PMLA Cannot Be Invoked Solely On The Basis Of Unexplained Assets, Holds Allahabad HC

The Allahabad High Court, in the case of Sanjay Kumar @ Sanjay Dhiman v. Directorate of Enforcement, Criminal Misc. Bail Application No. 38900 of 2025, delivered a significant ruling under the Prevention of Money Laundering Act, 2002 (“PMLA”), reiterating a legal principle which asserts that assets derived from unknown or unexplained sources cannot, merely on that basis, be presumed to constitute “proceeds of crime” arising from a scheduled offence under the PMLA. The Court made this observation while granting bail to the applicant in a money laundering case linked to alleged illegal mining activities in Himachal Pradesh. The decision is of considerable significance as it reaffirms the statutory architecture of the PMLA. The  does not criminalise the mere possession of unaccounted wealth rather, it targets only those properties that are derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence. The High Court’s reasoning underscores that the Directorate of Enforcement (“ED”) cannot rely solely on the existence of suspicious or unexplained assets but must establish a clear nexus between the property in question and the predicate offence forming the basis of the money laundering proceedings.

The Factual Setting

The case arose from a bail application under Sections 3 and 4 of the PMLA, filed by Sanjay Kumar @ Sanjay Dhiman. The ED initiated an Enforcement Case Investigation Report (“ECIR”) based on six FIRs registered in Himachal Pradesh alleging illegal mining by Jai Maa Jwala Stone Crusher. The ED alleged that the proceeds generated from these activities were used to purchase Garhwal Stone Crusher in Uttar Pradesh, thereby constituting money laundering. During the investigation, Garhwal Stone Crusher was also alleged to have engaged in the purchase and sale of illegally mined minerals, which lead to registration of a fresh FIR in Uttar Pradesh. The applicant challenged the proceedings on the ground that the predicate FIR’s had culminated in closure reports, he was never named in those FIRs and no proceeds of crime attributable to him had been identified, bringing the scope of proceeds of crime under the PMLA for consideration before the Allahabad High Court.

The Court’s Reasoning

The central observation of the Court was direct and emphatic, a person may possess assets which are derived from an unknown source of income, but that alone does not justify the conclusion that such assets were derived from a scheduled offence. The Court further stated that the prosecution had not sufficiently demonstrated identifiable proceeds of crime arising from a scheduled offence in relation to the applicant.

This matters because the PMLA uses a precise statutory definition of proceeds of crime under section 2(1)(u) of the PMLA which requires a property to be connected to criminal activity relating to a scheduled offence, and not merely to be unexplained or suspicious. The Court’s approach is consistent with the idea that PMLA is a special law with a focused object: it is designed to target laundering of crime proceeds, not every case of tax evasion, unexplained wealth, or accounting irregularity.

Accordingly, the Allahabad High Court granted bail, observing that the applicant was not linked to any identifiable proceeds of crime arising from a scheduled offence. The Court also took into account the completion of the investigation, the applicant’s prolonged incarceration, and the settled principle that bail should not be withheld as a form of pre-trial punishment.

Why It Matters?

The ruling reinforces that the PMLA is an offence-linked statute, not a mechanism to prosecute every instance of unexplained wealth or financial irregularity. By holding that unexplained assets, without a demonstrable nexus to a scheduled offence, cannot be presumed to be “proceeds of crime,” the Allahabad High Court reaffirmed the statutory discipline which is embedded in Section 2(1)(u) of the PMLA. While the judgment does not dilute the ED’s power to investigate genuine money laundering cases, it emphasis that such powers must be exercised on the basis of identifiable proceeds of crime and a clear evidentiary link with the scheduled offence.

The decision is likely to influence future bail and attachment proceedings where the ED relies primarily on unexplained assets, financial irregularities, or inferred concealment without tracing the property to a scheduled offence. It underscores that mere suspicion, however strong, cannot substitute the statutory ingredients of the offence of money laundering. Consequently, the ruling may encourage more rigorous investigation, asset tracing, and transaction-specific evidence before invoking the PMLA, particularly in cases where the scheduled offence are weak, close, or have culminated in closure reports. At a broader level, the judgement also reaffirms the balance between effective anti-money laundering enforcement and the constitutional protection of personal liberty by ensuring that the stringent provisions of the PMLA are applied within the limits prescribed by the statute

Conclusion

The Allahabad High Court’s message is simple but powerful, the ED cannot presume that every unexplained asset is a laundering asset. Under PMLA, the prosecution must establish a real and identifiable connection with a scheduled offence, and that burden does not disappear merely because the source of wealth is not immediately clear.

For lawyers, investigators, and courts, the ruling reinforces a core doctrinal safeguard in PMLA jurisprudence that the statute targets crime proceeds, not mere unexplained wealth. The distinction may seem technical, but in money-laundering litigation it is often decisive.