Corporate Frauds, Money Laundering and Benami Properties in India

(A) Corporate Frauds- Section 447 of Companies Act, 2013

1. Introduction on the Imprisonment + Fine (both) for Corporate Fraud under Section 447 of the Companies Act, 2013 (Act).

(a) Corporate frauds are increasing in India by the person(s) those are directly or indirectly connected or even not-connected to the corporate.

(b) It’s required that high standards for corporate governance and strong legal provisions should be introduced to stop and tackle the corporate fraud to be committed by the Indian corporate.

(c) Now day’s a growing tendency in corporate to manipulate the financial statements (Balance Sheet and Profit & Loss Account) commonly known as window dressing to demonstrate as healthy and wealthy financial statements in front of the Stakeholders, Public, Investors, Creditors and Employee along with the , banks, financial institution, Foreign Investors and any other person. This tendency is also included under the head corporate fraud and liable for imprisonment + fine (both)

(i) In 2013 strong provisions are introduced under section 447 of the Act by way of increasing the roles and duties of independent directors and statutory auditors (both)

(ii) The act is more focusing on stopping and tackling of the corporate fraud as to be committed by the Indian corporate.

(iii) Corporate fraud is including the financial and non-financial gain or loss to a corporate and correspondingly financially and non-financially loss or gain respectively to the victim of corporate fraud

(iv) Corporate fraud is treated a criminal liability. Hence person committing Corporate fraud is liable for imprisonment + fine (both)

(v) Robbery Vs Fraud

• • There are 2 ways to get something from someone illegally like robbery and fraud

(a) Robbery includes:

(aa) Robbery is an act where an officer(s) or any other person or group of the persons are physically forcing someone by using a gun or any other weapon or a brute force and also to trick someone out of his belongings is called a robbery.

(ab) Robbery is often more violent and traumatic than a fraud and it’s attracts more public attention. However the total loss from a fraud is much exceeding than a loss from a robbery

(b) Fraud includes:

(ba) Fraud is an intentional with a deception or a willful misrepresentation of the material facts and is to be described by way of cheating and stealing.

(bb) Fraud is consisting of coercing the other person to act against his own best interest / wish.

(bc) Fraud is an intentional act to induce another person to part with something of valuable or to surrender his legal right.

(bd) Fraud is a deliberate misrepresentation or concealment of the information’s in order to deceive or mislead someone.

(be) Fraud can be within a range from minor employee theft to large scale misappropriation of assets and manipulation of financial statements etc.

(vi) Main reasons for committing a corporate fraud

(a) Corporate fraud is generally being committed due to an external factor like economic, competitive, social, political and poor control mechanism.

(b) Some persons are more prone to commit fraud rather than others.

(c) Besides the external and internal environmental factors the nature of people is also more important for committing the corporate fraud.

(d) Fraud is being committed by the white-collar criminals.

(e) Corporate is an artificial juridical person, invisible and intangible as created by law with a discrete legal entity, perpetual succession and being operated with the common seal. Hence corporate is more fraud prone entit

(f) Corporate is an association of various stakeholders which are commonly known as shareholders, public, investors, customers, and employees (SPICE) vendors, and any other person.

(g) Major stakeholders can be expressed in one word like is SPICE where :-

S for shareholders

P for public

I for investors

C for customers

E for employees

• • • • And along with Govt. and any other person. Hence a company must be fair and transparent with the stakeholders.

(h) Corporate fraud is a globalized scenario due to the followings reasons:

(ha) For economical accessing the global resources

(hb) For attracting and retaining the best human capital globally

(hc) For having partnership with the vendors for collaborations and also need to live in harmony with the society.

(hd) For having embraces and demonstrates the ethical conduct by the corporate.

(viii) Concept of Corporate Fraud under the Act

(a) Corporate sector is mainly regulated by the Act through different provisions in Act and correspondingly in rules for regulating the affairs of corporate.

(b) The Act is first time properly defining about the corporate fraud.

