'No Intention': Karnataka HC Quashes PMLA Case Against Payment Gateway App Over Commission Earned From Illegal Business Of Another Entity

The Karnataka High Court has quashed the offences of Money laundering initiated against payment gateway company Razorpay, accused of being negligent in setting up the merchant IDs in the name of a co-accused who was involved in illegal money lending business.

A single judge bench of Justice Hemant Chandangoudar allowed the petition filed by the company and quashed the proceedings initiated by the Enforcement Directorate under Sections 3, 70 and 4 of Prevention of Money Laundering Act, 2002 and the summons issued against it by the Special court.

The bench said, “The commission amount earned by accused No.7 (Razorpay/petitioner) cannot be deemed a result of facilitating the illegal money lending business of accused No.5 (M/s.Jamnadas Morarji Finance Pvt. Ltd.), as there is no evidence to establish that accused No.7 had the intention to commit the crime under Section 3 of the PMLA.”

The co-accused was booked under various provisions of the IPC and Information Technology Act for alleged involvement in money lending through mobile phone applications on exorbitant rate of interest. It was alleged that when the borrowers failed to the repay the loan amount in time, and in some cases, even after the repayment of the loan, the co-accused were 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.

As the offences under Sections 384, 385, 419, 420 IPC are scheduled offences under the PMLA Act, the case was referred to ED. After investigation the central agency submitted the complaint arraigning Razorpay as accused No.7.

Razorpay argued that the allegation against it is that it allowed the transactions in the name of M/s.Jamnadas Morarji Finance Pvt. Ltd. (accused No.5) without verification of the credibility. It submitted that in the absence of any allegation or material that Razorpay was actually involved in concealment of the proceeds of crime and in the absence of any predicate offence alleged against it, the cognizance taken against it is without any substance.

Further, it argued that since the company's registered office is in New Delhi therefore, the enquiry under Section 202 of CrPC is sine qua non for issuance of summons under Section 204 of CrPC.

ED opposed the plea saying that Section 202 of CrPC would not stand attracted to the complaint filed under Section 44 PMLA as Section 44(1)(b)(d) of the Act confers jurisdiction on the Special Court to take cognizance notwithstanding anything contained in CrPC. Further it said that Razorpay, claiming to be an intermediary, can claim immunity for the offence under the IT Act as stated under Section 79 of the IT Act but cannot claim immunity for the offences committed under PMLA.

It was further argued that though Razorpay is not accused of the predicate offences, the offence under Section 3 PMLA is a standalone offence and the material on record clearly establishes the company's involvement.

The bench noted that in the present case, the scheduled offences are under investigation by the jurisdictional police. Therefore, it said Razorpay can be subjected to prosecution under the PMLA, if it can be established that it has prima facie committed an offence under Section 3 of the PMLA.

Court then enumerated the essential elements to constitute an offence under Section 3 PMLA: 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.

The bench referring to the allegations levelled against the company said “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.”

It said even if it accept the statements from the Director of accused No.5, at most, it indicates that Razorpay was negligent in setting up the merchant IDs in the name of accused No.5.

"Intent is essential to constitute an offence 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.”

Court said when there is no prima facie material to substantiate that Razorpay knowingly facilitated the transfer of proceeds of the crime, no presumption can be drawn that it was involved in money laundering as stated under Section 24, and the burden is on prosecution to prove otherwise.

Accordingly it allowed the petition and quashed the proceedings.

Appearance: Senior Advocates C V Nagesh and Sandesh J Chouta, for Advocate Abhishek Kumar for Petitioner.

Additional Solicitor General Aravind Kamath, for CGC Madhukar Deshpande for Respondent.

Citation No: 2024 LiveLaw (Kar) 118

Case Title: Razorpay Software Private Limited AND Union of India

Case No: Writ Petition No 10329 OF 2023

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