India’s corporate fraud investigation agency and the CEOs of state-owned banks can now directly prevent scamsters from leaving the country

• The Ministry of Home Affairs has empowered the Serious Fraud Investigation Office (SFIO) to request the issuance of look-out-circulars (LOC) against people who are suspected of defaulting on large loans.
  
• Last week, the same power was also granted to the CEOs of India’s public-sector banks, which have largely been the major casualties of these frauds and loan defaults.
  
• Prior to these changes, the ability to request for LOCs was mainly extended to police authorities, the CBI, Enforcement Directorate, the home and external affairs ministries as well as regional passport offices and customs and tax officials.
  
  

In the wake of a series of high profile banking scams and loan defaults this year, the most notable of which is the Nirav Modi case, the Indian government is trying to make it easier to prevent fraudsters from escaping the country and taking up residence elsewhere.

To this effect, the Ministry of Home Affairs has empowered the Serious Fraud Investigation Office (SFIO), which is housed under the corporate affairs ministry, to request the issuance of look-out-circulars (LOC) against people who are suspected of defaulting on large loans.

Last week, the same power was also granted to the CEOs of India’s public-sector banks, which have largely been the major casualties of these frauds and loan defaults. However, as these public-sector banks aren’t official investigation agencies, the LOCs requested by them can be challenged in court. That is not the case with the SFIO.

Prior to these changes, the ability to request for LOCs was mainly extended to police authorities, the CBI, Enforcement Directorate, the home and external affairs ministries as well as regional passport offices and customs and tax officials.

A major reason why wilful defaulters like Vijay Mallya, Nirav Modi and Mehul Choksi were able to flee India for safer havens was because the agencies or entities that caught wind of their crimes did not have the authority to prevent them from fleeing and had to follow protocols and notify higher powers with said authority. By the time formal channels of communication were activated, it was too late.

This is reportedly what happened in the case of Vijay Mallya, who fled India in March 2016. The CBI actually watered-down the LOC it had filed against the liquor baron in October 2015 from “detain” to “inform” after citing a lack of evidence and Mallya’s supposed intention to cooperate, which eventually allowed him to leave the country. The CBI had actually taken over the case from the SFIO, which had been looking into the diversion of funds at Mallya’s companies in September 2015.

By broadening the number of stakeholders that can ask for the arrest of a wilful defaulter, the move could decrease the chances of this happening again in the future, especially in instances where investigations by the police and CBI are hamstrung by “conflicts of interest” or they don’t follow through with arrests.

A few months ago, the central government also passed the Fugitive Economic Offenders Act. The law allows the Enforcement Directorate to seize the domestic as well as foreign assets of “economic offenders” who have left the country so their creditors may recover their dues. The crimes involve amounts of ₹1 billion or more.


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