Supreme Court’s stance on Freezing of Bank Accounts under PMLA 2002

Ashish M. Shaji

11 Jul, 2023

The Supreme Court recently allowed an appeal filed by OPTO Circuit India Ltd. that challenges an order of the Karnataka High Court. Additionally, the Supreme Court quashed the communication issued by the Enforcement Directorate and asked the respondent banks- Axis Bank, Induslnd Bank & State Bank of India (SBI), to de-freeze accounts of the appellants frozen due to the allegations of foreign diversion of funds. The question before the Court was the legality of the freezing of bank accounts.

What do you mean by Freezing bank accounts?

Freezing of a bank account means that the account holder can no more carry out any financial transactions with the bank account until they receive further notice from the bank. In this case, every payment and transaction will come to a standstill.

Background of the Case: Freezing of bank accounts of appellate

The Supreme Court didn’t interfere in the proceedings instituted under PMLA in this appeal. The case before the Karnataka HC came due to an action initiated by the CBI that led the ED to ask respondent banks to freeze/stop operations of the accounts belonging to the appellant.

In the complaint instituted by the SBI, allegations were made of foreign diversion of funds of Rs. 354.32 crore. The Supreme Court concurred with the High Court with respect to the scope of parallel proceedings under Sections 3 & 4 of the PMLA. The Supreme Court observed that the question about whether or not the communication directing the freezing of the accounts was legally tenable, should have been evaluated under the test of “due process” provided under the Act.

Compliance under Section 17(1) of the PMLA 2002

The ED submitted in the SC that the order to freeze the accounts of the appellant was issued with a view to “stop layering/diversion and safeguarding the proceeds of crime.” However, it was also seen that it was not issued in accordance with Section 17(1) of the PML Act 2002, which empowers the enforcement authority to order the search and seizure of property/records if it is conducted on the basis of the presence of cogent “reasons to believe.”

 The Supreme Court stated that the powers exercised by the concerned authorities should be as per the provisions of the Act. The bank accounts fall within the ambit of both “property” and “records”, therefore any order freezing the same should be in line with the procedure laid down under Section 17 of the Act.

The Supreme Court asserted the need for drawing a balance between the Act’s objectives and protecting the accused person from an arbitrary action outside the purview of permissible action. The court held that the order of freezing the accounts of the appellants was made on the basis of a communication to the Anti-Money Laundering Officer. This did not satisfy the “reasons to believe” test as provided under the Act.

The authorities had failed to meet the mandatory requirements as provided under Section 17 of the Act. The failure includes the failure to record the “belief of commission of the act of money laundering” and after affecting such seizure filing an application before the Adjudicatory Authority, PMLA.

The Court further held that if a law provides for a procedure to be followed in a particular manner, then it must be adhered to strictly. The authorities are held to be bound by procedure provided in the statute for their action to be legally sustainable. 

Applicability of CrPc 1973 in freezing of bank accounts

The SC rejected the alternative argument of the ED that seizure under challenge can be sustained under Section 102 of the CrPc 1973¹. The SC said that the legislation (PMLA) is endowed with a scheme that differentiates it from general procedural laws and also provides for specific provisions governing the power of seizure and the procedure. The Supreme Court held that the freezing didn’t even meet the conditions as provided under the Code of Criminal Procedure 1973.

Conclusion

The fact of the matter is that there must be an element of “reasons to believe” and compliance with the procedure provided under the PML Act before freezing bank accounts or taking such actions. This will prove to be precedent for the adjudicating authority as well as for the appellate courts.

Read our article:Delhi District Court entitles accused legal consultation of 20 minutes everyday while the custody of ED under PMLA

1. https://www.indiacode.nic.in/handle/123456789/16225?sam_handle=123456789/1362