By TIOL News Service

CHENNAI, JULY 25, 2012: WHILE disposing of Writ Petitions filed by Indian Bank and others in challenging the Provisional Attachment Orders issued by the Enforcement Directorate, in the context of Prevention of Money Laundering Act, 2002 (PMLA), the High Court of Madras categorically held, " Prevention of Money Laundering Act, 2002 (PMLA) - PMLA, not only seeks to punish the offenders, but also seeks to punish the victims of such offences” and also as "Section 8 of PMLA in its entirety is accused-centric and Central Government-centric - It does not take into account the plight of victims of crime - There is an inherent lacuna in the PMLA - The very object of the PMLA is completely different from what the respondents (ED) are now attempting to do” . etc. In the light of this Judgment, will the Central Government make amendments to plug the lacunae and flaws in the PMLA? As PMLA is challenged in many cases and one of such case viz., B. Teja Raju Vs. Union of India (SLP No. of 2011) is already reached to the level of Apex Court and the same is posted for regular hearing in the year 2013.

The factual matrix the present case is as follows.

Brief Facts of the case :

THE Petitioner (Indian Bank) and M/s Palpap Ichinichi Software International Ltd., (Company), (Petitioner in second WP) had filed two different Writ Petitions before the High Court challenging the Provisional Attachment Order (PAO) passed by the Joint Director, Enforcement Directorate. The Company borrowed monies from the Indian Bank and purchased a property at Chennai. The Petitioner lodged a complaint with CBI against the Company, alleging that the Company and its officers had defrauded the Bank. State Bank of India also lodged a complaint alleging that the Company organised personal loans for 161 persons, showing them as its employees. Bank of India lodged another complaint alleging that the Company obtained loans in the name of 149 persons allegedly employed by them. On the complaint lodged by the Petitioner, a charge sheet was filed on the file of the ACMM, Chennai. Similarly, charge sheets also filed in respect of complaints filed by SBI and Bank of India. The charge sheet alleged that the Company and its MD namely Mr. S. Senthil Kumar, had committed offences punishable under Sections 120-B, 420, 467, 468 and 471 of the IPC. The charges framed against the Company and its officers also included the offences indicated in the Schedule in terms of Section 2(1)(y) of Prevention of Money Laundering Act, 2002 (PMLA). Later, Joint Director, ED passed PAO under Section 5(1) of PMLA, for the property purchased by the Company from the funds taken on loan from the Petitioner. The PAO was passed on the premise that the said property purchased in the name of the Company was acquired out of the Proceeds of Crime (POC) as defined in Section 2(1)(u) of PMLA and that therefore, it was liable for confiscation in terms of Section 8 of PMLA. Immediately upon coming to know of the PAO, the Petitioner filed WP with a prayer to quash the PAO by contending that the account of the Company had already become a non-performing asset and that since the property was mortgaged to them, the Petitioner had already taken steps to bring the property to sale in terms of the provisions of the SARFAESI Act, 2002. The writ petition was admitted and also granted an interim stay. During the operation of stay, the PMLA Adjudicating Authority passed an order confirming the PAO, till the conclusion of the proceedings before the appropriate Criminal Court.

The High Court observed as -

++ As a matter of fact, the Petitioner is one of the 3 complainants. It is on the basis of these complaints that criminal prosecution has been launched and charge sheets have been filed. But both the lender and the borrower are now aggrieved by the PAO and the adjudication proceedings. While the grievance of the Petitioner is that their right to proceed against the property under the SARFAESI Act, stands impaired by the PAO, the grievance of the Company is that the property sought to be attached does not represent the ‘Proceeds of Crime'. Therefore, two questions arise for consideration viz., (i) as to whether the property sought to be attached represents the proceeds of the crime and (ii) if the property represents the proceeds of the crime, where would the claim of the complainant-Indian Bank stand.

Question-I:

++ It is the contention of the Company that since the entire sale consideration for the purchase of the property in question had gone from the Bank to the vendors, the property cannot be taken to represent the "Proceeds of Crime" within the meaning of Section 2(1)(u). The Petitioner says is that since the sale consideration had gone out of the funds of the Bank and also since the property was mortgaged to them, they have a right to recover their dues by bringing the property to sale in exercise of the power conferred by SARFAESI Act, 2002.

