Introduction

The Prevention of Money Laundering Act, 2002 (PMLA) was enacted
with an intention to forestall money-laundering and to offer for
confiscation of property derived from, or concerned in,
money-laundering. The Directorate of Enforcement (ED) is the
designated company accountable for investigation and prosecution in
relation to the offence of cash laundering.¹ In
addition to investigating/ prosecuting offences, the ED can also be
tasked with tracing and confiscating ‘proceeds of crime’.
For the aim of carrying out these targets, the ED is given
broad powers underneath the statute together with energy of search, seizure,
attachment, arrest and so forth.

The PMLA defines ‘proceeds of crime’ as “any
property derived or obtained, instantly or not directly, by any particular person
on account of legal exercise referring to a scheduled offence or
the worth of any such property or the place such property is taken or
held outdoors the nation, then the property equal in worth
held throughout the nation or overseas.” This is a large
definition and is commonly utilized to numerous kinds of properties
together with immovable property, stability in financial institution accounts, shares,
jewellery, autos, work and so forth.

In order to find out whether or not property is proceeds of crime, the
ED will consider whether or not the property might be traced to an offence
i.e. supply of the proceeds of crime. The ED will decide the
quantum of proceeds of crime concerned within the offence and can hint
the cash path by evaluating the financial institution statements and different information
of entities which have transacted with the people/entities that
have generated/obtained proceeds of crime by committing an
offence.

Such an investigation is performed to uncover the layering,
applied by the accused, to disguise the supply of the proceeds
of crime. Once the ED has purpose to consider that any property might
be proceeds of crime or associated to cash laundering, it’s going to
proceed to freeze/connect the property. Thereafter, such property
could also be confiscated, if the Special Court (i.e. the court docket designated
underneath the PMLA Act) finds that the property is concerned in cash
laundering or used within the fee of the offence of cash
laundering.

Illustrative Example

For the sake of illustration, Mr. X by Company XYZ commits
the crime of dishonest underneath the Indian Penal Code (IPC) by
defrauding a financial institution of INR 50 crores in December 2019. The funds
obtained from this offence are deposited within the checking account of
Company XYZ. Subsequently, in January 2020, Company XYZ enters into
transactions with 5 dummy corporations and transfers INR 10 crores to
every of those corporations underneath the guise of real transactions for
provide of consultancy companies. In February 2020, the 5 shadow
corporations every switch INR 10 crores to Mr. Y, the son of Mr. X.
Mr. Y instantly makes use of these funds to buy an immovable
property value INR 35 crores and work value INR 14 crores. In
March 2020, Mr. Y transfers INR 2 crores (of which INR 1 crore
pertains to share of sale proceeds of a co-owned property acquired
in 2010) to his son – Mr. Z and the identical stays in Mr. Z’s
checking account.

In this instance, the quantum of proceeds of crime is INR 50
crores. The ED will comply with the cash path by evaluating the financial institution
statements of Company XYZ, 5 dummy corporations, Mr. Y and Mr. Z. The
offence was dedicated in December 2019 and the proceeds of crime
might be traced to Mr. Y. Mr. Y bought the immovable property and
work after the date of the crime i.e. December 2019.
Therefore, the ED might decide that these properties, value INR 49
crores (immovable property value INR 35 crores and work value
INR 14 crores), are proceeds of crime, and therefore liable to be
hooked up/confiscated. It can also be probably that the ED will freeze the
checking account of Mr. Z on condition that INR 1 crore (out of INR 2 crores)
transferred to Mr. Z is proceeds of crime. The query stays as
to what’s the destiny of the extra INR 1 crore which was
transferred by Mr. Y to Mr. Z which can’t be stated to be proceeds
of crime?

Procedure for Freezing Accounts underneath Sections 17 and 20 of
the PMLA

In order to find out the reply to this query, one should
perceive the process and legislation concerning freezing of accounts
underneath the PMLA. The ED might both freeze or connect accounts
relying on the circumstances of the case. Invariably, the ED will
freeze financial institution accounts by software of Section 17 of the PMLA,
on condition that the funds in financial institution accounts are simply transferable. The
ED might freeze financial institution accounts by issuing a course to the involved
financial institution through which the account is held.

