2025 (7) TMI 155 - AT - Money Laundering

Money Laundering - provisional attachment order - coonection with the proceeds of crime - attachment made without the compliance/ existence of the conditions as stated under the second proviso of Section 5(1) - requirements of Section 5(1)(a) (b) are not fulfilled independent of and in conjunction before attaching the properties - failure to prove legal source of income for acquiring the properties - Respondent ED has not conducted any independent investigation. Whether the immovable properties cannot be attached being acquired prior to the enforcement of PMLA as well as prior to the alleged commission of the scheduled offence? - Whether the properties attached in the PAO needs to be set-aside for want of any connection with the alleged proceeds of crime ? - HELD THAT - PMLA 2002 came into force w.e.f. 01.07.2005. The period of commission of the schedule offence is from 1997 to 2013. The contention of the Ld. Counsel for the appellants that investments/ acquisitions made by the appellants prior to the alleged period of offence is also not covered within the definition of proceeds of crime is devoid of any merits - The perusal of the definition reveals three limbs of the definition out of which first part refers to the property acquired or derived directly or indirectly by a person relating to the criminal activity to a scheduled offence. The second part includes the value of any such property . The second part is generally mixed with third part for giving interpretation. Further this Tribunal has also given an elaborate judgment on the issue in the case of Sadananda Nayak v. The Deputy Director Directorate of Enforcement Bhubaneswar 2024 (10) TMI 1619 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI where all the judgments on the issue have been considered and thereby this issue was decided in favour of Respondent ED. Accordingly when any property is attached as value thereof in absence of direct proceeds of crime then question of proving its connection with the proceeds of crime has no relevance. Thus issue no. i) ii) are decided against the appellants. Whether the attachment was made without the compliance/existence of the conditions as stated under the second proviso of Section 5(1)? - Whether requirements of Section 5(1)(a) (b) are not fulfilled independent of and in conjunction before attaching the properties? - HELD THAT - In the present matter there is ample material on record to prove that these properties were acquired illegally by Sh. Farouq Irani and further statements recorded under Section 50 of PMLA also support the stance. Moreover the appellant s father even transferred the properties to his daughters via a settlement deed and thereby tried to divert the properties and bring them into the legal pool and hence tried to frustrate the proceedings of the Act. These settlement deeds were executed after the commission of fraud came into the light of RBI - the Second Proviso is rightly applicable in the present case seeing the fact that an attempt to divest the properties has already been made thus an apprehension is pertinent in this case regarding frustration of proceedings of PMLA and immediate attachment is justified. Further the issue that the requirements of Section 5(1) (a) (b) were not fulfilled in the instant case also does not hold good as the appellant is in possession of proceeds of crime and the same has a likelihood of being concealed transferred or diverted as an attempt for the same has already been made by transferring these properties to her via the settlement deed. Thus as a precautionary measure these properties are liable to be attached and rightly attached - the issues are decided against the appellant. Whether the appellant was able to prove her legal source of income for acquiring the properties? - Whether the attachment of the two immovable properties and term deposits need to be set-aside in view of Settlement Deed No. 3133 of 2013 and 91 of 2014 executed by her parents in favour of appellant and her sister? - HELD THAT - The appellant has not been able to prove any documentary evidence via which the legal source of income could be proved for acquiring the term deposits or share in the property at S. No.2. She has not filed her bank statements reflecting any regular income and accumulated balance for acquiring these properties. On the other hand the documentary evidence reveals that the income of FLCIL was regularly inflated to get more loans year after year from the consortium of banks and thereafter fraudulently diverted the same. In fact these properties were apparently purchased by Sh. Farouq Irani as discussed in detail in para 6 of the impugned order. The only stand taken by the appellant is that these properties were transferred to her via a settlement deed and on perusal of the records it is evident that these deeds were merely a cover-up to paint the illegally acquired properties as legal and to shelter it from attachment - these issues are also decided against the appellant. Whether the attachment needs to be set-aside as Respondent ED has not conducted any independent investigation? - HELD THAT - ED is not required to conduct any investigation for the predicate offence. ED can only point out any glaring mistake or lacunae in the said investigation conducted by police/ CBI which may come to its knowledge while conducting the investigation under PMLA. However ED cannot arrive at different conclusion qua the predicate offence while conducting investigation for PMLA. Thus this contention is decided against the appellants and in favour of ED as no independent investigation is required to be made by the ED. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(i) Whether immovable properties acquired prior to the enforcement of the Prevention of Money Laundering Act, 2002 (PMLA), as well as prior to the alleged commission of the scheduled offence, can be attached under the PMLA;

