Case Law Details
Razorpay Software Private Limited Vs Union of India (Karnataka High Court)
In the case of Razorpay Software Private Limited vs Union of India, the Karnataka High Court examined whether the accused, a payment gateway, could be held liable under the Prevention of Money Laundering Act, 2002 (PMLA), for allegedly facilitating illegal money lending activities without knowingly participating in criminal activity or having the intent to launder money. Here’s a summary of the judgment:
Background: The accused, Razorpay Software Private Limited, was alleged to have facilitated illegal money lending activities by allowing transactions in the name of another accused entity without proper due diligence.
Allegations: The complaint filed by the respondent alleged that the accused payment gateway facilitated transactions for an entity involved in illegal money lending, leading to harassment of borrowers and misuse of data.
Legal Arguments:
- The defense argued that the accused payment gateway had no knowledge of the funds’ criminal origin or intent to launder money.
- They contended that mere negligence in setting up merchant IDs without intent to commit an offense under the PMLA cannot constitute an offense.
- The defense also argued that the burden of proving innocence shifts to the accused only after the prosecution establishes the primary burden of guilt.
Court’s Analysis:
- The court examined relevant provisions of the PMLA and legal precedents regarding money laundering offenses.
- It emphasized that to constitute an offense under Section 3 of the PMLA, intent is essential, and the accused must knowingly participate in concealing or utilizing proceeds of a crime.
- The court scrutinized the evidence provided by both parties, including statements from witnesses and employees of the accused payment gateway.
Decision:
- The court found that there was no evidence to suggest that the accused payment gateway knowingly facilitated the transfer of proceeds of crime or had the intent to commit an offense under the PMLA.
- It concluded that the allegations against the accused did not satisfy the essential elements required to constitute offenses under the PMLA.
- Consequently, the court quashed the proceedings against the accused payment gateway, ruling that the continuation of criminal proceedings would amount to an abuse of the legal process.
Order: The petition filed by Razorpay Software Private Limited was allowed, and the proceedings against them were quashed.
This judgment highlights the importance of proving intent and knowledge in cases involving allegations of money laundering under the PMLA. Despite negligence in due diligence, the court ruled that mere negligence without intent does not constitute an offense under the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The cognizance taken of the offences punishable under Sections 3, 70 and 4 of Prevention of Money Laundering Act, 2002, and the issuance of summons is impugned in this petition by the petitioner – accused No.7.
2. The summary of the complaint filed by the respondent before the learned Sessions Judge is as follows:
3. The FIRs were registered by the jurisdictional police for the offences punishable under Sections 419, 385, 384, 509, 420 of IPC and Sections 66, 66(c), 66(d) and 67 of the Information Technology Act, stating that, the accused therein were involved in money lending through mobile phone applications on exorbitant rate of interest, and when the borrowers failed to the repay the loan amount in time, and in some cases, even after the repayment of the loan, the accused therein have been harassing the borrowers to extort money from them, and had also stolen the data from the mobile phones of the victims, and misused the same. The accused therein had also created Whatsapp groups to harass the victims, and abused them etc.
4. As the offences under Sections 384, 385, 419, 420 IPC are scheduled offences under the PMLA Act, the case was referred to the respondent herein. The respondent conducted an investigation, and submitted the complaint arraigning the petitioner as accused No.7.
5. In the complaint, it is stated that the accused No.7 is a payment gateway, and they were negligent in allowing the transactions in the name of the accused No.5 without due diligence, and the said allegation is substantiated by the statement of the employee of the accused No.7.
6. The learned Sessions Judge, after perusing the materials on record, took cognizance of the aforesaid offences and issued summons.