++ The Ld. Standing Counsel for respondents, raised a objection that the property was purchased from out of the funds secured by the Company by fraudulent means from 3 different Banks and that the Petitioner did not pay the entire sale proceeds. According to the Ld. Counsel for the respondents, the fact that the company committed a fraud upon the Banks and the fact that the property was purchased from out of the funds secured by the company, by fraudulent means from 3 Banks, are not disputed by the Bank. Therefore, it is their contention that the definition of the expression 'proceeds of crime' under Section 2(1)(u) stands satisfied and that hence, the respondents have the power to attach the property under Section 5.

++ Prima facie , the entire sale consideration for the purchase of the property in question had directly gone from the Petitioner to the vendors and the vendors executed a Sale Deed in favour of the Company. Hence, the respondents cannot justify the order of attachment on the sole ground that Indian Bank paid only a part of sale consideration and that the remaining part of the sale consideration flowed out of the funds of the other Banks.

++ It is clear that the criminal activity alleged against the Company and its Directors relates to scheduled offence as per PMLA. Therefore, the ingredients of the expression proceeds of crimestand satisfied, in view of the fact (i) that the company is charged of committing scheduled offences and (ii) the property in question is allegedly derived as a result of a criminal activity relating to scheduled offences. Since the entire sale consideration for the property was paid by the Bank, it cannot be termed as the Proceeds of Crime. Prima facie, the property represents the Proceeds of Crime and it is upto the accused to establish, by evidence, before the criminal court that it is not so.

Question-II:

++ The second question that arises for consideration is as to where would the claim of the Bank stand, if the property is taken to represent the proceeds of crime. This question is of extreme importance for various reasons.

++ It can be easily appreciated from the narration of facts that the very initiation of the action by the respondents is on the basis of the criminal complaints lodged by the 3 Banks with the CBI. Today the respondents presume that the allegations are true. The respondents have proceeded with the action in terms of PMLA only on the presumption that the allegations made by the Banks in their complaints are true. If, as presumed by the respondents, the allegations made by the Banks in their complaints are true, then these Banks are the victims of a fraud committed by the Company and its officers. In other words, it is the Banks' money which has actually been made use of by the company and its Directors to buy properties in their names. Where do these victims stand, vis-a-vis accused in such cases? Unfortunately, the PMLA, does not appear to take note of the above question viz., as to where the victims stand.

++ In other words, PMLA, not only seeks to punish the offenders, but also seeks to punish the victims of such offences. Take for instance a case, where an offence of kidnapping for ransom punishable under Section 364-A takes place. If the amount involved is more than Rs.30 lakhs, it is a scheduled offence under PMLA. Therefore, if the accused is apprehended and charged under PMLA and the money is also recovered, then the person who paid the ransom to the accused and who happens to be the victim of the crime, will lose his money by virtue of Section 8(6) and Section 9. He would rather prefer to turn hostile in the criminal case by reaching an agreement with the accused so that the attachment order gets lifted under Section 8(5) enabling him to take away his money. In other words, Section 8(6) and Section 9, which seeks to punish the victims of crime along with the accused, appear to be a disincentive for the victims. The same analogy holds good even for offences of robbery and dacoity punishable under Sections 392 to 402, which are included in Paragraph 1 of Part B of the schedule to the Act. A person, who is robbed or a person on whom dacoity is committed, has to lose his property to the Central Government by virtue of Section 8(6) and Section 9 of the Act, if the stand taken by the respondents is accepted. For the victims of crime, there would virtually be no difference between the accused and the Central Government, as in any case, they would have to lose their property, to either of the two.

