Navigating Intersection Of Anti-Money Laundering And Recovery Laws: The Imperative For Collaboration And Cooperation

The legislative efforts to combat money laundering activities in the country and the legislative measures to deal with the recovery of nonperforming assets in the Banking sector without the intervention of courts of law coincided in the same year with the passage of two special Acts in the year 2002.

These two Acts, (Prevention of Money Laundering Act 2002 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002) though passed in the same year, have no proximate connection with each other as they operate in completely different areas and the purposes and objects of the Acts also being vastly different in their nature.

It is therefore necessary to examine the legal frameworks of both these statutes and chart out a course of action by which an effective, efficient, collaborative, and smooth implementation of both the frameworks is made possible.

There are many issues on which the Public Sector Banks and the Officials of the Anti Money Laundering Act engage themselves in courts asserting their legal rights. These specifically pertain to the security held by the public sector banks and financial institutions. The secured creditors in exercise of their statutory rights proceed against the mortgaged properties for recovery of the loans advanced by them while the Anti Money Laundering officials will be pursuing their actions primarily from the perspective of the offences committed under the Act. In the course of such actions by the Anti Money Laundering Authorities, the properties charged/secured to Bankers comes under the scanner of the Anti Money Laundering officials.

The implementation of the Prevention of Money Laundering Act and the Enforcement of Security Interest by the secured creditors over the last two decades and in the recent past has seen contentious stands of the two government agencies. Both these government agencies have canvassed for their rights before the courts.

As the resolution of issues through courts between two government agencies is fraught with consuming precious judicial time besides the time and efforts of other important officials, an attempt is made to suggest a suitable institutional framework for an amicable settlement between the Government Agencies before the issues get escalated to courts.

Prevention of Money Laundering Act 2002: The Prevention of Money Laundering Act was passed in 2002. The passing of this law by our country is in recognition and acknowledgment in the international community of the need to prevent and put punitive measures in place to fight the menace of money laundering.

Objects of the Prevention of Money Laundering Act: As the title of the Act itself indicates the the object of the Prevention of Money laundering Act is to prevent the offence of money laundering and meet out punishment to the offenders. The objects of the Act which can be deciphered from the preamble of the Act which is as follows.

1. Act to Prevent Money Laundering and
2. providing for confiscation of property derived from or involved in money Laundering

Important Definitions under the Act:

Definition of Money Laundering: Section 3:

Who so ever directly or indirectly attempts to indulge or knowingly assists or is knowingly a party or is actually involved in any process or activity connected with the proceeds of the crime and projecting it as untainted property shall be guilty of the offence of Money Laundering

Definition of Proceeds of crime: Section 2(u)

Any property derived or obtained directly or indirectly by a person as a result of a criminal activity relating to a scheduled offence or the value of such property.

Authorities under the Act: The Act provides for a suitable mechanism for administering the Act. Chapter VIII of the Prevention of Money Laundering Act under Section 48 provides for

1. Director or Additional Director or Joint Director
2. Deputy Director
3. Assistant Director and
4. Such other class of officers as may be appointed for the purposes of the Act.

The above Authorities are entrusted with the task of the enforcement of the Money Laundering Law.These Authorities exercise their powers in accordance with the provisions of the Act. The powers exercised by the above officials include the powers to search, seize and arrest a person. Sections17, 18 and 19 provide for the powers of search, seizure, and arrest, respectively.

Adjudicating Authority: An Authority known as Adjudicating Authority is envisaged in terms of Section 8 of the Prevention of Money Laundering Act. The Adjudicating Authority performs various functions envisaged in the Act

The Adjudicating Authority under Section 8 of the Act on receipt of a complaint under section 5 or an application under sub section (4) of section 17 or under sub section(10) of section 18 is empowered to issue a notice to a person calling him to show as to why the properties mentioned in the said notice should not be declared as involved in money laundering and confiscated by the Central Government.

