Fugitive Economic Offenders - the Modi and Mallya's

Who are fugitive economic offenders?

• These are rich business tycoons who have looted our banks, engaged in money laundering, committed fraud upon the public, broken our country's laws and are now evading arrest in India by escaping to a foreign country.
• Some of the recent examples include Vijay Mallya and Lalit Modi (residing in London), Nirav Modi and Mehul Choksi (location unknown  - currently evading arrest).
• Vijay Mallya is wanted in India for defrauding Indian banks of more than Rs. 9,000 cr (among various other offences such as foreign exchange violations, money laundering, etc).
• Nirav Modi and his uncle Mehul Choksi are wanted for defrauding PNB of more than Rs. 11,000 crore.
• Lalit Modi is wanted in connection with money laundering in connection with IPL.

FEOs: From left to right: Nirav Modi, Mehul Choksi, Vijay Mallya, Lalit Modi

What is their Modus Operandi?

FEOs have personal wealth amounting to hundreds of crores of rupees. However, they live in a house of cards, with significant debt piling up, which they are unable to repay due to their dark transactions such as diversion of money/ money laundering. Their situation is akin to a person riding a tiger, who does not know how to get down without being eaten (Nirav Modi case: LOUs needed to be renewed continuously or their scam would surface)

Due to their money power, they exercise significant political clout. They have powerful friends in political parties (both Congress and BJP and regional parties). For instance, Vijay Mallya was made an MP in Rajya Sabha with the support of BJP. Prior to that, he had earlier been elected to Rajya Sabha with the support of Congress and JD(S). Lalit Modi, Mehul Choksi and Nirav Modi were known to be close to many politicians.

• When their fraud is about to get exposed, they escape from India, never to return. How does this happen? - To answer simply, these business tycoons already own residency permits (sometimes even citizenship!) of other countries owing to their money power. It is important to note here that India does not permit dual citizenship. If a person becomes a citizen of another country, he will have to forfeit his Indian citizenship and passport. However, no such restrictions are in place for residency permits.
• They may also use their political clout and connections to facilitate their escape from India (as alleged in the case of Vijay Mallya, Lalit Modi and others)

Residency Abroad or Ticket out of jail?

• Many countries such as UK, Singapore, etc offer residency permits to wealthy foreign investors. For instance, UK has an investor residency program wherein residency permits are granted in return for investments in UK ranging from £2 to £10 million. Vijay Mallya has been holding a UK residency permit since 1992.
• Similarly, Singapore has a residency program called Global Investor Program (GIP), wherein foreign investors are granted residency permits for investments of SGD 2.5 million.
• While these are out of reach for the 'aam aadmi', FEOs may take full advantage of this.

How serious is the problem?

• High networth individuals (HNIs) changing their domicile/ escaping India is a serious problem as it may pose great economic and tax losses for the nation.
• According to a report by New World Wealth, 7000 ultra-rich Indians shifted their domicile in 2017 alone. As many as 23,000 wealthy Indians have given up their citizenship since 2014.
• The latest to the list is real estate tycoon Surendra Hiranandani of Hiranandani Group. He gave up his Indian passport to become a citizen of Cyprus.

Surendra Hiranandani

• Mr. Hiranandani maintains that he didn't do it for tax purposes. He says that it is difficult to get work visas with Indian passports. Although, we all know that such a move would have multiple drivers in addition to the above, such as tax benefits, improved lifestyle, escape (Mallya style) from stringent punitive regulations in India (such as imprisonment to the promoter under the Real Estate Regulation Act)
• So, once the culprit or FEO has successfully escaped and residing in a foreign country, the question becomes how to bring him back?

Deportation vs Extradition - Which route should India to take to bring them back?

• Deportation means sending an 'illegal immigrant' packing to his home country for violation of immigration laws by a foreign country.
• The process of deportation is a lot easier and faster than extradition. The reason being, deportation is an executive process. It involves no court process, unlike extradition, which is a lengthy court process with multiple appeals.
• Unlike deportation, in extradition, the 'prima facie culpability' of the person has to be proved.
• The likes of Vijay Mallya cannot be deported, but they have to be extradited. The simple reason being - UK residency laws permit a person to reside in UK, if he arrived on a valid passport. It doesn't matter from a UK law perspective if his passport was subsequently revoked. The UK has hence clearly rejected the deportation proposal.

