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2019 (1) TMI 515 - HC - Money LaunderingValidity of communications issued by officers of the Enforcement Directorate to the BSE - attachment of equity shares of KRBL Ltd. held by the petitioners in their Demat Accounts with SMC - Withholding of the proceeds of equity shares sold by the petitioners on the platform of respondent no.2 - prohibition of any debit transaction in the Demat Accounts. Held that - In terms of Section 8(1) of the PMLA, the Adjudicating Authority is required to examine the complaint filed under Section 5(5) of the PMLA or an application made under Section 17(4) of the PMLA. If on receipt of such complaint or application, the adjudicating authority has reason to believe that a person has committed an offence of money laundering or is in possession of the proceeds of crime, he is required to serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets or the means with which he has acquired the property which is provisionally attached under Section 5(1) of the Act or seized or frozen under Section 17 of the PMLA - In either case, the Adjudicating Authority is required to pass an order within a period of one hundred and eighty days from the date of the order of provisional attachment under Section 5(1) or from the date of order of seizure/freezing passed under Section 17 of the PMLA. This is explicitly clear by the plain language of Section 5(1) of the PMLA. In terms of Section 20 of the PMLA, any property seized under Section 17 or frozen under Section 17(1A) of PMLA can be retained or if frozen, continue to remain frozen for a period not exceeding one hundred and eighty days. Any property can be provisionally attached under Section 5 or be seized under Section 17 or be frozen under Section 17(1A) of the PMLA. However, any such order can be passed only if the necessary checks and balances are complied with; namely, that the seizure or attachment is preceded by the concerned authority having reason to believe that such properties are proceeds of crime or are otherwise related to crime - It is axiomatic that no order of freezing can be passed except in accordance with the provisions of Section 17(1A) of the PMLA. The reliance placed on provisions of Section 65 of the PMLA is misplaced. By virtue of Section 65, the provisions of Cr.P.C. apply only insofar as they are not inconsistent with the provisions of the PMLA. There can be little doubt that scheme of seizure under Section 102, Cr.P.C. is inconsistent with the provisions relating to attachment and seizure of property under the PMLA. The contention that officers of the Enforcement Directorate could issue orders of freezing under Section 102 of Cr.P.C. is rejected and the communications issued by the Enforcement Directorate to BSE are, plainly, without authority of law - it is not necessary to examine whether the series of communications sent by the officers of Enforcement Directorate for interdicting the transaction relating to sale of 64,94,891 equity shares of KRBL Ltd. are otherwise sustainable in law. However, for the sake of completeness, this Court considers it apposite to also examine the question whether such communications could be issued under the provisions of Section 102 Cr.P.C. Plainly, provisions of Section 102 Cr.P.C. do not empower any police officer to nullify a transaction. The sale of shares of KRBL Ltd. were complete and SMC had tendered the shares and M/s Pabrai Investment Fund had tendered the consideration and was entitled to the said securities. The petitioners were entitled to the consideration paid by M/s Pabrai Investment Fund. By directing BSE to release funds to M/s Pabrai Investment Fund, the Deputy Director of the Enforcement Directorate had proceeded further; he had interdicted the BSE from effecting the clearing and, by the letter dated 23.03.2018, the Assistant Director of the Enforcement Directorate had nullified the sale transaction that was complete. No authority for such actions can be found in section 102 Cr. PC. A police officer cannot set aside a transaction of sale and purchase of shares under the provisions of Section 102 Cr.PC. This Court pointedly asked Mr Singh, the learned counsel for the respondents as to under which authority did the Assistant Director, PMLA issue the communication dated 23.03.2018. Apart from contending that such action was bonafide, there was no explanation forthcoming as to under which provision of law, this direction had been issued. Accordingly, 5109 shares of KRBL Ltd., which were sold by the petitioners, were released to the counter parties (purchasers) - However, on instructions of the Enforcement Directorate, BSE continued to withhold 64,94,891 shares of KRBL Ltd. and ₹30,35,006.90 which were received as consideration for the sale of 5109 shares. It is seen that orders under Section 17 of the PMLA freezing the said shares and the amount released in the bank account of the petitioners has since been passed and, the petitioners have preferred an appeal before the Appellate Tribunal. Keeping this in view, no further orders are being passed and it would be open for 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 respondents. Whether the provisions of the