2025 (11) TMI 1100 - AT - Money Laundering

Appeals dismissed; provisional attachment upheld as fintechs outsourced NBFC core functions, attracting offences under s.417,419,420 IPC; s.66C,66D IT Act

M/s Conroy Financial Private Limited, M/s Diversity Weekday Technology India Pvt. Ltd., M/s Constant Blue Fintech Private Ltd., M/s Microcard India Technology Consulting Service Pvt. Ltd., My Salary Dost Fintech Private Limited, M/s Finmotive India Pvt. Ltd., M/s Clover Spring Pvt. Ltd. M/s Pioneer Financial & Management Services Ltd. and M/s Kudos Finance & Investment Pvt. Ltd. Versus The Deputy Director, Directorate of Enforcement, Hyderabad

AT dismissed the appeals and upheld the provisional attachment, finding the co-lending/service agreements allowed fintech firms to perform core NBFC ... Money Laundering - provisional attachment order - entering into service agreement without due diligence and further allowed the fintech companies to misuse the data of the borrowers - offence under section 417, 419, 420 of the IPC, 1860 and section 66-C, 66-D of IT Act, 2000 - HELD THAT:- The agreement between the NBFC and fintech companies is under a co-lending model wherein, the fintech companies were flush with funds, provide funding to the NBFC under the pretext of ‘Performance Guarantee’ and the amount is disbursed for loan to the borrowers. The NBFC gets guaranteed revenue in accordance with the service agreement entered into with the fintech companies on revenue sharing basis in the form of service fees ranging from 0.4% to 0.5% on total disbursement through the mobile apps or minimum commitment on monthly basis of the amount specified in the agreement, whichever is higher. Thus, NBFC without investing a single rupee, gets return in lieu of lending licensing and giving it to service provider companies. A bare perusal of the guidelines referred by the appellants would show that core management functions would not be outsourced like determining compliance of the KYC norms, for opening deposit accounts, sanction for loans and management of investment portfolio. We have already discussed the scope of work stipulated into the agreements placed before us and it is wide enough to cover the core activities of NBFC which could not have been outsourced by it - the argument of the appellant stating that fintech companies had limited role cannot be accepted. Thus, it is unable to agree with the arguments of the appellants and thus, the appeals fail and are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether property can be provisionally attached under the Prevention of Money Laundering Act, 2002 (PMLA) in respect of proceeds of crime found in possession of a person who is not named as an accused in the FIR/charge-sheet. 2. Whether the contractual/service arrangements between NBFCs and fintech/service providers, as manifested in the reproduced agreements, operate to outsource core lending and recovery functions in breach of RBI directions, and whether such arrangements may render the NBFCs and/or fintech companies liable as persons in possession of proceeds of crime. 3. Whether the role asserted by fintech companies (limited to app development/marketing/service provision) as per service agreements is factually and legally sufficient to negate their involvement in the commission of scheduled offences or in receipt/possession/use of proceeds of crime. 4. Whether the material placed on record (including MOUs, merchant ID routing, payment gateway flows, evidence of data capture/harassment and revenue sharing) gives the authorised officer reason to believe, within the meaning of Section 5 PMLA, that the properties/bank accounts are proceeds of crime and liable to provisional attachment. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of attachment where appellant is not named as accused Legal framework: Sections 2(1)(u), 3 and 5 of the PMLA define 'proceeds of crime', the offence of money-laundering and the power of provisional attachment where the authorised officer 'has reason to believe' (to be recorded) that any person is in possession of proceeds of crime and such proceeds are likely to be concealed/transfered. Precedent treatment: The Tribunal followed the reasoning in the apex authority's judgment which held that Section 5(1) is not limited to accused named in the scheduled-offence FIR; attachment may extend to any person in possession of proceeds of crime. The Tribunal also relied on its earlier decision (Sant Singh) interpreting the statutory scheme consistently. Interpretation and reasoning: The Tribunal emphasised that the statutory language contemplates attachment of property held by 'any person' and not only by the accused in the underlying FIR. The definition of proceeds of crime covers property 'directly or indirectly' derived from scheduled offences and Section 3 criminalises dealing with such proceeds. Therefore, where material on record indicates possession/use/benefit from proceeds, attachment is permissible even absent naming in FIR/charge-sheet. The Tribunal quoted and applied the apex authority's exposition that the sweep of Section 5(1) extends beyond the accused in the scheduled offence to any person involved in processes connected with proceeds of crime. Ratio vs. Obiter: Ratio - attachment under Section 5 PMLA can be directed against any person in possession of proceeds of crime irrespective of whether that person is named as accused in the FIR/charge-sheet, provided the authorised officer records reasons based on material. Conclusion: The Tribunal upheld provisional attachment in respect of persons not named as accused where materials satisfy the 'reason to believe' threshold; the appellants' challenge on this ground is rejected. Issue 2: Whether service agreements outsourced core lending/recovery functions in violation of RBI directions and rendered parties culpable Legal framework: RBI's Outsourcing of Financial Services Directions (2017) and Master Directions require NBFCs to retain ultimate control of core functions (e.g., sanctioning loans, KYC compliance) and to avoid outsourcing core management/decision-making functions; NBFCs must ensure oversight, audit rights and compliance when outsourcing; PMLA and IPC/IT Act offences arise where scheduled offences generate