SAFEMA Tribunal Sets Aside ₹1.18 Crore PMLA Attachment for Lack of Proceeds of Crime Nexus

Sarvottam Fincap Limited Vs Deputy Director (Appellate Tribunal under SAFEMA, New Delhi)

Bank Balance Cannot Be Attached Under PMLA Without a Nexus to Proceeds of Crime

Background: Digital Lending Investigation and Attachment

The appeal concerned the attachment of ₹1,18,30,435 lying in the appellant’s bank account. The Adjudicating Authority, by its order dated 21 July 2023, had confirmed the provisional attachment dated 25 January 2023.

The Enforcement Directorate’s investigation arose from several FIRs concerning instant digital loan applications. The alleged activities included cheating, excessive charges, misuse of borrowers’ personal information and coercive recovery practices.

According to the investigation, various fintech companies operated lending applications through arrangements with registered Indian NBFCs. While the NBFCs provided their licences and banking infrastructure, the fintech entities allegedly controlled customer acquisition, lending, disbursement and recovery. The amounts generated through the alleged criminal activities were treated as proceeds of crime.

Sarvottam Fincap was proceeded against as one of the NBFCs allegedly facilitating this business model.

Appellant’s Defence: Its Own Application, Without a Fintech Operator

The appellant maintained that its case was materially different. It independently operated the loan application “Paisa Finch”, and no fintech company or service provider controlled its lending business.

Significantly, the appellant relied on the Enforcement Directorate’s own provisional attachment order, whose transaction statement recorded that there was “No service provider” involved in its operations.

The appellant further submitted that its name had appeared in only two FIRs. Following investigation, the final chargesheets did not name either the appellant or its application in the predicate offence proceedings.

It also distinguished an earlier adverse Tribunal order dated 14 December 2023, contending that the present attachment rested on a different factual record.

General Allegations Cannot Replace Evidence Against the Particular Entity

The Tribunal found a fundamental difference between the general allegations against other NBFCs and the material concerning the appellant.

The principal allegation was that unauthorised fintech entities had used NBFC licences to conduct lending activities. However, that arrangement was not established in the appellant’s case. The respondent’s own records supported the appellant’s position that it operated its application independently.

The Tribunal held that the alleged modus operandi of other entities could not be mechanically extended to the appellant merely because they were investigated under the same ECIR.

There was no material demonstrating that an unauthorised fintech company controlled the appellant, operated through its licence, or that the appellant knowingly participated in coercive recovery practices or misuse of borrowers’ data.

Earlier Adverse Order Did Not Govern Different Facts

The Enforcement Directorate argued that the appeal should follow the Tribunal’s earlier decision against the same appellant.

The Tribunal rejected this contention because the earlier proceedings involved allegations and material concerning a service-provider arrangement. The present record did not establish a comparable arrangement.

An earlier adverse decision against the same company could not determine a subsequent appeal where the material allegations and supporting evidence differed. The Tribunal therefore examined the present attachment on its own factual foundation.

Chargesheets and the Missing Link to Proceeds of Crime

The Tribunal treated the subsequent filing of chargesheets, without naming the appellant or attributing the alleged criminal activity to its application, as a material development.

An FIR initiates an investigation; its allegations are not conclusive proof. The Adjudicating Authority was required to consider the outcome of the predicate offence investigation while examining whether the attached property represented proceeds of crime.

The Tribunal also found that the allegation of commission income did not identify how the appellant had derived or obtained proceeds of crime. It emphasised the distinction between income from legitimate lending activity and property derived from criminal activity.

An Outstanding Loan Is Not Automatically Proceeds of Crime

The attachment order itself recorded that the appellant had repaid ₹3.50 crore to V-Point IT Solutions Pvt. Ltd., with interest at 18% per annum, while ₹1.02 crore remained outstanding because its accounts were frozen.

The Tribunal held that an unpaid contractual loan balance does not, by itself, become proceeds of crime. Further supporting material was necessary to establish that character.

Decision: Attachment Set Aside

The Tribunal found that the Enforcement Directorate had failed to establish the requisite nexus between the attached bank balance and proceeds of crime.

