The Prevention of Money Laundering Act, 2002 (PMLA) was enacted with an aim to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering. The Directorate of Enforcement (ED) is the designated agency responsible for investigation and prosecution in relation to the offence of money laundering.1 In addition to investigating/ prosecuting offences, the ED is also tasked with tracing and confiscating 'proceeds of crime'. For the purpose of accomplishing these objectives, the ED is given wide powers under the statute including power of search, seizure, attachment, arrest etc.
The PMLA defines 'proceeds of crime' as "any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad." This is a wide definition and is often applied to various types of properties including immovable property, balance in bank accounts, shares, jewelry, vehicles, paintings etc.
In order to determine whether property is proceeds of crime, the ED will evaluate whether the property can be traced to an offence i.e. source of the proceeds of crime. The ED will determine the quantum of proceeds of crime involved in the offence and will trace the money trail by evaluating the bank statements and other records of entities that have transacted with the individuals/entities that have generated/obtained proceeds of crime by committing an offence.
Such an investigation is conducted to uncover the layering, implemented by the accused, to disguise the source of the proceeds of crime. Once the ED has reason to believe that any property may be proceeds of crime or related to money laundering, it will proceed to freeze/attach the property. Thereafter, such property may be confiscated, if the Special Court (i.e. the court designated under the PMLA Act) finds that the property is involved in money laundering or used in the commission of the offence of money laundering.
For the sake of illustration, Mr. X through Company XYZ commits the crime of cheating under the Indian Penal Code (IPC) by defrauding a bank of INR 50 crores in December 2019. The funds obtained from this offence are deposited in the bank account of Company XYZ. Subsequently, in January 2020, Company XYZ enters into transactions with 5 dummy companies and transfers INR 10 crores to each of these companies under the guise of genuine transactions for supply of consultancy services. In February 2020, the 5 shadow companies each transfer INR 10 crores to Mr. Y, the son of Mr. X. Mr. Y immediately uses these funds to purchase an immovable property worth INR 35 crores and paintings worth INR 14 crores. In March 2020, Mr. Y transfers INR 2 crores (of which INR 1 crore relates to share of sale proceeds of a co-owned property acquired in 2010) to his son - Mr. Z and the same remains in Mr. Z's bank account.
In this example, the quantum of proceeds of crime is INR 50 crores. The ED will follow the money trail by evaluating the bank statements of Company XYZ, 5 dummy companies, Mr. Y and Mr. Z. The offence was committed in December 2019 and the proceeds of crime can be traced to Mr. Y. Mr. Y purchased the immovable property and paintings after the date of the crime i.e. December 2019. Therefore, the ED may determine that these properties, worth INR 49 crores (immovable property worth INR 35 crores and paintings worth INR 14 crores), are proceeds of crime, and hence liable to be attached/confiscated. It is also likely that the ED will freeze the bank account of Mr. Z given that INR 1 crore (out of INR 2 crores) transferred to Mr. Z is proceeds of crime. The question remains as to what is the fate of the additional INR 1 crore which was transferred by Mr. Y to Mr. Z which cannot be said to be proceeds of crime?
Procedure for Freezing Accounts under Sections 17 and 20 of the PMLA
In order to determine the answer to this question, one must understand the procedure and law regarding freezing of accounts under the PMLA. The ED may either freeze or attach accounts depending on the circumstances of the case. Invariably, the ED will freeze bank accounts by application of Section 17 of the PMLA, given that the funds in bank accounts are easily transferable. The ED may freeze bank accounts by issuing a direction to the concerned bank in which the account is held.
Section 17(1-A) empowers the ED to pass an order to freeze property, where it is not practical to seize the same, whereupon the property cannot be transferred or dealt with without prior permission of the officer making such order. Copy of the freezing order is to be served on the person concerned i.e. account holder. Reasons for issuance of the freezing order along with material in possession of the officer must be immediately forwarded to the Adjudicating Authority (AA) under sealed envelope. Subsequently, the officer must within a period of thirty days from such freezing, file an application with the AA requesting retention of the property.
Procedure for Adjudication under Section 8 of the PMLA
In case the ED is seeking continuation of freezing, it must file an application before the AA in terms of Section 17(4) of the PMLA. Under Section 8 of the PMLA, on receipt of such application, if the AA has reasons to believe that any person has committed an offence of money laundering or is in possession of proceeds of crime, it may issue notice of not less than 30 days on such person. The notice must call upon the person to indicate the source of his income, earning or assets, out of which he has acquired the frozen property along with evidence/information he relies upon and to show cause why such property should not be declared to be property involved in money laundering and confiscated by the Central Government.
The AA must grant the person claiming the frozen property an opportunity of hearing. The AA is also required to consider any reply to the notice filed by such person and to take into account any relevant materials placed before it. Thereafter, the AA must, by an order, record whether the property is involved in money-laundering. Third-parties who have not been served notice but claim an interest in the property are also entitled to an opportunity of being heard to prove that the property is not involved in money-laundering. Such parties must first seek to be impleaded in the proceedings before the AA.
