2016 (6) TMI 57 - HC - Money Laundering

Court upholds show cause notices under Prevention of Money Laundering Act for non-executive directors

The court dismissed the petition challenging show cause notices issued under the Prevention of Money Laundering Act by non-executive directors of a ... Compensation for causing mental and physical harassment to the petitioners - show cause notices under Section 13 of the Prevention of Money Laundering Act, 2002 challenged - Held that:- Having seen the matter in the light and having gone through the contents of the order dated 4th November, 2015 and the contents of the impugned show cause notices, in my opinion, no interference at the show cause notice stage is warranted in the interest of clean and honest administration. NSEL, as aforesaid, vide order dated 4th November, 2015 has already been held to be a “reporting entity” and guilty of failure to comply with the provisions of PMLA. The petitioners were admittedly Non-executive Directors of NSEL. Section 13 empowers the respondent to issue directions to any of the employees of a reporting entity to comply with specific instructions or to send reports at such intervals as may be prescribed on the measures it is taking and to impose monetary penalty on any of the employees of a “reporting entity”. In exercise of such power, the respondent is within its right to issue impugned show cause notices to the petitioners. At this stage, need not say anything further for the fear of affecting the proceedings before the respondent. Issues:Challenge to show cause notices under Prevention of Money Laundering Act, 2002 (PMLA) by non-executive directors of National Spot Exchange Limited (NSEL) seeking compensation for harassment.Analysis:1. Jurisdiction and Legality of Show Cause Notices:The petitioners challenged the show cause notices issued under Section 13 of the PMLA by the Financial Intelligence Unit, alleging lack of jurisdiction and malicious intent. The petitioners argued that the notices did not specify their roles or involvement in NSEL's affairs, violating principles of natural justice. The court noted that a show cause notice does not create a cause of action unless issued without authority or is patently illegal. The petitioners failed to establish any such illegality in the notices, leading to the dismissal of their challenge.2. Role of Non-Executive Directors:The petitioners contended that as non-executive directors, they were not in charge or responsible for NSEL's operations, hence should not have been targeted individually. The respondent argued that even non-executive directors could be held accountable under PMLA, emphasizing the duty of all officers in a reporting entity to comply with regulations. The court found that the respondent had the authority to issue notices to employees of a reporting entity, including non-executive directors, under Section 13.3. Compliance with Principles of Natural Justice:The petitioners raised concerns about the lack of specific allegations in the notices and the absence of findings against them in the previous order against NSEL. The court highlighted the importance of a fair opportunity for the petitioners to respond to the allegations before any action could be taken. It emphasized that the petitioners could present their arguments during the response to the notices, and interference at this stage would hinder the investigative process.4. Precedents and Legal Arguments:The court referenced various legal precedents and arguments presented by both parties, including comparisons with the Negotiable Instruments Act and the duty of directors in a reporting entity. The court rejected the contentions of the petitioners, emphasizing the need for a thorough examination of the charges and circumstances before challenging show cause notices.5. Dismissal and Future Recourse:Ultimately, the court dismissed the petition as not maintainable, allowing the petitioners to raise their grievances during the response to the show cause notices. The court highlighted the importance of upholding clean and honest administration and refrained from interfering at the show cause notice stage to avoid prejudicing the ongoing proceedings. The dismissal was made without costs, preserving the petitioners' right to challenge the respondent's decision if aggrieved.This detailed analysis of the judgment addresses the jurisdictional issues, roles of non-executive directors, compliance with natural justice principles, legal arguments presented, and the court's decision to dismiss the petition challenging the show cause notices under PMLA.