(c) The definition of fraud is generally represent the following acts:

(ca) Misrepresentation of the material facts

(cb) Misrepresentation must be made by a person(s) knowingly and deliberately with intent to deceive another person.

(cc) Victim of fraud must have relied on the misrepresentation

(cd) Injury or damage must be a result due to reliance by the victim on the misrepresentation

2. Imprisonment + Fine (both) for Corporate Fraud

(i) Definition of the Corporate fraud

• • Now detailed definition of the corporate fraud and punishments for committing the corporate fraud are properly incorporated under section 447 of the Act.

(ii) Imprisonment + fine (both) for committing corporate fraud

• • Now an officer(s) or any other person as guilty for committing corporate fraud is liable for an imprisonment + fine (both) under section 447

(iii) Quantification for Imprisonment + fine (both) for corporate fraud

(a) Act is providing an imprisonment for a minimum period of 6 months and maximum period of 10 years where corporate fraud is minimum for Rs. 10 lac or 1% of the turnover whichever is lower

• • • And also a fine minimum @100% and maximum @300% of the amount of corporate fraud where fraud is not involving public

(b) Act is providing an imprisonment for a minimum period of 3 years and maximum period of 10 years where corporate fraud is minimum for Rs. 10 lac or 1% of the turnover whichever is lower

• • • And also a fine minimum @100% and maximum @300% of the amount of corporate fraud where fraud is involving public.

(c) Act is providing an imprisonment for a maximum period of 5 years where corporate fraud is less than for Rs. 10 lac or 1% of the turnover whichever is lower or a fine for maximum of Rs.20 Lac or both where fraud is not involving public.

(iv) Non-compoundable offence for committing the corporate fraud

• • The punishment for the corporate fraud likes imprisonment + fine (both) are non-compoundable offences. Hence non compoundable of offences are a serious consequence for a person(s) committing corporate fraud.

3. Special Features of the Corporate Frauds

(i) (a) Now the corporate frauds are treated as criminal liability under the Section 447 of the Companies Act, 2013.

(b) Hence any person(s) as involved in corporate frauds are liable for imprisonment + fine (both) under the Section 447 of the Companies Act, 2013.

(ii) (a) Now the corporate frauds are also included in the list of 29 schedule offences under Prevention of Money Laundering Act (PMLA), 2002.

(b) Hence any person(s) as involved in corporate frauds are liable for imprisonment + fine (both) under the PMLA, 2002

(iii) Inflating or deflating of purchases, expenses and also incomes along with diversion of funds to the related parties directly or indirectly and misappropriation of funds through any other mode are also known as corporate fraud. Hence liable for imprisonment + fine (both)

(iv) Debiting any personal expense of the director(s) and promoter(s) in company’s books of accounts are also known as corporate fraud. Hence liable for imprisonment + fine (both)

(v) Reducing the tax liability under the head direct tax and indirect tax are also known as corporate fraud through inflating purchases and direct or indirect expenses and misappropriation of funds. Hence liable for imprisonment + fine (both)

(vi) Claiming of non-allowable allowances and exemptions under direct tax and indirect tax with intention to reduce the tax liability is also known as a corporate fraud as directly or indirectly affecting the welfare of the Hence liable for imprisonment + fine (both)

(vii) Manipulation through related party transactions without matching with Arm Length Price (ALP) and taking personal benefit of the company’s income and assets are known as corporate fraud. Hence liable for imprisonment + fine (both)

(viii) Directly and indirectly involvement of the promoter(s), director(s), CEO, CFO and Company Secretary, independent director(s) for any personal benefits are known as corporate fraud. Hence liable for imprisonment + fine (both)

• Detailed article on corporate frauds can be view at

http://femainindia.com/Image/Imprisonment.pdf

(B) Prevention of Money Laundering Act (PMLA), 2002

1. Introduction on the PMLA

(i) Definition of the PMLA is given under section 3 of the PMLA, 2002 where any alleged activity of Money Laundering for the purpose of converting Non legitimize money into legitimize money which was earned through schedule offence by a person.

(ii) 3 mandatory conditions for application of the PMLA.

