In this article, Sonu Surana pursuing M.A, in Business Law from NUJS, Kolkata discusses Is corporate corruption (where no government/public official is involved and also talks of the laws which can be used to curb it.

Corruption misrepresents markets and creates unfair competition. Companies often pay bribes or fix up bids to win various public/private procurement contracts. Many companies hide corrupt acts behind secret deals and arrangements. they seek to pressure political decision-making in wrong manner. Also many companies exploit tax laws to evade taxes, wok under cartels or misuse legal loopholes. Private companies have huge influence in many public spheres. So it’s easy to see how corruption in private sector businesses harms taxpayers’ interests, consumers benefits and in effect paralyses the whole system.

Today, businesses are operating in extremely challenging, the fact that executives and their teams are under increasing pressure to deliver unrealistic results in difficult markets. Managers in their companies are under tremendous pressure to deliver exception financial results over the next fiscal years. Thus, they indulge in corrupt practices next time to win businesses.

India in recent times the public and private partnership system has been put under the microscope and it has been found to be actively working in partnership with politicos and bureaucrats to perpetrate large-scale corruption. Also, private sector is involved in corruption internally which involves top management of the companies to mislead the shareholders or public in large or involves the middle and lower tier of the company to fool the top management or the consumers to gain extra monetary benefit.The same has been noticed in the Central Vigilance Commission (CVC) report by Transparency International India (TII) that documents this unholy nexus. The report makes scathing observations on the decay in the private sector against the backdrop of the various scams, in which major private players are in the dock for colluding with the system execute India’s biggest corruption scandals.

The private sector cannot be considered as a victim of corruption in India. Instead, it is instrumental in effecting it too and may be it is hands-in-glove with public/private officers. The government is trying to install some strong deterrent tool to curb corruption in the private sector. India’s drive against corruption is perceived to be hampered by the general weakness of the country’s anti-corruption institutions. However, India’s Supreme Court is regarded as one of the key institutions which has been effective in fighting corruption. This decision is consistent with this view, notwithstanding any misgivings about the judicial activism required to reach the decision.

Few big corruption and fraud scams which have unearthed in private sector in recent times are:

Satyam scam: It was about corporate governance issues and fraudulent auditing practices allegedly in collusion with auditors. The company distorted its accounts to its board, stock exchanges, regulators, investors and all other stakeholders. Finally it misled the market and other stakeholders by lying about the company’s financial health. All the basic facts and figures such as revenues, operating profits, financial  liabilities and cash and bank balances were grossly inflated to show the company position in good health.

NSEL case: The NSEL (National spot Exchange Ltd) scandal or NSEL fraud was a methodical and planned corruption perpetrated in the commodity market on Jignesh Shah owned National Spot Exchange (NSEL) which is based in Mumbai, India. The NSEL was a company promoted by Financial Technologies India Ltd and the National Agricultural Cooperative Marketing Federation. This scam was a Ponzi scheme and is estimated to be a Rs. 5600 crore  fraud that came out to light after the National Spot Exchange failed to pay its investors in commodity contracts after 31 July 2013. Thirteen thousand investors from India lost about Rupees Five Thousand Six Hundred Crores when the fraud was discovered and it was found that NSEL had neither the money nor the stocks to pay them back.

Bank NPA defaults: Loan malaise has been plaguing the Indian banking system, both public and private sector banks which roughly have 70% market share in assets.

Various other private sector corruption scams of recent memories are:

1. Indian Premier League Scam – Allegedly involving top officials of BCCI
2. Harshad Mehta stock market scam
3. Kingfisher Airlines

These numerous scams which have surfaced in India in recent times has made the enforcement agencies increasingly proactive and vigilant in terms of monitoring compliance under relevant anti-corruption and bribery laws and taking action against violations thereof. For example, the Central Vigilance Commission (CVC) in 2015 initiated an inquiry against a private company for the first time, amidst allegations that the company had bribed public servants in order to obtain certain clearances and permits in India. The Serious Fraud Investigation Office (SFIO) , an investigative arm of the Ministry of Corporate Affairs) has also investigated cases of alleged fraud in various companies in the past many years, of which many investigations have concluded to an logical end.

Besides the monetarily losing out, businesses that are victims of corruption also suffer long-term negative impact on their brand reputation. In current times, market reputation of some of the large corporate organisations have been mauled by a series of instances relating to frauds/corrupt practices including corruption and bribery. There are concerns about the financial losses that businesses suffer as a result of these frauds. Intentional corrupt and misguided financial reporting, information manipulation, theft of stock, etc are among the common types of misconducts or corrupt practices that can result in financial losses for private companies. Further, the cost of employing additional internal compliance controls/ remedial measures to combat frauds/corruption leads to financial impact and also waste of managerial time in complying to these. This shows that irrespective of the impact of frauds on private sector businesses, a number of organisations remain averse to implementing a comprehensive anti-fraud system to work on these, detect, prevent and remediate fraud risks.

