2026 (3) TMI 33 - AT - Money Laundering

Proceeds of crime definition permits attachment of equivalent-value property where tainted assets are dissipated, subject to bona fide secured claims.

The note addresses validity of provisional attachment under the Prevention of Money Laundering Act over immovable property subject to prior mortgage or ... Provisional attachment - definition of 'proceeds of crime' - 'value thereof' - reasonable belief - overriding effect of statute - bona fide third party claim - offences of cheating and defrauding the OBC, as well as the farmers - definition of transfer in Section 2(1)(za) - foundational connect/nexus between the proceeds of crime and the assets/properties sought to be attached is completely missing. Proceeds of crime includes value thereof - Whether property not directly purchased with tainted funds can be attached as the 'value' or property equivalent in value under the definition of proceeds of crime. - HELD THAT:- The Tribunal applied the statutory text of Section 2(1)(u) and followed binding precedents which hold that the definition of 'proceeds of crime' comprises three limbs, the middle limb enabling attachment of property equivalent in value when the actual tainted property is not available. The reasoning explained that read literally and purposively, the phrase 'or the value of any such property' is not redundant and permits attachment of alternative or deemed-tainted property to secure illicit gains where proceeds have been dissipated or cannot be traced. The Tribunal accepted the axis of authority that safeguards exist for bona fide third parties and secured creditors, but rejected the argument that pre existing properties are categorically immune from attachment under the second limb. [Paras 11, 12, 13] Attachment of property as the 'value thereof' is permissible under Section 2(1)(u) when proceeds are dissipated or unavailable, subject to the statutory safeguards for bona fide third parties and secured creditors. Reasonable belief for provisional attachment - Whether the Deputy Director had recorded a reasonable belief, based on material, to lawfully pass the Provisional Attachment Order. - HELD THAT: - The Tribunal reviewed the PAO and the material cited therein, noting specific documentary and testimonial material (statements and documents recorded under Section 50 and listed in the PAO) and factual findings about diversion of funds, failed restructuring and risk of liquidation. It held that the Deputy Director had independently applied mind to the material, formed a subjective satisfaction grounded in a rational connection between material and belief, and did not act on conjecture. While courts may not re weigh sufficiency of evidence, they may test whether material existed and bore nexus to the belief; on that test, the PAO's reasons were adequate. [Paras 9, 10] The formation of reasonable belief by the Deputy Director for provisional attachment was based on material and is sustainable. Coexistence of PMLA and SARFAESI with protection for bona fide secured creditors - How the PMLA attachment interacts with the rights of secured creditors under SARFAESI and related recovery laws. - HELD THAT: - The Tribunal applied the harmony principle endorsed in Axis Bank, observing that PMLA has overriding effect but must operate compatibly with other statutes so as to secure proceeds of crime while not destroying legitimate third party rights. The law permits an order of attachment under PMLA to be valid and operative notwithstanding prior charges, but a bona fide secured creditor may assert and enforce its claim; where such claim is established, attachment will be subject to satisfaction of that charge and limited to excess value. The Impugned Order had expressly left the Appellant Bank free to stake its claim under Section 8(8) of PMLA before the Special Court, thereby preserving the statutory remedies available to the secured creditor. [Paras 16, 17, 18] PMLA attachments and secured creditor remedies under SARFAESI/RDBA/insolvency must co exist; attachment does not ipso facto defeat bona fide secured interests, which may be protected subject to statutory safeguards and adjudication. Final Conclusion: The Appeal is dismissed. The Tribunal upheld the provisional attachment as founded on reasonable belief and consistent with the statutory definition of proceeds of crime (including 'value thereof'); secured creditor rights remain enforceable and the Appellant Bank may pursue its claim under Section 8(8) of PMLA before the Special Court. Issues: Whether the provisional attachment under Section 5(1) and the definition of 'proceeds of crime' (Section 2(1)(u)) of the Prevention of Money Laundering Act, 2002 is valid in respect of immovable property subject to prior mortgage/pari-passu charge, including attachment as 'value thereof', and how such attachment coexists with the rights of a secured creditor under SARFAESI and related statutes.Analysis: The material in possession showing diversion of funds, conversion into proceeds of crime and the inability to trace the actual tainted property supports formation of a recorded reasonable belief under Section 5(1) of PMLA. The definition of 'proceeds of crime' in Section 2(1)(u) includes the 'value thereof', permitting attachment of property of equivalent value where actual tainted property is not available. Binding and persuasive authorities interpret the definition to cover (i) tainted property derived from the scheduled offence, (ii) property equivalent in value where proceeds have been dissipated, and (iii) property held abroad with equivalent value domestically; safeguards and assessment of wrongful gain are required before confirmation. Where a secured creditor has a bona fide prior interest, the PMLA attachment remains valid but operates subject to the secured creditor's claim, with entitlement to stake its claim under Section 8(8) of PMLA and statutory safeguards protecting bona fide third-party rights. The statutory scheme (including Section 71 of PMLA and Section 35 of SARFAESI Act) and judicial precedents require harmonious construction to secure proceeds of crime while preserving bona fide secured interests to the extent of their claims; courts can examine existence of material and nexus for reasonable belief but not the sufficiency of investigative material.Conclusion: The provisional attachment and its confirmation under the Prevention of Money Laundering Act, 2002 are valid in the facts of this case, including attachment as value equivalent, subject to the secured creditor's right to claim and satisfaction of its bona fide charge. The appeal by the secured creditor is dismissed and the secured creditor may pursue its claim under Section 8(8) of PMLA before the Special Court.