(a) Schedule offence should have already been committed

+

(b) Non legitimize money should have already been earned through alleged schedule offence

+

(c) Non legitimize money as earned through alleged schedule offence should have already been converted into legitimize money through Money laundering.

• Hence these 3 mandatory conditions should be satisfied for application of the PMLA.

(iii) Burden of proof for application of the PMLA

• Burden of proof that a money laundering activity has already committed is on the Directorate of Enforcement (ED) who is investigating the case under the PMLA. Hence burden of proof is on ED under the head natural justice

(iv) History of the PMLA

• PMLA was originally passed in year 2002

(b) PMLA is first time applicable on whole of India including Jammu and Kashmir from 01^st July, 2005

(c) PMLA was first amended from 01^st June, 2009

(d) PMLA was second amended from 15^th Feb, 2013.

(e) PMLA was third amended through Finance Act, 2015 from 14^th May, 2015.

(f) PMLA was forth amended through Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 from 01^st July, 2015.

(g) PMLA was fifth amended through Finance Act, 2016 from 01^st June, 2016.

(h) PMLA was sixth amended through Finance Act, 2018 from 19^th April, 2018.

(v) PMLA was seventh amended through The Prevention of Corruption (Amendment) Act, 2018 from 26^th July, 2018.

(j) PMLA was eighth amended through Finance Act (No. 1), 2019 from 20^th March, 2019

(k) PMLA was ninth amended through The Aadhar and other laws (Amendment) Act, 2019 from 25^th July, 2019

(l) PMLA was tenth amended through Finance Act (No.2), 2019 from 01^st August, 2019

(v) Indian Corporate Frauds- Section 447 of the Companies Act, 2013

Now names of 29 schedule offences under the PMLA, 2002 are also to include the Indian Corporate Frauds as defined under section 447 of the Companies Act, 2013.

(vi) Arrest under PMLA without issue of warrant and filling of FIR

Now all PMLA offences are to be treated as cognizable and non-bailable. Hence authorized officer of ED office is permitted to arrest any person without issue of warrant and filling of FIR.

(vii) Time limit for the retention of records and properties as seized during search and seizure- Section 20 and 21

• • The properties and records can be retained for a period not exceeding 180 days.

(viii) Power of the Central Govt.

• • Now Central Govt. is permitted to set up an Inter-Ministerial Coordination Committee for inter-departmental and inter-agency coordination against operational and policy level cooperation for consultation on anti-money laundering and the terror funding activities

2. Names of the activities under Money Laundering:-

(i) Concealment

(ii) Possession

(iii) Acquisition

(iv) Use

(v) Projecting as untainted property

(vi) Claiming as untainted in any other manner

3. Role of the ED and Financial Intelligence Unit – India (FIU-IND)

(i) Role of the ED

The ED in the Department of Revenue, Ministry of Finance is authorized for investigation the cases against already committed alleged money laundering through schedule offence.

(ii) Role of the FIU-IND

FIU-IND under the Department of Revenue, Ministry of Finance is a central nodal agency and authorized for receiving, processing, analyzing and disseminating the information’s relating to alleged money laundering and to inform the ED.

4. PMLA outside India

(i) The Financial Action Task Force (FATF) on Money Laundering was first time established through the G-7 Summit as held at Paris in 1989 for developing a coordinating an international agency.

(ii) First tasks of the FATF was to develop the recommendations for setting out the measures for the government of country‘s or territory’s for effective anti-money laundering measures. India is an active member of the FATF.

(iii) Every member of FATF is required to have a separate PMLA similar to the PMLA in India.

