This article is written by Kavana Rao from Symbiosis Law School, Noida. This article is about the types of business crimes and the process of investigation and prosecution based on Indian laws and statutes.
With the rise in the number of corporate companies and start-ups, there is also a rise in the number of corporate fraud, embezzlement, money laundering, etc. Business crimes are often characterized by deceit, concealment, or violation of trust. These are committed by business professionals for financial gain or fear of losing business standing, money, and other assets. Business crimes are also done to avoid the payment of legal or formal dues and unjustly retain money or property. The primary reason for the increase in business crimes is the rapid growth in industries and technologies.
Criminal Law enforcement under Indian Law
The Government of India, under the department of revenue, has set up various agencies to enforce laws and combat crime. Some of the major organizations listed are:
- The Central Economic Intelligence Bureau;
- The Directorate of Enforcement;
- The Central Bureau of Narcotics;
- The Directorate General of Revenue Intelligence;
- The Securities and Exchange Board of India;
- The Directorate General of Income Tax;
- The Financial Intelligence Unit, India;
- The Directorate General of Foreign Trade under the Ministry of Commerce and Industry ;
- The Competition Commission of India.
Different kinds of business crimes
The Securities and Exchange Board of India Act, 1992 and Rules deal with the frauds related to securities and the issue, purchase, or sale of securities.
Fraud as defined under Section 17 of the Indian Contract Act, 1872, as the acts where:
- Any such facts which are untrue and the person making it also believes it to be untrue, or
- There is active concealment of facts by the person who knows about the fact, or
- Promises made without the intention of fulfilling it, or
- Other acts which are fitted to deceive the other party or any such act or omission which is considered fraudulent.
Therefore, securities fraud is a serious type of white-collar crime that is committed in a variety of forms but ideally involves misrepresenting information that investors use to make decisions.
Accounting fraud is the manipulation of financial statements to create a false appearance of corporate financial health. The financial statements can be falsified by overstating its revenue, failing to record expenses and misstating assets and liabilities. Under the Companies Act, 1956, the Central Government is empowered to inspect the books of accounts of a company, direct special audits, order investigations, and launch prosecutions. The IPC sets out punishments for forgery and falsification of accounts.
Section 465 describes the punishment for forgery which states that whoever commits forgery will be punished with imprisonment of description for a term which may extend to two years, or with a fine, or with both.
Falsification of accounts
Section 477A describes the punishment for falsification of accounts with imprisonment which may extend to seven years and shall also be liable to a fine.
In India, SEBI (Insider Trading) Regulation, 1992 framed under Section 11 of the SEBI Act, 1992 intends to curb and prevent the menace of insider trading in securities. An insider is someone who is connected to the company, who was connected with the company, or who is deemed to be connected to the company. The scope and definitions of who an “insider” or a “connected person” is widened. Hence, any person, related to the company or not, comes within the purview of these regulations if he is expected to have access to or possess the UPSI. The insider cannot communicate, counsel, or disclose UPSI (Unpublished Price Sensitive Information). The SEBI, advancing its stance against insider trading, notified the amendments in 2018 of the Prohibition of Insider Trading Regulations, 2015.
Under the IPC, embezzlement under Section 409 is defined as a criminal breach of trust and dishonest misuse of property. The individual entrusted with such property should have either dishonestly misappropriated or converted the property to his advantage, or used and disposed of the item or property illegally. The offence carries imprisonment for a term that may extend to two years or fine or both.
Bribery of government officials
Bribery of government officials is governed by the Prevention of Corruption Act, 1988. Public servants or other persons or commercial organizations attract penalties under the Act:
- Taking gratification other than the legal remuneration in respect of an official act.
- Taking gratification by corrupt or illegal means to influence a public servant.
- Taking gratification for the exercise of personal influence with a public servant.
- A public servant obtaining valuable things without consideration from the person concerned in proceedings, or business transacted by such public servant.
- Any person who promises to give undue advantage to a person with an intent to induce or reward public servants to perform their public duty “improperly”.
- Anyone who is associated with a commercial organization who gives or promises to give undue advantage to a public servant to obtain or retain business or an advantage in the conduct of business for such commercial organization.
