This article has been written by Ritika Saxena, LLB 2nd year, Shri Ramswaroop Memorial University, Lucknow.
White Collar Crimes are committed by various Individuals in greed of self-enrichment. But when this crime is conducted collectively by group of people or association in any business, then such crime becomes Corporate Crime. The loss being suffered from other Conventional Crimes such as theft, trespass, burglary, arson, etc. is far less than the loss being suffered from White Collar Crimes. It causes an adverse impact on the commerce and economy of our country. And it also leads to loss of trust of the investors in the market. This study deals with the cases of white collar crimes and corporate crime in India and its types. The statistical data of the past years relating to white collar crime is also shown. This study also enlightens the provision and laws which provides protection against this matter.
White Collar Crimes are the crimes which are committed by the men of high class society during the course of their business or occupation. White Collar Crime is an illegal act done in order to achieve illegal objective known as Wrongful Gain or in order to avoid payment of legal or formal dues, or to retain money or property etc. All of this encompasses criminal and civil violations.
Meaning of White Collar Crimes
According to Professor Sutherland, “when a person of respectability and high social status in course of his legitimate occupation commits an act which is approximately a crime, it is a White Collar Crime”. But afterwards he modified his own definition and gave a new definition as “A person of upper Socio-economic class who violates the criminal law in course of occupational or professional activities.”
Classification of White Collar Crimes
- Ad hoc crimes: In this category a person or the offender pursues his own individual objective having no face-to-face interaction with the Victim. E.g. Credit Card frauds, hacking, etc.
- Bribery: When money, goods, services or any type of information is offered with intent to influence the action, opinion and decisions of the taker, constitutes Bribery.
- Embezzlement: When a person, who has been entrusted with the money or property, appropriates it for his or her own use.
- Counterfeiting: Copies or imitates an item without having been authorized to do so.
- Forgery: When a person passes false instruments such as cheque.
- Tax-evasion: frequently used by middle class to have extra-unaccounted income.
- Professional Crime: Crimes committed by Medical practitioners, Lawyers in course of their occupation.
- Fraud: In a broadest sense, fraud means, an intentional deception made for personal gain or to damage another person or entity. Fraud is defined in both criminal as well as civil code.
“FRAUS OMNIA VITIATE”
“Fraud violates everything”
Under Indian Contract Act, 1872
Fraud’ defined.—‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
- the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
- the active concealment of a fact by one having knowledge or belief of the fact;
- a promise made without any intention of performing it;
- any other act fitted to deceive;
- Any such act or omission as the law specially declares to be fraudulent.
Under Indian Penal Code, 1860
‘Fraudulently’ means, a person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.
A corporate crime or fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. Companies adopts various Modus-operandi to commit such corporate frauds, which may include misrepresentation in prospectus, manipulation of accounting records, debt hiding, etc.
Types of Corporate Fraud
- Fraudulent Financial Statements
- Employee Fraud
- Vendor Fraud
- Customer Fraud
- Investment Scams
- Bankruptcy Fraud
- Misappropriation of Assets
(Common element is Deceit and Trickery).
Financial Fraud includes,
- Manipulation, falsification, alteration of accounting records.
- Misrepresentation or intentional omission of amounts.
- Misapplication of accounting principles.
- Intentionally false, misleading or omitted disclosures.
Misappropriation of Assets includes,
- Theft of tangible assets by internal or external parties.
- Sales of proprietary information.
- Causing improper payments.
- Making or receiving improper payments.
- Offering bribes to public or private officials.
- Receiving bribes, kickbacks or other payments.
- Aiding and abetting fraud by others.
Famous cases on Corporate Frauds
East Indian Company
The East India Company was a Crown chartered trading company. It was owned privately but had a mandate to benefit the British State commercially and politically. First and foremost, the EIC was an agent of the Crown.
It was first Multinational Corporation in the world that pursued investment opportunities as well as territorial power. EIC employees based in India sought commercial profits for themselves, the Crown, and East India House; while they acquired Indian Territory aggressively on behalf of the Empire. In late 1700s Edmund Burke had Robert Clive, (the founder of the empire) and Warren Hastings, (India’s Governor General), brought up on impeachment charges laden with corruption issues. Though the trail failed to convict anybody.
To achieve all of these ends, the EIC’s corporate conduct was inconsistent. Sometimes, the Company complied with ethical practice in safety and financial matters. At other times it readily engaged in economic theft and bribes, or breached civil liberties and human rights. The concept of corporate social responsibility was secondary to its interests. The company was subsequently wound up under East India Company Stock Redemption Act.
Mundhra Scam- First Scam of Independent India
Haridas Mundhra, an industrialist and stock speculator sold fictitious shares to Life Insurance Corporation (LIC) and thereby defrauding LIC by 125 crores. Mr. Jawahar Lal Nehru, (the then Prime Minister), set up a one-man commission headed by Justice Chagla to Investigate. Justice Chagla concluded the matter and Haridas was found guilty and was sentenced to imprisonment of 22 years and T.T. Krishnamachari, the then Finance Minister, resigned from his position.