(ii) Whether the properties attached under the Provisional Attachment Orders (PAOs) have any nexus or connection with the alleged 'proceeds of crime';

(iii) Whether the attachment orders were passed without compliance with the conditions stipulated under the second proviso of Section 5(1) of the PMLA;

(iv) Whether the requirements of Section 5(1)(a) and (b) of the PMLA were fulfilled independently and conjointly before attaching the properties;

(v) Whether the appellant was able to prove a legitimate source of income for acquiring the attached properties;

(vi) Whether the attachment of the immovable properties and term deposits should be set aside in light of Settlement Deeds executed by the appellant's parents in favour of the appellant and her sister;

(vii) Whether the attachment should be set aside on the ground that the Enforcement Directorate (ED) did not conduct an independent investigation.

2. ISSUE-WISE DETAILED ANALYSIS

Issues (i) and (ii): Attachment of properties acquired prior to enforcement of PMLA and nexus with proceeds of crime

Legal Framework and Precedents: The PMLA came into force on 01.07.2005. The definition of "proceeds of crime" under Section 2(1)(u) includes property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence, or the value of any such property. The Tribunal referred to authoritative judicial pronouncements, including a detailed discussion in a Delhi High Court judgment and the Supreme Court's ruling in Vijay Madanlal Chaudhary v. Union of India (2022), which clarified that properties acquired prior to the enforcement of PMLA may be attached if they are equivalent in value to the proceeds of crime, especially where the actual tainted property cannot be traced. The Apex Court emphasized that the definition of proceeds of crime is wide enough to include both tainted and untainted property, and attachment of property equivalent in value is permissible to achieve the legislative intent of confiscating proceeds of crime.

Court's Reasoning: The Tribunal noted that although the appellant's properties were acquired prior to the enforcement of PMLA and prior to the alleged commission of the scheduled offence, the proceeds of crime had been siphoned off and dissipated. Therefore, under the second limb of the definition, properties of equivalent value could be attached. The Tribunal held that when actual proceeds of crime are not available, attachment of property equivalent in value is justified, and in such cases, proving direct connection with proceeds of crime is not necessary.

Key Evidence and Findings: The investigation revealed manipulation and falsification of accounts by the company and its officials, including the appellant's family members, to inflate assets and income, enabling fraudulent loans and diversion of funds. The properties attached were valued at approximately Rs. 25.41 crores and were found to be linked to the proceeds of crime through the layering and diversion of funds.

Application of Law to Facts: The Tribunal applied the wide interpretation of "proceeds of crime" and held that attachment of properties acquired prior to the offence is permissible if they represent the value of proceeds of crime that have been dissipated or are untraceable.

Treatment of Competing Arguments: The appellant relied on the principle against ex-post facto laws and judgments holding that properties acquired prior to the offence cannot be attached. The Tribunal distinguished these by emphasizing the legislative intent and judicial precedents allowing attachment of equivalent value properties where proceeds of crime are not directly traceable.

Conclusion: Issues (i) and (ii) were decided against the appellant, affirming the validity of attachment of properties acquired prior to the offence under the PMLA.

Issues (iii) and (iv): Compliance with conditions under second proviso of Section 5(1) and fulfillment of requirements of Section 5(1)(a) & (b)

Legal Framework: Section 5(1) of the PMLA empowers the Director or an authorized officer to provisionally attach property if there is reason to believe that a person is in possession of proceeds of crime and that such property is likely to be concealed or dealt with in a manner frustrating confiscation proceedings. The provisos require either a report to a Magistrate under Section 173 CrPC or a complaint filed, or, alternatively, immediate attachment if non-attachment is likely to frustrate proceedings, with reasons recorded in writing.

Court's Interpretation and Reasoning: The Tribunal found ample material on record showing that the properties were acquired illegally and that the appellant's parents had transferred the properties to the appellant and her sister via settlement deeds post the fraud coming to light, indicating an attempt to divest and frustrate proceedings. This justified the invocation of the second proviso for immediate attachment. The Tribunal further held that the requirements under Section 5(1)(a) and (b) were satisfied independently and conjunctively, as the appellant was in possession of proceeds of crime and there was a likelihood of concealment or transfer.