7. Sri C V Nagesh and Sri Sandesh J Chouta, the learned Senior Counsel representing the petitioner’s counsel, Sri Abhishek Kumar, presented the following arguments:
a) The allegation against the accused No.7 is that without verification of the credibility of an entity viz., M/s. Jamnadas Morarji Finance Pvt. Ltd., (accused No.5), allowed the transactions in the name of the accused No.5 without due diligence. Therefore, in the absence of any allegation or material that the petitioner was actually involved in the concealment of the proceeds of the crime or knowingly assisted in such concealment of the proceeds of the crime, which must have arisen from the predicate offence, and in the absence of any predicate offence against the petitioner, the cognizance taken of the offences alleged against the petitioner is without any substance.
b) The onus of proof of innocence gets shifted on the petitioner only in the event of the prosecution discharging its primary burden of establishing that the petitioner has committed an offence under the 2002 Act. The respondent having not established the guilt of the petitioner, the presumption of the guilt of the petitioner cannot be inferred under Sections 22 and 24 of the Act, 2002. In support, reliance is placed on the decision of the Hon’ble Supreme Court in the case of Balvir Singh –vs-State of Uttrakhand – 2023 SCC OnLine SC 1261.
c) The petitioner-accused No.7 is the Company incorporated under the Companies Act, and having its registered office at New Delhi, and not residing within the territorial jurisdiction of the Trial Court. Therefore, the enquiry under Section 202 of Cr.PC is sine qua non for issuance of summons under Section 204 of Cr.PC. The Trial Court without conducting an enquiry has issued summons, and the same stands vitiated for noncompliance of mandatory provision contained in Section 202 of Cr.PC. In support, reliance is placed on the decision of the Hon’ble Supreme Court in the case of M/s. Cheminova India Pvt. Ltd. And another –vs- State of Punjab (Crl. A No.749/2021).
8. Per contra, Sri Aravind Kamath, the learned Additional Solicitor General representing Sri Madhukar Deshpande, learned counsel for the respondent presented the following arguments:
a) Section 202 of Cr.PC would not stand attracted to the complaint filed under Section 44 of the Act, 2002, as Section 44(1)(b)(d) of the Act, 2002 confers jurisdiction on the Special Court to take cognizance notwithstanding anything contained in the Criminal Procedure Code. Even otherwise, without conceding that, Section 202 is applicable, the complaint was filed by the public servant in discharge of his duties, and there is no requirement for the Special Court to examine the respondent or any witnesses before taking cognizance. In support, reliance is placed on the decision of the Hon’ble Supreme Court in the case of M/s. Cheminova India Pvt. Ltd. And another –vs-State of Punjab (Crl. A No.749/2021).
b) It is not a condition precedent that the investigation for a predicate offence should be completed, and a charge sheet to be filed for launching prosecution under the provisions of the Act, 2002.
c) The petitioner, who claims to be an intermediary, can claim immunity for the offence under the IT Act as stated under Section 79 of the IT Act, and cannot claim immunity for the offences committed under the Act, 2002.
d) Though, the petitioner is not accused of the predicate offences, the offence under Section 3 of the Act, 2002 is a standalone offence, and the material on record clearly establishes the involvement of the petitioner in commission of offence under this Act, 2002. In support, reliance is placed on the decision of the Hon’ble Supreme Court in the case of Vijay Madanlal Choudhary – vs- Union of India – 2022 SCC OnLine SC 929 (para-295).
e) The contention of the petitioner that the knowledge of proceeds of crime is not established against it, and therefore, launching of prosecution under the PMLA Act is impermissible lacks substance. The possession of proceeds of crime being key to the offence of money laundering, and the petitioner, who was in possession of proceeds of the crime, is required to rebut the presumption under Section 24 of the Act, 2002.
f) The prosecution for an offence of money laundering against the company is maintainable without prosecuting the director or any person in charge of the day to day affairs of the company as stated in Explanation-2 to Section 70 of the 2002, Act.
9. After carefully considering the arguments presented by the learned counsel for the parties, the key point for deliberation are as follows:
i) Is it permissible to take cognizance and issue summons without conducting an enquiry as prescribed under Section 202 of Cr.PC?
ii) Can the petitioner, who is not charged with the predicate offence, still be prosecuted for the offence under the PMLA Act?
iii) Does the investigation under the PMLA Act provide sufficient evidence to establish that the petitioner – accused No.7 has prima facie committed the offence alleged?
10. Before delving into the matter at hand, it is pertinent to cite the relevant provisions of PMLA Act and Cr.PC and the legal principle established by the Courts of law with reference to the said provisions.
11. Section 3 of the PMLA Act deals with the money laundering, and it states that whoever directly or indirectly attempts to indulge or knowingly assist or knowingly is a party or is actually involved in any process or activity connected it as untainted property shall be guilty of money laundering.
