Introduction

The Prevention of Money Laundering Act, 2002 (PMLA) was enacted
with an purpose to stop 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 answerable for investigation and prosecution in
relation to the offence of cash laundering.¹ In
addition to investigating/ prosecuting offences, the ED can be
tasked with tracing and confiscating ‘proceeds of crime’.
For the aim of conducting these targets, the ED is given
broad powers beneath the statute together with energy of search, seizure,
attachment, arrest and many others.

The PMLA defines ‘proceeds of crime’ as “any
property derived or obtained, straight or not directly, by any individual
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 usually utilized to numerous forms of properties
together with immovable property, steadiness in financial institution accounts, shares,
jewellery, autos, work and many others.

In order to find out whether or not property is proceeds of crime, the
ED will consider whether or not the property will 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,
carried out by the accused, to disguise the supply of the proceeds
of crime. Once the ED has purpose to consider that any property could
be proceeds of crime or associated to cash laundering, it is going to
proceed to freeze/connect the property. Thereafter, such property
could also be confiscated, if the Special Court (i.e. the courtroom designated
beneath 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 way of Company XYZ commits
the crime of dishonest beneath 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 beneath 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
will 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 could 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
connected/confiscated. It can be doubtless that the ED will freeze the
checking account of Mr. Z provided 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 mentioned to be proceeds
of crime?

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

In order to find out the reply to this query, one should
perceive the process and regulation relating to freezing of accounts
beneath the PMLA. The ED could 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,
provided that the funds in financial institution accounts are simply transferable. The
ED could freeze financial institution accounts by issuing a route to the involved
financial institution wherein the account is held.

Section 17(1-A) empowers the ED to cross an order to freeze
property, the place it isn’t 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 individual 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) beneath 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 beneath Section 8 of the
PMLA

In case the ED is searching for continuation of freezing, it should file
an software earlier than the AA when it comes to 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 individual has dedicated an offence
of cash laundering or is in possession of proceeds of crime, it
could challenge discover of not lower than 30 days on such individual. The
discover should name upon the individual to point the supply of his
revenue, incomes or belongings, out of which he has acquired the frozen
property together with proof/data 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 individual claiming the frozen property an
alternative of listening to. The AA can be required to contemplate any
reply to the discover filed by such individual 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 beneath
Section 8, such property could proceed to stay frozen for a interval
not exceeding 180 days from the date on which such property was
frozen. Upon expiry of the mentioned interval, the property should be
returned to the individual from whom it was seized except the AA
permits the continuation of freezing of the mentioned property past
this era. Therefore, the AA should determine an software beneath
Section 17(4) inside a interval of 180 days from the date of the
order of freezing handed beneath Section 17 of the PMLA.

In the occasion that the AA decides that the property is concerned
in money-laundering, it shall cross an order in writing confirming
retention of the property, wherein case the property shall stay
frozen throughout investigation for a interval not exceeding one year or
pendency of proceedings beneath the PMLA or in case the property has
been seized on the idea of a letter of request, the proceedings
earlier than the competent courtroom beneath the corresponding regulation of the
requesting nation. The freezing order shall change into last in case
an order of confiscation is handed by the Special Court beneath
Sections 8(5) or 8(7) when it comes to the PMLA or Section 58(b) or
subsection (2-A) of Section 60 when it comes to a letter of request
acquired from a overseas nation.

Recent Judgments on Freezing of Accounts

In quite a lot of latest judgments, the PMLA Appellate Tribunal and
numerous High Courts have handled the difficulty of freezing of
accounts by the ED in a fashion that’s 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 thought-about a case whereby the ED imposed a debit
freeze on the financial institution accounts of the appellant. The ED filed an
software beneath Section 17(4) searching for continuation of the
freezing order which was rejected by the AA. Despite rejection of
the applying, the ED didn’t defreeze the accounts. Thereafter,
the ED filed a contemporary freezing order and software beneath 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 beneath 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 beneath Article 226 of the
Constitution of India searching for quashing of a present trigger discover beneath
Section 8(1) of the PMLA, on the bottom that the mentioned petition was
untimely provided that the petitioners had an efficient and
efficacious treatment beneath 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 way of BSE.
The ED handed freezing order beneath Section 17(1-A) with respect to
the shares and filed an software beneath 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 regulation. In this regard, the ED argued that
the directions issued by the ED to the BSE have been in train of
powers conferred beneath 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 required officer having
’causes to consider’ that the property sought to be frozen
is proceeds of crime or associated to against the law and after recording the
causes in writing.

The High Court held that the scheme of seizure beneath the CrPC
together with the checks and balances in train of such energy, is
wholly inconsistent with the scheme of the provisions beneath the
PMLA. Section 65 of the PMLA gives that the CrPC can be apply,
in as far as they aren’t inconsistent with the PMLA, to arrest,
seizure, confiscation and many others. The courtroom 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
challenge 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 regulation. 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 courtroom acknowledged that it’s open to the
petitioners to hunt applicable 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 towards the
abovementioned order handed by the Single Judge. The Division Bench
upheld the choice of the Single Judge and acknowledged that
“we maintain that components 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 towards
this determination earlier than the Supreme Court and the matter is sub
judice.

Most not too long ago, 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 idea 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 steadiness standing within the frozen financial institution accounts and
therefore the freezing order was extreme. The High Court famous {that a}
certain quantity had been talked about qua the petitioners within the
software beneath Section 17(4) filed by the ED and held that the
motion of freezing your complete financial institution accounts of the petitioners
appeared prima facie unreasonable and never licensed by
regulation. Accordingly, as an interim measure, the High Court stayed the
freezing order topic to the petitioners securing the mentioned
certain quantity by the use 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 wherein he holds INR 2 crores. Out of
this, INR 1 core can’t be mentioned to be proceeds of crime.

In this example, Mr. Z must be issued a discover by the ED
and thereafter the AA, and must be given a possibility to seem
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 belongings, out of which or by way of 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 might additionally argue that the fraud quantity
was INR 50 crores however ED has connected belongings and frozen a financial institution
account with an combination 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 could be open to Mr. Z to use
the authorized maxim that if the statute requires a factor to be executed in
a selected method, it should be executed in that method or in no way.
Mr. Z could 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,
can be launched to Mr. Z. However, in case the AA shouldn’t be
happy and orders the retention of the quantity, Mr. Z could
method the PMLA Appellate Tribunal in attraction beneath Section 26 of
the PMLA or Special Court through the trial beneath 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
beneath the PMLA is scrupulously adopted. Accounts should be frozen
solely when the ED has a bona fide ‘purpose to
consider’ on the idea of the fabric in its possession.
Furthermore, the ED ought to freeze accounts in a proportionate
method and solely to the extent that the belongings within the accounts can
be traced to cash laundering or proceeds of crime. The AA should
challenge correct discover beneath 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
make sure that the timelines offered beneath the statute are adopted.
In different phrases, the checks and balances supplied with respect to
freezing of financial institution accounts beneath 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 often after going by way of 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 straight 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 linked 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 similar as suspicion or
doubt. Belief is a better stage of the frame of mind. When it’s
mentioned that an individual has Reason to Believe a factor, it signifies that the
circumstances and information recognized to him are such {that a} affordable man
by possible reasoning can conclude or infer relating to the character of
the factor involved. It will not be an absolute conviction or
inference. But it might be a potential 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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