Supreme Court upholds quashing of money laundering case against Razorpay, rejects ED's appeal

The Supreme Court recently dismissed the Enforcement Directorate’s (ED) appeal against a Karnataka High Court order that had quashed money laundering proceedings against Razorpay in connection with an alleged illegal loan app racket [Union Of India vs. Razorpay Software Private Limited].

A Bench of Justices MM Sundresh and NK Singh declined to interfere with the High Court’s March 5, 2024, judgment, which had set aside cognisance taken under the Prevention of Money Laundering Act (PMLA) against Razorpay.

The case traces back to multiple FIRs registered by the police against certain mobile loan app operators.

The FIRs alleged that the apps were lending money through mobile applications at exorbitant interest rates. Borrowers were allegedly harassed, threatened and blackmailed. In some cases, even after repayment, victims were allegedly forced to pay more money.

Since these were scheduled offences under the PMLA, the matter was referred to the ED.

The ED launched an investigation, arraigned Razorpay as an accused, and filed a complaint before the Special Court in Bengaluru.

The allegation against Razorpay was that it had created merchant IDs in the name of a non-banking financial company named M/s Jamnalal Morarji Finance Pvt. Ltd., without conducting proper due diligence.

According to the ED, Razorpay’s negligence enabled the laundering of proceeds of crime.

The Special Court took cognisance under Sections 3 and 4 of the PMLA and issued summons. Razorpay then approached the Karnataka High Court seeking the quashing of the complaint and summons.

Before the High Court, Razorpay argued that it was merely a payment gateway. It contended that there was no material to show that it had knowingly assisted in concealing or transferring proceeds of crime. It also argued that since it was not accused in the predicate offence cases, the PMLA prosecution against it was unsustainable.

On the issue of summons, it argued that since it did not reside within the territorial jurisdiction of the Special Court, an inquiry under Section 202 of the CrPC was mandatory before the issuance of process.

The ED opposed the plea. It argued that under Section 44 of the PMLA, the Special Court could take cognisance notwithstanding the CrPC. It also contended that an accused need not be charged in the predicate offence to face prosecution under Section 3 of the PMLA, as the offence of money laundering is a standalone offence.

A High Court Bench comprising Justice Hemant Chandangoudar noted that for money laundering to be made out, there must be material to show that Razorpay knowingly assisted in dealing with proceeds of crime and intended to project such money as untainted.

After examining the complaint and witness statements, the Court found that there was no material to show that Razorpay had knowledge that the funds routed through the merchant IDs were derived from criminal activity.

It observed that even if the statements relied upon by the ED were accepted, they only suggested negligence in onboarding procedures. The High Court, therefore, quashed the ED case against Razorpay.

Aggrieved by this decision, the ED approached the Supreme Court.

After hearing the parties, the Supreme Court declined to interfere and dismissed the appeal, thereby affirming the High Court’s decision.