Introduction | Prevention of Money Laundering Act & the Judgment

The Prevention of Money Laundering Act, 2002 (hereinafter “The Act”) is a specific legislation enacted for preventing and investigating instances of money laundering as well as recovering any proceeds which are connected to or derived from money laundering itself. The Act operates on a stringent reverse burden of proof and extends the same to any interconnected transactions. It also provides a comprehensive mechanism for dealing with the offence of money laundering and empowers officers of the Enforcement Directorate with a range of powers including of attachment of property or records, search, seizure, and arrest. Keeping in mind the special and stringent character of the Act, it is imperative that the internal system of checks and balances incorporated within it must be strictly adhered to especially, those provisions concerning the procedural functioning of the Adjudicating and Appellate Authority and their ability to attach or freeze properties or records so as to ensure that the rights of the accused are safeguarded. The Act aims to put in these safeguards by mandating that almost every action of an officer or adjudicatory body including attachment, seizing, freezing, or searching is backed by reasons to believe which are to be recorded in writing and furnished to the accused.

Recently, a three-judge bench of the Supreme Court in Opto Circuit India v. Axis Bank [2021 SCC OnLine SC 55] rendered a decision that potentially has far-reaching implications for the rights of an accused regarding the procedure of attachment/freezing of property under the Prevention of Money Laundering Act, 2002. The Apex Court held that the freezing of bank accounts under the Act requires the recording of reasons and failure to adhere to the written requirement will render the freezing to be illegal. This article will analyse the reasoning employed in the judgement and suggest certain implications which arise from it regarding the mechanism for attachment and freezing of properties and records under the Act.

Facts

The factual background is that the CBI initiated investigation against the Petitioner for the commission of a predicate offence within the meaning of the PMLA and analogous proceedings were initiated by the Enforcement Directorate for the offence of money laundering. The appeal arose from a challenge to the Enforcement Directorate’s action of issuing a direction to the Respondent banks to debit freeze the various bank accounts of the Petitioner with immediate effect. This order was issued with a view to track the money trail relating to the predicate offence and to prevent the further layering of the proceeds of the same. The Petitioner challenged before the Karnataka High Court the initiation of parallel proceedings under Section 3 and 4 of the Act and the communication issued to the Respondent banks by the Enforcement Directorate and sought that the bank accounts are defreezed for the purpose of making statutory payments under various enactments and paying salaries of employees. The High Court held, inter alia, that the action initiated under the PMLA against the Petitioner was with competence. However, as observed by the Supreme Court in its decision, the High Court did not examine whether the communication for freezing of the Petitioner’s bank accounts was in conformity with the due process requirements mandated under the PMLA thereby, giving rise to this appeal before the Apex Court.

Analysis

Before adverting to the reasoning adopted by the Apex Court in its decision, it is necessary to understand the procedure for the freezing of bank accounts or other property or records under the Act. Simply put, Section 17 mandates that the officer must have reasons to believe, based on information available to him, that a person has committed acts relating to money laundering and there is a need to seize or freeze the record or property found in any search conducted. The provision also specifically stipulates that the “reasons to believe” must be recorded in writing. Section 17(1A) enables the Authorised Officer to freeze the concerned record or property if it’s not practicable to seize the record or property. Section 17(2) directs the Authorised Officer to forward a copy of recorded reasons along with the material sustaining his belief to the Adjudicating Authority in a sealed envelope. Section 17(4) provides that the Authorized Officer must present an application before the Adjudicating Authority within 30 days from the date of seizure or freezing for retaining such property or records.

The Supreme Court began by analysing and elucidating the abovementioned procedure contemplated for the freezing of bank accounts under the Act and proceeded to apply the same to the circumstances of this case. Through its reasoning, it established two main conclusions with respect to the facts before it and the arguments advanced by the Enforcement Directorate:

  • Recording of written reasons is mandatory to sustain an action under Section 17 of the Act;
  • Actions taken under standalone enactments such as the PMLA have to conform with its inbuilt safeguards and in absence of compliance with procedural requirements under PMLA, the CrPc cannot be resorted to.

