2021 (3) TMI 1132 - HC - Money Laundering

Validity of imposition of debit-freeze of the bank accounts - Attachment of property in money laundering - conspiracy to create false and forged documents - cheating the Government of India by transferring of ₹ 569 crores in foreign exchange outside India to Singapore, Hongkong and China - search and seizure - HELD THAT - The scheme of the Act provides for an initial attachment of the proceeds of the crime in the possession of any person for an initial period of 180 days by the Director or any other Officer not below the rank of Deputy Director Authorised by the Director, for the purposes of Section 5 of the Act. This attachment can be made only when the said officer records, in writing, his reason to believe that such a person is in possession of any proceeds of crime and that such proceeds of crime are likely to be concealed or transferred or debited in any manner which may result in frustration of any proceedings relating to confiscation of such proceedings of the crime. After such provisional attachment is made, the said order of attachment, along with the material in possession of the said officer, shall be forwarded to the adjudicating authority in a sealed envelope for further proceedings. The sine qua non for exercise of the powers under either section 5 or section 17 of the Act is the formation of an opinion, by a competent officer, that the conditions set out in these sections are found to exist. In the absence of such a finding, the exercise of power under these Sections would be without basis and cannot survive in the absence of these requirements. There are no such reasons recorded in the order dated 6.11.2020. The Hon ble Supreme Court in OPTO Circuit India Limited vs. Axis Bank and others, 2021 (2) TMI 117 - SUPREME COURT , had considered a similar situation. In this case, the concerned authority, without any findings either under Section 5 of the Act or under Section 17 of the Act, had directed a debit-freeze/stop operation of the accounts of the petitioner therein. The Hon ble Supreme Court after considering the provisions of the Act had held that while the provisions of the Act empower the appropriate authority to attach or seize the proceeds of the crime, the due process set out in the Act would have to be followed and the minimum requirement for such due process is the formation of an opinion, that he has reason to believe , set down in writing. The Hon ble Supreme court had also held that this formation of opinion, at the very least should be available in the file of the authority. In the present case also no finding, recorded in writing, either under Section 5 or Section 17 of the Act, has been placed before this Court, nor has any material been placed to show that such a finding is available in the files of the Enforcement Directorate. The action of the 3rd respondent in the present case in issuing similar orders of debit-freeze/ stop operations, cannot be sustained - the said order of the 3rd respondent directing the 4th respondent to freeze the accounts of the petitioners is not valid and has to be set aside - Petition allowed.

Summary

Issues Involved:
1. Legality of the "debit-freeze" order on petitioners' bank accounts.
2. Compliance with procedural requirements under the Prevention of Money Laundering Act, 2002.
3. Validity of the investigation and ancillary powers exercised by the 3rd respondent.

Detailed Analysis:

1. Legality of the "debit-freeze" order on petitioners' bank accounts:
The petitioners, involved in the manufacture, sale, and export of carpets and floor coverings, challenged the imposition of a "debit-freeze" on their bank accounts by the 3rd respondent. The freeze was based on an order dated 06.11.2020 from the Enforcement Directorate, communicated to the 4th respondent bank. The petitioners argued that they were not informed of this order and only became aware of the case against them upon receiving a Show Cause Notice from the adjudicating authority under the Act on 22.01.2021. The 3rd respondent justified the freeze by citing an ongoing investigation into money laundering activities involving transfers of ?47.41 crores from the petitioners' accounts to entities linked with a certain individual, Vaddi Mahesh.

2. Compliance with procedural requirements under the Prevention of Money Laundering Act, 2002:
The court examined the provisions of the Prevention of Money Laundering Act, 2002, particularly Sections 5 and 17, which mandate that any attachment or seizure of property must be based on a written record of the officer's "reason to believe" that the property is involved in money laundering. The court noted that no such reasons were recorded in the order dated 06.11.2020. The Supreme Court's judgment in OPTO Circuit India Limited vs. Axis Bank and others (Criminal Appeal No.102 of 2021) was cited, emphasizing that the due process set out in the Act must be followed, including the formation of a written opinion by the concerned authority. The court found that the 3rd respondent failed to meet these procedural requirements.

3. Validity of the investigation and ancillary powers exercised by the 3rd respondent:
The 3rd respondent contended that the "debit-freeze" order was part of the investigation process defined under Section 2(na) of the Act, which includes all proceedings for collecting evidence. The respondent argued that such measures were necessary to prevent further money laundering and relied on a judgment from the Calcutta High Court in the case of Rose Valley Real Estate and Constructions Limited vs. Union of India & others. However, the court rejected this argument, stating that the Supreme Court's judgment in OPTO Circuit India Limited, which requires compliance with procedural safeguards, takes precedence. The court held that the ancillary powers claimed by the 3rd respondent do not override the necessity of following the due process established by the Act.

Judgment:
The court concluded that the "debit-freeze" order dated 06.11.2020 issued by the 3rd respondent was invalid due to non-compliance with the procedural requirements under the Prevention of Money Laundering Act, 2002. Consequently, the writ petitions were allowed, and the order was set aside. The 4th respondent was directed to permit the petitioners to operate their bank accounts. However, the judgment clarified that this decision does not preclude the authorities from initiating fresh action in accordance with the law.

Conclusion:
The court's decision underscores the importance of adhering to procedural safeguards in the exercise of powers under the Prevention of Money Laundering Act, 2002. The failure to record reasons for the "debit-freeze" order and to follow the due process rendered the order invalid, leading to its annulment and the restoration of the petitioners' banking operations.