Enforcement Directorate’s power of freezing bank accounts – Delhi High Court prescribes Dos & Don’ts.

Recently in JK Tyre & Industries Limited v Directorate of Enforcement – W.P. (C) 5713 of 2020 & connected matters (writ petition/case/matter), the Hon’ble High Court of Delhi held that the power of Enforcement Directorate (ED) and Adjudicating Authority (AA) to freeze bank accounts under Prevention of Money Laundering Act, 2002 (PMLA) must be exercised in proportion and only qua the amount alleged to be laundered.

Background:

The ED passed a freezing order under Section 17 (1A) of the PMLA in July 2020, freezing bank accounts of the Petitioners and other companies in India, and commenced proceedings under the PMLA against the said 66 Indian companies. Thereafter, the matter was referred to the AA by the ED under Section 17(4) of the PMLA, pursuant to which, the AA issued notices to the Petitioner under Section 8 (1) of the PMLA to show cause as to why their properties seized or frozen should not be retained, same being involved in money laundering under PMLA.

In the meanwhile, the Petitioners filed the present writ petitions praying the Hon’ble Court to quash and set aside the freezing orders passed by the ED. The Delhi High Court passed an interim order dated 26.08.2020 in the present writ petitions directing the Petitioners to secure the amounts qua which the allegations of money laundering pertained, in a fixed deposit/bank account. The order which froze the bank accounts of the Petitioners passed by the ED was stayed, subject to the alleged laundered amount being maintained by the Petitioners.

Thereafter, the AA passed an order dated 28.12.2020 whereby it confirmed the freezing orders passed by the ED, however, only in respect of the amounts mentioned by the Authorities in letter of request and not the entire bank accounts.

Under this writ petition, the Petitioners had challenged the order dated 28.12.2020 on the ground that neither the relied upon documents (RUD) were provided to the Petitioners, nor they were given sufficient opportunity to put forth their case by the AA, and still a carte blanche order of freezing of bank accounts was passed by the AA.

Issues:

The Hon’ble Court streamlined the contentions of the parties into the following eight questions:

“27…”…

What is the procedure to be followed by ED when letters of request are received under Section 60 of the PMLA from a contracting state?

Whether ED Is duty bound to provide the ‘reasons to believe’ while passing orders under Section 17 of the PMLA, to the concerned parties?

What is the procedure to be followed by the ED while forwarding the ‘reasons to believe” and the application under Section 17(4) of the PMLA to the AA seeking continuation of the freezing orders and confiscation?

Whether the ED ought to transmit all the documents, which are in its possession, to the AA while sending the same in a sealed cover under Rule 8 of The PMLA (Forms, Search and Seizure or Freezing and the manner of forwarding the reasons and material to the AA, impounding and custody of records and the period of retention) Rules 2005?

What is the procedure to be followed by the AA, upon receipt of the application under Section 17(4) of the PMLA?

What is the level of satisfaction to be recorded by the AA prior to issuance of show cause notice under section 8(1) of the PMLA?

Whether while issuing the show cause notice, all the ‘Relied Upon Documents’ have to be supplied to the parties concerned?

What is the procedure to be followed for providing inspection of records, and for giving a reasonable hearing to the parties, prior to passing of orders by the AA under the PMLA?”

Held:

The Hon’ble Court, while answering the framed questions above, advanced the following pertinent interpretations/observations:

The Hon’ble Court held that the request for freezing, or seizure of assets/property has to have a ‘reasonable basis’ and there have to be sufficient grounds for taking the action. Furthermore, the Hon’ble Court held that the ED as also the AA would have to adhere to all the provisions in respect of recording the ‘reasons to believe’, supplying the RUD etc. However, this is subject to the fact that the said question of law as to whether ED has to have a reasonable basis is pending determination before the Apex Court in SLP(C) No. 12865/2018 titled Union of India and Ors. vs. J. Sekar.

The Hon’ble Court held that the specific procedure that is contemplated under the PMLA, in respect of investigations, seizures and freezing of assets/property/ bank accounts, ought to be strictly and scrupulously followed, in the manner prescribed under the PMLA.

