Amidst growing number of financial crimes in the country, the Indian legislature took steps to make the principal anti money–laundering statute, the Prevention of Money Laundering Act, 2002 (“PML Act”) not just stricter in its application, but also wider in its reach. The Enforcement Directorate (“ED”), being the investigating agency under the PML Act, has been provisionally attaching properties of accused that are indirectly derived or obtained from any criminal activity and/or that have no direct link with criminal activity of an accused. Resultantly, there have been interesting courtroom battles involving the ED, where bona fide third parties (such as banks and financial institutions) who have acquired an interest in the property of the accused, have had to approach courts or tribunals in India, seeking release of properties that have been provisionally attached by ED in relation to their investigation under the PML Act.
This Article seeks to analyze recent judicial developments concerning the powers of ED to provisionally attach the assets under the PML Act and the remedies available to a third party, who may have acquired an interest in such asset prior to acquisition by ED. In the midst of conflicting claims over assets, this article also sets out the need for legislative and/or interpretive guidance in respect of the nature of properties that ED can proceed against under the PML Act.
Under the PML Act, a person shall be guilty of offence of money-laundering if he/she is directly or indirectly involved in or knowingly assists any process or activity connected with ‘proceeds of crime’ including its concealment, possession, acquisition or use and projecting or claiming it as untainted property.1 It is central to the construct of the offence of money laundering that prior to coming in possession, acquisition, concealment or use of ‘tainted property’ there must have been some other offence committed (‘predicate offence’) and the property alleged to be tainted, i.e. ‘proceeds of crime’, is the product of such offence.
The PML Act envisages penal consequences2 as well as deprivation of the ‘proceeds of crime’ through ‘confiscation’ to the central government upon conclusion of trial if the offence of money laundering is established.3 Particularly, in order to facilitate an eventual ‘confiscation’ of the ‘proceeds of crime’ upon conclusion of trial and to curtail disposal of tainted assets by the accused, the PML Act also confers powers on ED to provisionally attach properties of accused at any time prior to the commencement of trial.
Therefore, under the PML Act, two different set of proceedings are set into motion by the ED. One set of the proceedings deal with the provisional attachment of the properties and the second set of proceedings deal with the trial for the offences under the PML Act and final confiscation of proceeds of crime. In this Article, the primary focus will be on the proceedings in relation to the provisional attachment of assets.
Section 5 of the PML Act, empowers the ED to provisionally attach a property if a person is in the possession of any ‘proceeds of crime’ and such ‘proceeds of crime’ are likely to be dealt with in a manner which may frustrate the confiscation proceedings under the PML Act. The ED can provisionally attach any property (for a period of 180 days) if a report or a complaint has been filed previously with the competent court which can take cognizance of the predicate offence. In certain situations the ED can proceed with provisional attachment even without a report or a complaint, if immediate non-attachment of tainted property is likely to frustrate proceedings under the PML Act.
The ED is required to immediately send a copy of the provisional attachment order to an Adjudicating Authority (a quasi-judicial body) and file a report with the authority within thirty days of the attachment, setting out the facts leading up to the attachment. On receiving the report, if the Adjudicating Authority has reason to believe that any person has committed an offence under the PML Act or that such person is in possession of proceeds of crime, it may call upon him / her to show cause why all or any of such properties should not be declared to be proceeds of crime. If the property in question is held by another person on behalf of the accused, typically, an explanation may also be sought from such other person. After receiving the responses, the Adjudicating Authority records a finding on whether all or any of the properties provisionally attached tainted properties or proceeds of crime. If a positive finding is recorded, the Adjudicating Authority confirms the provisional attachment order previously issued by ED.
The attachment continues to be in force for a maximum period 365 days during the investigation or trial in relation to the money-laundering offence. If the money laundering offence is established in trial, then the properties that have been attached previously will be confiscated to vest with the central government. Alternatively, if the trial leads to a conclusion that no offence of money laundering is made out or that a property is not proceeds of crime, the property is released from attachment.
