Fund-raising without a proven “scheduled-offence source” is not “proceeds of crime”: Bail under PMLA cannot rest on guilt by association

1. Introduction

The Delhi High Court in MOIDEEN KUTTY K @ M.K. FAIZY v. DIRECTORATE OF ENFORCEMENT (16-02-2026) decided a regular bail application under Section 439 CrPC read with Sections 45 and 65 of the Prevention of Money Laundering Act, 2002 (“PMLA”). The applicant, Moideen Kutty K @ M.K. Faizy (National President of SDPI), was arrested on 03.03.2025 in an ECIR registered by the Directorate of Enforcement (“ED”), predicated on an NIA RC alleging a conspiracy involving PFI and others under IPC/UAPA (scheduled offences).

A central feature was the applicant’s belated arraignment: despite multiple prosecution complaints and attachments over several years, his name appeared for the first time only in the 7th Supplementary Prosecution Complaint dated 15.06.2025. ED’s core case was that SDPI functioned as a political “front” of PFI and that SDPI’s donations/fund flows (including substantial cash deposits) were “proceeds of crime” used to finance unlawful/terror activities; ED also alleged the applicant’s leadership roles in both PFI (earlier) and SDPI and receipt of funds into his personal account.

The key issues before the Court were: (i) whether ED showed “proceeds of crime” as required for Section 3 PMLA, (ii) whether “guilt by association” (PFI/SDPI nexus) can satisfy Section 45’s stringent “twin conditions,” (iii) what significance attaches to the applicant not being named in the predicate NIA proceedings even after ED shared material under Section 66, and (iv) whether prolonged pre-trial incarceration in an extremely voluminous case warrants bail.

2. Summary of the Judgment

The Court allowed the bail application and directed release on regular bail subject to standard conditions (bond/surety, travel restriction and passport surrender, contact details, address intimation, non-interference with witnesses/evidence, and appearance as required).

On merits, the Court held that ED’s case against the applicant was primarily “guilt by association” and that the material, as presented, did not prima facie establish that the funds characterised as donations/collections were “derived or obtained as a result of” criminal activity relating to a scheduled offence. It also emphasised the constitutional dimension of Article 21 given an imminent long trial (voluminous record, many witnesses) and the applicant’s incarceration of about 11 months.

