Communication of Reasons to Believe under PMLA - Prevention of Money Laundering Act - AML

In a bunch of writs decided by a Bench of Delhi High court, it has been held that

(i)    The second proviso to Section 5(1) PMLA is not violative of Article 14 of the Constitution of India.

 

(ii)   The expression ‘reasons to believe‘ has to meet the safeguards inbuilt in the second proviso to Section 5(1) PMLA read with Section 5(1) PMLA.

 

(iii)  The expression ‘reasons to believe‘ in Section 8(1) PMLA, has to satisfy the requirement of law.

 

(iv)There has to be a communication of the ‘reasons to believe‘ at every stage to the noticee under Section 8(1) PMLA.

 

(v)  The noticee under Section 8(1) PMLA is entitled to access to the materials on record that constituted the basis for ‘reasons to believe‘ subject to redaction in the manner explained hereinbefore, for reasons to be recorded in writing.

 

(vi)If there is a violation of the legal requirements outlined hereinbefore, the order of the provisional attachment would be rendered illegal.

 

(vii)  There can be single-member benches of the Adjudicating Authority and the Appellate Tribunal under the PMLA.

 

The Court, with regard to the constitutionality of the second proviso to Section 5 (1) PMLA, held as under:

(i)    Although the second proviso to Section 5(1) states that the property has to be involved in money-laundering and Section 5(1) states that mere possession of proceeds of crime is sufficient, the Court does not see any conflict in these expressions. When the definition in Section 3 PMLA is read with Section 2(1)(v) and the Explanation thereto, it becomes clear that the property which constitutes “proceeds of crime‘ is the property involved in money-laundering.

 

(ii)   The reasons to believe at every stage must be noted down by the officer in the file.

 

(iii)  While the reasons to believe recorded at the stage of passing the order of provisional attachment under Section 5(1) PMLA may not be forthwith at that stage communicated to the person adversely affected thereby, the reasons as recorded in the file have to accompany the complaint filed by such officer within 30 days before the ADJUDICATING AUTHORITY under Section 5(5) PMLA.

 

(iv)A copy of such complaint accompanied by the reasons, as found in the file, must be served by the ADJUDICATING AUTHORITY upon the person affected by such attachment after the ADJUDICATING AUTHORITY adds its own reasons why he prima facie thinks that the provisional attachment should continue.

 

In the above case one of the major issue before the court was, What should constitute the reasons to believe‘ that are to be recorded?

In the above context, it has to be seen that even for the exercise of power under Section 5(1), the Director/Deputy Director/Authorized Officer has to record his reasons to believe in writing. That is the expression that is used in the second proviso to Section 5(1) PMLA as well. It is the same expression that is used even as far as the powers exercised by the ADJUDICATING AUTHORITY under Section 8(1) PMLA are concerned.

 

The expression reasons to believe‘ under Section 26 IPC is understood in the sense of sufficient cause to believe that thing but not otherwise‘.

In Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC), the Supreme Court in the context of the Income Tax Act, 1961 explained the expression as under:

Since, the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief, is not for the Court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the Court  may look  into the  conclusion  arrived  at by the Income-tax Officer and examine whether there was any material available on the record  from  which  the  requisite  belief  could  be  formed  by  the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief.‖

 

In Income Tax Officer v. Lakhmani Mewaldas 1976 (3) SCR 956, the Supreme  Court  held  that  there  should  be  a  live  link  or  close  nexus, between the material before the ITO and the formation of his belief that income had escaped assessment. In Aslam Mohd Merchant v. Competent Authority (2008) 14 SCC 186, the entire legal position has been explained elaborately by the Supreme Court as under:

“28. It is, however, beyond any doubt or dispute that a proper application  of  mind  on  the  part  of  the  competent  authority  is imperative before a show cause notice is issued. Section 68-H of the Act  provides  for  two  statutory  requirements  on  the  part  of  the authority viz: (i) he has to form an opinion in regard to his `reason to believe'; and (ii) he must record reasons therefor. Both the statutory elements, namely, `reason to believe' and `recording of reasons' must be premised on the materials produced before him. Such materials must have been gathered during the investigation carried out in terms of Section 68-E or otherwise. Indisputably therefore, he must have some materials before him. If no such material had been placed before him, he cannot initiate a proceeding. He cannot issue a show cause notice on his own ipse dixit. A roving enquiry is not contemplated under the said Act as properties sought to be forfeited must have a direct nexus with the properties illegally acquired.”

 

It is now a trite law that whenever a statute provides for `reason to believe', either the reasons should appear on the face of the notice or they must be available on the materials which had been placed before him. We have noticed hereinbefore that when the authority was called upon to disclose the reasons, it was stated that all the reasons were contained in the show cause notices themselves. They, however, in our opinion,  do  not  contain  any  reason  so  as  to  satisfy  the requirements of sub-section (1) of Section 68H of the Act.

The original judgment can be accessed from: http://lobis.nic.in/ddir/dhc/SMD/judgement/11-01-2018/SMD11012018CW53202017.pdf

 

BY

*Vijay Pal Dalmia, Advocate
Supreme Court of India and High Court of Delhi

Email: vpdalmia@gmail.com Mobile: +919810081079

 

*The author, Vijay Pal Dalmia, Advocate Email: vpdalmia@vaishlaw.comMobile: +919810081079, is a practicing lawyer in Supreme Court of India and High Court of Delhi with a standing of 32 years and also specializes in Anti Money Laundering laws (AML), White collar crimes, Cryptocurrency / Virtual currency laws. 

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