5. Names of 29 schedule offence under the PMLA:-

Companies Act, 2013 for Indian corporate frauds- Section 447

(i) Suppression of Unlawful Acts against Safety of Maritime Navigation and Fixed Platforms on Continental Shelf Act, 2002

(ii) Biological Diversity Act, 2002

(iii) Protection of Plant Varieties and Farmers’ Rights Act, 2001

(iv) Information Technology Act, 2000

(v) Juvenile Justice (Care and Protection of Children) Act, 2000

(vi) Trade Marks Act, 1999

(vii) Transplantation of Human Organs Act, 1994

(viii) SEBI Act, 1992

(ix) Prevention of Corruption Act, 1988

(x) Child Labor (Prohibition and Regulation) Act, 1986

(xi) Environment Protection Act, 1986

(xii) NDPS Act, 1985

(xiii) Emigration Act, 1983

(xiv) Air (Prevention and Control of Pollution) Act, 1981

(xv) Bonded Labor System (Abolition) Act, 1976

(xvi) Water (Prevention and Control of Pollution) Act, 1974

(xvii) Wildlife (Protection) Act, 1972

(xviii) Antiquities and Arts Treasures Act, 1972

(xix) Passports Act, 1967

(xx) Unlawful Activities (Prevention) Act, 1967

(xxi) Custom Act, 1962

(xxii) Arms Act, 1959

(xxiii) Copyright Act, 1957

(xxiv) Immoral Traffic (Prevention) Act, 1956

(xxv) Foreigners Act, 1946

(xxvi) Explosive Substance Act, 1908

(xxvii) Explosive Act, 1884

(xxix) Indian Penal Code (IPC) 1860

6. Names of the Investigation agencies for schedule offence:-

(i) ED

(ii) Police

(iii) Customs

(iv) SEBI

(v) NCB

(vi) CBI

(vii) Etc

7. Powers of the officers of ED for investigation:-

(i) Provisionally attach the properties as derived or obtained directly or indirectly by a person through alleged money laundering – section 5

(ii) Conduct a survey of the place – section 16

(iii) Conduct a search of the buildings, places, vessels, vehicles or aircrafts and seize the records and properties – section 17

(iv) Conduct the personal search – section 18

(v) Arrest the person as accused for alleged money laundering – section 19

(vi) Issue a summon and to record the statements of the person – section 50

8. Definition of the Properties to include – Section 2(1)(v)

(i) Corporeal or incorporeal

(ii) Movable or immovable

(iii) Tangible or intangible

(iv) Deeds and instruments as documentary proof for the titles

(v) Interest in any property or asset as located in India and also Outside India

9. Definition of the Person to include – Section 2(1)(s)

(i) Individual

(ii) Hindu undivided family (HUF)

(iii) Domestic (Indian) Company

(iv) Domestic (Indian) Partnership Firm and LLP

(v) Association of persons (AOP) or body of individuals (BOI) as incorporated or non-incorporated (both).

(vi) Any other artificial juridical person “not” already covered under Para i to v as above

(vii) Any agency office or branch office as owned or controlled by any of the above mentioned persons under Para i to vi as above

(viii) Any other legal entity

10. Duties of the Authorized officers of ED office to arrest the person – Section 19

(i) Authorized officers should have in possession a specific material for alleged already committed the money laundering

(ii) Authorized officers should have reason to believe

(iii)Authorized officers should have communicated to the person as to be arrested about the grounds for arrest

(iv) Authorized officers should have intimated to the adjudicating authority under the PMLA.

11. Imprisonment + Fine (both)

(i) Role of the Income Tax (IT) Department under the Income Tax Act, 1961

(a) Now the IT Department is forwarding the thousands cases to the ED for investigation against the alleged money laundering where the incomes have been evaded by the taxpayers.

(b) Imprisonment + fine (both) are to be levied by the Income tax department for the evasion of incomes by the tax payers over and above imprisonment + fine (both) for money laundering separately on the same financial transactions.

(c) Now the IT department is forwarding the thousands cases to the ED for investigation against the alleged money laundering where the Income tax cases are time barred for issuing of notice under section 148A of the Income Tax Act after expiry of 10 Assessment years against likely escaped incomes exceeding 50 lacs per assessment year.

(d) (da) Now the IT department along with various offices of the revenue department, Ministry of Finance are forwarding the thousands cases to the ED for investigation against the alleged money laundering through using the latest digital techniques like Artificial Intelligence (AI) data mining and data analyzing etc for finding the cases of Money Laundering.

