India: White Collar Crime

The key financial crimes/offences applicable to companies and its officers/directors include the following:

1. Fraud: Under the Indian legal regime, corporate fraud is broadly governed by the Companies Act, 2013, in section 447 which deals with fraud and punishment thereof, and the Indian Penal Code, 1860, which deal with offences such as cheating, dishonest misappropriation of property, criminal breach of trust, criminal conspiracy, cheating and dishonestly inducing delivery of property and forgery. Provisions criminalising specific kinds of fraud can also be found in other enactments such as: Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
2. Bribery and Corruption: This category of offences is broadly governed by India’s primary anti-corruption legislation being, the Prevention of Corruption Act, 1988 in addition to the Companies Act, 2013 and the Indian Penal Code, 1860.
3. Insider trading and market abuse- Violations or offences concerning the securities market are regulated by the Securities and Exchange Board of India (SEBI) established by the SEBI Act, 1992. It prevents abuse of the market through a myriad of regulations, including the SEBI (Prohibition of Insider Trading) Regulations, 2015.
4. Money laundering- A specific legislation to combat/prevent money-laundering (channelization of monies into illegal activities) and other economic crimes is the Prevention of Money Laundering Act, 2002 (PMLA) which is applicable in conjunction with the Companies Act, 2013 and the Indian Penal Code, 1860.
5. Defective financial record keeping- Provisions of the Companies Act, 2013, PMLA, Foreign Contribution (Regulation) Act 2010, relevant taxation laws and various regulations issued by SEBI and Reserve Bank of India are found to be operative in this sphere based on the nature of the company, its activities, etc.

Under Indian law, companies are liable to be prosecuted for criminal offences. In this regard, the principle of attribution and the doctrine of alter ego, i.e., a corporation is deemed to act through its functionaries – its directors, managers and other persons who control the affairs of the corporation, are applicable. As such, criminal intention or mens rea can be attributed to the company if it existed in the minds of its sentient functionaries while partaking in a criminal act. Additionally, certain Indian statutes such as foreign exchange regulations/laws, labour laws, tax laws and environmental laws employ the doctrine of vicarious liability making the directors or persons in-charge liable for the offences committed by the company. Further, directors are also liable for offences under statutes/codes such as Insolvency and Bankruptcy Code, 2016 and PMLA.

Under Indian law, an individual who has perpetrated the commission of an offence on behalf of the company can be prosecuted, along with the company. Most commonly prosecuted offences where directors and/or officers are prosecuted include economic offences committed by a company such as corporate fraud, dishonour of cheques, criminal conspiracy, money-laundering and corruption. However, there must be sufficient evidence to prove active involvement and criminal intent on part of the directors/officers prosecuted.

Additionally, directors/officers are also commonly held liable for various acts undertaken during the daily management and/or functioning of the company under the Companies Act, 2013 such as: (i) issue of a prospectus containing false/misleading information; (ii) failure to abide by guidelines issued by SEBI in relation to buy-back of shares by the company; (iii) non-compliance with an order of National Company Law Tribunal to make payment of the principal amount and interest due on debentures; (iv) failure to file annual returns of the company within stipulated time; (v) failure to maintain proper books of accounts on behalf of the company; and (vi) knowingly making false statements with reference to any financial statement, return, prospectus, filing or any other document.

The prosecuting authorities in India, which investigate and prosecute financial crimes, are determined on the basis of the nature of the offence alleged to have been committed by the company. In general, there are two primary investigating authorities:

1. Serious Fraud Investigations Office (SFIO) – SFIO is a specialist agency investigating and prosecuting crimes under the Companies Act, 2013. It is a multi-disciplinary organization consisting of experts from various fields and is primarily responsible for detecting and prosecuting white collar crimes or corporate frauds.
2. b. Central Bureau of Investigation (CBI) – As India’s premier investigating police agency, CBI deals with three categories of crimes, being cases of corruption and fraud committed by public servants; economic crimes, including financial frauds by corporates; and special crimes such as terrorism.

