2025 (7) TMI 799 - AT - Money Laundering

Money Laundering - attachment of 20 immovable properties - running a Ponzi scheme - HELD THAT - The allegations against the appellant are as already stated of running a Ponzi scheme by attracting members of the public to advance money by promising overly attractive and unsustainable returns and subsequently defaulting in the payments shutting down the business and attempting to flee. By their very nature Ponzi schemes initially deliver the high rates of return promised to the investors. Such initial payouts are funded by the investments of new recruits and create the illusion of success and profitability. This persuades others to join the scheme. However eventually due to lack of intrinsic value in the business this model becomes unsustainable and inevitably collapses under its own weight. At this stage the promoters of the scheme typically attempt to abscond from the scene. The operations which were being managed and run by the appellant in the present case clearly appear to follow this classic pattern. Funds were initially collected by the appellant through the firm Anee Bullion Traders set up by him and subsequently through Eye Vision Credit Co-operative Society which was being run by individuals who were directly or indirectly employed by him in his group entities. The promised returns were delivered at first but subsequently the funds dried up. There are no merit in the argument that since the appellant was in jail at the relevant time there was no reason to believe under Section 5 that if the properties are not attached immediately such non-attachment of the property is likely to frustrate any proceeding under this Act. As pointed out by the respondents a person who is behind bars can always act through a power of attorney or otherwise through his accomplices. In the present case the facts on record show that the appellant had been running his operations with the help of a number of associates. It was not difficult for him to act through them in order to deal with the properties so as to frustrate the prosecution and confiscation proceedings. It is by now well settled that attachment of property under the PML Act of 2002 is an intermediate stage. It is a balancing arrangement to secure the interests of the person as also to ensure that the proceeds of crime remain available in order to be dealt with in the manner provided under the Act during the pendency of the trial. In other words it is meant to ensure that the property remains available for confiscation in case the criminal prosecution case against the appellant results in a conviction. Further attachment per se does not affect possession and use of property unless in a given case it becomes imperative for the Directorate to take possession of the property due to exceptional circumstances. There are no ground to interfere with the order of the Ld. Adjudicating Authority confirming the provisional attachment of the properties in question - Accordingly this appeal is hereby dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the attachment of immovable properties valued at Rs. 7,07,22,100/- under the Prevention of Money-Laundering Act, 2002 (PMLA) was justified in the present case.

- Whether the appellant's activities constituted a 'scheduled offence' under the PMLA, specifically relating to running a Ponzi scheme attracting criminal liability.

- Whether the appellant had knowledge of the proceeds of crime and was involved in the concealment, possession, acquisition or use of such proceeds as required under Section 3 of PMLA.

- Whether the properties attached were 'proceeds of crime' within the meaning of Section 2(u) of the PMLA.

- Whether the default in payment of returns to investors was a civil matter or a criminal offence warranting attachment of properties under PMLA.

- Whether the appellant discharged the burden of proof under Sections 8 and 24 of the PMLA to demonstrate that the attached properties were acquired from legitimate sources.

- Whether the 'reason to believe' standard for provisional attachment under Section 5 of PMLA was met, especially considering that the appellant was in custody at the time of investigation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Attachment of Properties under PMLA

The legal framework under the PMLA allows for provisional attachment of properties suspected to be proceeds of crime to prevent their alienation or disposal. Section 5 of PMLA requires a 'reason to believe' by the Deputy Director that such attachment is necessary to prevent frustration of proceedings.

The Court observed that the appellant was allegedly running a Ponzi scheme, collecting funds from investors under various schemes promising high returns, and subsequently defaulting on payments. The ED's investigation revealed diversion of investor funds into group companies and acquisition of immovable properties. The appellant failed to provide documentary evidence to rebut these findings or to prove legitimate sources for the properties.

The appellant's contention that the default was due to unforeseen business difficulties during the COVID-19 pandemic was considered but found insufficient to negate the prima facie case of proceeds of crime. The Court noted that even though the appellant was in custody, he could have acted through associates to dispose of properties, justifying the attachment.

The Court applied the provisions of Sections 5, 8, and 24 of PMLA, holding that the burden was on the appellant to prove legitimate acquisition, which was not discharged. Thus, the attachment was justified.