Section 17(1-A) empowers the ED to move an order to freeze
property, the place it’s not sensible to grab the identical, whereupon
the property can’t be transferred or handled with out prior
permission of the officer making such order. Copy of the freezing
order is to be served on the particular person involved i.e. account holder.
Reasons for issuance of the freezing order together with materials in
possession of the officer should be instantly forwarded to the
Adjudicating Authority (AA) underneath sealed envelope. Subsequently,
the officer should inside a interval of thirty days from such freezing,
file an software with the AA requesting retention of the
property.

Procedure for Adjudication underneath Section 8 of the
PMLA

In case the ED is looking for continuation of freezing, it should file
an software earlier than the AA by way of Section 17(4) of the PMLA.
Under Section 8 of the PMLA, on receipt of such software, if the
AA has causes to consider that any particular person has dedicated an offence
of cash laundering or is in possession of proceeds of crime, it
might subject discover of not lower than 30 days on such particular person. The
discover should name upon the particular person to point the supply of his
revenue, incomes or property, out of which he has acquired the frozen
property together with proof/info he depends upon and to point out
trigger why such property shouldn’t be declared to be property
concerned in cash laundering and confiscated by the Central
Government.

The AA should grant the particular person claiming the frozen property an
alternative of listening to. The AA can also be required to contemplate any
reply to the discover filed by such particular person and to consider
any related supplies positioned earlier than it. Thereafter, the AA should,
by an order, report whether or not the property is concerned in
money-laundering. Third-parties who haven’t been served discover however
declare an curiosity within the property are additionally entitled to an
alternative of being heard to show that the property shouldn’t be
concerned in money-laundering. Such events should first search to be
impleaded within the proceedings earlier than the AA.

Under Section 20 of the PMLA, the place property has been frozen and
the ED has causes to consider ² that such property is
required to be retained for the needs of adjudication underneath
Section 8, such property might proceed to stay frozen for a interval
not exceeding 180 days from the date on which such property was
frozen. Upon expiry of the stated interval, the property should be
returned to the particular person from whom it was seized except the AA
permits the continuation of freezing of the stated property past
this era. Therefore, the AA should determine an software underneath
Section 17(4) inside a interval of 180 days from the date of the
order of freezing handed underneath Section 17 of the PMLA.

In the occasion that the AA decides that the property is concerned
in money-laundering, it shall move an order in writing confirming
retention of the property, through which case the property shall stay
frozen throughout investigation for a interval not exceeding 12 months or
pendency of proceedings underneath the PMLA or in case the property has
been seized on the premise of a letter of request, the proceedings
earlier than the competent court docket underneath the corresponding legislation of the
requesting nation. The freezing order shall develop into remaining in case
an order of confiscation is handed by the Special Court underneath
Sections 8(5) or 8(7) by way of the PMLA or Section 58(b) or
subsection (2-A) of Section 60 by way of a letter of request
acquired from a overseas nation.

Recent Judgments on Freezing of Accounts

In plenty of latest judgments, the PMLA Appellate Tribunal and
varied High Courts have handled the difficulty of freezing of
accounts by the ED in a way that isn’t 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 thought-about a case whereby the ED imposed a debit
freeze on the financial institution accounts of the appellant. The ED filed an
software underneath Section 17(4) looking for continuation of the
freezing order which was rejected by the AA. Despite rejection of
the appliance, the ED didn’t defreeze the accounts. Thereafter,
the ED filed a recent freezing order and software underneath Section
17(4). Despite expiry of 180 days from the preliminary freezing order,
the AA handed order within the second software directing
continuation of the freeze. The PMLA Appellate Tribunal held that
AA didn’t have jurisdiction to substantiate 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} discover issued by
the AA underneath Section 8(1) that didn’t disclose ’causes to
consider’ was invalid. The High Court additional held that the
absence of communication of causes to consider within the show-cause
discover “wouldn’t be a mere irregularity however an illegality
vitiating the discover itself and, consequently, the next
continuing.” Consequently, the High Court set-aside the
order handed by the AA in addition to the ED’s attachment order.
Interestingly, within the earlier case of Farida Begum Biswas &
Ors. vs. Union of India ⁵, the Delhi High Court
rejected a writ petition filed underneath Article 226 of the
Constitution of India looking for quashing of a present trigger discover underneath
Section 8(1) of the PMLA, on the bottom that the stated petition was
untimely on condition that the petitioners had an efficient and
efficacious treatment underneath PMLA.

