41. Fugitive Economic Offenders Bill 2018

Parliament has approved a legislation to help the government bring back fugitives involved in white-collar crimes to stand trial in India.

o   It seeks to confiscate properties of economic offenders who have left the country to avoid facing criminal prosecution.

Who is a Fugitive Economic Offender?

o   A fugitive economic offender has been defined as a person against whom an arrest warrant has been issued for committing specified offences over Rs 100 crore in value, and Further the person has:

                                  i.            Left the country to avoid facing prosecution

                                 ii.            Refuses to return to face prosecution.

o   There are 55 economic offences covered under this definition including tax evasion, money laundering, transactions defrauding creditors, benami transactions, counterfeiting government stamps or currency and dishonoring cheques.

o    Some of the offences listed in the schedule are:

                                i.            Counterfeiting government stamps or currency

                               ii.            Chequedishonourfor insufficiency of funds

                              iii.            Money laundering

                             iv.            Transactions defrauding creditors.

o   The Bill allows the central government to amend the schedule through a notification.

What is the process involved?

Application

o   A director or deputy director (appointed under the Prevention of MoneyLaundering Act, 2002) may file an application before a special court (designated under the 2002 Act) to declare a person as a fugitive economic offender.

o   The application will contain:

                                 i.            The reasons to believe that an individual is a fugitive economic offender

                               ii.            Any information about his whereabouts

                              iii.            List of properties believed to be proceeds of a crime for which confiscation is sought

                             iv.            A list of benami properties or foreign properties for which confiscation is sought

                               v.            A list of persons having an interest in these properties.

o   Upon receiving an application, the special court will issue a notice to the individual

                                 i.            Requiring him to appear at a specified place within on a date which is six weeks after the issue of notice

                               ii.            Stating that a failure to appear will result in him being declared a fugitive economic offender.

                              iii.             If the person appears at the specified place, the special court will terminate its proceedings under the provisions of this Bill.

Attachment of property

o   The director or deputy director may attach any property mentioned in the application with the permission of a special court.

o   Further, these authorities may provisionally attach any property without the prior permission of the special court, provided that they file an application before the court within 30 days.

o   The attachment will continue for 180 days, unless extended by the special court. If at the conclusion of proceedings, the person is not found to be a fugitive economic offender, his properties will be released.

Attachment is a legal process by which a court of law, at the request of a creditor, designates specific property owned by the debtor to be transferred to the creditor, or sold for the benefit of the creditor. A wide variety of legal mechanisms are employed by debtors to prevent the attachment of their assets.

Declaration as fugitive economic offender

o   After hearing the application, the special court may declare an individual as a fugitive economic offender.

o   It may confiscate properties which

                                i.            Are proceeds of crime

                              ii.            Are benami properties in India or abroad

                            iii.            Any other property in India or abroad.

o   Upon confiscation, all rights and titles of the property will vest in the central government, free from all encumbrances (such as any charges on the property).

o   The central government will appoint an administrator to manage and dispose of these properties.

o   The Bill allows any civil court or tribunal to disallow a person, who has been declared a fugitive economic offender, from filing or defending any civil claim.

Powers of the director

o   The director or deputy director will have the powers vested in a civil court.

o   These powers include

                                 i.            Entering a place on the belief that an individual is a fugitive economic offender

                               ii.            Directing that a building be searched, or documents be seized.

Appeal

o   Appeals against the orders of the special court will lie before the High Court

Key Issues

Ø  Barring an FEO from filling a civil claim

o   Under the Bill, any court or tribunal may bar an FEO or an associated company from filing or defending civil claims before it. 

o   Barring these persons from filing or defending civil claims may violate Article 21 of the Constitution i.e. the right to life. 

o   Article 21 has been interpreted to include the right to access justice.

o   They can’t even defend themselves if someone else files a civil case against them, for instance for defamation or nuisance, which would mean they would automatically lose those cases.

o   On top of this, the Bill also says that if any representative, promoter, key managerial personnel, majority shareholder or owner of a controlling interest in a company or LLP is declared a fugitive economic offender, then the company or LLP can’t file or defend cases either.

o   Again, this can be the case even if the company has nothing to do with whatever offence the fugitive is alleged to have committed.

The government has also inserted a clause to protect itself and officers from any legal action. Those classified as fugitives will also not be able to pursue civil cases in India unless they come back to India and face prosecution.

Ø  Fate of unsecured creditors

• Under the Bill, an FEO’s property may be confiscated and vested in the central government. 
• The Bill allows the Special Court to exempt properties where certain persons may have an interest in such property (e.g., secured creditors). 
• However, it does not specify whether the central government will share sale proceeds with any other claimants who do not have such an interest (e.g., unsecured creditors). 

