2025 (5) TMI 1456 - HC - Money Laundering

Money Laundering - legality of all actions taken by the police pursuant to the subject FIR and by the ED in the subject ECIR including the petitioners arrest - whether the search and seizure operation carried-out by the ED at the petitioners residential premises and at the office premises of their companies could have led to the registration of the subject FIR or the subject ECIR?. Does the enactment of FEMA grant to a person immunity from prosecution for offences which arise under the IPC from the underlying acts or omissions that led to infraction of the provisions of FEMA ? - HELD THAT - Though much stress has been laid by learned senior counsel appearing for the petitioners on the argument that this court must appreciate the mischief that the Legislature had sought to remedy by enacting FEMA in the opinion of this court that proposition is not contested since there is no doubt even in the minds of the ED that FEMA was enacted to decriminalise infractions relating to foreign exchange transaction. There is no contest with the proposition that once FEMA was enacted the criminality that used to attach to infractions relating to foreign exchange transactions under FERA got converted into civil penalty with no penal consequences. This question is squarely answered by the Supreme Court in Venkateshan S. 2002 (4) TMI 789 - SUPREME COURT where the Supreme Court was dealing with a detention order passed under the COFEPOSA which detention order was quashed by the Karnataka High Court on the ground that what was considered a criminal violation under FERA had ceased to be so once FERA was repealed and FEMA was enacted. In this context the Supreme Court observed Section 3 of the COFEPOSA Act which is not amended or repealed empowers the authority to exercise its power of detention with a view to preventing any person inter alia from acting in any manner prejudicial to the conservation or augmentation of foreign exchange. If the activity of any person is prejudicial to the conservation or augmentation of foreign exchange the authority is empowered to make a detention order against such person and the Act does not contemplate that such activity should be an offence. What is noteworthy is that even though both COFEPOSA and FEMA deal essentially with the same subject matter namely foreign exchange transactions even so in the above case the Supreme Court held that though FEMA had decriminalised foreign exchange transactions yet a person could be detained under COFEPOSA based on his conduct relating to the same foreign exchange transactions. In the present case neither do the two statutes viz. FEMA and IPC occupy or operate in the same field; nor do they contain any inconsistent or repugnant or irreconcilable provisions. FEMA replaced FERA with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of the foreign exchange market in India; while IPC is the codified substantive penal law of the country which deals with punishing conventional crimes. In the opinion of this court the civil wrongs alleged to have been committed by the petitioners relating to foreign exchange transactions under FEMA cannot be viewed as having been committed in one fell swoop with all preceding actions and omissions that the petitioners committed in preparation of the civil wrongs. As per the allegations the foreign exchange transactions that are subject matter of investigation by the ED under the provisions of the FEMA were preceded by several actions and omissions such as forging of notarial stamps and fabrication of fake invoices which amount to criminal offences under the IPC; and these offences were committed even before the petitioners committed the civil wrongs under FEMA that they have been accused of. In view of the foregoing position of law as applied to the provisions of FEMA vis- -vis the provisions of IPC this court is of the view there is no basis to hold that the enactment of FEMA grants to a person immunity for offences under the IPC since FEMA does not repeal the IPC either expressly or by implication. Moreover FEMA and IPC address different and distinct infractions of the law with FEMA addressing infractions relating to foreign exchange transactions and the IPC dealing with conventional crimes. To be absolutely clear the offences of criminal conspiracy cheating forgery and related offences of which the petitioners are accused under the IPC do not get obliterated or subsumed or cease to be penal offences merely because they were the underlying actions for the infractions of foreign exchange regulations. Pertinently the penal offences were complete in themselves before the infraction of the provisions of FEMA took place - In the opinion of this court therefore the petitioners submission that they cannot be prosecuted for offences under the IPC cannot be accepted. Was the registration of the subject FIR by the Delhi Police valid and legal? - HELD THAT - Upon considering the foregoing submission this court is of the view that for one a reading of the subject FIR would show that it is not based solely on Manideep Mago s statement recorded under section 37 FEMA but is also founded on the recoveries made by the ED in the course