The Court took note of the arguments put forth by the Enforcement Directorate regarding the freezing of bank accounts under Section 17 and found them to be not in compliance with the procedure prescribed under the Act. It observed that the ED’s counter-affidavit submits that the freezing order was issued for preventing layering/diversion of proceeds of crime but had not been issued under Section 17 of the Act.

It held, in unequivocal terms, that freezing a bank account will require the same procedure as freezing of a property or record since a bank account falls under the definition of property as well as record provided in the Act. It observed that the PMLA’ scheme is to strike a balance between the goal of preventing money laundering while also safeguarding the rights of accused persons under the Act. It finally concluded, that due to the clear procedural requirement of reasons to be recorded in writing, as stipulated by Section 17(1), a freezing order issued without such recording of reasons shall be illegal and not sustainable.

Applying the above reasoning to the facts before it, the Court noticed that there was no material placed before it to show compliance with Section 17 as there was no recording of reasons which indicated the belief of the Authorised Officer in the commission of an act related to money laundering. It found that besides the communication issued by the ED to the Anti Money laundering Officer of the Respondent banks to freeze the accounts, there was no material on record to sustain the act. It went on to observe that the communication to the bank itself need not contain the reasons to believe provided that there is an order in the file recording the same.

Another argument advanced was that the power of seizure under Section 102, CrPC had been used to freeze the bank account but the Court dismissed the same due to three reasons. First, the PMLA is a standalone enactment that contains its own provision and procedure for freezing of property or records therefore, the provision and procedure present within it has to be used for freezing. Second, the general principle that when power is provided under the special act then the use of power under the general law is not permitted. Third, seizure under Section 102, CrPc empowers a police officer during investigation and mandates that the officer must forward the seizure report to the Magistrate which was not done in the case before it.

Two ancillary points were re-emphasized by the Court. First, relying upon Mohinder Singh Gill [(1979) 1 SCC 405], it upheld that when an action is sought to be sustained to the contents of a particular order/communication (in this case, the order to the Respondent banks under Section 17), the same cannot be justified or improved upon through subsequent affidavits before the Court. Simply put, orders must not be like wine, improving with age. Second, relying upon Chandra Kishor Jha [(1999) 8 SCC 266], it restated the principle that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and no other.

Another aspect discussed was the plea sought by the appellant which was to defreeze the bank account for paying various statutory dues such as Provident Fund, Professional Tax, Gratuity and LIC Employees’ deductions as well as salaries. Owing to its conclusion that the freezing order was itself illegal, the Court allowed the appellant to pay the amount due to statutory authorities while granting liberty to the ED to freeze the account again, after complying with procedural requirements.

Implications & Conclusions

This judgment is another decision in the burgeoning trend of incorporating greater procedural or due process safeguards within the process of attaching/freezing of properties under the PMLA and provides safeguards for the rights of an accused person. Recent jurisprudence, emerging from High Court decisions regarding the term ‘reason to believe’ is mostly in favour of interpreting written reasons requirements to be mandatory. In the context of Section 5(1) of the Act, the decisions in Excel Powmin [2020 SCC OnLine Cal 384], Seema Garg [2020 SCC OnLine P&H 738] and Digambar Kamat [2020 SCC OnLine Bom 1899] have already held that the authorised officer, while provisionally attaching any property, must record the reasons for believing that the property is a proceed of crime and is likely to be transferred, concealed, or dealt in a manner resulting in frustration of proceedings under the Act. In J. Sekar [2018 SCC OnLine Del 6523], the Delhi High Court went a step further and held that the Adjudicating Authority, while issuing a show-cause notice under Section 8(1), has to record written reasons to believe even though the wording of the Section does not require the same. It is to be noted that J. Sekar has been stayed by the Supreme Court and is pending thereto. The judgement in Opto Circuit India, explicitly affirms the decisions of the respective High Courts in Excel Powmin, Seema Garg and Digambar Kamat while providing an indication as to how the Apex Court might approach the dictum rendered in J. Sekar.


About the Author, Shiva [2017-22] is pursuing B.A.LL.B (Hons) from the University School of Law and Legal Studies, GGSIPU.


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