Ø  Absence of search warrant

o   The Bill does not require the authorities to obtain a search warrant or ensure the presence of witnesses before a search. 

o   This differs from other laws, such as the Code of Criminal Procedure (CrPC), 1973, which contain such safeguards.  

o   These safeguards protect against harassment and planting of evidence.

Ø  Confiscation of property

o   The Bill provides for confiscation of property upon a person being declared an FEO. 

o   This differs from other laws, such as CrPC, 1973, where confiscation is final two years after proclamation as absconder.

Ø  Easily circumvented

o   The draft of the FEO bill that is in the public domain does not provide for a situation where confiscated property is in excess of the claims against the fugitive offender.

o   If the scope of the proposed Bill is restricted to offences whose value is Rs. 100 crore or more, it could just as easily be circumvented by mischievous or devious actions.

Positive Outcome of the Bill

Ø  Aid the Banking and Judicial system

o   Given the apparent ease with which economic offenders flee India and cock a snook at the banking and judicial systems, the proposed law to seize their wealth is undoubtedly a welcome measure. 

o   Legal provisions to confiscate the assets of offenders already exist, but these are regarded as somewhat inadequate.

o   The Fugitive Economic Offenders Bill, aims to make up for the shortcomings and provide a fresh legal framework that would enable the confiscation of the property of those evading prosecution by fleeing the country or remaining abroad.

o   This is expected to help banks and other financial institutions achieve higher recovery from financial defaults committed by fugitive economic offenders, thereby improving the overall financial condition of these institutions.

Ø  Past Instances

o   There remains great consternation over liquor baron Vijay Mallya’s flight from the country, with his now-defunct Kingfisher Airlines having run up outstanding loans of over ₹9,000 crore from Indian banks.

o    Both Mr. Mallya and former Indian Premier League commissioner Lalit Modi, who faces an Enforcement Directorate probe for foreign exchange law violations, are in Britain.

o   They left Indian shores for safer climes , as did diamond merchants Nirav Modi, Mehul Choksi and their associates, whose firms defrauded the country’s second largest public sector bank of over ₹12,800 crore.

o   Though government agencies have attached the diamond merchant duo’s assets in India, an American court has disallowed the sale of their assets in other jurisdictions while allowing their U.S.-based entity to offload its assets. The reason: India is yet to pass a model law mooted by the UN for cross-border insolvency cases.

o    It is not clear whether this ordinance can tide over this major handicap.

Ø  Catch big offenders

o   The FEO bill has a pretty clear aim - target fugitives in offences exceeding 100 crore rupees in value.

o   It was being done to "catch the big offenders and not to clog the courts." 

o   The proposed law will extend to loan defaulters and fraudsters as well as to individuals who violate laws governing taxes, black money, benami properties and financial corruption.

On whom does the burden of proof lie?

o   In keeping with the principle of ‘innocent until proven guilty’, the burden of proof for establishing that an individual is a fugitive economic offender or that certain property is part of the proceeds of a crime is on the Director appointed to file an application seeking fugitive economic offender status.

Why was such a law needed, in the first place?

Ø  Cumbersome Extradition

o   The existing provisions of the law do not impeder fugitive economic offenders.

o   This  is because the extradition between India and other countries is generally cumbersome.

o   India is not a favoured country in case of extradition requests.

o   Courts in the UK have rejected the extradition requests on the ground that the jail condition in India was inhumane and that the accused could not be guaranteed a fair prosecution.

o    This unexpected argument was most recently on display in connection with Vijay Mallya’s extradition request.

Ø  Confiscation of Property

o   Confiscation of property belonging to offenders is already allowed under different laws.

o   The Prevention of Money Laundering (PML) Act, 2002, prescribes three stages before the final confiscation of an accused’s property - provisional attachment of the property; confirmation of the attachment pursuant to adjudication; and the confiscation of the property subject to conviction.

o   Under the PML Act, only the proceeds of crime or such property that is involved in money laundering attract the provisions of attachment.

What is the latest development with Vijay Mallya and Nirav Modi?

o   A special Prevention of Money Laundering Act court on June 30 took cognisance of an application by the Enforcement Directorate (ED) under the Ordinance and issued summons to Vijay Mallya and others before it on August 27, 2018.

o    The ED on July 11 also moved a special court in Mumbai seeking ‘fugitive economic offender’ status for Nirav Modi and his uncle MehulChoksi.