In Abdullah Ali Balsharaf & Ors vs. Directorate of
Enforcement & Ors. ⁶ a Single Judge of the
Delhi High Court thought-about a writ petition difficult the
instructions issued by the ED to the BSE leading to withholding of
the proceeds of fairness shares offered by the petitioners by BSE.
The ED handed freezing order underneath Section 17(1-A) with respect to
the shares and filed an software underneath Section 17(4). One of the
main points on this case was whether or not the ED’s directions
to BSE have been sustainable in legislation. In this regard, the ED argued that
the directions issued by the ED to the BSE have been in train of
powers conferred underneath Section 102 of the Code of Criminal
Procedure, 1973 (CrPC). Section 102 permits a police officer to
seize property suspected to be concerned within the fee of an
offence versus Section 17 of the PMLA, which requires
freezing to be preceded by the desired officer having
’causes to consider’ that the property sought to be frozen
is proceeds of crime or associated to a criminal offense and after recording the
causes in writing.

The High Court held that the scheme of seizure underneath the CrPC
together with the checks and balances in train of such energy, is
wholly inconsistent with the scheme of the provisions underneath the
PMLA. Section 65 of the PMLA gives that the CrPC could be apply,
in as far as they don’t seem to be inconsistent with the PMLA, to arrest,
seizure, confiscation and so forth. The court docket held that Section 65 wouldn’t
apply within the current 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 couldn’t
subject orders ‘freezing’ Demat accounts by resorting to the
provisions of Section 102 of the CrPC and the communications issued
to BSE have been with out authority of legislation. Interestingly, the ED’s
actions additionally resulted in a monetary lack of INR 190 crores to the
petitioners for the reason that value of securities had subsequently been
considerably eroded. The court docket said that it’s open to the
petitioners to hunt acceptable treatment together with compensation for
any loss suffered by them on account of the unlawful actions on the
a part of the ED.

In Directorate of Enforcement vs Abdullah Ali Balsharaf
& Ors. ⁷ the Division Bench of the Delhi High
Court handled an attraction filed by the ED in opposition to the
abovementioned order handed by the Single Judge. The Division Bench
upheld the choice of the Single Judge and said that
“we maintain that substances of part 17 of PMLA should be
scrupulously complied with and it’s impermissible for seizure to
be made by relying as an alternative upon the provisions of part 102 of
the CrPC.” The Division Bench reiterated that the ED should
strictly adjust to the requirement of getting purpose to consider
whereas passing a freezing order. The ED has filed attraction in opposition to
this choice earlier than the Supreme Court and the matter is sub
judice.

Most lately, in Hamilton Housewares Pvt. Ltd. vs.
Directorate of Enforcement ⁸ the Delhi High Court
is contemplating a case whereby the ED has seized sure financial institution
accounts of the petitioners on the premise of a letter of request
from the Government of Brazil. The petitioners filed writ petitions
on the bottom that the quantum of the suspect transaction was far
lower than the stability standing within the frozen financial institution accounts and
therefore the freezing order was extreme. The High Court famous {that a}
certain amount had been talked about qua the petitioners within the
software underneath Section 17(4) filed by the ED and held that the
motion of freezing the whole financial institution accounts of the petitioners
appeared prima facie unreasonable and never approved by
legislation. Accordingly, as an interim measure, the High Court stayed the
freezing order topic to the petitioners securing the stated
certain amount by means of a Bank Guarantee/Fixed Deposit or by
sustaining a deposit of an equal quantity of their financial institution
accounts in query. This matter is presently sub judice
earlier than the Delhi High Court.