12. Section 4 of the PMLA Act deals with the punishment of money laundering.
13. Section 22 of the PMLA Act discusses presumption regarding records or property in certain cases, asserting if any properties for records or discovered in the possession or control of an individual during a survey or search, it is presumed such records or properties belong to that person, and the contents therein are deemed value.
14. Section 24 of the PMLA Act discusses the burden of proof, indicating that if an individual is charged with the offence of money laundering under Section 3, it is presumed that the person is involved in money laundering unless proven otherwise.
15. Section 44 of the PMLA Act addresses offence triable by Special Courts, stating that notwithstanding anything contained in the Code of Criminal Procedure, a Special Court under sub-Section 1(b) can take cognizance of offence under Section 3 without the accused being committed to it for trial.
16. Section 70 of the 2002 Act deals with offence by company and Explanation 2 to the said provision clarifies that a company can be prosecuted irrespective of whether the prosecution or conviction of any juridical person if contingent upon the prosecution or conviction of any individual.
17. Section 202 of Cr.PC pertains to the postponement of issuance of process, mandating that the Magistrate shall postpone the issuance of process against an accused, who is residing beyond his jurisdiction, and shall enquire himself or direct the investigation for the purpose of residing whether or not, there is sufficient ground for proceeding.
18. In the case of Pavana Dibbur –vs- The Directorate of Enforcement in Crl. A No.2779/2023 (DD 29.11.2023), the Hon’ble Supreme Court interpreted Section 3 of the Act, 2002 establishing that the offence under Section 3 can occur subsequent to the commission of a schedule offence. It was elucidated that an individual, regardless of his connection to the scheduled offence, is deemed guilty under Section 3, if he is knowingly assisting in concealing the proceeds of the crime or facilitating the use of proceeds.
19. In the case of T.D. Sonia –vs- Deputy Director – 2022 SCC OnLine Mad 8182, the Hon’ble Supreme Court ruled that even if the accused was not directly engaged in criminal activity responsible for generating the proceeds of the crime, his involvement in any capacity with the proceeds of such crime renders him liable under Section 3.
20. The Hon’ble Supreme Court in the case of Vijay Madanlal Choudhary –vs- Union of India – 2022 SCC OnLine SC 929 at paras-251, 295 has held as follows:
“251. The “proceeds of crime” being the core of the ingredients constituting the offence of money-laundering, that expression needs to be construed strictly. In that, all properties recovered or attached by the investigating agency in connection with the criminal activity relating to a scheduled offence under the general law cannot be regarded as proceeds of crime. There may be cases where the property involved in the commission of scheduled offence attached by the investigating agency dealing with that offence, cannot be wholly or partly regarded as proceeds of crime within the meaning of Section 2(1)(u) of the 2002 Act — so long as the whole or some portion of the property has been derived or obtained by any person “as a result of” criminal activity relating to the stated scheduled offence. To be proceeds of crime, therefore, the property must be derived or obtained, directly or indirectly, “as a result of” criminal activity relating to a scheduled offence. To put it differently, the vehicle used in commission of scheduled offence may be attached as property in the concerned case (crime), it may still not be proceeds of crime within the meaning of Section 2(1)(u) of the 2002 Act. Similarly, possession of unaccounted property acquired by legal means may be actionable for tax violation and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence and such offence is included in the Schedule of the 2002 Act. For being regarded as proceeds of crime, the property associated with the scheduled offence must have been derived or obtained by a person “as a result of” criminal activity relating to the concerned scheduled offence. This distinction must be borne in mind while reckoning any property referred to in the scheduled offence as proceeds of crime for the purpose of the 2002 Act. Dealing with proceeds of crime by way of any process or activity constitutes offence of money-laundering under Section 3 of the Act.
