Introduction:

In a significant ruling reinforcing the supremacy of secured creditors’ rights under the Prevention of Money Laundering Act (PMLA), the Karnataka High Court in Deputy Director, Directorate of Enforcement v. Asadullah Khan & Ors., Miscellaneous Second Appeal Nos. 78, 87, 88, and 89 of 2020, decided on October 2025, held that properties mortgaged to banks for the advancement of loans cannot be treated as “proceeds of crime” under the PMLA. The Division Bench comprising Justice D.K. Singh and Justice Venkatesh Naik T dismissed an appeal filed by the Enforcement Directorate (ED) challenging an order of the Appellate Tribunal that had quashed the Adjudicating Authority’s confirmation order of attachment of seven mortgaged properties. The Court clarified that the object of the PMLA is to attach assets derived from criminal activities, not to deprive banks of their rights to recover legitimate loans advanced from public funds. The case stemmed from a fraud at Syndicate Bank’s Mandya branch, where its manager, in collusion with certain borrowers including Asadullah Khan, sanctioned and disbursed loans fraudulently, causing a loss of over ₹12.63 crore to the bank. When the ED attached mortgaged properties as proceeds of crime, the Syndicate Bank, which was neither heard nor made a party before the Adjudicating Authority, objected that the properties were its secured assets obtained lawfully as collateral for genuine banking transactions. The High Court upheld the Tribunal’s decision and categorically ruled that the bank was a victim, not a conspirator, and its mortgaged assets could not be confiscated under the PMLA.

Arguments of the Appellant (Enforcement Directorate):

The Enforcement Directorate, represented by Advocate Madhukar M. Deshpande, contended that the attachment of the properties under Section 5 of the PMLA was legally valid since the assets were involved in money laundering activities arising out of fraudulent loan transactions committed by the accused in conspiracy with the then branch manager of Syndicate Bank. The ED submitted that the CBI had already registered a criminal case under Sections 120B, 409, 420, 467, and 471 of the IPC and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988. The proceeds generated from these offences were, therefore, “proceeds of crime” within the meaning of Section 2(u) of the PMLA. According to the ED, even if the properties were mortgaged to the Bank, they remained tainted assets because they were part of a fraudulent transaction arising from criminal conspiracy and cheating. The ED argued that the mortgage did not cleanse the property of its criminal taint, as the mortgage was itself part of the chain of transactions that constituted the offence. It was submitted that the Bank’s rights as a secured creditor could not supersede the State’s right to confiscate assets derived from criminal activity.

The ED also maintained that the Appellate Tribunal erred in setting aside the Adjudicating Authority’s confirmation order, as the Tribunal wrongly prioritized the Bank’s recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), over the PMLA’s preventive and confiscatory powers. The ED argued that the PMLA had an overriding effect under Section 71, which clearly states that the provisions of the PMLA shall prevail over any inconsistent law, including the SARFAESI Act. The Directorate thus contended that allowing the Bank to recover its loans from such properties would defeat the purpose of the PMLA, which seeks to deprive offenders of the benefits of criminal activities. The ED further argued that the timing of the offences—whether before or after 1 June 2009, when cheating and conspiracy were added to the PMLA Schedule—was immaterial because the wrongful gains and loss to the Bank had continued thereafter. The appellant also asserted that the Adjudicating Authority had the jurisdiction to attach and confirm such properties since they were used as instruments to conceal or project proceeds of crime. The ED urged the Court to reverse the Tribunal’s finding and restore the Adjudicating Authority’s confirmation order, emphasizing that national interest and anti-money laundering enforcement outweighed the Bank’s financial interests in this context.

Arguments of the Respondents (Accused and Syndicate Bank):

On the other hand, Advocate Bhargava D. Bhat appeared for the accused respondents, while Advocate C. Vinay Swamy represented Syndicate Bank, and they vehemently opposed the ED’s claims. The respondents argued that the properties mortgaged to the Bank could not be considered “proceeds of crime” under the definition in Section 2(u) of the PMLA because these assets were lawfully acquired by the borrowers long before the alleged offences took place. The loans advanced by Syndicate Bank were legitimate financial transactions, and the funds were drawn from the Bank’s public deposits—not from criminal sources. Therefore, the respondents contended that it was erroneous and unjust to treat such assets as tainted merely because of an internal fraud involving certain bank officials and borrowers.

The Syndicate Bank specifically argued that it was not made a party to the proceedings before the Adjudicating Authority and was not even issued a notice to present its case or establish its ownership and interest in the mortgaged assets. This procedural lapse, the Bank submitted, violated the mandatory requirement of Section 8(1) and 8(2) of the PMLA, which mandates that any person claiming an interest in attached properties must be given an opportunity of being heard. The Bank had independently initiated recovery proceedings under the SARFAESI Act as early as 2009—much before the ED’s provisional attachment order of 2012—by issuing a demand notice and taking physical possession of the mortgaged properties.