A balance could not be attached merely because the account appeared in the financial trail examined during an investigation. Accordingly, the Tribunal allowed the appeal and set aside the attachment of ₹1,18,30,435.

Author’s Comments

The decision underscores that investigation of an account is not proof that its entire balance represents proceeds of crime. Attachment requires material connecting the property with criminal activity relating to a scheduled offence.

However, the ruling should not be read as establishing that absence from a predicate-offence chargesheet automatically prevents PMLA attachment. The relief rested on the combined absence of an established fintech arrangement, evidence of participation and a demonstrated nexus to the attached funds.

The practical lesson is clear: entity-specific evidence must prevail over a common investigative narrative. Likewise, a contractual borrowing or outstanding liability cannot be converted into proceeds of crime merely by description or suspicion.

Cases Discussed

• M/s Sarvottam Fincap Limited — Earlier Appellate Tribunal Order dated 14.12.2023: Considered and distinguished on the facts. The earlier proceedings involved a service-provider arrangement and different supporting material. The Tribunal declined to apply that decision mechanically to the present attachment.

FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA

The present Appeal has been preferred under Section 26 of the Prevention of Money Laundering Act, 2002 (in short “PMLA”) against the Order dated 21.07.2023 passed by the Adjudicating Authority in Original Complaint (“OC”) No. 1902 of 2023. The Adjudicating Authority has confirmed the Provisional Attachment Order No. 01/2023) dated 25.01.2023 for the following movable property. S.No. Bank/Payment Account Account Name Available Gateway No./MID balance for (Sources) attachment 1. HDFC 50200058917636 Sarvottam 1,18,30,435 Fincap Ltd.

2. The ECIR was recorded on the basis of several FIRs registered by the Cyber Crime Police Stations at Rachakonda, Cyberabad and Hyderabad concerning to the various instant digital loan applications. The FIRs alleged offences including cheating and related offences under Sections 417,419 and 420 and other offences of the Indian Penal Code, 1860 (in short “IPC”), which are scheduled offence under the PMLA.

3. The investigation revealed that approximately 365 mobile applications were used for sanctioning and recovering instant micro- loans. The lending and recovery transactions were routed through payment gateways, including Paytm, Cashfree and Razorpay, through Merchant IDs (“MIDs”) linked with various bank accounts. Several fintech/service-provider companies operating such applications had entered into Memorandum of Understanding/service agreements with Indian NBFCs on the strength of their licences. It is to undertake digital lending through mobile applications. The fintech companies allegedly provided the funds required for lending in the form of “Performance Guarantees”, “Security Deposits” or Inter-Corporate Deposits. The NBFCs thereafter opened MIDs with payment gateways and permitted the fintech companies to utilise the same for disbursal and recovery of loans.

4. According to the investigation, although the arrangements were represented as outsourcing of certain financial services, the fintech companies allegedly exercised effective control over the entire lending process. They were stated to control the mobile applications, undertake customer acquisition and underwriting, arrange the funds, process and disburse the loans, determine the charges and interest, and undertake recovery. The NBFCs were alleged to have exercised little or no effective control over these activities.

5. The borrowers were allegedly required to provide extensive personal information, including access to their contacts, photographs, media and other data stored on their mobile devices. The loan applications allegedly deducted substantial processing charges, generally ranging between 15% and 25% of the sanctioned loan amount, at the time of disbursement. The loans were for short periods, generally ranging from 7 to 60 days, and were allegedly accompanied by high rates of interest and penalties. Upon default or delayed repayment, the recovery process allegedly involved abusive and coercive calls and messages to the borrowers and their relatives, friends and other contacts. The investigation alleged that the personal data obtained through the applications was misused for threatening, humiliating and harassing borrowers. In some cases, borrowers were allegedly induced to obtain fresh loans from other applications for repayment of earlier loans, thereby trapping them in a cycle of indebtedness.

6. The investigation further alleged that the Indian NBFCs had comparatively small Net Owned Funds (“NOF”), while the loan transactions undertaken through the fintech applications were disproportionately large. It was alleged that the fintech companies deposited substantial funds with the NBFCs and thereafter utilised the NBFCs’ regulatory framework and payment-gateway arrangements for carrying on digital lending activities.

