Commercial implications of steps to prevent bank fraud

By Manoj Kumar, Hammurabi & Solomon
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In one of a slew of steps to prevent bank fraud in India, the government has proposed the Fugitive Economic Offenders Bill, 2018, to deal with the menace of fugitive economic offenders who have left India to avoid criminal prosecution and who refuse to return to India to face criminal prosecution in respect of scheduled offences as set out in the bill. The bill includes measures to confiscate property of fugitive economic offenders and proceeds of crime.

Manoj KumarFounder and managing partnerHammurabi & Solomon
Manoj Kumar
Founder and managing partner
Hammurabi & Solomon

An application can be filed by a “director” appointed under the Prevention of Money Laundering Act, 2002 (PMLA), or any person authorized by such a director (who is not below the rank of deputy director) before the special court constituted under the PMLA for declaration of an individual who has committed a scheduled economic offence, as defined under the bill, of more than ₹1 billion (US$15 million), as a fugitive economic offender.

The bill enables the director to attach property with the permission of the special court, whether located in India or abroad, of the fugitive economic offender and property which is believed to be the proceeds of crime of the offender. Such a director is also authorized to attach such property before filing an application before the special court but an application must be filed within 30 days of such attachment. The director will have the power to survey and make searches and seizures as well. The property so attached will continue to be attached for a period of 180 days from the date of the order of attachment or any other period as may be extended by the special court. The attachment however will not impact the rights to enjoy an immovable property attached by any person claiming or entitled to claim any interest in the property.

The special court is empowered under the bill to issue a legal notice to a person who is declared as a fugitive economic offender to enter an appearance through counsel upon returning to India and surrendering. In the event of failure to comply with the notice, property of the fugitive economic offender, located in India or abroad, would be confiscated. The confiscated property of the fugitive economic offender will be managed and disposed of by an administrator appointed by the government. The special courts will have the power to bar the fugitive economic offender from defending any civil claim.

Additionally, the National Financial Reporting Authority (NAFRA), set up by the government under section 132 of the Companies Act, 2013, has been tasked to advise the government on accounting and auditing policy and standards in respect of companies’ books, with the aim of achieving higher compliance standards. NAFRA will also monitor and enforce compliance with the standards, oversee the quality of service in ensuring compliance, and conduct investigations where necessary.

In a case where NAFRA finds professional or other misconduct, it can (i) impose penalties on individuals of up to five times the fees they received and on firms of up to 10 times the fees they received; (ii) debar individuals or firms from engaging in practice as members of the Institute of Chartered Accountants of India for six months to 10 years. NAFRA will also have the powers of a civil court and powers to investigate, either on reference from the government or on its own initiative. An appellate authority will hear appeals against decisions of NAFRA.

Further, NAFRA will maintain books of account, which will periodically be audited and certified by the Comptroller and Auditor General of India, and its audited accounts will be forwarded to the government.

Recently, the Reserve Bank of India (RBI) has also banned the issuance of letters of undertaking (LoUs) and letters of comfort by Indian banks to domestic importers. The RBI’s action may adversely affect trade financing in India by a rise in credit costs for importers and will require companies that have obtained credit based on LoUs to repay their borrowings in the absence of rollovers of existing LoUs.

Alternative instruments such as bank guarantees will not offer the same ease of business as loans based on LoUs, which are denominated in foreign currency and are also comparatively cheaper. As these measures add up, initiatives to restore faith and confidence in the banking institutions in India will be required to plug holes in banking practices and improve internal functioning and controls within the banking institutions.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon.

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