In a significant ruling reinforcing procedural safeguards under the Prevention of Money Laundering Act (PMLA), the Supreme Court has held that the directorate of enforcement (ED) cannot freeze bank accounts merely on suspicion and must first record legally sustainable 'reasons to believe' before exercising such powers.
The ruling is expected to have far-reaching implications for ED's investigative powers, particularly in cases where bank accounts or other financial assets are frozen during money-laundering investigations.
Delhi High Court Interpretation Upheld
The controversy centred on the interpretation of Section 17 of the PMLA. While Section 17(1) expressly requires an authorised officer to have 'reasons to believe' before conducting a search and seizure, Section 17(1A), which empowers ED to freeze bank accounts or properties, does not explicitly repeat the phrase.
The Delhi High Court ruled that both provisions form part of a single statutory framework and must be read harmoniously. Consequently, the HC held that the same threshold of 'reasons to believe' applies while exercising powers under Section 17(1A).
By refusing to interfere with this interpretation, the Supreme Court has effectively affirmed that ED cannot bypass statutory safeguards by invoking freezing powers on the basis of mere suspicion.
Case Arose from Sterling Biotech Investigation
The case arose after ED froze two bank accounts belonging to Poonam Malik during its investigation into the alleged ₹5,000-crore Sterling Biotech Ltd bank fraud.
According to the case records, Ms Malik and her husband, Ranjit Malik, were neither named in the first information report (FIR) nor in the enforcement case information report (ECIR) relating to the alleged fraud.
ED, nevertheless, froze her accounts, stating that it suspected proceeds of crime linked to money laundering were lying in them.
Ms Malik challenged the freezing order before the PMLA appellate tribunal which set aside ED's action. ED then approached the Delhi High Court, arguing that its powers under the PMLA permitted such action on the basis of suspicion.
However, the High Court found the freezing orders to be 'cryptic in nature' and based solely on suspicion, without recording the mandatory 'reasons to believe' required under the law.
ED Warned of 'Dangerous Precedent'
Before the Supreme Court, ED argued that the Delhi High Court's interpretation would create a 'dangerous precedent' by restricting its preventive powers under the anti-money-laundering law.
The agency contended that the High Court had exceeded its jurisdiction by examining the sufficiency of evidence and that attachment proceedings under the PMLA are preventive in nature.
It also argued that requiring a higher threshold could dilute the effectiveness of money-laundering investigations and encourage premature judicial interference.
The Supreme Court, however, declined to accept these submissions and dismissed the appeal without interfering with the High Court's reasoning.
Major Implications for Future Investigations
The ruling strengthens procedural safeguards available to individuals and businesses whose bank accounts are frozen during ED investigations.
The judgement underscores that freezing bank accounts—one of the agency's most intrusive investigative measures—cannot be exercised arbitrarily and must be supported by documented reasons capable of judicial scrutiny.
The decision is particularly significant for persons who are not named as accused in predicate offences or ECIRs but whose assets are frozen because of their alleged association with ongoing investigations.
The ruling also reinforces the principle that investigative agencies, while empowered to combat financial crimes, remain bound by statutory safeguards and constitutional protections against the arbitrary exercise of power.
For those facing freezing orders under the PMLA, the judgement provides a stronger legal basis to challenge such actions where the ED has failed to record or demonstrate the mandatory 'reasons to believe' before issuing the order.
(Diary No. - 25221/2026 Date: 31 July 2026)
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