Bengaluru | In a significant ruling, the Karnataka High Court (KHC) has held that properties mortgaged to a bank cannot be attached under the Prevention of Money Laundering Act, 2002 (PMLA) unless they are proved to be “proceeds of crime.”

Background of case

The judgment arose in a case involving alleged corruption at a branch of Syndicate Bank in Mandya district. According to the notification, bank officials were accused of mis-disbursing loans and overdrafts in breach of procedure, resulting in losses of over ₹12 crore.
The Central Bureau of Investigation (CBI) had registered a case of criminal conspiracy and corruption. The Enforcement Directorate (ED) subsequently filed a complaint under the PMLA and issued an attachment order in 2012 for certain properties linked to the accused. The appellate tribunal had quashed the ED’s attachment order in 2017, after which the ED approached the Karnataka High Court.

What the court found

A division bench of Justices D K Singh and Venkatesh Naik, in its order dated 17 October (publicly reported on 23 October), observed that of the seven properties that were mortgaged to the bank and owned by one of the accused and his relatives, the bank had already initiated separate recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). One property had been physically taken possession of by the bank following a 2010 notice.
The bench held that since the bank (which held the mortgage) was not part of the alleged criminal conspiracy (only the branch manager and a manager were accused), the mortgaged properties could not automatically be treated as “proceeds of crime.” It said:

“When prima facie the properties mortgaged to the bank are not the proceeds of the crime, the attachment order cannot be justified in law.”
The court further noted the “precarious” position of the bank if simultaneous enforcement under SARFAESI and attachment orders by ED were allowed to proceed. The judgement therefore dismissed the ED’s appeal in respect of these properties.

Implications

  • This ruling sets a precedent that for attachment under the PMLA, the property must be shown to be the “fruit or instrument” of crime — mere mortgaged property offered as collateral does not suffice.
  • It safeguards the rights of banks who hold security interests, emphasising that enforcement under SARFAESI or other debt-recovery laws cannot be undermined by PMLA attachments unless proper linkage is shown.
  • From an enforcement perspective, the ED and similar agencies will need to ensure more rigorous tracing of proceeds and clearer proof that a particular property is derived from criminal activity.

Watch-out points

  • While this is a favourable decision from a borrower’s or bank’s perspective, it does not mean that any mortgaged property can never be attached — only that attachment without showing that it constitutes proceeds of crime will be vulnerable to challenge.
  • The decision may encourage more litigation by persons whose properties are mortgaged or collateralised, to argue that the PMLA attachment is invalid.
  • Banks should maintain meticulous records when mortgaging properties and monitor if concurrent investigations or attachments may conflict with their rights under SARFAESI or similar statutes.

Conclusion

The Karnataka High Court has clarified that under the PMLA regime, attachment orders must be linked to proceeds of crime. Mortgaged properties held by a bank as collateral cannot be treated as automatically attachable merely because the borrowal transaction is connected to alleged wrongdoing. This judgment strengthens the protection of secured creditors and sharpens the burden on enforcement agencies to demonstrate the criminal nexus of properties targeted for attachment.