Another investigating agency is the Enforcement Directorate (ED), which primarily enforces Foreign Exchange Management Act, 1999 and PMLA. The criminal arm of ED investigates cases relating to money laundering. Other agencies responsible for enforcement of laws and regulations relating to corporates include the Directorate of Revenue Intelligence, the Competition Commission of India and SEBI.

In case of corporate crimes/offences where investigations are carried out by the investigating authorities mentioned in response to question 4, prosecution and trials take place before the ordinary criminal courts of India. Additionally, certain courts are designated as special courts under certain specific statutes/codes to deal with the offences laid down therein, for instance PMLA envisages designation of courts of sessions as special courts to try offences punishable under PMLA. Jury trials have been abolished in criminal courts of India since 1973.

Generally, a criminal investigation is based on the registration of a first information report, which is the formal description of the basic facts of the suspected crime and its actors. An investigation may be triggered by a variety of other events such as a whistle-blower’s report and generally depends on the nature of the violation. For instance, the Central Government has the power to decide and direct the SFIO to initiate prosecution of any case of corporate fraud. SFIO can also investigate a company in additional circumstances such as upon request by a Registrar or inspector of Companies, a special resolution passed by the board of a company asking to be investigated or where public interest demands so.

It is common for investigating authorities to conduct un-announced raids (colloquially known as dawn-raids) into the official premises of the company as well as the private premises of directors/employees or other accused persons. The investigating authorities also have the power to compel production of all relevant documents, records and communications in the possession of the company, with respect to a suspected crime/offence and providing such information is mandatory.

Under Indian law, investigating authorities have the power to examine any person who is supposed to have knowledge or be acquainted with the facts of any alleged crime/offence including an accused. Such authorities are also competent to obtain search warrants to investigate physical premises, electronic records and obtain information from sources located abroad through appropriate channels prescribed in that regard. Finally, subject to certain conditions, investigating authorities also have the power to arrest persons who avoid the investigation.

Indian law provides many safeguards to ensure that investigations into criminal acts are carried out fairly and without violating constitutionally-mandated fundamental rights. In this regard, a person has several rights, including: (i) a right against self-incrimination i.e., no person can be compelled to be a witness against himself. Further, a statement made to a police officer cannot be used as evidence in a court of law. The statement is presented before a judge for formal recording of a testimony and in such cases, the judge is required to inform the person that whatever he/she says may be used against him/her at trial; (ii) while a lawyer may be present during questioning by the investigating agencies, his/her presence is not a pre-requisite, i.e., the investigating agency is competent to interview an accused in the absence of a lawyer. In practice, investigators often request accompanying lawyers to not insist on being present during such investigation.

During an investigation, the investigating officer may take notes of the statements made by the witnesses and record the same by audio, video and electronic means, however recording such statements is not mandatory.

The Companies Act, 2013 is limited in its application to companies incorporated under the said legislation within the territory of India (subject to certain exceptions in relation to foreign companies having a place of business in India). However, the Indian Penal Code, 1860 has extra-territorial jurisdiction, whereby any act committed by an Indian person (including companies) abroad, which would have been a crime had it been committed in India, can be tried by Indian criminal courts. Thus, crimes committed by Indian companies abroad, which come under the purview of the Indian Penal Code, 1860, can be tried by Indian criminal courts.

Further, PMLA deals with and is applicable to certain offences of cross-border implications, i.e., offences committed by or related to companies outside India that constitute an offence in the respective jurisdiction and are also scheduled offences under PMLA and wherein a part of or all proceeds are remitted to India.

In India, the legal framework for combatting crimes, including international crimes, includes Mutual Legal Assistance Treaties, MOUs/Bilateral Agreements signed between India and other countries. Such treaties ensure mutual cooperation in respect of various forms of crimes including money laundering and counterfeiting and are designed to facilitate measures of mutual assistance in investigation, prosecution and prevention of crime, service of summons and other judicial documents, execution of warrants and other judicial commissions and tracing, restraint, forfeiture or confiscation of proceeds and instruments of crime. India currently has Mutual Legal Assistance Treaties with 39 countries and has successfully brought back numerous fugitive criminals from various countries.

