9911796707
TMI Blog2021 (10) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... believe while passing orders under Section 17 of the PMLA - procedure to be followed by the ED while forwarding the reasons to believe and the application under Section 17(4) of the PMLA - requirement to transmit all documents - procedure to be followed by the Adjudicating Authority, upon receipt of the application under Section 17(4) of the PMLA - level of satisfaction to be recorded by the Adjudicating Authority prior to issuance of show cause notice under section 8(1) of the PMLA - requirement to supply Relied Upon Documents while issuing SCN - procedure to be followed for providing inspection of records, and for giving a reasonable hearing to the parties, prior to passing of orders by the Adjudicating Authority under the PMLA. Procedure to be followed upon receiving letters of requests from a contracting state, under Section 60 of the PMLA - HELD THAT:- Under Section 60 of the PMLA, the Director, ED upon being forwarded a letter of request by the Central Government, has to direct an authority under the PMLA (person authorized) to take steps necessary for tracing and identifying the property, of which freezing/seizure is sought. The person authorized has wide powers, including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peruse all the relevant material placed on record before it, and only then record a finding confirming the search or seizure/ confiscation/ freezing, after reaching a conclusion that the defendant(s) is involved in the offence of money laundering under Section 3 of the Act, or is in possession of proceeds of crime - It would not be permissible for the complainant-ED to show any documents or material to the Adjudicating Authority outside of the hearing being given, or behind the back of the parties concerned. The hearing has to also be transparent and in the presence of the parties concerned. Unilateral hearings in the absence of the opposing party would not be permissible before the AA. If the Adjudicating Authority comes to the conclusion that the party(s) concerned is involved in money laundering, an order would have to be passed in writing under Section 8(3) of the Act - The order passed by the Adjudicating Authority would then be communicated to all the parties concerned. Thereafter, remedies can be availed of by the parties concerned, in accordance with law. Procedure to be followed for inspection of records - HELD THAT:- he provisions relating to inspection and fees for insp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the defendants; secondly, hear all the parties in a meaningful manner; and thirdly peruse all the relevant material placed on record before it, and only then record a finding confirming the search or seizure/ confiscation/ freezing, after reaching a conclusion that the defendant(s) is involved in the offence of money laundering under Section 3 of the Act, or is in possession of proceeds of crime. It would not be permissible for the complainant-ED to show any documents or material to the Adjudicating Authority outside of the hearing being given, or behind the back of the parties concerned. The hearing has to also be transparent and in the presence of the parties concerned. Unilateral hearings in the absence of the opposing party would not be permissible before the AA. The impugned order under Section 17(1A) of the PMLA in all these petitions, as also the orders passed by the Adjudicating Authority under Section 8 of the PMLA dated 28th December 2020, are set aside - Petition allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... rades, Eastman Industries Limited, M/s. Suprint Textiles Jaipur Pvt. Ltd., M/s. Suku Innovatives Versus Directorate Of Enforcement & Anr., Union Of India & Anr. JUDGMENT Prathiba M. Singh, J. 1. This judgment has been pronounced through video conferencing. 2. These are a batch of writ petitions filed under Article 226 of the Constitution of India, challenging freezing orders passed by the Directorate of Enforcement (hereinafter "ED") wherein the bank accounts of the Petitioners were ordered to be frozen. 3. The genesis of these disputes is a communication dated 26th September 2018 received from the Office of the Prosecutor General, Rio De Janeiro, Brazil. The said communication was termed as a `Request for legal assistance' in a criminal matter involving a former Governor of Brazil, Sergio Cabral, against whom allegations of corruption and money laundering were levelled. The diversion was assessed by the Brazilian Authorities to be more than a 100 Million Dollars. According to the Brazilian Authorities, a sophisticated system of compensation was indulged in by the former Governor. As per the said allegations, more than 3000 companies from 53 countries were stated to be involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terim stage, contended that the request, if any, ought to be, only qua the particular amounts and the carte