perspectives Law

Running Argument

The flaws in the draft Fugitive Economic Offenders Bill

By ABHINAV SEKHRI | 1 August 2017

During the telecast of the group-stage Champions Trophy match between India and Pakistan at Edgbaston in early June, a cameraperson picked out the beleaguered liquor baron Vijay Mallya in the crowd, coolly sipping a drink. Mallya—whose brand, Kingfisher, was the tournament’s “Official Lager Partner”—promised in interviews after the game that he would attend all of the Indian team’s remaining Champions Trophy matches.

Mallya’s appearance at the match created a media flurry, since he is wanted by Indian law-enforcement agencies for multiple alleged economic offences, including cheating and money laundering. He is also estimated to owe around Rs 9,000 crore to public-sector banks.

Mallya left India in March 2016, before investigative agencies could secure warrants for his arrest. This April, he was arrested by the UK police on behalf of Indian authorities, and was then released on bail. The Indian government had already been facing criticism for not bringing Mallya to book, and his appearance at the match two months after his arrest only earned it more flak.

Mallya’s unpaid arrears, in particular, are part of a larger problem facing India’s public-sector banks. Several of these—including the State Bank of India, UCO Bank and IDBI Bank—have amassed bad debts worth many thousands of crores of rupees. Critics have described this large-scale mismanagement of taxpayers’ money as a crisis, and have assailed the government for having done little to avert it.

Perhaps in response to these critics, the government has taken measures to strengthen its hand against economic offenders. Among these measures is the Banking Regulation (Amendment) Ordinance, passed in May, which aims to expedite banks’ recovery of unpaid loans. The government has also declared that it will take steps to end the impunity currently enjoyed by corporate defaulters such as Mallya. In May, the finance ministry shared for public comment a draft of the Fugitive Economic Offenders Bill, which seeks to ensure that defaulters absconding from the country return to face formal processes.

In an explanatory note, the ministry stated that present laws against economic offenders are “not entirely adequate to deal with the severity of the problem.” Citing cases of debt default and money laundering, the note pointed out that while some existing laws, such as the Prevention of Money Laundering Act, allow for the confiscation of wrongdoers’ properties, the procedures they prescribe are “time-consuming.” In money-laundering cases, it said, “the purpose for such confiscation is as punishment for the offence committed and not strictly as a deterrent for any absconding accused to return to India.”

The proposed law covers cases involving sums over Rs 100 crore, and a set of offences that includes cheating, customs fraud and securities fraud. Where it applies, the government may invoke a process to swiftly seize properties from the accused person. This process is triggered when an authorised officer (a director- or deputy-director-level officer in the Enforcement Directorate) files an application before a Special Court, stating that a person is abroad, and has failed to appear before investigators despite the issuance of warrants, with the intent of avoiding the law. The application must mention a list of properties connected to the case in question, as well as all other properties owned by the person in India. The Special Court will then issue a notice to this person, and if she does not appear in court within six weeks, the court may declare her a “fugitive economic offender.”

Before this declaration is made, the properties in the application can, on orders from the authorised officer, be attached—that is, prevented from being sold or traded while the issue is decided. If the court goes on to authorise their confiscation, the state can then sell them. If the accused appears in court within six weeks of the notice’s issuance, proceedings under the proposed law are automatically terminated. But once a person is declared a fugitive economic offender, the only recourse available is to appeal before the concerned high court. (If, during the six-week waiting period, an advocate representing the accused appears before the court in lieu of the accused herself, the accused must file a written reply to the allegations against her. The law says nothing about the procedure to be followed in such instances thereafter.)

The law also proposes additional measures that may be implemented once a person is declared a fugitive economic offender. One, companies where the person occupies a “key managerial position” or is a promoter or majority shareholder will be barred from defending themselves in any civil cases. Two, all property associated with the alleged offence will be confiscated by the central government without any encumbrances—and an additional clause also proposes that “any other property in India” owned by the alleged offender can also be confiscated. These properties will be handed over to an administrator who will then settle the claims of the person’s creditors.

Historically, whenever the Indian government has turned its attention to economic offences it has failed to examine its own role in creating the conditions that allowed the wrongdoing. Instead, it has tended—regardless of the party in power—to prescribe harsh punishments for offenders. Both these trends hold true in the present instance, and offer valid cause for concern. But there is another, perhaps more pressing cause for concern too: the bill, in its current form, is so excessive as to be prone to collapse if constitutionally challenged.

Perhaps the first Indian law to crack down on people taking advantage of unsound economic policies was passed in 1964. The Planning Commission’s socialist economic policies had largely failed, resulting in a food shortage through the 1960s. In response to severe criticism on this front, the government passed the Essential Commodities (Amendment) Ordinance, which allowed courts to hold summary trials—the shortest possible procedure for criminal cases under Indian law—of suspected hoarders and black-marketeers. The law allowed for hefty sentences and fines, and it precluded appeals in cases involving fines of up to Rs 2,000, a huge sum at the time.