The above instances are indicating that India’s business situation provides a fertile ground for corruption, frauds and manipulations. There is an urgent need for companies/corporates to put in place robust deterrents, hold constant vigilance and identify alerts at the earliest hint of any corrupt instances. With an overall awareness about corruption situations and the unique ways being adopted by fraudsters, expansion in the scope of corruption mitigation plans, workshops and reconsideration of their existing governance standards, private sector can actively manage their risks. Further, strict law enforcement and rigorous penal provisions prosecutions by courts and law regulatory agencies will help in transparency and accountability across the Board, both in the government and corporate sectors.

The Supreme Court (“SC“) in Central Bureau of Investigation, Bank Securities and Fraud Cell and Others v. Ramesh Gelli and Others (Criminal Appeal Nos. 1077-1081 of 2013 and W.P. (Crl.) No. 167 of 2015) has held officers of private banks to be public servants under Prevention of Corruption Act, 1988 (“PCA“)

Parliament of India recently passed:

• The Whistleblowers’ Protection (Amendment) Bill 2015 (pending presidential assent).
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015; and
• The Lokpal and Lokayukta (Amendment) Act 2016;

The Prevention of Corruption (Amendment) Bill 2013, which is pending parliamentary approval, seeks to amend the Prevention of Corruption Act 1988 by setting out specific provisions for the prosecution of bribe givers; explicitly bringing commercial organisations within the ambit of the definition of ‘bribe giver’; and prescribing a specific time limit for completing trials.

The Prevention of Corruption (Amendment) Bill criminalises the acceptance of gratification (pecuniary or otherwise) other than the acceptance of legal remuneration by private sector persons which is paid by their employers in connection with the performance of their duties. Aiding and abetting the commission of bribery is also an offence, such that any person, who bribes or attempts to bribe a public servant or acts as a middleman for such bribing may also be held liable. Further, the law creates an adverse presumption if a public servant’s assets are disproportionate in value to his or her income and cannot be satisfactorily accounted for. The provisions of the law apply regardless of the location or jurisdiction of the commission of an offence, as long as the same is committed by a ‘public servant’ as defined under it. Judicial decisions have also interpreted the term ‘public servant’ in the laws to include a wide variety of persons, such as bank employees in both private and government owned banks

However, despite several emerging issues, India, has responded back by enacting several pieces of Legislations. One piece of Legislation that stood out recently is the Companies Act, 2013 (the ‘Act’). The Act has raised the bar of how Indian companies need to evaluate themselves and aims to increase corporate transparency. The other anti-corruption Legislations, Regulations, Guidance, include the following:

(a) Prevention of Corruption Act(1988)

(b) Whistle Blowers Protection Act

(c) Prevention of Money Laundering Act, 2012

(d) Central Vigilance Commission Act, 2003

(e) Indian Contract Act, 1872

(f) Indian Penal Code, 1860

(g) Listing Agreements

(h) CARO 2006

(i) Income Tax Act, 1961

(j) Right to Information Act, 2005

For instance, the Companies Act, 2013 which replaced the Companies Act 1956 has several measures to deal with corporate corruptions. One of such measure is the formation of a financial reporting body called the “National Financial Reporting Authority (NFRA)” for better monitoring of Corporate Financial Management. This body will have quasi-judicial powers to order investigation, levy penalty and bar professionals from practice in case of their indulgence in professional or other misconduct.

Such authority has the mandate to ensure scrutiny and compliance of Accounting and Auditing Standards. It will also ascertain the quality of service of professionals associated with compliance. The new Act provides more fangs to Serious Corruptions Investigation office (SFIO).The SFIO is a multi-disciplinary organization under the Ministry of Corporate Affairs,consisting of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution of corruptions, and has enforcement powers, including arrests; focus on protection of investors with recognition of class action suits and provision for nomination of Directors by small shareholders and stricter role for auditors including rotation.

The major gridlock of occurrence of regulatory overlap with more than one agency entitled to investigate an event of corporate crime has been overcome with the Companies Act, 2013 and designating SFIO as the agency to investigate corporate corruption. Currently under various regulations like Clause 49 of the Listing Agreement, the CEO and CFO of a company, in their certification have to confirm that there are, to the best of their knowledge and belief, no corruption /illegal / fraudulent transactions entered into by the company during the year. Also, as per Companies (Auditor’s Report) Order (CARO) 2006, the auditor has to report whether any corruption by or on the company was noticed or reported along with its nature and amount.

Section 447 of the new Companies Act, 2013 provides for the definition of fraud and also the punishment for committing fraud. Fraud is defined inclusively as under: “Fraud in relation to affairs of a company or any body corporate includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.”

It is clear from the definition that not all acts, omissions, concealment of fact or abuse of position will lead to fraud or corruption . In order to fall within the meaning of ‘fraud/corruption’ these actions, omissions, concealment of fact or abuse should be done with an intent to deceive or to gain undue advantage or to injure the interest of the company or its shareholders or creditors or any other person. Therefore, this brings in the concept of mensrea.