PMLA are applicable in respect of freezing orders passed under Section 17(1A) of the PMLA in respect of the shares of KRBL Ltd.? - Held that - As is apparent from the above that whilst it is clear that RAKGT is alleged to have received the alleged proceeds of crime, it is unclear on what basis it is alleged that the petitioners are recipients of proceeds of crime. Clearly, a ledger entry is not a property and cannot be the proceeds of crime. It appears from the reading of the counter affidavit that it is the Enforcement Directorate s allegation that certain funds were received by RAKGT which were essentially kickbacks paid by AgustaWestland. The receipt of the said amounts are reflected as credit entries against M/s Omar Ali Balsharaf-GK. In other words, books of RAKGT reflect that the said sums have been received from petitioner No.2 - this court in order to seek clarity, by order dated 27.09.2018 directed Enforcement Directorate to file the statement indicating money trail which the Enforcement Director alleges to be proceeds of crime. If it is established that the petitioners hold any property overseas, which is derived or obtained by a scheduled offence, then the Enforcement Directorate would be well within its right to initiate proceedings against any property held by the petitioners in India to the extent of the value of the proceeds of crime held overseas. In such a case, it would be irrelevant whether the assets acquired in India were acquired prior to or after the PMLA came into force - the contention that assets acquired prior to enactment of the PMLA could never fall under the scope of the definition of the expression proceeds of crime and consequently are immune from the provisions of the PMLA, is erroneous and is accordingly rejected. Petition disposed off.
Issues Involved:
1. Legality of the Enforcement Directorate's (ED) instructions to the Bombay Stock Exchange (BSE) under Section 102 of the Code of Criminal Procedure (Cr.P.C.). 2. Applicability of the Prevention of Money Laundering Act (PMLA) to shares acquired before its enactment. Issue-wise Detailed Analysis: 1. Legality of the ED’s Instructions to BSE under Section 102 Cr.P.C.: The petitioners, foreign nationals, challenged the ED's directions resulting in withholding the proceeds of equity shares sold on the BSE platform and the freezing of their Demat accounts. The ED issued these directions under Section 102 Cr.P.C., claiming the shares were proceeds of crime related to the AgustaWestland helicopter scam. The court examined whether Section 102 Cr.P.C. applies to PMLA proceedings. It was noted that PMLA has specific provisions for attachment and seizure of property under Sections 5 and 17, which require the Director or an authorized officer to have reason to believe, based on material in possession, that the property is proceeds of crime. These reasons must be recorded in writing, and such orders are subject to strict timelines and procedural safeguards, including confirmation by the Adjudicating Authority. Section 102 Cr.P.C. allows police officers to seize property suspected to be involved in an offense, but it requires reporting the seizure to a Magistrate. The court found the scheme of seizure under Cr.P.C. inconsistent with PMLA’s provisions, which have their own checks and balances. The court rejected the ED's reliance on Section 102 Cr.P.C., stating that it cannot be used to bypass PMLA's specific procedures. The court held that the ED's instructions to BSE were without authority of law, as they did not conform to PMLA's requirements. The communications sent by the ED to BSE were deemed illegal and beyond the scope of Section 102 Cr.P.C. The court noted that the ED's actions, including freezing shares and reversing transactions, were unauthorized and caused significant financial loss to the petitioners. 2. Applicability of PMLA to Shares Acquired Before Its Enactment: The petitioners argued that the shares acquired in 2003, before PMLA’s enactment, should not be subject to its provisions. The court examined the definition of "proceeds of crime" under Section 2(1)(u) of PMLA, which includes property derived from criminal activity or property of equivalent value held in India if the proceeds are held outside the country. The court noted that the shares in question were acquired through legitimate means before the alleged crime and PMLA's enactment. However, if it is established that the petitioners hold proceeds of crime overseas, PMLA allows for the attachment of property in India equivalent to the value of those proceeds, regardless of when the Indian assets were acquired. The court concluded that the provisions of PMLA could apply to the shares if it is proven that the petitioners possess proceeds of crime abroad. The argument that assets acquired before PMLA's enactment are immune from its provisions was rejected. Conclusion: The court disposed of the petition, allowing the petitioners to seek further reliefs in appropriate forums. The freezing orders under Section 17 of PMLA were upheld, subject to the outcome of the petitioners' appeal before the Appellate Tribunal. The pending applications were also disposed of.
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