Allahabad HC Upholds ED's Money Laundering Probe Against Sahara Societies, Citing Prima Facie Case of Cheating

The Court rejected arguments that proceedings must cease following the closure of a single predicate offence, emphasizing the existence of over 300 other FIRs and allegations of a centralized fund diversion scheme orchestrated from Sahara's Lucknow headquarters.

In a significant ruling that reinforces the expansive investigative powers of the Enforcement Directorate (ED) under the Prevention of Money Laundering Act, 2002 (PMLA), the Allahabad High Court has refused to quash search and seizure proceedings against four cooperative societies linked to the Sahara Group. The Lucknow bench, presided over by Justice Subhash Vidyarthi, held that the closure of a single predicate offence does not invalidate the PMLA investigation when numerous other FIRs alleging scheduled offences exist.

The Court dismissed a petition filed under Section 482 of the Code of Criminal Procedure by M/s Humara India Credit Cooperative Society Ltd., M/s Sahara Credit Cooperative Society Ltd., M/s Stars Multipurpose Cooperative Society Ltd., and M/s Saharayan Universal Multipurpose Society Ltd. The societies had challenged the ED's search operations conducted at their Lucknow offices between July 3-5, 2024, stemming from an Enforcement Case Information Report (ECIR) registered by the agency's Kolkata Zonal Office on March 31, 2023.

Justice Vidyarthi observed that the ED's allegations, detailing a systematic practice of redepositing matured funds into new schemes through mere book adjustments without actual bank transfers, established a prima facie case of cheating.

"The aforesaid facts prima facie make out commission of offence of cheating by the petitioners so as to warrant their trial for the offence," Justice Vidyarthi noted in the order. "Correctness of the allegations cannot be examined by this Court in exercise of its inherent powers and that will be done by the trial Court after the parties have been given opportunity to lead evidence in support of their respective case."

The ruling provides crucial judicial clarity on several contentious issues in PMLA jurisprudence, including territorial jurisdiction, the effect of a closed predicate offence, and the interplay between the PMLA and other statutes like the Banning of Unregulated Deposit Schemes (BUDS) Act, 2019.

Jurisdictional Challenge and the Cause of Action

Before delving into the merits, the High Court addressed a preliminary objection raised by the ED regarding the Lucknow Bench's territorial jurisdiction. Additional Solicitor General S.V. Raju, representing the ED, argued that since the ECIR was registered in Kolkata, where the layering of proceeds and the adjudicating authority were located, any challenge should be brought before the courts in Kolkata.

The High Court, however, rejected this contention. Justice Vidyarthi reasoned that a significant part of the cause of action had accrued within the territorial limits of the Lucknow Bench. The Court highlighted that: - The search and seizure operations, which were the subject of the challenge, were conducted at the petitioners' Lucknow offices. - All accounts and records of the Sahara group were maintained in Lucknow. - A sum of ₹2.98 crore in cash was seized from Lucknow. - Key decisions regarding fund management and group meetings allegedly took place at the Lucknow headquarters.

The Court further observed that under Section 42 of the PMLA, an appeal against an order of the Appellate Tribunal could be filed in the High Court within whose jurisdiction the aggrieved party carries on business. Applying this principle analogously to a petition under Section 482 CrPC, the Court concluded that it was competent to hear the matter.

Can PMLA Proceedings Survive a Closed Predicate Offence?

The central argument advanced by the petitioners, represented by Senior Advocate Vikram Chaudhary, was that the PMLA proceedings were unsustainable in law. The ECIR was initially predicated on an FIR registered in Bhubaneswar, which was subsequently closed by the police, a decision accepted by the concerned Magistrate. Mr. Chaudhary contended that once the scheduled offence that formed the basis of the ECIR ceased to exist, the money laundering investigation automatically collapsed.

The ED countered this by revealing that its investigation was not predicated on a solitary FIR. ASG Raju submitted that the agency's probe encompassed over 500 FIRs lodged nationwide against Sahara Group entities, with more than 315 of them involving scheduled offences under the PMLA, primarily cheating (Section 420 IPC) and forgery (Section 467 IPC).

The High Court sided with the ED, affirming that the closure of a single FIR does not preclude the agency from continuing its investigation when other FIRs involving scheduled offences are pending. This interpretation prevents accused parties from nullifying a broad-based PMLA investigation by securing a closure report in a single, isolated case.

Interplay of BUDS Act and IPC

The petitioners also argued that the allegations, at best, constituted an offence of non-payment of returns on investments, which would be covered by the Banning of Unregulated Deposit Schemes (BUDS) Act, 2019. Since an offence under the BUDS Act is not a scheduled offence under the PMLA, they argued the entire proceedings were void.

The Court dismantled this argument by pointing to Section 35 of the BUDS Act, which explicitly states that its provisions are "in addition to and not in derogation of" any other law. Justice Vidyarthi held that this non-obstante clause means the applicability of the BUDS Act does not bar the simultaneous application of provisions of the Indian Penal Code. Consequently, since the underlying FIRs alleged cheating under the IPC—a scheduled offence—the ED was well within its rights to investigate under the PMLA.

Prima Facie Case of Cheating and Centralized Control

The Court found compelling the ED's detailed account of the Sahara group's modus operandi, which suggested a centralized and potentially fraudulent scheme. The ED's counter-affidavit alleged that all deposit-taking entities of the group utilized a common infrastructure, including branches, agents, and bank accounts managed by M/s Sahara India.

Crucially, the ED submitted that maturity amounts were not paid out to investors but were redeposited into new schemes through internal book adjustments, leaving depositors with no real choice. The agency stated that "the maturity amount of one scheme of Sahara Group was redeposited in the existing new scheme and for that no bank account transfer used to take place."

The ED further contended that this entire operation was orchestrated from the Lucknow headquarters, with key decisions being made there, while the formal boards of the cooperative societies served merely for compliance purposes. This centralization, combined with the practice of paying earlier investors with funds from new depositors, formed the basis of the ED's allegation of cheating. The High Court found that these facts were sufficient to establish a prima facie case warranting a full trial.

As per the ED's submission, "all the key decisions were taken by the head office at Lucknow" and "none of the decisions was taken by them in the interest of the cooperative society or its members."

By declining to interfere under its inherent powers, the Allahabad High Court has sent a clear message that complex financial schemes with numerous underlying criminal complaints will not be shielded from PMLA scrutiny based on technical or procedural victories in isolated predicate cases. The judgment underscores the judiciary's deference to the investigative process in PMLA matters, particularly when a prima facie case is made out, leaving the determination of guilt or innocence to the trial stage.