GK: Understanding LoU and PNB Scam (ECONOMICS)

State-owned lender Punjab National Bank (PNB) has informed the Bombay Stock Exchange that it has detected fraudulent transactions worth $ 1,771.7 million (over Rs 11,000 crore) in its mid-corporate branch at Brady House, South Mumbai. PNB has alleged that two employees had “fraudulently issued Letters of Undertaking (LoUs) and transmitted SWIFT instructions to the overseas branches of Indian Banks” to raise buyers credit for companies of billionaire diamond jeweller Nirav Modi without “making entries in the bank system”.

So, what is an LoU, and how is it issued?

An LoU is an assurance given by one bank to another to meet a liability on behalf of a customer. The LoU is akin to a letter of credit or a guarantee. LoUs are used in international banking transactions. An LoU is issued for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas. According to norms, the term of an LoU is 180 days, and can be rolled over once for six months. Since LoUs are a form of lending, they are typically backed by security.

LoUs are conveyed from bank to bank through Society for Worldwide Interbank Financial Telecommunication (SWIFT) instructions, which pass through a triple layer of checks. A SWIFT instruction, which represents a bank’s consent, is cleared by a maker, a checker and a verifier before it is sent across. There is no reported instance so far of a breach in SWIFT instructions anywhere in the world.

What are the specific allegations by PNB in the present case?

PNB has alleged that two of its employees “fraudulently” issued LoUs and “transmitted SWIFT instructions to the overseas branches of Indian Banks” to raise buyers’ credit for Nirav Modi’s firms, Diamond R US, Solar Exports, and Stellar Diamonds, without making entries in the bank system

The bank has alleged that one such fraudulent LoU issuance took place on January 16, 2018, for and on behalf of Modi’s firms, which allegedly presented a set of import documents to the branch, with a request to allow buyers’ credit for making payments to suppliers overseas. When bank officials requested the firms to furnish 100% cash margin for the LoU, the firms argued that they had availed this facility in the past as well.

However, branch records did not have the details of any such facility having been granted to the firms. An internal probe by the bank then found that a few of its employees had fraudulently issued LoUs for Hong Kong branches of two Indian banks for and on behalf of Modi’s firms. PNB has alleged that the buyers’ credit based on the fake LOUs may also have been paid through a Nostro account — which is an account that a bank holds in a foreign currency in another bank.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment. SWIFT also sells software and services to financial institutions, much of it for use on the SWIFTNet Network, and ISO 9362. Business Identifier Codes (BICs, previously Bank Identifier Codes) are popularly known as "SWIFT codes".

SWIFT transports financial messages in a highly secure way but does not hold accounts for its members and does not perform any form of clearing or settlement.

SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

SWIFT is a cooperative society under Belgian law owned by its member financial institutions with offices around the world. (Founded 1973)

Source:

http://indianexpress.com/article/explained/inside-the-pnb-fraud-what-an-lou-is-how-case-may-impact-the-bank-nirav-modi-5064357/

PNB Scam (22.02.18)

HOW SCAM OCCURRED?

How did the Punjab National Bank (PNB) scam work?

Diamond merchant Nirav Modi has been accused of siphoning off funds worth about ₹11,500 crore from the public sector bank, PNB. A key element of the scam is the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging network that connects banks and other financial institutions across the world. Among other things, a bank that is part of SWIFT can use the system to convey credit instruments called letters of undertaking (LoUs) to other banks located overseas. An LoU is simply a request made to another bank in the SWIFT network to loan money to a client. The bank that issues the LoU essentially guarantees the bank that receives the LoU request that it stands by the creditworthiness of the borrower. That is, in case of a default, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower. PNB alleges that employees at one of its branches in Mumbai issued fraudulent LoUs that were not authorised by its management. This allegedly allowed Mr. Modi's companies to obtain loans from the overseas branches of various Indian banks.

Why did it happen?

PNB’s internal information systems were not seamlessly linked to SWIFT. It is claimed that the huge fund transfers made via SWIFT to Mr. Modi’s companies by a few PNB employees went undetected for many years. Many critics, however, contend that the fraud is not simply a matter of the failure of PNB’s internal control system. Instead, they blame flaws in the ownership of public sector banks. In fact, the PNB scam came to light only after a whistle-blower exposed it.

Is this the first time?

No. SWIFT has been gamed by miscreants on a number of occasions. In 2016, there was a cyber-heist of $81 million from Bangladesh’s central bank. Russia’s central bank recently reported that $6 million was stolen from a Russian bank last year by exploiting the SWIFT system. Even the Reserve Bank of India stated this week that it had privately warned Indian banks about the prospect of misuse of SWIFT at least three times since August 2016.