The Adjudicating Authority as per Section 11 of the PML Act has the powers of a civil court in summoning and enforcing the attendance of persons, ordering production and discovery of documents and such other powers.

Appellate Tribunal: Section 25 of the PML Act envisages the establishment of an Appellate Tribunal. The Appellate Tribunal sits as an Appellate body over the orders of the Adjudicating Authority and decides the Appeals brought before it.

A time limit of 45 days has been prescribed under the Act for the Authorities to file the appeal before the Tribunal. The time of 45 days is calculated from the time of receipt of the order copy against which the Appeal is to be preferred.

Financial Intelligence Unit: Financial Intelligence Unit is tasked with the responsibility of collecting data in respect of financial transactions from financial intermediaries

Powers and functions of the Authorities under the PML Act:

The powers of the various authorities constituted under the Act are derived from the Act. The Act confers specific powers to the Authorities to proceed against the persons involved in the Money Laundering Activities and to attach and confiscate the properties involving money laundering. The important powers exercised by the Authorities under the Act in relation to attachment and confiscation are described below.

Attachment of property under Section 5: Section 5 of the Prevention of Money Laundering Act 2002 empowers the Authorised officer (Director or Deputy Director) to order attachment of the proceeds of crime. The exercise of this power is at the preliminary stages of the Investigating proceedings and the attachment ordered under this section is on a provisional basis. The attachment made being provisional has to be confirmed within 90 days by the Adjudicating Authority under section 8 failing which provisional attachment ceases to be operative.

Grounds or basis for provisional attachment:

Section 5 of the PML Act 2002, confers powers on the Director, or any other officer not below the rank of Deputy Director authorised by him, to order an attachment, if he has reason to believe, on the basis of material in his possession that

1. any person is in possession of proceeds of crime.
2. Such person has been charged of committing a scheduled offence.
3. Such proceeds of crime are likely to be concealed or transferred or dealt with in any manner which may result in frustrating any proceedings in relation to confiscation of such proceeds of crime.

The important term to be understood is the expression proceeds of crime. Proceeds of crime is defined under section 2(u) as any property derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offence and includes the value of such property.

The main ingredients on which a provisional attachment can be based hinge on the possession of the proceeds of the crime, person charged with committing a scheduled offence and the proceeds of the crime are likely to be concealed or transferring defeating the confiscation at a later stage of the adjudicatory proceedings.

Further the provisional attachment is predicated upon the Authorised officer having reasons to believe which are required to recorded in writing.

The Authorities under the Act have affected several attachments under this section. The type of assets/properties attached include both movable and immovable properties.

Steps further to Provisional attachment: The Prevention of Money Laundering Act envisages further steps to be initiated pursuant to provisional attachment made under section 5. Section 8 to 10 of the Act lists out these measures. The property attached under section 5 and later confirmed by the Adjudicating Authority under section 8 is liable to confiscation and the eventual vesting of the property in the Central Government.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002

Having presented the structure of the Prevention of Money Laundering Act 2002, it would be pertinent to understand the scheme of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.

Genesis of the Act: The Act was necessitated in the backdrop of the mounting of nonperforming assets in the banking sector. Experience has shown that the then existing mechanisms for recovery of nonperforming assets were not effective, quick and solution oriented. Pendency of cases in courts/Tribunals for longer duration and the legal provisions being circumvented by the defaulters proved to be a major challenge for recovery. With a view to addressing these concerns, the securitisation and reconstruction of financial assets and enforcement of security interest Act was passed in 2002

Purposes and objects of the Act: The primary purpose and object of this Act is to empower banks and financial institutions to recover the nonperforming assets by the sale of mortgaged properties without the intervention of courts of law.

Objects of the Act: The Preamble of the Act reads as follows.

