Introduction
In the case of RAP Events v. Deputy Director, Directorate of Enforcement, Chandigarh[i], the Appellate Tribunal SAFEMA, New Delhi (‘Tribunal’) examined allegations involving Assistant Managers of the Indian Overseas Bank (‘IOB’) in a fraudulent scheme. This scheme, which led to a financial loss of Rs. 321 crores, involved issuing fraudulent letters of comfort (‘LOCs’) and letters of undertaking (‘LOUs’) through SWIFT messages, allegedly in collusion with third parties. These LOCs and LOUs were used to secure buyer’s credit from foreign banks, which subsequently demanded repayment from IOB.
This decision is important as it highlights the broad scope of the Prevention of Money Laundering Act, 2002 (‘PMLA’) and reinforces the judiciary’s role in combating economic offences.
Brief Facts
The case began when IOB filed a complaint alleging fraudulent activities by certain Assistant Managers of the bank. In collusion with the forex department and third parties, they issued unauthorised SWIFT messages, generating fraudulent LOCs and LOUs. These were used to secure buyer’s credit from foreign banks without legitimate commercial backing, such as moving goods or services. As a result, IOB became liable for repaying these foreign banks, allegedly leading to a financial loss of Rs. 321 crores.
Consequently, the Central Bureau of Investigation (‘CBI’) registered an FIR under s. 120B read with s. 420 of the Indian Penal Code, 1860 (‘IPC’) [which now corresponds to ss. 61(2) and 318(4) of the Bharatiya Nyaya Sanhita , 2023] and ss. 13(2) and 13(1)(d) of the Prevention of Corruption Act, 1988 (‘PCA’). Subsequently, the Directorate of Enforcement (‘ED’) initiated proceedings under the PMLA and conducted searches under s. 17 of the PMLA. During the investigation, it was revealed that Rs. 6.05 crores had been transferred to RAP events (‘Appellant’) by Prenda Creations from the proceeds of crime of the Rs. 321 crore fraud.
The Appellant claimed it had received the money for legitimate services in the ordinary course of business. However, it failed to provide documentary evidence, such as invoices or bills, to substantiate this claim. Therefore, the Appellant’s bank account was frozen. The ED argued that there was no underlying commercial transaction justifying the receipt of this amount, and the funds were part of the proceeds of crime. Subsequently, the Adjudicating Authority (‘AA’) allowed the ED to retain the seized assets under s. 17(4) of the PMLA.
Aggrieved by this, the Appellant filed an appeal under s. 26 of the PMLA, contending that it was neither named in the CBI’s chargesheet nor the prosecution complaint and that freezing its bank account was unjustified. The ED countered that the amount transferred to the Appellant was part of the proceeds of crime and, in the absence of any legitimate business transaction, freezing the account was warranted under the PMLA.
Held
The Tribunal upheld AA’s decision, ruling that the Appellant could not claim ignorance of the illicit nature of the funds. Consequently, it dismissed the appeal, holding that freezing the funds was appropriate and lawful under the provisions of the PMLA.
The Tribunal found that freezing Rs. 6.05 crores in the Appellant’s bank account was justified, as the funds received from Prenda Creations were linked to suspected transactions involving the accused entities under investigation for money laundering. Despite the Appellant’s contention that the funds were received in the ordinary course of business, the Tribunal observed that the Appellant failed to provide any documentary evidence, such as invoices or bills, to substantiate its claim that the funds were received for goods or services.
The Tribunal rejected the Appellant’s argument that not being named in the CBI chargesheet or the ED prosecution complaint was sufficient grounds for releasing the frozen funds. It was observed that the freezing of the bank accounts was part of a larger investigation aimed at unearthing the proceeds of crime. Accordingly, the appeal was dismissed for lack of merit, affirming the legality of the account freeze under the PMLA.
Our Analysis
The Tribunal’s decision in this case emphasizes how the judiciary addresses proceeds of crime when parties indirectly involved claim innocence. It reinforces a stringent interpretation of the PMLA, highlighting the importance of providing substantive evidence for any claim of legitimacy in financial transactions. The Appellant’s failure to provide documentary evidence, such as invoices or bills, to substantiate its claim that the amount was received for legitimate business purposes played a pivotal role in the case’s outcome.
The Tribunal expressly held that not being named in the CBI chargesheet or the ED prosecution complaint is insufficient grounds to claim the removal of the attachment. Under the PMLA, the burden of proof shifts to the person or entity claiming the legitimacy of funds linked to proceeds of crime. The Appellant’s failure to meet this burden allowed the Tribunal to uphold the freezing of its account. Though this aligns with the objectives of the PMLA, which seeks to trace, identify, and prevent the misuse of proceeds of crime, it empowers the ED to attach properties linked to proceeds of crime even before a formal charge is filed.
Moreover, the Tribunal’s decision reinforces the notion of constructive knowledge. The Appellant could not merely claim ignorance of the funds’ illicit origins. Even if the Appellant was not directly involved in the fraudulent scheme, its failure to demonstrate a legitimate commercial basis for receiving funds suggested that it knew or should have known about its tainted origin. The judgment highlights that receiving tainted funds without proving their legitimate source can lead to seizure and penalties under the PMLA, which gives the ED a disproportionate reach into an individual or entity’s property rights without immediate judicial oversight.
End Note
[i] [2024] 166 taxmann.com 701 (SAFEMA - New Delhi) [dated: 12-09-2024].
Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.