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A DEEPER MALADY: ON PNB FRAUD CASE

Barely days after news of the ₹11,500 crore fraud at Punjab National Bank broke, another but very different scam of a ₹3,695 crore wilful loan default has surfaced. The Central Bureau of Investigation has registered a case against three directors of a Kanpur-based company, and others including unknown bank officials, on allegations of cheating a consortium of banks by siphoning off loans disbursed to the company. If the two cases must be compared, the similarities lie in the breakdown in internal control mechanisms and in the supervisory failure at the banks. In the case of Kanpur-based Rotomac Global, it had availed credit limits from a consortium of seven public sector banks. Given that the facility was made available from 2008 (in the case of Bank of Baroda, which filed the complaint with the CBI), and was used for a range of seemingly unrelated transactions including the import of gems and jewellery and the export of wheat, it is especially surprising that it took such a long time for this diversion of funds to surface as a criminal complaint. It is one thing for individual bank officials to have been complicit in the commission of frauds as has been claimed in the PNB case but quite another for supervisory cadre and risk detection and management systems to have delayed taking remedial action as they did in the Rotomac case. It took too long for the criminal complaints to be filed against the defaulters. On Bank of Baroda’s website Rotomac was listed as its top defaulter almost a year ago; the account had been classified as an NPA in 2015.

In the case of the Punjab National Bank fraud, letters of undertaking were issued bypassing the bank’s reporting system; the three-tier audit failed to detect the malfeasance. In contrast, BoB was not oblivious of the Rotomac default and took unconscionably long to act. It is important to determine why the Reserve Bank of India, which is vested with keeping an eye on bank books, was unable to take prompt corrective action in this case. Rather than routinely reiterate the importance of strengthening corporate governance in public sector banks and promising to infuse greater professionalism, transparency and accountability, it is time the Centre, the major shareholder in these institutions, takes serious steps to translate this intent into action. Any improvement in the functioning of the PSBs cannot be undertaken without empowering bank managements and securing their independence from political interference while enforcing strict accountability for lapses. To restore the depositor’s faith in the banking system, the government, the RBI and the judiciary must ensure that prompt and salutary action is taken. The economic cost of doing otherwise is too painful to imagine.

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GEM OF A SCAM: ON PNB FRAUD

A regulatory filing to the stock exchanges by Punjab National Bank has blown the lid off a ₹11,500-crore fraud. Perhaps the largest such scam in India, it was perpetrated by a maverick diamond merchant in collusion with bank officials at a single branch in South Mumbai. For India’s second largest bank to be defrauded in the manner suggested is astounding, especially since there has been heightened scrutiny of public sector banks’ operations in the last few years. The bank’s audit committees and boards, as well as the central bank, which conducts routine financial inspections of banks’ books, have been ostensibly keeping a close watch on the loans that have turned substandard or are on the verge of default. The government, which has often blamed the pile of bad loans on crony capitalism during the UPA regime, just last month unveiled a plan to infuse about ₹1 lakh crore into 21 capital-starved public sector banks this fiscal. Of this, ₹5,473 crore is to be injected into PNB. So even if the actual loss the bank ends up incurring on account of this fraud is half the stated amount, its capital adequacy ratio will be back to the same level before the recapitalisation was announced. Its market capitalisation has tanked ₹8,077 crore over the past two days, with the share price falling over 20% since the news broke.

The bank’s top brass has said it has acted promptly, suspending around 10 officials. The Central Bureau of Investigation has booked one retired and one serving PNB employee so far. It is also difficult to believe that a handful of junior employees could orchestrate such a massive fraud. The bank’s managing director has claimed that supervisory lapses are being probed, and the Enforcement Directorate has initiated a money laundering case against the main accused, billionaire-jeweller Nirav Modi, his wife Ami Modi and close associates and relatives. The firms run by him had seen a meteoric rise and an IPO was in the offing after buyouts of global players and a ramp-up of retail presence in India and abroad. It appears that the bank employees who assisted in the fraud routed large transactions for the borrowers by circumventing the core banking solution. This flies in the face of the government’s push for a digital payment economy. PNB has sought to blame overseas branches of other banks for not undertaking due diligence before accepting such transactions, but that may be too simplistic an explanation. An inquiry by the RBI must get to the bottom of the systemic lapses in this affair and fix accountability across the chain of command. The banker-borrower nexus has been blamed for problems in the banking system for years. This episode will set off fears of a nexus deeper than imagined. The RBI and investigating agencies should act speedily to restore trust in the banking system.

(All of the above articles have been taken straight from The Hindu. We owe it all to them. This is just a small effort to consolidate opinions expressed in The Hindu in a subject-wise manner.)