blanche freezing of the bank accounts in their entirety was not warranted, when the dispute was pending before the AA. 8. Thereafter, interim orders were passed in all these petitions directing the Petitioners to secure the amounts qua which the allegations of money laundering pertained, in a fixed deposit/ bank guarantee or by depositing the said amounts in their bank accounts in question at all times. The order of the ED, freezing the bank accounts were stayed, subject to the said amounts being maintained. The said interim order, was initially passed in WP(C) 5235/2020, on 26th August 2020, and was reiterated in all the connected petitions, reads as under: "3. It is the case of the petitioner(s) that the Impugned Orders freezing their bank accounts do not disclose any 'reason to believe' that the money lying in the credit of the said bank accounts are, in any manner, involved in 'money laundering' or are 'proceeds of crime'. They further submit that the due process as required under Section 17 and Section 60 of the Prevention of Money Laundering Act, 2002 (PMLA) has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 2020 and were made applicable during the pendency of these petitions. Owing to the nature of legal issues raised and owing to the fact that the PMLA Appellate Tribunal is not currently functioning, the limitation period for challenging the orders of the AA was also suspended during the pendency of these petitions. The said order dated, dated 4th February 2021, amending the previous interim orders reads as under: 3. In the meantime, it is noted that vide order dated 16th August 2020 in W.P.(C) 5235/2020, the Petitioner was allowed to transact in their bank account by making deposit of money, to the extent of the amount involved in the dispute or alleged to have been laundered, in the same and withdrawing/ transferring the amount so deposited. Similarly, vide order dated 27th August in W.P.(C) 5235/2020, the Petitioner was given the option of either depositing the money mentioned in the application for amendment filed by the ED before the Adjudicating Authority, or of securing the same by way of a Bank Guarantee or a fixed deposit of equivalent amount in their bank accounts in question. Subject to the said deposit, the order freezing the bank account of the Petitioners has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * A reading of Section 60, sub-section (2) and sub-section (6) of the PMLA shows that whenever any request is received from a foreign country which is a convention country, the procedure which has to be followed has to be as per Chapter III and Chapter V of the said Act. * That without complying with the requisite procedures and safeguards provided under the said section of the Act, freezing of the bank accounts of the Petitioners could not have been undertaken by the authorities. * That the initial show cause notice which was issued by the Adjudicating Authority did not have the 'Relied Upon Documents' (RUDs), which ought to have been supplied as a matter of right. Reliance is placed upon Rules 2(f), Rule 5 and Rule 6 of the Prevention of Money Laundering (Forms, Search and Seizure or Freezing and the manner of forwarding the reasons and material to the Adjudicating Authority, Impounding and Custody of Records and the Period of Retention) Rules, 2005, to argue that any material which forms the basis of the reasons which are recorded ought to be supplied to the party concerned, which is also clear from the reading of the Rules 5 & 6 which require the retention of the reasons an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03, also known as the Merida Convention, to argue that under Articles 55(4), 55(9) and 46(19) of the said Convention, there are sufficient safeguards provided especially, in respect of bona fide third parties as also in respect of the information and evidence that can be disclosed by the requested country. Moreover, the said Convention also, under Article 55(4), provides that the domestic law would have precedence in such matters. * The investigating authorities in the present case, i.e., the ED, has not followed the provisions of the Act and the requisite safeguards provided therein. Mr. Awanish Kumar, ld. Counsel, appearing in W.P.