Attachment of Property under PMLA & bonafide third party claim – High Court explain the law

Attachment of Property under PMLA and bonafide third party claim – High Court explain the law and Prerequisites for a valid claim  

ABCAUS Case Law Citation:
ABCAUS 2858 (2019) (04) HC

In the instant case law, several appeals had been filed under Section 42 of the Prevention of Money-Laundering Act, 2002 (PMLA) against similar orders of the appellate tribunal (constituted under Section 25).

The said orders had been rendered on appeals of the respondent banks vis-à-vis the orders of provisional attachment issued by the enforcement officers under Section 5, as confirmed by the adjudicating authority under Section 8 of PMLA.

The orders give rise, inter alia, to certain common questions of law of import concerning nature of property that may be attached under this PMLA against claim of bonafide acquisition of interest by third parties.

The measure of attachment of property involved in “money laundering”, it essentially representing “proceeds of crime” is provided to ensure that the ultimate objective of “confiscation” of such ill-gotten property be not frustrated, the power and jurisdiction to order confiscation being vested in the Special Court.

The provisions for attachment followed by adjudication leading to confiscation are sanctions in addition to the criminal sanction rendering the act of “money laundering” a penal offence by virtue of section 4. Under section 9, the order of “confiscation” of property attached under PMLA takes away the right and title of its owner and vests it “absolutely in the Central Government free from all encumbrances

The batch of appeals in the instant case was concerned with claims of banks (entities other than the persons in whose name the attached properties are held) say “third party” arising from charge, lien or encumbrances legitimately created.

On other words, the dispute is related to the sovereign authority of the State to take away and confiscate the property which has been acquired by a person through criminal activity as against the lawful claim of a third party to reach out to such property to recover, in accordance with law, what is due by attachment and sale of same very property.

For example in one of the appeals the issue was attachment of an Audi car of one of the respondents (the registered owner), by the enforcement officer under PMLA, as confirmed by the adjudicating authority, and the claim of the respondent bank over the said car on account of hypothecation in relation to the finance that had been provided by it for its acquisition by the said registered owner.

The adjudicating authority confirmed the attachment order. Before confirmation, the adjudicating authority had issued a notice u/s 8 to the bank to show cause as to why the properties, including the Audi Car, be not attached. The request of its asset management company for suspending the provisional attachment was, however, rejected.

The appellate tribunal in appeal of the bank set aside the order of the adjudicating authority confirming the attachment order directing the vehicle to be returned to the bank holding it entitled to dispose it of to recover the balance amount due to it under the loan contract as per law, pointing out, inter alia, that the loan facility pre-dated the allegations of money-laundering, the finance used for its acquisitions not representing “proceeds of crime”, the lender (the bank) having first priority/charge over the hypothecated property, the objective of PMLA not detracting or derogating from the protection of legitimate transaction and financial assets as afforded by legislation such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”, for short).

The Hon’ble High Court observed that the PMLA though enacted and notified on 17th January, 2003, came into force w.e.f. 01.07.2005. It was brought on the statute book with the avowed objective “to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incident thereto”,

It was observed that the challenge posed by money-laundering is intended to be met by the legislation through measures which include penal consequences for the offence (Section 4) and by deprivation of the “proceeds of crime” through “confiscation”, the latter being a process which commences with order of “attachment”.

It was observed that the expression “proceeds of crime” constitutes the core of the offence of money-laundering. Prior to coming in possession, acquisition, concealment or use of “tainted property” (the claim being to the contrary that it is untainted property) there must have been some other offence committed, the property perceived or alleged to be tainted being the product of such criminal activity.

The Hon’ble High Court noted that it is not any or every crime, the fruits whereof would be treated as “proceeds of crime” for initiation of action under PMLA. The enactment restricts it to the “result of criminal activity” relating to a “scheduled offence” as defined by Section 2 (1) (y).

The Hon’ble High Court further observed that the provisional attachment under the directions of enforcement authorities is subject to confirmation by the adjudicating authority. Mere order of provisional attachment does not prevent a person “entitled to claim” any interest in the property. The attachment is an interim measure, eventual intendment being that in the event of it being “found” that the offence of money-laundering has been committed and that “such property” is involved or has been used for such offence to be committed, the same shall be ordered to be “confiscated to the Central Government”.