An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights, and for matters connected therewith or incidental thereto

Important definitions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002:

Security Interest: Section 2 (zf) “security interest” means

right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes—

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred, or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset;]

Security Creditor: Section 2(zd) defines “secured creditor” means—

1. any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l).
2. (ii) debenture trustee appointed by any bank or financial institution; or
3. an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or
4. debenture trustee registered with the Board and appointed] for secured debt securities; or
5. any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.]

Nonperforming Asset: Section 2(o) defines nonperforming asset as

non-performing asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, —

(a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted, or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body.

(b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank

Authorities under the Act: The enforcement of security interest created in favour of the Secured creditors is enforced in accordance with the provisions delineated in Chapter III of the SRFA& ESI Act 2002 read with the Security Interest and Enforcement Rules 2002.The various measures taken by the secured creditors under this chapter are enforced through a self contained machinery laid down under the Act.

Authorised Officer: The Authorised officer is an important functionary entrusted with the task of enforcing the security interest. Security Interest for the purposes of the Act refers to and includes both Movable and Immovable Assets. The role of the Authorised officer generally commences from the stage of issuing notice and concludes with the issuance of sale certificate of the properties sold by him under the Act

Secured Creditor: Secured creditor for the purposes of the Act refers to the agency/entity in whose favour the security interest is created. The role and responsibility of the Secured creditor is specified in Chapter III of the SRFA & ESI Act. The crucial functions performed by the secured creditor among others include fixation of reserve price for the purposes of sale of the security interest etc.

Powers and functions of the Authorities under the Act: The first step taken by a secured creditor under Chapter III of the Act commences with the issuance of a notice under Section 13(2), wherein the borrower (defaulter) is called upon to pay the demanded amount within a period of 60 days failing which the borrower may suffer the consequence of his mortgaged property being taken over and sold by the Secured creditor. Such a notice can be issued by the Secured creditor only after the account of the borrower is classified as a nonperforming asset in the books of the lender.

The legal consequence of this notice is spelt out in sub clause 13 of Section 13 which states that after the service of this notice on the borrower, the borrower is prohibited from dealing with the property or transferring the property either by sale, lease or in any other manner. The issuance of the notice is in a way an attachment of the property by the secured creditor.

Interplay of the provisions of law by the two statutory Authorities: The actions taken by one of the Authorities is likely to have an impact on the rights of the other.For example if a provisional attachment is ordered by the Anti Money Laundering Authorities, in all probability the same is likely to face legal challenges from the Public Sector Banks who may have a mortgage over the same property which was attached on a provisional basis in the first instance

The first intersection between the Authorities under the prevention of money laundering Act and the Authorities under SRFA& ESI Act happens when the Section 13(2) notice and the Provisional attachment made by the Directorate of Enforcement come into play. Either of the two i.e issue of notice by a secured creditor under Section 13(2) or passing of a Provisional Attachment order by the Enforcement Directorate may happen first.

The various scenarios that can be countenanced in relation to the attachments made by Enforcement Directorate/Authorised Officer under SRFA & ESI Act are given hereunder.

1: Section 13(2) Notice is issued First and there is no attachment order under the PML Act 2002:

Under this scenario, the Secured creditor (A Public Sector Bank or a Public Financial Institution) issues the notice under Section 13(2). At this point of time, if there is no attachment order of the Enforcement Directorate, either prior to or after the said notice, the secured creditor will be free to go ahead with other measures contemplated under the Act. This is an ideal scenario in which no clash or conflict of interest is involved between the Secured creditor and the Enforcement directorate.

2. Subsistence of provisional attachment order at the time of issuance of section 13(2) notice by the secured creditor: The second scenario arises where the secured creditor issued notice under 13(2) is during pendency of the attachment order under Section 5 of the PMLA Act. The secured may or may not be aware of the order of provisional attachment.