(C) 5855/2020 15. Mr. Awanish Kumar, ld. Counsel, submits that under Section 17 of the Act, any action taken under the Act, can only be taken by an officer who is the Director, or someone who is not below the rank of a Deputy Director, duly authorized by the Director. In the present case, the Assistant Director has passed the freezing orders, and thus this would be contrary to the mandate of Section 17(1) of the PMLA. He submits that in view of this violation of Section 17(1) of the Act, the freezing order itself is non est and is liable to be quash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons to believe' cannot be made mandatory at both stages as the said judgment which mandates the same, has been stayed by the Supreme Court vide order dated 4th July 2018, in Special Leave to Appeal (C) No. 12865/2018. * Reliance is also placed on Biswanath Bhattacharya v. Union of India and Ors. (2014) 4 SCC 392, specifically paragraphs 10 to 16, to argue that there is no principle that 'reasons to believe' have to be supplied at every stage so long as there are safeguards including, that a copy of the said reasons, are given at a later stage. The Petitioners cannot argue that the 'reasons to believe' have to compulsorily be given by the authority, when finding is given at the stage of section 17 of the PMLA. Proceedings before the Court post the submissions of the parties: 17. During the hearings in these matters, this Court, vide order dated 13th August 2021, had directed ld. Counsels for the ED to seek instructions as to whether the following documents were provided to the Petitioners: "i. The 'reasons to believe' submitted by the ED to the Adjudicating Authority under Section 17 of the PMLA; ii. The 'reason to believe' recorded by the adjudicating authority under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant. This, in the present case, shall be the ED. 5. Mr. Deepak Chauhan, Deputy Director, ED, who has appeared before the Court today, submits that upon receiving the copy of the show-cause notice from the AA, the Application under Section 17(4) as also the RUDs from pages 19 to 107, were all supplied to all the parties. However, none of the other documents were supplied to the parties, as per his knowledge. He submits in response to a query from the Court as to whether the AA was shown the documents which were given to the Court in a sealed cover, including the order from the Brazilian court, etc., that the IO dealing with the matter is not available and since the AA has referred to these documents in its order, they may have been shown to the ED. But he would not be able to make a categorical statement in this regard, without verifying from the concerned IO." 20. After hearing the officers, the matter was again listed on 13th September 2021, when, a categorical statement was made by Mr. Deepak Chauhan, Deputy Director, ED, under instructions from the Investigating Officer, that the RUDs were shown to the Adjudicating Authority. Accordingly, this Court had directed as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Court. Accordingly, before proceeding to the final directions that are to be passed in these cases, in terms of the statement made by ld. Counsels for the ED on 7th October 2021, the legal position as per the PMLA, the Rules thereof and the Conventions, is being analysed by this Court. Analysis and Directions 24. The chronology of events in this case, as revealed from the documents, are as under: * A letter of request was received from the Office of the Prosecutor General, State of Rio De Janeiro by the Indian Directorate of Enforcement on 26th September 2018. The said request was for rendering legal assistance in criminal matters related to breach of bank secrecy and fraudulently obtaining financial information. * Information was sought in respect of bank accounts of various companies, with a request that the bank accounts ought to be seized for the purposes of repatriation. The said letter of request was also for identifying the beneficiaries and for the freezing of assets of the said beneficiaries. * Pursuant to the said letter of request, the ED registered Panchnamas against the companies mentioned, and investigation under PMLA was commenced in terms of section 60(6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts was ordered to be continued in the interest of the investigation. The application of the ED under Section 17(4) of the PMLA was allowed by the AA. 25. As has been unravelled before this Court during the course of submissions, the various documents which were received from the Brazilian Authorities, forming the basis of the 'reasons to believe' of the ED and the 'reason to believe' of the AA in its final order, which were placed in sealed cover before this Court, were not supplied to the Petitioners. The same were not even shown to the AA at the stage of issuance of show cause notice under 8(1) of the PMLA. These documents include the following: * Copy of the Letter of Request received from the Central Authority of Brazil; * Plea Bargain Agreement referring to Annex 2 of Claudio Barboza; * Plea Bargain Agreement referring to Annex 46 of Vinicus Claret; * Digital Media (CD) with the bank account identified, with their number, bank, transaction amount and transaction dates; * Details of bank accounts of Petitioners viz. Bank account Statement, KYC, FIRC etc. obtained for verification of alleged transaction from concerned bank/branch; * Order passed under Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether while issuing the show cause notice, all the 'Relied Upon Documents' have to be supplied to the parties concerned? viii) What is the procedure to be followed