In my speech today, I wish to go into detail on the legal and technical issues that are involved in the apparent conflict between policymaking and policing.
Safety is a "public good". Public good is defined around two tests: non-rival and non-excludable. Safety is non-rival: my safety while walking on a street does not reduce your consumption of safety. Safety is non-excludable: when one more child is born into the world, it is not possible to exclude that child from the umbrella of safety. Safety satisfies both tests and it is a public good. A fortiori, safety of the financial system is a public good. If we fail on safety, we will fail to get growth.
Providing safety is the job of the government. A sound criminal justice system must ensure safety of the financial system. It must protect the financial system against theft, fraud, forgery, mis-selling, money laundering, hacking, cyber attacks etc. Hence the need for a first rate investigating agency.
An investigating agency must build capacity. I have no doubt that a trained police officer is capable of handling financial crimes. I was told that an IPS officer was brought into the Securities and Exchange Board of India (Sebi) some years ago as an executive director, and he pioneered many new methods of investigation that yielded permanent improvements in the manner in which Sebi works. The point that I wish to make is the need for bringing a variety of skilled people into the investigating agency. In the case of the Central Bureau of Investigation (CBI), it must recruit bankers, accountants, lawyers, insurers, fund managers and securities experts; train them, and turn them into first-rate investigators.
The second limb of capacity is technology. Financial crimes are committed using the most advanced technology, including sophisticated software. The investigating agency must have technological capability matching the offender's capability.
Many financial crimes span several countries. These criminal networks cannot be exposed by an agency acting alone. There must be a robust mechanism for exchange of tax and financial information among the countries of the world. Fortunately, more countries are entering into agreements for tax information exchange and mutual assistance in criminal matters. CBI, as the nodal agency in India for Interpol, is best placed to join a network of investigating agencies for mutual assistance in criminal matters.
I may also point out that there are usually three groups of people involved in financial crimes.
Firstly, there are the core conspirators. Then there are accomplices in the financial system and, finally, there are their accomplices in government departments. Any thorough investigation must uncover all the groups of people and links that made the conspiracy possible. All the groups must suffer punishment. It is, therefore, important that the investigating agency identifies all the individuals who collaborated in the crime and brings to justice every one of them. That alone will establish deterrence.
As a rule of criminal jurisprudence, a crime requires mens rea, that is a criminal state of mind. I am aware that there are exceptions and some offences are charged on the principle of "strict liability". In my view, the principle of strict liability may not apply without qualification to financial crimes, except in the small number of cases where there is a clear and unambiguous rule of conduct and the law unambiguously stipulates that any violation of that rule would be considered an offence. Ordinarily, a financial crime would arise from either an unlawful gain or unlawful loss and, in such cases, the law could either stipulate proof of the state of mind or presume a state of mind to cause the unlawful gain or the unlawful loss. So, in financial crimes, mens rea or the state of mind must be invariably proved or presumed from certain facts. This, in my view, is the correct approach to financial crimes.
There are cases where the CBI - and sometimes the courts - have interpreted provisions of law to exclude mens rea. A frequently cited example is section 13(1) (d) (iii) of the Prevention of Corruption Act, 1988. That provision reads as follows:
"If he, while holding office as a public servant, obtains for any person any valuable thing or pecuniary advantage without any public interest".
A close reading of the above provision does not, in my view, rule out mens rea. The words "without public interest" imply that the offender must have committed the act although he knew that there was no public interest. In a case arising under this section, if the accused is able to show that there was indeed some public interest, in my view, the offence would not be made out and the accused would be entitled to an acquittal. I would once again commend the prudent approach to financial crimes, and that is the requirement of mens rea or state of mind, unless it is unambiguously excluded by the express language of the law.
Let me illustrate with reference to certain kinds of financial transactions. Banking is a business, so banks lend. In some cases, they lend at the prime lending rate, in some cases below that rate, and sometimes at the base rate. Interest rates can be reset. Similarly, insurance companies invest funds by choosing winners. They buy and sell financial assets. These decisions are taken based on facts and circumstances that are available at that time. When market conditions change, a loan may turn into a non-performing asset. An investment may collapse in value and result in a loss.
How should one characterise the original decision? It may have been a poor decision, it may be a decision that turned out to be a wrong decision, but does that make the decision an offence or the decision maker a criminal? I think an investigating agency should tread carefully before it reaches the conclusion that a business or commercial decision, taken on the basis of available facts, amounts to a crime. This is where the state of mind comes in. In my view, it would be opposed to common sense and fair play if the agency ignored the state of mind and jumped to the conclusion that a business or commercial decision amounted to a crime.
Edited excerpts from Union Finance Minister P Chidambaram's speech at the XXth conference of CBI and State anti-corruption bureaus on "Building A Criminal Justice System To Deal With Financial Crimes" in New Delhi, November 12, 2013
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