For all the above offences, mere acceptance, or agreement to accept to obtain such gratification or give or promise to give an undue advantage to a public servant is sufficient to constitute an offence.
Other acts such as IPC, the Benami Transactions (Prohibition) Act, 1988, and the PMLA are also applied for penalizing acts such as the bribery of Government officials.
Cartels and other competition offences
Cartels are where firms or companies agree to not compete with one another to manipulate the markets by raising prices and restricting supply. This harshly injures the markets and the customers. Under the Indian Law, disputes regarding cartels and other competition offences fall under Civil Statute therefore remedies are available in the form of penalty or cease and desist order. Section 3 of the Competition Act, 2002 states that if any agreements are likely to have adverse effects on the competition in India, then such agreements will be considered void. If complaints are filed by the Competition Commission or an authorized person, the Magistrate has the power to take cognizance of the offence.
Crimes related to tax in India are prosecuted under various acts like The Income Tax Act, 1961, the Customs Act, 1962, Central Excise Act, 1944, the Central Sales Tax Act, 1956, etc. These crimes include – smuggling, tax evasion, tax fraud, customs duty evasion, etc.
Companies generate a lot of wastes in the process of their manufacture and production, which largely affects the environment, also having a direct effect on animal and human life. Therefore, as per the Water (Prevent and Control Pollution Act) of 1974 entrusted to the Pollution Control Board, any person who wilfully causes any poisonous, toxic, or polluting matter into any water stream, well, sewer or land or otherwise contravenes the provisions of the act is liable for imprisonment for anywhere between 18 months to 6 years along with a fine. A subsequent similar offence will result in imprisonment from 2-7 years along with a fine. Any person who knowingly permits the said violation is also liable for the same.
Campaign finance/election law
Corporate contributions to candidates and political parties are regulated under the Companies Act 2013. According to it, the contribution amount must not exceed 7.5% of the company’s average profit of the past 3 years. Non-compliance to this would result in a fine up to five times the said amount and imprisonment up to 6 months. Under the Income Tax Act, the corporations can deduct the total income to the extent of the contribution made to the political parties for tax purposes.
The political parties can accept any amount voluntarily offered to them by the companies except Government companies under the Representation of People Act, 1951 (RPA). Additionally, there is an absolute restriction on contributions coming from foreign sources.
Derivative sales are controlled under provisions of the Securities Contract (Regulation) Act, 1956 (SCR Act) and the Securities Exchange Board of India (SEBI) Act 1992.
Section 12A of the SEBI prohibits the use of manipulative and deceptive devices, substantial acquisition of securities, and insider trading. As per it, no person shall use or indulge in connection with the issue, purchase, or sale of any securities listed on a recognized stock exchange, any manipulative or deceptive device or contrivance which stands in contravention of the SEBI Act.
Money laundering or wire fraud
Money laundering is the illegal process of making large amounts of money generated by criminal activity, such as drug trafficking or terrorist funding, but make it appear to have come from a legitimate source. The Prevention of Money Laundering Act, 2002 (PMLA) deals with offences related to it.
Cybersecurity and data protection law
The Information Technology Act, 2000 (IT Act) and the Amendment Act 2008 cover offences related to cyber-terrorism, identity theft, violation of privacy and also deal with e-governance and e-commerce. The IT Act also covers offences committed outside India by any person if the act involves a computer system or network located in the Indian territory.
It also prescribes that a corporate body would be liable to pay damages if it is negligent in implementing reasonable and proper security practices, which results in any wrongful damage or gain to individuals.
Trade sanctions and export control violations
Matters relating to foreign trade and its regulation are controlled under the Foreign Trade (Development and Regulation) Act, 1992, which gives the Central Government powers to make provisions for prohibiting, restricting, and regulating import/export of goods in the country. They also have the power to impose restrictions related to the number of goods imported if it may seem that these imports may cause or threaten to cause serious injury to the domestic industries and sectors.
