The Karnataka High Court has ruled that the Enforcement Directorate (ED) cannot assume the role of a primary investigating agency or file private complaints to initiate action over alleged scheduled offences when the competent police or investigating authorities do not act on information shared by it.
The court also held that money laundering proceedings under the Prevention of Money Laundering Act (PMLA) cannot continue once the underlying scheduled or predicate offence has been closed. It observed that the ED's powers under the law are derivative and not independent, and that the agency cannot initiate an investigation solely on the basis of a suspicion of money laundering.
Justice M I Arun made the observations while allowing a batch of petitions filed by Karnataka Congress MLA K Y Nanjegowda, former Kolar and Chikkaballapur Milk Union Ltd (KOMUL) director Y B Ashwathanarayan and others. The court quashed the ED proceedings against the petitioners, including the Enforcement Case Information Report (ECIR), consequential proceedings and action arising from a private complaint filed by the agency.
It also set aside an order of the PMLA Adjudicating Authority confirming the seizure of articles and directed that the seized items be returned to one of the petitioners.
“The ED is not a super cop to investigate anything and everything which comes into its notice,” the court observed, emphasising that the agency must operate within the powers expressly granted to it under the PMLA.
ED cannot file private complaint when agencies do not act
A key issue before the High Court was whether the ED could approach a magistrate or special court with a private complaint under Section 200 of the Code of Criminal Procedure, now corresponding to Section 223 of the Bharatiya Nagarik Suraksha Sanhita (BNSS), after the local investigating agency failed to act on information provided by it.
The case arose after the ED, while investigating an alleged land scam, found material that it believed indicated irregularities in recruitment at KOMUL. The agency shared the information with the Lokayukta police under Section 66(2) of the PMLA.
However, when the Lokayukta police did not initiate action, the ED filed a private complaint in 2024 seeking a direction for an investigation into the alleged recruitment scam under the Prevention of Corruption Act.
The High Court held that Section 66(2) of the PMLA requires the ED to forward information about offences under other laws to the appropriate investigating agency. It does not authorise the agency to take over the investigation or independently initiate proceedings through a private complaint.
“The Act does not expressly empower the ED or the authorities under the PMLA to prefer private complaint in respect of a scheduled offence and on the strength of it, thereafter, take up investigation against the accused therein under the provisions of PMLA,” the court said.
It added that allowing the ED to file private complaints whenever another government authority decided not to proceed would effectively place the agency above other investigating institutions.
The court said such an interpretation would also mean assuming that the jurisdictional police or the concerned authorities had failed in their duties, while treating the ED's assessment as necessarily correct. This, it held, was not contemplated under the law.
Money laundering probe cannot survive closure of predicate offence
The High Court also examined whether the ED could continue its money laundering investigation after the underlying land scam case had been closed.
The allegations in the original case concerned the alleged illegal allotment of around 80 acres of land to approximately 38 people by the Malur Land Grant Committee in Karnataka's Kolar district. Nanjegowda was the committee's chairman at the time. He and other members were accused of abusing their official positions to recommend the allotments illegally.
The case originated from a private complaint filed by social activist K C Rajanna before the Chief Metropolitan Magistrate in Bengaluru in 2022. Based on the complaint, a criminal case was registered under Sections 468, 464, 465, 471, 420 and 120B of the Indian Penal Code, 1860.
The ED subsequently treated the alleged land scam as a predicate offence and registered an ECIR on November 30, 2023. During its investigation, the agency also found material relating to alleged irregularities in employee recruitment at KOMUL, which it described as a separate job scam.
Meanwhile, the original land scam complaint was closed after the requisite sanction to prosecute the public servants concerned was not obtained. The ED nevertheless continued its investigation into the alleged proceeds of crime arising from the land scam.
The petitioners argued that once the predicate offence had been closed, the ED could not sustain proceedings under the PMLA, irrespective of whether the closure was on merits or on technical grounds.
The ED contended that the closure had occurred on technical grounds rather than following an examination of the allegations on merits. It argued that this did not prevent the agency from continuing its money laundering investigation.
Rejecting the ED's position, the High Court referred to the Supreme Court's ruling in Vijay Madanlal Choudhary and Others v Union of India and Others. It said an investigation into the existence of proceeds of crime or the laundering of money derived from such proceeds could be undertaken only when a predicate offence existed.
“The power of the ED is derivative and not original. It cannot initiate an investigation suo-motu based on a standalone suspicion of money laundering. If there is no existence of the predicate offence, then in that event, proceedings under PMLA cannot exist,” the court held.
It further said the ED's role under the PMLA begins only after a primary law enforcement agency registers an FIR or a formal criminal complaint concerning a scheduled offence.
Since the land scam complaint had been closed for want of the requisite sanction, the court held that the ED's continued investigation into alleged proceeds of crime arising from that case could not be sustained.
Court invokes separation of powers and checks and balances
The High Court also underlined the constitutional principle of separation of powers, observing that no institution could be allowed to assume authority beyond the limits prescribed by law.
It said the PMLA lays down the powers and responsibilities of the authorities constituted under it, and those authorities must operate within the statutory framework.
The court observed that the responsibility for maintaining law and order rests with the state and that the ED cannot assume the functions of other investigating agencies merely because it disagrees with their decision not to initiate proceedings.
“Allowing the ED to prefer a private complaint, when the other government authorities deem it inappropriate to initiate any proceedings against anybody, will amount to permitting the ED to act as a super cop and it goes against the philosophy of the Act,” the court said.
It added that the law provides for checks and balances to prevent any one institution from becoming supreme and abusing the powers conferred upon it.
Petitions allowed, ED proceedings quashed
The High Court allowed the batch of petitions challenging the ED's actions in the land scam and alleged KOMUL recruitment scam matters.
Apart from quashing the ECIR dated November 30, 2023, and the consequential proceedings against the petitioners, the court set aside the June 6, 2024 order of the PMLA Adjudicating Authority insofar as it concerned one of the petitioners. It also quashed the summons and related adjudication proceedings, including the show-cause notice, to the extent they concerned the petitioners.
Proceedings arising from the ED's private complaint seeking an investigation into the alleged job scam were also quashed insofar as they concerned the petitioners. The court further directed the return of seized articles to one of them.
The petitioners were represented by senior advocate Kiran S Javali and advocates Mayank Jain, Madhur Jain, Arpit Goel and Mahendra Gowda, among others. Additional Solicitor General S V Raju, assisted by advocate Anuparna Bordoloi, appeared for the Union of India and the ED.
The ruling sets out the limits of the ED's authority under the PMLA, particularly when information about a suspected scheduled offence is not acted upon by the competent investigating agency. It reiterates that the agency cannot independently create the legal basis for a money laundering investigation or continue proceedings when the predicate offence supporting them no longer survives.