Illustration Revisited

In our illustration, we’re contemplating a case the place Mr. Z’s
account has been frozen through which he holds INR 2 crores. Out of
this, INR 1 core can’t be stated to be proceeds of crime.

In this example, Mr. Z must be issued a discover by the ED
and thereafter the AA, and needs to be given a chance to look
earlier than the AA to make a case that the INR 1 crore was not concerned
in cash laundering. Mr. Z must set up the supply of
revenue, incomes or property, out of which or via which he
acquired the INR 1 crore in query. In this case, the sale of a
co-owned property.

Moreover, Mr. Z can also spotlight that the co-owned property
was acquired a lot previous to the crime and has no connection to cash
laundering. Further, Mr. Z may additionally argue that the fraud quantity
was INR 50 crores however ED has hooked up property and frozen a financial institution
account with an mixture worth of INR 51 crores. Mr. Z can also
search to offer a financial institution assure/fastened deposit of INR 1 crore
(quantum of proceeds of crime within the checking account) and search
de-freezing of the checking account.

Furthermore, within the occasion that there’s any procedural lapse
dedicated by the ED or the AA, it might be open to Mr. Z to use
the authorized maxim that if the statute requires a factor to be completed in
a specific method, it should be completed in that method or by no means.
Mr. Z might problem an unlawful motion by the ED or AA earlier than the
PMLA Appellate Tribunal or High Court.

If Mr. Z is profitable, the INR 1 crore which has been frozen,
could be launched to Mr. Z. However, in case the AA shouldn’t be
happy and orders the retention of the quantity, Mr. Z might
strategy the PMLA Appellate Tribunal in attraction underneath Section 26 of
the PMLA or Special Court in the course of the trial underneath Section 8(8) of
the PMLA.

Conclusion

The freezing of accounts can have drastic results on the holders
of the account together with ensuing within the monetary loss of life of the
particular person/entity whose accounts are frozen. Therefore, the ED and
AA should take utmost care to make sure that the process outlined
underneath the PMLA is scrupulously adopted. Accounts should be frozen
solely when the ED has a bona fide ‘purpose to
consider’ on the premise of the fabric in its possession.
Furthermore, the ED ought to freeze accounts in a proportionate
method and solely to the extent that the property within the accounts can
be traced to cash laundering or proceeds of crime. The AA should
subject correct discover underneath Section 8(1) which incorporates causes to
consider after software of thoughts. The AA should present a good
alternative of listening to earlier than passing an order for continuation of
a freezing order, whether it is happy that the property is proceeds
of crime or in any other case associated to crime. Due care should be taken to
be sure that the timelines supplied underneath the statute are adopted.
In different phrases, the checks and balances supplied with respect to
freezing of financial institution accounts underneath the PMLA should 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 extreme. However, such intervention and
consequent reduction are normally after going by pointless
hardship by the accountholder. Therefore, it’s crucial that the
ED doesn’t train its energy to freeze accounts arbitrarily and
with out due care.

Footnotes

1. Section 3. Offence of cash
laundering

Whosoever instantly or not directly makes an attempt
to indulge or knowingly assists or knowingly is a celebration of is
truly concerned in any course of or exercise related with the
proceeds of crime together with its concealment, possession,
acquisition or use and projecting or claiming it as untainted
property shall be responsible 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 ‘purpose to consider’ as follows: “The
phrase ‘Reason to Believe” shouldn’t be identical as suspicion or
doubt. Belief is a better stage of the mind-set. When it’s
stated that an individual has Reason to Believe a factor, it implies that the
circumstances and information recognized to him are such {that a} affordable man
by possible reasoning can conclude or infer concerning the character of
the factor involved. It might not be an absolute conviction or
inference. But it could be a doable 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 earlier than
the Delhi High Court

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