August 17, 1998

A proposed anti-money laundering legislation clouds industry's celebration over the move to repeal FERA.

By Shefali Rekhi

Walk through the corridors of the Enforcement Directorate (ED) and there are these dark pockets of cobwebs, a musty smell and an eerie silence. But over the past 25 years, they have hardly bothered those summoned there as the draconian power that the directorate's officers wield over them overshadows all that. Not for much longer though. Last week, the Government presented in Parliament two bills to enact the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA), both aimed at overhauling the existing foreign exchange regulatory system. The bills are expected to be passed in the winter session of Parliament.

While FEMA and its softer provisions will replace the Foreign Exchange Regulation Act (FERA), the PMLA seeks to check the flow of money connected with criminal activity. Till now, money laundering essentially meant hawala transactions. But with the rupee heading towards full convertibility, hawala is bound to become less attractive. To prevent laundering through other routes, the new law will cover a range of crimes, from narcotics peddling and flesh trade to terrorism and murder. It will also plug ambiguities in existing legislation which make it difficult for the authorities to penalise those not directly involved with the crime, though they could be using the money involved. Says Revenue Secretary N.K. Singh: "FERA was an unwritten law on money laundering but with a separate bill, offences will be clearly covered. It is also in keeping with the best international practice."

The industry's reaction has been mixed. While it is celebrating the arrival of FEMA, there are fears that some of the powers the ED may be shedding will make a backdoor entry through the provisions of PMLA. While FERA was a criminal offence, FEMA will be a civil offence, entailing less stringent penalties. Says Rakesh Mohan, director-general, National Council of Applied Economic Research: "It is the first truly positive sign on the economic policy front from the Government." The new bill goes beyond the FEMA proposal made by the shortlived United Front (UF) government. The ED's powers to arrest will now be taken away, as also its right to search and seize. The way its new role has been envisaged, the ED will function like a policeman who cannot reach for the handcuffs.

In other ways too, the BJP Government seems to have gone a step ahead. The FEMA approved by the UF cabinet required that a distinction be made between criminal and civil cases. The new bill, however, stipulates that all offences under FEMA will be treated as civil cases which can be settled by paying a penalty. Further, businessmen will no longer have to go through the tedious procedure of getting approvals from the Reserve Bank of India for foreign trips and minuscule foreign exchange transactions. Powers will now be delegated to authorised forex dealers to do the needful. "It's a welcome change," says Jamshyd Godrej, managing director, Godrej & Boyce. "FERA was punitive when we were trying to globalise."

But, like other industrialists, he is keeping his fingers crossed as FEMA is yet to be passed. With the ED cracking down on high-profile offenders in the past three years (see box), there is bound to be public criticism that the bill was introduced in a hurry. That there was no protest from the opposition parties on the day the bill was tabled has only fuelled such doubts.

That apart, the scope of the PMLA is also worrying industry circles. Under the act, designated officers will have the power to arrest an individual on mere suspicion of a violation. One such violation deals with "falsification of accounts". Currently, it is an offence under the Indian Penal Code where the accused can get away by paying a fine. Anticipatory bail is also allowed in case of arrest. But in the new dispensation, an individual can be straightaway arrested on the basis of "suspicion". Anticipatory bail is not possible. "This only means further harassment for entrepreneurs," says K.K. Modi, president of the Federation of Indian Chambers of Commerce and Industry. If the accused is proved guilty, punishment can mean rigorous imprisonment for three to seven years with a fine of up to Rs 5 lakh. The PMLA also makes it mandatory for financial institutions (FIs) to report transactions above Rs 25 lakh to the Income Tax Commissioner. Businessmen and FIs, however, want the limit to be raised to Rs 1 crore.

Catering to these demands will not be easy. The Government believes that the liberal provisions of FEMA have to be balanced by stringent legislation against money laundering. The aim is to ensure that crime proceeds do not make their way into India.

At the same time, the Government will have to be careful about when FEMA will come into force. If the rupee's instability and the economy's downslide continue, there is danger of the flight of capital from the country. That does seem to be the case at the moment. Besides sluggish exports, first quarter company results and the overall industrial growth suggest that the increase in GDP this year may not be much higher than last year's 5.1 per cent. Moreover, forex traders fear a further depreciation of the rupee if there is fresh turbulence in the South-east Asian markets. As B.B. Bhattacharya, economist with the Institute of Economic Growth, points out, "The bop front is not healthy at the moment. That is disturbing." The bottom line is that the economy must get on track before FEMA and PMLA are enforced. It is only then that the two legislations can have the desired effect.

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