Curbing the menace of increasing fugitive economic offenders

An Analysis of the Fugitive Economic Offender’s Act, 2018.

A huge number of reports pertaining to financial irregularities concerning eminent Indian businesspersons have come to light the past year. These irregularities involved manipulation, forgery, fraud in obtaining financial guarantees from National Banks in form of LoU(s) [Letters of Undertaking] Letters of credits etc. As a result, huge financial losses were faced by various lenders and investors. The economic offenders were further observed to flee to various countries around the world so as to avoid prosecution under the Indian Penal Code and other Statutes.

Indian authorities such as the Enforcement Directorate and the Central Bureau of investigation found extraditing these ‘fugitives’ to be an extremely lengthy and arduous task. Since the nature of the offences committed by these offenders is economic, time is of essence, as prolonged legal proceedings tend to devalue the assets and businesses owned by these individuals, making it difficult for the government to realize the amount and repay the original lenders and investors. Further, the value of the related assets in these frauds was found to be miniscule considering the quantum of the money owed pertaining to them.

The existing laws prevented the authorities from attaching properties not connected to the offence, which worked miraculously for the offenders. In the absence of a threat to their property, these willful financial defaulters kept disregarding the rule of law and avoided criminal proceedings.

On 29th January, 2018, PNB filed a complaint regarding a Rs.280 Crore fraud played on the national lender. On 31st January CBI booked Nirav Modi and his partner Mehul Choksi based on the information provided by the bank, in the meanwhile the bank found out about a huge magnitude of loans obtained by falsification of letters of undertaking (LoU) amounting to Rs.11,400 Crores (approximately). The month of February, 2018 saw the unraveling of the PNB scam and exposed the Modi-Choksi modus operandi.

While the governmental agencies enforcing corporate criminal laws (ED, CBI etc.) do not have control over the credit-creation process undertaken by the banks they certainly have the power to investigate and try the offences as and when they crop up. An essential element of these criminal trials is attendance of the accused before the courts. Provisions to ensure appearance of the accused exist in several criminal laws including the Criminal Procedure Code. These processes issued by the courts include service of summons, issuance of warrants, proclamation of offenders and attachment of property.[

Fast-track movement towards an enactment

The attachment of properties in cases involving money laundering had to follow the procedure laid down by the Prevention of Money Laundering Act, which provided for a provisional attachment of properties derived through proceeds of crime for a period of 180 days. Further, the complete confiscation could only happen upon conviction, which would often take years together. Since obtaining a conviction requires a proper trial including appearance of the accused and the current legal regime failed to enforce the same, the incumbent government came up with the Fugitive Economic Offender’s Bill, 2018 before the Lok Sabha on March 12, 2018 in the budget session. As the void in the law could potentially harm the investors and lenders, an ordinance incorporating the provisions of the Bill was promulgated by the President on 21st April, 2018. The ordinance stayed in force for over three months after which the Lok Sabha passed the FEO Bill on 19th July, 2018 and the Rajya Sabha on 25th July 2018.

The act came into force retrospectively from 21st April, 2018[, once the president assented to the same on 31st July 2018. The preamble of the enactment declares the objective of the act as:-

“An Act to provide for measures to deter fugitive economic offenders from evading the process of law in India by staying outside the jurisdiction of Indian courts, to preserve the sanctity of the rule of law in India and for matters connected therewith or incidental thereto”

Key Provisions of the Act:

  • Who is a fugitive economic offender?

The Act provides for the declaration of a person as a fugitive economic offender if- There exists an arrest warrant issued by a court against the person w.r.t  an offence mentioned in the schedule (of the Act), and the person has left India or refuses to come back to India to face criminal prosecution.

Procedure for the declaration of a fugitive economic offender:

  • Application u/s 4:

An application containing reasons to believe that a person is a FEO, details of his properties (own and benami) against which confiscation is sought, information pertaining to his whereabouts and a list of interested parties is to be filed by either a Deputy Director or a Director under the Prevention of Money Laundering Act before the authority ( same as the authority for PMLA Act, 2002).

  • Provisional Attachment u/s 5:

Section 5 provides for provisional attachment of the properties and provisional attachment for a period of 180 days extendable by the special court even before filing an application u/s 4. The properties mentioned u/s 4 subject to the special court’s permission by the Director or any officer not below the rank of the Deputy Director authorized by him may be attached. Such an attachment may be done if there is a reason to believe that the property is proceeds of crime or is a property or a benami property owned by an individual who is a fugitive economic offender who is likely to deal with it so as to make it unavailable for confiscation.

The section however mandates the filing of an application u/s 4 within 30 days.

  • Notice:

Once an application is duly filed before the special court u/s 4, the court shall issue a notice to the alleged person. The notice shall require the attendance of the person at a specified place within 6 weeks of the issuance of the notice, and state that the person will be declared a fugitive economic offender failing to appear.[

The notice u/s10 may be served by electronic means as well, these include:

a) e-mail address linked to the PAN.

b) e-mail address linked to AADHAR

c) Any electronic account as may be prescribed, subject to the court’s satisfaction that it had been recently used.

  •  Proceedings:

Section 11 provides that the proceeding may be terminated if he appears before the court. It also provides that if the person is represented by his counsel he may be given a week’s time (at the court’s discretion) to file a reply to the application u/s 4.

  • Declaration and Confiscation:

Section 12 provides that, upon the conclusion of the proceedings, the court if satisfied may declare a person as a fugitive economic offender recording reasons in writing.

  • The court may then order for the confiscation of the properties which are proceeds of crime, benami or any other properties irrespective of them being located in India or abroad.

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 bona fide and without knowledge of the fact that the property was proceeds of crime.  

  • The government may dispose of the property after 90 days of such confiscation.
  • Disallowance of any Civil Claims:

Section 14 provides an explicit bar with respect to any civil claims arising out of the confiscated property. Not just the FEO, but also a company or a Limited Liability Partnership firm or a key managerial person (as per the Companies Act, 2013) is barred from bringing about or defending a claim for the FEO.

  • Appeal

An appeal is available against the Special Court’s order to be filed before the High Court within 30 days of the order (extendable to 90 days at the High Court’s discretion).[

The statute has certainly provided teeth to the several impending litigations pertaining to fugitive economic offenders. The Act becomes even more relevant in the light of the recent declaration of Vijay Mallya as a Fugitive Economic Offender on 5th January, 2019. The declaration implies that he now stands compelled to appear before the court if he desires ownership and rights over his other ancillary properties.

This article has been authored by Anurag Shankar Prasad.