ED’s PMLA Power derivative, not original: Karnataka HC Draws Red Line

Bengaluru: Drawing a sharp line around the powers of the Enforcement Directorate (ED), the Karnataka High Court has held that the agency “is not a super cop to investigate anything and everything which comes into its notice”, ruling that it cannot bypass the statutory framework to independently create the foundation for a money-laundering investigation.

The Court held that the ED’s powers under the Prevention of Money Laundering Act (PMLA) are “derivative and not original” and that proceedings under the statute cannot continue when the predicate or scheduled offence forming their foundation no longer survives.

Justice M.I. Arun consequently quashed the ECIR and consequential proceedings initiated by the ED against several petitioners, including Karnataka Congress MLA K.Y. Nanjegowda and others connected with him.

The Court also set aside proceedings arising from a private complaint filed by the agency.

The High Court further quashed an order of the PMLA Adjudicating Authority confirming the seizure of assets and directed the return of articles seized from one of the petitioners.

The ruling came in a batch of petitions arising out of an ED investigation linked to allegations concerning the recruitment of employees at the Kolar-Chikkaballapur District Cooperative Milk Producers Union Ltd (KOMUL).

Advocate Mayank Jain appeared for some of the petitioners, including those connected with Congress MLA K.Y. Nanjegowda, in the batch of matters challenging the ECIR, consequential proceedings under the PMLA and the private complaint initiated by the ED.

The High Court underscored that proceedings for the offence of money laundering cannot exist independently of the statutory requirement of a scheduled offence.

Taking note of submissions advanced by counsel Mayank Jain, the Court held that the ED’s role under the PMLA commences only after a primary law-enforcement agency registers an FIR or a formal criminal complaint concerning a scheduled offence.

The ED’s power, the Court said, “is derivative and not original”, and the agency cannot launch an investigation suo motu merely based on a standalone suspicion of money laundering.

Justice Arun further held that where the predicate offence does not exist, proceedings under the PMLA cannot survive, including in cases where the predicate offence has been terminated in favour of the accused.

In the present case, involving proceedings against K.Y. Nanjegowda and other petitioners, the underlying land scam case had been closed after the requisite sanction for prosecution was not obtained.

Since the closure had attained finality, the Court held that the ED’s continuation of an investigation or inquiry into alleged proceeds of crime arising from that case could not be sustained.

In one of its sharpest observations, the High Court rejected the ED’s attempt to initiate a private complaint after the jurisdictional agency did not act upon information supplied under Section 66(2) of the PMLA.

The Court held that where the ED comes across material suggesting violations of another law, Section 66(2) requires it to share such information with the concerned agency.

The ED, it said, cannot itself take over the investigation into those offences.

Observing that statutory powers must be exercised only in the manner prescribed by law, the Court said the constitutional scheme of checks and balances cannot permit one institution to become supreme.

The Court then made the emphatic observation that the “ED is not a super cop to investigate anything and everything which comes into its notice.”

It held that the PMLA does not expressly empower the ED or its officers to file a private complaint regarding a scheduled offence and thereafter use such a complaint as the foundation for initiating money-laundering proceedings against the accused.

A key plank of the challenge advanced on behalf of the petitioners, including Congress MLA K.Y. Nanjegowda, who were also represented by Senior Advocate Kiran S. Javali and Advocate Mayank Jain, was that once the predicate offence had been closed, the ED could not continue its investigation under the PMLA.

The petitioners also argued that where the ED, during an investigation into one alleged offence, came across material suggesting an altogether different scheduled offence, it was empowered only to share that information with the appropriate police or investigating agency under Section 66(2).

It could not itself file a private complaint and subsequently proceed against the accused under the PMLA.

The Court held that the ED, unlike an ordinary private individual, must exercise only those powers that have been expressly conferred upon it under the PMLA.

“Filing of a private complaint by the ED is not contemplated under the PMLA,” the Court held, adding that permitting the agency to do so merely because another government authority considered it inappropriate to initiate proceedings would effectively allow the ED to act as a “super cop” — a result contrary to the philosophy and scheme of the statute.

The ED had argued that even if the predicate offence was closed on technical grounds rather than on merits, it could continue investigating the alleged offence of money laundering.

It had also contended that since any person could set the criminal law in motion, the ED could maintain a private complaint under criminal procedure law.

The Court, however, noted that accepting the ED’s position would effectively mean presuming that the jurisdictional police, sanctioning authorities and other investigating agencies were wrong or had failed in the discharge of their duties, while placing the ED on a higher pedestal, something not contemplated by law.

The scheme of the PMLA, the Court held, requires prosecution of the predicate offence to be initiated by the appropriate prosecuting agency or another competent party, and not by the ED or authorities constituted under the PMLA.

Allowing all the petitions, the High Court quashed the June 6, 2024 order of the PMLA Adjudicating Authority insofar as it concerned one of the petitioners and directed the return of articles seized from him.

The Court also quashed the ECIR dated November 30, 2023, summons issued pursuant to it and consequential proceedings, including the show-cause notice in the adjudication proceedings, insofar as they concerned Karnataka Congress MLA K.Y. Nanjegowda and the other petitioners.

Proceedings arising from the private complaint filed by the ED were also quashed insofar as they concerned the petitioners in the connected matters.