proceeds. Precedent treatment: The Tribunal applied the RBI guidelines to contract terms and factual matrix; earlier Tribunal decisions were used to underscore the obligation of NBFCs to retain core control and the non-delegability of certain functions. Interpretation and reasoning: The Tribunal examined the reproduced service agreements in detail and found that the fintech companies were assigned wide-ranging functions - app development, hosting, customer acquisition, collection/recovery, KYC/document collection, monitoring and even appointing collection agents - effectively exercising control over origination and recovery. Revenue sharing, performance guarantees, merchant ID routing and minimal NBFC economic participation indicated that NBFCs ceded core activity to fintechs. Although agreements purportedly contained compliance and penalty clauses, the operational structure permitted fintechs de facto conduct of lending and recovery, including data capture and use enabling harassment/extortion. Therefore such outsourcing crossed the line prohibited by RBI directions and reflected misuse of NBFC licence to generate proceeds of crime. Ratio vs. Obiter: Ratio - where contractual and operational arrangements confer upon service providers substantive control of loan origination and recovery (core NBFC functions), such arrangements violate RBI outsourcing directions and may support findings of involvement in scheduled offences and possession/use of proceeds; obiter - contractual clauses promising compliance/penalties do not, by themselves, shield parties where factual control and conduct show otherwise. Conclusion: The Tribunal concluded the agreements and conduct evidenced outsourcing of core NBFC functions in breach of RBI directions; fintechs functioned as de facto NBFCs and NBFCs impermissibly ceded core activities, contributing to culpability and supporting attachment of proceeds. Issue 3: Sufficiency of service agreements to absolve fintechs/NBFCs of liability Legal framework: Contractual allocation of responsibilities does not determine criminal or statutory liability; PMLA and related statutes focus on substance and possession/use of proceeds rather than label in agreements; RBI master directions limit permissible outsourcing and preserve NBFC responsibility. Precedent treatment: The Tribunal treated contractual provisions as evidence to assess role and control but declined to accept exculpation by mere contractual characterization when factual matrix contradicted it; adverse inference imposed where agreements were not produced by some appellants. Interpretation and reasoning: The Tribunal parsed clauses (scope, indemnity, security deposit, data storage, collection protocols) and found that, despite prescriptive language, the operative arrangements and financial flows (performance guarantees routed to NBFC MIDs, fintechs bearing processing fees and enjoying major revenue, fintechs developing and controlling apps that captured sensitive data) indicated substantive operational control by fintechs. The Tribunal noted that clauses showing NBFC discretion (e.g., NBFC retains right to underwrite) were not reflective of practice; moreover, penalty/indemnity clauses were inconsistent with the modus operandi of harassment and threats. For appellants who failed to place agreements on record, an adverse inference was drawn. The Tribunal held that legal liability under PMLA depends on possession/use of proceeds and involvement in processes connected to proceeds, not contractual labels of 'service provider'. Ratio vs. Obiter: Ratio - formal service agreements do not, ipso facto, absolve a party from attachment or criminal liability where the facts demonstrate actual exercise of core functions, receipt/possession of proceeds, or involvement in processes connected with proceeds; obiter - detailed compliance clauses may mitigate but cannot override statutory/regulatory obligations. Conclusion: The Tribunal rejected appellants' contention that service agreements absolved them; agreements were insufficient to negate liability given the operational reality and revenue flows indicating possession/benefit from proceeds. Issue 4: Sufficiency of material to constitute 'reason to believe' for provisional attachment Legal framework: Section 5(1) PMLA requires the authorised officer to have reason to believe (to be recorded) based on material in possession that (a) a person is in possession of proceeds of crime and (b) such proceeds are likely to be concealed/transferred, etc.; provisos require linkage with scheduled offence reports/complaints. Precedent treatment: The Tribunal applied statutory standard and prior judicial exposition that the threshold for provisional attachment is based on material sufficient to form reasoned belief; it relied on the operational and documentary matrix to assess sufficiency. Interpretation and reasoning: The Tribunal considered aggregated materials: multiple FIRs alleging cheating/harassment, ECIR recording money-laundering, evidence of 365 mobile apps, merchant ID/payment gateway flows, revenue figures showing disproportionate receipts (approximate proceeds quantified), agreements and clauses conferring operational control to fintechs, data capture permissions and use, evidence of call centres and threatening recovery practices. The Tribunal found the material collectively furnished a reasoned basis for the authorised officer's belief that the accounts/property contained proceeds of crime and were at risk of dissipation. The Tribunal also noted statutory permissibility to attach property of persons not named in FIRs where material indicates possession/use of proceeds. Ratio vs. Obiter: Ratio - aggregated documentary and operational material (FIRs, ECIR, payment flows, contracts, data-use evidence, revenue pattern) can satisfy the 'reason to believe' test under Section 5(1) PMLA to warrant provisional attachment; obiter - quantification examples illustrate how processing fees and effective interest can convert legitimate-looking transactions into proceeds of crime in context. Conclusion: The Tribunal held that the material on record met the statutory threshold for provisional attachment; the impugned confirmation of attachment was sustained and the appeals dismissed.