Corporate criminal liability
Under the older traditional view of the subject, the company itself was not perceived to have the mens rea to commit an offence. However, subsequent decisions by the courts universally have established the fact that the company or a legal entity has virtually the same position as an individual and can be convicted of breach of statutory laws requiring mens rea.
To further clarify, Section 85(2) of the Information Technology (Amendment) Act, 2006, reads:
“…. where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officers of the company, such director, manager, secretary or other officers shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.”
Additionally, there have been cases where it was held that impleading the company as an accused is sine qua non (an essential condition) for prosecuting the directors and /or individuals employed with the said company.
In cases of mergers and acquisitions, if the same is court-approved then the court-sanctified scheme will itself provide for the successor liabilities.
Statutes of Limitation
As per Section 468 of CrPC, no court can take cognizance of an offence after the expiry of (1) six months, if the offence is punishable only with a fine, (2) one year, if the offence is punishable with imprisonment for a term not exceeding one year, or (3) three years if the offence is punishable with imprisonment for a term not exceeding three years. The limitations period commences on the date of the offence.
However, concerning certain economic offences/ business crimes, the Economic Offences (Inapplicability of Limitation) Act, 1974 provides that provisions of CrPC relating to limitation shall not apply in relation to, inter alia, the following statutes:
- The Income Tax Act, 1961;
- The Companies (Profits)Surtax Act, 1964;
- The Wealth Tax Act. 1957;
- The Gift Tax Act, 1958;
- The Central Sales Act, 1956;
- The Central Excises and Salt Act, 1944;
- The Customs Act, 1962;
- The Emergency Risks (Goods) Insurance Act, 1971.
If the court is convinced that the delay has been properly explained or if it is necessary to do so in the interest of justice, then the limitation period will not apply.
- The time during which a person has with following due diligence has been prosecuting another action against the offender in another court of the first instance, a court of appeal or revision, if it relates to the same facts and is prosecuted with no malicious feelings in another court which could not entertain it for want of jurisdiction or another cause of a similar nature.
- When the institution of the prosecution has been stayed by an injunction or order,
- Where the previous sanction of the government is required for the institution of the offence, and
- Lastly, the time during which the offender has been from India or has avoided arrest by absconding or concealing himself.
Initiating the investigation
As a normal routine, investigations are initiated by filing a report with the concerned police station, called the First Information Report (FIR). Based on the FIR, the police initiate an investigation. The procedure for conducting an investigation is prescribed under Section 157 of the CrPC.
Cooperating with foreign enforcement authorities
Under the provisions of the PMLA, if an order is passed for freezing any property which is a proceed of a crime, and such property is located outside of India, then the concerned authority can make a request to the appropriate court in India under Section 166A of the CrPC to issue a letter of request to a court or authority in the contracting state to execute the order. The contracting state refers to any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise.
In the course of the investigation into an offence, an application can be filed by an investigating officer saying that evidence is available in a county or place outside India. For this, the court may issue a letter of request to such court or authority outside India to examine any person acquainted with the facts and circumstances of the case and to record his statement. The court may also see to, that such a person or any other person produces any document or thing in his or her possession which is concerning the case and forward all the evidence to the court that issues such a letter.
The Indian legal regime provides for other cooperation with foreign enforcement authorities. Some of them are listed below:
- Central Bureau of Investigation (CBI).
The CBI serves as a National Central Bureau for corresponding with the ICPO-INTERPOL to cooperate and coordinate with each other concerning the collection of information, the location of fugitives, etc.
- The double tax avoidance agreement and tax information exchange agreements .
They ensure and strengthen the information exchange relating to tax evasion, money laundering, etc.
- Mutual Legal Assistance Treaties (MLATs)
The MLATs facilitate cooperation in matters relating to service of notice, summons, attachment, or forfeiture of property or proceeds of crime or execution of search warrants. They have been given legal sanction under Section 105 of the CrPC.
Collecting information during the investigation
The pre-set-up investigation agencies have the required authority and statutory powers under Section 156 of the CrPC, which gives the officer in charge to obtain records, documents, any company or employee information as well as to record statements if required within the course of the investigation. They also have the authority to conduct searches within the company premises or their employees.
