2025 (9) TMI 1471 - AT - Money Laundering

Appeal dismissed; provisional attachment upheld after Rs.3.86 crore traced as proceeds of crime despite intermediary transfers

The AT dismissed the appeal and upheld provisional attachment of three bank accounts. It found undisputed receipt by a club of Rs. 4.08 crore from a ... Money Laundering - provisional attachment order - layering of proceeds of crime - scheduled offence - money had been mobilized by cheating the common people under false promise of high returns - HELD THAT:- There is no dispute as to the receipt of Rs. 4.08 crores by the East Bengal Club as sponsorship money from the Saradha Group. In fact an MOU was signed between the East Bengal Club and Saradha Group on 23.06.2010 for the use of logo of Saradha Group by the East Bengal Club. It is also on record that the East Bengal Club had entered into an agreement with the United Breweries Ltd. in 1998 to form a Company called United East Bengal Football Pvt. Ltd. On 18.09.2013 the name of the Company was changed to KFEBFT. While it is true that KFEBFT is a separate entity from the East Bengal Club, even the Appellant Company has not denied receiving Rs. 3.86 crores from the East Bengal Club for the financial years 2010-11, 2011-12 and 2012-13 in tranches of Rs. 1.5 crore Rs. 1.85 crore and Rs. 0.51 crore respectively - There is nothing on record to deny that Rs. 3.86 crores which was received by the Appellant Company was part of the funds that the East Bengal Club had received from Saradha Group. Since, the Appellant Company had used Rs. 3.86 crores to pay the players, the Respondent Directorate froze the three bank accounts of the Appellant Company having total balance of Rs. 1,78,66,958/-. The Appellant Company has questioned the freezing of this amount on the grounds that the said amounts were received from sources of the Income Tax Department and of the United Breweries Ltd. The amounts in three bank accounts of the Appellant Company, though received from sources other than the East Bengal Club, were nothing but the proceeds of crime since the amount of Rs. 3.86 crores transferred from the East Bengal Club had already been dissipated, notwithstanding its utilization for the payment to the players in accordance with the agreement signed with the Club by the Appellant Company or its erstwhile Company. The Appeal filed by the Appellant Company is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts standing in the bank accounts of the assailed company constitute 'proceeds of crime' within the meaning of Section 2(1)(u) of the Prevention of Money Laundering Act, 2002 when (a) the original sponsorship funds from a fraudulent mobilization were received by a club and (b) a part of those funds was transferred to the company and subsequently dissipated by payment to players. 2. Whether provisional attachment under Section 5(1) of the PMLA of bank balances of an entity that is not an accused in the scheduled offence is permissible where funds traceable to a scheduled offence have been transferred and partly dissipated. 3. Whether the Adjudicating Authority's confirmation of provisional attachment was arbitrary or made without application of mind in light of contractual arrangements asserting legitimate source and use of funds. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of the bank-account amounts as 'proceeds of crime' under Section 2(1)(u) of PMLA Legal framework: Section 2(1)(u) defines 'proceeds of crime' as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property; it also contemplates equivalence in value where original property is taken or held outside the country. The Explanation extends the net to property directly or indirectly derived or obtained as a result of criminal activity relatable to the scheduled offence. Precedent treatment: A binding higher-court interpretation holds that 'proceeds of crime' includes property of equivalent value and permits attachment of property equivalent in value where original proceeds are not available; a tribunal's prior decision applied that interpretation to permit attachment of property held by third parties or in altered forms. Interpretation and reasoning: The Court applied the wide statutory definition and the cited judicial interpretation to the facts: there is no dispute that the club received sponsorship money from a source engaged in fraudulent mobilization; a substantial part of that sponsorship was transferred to the company in tranches. Although the company used those transferred funds to pay players pursuant to contractual arrangements, the original funds traceable to the scheduled offence were thereby dissipated. Where proceeds have been dissipated or siphoned off, the statutory definition and precedent permit treating property remaining in the hands of recipients (even if acquired from other sources) as 'proceeds of crime' to the extent of equivalent value. Ratio vs. Obiter: Ratio - the statutory definition, read with authoritative interpretation, permits treating amounts remaining with a transferee as proceeds of crime (including by value-equivalence) where the original proceeds have been dissipated. Obiter - ancillary observations on specific accounting particulars of particular transfers and disbursements not necessary to the core legal conclusion. Conclusions: The balances in the