As SC raps ED, a look at agency’s powers, role and red lines

Notably, the TASMAC case is not the first time the apex court has pulled up the ED. Earlier this month, the Court criticised the body for making “allegations without any reference to anything” in a liquor scam case in Chhattisgarh. In another case in Chhattisgarh, it had called out the agency for paying scant heed to the “fundamental rights of the accused”.

These developments warrant revisiting the formation and evolution of India’s economic intelligence agency, and its role in enforcing economic laws and combating financial crimes.

Evolution of India’s economic intelligence agency

The ED was established on May 1, 1956, as the ‘Enforcement Unit’ under the Department of Economic Affairs within the Ministry of Finance for handling violations of exchange control laws under the now-repealed Foreign Exchange Regulation Act, 1973 (FERA). Later on, it was renamed the Enforcement Directorate and was transferred to the administrative control of the Department of Revenue, and subsequently entrusted with the enforcement of a broader range of financial laws.

The enactment of the Foreign Exchange Management Act (FEMA), which replaced FERA in 1999, and the Prevention of Money Laundering Act (PMLA) in the early 2000s, increased the power of ED. These moves aligned its functions with international standards to combat financial crimes, notably those recommended by the Financial Action Task Force (FATF).

In 2006, India received observer status in FATF – which was created in 1989 to coordinate anti-money laundering efforts across the world – and in 2010, it became its member state.

Mandate to enforce laws

While the ED has a broad mandate to investigate offences related to money laundering and foreign exchange violations, it’s empowered to enforce the following key laws:

— The Prevention of Money Laundering Act, 2002 (PMLA): The ED traces assets from money laundering activities and is responsible for ensuring the prosecution of offenders and confiscation (permanent seizure of ownership, usually after conviction) of such assets.

— The Foreign Exchange Management Act, 1999 (FEMA): The law enforcement agency is also responsible for imposing penalties on offenders of FEMA and in the cases pertaining to violations committed prior to the repeal of the FERA of 1973, which FEMA replaced, thus being responsible for the handling of legacy FERA cases.

— The Fugitive Economic Offenders Act, 2018 (FEOA): The ED is mandated to attach (temporarily seizing of property without assuming ownership to prevent sale, usually during trial phase) and confiscate properties of economic offenders evading Indian law by fleeing abroad.

— The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA), 1974: The Directorate is the sponsor of cases under the law and can initiate preventive detention proceedings on FEMA violations based on COFEPOSA.

ED’s power and federal structure

Thus, as the primary body to enforce economic laws, the ED enjoys significant powers to investigate, detect, and prevent economic crimes. For instance, under the PMLA, the central agency is empowered to summon individuals, enforce their attendance, and record their statements, which are valid as evidence.

The ED also has the authority to conduct searches and seize property or documents linked to money laundering, provided there’s a recorded ‘reason to believe’ and the statutory prerequisites are met. It can also make arrests based on material evidence and written justification – but with the condition that the grounds for arrest are communicated to the accused. This is a higher threshold than that required for arrests under the Bharatiya Nagarik Suraksha Sanhita (BNSS).

The ED also has the power to attach properties suspected to be proceeds of crimes for up to 180 days to prevent their sale during investigation. A distinctive feature of PMLA is the reversal of the burden of proof, where the onus often shifts to the accused to prove innocence by showing the legitimacy of the attached assets.

Under the FEMA, the ED has adjudication powers and acts as a quasi-judicial body to impose penalties for foreign exchange regulation violations. Further, the FEOA grants the ED powers to attach and confiscate properties of economic offenders who have absconded from India.

Taken together, these wide range of powers to investigate, secure evidence, attach and confiscate assets strengthen the ED’s objective of protecting the integrity of India’s financial system.

However, these powers are subject to constitutional limits rooted in federalism. The Supreme Court has repeatedly warned the ED on overreaching its jurisdiction, stressing the need to respect state autonomy and to avoid causing any disruption to the union-state balance. These instructions are relevant, particularly in light of allegations regarding the use of the ED as a tool to interfere in investigations that fall under state jurisdiction.

Concerns over operational independence

While the ED has an important role in safeguarding India’s financial integrity, its functioning has regularly drawn scrutiny and raised significant concerns, as seen in the Supreme Court’s recent criticism of the TASMAC case. The CJI’s observation regarding a violation of the Constitution’s federal structure coupled with concerns about the agency’s operational independence and allegations of partisan motivations underlined the need for introspection.

A significant criticism faced by the ED is regarding its low conviction rate under the PMLA, despite a substantial number of cases registered. Of the 5,297 cases registered under the PMLA from 2014 to 2024, only 40 cases have seen convictions, prompting the apex court to direct the agency to ‘focus on quality prosecution and evidence’ in August 2024. This has raised questions about the intent and effectiveness of the ED’s investigative and prosecution mechanisms in securing convictions.

The extensive powers granted to the ED, particularly under PMLA, including the power to arrest, provisionally attach assets, and the unique provision of a reversed burden of proof, have led to debates regarding their potential impact on due process and civil liberties.

It has been alleged that the provision placing the burden of proof on the accused to prove their innocence has been used as a political tool to stifle the opposition. The Supreme Court’s observations regarding a pattern of accusations without proof, and dismissal of multiple cases due to lack of evidence, substantiate such concerns.

Concerns have also been raised regarding the operational independence of the ED. Allegations of political influence and targeting of specific individuals or entities have frequently surfaced, impacting public perception and the agency’s credibility. The need for greater transparency in its case selection process, investigations, and conviction rates is widely discussed. Additionally, the ED’s actions sometimes overstep its jurisdictions, taking up cases that fall under states’ ambit, as seen in the TASMAC case, leading to federal friction.

What is the way forward?

The ED would benefit from certain reforms aimed at increasing its effectiveness and improving the public perception regarding its functioning. A key step perhaps could be to place the agency under stronger judicial oversight, particularly the investigation, arrest, and attachment processes to prevent overstepping of jurisdiction.

Another step could involve strict adherence to due process to counter allegations of political interests and harassment, which could be supported by establishing clear Standard Operating Procedures and effective training and capacity-building for ED personnel. Reorienting the ED’s functioning to make investigations intelligence-driven and focussing on convictions through strong evidence might further help to dispel the perception of bias.

To conclude, an economic intelligence agency such as the ED is a necessity to protect the economic integrity of India, ensuring the prevention of financial crimes. Reforms that keep pace with the times and strict adherence to due process and constitutional norms will be essential to ensure its fair and effective functioning.

Post Read Questions

How has the Enforcement Directorate’s mandate evolved over time since its inception in 1956? What are the key laws enforced by the Enforcement Directorate, and how do they define its jurisdiction?

How does the Enforcement Directorate’s role intersect with federal principles enshrined in the Indian Constitution?

The Supreme Court criticised the Enforcement Directorate for “crossing all limits” and “violating the federal structure” in the Tamil Nadu State Marketing Corporation (TASMAC) case. Evaluate the concerns raised by the Court.

Do you think the political misuse of agencies like the Enforcement Directorate impact democratic institutions and public trust in governance?

What is the significance of the Enforcement Directorate’s powers to attach and confiscate property under different laws like PMLA, FEMA, and FEOA?

(Kannan K is a doctoral candidate in Political Science at the Centre for Economic and Social Studies, Hyderabad.)

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