for providing inspection of records, and for giving a reasonable hearing to the parties, prior to passing of orders by the Adjudicating Authority under the PMLA? I. Procedure to be followed upon receiving letters of requests from a contracting state, under Section 60 of the PMLA 28. Chapter IX of the PMLA, titled 'Reciprocal Arrangements for Assistance in Certain Matters and Procedure for Attachment and Confiscation of Property' deals with reciprocal arrangements with a contracting state. The term `contracting state' is defined under Section 55(a) as under: S.55 Definitions- In this Chapter, unless the context otherwise requires, - (a) "contracting State" means any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise; Thus, every country with whom arrangements have been entered into by the Central Government, through treaty or otherwise, would be a contracting state. The two International Conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assistance may be refused. The same reads as under: "Article 46. Mutual Legal Assistance xxx 21. Mutual legal assistance may be refused: (a) If the request is not made in conformity with the provisions of this article; (b) If the requested State Party considers that execution of the request is likely to prejudice its sovereignty, security, order public or other essential interests; (c) If the authorities of the requested State Party would be prohibited by its domestic law from carrying out the action requested with regard to any similar offence, had it been subject to investigation, prosecution or judicial proceedings under their own jurisdiction; (d) If it would be contrary to the legal system of the requested State Party relating to mutual legal assistance for the request to be granted. xxx" 34. A perusal of the above provisions clearly shows that all action pursuant to a Request by a Contracting State is to be executed in accordance with domestic law of the requested country. Thus, if any action is prohibited by the domestic law of a country, or for other reasons mentioned in Art.46(21) including prejudice to sovereignty, public policy etc., then legal assistan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ED located in India. 37. Article 55 (3) of the Convention clearly stipulates that provisions of Article 46 of the Convention would apply in the cases of seizure and freezing of property. It also contemplates that the order which is the basis of the confiscation request, as also a detailed statements of facts and the information which may be required for the country to whom the request is sent to execute the request, has to be provided for implementing such seizure and freezing requests. The said provision reads as under: "Article 55. International Cooperation for the purposes of confiscation. xxx 3. The provisions of article 46 of this Convention are applicable, mutatis mutandis, to this article. In addition to the information specified in article 46, paragraph 15, requests made pursuant to this article shall contain: (a) In the case of a request pertaining to paragraph 1 (a) of this article, a description of the property to be confiscated, including, to the extent possible, the location and, where relevant, the estimated value of the property and a statement of the facts relied upon by the requesting State Party sufficient to enable the requested State Party to seek the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seek the confiscation/seizure order under the domestic law of the respective country. 43. As per Article 13(4), actions, pursuant to this Convention, are to be taken in accordance with, and subject to, the provisions of the domestic law. The said provision reads as under: "Article 13. International Cooperation for the purposes of confiscation. xxx 4. The decisions or actions provided for in paragraphs 1 and 2 of this article shall be taken by the requested State Party in accordance with and subject to the provisions of its domestic law and its procedural rules or any bilateral or multilateral treaty, agreement or arrangement to which it may be bound in relation to the requesting State Party. xxx" 44. Similar to the Merida Convention, any action taken pursuant to the provisions of this Convention cannot prejudice the rights of bonafide third parties, as per Article 13(8). 