Supreme Court on de-freezing of bank accounts under the Prevention of Money Laundering Act, 2002

A three-judge Bench of the Supreme Court, comprising Chief Justice of India SA Bobde and Justices AS Bopanna and V Ramasubramanian, on February 3, allowed an appeal filed on behalf of OPTO Circuit India Ltd. challenging an August 2020 order passed by the Karnataka High Court.

While doing so, the Supreme Court quashed the communication issued by the Directorate of Enforcement (ED) and directed the respondent banks i.e. Axis Bank, Induslnd Bank and State Bank of India, to de-freeze the accounts of the appellants frozen on account of allegations of foreign diversion of funds made.

The primary question before the Court was the legality of the freezing of the accounts of the appellants.

Background Facts

The Supreme Court refused to interfere in the proceedings instituted under the Prevention of Money Laundering Act, 2002 (PMLA) in the present appeal. The proceedings before the High Court arose out of an action initiated by the Central Bureau of Investigation (CBI), which led the ED to direct the respondent banks to “debit freeze/stop operations” of the accounts of the appellant. The allegations contained in the complaint instituted by the State Bank of India were of foreign diversion of funds to the tune of Rs. 354.32 crore.

The Supreme Court concurred with the observations of the High Court with respect to the scope of parallel proceedings under Section 3 and 4 of the PMLA. However, it observed that the question as to whether the communication directing the freezing of the accounts was legally tenable or not should have been evaluated under the test of “due process” contemplated under the Act.

Applicability of Section 17(1) of the PMLA, 2002

It was submitted by the ED that the directions for freezing of the concerned accounts were issued to “stop the layering/diversion and safeguarding the proceeds of crime.” However, it was also submitted that the same was not issued in accordance with Section 17(1) of the Act, which empowers the enforcement authority to order search and seizure of property or records, provided the same is done on the basis of presence of cogent “reasons to believe.”

The Supreme Court reiterated that the powers exercised by the concerned authorities should be in accordance with the provisions of the Act, and since bank accounts fall squarely within the ambit of both “property” and “records”, any order freezing the same must be in line with the procedure laid down under Section 17 of the Act.

The High Court of Bombay in the case of Digambar Kamat & Ors v. Joint Director (PJZO), Directorate of Enforcement, Government of India & Ors observed:

“32. On a plain reading of the provisions of Section 5(1) of the PMLA it is apparent that the director or the authorized officer has powers to provisionally attach properties involved in money laundering, however, such power is hedged by the crucial circumstance that the director or the authorized officer must have reason to believe that the two predicates referred to in clauses (a) and (b) as aforesaid exist or are fulfilled. Further, it is not sufficient, that the director or the authorized officer merely entertains such reason to believe in his mind but further, the reasons for such belief are required to be recorded in writing. At least on a plain reading of the provisions of Section 5(1) of the PMLA, it is apparent that the two predicates in clauses (a) and (b) have to be construed conjunctively and not disjunctively as suggested by Mr. Vaze, learned counsel for the ED. This means that the director or the authorized officer before he proceeds to make an order under Section 5(1) of the PMLA, must have reason to believe, on the basis of material in his possession, not only any person is in possession of any proceeds of crime but further, such proceeds of crime are likely to be concealed, transferred or dealt with to frustrate confiscation proceedings under Chapter III of PMLA.”

The Delhi High Court in the case of J Sekar & Ors v. Union of India & Ors observed:

“72. Reasons to believe cannot be a rubber stamping of the opinion already formed by someone else. The officer who is supposed to write down his reasons to believe has to independently apply his mind. Further, and more importantly, it cannot be a mechanical reproduction of the words in the statute. When an authority judicially reviewing such a decision peruses such reasons to believe, it must be apparent to the reviewing authority that the officer penning the reasons has applied his mind to the materials available on record and has, on that basis, arrived at his reasons to believe...

…75. There are two reasons to believe. One recorded by the officer passing the order under Section 5(1) PMLA and the other recorded by the AA under Section 8(1) PMLA. Both these reasons to believe should be made available to the person to whom notice is issued by the AA under Section 8(1) PMLA. The failure to disclose, right at the beginning, the aforementioned reasons to believe to the noticee under Section 8(1) PMLA would not be a mere irregularity but an illegality. A violation thereof would vitiate the entire proceedings and cause the order of provisional attachment to be rendered illegal.”

Applicability of the Code of Criminal Procedure, 1973

The Bench rejected the ED’s alternative argument that the seizure under challenge is sustainable under Section 102 of the Code of Criminal Procedure (CrPC), 1973. It reiterated that the PMLA is a special legislation endowed with a scheme which is different from general procedural laws, and which also provides for specific provisions governing the power of seizure and the procedure to effect the same. The Bench also observed that the impugned freeze does not even satisfy the conditions laid down under the provisions of the CrPC.

The Bench in this regard interestingly remarked:

“13. The action sought to be sustained should be with reference to the contents of the impugned order/communication and the same cannot be justified by improving the same through the contention raised in the objection statement or affidavit filed before the Court.”

Compliance under Section 17 of the PMLA held mandatory

The Court emphasized on the importance of drawing a balance between the stated objectives of the Act and protecting an accused person from arbitrary action outside the purview of permissible action. It observed that in the facts of the present case, where an order freezing the accounts of the appellant was made solely on the basis of a communication directed to the Anti-Money Laundering (AML) Officer, such action did not satisfy the “reasons to believe” test as contemplated under the Act.

The Bench observed that the authorities had failed to comply with the mandatory requirements as laid down under Section 17 of the Act, particularly the failure to record “belief of commission of the act of money laundering” and of filing an application before the Adjudicatory Authority, PMLA after affecting such seizure.

The Court in this regard also reiterated the principle that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner alone, which reaffirms the position adopted by the Courts in cases under the PMLA, 2002, where the authorities are held to be bound by the procedure employed in the statute in order for their action to be deemed to be legally sustainable.

While analyzing the scope of the powers available to the ED, the Bench observed that even though adequate powers were vested with the authorities, such powers are strictly circumscribed by the procedure laid down under the Act. In light of the same, the Bench held that the freezing of the accounts of the appellant was legally untenable on account of non-compliance with the procedure established under the Act.

The way forward

The decision of the Supreme Court reaffirms the position with respect to the mandatory requirement of presence of “reasons to believe” as well as strict compliance with the procedure contemplated under the Act before depriving any individual or entity of their property. The observations made by the Court are bound to have a far-reaching impact on proceedings under the PMLA, 2002 before the Adjudicatory Authority as well as the appellate courts, thereby ensuring that the actions of the enforcement authorities are within the letter of the law.

Jai Anant Dehadrai is an Advocate practicing in Delhi and Ashna Chhabra is an Associate at Dehadrai & Company.