As the demand notice under 13(2) is issued only to the Borrower, it may not come to the knowledge of the Enforcement Directorate. However, if the demand notice is published in Newspapers, it is highly probable that the enforcement directorate may get to know of the attachment. In such a situation a clash of interests between the two arises and, in any case, as the provisional attachment is subject to confirmation by the Adjudicating Authority, the issue is likely to get the attention of the Adjudicating Authority.In case the provisional attachment is not confirmed by the Adjudicating Authority, the Secured creditor is likely to proceed with further actions under the SRFA & ESI Act till the Enforcement Directorate Authorities secure an order in their favour confirming the provisional attachment.

3. Enforcement Directorate steps into the scene after Section 13(2) is issued by the Secured creditor and ED passes a parallel attachment order.

Another scenario which often arises is when the Enforcement directorate issues a provisional attachment order without having knowledge of the notice issued under Section 13(2). In such a situation the Enforcement Directorate will seek confirmation of the provisional attachment order. The secured creditors can represent before the Adjudicating Authority that the property obtained by way of mortgage is not liable to be attached by the Enforcement Directorate. In case the secured creditors objections find favour with the Adjudicating Authority, the provisional attachment may be set aside leaving the secured creditors to proceed with their actions.

4.Secured creditors conniving with the promoters in accepting property acquired out of Money Laundering activities:

If it is established that the mortgaged property was bought by the owner of the property with proceeds of crime and subsequently mortgaged, then the Enforcement Directorate would press for continuation of the proceedings against the owners.Further if there is any connivance or complicity by the Bank in accepting such property acquired with proceeds of crime, the Bankers also run the risk of being prosecuted under the Anti Money Laundering Law

5.Enforcement Directorate intervenes at the stage of taking possession by the Secured creditor and at the stage of issuance of rule 8(6) notice and sale notice under Rule 9(1) of the Security Interest Enforcement Rules 2002

Apart from the three scenarios mentioned above, there is every possibility of the Prevention of Money laundering Authorities intervening with the course of measures being taken by the secured creditor at other stages of enforcement of security interest. In other words, by virtue of the Anti-Money Laundering Law, the Enforcement Directorate can intervene at the time or after taking possession of the mortgaged properties, sale of mortgaged properties and even after sale but before confirmation of sale by the secured creditors.

In all the above situations an inevitable legal tussle is likely to unfold between the Secured creditors and the Anti Money Laundering Authorities.

Questions of law with a conflict of Interest between the Enforcement Directorate and the Secured Creditors

The critical legal question that often arises between the secured creditors and the Anti money laundering authorities is over the source of acquisition of the mortgaged properties.

The enforcement directorate as per the provisions of the PML Act 2002 has powers to attach properties if the source of acquisition of the properties is linked to the proceeds of crime. In other words, if the owners acquire immovable properties with the proceeds of crime of a scheduled offence, then notwithstanding that the said property is mortgaged to secured creditors, the Enforcement directorate can attach the said properties.

The primary burden of proving that the acquisition of property is not tainted squarely lies with the owner of the properties. This burden can be transferred to the secured creditors if they knowingly accept the property as security despite knowing that the property is a tainted property.

The Enforcement Directorate and the secured creditors proceed against the same properties one with the object of confiscating the property and the other with the object of recovering the money lent against the said property.

There are number of instances wherein the secured creditors represented by public sector banks and enforcement directorate clash over the properties. These have resulted in the parties approaching the courts for resolution of the issues therein.

A distinct feature of the Prevention of Money Laundering Act is that unlike other statutory dues that are payable to a statutory Authority (Such as Customs, Excise, GST, Employee's provident Fund, Employee state Insurance Etc), there are no dues that are payable either under the terms of a Statute or under a contractual arrangement to the Prevention of money Laundering Authorities. Hence the disputes and conflicts between the Government Owned Banks and the Enforcement is not primarily over the priority of dues.

The disputes between these two government agencies are over who is entitled to proceed against the properties. If the PML Authority's action to proceed against the properties is upheld it may end up in confiscation of property and vesting of the property in the Central Government. If the Bankers succeed over the PML Authorities, they would be entitled sell the properties through the available legal framework and recover the loan.

