2025 (2) TMI 216 - HC - Money Laundering

Former MUDA Commissioner's residence search under Section 17 PMLA declared illegal for lacking proper authority and evidence

Karnataka HC held that search and seizure conducted at petitioner's residence (former MUDA Commissioner) under Section 17 of PMLA, 2002 was illegal and ... Money Laundering - legality of search and seizure conducted at his residence from 28.10.2024 to 29.10.2024, as well as the subsequent statement recorded under Section 17 of the Prevention of Money-Laundering Act, 2002 - proceedings based solely on the assumption or suspicion that the petitioner, as the former Commissioner of MUDA, might be in possession of records related to the offence of money laundering, is violative of statutory procedural safeguards - reason to believe under section 17 (1) of PMLA, 2002. Whether the authorisation issued to conduct the impugned search and seizure at the residence of the petitioner on 28.10.2024 and 29.10.2024, and the consequent statement recorded under Section 17 of PMLA, 2002 suffers from lack of jurisdiction? - HELD THAT:- A careful perusal of Section 17 of the Act, 2002, the relevant portion of which is extracted hereunder, reveals that the competent authority under the Act to authorize a search and seizure of any premises is the Director or any other officer authorized by the Director, for the purposes of Section 17, provided such officer is not below the rank of Deputy Director. Therefore, the statute clearly limits the vesting of authority to record reasons to believe on the basis of material in possession with highest responsible authority to prevent the misuse of such provisions. Furthermore, the words “the Director” in sub-section (1) of Section 17 were substituted for the words “the Director or any other officer not below the rank of Deputy Director authorised by him for the purposes of this section” vide the Amendment Act 21 of 2009 (w.e.f. 1.06.2009). Where the Director has clearly authorised the Joint Director (an officer above the rank of Deputy Director) for purposes of Section 17 of PMLA, 2002 vide Circular No. Circular Order (Tech) No. 03/2011, dated 27.09.2011, the conduct of impugned search and seizure under Section 17 of PMLA, 2002 cannot be faulted for lack of jurisdiction. Whether the said impugned search and seizure and the statement recorded, is bad in law for lack of the requisite “reason to believe” under section 17 (1) of PMLA, 2002, and is therefore, an abuse of process of law? - HELD THAT:- Concluding its observations in Arvind Kejriwal [2024 (7) TMI 760 - SUPREME COURT], the Supreme Court held that “reason to believe” must be distinguished from ‘mere grave suspicion’. “It refers to the reason for the formation of belief which must have rational connection with or an element bearing on formation of belief.” The reason must not be extraneous to the provision’s purpose. The Court further held that “reason to believe” should be furnished to the arrestee at the time of arrest to enable them to challenge the arrest. It opined that any State action prejudicing personal liberty is subject to judicial review. The Court concluded that doubts arise only when the reasons recorded by the authority are unclear or ambiguous, thereby necessitating deeper scrutiny to determine the validity of the “reason to believe.” In the present case, the alleged predicate offence pertains to the illegal allotment of sites during the petitioner’s tenure as the Commissioner of MUDA. However, there is no evidence to demonstrate that any consideration passed in relation to the conveyance or relinquishment of such sites was received by the petitioner. Consequently, the petitioner cannot be attributed any role in possessing, concealing, or using the proceeds of crime to constitute an offence under Section 3 of the PMLA, 2002 - the existence of “reason to believe,” as required under the Prevention of Money Laundering Act, 2002 (PMLA), mandates the presence of sufficient cause to indicate the commission of the offence of money laundering. Additionally, it necessitates a corresponding justification for the seizure of any records or proceeds of crime discovered during the search. Such a requirement ensures that the said property is not dissipated, layered, or integrated in a manner that renders it seemingly legitimate. It is now well settled that reason to believe must exist on the basis of evidence regarding the existence of certain facts. In the instant case, no such material as was in possession at the time of search, has been furnished to this Court to probablize the purported involvement of the petitioner. In absence of the same, any conclusion arrived at necessitating the search does not satisfy the threshold of “reason to believe”, as envisaged under the PMLA, and is therefore, no more than a mere suspicion of involvement in the offence under the Act. Thus, this Court is of the opinion that the impugned search and seizure conducted at the residence of the petitioner was unwarranted and based on unfounded suspicion, and is therefore, an abuse of process of law. Whether the impugned summons/notices issued under Section 50 of PMLA, 2002 and the various statements recorded thereunder, be sustained under the law? - HELD THAT:- In the present case, summons under Section 50 were issued following the ‘illegal’ search and seizure conducted under Section 17 of the PMLA. However, as established in the preceding paragraphs, the reasons recorded for the search do not satisfy the essential elements required to establish the commission of an offence under Section 3 of the PMLA. As a result, the search and seizure lacked proper authority for there being no proper reason to warrant such a search. The respondent-Agency can summon any person to record a statement or produce a document or record only in cases where there is credible evidence that an offence under Section 3 of PMLA has been committed, and in such circumstances, the person who has been summoned cannot raise any grievance against the issuance of summons. In light of the circumstances of this case, where no prima facie case has been established showing that an offence has been committed under the PMLA, and no incriminating material has been elicited at the time of search and seizure, the issuance of summons to the petitioner lacks legal authority. The