With respect to privileged professional communication between a client and the legal advisor in cases of criminal proceedings/investigations, Indian law adopts a strict approach. Under Indian evidence law, such privilege is extended only after creation of a client-attorney relationship. Further, in-house lawyers of companies are not included within the ambit of such privilege. There is no statutory privilege accorded to the communication between in-house lawyers and their employers.

In India, data protection and privacy laws do not curtail the powers of the investigating authorities in a criminal or regulatory investigation. In this regard, the authorities may request the disclosure of all relevant documents, records and communications and providing such information is mandatory.

No, there is no doctrine of successor criminal liability under Indian law. Criminal liability remains steadfastly fastened to the actual perpetrator and cannot be transferred by any contract between persons (or companies) or by any statute.

An investigation must be carried out by the investigating authority based solely on the facts and circumstances relevant to the allegations and case at hand. The investigation must be independent of political, religious or any other beliefs. Once the investigation is complete, the magistrate or judge must apply settled principles of law and precedents to adjudicate upon the charges.

The evidential standard of proof required to secure conviction in criminal trials is beyond reasonable doubt.

Under Indian law, certain categories of criminal offences/cases are subject to a period of limitation for the court to take cognizance of the matter. These categories include offences punishable with fine only or imprisonment for a term not exceeding one year or imprisonment for a term exceeding one year but not exceeding three years. However, courts have the discretion to condone delay and extend the period of limitation in cases where the facts and circumstances can properly explain the delay or it is necessary to do so in the interests of justice.

As is evident from the above, period of limitation does not apply to grave and serious criminal offences. Further, the abovementioned limitation rules/principles do not apply to certain economic offences which have been specifically exempted by the Government, such as offences under foreign exchange regulation law.

The law does not permit resolution, settlement or compounding of serious criminal cases. There are no parallel provisions for deferred prosecution agreement, non-prosecution agreements, etc.

Under Indian criminal system, plea bargaining was introduced in 2006. The mechanism of plea bargaining is not applicable in certain cases, including offences where the maximum punishment is imprisonment for a term exceeding seven years or where the accused has been previously convicted for the same offence. An accused who wishes to plead guilty may make an application, voluntarily, before the court where the trial is pending.

While there is a general obligation under law to report crimes, a specific obligation to disclose will depend on the requirements of the statute in question as regards the wrongdoing under investigation. For example, highly regulated corporations, such as banking businesses and corporations listed on stock exchanges, are required by law to report wrongdoing. More recently, the Prevention of Corruption Act, 1988, India’s principal domestic anti-bribery law, has prescribed reporting requirements. It is compulsory for a person to report an act of bribery within seven days if that person wishes to later present a defence that he/she was compelled to bribe a public official.

Generally, voluntary disclosure is not linked to amnesty or reduced sanctions. However, in more modern statutes, such as the Competition Act, 2002, there is a provision for leniency in case a corporation makes full and true disclosure.

A corporation can only be fined for criminal action. However, its directors, officers, employees, etc. who are found responsible may also be imprisoned. There are no specific sentencing guidelines for corporates. If a company is found guilty, the quantum of fine is determined by the judge depending on the specific punishment prescribed, whether an offence is a repeat offence, etc.

Generally, internal compliance procedures do not impact the investigation carried out by agencies. However, certain statutes such as the Prevention of Corruption Act, 2002, which codifies corporate criminal liability, allow a defence to corporations to demonstrate that they had ‘adequate procedures’ in place to prevent bribery.

To safeguard their business, corporations should formulate strong internal policies/guidelines and an efficient and robust vigilance mechanism. In case of any misconduct/violation, corporates should carry out an independent internal investigation into the issue and prepare a detailed report. Companies may conduct regular workshops and training sessions for its employees and managerial personnel to raise awareness regarding applicable laws/regulations and ensure compliance. Corporates may also engage law firms/professionals to conduct an annual internal audit and review of its policies, procedures and affairs.

Additionally, to combat corruption/bribery, corporations should undertake detailed due diligence prior to entering into contractual agreements/arrangements with third-party service providers, as well as include stringent anti-bribery/corruption clauses in the agreements.