45. Article 18 of this Convention requires that parties to the Convention shall provide to one another complete mutual cooperation and legal assistance in investigations, prosecution and judicial proceedings, in a reciprocal manner qua offences which are transnational in nature. The requirements of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e municipal law. The same has categorically been settled by the Supreme Court in Bhavesh Jayanti Lakhani vs. State of Maharashtra (2009) 9 SCC 551. The Supreme Court, in the said case, held: "45. India follows the doctrine of dualism and not monism. We may, however, hasten to add that this Court, however, at times for the purpose of interpretation of statute has taken into consideration not only the treaties in which India is a party but also declarations, covenants and resolutions passed in different International Conferences. [See M/s Entertainment Network (India) Ltd. vs. M/s Super Cassettes Industries Ltd.] 46. The Act as also the treaties entered into by and between India and foreign countries are admittedly subject to our municipal law. Enforcement of a treaty is in the hands of the Executive. But such enforcement must conform to the domestic law of the country. Whenever, it is well known, a conflict arises between a treaty and the domestic law or a municipal law, the latter shall prevail." 49. India's signing of the Merida and Palermo Conventions resulted in the enactment of the Prevention of Money Laundering Act, 2002 as it stands today, as also resulted in amendments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecution of such request in accordance with the provisions of this Act or as the case may be, any other law for the time being in force." 53. It is relevant to note that execution of the request has to be "in accordance with the provisions of the Act or any other law for the time being in force". Thus, the assistance to the contracting state has to be rendered, however, within the legal regime that applies and operates in India. 54. Under Section 60 of the PMLA, the Director, ED upon being forwarded a letter of request by the Central Government, has to direct an authority under the PMLA (hereinafter referred to as "person authorized") to take steps necessary for tracing and identifying the property, of which freezing/seizure is sought. The person authorized has wide powers, including to inquire, investigate and survey under 60(4) of the Act. However, Section 60 (6) of the Act specifically provides that the provisions contained in Chapter V of the Act for surveys, searches and seizures would apply to all letters of request received from a contracting state. Section 60(6) of the Act reads as under: "S.60. Attachment, seizure and confiscation etc., of property in a contracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; and "reason for such belief to be recorded in writing". Here again, the authorised officer shall immediately on search and seizure or upon issuance of freezing order forward a copy of the reasons so recorded along with the material in his possession to the Adjudicating Authority in a "sealed envelope" in the manner as may be prescribed and such Adjudicating Authority shall keep such reasons and material for such period as may be prescribed. In order to ensure the sanctity of the search and seizure and to ensure the safeguards, in exercise of power Under Section 73 of PMLA, the Central Government has framed "The Prevention of Money-Laundering (Forms, Search and Seizure or Freezing and the Manner of Forwarding the Reasons and Material to the Adjudicating Authority, Impounding and Custody of Records and the period of Retention) Rules, 2005"." 59. The Division Bench of this Court in Directorate of Enforcement v. Abdullah Ali Balsharaf and Ors., 2019 (3) RCR (Criminal) 5661, was dealing with an issue as to whether freezing of assets for the purposes of issues concerning money laundering could be done by exercising powers under Section 102 CrPC instead o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded in writing) that any person..." xxx 27. In fact in Noor Aga vs. State of Punjab reported as (2008) 16 SCC 417, the Supreme Court referred to the definition of 'reason to believe' as contained in section 26 of the IPC in the context of sections 42 and 43 of the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) as also Section 110 of the Customs Act, 1962 (Customs Act) which provisions concern powers of entry, search, seizure and arrest; and in which the requirement of reason to believe has been incorporated by the legislature. In the context inter-alia of the power of seizure under the NDPS Act and the Customs Act, the Supreme Court had this to say in Noor Aga's case: "37. It is the consistent view of this Court that "reason to believe", as provided in several provisions of the Act and as defined in Section 26 of the Penal Code, 1860 on the part of the officer concerned is essentially a question of fact. The procedures laid down under the Act being stringent in nature, however, must be strictly complied with." It is therefore clear that where there is a requirement that an action may be taken by an officer only whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y where it is not practicable to seize such record or property. Subsection (2) provides that after search and seizure or upon issuance of a freezing order the Authorised Officer shall forward a copy of the reasons recorded along with material in his possession to the Adjudicating Authority in a sealed envelope. Subsection (4) provides that the Authority seizing or freezing any record or property under