The attachment of the property only prohibits the transfer, conversion, disposition or movement of such property.4 It is only at the stage of confiscation that all rights and title in such property shall vest absolutely in the central government free from all encumbrances.
a) property derived or obtained (directly or indirectly) as a result of criminal activity relating to a scheduled offence (“Category I); or
b) the value of any such property (“Category II”); or
c) if the property of the above mentioned nature has been taken or held outside India, then any other property ‘equivalent in value’ whether held in India or abroad (“Category III”).
Category I is where the ED could presumably have prima facie evidence suggesting that such property was a product of a predicate offence or that it was (directly or indirectly) obtained by using the proceeds from such predicate offence. Should the ED not be able to trace properties under Category I and/or the assets traced are insufficient to fully account for the stated pecuniary advantage gained through commission of the predicate offence, then typically, the ED proceeds to attach alternative categories of property. This is akin to attachment of properties under Category II or Category III.
Provisional attachment of such alternative categories of property of an accused may involve rights of thirds parties such as transferee, lessee, mortgagee, hypothecatee, manager, agent, trustee, who may have acquired a bona fide interest in such property. For instance under the banking laws,5 banks/ financial institutions have a statutory right to enforce security interest and/or recover debts from defaulting borrowers. The insolvency laws on the other hand envisage an insolvency resolution process for financially distressed entities, which aims to maximize the value of assets by imposing a period of moratorium, during which the initiation or continuance of legal proceedings against the distressed entity stands barred. Consider the following situations:
a) Should the ED provisionally attach assets of a company which is undergoing insolvency resolution proceedings under the Insolvency and Bankruptcy Code, 2018 (“IBC”), the rights and interests of the stakeholders to the insolvency resolution process will be adversely affected as such assets (which are critical to the insolvency resolution plan) will be unavailable;
b) A bank or financial institution acquired an interest (by way of a mortgage) in an immovable property of its customer as security against the loan extended to such customer. Owing to a provisional attachment by the ED, the bank or financial institution shall not able to exercise its right to enforce its security interest (also a statutory right) against such property upon default of loan repayment by its customer;
c) A person acquired ownership of property through transfer of ownership (via sale, gift etc.). Owing to provisional attachment by the ED, the person will be hindered or prevented from fully enjoying his rights of ownership, which include leasing of property, sale of property etc.
In view of the limitations that arise from the attachment of a property, bonafide third parties may not be able to enforce their rights vis-à-vis such property. Importantly, if the attached properties are eventually released, the bonafide rights of third parties would be frustrated as they were prevented from enforcing their rights in a timely manner owing to the provisional attachment.
In the existing scheme of things, (a) an order of provisional attachment under PML Act is not rendered illegal merely because a third party had a prior interest in such property and (b) conversely, mere issuance of an order of attachment under PML Act cannot, by itself, render illegal the prior statutory right of a bona-fide third part. In circumstances such as those illustrated above, bona fide third parties are not left remediless and in fact, the PML Act recognizes that the attachment and/or confiscation proceedings may affect the rights of third parties having an interest in such property.
a) Approaching the Adjudicating Authority prior to confirmation of the provisional attachment to prove that the subject property was not proceeds of crime;6
b) At any time post confirmation of the provisional attachment, approaching the competent court seized of the trial in relation to the offences under the PML Act and seeking release or restoration of the properties on the ground that (i) the subject property was not proceeds of crime. This remedy is available to a third party even post the order of confiscation of such properties to the central government. The burden to prove that the property was not tainted is upon the person whose property stands attached.
a) The assets under attachment are not even remotely connected to the predicate offence or the offence of money-laundering;
The assets cannot be considered to be derived or obtained from the proceeds of the predicate offence and the third party has acquired such interest from a bona fide source of income and through lawful means;
b) The assets or an interest thereon was acquired by the third party prior to the alleged acts in relation to the predicate offence or the offence of money-laundering;
c) Neither the third party nor any of its agents or employees have had any connection or involvement with any act of commission or omission in relation to the predicate offence or the offence of money-laundering;
d) An interest in the subject property was acquired by the third party in a bona fide manner and for lawful (and adequate) consideration and there appears to be no intent while acquiring such interest to frustrate the law;
e) The entire basis for the attachment of such asset by ED is that properties of value equivalent to the proceeds of crime are not available or traceable or that they have not been able to lay hands on the property that are proceeds of crime.