In contrast to the effect of the order of “attachment” which only entails “prohibition of transfer, conversion, dispossession or movement” of such property, “the confiscation” in terms of Section 8 (5) and (7) entails all the rights and title in such property vesting absolutely in the Central Government “free from all encumbrances”.

The Hon’ble High Court noted that the law recognizes that there may be third parties having “legitimate interest” in such property and they are afforded opportunity to approach the adjudicating authority. The basic tests prescribed by the law while dealing with the claim of a third party for “release” of the property are to find as to whether such claimant has “a legitimate interest” in the property, whether he had “acted in good faith” having taken “all reasonable precautions” and himself was “not involved in the offence of money laundering” or “may have suffered a quantifiable loss as a result of the offence of money-laundering”

The Hon’ble High Court observed that in the present context, particularly under PMLA regime, the confiscation of property (which is akin to forfeiture of property) is definitely not envisaged as a criminal sanction, this for the reason that the objective of the legislature clearly is to deprive the offender (of money-laundering) the enjoyment of “illegally acquired” fruits of crime by taking away his right over property thereby acquired, it affecting his civil rights. All the more so, because the jurisdiction to order attachment of the property is vested in the executive and its confirmation is left to decision of the quasi-judicial body i.e. adjudicating authority.

The Hon’ble High Court opined that there are three parts of the definition of the expression “proceeds of crime”, the first clearly referring to a property respecting which there is material to show the same to have been “derived or obtained”, directly or indirectly, by a person “as a result of criminal activity (of specified nature)”. In case such property is held by the person who is “charged with the offence of money-laundering”, there is a statutory presumption under Section 24(a) PMLA, using the expression “shall presume”, about it being proceeds of crime involved in such money-laundering. It is a rebuttable presumption, the onus to prove facts to the contrary being on the person accused of such offence. If the acquisition of such property by such accused has involved more than one “inter-connected transactions”, one of such transactions being proved to be involving money-laundering, a statutory presumption is raised under Section 23 PMLA that the other transactions form part of the former, the burden to prove facts to the contrary being again on the person claiming otherwise.

But, in cases where the enforcement authority seeks to attach other properties, suspecting them to be “proceeds of crime”, not on the basis of fact that they are actually “derived or obtained” from criminal activity but because they are of equivalent “value” as to the proceeds of crime which cannot be traced, it is essential that there be some nexus or link between such property on one hand and the person accused of or charged with the offence of money-laundering on the other. Such presumption, if drawn, may also be rebutted by evidence showing facts to the contrary.

The Hon’ble High Court observed that an interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the proscribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property to such extent by the enforcement authority in exercise of its power under Section 8 PMLA.

The Hon’ble High Court observed that situation may also arise as in the cases in hand wherein a secured creditor, it being a bonafide third party claimant vis-a-vis the alternative attachable property (or deemed tainted property) has initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the initiation of the latter action unwittingly having the effect of frustrating the former. Since both actions are in accord with law, in order to co-exist and be in harmony with each other, following the preceding prescription, it would be appropriate that the PMLA attachment, though remaining valid and operative, takes a back-seat allowing the secured creditor bonafide third party claimant to enforce its claim by disposal of the subject property, the remainder of its value, if any, thereafter to be made available for purposes of PMLA.

The Hon’ble High Court summarised the conclusions on attachment of property under PMLA as under:

(i). The process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-a-vis the offence of money-laundering.

(ii). The empowered enforcement officer is expected to assess, even if tentatively, the value of proceeds of crime so as to ensure such proceeds or other assets of equivalent value of the offender of money-laundering are subjected to attachment, the evaluation being open to modification in light of evidence gathered during investigation.

(iii). The empowered enforcement officer has the authority of law in PMLA to attach not only a “tainted property” – that is to say a property acquired or obtained, directly or indirectly, from proceeds of criminal activity constituting a scheduled offence – but also any other asset or property of equivalent value of the offender of money laundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money-laundering.

