2025 (2) TMI 747 - AT - Money Laundering

Money Laundering - proceeds of crime - alleged transfer of public funds by way of fraudulent transactions - Appellant Bank as a victim of fraud has a legitimate claim over the attached properties that were mortgaged to it by Vijay Kumar Kushwaha and others or not - HELD THAT - The properties which have been attached by the Respondent Directorate in exercise of powers under section 5 of the PMLA 2002 were admittedly already under mortgage with the appellant bank. The Appellant Bank has argued that it is the victim of a fraud and has the first charge over the property. As such it is entitled to appropriate the properties in view of the charge created on the properties in its favour. The Appellant has inter alia placed reliance on the judgement titled Deputy Director Directorate of Enforcement. Delhi v. Axis Bank 2019 (4) TMI 250 - DELHI HIGH COURT . The underlying issue is squarely covered by the judgement of this Appellate Tribunal in the case of JM Financial Asset Reconstruction Company Ltd. 2024 (4) TMI 1228 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI where it was held that the interference in the order of the attachment order on a challenge by the financial institution should not be persuaded by the sentiments and only on the ground that once there is a mortgage of the property it should go to the financial institution. Conclusion - The attachment under PMLA is lawful and does not transfer title unless the property is confiscated. The rights of financial institutions are protected under Section 8(8) and they may pursue their claims in accordance with the provisions of PMLA. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the properties attached under the Prevention of Money Laundering Act, 2002 (PMLA) should be released to the Appellant Bank, which claims to be a bona fide third party with a legitimate interest in the properties.
Whether the Appellant Bank, as a victim of fraud, has a superior claim over the attached properties due to the mortgage created in its favor prior to the attachment under PMLA.
The applicability of Section 8(8) of the PMLA, which provides for the settlement of rights of claimants having legitimate interest in the properties even if attached and confiscated.
The interpretation of the overriding effect of PMLA over other laws, such as the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB Act) and the SARFAESI Act, in the context of proceeds of crime and attached properties.
The rights of a secured creditor in the context of properties attached under PMLA, particularly when the properties were mortgaged to secure loans before the alleged criminal activity.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Release of Attached Properties to Appellant Bank

Legal Framework and Precedents: The case primarily revolves around the interpretation of Section 8(8) of the PMLA, which allows for the settlement of claims by legitimate interest holders in attached properties. The Appellant Bank relies on precedents such as the decision in Deputy Director, Directorate of Enforcement. Delhi v. Axis Bank, which discusses the rights of third parties with legitimate interests in attached properties.
Court's Interpretation and Reasoning: The Tribunal refers to its previous judgment in JM Financial Asset Reconstruction Company Ltd., emphasizing that the rights of financial institutions with legitimate claims are protected under Section 8(8) of PMLA. However, the release of properties should occur after the trial's conclusion to ensure all claims are addressed.
Key Evidence and Findings: The properties in question were mortgaged to the Appellant Bank before the attachment under PMLA. The Appellant Bank argues that it is a victim of fraud and has a legitimate claim over the properties.
Application of Law to Facts: The Tribunal applies the principles from the JM Financial judgment, which states that the attachment does not affect the title or ownership of the property unless it is confiscated. The settlement of property claims should occur at the trial's end.
Treatment of Competing Arguments: The Tribunal acknowledges the Appellant Bank's position as a victim and its legitimate claim but emphasizes the need to follow the statutory framework under PMLA to ensure all claims are fairly addressed.
Conclusions: The appeal is dismissed, but the Appellant Bank is allowed to pursue its claims under Section 8(8) of PMLA before the Special Court.

Issue 2: Overriding Effect of PMLA

Legal Framework and Precedents: The Tribunal considers the overriding effect of PMLA as established in the Deputy Director of Enforcement v. Axis Bank & Others, which emphasizes PMLA's distinct purpose and its precedence over other financial recovery laws.
Court's Interpretation and Reasoning: The Tribunal concurs with the precedent that PMLA has an overriding effect due to its distinct purpose of addressing money laundering and proceeds of crime, which is separate from the objectives of other financial recovery laws.
Key Evidence and Findings: The Tribunal notes the ongoing trial and the need for a comprehensive inquiry into all claims, including those of secured creditors, under the PMLA framework.
Application of Law to Facts: The Tribunal applies the principle that PMLA's purpose is distinct and should be harmoniously construed with other laws, ensuring that the attachment and confiscation processes under PMLA are not undermined by other claims.
Treatment of Competing Arguments: The Tribunal rejects the argument that other financial recovery laws should prevail over PMLA, emphasizing the need to adhere to PMLA's statutory framework.
Conclusions: The Tribunal upholds the overriding effect of PMLA and dismisses the appeal, allowing the Appellant Bank to pursue its claims under the appropriate legal provisions.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "The rights of the parties or the financial institution having mortgage the properties and thereupon attached under the Act of 2002 are protected under section 8(8) of the Act of 2002."
Core Principles Established: The judgment reinforces the principle that the attachment under PMLA does not affect the title or ownership of the property unless it is confiscated. The rights of legitimate claimants, including financial institutions with mortgages, are protected but should be settled at the trial's conclusion.
Final Determinations on Each Issue: The appeal is dismissed, but the Appellant Bank is granted the liberty to pursue its claims under Section 8(8) of PMLA before the Special Court. The overriding effect of PMLA is upheld, ensuring that the statutory framework for addressing proceeds of crime is not undermined by other financial recovery laws.

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