Under Section 20 of the PMLA, where property has been frozen and the ED has reasons to believe 2 that such property is required to be retained for the purposes of adjudication under Section 8, such property may continue to remain frozen for a period not exceeding 180 days from the date on which such property was frozen. Upon expiry of the said period, the property must be returned to the person from whom it was seized unless the AA permits the continuation of freezing of the said property beyond this period. Therefore, the AA must decide an application under Section 17(4) within a period of 180 days from the date of the order of freezing passed under Section 17 of the PMLA.
In the event that the AA decides that the property is involved in money-laundering, it shall pass an order in writing confirming retention of the property, in which case the property shall remain frozen during investigation for a period not exceeding 365 days or pendency of proceedings under the PMLA or in case the property has been seized on the basis of a letter of request, the proceedings before the competent court under the corresponding law of the requesting country. The freezing order shall become final in case an order of confiscation is passed by the Special Court under Sections 8(5) or 8(7) in terms of the PMLA or Section 58(b) or subsection (2-A) of Section 60 in terms of a letter of request received from a foreign country.
Recent Judgments on Freezing of Accounts
In a number of recent judgments, the PMLA Appellate Tribunal and various High Courts have dealt with the issue of freezing of accounts by the ED in a manner that is not in accordance with the PMLA, few of which have been summarized hereinafter:
In GLS Films Industries Pvt. Ltd. vs. The Deputy Director, Directorate of Enforcement, Patna 3 the PMLA Appellate Tribunal considered a case wherein the ED imposed a debit freeze on the bank accounts of the appellant. The ED filed an application under Section 17(4) seeking continuation of the freezing order which was rejected by the AA. Despite rejection of the application, the ED did not defreeze the accounts. Thereafter, the ED filed a fresh freezing order and application under Section 17(4). Despite expiry of 180 days from the initial freezing order, the AA passed order in the second application directing continuation of the freeze. The PMLA Appellate Tribunal held that AA did not have jurisdiction to confirm the retention after the expiry of 180 days.
In the case of Excel Powmin Ltd. vs. Union of India 4 the Calcutta High Court held that a notice issued by the AA under Section 8(1) that did not disclose 'reasons to believe' was invalid. The High Court further held that the absence of communication of reasons to believe in the show-cause notice "would not be a mere irregularity but an illegality vitiating the notice itself and, consequently, the following proceeding." Consequently, the High Court set-aside the order passed by the AA as well as the ED's attachment order. Interestingly, in the earlier case of Farida Begum Biswas & Ors. vs. Union of India 5, the Delhi High Court rejected a writ petition filed under Article 226 of the Constitution of India seeking quashing of a show cause notice under Section 8(1) of the PMLA, on the ground that the said petition was premature given that the petitioners had an effective and efficacious remedy under PMLA.
In Abdullah Ali Balsharaf & Ors vs. Directorate of Enforcement & Ors. 6 a Single Judge of the Delhi High Court considered a writ petition challenging the directions issued by the ED to the BSE resulting in withholding of the proceeds of equity shares sold by the petitioners through BSE. The ED passed freezing order under Section 17(1-A) with respect to the shares and filed an application under Section 17(4). One of the primary issues in this case was whether the ED's instructions to BSE were sustainable in law. In this regard, the ED argued that the instructions issued by the ED to the BSE were in exercise of powers conferred under Section 102 of the Code of Criminal Procedure, 1973 (CrPC). Section 102 permits a police officer to seize property suspected to be involved in the commission of an offence as opposed to Section 17 of the PMLA, which requires freezing to be preceded by the specified officer having 'reasons to believe' that the property sought to be frozen is proceeds of crime or related to a crime and after recording the reasons in writing.
The High Court held that the scheme of seizure under the CrPC including the checks and balances in exercise of such power, is wholly inconsistent with the scheme of the provisions under the PMLA. Section 65 of the PMLA provides that the CrPC would be apply, in so far as they are not inconsistent with the PMLA, to arrest, seizure, confiscation etc. The court held that Section 65 would not apply in the present case since Section 102 of the CrPC was clearly inconsistent with the scheme and provisions of Section 17 of the PMLA. The High Court inter alia held that the ED could not issue orders 'freezing' Demat accounts by resorting to the provisions of Section 102 of the CrPC and the communications issued to BSE were without authority of law. Interestingly, the ED's actions also resulted in a financial loss of INR 190 crores to the petitioners since the price of securities had subsequently been significantly eroded. The court stated that it is open to the petitioners to seek appropriate remedy including compensation for any loss suffered by them on account of the illegal actions on the part of the ED.