Extradition - Legally complicated and time consuming

• Extradition in India is governed by the Indian Extradition Act of 1962. In accordance with this Act, India has entered into extradition treaties with 40+ countries.
• India entered into an extradition treaty with UK in 1993. India is pursuing Vijay Mallya's extradition in accordance with this treaty

We need to understand the International extradition laws to appreciate what is going on. Extradition can be refused by UK courts on several grounds. Some of them are:

• If the offence is trivial in nature
• If the UK court believes that a fair trial is not possible in India (due to media/ public pressure)
• For political crimes (in case where accused seeks political asylum like whistleblower Edward Snowden or Julian Assange of Wikileaks)
• If the crime in India is not regarded as a crime in UK (ex: homosexuality)
• On humanitarian/ human rights grounds (like bad condition of prisons in India, possibility of death penalty, etc)

Vijay Mallya has claimed all of these reasons as the grounds why he should not be extradited - bad conditions of jails in India, inability of fair trial in India due to public/ media pressure, political revenge, etc.

The extradition proceedings are currently underway in a Magistrate Court in London.

The Crown Prosecution service is fighting the case on behalf of Indian authorities. (It may be noted that a non-bailable arrest warrant was issued to Vijay Mallya by a Mumbai court after he failed to appear before the court despite issuance of 3 notices in IDBI money laundering case.)

We should not be too hopeful of Mallya's return. Reasons being very simple -

• Once the case is decided in Magistrate Court in London, Mallya reserves the right to appeal to the higher courts in UK
• UK laws are very stringent when it comes to Human rights. Till today, only 1 person has been extradited from UK (that too because he did not contest it!)
• In the past, we have seen that UK has denied to extradite a fugitive because of the condition of prisons in India even though that person (Sanjeev Kumar Chawla) was found guilty. Ironically the same witness (Dr. Alan Mitchell) who testified in that case about the quality of prisons in India is testifying in Vijay Mallya's case
• Also India falls in 'Type B' of category 2 of the list of countries with which UK has a treaty. This means that India has lower priority and needs to furnish higher degree of proof to extradite somebody. In contrast to this, US and EU countries fall much higher in priority and require lower degree of proof.
• In the opinion of experts, Mallya's extradition is also likely to fail. If we look at precedents, India has been trying for Tiger Hanif's extradition since 2010. He is wanted for the 1993 Gujarat blast. India has failed to get him extradited even after he has exhausted all his legal remedies and his final appeal is currently pending with the Home Secretary, UK for the last several years.

Tiger Hanif, wanted in the 1993 Gujarat Blast case

Fugitive Economic Offences Ordinance - A farce to mislead public?

• Due to massive public pressure to crack down on these offenders, the government recently introduced an ordinance ('the Fugitive Economic Offenders Bill, 2017')
• To qualify as an offence under this ordinance, the quantum of offence should be above Rs. 100 cr. There are certain offences under Indian Penal Code, Prevention of corruption Act, etc, which are listed as scheduled offences under this ordinance.
• The ordinance enables the government to declare a person as an 'FEO', if an arrest warrant is issued in his name and if he fails to surrender before the law enforcement agencies within 6 weeks
• The ordinance then enables the agencies to confiscate the assets (both Indian and foreign) of the FEO without having to prove his guilt (which is not present under the money laundering act)
• While confiscating the foreign assets is outside the jurisdiction of Indian agencies, it needs cooperation from the foreign authorities.

Why I say the Ordinance appears to be a Farce and will not be effective in achieving anything substantial

• There are a lot of existing laws under which banks (if not government) can confiscate and sell Vijay Mallya's assets. These laws include Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESI), Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI). These laws enable the banks to seize and sell the assets of Vijay Mallya without having to prove his guilt because this power comes from a legal contract entered between them. The Prevention of Money Laundering Act also empowers the government to confiscate the 'proceeds of crime' (after proving his guilt).
• The only difference being that under the ordinance, the agencies can attach and sell properties before proving the guilt of the accused and such assets need not necessarily be 'proceeds of crime'. Further, under the law, the accused would lose this right to file a civil suit in relation to property anywhere in India. Many lawyers argue that this is unconstitutional as it goes against the principles of law and legal precedents. It needs to be seen if this ordinance can stand the test of constitutionality if challenged by courts.
• However, the most interesting thing to note is that In Vijay Mallya's case and some of the others also, we see that the law enforcement agencies have confiscated more assets in India than the actual amounts due. In Vijay Mallya's case, we have seen that the ED has confiscated assets worth Rs. 9,300 crore (while the dues are only Rs. 9,000 crore). However, the ground reality of this would shock us!. The fact is that is that the banks, the asset trustees and government agencies have miserably failed in auctioning these assets. Most of the properties have gone unsold and those that we sold have fetched a meagre sum.
• To name a few instances, the consortium of lenders (led by SBI) tried unsuccessfully to sell Kingfisher house in Mumbai for the 7th time. The initial price quoted was Rs. 150 cr, which was brought down to Rs. 75 crore during the 7th auction. However they failed to sell it.