295. As aforesaid, in this backdrop the amendment Act 2 of 2013 came into being. Considering the purport of the amended provisions and the experience of implementing/enforcement agencies, further changes became necessary to strengthen the mechanism regarding prevention of money-laundering. It is not right in assuming that the attachment of property (provisional) under the second proviso, as amended, has no link with the scheduled offence. Inasmuch as Section 5(1) envisages that such an action can be initiated only on the basis of material in possession of the authorised officer indicative of any person being in possession of proceeds of crime. The precondition for being proceeds of crime is that the property has been derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. The sweep of Section 5(1) is not limited to the accused named in the criminal activity relating to a scheduled offence. It would apply to any person (not necessarily being accused in the scheduled offence), if he is involved in any process or activity connected with the proceeds of crime. Such a person besides facing the consequence of provisional attachment order, may end up in being named as accused in the complaint to be filed by the authorised officer concerning offence under Section 3 of the 2002 Act.”
21. In the case of Balvir Singh (supra), the Apex Court with reference Section 106 of the Evidence Act has ruled that Section 101 with its illustration (a) lays down the general rule that in a criminal case, the burden of proof is on the prosecution and Section 106 is certainly not intended to relieve it of that duty. On the contrary, it is designed to meet certain exceptional cases in which it would be impossible or at any rate, disproportionately difficult for the prosecution to establish the facts, which are especially within the knowledge of the accused, and which he can prove without difficulty or inconvenience.
22. The coordinate Bench of this Court in the case of Kunal Bahl, Chief Executive Officer and Director of Jasper Infotech Private Limited and another –vs- State of Karnataka, represented by Drugs Inspector (Intelligence)-2 Regional – 2021 SCC OnLine Karnataka 15706 determined that if an accused maintain an office, branch office, corporate office, sales office or similar establishment within the jurisdiction of the Magistrate where the offence was committed or continues to be committed, there is no necessity of conducting an enquiry under Section 202 of Cr.PC. However, it is imperative for the Magistrate to record in the order the rationale behind not conducting an enquiry under Section 202 of Cr.PC.
23. The High Court of Gujarat in the case of Santhosh Nayak –vs- Deputy Director (Crl.RP No.1175 – 1177 of 2017 (DD 23.2.2018) at para-26 has held as follows:
“26. Therefore, in absence of prima facie and sufficient evidence as discussed by the Hon’ble Supreme Court in above para, it cannot be said that there is sufficient material before the Trial Court/Special Court to proceed further against anyone/everyone who is even remotely connected with prime accused for Scheduled offence under the Act. For the sake of argument, the assumption can be made that if section is read in the way in which the respondents have acted in filing complaint against numbers of persons, it seems that probably all the counsel who are appearing for prime accused who have committed Schedule offences or any other accused in such connected cases may also be terms as a co-accused because they would certainly receive legal fees from such accused who would have paid it from some money which is alleged to be the money transacted for illegal purpose by illegal means since that is the basic ingredient of PMLA. In that case, probably wherever such accused spent some money which may be for petrol, grocery, clothes, traveling and transportation etc., basically every money spent by such accused is to be termed as tainted money and everyone has to prove that they have not used such tainted money for any illegal act. However, it can certainly be argued by respondents that if such accused travel by the help of the tainted money so as to continue the offence and commit the offence then, such traveler helps the accused in doing his illegal activity. Though this may be an extreme example and not possible to be considered as such, the fact remains that the provisions of the Act and its interpretation of the respondent certainly lead to the such situation, which is described herein in above as an illustration.”
24. The Hon’ble Supreme Court in the case of Cheminova India Ltd. (supra) ruled that the Magistrate, while taking cognizance, need not record the statement of such a public servant who has filed a complaint in discharge of official duty.
25. In the backdrop of the aforesaid provisions, and the ratio enunciated by the Hon’ble Supreme Court, the points raised for consideration requires examination:
26. Re: Point No.(i):
Upon examination of Clause (b) to Sub-Section 1 of Section 44, it is evident that the Special Court, irrespective of the provisions in the Code of Criminal Procedure, possesses the authority to take cognizance of an offence under Section 3 without being committed to trial. In the present case, the complaint was lodged by the respondent, an authorized Officer, and the Special Court can take cognizance without resorting Section 202 of Cr.PC, thus, the argument presented by the learned Senior Counsel for the petitioner, asserting that the issuance of summons violated Section 202 of Cr.PC is untenable.