Cases decided by the Indian Courts on the claims of PMLA and Secured Creditors: The decisions rendered by Indian Courts about attachment of properties either by PML Authorities and/or by Banks and financial institutions can be examined by classifying the same on the basis of position prevailing before 2016 and after 2016. The year 2016 assumes significance as amendments were made to the Recovery Laws by giving priority to the secured creditors over statutory dues. These amendments were made to the SRFA& ESI Act 2002 by insertion of Section 26 E and to RDDB Act 1993 by insertion of Section 31 B.

Position before 2016

Indian Bank vs Government of India^[1] : The Chennai High Court has considered several interesting questions of law involving the rights of the Banks who were secured creditors and the Enforcement Directorate. Indian Bank and State Bank of India have filed the Writ petitions in the High Court challenging the provisional attachment made by the officer of the Enforcement Directorate.

One of the main contentions advanced by the Banks was that entire sale consideration of the property acquired by the Borrower company was paid directly by the banks and the property after acquisition stood mortgaged to them. Hence the Bank contended that as the entire sale consideration was paid out of its funds, the said property is not liable for attachment by the Enforcement Directorate and hence the provisional attachment be set aside.

The High Court after considering the rival contentions of the parties concluded that the fact of payment of sale consideration by the Bank for the acquisition of the properties would not by itself rule out that the scheduled offences under the PML act were not committed. The High Court has left it to the special court to consider this aspect

However, on the issue of setting aside the provisional attachment order (which was later confirmed by the Adjudicating Authority during the current writ proceedings), the High Court held that the Adjudicating Authority's order of confirmation of provisional attachment has to be set aside as the Adjudicating Authority did not issue the notice to the Banks and further the Adjudicating Authority in deliberate defiance of an order of the High court staying further proceedings, has confirmed the provisional attachment.

B.Ramaraju Vs Union of India^[2]: The Andhra Pradesh High Court has held that if the Adjudicating Authority is satisfied as to the bona fide acquisition of property, it should relieve such property from provisional attachment by declining to pass an order of confirmation of the provisional attachment.

Position after 2016: The legal position in relation to priority of dues of secured creditors versus statutory dues have undergone a major change with the amendment of the SRFA & ESI Act 2002 and RDDB Act 1993 in the year 2016. Through the amendments carried out to the above Acts, the secured creditors have been placed over and above all the other claimants including statutory charge holders. As a result of this amendment, the secured creditors dues rank prior to all other dues including sovereign dues

State bank of India vs joint director of Enforcement^[3]: The Appellate Tribunal was considering an appeal filed by SBI challenging the attachment of eight properties by the Enforcement Directorate. The Bank's case was that the properties were mortgaged to the Bank way back in 2005 and they are continuing with the said properties without any legal challenge till the attachments were made.

The Appellate Tribunal's observations over the rights of the secured creditors and the actions Enforcement Directorate are relevant to be mentioned. At paras 50 and 51 of the order, the Appellate Tribunal has held that

50. The ED in its provisional order as well as in the complaint before the Ld. Adjudicating Authority admitted that the properties which are subject matter are mortgaged with the appellants banks. The borrowers acquired and possessed by the respective owners since 2000, much before the borrowers availed the loan from the appellants banks and therefore no proceeds of crime were invested in these properties and even prior to the coming in force of the Act of 2002. The copies of the sale deed/title deed of the properties show the date of acquisition to be prior to dates of alleged fraud committed in 2008-2009 as per the case of the respondent no.1. Hence, it cannot be said the claim in any manner that these properties have been acquired out of the funds/loans availed from Union Bank of India. 

51. The mortgaged properties are security to the loans and cannot be subject matter of attachment particularly when the same were purchased and mortgaged prior to the events of funds diversion and frauds committed by the respondents. The appellants Banks have to recover huge amounts in the above loan accounts and the appellant bank being the mortgagee/transferee of the interest in the properties is entitled to recover its dues with the sale of the mortgaged properties.The properties stood transferred by way of mortgage to the appellant bank much before the alleged criminal action.

