2019 (9) TMI 429 - HC - Money Laundering

Court Upholds Appeal Dismissal, Warning Letter Closed Matter

Financial Intelligence Unit – Ind Versus Kotak Mahindra Bank

The court dismissed the appeal, upholding the Appellate Tribunal's decision to set aside the penalty order dated 04.09.2015. It was determined that the ... Failure to report attempted suspicious transactions - Prevention of Money Laundering (Maintenance of Records) Rules, 2005 - HELD THAT:- There is no doubt that the warning letter dated 18.09.2014 was issued by the FIU in respect of the alleged violation of Section 12 of the PMLA, read with the Rules. The subject matter of the allegations included the internal control systems and failure to submit the STRs in relation to the sting operation conducted by Cobrapost. It is clear from the communications that the sting operation conducted by Cobrapost had set in motion an inquiry by the FIU which was not only limited to non-reporting of the transactions, which were subject matter of the sting operation, but also an extensive examination into the internal control system and anti-money laundering procedures established for compliance of the statutory obligations by the respondent. Given the manner in which the inquiry was conducted, there is no scope for separating the allegation relating to non-reporting of transactions, which were subject matter of the sting operation and the systems put in place by the respondent bank for compliance with its reporting obligations. Thus, there is merit in the respondent’s claim that the letter dated 18.09.2014 had closed the entire matter by the issuance of a warning - Having issued a warning to the respondent and the respondent having accepted the same, there was no occasion for the FIU to pass the order dated 04.09.2015. Appeal dismissed. Issues Involved:1. Whether the Appellate Tribunal erred in proceeding on the basis that the letter dated 18.09.2014 was issued by the FIU in respect of the failure to report suspicious transactions related to the Cobrapost sting operation.2. Whether the order dated 04.09.2015 imposing a penalty was an afterthought.3. Whether the Additional Director, FIU, was authorized to issue the warning letter dated 18.09.2014.Issue-wise Detailed Analysis:1. Whether the Appellate Tribunal erred in proceeding on the basis that the letter dated 18.09.2014 was issued by the FIU in respect of the failure to report suspicious transactions related to the Cobrapost sting operation:The appellant, FIU, argued that the letter dated 18.09.2014, which issued a warning to the respondent bank, was related to a different set of transactions and not the Cobrapost sting operation. The FIU contended that the Appellate Tribunal failed to appreciate this distinction. However, the court noted that all communications referenced the same file number (F25-1/2013-FIU-IND), indicating they were part of a single proceeding. The initial communication from FIU dated 10.07.2013 explicitly mentioned the Cobrapost sting operation. Subsequent communications, including the show cause notice dated 27.01.2014 and the letter dated 03.02.2014, were also in reference to the Cobrapost sting operation. The personal hearing on 15.04.2014 and the questions raised therein were directly related to the Cobrapost sting operation. The letter dated 18.09.2014, which issued a warning, also referred to the respondent’s letter dated 21.02.2014, which was a response to the FIU’s letter dated 03.02.2014. Thus, the court concluded that the warning letter dated 18.09.2014 was indeed issued in respect of the alleged violation related to the Cobrapost sting operation.2. Whether the order dated 04.09.2015 imposing a penalty was an afterthought:The court found that the FIU had closed the matter with the issuance of a warning letter dated 18.09.2014. The warning letter directed the respondent bank to be vigilant in the future and indicated that any reoccurrence of lapses would result in complaint proceedings. The court noted that the inquiry by the FIU was comprehensive, covering both the non-reporting of transactions from the Cobrapost sting operation and the respondent bank’s internal control systems. Given this, the court agreed with the Appellate Tribunal that the order dated 04.09.2015 imposing a penalty of Rs. 3 lakhs was an afterthought, as the matter had already been closed with the issuance of the warning.3. Whether the Additional Director, FIU, was authorized to issue the warning letter dated 18.09.2014:The appellant argued that the Additional Director, FIU, who issued the warning letter, was not authorized to do so under Section 13 of the PMLA. However, the court found this contention unsustainable. The letter dated 18.09.2014 indicated that it was issued with the approval of the Director, FIU, who is the designated authority for imposing fines under Section 13 of the PMLA. Therefore, the court held that the warning letter was authorized.Conclusion:The court dismissed the appeal, finding no merit in the appellant’s contentions. The Appellate Tribunal’s decision to set aside the order dated 04.09.2015 was upheld, as the matter had been closed with the issuance of the warning letter dated 18.09.2014. The court also found that the warning letter was authorized, as it was issued with the approval of the Director, FIU.