While remedies may be available under the PML Act for third parties to seek release/ restoration of properties provisionally attached by ED, the questions that merit deliberation are (a) whether ED can provisionally attach property of an accused over which a bona-fide third party has an interest and (b) whether the rights of such third parties are frustrated owing to the non-availability of assets in a timely manner. Given that effect of provisional attachment of property under the PML Act is that the property in question cannot be transferred, converted, disposed or moved, these weighty questions need to be deliberated upon to address concerns of creditors / banks / other bona fide third parties, seeking to enforce their rights in relation to the property under these banking and insolvency laws.
In attempting to strike a balance, Courts in India have typically endeavoured to determine questions of which legislation and consequently whose rights will prevail. For instance, basis principals of statutory interpretation, courts / tribunals have held that the insolvency laws (by virtue of being enacted later in time) will prevail over the PML Act, and consequently the ED cannot exercise jurisdiction to attach assets subject to insolvency proceedings.7 On the other hand, some Courts have taken a view that because the objective of the PML Act is distinct from the objectives of insolvency and banking laws, there is no inconsistency and therefore the later cannot prevail over the former.8 As a corollary, an attempt has been made by Courts to harmoniously interpret the laws so that each could be enforced without being in derogation to the other. However, as we explain in the following paragraphs, even on this point, there is divergence of opinion in the decisions rendered by various courts in India.
The Delhi High Court has held9 that bank’s security interest may prevail over the attachment order issued under the PMLA only (a) where the bank had acquired an interest prior to the commission of the alleged offence; and (b) where the bank had initiated proceedings to enforce its security prior to the commission of the alleged offence. Thus, per the Delhi High Court’s judgment if a secured creditor has acquired an interest over a property subsequent to the commission of the alleged offence in a bona fide manner, such a secured creditor’s interests will be subservient to the interest of a secured creditor who has acquired the interest prior to the commission of the offence. In such cases, banks will have to prove that the bank had undertaken due diligence to the extent of ensuring that the property in respect of which a loan is being given, is not a ‘tainted’ property in terms of the PML Act, irrespective of whether there has been an investigation initiated in respect of the borrower / property by the investigative authority under the PMLA. Essentially, the Delhi High Court proceeded on the basis that the ED has the power to not only attach tainted properties of accused (i.e. properties falling in bucket Category I) but also any other property failing alternative categories.
On the other hand, the Punjab and Haryana High Court has held that ED cannot attach any property which has no link with the commission of the predicate offence as the same would confer unguided and unbridled powers on ED thereby jeopardizing rights of bona fide third parties.10 The decision of the Delhi High Court is in appeal before the Supreme Court and has been stayed.
Owing to a difference of opinion between various courts and tribunals, the question of whether the power of ED to provisionally attach properties under the PML Act prevail over the statutory rights or interests of bona fide third parties such as banks or financial institutions is presently pending before the Supreme Court of India.11
While courts are deciphering whether PML Act has primacy over other statutes basis cardinal principles of interpretation and/or reconciliation of statutes, it is imperative to focus on interpretative or legislative guidance that is necessary on interpretation of the term ‘value of any such property’ in the definition of the term ‘proceeds of crime’. As a matter of practice, the ED seeks to attach alternative categories of property with no direct link to the predicate offence. The core issues in relation to the exercise of such powers vis-à-vis the bona fide third parties are:
(a) whether the phrase ‘value of any such property’ in the definition of ‘proceeds of crime’ means/ includes any property which has no direct/ indirect link with property derived or obtained from commission of a predicate offence and
(b) whether ED can attach property otherwise derived from a legitimate source on the ground that property derived from predicate offence is not traceable.
Failing to address these core issues can lead to unreasonable burdens on creditors such a banks and financial institutions, and the vesting of unbridled powers in the hands of enforcement authorities under the PML Act to implicate and attach properties having no relationship or connection whatsoever to a money laundering offence. Till the time the aforementioned questions are clarified by suitable amendments to the PML Act or by the Supreme Court while interpreting the term ‘proceeds of crime’, the courts in India will continue to be tasked to decide on the conflict between ED’s power to provisionally attach the properties of an accused and the lawful claims of bona-fide third parties.
Contributed by: Anuj Berry, Partner; Anusha Ramesh, Senior Associate; PSS Bhargava, Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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