(iv). If the “tainted property” respecting which there is evidence available to show the same to have been derived or obtained as a result of criminal activity relating to a scheduled offence is not traceable, or the same for some reason cannot be reached, or to the extent found is deficient, the empowered enforcement officer may attach any other asset (“the alternative attachable property” or “deemed tainted property”) of the person accused of (or charged with) offence of money-laundering provided it is near or equivalent in value to the former, the order of confiscation being restricted to take over by the government of illicit gains of crime.

(v). If the person accused of (or charged with) the offence of money-laundering objects to the attachment, his claim being that the property attached was not acquired or obtained (directly or indirectly) from criminal activity, the burden of proving facts in support of such claim is to be discharged by him.

(vi). The objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and Insolvency Code, the latter three legislations do not prevail over the former.

(vii). The PMLA, by virtue of section 71, has the overriding effect over other existing laws in the matter of dealing with “money-laundering” and “proceeds of crime” relating thereto.

(viii). The PMLA, RDBA, SARFAESI Act and Insolvency Code (or such other laws) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other with regard to the assets respecting which there is material available to show the same to have been “derived or obtained” as a result of “criminal activity relating to a scheduled offence” and consequently being “proceeds of crime”, within the mischief of PMLA.

(ix). If the property of a person other than the one accused of (or charged with) the offence of money-laundering, i.e. a third party, is sought to be attached and there is evidence available to show that such property before its acquisition was held by the person accused of money-laundering (or his abettor), or it was involved in a transaction which had interconnection with transactions concerning money-laundering, the burden of proving facts to the contrary so as to seek release of such property from attachment is on the person who so contends.

(x). The charge or encumbrance of a third party in a property attached under PMLA cannot be treated or declared as “void” unless material is available to show that it was created “to defeat” the said law, such declaration rendering such property available for attachment and confiscation under PMLA, free from such encumbrance.

(xi). A party in order to be considered as a “bonafide third party claimant” for its claim in a property being subjected to attachment under PMLA to be entertained must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money-laundering, and that it has made all compliances with the existing law including, if so required, by having said security interest registered.

(xii). An order of attachment under PMLA is not illegal only because a secured creditor has a prior secured interest (charge) in the property, within the meaning of the expressions used in RDBA and SARFAESI Act. Similarly, mere issuance of an order of attachment under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release (or restoration) from PMLA attachment being dependent on its bonafides.

(xiii). If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property), claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken “due diligence” (e.g. taking reasonable precautions and after due inquiry) to ensure that it was not a tainted asset and the transactions indulged in were legitimate at the time of acquisition of such interest.

(xiv). If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property) claiming that it had acquired the same at a time anterior to the commission of the proscribed criminal activity, the property to the extent of such interest of the third party will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists, the attachment under PMLA being valid or operative 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.

(xv). If the bonafide third party claimant (as aforesaid) is a “secured creditor”, pursuing enforcement of “security interest” in the property (secured asset) sought to be attached, it being an alternative attachable property (or deemed tainted property), it having acquired such interest from person(s) accused of (or charged with) the offence of money-laundering (or his abettor), or from any other person through such transaction (or inter-connected transactions) as involve(s) criminal activity relating to a scheduled offence, such third party (secured creditor) having initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the directions of such attachment under PMLA shall be valid and operative 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.

(xvi). In the situations covered by the preceding two sub paragraphs, the bonafide third party claimant shall be accountable to the enforcement authorities for the “excess” value of the property subjected to PMLA attachment.

(xvii).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 PMLA has commenced, the claim of a party asserting to have acted bonafide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.

The Hon’ble High Court opined that it appeared that the assets which had been the subject matter of attachment in the appeals at hand were not “tainted property”, the same having been seemingly acquired prior to the criminal activity giving rise to accusations of money-laundering. But, they are sought to be attached and subjected to eventual confiscation on account of they being the alternative attachable properties or deemed tainted properties, which is permissible in law.

The Hon’ble High Court opined that though there was no such element of complicity on part of any of the officials of the banks, closer scrutiny as to the claim of the bonafide actions were required.

Accordingly, the appeals were allowed and the impugned decisions of the appellate tribunal were set aside.

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