The country’s most acute economic challenges in the next decade involved low foreign-exchange reserves and a sharply devalued rupee. The Congress government under Indira Gandhi chose to squeeze the markets for imported goods and foreign exchange through a restrictive regime of licences. This, however, furthered the growth of an underground economy. The government responded with draconian laws such as the Maintenance of Internal Security Act, the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, and the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act. These became widely known by their dreaded acronyms—MISA, COFEPOSA and SAFEMA. (While MISA has since been repealed, the two latter laws remain in force.) MISA and COFEPOSA permitted preventive detention, for up to six months without trial, of those suspected of certain crimes, including smuggling. SAFEMA allowed the government to confiscate any properties that it suspected were ill-gotten.

A pattern was emerging. The government would make questionable policies with detrimental public effects that became election issues. It would then crack down on those seen as gaming the system as a way of signalling its good intent, and use this to court votes, particularly among the poor.

The government’s response to the current crisis of “non-performing assets” in the banking system is in keeping with this trend. The present situation, with tens of thousands of crores of rupees in bad debt concentrated in the hands of relatively few corporate defaulters, owes in some measure to questionable policy decisions and lending patterns very often overseen by the government-appointed and politically malleable chiefs of public-sector banks. Mallya’s case is serious and merits action, but the government’s zeal in pursuing him in particular suggests populist scapegoating more than a concerted clampdown. It has appeared—at least publicly—far less zealous in chasing down the far greater debts of companies such as Bhushan Steel and Essar.

The Supreme Court has, so far, consistently supported harsh laws to tackle economic offences. One illustrative case is Dropti Devi vs Union of India, from 2012. There, the petitioners challenged the provisions for preventive detention under COFEPOSA. They pointed out that the overarching foreign-exchange law, the Foreign Exchange Regulation Act of 1973, had been replaced by the more lenient Foreign Exchange Management Act of 1999, which mandated no imprisonment for foreign-exchange violations. Based on this, they argued that COFEPOSA’s provisions for detention should be read down. The Supreme Court disagreed, observing, “The menace of smuggling and foreign exchange violations has to be curbed. Notwithstanding the many disadvantages of preventive detention, particularly in a country like ours where the right to personal liberty has been placed on a very high pedestal, the Constitution has adopted preventive detention to prevent the greater evil of elements imperilling the security, the safety of State and the welfare of the Nation.”

Despite this, there is a high chance that the present draft bill would not pass muster before the court, since it overshoots the historically sanctioned excesses against economic offenders in several ways.

First, it lacks measures for due scrutiny before the government can take coercive measures. Under SAFEMA, an accused person’s properties can only be confiscated if she is convicted of certain offences, or detained under COFEPOSA. In the latter case, any preventive detention lasting beyond three months must, according to the constitution, be reviewed by a tribunal that includes persons who have served as or are qualified to be high-court judges—and confiscation is only allowed if that tribunal finds the ongoing detention justified. The draft bill, however, prescribes forfeiture of property based solely on allegations of wrongdoing. Although the Special Court that would hear cases under the proposed law would have to satisfy itself that the accused person has failed to appear despite the issuance of warrants, the draft bill is silent on whether the court must also satisfy itself of the veracity of the allegations made. Since it is common for investigators to put forth their best possible case in framing initial accusations, it is likely that their claims before the court will be exaggerated to allow them recourse to exceptional remedies.

Second, the draft bill’s proposed remedies outdo anything included in its predecessors. Disentitling an entire company from defending itself in civil proceedings, for instance, threatens to condemn all of its shareholders for the possibly illegal conduct of just one of them.

Further, even the provisions for confiscation of property are excessive. The bill allows the seizure of all of the offender’s property in India, regardless of how much property would need to be confiscated to pay off the offender’s liabilities. Some comparable global provisions, such as the United Kingdom’s Proceeds of Crime Act 2002, mandate that courts inquire into the total sum owed before deciding the extent of forfeiture. (Curiously, the draft bill is also silent on what happens if an appeal is successful and properties have already been sold.)

The provisions in the draft bill, if they become law, would certainly help the government bring alleged fraudsters such as Mallya to justice. But while crafting any law to rein in economic malfeasance, the government must not ignore the overarching problems of policy and regulation that lead to situations such as the current banking crisis, which it is responsible for. Further, a law that cuts as many corners as the proposed one opens itself up to constitutional challenges that it might well not overcome—and that would mean it does not strengthen the government’s hand at all.

Abhinav Sekhri is a lawyer practising in the trial courts of Delhi. His primary interests are criminal law and procedure.

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