, on the other hand, provisions regarding the attachment of property involved in money laundering; search, seizure and freezing of property and records and search of persons are provided under Sections 5, 17 and 18, respectively, under the PMLA. While dealing with the dual procedure/ mechanism under the PMLA, the Hon’ble High of Delhi in Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank, inter alia, observed, “[t]he process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-a-vis the offence of money-laundering.” Significantly, the object of attachment under PMLA is to ensure that, “the proceedings for confiscation of proceeds of crime, are not frustrated….Once a property is attached and necessary encumbrances are entered in the records of the Sub-Registrar and once a prohibitive order is also passed, no alienation can take place. Even if any alienations take place, they would be null and void.” Therefore, PMLA clearly stipulates that by retaining symbolic, legal and constructive possession of the property, by attachment or otherwise, the proceedings under the Act are not frustrated, which may eventually lead to the confiscation of property attached with the Central Government. In fact, as per the provisions of Section 8(5) of PMLA, “when on conclusion of a trial of an offence under this Act, the Special Court finds that the offence of money-laundering has been committed, it shall order that such property involved in the money-laundering or which has been used for commission of the offence of money-laundering shall stand confiscated to the Central Government.” In the alternate, where on conclusion of such proceedings, the Special Court finds that the offence of money-laundering has not taken place or the property is not involved in money-laundering, as per the provisions of Section 8(6) of the said enactment, “it shall order release of such property to the person entitled to receive it.”
Significantly, the powers of attachment, freezing of accounts, search, seizure, etc., as envisaged under the provisions of PMLA are not unbridled. Rather, the same may be exercised by the concerned authorities under the said Act, only after due compliance of the necessary and in-built safeguards/ restrictions/ limitations, as contemplated therein. In this regard, the Hon’ble High Court of Delhi in Abdullah Ali Balsharaf v. Directorate of Enforcement & Ors., observed, “any property can be provisionally attached under Section 5 or be seized under Section 17 or be frozen under Section 17(1A) of the PMLA. However, any such order can be passed only if the necessary checks and balances are complied with; namely, that the seizure or attachment is preceded by the concerned authority having reason to believe that such properties are proceeds of crime or are otherwise related to crime. Further, such reasons to believe must be formed on the basis of material in possession of the concerned officer and must be recorded in writing. In addition, such orders cannot be extended beyond the period of one hundred and eighty days, within which the Adjudicating Authority has to examine the matter and pass an order after issuing notice to the concerned persons and after affording the concerned person full opportunity to be heard.” Similarly, the Hon’ble Apex Court in OPTO Circuit India Ltd. v. Axis Bank, while dealing the provisions under Section 17 of the PMLA in relation to the freezing of bank accounts, observed, “the Director or such other Authorised Officer in order to exercise the power under Section 17 of PMLA, should on the basis of information in his possession, have reason to believe that such person has committed acts relating to money laundering and there is need to seize any record or property found in the search. Such belief of the officer should be recorded in writing.” Further, as per the Hon’ble Court, while exercising the power by the concerned authority(ies) under the said provision, it is not only necessary that the ‘reason(s) to believe’ as provided under Section 17(1) of PMLA are recorded by the concerned/ authorized officer/ authority before any communication is issued under the said provision, rather, the requirement under Section 17(2) of PMLA, after the freezing is made, must be complied with. The Hon’ble Supreme Court, at the same time, cautioned, “though the Authorised Officer is vested with sufficient power; such power is circumscribed by a procedure laid down under the statute. As such the power is to be exercised in that manner alone, failing which it would fall foul of the requirement of complying due process under law.”
