For secured creditors, the value of security has traditionally rested on a straightforward proposition: if a borrower defaults, the lender should be able to enforce its security and recover its dues.
The Prevention of Money Laundering Act, 2002 (PMLA) complicates that proposition.
Where the Enforcement Directorate attaches an asset under the PMLA, a secured creditor may suddenly find that an asset it relied upon as security cannot be freely enforced, transferred or realised. The issue becomes particularly difficult where the lender claims that it had no involvement in the alleged offence and had created or acquired its security interest in the ordinary course of lending.
This raises a larger question for Indian credit markets: how should the rights of secured creditors be protected when the security itself becomes subject to proceedings under a law designed to deprive offenders of the benefit of criminal proceeds?
The answer is not simply that one statute automatically prevails over the other. The real issue is the nature of the asset, the timing of the security interest, the source of the funds used to acquire the asset, and the stage and outcome of the PMLA proceedings.
The problem begins with attachment
Under the PMLA, the Enforcement Directorate can provisionally attach property where the statutory conditions for attachment are satisfied and there is reason to believe that the property represents proceeds of crime.
The consequences can be significant for a secured lender.
Consider a bank that has granted a substantial loan against a mortgaged property. The borrower subsequently becomes the subject of a money laundering investigation and the property is provisionally attached.
The bank may still have a valid mortgage. But its ability to enforce that mortgage can be affected by the attachment and the subsequent proceedings under the PMLA.
This creates a practical disconnect between having security and being able to realise security.
For lenders, that distinction matters enormously.
A secured interest does not automatically put the lender outside the PMLA
One of the more dangerous assumptions in this area is that a bank or financial institution, because it is a bona fide secured creditor, is automatically protected from PMLA proceedings.
That is too broad.
The PMLA is concerned primarily with the property involved in money laundering and the proceeds of crime. The existence of a mortgage does not, by itself, determine whether the property can be proceeded against under the statute.
At the same time, the fact that an asset has been attached does not mean that every third-party interest in that asset simply disappears.
This distinction is important.
The PMLA itself contains a mechanism for dealing with claims to attached property. Section 8 provides for adjudication of the attachment and contemplates the treatment of property claimed by persons other than the person accused of money laundering. The statutory framework therefore requires attention to the interests of third parties rather than treating every attached asset as belonging exclusively to the accused.
For secured creditors, the question is therefore not merely whether there is an attachment. It is whether the creditor can establish the legal basis and circumstances of its interest in the property.
The timing of the mortgage can become critical
A lender’s position may depend significantly on when its security interest arose.
Suppose a mortgage was created years before the alleged money laundering activity and the lender extended credit after carrying out the usual due diligence. The lender has a substantially different factual position from a creditor whose security was created after the property had already become connected with alleged proceeds of crime.
This is why due diligence cannot be viewed solely as a pre-disbursement exercise.
For secured lending, lenders increasingly need to consider whether the asset being offered as security has any history that could expose it to future criminal or regulatory claims.
This does not mean that banks should attempt to conduct an Enforcement Directorate investigation before every loan. It does, however, suggest that higher-value and higher-risk transactions require a more sophisticated assessment of title, beneficial ownership, source of acquisition and litigation history.
The traditional question, “Does the borrower own the asset?”, may no longer be enough.
The more relevant question is increasingly, “Could the asset itself become the subject of a statutory claim that affects enforcement?”
SARFAESI rights do not exist in isolation
Secured creditors may have rights under the SARFAESI Act, the Recovery of Debts and Bankruptcy Act, 1993, contractual security documents and, where applicable, the Insolvency and Bankruptcy Code, 2016.
These frameworks provide important mechanisms for recovery and enforcement.
However, the existence of a statutory enforcement mechanism does not mean that a lender can simply disregard an attachment under the PMLA.
The PMLA contains an overriding provision in Section 71. At the same time, the Supreme Court’s jurisprudence on the PMLA has emphasised that the statute must be applied according to its own requirements and that attachment and confiscation are connected to the statutory concept of proceeds of crime.
This makes the interaction between recovery legislation and the PMLA highly fact-sensitive.
For lenders, the practical lesson is clear: a recovery proceeding and a PMLA proceeding may need to be addressed together rather than pursued as completely independent tracks.
Insolvency adds another layer
The position becomes even more complex when the borrower enters insolvency proceedings.
The IBC is built around collective resolution and protection of the insolvency estate. PMLA proceedings, by contrast, are directed towards property associated with money laundering and ultimately towards confiscation where the statutory requirements are satisfied.
Courts and tribunals have therefore had to confront the interaction between insolvency proceedings and PMLA action.
One particularly important development is the protection available under Section 32A of the IBC in specified circumstances. The provision can protect the corporate debtor’s property from prosecution and action for offences committed before the commencement of insolvency proceedings, subject to its statutory conditions.
That protection, however, should not be treated as a universal answer to every PMLA attachment.
Its operation depends on the precise circumstances, including the nature of the transaction, the person acquiring the property and the statutory requirements contained in Section 32A.
For secured creditors, this reinforces a broader point: insolvency is not necessarily a reset button for an asset already caught in a money laundering proceeding.
The real issue is priority versus confiscation
Much of the debate surrounding PMLA attachments and secured creditors is framed as a question of priority.
Which claim comes first: the bank’s mortgage or the State’s claim over proceeds of crime?
But that framing can sometimes obscure the more fundamental issue.
A secured creditor’s claim is ordinarily a claim for repayment of money. Confiscation under the PMLA serves a different purpose. It is directed at property connected with criminal activity.
The law therefore has to distinguish between recovering legitimate debt and allowing a person to retain the benefit of proceeds of crime.
That distinction is also why the factual position of the secured creditor matters.
A lender that acted independently, extended genuine credit and acquired security in good faith cannot simply be equated with the person who generated or laundered the proceeds. But the lender’s rights also cannot be considered without examining the statutory consequences attached to the property itself.
The challenge for courts is to protect legitimate commercial interests without creating a route through which criminal proceeds can effectively be insulated by the creation of security interests.
What should secured creditors do differently?
The emerging lesson is that PMLA risk needs to become part of credit-risk assessment, particularly for lending against valuable immovable property and assets held through complex ownership structures.
Lenders should consider stronger checks around beneficial ownership, title history, pending criminal or regulatory proceedings and the circumstances in which the borrower acquired the secured asset.
Security documentation should also be drafted with greater attention to regulatory and enforcement risks rather than assuming that contractual enforcement rights will operate in isolation.
Where an attachment has already occurred, the lender should act quickly. The relevant questions include whether the asset is actually alleged to constitute proceeds of crime, when the lender’s interest arose, what due diligence was undertaken, whether the lender falls within any statutory protection, and what stage the PMLA proceedings have reached.
These are not merely litigation questions. They can materially affect the recoverability and valuation of the loan.
Looking beyond the immediate dispute
The growing intersection between PMLA enforcement, secured lending and insolvency reflects a broader change in Indian financial law.
Credit markets operate on the assumption that security can ultimately be converted into recovery. Anti-money laundering law operates on the assumption that property connected with criminal activity cannot be allowed to retain its economic value for those responsible.
Neither objective can simply be ignored.
The more sustainable approach is therefore one that recognises the legitimate position of secured creditors while preserving the State’s ability to act against proceeds of crime. For lenders, this means moving beyond the traditional assessment of whether security is legally valid and examining the wider legal risks surrounding the asset.
The future of secured lending may depend not only on the strength of the security created, but on the legal history and regulatory exposure of the asset securing it.
That is where PMLA risk is becoming a credit issue, rather than merely a criminal-law issue.