Key Evidence: Statements under Section 50 PMLA, the settlement deeds executed after the fraud was revealed, and documentary evidence of manipulation of accounts.

Application of Law to Facts: The Tribunal applied the statutory conditions strictly, finding that the ED had recorded reasons in writing and that immediate attachment was necessary to prevent frustration of proceedings.

Treatment of Competing Arguments: The appellant argued non-compliance with the proviso conditions and lack of material to justify immediate attachment. The Tribunal rejected these contentions, noting the attempts to transfer properties and the material on record.

Conclusion: Issues (iii) and (iv) were decided against the appellant, upholding the attachment orders.

Issues (v) and (vi): Proof of legal source of income and effect of Settlement Deeds

Legal Framework: The burden is on the appellant to prove legitimate source of income for acquiring attached properties. Settlement deeds executed post-offence may be scrutinized for bona fides and not allowed to defeat attachment if they are sham or intended to frustrate proceedings.

Court's Reasoning: The appellant failed to produce documentary evidence such as bank statements or income tax returns to prove legitimate income for acquiring the term deposits or immovable property shares. The settlement deeds were executed after the fraud was exposed and appeared to be a cover-up to shelter the properties from attachment. The Tribunal thus rejected the appellant's claim of legitimate acquisition and held that the deeds did not absolve the properties from being proceeds of crime.

Key Evidence: Lack of bank statements, absence of proof of income accumulation, timing of settlement deeds, and forensic audit reports indicating inflated income and fraudulent diversion of funds.

Application of Law to Facts: The Tribunal applied the principle that post-offence transfers cannot defeat attachment and that failure to prove legitimate source of income supports attachment.

Treatment of Competing Arguments: The appellant relied on the settlement deeds and claimed income from business and consultancy. The Tribunal found these claims unsubstantiated and insufficient.

Conclusion: Issues (v) and (vi) were decided against the appellant, sustaining attachment.

Issue (vii): Whether attachment should be set aside due to lack of independent investigation by ED

Legal Framework: The ED is not required to conduct an independent investigation into the predicate scheduled offence but must investigate only the money laundering aspects, including tracing proceeds of crime and their layering or dissipation.

Court's Reasoning: The Tribunal held that the ED's role is limited to investigating money laundering and not re-investigating the predicate offence, which is the domain of police or CBI. The ED may point out lacunae in the predicate investigation but cannot arrive at different conclusions. The ED's reliance on the investigation conducted by CBI and other agencies was appropriate.

Key Evidence: Statements recorded under Section 50 PMLA, forensic audit reports, and investigation materials obtained from CBI and banks.

Application of Law to Facts: The Tribunal applied the statutory scheme and judicial precedents to hold that the ED's investigation was proper and attachment valid.

Treatment of Competing Arguments: The appellant contended that ED's failure to conduct independent investigation invalidated attachment. The Tribunal rejected this, clarifying the scope of ED's investigation.

Conclusion: Issue (vii) was decided against the appellant.

3. SIGNIFICANT HOLDINGS

"The expression proceeds of crime envisages both -tainted property as well as -untainted property with it being permissible to proceed against the latter provided it is being attached as equal to the 'value of any such property' or 'property equivalent in value held within the country or abroad'."

"When the proceeds of crime are not available with the accused but have been siphoned off or dissipated, attachment of properties equivalent in value is justified under the PMLA."

"The second proviso to Section 5(1) of the PMLA permits immediate attachment of property if there is reason to believe that non-attachment is likely to frustrate proceedings, and such belief must be recorded in writing on the basis of material in possession."

"Settlement deeds executed after the commission of the scheduled offence, especially where they appear to be a cover to divest properties and frustrate proceedings, do not absolve the properties from being proceeds of crime."

"The Enforcement Directorate is not required to conduct an independent investigation into the predicate offence but must investigate the laundering aspects, relying on investigations by police or CBI."

"The requirements of Section 5(1)(a) and (b) must be fulfilled independently and conjunctively before attachment, and the presence of proceeds of crime in possession of the person and likelihood of concealment or transfer justify attachment."

Final determinations on each issue were adverse to the appellant, resulting in dismissal of the appeals and confirmation of the attachment orders. The Tribunal clarified that the decision does not affect rights of parties during criminal trials and that no coercive action will be taken on frozen properties until trial conclusion.