This article is written by Yash Singhal from Vivekananda Institute of Professional Studies, New Delhi. The article is an exhaustive guide on financial crimes in India and their impact on the national economy. It also states existing legislation in this regard and certain reforms suggested to avoid them.

Introduction 

Financial crime is a field yet not completely known to the general public. It is significant to follow the developments in the field of financial crisis to save yourself from committing any such crime in future. It is an established fact that everyone in India is aware of the plight of Vijay Mallya and Nirav Modi and how important it is to get them extradited to India for the financial frauds they have committed against the government. It is in this regard, that we need to be aware of the offences they committed.

Law shares a cordial interdisciplinary relationship with economics and it is pertinent to study about it in detail. This article would explain the scope of financial offences and the legislation in this regard to counter them. 

What are financial offences?

As the term suggests, financial offences deal with money-related offences committed by an individual or a group of individuals against the State and its authorities. The National Crime Records Bureau (NCRB) defined financial crimes as a manifestation of criminal acts in an organised manner with the intent to earn wealth through unlawful means. The term ‘unlawful’ here covers violation of any law established by the legislation or statutory laws. 

These crimes are often regarded as ‘white-collar crimes’ for the fact that any person in the position of responsibility or holding an office, can indulge in such unlawful activities. However, it is not completely true as we can have any individual committing a financial offence through regular dealings in banks, practices of money laundering or misappropriation of funds through illegal ways. 

There is no specific universal definition to financial offences so it would be correct to make a personal interpretation as to its meaning that include any act committed with an intention to gain financial benefit illegally. 

Impact of financial crimes on the national economy

It is an assumed statement that no crime could ever be attributed to a positive impact on society. Similarly, financial crimes have serious negative consequences on the national economy. It impacts the growth and economic development of the country in multiple ways. It weakens the stability of the country and affects international reputation. 

There is an observation of the unequal distribution of resources among the population; the abundance of black money, i.e. the money not accounted for during the calculation of national income in a financial year and creation of parallel economy with people investing in fictitious sources that are not registered with the government, as some major impacts of financial offences on the national economy.

Also, there are some more impacts which need clear attention at the earliest- stagnation of government development projects across the country weakens the citizens’ trust in the efficiency of the government and a steep rise in the corruption level.

Classification of financial offences from criminal offences

The financial crimes are non-violent in nature but have equally negative effects on society due to both its direct and indirect consequences. These are a set of organised crimes dealing with money and matters of finance. 

Tax evasion, bank frauds, insurance frauds, hawala scams, money laundering, credit card crimes, counterfeiting of currency are some of the examples of financial crimes which may not seem as dangerous as a crime committed under the Indian Penal Code, 1860 but they have the potential to shake the society equally.

Financial crimes in the Indian Penal Code

The Indian Penal Code, 1860 is not an exclusive statute for financial crimes but it does have some financial offences in its provisions. The punishments are also stated along with the crimes to restrict the commission of such crimes in the society.

Cheating

Section 420 of the Code deals with the act of dishonestly inducing another person to deliver a property by way of deception that would amount to cheating. It also includes any act of making or destroying the personal valuable security, in whole or in part. The punishment for the offence is imprisonment for a term extending up to seven years and fine.

Criminal Breach of Trust

Section 409 of the Code states that any public servant who is entrusted with the property in his official capacity commits an act amounting to criminal breach of trust in relation to the property would be punished under this section. The punishment for the offence includes life imprisonment, or imprisonment extending up to ten years along with a fine.

Counterfeiting of coins

Section 232 of the Code deals with the criminal act of counterfeiting Indian coins which include generation of similar coins in an individual capacity, contrary to the authority of a citizen. The punishment for the offence includes life imprisonment, or imprisonment extending up to ten years and fine.

Fraudulent use of Weights and Measures

Section 265 of the Code deals with the offence of frauds related to using wrong weights and measuring instruments intentionally against the actual measure. The punishment for the offence includes imprisonment for a term extending up to one year, or fine, or both.

False property mark

Section 481 of the Code deals with the crime of marking a movable property package as to belonging to some other person and not the actual owner. 

Tampering with property mark

Section 489 of the Code deals with the crime of making changes with the property marks intending to cause injury to any person. The punishment for the offence involves imprisonment for a term extending up to one year, or fine, or both.

Types of financial crimes in India

The offenders have exploited every area of financial services available in India. It shall continue until an effective system is formulated to monitor the malicious usage of the financial services by the state authorities. But before we embark on the argument for an efficient system, we need to first enumerate a list of financial crimes being committed in India in detail.

Bank Frauds

The banking sector is divided into two categories on the basis of ownership- Private banks and public sector banks. It is to utter disappointment that most of the financial crimes related to bank frauds are through government banks. The individuals or the group of individuals target these banks to gather crores in loans. 

The non-performing assets, which are created as a liability by any bank on non-payment of loans by a person within a specified time period have soared sky-high limits for government banks. The big borrowers, backed by criminal connectivity or a financial firm, are alone misusing the system to garner huge amounts and create high non-performing assets. 

As of March 31, 2018, the estimated total volume of gross NPAs in the economy is calculated at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks to borrowers. The real problem lies with the procedure that allows these big borrowers to get loans sanctioned with such ease but small investors face multiple issues in getting their loans sanctioned. The foremost problem of collateral against loans discourages small investors from approaching banks. 

Import/Export Frauds

The amount of black money in India has created parallel economies worth even more than the actual worth of the Indian economy. The people possessing black money face an issue with the utilisation of this black money due to its lack of official record in the government treasury. The Government limits black money by enabling provisions that promote legally sanctioned currency in purchasing services in India.

