“Act”) was enacted to prevent
ill-gotten wealth being reintroduced into India’s financial
system. A key feature of the enactment is the power of the
investigating agency under the Act, i.e., the Directorate of
Enforcement (the “ED”), to
provisionally attach any property believed to be involved in money
laundering for an initial period up to 180 days from the date of
such attachment.1
Section 5 of the Act ensures that proceeds that are obtained
directly or indirectly from the offences noted under the Act
(“scheduled offences”) are not dealt
with in any manner so as to frustrate proceedings relating to the
confiscation of such proceeds under the Act. Ex facie,
this provision appears to be in direct conflict with the rights of
bona fide third-parties such as banks, mortgagees,
transferee, and lessee etc. who may otherwise have a lawful
interest in a property alleged to be involved in money laundering
and had no knowledge of such involvement at the time of acquisition
of interest in such property.
This article examines the scheme of the Act and the scope of
provisional attachment of property under the Act to evaluate
whether the Act adequately safeguards the rights of such
third-parties.
Scheme of the Act and the Extensive Definition of
“Proceeds of Crime”
Under Section 3 of the Act, the offence of money laundering is
defined as: (a) a direct or indirect attempt, (b) any direct or
indirect assistance, or (c) being, directly or indirectly, a
knowing party to or being involved in any process or activity that
is connected with the proceeds of a crime including its
concealment, possession, acquisition or use, with the intention of
projecting / claiming those proceeds of crime as untainted
property. Therefore, it is clear that the offence of money
laundering is preceded by the commission of a scheduled offence,
the proceeds of which become the subject matter of the offence of
money laundering. Scheduled offences are listed in Part A to C of
the Schedule to the Act and include offences under various statutes
such as the Indian Penal Code, 1860; Prevention of Corruption Act,
1988; Securities and Exchange Board of India Act, 1992; and
Companies Act, 2013; among others.
The definition of “proceeds of crime” under the Act
includes any property derived or obtained directly or
indirectly by any person as a
result of a criminal activity falling under the ambit of a
scheduled offence or, value of such property or the property
equivalent in value held within the country if such property is
taken or held outside the country. 2 Therefore, it is
possible that even untainted or clean properties which are of the
same value as the tainted property could be deemed as proceeds of
crime. An explanation to Section 2(u) was inserted by the Finance
Act, 2019 which expanded the scope of “proceeds of
crime” under the Act to include “any other
property which may directly or indirectly be derived or obtained as
a result of any criminal activity relatable to the scheduled
offence”. The use of the words “relatable to”
indicates that the legislative intent behind this amendment was to
include within the definition of “proceeds of crime”
any property derived as a result of a criminal activity that has a
nexus with a scheduled offence.
Provisional Attachment of Property under the Act
The Act grants wide powers to the ED to attach properties
believed to be involved in the offence of money laundering. Under
Section 5 of the Act, the ED is empowered to provisionally attach
“any property” of “any person” who is in
the possession of proceeds of crime. The ED could rely on the
expressions “value of any such property” and
“equivalent in value” under Section 2(u) to attach even
untainted properties where such untainted property potentially has
a link or nexus with the offence or offender of money
laundering.3
The standard of test to be followed by the ED in order to effect
a provisional attachment is the “reason to believe”
standard and the ED is empowered to exercise this authority if, on
the basis of material in its possession, it has a “reason to
believe” (such reason(s) to be recorded in writing) that such
proceeds of crime are likely to be dealt with in a manner which may
frustrate any proceedings under the Act. Although the phrase
“reason to believe” is not defined in the Act, courts
have interpreted the phrase to mean “more than a nagging
suspicion or personal conviction”4 and not a
“rubber stamp of the opinion formed by someone
else”5. Such attachment may be in place for
an initial period up to 180 days from the date of such
attachment6 and may continue to be attached during the
pendency of the proceedings under the Act, if the Adjudicating
Authority confirms the provisional attachment under Section 8 of
the Act.