3. Analysis

3.1 Precedents Cited (and how they shaped the outcome)

  • Vijay Madanlal Choudhary v. Union Of India, (2023) 12 SCC 1
    The Court treated this as the anchor precedent on the meaning of “proceeds of crime.” It extracted the Supreme Court’s insistence that property is “proceeds of crime” only if it is “derived or obtained… ‘as a result of’ criminal activity relating to a scheduled offence”, i.e., linked to a scheduled offence already “accomplished,” not merely suspected or assumed. This framing drove the High Court’s conclusion that mere receipt/collection of money (even if suspicious) is not automatically “proceeds of crime” unless ED demonstrates its source in a scheduled offence.
  • Pavana Dibbur v. Enforcement Directorate, 2023 SCC OnLine SC 1586
    The Court used this to reaffirm two connected propositions: (i) the PMLA offence can be pursued even against persons not accused in the scheduled offence; but (ii) as a condition precedent, there must exist a scheduled offence and “proceeds of crime” in relation to it. This supported the Court’s reasoning that “non-accused in predicate case” is not a complete defence, yet ED must still cross the threshold of showing proceeds of crime with a scheduled-offence nexus.
  • Union of India v. Kanhaiya Prasad, 2025 INSC 210
    Cited to reiterate that Section 45 PMLA’s twin conditions are mandatory even when bail is sought under Section 439 CrPC. The High Court nonetheless found the twin conditions satisfied on its reading of the record: there were reasonable grounds to believe the applicant was not guilty (for want of proceeds-of-crime linkage), and the Court did not find a demonstrated likelihood of reoffending on bail.
  • Union of India v. K.A. Najeeb, (2021) 3 SCC 713
    Relied upon for the constitutional principle that stringent bail restrictions do not disable constitutional courts from granting bail where continued incarceration would violate Part III rights, particularly when there is no likelihood of trial concluding within a reasonable time. This precedent bolstered the Court’s Article 21 analysis in a mega-trial context.
  • Manish Sisodia v. Directorate of Enforcement, 2024 SCC OnLine SC 1920 (Manish Sisodia II), K. Kavitha vs. Directorate of Enforcement, 2024 INSC 632, ARVIND KEJRIWAL v. DIRECTORATE OF ENFORCEMENT, 2024 INSC 512
    Invoked (primarily by the applicant) to stress that prolonged incarceration may become pre-trial punishment and that “bail is the rule.” The High Court’s reasoning aligns with the thrust: when trial is remote and evidence is documentary/seized, extended custody becomes constitutionally suspect.
  • Harish Fabiani and Ors. v. ED and Ors., WP (Crl.) 408/2022 (Delhi HC, decided on 26.09.2022)
    Cited on Section 66 and the caution against triggering/expanding PMLA action on mere “assumption.” The High Court used this to underline that inter-agency sharing does not itself “crystallize” a scheduled offence.
  • R.K.M Powergen Private Limited v. ED and Ors., W.P.Nos.4297 & 4300/2025 (Madras HC, decided on 15.07.2025)
    Cited for the proposition that ED cannot become a “roving” investigator into other offences; Section 66(2) is for information-sharing with the competent agency. The metaphor used there (“no predicate offence, no action by ED”) was employed to support the Court’s scepticism where the applicant was absent from predicate proceedings notwithstanding material sharing.
  • Tarun Kumar v. Enforcement Directorate, 2023 SCC OnLine SC 1486, Vijay Madanlal Choudhary & Ors. v. Union of India, (2022) SCC OnLine SC 929
    Relied upon by ED to stress the stringency and continued application of Section 45. The Court accepted the doctrinal stringency but held that, on facts, the essential “proceeds of crime” foundation was not shown against this applicant.
  • Manharibhai Muljibhai Kakadia & Anr v. Shaileshbhai Mohanbhai Patel & Ors, (2012) 10 SCC 517
    Cited by ED to argue that cognizance indicates prima facie application of mind. The High Court did not treat cognizance alone as sufficient to deny bail in the absence of the “proceeds of crime” linkage and in view of Article 21 concerns.
  • A. Kalyan Chandra Sarkar v. Rajesh Ranjan, (2004) 7 SCC 528, Rajesh Ranjan Yadav v. CBI, (2007) 1 SCC 70, State of Bihar & Anr. v. Amit Kumar, (2017) 13 SCC 751
    Cited by ED to argue that long incarceration alone cannot justify bail, especially in serious/economic offences. The High Court’s approach distinguishes these by grounding bail not solely on time, but on (i) weak prima facie proceeds-of-crime nexus, plus (ii) the structural impossibility of early trial.
  • Sagar v. State of Uttar Pradesh, 2025 INSC 137
    Cited by ED to caution against mechanical parity. The High Court’s ultimate grant did not turn on parity alone; it turned on foundational deficiencies in the “proceeds of crime” theory and constitutional-delay considerations.
  • Manish Sisodia v. CBI, 2023 SCC OnLine SC 1393 (Manish Sisodia I) and V. Senthil Balaji, (supra)
    These appeared in ED’s response to resist any fixed “one-year custody” rule. The High Court did not create a bright-line rule; it assessed the concrete trial realities (90,000 pages, 240+ witnesses, pre-charge stage).
  • Anil Tuteja, (supra)
    Relied upon by ED to argue ED’s duty under Section 66(2) and the independence of PMLA proceedings. The High Court accepted the independence in principle but, on facts, found the absence of a demonstrated proceeds-of-crime trail and the applicant’s continued absence from predicate proceedings significant at the bail stage.

3.2 Legal Reasoning

  1. Section 45 PMLA governs bail, but its application still depends on “foundational facts”
    The Court reaffirmed that bail under PMLA is controlled by the twin conditions: (i) reasonable grounds to believe the accused is not guilty; and (ii) not likely to commit an offence on bail. However, it treated “proceeds of crime” as the indispensable foundation for guilt under Section 3. If ED’s theory does not cross that proceeds-of-crime threshold, the first twin condition can be satisfied.
  2. “Proceeds of crime” must be derived/obtained “as a result of” a scheduled offence
    Applying Vijay Madanlal Choudhary v. Union Of India, (2023) 12 SCC 1, the Court held that “proceeds of crime” requires a demonstrable linkage: the property must arise from criminal activity relating to a scheduled offence that has already been committed. ED’s case, as evaluated at the bail stage, was characterised as: funds collected from unknown sources, shown as donations, allegedly intended/used for unlawful activities. The Court found no prima facie evidence that the funds themselves were generated from the commission of a scheduled offence; at most, collection/raising of funds might constitute an offence under some law, but that does not automatically transform such collections into “proceeds of crime” for Section 3 PMLA.
  3. Rejecting “guilt by association” as a substitute for proof of money-laundering activity
    ED emphasised the applicant’s past leadership in PFI and present leadership in SDPI, asserting SDPI as PFI’s “front.” The Court held that mere leadership/association—especially when PFI was lawful during the applicant’s alleged involvement (2009–2018) and SDPI remains lawful—does not, without specific evidence of laundering, establish an offence under Section 3.
  4. Significance of absence from predicate proceedings and Section 66 sharing
    While the Court acknowledged (via Pavana Dibbur v. Enforcement Directorate, 2023 SCC OnLine SC 1586) that an accused need not be arraigned in the scheduled offence to face PMLA, it still treated the following as materially weakening ED’s case at the bail stage: (i) the applicant was not named in the original NIA FIR/RC or ED ECIR; (ii) despite ED’s letter dated 13.06.2025 sharing material with NIA, NIA did not file any supplementary charge-sheet naming him; and (iii) the applicant appeared for the first time only in the 7th supplementary complaint after years of investigation. Drawing from Harish Fabiani and Ors. v. ED and Ors., WP (Crl.) 408/2022 and R.K.M Powergen Private Limited v. ED and Ors., W.P.Nos.4297 & 4300/2025, the Court underscored that inter-agency sharing does not itself “crystallize” a scheduled offence against a person; it remains, in effect, an “assumption” unless acted upon by the competent predicate agency.
  5. Delay and Article 21: the “mega-trial” reality matters
    Independently, the Court treated the case’s scale—about 90,000 pages, 240+ witnesses, multiple accused, digital/forensic material—as making early completion unrealistic. Relying on Union of India v. K.A. Najeeb, (2021) 3 SCC 713 and Manish Sisodia v. Directorate of Enforcement, 2024 SCC OnLine SC 1920 (Manish Sisodia II), it held that indefinite undertrial detention cannot be permitted; the rigours of Section 45 cannot operate to sanction endless incarceration when trial is unlikely to conclude within a reasonable time.