The Appellate Tribunal has set aside the attachment of the properties by the Enforcement Directorate

Punjab National Bank Vs Dy Director Enforcement Directorate^[4]:

The Appellate Tribunal for Prevention of Money Laundering Authority in this case was considering an appeal filed by Punjab National Bank challenging the attachment of the Mortgaged property by the Enforcement Directorate under Section 8 of the PML Act 2002

The Bank had primarily contended that the property attached by the Enforcement Directorate was in no way involved in money laundering activities as the same was acquired and mortgaged to the Bank much prior to the enforcement directorate swung into action.

The Appellate Tribunal had considered the factual aspects as well as the legal position flowing out of the SRFA & ESI Act 2002 and RDDB Act 1993 and held that the Bank was an innocent party. The Appellate Tribunal found fault with the attachment order passed by the Enforcement Directorate even after it was established that the property was not a tainted property. The Appellate Tribunal in the circumstances set aside the attachment order of the Adjudicating Authority and permitted the Bank to sell the properties. The observation of the Appellate highlighting the importance of recovering the public sector Banks dues have been succinctly stated which is reproduced below.

“The appellant is a Public Sector Bank. The money must come to the public forthwith not after the trial of criminal case against the borrowers which may take many years. The banks are in crisis, no attempt should be made to block the loan amount in order to avoid worsen positions in the commercial market. The trial may continue against the borrowers”

Bank of India Vs Enforcement directorate:^[5]

The property of the Bank cannot be attached or confiscated if there is no illegality in the title of the appellant and there is no charge of money laundering against the appellant. The mortgaged of property is the transfer under the Transfer of Property Act. Even the respondent is not denying the fact that the Bank is a victim party who is also innocent and is entitled to recover the loan amount. It is also not disputed by the respondent that the properties in dispute are mortgaged with Bank and it has to go to Bank. The Appellate Tribunal also did not accept the contention of the stand of the PML Authorities that the properties be sold by the Banks after the Trial stood completed. The Tribunal held that holding up the sale of properties by the Banks would lead to a collapse of the banking system as the Trial in respect of criminal offences is a long-drawn process.

The Deputy Directorate of Enforcement Vs Axis Bank and others^[6]:

The Delhi high court in this has considered the order of the Appellate Tribunal for PMLA which has held that the Banks will have priority under SRFA &ESI Act, RDDB Act and IBC over PMLA. The said order was examined in appeal by the Delhi High Court. The Appellate Tribunal in its order has set aside the order Adjudicating Authority which has confirmed the provisional attachment. Hence this criminal appeal was filed by the Deputy Director of enforcement

The High Court has highlighted the need for a harmonious interpretation between the two laws. The main emphasis of the judgement was on the need to implement the two Acts in a spirit of coexistence rather than concluding that one Act overrides the the other. Some of the pertinent observations made by the High court are highlighted below to focus on the judicial thinking shown by the High court.

At Para 171 of the judgement, the High court has observed as under

(viii) The PMLA, RDBA, SARFAESI Act and Insolvency Code (or such other laws) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other with regard to the assets respecting which there is material available to show the same to have been "derived or obtained" as a result of "criminal activity relating to a scheduled offence" and consequently being "proceeds of crime", within the mischief of PMLA.

xi). A party in order to be considered as a "bonafide third party claimant" for its claim in a property being subjected to attachment under PMLA to be entertained must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money-laundering, and that it has made all compliances with the existing law including, if so required, by having said security interest registered.

(xii). An order of attachment under PMLA is not illegal only because a secured creditor has a prior secured interest (charge) in the property, within the meaning of the expressions used in RDBA and SARFAESI Act. Similarly, mere issuance of an order of attachment under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release (or restoration) from PMLA attachment being dependent on its bonafides.