(db) Hence IT department along with others revenue departments of Ministry of Finance are extra vigilant for finding Money Laundering cases and forwarding to the ED for investigation under the PMLA.

(ii) Imprisonment + Fine (both) for Money laundering by the alleged persons

• Imprisonment + Fine (both) by the special courts as specifically constituted for the money laundering cases is permitted for a minimum period 3 years and maximum period 7 years along with a fine of Rs. 5

(iii) Imprisonment + Fine (both) for vexatious (illegal) search to the authorized officers of ED office- Section 62

(a) The authorized officers of the ED office are liable for punishment + fine (both) for exercising the powers as available under the PMLA without recording the reasons for search. Hence the authorized officers are liable for imprisonment + fine (both) for exercising the powers without recording the reasons:-

(aa) Search and seizure of any building or place

(ab) Detain, search or arrest any person

(b) The authorized officers are liable for imprisonment for a maximum period 2 years or a maximum fine of 50 thousand or both.

(iv) Imprisonment for the false information’s or failure to give information etc by alleged person to the ED office –Section 63

• • Imprisonment is permitted for a maximum period 2 years and also maximum fine 50 thousand or both for willfully and maliciously giving false information’s.

(v) Designated Special Courts for punishment under the PMLA–Section 43

• • The Central Government in consultation with the Chief Justice of the High Court’s is permitted to designate one or more Courts as special court(s) for such area(s) for such case or class or group of cases as may be specified in the notification by the central govt.

(C) Benami Transactions (Prohibition) Amendment Act, 2016

1. Introduction on the Benami Transactions (Prohibition) Amendment Act

(i) (a) This Act is empowering to the authorized authorities for the provisional attachment (Confiscation) of the Benami properties.

(b) Confiscation of the Benami properties is to prohibit any transfer, conversion or disposition of the Benami properties.

2. Definition of the Benami Transactions to include:-

(i) Any transaction or arrangement as made by the real beneficiary (actual owner) through using the name of another person instead of using his own name.

(ii) Any transaction or arrangement as made by the actual owner through using name of a fictitious person instead of using his own name.

(iii) Any transaction or arrangement as made by the actual owner through using name of another person where another person is not aware about knowledge of his ownership.

(iv) Any transaction or arrangement as made by the actual owner through using name of another person where the actual owner is not traceable.

(v) Any transaction or arrangement as made by the actual owner through using any right, interest, legal document or instrument as evidencing an interest in a properties where the title is in the name of another person instead of using his own name.

(vi) (a) However Benamidar is not permitted to re-transfer the benami properties to the actual owner.

(b) Hence any such transaction if undertaking shall be treated as invalid under the Benami Act.

3. History of the Benami Act, 2016

(i) Benami Transactions (Prohibition) Act, 1988 (Old Act) was first introduced to prohibit benami transactions and to recover the benami properties.

(ii) Old Act was containing 8 sections only. Moreover the rules, regulations and procedures for the implementation of the old Act were not framed. Hence old Act became ineffective.

(iii) Benami Transactions (Prohibition) Amendment Act, 2016 (the Act) is enacted in July 2016 with 72 sections along with the rules, regulations and procedures for the implementation of the Act. This Act is applicable from November 01, 2016.

4. Exempted properties under the Benami Act

(i) Any property as held by the Karta or by a member of Hindu Undivided Family (HUF) on behalf of the HUF

(ii) Any property as held by a person as trustee, partner, director or depository in a fiduciary capacity on behalf of the trust, partnership firm/ LLP, company or depository.

(iii) Any property as held by a person in the name of his spouse or children including step children

(iv) Any property as jointly held by a person with his lineal ascendant, lineal descendant, brother or sister where his share of total consideration is also paid by his lineal ascendant, descendant, brother, sister from his own sources.