7. It was further alleged that the NBFCs, being non-deposit-taking and non-systemically important NBFCs, had accepted funds from fintech companies in the guise of performance guarantees/security deposits without complying with the applicable RBI requirements. It was alleged that the arrangements enabled fintech companies, including entities suspected to have foreign/Chinese or Hong Kong funding, to effectively carry on lending activities without independently obtaining the requisite NBFC licence.

8. The investigation estimated that approximately Rs.66,19,21,85,467/- had been disbursed under the names of various NBFCs through the digital lending arrangements and that the NBFCs and fintech companies had collectively generated approximately Rs.14,97,84,70,595/- from the lending activities. According to the investigation, the amounts collected by way of excessive processing fees, interest, penalties and other charges constituted proceeds of crime, as the same were allegedly generated through cheating, misuse of borrowers’ personal data, coercive recovery practices and other criminal activities. It was further alleged that the funds constituting proceeds of crime were repeatedly rotated through the lending cycle, with recovered amounts being utilised for further lending. The transactions were routed through the MIDs maintained with various payment gateways and thereafter settled into different bank accounts. The balances available in the relevant MIDs and bank accounts were accordingly treated as representing proceeds of crime and were provisionally attached.

Role Attributed to M/s Sarvottam Fincap Limited

9. M/s Sarvottam Fincap Limited (“Sarvottam Fincap”) was one of the Indian NBFCs alleged to have entered into service agreements with various fintech/service-provider companies for undertaking lending through digital loan applications.

10. The specific allegation against Sarvottam Fincap was that it permitted the fintech companies to utilise its NBFC status/licence for carrying on digital lending activities through their mobile applications. According to the Enforcement Directorate, Sarvottam Fincap did not merely outsource limited financial services but allegedly permitted the fintech companies to exercise effective control over the entire lending business.

11. The investigation alleged that Sarvottam Fincap entered into agreements with service providers without conducting the requisite due diligence regarding their operations and financial activities. The fintech companies were allegedly permitted to control the loan applications, customer acquisition, underwriting, loan disbursal, recovery and other essential aspects of the lending business.

12. It was further alleged that the funds required for lending were substantially arranged by the fintech companies and were routed through payment gateways and MIDs associated with the NBFCs. Sarvottam Fincap allegedly provided the regulatory framework under which such transactions could be undertaken, while the actual lending operations were carried out by the fintech/service-provider companies.

13. According to the Enforcement Directorate, Sarvottam Fincap did not have the necessary operational infrastructure, expertise or financial capacity to independently undertake the volume of digital lending attributed to it. The disproportion between its own funds and the volume of loans allegedly processed through the associated fintech companies was relied upon to contend that the fintech entities were effectively using Sarvottam Fincap’s NBFC licence to conduct the lending business. Sarvottam Fincap was also alleged to have failed to exercise effective supervision and control over the service providers. In particular, it was alleged that it did not undertake adequate due diligence or ensure compliance with the applicable RBI norms relating to outsourcing, lending operations and customer protection. It was further alleged that the fintech companies obtained and misused sensitive personal information of borrowers through the digital applications and thereafter employed coercive recovery methods. Sarvottam Fincap was alleged to have facilitated such activities by permitting the fintech companies to conduct the lending business through arrangements entered into with it, despite allegedly having no effective control over their operations.

14. The allegation against Sarvottam Fincap, therefore, was merely that it entered into service agreements with fintech companies, but that it allegedly enabled those entities to use its NBFC status as a vehicle for conducting digital lending activities which, according to the investigation, were otherwise being undertaken without the requisite regulatory authorisation and in violation of applicable RBI norms.

15. It was further alleged that Sarvottam Fincap received a share/commission from the lending business, stated to be approximately 0.5% to 1% of the loan amount disbursed. It was alleged that, despite not undertaking the substantive lending operations or incurring the corresponding expenditure, Sarvottam Fincap derived financial benefit from the transactions carried out through the fintech companies.

