2020 (12) TMI 1385 - AT - Money Laundering

Financial institution fails to challenge property attachment despite claiming prior secured creditor rights under SARFAESI Act Section 5(1) PMLA

The Appellate Tribunal under SAFEMA dismissed an appeal challenging property attachment under PMLA. The appellant, a financial institution claiming to be ... Provisional attachment under Section 5 of PMLA - reason to believe under Section 5(1) of PMLA - bona fide third party interest in tainted property - priority of secured creditor and interplay between SARFAESI and PMLA - jurisdiction of Appellate Tribunal under Section 26(4) of PMLA - claim for release of property before Special Court under Section 8 of PMLABona fide third party interest in tainted property - due diligence of secured creditor - Entitlement of the appellant (secured creditor) to release of attached properties on the ground of being a bona fide third party having acquired interest prior to March 2016 loan sanction. - HELD THAT: - The Tribunal considered whether the appellant's mortgage interest, arising from home loans sanctioned in March 2016, defeated the provisional attachment where the properties were prima facie acquired in 2013-2014 out of proceeds of crime. The record and the investigation materials establish a prima facie money trail showing that funds from the consortium loans were utilised to acquire the properties before the appellant advanced its loans. Although the appellant produced documents to show due diligence at sanction, the Tribunal held that where the property is prima facie tainted and was acquired out of proceeds of crime prior to the creditor's charge, the attachment cannot be set aside in favour of the secured creditor. Reliance placed by appellant on authorities permitting protection of bona fide third parties was found inapplicable because the alleged criminal activity and acquisition pre-dated the appellant's interest; accordingly the appellant's claim to priority and release failed. [Paras 5]Appellant's plea as a bona fide third party and claim for release on grounds of due diligence is rejected.Priority of secured creditor and interplay between SARFAESI and PMLA - attachment under PMLA vis-a -vis enforcement under SARFAESI - Whether initiation of SARFAESI proceedings and symbolic possession prior to provisional attachment entitles the secured creditor to have the PMLA attachment subordinated or lifted. - HELD THAT: - The Tribunal examined the contention that enforcement action under SARFAESI, initiated prior to the PMLA provisional attachment, should prevail and permit the secured creditor to enforce its security. It found that where the properties are prima facie proceeds of crime (acquired before the creditor's charge), initiation of SARFAESI proceedings before attachment does not automatically override PMLA protection. The Tribunal distinguished earlier decisions relied upon by the appellant as inapposite on facts: in this case the funds underlying acquisition of the properties originated from the criminal activity predating the appellant's charge. The Tribunal also noted binding authorities that PMLA's scheme must operate to protect tainted assets and that SARFAESI cannot displace PMLA where properties are proceeds of crime. [Paras 5]Appellant's contention that SARFAESI enforcement prior to attachment yields priority is not accepted; the PMLA attachment remains unaffected on the facts.Reason to believe under Section 5(1) of PMLA - provisional attachment under Section 5 - Validity of the Adjudicating Authority's confirmation of the provisional attachment on the basis of the material forming 'reason to believe'. - HELD THAT: - The Tribunal reviewed the material relied upon by the Enforcement Directorate and recorded by the Adjudicating Authority, including the FIR, forensic audit findings, bank records and traced money flows showing utilisation of consortium loan funds for acquisition and subsequent transfers relating to the properties. The impugned order (paras 3-26 and conclusions at paras 27-29 of the Adjudicating Authority) sets out the factual basis for formation of 'reason to believe'. On that basis the Tribunal held there was compliance with the statutory requirement to form a reasoned belief that the properties were proceeds of crime and likely to be dealt with so as to frustrate confiscation proceedings; accordingly the confirmation of attachment was not legally infirm. [Paras 5]The Adjudicating Authority had sufficient material to form 'reason to believe'; the confirmation of provisional attachment is sustained.Jurisdiction of Appellate Tribunal under Section 26(4) of PMLA - claim for release of property before Special Court under Section 8 - Competence of this Appellate Tribunal to entertain the appeal against confirmation of attachment notwithstanding parallel criminal proceedings and the possibility of claims before the Special Court. - HELD THAT: - The Tribunal considered whether it was functus or ousted by the Special Court's