2015 (3) TMI 1267 - HC - Money Laundering

Direction to banks to prohibit/freeze the withdrawal from the accounts maintained in the branches by the appellant No. 1 Group of Companies - Held that - (a) Impugned letter dated 19.09.2014 issued by respondent No. 3 requesting respondent banks (reporting entities under the Act) to prohibit/freeze withdrawal of monies from the account of the appellant s group of Companies is to be read as an indispensable temporary measure for preservation of evidence pending investigation and has been issued in aid of proceedings for attachment and seizure contemplated under section 5 or 7 of the Act and not to supplant them. Such incidental and consequential power being in aid to proceedings contemplated under the Act is held to be vested in the investigating agency in view of the inclusive definition of investigation under section 2(na) of PML Act, 2002. (b) Respondents banks being reporting entities under the Act are duty bound to assist the investigating agency in terms of section 54 of PML Act and therefore issuance of notice upon the respondents banks cannot be said to be illegal. (c) Failure to refer to other scheduled offences apart from the one under the SEBI Act in the impugned letter would not ipso facto invalidate the same in view the materials emanating from the records of investigation as also the saving provision engrafted in section 68 of the PML Act, 2002. (d) Impugned letter dated 19.09.2014 having been held to be a temporary measure in aid of proceedings under the Act cannot be an end it itself. Hence, embargo contained in the said letter cannot continue indefinitely but is required to be restricted to a time frame within which the respondents may initiate appropriate proceedings under the Act in respect of the accounts/assets referred therein. Accordingly, the impugned letter dated 19.09.2014 is modified and the embargo contained therein is directed to operate for a period of three months from date within which the respondent authorities are at liberty to initiate appropriate proceedings as contemplated under the Act, if not already done, in respect of the assets/accounts referred to therein. If the respondent authorities fail to initiate proceedings under the Act in respect of the accounts/assets referred to in the impugned letter within the aforesaid time frame, the respondent banks would be at liberty to permit the appellants to operate the said accounts/assets in accordance with law. The appeal is partly allowed.

Issues Involved:
1. Jurisdiction to issue the impugned letter dated 19.09.2014.
2. Applicability of the PML Act, 2002.
3. Legality of prohibiting/freezing withdrawal from the appellant's bank accounts.
4. Investigation scope under PML Act, 2002.
5. Temporary measures during investigation.

Issue-wise Detailed Analysis:

1. Jurisdiction to issue the impugned letter dated 19.09.2014:
The appeal challenges the jurisdiction of respondent No. 3 to issue the letter dated 19.09.2014 to respondent banks, prohibiting/freeze withdrawals from the appellant's accounts. The appellants argued that such power could only be exercised under sections 5 or 7 of the PML Act, 2002, which require recording reasonable belief based on materials in possession. The court, however, found that the impugned letter was issued as an incidental and consequential step necessary for preserving evidence pending investigation and was not an exercise of power under sections 5 or 7. The court held that the inclusive definition of "investigation" under section 2(na) of the PML Act allows for such temporary measures.

2. Applicability of the PML Act, 2002:
The appellants contended that the amounts collected through non-convertible debentures had already been refunded, and thus, the PML Act was not applicable. The court rejected this argument, stating that "proceeds of crime" under the PML Act includes not only the direct amounts collected but also any benefits or usufructs derived indirectly from the criminal activity. The court also noted that the investigation was not limited to the SEBI Act offense but extended to other scheduled offenses under the IPC, such as sections 420/120B, being investigated by the CBI.

3. Legality of prohibiting/freezing withdrawal from the appellant's bank accounts:
The court examined whether the direction to prohibit/freeze withdrawals was lawful. It found that such a measure was necessary to prevent the funds from being spirited away, which would render the investigation futile. The court held that the investigating agency must have the power to take such steps to preserve evidence and ensure effective enforcement of the Act. The court also noted that the respondent banks, as "reporting entities" under the Act, were duty-bound to assist the authorities under section 54 of the Act.

4. Investigation scope under PML Act, 2002:
The appellants argued that the investigation should be limited to the scheduled offense under the SEBI Act. The court disagreed, stating that an investigation is a dynamic process that can encompass other scheduled offenses as it progresses. The court emphasized that the investigation's scope is not restricted by the initial registration of the case and can include other offenses discovered during the investigation.

5. Temporary measures during investigation:
The court held that the impugned letter was a temporary measure for preserving evidence and was issued in aid of proceedings for attachment and seizure under sections 5 or 7 of the Act. The court emphasized that such measures are necessary to prevent the funds from being withdrawn and to ensure the effectiveness of the investigation. The court also noted that the impugned letter must be read as a temporary measure and cannot continue indefinitely.

Conclusion:
The court concluded that the impugned letter dated 19.09.2014 was a lawful and necessary temporary measure for preserving evidence pending investigation. The court modified the letter, directing that the embargo contained therein would operate for three months, within which the respondent authorities could initiate appropriate proceedings under the Act. If no proceedings were initiated within this period, the respondent banks would be at liberty to allow the appellants to operate the accounts/assets in accordance with the law. The appeal was partly allowed, and the findings were stated to be applicable only for the purpose of disposing of the appeal.

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