three bank accounts were lawfully characterised as proceeds of crime (or equivalent in value thereto) because the funds transferred to the company originated from sponsorship monies obtained through the scheduled offence and those original proceeds were dissipated by payments, authorising attachment of the remaining value. Issue 2 - Validity of provisional attachment under Section 5(1) against an entity not itself accused in the scheduled offence Legal framework: Section 5(1) authorises provisional attachment of property where the Directorate has reason to believe that the property is proceeds of crime. The definition of proceeds of crime contemplates property indirectly derived or the value equivalent of such property; attachment can extend to property held by persons who are not accused if that property represents proceeds or equivalent value. Precedent treatment: Prior authoritative rulings endorse the proposition that third parties holding property representing proceeds of crime may be subjected to attachment; this extends to situations where the accused has parked proceeds with another person and to attachment of property of equivalent value if direct proceeds are not available. Interpretation and reasoning: The Tribunal found that the necessary 'reason to believe' existed because (a) the club had indisputably received sponsorship proceeds from the fraudulent source, (b) a major portion was transferred to the company, and (c) the original proceeds were dissipated. Given the dissipation, the only effective remedy to prevent frustration of the Act's object is attachment of property equivalent in value, even when held by an entity not formally accused. The Court rejected the argument that non-accused status vitiates attachment where statutory tests and reason to believe are satisfied. Ratio vs. Obiter: Ratio - provisional attachment under Section 5(1) is permissible against a non-accused transferee where there is reason to believe the property (or its equivalent in value) is proceeds of crime; this interpretation furthers legislative purpose and prevents evasion. Obiter - remarks on policy imperatives and hypothetical alternatives for tracing funds. Conclusions: The provisional attachment of the company's bank balances was validly effected under Section 5(1) as the balances represented value equivalent to proceeds of crime after dissipation of the original funds; non-accused status alone does not preclude attachment when statutory grounds exist. Issue 3 - Allegation of arbitrariness and non-application of mind by the Adjudicating Authority in confirming attachment Legal framework: Administrative action to attach property must be supported by reason to believe, material on record, and application of the statutory test. The Court assesses whether the AA considered relevant documents (agreements, banking records, statements) and applied legal standards rather than acting arbitrarily. Precedent treatment: Authorities require that conclusions on attachment be based on material which reasonably supports the requisite belief; however, judicial precedents also recognise that the test is 'reason to believe' not proof beyond reasonable doubt. Interpretation and reasoning: The Tribunal observed undisputed documentary facts: existence of a sponsorship MOU between the fraudulent mobilizer and the club; undisputed receipt by the club of defined sponsorship sums; transfers from the club to the company in defined tranches; and dissipation of the transferred sums by payment to players. The AA's conclusion that remaining balances were attachable followed the statutory definition and precedent interpretation; there was no shown failure to consider the contractual claim that transfers derived from legitimate contractual obligations or proof that the specific attached sums demonstrably originated from independent legitimate sources (for some balances the company claimed income-tax refund and separate corporate receipts, but the totality of records supported the linkage to diverted sponsorship funds). Given that the AA addressed the material and reached a decision within legal parameters, the allegation of arbitrariness/non-application of mind was rejected. Ratio vs. Obiter: Ratio - where material on record establishes provenance of funds from a scheduled offence and dissipation occurs, confirmation of provisional attachment is not arbitrary if the authority records reasons satisfying the Section 5(1) test. Obiter - observations on the need for granular forensic accounting in other fact patterns where provenance is genuinely disputed. Conclusions: The Adjudicating Authority's confirmation of the provisional attachment was not arbitrary and reflected application of mind to the material on record; the company's contractual defences and assertions of alternate sources did not negate the statutory basis for attachment given the proved flow and dissipation of tainted sponsorship funds. Overall Disposition Applying the statutory definition of 'proceeds of crime,' the authoritative interpretation permitting attachment of equivalent value, and the evidentiary material demonstrating transfer and dissipation of tainted sponsorship funds, the attachment of the bank-account balances was upheld and the appeal against confirmation of the provisional attachment was dismissed as devoid of merit.