3.3 Impact

  • Stronger insistence on “source linkage” for proceeds of crime
    The judgment reinforces that, even in terror-financing narratives, ED must show (at least prima facie) that the property/funds were derived/obtained as a result of a scheduled offence—not merely that funds were raised suspiciously or later used unlawfully. This narrows the use of PMLA where the alleged illegality is framed as “fund-raising intended for unlawful acts,” without demonstrating scheduled-offence-derived generation.
  • Limits on “front organisation” theory at the bail stage
    The Court’s “guilt by association” critique signals that organisational overlap and leadership roles, without concrete laundering acts tied to proceeds of crime, may be insufficient to defeat bail under Section 45.
  • Section 66(2) as information-sharing, not jurisdiction-expanding
    By aligning with Harish Fabiani and Ors. v. ED and Ors., WP (Crl.) 408/2022 and R.K.M Powergen Private Limited v. ED and Ors., W.P.Nos.4297 & 4300/2025, the judgment may be cited to resist PMLA expansion based on “other-law contraventions” that the competent agency does not register/pursue.
  • Article 21 continues to operate as a safety valve in PMLA
    The Court’s explicit statement that Section 45 rigours cannot sanction indefinite detention strengthens the “constitutional override” line developed in Union of India v. K.A. Najeeb, (2021) 3 SCC 713, likely influencing bail adjudication in voluminous PMLA prosecutions where trials are structurally delayed.

4. Complex Concepts Simplified

  • ECIR: The Enforcement Case Information Report—ED’s internal case registration document (not the same as an FIR).
  • Predicate/Scheduled offence: The underlying offence listed in the PMLA Schedule (e.g., certain IPC/UAPA offences). PMLA action depends on a scheduled offence being in play.
  • Proceeds of crime (Section 2(1)(u) PMLA): Property obtained “as a result of” criminal activity relating to a scheduled offence (or its value). Suspicious money is not automatically proceeds of crime unless tied to such criminal activity.
  • Money laundering (Section 3 PMLA): Involvement in processes/activities connected with proceeds of crime and projecting it as untainted.
  • Section 45 twin conditions: Bail requires (i) reasonable grounds to believe the accused is not guilty, and (ii) not likely to commit an offence on bail—both must be satisfied.
  • Section 66(2) PMLA: If ED finds contravention of other laws, it must share information with the competent agency; ED does not automatically gain power to prosecute those other offences.
  • “Guilt by association”: Treating a person as culpable primarily because of membership/leadership links with an organisation, rather than specific acts satisfying the offence ingredients.

5. Conclusion

This decision is significant for two reinforcing propositions. First, it insists—through Vijay Madanlal Choudhary v. Union Of India, (2023) 12 SCC 1—that “proceeds of crime” must be shown to be derived from scheduled-offence criminality; raising/collecting funds from unknown sources, without proof of scheduled-offence derivation, does not by itself meet Section 3 PMLA. Second, it reasserts that Article 21 prevents Section 45 from becoming a tool for indefinite undertrial incarceration in “mega-trials,” drawing strength from Union of India v. K.A. Najeeb, (2021) 3 SCC 713.

As a precedent, the judgment will likely be deployed in future PMLA bail litigation to challenge (i) prosecutions built primarily on organisational association/front-entity narratives, and (ii) “proceeds of crime” theories that do not demonstrate the required scheduled-offence source linkage—especially where trial timelines are demonstrably unmanageable.