Supreme Court Judgment Delineating Statutory Safeguards under PMLA

Ashish M. Shaji

15 Oct, 2022

The Prevention of Money Laundering Act 2002 is one of the primary legislations to counter the offence of money laundering. It has envisaged enormous power to the Enforcement Directorate^[1], which is the investigating agency under the Act. Powers of attachment of property, freezing of bank accounts, etc., are some of the provisions envisaged under the Act. However, the PML Act has been courted with controversies due to alleged unjust attachment of property and proceedings violating the constitutional rights of persons. This article will discuss the Supreme Court’s judgment elaborating on the Statutory Safeguards under PMLA.

Statutory Safeguards under PMLA- Introduction

Recently while upholding the constitutional validity of different provisions of the PML Act 2022, the Supreme Court in Vijay Madanlal & Ors. v. Union of India & Ors.elaborated on certain statutory safeguards under the Act. The Court has expressed several inbuilt safeguards provided by the Parliament while enacting the PML Act 2002.

The Court has held that procedural safeguards concerning the provisional attachment protect the interest of the person against whom proceedings have been initiated under the PML Act.

The Court has emphasized that all these inbuilt safeguards help prevent the arbitrary exercise or misuse of power by authorities under the Act. In the next segment, we will look in detail at the safeguards pointed out by the Supreme Court.

In early 2022, Solicitor General Tushar Mehta also argued before the Supreme Court that the PML Act places crucial safeguards on ED’s power. He contended that the statutory safeguards under PMLA prevent misuse of Section 19 of the Act, which confers the power of arrest to higher-ranked officials. He emphasized that the provision regarding arrest was neither unconstitutional nor arbitrary.

Let’s now delve deeper into what Supreme Court held regarding statutory safeguards under PMLA in the case- Vijay Madanlal & Ors. v. Union of India & Ors.

Statutory Safeguards under PMLA- Supreme Court’s Observation and Analysis

Section 5

While going through Section 5 of the PML Act 2002, the Court said various inbuilt safeguards were in it. The Court stated that the sub-section provides for sufficient safeguards, which have to be adhered to by the authorized officer prior to issuing a provisional attachment order in relation to the proceeds of crime.

• The Court held that only when the satisfaction regarding the twin requirements under sub-section 1 is recorded the authorized officer can issue an order of provisional attachment. The Court pointed out that before a formal order is issued, the authorized officer has to form an opinion and provide the reasons for such belief, which is recorded in writing.
• The Court expressed that it is not based on assumption but based on the material in his possession. Therefore, the Court held that the order of provisional attachment results from the satisfaction recorded by the authorized officer.
• The Court further pointed out that the provision of the provisional attachment order for a fixed period is yet another safeguard provisioned under the PML Act. 
• The Court also indicated that the authorized officer is required to record satisfaction and record reasons for the belief based on the material in his possession that the proceeds of crime involved in the money laundering, if not attached immediately, can frustrate the proceedings under the PML Act 2022.
• The Court said that it is yet another safeguard provided due to the urgency felt by the authority to obtain the property in order to effectively prevent and regulate money laundering offences.
• The Court stated that this meant the authorized officer cannot resort to mechanically attaching the property. Therefore, the Court believes that there are inbuilt safeguards in the main provision as well as in the second provision.
• The Court said it failed to comprehend how this provision is irrelevant or arbitrary in the context of the objective of the PML Act.
• The Court stated that such provision would enable the mechanism of prevention and regulation of activity resulting in the offence of money laundering.
• The Court said that the officer will have to apply his mind to the materials on record before recording his reasons for invoking the second proviso to Section 5(1), which was a sufficient safeguard to the invocation of powers under the said proviso.
• The Court also highlighted the third proviso in Section 5(1) of the Act and termed it as another statutory safeguard under PMLA.
• The Court noted that before the period expires related to the provisional attachment order, the officer immediately after the attachment under sub-section 1 is obliged to provide a copy of the order to the adjudicating authority in a sealed envelope, which is retained by such authority. The Court held that it ensured fairness in action and also ensured accountability of the authority that passes the attachment orders.
• Therefore, considering the scheme of the PML Act 2002 and Section 5 in particular, the Court said that it was clear that sufficient safeguards were provided as preconditions for invoking the power of provisional attachment of property under PMLA.