The limitations force the people to look out for alternatives to convert their black money into a legally sanctioned white money. They involve themselves in import/export frauds, whereby they make false receipts of trade and obtain incentives from the government on payment of tax. It is all a part of intensive planning which is hatched under the ‘watchful’ eyes of the government and its authorities.

Insurance frauds

The purpose of the insurance companies is to provide assurance of payment at the time of an accident or any future specified date to the individuals. They function on the monthly interests paid by the customers on the total amount of their insurance claim. They have been often used by offenders to extract financial benefits.

People under misrepresentation approach the insurance companies to get themselves insurance. The companies are required to carry out police investigations into the identity of the claimants but most of the time it is rigged by the offenders. These claimants intentionally commit an accident to claim the insurance amount, sometimes claiming multiple insurances on similar accidents.

Non-Banking Financial Companies fraud

Non-Banking Financial Companies (NBFC) are companies registered under the Companies Act, 1956 as a legal entity. As the name suggests, these are financial institutions separate from a bank. The functions of the company include the issuance of a loan, shares/securities/bonds acquisition and other financial operations. 

These companies are not regulated by the Reserve Bank of India, unlike banks, it lends loans at high-interest rates to borrowers. They collect money from these borrowers through the interest rates along with the principal amount and earn crores of rupees. There was a similar instance in the past in India where one NBFC opened 130 other companies and all involved in a similar offence. 

Fake currency

A country controls the money supply in its economy according to the annual income of its population. It is a mechanism to regulate the inflationary rates in the economy. Only the Reserve Bank of India has the authority to issue currency in India and any other individual or authority issuing currency would be deemed as illegal.

There are individuals who commit the acts of issuing fake currency while photocopying the original currency and circulate them in the economy as a payment to purchase goods or services. It is a wrongful loss to the seller as he got a fake currency in return for his goods. 

Legislations against financial crimes

There are various legislations in regard to financial crimes in the pursuit to minimise the instances of the commission of these kinds of offences. The Government and its authorities realise the need to formulate policies in furtherance of an efficient system to stall the offenders from misusing the functions of public authorities.

The list of some of the legislation include:

• Income Tax Act, 1961 
• Companies Act, 1956
• Companies Act, 2013
• Customs Act, 1962
• Banking Regulation Act, 1949
• Prevention of Money Laundering Act, 2002
• Insolvency and Bankruptcy Code, 2016 

Fugitive Economic Offenders Act, 2018

• The Indian government proposed a ‘Fugitive Economic Offenders Bill, 2018’ on March 12, 2018, to be later enacted as an Act, to address those offenders who escape criminal prosecution after committing economic offences. 
• For the purpose of the Bill, a ‘fugitive economic offender’ was identified as someone who is involved in an economic offence and a warrant is issued against them for an immediate arrest. 
• It has also included those people who went abroad to avoid criminal prosecution in India and someone who is already in a foreign country and refuses to return to India (criminal prosecution in India). 
• Under this Act, Vijay Mallya and Nirav Modi are fugitive economic offenders who await criminal prosecution in India after they committed a financial crime here and left the country to be settled abroad.

Reforms required to reduce financial crimes

Even though the Indian government enacted multiple legislations in various fields of financial functions to reduce financial crimes yet the offenders have found loopholes in the system to be exploited until the helm. Some of the reforms that are required in the system are specified hereunder:

Equal treatment of financial offences as Penal offences

The economic offences do not have enough strict provisions as those in the penal offences. There is a sense of relaxation to the financial offenders which has failed to set a precedence for future offenders to not commit such crimes. The purpose of the law is to deter a person from any criminal activity and also to set an example for the society to not get involved in criminal activities.

The financial offenders continue to enjoy luxurious lifestyles without any forced detention in the deplorable state of prisons. There is a lack of seriousness in treating financial offences with a similar degree as a penal offence. The government and its authorities need an immediate response in the following regard to curb the rising rates of financial crimes.

Exclusive courts

The courts in India have already been overburdened with the number of pending cases that it is important to organise a system of tribunals to dispense cases in different fields of law. It would benefit the public as the speed of trial would increase with the advantage of specialised courts with adequate knowledge on the issues taking up the cases. 

The delegated legislation concept is the basic requirement as a reform in regard to financial crimes. It is a settled principle that ‘justice delayed is justice denied’ which can be avoided with an exclusive court/tribunal to handle financial crimes cases.

International cooperation

It is a general observation that the financial offenders in order to escape criminal prosecution in India, flee abroad. The enactment of the ‘Fugitive Economic Offenders Act, 2018’ has allowed for criminal prosecution against those who are residing abroad after committing a financial offence in India but it is on the condition that the Extradition Treaty between the countries allows it.

International cooperation with respect to the extradition of financial offenders would leave these offenders no other alternative than to admit their guilt and face criminal prosecution. This is not a single country’s problem but spreads across continents with some even involved in cross-border financial crimes with no fear of prosecution. A concrete plan on this would be advantageous to every country in the world.

Regulate company records 

The government shall have specific bodies to regulate stepwise verification of each company registered under the Companies Act. There should be no complacency in carrying out their functions, if any, should lead to legal sanctions against the responsible individual or authority.

The complete police investigation into the status of the company and how they utilised the issued funds. It should be checked whether the allocated funds were put into similar use as stated in the paperwork or not. These small regular monitoring procedures would be a positive step towards minimising the financial crimes in society.

Conclusion

The financial offences in India have not been given similar status as other offences and hence, they involve soft punishments which do not prevent the individuals in the society from committing such crimes in future. These financial crimes are sometimes more serious than the penal offences themselves due to their ability to impact the national economy at an instant. The government has enacted legislation to curb the acts of financial crimes but no significant reduction has been observed due to offenders’ ability to search for loopholes. There is no surety that the reforms stated are enough to minimise the crimes but would definitely strengthen the government system in this regard.

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