2021 (10) TMI 1176 - HC - Money Laundering

Court sets aside freezing orders, emphasizes transparency. Deadlines set for document submission.

The court set aside the freezing orders under Section 17(1A) of the Prevention of Money Laundering Act and directed the Enforcement Directorate to provide ... Freezing of petitioner's Bank Account - allegations of corruption and money laundering were levelled - diversion of funds - reasons to believe - procedure to be followed by the ED when letters of request are received under Section 60 of the Act from a contracting state - requirement to provide ‘reasons to 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 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. The requisite safeguards contained in the provisions of Chapters III and V of the Act, for the purpose of attachment, confiscation, search, freezing/seizure etc., would undoubtedly apply even in respect of requests received from contracting states under Section 60 of the Act. Thus, requests from contracting states cannot be treated at a higher threshold - the ED/ Adjudicating Authority, would have to adhere to all the provisions in respect of recording the ‘reasons to believe’, supplying the ‘Relied Upon Documents’ etc., as is required to be done in the case of domestic enquiries, investigations, surveys, searches and seizures under the provisions of the PMLA, and the Rules and Regulations. Procedure to be followed while passing orders of search and seizure under Section 17 of the PMLA, when letters of request are received under Section 60 of the PMLA - HELD 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. The material in possession would mean and include all material in possession, in respect of the investigation, which is to be forwarded by the ED to the AA, irrespective of whether the same have been referred to in the ‘reasons to believe’ or not - On the basis of these “reasons to believe” and the “material in possession” of the ED, the ED has to then move an Application under Section 17(4) of the PMLA before the Adjudicating Authority, for retention of the record or the property seized, or for continuation of the freezing order, as applicable. Procedure to be followed by the Adjudicating Authority, upon receipt of an Application under Section 17(4) of the PMLA from the ED - HELD THAT:- As the hearing before the 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 - 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 inspection and copying, are in respect of records which are beyond the ‘Relied Upon Documents’ which may be part of `material in possession’. Inspection of such documents can only be given to the party concerned and not to any third parties. Strict confidentiality ought to be maintained. No fee can be charged for supplying the ‘Relied Upon Documents’ by the Adjudicating Authority directly, or through the ED. What is the level of satisfaction to be recorded by the Adjudicating Authority prior to issuance of show cause notice under section 8(1) of the PMLA? - HELD THAT:- 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. Whether while issuing the show cause notice, all the ‘Relied Upon Documents’ have to be supplied to the parties concerned? - HELD THAT:- 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 bound to serve all the documents, that it has ‘relied upon’ i.e., the ‘Relied Upon Documents (RUDs)’, while coming to its ‘reason to believe’ to the party concerned, in a bound paper book. The said service of documents can be effected through the ED, and the Adjudicating Authority has to ensure that the said service has been effected. A simple service of the show cause notice, without the RUDs would not be sufficient. The 30-day period notice would naturally have to be thus counted from the date when the complete RUDs are supplied to the parties concerned/ Defendants, as no effective opportunity to reply would be possible unless all the RUDs are received. 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? - HELD THAT:- 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. 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. Issues Involved:1. Freezing orders passed by the Directorate of Enforcement (ED) under Section 17(1A) of the Prevention of Money Laundering Act, 2002 (PMLA).2. Compliance with procedural requirements under PMLA and related rules.3. Provision and sufficiency of 'Relied Upon Documents' (RUDs) to the petitioners.4. Adjudicating Authority's procedure and satisfaction under Section 8 of the PMLA.5. Inspection of records and fee structure under the Adjudicating Authority (Procedure) Regulations, 2013.6. Application of Section 32A of the Insolvency and Bankruptcy Code (IBC) to Alok Industries Limited.Detailed Analysis:I. Freezing Orders and Compliance with Procedural Requirements:The petitioners challenged the freezing orders issued by the ED under Section 17(1A) of the PMLA. The genesis of these disputes was a request from Brazilian authorities regarding a money laundering investigation involving a former Brazilian Governor. The ED acted on this request, freezing the petitioners' bank accounts without providing the 'reasons to believe' or the RUDs to the petitioners. The court emphasized that the ED must follow the stringent procedures under the PMLA and related rules, including recording 'reasons to believe' and forwarding all material in possession to the Adjudicating Authority in a sealed cover.II. Provision and Sufficiency of 'Relied Upon Documents' (RUDs):The court found that the ED had not provided all the RUDs to the petitioners, which is a violation of the principles of natural justice and the provisions of the PMLA. The Adjudicating Authority is required to serve all RUDs to the parties concerned in a bound paper book, ensuring that the parties have a fair opportunity to respond to the show cause notice.III. Adjudicating Authority's Procedure and Satisfaction:The Adjudicating Authority must independently record its 'reason to believe' before issuing a show cause notice under Section 8(1) of the PMLA. This satisfaction must be independent of the ED's 'reasons to believe' and must be based on the material forwarded by the ED. The Adjudicating Authority cannot mechanically rely on the ED's findings and must ensure a transparent and fair hearing process.IV. Inspection of Records and Fee Structure:The court highlighted the need for rationalizing the fee structure for inspection and copying of records under the Adjudicating Authority (Procedure) Regulations, 2013. It suggested that the Adjudicating Authority issue interim practice directions for electronic copies of records during the COVID-19 pandemic.V. Application of Section 32A of the IBC to Alok Industries Limited:For Alok Industries Limited, which underwent insolvency proceedings, the court directed the ED to reconsider the freezing orders in light of Section 32A of the IBC, which provides immunity to the corporate debtor's assets once a resolution plan is approved. The ED was instructed to pass fresh orders by 31st January 2022, considering the new management's submissions.Directions Issued:1. The freezing orders under Section 17(1A) of the PMLA and the Adjudicating Authority's orders dated 28th December 2020 were set aside.2. The ED was directed to supply all documents forming the basis of the freezing orders to the petitioners by 15th November 2021.3. Petitioners were allowed to file submissions based on the new material by 15th December 2021.4. The ED was to pass fresh orders by 15th February 2022.5. Specific amounts mentioned in the Adjudicating Authority's order were to remain frozen, with the option for petitioners to furnish bank guarantees or securities for defreezing.6. The Government was advised to consider rationalizing inspection and copying fees under the Adjudicating Authority (Procedure) Regulations, 2013.7. The Adjudicating Authority was encouraged to issue interim guidelines for electronic copies of records.Additional Directions for Alok Industries Limited:The ED was to pass fresh orders considering the applicability of Section 32A of the IBC by 31st January 2022. The case was listed for further status updates regarding appointments and vacancies at the Adjudicating Authority under the PMLA.Conclusion:The court emphasized strict adherence to procedural safeguards under the PMLA and related rules, ensuring fairness and transparency in the adjudication process. The directions aimed to rectify procedural lapses and ensure compliance with legal requirements, providing the petitioners with a fair opportunity to defend themselves against the freezing orders.