27. Reg. Point No.(ii):
What is apparent from reading of Section 3, and the legal precedent established by the Court of Law with reference to the said provision is as follows:
i) An individual, even if not directly involved in the criminal activity that generated the proceeds of the crime, can face prosecution for the offence under Section 3, and be punished under Section 4, if he knowingly participates in concealing or utilizing the proceeds of the crime.
ii) In case under the PMLA, an accused need not necessarily be implicated in the scheduled offence, he can still be prosecuted under the PMLA as long as the scheduled offence exists.
28. In the present case, the scheduled offences are under investigation by the jurisdictional police. Therefore, the petitioner can be subjected to prosecution under the PMLA, if it can be established that the petitioner has prima facie committed an offence under Section 3 of the PMLA.
29. Reg. Point No.(iii):
As per complainant/respondent, the investigation under the PMLA revealed thus:
i) The recovery agents of Barynax and Mad Elephant used the symbols/logo/seals of High Court of Delhi and police department to prepare fake legal notices, and sent them over on Whatsapp to intimidate, and threatened the complainant/customers. Therefore, there is a prima facie evidence against two companies on various counts hacking, violation of privacy, extortion, threatening, forging of documents etc.
ii) The accused No.5 – M/s. Jamnalal Morarji Finance Pvt. Ltd. is a non-banking financial company, and the money was laundered through the account of the accused No.5, and the proceeds of the crime were found to be lying in the account of accused No.5, which are the recovered loans and the subject matter of the investigation of the schedule offences by the jurisdictional police.
iii) The petitioner – accused No.7 which is a payment gateway created merchant ID in the name of accused NO.5 without carrying out proper due diligence. While opening the account, it did not verify the genuineness of the persons applying for the accounts, and also did not verify whether the persons are linked to accused No.7 or not, and whether they are the authorized signatory of the accused No.5 or not. Despite failing the penny test and providing forged cheques by the unauthorized persons, the accused No.7 continued operations in these merchant IDs. This fact has been admitted by Sri Amitabh Tiwari in his statement given under PMLA, 2002. Thus, the accused No.7 has knowingly assisted the unauthorized person in creating the merchant IDs. and collecting and disbursing money to these merchant IDs. An amount of Rs.86,44,049/- was earned by the accused No.7 from the merchant IDs. created in the name of the accused No.5. Therefore, the commissions earned by the accused No.7 by facilitating illegal business of money lending of the accused No.5 is nothing but proceeds of crime.
iv) The witness viz., Lalith Mohan Tayal, Director of the accused No.5 has stated that the accused No.5 has not entered into any agreement with the accused No.7, and there are no one in the name of Vikram Tanuj Singh, and Rahul Chandar associated with the company, and the accused No.5 has not opened any account with any Bank or payment gateway.
v) The witness Sri Arpit Chuj, Chief Financial Officer of the accused No.7, who is named as one of the witnesses, has stated that the role of accused No.7 is to act as payment aggregator allowing merchants to accept payments without having direct integration with the Bank/payment gateway.
vi) Sri Amitabh Tiwari, Chief Innovation Officer in accused No.7, who is named as one of the witness, has stated as follows:
“As stated in response to the previous question, details of the company are validated through the MCA database or through documents collected from the applicant. In case of Jamnadas Morarjee, apart from a copy of NBFC certificate, PAN of the company (which is not available on MCA) and their bank account details were also provided by the three individuals. They also provided their Aadhaar card copies. Using the bank account details provided by them, a penny test was successfully completed before activating the account. This validated that the account belonged to Jamnadas Morarjee. I am providing a detailed note on boarding process of Jamnada Morarjee Finance Private Limited under my signature.”
30. The essential elements to constitute an offence under Section 3 of the Act are as follows:
a) Proceeds of crime: Involvement with the property derived from criminal activity.
b) Directly or indirectly engaging: Participation in concealing, transferring or removing the proceeds of the crime.
c) Knowledge or reason to believe: The accused must have knowledge or reason to believe that the property involved is derived from a criminal activity related to a scheduled offence.
d) Criminal activity: The offence under Section 3 of the PMLA is linked to the scheduled offences listed in the act.
e) Intent: There should be intention on the part of the accused to project the proceeds of the crime as untainted money.