(xiii). If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property), claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity , in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken “due diligence" (e.g. taking reasonable precautions and after due inquiry) to ensure that it was not a tainted asset and the transactions indulged in were legitimate at the time of acquisition of such interest.

xv). If the bonafide third party claimant (as aforesaid) is a "secured creditor", pursuing enforcement of "security interest" in the property (secured asset) sought to be attached, it being an alternative attachable property (or deemed tainted property), it having acquired such interest from person(s) accused of (or charged with) the offence of money-laundering (or his abettor), or from any other person through such transaction (or inter-connected transactions) as involve(s) criminal activity relating to a scheduled offence, such third party (secured creditor) having initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the directions of such attachment under PMLA shall be valid and operative subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party.

(xvi). In the situations covered by the preceding two subparagraphs, the bonafide third party claimant shall be accountable to the enforcement authorities for the "excess" value of the property subjected to PMLA attachment.

(xvii). If the order confirming the attachment has attained finality, or if the order of confiscation has been passed, or if the trial of a case under Section 4 PMLA has commenced, the claim of a party asserting to have acted bonafide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.

The High Court has remitted the matter back to the Tribunal to examine all the questions raised by the parties in the light of the above principles. The High Court has set aside the orders of the Appellate Tribunal which has set aside the order of the adjudicating Authority under Section in confirming the provisional attachment.

The above judgement has maintained a delicate balance between the rights and responsibilities of both the Government Agencies. The observations that the attachments made by the PMLA and/or by the secured creditors does not ipso facto become illegal ensures that the attachments made are protected and there is no necessity of one government agency seeking set aside of the order passed by the other Authority.Similarly the High Court has also protected the interests of the secured creditors by stating that an attachment of the properties by the Anti Money Laundering Authorities does not render the mortgage void or invalid.

The observation by the High Court that the excess value of the property realised by the secured creditor per se should not be objectionable to the secured creditor as under the SRFA& ESI Act also the secured creditor has to refund the surplus to the owner of the property.

Suggestions:

Certainty in law with regard to priority of due to secured creditors over statutory Authorities has been made possible with the amendments to the SRFA& ESI Act and RDDB Act in 2016 with priority being given to the secured creditors over other claimants.

Judicial propositions are also absolutely firm and clear as the Supreme Court and the High Courts as well as the Appellate Tribunal for PMLA having pronounced several judgments by which the rights of the secured creditors have been held to have priority over others.

Despite the certainty of law and judicial thinking, inter se disputes between the Prevention of Money Laundering Authorities and the Public Sector Banks and Public Financial Institutions are not seeing any decline. If the inter se claims and counter claims are to be fought bitterly in courts of law, between two government agencies working with the same purpose of serving in public interest ,it is no exaggeration that not only precious time of judicial officers is consumed but also the time of the officials on both sides is also equally consumed as they need to spend their time and efforts in pursuing the litigation.

It is therefore proposed that an Institutional framework and mechanism be created for an amicable, efficient, and effective resolution of all issues arising between these two Governmental Authorities i.e the Enforcement Directorate and Public sector Banks and Public Financial institutions.

A: Creation of Institutional framework: One should not lose sight of the fact that both the Anti money laundering Authorities and the Banks and Financial institutions are the arms of the sovereign, and both these institutions perform public functions and public duties with public purpose as its dominant objective. Instead of the sovereign and its Instrumentalities engaging in courts, it would be highly appreciable if both agencies engage themselves in a cooperative manner whereby a mutually acceptable course of action is chalked out. A high-powered committee consisting of the representatives of the Officials of the Money Laundering Authorities and the representatives of public sector Banks can be created to handle the issues arising inter se.