The wide import of Section 5 of the Act makes it clear that an
order of provisional attachment may even be invoked against a
person who is not accused of a scheduled offence in respect of a
property involved in money laundering. The constitutional validity
of this provision was upheld by the Andhra Pradesh High Court in
B. Rama Raju v. Union of India and
Ors.7 where the Andhra Pradesh High Court held that
the intention of the legislature behind the proviso to Section 5(1)
was to clarify that there are two sets of proceedings provided for
in the Act – a criminal action pertaining to whether the
offence of money laundering is made out, and a civil action
pertaining to the attachment and confiscation or property which is
subject to proceeds of crime. While deciding on an identical
issue, the Delhi High Court in J. Sekar v. Union of
India8 following the decision of the Madras High
Court in Dr. V.M. Ganeshan v. Joint Director,
Directorate of Enforcement9 made an observation
that the proviso includes “a person who is not accused of
any offence, but who was merely come to possess, under fortunate or
unfortunate circumstances, a property that represents the proceeds
of crime”.
Therefore, even from judicial precedents it is sufficiently
clear that Section 5 of Act empowers the ED to serve an order of
provisional attachment of property on bona fide
third-parties who may otherwise have a lawful interest in such
property and had no knowledge of the property’s nexus to
money laundering at the time of acquisition of such interest.
Position of Third-Parties under the Act
Any person other than the person accused of the offence of money
laundering, who otherwise has a lawful interest in the property
which is provisionally attached by the ED would qualify to be a
third-party. Although the Act does not define a third-party or
stipulate the rights and remedies that are available to such
bona fide third-party, this issue was dealt with in detail
by the Delhi High Court in Deputy Director, Directorate of
Enforcement Delhi and Ors. v. Axis Bank and
Ors.10 (the “Axis
Bank”).
In Axis Bank, several banks and financial institutions
had granted credit facilities against hypothecation/charge over
certain assets, the title-holders of which assets were charged
under the Act and attachment orders were passed in respect of these
assets deemed as proceeds of crime, thereby affecting the rights
vested with banks and financial institutions under various other
statutes. The Appellate Tribunal constituted under the Act (the
“Appellate Tribunal”) had set aside
these attachment orders on certain grounds and the orders of the
Appellate Tribunal were challenged before the Delhi High Court
separately. The Delhi High Court, clubbed these appeals together,
and held that rights under other statutes and the Act must co-exist
and be enforced in harmony, without one being in derogation of the
other. The Delhi High Court observed that an order of attachment
under the Act is as lawful as an action claimed by a third-party
and such an order of attachment is not rendered illegal merely
because a third-party has acquired prior interest in the property.
The Delhi High Court further observed that mere issuance of an
order of attachment cannot render illegal a bona fide
third-party’s interest in the property, unless it was created
to defeat the object of the Act, and a balance ought to be struck
between the two competing interests. According to the Delhi High
Court, the scheme of the Act itself makes way for a balance between
these interests. For instance, the Act provides an opportunity to a
person claiming legitimate interest to approach the forums under
the Act to prove that he had acted in good faith, took all
reasonable precautions, is himself not involved in money
laundering, and to seek a release or restoration of the property
under Section 8(8) of the Act.
On the issue of the authority of the ED to provisionally attach
a property involved in money laundering and conflicting third-party
claims on the property, the Delhi High Court in Axis Bank
made the following observations:
Who is a bona fide third-party?
A bona fide third party is a party who can show by
cogent evidence that he had acquired interest in the attached
property lawfully and for adequate consideration; that he was not
privy to, or complicit in, the offence of money laundering; and
that he has made all compliances with existing laws.
What remedies are available to a bona fide
third-party?
If the third-party can show by cogent evidence that he had
acquired interest in the attached property at the same time or
after the commission of the scheduled offence, he can seek release
of attachment of the property by proving that he had taken due
diligence to ensure that the attached property was not a tainted
asset and that the transactions indulged in were legitimate at the
time of acquisition of such interest. If the third-party can show
by cogent evidence that he had acquired the same after the
commission of the scheduled offence, the property to the extent of
such interest of the third-party will not be subject to
confiscation so long as the charge or encumbrance of such
third-party subsists, subject to satisfaction of the charge or
encumbrance of such third-party and restricted to such part of the
value of the property as is in excess of the claim of the said
third-party.
At what stage is the claim of a bona fide third-party
adjudicated?