A strict compliance structure within a corporate could serve as a defence against liability for the corporate entity.

Generally, for crimes/offences committed by a company, the criminal penalty which can be imposed on a corporation is fine, while its directors, officers, employees, etc. who are found to be responsible may also be imprisoned. With respect to the crimes/offences listed in response to question 1, the quantum of the fine payable by the company and/or the term of imprisonment varies on the basis of the specific provision of law violated, whether the contravention is a first or repeated contravention.

Different statutes also impose civil penalties upon companies. For example, fines are payable for a civil violation of foreign exchange regulations and the quantum thereof could be up to three times the amount of the contravention. Certain regulators may also impose non-pecuniary civil penalties such as prohibiting a company from participating in the stock market.

The accused has a statutory right to appeal when he/she is convicted as guilty by the trial court. Depending upon the level of the court passing the judgment of conviction and certain other conditions, an appeal may lie before the higher forum. In case a High Court convicts an accused, an appeal would lie to the Indian Supreme Court, whereas in case a trial is conduct by the sessions court (or any other court), wherein a sentence of imprisonment for a term exceeding seven years had been passed, an appeal would lie before High Court and then before the Supreme Court.

Appeals may also be preferred by the victim against an order passed by the criminal court in certain circumstances such as judgment of acquittal, conviction of lesser offence or inadequate compensation.

In recent times, on account of technological advancement and increase in foreign investment in India, economic and financial crimes have been on a rise. Resultantly, investigating authorities have changed their approach and outlook to tackle such crimes/offences – investigating authorities are now employing advanced technological tools to investigate and gather information/evidence. Regulatory framework and regime are also undergoing drastic changes to deal with the increase in financial crimes/offences. In 2018, the Indian Parliament modernised the primary anti-corruption law of India, i.e., the Prevention of Corruption Act, 2002 to codify corporate criminal liability. Directors, managers and secretaries of a corporation may be held liable and punished if it is proven that bribes were paid with their consent or connivance. Additionally, in 2018, the Fugitive Economic Offenders Act was passed to deter fugitive economic offenders from evading the legal process by staying outside the jurisdiction of Indian courts and ensuring extradition.

In the recent past, Indian businesses have witnessed increased reporting and enforcement of frauds and financial scams, particularly in the banking sector. To deal with this, Indian Supreme Court ruled that all employees, directors and even auditors of private banks are deemed public officials for the purpose of enforcing anti-corruption laws. This significant change has brought banks under heightened scrutiny of their internal affairs and stricter reporting obligations, both to the regulator – Reserve Bank of India and government’s vigilance department.

On 30 June 2020, the Central Board of Indirect Taxes and Customs at Thiruvananthapuram airport at Kerala (acting on an anonymous tip) seized a diplomatic bag carrying thirty kilograms of 24 carat gold, approximately worth INR 15 crores (USD 1,985,440), which was meant to be delivered to the UAE Consulate at Thiruvananthapuram.

In July 2020, National Investigation Agency initiated investigation and registered a first information report under the Unlawful Activities (Prevention) Act, 1967 against several accused persons. Enforcement Directorate also initiated a probe into the case on the suspicion that the proceeds were used to fund terror activities.

At present, investigations are underway and allegations have been raised against the Chief Minister and other ruling politicians of Kerala regarding their involvement in the matter.

The Government is considering introduction of proper classification of crimes/offences into blue collar, white collar and black collar crimes to improve and increase the ability of the investigating authorities to deal with such offences. The Government is also contemplating amendments to the Competition Act, 2002 to provide for and deal with the issue of cartels.

In order to improve the legal framework to handle financial crimes, the following reforms may be adopted: (i) financial and economic offences and the provisions dealing with them should be made more stringent and equivalent to penal offences; (ii) increase and improve international cooperation with respect to extradition of financial offenders (though the Fugitive Economic Offenders Act, 2018 deals with the said issue, however India ought to have an extradition treaty with the country); and (iii) establish special and exclusive courts/tribunals to deal with financial and economic offences to ensure speedy and efficient trial of offences.