Enron scandal, publicized in October 2001, eventually lead to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas and De-Facto dissolution of Arthur Andersen.
- In February 2000, Fortune Magazine Chooses Enron as its “Best Managed and Most Innovative Company”.
- August 2000: Stock at $73 Billion.
- March 2001: Financial Year 2000 revenues at $100 Billion.
- September 16, 2001: Enron buys more shares.
- October 2001: Enron pays its regular Dividend.
- October 16, 2001: 3rd quarter loss was shown as $618 million and further made deduction of $1.2 billion in equity shares.
- October 31, 2001: SEC upgrades inquiry into a formal investigation.
- December 2, 2001: Enron files for Bankruptcy.
Result of this was 4,000 employees were fired, 20,000 workers loses their jobs and $73 billion was lost in the stock value.
Reason behind Enron Fiasco: Enron Senior Management used complex and murky accounting schemes,
- To reduce Enron’s tax payments.
- To Inflate Enron’s income and profits.
- To inflate Enron’s stock Price and credit rating.
- To hide losses in off-balance-sheet subsidiaries.
- To engineer off-balance-sheet scheme to funnel money to themselves, friends and family.
- To fraudulently misrepresent Enron’s financial condition in public report.
Satyam – Enron of India
Satyam Scam, 2009: Satyam was the biggest scam in the history of India. The Satyam scam of 2009 has shatter the peace and tranquility of investors in the share market. The chairman Ramalinga Raju has manipulated the financial statement and the books of accounts. Satyam’s books of account shows:
- Over stated Assets of Rs. 490 crores.
- Fake cash balance over Rs. 5000 crores in the balance sheet.
- Interest component of Rs. 376 crores which never flowed into the company’s coffers.
- Understated Liabilities of Rs. 1,230 crores.
He has also inflated with revenues and net profit figures of the company, with which he was charged with heavy penalty.
- Investors panicked as Stock Plummeted.
- Employees were stranded in many ways, like; morally, financially, legally and socially.
- The incident resulted in immeasurable and unjustifiable damage to Brand India and Brand IT in particular.
- Chairman, Managing Director, Chief Executive Officer and Chief Finance Officer and the Key Managerial Personal were arrested.
- Partners of audit firm were also arrested.
- People lost staggering Rs. 100 billion in Satyam in market capitalization as investors reacted sharply and dumped shares, pushing down the scrip by 78 percent to Rs. 39.98 on Bombay Stock Exchange (BSE).
Harshad Mehta Scam Case
The Harshad Mehta Scam shocked the entire economy of India. He fooled many investors by taking advantage of the loopholes of the system.
- Harshad Mehta obtained fake Bank receipts from small Banks.
- The said Bank Receipts were further passed on to other banks as security to obtain cash.
- This money was used to drive up the prices of stocks in the stock market.
- Bubble of stock market manipulation and fake bank receipts busted.
- Drastically impacted the stock market, economy and progress of the country.
- Banking system was swindled was swindled of a whopping of Rs. 5000 crores.
- Even, the chairman of one of the bank committed suicide.
This scam can be called as one of the biggest white collar crime as the case was mainly regarding the manipulation of accounts and providing misleading information.
Sahara vs. SEBI: It was a case of issuing misleading information and clause in prospectus of company.
- Here the question raised that whether the private placement of shares can be treated as offer?
- In this cases, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated an issue of option of fully convertible debenture (OFCD’s) to more than million investors and termed their issued debenture as private placement, with a defense that the company did not intend to get their OFCD’s listed because the security which have been issued is a Hybrid Security.
- During this period, the company had total collection of over Rs. 17,656 crore. This amount was collected from 30 million of investors.
- The Hon’ble Supreme Court on 31st august, 2012 in one of the most anticipated judgment of recent times has directed the Sahara Group and its two group companies SIRECL and SHICL to refund around Rs. 17,400 crore to their investors within 3 months.
- Supreme Court also ruled that SEBI has myriad powers to invest listed and unlisted companies functioning regarding the issue of securities in order to secure the interest of investors. This was the landmark judgment in the field of Indian corporate Law.
2G Spectrum Scan Cases
2G scam was basically a telecommunication and a political scandal. In this scandal many Politicians and government were involved. The scam was about the allocation of unified access service license. The former telecom minister A Raja has evaded norms at every level and carried out the dubious 2G scam in the year 2008.
There are many corporate scams which has taken our economy to a greater loss, Coal Scam, Bofors scandal etc. were also famous in this regards.
Corporate Crime in India
Corporate Crime is being increasing with the change in the decade, the reason behind this enormous increase behind this is found in the fast developing countries and industrial growth in the developing countries. The fast growth of industries and the technologies is the reason behind this crime.