subsection (1) or (1A) shall within a period of thirty days from such seizure or freezing, as the case may be, file an application before the Adjudicating Authority requesting for retention of such record or properties seized. xxx 11. The scheme of the PMLA is well intended. While it seeks to achieve the object of preventing money laundering and bring to book the offenders, it also safeguards the rights of the persons who would be proceeded against under the Act by ensuring fairness in procedure. Hence a procedure, including timeline is provided so as to ensure that power is exercised for the purpose to which the officer is vested with such power and the Adjudicating Authority is also kept in the loop. In the instant case, the procedure contemplated under Section 17 of PMLA to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that manner alone, failing which it would fall foul of the requirement of complying due process under law." 61. From a perusal of the above decisions, it is clear that the specific procedure that is contemplated under the Act, in respect of investigations, seizures and freezing of assets/property/ bank accounts, ought to be strictly and scrupulously followed, in the manner prescribed under the Act. 62. While initiating action upon receiving a letter of request under Section 60 of the Act, broadly, the Director ED or the person authorized (not below the rank of Deputy Director) - has to have 'reasons to believe' that the acts complained of, constitute money laundering or the offence alleged therein. Thus, from the facts explained and the documents submitted by the requesting country, the Director or the person authorized, has to have reasonable basis and sufficient grounds to believe that an offence may have been committed. After perusing the letter of request received from the contracting State, as also the facts set out therein and the supporting documentation, the Director ED, or the person authorized, ought to have 'reasons to believe' that the persons/entities against who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the 'material in his possession', in respect of the case, to the Adjudicating Authority (AA) in a sealed cover. Section 17(2) of the PMLA reads as under: "S.17. Search and seizure.- xxx (2) The authority, who has been authorised under subsection (1) shall, immediately after search and seizure or upon issuance of a freezing order, forward a copy of the reasons so recorded along with material in his possession, referred to in that subsection, to the Adjudicating Authority in a sealed envelope, in the manner, as may be prescribed and such Adjudicating Authority shall keep such reasons and material for such period, as may be prescribed. xxx" 67. Apart from the above provision, detailed Rules have also been enacted under The Prevention of Money Laundering (Forms, Search and Seizure or Freezing and the manner of forwarding the reasons and material to the Adjudicating Authority, Impounding and Custody of Records and the Period of Retention) Rules, 2005. The relevant provisions of the said Rules read as under: ["2. Definitions: xxx (j)"material for the purpose of sub-section (1A) and sub-section (2) of section 17 of the Act" means the material in possession of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envelope. (7) The authority, as the case may be, shall maintain registers and other records such as acknowledgement slip register, dak register for the purposes of this rule and shall ensure that necessary entries are made in the register immediately as soon as a copy of the reasons along with the material are forwarded to the Adjudicating Authority." xxx "9. Acknowledgement of receipt of a copy of the reasons and the material relating to search, seizure or freezing and search of person by the Adjudicating Authority: (1) On receipt of the outer sealed envelope along with Form IV, the Adjudicating Authority or in his absence, the designated officer of the office of Adjudicating Authority shall forward Form IV duly filled in, signed and his name legibly written below his signature. The seal of the office of the Adjudicating Authority shall be affixed before forwarding Form IV to the authority as a token of receipt of the sealed envelope. (2) The Adjudicating Authority shall, on opening of the sealed envelope, forward Form III duly filled in, signed and his name legibly written below his signature. The seal of the office of the Adjudicating Authority shall be affixed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial received, i.e., all the material in possession of the ED, as also the 'reasons to believe' recorded by the ED, that a case is made out to issue show-cause notice to the party under Section 8 of the PMLA. After the AA has issued notice to show cause under Section 8(1) of the PMLA, the ED cannot be permitted to produce any documents before the Adjudicating Authority in relation to the matter, which were already in its possession prior to the issuance of the said show cause notice. 