16. On the basis of the above circumstances, which has been alleged that Sarvottam Fincap was knowingly involved in and facilitated the acquisition and handling of proceeds of crime generated through the digital lending operations. It was alleged that the company’s role in providing its NBFC framework, permitting the use of its payment arrangements and receiving a share of the profits enabled the fintech companies to carry out the alleged illegal lending and recovery activities.

17. The investigation alleged that the proceeds of crime were first received through payment-gateway MIDs and subsequently settled into bank accounts associated with the NBFCs and fintech companies. Since the proceeds of crime were allegedly routed and transferred through multiple accounts, the balances available in the relevant MIDs and bank accounts were treated as representing proceeds of crime.

18. The allegation against M/s Sarvottam Fincap Limited is that it provided its NBFC status and banking/payment infrastructure to fintech companies, permitted them to conduct digital lending through mobile applications without exercising effective supervision and due diligence, facilitated routing, lending and recovery transactions, and consequently, received a share of the financial benefit.

19. It was consequently alleged that Sarvottam Fincap knowingly facilitated the generation, possession, use and projection of the alleged proceeds of crime as legitimate business income.

Submissions of counsel for the appellant:

20. The learned counsel for the appellant submitted that the appellant Sarvottam Fincap Ltd. is an NBFC who is different from the other NBFC’s as it had operated its application namely “Paisa Finch” on its own and there was no involvement of any Fintech Company. This is an admitted position of the Enforcement Directorate in its own provisional attachment order which is given below:-

Thus, the appellant herein has never misused its licence by allowing any fintech company to take over.

21. The learned counsel for the appellant further submitted that the appellant’s name had been taken only in 2 FIRs i.e., FIR No. 2452 of 2020 and FIR No. 1136 of 2020. In the chargesheet, the appellant has not been named for commission of predicate offence. Even the application “Paisa Finch” has not been named in the final chargesheets in either case. The appellant is not being prosecuted for any unlawful acts by any predicate offence agency and as per the admitted case of ED, there is no fintech company involved and thus, the allegation of misuse of licence doesn’t arise.

22. The learned counsel for the appellant further submitted that the appellant had earlier preferred an appeal before this Tribunal against an earlier Provisional Attachment Order. The said appeal was heard and final order was passed on 14.12.2023. The fundamental difference in the case of the appellant as on the date is that the FIRs mentioned in the order have culminated into chargesheet not naming the appellant as an accused. When the first order was passed, the allegations were subsisted in the nature of FIR’s. However thereafter investigation was conducted and the jurisdictional police has not named the appellant as an accused. Thus, as on date, there is no predicate offence on account of the fact that same modus operandi is not followed by the appellant herein which was followed by others. Further, earlier order was predicated on the Inter Corporate Deposit of V- Point IT Solutions whereas the present PAO makes it clear that it was a mere loan transaction which has been paid off in part and the remaining amount is outstanding due to accounts being freezed. It was mentioned by the ED itself, in their PAO that “Rs.3.5 crore Principal amount was repaid to V point IT Solutions Pvt Ltd with interest @18% Per Annum on 28th April 2021. The balance loan amount of Rs.1.02 crore is to be repaid once the accounts are defreezed.”

23. The learned counsel for the appellant has not raised any other argument than referred to above despite an opportunity to raise any other legal or factual issue. The learned counsel for the appellant shown his satisfaction to the arguments raised above and closed his arguments.

Submissions of the counsel for the respondent:

24. The learned counsel for the respondent contested the appeals on all the issues raised by the appellant. Elaborate arguments were made and would be referred while addressing each issue raised by the appellant. It is to avoid repetition of the same facts and for the sake of brevity.

Finding of the Tribunal

25. I have considered the rival submissions of the parties and scanned the matter carefully.

26. The present case is arising out of several FIRs registered by the Cyber Crime Police Stations at Rachakonda, Cyberabad and Hyderabad concerning the operation of various instant digital loan applications. The FIRs alleged commission of offences of cheating and related offences under Sections 417, 419 and 420 of the IPC.