petitioners cannot be compelled to appear and record their statements or produce documents, as such actions would unjustly infringe upon their personal right to liberty. Whether, in the course of its administration and execution of the PMLA, 2002, the attachment of property under Section 5 of the Act must mandatorily precede the conduct of search and seizure under Section 17 of the said Act? - HELD THAT:- As against the submission of the learned ASG that the instant petition suppresses material facts of the petitioner and the scope of responsibilities incumbent upon him, in relation to holding of the office of Commissioner of MUDA in the past, it is to be observed that the petitioner is not an accused in the predicate offence and that unless the petitioner were to be informed that the investigation conducted is in relation to the particular predicate offence, and that the impugned search and seizure and the subsequent issuance of summons were in relation to purported role of the petitioner in the illegal allotment of 14 sites to an accused in the predicate offence, it cannot be expected of the petitioner to disclose past fact of having discharged any duties of such nature. The right to liberty and privacy under Article 21 of the Constitution vests a right against the conduct of arbitrary searches, and therefore, the search conducted on the premises of the petitioner under the garb of investigation, when there is no prima facie evidence to establish the offence under Section 3 is but an abuse of process of law. The Enforcement Directorate cannot give the elements of procedural fairness contained in the PMLA a go-by in the course of its administration. It is pertinent that the right to liberty and privacy of individuals cannot be trampled upon and that any curtailment of civil liberties is subject to the due process of law. Conclusion - i) The search and seizure conducted at the petitioner's residence and the statement recorded under Section 17 (1) (f) of the PMLA are declared invalid and illegal. ii) The statement recorded under Section 17 (1) (f) is ordered to be retracted. iii) The summons issued under Section 50 of the PMLA and the various statements recorded thereunder are quashed. iv) The petitioner is granted the liberty to initiate action under Section 62 of the PMLA against the concerned officer, as the matter of whether the search and seizure were vexatious is subject to trial. Petition allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:i. Whether the authorization for the search and seizure at the petitioner's residence was issued without jurisdiction under Section 17 of the Prevention of Money-Laundering Act, 2002 (PMLA).ii. Whether the search and seizure and the subsequent statement recorded under Section 17 were conducted without the requisite 'reason to believe,' thus constituting an abuse of process.iii. Whether the summons issued under Section 50 of the PMLA and the statements recorded thereunder can be sustained under the law.iv. Whether the attachment of property under Section 5 of the PMLA must mandatorily precede the conduct of search and seizure under Section 17 of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue No. 1: Jurisdiction of Authorization for Search and SeizureThe petitioner challenged the jurisdiction of the authorization for the search and seizure conducted at his residence, arguing that the Joint Director, who authorized the Assistant Director, was not competent under the Act. The Court analyzed Section 17 of the PMLA, which requires that such authorization be given by the Director or an officer not below the rank of Deputy Director. The Court found that the authorization was valid as the Joint Director, being above the Deputy Director in rank, was competent to authorize the search and seizure under the PMLA.Issue No. 2: Lack of 'Reason to Believe'The petitioner contended that the search and seizure lacked the requisite 'reason to believe' as mandated by Section 17 of the PMLA. The Court reviewed the precedents and emphasized that 'reason to believe' must be based on credible material indicating involvement in money laundering activities. The Court found that the reasons recorded for the search were based on mere suspicion without substantive evidence of the petitioner's involvement in money laundering or possession of proceeds of crime. Consequently, the search and seizure were deemed unwarranted and an abuse of process.Issue No. 3: Validity of Summons under Section 50The petitioner argued that the summons issued under Section 50 were vague and violated constitutional protections against self-incrimination. The Court referred to precedents indicating that summons under Section 50 are procedural and do not imply an accusation. However, the Court found that since the search and seizure were based on unfounded suspicion, the subsequent summons lacked legal authority and were unjustified.Issue No. 4: Precedence of Property AttachmentThe petitioner argued that property attachment under Section 5 should precede search and seizure under Section 17. The Court clarified that Section 5 is an investigative tool and does not mandatorily precede search and seizure. The Court held that the sequence of these actions is at the discretion of the investigating agency, depending on the facts and circumstances of each case.3. SIGNIFICANT HOLDINGSThe Court concluded that the search and seizure conducted at the petitioner's residence were invalid due to the absence of a legitimate 'reason to believe.' The summons issued under Section 50 were quashed as they were based on an invalid search. The Court emphasized the importance of procedural fairness and the protection of individual rights against arbitrary actions by investigative agencies.ORDERi. The petition is allowed.ii. The search and seizure conducted at the petitioner's residence and the statement recorded under Section 17 (1) (f) of the PMLA are declared invalid and illegal.iii. The statement recorded under Section 17 (1) (f) is ordered to be retracted.iv. The summons issued under Section 50 of the PMLA and the various statements recorded thereunder are quashed.v. The petitioner is granted the liberty to initiate action under Section 62 of the PMLA against the concerned officer, as the matter of whether the search and seizure were vexatious is subject to trial.