Introduction

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.

Illustrative Example

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.

Illustration Revisited

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.

Conclusion

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.

Footnotes

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.