PNB Scam: A Brief of the Fugitive Economic Offenders Act, 2018

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In a first of its kind, partial confiscation of Nirav Modi’s properties were allowed. A Special Judge at the Civil and Sessions Court in Mumbai allowed this order. The order stated that other than the properties secured to PNB, all properties are to be confiscated.

Background

Nirav Modi was part of the Punjab National Bank (“PNB”) Scam that began in 2011. Hence, this scam is one of the biggest banking frauds in India. The scam relates to fraudulent undertaking letters worth of Rs 11,000 Crore issued by the bank. Two employees of the bank would issue these letters without following the procedures. The employees would then relay instructions to overseas branches of Indian banks. They would do this to raise the Buyer’s Credits without entries. Buyers’ Credit is a short-term loan facility given to importers. This is so that they can finance goods and services. Hence, the entire process was off the records to avoid detection. Besides PNB, overseas branches of Allahabad Bank and Axis Bank were also involved.

The fraud came to light on January 2018, when Punjab National Bank filed a complaint with the CBI. The complaint was about the filing of fraudulent letters wort Rs 2980 Crores. However, on further investigations, letters for over Rs 11,000 crores were discovered. In the complaint, the main accused in the scam was Nirav Modi, who is a diamond jeweller and designer. Other than Nirav Modi, the list of people accused involved his family members. It included his wife, brother, maternal uncle and business partner, Mehul Choksi. Hence, ‘Deputy Director, Directorate of Enforcement v. Nirav Deepak Modi, was filed.

The Judgement

Recently, a Special Judge at the City Civil and Sessions Court in Mumbai passed Judgement on the PNB scam. The Enforcement Directorate (“ED”) sought to confiscate properties of Nirav Modi. This was after he was declared a Fugitive Economic Offender. PNB applied Section 12 (7) of the Fugitive Economic Offender Act, 2018. The Banks sought the exemption of the mortgaged, hypothecated and guarantors’ properties. Especially where they had a bonafide and legal interest.

Special Judge V C Barde permitted the partial confiscation of Modi’s properties. While allowing the ED’s application, the Court also permitted the exemption sought by the Banks. The Court held that the ED could confiscate all properties, other than the ones secured to the banks.

Fugitive Economic Offenders Act, 2018

The purpose of the Fugitive Offenders Act, 2018 is to deter offenders from evading the law. The Act seeks to preserve the sanctity of the rule of law. It dissuades offenders from evading the law by escaping outside the jurisdiction of the country. Thus, the losses suffered by entities are recovered by confiscation of the offender’s property.

Section 12 of the Act elaborates on the confiscation of property. If an offender is declared a Fugitive Economic Offender, the Court may pass an order to confiscate all their property. The confiscated property falls under the control of the Central Government. The following sub-sections lay down the related rules and procedures.

The order of the Special Judge passed under Section 12(2), is a first of its kind. In the order, the Judge directed the ED to confiscate properties within a month from the date of the order. Further, Section 8 of the Act also talks about confiscation. It talks about the actions that can be taken against a declared Fugitive Economic Offender. The actions include seizing of any property found of the offender on search.

Section 12 in Context of the Highlighted Cases

Section 12 also provides an exception under subsection (7). The provision elaborates upon the properties that can be exempted from confiscation. A property can be exempted if a third party has bona fide interest in it. The Court has to be satisfied that the interest of the third party is bona fide and without knowledge of the offence.

In the present case, PNB applied the above provision. It requested the Court to exempt the properties secured to them. Furthermore, the application stated that their interest in the property was in the form of security. Hence, the Court was satisfied with the interest of the banks in the properties. As a result, the Court granted partial confiscation of the properties.

Conclusion

The second fugitive declared under the act is Nirav Modi. The application and the confiscation are the first of its kind, especially since the Act is in its nascent stages.

The Act has been recently challenged on Constitutional grounds. Nevertheless, the courts have continued to stand by its validity. The above Judgement has paved the way for two new concepts under the Act. Only time will show us the results of its implementation.


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