Opinion Rapped by Supreme Court in TASMAC case, ED only has itself to blame

The allegations, as culled out from multiple FIRs registered by the Tamil Nadu Police since 2017, are broadly that employees of TASMAC-operated shops allegedly collected amounts in excess of the MRP from customers while selling liquor, and further, that high-ranking TASMAC officials were being bribed to allow these shops to sell liquor at higher rates. These allegations were initially being investigated by the Tamil Nadu Police; however, the ED eventually entered the picture, given that the offences alleged in these state FIRs, namely, corruption, cheating, etc were “scheduled offences,” the only prerequisite to invoke the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). This armed the ED to parallelly investigate the money laundering aspect of the offence and, in the process, carry out extensive search and seizure operations, which became the subject matter of the said petitions.

The bone of contention is a raid conducted by the ED on March 6 at the TASMAC Headquarters in Chennai, in purported exercise of powers under Section 17 of the PMLA. The raid went on for three days, totalling around 60 hours, and it has been alleged by employees and staff of TASMAC that during the course of the raid, the ED harassed and coerced them. It is alleged that employees were unlawfully confined for long hours, not provided with food or rest, denied communication with anyone, and that some were detained for the entirety of the 60 hours.

Accordingly, writ petitions were filed before the Madras High Court on behalf of the State of Tamil Nadu and TASMAC, seeking a declaration that the raid conducted by the ED was illegal and further seeking a declaration that the ED’s investigation, without the consent of the State, violated the federal structure and the basic structure of the Constitution of India. It was also alleged that a large number of documents were indiscriminately copied and seized, and that digital devices of the company and its employees were cloned and retained, thereby violating the right to privacy of these individuals.

The Madras High Court dismissed these writ petitions and upheld the ED’s investigation and the validity of the said search and seizure carried out. It held that the allegations of harassment were not substantiated through any physical evidence and, therefore, could not be believed. It further stated that the records of the search proceedings incidentally created by the ED itself did not mention any instance of harassment and, therefore, no such harassment could be presumed to have taken place. It also held that the ED was well within its powers to conduct the search and that there was no violation of the federal structure.

There was also a legal challenge to the search itself, in light of the mandate of Section 17 of the PMLA, which requires the existence of “reasons to believe,” supported by “material in possession,” to justify conducting a search in the first place. The Supreme Court, in its recent ruling in the Arvind Kejriwal case, held that the “reasons to believe” under Section 19 of the PMLA which bears similarly worded provisions, must have a nexus with the “material in possession”.

The dictum of the Madras High Court is flawed on several counts and the contentions of TASMAC and its employees deserve consideration, as is evident from the Supreme Court’s interim order. The issues raised before both the Supreme Court and the High Court are not only interlinked but also reflect the long-standing issue of duplicated and parallel investigations being carried out by state and central agencies (such as the ED, CBI, etc).

On the issue of the alleged harassment, the High Court should not have relied so heavily on documents created by the ED to conclude that no harassment occurred. These search documents, such as panchnamas, are prepared by ED officials themselves and, by their very nature, would not contain any admission of misconduct.

These concerns must also be understood in the context of the ED’s inherently secretive style of operation. The ED often refuses to supply copies of seizure memos or reports prepared during searches. It is not even mandated to supply a copy of the Enforcement Case Information Report (ECIR), the very document that sets an investigation in motion.

Furthermore, given that the Tamil Nadu Police has been investigating the alleged liquor scam since 2017, the ED’s abrupt intervention and mass seizures not only undermine the federal structure but also derail the ongoing investigation. Due to its wide-ranging powers, the ED often dictates the manner and trajectory of the investigation, essentially positioning itself as a superior investigating agency. This can also demoralise state police forces from pursuing their work effectively, out of fear of conflict with the Central Government, even though the investigation of offences is essentially within the domain of the state as per the Constitution of India.

Now, the Supreme Court in Arvind Kejriwal vs Directorate of Enforcement held that “reasons to believe” in Sections 17 and 19 of the PMLA must be cogent, evidence-based, and subject to judicial scrutiny. However, the High Court effectively diluted this standard in the context of Section 17, as it held that such a high threshold for “reasons to believe,” as required for a valid arrest, was not applicable to search/raid proceedings. Yet, judicial review of such “reasons to believe” is all the more essential in such cases, especially since the ED also has the power to record statements, and several TASMAC employees have complained of coercion and harassment. Scrutiny of this requirement would determine whether the search was genuinely warranted or merely a means of intimidation. Given the sweeping powers conferred by the PMLA, these procedural safeguards exist for a reason and must be scrupulously followed to ensure a balance between investigative efficacy and the protection of individual rights. In OPTO Circuit India Ltd. v Axis Bank & Others, the Supreme Court held that compliance with Section 17’s mandate is essential and must be uniformly observed.

The ED has appeared somewhat overzealous and trigger-happy in its recent investigation into TASMAC. There seemed to be no immediate urgency to conduct searches in the manner alleged by the TASMAC employees. This is underscored by the fact that the ED could have taken a more measured approach and sought assistance from TASMAC. Under Section 54(j) of the PMLA, the ED could have requested TASMAC’s assistance in obtaining relevant records, as this provision allows it to seek cooperation from officers or corporate bodies established under central or state enactments. Moreover, the ED could have, based on available evidence, informed the Tamil Nadu Government of appropriate action under Section 66(2) of the PMLA. The very fact that these more cooperative options were bypassed in favour of a full-scale search and seizure justifies the criticism levelled against the ED. Unfortunately, the ED is now, perhaps, a victim of its own reputation where even genuine investigations tend to be sullied by allegations of malice and overreach.

The writers are lawyers practicing in Delhi