5. Power of the Govt. Authorities

(i) Discovery and inspection of the benami properties

(ii) Instruction to produce the books of accounts

(iii) Receiving any evidence on the affidavit

(iv) Confiscation of the benami properties

6. Definition of the Benami Properties to include:-

(i) Any movable or immovable property

(ii) Any tangible or intangible property

(iii) Any corporeal or incorporeal property

(iv) Any right, interest, legal document or instrument for the evidence an interest in a property.

7. Punishment + Fine (both) under the Benami Act

(i) 100% confiscation of the properties as involved under the Benami Act

+

(ii) Imprisonment for a minimum period of 1 year and maximum 7 years under the Benami Act

+

(iii) Additional fine maximum 25% of the fair market value of the properties under the Benami Act

(iv) Hence total maximum fine is 125% as 100% confiscation of Benami properties + additional fine a maximum 25% of the fair market value of the properties under the Benami Act

+

(v) (a) Additional Imprisonment a minimum period 6 months and maximum 5 years for not providing or providing the false information(s) under the Benami Act

+

(b) Additional fine a maximum 10% of the fair market value of the properties for not providing or providing the false information(s) under the Benami Act

(vi) Imprisonment + fine (both) are applicable on the actual owner + Benamidar (both).

8. Role of the Income Tax (IT) Department under the Income Tax Act, 1961

(i) Now the IT Department is forwarding the thousands cases to the authorized officer under the Benami Act for investigation against the alleged benami properties where the incomes have been evaded by the taxpayers.

(ii) Imprisonment + fine (both) are to be levied by the Income tax department for the evasion of incomes by the tax payers over and above imprisonment + fine (both) for benami properties separately on the same financial transactions.

(iii) Now the IT department is forwarding the thousands cases to the authorized officer under the Benami Act for investigation against the alleged benami properties where the Income tax cases are time barred for issuing of notice under section 148A of the Income Tax Act after expiry of 10 Assessment years against likely escaped incomes exceeding 50 lacs per assessment year.

(iv) (a) Now the IT department along with various offices of the revenue department, Ministry of Finance are forwarding the thousands cases to the authorized officers under the Benami Act for investigation against the alleged benami properties through using the latest digital techniques like Artificial Intelligence (AI) data mining and data analyzing etc. for finding the cases of benami properties.

(b) Hence IT department along with others revenue departments of Ministry of Finance are extra vigilant for finding benami properties cases and forwarding to the authorized officer for investigation under the Benami Act.

(v) Now Revenue department is motivating to the general public to provide information’s regarding benami properties based on the award money as to be given a certain percentage of the benami properties.

(D) Nexus between Corporate Frauds, Money Laundering and Benami roperties

1. Introduction on the Nexus

(i) The Corporate frauds are the beginning point where corporate are non- legitimately taking money from the business and converting the non- legitimate money into legitimate money through money laundering with the help of benamidar and thereafter investing in the benami properties.

(ii) Now the corporate frauds as defined under section 447 of the Companies Act, 2013 are included in the list of 29 schedule offences where PMLA, 2002 is applicable.

2. Statement of Imprisonment + Fee for Corporate Frauds, Money Laundering and Benami Properties

S. No	Minimum or Maximum	Under Corporate Frauds	Under PMLA	Under Benami Properties	Total
1	Minimum Imprisonment	6 Months or 3 years (as case may be)	3 Years	1 Year	4 and half years or 7 years
2	Maximum Imprisonment	10 years	7 Years	7 Years	24 years
3	Minimum Fine	100% of amount of corporate fraud	5 Lac	125% of amount of benami properties	225% of amount involved + 5 Lac
4	Maximum Fine	300% of amount of corporate fraud	5 Lac	125% of amount of benami properties	425% of amount involved + 5 Lac

(Author can be reached at email address satishagarwal307@yahoo.com or on Mobile No. 9811081957)

Disclaimer : The contents of this presentation are solely for informational purpose. Neither this presentation nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this presentation does not constitute/substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this presentation to ensure its accuracy at the time of publication, Satish Agarwal assumes no responsibility for any errors which despite all precautions, may be found herein. In no event shall we be liable for direct or indirect or consequential damages, if any, arising out of or in any way connected with the use of this presentation or the information contained herein.