2019 (9) TMI 430 - HC - Money Laundering

Money Laundering - sting operation - Reduction in quantum of penalty - Violation of the reporting obligations on part of the respondent banks - issuance of a warning in writing under Section 13(2)(a) of the Act - whether the Appellate Tribunal could modify the order passed by the Director, FIU by reducing the penalty imposed? - HELD THAT - It is apparent that FIU s contention that provisions of Section 13(2) of the Act, as in force prior to amendment on 15.02.2013, are applicable, is bereft of any factual foundation. The said contention is premised on the basis that the sting operation had been conducted prior to 15.02.2013 and, therefore, the respondent banks had violated the provisions of the Act, prior to Section 13(2) of the Act being amended. Consequently, the respondent banks are required to be visited with penalty as provided under Section 13(2) of the Act as in force prior to 15.02.2013. However, since there is no material on record to establish that the sting operation had been conducted prior to 15.02.2013, the aforesaid contention is unfounded. The sub-section (2) of Section 13, as in force prior to 15.02.2013, expressly provided that in case a banking company, financial institution or intermediary or any of its officers fail to comply with the provisions of Section 12 of the Act, then the Director, FIU may by an order, levy fine on such banking companies, financial institution or intermediary which shall not be less than ₹ 10,000/- but may extend to ₹ 1,00,000/- for each failure - Section 13(2) of the Act was substituted by Clause (iii) of Section 11 of the Prevention of Money-Laundering (Amendment) Act, 2012. By virtue of the said amendment, it was no longer necessary for the Director to impose a monetary fine; he was enabled to pass other orders as may be warranted, including issuing a warning in writing or issuing directions for compliance with specific instructions or issuing directions for sending reports as may be prescribed on the measures being taken by the reporting entity. The object of amending Section 13(2) of the Act is clearly to enable the Director, FIU to issue such orders as may be warranted. Under the unamended provision, the Director had no discretion except to levy a fine in cases where failure to comply with the provisions of Section 12 of the Act was established. He, however, had the discretion to determine the quantum of fine within the limits as prescribed. The maximum fine that could be imposed by him was ₹ 1,00,000/- for each failure. The same could be reduced, however; but not less than ₹ 10,000/-. The rigors of the aforesaid provisions have been relaxed by virtue of Section 11(iii) of the Prevention of Money-Laundering (Amendment) Act, 2012. Thus, in cases where only a warning is warranted, it is not necessary for the Director to impose a monetary fine. Even if it is assumed that the sting operation was conducted prior to 15.02.2013, there is no infirmity in the decision of the Appellate Tribunal to modify the punishment from a monetary fine to a warning in writing, in terms of Section 13(2)(a) of the Act as substituted with effect from 15.02.2013 - appeal dismissed.

Summary

Issues Involved:
1. Applicability of Section 13(2) of the Prevention of Money-Laundering Act, 2002, as amended on 15.02.2013.
2. Whether the Appellate Tribunal could modify the penalty imposed by the Director, FIU.
3. The admissibility and interpretation of evidence obtained from a sting operation.

Issue-wise Detailed Analysis:

1. Applicability of Section 13(2) of the Prevention of Money-Laundering Act, 2002, as amended on 15.02.2013:
The core issue was whether the amended provisions of Section 13(2), which allowed for a warning instead of a mandatory monetary penalty, could be applied retrospectively. The Financial Intelligence Unit (FIU) contended that the pre-amendment version of Section 13(2), which mandated a minimum fine of ?10,000, should apply since the sting operations were allegedly conducted before the amendment date. However, the court noted that there was no factual foundation to support that the sting operations occurred before the amendment date. Some banks, including Axis Bank, asserted that the sting operations were conducted after 15.02.2013, an assertion that was not contested by FIU. Consequently, the court dismissed FIU's contention due to the lack of evidence establishing the timing of the sting operations.

2. Whether the Appellate Tribunal could modify the penalty imposed by the Director, FIU:
The Appellate Tribunal had modified the orders of the Director, FIU, reducing the penalty from a monetary fine to a warning. The court examined whether such modification was permissible under the amended Section 13(2). The court referred to Supreme Court precedents, including T. Barai v. Henry Ah Hoe and Anr. and Nemi Chand v. State of Rajasthan, which established that if a law reduces the punishment for an offense, the benefit of the reduced punishment should be applied retrospectively. The court concluded that the amended Section 13(2), which allowed for lesser penalties such as warnings, should be applied retrospectively as it mitigates the severity of the punishment. Thus, the Appellate Tribunal's decision to issue a warning instead of a monetary fine was upheld.

3. The admissibility and interpretation of evidence obtained from a sting operation:
The controversy originated from a sting operation conducted by Cobrapost, which recorded conversations with bank officials allegedly willing to facilitate money laundering. The FIU issued show cause notices based on these recordings, alleging non-compliance with Section 12 of the Act. The banks argued that the conversations did not constitute "suspicious transactions" as defined under the Rules and that the recordings were incomplete and edited. The Appellate Tribunal rejected the banks' contention, holding that the conversations did amount to suspicious transactions that should have been reported. The court noted that the banks had not appealed this aspect of the Appellate Tribunal's decision, and thus, it did not examine the admissibility or interpretation of the evidence further.

Conclusion:
The court dismissed the appeals, affirming the Appellate Tribunal's decision to reduce the penalty to a warning. The court emphasized that the amended Section 13(2), which provided for lesser punitive measures, should be applied retrospectively to benefit the respondents. The court did not address the banks' contentions regarding the nature of the conversations as suspicious transactions or the admissibility of the sting operation recordings, as these issues were not appealed by the banks. All pending applications were disposed of, and the parties were left to bear their own costs.