71. Rule 8 of the Rules extracted above, also provides a detailed procedure for transmission of the material, to ensure that there is no tampering in the material sent by the ED to the Adjudicating Authority. Safeguards, such as an officer at the ED signing sign each page of the index, and also writing a letter to the Adjudicating Authority, giving details of the material being forwarded, have been duly incorporated. 72. An acknowledgement is also to be issued by the Adjudicating Authority, in terms of Form III of the Rules, and utmost confidentiality is to be maintained at this stage, considering the sensitive nature of the proceedings. 73. The Rules, extracted above, contemplate that there shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 8(1) of the Act, by the Adjudicating Authority. A notice to show cause would have to be then issued to the parties concerned, along with the evidence on which the Adjudicating Authority has relied to reach the conclusions in its `reason to believe'. This material is called the 'Relied Upon Documents' (RUDs). Section 8(1) and 8(2) of the PMLA read: "8. Adjudication: (1) On receipt of a complaint under sub-section (5) of section 5, or applications made under sub-section (4) of section 17 or under sub-section (10) of section 18, if the Adjudicating Authority has reason to believe that any person has committed an offence under section 3 or is in possession of proceeds of crime, it may 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, out of which or by means of which he has acquired the property attached under sub-section (1) of section 5, or, seized or frozen under section 17 or section 18, the evidence on which he relies and other relevant information and particulars, and to show cause why all or any of such properties should not be declared to be the properties involved in money-laun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RUDs would not be sufficient. The 30-day period notice would naturally have to be thus counted from the date when the complete "Relied Upon Documents" are supplied to the parties concerned/ Defendants, as no effective opportunity to reply would be possible unless all the "Relied Upon Documents" are received. 83. The language of Section 8(1) of the Act, read with Regulation 13 of the Regulations of 2013 is clear, to the effect that all the evidence which the Adjudicating Authority relies upon, including the relevant information and particulars thereof, which form the basis of its 'reason to believe' have to accompany the said show cause notice. It would not be permissible for the Adjudicating Authority, in terms of the PMLA and the Regulations thereinunder, to withhold evidence or other information and particulars, which the Adjudicating Authority relies upon while framing its `reason to believe'. 84. The Adjudicating Authority, after issuing the show cause notice, has to give a 30 days period for the parties/ defendants to file their replies. Upon receipt of the show cause notice, if the defendants concerned seek inspection of records, prior to filing of their reply, the same wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adjudicating Authority is not merely a procedural hearing, but an adjudicatory hearing, the Adjudicating Authority has to, as per Section 8(2) of the PMLA, first consider the reply to the show cause notice filed by the defendants; secondly, hear all the parties in a meaningful manner; and thirdly peruse all the relevant material placed on record before it, and only then record a finding confirming the search or seizure/ confiscation/ freezing, after reaching a conclusion that the defendant(s) is involved in the offence of money laundering under Section 3 of the Act, or is in possession of proceeds of crime. 92. It would not be permissible for the complainant-ED to show any documents or material to the Adjudicating Authority outside of the hearing being given, or behind the back of the parties concerned. The hearing has to also be transparent and in the presence of the parties concerned. Unilateral hearings in the absence of the opposing party would not be permissible before the AA. 93. If there is any third party, whose interests are being affected, apart from the parties to whom show cause notice is issued, such third party would also be given an opportunity of being heard to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations framed under the Act have to be followed. The said requests cannot be treated at a higher threshold. The ED and the Adjudicating Authority, would have to adhere to all provisions relating to recording the 'reason(s) to believe' and supplying the 'Relied Upon Documents', as is required to be done in the case of domestic proceedings under the PMLA. ii) Whether the ED is duty bound to provide the 'reasons to believe' while passing orders under Section 17 of the PMLA, to the concerned parties? • The said question is pending for