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 ... Freezing of the bank accounts of petitioner - reasons to believe - submission is that the freezing of bank account of the petitioner is a draconian act which would entail serious civil consequences and if the statute directs performance of act of freezing in a particular manner, the respondents cannot deviate from the said procedure and if there is deviation it would become non est in the eye of law. HELD THAT:- It is germane to notice that there is huge proliferation of mobile loan apps and their modus operandi is in public domain. The operation is alleged to be this way, a gullible borrower is given a call and is lured into, for getting a small loan without any documentation. All that the borrowers are informed is that they should download the loan app and give access to the contents of the smart phone. A small time borrower desirous of getting money without any documentation would grab at the opportunity and accept every condition and give access to his smart phone. It is then the trouble crops up when the representatives of such mobile loan apps/companies begin to haunt the borrower threatening leakage of contents in the smart phone while seeking such repayment. It is alleged in some cases that repayment is sought 16 to 20 times more than what a borrower has to pay as EMI. It is again in public domain that several borrowers have committed suicide unable to bear the harassments of the representatives of such loan apps. The office bearers of several of these companies which control and operate such mobile loan apps are said to be entities of China or individuals from China sitting as Directors of such mobile loan apps. Therefore, it becomes necessary for an investigation, in the least to be conducted of any such company who would operate such loan apps and has transactions between each other. The investigation would be imperative, as any effort of any neighbouring nation to destabilize this country, either economically or otherwise, by any method which would touch upon the security of the nation and safety of its citizens, cannot be turned a blind eye to, and in certain cases, certainly in the case of the petitioner, investigation cannot be stalled on this specious plea of procedural aberration as alleged by the petitioner. There are no warrant to interfere with the impugned proceedings at this juncture. The challenge to both the freezing order and the show cause notice deserves to be rejected and the defreezement order shall remain subject to the proceedings before the Adjudicating Authority. Petition dismissed. 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.