Directorate of Enforcement (ED) is a specialized body tasked with implementing two crucial financial laws –Prevention of Money Laundering Act, 2002 (PMLA) and Foreign Exchange Management Act, 1999 (FEMA). ED exercises mainly two functions under the relevant laws: – conduct an investigation for violations of the FEMA provisions and money laundering offences under the PMLA; attach and confiscate property if it is determined to be proceeds of crime derived from a Scheduled Offense under the PMLA; and prosecute those who are involved in money laundering offences. This article deals with the extent and nature of ED’s powers.
Investigation under PMLA
Despite being adopted and notified on January 17, 2003, the Prevention of Money Laundering Act, 2002 (“the PMLA”) went into effect on July 1, 2005, and has been revised several times, most recently by the Finance Act, 2019. It was passed with the goal of preventing money laundering and providing for the confiscation of property derived from or involved in money laundering, as well as matters related to or incidental to money laundering.
Power to attach property
If an individual is in possession of “proceeds of crime,” the ED has the authority to temporarily attach a property under Section 5(1) of the PMLA. The Adjudicating Authority confirms the aforementioned attachment under Section 8(3) of the PMLA, and the Government would finally confiscate it under Section 9 of the PMLA. The existence of “proceeds of crime” is thus essential in establishing a money laundering or property attachment offence under the PMLA.
Proceeds of crime
Section 2(i)(u) of the PMLA divides proceeds of crime into three categories:
(1) property derived or obtained as a result of criminal activity;
(2) the value of such property; or
(3) if the property has been “taken or held” abroad, any other property “equivalent in value” whether held in India or abroad.
If “tainted properties” are not accessible for attachment, can the ED attach even “clean/untainted properties”? This question has been dealt by the Court in the Axis Bank case. The banks, (respondents) in the course of their banking operation, claim to have gained a valid interest through mortgage or hypothecation in the properties which have been attached. The Court ruled that “deemed tainted properties” are those that were purchased and acquired without any link to criminal conduct but are nonetheless subject to attachment if the tainted goods are not identifiable or accessible for attachment. In this instance, the Court construed the term of “proceeds of crime” in a way that allowed the ED broad authority to attach property under the PMLA.
However, a contrary view from the Axis Bank ruling was taken by the Court in Seema Garg vs. Deputy Director, Directorate of Enforcement holding that the ED cannot attach tainted properties and the “deemed tainted properties” as defined in the Axis Bank case, if they don’t have direct or indirect link, with the property derived or obtained from the commission of a scheduled offence.
In the case of State Bank of India vs. The Joint Director, the ED continued to seize property without giving a thought to the financial consequences for the banks that used the property as collateral for their loans. The appellate tribunal, on the other hand, held that the ED cannot attach any such property mortgaged to banks per se, especially if the transaction with the bank occurred before the alleged crime, indicating that the property is not proceeds of crime and has appropriate documentation and a clear title in the borrower’s name.
The ED’s eagerness to raiding and prosecuting individuals does not appear to result in successful prosecutions. Between March 2011 and January 2020, the ED performed almost 1700 raids in connection with 1569 separate investigations, but just nine of them resulted in convictions. Furthermore, there have been reports that the ED has attempted to confiscate an individual’s assets by relying on incorrect legal provisions. For example, instead of complying with the underlying preconditions required by Section 60 of the PMLA, the ED improperly acquired an order of seizure (LR) of a bank account situated in a foreign jurisdiction under Section 57 of the PMLA.
Power to Seize assets
The ED has the authority to undertake “search and seizure” against any individual based on information in the officer’s possession and by establishing in writing exact “reasons to suspect” that money-laundering has occurred.
With regard to Section 157 CrPC, the proviso to Sections 17(1) and 18(1) were repealed by the Finance Act, 2019, thus authorising ED to enter any property for search and seizure even without registering a scheduled crime with a Magistrate or any other competent body. This change significantly enlarged the ED’s current powers by placing Sections 17 and 18 in same level with Section 19, where there is no prerequisite to forwarding a report under Section 157 CrPC to a Magistrate – thus removing judicial scrutiny at this point.
