The Aryavarth Express
Agency(Karnataka): The High Court of Karnataka has granted relief to Razorpay Software Private Limited, a payment gateway company, by quashing the proceedings initiated against it by the Directorate of Enforcement under the Prevention of Money Laundering Act (PMLA), 2002. The court’s decision came in response to a writ petition filed by Razorpay, which was arraigned as accused No. 7 in the complaint filed by the Enforcement Directorate.
The case revolves around FIRs registered by the jurisdictional police against accused entities for offenses related to illegal money lending through mobile applications, charging exorbitant interest rates, harassing borrowers, and misusing their data. As the offenses fell under the scheduled offenses of the PMLA Act, the Enforcement Directorate conducted an investigation and filed a complaint, naming Razorpay as one of the accused.
The primary allegation against Razorpay was that it had allowed transactions in the name of accused No. 5, M/s. Jamnadas Morarji Finance Pvt. Ltd., without conducting proper due diligence. The Enforcement Directorate claimed that Razorpay had knowingly assisted unauthorized persons in creating merchant IDs and collecting and disbursing money to these IDs, earning a commission of Rs. 86,44,049/- in the process.
Razorpay challenged the proceedings, arguing that the absence of its involvement in concealing or knowingly assisting in the concealment of proceeds of crime arising from a predicate offense rendered the prosecution under the PMLA Act untenable. The company also contended that the Special Court had issued summons without conducting the mandatory inquiry under Section 202 of the Code of Criminal Procedure (CrPC).
The Enforcement Directorate countered these arguments, asserting that Section 202 of the CrPC was not applicable to complaints filed under Section 44 of the PMLA Act and that an offense under Section 3 of the Act was a standalone offense. The agency maintained that the material on record established Razorpay’s involvement in the commission of the offense.
After carefully considering the arguments and examining the relevant provisions of the PMLA Act and the legal principles established by the courts, the High Court concluded that the complaint’s averments did not satisfy the essential elements to constitute the offenses alleged against Razorpay. The court noted that there was no evidence to suggest that Razorpay had knowledge of the funds transferred to the merchant IDs of accused No. 5 being derived from criminal activity or that it had knowingly assisted in concealing or transferring illicit proceeds.
The High Court observed that even if the statements from the director of accused No. 5 and the employee of Razorpay were accepted, at most, it indicated negligence on the part of Razorpay in setting up the merchant IDs. However, intent is crucial to constitute an offense under Section 3 of the PMLA Act, and the commission amount earned by Razorpay could not be deemed a result of facilitating the illegal money lending business of accused No. 5 in the absence of such intent.
Furthermore, the court pointed out that other banks and payment gateways that had facilitated transactions for the other accused entities were not arraigned as accused or had their commissions attached as proceeds of crime, suggesting that Razorpay had been singled out for targeting.
In light of these findings, the High Court allowed the writ petition and quashed the proceedings against Razorpay in the complaint filed by the Enforcement Directorate. The court held that continuing the criminal proceedings would be an abuse of the process of law when there was no prima facie material to substantiate Razorpay’s involvement in money laundering.
The judgment underscores the importance of establishing intent and sufficient evidence while prosecuting offenses under the PMLA Act. It also highlights the need for a consistent approach in dealing with entities facilitating financial transactions, ensuring that the application of the law is fair and equitable.