Who's Afraid of FEMA?

By enacting the FEMA without the complementary money laundering bill, the government has left gaping holes in forex regulations.

Ashish Gupta

To those who've made the dreaded trips to the sixth-floor offices of the Enforcement Directorate (ED) in New Delhi's Lok Nayak Bhawan, the sense of tame despair that now overhangs its corridors hits like a wall. Officers who once acted God to trade, today roam the directorate's confines like caged tigers. Busy files, whose contents could until recently make or break corporate fortunes, lie quiet, gathering dust. The ED isn't happy.

Ever since the Foreign Exchange Management Act (FEMA) came into being on June 1, 2000, replacing the paranoid Foreign Exchange Regulation Act of 1973, the directorate's sweeping powers have been severely pruned. Its every day working is hobbled by different, and sometimes conflicting, legislative guidelines. Says S.S. Dawra, 56, Director, ED: ''While FERA was a self-contained act, FEMA is not. Most of its clauses are to be read in conjunction with the provisions of the Income-Tax Act.'' That's Dawra's way of saying that FEMA is in itself toothless.

What has really tied the hands of the directorate is the sweeping change in the way foreign exchange violations are treated under FEMA. In the FERA era, such violations were punishable criminal offence, entailing fine and imprisonment. But FEMA treats them as a civil offence, with no provision for imprisonment. The culprit can be fined, but only up to thrice the value of contraband seized. Besides, while earlier the defendant had to prove his innocence, now the directorate must prove his guilt.

Moreover, FEMA has introduced a 'sunset clause' that allows the ED to settle all pending cases under the old FERA rules, but within the next two years. Worse still, the Prevention of Money Laundering Bill (PMLB) that was supposed to supplement the diluted FEMA has been referred to the Select Committee of Parliament, and may not get enacted until the monsoon session of the Parliament. opening the floodgates

That does all this mean? For anybody interested in running a money laundering operation, this is open season. Millions of dollars can be funneled into the country for use by drug or arms dealers, and extremists. But the ED will not be able to arrest the culprit. Even a search and seizure must be done under the Income Tax Act, since FEMA does not provide for it. Says an ED official: ''FEMA is so benign that we may not even get to interrogate the real culprits.''

Feeling powerless, the directorate has almost stopped pursuing the 4,000 cases it is saddled with. Some of these cases are high-profile. For instance, there's the Rs 133-crore urea scam involving former Prime Minister P.V. Narasimha Rao; the $100-million case against the Essar Group; ITC's now-famous Bukhara Restaurant case; and, incidentally, a case that involves Vijay Mallya of the UB Group. Chances are that these cases may now be given a quiet burial. Points out a senior official of the Central Bureau of Investigation: ''There is a pressing need now for the Prevention of Money Laundering Act.''

If FEMA is not to be reduced to a joke, then the Prevention of Money Laundering Bill must get enacted. The bill itself is entangled in controversies, with industry calling it draconian and the Law Ministry keen to give it teeth. Says G.P. Goenka, 59, President, Federation of Indian Chamber of Commerce and Industry: ''Sure, there is a need to regulate matters like money laundering, but there should be minimal interference in the running of business.'' Counters S.K. Srivastav, 57, Chief Commissioner, Customs (Northern Region): ''There's no point in having a money laundering act without teeth.''

Piecemeal regulations

Before the bill was conceived, money-laundering was being tackled on a piecemeal basis through a number of acts, including the Customs Act of 1962, the Narcotic Drugs and Psychotropic Act of 1989, the Smugglers and Foreign Exchange Manipulators Forfeiture of Property Act of 1976, and the Criminal Law Amendments Ordinance of 1994.

The new Act tries to weave in a bit of everything, but may end up being a bad compromise. Two key concepts of 'suspect property' and 'deemed money laundering' have been omitted in the bill. Inclusion of these in the bill would have allowed the authorities to freeze any unexplained property or money as 'suspect property'.

A senior ED official also points out that the bill does not take into account money linked to tax evasion, corruption, and smuggling. Similarly, sales tax, excise, or octroi evasion is not covered under the proposed money laundering act. Says the official: ''The scope of PMLB should be expanded.''

What's also worrying the regulators is that under the PMLB, action can be initiated against a suspect only after charge-sheeting. But others feel the time-lag between the beginning of the investigation and charge-sheeting gives the suspect enough time to dispose his property. ''A provision for interim attachment during the investigation should be made,'' says an ED official.

Corporate India bristles at all such suggestions. FICCI wants references to offences unrelated to the bill's objective to be deleted. An example: Section 489(B) of the Indian Penal Code that provides for punishment of even those who unwittingly receive or use counterfeit money.

It is not clear how many of such demands will be incorporated, or in what shape the bill will finally be passed. What's clear, however, is that the government will eventually have to transit to a regime of free convertibility. The directorate, then, will have to re-invent itself.

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