Money Laundering : Properties mortgaged to a bank cannot be classified as proceeds of crime

Karnataka High Court Upholds Tribunal's Decision: Properties Mortgaged to Banks Not Proceeds of Crime Under PMLA. High Court affirms that banks as victims cannot have their mortgaged properties attached under the Prevention of Money Laundering Act, 2002, enhancing bank rights under the SARFAESI Act.

Bengaluru, October 17, 2025 - The Karnataka High Court has delivered a significant judgment reinforcing the rights of banks in cases involving fraudulent activities by bank officials and borrowers. The court has upheld the Appellate Tribunal's order that properties mortgaged to banks cannot be classified as proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA) when the bank itself is a victim of the alleged fraud and conspiracy.

The case, Deputy Director, Directorate of Enforcement v. Sri Asadhullah Khan and others, involved allegations of fraudulent transactions against Sri Asadhullah Khan and certain officials of Syndicate Bank's Mandya branch. The allegations included collusion in the disbursal of loans and overdrafts, resulting in substantial financial losses to the bank.

The Enforcement Directorate had attached properties mortgaged to Syndicate Bank, claiming them as proceeds of crime. However, the Appellate Tribunal had set aside the attachment order, a decision now upheld by the Karnataka High Court. The High Court, in its ruling, emphasized that properties mortgaged to a bank for loans cannot be deemed proceeds of crime if the bank is the victim of the conspiracy.

The court pointed out that the properties in question were mortgaged as security for loans given by the bank, which had already initiated recovery proceedings under the SARFAESI Act. The High Court underscored that failing to notify Syndicate Bank violated statutory provisions under the PMLA, rendering the attachment order invalid.

"The public money advanced by the bank against mortgaged properties cannot be attached under PMLA when the bank is the victim of the alleged conspiracy and fraud," the court stated. The judgment further noted that the bank's rights to enforce its security interest should not be nullified by attachment orders, as it would impede the bank's ability to recover its dues.

This judgment highlights the importance of distinguishing between proceeds of crime and properties used as collateral in financial transactions. It affirms the bank's position as a secured creditor and its entitlement to recover loans through the enforcement of security interests, reinforcing the bank's rights under the SARFAESI Act.

The Karnataka High Court's decision serves as a precedent in protecting the interests of financial institutions in cases of fraud and conspiracy, emphasizing the need for adherence to statutory processes and the protection of secured creditors' rights.

Bottom Line:

Properties mortgaged to a bank cannot be classified as proceeds of crime under the Prevention of Money Laundering Act, 2002, when the bank itself is the victim of the alleged conspiracy and fraud.

Statutory provision(s): Prevention of Money Laundering Act, 2002 Sections 2(u), 8(4), 8(1) proviso, 8(2) proviso; Indian Penal Code Sections 120B, 409, 420, 467, 471; Prevention of Corruption Act, 1988 Section 13(2), 13(1)(d).

Deputy Director, Directorate of Enforcement v. Sri Asadhullah Khan, (Karnataka)(DB) : Law Finder Doc Id # 2796619