If the order confirming the attachment has attained
finality, or if the order of confiscation has been
passed, or if the trial of a case under Section 4 of the Act has
commenced, the claim of a third party asserting to have acted
bona fide or having legitimate interest in the
nature mentioned above will be inquired into and adjudicated upon
only before the special court, and not at the stage of provisional
attachment.
The judgment in Axis Bank has been challenged by way of
a Special Leave Petition and is pending adjudication before the
Supreme Court of India.11 Although these observations
made by the Delhi High Court are pivotal in safeguarding the rights
of bona fide third-parties, recourse to these defences is
available only before the Adjudicating Authority in response to the
show cause notice issued12 and after the order
confirming the attachment has attained finality13 but,
in the view of the Delhi High Court, is not available to resist an
order of provisional attachment by the ED. Accordingly, the impact
of delay in adjudication of third-party rights deserves further
consideration especially since such delay could make the remedy of
an eventual release of the attached property almost
meaningless.
Under Section 8(1) of the Act, once any property of any person
is provisionally attached by the ED, and a complaint is filed by
the ED under Section 5(5), the Adjudicating Authority is required
to serve a notice on the person whose properties have been attached
and offer an opportunity to be heard and satisfy the burden of
proof before confirming the order of attachment. Therefore, even if
a third-party is able to prove to the ED that it has paid adequate
consideration and had no knowledge about the property being
acquired with the proceeds of crime, there is no provision under
the Act to resist the order of provisional attachment. As a result,
the vesting of an almost absolute authority to provisionally attach
“any property” of “any person” may put the
lawful interest of a third-party, who may have acted bona
fide and with genuine due diligence, in jeopardy.
Conclusion
The object of the Act, inter alia, is to provide for
confiscation of property involved in money laundering and the
ED’s authority under the Act, to provisionally attach a
property believed to be involved in money laundering, is in
furtherance of such object. However, it is manifestly arbitrary if
a third-party vested with an otherwise lawful interest in a
property acquired by payment of adequate consideration, who has no
knowledge or means to know that the property constitutes
“proceeds of crime”, is subjected to an order of
provisional attachment. In particular, when such third-party has
not received any unjust benefits from the acquisition of such
lawful interest in the property.
Further, if a bona fide third-party is able to show
documented proof of the acquisition of interest in the property
along with proof of payment of adequate consideration, the ED
should be restrained from passing an order of provisional
attachment on the property and should instead trace and attach the
consideration received in the hands of the accused towards sale of
such property or transfer of interest in such property. This
principle is also supported by the fact that, under the Act, the
term “proceeds of crime” includes “value of any
such property”. In light of the aforesaid, the safeguards
available to bona fide third-parties who could potentially
get and/or are getting adversely impacted by provisional
attachments under the Act in its present form, in particular the
stage at which such safeguards may be invoked, deserve
reconsideration.
Footnotes
1 Section 5(1) of the Act.
2 Section 2(u) of the Act.
3 Deputy Director, Directorate of Enforcement Delhi
and Ors. v. Axis Bank and Ors. 2019 SCC OnLine Del
7854.
4 Kavitha G. Pillai v. The Joint Director, Director of
Enforcement, Government of India, 2017 SCC OnLine Ker
10118.
5 J. Sekar v. Union of India, 2018 Cri LJ
1720.
6 Section 5(1) of the Act.
7 B. Rama Raju v. Union of India and
Ors.,[2011] 108 SCL 491 (AP).
8 J. Sekar v. Union of India, 2018 Cri LJ
1720.
9 Dr. V.M. Ganeshan v. Joint Director,
Directorate of Enforcement, 2014 SCC OnLine Mad
10702.
10 Deputy Director, Directorate of Enforcement Delhi
and Ors. v. Axis Bank and Ors. 2019 SCC OnLine Del
7854.
11 Axis Bank Ltd. v. Deputy Director,
Directorate of Enforcement Delhi (Diary No.
28906/2019).
12 Section 8(1) of the Act.
13 Section 8(6)-(8) of the Act.
This insight/article is intended only as a general
discussion of issues and is not intended for any solicitation of
work. It should not be regarded as legal advice and no legal or
business decision should be based on its content.
