The French connection

SAMPATH KUMAR D | Updated on January 17, 2018

In a wrangle: The curious case against Lagarde

Indian public servants can a learn a thing or two from the recent legal travails of IMF chief Christine Lagarde in France

It is not often that the average Indian civil servant would find parallels between his/her situation under the Indian law on prevention of corruption and the travails of Christine Lagarde, Managing Director of the International Monetary Fund, under the French law. Just a fortnight ago, the highest court of the land in France dismissed an appeal by her against the ruling of a lower court which held that she should be tried on the charge of “negligence by a person in position of public authority”.

That the negligence in question has cost the French exchequer a tidy sum of €404 million is what the fuss has been about, for the last seven years or so.

The story goes all the way back to 1993 and involves Credit Lyonnais, a French bank which was, at one time, the largest in France. According to chronology of events put out by the BBC while reporting on the lower court’s verdict in December 2015, the facts appear to be as follows:

Tapie’s case

Bernard Tapie, a French businessman turned politician and for a brief while a minister in the French Government headed by Francois Mitterand, had mandated Credit Lyonnais to sell his stake in the sports goods and apparel company, Adidas. The bank manages to secure a price from a consortium of investors that turns out to be substantially lower than what the latter manages to secure for themselves in a subsequent sale, a short while thereafter.

Tapie then sued Credit Lyonnais seeking compensation for the consequent loss of profits. He argued that the bank had not acted in his best interests while claiming to be an agent in the negotiations with the prospective buyers. He had based his claim on the fact that there is a huge difference between the original sale consideration and the subsequent one both taking place within proximate points of time. The fact that the subsequent buyers were themselves part of the initial consortium which quoted a lower price has only served to strengthen Tapie’s case.

Even as these events were unfolding, Tapie’s financial affairs take a turn for the worse and the bank confiscates his assets offered as a collateral for the loans he had taken. The French businessman now sues the bank for damages for failing to act in his best interests while selling the former’s stake Adidas.

Meanwhile Credit Lyonnais makes a series of bad business loans and as part of a French government bailout of the troubled bank takes over its bad loans, which includes Tapie’s outstanding loans to the bank, and places it in the hands of a wholly State-owned investment company.

Lagarde’s worries

In the process, the State-owned investment company gets impleaded in the suit (recovery of damages that the French businessman had filed against Credit Lyonnais). The French businessman wins his case in the lower court and the Government goes in appeal and the case drags on for a number of years. Sometime in 2007, the Government in its capacity as the 100 per cent stakeholder in the investment arm is presented with a choice as to whether to continue to litigate the matter in the French courts or refer it for arbitration before a panel of private arbitrators. That decision falls on the lap of Lagarde as the Minister for Economy in the cabinet of President Nicolas Sarkozy. The civil servants under Lagarde advise her against referring it for private arbitration. The minister overrules them and agrees to refer the dispute for private arbitration.

A year later in 2008, the private arbitrators rule against the government-owned investment company and awards a compensation of €404 million in favour of the businessman. Since the investment company doesn’t have any liquid assets of its own, the Government ends up shelling out the money awarded as compensation.

There is a huge public outcry and the case is taken up by the French Public Prosecutor for further investigation. Upon completion of his investigation, he recommends in 2011 that formal charges be pressed against her for causing a loss to the public exchequer. Lagarde defends her decision saying that she had acted solely in the interest of the State and in complete compliance with the law.

But the prosecutors formally arraign her on charges of negligence resulting in loss of public revenues before a court. Lagarde appeals to the Supreme Court praying for dismissal of the suit against her. The Court dismisses her appeal on July 22 and orders her to stand trial.

The Indian connection

It is nobody’s case that Lagarde benefited personally from the decision. Nor is the businessman in question who benefited from the arbitral award related to her. But the fact remains that a decision ended up costing the State a considerable sum of money. In short, the case has all the ingredients of prima facie charge of ‘criminal misconduct’ within the meaning of Section 13 (1) (d) and more particularly, the sub clause (iii) of the clause ‘d’ of ‘Prevention of Corruption Act 1988’ under the Indian law.

It talks of a conduct by a public servant which results some pecuniary advantage accruing to a private individual. Essentially she is being faulted for referring a commercial dispute involving a public sector company and a private individual for private arbitration and over ruling the recommendations of officials working under her. Does going against the recommendations of a junior amounts to criminal misconduct merely because subsequent events would result in some person gaining some monetary advantage?

That is absurd. We might as well dispense with a pyramid structure for organization. Also, what if the arbitrators had found in favour of the French public sector company? She would surely have been applauded for her bold and courageous action in quickly putting an end to a vexatious dispute? To add to the complexity of the problem, in the crucial presidential elections held in 2007, Tapie a politician of some standing crossed over to the Liberal Party headed by Sarkozy who later won the election and went on to become the President of the nation.

So, was Lagarde’s decision to refer the dispute for private arbitration a political quid pro quo which ended up costing the Government some tax payers’ money? It is hard to say. But this is precisely the kind of situation that the law sought to preempt with that onerous clause under Section 13(1) (d).

An intuitive conclusion as to the criminality of action after weighing a cocktail of disparate facts none of which either individually or collectively point inexorably to an objective finding. While it is hard not to sympathise with the situation of a public servants placed in such circumstances the larger purpose of going after quid pro quo deals that is the stuff of politics cannot be ignored either.

Perhaps it might not be a bad idea to ask of aspirants to a career in civil service to sign an undertaking that they have read and understood the implications of Section 13(1) (d) of the Prevention of Corruption Act. Sort of putting the buyer on notice ‘Caveat Emptor’.

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Published on August 03, 2016
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