Despite the ban on LoUs and LoCs, ground still needs to be covered beyond the NAFRA/NFRA and FEO Bill to restore faith and confidence in banking institutions including the RBI
The recent banking fraud has forced the Government of India into action in taking swift steps to set up the National Financial Reporting Authority ("NFRA") under Section 132 of the Companies Act, 2013, to inter alia make recommendations on accounting and auditing policy and standards in respect of books of accounts, in particular including accounting and auditing of the same for companies and auditors as a preventive measure to achieve higher compliance standards.
Additionally, the Fugitive Economic Offenders Bill, 2018 ("FEO Bill") proposed by the Government of India seeks to inter alia deal with the menace of fugitive economic offenders who have left India so as to avoid criminal prosecution and who, being abroad, refuse to return to India to face criminal prosecution in respect of scheduled offences as set out in the FEO Bill including inter alia confiscating the properties of the fugitive economic offenders and proceeds of crime.
The banking fraud which led to quick actions by the Government of India had raised serious questions with respect to the working of the Society for Worldwide Interbank Financial Telecommunication ("SWIFT"), a messaging service for banking industry, otherwise recognized across the globe as an efficient banking system; however, the misuse of SWIFT-based banking practices to defraud Indian banks of huge sums of money could neither be prevented nor detected for a long period of time. While SWIFT works as an independent messaging platform, it has not been integrated with the CBS by several banks. In fact, the Reserve Bank of India ("RBI") vide a letter dated November 25, 2016, had informed all scheduled commercial banks with respect to potential frauds emanating from SWIFT and had advised them to initiate, with the approval of their respective Boards, the steps toward safeguarding themselves from frauds.
However, despite the advisory from RBI, several Indian banks failed to put in place, a proper mechanism to ensure proper accounting entry into their books and reconciliation through concurrent audit.
A primer on NAFRA and FEO Bill is as follows:
Central government shall constitute NAFRA which shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law and shall not be associated with any audit firm or its related consultancy firms, such other members not exceeding fifteen as part-time or full-time members and a Secretary, if considered necessary for the efficient performance of the functions.
Bank Fraud and RBI's banning
issuance of LoUs and LoCs
by Indian banks to domestic
importers have exposed importers
to unexpected rise in credit costs
for importers as Government
seeks to tighten transparency in
the Banking System
-Makes recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards which the companies/class of companies/auditors are to adopt.
- Monitor and enforce the compliance of standards.
- Oversee the quality of service in ensuring compliance with the standards and conduct investigations where necessary.
- Maintain books of accounts, which are to be periodically reviewed and certified by the Comptroller and Auditor General of India, who forwards a Certified Annual Audit Report to the Central Government.
- Prepare annual report of its activities and to forward a copy to the Central Government.
- NAFRA shall have all the powers of a Civil Court, and in case it finds that there has been a professional or other misconduct, it can pass orders to the extent of: (i) imposing penalty on individuals of '1 Lakh or more, which may extend to five times the fees received by him, and on firms of '10 Lakh or more, which may extend to 10 times the fees received by the firm; (ii) debarring the members or firm from engaging in practice as member of ICAI for 6 months or more, not exceeding 10 years.
- NAFRA shall have the power to investigate, either on reference by the Central Government or suo moto.
- Person aggrieved by the decision of NAFRA can approach the appellate authority constituted by Central Government to hear appeals arising out of orders of NAFRA.
- Appellate authority shall comprise a chairman and maximum two members, as appointed by the Central Government.
- Accounts of NAFRA shall be audited by the Comptroller and Auditor General of India and such audited accounts shall be forwarded to the Central Government by NAFRA.
- An application can be filed by a person appointed as Director appointed under the Prevention of Money-Laundering Act, 2002 ("PMLA") or any other person authorized by such Director (who shall not be below the rank of Deputy Director) before the special court constituted under PMLA for declaration of an individual, who has committed a scheduled economic offence, as defined under FEO Bill, of more than 100 crore rupees as a fugitive economic offender.