The use of the terms “any offence” and “any property” allows a police officer to confiscate any property under suspicious circumstances under any act. As that the Finance Act of 2019 emphasized, the crimes under the Act have always been cognizable and non-bailable, giving the ED unrestricted authority to investigate, arrest, and harass anybody under the guise of “reasonable suspicion”.
In Abdullah Ali Balsharaf v. Directorate of Enforcement the Delhi High Court held that:
“Powers of seizure of properties is a draconian power. Grant of such authoritarian and drastic powers, without commensurate checks and balances, would militate against the principle of rule of law engrafted in the Constitution of India.”
The ED seizes a property first for purposes other than those intended, and then chooses whether to apply provisions of the PMLA or Section 102 CrPC, as it has been done in Opto Circuit. In this judgment, the Court dismissed the ED’s argument that the power of seizure is available under Section 102 CrPC, which was exercised, and therefore the freezing of account would stay lawful. The Court concluded that the power must be exercised in the way described, or it will violate the necessity of adhering with due process under law.
Whether investigation by the ED can continue if the predicate offence has ceased to exist?
Predicate Offences are the scheduled offences and its occurrence is a requirement for launching an inquiry into money laundering. Section 2(y) of PMLA defines scheduled offences and are mentioned in the schedule.
The ED registered an ECIR in Babulal case and while investigating, they discovered that the Petitioners were involved in Rs. 3500 crore worth money laundering activities. The Court concluded that the investigation by the ED under the PMLA is unaffected and can proceed even though the scheduled offence is compromised, compounded, quashed or the accused therein is acquitted.
The aforementioned decision makes it evident that the Court should impose measures to guarantee that investigations by ED are not turned into a fishing and roving inquiry when the ED discovers a new offence during the inquiry.
Investigation under FEMA
The Central Government under FEMA has empowered the ED to hold an enquiry against any person/entity who is alleged to have committed contravention of the provisions of FEMA or rules and regulations made thereunder. The ED investigates the contravention under Section 13 of the Act. The ED has also been given the power to compound contraventions committed by an accused under Section 13 of the Act.
The main function of ED under the FEMA is to investigate contraventions of the provisions of FEMA. FEMA violations are addressed through adjudication by authorised ED authorities, who can impose penalties of up to three times the amount involved. The same has been discussed below:
Power to investigate:
Section 37 of FEMA gives the Director and Assistant Director of the ED the authority to investigate any violation of FEMA. Under the FEMA, these officers have the authority to exercise all of the investigative powers granted to income-tax authorities under the Income Tax Act of 1961. (ITA). When trying an action in relation to subjects under Sec 131 of the ITA, the ED has been given the same powers as a civil court under the Code of Civil Procedure, 1908.
In Suman Sehgal v. Union of India & Anr the Petitioner was a consultant to a Russian Construction Company. In 2005, several newspapers carried reports stating that Petitioner’s son and his concern were recipients of favours. Later ED has impounded the passport of the petitioner under Section 37 of Foreign Exchange Management Act, 1999 read with section 131(3) for the purpose of investigation. Aggrieved by the situation, Petitioner has filed a writ petition and contended that recourse to s.131(3) could not be taken as no proceedings are pending against him. Upon hearing both the parties, the Delhi High Court held that there is no pre-condition that any ‘proceeding’ ought to be pending against a particular or specified individual nor is the pre- requisite for exercise of such power dependent upon existing judicial proceedings.
Power to summon:
Section 37(3) of FEMA grants the Director or Assistant Director of ED the authority to summon someone. As the Madras High Court stated in the matter of KA. Manzoor Vs. Assistant Director, Enforcement Directorate, Government of India, such a right under s. 37(3) to be summoned by the ED cannot be disputed in court by way of writ. The ability to summon a person to appear in order to submit relevant documents is part of the ED’s preliminary inquiry and does not render a person ‘accused’ in the eyes of the law. As a result, the issuance of a summons does not infringe on a person’s rights, and they are unable to challenge it in court.
Also, in Standard Chartered Bank v. Directorate of Enforcement the Respondent has contended the summons by way of writ petition. In this regard, the High Court of Madras held that the summons issues cannot be challenged by writ petition. It also observed that the issuance of summons will in no way affect the rights of the person because it is only for the preliminary investigation and for production of documents for further investigation that ED is entrusted with.