The Bank emphasized that as a secured creditor, it had first charge over the mortgaged properties and could not be deprived of its statutory right of recovery merely because the ED had attached those properties. It asserted that the object of the PMLA was to punish offenders and confiscate assets derived from money laundering, not to penalize innocent victims or financial institutions that had suffered losses due to fraud. The respondents also highlighted that the alleged offences were committed prior to 1 June 2009—the date when offences under Sections 120B and 420 IPC were included in the PMLA Schedule. Therefore, at the time of the alleged offence, the acts in question were not “scheduled offences,” and consequently, the PMLA could not be invoked retrospectively to attach the properties.

Further, the respondents argued that the loans disbursed by Syndicate Bank were sourced from public funds, representing the savings of millions of depositors. Describing such funds as tainted would have grave consequences for the banking system and undermine public trust. They maintained that the Bank was itself a victim of the conspiracy involving its employees and certain borrowers, and hence, subjecting it to the adverse consequences of attachment would be both legally unsound and morally unjust. The respondents thus urged the Court to uphold the Tribunal’s order and protect the Bank’s right to recover its dues under the SARFAESI Act.

Court’s Analysis and Judgement:

After carefully reviewing the records, submissions, and the orders passed by the Adjudicating Authority and the Appellate Tribunal, the Division Bench of the Karnataka High Court upheld the Tribunal’s reasoning and dismissed the Enforcement Directorate’s appeals. The Court observed that the Syndicate Bank had not been issued any notice or given an opportunity to be heard during the adjudication proceedings, despite being a secured creditor with a significant stake in the attached properties. This omission, the Bench held, was a serious procedural error that violated the fundamental principles of natural justice enshrined in Section 8 of the PMLA.

The Court further analyzed the definition of “proceeds of crime” under Section 2(u) and observed that the term refers to property derived or obtained directly or indirectly from criminal activity relating to a scheduled offence. The Bench emphasized that the mortgaged properties in question were neither derived from nor acquired using any criminal proceeds. Instead, they were lawfully acquired properties offered as collateral for genuine banking transactions. Thus, they could not be classified as “proceeds of crime.” The Court noted that it was the Syndicate Bank that suffered a loss of ₹12.63 crore due to the fraudulent acts of its employees and the borrowers, and hence, the Bank was a victim, not a beneficiary of the crime.

Importantly, the Court underscored that the offences allegedly committed by the accused took place before 1 June 2009, the date when Sections 120B and 420 IPC were added to the PMLA Schedule. Consequently, at the time of the offence, there was no scheduled offence under the PMLA, and therefore, the entire foundation for invoking the PMLA provisions collapsed. The Bench stated that retrospective application of the PMLA would be unconstitutional and impermissible.

The High Court also clarified that the loans advanced by the Bank were from public funds, and it was these funds that were secured by the mortgaged properties now under attachment. Therefore, the source of the funds could not be described as “tainted” or “illegal.” Rather, it was the Bank that had been defrauded by its officers and the borrowers. The Bench remarked, “It is the public money which was advanced by the Bank to the borrowers against the mortgaged properties, the subject matter of attachment. The Bank has been the victim of the crime committed by the Branch Manager and the borrowers. By attaching these properties, the Bank would not be able to recover its loans, and that cannot be the object of the PMLA.”

The Court further observed that the PMLA and SARFAESI Act operate in distinct domains—the former being a preventive and penal statute aimed at curbing money laundering, and the latter being a recovery mechanism to secure debts due to banks. The Bench stated that the Bank’s right as a secured creditor under the SARFAESI Act, especially when proceedings were initiated prior to the ED’s attachment, cannot be undermined or nullified by subsequent attachment orders. “The Bank is entitled to enforce its security interest by attaching the secured assets. The Bank’s right should not be nullified,” the Court held, stressing that allowing the ED to proceed in such situations would place banks in a precarious position and disrupt the entire debt recovery framework.

The Division Bench also found merit in the Appellate Tribunal’s findings that the Adjudicating Authority’s attachment order was contrary to the mandate of Sections 3 and 8(8) of the PMLA. Since the properties were not derived from criminal proceeds, there was no legal justification to prevent the Bank from recovering its legitimate dues. The High Court reiterated that Section 8(8) allows for restoration of property to claimants who suffered a genuine loss due to money laundering, provided their claim is legitimate. In this case, the Bank’s claim was not only legitimate but was also supported by statutory rights under the SARFAESI Act.

The Court also highlighted that the Adjudicating Authority failed to exercise due diligence by not issuing a notice to the Bank, even though it was aware that the properties were mortgaged for loans. This failure, according to the Court, rendered the entire attachment proceedings flawed. It held that the Appellate Tribunal rightly intervened to correct the error and protect the Bank’s interests.

In its concluding observations, the Bench stated that the PMLA cannot be used as an instrument to defeat lawful banking operations or jeopardize public funds. The objective of the Act is to target illicit gains and the laundering of criminal proceeds—not to attach properties securing genuine financial transactions. Therefore, the Bench dismissed the Enforcement Directorate’s appeals, upholding the Tribunal’s order setting aside the attachment of the seven mortgaged properties.