of its search and seizure operation including the recovery of invoices notarial stamps and other material which was the basis of the allegations of forgery and fabrication under the provisions of the IPC. In the present case in his statement recorded under section 37 of the FEMA Manideep Mago does not appear to have confessed to committing any offence and therefore it would appear that at worst the statement merely contains some admissions on his part. As a result even if some parts of the subject FIR are based on Manideep Mago s statement recorded under section 37 of the FEMA that cannot be ground for quashing the subject FIR. In the present case there can be no cavil that the complaint received by the police from the ED did disclose the commission of cognizable offences; and therefore the law mandated that the police must register an FIR; and they cannot be faulted for having done so. Was the petitioners arrest by the ED in the subject ECIR valid and legal? - HELD THAT - A perusal of the grounds of arrest in respect of both petitioners would show however that certain allegations specific to the petitioners have been set-out in them which sufficiently convey the essential case against them which has made it necessary to arrest them; and non-cooperation with the investigating agency is only one of those grounds and not the sole reason for their arrest. It may be noted that what the Supreme Court has said in Pankaj Bansal 2023 (10) TMI 175 - SUPREME COURT is that mere non-cooperation or failure to respond to a question put by the ED is not in itself sufficient to arrest a person; but that cannot be construed to mean that if there are other grounds to arrest a person those should be ignored. In view thereof the argument that the petitioners were arrested merely for non-cooperation in investigation is misconceived and must be rejected. Was the petitioners arrest by the Delhi Police in the subject FIR valid and legal? - HELD THAT - The Delhi Police are correct in pointing-out that in a recent decision rendered by this Bench in Marfing Tamang taking cue from the observations of a Co-ordinate Bench in Pranav Kuckreja this Bench has suggested that a column be incorporated in the format of an arrest memo itself where the investigating officer can set-out the grounds of arrest to obviate the need for issuing to an arrestee a separate piece of writing which would also ensure that the grounds of arrest are communicated to an arrestee simultaneously with the issuance of the arrest memo thereby streamlining the process. In the opinion of this court what have been set-out in the Delhi Police arrest memos are not grounds of arrest but only reasons for arrest against column No.9 of the arrest memos. A perusal of that column shows that the investigating officer has only mentioned general reasons for which any person may be sought to be arrested viz. that the person s custodial interrogation is required; that the person is likely to destroy evidence; that the person is likely to influence witnesses; and that the person s presence cannot be ensured unless he is arrested namely that he is a flight-risk - What has been recorded in the arrest memos are not grounds of arrest since these do not spell-out the specific roles alleged against the petitioners; nor do they refer to the specific incriminating circumstances that can be attributed to a particular petitioner in relation to the offences alleged. The petitioners arrest by the Delhi Police is therefore clearly not in compliance with the mandate of the Supreme Court in Prabir Purkayastha. Conclusion - i) The enactment of FEMA does not grant to a person immunity from prosecution for offences under the IPC even if the offences alleged arise from the same underlying actions or omissions that led to infractions of FEMA. ii) The registration of the subject FIR by the Delhi Police based on the complaint filed by the ED arising from the search and seizure operation conducted by the (latter) agency is not invalid or illegal merely because the FIR is based on the ED s complaint. It may be observed however that this court has not examined the legal tenability of the subject FIR on the touchstone of the grounds for quashing enunciated by the Supreme Court in Bhajan Lal 1992 (12) TMI 234 - SUPREME COURT iii) The petitioners arrest by the ED in the subject ECIR for violations of the provisions of PMLA is valid and legal and in compliance of the requirements of the law including the requirements of the Supreme Court verdict in Prabir Purkayastha and section 19 of the PMLA. iv) The petitioners arrest by the Delhi Police in the subject FIR is not valid since those are in violation of the mandate of the Supreme Court in Prabir Purkayastha. The petitioners arrest in the subject FIR is therefore quashed. Accordingly the petitioners Manideep Mago s/o Neeraj Mago and Sanjay Sethi s/o late Chuni Lal are liable to be released from custody in the subject FIR upon furnishing personal bond in the sum of Rs. 05 lacs each with 02 sureties in the like amount from family members to the satisfaction of the learned trial court. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court identified four core legal questions for determination:

(i) Whether the enactment of the Foreign Exchange Management Act, 1999 (FEMA) grants immunity from prosecution under the Indian Penal Code (IPC) for offences arising from acts or omissions that led to infractions of FEMA;

(ii) Whether the registration of the FIR by the Delhi Police, based on a complaint by the Enforcement Directorate (ED) following a search and seizure operation under FEMA, was valid and legal;

(iii) Whether the petitioners' arrest by the ED under the Economic Crime Information Report (ECIR) and Prevention of Money Laundering Act, 2002 (PMLA) was valid and legal;

(iv) Whether the petitioners' arrest by the Delhi Police in the FIR was valid and legal, particularly in light of procedural safeguards such as service of grounds of arrest in writing.

2. ISSUE-WISE DETAILED ANALYSIS

Issue I: Immunity from IPC Prosecution by Enactment of FEMA

Legal Framework and Precedents: FEMA replaced the Foreign Exchange Regulation Act, 1973 (FERA) with the objective of decriminalizing foreign exchange violations, converting criminal offences under FERA into civil penalties under FEMA. The Supreme Court's decision in Union of India & Anr. vs. Venkateshan S. & Anr. (2002) was pivotal, where it was held that FEMA and preventive detention laws like COFEPOSA occupy different fields and that decriminalization under FEMA does not preclude detention under COFEPOSA for related activities. The doctrine of implied repeal was also examined, with the Supreme Court in M. Karunanidhi vs. Union of India & Anr. (1979) elucidating that repeal by implication requires clear repugnancy between statutes.

Court's Reasoning: The Court acknowledged that FEMA decriminalized foreign exchange infractions that were criminal under FERA. However, it rejected the petitioners' argument that this decriminalization extends immunity from prosecution under the IPC for criminal acts underlying the FEMA violations. The Court noted that the IPC and FEMA address different legal domains: FEMA regulates foreign exchange transactions with civil penalties, while the IPC punishes substantive criminal offences such as forgery, cheating, and criminal conspiracy.

Further, the Court relied on the principle that multiple statutes can apply to the same transaction without implied repeal unless irreconcilable conflict exists. The Court emphasized that the acts of forgery and fabrication, which preceded the FEMA infractions, are criminal offences independent of FEMA violations.

Key Findings and Application: The Court found no express or implied repeal of the IPC by FEMA. The petitioners' alleged criminal acts under the IPC remain prosecutable despite FEMA's civil penalty regime. The Court also cited the Supreme Court's decision in Leo Roy Frey vs. Superintendent, District Jail, Amritsar, which distinguished criminal conspiracy as an offence separate from regulatory violations.

Treatment of Competing Arguments: The petitioners' reliance on the legislative intent behind FEMA to decriminalize foreign exchange violations was accepted in principle but rejected as a basis to immunize criminal acts under the IPC. The respondents' submissions that criminal offences can coexist with civil infractions were accepted.

Conclusion: Enactment of FEMA does not grant immunity from prosecution under the IPC for offences arising from the same underlying acts or omissions.

Issue II: Validity and Legality of FIR Registration

Legal Framework and Precedents: The Supreme Court's decision in Lalita Kumari vs. Government of Uttar Pradesh & Ors. (2014) mandates registration of an FIR if the information received discloses a cognizable offence, with preliminary inquiry only permissible where no cognizable offence is prima facie disclosed. The Court also considered K.T.M.S. Mohd. & Anr. vs. Union of India (1992) regarding admissibility of confessional statements recorded under one statute for prosecution under another.

Court's Reasoning: The Court examined the FIR and found it was not based solely on the petitioners' statements recorded under section 37 of FEMA but also on recoveries made during the ED's search and seizure operations, including bogus invoices, forged notary stamps, and fabricated documents, which disclose cognizable offences under the IPC. The Court distinguished between 'confession' and 'admission', holding that the statements recorded under FEMA amounted to admissions rather than confessions, and thus did not invalidate the FIR.

The Court further held that the police were mandated to register the FIR upon receiving information disclosing cognizable offences, and no preliminary inquiry was necessary. The petitioners' contention that the FIR was registered solely based on the ED complaint was rejected, as the complaint contained credible information of offences under the IPC.

Key Findings and Application: The FIR disclosed cognizable offences such as forgery, cheating, and criminal conspiracy, justifying mandatory registration. The ED's complaint and the evidence recovered during search operations provided sufficient grounds.

Treatment of Competing Arguments: The petitioners' argument that the FIR was invalid due to reliance on inadmissible statements and absence of preliminary enquiry was rejected. The Court accepted the respondents' submissions that the FIR was properly registered in compliance with legal standards.

Conclusion: The registration of the FIR by the Delhi Police was valid and legal.

Issue III: Validity and Legality of Arrests by the Enforcement Directorate under PMLA

Legal Framework and Precedents: Section 19 of the PMLA prescribes procedural safeguards for arrest, including furnishing 'reasons to believe' to the arrestee. The Supreme Court's recent decision in Arvind Kejriwal vs. Directorate of Enforcement (2025) introduced an additional requirement to communicate reasons to believe at the time of arrest, effective from the date of pronouncement (12.07.2024). The Punjab & Haryana High Court's decision in Dilbag Singh vs. Union of India was also considered regarding compliance with section 19(2) of the PMLA.