Further, it would still constitute fraud or corruption whether or not such acts, omissions, concealment of fact or abuse of position results in ‘wrongful gain’ or ‘wrongful loss’ i.e. commission of crime with that intent is important not the results thereof. ‘Wrongful gain’ has been defined to mean gain by unlawful means of property to which the person gaining is not legally entitled.

Similarly, “wrongful loss” has been defined to mean loss by unlawful means of property to which the person losing is legally entitled. Therefore, to fall within the meaning of fraud or corruption, the following should have happened:

(a) acts, omissions, concealment of fact or abuse of position should have taken place;

(b) such acts, omissions, concealment of fact or abuse of position should have essence of mens-rea in them; and

(c) irrespective of the fact whether or not they resulted in ‘wrongful gain’ or ‘wrongful loss’. The definition of the term fraud uses the term ‘person’ which gives it a very wide coverage.

Thus, it just doesn’t only mean and cover certain officers, directors or employees of the company, instead it covers any person in relation to the affairs of the company. So irrespective who that person is, as long as that person in the context of the affairs of the company falls within the ambit of the definition of fraud, he will be guilty of committing fraud or corruption.

Various Domestic law  The key laws pertaining to corruption and bribery in India are as follows:

• The Indian Penal Code is the penal law of India and puts in place various provisions that are interpreted to cover bribery, corruption and fraud matters, including those committed even in the private sector. Its provisions include offences relating to cheating and dishonestly inducing delivery of property and criminal breach of trust.
• The Prevention of Corruption Act 1988, is the main anti-corruption law of the country. It punishes the offences committed by public officials. However, recently private persons have also been included under its ambit and thus is one of the guiding anti-corruption laws of the country.
• The Whistleblowers’ Protection Act 2011, is mainly intended to protect whistleblowers, one who initiated or bring to the public any bribe or corruption event, with respect to disclosure of acts of corruption, any wilful abuse of power, wilful abuse of discretion etc.
• The Whistleblower Protection Act, 2011 (the “Whistleblowers Act”l) also aims to promote and protect the interest of whistleblowers. It has been approved in both the Lok Sabha and Rajya Sabha, both houses of the Parliament, and has received Presidential assent. Under the Whistleblowers Act, any public servant or any other person including a non-governmental organisation may make a public interest disclosure to the CVC or the State Vigilance Commission or the High Court, including disclosures in relation to the commission of, or an attempt to commit, an offence under the PCA. The Whistleblowers Act, further seeks to establish a mechanism to receive complaints relating to disclosure on allegations of corruption, misuse of power against any public servant or private officials, to inquire into such disclosure and provide safeguards against the victimisation of the complainant.
• The Foreign Contribution (Regulation) Act 2010 controls the acceptance and use of foreign contributions by corporate entities and individuals. Receipt of foreign contributions needs prior registration with or approval of the Ministry of Home Affairs. In the lack of such registration or approvals, any receipt of foreign contributions may be considered illegal and punishable under the Indian laws.
• The Prevention of Money Laundering Act 2002 forms the core of the legal framework put in place by India to fight money laundering. It came into force in 2005. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

The anti-corruption laws do not differentiate between the penalties to be imposed for offences committed by an individual and those committed by a company or organisation; therefore, the relevant penalties apply to both. However, where the penalty for a given offence involves imprisonment and a fine, the courts will impose only the fine on the company or organisation (as the penalty of imprisonment cannot be imposed on a legal person), although persons in charge of the company or responsible for the conduct of its business when the offence was committed may be liable to imprisonment.

While conceptually the Indian industry has expressed its desire and keenness for adopting measures which would be effective deter and helpful tools in curbing corruption, however, it has, in the same breath, expressed its concerns that it would be necessary to ensure that the amended law does not cause undue harassment to businessmen and women in the country and in a sense curb their freedom of ease of doing business. It would be open for any police officer, irrespective of rank, to initiate criminal proceedings against a private sector business official for violation of the proposed law. No prior permission from any authority whatsoever would be required for the said purpose.

India is witnessing a sea change in its approach to the issue of corruption. Given the spate of recent scams and public outcry on the issue, it is clear that public displeasure about the level of corruption has reached alarming proportions. This socio-cultural development must be seen and understood in the political and legal context which requires adherence to international standards for combating corruption as envisaged by the United Nations Convention Against Corruption (UNCAC), ratified by India in 2011.

While new laws, as envisaged, may take some time to be incorporated into existing statutes or new statutes, companies doing business in India – both foreign as well as Indian – must step up their own ethical standards, compliance and the overall standard of corporate governance to deter corruption. There is indeed strong need to build a clean corporate environment in which standards and values are central to the private company’s growth strategy just as much, if not more as economic objectives. Companies doing business in India must relook at their Ethics & Compliance policies, make them more strong, and ensure their effective implementation. This alone would ensure compliance with existing as well as imminent laws as well as the norms of good governance and would lead to check and deter corrupt practices.