ED's Power Under PML Act Rests On The Quartet-Test Of 'Search', 'Seize', 'Proceeds Of Crime' & 'Money-Laundering': Calcutta High Court

In a significant order, the Calcutta High Court on Wednesday explained and deliberated upon the procedure of Search, Seizure of Property & Impounding of Records as provided under Section 17 (1) of the Prevention of Money Laundering Act.

The bench of Justice Moushumi Bhattacharya stressed that the power of the Directorate of Enforcement under the PML Act rests upon the quartet-test of 'Search', 'Seize', 'Proceeds Of Crime' & 'Money-Laundering'.

In other words, the Court has held that the power of search and seizure as provided under Section 17(1) of the PML Act must satisfy the defining characteristic of "money-laundering" [Section 3 of the PML Act] and "proceeds of crime" [Sections 2(1)(u)] as well as their respective procedural requirements as separately stipulated in Act.

The Court observed thus while dealing with the writ plea filed by M/s. Rashmi Metaliks Limited & Anr seeking a stay on two orders of ED made under Section 17(1-A) of the Act, freezing petitioner's two bank accounts.

The primary question before the Court in this matter was - on what basis the ED had proceeded to initiate action under Sections 17 and 17(1-A) of The PMLA for freezing the bank accounts of the petitioner no. 1. Before discussing the same, the Court discussed both the above-mentioned provisions 

Section 17 (1) and 17 (1-A) of PML Act in brief

Essentially, Section 17 (1) of the PML Act talks about the search and seizure of record or property, whereas, Section 17 (1-A) comes into picture when it is not practicable to search or seizure of record or property, as this provision provides for freezing of the property (bank account being a property).

Agaisnt this backdrop, at the outset, the Court noted that the pre-requisite for an authorized officer of a certain rank being entitled to search and seize [under section 17 (1) of PML Act] is that such officer has information in his possession and a reason to believe, expressed in writing that a person:-

i) has committed any act of money-laundering, or

ii) is in possession of any proceeds of crime involved in money laundering, or

iii) is in possession of records relating to money laundering, or

iv) is in possession of any property related to crime.

Now, it may further be noted that the abovementioned 4 pre-requisites not only indicate that the authorized officer must have reason to believe (reduced to writing) on the information in his possession but he must also have a reason to believe that the person in relation to the premises is guilty of an offence defined in Section 3 of The PMLA - "money-laundering".

In other words, if the authorized officer doesn't have the reason to believe that the person in relation to the premises is guilty of an offence defined in Section 3 of The PMLA - "money-laundering", and even then, if search/seize takes place, then it won't be legally tenable.

Now, to understand the term 'money laundering', we have to refer to Section 3 of the PML Act, which entails a separate set of requirements and evidence including that the person who is found guilty of the offence of money laundering has knowingly indulged or assisted in the commission of an activity connected with "proceeds of crime" and has concealed, possessed, acquired or used the same.

The term "proceeds of crime" has been defined in Section 2(1)(u) as any property derived directly or indirectly by any person as a result of criminal activity related to a scheduled offence as well as any property which is used in the commission of an offence under The PMLA or any of the scheduled offences.

Besides, commission of an offence would only qualify as money-laundering if the offence generates proceeds of crime and tainted property, the Court added relying upon the Apex Court's ruling in the case of Vijay Madanlal Choudhary vs. Union of India.

Consequently, summarisng the law with regard to 'search' and 'seize', the Court remarked thus:

"In other words, the power to enter and search any place or to seize any record or property must be predicated by the satisfaction of all the requirements under Section 17(1) which should find a particularized statement in the written "reason to believe" component by the authorised officer under Section 17(1). It is only on the fulfillment of the conditions stipulated under Section 17(1) together with the satisfaction of the conditions of Sections 2(1)(u) and 3 that the power to search and seize is crystallized."

Now, discussing Section 17(1-A), the Court noted that this provision is an alternative to Section 17(1) for facilitating the measures which are required to be taken in the event search and seizure is not practicable. Summarising the mandate of this provision, the Court observed that the officer must:

a) Satisfy the pre-requisites of Section 17(1)

b) Upon satisfaction of the conditions, enter the place and search and seize the property and

c) Come to a conclusion that seizing the property under Section 17(1) is not practicable

d) Record the reasons why it is not practicable to search and seize under Section 17(1) e) Satisfy the reason/basis of the apprehension that the property may be transferred or otherwise dealt with unless such freezing order is passed.

The Court stressed that each of the above five conditions is required to be satisfied before graduating from Section 17(1) to the next stage of action under 17(1-A) by the authorised officer.

When the freezing order can be made?

The Court said that before reaching the stage of power conferred under Section 17(1-A), the authorised officer must also come to an informed finding that the exact location of proceeds of crime or the documents relating to money-laundering cannot be ascertained. Further, his finding must also include the apprehension of resistance on the part of the person whose place is proposed to be entered into and searched.

The Court also underscored that the "reason to believe" which is a mandate for search and seizure under Section 17(1) and for freezing orders under Section 17(1-A) must be satisfied before any action could be taken by the authorsed officer.

Court's order in the instant case

Now, having discussed the relevant provisions of law, the Court took into account the case of the petitioner to note that the impugned orders of freezing did not discharge the onus of stating with reasons as to the necessity of passing such orders or the basis for freezing accounts under Section 17(1-A) of The PMLA.

"The singular absence of statements of reasons or the basis of an apprehension, factual or otherwise, for freezing the properties of the petitioners is apparent from the impugned orders. The requirement of satisfaction of the conditions stated in Section 17(1) before proceeding to Section 17(1-A) do not contemplate parroting the words used in the sections but a precise statement, in writing, reflecting the factors which form the basis of the conclusion arrived at. A person reading the order must be able to find the connecting link between the reason given and the action taken. The view of the Court is bolstered by the specific conditions under Section 17(1) as well as in Section 3 (Offence of money-laundering) which demand that properly graded reasons must be stated in an order justifying initiation of measures under Sections 17(1) and 17(1-A)," the Court remarked.

Consequently, the Court held that the impugned orders fell short at all levels of the statutory requirements as the Court noted that the freezing orders did not contain any "reason to believe" which is a mandate for search and seizure under Section 17(1) and for freezing orders under Section 17(1-A).

The Court also noted that there was a stay of proceedings ordered in the criminal case against the petitioner company by the Supreme Court on 14th December, 2015 is continuing till date.

The Court also noted that the authorities under The PMLA cannot resort to action against any person for money-laundering on an assumption that the property recovered by them must be proceeds of crime unless the same is registered with the jurisdictional police or pending enquiry in a competent forum

Accordingly, the Court ordered a stay upon the impugned freezing orders dated 13th July, 2022 and the respondents were directed not to act in terms of the said orders or take steps in furtherance thereto. 

Case title - M/s. Rashmi Metaliks Limited & Anr. v. Enforcement Directorate & Ors.

Citation: 2022 LiveLaw (Cal) 289

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