Delhi Court Criticizes ED For “Arbitrary” Arrest, Asks ED Director If There Is Any SOP To Regulate & Monitor Arrests

Noting that the investigation cannot be conducted on 'subjective interpretation' of the Investigation Officer, Judge Dheeraj Mor stated that “The hallmark of investigation is its objectivity. Subject interpretation of IO must be deprecated as it would make a supposed objective investigation dependent upon his uncontrolled whims and fancies, who has been conferred extreme power of arrest that leads to curtailing liberty of an individual.”

The Court addressed the 'glaring and disturbing' approach of ED in this case.

It remarked that “In the instant case, there is very unpleasant situation wherein one IO choose to cite the applicant as a witness and the next IO opted to arrest him based upon exactly same evidence available on record. In these circumstances, it is apparent that one of the IOs was/is wrong and either acted upon the considerations extraneous to law for the reasons to be ascertained or he was incompetent to comprehend the facts of the case in proper perspective. Both the situations are perilous as it may allow an accused getting scot free or result in unlawful curtailment of liberty of an individual thereby impinging his cherished Fundamental Rights of Liberty.”

The facts of the case are that the applicant was arrested by the ED for the offence of money laundering under the PMLA. The applicant, a resident of Dubai, is accused of generating a bogus invoice of USD 1.3 million. It is alleged that the main accused and others, through the applicant, channeled a substantial amount of 'Proceeds of Crime' (POC) from one company to their allied/associate companies.

The applicant admitted issuance of the invoice, but denied that he knew that the said amount was POC.

Before the filing of first criminal complaint, the applicant was summoned by the ED and he gave his statements under Section 50 of PMLA. The applicant was cited as a prosecution witness in the first complaint. However, during further investigation, the successor IO arrested the applicant based on the same evidence.

Action cannot be taken under PMLA on assumption that property must be Proceeds of Crime

The Court referred to Section 2(u) of PMLA, which deals with the proceeds of crime. It is defined as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.

The Court noted that the proceeds of crime have to be construed strictly as per Section 2(u) of PMLA. It stated that the quantum cannot be arbitrarily overblown on 'unfounded assumptions'. Only property which is obtained from a criminal activity relating to a scheduled offence can be considered as a POC.

It observed that the authorities under PMLA cannot take action against any person under money laundering merely on the assumption that the property revered must be POC. It stated that unless the offence is registered with the jurisdictional police or there is a pending inquiry before a competent forum, authorities cannot take action.

“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 POC and that a scheduled offence has been committed, unless the same is registered with the jurisdictional police or pending inquiry by way of complaint before the competent forum.”

In the present case, the Court noted that the ED failed to show any credible evidence to prove that the applicant entered into the transactions with the knowledge that he was dealing with POC.

Further, it noted that the while taking cognizance of the first criminal prosecution complaint, the court did not summon the applicant. The Court inferred that this was because the court did not find evidence to be sufficient to consider the applicant as complicit or an accused to face trial.

It thus observed that the while arresting the applicant based on same evidence, the IO chose to “…sit as an Appellate Forum on the wisdom of the court which desisted to summon the applicant for the offence based upon the same evidence.” It noted that after arresting the accused, the ED has been trying to collect additional evidence against the applicant, in an attempt to justify the arrest.

It stated that “Admittedly, the IO has prerogative to take a decision to arrest or not arrest any person. However, it cannot be arbitrary and when the evidence available with the IO and the court are exactly similar and the court desisted to summon him as an accused, the act of the IO to arrest him on the same evidence is an apparent overreach of his powers that deserves to be disapproved.”

Bail under PMLA

The Court referred to Section 45 PMLA, where the accused must satisfy the twin conditions for bail. First, the court should be satisfied that there are reasonable grounds to believe that accused is not guilty of offence and second, accused is not likely to commit any offence when on bail.

It observed that the courts are only required to consider the broad probabilities based on investigation materials. A finding on acquittal or conviction is not necessary to be given while considering bail, it said.

In the present case, it noted that there is no evidence to establish the applicant's guilt in dealing with the POC. It noted that there are reasonable grounds to believe that the applicant is not guilty of the offence and that he does not have any other criminal involvement. It thus held that the applicant qualified the twin conditions required for bail under Section 45 PMLA.

The Court then proceeded to determine that the triple test required for bail considerations. These tests include flight risk of accused, possibility of influencing witnesses and tampering with evidence.

The Court noted that the applicant is not a flight risk, not in a position to influence the witnesses or tamper with evidence as the witness statements have already been recorded and the prosecution has all relevant documents of the case. The Court thus held that the applicant satisfied the triple test.

Further, the Court observed that the power of arrest must be directly proportional to its checks and balances. 

 "The power to arrest must be directly proportional to its checks and balances coupled with unambiguous regulations or Standard Operating Protocol (SOP)."

The Court thus asked the Director of ED to inform the court is there is any Standard Operating Procedure (SOP) or regulation regarding arrests and the process adopted by seniors to monitor the arrest of the accused.

It stated that the Director has to conduct an inquiry for determining the reasons for the two IOs adopting opposite approaches against the accused, while having the same evidence.

It thus granted bail to the applicant subject to furnishing surety of Rs. 2 lac. It stated that applicant cannot leave the country without prior permission of the court and required the applicant to join investigation ass and when directed by the IO.

Case title: Directorate of Enforcement vs. M/s Phoenix International FZC & Ors. (IA No. 9/2024 in CC No.112/2022)