The Rajya Sabha was informed on the 19th November by the minister of state for finance that as on 30 September 2019, the Enforcement Directorate (ED) was conducting investigations in 963 cases under the Prevention of Money Laundering Act, 2002 (PMLA) and 7,393 cases under the Foreign Exchange Management Act, 1999 (FEMA). The ED was thus investigating more than 8,000 cases on the said date.
A few high profile cases that immediately come to mind include Kingfisher, Vijay Mallya, Nirav Modi, INX Media, Winsome Diamonds, Mehul Choksi, Fortis, and the Punjab and Maharashtra Cooperative Bank (PMC Bank), besides investigation of several high profile politicians, and bureaucrats.
The amount involved in each case runs into several thousand crores of rupees. Even taking a conservative estimate of Rs250 crore per case, the total amount that ED was investigating as of 30 September 2019 could exceed a staggering Rs20 lakh crore!
In other words, the value of offences being investigated by the ED could dwarf the total non-performing assets (NPAs) of the entire banking system.
The position worsens further if one takes into account the very large number of cases that either go undetected or are simply not investigated due to the sheer burden on the ED. Is anything being done to check the growing menace?
Multi Agency Group’s Deliberations
Recently, a high powered meeting of a multi-agency group, including the directorate of revenue intelligence (DRI), income tax (I-T), ED, serious frauds investigation office (SFIO), and directorate general of foreign trade (DGFT) expressed unanimously the opinion that FEMA should be made into a criminal law, says a report from the Times of India
RBI: The Spoiler
The only discordant note surprisingly came from the official of Reserve Bank of India (RBI), which was baffling for more reasons than one.
First, RBI had played a key role in the formulation of FEMA. Secondly, as per Section 3 of FEMA, dealing in foreign exchange is permitted only as provided in the Act or with a general or a specific permission of RBI.
Thirdly, as per Section 10 of FEMA, the management of FEMA is done through banks (authorised persons) who operate under the supervision and control of the RBI. Given its pivotal role, RBI should have supported the proposal whole-heartedly but didn’t.
Misplaced Apprehensions on FDI
The RBI also came up with a ludicrous argument; that criminalization of FEMA would adversely impact foreign direct investment (FDI).
RBI failed to appreciate that no respectable investor, domestic or foreign, would be influenced by whether a law is civil or criminal in nature. Those who take care to be on the right side of the law do not fear it anyway.
Investment decisions are based solely on economic viability. This in turn depends on factors like market size, scalability of the project, stability of government policies, effective judicial systems, level playing field etc.
Markets are convinced that the country could see an inflow of 3-4 billion US dollars buoyed by the recent Supreme Court judgment clearing the way for Arcelor Mittal’s acquisition of Essar Steel.
RBI’s apprehensions on this count are therefore totally misplaced.
Frauds in PSBs Exceed Rs95,000 Crore in HI-FY20
Quoting RBI data, the Rajya Sabha was also informed on 19 November 2019 by the finance minister, Nirmala Sitharaman, that public sector banks reported frauds involving more than Rs95,700 crore in the first six months of the current fiscal year.
Most of the frauds are generally on account of illegal trade based transactions, diversion of funds etc. which are also offences under FEMA. Instead of needlessly worrying about FDI, RBI should instead focus on effective supervision of banks.
All Inward Foreign Inflows Are Not Kosher
Contrary to the common perception, foreign exchange illegally brought into the country is as much, if not a bigger concern than that taken out illegally. This could even result in compromising national security and interests.
In the AgustaWestland case, the Central Bureau of Investigation (CBI) has alleged that the alleged kingpin, Christian Michel, had paid bribes of almost Rs300 crore to Indian politicians and defence personnel to swing the deal.
Zakir Naik, whose interests are considered to be inimical to the country’s interests, is alleged to have received Rs65 crore from more than one country between 2003-04 and 2016-17.
This is another area which needs RBI’s urgent attention. Illegal foreign inflows vitiate the very sanctity of the banking system.
Strong Case for FEMA to Be Made into a Criminal Law
Currently, violations under FEMA are compoundable. An accused can get away simply by paying fines and/or penalties. No wonder then that the size of the problem is so gigantic. A strong deterrent simply does not exist.
Common violations that make a mockery of FEMA include trade based money laundering by over-invoicing of imports and/or under invoicing of exports, round tripping of funds, hawala (illegal remittances), and smuggling of foreign currency.
The penal acts involved in the above violations of FEMA include a cocktail of criminal conspiracy, cheating, forgery of valuable security, using as genuine forged documents etc. Besides being offences under the Indian Penal Code, these also fall under “scheduled offences” under the Prevention of Money Laundering Act, 2002 which attracts rigorous imprisonment of three to seven years, fines and confiscation of property.
Thus many of the offences committed under FEMA are also found to be punishable under PMLA. However valuable time is lost before proceedings under PMLA are initiated.
Making violations under FEMA a criminal offence will not only help integrate FEMA and PMLA but will also make the criminal justice system more effective and provide a strong deterrent. One hopes that this is done sooner than later.
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.)