Explained: Scope of ED’s power to freeze bank accounts under Prevention of Money Laundering Act, 2002

Supreme Court: The 3-judge bench of SA Bobde, CJ and AS Bopanna* and V. Ramasubramanian, JJ has held that  under the Prevention of Money ­Laundering Act, 2002, though the Directorate of Enforcement is vested with sufficient power to freeze the accounts; such power is circumscribed by a procedure laid down under the statute.

“It certainly is not the requirement that the communication addressed to the Bank itself should contain all the details. But what is necessary is an order in the file recording the belief as provided under Section 17(1) of PMLA before the communication is issued and thereafter the requirement of Section 17(2) of PMLA after the freezing is made is complied.”

Background

Enforcement Directorate in order to track the money trail relating to the predicate offence by the appellant company and prevent layering of the same had initiated the proceedings under the Prevention of Money ­Laundering Act, 2002 (PMLA). This led to the freezing of the accounts maintained by the appellant company.

It was Appellant Company’s case that the freezing of the accounts has prejudiced the appellant, inasmuch as, the amount in the account which belongs to the appellant is made unavailable to them due to which statutory payments to be made to the Competent Authorities under various enactments is withheld and the payment of salary which is due to the employees is also prevented. The limited issue before the Supreme Court, hence, is that of defreezing the bank account so as to enable the appellant to make the statutory payments.

Analysis

Scheme of PMLA

While PMLA 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.

Section 17 of PMLA

The pre-requisite of Section 17 of PMLA is that the Director or such other Authorised Officer in order to exercise the power under the section, should on the basis of information in his possession, have reason to believe that such person has committed acts relating to money laundering and there is need to seize any record or property found in the search.  Such belief of the officer should be recorded in writing.

• Sub-section (1A) to Section 17 of PMLA provides that the Officer Authorised under sub-section (1) may make an order to freeze such record or property 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.
• Sub-section (4) provides that the Authority seizing or freezing any record or property under sub-section (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.

The Court. Further, emphasised that the freezing of the account will also require the same procedure since a bank account having alleged ‘proceeds of crime’ would fall both under the ambit “property” and “records”.

Discussion on facts

The Directorate of Enforcement in their counter affidavit had taken contradictory stand inasmuch as, while explaining the need to freeze the account has stated that the ‘stop operation’ was requested to stop the further layering/diversion of proceeds of crime and to safeguard the proceeds of crime, which we notice is a power available under PMLA. But in the counter affidavit it is strangely stated that the same has not been done under Section 17(1) of the PMLA. However, in contrast it has been further averred with regard to the power available under PMLA and that PMLA being a stand-alone enactment and independent process whereunder Section 71 of PMLA has an overriding affect over other laws. Irrespective of the stand taken, the power exercised by the Competent Authority should be shown to be in the manner as has been provided in law, in this case under PMLA.

In the instant case, the procedure contemplated under Section 17 of PMLA to which reference is made above has not been followed by the Officer Authorised.

“Except issuing the impugned communication dated 15.05.2020 to AML Officer to seek freezing, no other procedure contemplated in law is followed. In fact, the impugned communication does not even refer to the belief of the Authorised Officer even if the same was recorded separately. It only states that the Officer is investigating the case and seeks for relevant documents, but in the tabular column abruptly states that the accounts have to be ‘debit freezed/stop operations’.”

Hence, the freezing or the continuation thereof is without due compliance of the legal requirement and, therefore, not sustainable.

Power of seizure under Section 102 CrPC – Applicability

The Court rejected Additional Solicitor General S.V. Raju’s contention that the power of seizure is available under Section 102 of the Code of Criminal Procedure, which has been exercised and as such the freezing of the account would remain valid, on the following grounds:

1. Directorate of Enforcement has contended that PMLA is a standalone enactment. If that be so and when such enactment contains a provision for seizure which includes freezing, the power available therein is to be exercised and the procedure contemplated therein is to be complied.
2. When the power is available under the special enactment, the question of resorting to the power under the general law does not arise.
3. The power under Section 102 CrPC is to the Police Officer during the course of investigation and the scheme of the provision is different from the scheme under PMLA. Further, even sub¬section (3) to Section 102 CrPC requires that the Police Officer shall forthwith report the seizure to the Magistrate having jurisdiction, the compliance of which is also not shown if the said provision was in fact invoked. The impugned communication dated 15.05.2020 does not refer to the power being exercised under the Code of Criminal Procedure.

The Court, hence, said that,

“The action sought to be sustained should be with reference to the contents of the impugned order/communication and the same cannot be justified by improving the same through the contention raised in the objection statement or affidavit filed before the Court.”

Conclusion

The Court noticed that in the instant case, though the Authorised Officer is vested with sufficient power; such power is circumscribed by a procedure laid down under the statute. As such the power is to be exercised in that manner alone, failing which it would fall foul of the requirement of complying due process under law.

Finding fault with the Authorised Officer and declaring the action bad only in so far as not following the legal requirement before and after freezing the account, the Court directed the banks to defreeze the respective accounts and clear the cheques issued by the appellant, drawn in favour of the Competent Authority towards the ITDS, PF, ESI, Professional Tax, Gratuity and LIC employees’ deductions, subject to availability of the funds in the account concerned.

It further directed that if any further amount is available in the account after payment of the statutory dues and with regard to the same any action is to be taken by the Directorate of Enforcement within a reasonable time, it would open to them to do so subject to compliance of the required procedure afresh, as contemplated in law.

[OPTO Circuit India Ltd. v. Axis Bank, 2021 SCC OnLine SC 55, decided on 03.02.2021]

*Justice AS Bopanna has penned this judgment

Appearances before the Court

For the appellant company: Senior Advocate Mukul Rohatgi,

For Directorate of Enforcement: Additional Solicitor General S.V. Raju