Friday, July 24, 2020

Guest Post: Revisiting the Term, "Reason to Believe", in Section 8(1) of the PMLA

(This is a guest post by Ishita Khurana)

The Prevention of Money Laundering Act, 2002 (hereinafter, ‘PMLA’ or ‘the Act’) is a Special Statute enacted by the Legislature for the purposes of, inter alia, penalising the offence of money-laundering and confiscating the proceeds of crime projected as untainted money, traceable directly or indirectly to a scheduled offence. A mixture of civil and criminal provisions, its special stature is upheld with the aid of sections of reverse burden of proof, presumption in inter-connected transactions and the creation of quasi-judicial bodies with a rigorous system of inter-act appeals. Due to its special status, the internal safeguards become all the more vital to maintain its integrity and smooth functioning, with an emphasis on accountability of its adjudicatory bodies, traceable throughout the act, characterised with provisions demanding mandatory formation of ‘reason to believe’ prior to initiating its power of attachment, search or seizure of property, etc.

One such provision is that of Adjudication as under Section 8 of the Act, wherein the Adjudicating Authority (hereinafter, ‘AA’), on receipt of a complaint under Section 5(5) post-attachment of certain properties, or applications made under Sections 17(4) or 18(10), firstly, issues a show cause notice (hereinafter, ‘SCN’) based on the formation of ‘reason to believe’, secondly, pass an order regarding whether the said properties are involved or not in money laundering after considering the prescribed materials and testimonies, and thirdly, confirm the attachment, retention or freezing of such properties or perform related functions as laid down in the Act.

For the purpose of this article, the author will be limiting her discussion to sub-section (1) of Section 8, wherein we are concerned primarily with the occurrence, need and implication of the expression, ‘reason to believe’ with respect to the scheme of the Act, and whether a non-inclusion of the explicit need to record and communicate the said reason to the concerned noticee strips the teeth off its intended purpose.

Traditional Approach: Reasons Not Recorded 

Section 8(1) states that when the AA receives either a Section 5(5) complaint or an application under Section 17(4) or Section 18(10), if it has reason to believe that any person has committed an offence under Section 3 or is in possession of proceeds of crime, he may serve a SCN of not less than thirty days on such a person to justify his acquiring the concerned properties attached, seized or frozen under the respective provisions, along with relevant evidence or documentation, such that the said properties aren’t involved in money-laundering, liable to be confiscated. The term, ‘reason to believe’, unlike other sections, isn’t followed by the requirement of it being recorded in writing, neither is it indicated as to what shall be the basis of forming such reason (unlike the expressions, ‘material’ or ‘information’ in possession, found in other sections). Traditionally, it has been interpreted to mean a procedural formality wherein the only material available is the unilaterally sent complaint/application and the attached documents, by the concerned ED officers, spinning a one-sided story, and therefore, an order under Section 8(1) is not typically an adjudication order separately worthy of being challenged under Section 26, but rather a procedural notice to initiate involvement of the other side in the proceedings.

The AA is the competent authority to raise grievance pertaining to SCN issued under Section 8(1), which may be appealable under Section 26 in exceptional circumstances of great hardship involving abuse of law, injustice, irreparable loss and great prejudice on the face of the record and material available. A mere non-recording of fresh reasons, however, has been held to not qualify as a viable ground for appeal, until the AA fails to decide such a contention as per law, upon which the final order then be challenged in appeal.

While many a times various High Courts have mentioned the issuance of the said notice on reasons conceived by the AA, most either equated these as a rightful reproduction of the reason recorded in writing at the stage of provisional attachment [or under Sections 17(1) or 18(1)], or completely omitted mentioning the said reasons. In Brizo Reality Co. Pvt. Ltd. v. Aditya Birla Finance Ltd. [2014 (4) Mh. L.J. 849], the Court held that a notice under Section 8(1) incorporating the complaint in its entirety (including attached documents), along with the reasons recorded at the previous stage, is in itself sufficient ‘reason to believe’, warranting an SCN to be issued. Furthering the reasoning, one could argue that if, on the basis of the facts disclosed in the said enclosures, the AA isn’t convinced of valid reasons existing, he has the discretion to not issue the notice at all, when read in light with the words, ‘if’ and ‘may’ used in the provision. The very act of issuing indicates a formulation of such reason, as required. Recording it, in this case, isn’t a requirement of the said provision of a special act, carefully worded differently from its other provisions, and therefore, stating the fulfilment of this condition is sufficient compliance in itself.

Explaining how the importance of ‘reason to believe’ isn’t compromised while doing away with the need to record it, the Madras High Court has previously observed that the AA should not issue a notice automatically as an obligation, but after ensuring the existence of one of the two conditions as stipulated in the provision. An absence of such a reason shall result in no notice being issued, and a consequent lapse of provisional attachment order within the statutory time-limit. This ensures an application of mind on part of the AA, irrespective of its subsequent recording and communication or not. An enclosed attachment order incorporating most of such reason to believe is sufficient.