determination before the Supreme Court in SLP(C) No. 12865/2018 titled Union of India and Ors. vs. J. Sekar. iii) What is the procedure to be followed by the ED while forwarding the 'reasons to believe' and the application under Section 17(4) of the PMLA to the Adjudicating Authority seeking continuation of the freezing orders and confiscation? • Immediately upon a search and seizure/ freezing order being passed, the Director ED, or the person authorized has to forward a copy of the 'reasons to believe' recorded by the ED along with 'material in its possession' to the Adjudicating Authority, in a sealed cover, as per the provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in possession of 'proceeds of crime'. It has to record its satisfaction independent of the `reasons to believe' of the ED and only thereafter issue a show cause notice under Section 8(1) to be served upon the party/parties concerned. The said notice has to be issued in accordance with the Adjudicating Authority (Procedure) Regulations, 2013'. • The Adjudicating Authority cannot mechanically go by the reasons recorded by the ED, and has to have separate and independent grounds to believe that such an offence has been committed. The fact that the Adjudicating Authority is again required to have 'reason to believe' as per the provisions of the Act shows that there is a two-tier process which is to be followed prior to the issuance of the show cause notice, namely- satisfaction by the ED and thereafter, independent satisfaction by the Adjudicating Authority. vii) Whether while issuing the show cause notice, all the 'Relied Upon Documents' have to be supplied to the parties concerned? • A conjoint reading of Section 8(1) of the PMLA and Regulation 13(2) of the Adjudicating Authority (Procedure) Regulations, 2013, leaves no doubt that the Adjudicating Authority is duty bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow any documents or material to the Adjudicating Authority outside of the hearing being given, or behind the back of the parties concerned. The hearing has to also be transparent and in the presence of the parties concerned. Unilateral hearings in the absence of the opposing party would not be permissible before the AA. Applicability on facts and Directions 101. Coming to the facts of present cases - the chronology of events as set out in paragraph 24 above, the affidavits which have been filed by the Adjudicating Authority and the Petitioners, and the submissions made by the ld. counsels for ED, make it clear that the prescribed procedure, as per the PMLA and the Rules and Regulations framed thereinunder, have not been complied with. 102. The ED, initially, did not transmit all the 'material in its possession' to the Adjudicating Authority, prior to the issuance of the show cause notice. This would clearly be contrary to Rule 8 of the 2005 Rules, which have been extracted above in paragraph 67. The only documents that were transmitted along with 'reasons to believe' and the application under Section 17(4), by the ED to the Adjudicating Authority, were the Panchnamas. The said P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in M/s Radha Krishan Industries v. State of Himachal Pradesh and Ors., (2021) 6 SCC 771, in the context of GST law, freezing of bank accounts is a `draconian measure'. The observations of the Supreme Court read: "76.4 The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled. 76.5 The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue." Such freezing of bank accounts could lead to disruption of personal lives and/or of businesses. Thus, measures such as freezing of bank accounts ought to be proportionate and taken only to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submissions made by all the parties and then pass fresh orders in accordance with law by 15th February, 2022. (v) In the interregnum, the specific amounts as referred to in the order dated 28th December 2020 of the Adjudicating Authority, shall remain frozen. However, the Petitioners are permitted to furnish either bank guarantees, or securities to the satisfaction of the ED, subject to which the said accounts may be directed to be de-frozen by the ED, on a case-to-case basis. (vi) All the remedies available to parties, as per law, in respect of the orders, if any, passed by the ED, are kept open. 111. This Court also notices that under Regulations 17 and 18 of the Adjudicating Authority (Procedure) Regulations, 2013, fee for inspection is to be charged on an hourly basis, and ₹ 20/- per page is charged for copying of inspected records. 112. The Government may also consider rationalizing the fee structure for inspection and for copying under Regulations 17 and 18 of the Adjudicating Authority (Procedure) Regulations, 2013. 113. In the interregnum, however, especially during the COVID-19 pandemic when providing physical inspection may actually not possible for most ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