As the principles of law have now been laid down by the Courts, the factual aspects of Acquisition of properties, the sources of funding, the sanction of loan, creation of security, disbursement of loans and enforcement actions taken by both the Agencies as per the applicable are all capable of being agreed upon without the need to approach courts of law.In short all measures initiated by the public sector banks and the Anti Money Laundering activities can be discussed between them in a transparent manner and spirit of mutual cooperation.

Based on such meaningful deliberations between the government agencies, a mutually agreed course of action can be agreed upon. For instance, if,it is established

1.The property in question is not tainted and the provisions of Money Laundering Act are not attracted, the secured Creditors may be allowed to proceed with their actions for sale of the properties.

2. The second situation which may arise is that the property mortgaged to the Bank is a tainted one and the Provisions of Money Laundering Act get attracted. If the same property is under mortgage of the public sector Banks it is suggested that instead of allowing the said properties to be confiscated, it would be prudent to allow the sale of the said property by the Bank. This would result in the recovery of a bad asset and leaves the defaulter to face the consequence of deprivation of his property rights. If there is a surplus left, the same may be handed over to the Union of India.

3. The sale of the tainted property would not in any way come to the aid of the promoter as he will still be liable to face the consequences of money laundering activities. The Promoter will not be absolved from his liability under the PMLA Act due to the sale of property by the Banks.

4. The principles laid down by the Delhi High Court in its order dated 2^nd April 2019 can form the basis for securing mutual cooperation and understanding.

II: Securing Cooperation through Institutional Arrangements: The Banks and the Money Laundering authorities can have an institutional arrangement by which the data on various aspects of combating Money Laundering activities can be accessed.

III: In the era of digitalisation and Artificial Intelligence where the access to information can be had at a blistering speed, the sharing of information can also facilitate faster and effective decision making. For eg the information recorded by the Bankers with CERSAI and Information Utilities under the Insolvency and Bankruptcy Code can be used

IV: In case a substantial question of law arises, which requires determination by the higher judiciary, the same may be first examined by higher level functionaries on both sides and after a decision is arrived at, the recourse to courts may be taken.

The Public Sector Banks also employs the Recovery of Debts and Bankruptcy Act 1993 for recovery of their nonperforming assets. It is suggested that above suggestions can be made use of by the PML Authorities and Public Sector Banks before they approach the Tribunal/Appellate constituted under the Act.

In conclusion, the enactment of the Prevention of Money Laundering Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 marks a pivotal step in addressing financial irregularities and enhancing the stability of the banking sector in the country. Despite their distinct purposes—one combating money laundering and the other facilitating asset recovery—an integrated approach to the implementation of these acts can yield significant benefits.

By fostering collaboration between enforcement agencies and financial institutions, the government can create a more robust framework for monitoring and addressing financial crimes. Furthermore, aligning the objectives of these statutes can lead to improved financial governance, supporting economic growth and consumer confidence.

Ongoing evaluation and adaptive measures will be essential to keep pace with the evolving financial landscape. As such, the legal frameworks of both acts should be regularly reviewed to ensure they effectively combat emerging challenges in the domains of money laundering and nonperforming assets.

Through concerted efforts, the harmonious implementation of the PMLA 2002 and SRFA& ESI Act 2002 can strengthen the nation's financial integrity and create a safer, more secure banking environment.

1. W.P No 4596 and 12584 of 2012, Chennai High Court dated 11^th July 2012 ↑

2. Andhra Pradesh High Court W.P No 10765 of 2010 dated 04^th March 2011 ↑

3. Appellate Tribunal for PMLA, New Delhi FPA No 1026 of 2015 dated 14^th July 2017 ↑

4. Appellate Tribunal for PMLA ,New delhi FPA No 2633 of 2018 dated 02^nd January 2019 ↑

5. Appellate Tribunal for PMLA FPA-PMLA-2173/MUM/2018 dated 31st October 2018 ↑

6. Criminal Appeal No 143/2018 Delhi High Court dated 2^nd April 2019 ↑

   
   

   Views Are Personal.