"Reasons To Believe": A System Of Checks & Balances On The Powers Of The Enforcement Directorate Under PMLA, 2002

Strangely, the phrase "reasons to believe" finds no definition under the Prevention of Money Laundering Act, 2002 (PMLA) (hereinafter "the Act") despite being the sine qua non which empowers the Enforcement Directorate to attach the properties of a person alleged to be involved in money-laundering under Sections 3 & 4 of the Act.

For guidance, one could refer to Section 26 of the Indian Penal Code, 1860, which defines "reasons to believe", as sufficient cause to believe a thing but not otherwise. However, exporting a definition from a general procedural law to a special legislation with far-reaching impact on persons and property shall be improper and is bound to leave immense scope for ambiguity, thereby adversely prejudicing the interests of all affected persons.

Statutory Safeguard

Section 5(1) of the Act, which provides for attachment of property allegedly involved in money-laundering clearly lays down the pre-condition of "reasons to believe" arrived at on the basis of the material in the possession of the agencies provided the same are recorded in writing for affecting even a provisional attachment. Section 17(1) of the Act, which empowers the enforcement agencies to carry out search and seizure, prior to such raid, requires that "reasons to believe", be recorded indicating that the person has either committed an act which amounts to money-laundering; or is in the possession of any proceeds of crime involved in laundering; or the person is in the possession of any records relating to money-laundering, before carrying out such search and seizure. The Supreme Court in the decision of OPTO Circuit Indian Ltd. v. Axis Bank & Ors.^[1], inter alia has held that the power of freezing of assets granted to the enforcement authorities must be exercised strictly in line with the procedure laid down under Section 17 of the Act. The Court in this regard remarked that, "though the Authorised Officer is vested with sufficient power; such power is circumscribed by a procedure laid down under the statute. As such the power is to be exercised in that manner alone, failing which it would fall foul of the requirement of complying due process under law."

There are two stages where 'reasons to believe' are contemplated under the Act, first, where such reasons are recorded by the officer passing an order under Section 5(1) and the second set of reasons are recorded by the Adjudicatory Authority, PMLA under Section 8(1) and the failure on the part of the agency to disclose such reasons to the noticee at the very beginning is bound to vitiate the proceedings. This was also held by the High Court of Delhi in Aprajita Kumari & Ors. v. Joint Director, Enforcement Directorate & Ors.^[2], wherein the Court observed that "there has to be a communication of the reasons to believe at every stage to the noticee under Section 8(1) of the Act", and the failure to record cogent 'reasons to believe' is bound to vitiate the entire proceedings and render the Provisional Attachment Order illegal.

Evolving Scope of Reasons to Believe under the PMLA, 2002: Judicial Perspective

The legal standard employed under the PMLA before effectuating an attachment is the mandatory presence of reasons "to believe" which implies, that the same is arrived at on the basis of credible information within the knowledge of the enforcement agencies. The intention of the legislature behind placing a higher standard of evidence was to ensure that such powers are not exercised arbitrarily or merely on the basis of suspicion. As was observed by the High Court of Kerala in the decision of Kavitha G. Pillai v. The Joint Director, Director of Enforcement, Government of India^[3], the Court remarked that, "the reason "to believe" stands on a firmer footing than the reason "to suspect". Belief is a matter of faith or opinion- even in the secular sense. But "reason" to believe needs more than a nagging suspicion or personal conviction….. So we may say that the information must be credible, and the conclusions from that information probable. In other words, a surmise or a conjecture should not be the foundation for the belief." A similar position was taken by the High Court of Gujarat in the decision of Bhanuben & Ors. v. State of Gujarat & Ors.^[4] where the Court held that, "while the words 'reasons to believe' are wide in their import, it cannot include a mere suspicion or ipse dixit of the authorised officer. The belief of the authorised officer should lead him to form an honest and reasonable opinion based on reasonable grounds."

Thus, the mandatory requirement of "reasons to believe" acts as a firm check on the powers exercised by the enforcement agencies under the Act. The Courts while deciding challenges filed by those affected by the Provisional Attachment Orders passed by the Enforcement Directorate, such persons need not necessarily be persons accused of offences under the Act, have reiterated that such reasons cannot be a mere rubber stamp of the opinion already formed by someone else and thus imposes a separate obligation upon the officer to apply his mind and independent reasoning to record such reasons as well. Such a view was upheld by the High Court of Delhi in the decision of Aprajita Kumari (supra) & J. Sekar & Ors. v. Union of India & Ors.^[5]

Thus, Section 5(1) of the Act mandates the requirement of recording reasons to believe, and such reasons which are formed by the authorized officer on the basis of the material available in his possession should not only be with respect to the person having proceeds of crimes in his possession but also that such proceeds of crime are likely to be dealt with in a manner which shall frustrate confiscation proceedings under Chapter III of the Act.

In light of the nature of the partially summary proceedings under the Act and the wide ambit of attachment powers conferred upon the authorities, it is pertinent to have robust safeguards in place to maintain a balance between the rights of those accused and affected by the Attachment Orders and the need to preserve the general public interest. An important facet of this is to ensure that the Show Cause Notice issued under the Act must comprehensively deal with the essential elements of Section 8(1) of the Act, since the same is drawn after the Order under Section 5(1) directing Provisional Attachment of the properties is already issued.

Even though the Act does not explicitly cast any obligation upon the Adjudicatory Authority, PMLA to communicate the reasons to believe arrived at to the noticee, the High Court of Calcutta in the decision of Excel Powmim Ltd. v. Union of India^[6] has unequivocally held that such a requirement has to be read into Section 8(1) of the Act to fulfill its primary objective.

Inadequacy of the Framework to safeguard arbitrary exercise of power

The Courts have time and again reiterated the indispensable requirement of recording cogent 'reasons to believe' under the Act in order to ensure the presence of a precise and proximate link or nexus between the alleged commission of the predicate offence and the laundering of such money. This is necessary in order to ensure that persons are not unjustly deprived of their property where such acts are conducted without the knowledge or active connivance of the accused persons unless a prima facie violation of Section 3 of the Act is reasonably deduced from the "reasons to believe" recorded by the Agency