++ It is clear from the facts on the basis of which the respondents have proceeded, that if the order of adjudication made by the Adjudicating Authority becomes final, after the conviction of the Company and its Directors by the Criminal Court, the Central Government would confiscate such property in terms of Section 8(6). Thereafter, the property would vest in the Central Government free of all encumbrances under Section 9. In other words, the Banks, who were the victims of fraud, may have to lose the property to the Central Government, for no fault of theirs except that they were defrauded by the Company. The above disturbing feature which is inbuilt in the PMLA, was sought to be played down by Ld. Standing counsel for the respondents, on the ground that under Section 8(6), the confiscation of the property will not take place automatically and that it would happen only after giving an opportunity to the person concerned. But that argument is hardly convincing. A careful reading of Section 8 would show that there is no provision for the Adjudicating Authority to hand over the properties to third parties, unless they establish that the property does not represent the proceeds of crime. If a property is proved to be involved in money laundering, the Adjudicating Authority has only one choice viz., to make the attachment absolute, wait for the final adjudication by the Criminal Court and either release the property to the accused if he is acquitted in the Criminal Court or confiscate the property to the Central Government if the accused is convicted by the Criminal Court. Therefore, Section 8 in its entirety is accused-centric and Central Government-centric. It does not take into account the plight of victims of crime.

++ The Ld. ASG submitted that since the Banks involved in this case are Nationalised Banks, they can always approach the Central Government for the apportionment of the value of the property sought to be attached. But this is hardly a solution to the problem. It is only by coincidence that the complainants in this case, are Nationalised Banks. There may be cases of persons who are victims of dacoity, robbery, kidnapping for ransom etc. After their property gets confiscated under Section 8(6) and vests with the Central Government under Section 9, those victims will have to be out in the streets.

++ The validity of the Act is not under challenge before this court and that the validity of the Act has already been upheld by the Andhra Pradesh High Court. This court is only testing the strengths and weaknesses of the provisions of Sections 5, 8 and 9 for the limited purpose of finding an answer to the second question as to whether the Bank can be left high and dry. In view of the inherent lacuna in the Act, the banks cannot be left high and dry.

++ The very object of the PMLA is completely different from what the respondents are now attempting to do. The Statement of Objects and Reasons of the PMLA would show that the primary object for which the Act came into existence was for prevention of laundering of proceeds of drug crimes committed by global criminals/terrorists, involved in illicit trafficking of narcotic drugs and psychotropic substances. The more and more the Act is used for tackling normal offences punishable under the Indian Penal Code, committed within the territories of India, the result would be disastrous to the victims of crime. Therefore, Sections 5, 8 and 9 cannot be used by the respondents to inflict injury upon the victims of the crime. Hence the second question is to be answered in favour of the Petitioner.

++ What is more intriguing is the fact that in the original complaint filed before the Adjudicating Authority, the first respondent did not even make the Petitioner, a party. After having come to know that the Petitioner had approached this Court and also obtained not only an interim stay of further proceedings, but also a leave to proceed with the auction sale under the SARFAESI Act, 2002, the first respondent, in all fairness, should have impleaded the Petitioner as a party to the original complaint before the Adjudicating Authority. The failure of the first respondent to do so cannot be condoned.

++ The action of the Adjudicating Authority in proceeding with the hearing of the original complaint despite being aware of the interim stay order and also proceeding to pronounce a final order is clearly in defiance of the interim stay order of this Court. Therefore, the whole proceedings are vitiated and even confirmation order passed during the pendency of these writ petitions is illegal and are liable to be set aside as null and void.

++ The writ petitions are allowed, the PAO as well as all further proceedings pursuant thereto including the original complaint and the order of confirmation, are set aside as illegal. The order of confirmation dated 26.6.2012 was passed during the pendency of these WPs and that the same is not under challenge. But it hardly matters, in view of the fact that once the provisional order of attachment dated 22.2.2012 goes, there is nothing for the Adjudicating Authority to confirm.

Conclusion : In the light of the provisions of the PMLA and in terms of the above judgment, certain provisions of PMLA viz., Section 2(1)(u), Sections 5, 8 & 9, are vague, arbitrary and inconsistent with settled principles of law. Moreover, these provisions certainly cause more danger to the victims of crime instead of offenders as explained in the judgment.

(See 2012-TIOL-538-HC-MAD-PMLA)