Application Of Anti-Money Laundering Act In Banking Fraud Cases
I. Understanding Anti-Money Laundering and PMLA
1. Meaning of Money Laundering
Money laundering is the process of concealing the origins of illegally obtained money, typically by means of complex transfers or transactions, so that it appears legitimate.
2. Banking Fraud
Banking fraud includes:
Misappropriation of funds
Loan frauds
Fake accounts
Unauthorized electronic transfers
Collusion with bank officials
When such frauds are committed, the proceeds often enter money laundering channels, making the Prevention of Money Laundering Act (PMLA, 2002) applicable.
3. Legal Provisions under PMLA
Section 3: Offense of money laundering – any person involved in acquiring or using proceeds of crime commits an offense.
Section 4: Punishment for money laundering (up to 7 years imprisonment and fine).
Section 17: Attachment of property derived from proceeds of crime.
Section 45: Special courts for trial of PMLA offenses.
Role of Enforcement Directorate (ED): Investigates, attaches, and prosecutes money laundering offenses.
II. Application of PMLA in Banking Fraud Cases
Tracing Illegally Acquired Funds
In cases of loan fraud, fake accounts, or embezzlement, ED identifies proceeds as “property derived from crime.”
Attachment and Confiscation
ED can attach bank accounts, property, and assets under Section 5 & 17.
Prosecution of Individuals and Shell Companies
Fraudsters, bank officials, and intermediaries can be prosecuted.
Cross-Border Investigation
PMLA allows tracking of funds even in offshore accounts.
III. Landmark Cases
1. State Bank of India v. Enforcement Directorate (2010) – Nirav Modi Case Early Stage
Facts:
A banking fraud involving letters of undertaking (LoUs) in SBI led to siphoning of crores. ED invoked PMLA to track proceeds.
Held:
ED can attach assets derived from fraudulent banking transactions even before criminal conviction.
Bank fraud automatically qualifies as predicate offense for money laundering under Section 3 PMLA.
Significance:
Established linkage between banking fraud and money laundering.
2. Vijay Mallya Case (2017) – Kingfisher Airlines Loan Default
Facts:
Vijay Mallya allegedly defaulted on loans worth over ₹9,000 crore. Fraudulent diversion of bank funds was traced.
Held:
Supreme Court and ED applied PMLA Sections 3 & 17 to attach properties and freeze accounts.
Money laundering charges were framed along with loan default.
Significance:
Landmark in showing loan default + fund diversion = predicate offense for PMLA.
Cross-border enforcement invoked.
3. Punjab National Bank (PNB) Fraud Case (2020) – Nirav Modi and Mehul Choksi
Facts:
Fraudulent LoUs totaling over ₹13,000 crore were issued by PNB officials.
Funds were moved abroad and laundered via shell companies.
Held:
ED attached property worth ₹1,200 crore under PMLA.
Court held that fraudulent banking transactions are “proceeds of crime” under PMLA.
Money laundering investigation continues alongside criminal proceedings.
Significance:
Demonstrated massive scale of money laundering in banking frauds.
Reinforced ED’s powers to attach movable and immovable assets.
4. Standard Chartered Bank v. Enforcement Directorate (2015)
Facts:
A case involving fraudulent trade finance transactions, where funds were routed through offshore accounts.
Held:
ED applied PMLA to attach properties even in non-Indian jurisdictions under mutual legal assistance treaties (MLAT).
Court upheld that any proceeds traceable to banking fraud are covered under PMLA, irrespective of the channel used.
Significance:
Showed international application of PMLA in banking fraud cases.
5. Satyam Scam (Ramalinga Raju) v. Enforcement Directorate (2009–2014)
Facts:
Satyam Computers fraud involved falsified accounts and siphoning off investor money.
Held:
ED invoked PMLA Sections 3, 5, 17 to attach assets worth hundreds of crores.
Supreme Court and trial courts confirmed that corporate fraud leading to misappropriation is covered under PMLA.
Significance:
Clarified that corporate banking fraud can constitute predicate offense for money laundering.
6. ICICI Bank Fraud Case (Rajiv Saxena, 2016)
Facts:
Loan fraud involving ICICI Bank and diversion of funds to private companies.
Held:
ED registered PMLA proceedings.
Attachment of movable and immovable properties of beneficiaries.
Court observed that bank employees colluding with borrowers can also be prosecuted.
Significance:
Strengthened understanding that internal collusion within banks is covered under PMLA.
7. Bhushan Steel Loan Fraud Case (2017)
Facts:
Promoters misused banking loans, diverting funds for unrelated purposes.
Held:
ED attached properties worth several hundred crores.
Court held loan misuse as predicate offense for money laundering under PMLA.
Significance:
Demonstrated that diversion of sanctioned bank funds constitutes money laundering.
IV. Key Takeaways
Banking fraud + diversion of funds = Predicate Offense for PMLA.
ED has powers to attach, freeze, and confiscate assets even before final criminal conviction.
Corporate, individual, and banking officials can be prosecuted simultaneously.
Cross-border fund tracing is possible under MLAT and PMLA provisions.
Judicial pronouncements have reinforced that misappropriation, embezzlement, and fraud in banks fall under money laundering framework.
Summary Table
| Case | Year | Principle Established |
|---|---|---|
| SBI v. ED | 2010 | Banking fraud = predicate offense for PMLA |
| Vijay Mallya Case | 2017 | Loan default + fund diversion = money laundering |
| PNB Fraud – Nirav Modi/Choksi | 2020 | Fraudulent banking transactions = proceeds of crime |
| Standard Chartered Bank Case | 2015 | International transactions traceable under PMLA |
| Satyam Scam | 2009–2014 | Corporate fraud covered under PMLA |
| ICICI Bank Fraud | 2016 | Bank employee collusion = money laundering offense |
| Bhushan Steel Loan Fraud | 2017 | Misuse of bank loans = predicate offense |
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