Under the Prevention of Money Laundering Act 2002 (PMLA), the affiliated banks may even be required to present records relating to the suspected transaction by the DOE including any electronic evidence under Section 69 of the Information Technology Act, 2000.
In the duration of a trial or investigation/inquiry, the court or the investigation agency may issue a summoning order for any documents as they may deem fit for the same. The Court may also issue a search warrant if the Court has reasons to believe that the accused may not comply with their orders.
Additionally, the police also have the authority to seize certain property which might be allegedly stolen and/or creates suspicion of the offence.
The law does recognize the non-disclosure of some privileged information but only because the disclosure of such documents would result in injury to the public interest. Some other examples of privileged information would be, communication between wife and husband and communication between attorney and client in a professional purpose
Business secrets are no grounds for non-disclosure of documents before an authority however, in certain cases the courts may examine the documents before admitting their relevance to the matter. It must be noted that the labour laws do not protect employee information under company files.
Under Section 43(A) of the IT Act, a person’s “sensitive personal data or information” (SPDI) is protected along with compensation for mishandling and failure to protect this data by the concerned authorities. Rule 5 and 6 of the Information Technology Rules 2011 state that no SPDI can be collected unless it is necessary to collect it for a lawful purpose and its disclosure requires the consent of its provider.
For procurement of any personal information under the IT Act, it must be satisfied that it was done so for the greater goods like Public Benefit, Public order, or in the course of the reasonable procedure.
To a person under investigation by the authorities, it may seem like a good choice to simply not answer them, however, the Right to Silence is only available to an accused and not to a person under investigation, yet being silent in a court of law doesn’t translate to the admission of guilt as the courts operate on the belief of “innocent until proven guilty”. As far as other rights are concerned, any confession made to the police is inadmissible in court and a person cannot be compelled to sign any statement presumably given by him. The person cannot be represented during the questioning but he can hire a lawyer of his choice during interrogation though he cannot be present throughout.
Initiating the proceedings
A Magistrate can take cognizance of an offence in the following manner under Chapter XIV of the CrPC
- On receiving a complaint constituting an offence- An individual or a corporate entity may file a complaint in the court of the jurisdictional Magistrate in respect of a crime. Complaints can also be filed by statutory authorities under various enactments, like under the Income Tax Act in the Court of Jurisdictional Magistrate
- On receiving a police report- After the investigation is completed, the police force is required to file a report. This report is referred to as the charge sheet and this is filed in the court of the jurisdiction Magistrate. On receiving such a police report, the Magistrate takes cognizance of the offence and issues summons to the accused persons.
- On receiving information from any person other than a police officer- The Magistrate can take cognizance of an offence based on information received by him, other than a police officer. This information can also come from an uninformed source or an informer.
- Based on the knowledge of the magistrate itself, that an offence has been committed.
Burden of proof
The burden of proof refers to the responsibility/obligation of the party to back up their claims and assertions in a court of law. Usually, in a civil matter, this obligation rests with the party making the said claims (with a few exceptions). However, in criminal cases, the burden of proof may shift, as per Section 101 and Section 102 of the Indian Evidence Act 1872, from one party to another.
It must also be noted that the standard of proof in criminal matters is much higher than that in civil matters. In a case of defence by justification (affirmation), the party taking the said defence must be obligated with the burden of proof.
Aiding and abetting
A person aiding, assisting, or conspiring with someone can also be held liable for conspiring, abetment, and acts done in furtherance of a common intention.
Covered under Section 107 of the Indian Penal Code 1860 (IPC), abetment is when a person instigates another to do an illegal act or engages with one or more people in conspiring to perform or omit to perform an act which makes the thing or acts illegal, or causes or procures or attempts to cause or procure an act by willful concealment and/or misrepresentation of material facts.
As stated in Section 120A of the IPC, it arises when two or more people agree to commit or cause an act that is either statutorily illegal or a legal act in an illegal manner.
Acts in furtherance of common intention
As stated under Section 34 of the IPC, “When a criminal act is done by several persons in furtherance of the common intention of all, each of such persons is liable for that act in the same manner as if it were done by him alone.”