Pertinently, appreciating the gravity of the consequences which the initiation of attachment proceedings under PMLA may ensure, Indian Courts have persistently emphasized on the need of compliance of the mandatory safeguards, in particular, recording of the ‘reason to believe’ by the concerned officer/ Adjudicating Authority and conveyance of such reasons to the noticee under Section 8 thereof. Pertinently, the term ‘reason to believe’ is not defined under the PMLA, however, “[t]he expression “reason to believe” has been defined in Section 26 IPC. As per the definition in Section 26 IPC, a person is said to have “reason to believe” a thing, if he has sufficient cause to believe that thing but not otherwise.” In this regard, the Hon’ble High Court of Delhi, while emphasizing on a need of officer under Section 5 and the Adjudicating Authority under Section 8 of PMLA of recording the ‘reason to believe’ and mandatory availability thereof to the noticee, observed, “[t]here are two reasons to believe. One recorded by the officer passing the order under Section 5(1) PMLA and the other recorded by the AA under Section 8(1) PMLA. Both these reasons to believe should be made available to the person to whom notice is issued by the AA under Section 8(1) PMLA. The failure to disclose, right at the beginning, the aforementioned reasons to believe to the noticee under Section 8(1) PMLA would not be a mere irregularity but an illegality. A violation thereof would vitiate the entire proceedings and cause the order of provisional attachment to be rendered illegal.” The Hon’ble Court further, while dispelling the argument that under Section 8(1) of PMLA there was no requirement to communicate such ‘reason to believe’ to a noticee, held, “On a collective reading of Section 5(1) PMLA and Section 8(1) PMLA, such an interpretation is contraindicated and cannot satisfy the requirement of what the AA is supposed to do under Section 8(2) PMLA, viz. to consider the reply of the noticee, give them and the Director a hearing and ‘take into account’ all relevant materials placed on record.” In fact, it was vehemently emphasized by the Hon’ble Court that such dual ‘reason(s) to believe’ must be based on independent application of mind and that such ‘reasons to believe’, recorded by the Adjudicating Authority, cannot be a mere rubber stamping of the opinion already formed by someone else. It is further a settled law that mere reiteration of the wording of the provisions under the PMLA would not constitute, recording of reasons to believe. On the contrary, such reasons must emanate from the basis of material in possession of the concerned authority/ officer and that the recording of the same “cannot be mere formality but should be germane and relevant to the subjective opinion formed by the authority.”
Quite recently, the Hon’ble High Court of Calcutta, while affirming and relying upon the aforestated decision of the Hon’ble High Court of Delhi, reiterated the importance of conveyance of ‘reason to believe’ to a noticee under the PMLA. As per the Hon’ble Court, “[w]ithout an indication as to the reasons to believe for which the AA issued the notice, the noticee would be handicapped, without any fault of his own, from taking appropriate defence on all aspects of the matter. The evidence on which he relies and other relevant information, as indicated in Section 8(1), might also pertain to the absence of any basis of the reasons to believe, on which premise the notice itself was issued, thereby vitiating the notice and the ensuing hearing.” At the same time, while appreciating the said requirement in light of the provisions under Section 68 of PMLA, the Hon’ble Court, noted, “the substance and effect of the notice cannot be in conformity with or according to the intent and purpose of the Act, which incorporates the well-established principle of natural justice, audi alteram partem, which gives the noticee a right to contest the notice, its basis as well as the contents of the notice elaborately, if the basis of the notice under Section 8(1), that is, the “reasons to believe” of the AA are not disclosed in the notice.”
Conclusively, considering the gravity of consequences which the initiation of a proceeding under the stringent provisions under PMLA may entail, it is incumbent that the powers conferred therein are exercised within caution and circumspection. Undoubtedly, PMLA seeks to curtail the monstrosity which economic offences may inflict, however, the same may not be devised a tool of oppression and tyranny. Regrettably, in several instances of exercise of powers under PMLA, though, the concerned authorities act, cognizant of their powers, however, omit/ neglect to abide by the in-built safeguards as provided under the enactment. In fact, in majority of such cases, provisional order(s) of attachment under Section 5 PMLA are passed in a mechanical manner, which are confirmed by the Adjudicating Authority, without independent application of mind of the reasons to do so, solely under the garb of and justified by the reiteration of purpose of enactment of PMLA. Further, unfortunately, in several of these cases, the process of adjudication/ hearing before the Adjudicating Authority remains a mere formality, without complying with the said safeguard, emphasized by Courts from time to time. However, each such unrestrained exercise of power goes contra to the object and purpose of the said enactment and erodes the faith and confidence which law and society places on the shoulders of those in power. It is therefore, essential that the vast powers under the PMLA are not exercised casually, rather, must be based on proper evaluation, relevance, etc., and aimed towards achieving the goal with which the enactment came into force. It is only then that the law would be able to work with its full vigor; proving deterrent to perpetrators of offence on one hand, while ensuring protection to genuine transactions/ assets.
About the authors:
Mr. Varun Sharma is a practicing Advocate based in Delhi and has an experience of around fifteen years into the profession, dealing extensively with white collar crimes, insolvency related matters and other civil and commercial disputes. In past, Mr. Sharma was associated with the Dispute Resolution practice at L&L Partners Law Offices, ALA and Tiwari & Associates and presently associated with Clasis Law & Associates, Delhi. Mr. Sharma, in past, appeared in several proceedings before the Hon’ble Supreme Court and several High Court(s) across India and was an integral part of the defence team in ‘2-G Scam’ matter, before the concerned Courts.
