Fears of raids and asset seizures have turned the Directorate of Enforcement into a veritable bogeyman for India inc, writes Freny Patel

T he Directorate of Enforcement (ED), India’s most powerful crime-fighting agency, makes daily headlines for going after corporations, businessmen, politicians and the like in its pursuit of “the money trail” – and has set off alarm bells for India Inc.

Not only is the ED cracking the whip on illegal loan apps, cryptocurrency exchanges and payment gateways, but it is also scrutinising routine transactions such as syndicate loans, a New Delhi-based source cites. “The ED doesn’t seem to appreciate complex transactions as it feels these might give rise to money laundering,” he says.

Money laundering is a complex issue and can involve multiple jurisdictions. It is largely understood that complex financial structuring exists by means of layering and easy movements of money across borders, which also enable a cover for the proceeds of crime.

Although the ED enforces three major pieces of legislation, it is increasingly making its presence felt in relation to the Prevention of Money Laundering Act (PMLA) 2002, and to a lesser degree the Foreign Exchange Management Act (1999), and the Fugitive Economic Offenders Act (2018).

The ED’s origins date back to 1 May 1956, when an enforcement unit was set up within the Ministry of Finance’s Department of Economic Affairs to keep tabs on foreign exchange-related violations and crack down on money laundering cases.

The ED’s actions picked up pace in 2019 as the Indian government, through various amendments, made anti-money laundering legislation stricter by expanding the ambit of “proceeds of crime”. The scope now includes properties and assets created, derived or obtained through any criminal activity related to the scheduled offence, even if not under the PMLA.

Then in February 2022, the ED received support from unexpected quarters with the Supreme Court observing that “cash travels faster than light”, and so justifying the need for the agency to quickly investigate money laundering cases based on actionable intelligence, without waiting for the formal registration of a complaint.

The bench, headed by Judge AM Khanwilkar, was dealing with numerous petitions pertaining to the interpretation of certain provisions of the PMLA.

Ketan Mukhija, a New Delhi-based partner at Link Legal, adds: “Once the cash has been moved to its destination and used for intended purposes, it will eventually enter the legitimate financial system.” It can then be recycled through financial institutions and obscure the audit trail through the strategic layering of financial transactions and fraudulent bookkeeping.

Nearly 250 petitions were filed challenging the 2019 PMLA amendment. The constitutional safeguards, namely the right to life, liberty and due process, were eroded by way of the amended PMLA, petitioners lamented, saying it was in gross violation of fairness, justice and reasonableness.

GAINING STRENGTH

On 27 July this year, the ED became further empowered after the Supreme Court upheld the constitutional validity of various provisions of the anti-money laundering legislation, provisions that have given the agency blanket powers for arrest, conducting search and seizure, custody, attaching assets and investigation, and admission of evidence during questioning.

The 2019 amendments to the PMLA posed several challenges to the constitutionality of the act, as the provisions failed to achieve the intended purpose and led to multiple new issues, says Mukhija. He adds that it is imperative that the legislation – while granting the authority broad powers to combat India’s black money problem – should ensure compliance with principles of natural justice, and larger public interest must be harmoniously blended in.

It was anticipated that the Supreme Court would shed the much-needed light and bring about clarity to the provisions, and the conflicts and confusion surrounding their interpretation. But this was not the case. The court verdict was labelled “dangerous” by opposition parties, and reaffirmed the procedures adopted by the ED.

“It has done away with due process,” says EQX Business Consultancy founder and director, Nemin Shah in Mumbai. “India is getting into a culture where we arrest an accused and then start investigations,” says Shah. “This is what happens when an agency has no oversight and is given unfettered power.”

A number of lawyers this reporter spoke to shared similar views. The Supreme Court judgment empowered the ED to look into money laundering allegations at the cost of personal liberty, says Vikrant Singh Negi, a Mumbai-based partner at DSK Legal. “This is because the apex court has equated money laundering to terrorism, and stated that there is a compelling state interest in providing stringent bail conditions.”