The Hon’ble Court further held that the concerned officer was bound to transmit ‘all the material in his possession’ to the AA, in accordance with the procedure mentioned under Rule 8 of The Prevention of Money Laundering (Forms, Search and Seizure or Freezing and the manner of forwarding the reasons and material to the Adjudicating Authority, Impounding and Custody of Records and the Period of Retention) Rules, 2005 (PMLA Search & Seizure Rules, 2005). The Hon’ble Court while elaborating the scope of material in possession held that it means all material in possession, irrespective of whether the same is/was referred to in the ‘reasons to believe’ or not.

The Hon’ble Court held that AA upon a complaint filed by ED, must independently apply its mind and record its ‘reason to believe’ under Section 8 of PMLA. The Hon’ble Court held that the fact that the AA is again required to have ‘reason to believe’ as per the provisions of the PMLA showed that there is a two-tier process which is to be followed prior to the issuance of the show cause notice, namely- satisfaction by the ED and thereafter, independent satisfaction by the AA.

The Hon’ble Court further held that it would not be permissible for the ED to show any documents or material to the Adjudicating Authority outside of the hearing, or behind the back of the parties concerned. The hearing must be transparent and in the presence of the parties concerned. Unilateral hearings in the absence of the opposing party would not be permissible before the AA.

The Hon’ble Court, citing the recent decision of the Hon’ble Apex Court in “M/s Radha Krishan Industries v. State of Himachal Pradesh and Ors., (2021) 6 SCC 771”, held that freezing bank accounts is a draconian measure. Elucidating the concept of freezing of bank accounts in such cases, the Hon’ble Court held that:

“107…. such freezing of bank accounts could lead to disruption of personal lives and/or of businesses. Thus, measures such as freezing of bank accounts ought to be proportionate and taken only to the extent required. If any clarifications are required from authorities in the contracting state, the ED ought to seek those clarifications, prior to resorting to such measures of freezing. As is seen in the present case, the ED upon seeking clarifications from the Brazilian Authorities restricted the freezing amounts, which in their opinion were the amounts involved in the commission of offences. This action was several months after the initial freezing order.”

Accordingly, the Hon’ble Court allowed the writ petitions and set aside the order dated 28.12.2020, and further directed the Petitioners to furnish bank guarantees qua the amount frozen in the interim, pursuant to which the Hon’ble Court would proceed to de-freeze the bank accounts of the Petitioners on a case-to-case basis.

Analysis

The above ruling is significant one as it interprets the legislative intent of various provisions of PMLA and clarifies the procedure that ought to be followed by ED as also the AA. The salient takeaways from the ruling are set out hereunder:

The Hon’ble Court clarifies that proceedings at the instance of contracting states under Section 60 of the PMLA are no different than domestic investigations, and no greater deference shall be accorded to such investigations. Such directions of strict compliance diminish the scope of non-compliance with extant laws by the ED as also the AA in investigations under Section 60 of the PMLA.

The Hon’ble Court’s interpretation of Rule 8 of PMLA Search & Seizure Rules, 2005, and Section 8 of PMLA read with Regulation 13 (2) of the Adjudicating Authority (Proecudre) Regulations, 2013, clarifies that the exercise under these provisions ought to be carried out, not only proportionately but also strictly. Therefore, resultantly whatever documents would be required for the effective adjudication of proceedings including the RUD as also other documents relied upon by the ED, should be provided to the parties.

The limitation imposed upon the ED to adduce additional documents not forming part of the record at a later stage by the Hon’ble Court, will promote transparency and speedy disposal of cases.

The observation of the Hon’ble Court qua the emerging trend of non-freezing of entire bank account/furnishing bank guarantees in lieu of the alleged laundered amount, will limit the high handedness of the ED as also the AA, and further tab on the arbitrary power of the ED to unilaterally freeze bank accounts of the accused.

While the above principles have been ingrained in the statute since the beginning, a further reiteration of the same by the Hon’ble Court is a welcome move.