- With the permission of the special court, such Director can attach the properties, whether located in India or abroad, of the fugitive economic offender and the properties which are believed to be the proceeds of crime of the offender.
- Director is also authorized to attach such properties before the filing of the application before the special court; however, an application shall be filed within 30 days of such attachment. Director shall have all the powers of a civil court and shall have the power to survey, makes searches and seizures.
- The property attached shall continue to be attached for a period of 180 days from the date of the order of attachment or any other period as may be extended by the special court.
- Attachment shall not impact the rights to enjoy the immovable property attached by any person claiming or entitled to claim any interest in the property.
- Basis the application, the special court will issue a legal notice to the person who is declared as a fugitive economic offender. Pursuant to the notice, if such person returns to India and surrenders before the court or makes an appearance through its counsel, he will be entitled to file his reply and be dealt with in the manner provided under FEO Bill.
- Upon failure to appear, the property of the fugitive economic offender, located in India or abroad, will be confiscated.
Powers of Special Court
- Courts will have the power to bar the fugitive economic offender from defending any civil claim.
Disposal of Confiscated Property
- Confiscated property of the fugitive economic offender will be managed and disposed of by an administrator appointed by the Central Government.
The RBI has recently also banned the issuance of letter of undertakings ("LoU") and letter of comforts ("LoC") by Indian banks to domestic importers to get foreign exchange from banks abroad at a cheaper rate. While, RBI's action may be the need of the hour to prevent further damage to Indian Banks, the move may well adversely affect trade financing in India by a rise in credit costs for importers. Additionally, companies that have already obtained credit based on LoUs will find themselves in a spot with the burden to repay their borrowings on account of there being no rollover of existing LoUs issued to these companies.
Will other alternative instruments such as Bank Guarantees be able to offer the same ease of business as compared to loans based on LoUs which are denominated in foreign currency and are also comparatively cheaper? If not, then ground still needs to be covered on containing the impact of the ban on LoUs & LoCs on both the importers and Indian Banks. Much more, therefore, needs to be done beyond NAFRA & FEO Bill to restore faith and confidence in the banking institutions including RBI. Questions still remain whether the holes in banking practices or the internal functioning & controls within the banking institutions are the ills to be cured in the long run, before the next spate of frauds are detected.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
Dr. Manoj Kumar
Managing Partner, Hammurabi & Solomon Partners
Dr. Manoj Kumar is the founder and Managing Partner of Hammurabi & Solomon law firm. Dr. Kumar has been representing various leading Indian and International Corporates, Government Bodies and International Law Firms. An alumnus of prestigious world class institutions such as the Harvard Business School and the National Law School (NLSIU), Bengaluru, Dr. Kumar received his professional andleadership skills from distinguished & globally renowned Professors such as Padma Shri (Dr.) NR MadhavaMenon and Prof. Nitin Nohria, presently the Dean of the Harvard Business School. He is a recipient of theprestigious Mahatma Gandhi Samman 2017; was awarded at the House of Lords, London; he is included inthe A- List Lawyers rankings 2017 by India Business Law Journal (IBLJ) recognizing him as one of the top100 private practice lawyers in India. Dr. Kumar has been named as one of the 100 Legal Luminaries of India,published by LexisNexis in 2016. Known as the Best lawyer in the Corporate M&A, Strategy and Policy &Regulation Practice space in India, Dr. Kumar is known for his innovative, out-of-the box strategies pertainingto most critical and complex matters related to FDI, Cross-Border Transaction, Negotiations, Structuring, Restructuringand advising on the multitude of international agreements. Lawyer, Policy Expert, IndependentDirector, Author, Strategist, Columnist, Philanthropist, Thought Leader and Guest Faculty (at top of the lineLaw School & the prestigious Indian Institute of Management (IIM), Dr. Manoj Kumar has many introductions