The most recent precedent confirming this line of thought appears to be G. Gopalakrishnan v. The Deputy Director. The Court drew a distinction between the interpretation of ‘reason to believe’, as occurring in Section 8(1) vis-à-vis Section 5(1), since the latter provides for an explicit recording of reason in writing unlike the former. The notice of Section 8(1) is based on the subjective satisfaction derived from the previously recorded reasons found in the complaint and its enclosures, which are self-explanatory. When R/w the procedure contemplated under the Adjudicating Authority (Procedure) Regulations 2013, no mandatory requirement of recording reasons afresh is contemplated at this stage and the notice so issue is legally sound; the subsequent failure to record and communicate reasons to the noticee thereof would not, therefore, vitiate proceedings, as per the traditional approach.

Understanding the Roots of Reason to Believe 
The term, ‘reason to believe’, is not defined anywhere in the PMLA. To understand its interpretation when read with the provisions of the Act, its origin, meaning and evolution over the years through judicial precedents needs to be understood. It is defined in Section 26 of IPC, as a sufficient cause to believe a thing and not otherwise. Such a belief is expected to be bona fide and based on information or material available on record, which in turn has a rational nexus or a live link to the formation of the requisite belief. Further, the Apex Court has held in plethora of cases that it is equally the duty of a quasi-judicial authority, as that of a judicial court, to always record reasons in support of its conclusion, especially whenever such authority is exercising some sort of a discretionary power. Moreover, ‘reason to believe’ has to be distinguished from mere suspicion. Recording of reasons reassure an application of mind in exercising discretion, as well as fulfils the sought-after objective of justice not only being done, but appearing to have been done as well.

The prima facie formation of belief should be rational, coherent and not ex facie incorrect or contrary to what is on record. Extended in the context of Section 8(1), it doesn’t mean the said reason has to be in agreement with the complaint/application it is relying on, it rather indicates a thorough perusal of the said documents with an application of mind so as to not act as a mere rubber-stamp, but to derive its reasoning from the content, irrespective of the earlier conclusion arrived at by the concerned authority. Further, issuing of notice in a standard pro forma manner has been decried and it is expected to include material particulars and a distinguishable application of mind. A notice issued without delving into the material and recording valid reasons has also been held as invalid in law, capable of vitiating proceedings.

The evolving affect the term has in practice when used in similarly drafted special acts can be traced through judgements like Biswanath Bhattacharya v. UOI [(2014) 4 SCC 392], wherein with respect to an absence of a statutory need to communicate reasons recorded, a distinction was made between the cases of Ajantha Industries and S. Narayanappa, the former holding communication mandatory, and the latter holding otherwise, which was preferred due to various appeal and review provisions safeguarding the rights of an aggrieved, not warranting a mandatory requirement being read into a lacuna. Similarly, the case of Dr. Partap Singh held, when a search warrant was issued without recording ‘reason to believe’ under Section 37, FERA, 1937, that it is not mandatory to state the grounds inducing reasonable belief in the warrant as long as enough material was relied on. Moreover, such a duty to record reasons, when absent from the section itself, and the general provisions of the Act, cannot be read into it as mandatory. In Aslam Mohd. Merchant v. Competent Authority, while judging upon the validity of an SCN issued under Section 68-H, NDPS Act, the Court observed that a mere requirement of formulating ‘reason to believe’ calls for such reasons to appear on the face of the notice or available through the materials being relied upon. The latter half of the observation, therefore, allows for incorporation of said reason through attached documents, such as a POA in a parallel PMLA matter.

Changing Dynamics around the Concept
The landmark judgement of the Delhi High Court, J. Sekar v. UoI [2018 SCC Online Del 6523], changed the understanding of the term, ‘reason to believe’ in the PMLA in an unprecedented manner. It observed that the inclusion of the term in Section 8(1) casts an equally important onus as envisaged under Section 5(1), for the AA to independently apply its mind while issuing SCN. Only when these reasons are expressed clearly can their legality and validity be tested by a reviewing authority, unlike in case of a mere mechanical reproduction of the words in the statute. An SCN is incomplete without the AA adding its own reasons as to how one of the two conditions laid down in the sub-section are being prima facie fulfilled. A subsequent communication of the said reasons to the noticee is also vital since a failure to disclose would amount to an illegality, unfixable vide Section 68 of the Act, rendering the entire proceedings illegal. This, read in light with Section 8(2) which provides for seeking a reply from the aforementioned noticee, shall also vitiate his right to natural justice, since a lack of access to the said reasons will hamper the noticee filing an effective reply.

Despite J. Sekar being stayed by the Supreme Court, it continues to hold precedential value, and is arguably binding in similar cases in future (of third parties), since the order is of an interim nature, not undermined unless finally set aside in appeal. 

