Businessman Nirav Modi has been declared a fugitive economic offender by a court of Prevention of Money Laundering Act. He is the second businessman to be declared guilty under the Fugitive Economic Offenders Act, 2018. Earlier, Vijay Mallya was declared an economic offender under the same rules.

Fugitive Economic Offenders Act

The Fugitive Economic Offenders Act, 2018, seeks to confiscate properties and assets of economic offenders who evade prosecution by remaining outside the jurisdiction of Indian courts. Economic offences with a value of more than Rs 100 crore, which are listed in the schedule of the Fugitive Economic Offenders Act, come under the purview of this law.

As per the Act, a court (special court’ under the Prevention of Money Laundering Act) has to declare a person a fugitive economic offender.

Key features

A fugitive economic offender is a person against whom an arrest warrant has been issued for committing an offence listed in the schedule of the Act, and the value of the offence is at least Rs 100 crore. Further, the person has left the country and refuses to return in order to avoid facing prosecution.  The Act lists 55 economic offences in the schedule, which include…

* counterfeiting government stamps or currency

* dishonouring cheques

* benami transactions

* transactions defrauding creditors

* tax evasion

* money-laundering

The central government may amend the schedule through a notification.

Authorities under the PMLA can exercise powers given to them under the Act. These powers will be similar to those of a civil court, including search of persons in possession of records or proceeds of crime, search of premises on the belief that a person is an FEO, and seizure of documents.

Key issues

Barring persons from filing or defending civil claims may violate Article 21

Under Clause 14, any court or tribunal may bar an FEO from filing or defending any civil claim before it. Further, the Act allows courts to bar a company from filing or defending any civil claim before it if the promoter, key managerial personnel (such as manager or CEO), or majority shareholder is an FEO. It may be argued that such a bar could violate Article 21 of the Constitution. Article 21 states that no person (or company) can be deprived of their right to life or personal liberty, except by law. Courts have interpreted this to include the right to access justice, which cannot be taken away. This right includes the availability of a forum that aggrieved persons may approach to seek legal remedy. The question is whether a bar on filing and defending claims would violate this right.

For instance, an individual who is declared an FEO may be involved in a marriage suit or inheritance dispute. Under Clause 14, courts are allowed to bar the individual from exercising his right to file or defend such a claim.

Further, there may be cases where an FEO is the majority shareholder of a company. In such cases, even though the company is a separate legal entity, it may be barred from filing or defending cases. For example, a company may be barred from filing a suit against a supplier of goods or from defending a case where tax dues are imposed on it. There may also be instances where creditors obtain court orders for repayment of loans against the company, without the company having an opportunity to present its defence. In all such cases, the interests of the remaining shareholders will not be protected owing to such a bar on companies.

Use of sale proceeds from confiscated property not specified

The Act specifies that an FEO’s properties will be confiscated and vested in the central government, free of encumbrances (claims or rights in the property). The central government may dispose of the properties after 90 days.  The Act does not specify how the central government will use the sale proceeds. That is, would the government be obliged to share the sale proceeds with persons who may have a claim against the FEO.

Under the Act, the special court may exempt certain properties from confiscation if a person shows his legitimate interest in these properties. For example, this may cover secured creditors who have claims against specific properties of the FEO. The Act does not require the confiscated properties to be used to settle dues of other claimants (for example, unsecured creditors or persons claiming unpaid wages). In contrast, the Insolvency and Bankruptcy Code, 2016, specifies that sale proceeds from the property of the defaulter will be distributed among all claimants according to an order of priority.

Provisions related to search may not contain safeguards

Under the Act, authorities may search a person or premises on the belief that a person may be declared an FEO or has proceeds of the crime. The Act allows a search to be conducted without a search warrant or witnesses. This differs from other laws, such as the Code of Criminal of Procedure (CrPC), 1973, which provides certain safeguards.

Section 94 of the CrPC permits a search to be conducted only if a warrant has been issued by a magistrate. Further, Section 100 requires the presence of two or more independent witnesses while authorities search the premises. Typically, other laws such as the Prevention of Money Laundering Act, 2002, and Securities and Exchange Board of India Act, 1992, follow these procedures specified in the CrPC in case of a search. These safeguards seek to protect against instances of harassment of persons or cases where evidence may be planted against the accused.

Note that rules have been notified under the Fugitive Economic Offenders Ordinance, 2018. These specify that the procedure under the CrPC will apply in case of a search. It may be argued that procedural safeguards related to search should be specified in the law, instead of being notified by the government through delegated legislation.

Procedures that are similar to existing laws

The Act provides for the provisional attachment of properties and subsequent confiscation if a person is declared an FEO. This is similar to the CrPC, which also allows for attachment and confiscation of properties of absconders. Under the CrPC, the attached properties may be returned if the absconder appears within two years. This implies that properties will be finally confiscated only after two years of attachment. In contrast, under the Act, confiscation will be final once a person is declared an FEO by the special court.

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