Mortgaging property with Bank for loan not money-laundering: High Court

Srinagar, Jan 8: The High Court of J&K and Ladakh has held that mortgaging the property with a Bank for securing the loan cannot be termed as money-laundering even as it quashed Enforcement Directorate’s complaint against two functionaries of a house building cooperative society.

“In order to constitute an offence of money-laundering as defined under Section 3 of the Prevention of Money Laundering Act, 2002, the most important thing is that there must be an activity connected with the proceeds of crime,” a bench of Justice Javed Iqbal Wani said.

The Court noted that in keeping with this definition, the proceeds of crime would mean any property derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.

The Court pointed out that in order to constitute an offence under Section 3 of PMLA, Section 2(1)(u) is to be read together with it to find out whether the ingredients of the offence of money-laundering are made out or not.

The Court said when read so, the offence of money-laundering could be said to have been committed by fulfillment of these conditions: Scheduled offence must have been committed; Commission of scheduled offence must have resulted in some proceeds of crime; Person accused of money-laundering must have indulged in an activity connected with such proceeds of crime.

“It needs to be mentioned here that the activity connected with the “proceeds of crime” attributed to an accused must be the voluntary act of the accused.”  The Court said this in the judgement it delivered in response to a related plea by Hilal Ahmad Mir and Abdul Hamid Hajam.

The contention of the two petitioners was that they have been working as Chairman and Secretary of a registered Co-operative Society, River Jehlum Co-operative House Building Society which had proposed to develop a satellite township at Shivpora, Srinagar on a big plot of land. The land, they said, was proposed to be purchased by the Society from its land owners for the development of the township.

Mir, one of the petitioners contended that he approached the Jammu and Kashmir State Co-operative Bank for grant of financial assistance by way of loan of Rs 300 crores in favour of the Society for enabling it to acquire the identified land from its owners and its subsequent development for establishment of the satellite township.

The petitioners said that the Bank after considering the financial viability of the project and financial interests of the Bank, agreed to finance the project to the extent of Rs. 250 crores and subsequently in the first instance, the Bank released an amount of Rs. 223 crores as loan and directly transferred the same in the accounts of 18 land owners against the land in question measuring 257 Kanal and 18 Marlas in estate Shivpora.

The land owners consequently executed an irrevocable power of attorney in favour of Mir in order to facilitate the transfer of the land in the name of the Society.

The petitioners said subsequently a “frivolous” investigation was initiated in the matter by the Anti Corruption Bureau(ACB) after registering a case (FIR No. 4/2020) for commission of offences punishable under Sections 120-B, 420, 467, 471 RPC read with Section 5(2) of J&K Prevention of Corruption Act. The crux of the allegations against the petitioners, Mir and  Hajam and other co-accused was that they had falsely claimed that the Society was a registered Society and succeeded in obtaining a loan of Rs 250 crores from the Bank on false premise.

It was also alleged that the loan had been sanctioned by the Bank illegally and fraudulently without following the Standard Operating Procedure, proper documentation, KYC norms and also without obtaining tangible security.

The further allegation was that the whole exercise had been undertaken by the petitioners at the behest and instance of the then Chairman of the Bank, Muhammad Shafi Dar, who sought scrapping of proceedings in a separate petition.

Meanwhile ACB filed chargesheet against the petitioners along with the other accused persons.

The Court noted that during the course of investigation, land in question as also the Bank accounts of 18 land owners, in whose accounts the loan amount had been directly transferred by the Bank were attached to prevent the land owners from withdrawing the said money.

The attachment of the Bank accounts of the land owners became subject matter of the litigation before the Apex Court that passed orders to facilitate the land owners the withdrawal of the money that was deposited in their accounts in lieu of the land having been perpetually leased out in favour of the Society, the court said. The Court observed that the alleged offence manifestly has not resulted in any “proceed of crime” in favour of the petitioners.

The Court held that it cannot be said that the petitioners have indulged in any activity connected with the “proceeds of crime” for unless there are “proceeds of crime”, there cannot be any activity about the “proceeds of crime”, in that, existence of “proceeds of crime” pursuant to the predicate offence is sine qua non for commission of offence of money-laundering, to be precise that if there is no money or property, a question of money-laundering would not arise.

The Court observed that admittedly no money was transferred to the accounts of the petitioners, therefore, there was no occasion for the petitioners to indulge in any activity associated with the so called “proceeds of crime”. The money that has been released out of the sanctioned loan, which is described as the “proceeds of crime” in the complaint, had admittedly been transferred directly into the accounts of the land owners and the petitioners had never been in possession or control of the said money, which is alleged to have been laundered, the court said. The Court pointed out that in order to constitute the offence of money-laundering, it is imperative that one should be first in possession of the “proceeds of crime” and then engage in an activity to project it as untainted property, which, it said, is missing in the instant case.

“In the instant case, proceeds of crime in favour of the petitioners would have arisen only had the petitioners developed the plots in the colony and sold them to earn profit in the process, in that, the profits would have been the proceeds of crime and any activity related to such profits may have resulted in money-laundering, which stage in the instant case has not reached.”

The Court concluded that none of the ingredients of the offence of money-laundering against the petitioners is found to be existing in the present case.

“...more so in view of the fact that an act of mortgaging the property with the Bank for securing the loan that is said to have been obtained fraudulently without following Banking rules and regulations cannot by any stretch of imagination be termed as money-laundering”.

“The act of the petitioners of having fraudulently secured loan for development and establishment of Satellite Township by submitting false documents, at the most makes out a case for forgery or Bank fraud,” the court said and quashed ED’s complaint against the petitioners before designated court.