• The Service Tax department miserably failed to see Mallya's private jet. They had set the reserve price at Rs.152 crore. But they only found 1 buyer who offered no more than Rs. 1 crore !!!
• One of Vijay Mallya's private jets was sold for scrap for as low as Rs.22 lakh!!
• So the real question is how much are these assets really worth!! Is it 4000 cr, 3000 cr or 1000 cr or even less?
• In Nirav Modi PNB fraud case, the ED had claimed in February 2018 that they had seized assets/ jewellery worth Rs. 5,600 cr from both of them (Rs. 1,800 cr from Nirav Modi and remaining Rs. 3800 from Choksi). It appears that the ED was referring to the Book value of the jewellery and not its market price. As we know, books are subject to manipulation.
• An independent valuation of the jewellery seized from Mehul Choksi owned firm (Hyderabad Gems SEZ Ltd) has placed its value at Rs. 103 crores, which is less than 3% of the value of Rs. 3,800 cr declared in the firms books
• The valuation of the jewellery seized by ED from Gitanjali Gems has placed its its value at Rs. 597 cr (down 53% of its book value of 1,280 cr)
• Mehul Choksi appears to have submitted overvalued and inflated stock statements to the banks to avail credit facilities 
• The role of consultants in overvaluing these assets have also come under scanner.
• The only way then to recover the balance would be to go after their foreign assets, which the ED claims is more than sufficient to satisfy their claims
• Although the ordinance brings into its ambit foreign assets of the accused also, this is extra-jurisdictional and would require the cooperation of foreign agencies. However, an important point to note in this case is that India still lacks a cross border insolvency law in the lines of the UN Model law. This would make it difficult for creditors to enforce their claim when it comes to foreign assets. So without the model law in place, the foreign asset clause is of no real use.

Who is to be held accountable?

I would call this a system failure because the system aided and abetted this crime.

Banks - Violated their own guidelines in sanctioning loans (for monetary gains?) Senior executives of the bank should be held accountable. Normally what we see is that certain junior officers are made scapegoats.

Consultants who aided the fraud - There have been allegations that Grand Thornton, a consultancy firm, overvalued the assets of Kingfisher. However they vehemently continue to deny it. A thorough investigation should be done in this regard to check the role of all consultants in aiding and abetting the fraud like asset over-valuations, various certifications, audit, etc

Politicians and Government agencies: It is quite clear that offences of such magnitude cannot happen without the tacit support of powerful political leaders. Their role should be thoroughly investigated. However this would be wishful thinking due to political interference in these agencies!

Finally the FEO!

What can be done about it?

The ED should be strengthened to monitor and track those HNI who pose a flight risk. The amount they have borrowed from the banks and their repayment should be monitored regularly by both banks and ED.

These investigating agencies (ED, SFIO, CBI, etc) should be free from political interference

For those HNIs who apply for residency visas abroad, the Indian passport conditions should be amended to include a guarantor(s) in the event of a default or in the event the person becomes a FEO. The guarantor(s) should be a person resident in India and should have the capacity/ asset backing to repay all the debts. For failure, the guarantor should be imprisoned. (similar to guarantor for bails)

India currently has extradition treaties with only 40+ countries. Extradition treaty network can be improved to cover all the counties

Put diplomatic pressure on countries such as UK to expedite the process of extradition. Amend the extradition treaty with UK to bring India at par with other EU countries and USA. (Category 1 or Type A)

Bring in an Cross border insolvency code in the lines of the UN Model Law. Currently India does not have an cross border insolvency code making it difficult and confusing to confiscate and sell foreign assets.

Strengthen the Indian passport so that businessmen don't face any genuine hardship in legitimate business dealings like getting work visas

Bring in policies which discourage businessmen from giving up their Indian citizenship and taking up residency abroad.