One of the major havoc that has been found in recent times is disappearing of companies. Out of 5651 companies listed in BOMBAY STOCK EXCHANGE, 2750 has been vanished. It means that one out of two companies that comes to the stock exchange to raise crores from the investors and then run away. We have SEBI, RBI and Department of Companies Affairs to monitor the stock exchange but none has documented the whereabouts of these 2750 odd companies suspended.
Some Anti-Fraud regulations or legislations or guidance regarding corporate fraud are as follows:
- Indian Contract Act (Section-17)
- Indian Penal Code (section-25)
- Prevention of Corruption Act
- Prevention of Money Laundering Act
- The Companies Act
- Clause 49 of Listing Agreement
- Securities and Exchange Board of India Act
- CARO Act
- Essential Commodities Act (Section-6)
- Information Technologies Act (Section 43-44)
Prevention of Corruption Act, 1988: The issue of corruption is very dangerous to nation. The Sanathan Committee Report, 1964 defines the problem of corruption as a complex problem having its roots and ramification in the society itself as a whole. This Act consolidated the provision of IPC, CrPC and Criminal Act, 1952. This act has provided the definition of ‘Public Duty’, ‘Public Authority’ and ‘Public Servant’. These definition are sufficient to determine the criminal liability of Public Officer.
Prevention of Money Laundering Act, 2002: In India, money laundering is being practiced in large scale from past few decades. Due to which the socio-economic crimes have been increased rapidly. The process of conversion of black money into white money or the process of conversion of tainted money into untainted money is called money Laundering. Thus the main purpose and the objective of this act is to prevent Money Laundering.
The concept of Money Laundering is an International concept and menace and for the same reason, United Nations adopted a political declaration in June 1998 and asked its members to enact the national legislations for the prevention of Money Laundering.
Companies Act, 2013: The Companies Act, 2013 is the legislation which Focusses on issues related to Corporate Fraud. Fraud in relation to company or corporate body is defined under section 447 of this Act.
- Section 212- investigation into the affairs of the Company by Serious Fraud Investigation Office.
- Section 447- Punishment for Fraud.
- Section 448- Punishment for False Statement.
- Section 449- Punishment for False Evidence.
- Section 450- Punishment where no specific Penalty or Punishment is provided.
- Section 451- Punishment in case of Repeated Defaults.
The advancement of science and technologies in last few decades has created a new form of crime which is known as ‘White Collar Crime’. And due to personal greed on section of this crime has shown a tremendous growth, i.e. Corporate Fraud. Corporate fraud is responsible for most of the economic loss in the society. The people of nation also lose their trust in the investment in private sector. Where private sector can help in huge economic growth, nowadays it is more indulged in the field of Fraud.
Government of India has taken many steps to prevent this type of Crime in India. There are certain mechanisms that have been cited by the Government of India by which the frauds can be prevented under the Companies Act, 2013.
Section 211 empowers the Central Government to establish an office called Serious Fraud Investigation Office (SFIO) to investigate fraud relating to Companies (section 212). Further, Central Government can also order investigation into the affairs of a company and on the receipt of the report of the registrar or the inspector.
To prevent Corporate Crimes there are certain steps to be taken by the government and the organization.
What an Organization can do?
- Tone at the top: create an ethical environment.
- It should be lead by example.
- Corporate code of Conduct should followed.
- There should be strict rules regarding the Call in Service for Unethical Practices.
- There should be reliable Internal Control.
- Training courses should be organized, such as:
- Ethics Training
- Internal Controls
- Fraud Prevention
- Technological and Business changes
- Special trainings for Monitors.
- Reference check on New Employees should be done.
- Anti-Corruption & Anti-Bribery practices should be adopted.
- New Code of Governance should be developed.
 Section 23 of Indian Penal Code (45 of 1860)
 Dr. S.S Srivastava, Criminology, Criminal Administration (3rd Edition, Central Law Agency, 2007) pg. no. 40.
 Ahmad Siddique’s’ criminology and penology (16th Edition, Eastern Book Company, 2011) pg. no. 438.
 Section-171-B of Indian Penal Code (45 of 1860)
 Section 489A, 489B, 489C, 489D, 489E of Indian Penal Code (45 of 1860).
 Section 463 of Indian Penal Code (45 of 1860).
 Section 17 of Indian Contract Act of 1872.
 Section 25 of Indian penal Code (45 of 1860).
 Harshad Shantilal Mehta vs. Custodian & Ors 1998 ECR 1 SC, JT 1998 (4) SC 323.
 (2012) 10 SCC 603
 Survey on Fraud in India,2012
 Sangeet Kedia’s Economic and Commercial Law (June 2018, Pooja Law Publishing Co.)
 The Companies Act (12 of 2013)
 The Companies Act (12 of 2013)
 The Companies Act (12 of 2013)
 The Companies Act (12 of 2013)
 The Companies Act (12 of 2013)
 The Companies Act (12 of 2013)
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