In T.T.V. Dinakaran and Another vs The Enforcement Officer, the appellant has been served with a summon under Section 40 of the Foreign Exchange Regulation Act, 1973 to appear before ED to provide proper evidence for the purpose of investigation. Aggrieved by the summons, the appellant has challenged the summons contending that issue of summons under Section 40 can be made only when there exists such investigation or proceeding. In these matters the Madras High Court categorically held that when there is suspicion against the petitioner, the authorities may summon him for inquiry with all relevant documents in his possession. It cannot be concluded that the petitioner is innocent or not involved, until the inquiry is completed.
Power to penalize
Section 13 of the FEMA Act imposes penalties on anyone who violates the Act’s provisions or any order or regulation issued in the exercise of the Act’s functions. When the contraventions are quantifiable, the penalty can be up to three times the total amount involved. In this aspect, the ED has vast authority in his hands to collect such payment arrears. The ED has the same powers as the authorised agencies under the ITA when it comes to income tax collection.
In Suborno Bose vs Enforcement Directorate, the High Court has observed that mens rea is essential for imposing penalty for breach of civil obligations. It also noted that the penalty is remedial and coercive in its nature thus it emphasises the fact of loss of revenue. The same has been reiterated in the case of Director of Enforcement vs M.C.T.M. Corporation Pvt. that existence of “mens rea or criminal intent” for failure to repatriate foreign exchange was necessary before the respondents could be penalised for contravention of the provisions of Section 10(l)(a) of FERA, 1947.
Power during adjudication proceedings
During the adjudication of such a case, the Adjudicating Authority may decide to recommend to the ED the initiation of criminal proceedings in the same case. The ED may file a criminal complaint under Section 13(1B) after recording the Adjudicating Authority’s findings in writing. The court will only take notice of the case if ED files a written complaint with the court. If the security, exchange, or property is held in violation of FEMA or in excess of the government’s limit, the owner of the property will be found guilty and subject to penalties under FEMA Section 13.
In Arun K. Maitra & Ors vs Enforcement Directorate the Company was liable for compliance for payments exceeding US$5000. The petitioners submitted that the complaint filed by ED was opposed to findings in the CBI investigation report. It was contended by the petitioners that the complaint and impugned order deserve to be quashed as the facts of the case were concealed in the complaint and the respondents failed to establish the nexus between alleged facts and the findings. The Court quashing the complaints held that the respondents, ED have deliberately ignored the investigation conducted by CBI.
Power to compound contraventions:
Compounding is a settlement mechanism under section 13 in which a person willingly acknowledges to violating FEMA requirements, pleads guilty, and seeks redress. It is a procedure that allows a defendant to pay a monetary penalty rather than face prosecution and lengthy legal battles. The ED and the Reserve Bank of India (RBI) have the ability under Sec 15 of FEMA to compound contraventions listed in Sec 13 of the Act.
It is under the power of the competent authority to decide on a case-to-case basis whether or not compounding is to be granted. The same has been held by the Bombay High Court in the case of Brentfield Travels Co. Pvt. Ltd v. Reserve Bank of India & Anr,
“The power to compound has to be exercised judiciously having regard to the considerations which have been set out in the statute and in the circular issued by the Reserve Bank of India. There is no absolute right to claim a compounding of contraventions. It is for the Competent Authority to decide as to whether the contravention is of a technical nature or whether it is of a sensitive nature involving broader issues of national security or money laundering or serious infringement of the regulatory framework in which case a compounding cannot be allowed.”
Hence, it is the legislature’s responsibility to ensure sufficient transparency in submitting this closure report in order to limit any misuse of ED’s powers. The fundamental way in which the adjudicating authority can perform their duty as an officer of the law is to refrain from deviating from the essence of the law in any case that directly impinges on the victim’s fundamental right under Article 14 of the Constitution. To stop the exploitation of the rights of innocent victims, legislators must be proactive and take strict action against officers who violate the law.
Author: Abhishek Gupta, Senior Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at email@example.com