27. The investigation revealed that approximately 365 mobile applications were being used for sanctioning and recovering instant micro-loans. The lending and recovery transactions were routed through payment gateways, including Paytm, Cashfree and Razorpay, through Merchant IDs (“MIDs”) linked with various bank accounts. Several fintech/service-provider companies operating such applications had entered into Memorandum of Understanding/service agreements with Indian NBFCs on the strength of their licenses.

28. The alleged modus operandi was that the fintech companies approached registered Indian NBFCs and, on the strength of the NBFCs’ licences, sought to undertake digital lending through mobile applications. The fintech companies allegedly provided the funds required for lending in the form of “Performance Guarantees”, “Security Deposits” or Inter-Corporate Deposits. The NBFCs thereafter opened MIDs with payment gateways and permitted the fintech companies to utilise the same for disbursal and recovery of loans.

29. According to the investigation, although the arrangements were represented as outsourcing of certain financial services, the fintech companies allegedly exercised effective control over the entire lending process. They were stated to control the mobile applications, undertake customer acquisition and underwriting, arrange the funds, process and disburse the loans, determine the charges and interest, and undertake recovery. The NBFCs were alleged to have exercised little or no effective control over these activities.

30. The case of the Enforcement Directorate is founded upon the alleged modus operandi whereby various fintech/service-provider companies are stated to have utilised the regulatory framework and licences of Indian NBFCs for carrying out digital lending activities through various mobile applications. According to the respondent, such fintech companies exercised effective control over the lending business, while the concerned NBFCs merely provided their regulatory status, banking/payment infrastructure and other facilities, and thereby facilitated the generation and handling of proceeds of crime.

31. There is, however, a fundamental difference between the general allegations made in respect of the various NBFCs and the specific case relating to the appellant, M/s Sarvottam Fincap Limited. The appellant has specifically contended that it was itself operating its mobile application, namely, “Paisa Finch”, and that no fintech/service-provider company was permitted to take over or exercise control over its lending operations. This submission assumes significance because the very foundation of the allegation of misuse of an NBFC licence is the existence of an arrangement whereby a fintech entity, lacking the requisite regulatory authorisation, allegedly conducted lending activities by utilising the licence and infrastructure of an NBFC. It is not the case herein and stand proved from the statements relied by the respondent.

35. The respondent has not alleged involvement of a service provider. The appellant has relied upon the contents of the PAO itself to demonstrate that the lending through the application “Paisa Finch” was not undertaken through any fintech company. Once the existence of a fintech/service-provider arrangement is not established in the case of the appellant, the principal allegation that the appellant had permitted an unauthorised fintech entity to utilise its NBFC licence cannot be mechanically extended to the appellant merely because similar allegations were made against other entities investigated in the same ECIR.

36. It is also relevant that the appellant’s name was stated to have figured only in FIR Nos. 2452 of 2020 and 1136 of 2020. The said FIRs, which initially formed the basis of the investigation, have subsequently culminated in chargesheets. The appellant has not been arraigned as an accused in the final chargesheets filed in the predicate offences. Even the application “Paisa Finch”, through which the appellant claims to have undertaken its own lending activity, has not been shown to have been made an accused or otherwise arraigned in the final predicate offence proceedings.

37. The subsequent development in the predicate offence investigation cannot be ignored while examining whether the property sought to be attached represents proceeds of crime. The allegations contained in an FIR constitute the starting point of an investigation and cannot, by themselves, be treated as conclusive proof of the commission of a scheduled offence by a particular person. Where, after investigation, the jurisdictional agency files a chargesheet without arraigning the appellant as an accused and without attributing the alleged criminal activity to the appellant or its application, the same is a material circumstance which was required due consideration of the Adjudicating Authority.

38. In the present case, the appellant has not been prosecuted or charge-sheeted for the alleged cheating or other scheduled offences. There is no finding in the predicate offence proceedings that the appellant generated any proceeds of crime through the alleged digital lending fraud. The Enforcement Directorate cannot, merely on the basis of allegations contained in the FIRs, continue to attribute the same modus operandi to the appellant which, upon investigation, has not been found attributable to the appellant by the jurisdictional police.