In another case, Advantage Strategic Consulting, the Court briefly held that ‘reason to believe’ has to be recorded and communicated at every stage, including under Section 8(1), as a legal requirement, which when violated, will render the proceedings illegal. The term casts an onerous duty on the AA, for which it should be held accountable.

Shedding new light on the relevance of the term’s inclusion in the provision, a February 2020 Calcutta HC judgement, Excel Powmin [2020 SCC OnLine Cal 384] held that a recorded ‘reason to believe’ also forms part of the ‘materials on record and relevant information’ that the noticee relies upon while filing a reply in defense. Recording the same without AA applying its mind, or an absence of recording it altogether, is a factor strengthening the noticee’s defence. This becomes all the more relevant since the noticee has no remedy in law against the illegality of the notice itself until the culmination of trial, whereas this issue affects the very root of the proceedings. Moreover, unlike other statutes, PMLA has the principle of reverse burden of proof, making it impossible for the noticee to discharge the burden unless it has access to the allegations and said reason to believe. Therefore, to fulfill the intent and purpose of the Special Act, the recording and subsequent communication of ‘reason to believe’ has to be read into the provision. A mere adoption of the reason attributed at the stage of §5(1) is improper, defeating the objective of ensuring an independent application of mind and exercise of discretion as per jurisdiction vested under law.

Conclusion: Identifying Some Issues and Suggesting Some Answers
The recent evolution in the interpretation of the term, ‘reason to believe’ as found in Section 8(1) is nothing short of a game-changer. Seemingly trivial, this technical development of having to record and communicate reasons when not explicitly provided for in the section, has the power to vitiate proceedings in totality, on failure to abide by it. When talking in context of a Special Act where time is of the essence to ensure justice and the rightful protection of the nation’s wealth, it is of great consequence. It also raises the important issue of the conformity with principles of natural justice and the rights of a noticee who may eventually be innocent of a grave offence penalised under the Act.

As opposed to the traditional approach, the newly conceived reasoning is better embedded and substantiated in the contemporary dynamics of the relevant fields of law, however, in an attempt to tie loose ends, it is appropriate to discuss possible roadblocks at this juncture.

Firstly, as briefly discussed in Excel Powmin, the defect of not recording reasons may be construed as a mere irregularity, fixable when read with §68 of the Act. Turning to the keywords of the argument, ‘in conformity with the intent and purpose of the Act’, it may be argued that the mere omission fails to vitiate the operation of the notice, going by the bare text of the Act, which doesn’t cite it as a legal requirement. That, failure to comply with a technicality shouldn’t be allowed to deny the Enforcement Directorate to initiate proceedings against a potential offender and/or confiscate laundered property. On the other hand, it is contended that not recording and subsequently communicating the ‘reason to believe’ to the noticee thereof is in itself what defeats the intent and purpose of the Act, not curable under Section 68 PMLA adheres to the principles of natural justice, therefore, the noticee’s right to be heard under natural justice gets vitiated if (s)he’s denied access to the said reason at this stage. Hence, the omission is too grave to be treated as a mere irregularity, and holds greater consequences.

Secondly, if reasons are to be recorded and communicated under Section 8(1), the noticee shall also get the opportunity to challenge it while filing its defence under Section 8(2). However, the authority hearing the matter will be the same as the one issuing the notice, therefore, it is incompetent to question its own application of mind and hold the reasons arrived by it as prima facie defective. This violates the second principle of natural justice, nemo judex in causa sua. Legally indisputable, there may lie a procedural solution, wherein the SCN under Section 8(1) is issued by a separate Bench than that hearing the matter and passing the requisite order under Section 8(2), as has been previously directed by the Mumbai Appellate Tribunal. Although, for its effective implementation, an amendment in the appropriate Rules and Regulations providing for the same is required, until which it remains a powerless suggestion. Considering it an independently appealable order won’t resolve the issue in totality, while being cumbersome.

The current position remains captured in a sea of uncertainty, until there’s a conclusive judgement on the point by the Apex Court. In the recent times, the waves seem to suggest an inclination towards the newer interpretation of the provision in favour of the rights of the noticee and to promote greater accountability of the adjudicating body, yet, the practice isn’t uniform among subordinate courts. However, the true essence of a Special Act remains toothless if the value carried by expressions like ‘reason to believe’ isn’t realised and implemented with all its force. The mention of the term in Section 8(1) remains a mere formality if not supplemented by its recording and communication, creating a doubt on the wisdom of the legislature in including it in the first place while drafting the provision. On the other hand, if its interpretation is widened, it’ll also add an additional internal safeguard, to protect and forward the intent with which the PMLA was enforced. Any further confusion regarding the same should be resolved in the near-future, since the issue remains sub-judice in the Supreme Court, as an SLP against the judgement initiating these waves of change.