India: Powers Of Search And Seizure Under Section 17 Of The Prevention Of Money Laundering Act, 2002* (PMLA), And Importance Of Reasons To Believe

Last Updated: 18 December 2015
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia1, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India. The Author may be reached at vpdalmia@vaishlaw.com.

Any recourse by the Enforcement Department2 (ED) under PMLA, to any of the provisions of the Prevention of Money Laundering Act, 2002 (PMLA), having regard to the wide breadth of powers which are conferred upon the authorities mentioned under the PMLA, clearly postulate a higher standard of responsibility and public trust, accountability, transparency and must be able to justify the actions as one which conforms to judicially reviewable standards of propriety, legality, and constitutionality.

Search and seizure, as contemplated under Sec.17 of the PMLA, can be conducted only upon the satisfaction of the prerequisite conditions namely:

  1. the Director or any other officer authorized by him is in possession of some information,
  2. that on the basis of such information he has reason to believe,
  3. the reason for such belief has to be recorded in writing, and
  4. that there are reasons to believe that any person

    1. has committed any act which constitutes money-laundering, or
    2. is in possession of any proceeds of crime involved in money laundering, or
    3. is in possession of any records relating to money laundering, or
    4. is in possession of any property related to crime.

The Director, or any other officer authorized by him on this behalf, has to strictly satisfy the prerequisite conditions enumerated in Section 17 of the PMLA, before he could direct search and seizure to be conducted in the premises of an accused. On the basis of information in his possession, the director must have appropriate 'reasons to believe' that an offence has been committed under the PMLA and further, the said reasons shall be recorded in writing, before invoking Section 17 of the PMLA.

Though in Section 17 of the PMLA, there is no express requirement of stating the reasons recorded for initiating the search and seizure proceedings, to the aggrieved person, however, Search and Seizure is a deprivation of civil liberty, and as such, principles of natural justice need to be adhered, by requiring the reasons for such search and seizure, to be communicated to the aggrieved party. In absence of such a communication, any search and seizure is bad in law for the want of natural justice. The Courts in India have repeatedly propounded the above proposition of recordal of reasons and communication of the same to the aggrieved person. It is important to see how, the authorities under PMLA apply the mandate and interpretation of law, promulgated through various judgments discussed herein below:

In the case of CIT & Ors. v. Oriental Rubber Works3, [(1984) 1 SCC 700], while considering the powers of retention of seized documents under Section 132 of the Income Tax Act, 1962, wherein the reasons for retention were required to be recorded in writing, but nowhere required to communicate those reasons to the aggrieved person, as in the case of Section 17 of PMLA, there is no express requirement for communicating the reasons so recorded, the Hon'ble Supreme Court held that irrespective of there being no such requirement in the statute, the concerned officer is bound to communicate the said reasons, as the failure to communicate shall materially prejudice the person so searched under the provisions of Section 132 of the aforesaid Act. The relevant extract from the judgment is as under:

"4. ...On a plain reading of the aforesaid provisions it will be clear that ordinarily the books of account or other documents that may be seized under an authorisation issued under Sub-sections (1) of Section 132 can be retained by the authorised officer or the concerned Income-fax Officer for a period of one hundred and eighty days from the date of seizure, where after the person from whose custody such books or documents have been seized or the person to whom such books or documents belong becomes entitled to the return of the same unless the reasons for any extended retention are recorded in writing by the authorized officer/the concerned Income Tax Officer and approval of the Commissioner for such retention is obtained. In other words two conditions must be fulfilled before such extended retention becomes permissible in law:' (a) reasons in writing must be recorded by the authorised officer or the concerned Income-fax Officer seeking the Commissioner's approval and (b) obtaining of the Commissioner's approval for such extended retention and if either of these conditions is not fulfilled such extended retention will become unlawful and the concerned person (i.e. the person from whose custody such books or documents have been seized or the person to whom these belong) acquires a right to the return of the same forthwith. It is true that Sub-section (8) does not in terms provide that the Commissioner's approval or the recorded reasons on which it might be based should be communicated to the concerned person but in our view since the person concerned is bound to be materially prejudiced in the enforcement of his right to have such books and documents returned to him by being kept ignorant about the factum of fulfillment of either of the conditions it is obligatory upon the Revenue to communicate the Commissioner's approval as also the recorded reasons to the person concerned. In the absence of such communication the Commissioner's decision according his approval will not become effective."

That in the case of C.B. Gautam vs. Union of India4 (1993(1) SCC 78), a Constitution Bench of the Hon'ble Supreme Court of India held that the reasons to be recorded in writing shall not only be incorporated in the order but also shall be communicated to the affected parties. The relevant extract from the judgement is as under:

"Sec. 269UD(1), in express terminology, provides that the appropriate authority may make an order for the purchase of the property `for reasons to be recorded in writing'. Sec. 269UD(2) casts an obligation on the authority that it "shall cause a copy of its order under sub-s. (1) in respect of any immovable property to be served on the transferor". It is, therefore, inconceivable that the order which is required to be served by the appropriate authority under sub-s. (2) would be the one which does not contain the reasons for the passing of the order or is not accompanied by the reasons recorded in writing. It may be permissible to record reasons separately but the order would be an incomplete order unless either the reasons are incorporated therein or are served separately along with the order on the affected party. Reasons for the order must be communicated to the affected party."

This decision has been followed in various judgments by various Courts, including the Hon'ble Supreme Court of India.

The Hon'ble Supreme Court, in the case of M. P. Industries Ltd. v. IPO5, [(1970) 2 SCC 32], while dealing with the powers under Section 34(1) of the Income Tax, 1922, which required the officer to have 'reason to believe', has held that the expression 'reason to believe' in Section 3 does not mean purely subjective satisfaction on the part of the Income Tax Officer and that the belief must be held in good faith and it cannot be merely a pretence. It was further held by the Supreme Court that it is open to the Court to examine whether the reasons for the believe have a rational connection or an element bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the Section.

The Supreme Court, in the case of Mohammad Aslam Merchant v. Competent Authority6, [(2008) 14 SCC 186], while dealing with similar requirements under Section 68H of the Narcotics Drugs and Psychotropic Substances Act, has held that both the statutory elements, namely, "reason to believe" and "recording of reasons" must be premised on the materials produced before him and that such materials must have been gathered during the investigation carried out in terms of Section 68-E or otherwise. It was further held that indisputably, therefore, he must have some materials before him and that if no such material had been placed before him, he cannot initiate a proceeding.

The Hon'ble High Court of Andhra Pradesh, in the case of K. Munivelu v. The Government of India and Ors.7 [AIR1972AP318], while dealing with the terms "Reason to Believe" and "suspects", with respect to Section 3 (2) of Essential Commodities Act, 1955, which deals with the power of the authorized officer to enter and search the premises and the seizure thereof, and the Andhra Pradesh Coarse Grains (Export) Control Order, 1965, has held that the term "Reason to believe" is a much stronger expression than the word "suspect" and further observed from the meanings attributed to the words "suspect" and "reason to believe", that it is evident that the initial stage for believing the existence of a certain thing or an alleged fact is suspicion. After suspecting the existence of a thing, condition or a statement of fact, you collect information and then examine that information and come to a final conclusion on the basis of that information, that such a thing, condition or statement of a fact exists. All these ingredients are prerequisite for forming any opinion based on "Reason to Believe".

The Hon'ble High Court of Andhra Pradesh, in the case of K. Munivelu v. The Government of India and Ors.8, referred to the judgment of the Division Bench of the Andhra Pradesh High Court, in the case of Sriram Durga Prasad (P.) Ltd. Visakhapatnam v. Deputy Collector. Customs Dept. Visakhapatnam9, AIR1965AP294, in regard to construction of statutes which encroach on the rights of the subject observed that:

"Statutes which encroach on the rights of the subject whether as regards person or property are similarly subject to a strict construction in the sense above explained. Provisions as to search of the premises of a citizen place certain restrictions adversely on his possession and enjoyment of the properties and thereby encroach upon his civil liberties. They are subject to strict interpretation, just like statutory provisions imposing a tax on a citizen."

The powers which are conferred upon the authorities mentioned under the PMLA, are very wide and also encroaches the right of citizens. The powers under the PMLA, shall be exercised with extreme caution, higher standard of responsibility and public trust, accountability, transparency and the same must be able to justify the actions as one which conforms to judicially reviewable standards of propriety, legality, and constitutionality.

Footnotes

* http://fiuindia.gov.in/downloads/PMLA%20Act%20as%20amended%20in%202013.pdf

[1] http://vaishlaw.com/people.php?id=440

[2] http://www.enforcementdirectorate.gov.in/functions.html?p1=1151131423810719454

[3] http://judis.nic.in/supremecourt/imgs1.aspx?filename=9668

[4] http://judis.nic.in/supremecourt/imgst.aspx?filename=21482

[5] http://judis.nic.in/supremecourt/imgs1.aspx?filename=1431

[6] http://judis.nic.in/supremecourt/imgs1.aspx?filename=31809

[7] http://indiankanoon.org/doc/284718/

[8] http://indiankanoon.org/doc/284718/

[9] http://indiankanoon.org/doc/1426176/

© 2015, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

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Vijay Pal Dalmia, Partner
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