Court's Reasoning: The Court held that the additional requirement to furnish reasons to believe arose only after the Arvind Kejriwal judgment on 12.07.2024 and therefore did not apply retrospectively to the petitioners' arrests on 14.06.2024 and 03.07.2024. The Court was satisfied that the ED complied with section 19(2) by forwarding arrest orders and materials to the adjudicating authority within the prescribed timeframe, considering non-working days.

Regarding grounds of arrest, the Court noted that the arrest memos contained specific allegations beyond mere non-cooperation, including concealment of material information and involvement in money laundering. The Court rejected the argument that non-cooperation alone was insufficient ground for arrest, clarifying that it can form part of the necessity to arrest if other grounds exist.

Key Findings and Application: The arrests complied with the law prevailing at the time, including procedural safeguards under PMLA. Non-cooperation was not the sole ground but part of a broader case for arrest.

Treatment of Competing Arguments: The petitioners' arguments on non-compliance with section 19 and the invalidity of arrest due to non-cooperation were rejected. The respondents' submissions on compliance and sufficiency of grounds were accepted.

Conclusion: The petitioners' arrests by the ED under the PMLA were valid and legal.

Issue IV: Validity and Legality of Arrests by the Delhi Police in the FIR

Legal Framework and Precedents: The Supreme Court's decision in Prabir Purkayastha vs. State (NCT of Delhi) mandates that grounds of arrest must be served in writing to the arrestee, distinct from reasons for arrest, to ensure legality of arrest. The Court also considered recent decisions of this Court suggesting incorporation of grounds of arrest within arrest memos.

Court's Reasoning: The Court examined the arrest memos served by the Delhi Police and found that they contained only general reasons for arrest (e.g., custodial interrogation required, risk of evidence destruction, flight risk) without specific grounds detailing the petitioners' alleged roles or incriminating circumstances. The Court held that these do not satisfy the requirement of serving 'grounds of arrest' as distinct from 'reasons for arrest' under Prabir Purkayastha.

Key Findings and Application: The absence of specific grounds of arrest rendered the petitioners' arrests by the Delhi Police invalid and illegal.

Treatment of Competing Arguments: The Delhi Police's submission that grounds of arrest can be incorporated in arrest memos and that the memos served were sufficient was rejected, as the memos failed to meet the specificity and clarity required by law.

Conclusion: The petitioners' arrests by the Delhi Police under the FIR were not valid or legal and are quashed.

3. SIGNIFICANT HOLDINGS

"The enactment of FEMA does not grant to a person immunity from prosecution for offences under the IPC even if the offences alleged arise from the same underlying actions or omissions that led to infractions of FEMA."

"The registration of the subject FIR by the Delhi Police, based on the complaint filed by the ED, arising from the search and seizure operation conducted by the (latter) agency, is not invalid or illegal merely because the FIR is based on the ED's complaint."

"The petitioners' arrest by the ED in the subject ECIR for violations of the provisions of PMLA is valid and legal and in compliance of the requirements of the law, including the requirements of the Supreme Court verdict in Prabir Purkayastha and section 19 of the PMLA."

"The petitioners' arrest by the Delhi Police in the subject FIR is not valid, since those are in violation of the mandate of the Supreme Court in Prabir Purkayastha."

Core principles established include:

• The principle that civil regulatory infractions under FEMA do not immunize criminal offences under IPC arising from the same facts;
• The mandatory nature of FIR registration upon receipt of information disclosing cognizable offences, without requirement of preliminary inquiry if such offences are prima facie made out;
• The distinction between 'confession' and 'admission' in evidence law, and the admissibility of statements recorded under one statute for use as admissions in another;
• The procedural safeguard requiring service of specific grounds of arrest in writing to the arrestee, distinct from reasons for arrest, to validate an arrest;
• The prospective application of new procedural requirements introduced by judicial pronouncements.

Final determinations:

• The petitioners' arrests by the ED are upheld as valid and legal;
• The petitioners' arrests by the Delhi Police are quashed for non-compliance with procedural safeguards;
• The FIR registration is valid and legally sustainable;
• The petitioners are entitled to release from custody in the FIR case upon furnishing personal bonds and sureties.