High Court relief to Razorpay in a loan app fraud case

The High Court of Karnataka has quashed criminal proceedings initiated against Bengalurubased payment gateway, Razorpay Software Pvt. Ltd., by the Enforcement Directorate (ED), for allegedly facilitating the transfer of “proceeds of crime” generated through extortion of borrowers by a Mumbaibased nonbanking finance company (NBFC) through mobilebased loan apps, allegedly controlled by either Chinese entities or individuals from China.

The company had questioned the cognisance of offence taken against it under Section 3 of the PMLA by a special court in March 2023

Lack of evidence

“There is no evidence to suggest that the petitioner, Razorpay, a payment gateway, had knowledge that the funds transferred to the merchant IDs of accused no. 5 [Jamnadas Morarji Finance Pvt. Ltd., an NBFC] were derived from criminal activity related to a scheduled offence, nor did they [Razorpay] knowingly assist accused no. 5 in concealing or transferring illicit proceeds as clean money,” the High Court observed.

Justice Hemant Chandangoudar passed the order while allowing a petition filed by Razorpay, which had questioned the cognisance of offence taken against it under Section 3 of the Prevention of Money Laundering Act (PMLA) by a special court in Bengaluru in March 2023. Observing that statements of officers of the two companies recorded by the ED though indicate that “Razorpay was negligent in setting up the merchant IDs in the name of accused no. 5”, the High Court pointed out that the commission amount earned by Razorpay in the transaction cannot be deemed as a result of facilitating the illegal money lending business of accused no. 5, “as there is no evidence to establish that Razorpay had the intention to commit the crime under Section 3 of the PMLA”.

The ED had initiated proceedings against 12 accused, including Mad Elephant Network, Bengaluru; X10 Financial Services Ltd., Mumbai; Baryonyx Technologies Pvt. Ltd., Bengaluru, Track Fined Pvt. Ltd., Howrah in West Bengal; Jamnadas Morarjee Finance Pvt. Ltd.; Cloud Atlas Future Technology Pvt. Ltd., Gurugram in Haryana, Razorpay, and five individual representing these companies.

Continuation of criminal proceedings against Razorpay would be an abuse of process of law “when there is no prima facie material to substantiate that it knowingly facilitated the transfer of proceeds of the crime”, the High Court said while quashing the proceeding only against Razorpay.