In a significant ruling on the rigours of the Prevention of Money Laundering Act, the Bombay High Court has set aside the Appellate Tribunal’s order affirming the freezing of Coda Payments India’s bank accounts and merchant IDs, holding that the Adjudicating Authority’s failure to record an independent, reasoned finding under Section 8(2) of the PMLA that the attached properties constituted ‘proceeds of crime’ was a fatal statutory defect that could not be cured by the Appellate Tribunal.
The Court explained that Prevention of Money Laundering Act confers extensive powers upon the Enforcement Directorate, but those powers are circumscribed by statutory safeguards. Section 8(2) of the PMLA mandates the Adjudicating Authority to record an independent, reasoned finding that the attached property constitutes ‘proceeds of crime’ after considering the reply, hearing the aggrieved person, and evaluating all relevant material.
Where the Adjudicating Authority merely records that the material is sufficient for continuation of freezing without identifying the property or the nexus to money laundering, the order is vitiated. The Appellate Tribunal cannot subsequently cure this defect by recording its own finding, as the appellate jurisdiction is intended to review the correctness of the original exercise, not to substitute it. Accordingly, the High Court asserted that gross turnover and foreign remittances do not, without more, constitute ‘proceeds of crime’ and freezing disproportionate to the alleged predicate offence cannot be sustained.
The Division Bench comprising Justice A. S. Gadkari and Justice Kamal Khata observed that Section 8(2) of the PMLA is couched in mandatory terms and requires the Adjudicating Authority to record an independent, reasoned finding as to whether the attached properties constitute ‘proceeds of crime’. The Adjudicating Authority merely observed that the material in the Original Application was sufficient to arrive at satisfaction that continuation of the freezing/retention was required for the purposes of adjudication, without separately identifying the property or properties found to be involved in money laundering, and without explaining the nexus between the monies frozen and the alleged criminal activity.
The Court noted a clear distinction between: (a) recording that the material is sufficient for continuation of retention/freezing for purposes of adjudication; and (b) recording the statutory finding that the property is involved in money laundering. The Court said that a bank account belonging to a person under investigation is not, by that fact alone, ‘proceeds of crime’, and the turnover of a company is not, merely because it is large, amounts to proceeds of crime.
The Court further observed that the Appellate Tribunal itself noticed the statutory requirement under Section 8(2) of the PMLA but erred in stating that it could ‘cure the defect’ by itself recording the finding. The Appellate Tribunal observed that if an Adjudicating Authority omits the mandatory finding under Section 8(2), the Appellate Tribunal cannot thereafter supply that finding based on the same material, as that would render the statutory safeguard optional. However, despite this observation, the Tribunal did not set aside the order or require the statutory authority to undertake the mandated exercise.
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The Court emphasized that an Appellate Authority may affirm, reverse or modify a finding recorded by the authority below, but cannot ordinarily supply a mandatory statutory finding which the Original Authority was required to record after undertaking the statutory adjudicatory exercise. The principle that an order passed by a statutory authority must stand or fall on the reasons contained therein, as laid down by the Constitution Bench in Mohinder Singh Gill vs. Chief Election Commissioner, New Delhi & Ors. [(1978) 1 SCC 405], was held to be of direct relevance.
The Court also observed that the PMLA is concerned with ‘proceeds of crime’ as defined under Section 2(1)(u), and that the Supreme Court in Vijay Madanlal Choudhary & Ors. v. Union of India [(2023) 12 SCC 1], held that the expression ‘proceeds of crime’ must be construed strictly and that every property recovered or attached in connection with a ‘scheduled offence’ cannot, merely by reason of such attachment or connection, be regarded as ‘proceeds of crime’. The existence of a ‘scheduled offence’, by itself, does not render every asset or property of the person or entity concerned as ‘proceeds of crime’.
The Court found that gross business turnover cannot by itself establish that the entirety of the turnover represents ‘proceeds of crime’, and the fact that money has moved from India to an overseas group entity may be relevant to an investigation but does not, without more, establish that every amount in the company’s bank accounts constitute ‘proceeds of crime’. The Court noted that nine out of ten FIRs were closed/settled, leaving only one involving an amount of Rs. 85,650/-, making the freezing of accounts amounting to approximately Rs. 100 crores ex-facie excessive and disproportionate.
The Court found merit in the Appellant’s contention that it was merely an intermediary between the end user and Garena International Private Limited, acting solely as a re-seller of digital content, and that the debits to the alleged victims’ accounts were made on the basis of transactions with Payment Gateway Companies carried out through the secured mode of sending an ‘OTP’. The Court observed that the E.D. had not produced an iota of evidence to substantiate the ‘predicate offence’ over a period of two years or to justify its assertion that the game and payment system was designed to allow auto-debit of money without authorization via OTP.
Briefly, the Appellant, M/s Coda Payments India Pvt. Ltd., is a wholly owned subsidiary of Coda Payments Pte. Ltd., Singapore, providing technology-enabled services for the monetization and sale of digital content through brands ‘Codashop’ and ‘Codapay’. The Directorate of Enforcement (E.D.) registered an Enforcement Case Information Report (ECIR) on 28th December 2021, based on ten First Information Reports (FIRs) registered at different police stations alleging offences under Sections 420 and 120-B of the Indian Penal Code, 1860, principally concerning unauthorized deductions from users of the online game ‘Garena Free Fire’.
On 23rd September 2022, the E.D. conducted search operations at premises connected with the Appellant and its Director, seizing physical records and a MacBook Pro digital device. On the same date, Orders under Section 17(1A) of the Prevention of Money Laundering Act, 2002 (PMLA) were issued freezing the Appellant’s bank accounts and merchant IDs maintained with various payment aggregators and payment gateways, extending to five identified bank accounts and merchant IDs with several payment aggregators. The E.D. filed Original Application before the Adjudicating Authority on 19th October 2022, seeking continuation of the freezing. The Adjudicating Authority confirmed continuation of retention/freezing of the bank accounts and payment aggregator/payment gateway accounts. The appeal under Section 26 of the PMLA before the Appellate Tribunal was also dismissed.
By the time the Appeal was heard, nine of the ten FIRs had already been closed, leaving only one FIR pending involving an amount of approximately Rs. 85,650/-, while the freezing of assets was valued at approximately Rs. 100 crores. The total amount alleged across all ten FIRs was only about Rs. 25 Lakh. The Appellant’s case was that it collected Rs. 2,850 crores and remitted Rs. 2,320 crores outside India but acted merely as an intermediary/payment service provider, with transactions authenticated through OTP/UPI PINs.