Email id: varun.sharma@clasislaw.com; varunlvm@gmail.com; Mob.: +91-9650668623
Mr. Abhishek Goyal is an Advocate based in Delhi and presently associated with Clasis Law & Associates, Delhi. Mr. Goyal has an experience of around eleven years into the profession, commencing his journey in the year 2010. In past, Mr. Goyal worked under the able guidance of Hon’ble Ms. Justice Mukta Gupta and Hon’ble Mr. Justice V.P. Vaish, Hon’ble Judges of the Hon’ble Delhi High Court and was associated with the Dispute Resolution Team at L&L Partners Law Offices, Delhi and Chadha & Chadha IP, Gurugram (prior thereto) for a period of more than five years. His areas of interest and expertise involve; Insolvency and Bankruptcy Laws, Arbitration Laws, other Civil and Criminal Laws, etc.
Email id.: abhishek.goyal@clasislaw.com; abhigoyal85@gmail.com; Mob.: +91-9911584154
[1]Y.S. Jagan Mohan Reddy v. CBI, (2013) 7 SCC 439
[2] Introduced on August 4, 1998
[3] (2019) 9 SCC 24
[4] Section 4 of PMLA- “Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine: Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been substituted.”
[5] Section 3 of PMLA- “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering….”
[6] (2019) 259 DLT 500
[7] A. Kamarunnisa Ghori v. Chairperson, Prevention of Money Laundering, 2012 SCC OnLine Mad 2527: (2012) 4 CTC 608
[8] 2019 SCC OnLine Del 6428: (2019) 173 DRJ 395
[9] 2021 SCC OnLine SC 55
[10] As per the Hon’ble Court, “For the purpose of clarity, it is emphasised that the freezing of the account will also require the same procedure since a bank account having alleged ‘proceeds of crime’ would fall both under the ambit “property” and “records”.”
[11] Section 17(2) of PMLA- “The authority, who has been authorised under sub-section (1) shall, immediately after search and seizure or upon issuance of a freezing order, forward a copy of the reasons so recorded along with material in his possession, referred to in that sub-section, to the Adjudicating Authority, in a sealed envelope, in the manner, as may be prescribed and such Adjudicating Authority shall keep such reasons and material for such period, as may be prescribed.”
[12] Section 2(1)(a) of PMLA-“Adjudicating Authority” means an Adjudicating Authority appointed under sub-section (1) of Section 6.”
[13] Section 8(1) of PMLA- “On receipt of a complaint under sub-section (5) of Section 5, or applications made under sub-section (4) of Section 17 or under sub-section (10) of Section 18, if the Adjudicating Authority has reason to believe that any person has committed an offence under Section 3 or is in possession of proceeds of crime, it may serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the property attached under sub-section (1) of Section 5, or, seized or frozen under Section 17 or Section 18, the evidence on which he relies and other relevant information and particulars, and to show cause why all or any of such properties should not be declared to be the properties involved in money-laundering and confiscated by the Central Government…”
[14] Refer to P. Chidambaram v. Directorate of Enforcement, (2019) 9 SCC 24
[15] J. Sekar v. Union of India, 2018 SCC OnLine Del 6523: (2018) 246 DLT 610
[16] Refer to Seema Garg v. Deputy Director, 2020 SCC OnLine P&H 738
[17] Excel Powmin Ltd. v. Union of India, 2020 SCC OnLine Cal 384 (Significantly, the operation of the decision of the Hon’ble High Court of Delhi in J. Sekar v. Union of India, (2018) 246 DLT 610 was stayed by the Hon’ble Supreme Court in Union of India & Ors. v. J. Sekar, SLP(C) No.12865 of 2018 vide an order dated 04.07.2018 (proceedings being pending adjudication before the Hon’ble Apex Court till date). However, in the instant case, the Hon’ble High Court of Calcutta did not deal with the said aspect of said stay. Nevertheless, reference in this regard may be made to decision of the Hon’ble Appellate Tribunal under PMLA in Universal Music India Pvt. Ltd. v. The Deputy Director, Directorate of Enforcement, Mumbai, MANU/ML/0024/2019 and Sony Music Entertainment India Pvt. Ltd. v. The Asstt. Director, Directorate of Enforcement, Mumbai, MANU/ML/0026/2019, wherein the Hon’ble Tribunal observed, “Though the operation of the aforesaid judgment has been stayed by the Hon’ble Supreme Court, the above dicta cannot cease to be law of precedential value and binding in other matters i.e. third parties, in view of settled law……it is wrong to allege on behalf of respondent – ED that the said judgement rendered by the Hon’ble Division Bench of the Delhi High Court cannot be relied upon or not applicable. Unless it is set-aside by the Supreme Court, the same remained effective. The same may not be binding upon between the parties, but it has a binding effect to this Tribunal.” Refer also to the decision of the Hon’ble Tribunal in Bharat Yadav and Ors. vs. The Deputy Director, Directorate of Enforcement, Patna, MANU/ML/0027/2020)
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