31. These elements form a basis to prosecute a person under Section 3 of the PMLA.
32. The allegations which is the basis for prosecuting the petitioner – accused No.7 is as follows:
i) The role of the accused No.7 is to act as payment aggregator allowing merchants to accept payment without having direct integration with the bank/payment gateway.
ii) Merchant ID was created in the name of accused No.5 without proper due diligence by verifying the genuineness of the person applying for the account, and also whether they are authorized signatory of accused No.5. Despite failing any penny test, and on the basis of forged cheque provided by the unauthorized person, knowingly assisted the unauthorized person in creating the merchant IDs, and collecting and disbursing the money to these merchant IDs, which is admitted by Sri Amitabh Tiwari, an employee of accused No.7.
33. Sri Lalith Mohan Tayal, Director of accused No.5 stated that the accused No.5 has not entered into any agreement with accused No.7, and the said three persons who created the merchant IDs are not associated with the company, and the accused No.5 has not opened any account with any Bank or payment created.
24. Sri Amitabh Tiwari, Chief Innovation Officer in accused No.7 – company, is named as witness, and he has stated as under:
i) A copy of NBFC certificate, PAN of the company i.e. accused No.5 and its bank account details were provided by three individuals, and also provided their copies of the Aadhar Cards. Using the details of the bank accounts provided, a penny test was successfully completed before activating their account in the name of accused No.5.
ii) The three signatories of whom Adhaar Cards were given were not directors/promoters of the said entity or authorized signatories. Checking their names against the MCA data basis would have established this. However, this step may have been missed by the agent working onboarding this merchant as two documents pertaining to the merchants were already provided with the application and the penny testing was also successful.
35. That on 26.7.2020, the merchant settlement account was changed at the merchant’s request. The penny test failed for this updated account. As per the standard process, whenever the penny test fails, the canceled cheque/bank statement of the proposed settlement account needs to be provided by the merchant. In this case, the canceled cheque provided by the merchant was a forged one, and the agent is unable to detect the same.
36. The details of proceeds of crime attached vide provisional order dated 11.5.2021 issued by the Deputy Director, Directorate of Enforcement detailed in the complaint indicated that moveable’s/commission earned by other Banks/payment gateway i.e. ICICI Bank, RBL Bank, IDFC First Bank, Paytm, who admittedly facilitated transactions for the other accused entity i.e. accused Nos.1 to 4 and 6 have not been arraigned as accused in the complaint and neither the commission earned by them for facilitating such transactions have been attached as proceeds of crime by the respondent, which suggests that the petitioner has been single doubt for selecting targeting.
37. There is no evidence to suggest that the petitioner, who is a payment gateway, had knowledge that the funds transferred to the merchant IDs of accused No.5 were derived from criminal activity related to a scheduled offence, nor did they knowingly assist accused No.5 in concealing or transferring illicit proceeds as clean money. Even if we accept the statements from the Director of accused No.5 and the employee of accused No.7, at most, it indicates that accused No.7 was negligent in setting up the merchant IDs in the name of accused No.5. Intent is essential to constitute an offense under Section 3 of the PMLA. Therefore, the commission amount earned by accused No.7 cannot be deemed a result of facilitating the illegal money lending business of accused No.5, as there is no evidence to establish that accused No.7 had the intention to commit the crime under Section 3 of the PMLA.
38. When there is no prima facie material to substantiate that the Accused No.7 knowingly facilitated the transfer of proceeds of the crime, no presumption can be drawn that the Petitioner was involved in money laundering as stated under Section 24 , and the burden is on Petitioner to prove otherwise.
38. The aforesaid discussion clearly establishes that the complaint averments does not apparently satisfy the essential elements to constitute the offences alleged against the Petitioner, and , therefore the continuation of the criminal proceedings will be an abuse of the process of the law. Accordingly, I pass the following:
ORDER
i. The petition is allowed.
ii. The impugned proceedings in Spl. CC No.623/2023 (arising out of ECIR/BGZO/03/2021) on the file of the 21st Addl. City Civil and Sessions Judge and Principal Civil Court for CBI Cases initiated by the respondent – Directorate of Enforcement insofar it relates to petitioner – accused No.7 is hereby quashed.
Author Bio