Section 8

Section 8 deals with attachment, adjudication, and confiscation under the PML Act. The Court has observed that it is a wholesome provision that protects the interest of the person concerned as well as affords them a fair opportunity during the adjudication process.

The contention of no statutory safeguards under PMLA regarding search and seizure

• Another contention that was made before the Apex Court was that there were no statutory safeguards under PMLA regarding search and seizure under the Act. It was argued that such drastic power was used without a formal registration of FIR or complaint.
• However, the Court refuted such claims and pointed out that in the matter of search and seizure under the PML Act, the power can only be exercised by the Director or any other officer who is not below Deputy Director’s rank authorized by him. The Court said that they are high-ranking officials, and they have to be fully satisfied regarding the reason to believe based on the information that they have about the commission of money laundering offence or possession of proceeds of crime.
• The Court again reiterated that such reason to believe should be recorded in writing and forwarded to the adjudicating authority under PMLA, along with the material in his possession in a sealed envelope preserved by the authority. The Court said it is an inbuilt safeguard provided under the PML Act 2002.
• The Court pointed out that if the act taken by the authority under the Act is eventually found to be without reasons recorded in writing, it shall entail penal consequences for vexatious searches under Section 62 of the Act.
• The Court said that such is the stringent safeguards provided under the Act and Rules framed on the process of search and seizure concerning money laundering offences.
• The Court emphasized that all these were inbuilt safeguards that prevent authorities’ arbitrary exercise or misuse of power under the PML Act 2002.
• The Court held that the provision of Section 17 regarding search and seizure should be regarded as a reasonable provision with a nexus with the purposes sought to be achieved by the PML Act because of the inbuilt safeguards and stringent stipulations which is required to be followed by the Authorities.
• The Court also remarked that the authority that seizes any record or property during the search and seizure process must submit an application to the adjudicating authority within 30 days. After providing the application, the adjudicating authority gives the person an opportunity to hear why such records or property should not be retained.
• The Court said that such statutory safeguards under PMLA are given in order to secure the interest of the person who is subjected to search. The Court held that it strengthens the mechanism of prevention of money laundering.

Safeguards in respect of Arrest

In respect of arrest, the Court pointed out the following safeguards:

• Recording of reasons to believe about the involvement of a person in the money laundering offence
• Informing the person regarding the grounds of arrest while effecting the arrest of the person
• Forward the order copy by the authorized officer and the material in his possession in a sealed cover to the authority, which is preserved by the authority. (The Court held that this statutory safeguard under PMLA ensures fairness, objectivity, and accountability of the authorized officer in forming an opinion about the necessity to arrest the person)
• The obligation of the authorized officer is to produce such person before the Special Court or metropolitan magistrate, or judicial magistrate within 24 hours.

The Court observed that the safeguards as provisioned under the PML Act and the preconditions that the authorized officer must meet before arresting someone are stringent and of high standards.

The Court pointed out that the safeguards ensure that the officers don’t act arbitrarily but are held accountable for their judgment about the need to arrest a person as being involved in the money laundering offence. The Court expressed that in case the action of the authorized officer turns out to be vexatious, then such an officer can be proceeded against and inflicted with punishment under the PML Act 2002.

Conclusion

The lack of statutory safeguards under PMLA was the biggest challenge made against the Act, however, the Supreme Court thinks otherwise. The Supreme Court believes that procedural safeguards under PMLA are effective measures to protect the interests of the concerned persons. The Court has numerous times mentioned in the judgment that there are stringent safeguards envisaged under the PMLA legislation.

Read our Article: Attachment of Property under PMLA- An Overview