Freezing Orders Passed By ED Solely On Suspicion Without "Reason To Believe" Cannot Be Sustained Under PMLA: Delhi High Court
The High Court held that the ED cannot retain or continue freezing of bank accounts under Section 17 of the Prevention of Money Laundering Act without demonstrating “reason to believe” as mandated by statute.
Justice Subramonium Prasad, Justice Harish Vaidyanathan Shankar, Delhi High Court
The Delhi High Court dismissed two appeals filed by the Directorate of Enforcement, holding that the freezing orders were cryptic, founded solely on suspicion, and were issued without complying with mandatory statutory safeguards under Section 17 of the Prevention of Money Laundering Act, 2002.
The Court was hearing ED’s challenge to the Appellate Tribunal’s findings, which had invalidated the freezing on the ground that the statutory requirements embedded in Section 17 and the corresponding Rules had not been satisfied.
A Division Bench comprising Justice Subramonium Prasad and Justice Harish Vaidyanathan Shankar upheld the Tribunal’s conclusion. The Court emphasised that “the learned Adjudicating Authority cannot immediately after seizure or freezing, pass an order for retention or continuation of the freezing order without following the mandate of the PMLA” and held that to permit such action “would be a travesty of justice.”
Zoheb Hossain, Special Counsel, represented the appellant, while Senior Advocate Madhav Khurana represented the respondent.
Case Background
The appeals arose from orders passed by the Appellate Tribunal (PMLA), which had set aside freezing orders issued by the ED. The freezing order related to two bank accounts held by the respondent with the Delhi State Co-operative Bank and ICICI Bank.
The ED alleged that the respondent’s husband, employed as a driver with a cooperative bank and also engaged with an accused in the Sterling Biotech case, was involved in cash operations of the group and that the deposits were unexplained proceeds of crime. Based on these suspicions, the ED had frozen the respondent’s accounts under Section 17(1A) of the PMLA.
Following confirmation by the Adjudicating Authority, the respondent successfully appealed before the Tribunal, leading to the present challenge by the ED.
Court’s Observations
The Delhi High Court, upon examining the records, noted that the respondent and her husband were not named in the FIRs or ECIRs forming the basis of the money-laundering investigation. Nevertheless, the ED froze the respondent’s accounts, alleging unexplained deposits and a ₹20-lakh transfer by her husband to a co-accused.
However, the Bench noted that freezing orders themselves merely stated that “it is suspected” that the accounts contained laundered money and did not record the statutorily required “reason to believe”. The ED did not produce any material showing that the Director or Deputy Director had recorded such reasons before issuing authorisation.
The Court also found that the Adjudicating Authority had conflated the statutory concepts of freezing, continuation, retention, and confirmation, each of which carries separate legal meanings under the PMLA.
The Court held that freezing under Section 17(1A) cannot be ordered on mere suspicion. It drew a clear distinction, stating that “suspicion cannot be equated to a ‘reason to believe’... suspicion is more in the nature of a subjective state of mind… whereas a ‘reason to believe’ is based on an informed decision-making process.”
The freezing orders were accordingly found to be “cryptic in nature and founded solely on mere suspicion, do not meet the standard prescribed, which is the formation of a reason to believe.”
The Bench further underscored that even though Section 17(1A) does not expressly mention “reason to believe”, it cannot operate independently of Section 17(1), since freezing is merely an alternative to seizure, and therefore must adhere to the same statutory threshold.
The Bench stated that the ED had failed to follow the rule-mandated preparation of authorisation in the prescribed form, record and forward “reasons to believe” to the Adjudicating Authority and to properly formulate freezing memos. This non-compliance, the Bench remarked, rendered the orders void.
The Bench further expressed surprise that the Adjudicating Authority had allowed continuation of the freezing but simultaneously used terms such as retention and confirmation interchangeably, which the Court described as “a khichdi” and indicative of lack of application of mind.
The Court held that the ED’s attempt to supplement the freezing orders through later affidavits and submissions was impermissible under the principle laid down in Mohinder Singh Gill v. CEC.
The Court also highlighted that freezing a bank account without statutory backing violates the constitutional right to property.
Conclusion
Finding the freezing orders to be procedurally and substantively defective, the Court upheld the Tribunal’s decision and dismissed the ED’s appeals.
The Court concluded that the ED’s action was contrary to law, as the orders were issued without recording mandatory “reasons to believe” and without compliance with the prescribed procedure.
Cause Title: Directorate of Enforcement v. Poonam Malik (Neutral Citation: 2025:DHC:9981-DB)
Appearances
Appellant: Zoheb Hossain, Special Counsel; Advocates Vivek Gurnani, Kanishk Maurya, Satyam
Respondent: Madhav Khurana, Senior Advocate, Advocate Vignaraj Pasayat