In Directorate of Enforcement vs Abdullah Ali Balsharaf & Ors. 7 the Division Bench of the Delhi High Court dealt with an appeal filed by the ED against the abovementioned order passed by the Single Judge. The Division Bench upheld the decision of the Single Judge and stated that "we hold that ingredients of section 17 of PMLA must be scrupulously complied with and it is impermissible for seizure to be made by relying instead upon the provisions of section 102 of the CrPC." The Division Bench reiterated that the ED must strictly comply with the requirement of having reason to believe while passing a freezing order. The ED has filed appeal against this decision before the Supreme Court and the matter is sub judice.
Most recently, in Hamilton Housewares Pvt. Ltd. vs. Directorate of Enforcement 8 the Delhi High Court is considering a case wherein the ED has seized certain bank accounts of the petitioners on the basis of a letter of request from the Government of Brazil. The petitioners filed writ petitions on the ground that the quantum of the suspect transaction was far less than the balance standing in the frozen bank accounts and hence the freezing order was excessive. The High Court noted that a specific amount had been mentioned qua the petitioners in the application under Section 17(4) filed by the ED and held that the action of freezing the entire bank accounts of the petitioners appeared prima facie unreasonable and not authorized by law. Accordingly, as an interim measure, the High Court stayed the freezing order subject to the petitioners securing the said specific amount by way of a Bank Guarantee/Fixed Deposit or by maintaining a deposit of an equivalent amount in their bank accounts in question. This matter is presently sub judice before the Delhi High Court.
In our illustration, we are considering a case where Mr. Z's account has been frozen in which he holds INR 2 crores. Out of this, INR 1 core cannot be said to be proceeds of crime.
In this situation, Mr. Z ought to be issued a notice by the ED and thereafter the AA, and should be given an opportunity to appear before the AA to make a case that the INR 1 crore was not involved in money laundering. Mr. Z will have to establish the source of income, earning or assets, out of which or by means of which he acquired the INR 1 crore in question. In this case, the sale of a co-owned property.
Moreover, Mr. Z may also highlight that the co-owned property was acquired much prior to the crime and has no connection to money laundering. Further, Mr. Z could also argue that the fraud amount was INR 50 crores but ED has attached assets and frozen a bank account with an aggregate value of INR 51 crores. Mr. Z may also seek to provide a bank guarantee/fixed deposit of INR 1 crore (quantum of proceeds of crime in the bank account) and seek de-freezing of the bank account.
Furthermore, in the event that there is any procedural lapse committed by the ED or the AA, it would be open to Mr. Z to apply the legal maxim that if the statute requires a thing to be done in a particular manner, it must be done in that manner or not at all. Mr. Z may challenge an illegal action by the ED or AA before the PMLA Appellate Tribunal or High Court.
If Mr. Z is successful, the INR 1 crore which has been frozen, would be released to Mr. Z. However, in case the AA is not satisfied and orders the retention of the amount, Mr. Z may approach the PMLA Appellate Tribunal in appeal under Section 26 of the PMLA or Special Court during the trial under Section 8(8) of the PMLA.
The freezing of accounts can have drastic effects on the holders of the account including resulting in the financial death of the individual/entity whose accounts are frozen. Therefore, the ED and AA must take utmost care to ensure that the procedure outlined under the PMLA is scrupulously followed. Accounts must be frozen only when the ED has a bona fide 'reason to believe' on the basis of the material in its possession. Furthermore, the ED should freeze accounts in a proportionate manner and only to the extent that the assets in the accounts can be traced to money laundering or proceeds of crime. The AA must issue proper notice under Section 8(1) which includes reasons to believe after application of mind. The AA must provide a fair opportunity of hearing before passing an order for continuation of a freezing order, if it is satisfied that the property is proceeds of crime or otherwise related to crime. Due care must be taken to ensure that the timelines provided under the statute are followed. In other words, the checks and balances provided with respect to freezing of bank accounts under the PMLA must be strictly adhered to by the ED and the AA. The PMLA Appellate Tribunal and High Courts have routinely intervened in case the freezing order is invalid, arbitrary or excessive. However, such intervention and consequent relief are usually after going through unnecessary hardship by the accountholder. Therefore, it is imperative that the ED does not exercise its power to freeze accounts arbitrarily and without due care.
1. Section 3. Offence of money laundering
Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party of 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.
2. In the case of Ramani Mistry vs The Deputy Director Directorate of Enforcement (MANU/ML/0007/2013) the PMLA Appellate Authority interpreted the expression 'reason to believe' as follows: "The word 'Reason to Believe" is not same as suspicion or doubt. Belief is a higher level of the state of mind. When it is said that a person has Reason to Believe a thing, it means that the circumstances and facts known to him are such that a reasonable man by probable reasoning can conclude or infer regarding the nature of the thing concerned. It may not be an absolute conviction or inference. But it may be a possible conclusion or prima facie conclusion."
3. 2019 SCC OnLine ATPMLA 48
4. 2020 SCC OnLine Cal 384
5. 2015 SCC OnLine Del 11834
6. 2019 SCC OnLine Del 6428
7. 2019 SCC OnLine Del 7942
8. Writ Petition (C) 5657 of 2020 before the Delhi High Court
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.