39. It is well settled that the existence of a scheduled offence constitutes the foundational requirements for invoking the provisions of the PMLA. The expression “proceeds of crime” is a relevant aspect for causing provisional attachment of the property. Therefore, unless the property sought to be attached falls within the definition of proceeds of crime relating to a scheduled offence, the attachment cannot be sustained merely on the basis of suspicion or on account of the fact that the person concerned was one of the entities investigated in the subject ECIR.

40. The material on record does not establish that the appellant received any share of the alleged proceeds of crime generated by the fintech entities. In fact, a Fintech company is not involved in this case. The allegation that the appellant received a commission of approximately 0.5% to 1% of the loan amount is without identifying the proceeds of crime. It is without identifying as to how the alleged proceeds of crime was derived or obtained by the appellant. A distinction has to be maintained between legitimate business income earned pursuant to lending activity and property representing proceeds of crime derived from criminal activity.

41. Another important aspect of the matter relates to the transaction with V-Point IT Solutions Pvt. Ltd. The earlier order dated 14.12.2023 passed by this Tribunal, as submitted by the appellant, was based upon the circumstances then placed before the Tribunal, including the nature of the Inter-Corporate Deposit transaction. The appellant has specifically pointed out that the factual position in the present PAO is materially different. The PAO itself records that the principal amount of Rs.3.50 crore was repaid to V-Point IT Solutions Pvt. Ltd. together with interest at 18% per annum on 28.04.2021, while the balance amount of Rs.1.02 crore remained outstanding on account of freezing of the appellant’s bank accounts.

42. The aforesaid admission in the PAO assumes considerable significance. If the principal amount was admittedly advanced as a loan and a substantial part thereof was repaid together with contractual interest, the mere fact that a balance amount remained outstanding, cannot lead to the conclusion that the said balance constituted proceeds of crime without further material. A subsisting contractual liability and unpaid portion of a loan arising out of it does not, by itself, acquire the character of proceeds of crime.

43. The appellant cannot be held liable merely because other NBFCs, which allegedly entered into arrangements with fintech companies, were found involved in the alleged digital lending activities. It is more so when according to the respondent themselves, no Fintech company was involved in this case with the appellant. The allegation that the appellant had facilitated the generation, possession, use or projection of proceeds of crime also remains unsupported by any material demonstrating such activity. There is no material brought to our notice showing that the appellant was controlled by any unauthorised fintech company, permitted any such company to operate its lending business through the appellant’s licence, or knowingly participated in the alleged coercive recovery practices or misuse of borrowers’ personal data.

44. It is equally material that the PAO does not specifically identify the attached amount of Rs.1,18,30,435/- as representing proceeds of crime derived from any particular scheduled offence committed by the appellant. The attachment of an available bank balance, without establishing its identifiable nexus with the proceeds of crime, cannot be sustained merely because the account formed part of the financial trail examined during the investigation. The Adjudicating Authority, while confirming the PAO, was required to record a clear finding connecting the property of the appellant with the proceeds of crime and to examine whether the appellant had knowingly or unknowingly participated in any process connected with such proceeds. The impugned order, does not sufficiently deal with the appellant’s specific defence that it was independently operating “Paisa Finch”, and that no fintech company was involved in its lending activity, and that the appellant had not been charge-sheeted in the predicate offences.

45. In view of the aforesaid discussion, this Tribunal is of the considered view that the Enforcement Directorate has failed to establish the requisite nexus to hold that the property in the hands of appellant is the proceeds of crime. The subsequent filing of chargesheets, wherein neither the appellant nor its application “Paisa Finch” has been arraigned, coupled with the absence of material demonstrating the involvement of any fintech company in the appellant’s lending operations, constitutes a material circumstance which has not been appropriately appreciated by the Adjudicating Authority.

46. Accordingly, the impugned order dated 21.07.2023 passed by the Adjudicating Authority in OC No. 1902 of 2023, insofar as it confirms PAO No. 01/2023 dated 25.01.2023 against the appellant M/s Sarvottam Fincap Limited, cannot be sustained. The attachment of the available balance of Rs.1,18,30,435/- is accordingly set aside. Consequently, the present Appeal is allowed.