The important facts to be established here are that the person aided in the said act and it in pursuance of a common intention shared by all accused.
Common defences available
Lack of intention (no mens rea)
Since nearly every offence under IPC requires a criminal intent or mens rea as essential, the lack of proper motive to a crime can be a viable defence. This burden of proof rests upon the prosecution who must prove the accused’s criminal intent ‘beyond a reasonable doubt’.
However, in certain cases like negligence, the law does not require the establishment of a mens rea.
Mistake of fact
As per Section 76 of the IPC, nothing will be considered an offence if the person does an act by a reason of a mistake of fact and not under a mistake of law, and also believes that in good faith he or she was bound to do that act. The defendant, however, must prove that they were acting with reasonable care and caution.
Voluntary disclosure and leniency
If a person has a reason to believe that an offence has been committed, then they are bound by the law to disclose such information to the respective authority under Section 202 of the IPC. If not, such a person will face punishment where he or she can be imprisoned for a term which may extend up to a period of six months or fine, or both.
Further, if the person happens to be a party/co-conspirator to the crime and truthfully discloses all facts to his knowledge, the Magistrate holds the power to pardon the person. Upon acceptance of the pardon, the person shall be treated as a witness in a trial. However, this only applies to cases to be tried by the Session court in an offence that attracts a jail time of 7 years or more.
If the said person is found to have concealed information or given false evidence, his pardon shall be repealed and he will be tried for the same offence he was pardoned for in addition to the offence of presenting false evidence under Section 193 of IPC.
Plea bargaining is when a defendant agrees to plead guilty before the court in exchange for reduced charges or some concession. Such a settlement is mutually acceptable and negotiable by the prosecution and the victim. The court can award further compensation to the victim and decide on the punishment after discussing it with the parties. The final judgment must be delivered in an open court and cannot be appealed. Plea Bargaining is defined under Section 265(A)–265(L) of the CrPC.
As per Section 265(A) of the CrPC, plea bargaining is only available to the accused who is charged with any offence other than offences punishable with death or imprisonment or for life or imprisonment for a term exceeding seven years.
If the defendant is found guilty, then depending on the statutory provisions they may be imposed with a fine, imprisonment, or both. The Court, however, holds the majority of the discretion in such matters especially the compensation to be paid by the defendant which may include the expenses that occurred in the duration of the trial and/or compensating the bona fide buyer or the victim in cases of criminal misappropriation, criminal breach of trust or cheating. Before imposing a sentence, the court must look into the facts and circumstances of the case, motives of the accused, nature and manner of crime, etc. to come to a fair outcome.
If either of the two parties is dissatisfied with the court’s verdict (partly or whole) then they may appeal to a higher court.
If the appeal is to a Sessions Court, then there may be a full review of facts, appreciation of evidence, and the law. However, unless there is a gross miscarriage of justice or a prima facie error of facts, any appeal to a High Court or Supreme Court would result in confiding only to the issues of law. However, if the case is regarding a sentence of more than 7 years of imprisonment, it is treated in the same way as the former, with a full review of facts, evidence, and the law.
In case the appellate court upholds the appeal then as dictated under Section 386 of the CrPC, they are free but not limited to:
a. Through an acquittal order, reverse the order and direct that further inquiry be made or the accused may be re-tried or committed to a trial and pass the sentence
b. In a conviction appeal or enhancement of sentence-
i. reverse the finding and sentence of the lower court and acquit the accused or discharge them
ii. Maintain the sentence
iii. Alter the extent or the nature of the sentence.
c. Alter or reverse order from an appeal from any other such order
d. Make any just and proper amendment or any consequential or incidental order
In conclusion, with many business crimes that have occurred in the past, like the Satyam scam, the Mundhra scam and the Harshad Mehta scam, the laws have evolved and become more stringent to prevent such scams in the future. The advancement in science and technology has also played a vital role in making the process to identify such irregularities in the system. Certain things can be followed to prevent such crimes like ethics training, creating an ethical environment, regular auditing of accounts, constant monitoring of financial transactions, strict reference checks on new employees, and other such practices.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: