FUGITIVE ECONOMIC OFFENDERS ACT, 2018

What are Basic Features and Benefits to Banking Industry ?

Background :

In recent past years, all print, television and social media platforms were covered prominently  with news of economic offenders fleeing the jurisdiction of Indian courts, anticipating the initiation, or during the pendency, of criminal proceedings against them. After number of financial frauds, especially Rs. 9,000 crores by liquor baron Vijay Mallya and Rs 13,000 crore by diamantine Nirav Modi and Mehul Choksi, who fled the country, it became apparent that the existing civil and criminal provisions are not entirely adequate to deal with the severity of the problem.

The absence of such offenders from Indian courts has several deleterious consequences:

  1. it hampers investigation in criminal cases;
  2. it wastes precious time of courts of law,
  3. it undermines the rule of law in India,
  4. most such cases of economic offences involve non-repayment of huge bank loan default amounts thereby worsening the financial health of the banking sector in Ind

In order to address the said problem, it was felt necessary to lay down new effective and expeditious measures to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts. Therefore, it was proposed to enact legislation, namely, the Fugitive Economic Offenders Act, 2018 to ensure that fugitive economic offenders return to India to face the action in accordance with law.

Commencement:

The Fugitive Economic Offenders Ordinance 2018 was promulgated by President of India on 21st April, 2018. Later on, the Fugitive Economic Offenders Bill, 2018 was passed in Lok Sabha and Rajya Sabha on 19th July, 2018 and 25th July, 2018 respectively. Lastly, with the assent of President on 31st July, 2018, the Fugitive Economic Offenders Act, 2018 has been enacted and come into force.

Purpose :

Fugitive Economic Offenders Act, 2018 aims to preserve the sanctity of the rule of law in India by providing deterrence measures against ‘absconding economic offenders’, who evade of process of law by staying outside of jurisdiction of Indian courts. The act is primarily applicable to big sized or white collar offenders, those involved in financial misdemeanours or frauds, who fled the country to evade criminal trials for economic offences in Indian courts.

Key Features :

Definition of Fugitive economic offender (Section 2(1)(f), FEO Act 2018):

“Fugitive Economic Offender” means any individual against whom a warrant for arrest in relation to a Scheduled Offence has been issued by any Court in India, who—

(i)         has left India so as to avoid criminal prosecution; or

(ii)        being abroad, refuses to return to India to face criminal prosecution

Scheduled Offence (Sec 2(1)(m), FEO Act 2018) :

  • an offence specified in the Schedule, containing 55 offences under 15 various laws, namely –
    • Cheating, forgery and counterfeiting under Indian Penal Code, 1860 (IPC)
    • Dishonour of cheques under Negotiable Instruments Act 1881 (NIA)
    • Illegal gratification/ bribery to public officials under Prevention of Corruption Act, 1988 (PoCA)
    • Money-laundering under the Prevention of Money Laundering Act, 2002 (PMLA)
    • Transactions defrauding creditors under Limited Liability Partnership Act, 2008 (LLP)
    • Fraud under Companies Act, 2013
    • Transactions defrauding creditors under Insolvency & Bankruptcy Code, 2016 (IBC)
  • if the total value involved in such offence or offences is 100 crore or more.

Application for declaration of Fugitive economic offender (Section 4, FEO Act 2018):

01. A Director or Deputy Director (appointed under the Prevention of Money-Laundering Act, 2002) may file an application before a special court (designated under the 2002 Act) to declare a person as a fugitive economic offend

02. Such an application should contain —

  • reasons for the belief that an individual is a fugitive economic offender (on the basis of material in his possession);
  • any information available about whereabouts of the fugitive economic offender;
  • a list of properties believed to be the proceeds of crime for which confiscation is sought;
  • a list of properties or benami properties owned by the individual in India or abroad for which confiscation is sought; and
  • a list of persons who may have an interest in any of the properties listed under clauses (c) and (d).

Attachment of property (Section 5, FEO Act 2018):

01. The Director or Deputy Director, may, with the permission of the Special Court, attach any property mentioned in the application under section 4 by an order in writing.

02. The Director or Deputy Director, may also, by an order in writing, at any time prior to the filing of the application under section 4, attach provisionally any property—

  • for which there is a reason to believe that the property is proceeds of crime, or is a property owned by an individual who is a fugitive economic offender; and
  • which is being or is likely to be being unavailable for confiscation

Provided that the Director or Deputy Director shall file an application u/sec 4 before the Special Court within a period of 30 days from the date of such attachment.

  • The attachment of property shall continue for a period of 180 days from the date of order of attachment unless extended by the Special Court before the expiry of such period.

Notice to the Offender (Section 10, FEO Act 2018)

01. The Special Court shall issue a notice to the individual who is alleged to be a fugitive economic offender in application filed u/s 4.

02. Such a notice u/ sub-sec 10 (1) shall—

  • require the individual to appear at a specified place and time not less than six weeks from the date of issue of such notice; and
  • state that failure to appear on the specified place and time shall result in a declaration of the individual as a fugitive economic offender and confiscation of property under the Act.

03. The notice may also be served to the individual alleged to be a fugitive economic offender by electronic means to—

  • his electronic mail address submitted in application for allotment of PAN card.
  • his electronic mail address submitted in application for enrolment of Aadhaar;
  • any other electronic account as may be prescribed.

subject to the satisfaction of the Special Court that such account has been recently accessed by the individual and constitutes a reasonable method for communication of the notice to the individual.

Hearing of Application (Section 11, FEO Act 018)

  • If the individual, to whom notice has been issued, appears in person at the place and time specified in the notice, the Special Court may terminate the proceedings under this Act.
  • If the individual, to whom notice has been issued, fails to appear at the place and time specified in the notice, but enters appearance through counsel, the Special Court may in its discretion give a period of one week to file a reply to the application under section 4.
  • If the individual, to whom notice has been issued, fails to enter appearance either in person or through counsel, the Special Court may, if it is satisfied—
  • that service of notice has been effected on such party; or
  • that notice could not be served in spite of best efforts because such individual has evaded service of notice.

proceed to hear the application after recording the reasons in writing.

Declaration of Fugitive Economic Offender (Section 12 (1), FEO Act 2018)

The Special Court, after hearing the application under section 4, and if it is satisfied that an individual is a fugitive economic offender, may, by an order, declare the individual as a fugitive economic offender for reasons to be recorded in writing.

Confiscation of Properties (Section 12(2), FEO Act, 2018):

01. The Special Court, on a declaration of fugitive economic offender, may order that any of the following properties stand confiscated to the Central Government—

  • the proceeds of crime in India or abroad, whether or not such property is owned by the fugitive economic offender; and
  • any other property or benami property in India or abroad, owned by the fugitive economic offender.

02. If confiscated property is in a contracting State, the Special Court may issue a letter of request to a Court or authority in the contracting State for execution of such order.

03. The Special Court may, while making the confiscation order, exempt from confiscation any property which is a proceed of crime in which any other person, other than the fugitive economic offender, has an interest if it is satisfied that such interest was acquired bonafide and without knowledge of the fact that the property was proceeds of crime.

04. All the rights and title in the confiscated property shall, from the date of the confiscation order, vest in the Central Government, free from all encumbrances.

05. Where on the conclusion of the proceedings, the Special Court finds that the individual is not a fugitive economic offender, the Special Court shall order release of property or record attached or seized under this Act to the person entitled to receive it.

06. Where an order releasing the property has been made by the Special Court under sub-section (9), the Director or Deputy Director may withhold the release of any such property for a period of 90 days from the date of receipt of such order, if he is of the opinion that such property is relevant for the appeal proceedings under this Act.

Supplementary Application (Section 13, FEO Act 2018) :

Where at any time after the institution of the application under section 4, any other property is discovered or identified which constitutes proceeds of crime or is property owned by the fugitive economic offender liable to be confiscated under this Act, the Director or Deputy Director may file a supplementary application in the Special Court seeking confiscation of such properties.

Power to disallow civil claims (Section 14, FEO Act 2018):

  • Any civil court or tribunal may disallow a person, who has been declared  a  fugitive  economic  offender,  from  filing  or  defending  any  civil claim.
  • Any civil court or tribunal may also disallow any company or limited liability partnership, where such a person; who has been declared a fugitive economic offender, is a majority shareholder, promoter, or a key managerial person, from filing or defending any civil claim

Appointment of Administrator (Section 15, FEO Act, 2018):

The Central Government may, by order published in the Official Gazette, appoint Administrator (s) (not below the rank of a Joint Secretary to the Government of India) to manage and dispose of confiscated properties u/s 12. However, Administrator shall not dispose of any confiscated property for a period of 90 days from the date of the order u/ ss 12 (2).

Appeal (Section 17, FEO Act 2018):

An Appeal against the order of the special court may be filed before the High Court within a period of 30 days or maximum 90 days on discretion of the High Court, from the date of such order.

Observations:

The pre-conviction confiscation under FEO Act 2018 is adoption of United Nations Convention against Corruption (“UNCC“), which India ratified in 2011. Article 54 (1)(c) of the UNCC enables signatory countries, as may be necessary, to allow confiscation of such property without a criminal conviction in cases in which the offender cannot be prosecuted by reason of death or absence.

Earlier big economic offenders, after doing financial fraud or default of hundreds and thousands of crore amount; wilfully or un-wilfully would leave the country and enjoy their life freely, knowing the absence or incapability of any law to bring them back to India for jurisdiction and recovery of amount. But now any person, who is accused of a schedule financial offence of 100 crore or more; has been issued the arrest warrant; fled the country and refuses to come back to India can be booked as ‘Fugitive Economic Offender’ under this new law.

Once declared a ‘Fugitive Economic Offender’ by the Special Court, the FEO law provides two significant deterrence measures against such person :

Confiscation and Sell of Proceeds and Assets

  • The Special Court can order immediate confiscation of proceeds of crime and property owned by the Fugitive Economic Offender, whether in India or abroad. Thereafter, government can also sell the confiscated property after 90 days from the order of the confiscation.
  • While provisions for confiscation are already provided under the PMLA and the Code of Criminal Procedure, 1973 (CrPC), such confiscation can be ordered only as the final step after the conclusion of the trial, which usually takes several years. Until then, the government could have only attached the property. Attachment, as differentiated from confiscation, does not have the effect of vesting the property in the government’s name and consequently does not allow for its sale.
  • The term ‘proceeds of crime’ continues to have a wide scope (much like in the case of the PMLA) to include any property, derived or obtained, directly or indirectly, by ‘any person’ as a result of criminal activity relating to a Scheduled Offence.

Disallowance of Civil Claims

  • A ‘Fugitive Economic Offender’ or a company or limited liability partnership, where such ‘Fugitive Economic Offender’ is a majority shareholder, promoter, or a key managerial person can be disallowed from filing or defending any civil claims by a civil court or tribunal.

The immediate confiscation (and consequent sell) of properties and disallowance of civil claims will definitely force a ‘Fugitive Economic Offender’ to submit to jurisdiction of Indian courts to face the judicial proceedings.

Benefits to Banking Industry:

The increasing number of fraud cases reported by banks and defaults of bank debts, not only increases the level of Non Performing Assets of banks but also constitute the largest portion of economic offences. The number of fraud cases reported by banks, which generally averaged around 4,500 cases a year in the past 10 years skyrocketed to a shocking number of 5,835 cases in the year 2017-18. This year itself it has been estimated that the banking and finance sector has suffered losses of a staggering amount of Rs. 41,000 crore due to frauds. It includes Nirav Modi, Vijay Mallaya and others, who fled the country without paying huge bank dues.

The scheduled offences under the law include dishonour of cheques under Negotiable Instruments Act 1881, Transactions defrauding creditors under Insolvency & Bankruptcy Code, 2016, Cheating, forgery and counterfeiting under Indian Penal Code, 1860 and conducting the business of a company with intent to defraud its creditors and fraud under Companies Act, 2013, wherein fraudsters and defaulters of banks, fled the country, can now be booked to submit to Indian courts.

This would help the banks and other financial institutions to achieve higher recovery from financial defaults committed by such fugitive economic offenders, improving the financial health of such institutions.

Conclusion :

The Fugitive Economic Offenders Act might look to have some similar provisions of other statues or to have some arbitrary sections, but it has a strong intent of making big financial absconders compelled to surrender to Indian jurisdiction. It is expected to re-establish the rule of law by speedy confiscation of properties forcing the fugitive to return to India and face trial for his offences.

The effective and robust implementation of the Act would help to secure recovery of huge money by selling the property so confiscated. This would also help the banks and other financial institutions to achieve higher recovery from financial defaults committed by such fugitive economic offenders, improving the financial health of such institutions.

In January 2019, the Minister of State for Finance informed the Parliament that 27 defaulting business and economic offenders, under pending probes of Directorate of Enforcement (ED) and Central Bureau of Investigation (CBI), fled the country in last five years. He also informed that Directorate of Enforcement (ED) filed applications under Fugitive Economic Offender Act 2018 against seven defaulting persons involving amount of Rs. 27,968.83 crore.  Mr. Vijay Mallya is first to have been declared a ‘Fugitive Economic Offender’ under the Fugitive Economic Offenders Act, 2018 by Special PMLA Court on 5th January 2019.

In coming few days or months, it will be seen how the said Act would work in tandem with the existing statutes especially in relation to attachment or confiscation of properties and recovery of dues under different statutes.


Author

SHYAM KAGWAR

Chief Manager (Research),State Bank Institute of Credit & Risk Management (SBICRM), Gurugram


Published : Banking Finance, February 2018