2023 (3) TMI 587 - HC - Money Laundering

Court upholds freezing order & show cause notice challenged by NBFC linked to alleged money laundering activities

The court upheld the freezing order and show cause notice challenged by a non-deposit taking NBFC, emphasizing the need for investigation into alleged ... Reason to believe requirement under Section 17 of the Prevention of Money Laundering Act, 2002 - Freezing order under Section 17(1-A) of the Prevention of Money Laundering Act, 2002 - Forwarding of recorded reasons and material to the Adjudicating Authority under Section 17(2) of the Prevention of Money Laundering Act, 2002 - Procedural compliance for search, seizure and freezing under the Prevention of Money Laundering Act, 2002 - Maintainability of pre-emptive writ challenge to a show cause notice issued by the Adjudicating AuthorityReason to believe requirement under Section 17 of the Prevention of Money Laundering Act, 2002 - Freezing order under Section 17(1-A) of the Prevention of Money Laundering Act, 2002 - Forwarding of recorded reasons and material to the Adjudicating Authority under Section 17(2) of the Prevention of Money Laundering Act, 2002 - Procedural compliance for search, seizure and freezing under the Prevention of Money Laundering Act, 2002 - Validity of the freezing order issued under Section 17(1-A) of the PMLA and compliance with the requirement to record reasons and forward them to the Adjudicating Authority - HELD THAT: - The Court examined whether the authorised officer had recorded reasons to believe and complied with the statutory procedure under Section 17 before issuing freezing orders. The court found that the file placed by the Enforcement Directorate contained recorded reasons and material linking the petitioner (by prior commercial transactions and an agreement) to entities identified during searches of payment gateways, and that the reasons were forwarded to the Adjudicating Authority. The existence of a money-trail and the connection between the petitioner and entities subject to investigation furnished sufficient circumstances for issuance of a show cause notice and for freezing at the investigative stage. The court distinguished precedents where reasons were not recorded or forwarded, holding those cases factually distinguishable where reasons were absent; on the facts before it there was no procedural infirmity warranting interference at this stage. [Paras 11, 12, 14, 18]Freezing order under Section 17(1-A) and the recorded reasons before the Adjudicating Authority were held to be free from the procedural infirmity alleged; no interference with the freezing order at this stage.Maintainability of pre-emptive writ challenge to a show cause notice issued by the Adjudicating Authority - Procedural compliance for search, seizure and freezing under the Prevention of Money Laundering Act, 2002 - Whether the petition challenging only the show cause notice and freezing at the stage of investigation is maintainable or premature - HELD THAT: - The court held that where the Adjudicating Authority has issued a show cause notice and the investigation is ongoing, a writ challenge to the notice alone is premature. The petitioner has statutory and procedural opportunities to raise all contentions before the Adjudicating Authority in response to the notice; assuming procedural compliance is projected does not alone justify judicial interference when prima facie material and links in the money-trail exist. Consequently, the court declined to entertain a pre-emptive writ on the ground of asserted procedural aberration. [Paras 13, 15]Challenge to the show cause notice was held to be premature and not maintainable; petitioner must raise its contentions before the Adjudicating Authority.Final Conclusion: Writ petition dismissed; no interference with the freezing order or the show cause notice is warranted at this stage and the matter shall proceed before the Adjudicating Authority, the petitioner being free to raise all contentions in response to the notice. Issues Involved:1. Legality of the freezing order dated 02-09-2022.2. Procedural compliance under Section 17 of the Prevention of Money Laundering Act, 2002 (PMLA).3. Validity of the show cause notice issued to the petitioner.Issue-wise Detailed Analysis:1. Legality of the Freezing Order:The petitioner, a non-deposit taking Non-Banking Financial Company (NBFC), challenged the freezing order issued by the Assistant Director, Directorate of Enforcement, under Section 17(1-A) of the PMLA. The order was a result of a search conducted on Payment Gateways (Cashfree Payments India Private Limited and Razorpay Solutions India Private Limited) used by the petitioner for disbursing and collecting digital micro-loans. The petitioner contended that the freezing order was void ab initio, lacked procedural safeguards, and was issued without reasons to believe, thus violating Section 17 of the Act.2. Procedural Compliance under Section 17 of PMLA:The petitioner argued that the procedural requirements under Section 17 of the PMLA were mandatory and not ancillary. The petitioner claimed that no search was conducted at their office, and no seizure occurred from their premises. The respondents countered that the reasons to believe were recorded in the file and that the freezing order was based on substantial evidence linking the petitioner to entities involved in extortion and harassment through mobile loan apps. The court noted that the original records showed several reasons for freezing the account, emphasizing the need to investigate the money trail involving the petitioner.3. Validity of the Show Cause Notice:The petitioner also challenged the show cause notice issued by the Adjudicating Authority under Section 8 of the PMLA. The respondents argued that the investigation was ongoing and that the petitioner had the opportunity to present their case before the Adjudicating Authority. The court observed that the petitioner had transactions with entities controlled by Chinese nationals and that the investigation was necessary to uncover the extent of the alleged money laundering activities. The court found no procedural violation in issuing the show cause notice and held that the petitioner could raise their defenses before the Adjudicating Authority.Conclusion:The court rejected the petition, upholding the freezing order and the show cause notice. The court emphasized the importance of the investigation in light of the allegations of extortion and harassment through mobile loan apps, many of which were controlled by Chinese entities. The court found that the procedural requirements under Section 17 of the PMLA were met and that the petitioner had the opportunity to present their case before the Adjudicating Authority. The writ petition was dismissed, and the freezing order remained subject to the proceedings before the Adjudicating Authority.