The top court justified its stance by highlighting “the gravity of the fallout of money laundering activities having a transnational impact”. The court described money laundering as “an offence against the sovereignty and integrity of the country”, and expanded the meaning of the offence to include “every process and activity” directly or indirectly dealing with the proceeds of crime.

The three-judge Supreme Court bench, headed by Judge AM Khanwilkar, said in July that although the twin conditions restrict the right of the accused to be granted bail, they don’t impose absolute restraint.

Negi disagrees, saying securing bail and anticipatory bail are extremely challenging. The twin conditions enable the public prosecutor to oppose the bail application of an accused. The court also needs to be satisfied that there are reasonable grounds for believing that the accused is not guilty of such an offence and that he/she is not likely to commit any offence while on bail.

“With this threshold, now the legal doctrine seems to be ‘jail is the rule and bail an exception’,” says Negi.

CHECKS AND BALANCES NEEDED

In a democracy like India, proper checks and balances prove necessary for any law enforcement agency when exercising its powers. However, the ED, with massive discretionary powers, is a law unto itself, says the New Delhi-based source, citing the agency’s arbitrary action under the anti-money laundering legislation when it comes to the seizure and attachment of properties.

It is hoped the Supreme Court’s 25 August decision to “reconsider” two provisions under the PMLA – that of the reverse burden of proof, and not providing an enforcement case information report to the accused – will offer some degree of checking the ED’s unfettered powers.

Another three-judge bench of the Supreme Court agreed that certain aspects of the July judgment “will need a relook”, and issued a notice to the ED as it awaits a response from the federal government.

However, the Supreme Court’s “review powers are limited”, says Negi. Supreme Court lawyer Sarim Naved in New Delhi agrees, saying that the top court can at best judge whether legislation is constitutional, adding that it will be a political battle to change the law.

The only real check on the ED’s power is the provision under the PMLA that without the existence of a predicate offence there can be no case of investigating allegations under the anti-money laundering act. The crime-fighting agency does not have the power to investigate on its own, says Negi.

There is a lack of clarity as to whether the ED can continue its investigation if an individual is acquitted by the trial court, and the same is stayed by a higher court, he points out. “If an individual wins the case on merit in a lower court, appeals can take place in a higher court and the lower court orders of acquittal can stay.”

It is overwhelming for the system, and individuals and entities charged, says Negi, adding that the property will continue to be attached and be stuck in litigation. Some high courts are playing a critical role to keep the ED’s powers in check to some extent.

During a probe into a violation under the Foreign Exchange Management Act, the ED asked officials of a state-owned company to submit their income tax returns along with those of their family members. Had it not been for the intervention of the Kerala High Court, says Shah, these officials would have had to hand over their income tax returns or face arrest.

Similarly, the Bombay High Court dismissed the ED’s challenge against an order of the special PMLA court in August this year, which had granted interim bail to the two promoters of Omkar Realtors and Developers charged with money laundering. The high court ruling upheld the Supreme Court judgment, which endorsed the provisions of the PMLA where a person who has been acquitted in a primary offence does not face a separate action for an alleged money laundering offence.

Not only did the special anti-money laundering court refuse to entertain the ED’s plea to retain judicial custody of the two promoters, despite the absence of a scheduled offence, but it also described the financial crime-fighting agency as “vengeful”. The PMLA court said in its order that it was not a “post office to frame the charge at the behest of prosecution”.

ED WEAPONISED

The ED has intensified its activities since 2014, but more so during Prime Minister Narendra Modi’s second term in office, from 2019. Opposition parties have accused Modi of weaponising central enforcement agencies, in particular, the ED to go after a who’s who of the political opposition, including former finance minister P Chidambaram, Sonia Gandhi and her son, Rahul Gandhi, and former Maharashtra home minister Anil Deshmukh, to name a few.

Data released by the Ministry of Finance in July this year shows a sharp increase in the number of cases taken up by the ED since the Bharatiya Janata Party (BJP) government came to power in 2014.

Minister of state in the Ministry of Finance, Pankaj Chaudhary, told the lower house of parliament that in the past 10 years, the ED has taken up 24,893 cases for investigation under the provisions of the Foreign Exchange Management Act, 1999 (FEMA), and recorded 3,985 cases under the PMLA.