proceedings. Applying the legislative scheme and authoritative guidance, the Tribunal noted that the appellate forum under Section 26(4) may 'confirm, modify or set aside' the adjudicating authority's order and that jurisdiction of the Special Court to adjudicate third-party claims becomes exclusive only where the attachment order has attained finality, confiscation has been ordered, or trial under Section 4 has commenced. Since charges/trial had not commenced here, the Tribunal retained jurisdiction to decide the appeal. The Tribunal therefore proceeded to examine the merits rather than directing the appellant to the Special Court. [Paras 5]This Tribunal has jurisdiction to entertain and decide the appeal; the appellant was not required to approach the Special Court at this stage.Final Conclusion: The appeal is dismissed. The Tribunal found no illegality in the Adjudicating Authority's confirmation of the provisional attachment: the properties are prima facie proceeds of crime acquired prior to the appellant's charge, the material sufficed to form 'reason to believe', the appellant's bona fide third party and SARFAESI priority claims fail on the facts, and the Appellate Tribunal had jurisdiction to decide the matter. Issues Involved:1. Provisional Attachment Order (PAO) and its confirmation.2. Allegations of criminal conspiracy, breach of trust, cheating, forgery, and misconduct.3. Loans and financial assistance availed by M/s. Nathella Sampath Jewelry Private Limited (NSJPL).4. Allegations of misrepresentation, falsification of records, and diversion of funds.5. Identification and attachment of properties as proceeds of crime.6. Appellant's claim as a bona fide third party and secured creditor.7. Jurisdiction of the Appellate Tribunal under PMLA.8. Applicability of Section 3 of the PML Act, 2002.Detailed Analysis:1. Provisional Attachment Order (PAO) and its Confirmation:The appeal was filed against the order dated 16.01.2019, which confirmed the Provisional Attachment Order (PAO) no. 11/2018 dated 31.07.2018. The Adjudicating Authority confirmed the PAO based on allegations that the properties involved were acquired using proceeds of crime.2. Allegations of Criminal Conspiracy, Breach of Trust, Cheating, Forgery, and Misconduct:A criminal case was registered by the CBI against M/s. NSJPL and its directors for offenses under various sections of the Indian Penal Code and the Prevention of Corruption Act. The allegations included criminal conspiracy, breach of trust, cheating, forgery, and using forged documents.3. Loans and Financial Assistance Availed by M/s. NSJPL:M/s. NSJPL availed financial assistance from multiple banks, including SBI, IOB, ICICI, HDFC, and Citi Bank. The total credit limits availed were Rs. 340 crores. The company delayed servicing interest payments and was found to have low stock levels during inspections.4. Allegations of Misrepresentation, Falsification of Records, and Diversion of Funds:A forensic audit revealed misrepresentation and falsification of records by M/s. NSJPL, leading to a loss of Rs. 379.75 crores to the banks. The company was accused of diverting funds and falsifying financial statements to avail credit facilities fraudulently.5. Identification and Attachment of Properties as Proceeds of Crime:During the investigation, 37 immovable properties were identified and attached as proceeds of crime. The properties included lands and buildings acquired using funds from the loans taken by M/s. NSJPL. The attachment was challenged by the appellant, who claimed to be a secured creditor.6. Appellant's Claim as a Bona Fide Third Party and Secured Creditor:The appellant, Aditya Birla Housing Finance Limited, claimed to have sanctioned home loans to the borrowers against the mortgaged properties. The appellant argued that they were a bona fide third party and had followed due diligence before granting the loans. They contended that their interest in the properties should take priority over the attachment under PMLA.7. Jurisdiction of the Appellate Tribunal under PMLA:The appellant argued that the Appellate Tribunal had the jurisdiction to modify or set aside the impugned order confirming the PAO. The Tribunal held that it had the jurisdiction to pass orders on the legality of the attachment, even though the criminal trial had commenced.8. Applicability of Section 3 of the PML Act, 2002:The appellant contended that Section 3 of the PML Act was not applicable to them as they were neither accused in the FIR nor the ECIR. The Tribunal did not find it necessary to record a finding on this issue, as the proceedings were to examine the legality of the attachment order.Conclusion:The Tribunal dismissed the appeal, holding that the properties in question were acquired using proceeds of crime. The appellant's claims as a bona fide third party and secured creditor were not accepted, and the attachment under PMLA was upheld. The Tribunal found no illegality or impropriety in the impugned order passed by the Adjudicating Authority.