Issue 2: Whether the Offences Constituted Scheduled Offences under PMLA

The FIRs registered against the appellant included offences under Sections 419 (cheating), 420 (cheating and dishonestly inducing delivery of property), 467 (forgery of valuable security), and 471 (using forged documents) of the IPC, which are scheduled offences under the PMLA.

The Court found that the appellant's scheme followed the classic Ponzi pattern, initially paying returns to attract more investors and later defaulting and fleeing. The multiple FIRs and charge sheets filed underscored the criminal nature of the conduct, supporting the scheduled offence classification and the consequent applicability of PMLA.

Issue 3: Knowledge of Proceeds of Crime by the Appellant

Section 3 of PMLA requires knowledge of the proceeds of crime for establishing money laundering. The appellant argued that there was no proof of such knowledge, and that the funds were personal loans repaid with interest.

The Court found no credible evidence supporting the claim that the funds were personal loans. No loan agreements were produced, and the appellant failed to prove transparency or disclosure of the business model to investors. The pattern of diversion of funds and the closure of offices to avoid repayments indicated knowledge and intent to conceal proceeds of crime.

Issue 4: Whether the Attached Properties Were Proceeds of Crime

Section 2(u) of PMLA defines proceeds of crime as any property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence.

The appellant contended that the properties were not derived from criminal activity and that the term "or the value of any such property" should be read with ejusdem generis, requiring direct nexus with the scheduled offence.

The Court rejected this narrow interpretation, holding that the properties were acquired through funds collected from investors via fraudulent schemes, constituting proceeds of crime. The failure to produce legitimate source documents and the pattern of diversion supported this conclusion.

Issue 5: Civil vs. Criminal Nature of the Default

The appellant argued that the matter was purely civil, relating to non-payment of loans or returns, and not criminal.

The Court noted that the existence of 33 FIRs and charge sheets for offences involving cheating and forgery established criminality. The non-payment formed part of a fraudulent scheme amounting to criminal breach of trust and cheating, thus falling within the ambit of PMLA.

Issue 6: Burden of Proof on the Appellant

Under Sections 8 and 24 of PMLA, once the attachment is made, the burden shifts to the accused to prove legitimate acquisition of the attached properties.

The appellant failed to provide any documentary evidence or credible explanation for acquisition of the properties. The Court held that this failure justified confirmation of the provisional attachment.

Issue 7: Reason to Believe for Provisional Attachment Despite Custody

The appellant argued that since he was in jail at the time of investigation, there was no risk of disposal of properties.

The Court disagreed, reasoning that the appellant could act through power of attorney or associates to alienate properties. The presence of multiple associates and the modus operandi of the scheme supported the 'reason to believe' standard for attachment.

3. SIGNIFICANT HOLDINGS

"By their very nature, Ponzi schemes initially deliver the high rates of return promised to the investors. Such initial payouts are funded by the investments of new recruits and create the illusion of success and profitability. This persuades others to join the scheme. However, eventually, due to lack of intrinsic value in the business, this model becomes unsustainable and inevitably collapses under its own weight."

"Under provisions of Section 8 and Section 24 the burden of proof was squarely upon the appellant to show that the properties were acquired out of legitimate sources and did not constitute proceeds of crime. The appellant has clearly failed to discharge that burden."

"A person who is behind bars can always act through a power of attorney or otherwise through his accomplices. In the present case the facts on record show that the appellant had been running his operations with the help of a number of associates. It was not difficult for him to act through them in order to deal with the properties so as to frustrate the prosecution and confiscation proceedings."

"Attachment of property under the PML Act of 2002 is an intermediate stage. It is a balancing arrangement to secure the interests of the person as also to ensure that the proceeds of crime remain available in order to be dealt with in the manner provided under the Act during the pendency of the trial."

Final determinations:

- The attachment of the 20 immovable properties valued at Rs. 7,07,22,100/- was justified and rightly confirmed by the Adjudicating Authority.

- The appellant's activities constituted scheduled offences under the PMLA.

- The appellant had knowledge of the proceeds of crime and was involved in their concealment and use.

- The properties attached were proceeds of crime, acquired through diversion of investor funds.

- The default in payment was criminal in nature, not merely civil.

- The appellant failed to discharge the burden of proof to establish legitimate acquisition.

- The 'reason to believe' standard for attachment was satisfied despite the appellant's custody.