The ED ramped up its investigations in Modi’s second term. Against 2,659 cases registered in 2018-19 under the FEMA, the agency took up 5,313 cases in 2021-22. Similarly, cases under the PMLA spiked almost six times, from 195 in 2018-19 to 1,180 in 2021-22.

As of 31 March 2022, the ED has attached assets valued at INR1.05 trillion (USD13.1 billion) under the PMLA, of which about 50% have been confirmed by the adjudicating authority, amounting to INR585 billion.

However, the conviction rate is low, at about 1%. Negi says this is because money laundering convictions are challenging, given the need for proof of a nexus with the crime. “The threshold of evidence is ‘beyond reasonable doubt’, and that is challenging for the agency to demonstrate,” he says.

“Tangible assets like property can be attached, but it is difficult to attach if the money has been spent on intangibles like luxurious travel, gambled away in casinos or spent as expenses in liquid cash.”

Shah says the ED’s conviction rate will continue to be poor because even in the reverse burden of proof scenario there needs to be some level of evidence to be presented to the courts. “The problem may well be the lack of experience and specific skills required to investigate,” he says, suggesting that the government should consider increasing the ED’s budget, considering the number of cases and the heavy workload.

While the ED tries to look into numerous areas and has its fingers in too many pies – not necessarily related to money laundering – Shah says genuine cases of money laundering continue to flourish.

Money laundering cases previously have been few and far between and Shah says today there are so many cases where the ED has adopted an aggressive approach.

Citing a recent case of the ED freezing the accounts of WazierX, he says that the Indian cryptocurrency exchange was accused of poor documentation, when there are no prescribed rules on the documentation procedure regarding cryptocurrency exchanges, which to date are unregulated.

As such, convictions may be few and, as Naved points out, “the problem is with the process under the PMLA”. Considering the limited jurisprudence, experience and expertise of officers, not to mention the training imparted to investigate criminal cases, “there is a need for some degree of uniformity when it comes to the selection of cases by the ED”, he says.

CORPORATE CRACKDOWN


Top companies in the enforcement directorate’s crosshairs face business disruptions

This year has seen leading corporate entities coming under the scrutiny of the Directorate of Enforcement (ED) including US-headquartered Amway, Chinese smartphone manufacturers Vivo, Xiaomi, and Huawei for evading taxes, and payment gateways Paytm, Razorpay and Cashfree, which were all linked to a Chinese loan app scam. Their premises were raided and accounts frozen by the financial crime-fighting agency.

“The process is the punishment, even if the individual or company is subsequently acquitted,” says a lawyer representing a party involved in an ongoing money laundering case, adding the Indian judicial system takes a long time and the ED can under the PMLA freeze bank accounts of the accused. The lawyer cites the example of Amway, which was accused of running a pyramid fraud, and its assets valued at about USD200 million were frozen by the ED. According to an internal letter to members, Amway said that the ED’s actions related to a 2011 investigation.

The crackdown on Chinese smartphone majors has not gone down well in China, with Chinese Embassy spokesperson Wang Xiaojian saying: “The frequent investigation of Chinese companies by the Indian side not only disrupts the normal business activities of the companies … but also impedes the improvement of business environment in India.”

The bank accounts and funds of mobile manufacturers Vivo and Xiaomi were frozen by the ED in recent months, following allegations of money laundering.

Vivo challenged the ED’s decision before Delhi High Court, stating that freezing its accounts would affect its day-to-day operations. The high court agreed to allow Vivo to operate its frozen accounts on the condition that it maintains a minimum balance of INR2.51 billion (USD32 million) and furnishes a bank guarantee of INR9.5 billion. Vivo was accused of remitting 50% of its INR1.25 trillion Indian turnover largely to China to avoid paying local taxes.

Similarly, Xiaomi challenged the ED’s order before the Karnataka High Court and managed to get an interim stay in May this year on the seizure of its bank deposits valued at INR55.5 billion under the Foreign Exchange Management Act, following allegations that it had illegally remitted money overseas under the guise of royalty payments.