By Advocate Ayantika Mondal, LLB, LLM
The Prevention of Money Laundering Act, 2002 (PMLA), was designed as a robust framework to combat the global menace of black money, drug trafficking, and organised financial crime. Over the years, however, it has slowly crept into spaces where its invocation raises eyebrows — especially in business disputes or regulatory breaches that may involve misrepresentations but not illicit wealth.
One such emerging trend is the weaponisation of PMLA against startups and entrepreneurs, even when the core allegation concerns a regulatory lapse, not a laundering operation.
The Case of the Startup with a Shaky Incorporation
Let’s take the fictional example of Nexrise Technologies, a SaaS startup that took the fintech world by storm.
Founded by two young tech entrepreneurs, the company onboarded over 50 enterprise clients in three years, raised ₹10 crore in seed and Series A rounds, and generated over ₹1.5 crore in annual revenue through subscriptions and cloud services.
Three years into operations, an anonymous complaint revealed that one of the co-founders had submitted forged educational documents while registering the company with the Ministry of Corporate Affairs (MCA) and signing compliance certifications under various fintech guidelines.
The police invoked IPC Sections 420 (cheating), 468 (forgery), and 471 (using forged documents). But things took a dramatic turn when the Enforcement Directorate opened a PMLA investigation, alleging that all funds raised and revenues earned were “proceeds of crime”, as they were derived from a company founded on misrepresentation.
Dissecting the Legal Question
The central issue:
Can revenues and investor funds, earned from legitimate customers and lawful business activities, be treated as “proceeds of crime” under PMLA just because the founder misrepresented credentials at the time of registration?
What the Law Says
Under Section 3 of PMLA:
“Whoever directly or indirectly attempts to indulge or knowingly assists or is a party or is actually involved in any process or activity connected with the proceeds of crime… and projecting it as untainted property” is guilty of money laundering.
“Proceeds of crime” (Section 2(1)(u)) refers to:
Property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence.
The Legal Misfire: Linking Misrepresentation to Legitimate Earnings
Here’s where the law gets misapplied.
i) The misrepresentation — a forged degree — occurred at the time of company formation or onboarding as a director.
ii) The business itself — cloud software for compliance — functioned on merit, with paying clients, delivered services, and filed taxes.
iii) Investors made independent decisions based on pitch decks, product demos, and growth metrics — not on the founder’s degree.
In such a case, there’s no direct or indirect connection between the fraudulent act and the money earned.
At best, the misrepresentation enabled company registration — but did not generate the revenue itself.
What the Courts Have Clarified
Vijay Madanlal Choudhary v. Union of India (2022) 10 SCC 386:
There must be a clear nexus between the property and the scheduled offence. It is not enough if the property was merely facilitated by or incidental to the commission of the offence.
B. Rama Raju vs. Union of India & Ors. (2011 SCC Online AP 152):
In this judgment, while interpreting the definition of “proceeds of crime”, the High Court of Andhra Pradesh has held that since proceeds of crime is defined to include value of any property derived or obtained as a result of any criminal activity relating to a scheduled offence, where a person satisfies the Ld. Adjudicating Authority that the property acquired is through bona fide means, such property ought to be released from attachment.
Nexrise’s case, the company’s income flows from contractual, legitimate business activity, not the founder’s forged CV.
The Slippery Slope: If Everything is Crime, Nothing Is
If the “but for” logic is stretched — but for the misrepresentation, the company wouldn’t exist — then nearly every startup with a compliance error, flawed ROC filing, or overstated claim is at risk of PMLA prosecution.
This sets a dangerous precedent:
- A startup could have real services, paying clients, and tax compliance, and still face asset seizure.
- Investors’ capital, too, could be frozen as “laundered money” if it enters a venture linked to any past misrepresentation.
This would cripple innovation, chill entrepreneurship, and weaponize criminal law against what is essentially a commercial compliance issue.
What Should Remain the True Spirit of PMLA?
The purpose of PMLA is to crack down on:
- Drug money,
- Terror financing,
- Hawala transactions,
- Shell companies, and
- White-collar frauds involving illegitimate gain.
It is not meant to retroactively criminalise income that was lawfully earned just because of a mistake — or even dishonesty — in paperwork or registration, if that dishonesty did not generate the money itself.
Conclusion: A Law for Laundering, Not Lapses
In our enthusiasm to fight white-collar crime, we must ensure that PMLA remains a scalpel, not a sledgehammer. Invoking it where no proceeds of crime exist — simply because a founder erred on their resume — dilutes its moral and legal force.
Let’s keep PMLA focused on its original purpose: to trace, intercept, and punish the laundering of illicitly acquired property — not to penalize startups that made compliance mistakes but delivered real value.
Advocate Ayantika Mondal and Advocate A.M. Iktear Uddin, known as Advocate Anik, are distinguished lawyers at Prime Legal. With over 15+ years of experience, both specialise in cybercrime, criminal, civil, and family law, corporate law, family law, PMLA compliance, and transaction monitoring and has served as a Special Public Prosecutor for Karnataka in several high-profile cases, earning recognition as one of the best PMLA lawyers in Bangalore., holding top academic honours from Bangalore University. Together, they bring a powerful blend of litigation, corporate advisory, and family law expertise, leading Prime Legal with a commitment to excellence and innovation in the legal field.
