The White Collar Crimes are the types of crimes perpetrated, whether public or private, by respectable individuals with ideal situations. For bureaucratic entities, the surveillance and detection of fraud are practically very difficult as these activities are carried out in very much secrecy due to which these actions are neglected. Today, white-collar crime has shifted from people to an organization where individuals execute illegal actions either alone or in partnership with others. Corporate fraud has become the greatest risk facing organisations and is increasingly a major concern. Fraud incidents are becoming more and more severe as they destroy investors’ trust in stock markets, results in massive loss of investment wealth and damage the reputation, management and board of directors of the firm.
Corporate fraud is one of these white-collar crimes. Scandals and scams are as ancient as mountains in India. The 1950s saw the infamous LIC/Mundhra scam that marked independent India’s first big financial fraud. The famed Harshad Mehta scam, Satyam scam, DHFL scam, Bhushan steel scam are only a handful of many, with the fraud continuing with an alarming frequency following every decade. These scams were examined in the Indian Penal Code of 1860 by the law enforcement authorities (IPC). There was no specific definition of ‘fraud’ in the Companies Act 1956. Legally, a new crime was not needed as all such offences were properly dealt with by Lord Macaulay’s IPC.
CORPORATE FRAUDS IN INDIA
A corporation or entity fraud takes place when it alters and disguises important information purposefully, which then seems to make it look healthy. Companies employ several modes of operation to engage in such corporate frauds, including misinformation, manipulation of financial records, concealment of debt, etc. Fake accountancy, false profit inflation trading, disclosure of price-sensitive information that is subject to insiders, and false transactions that lead to an increase in investors and lenders being attracted to finance are part of the falsification of financial information. There are several reasons why corporations engage in such frauds as the creation of additional cash, building the company’s fake image for the market environment and misleading governments on tax evasion.
Advances in technological and scientific development also contributed to corporate fraud in India as mentioned in the report of the Committee on Prevention of Corruption.[i] The 1963 report of the Vivian Bose Commission[ii] pointed out that Dalmia Jain Group business tampered with personal profits, tax evasion and others and also revealed how other big corporate houses indulged in fraudulent activities. Mundhra scam was the first successful financial scandal trial in India,[iii] when Hon’ble Justice M.C. Chagla made several critical points on the large business of mogul Mundhra who sought to create a strong industrial empire.
Several studies in the finance, economics and law literature have recently been published on the knowledge of corporate fraud incentives and monitoring deterrents, as well as the gaps in government control mechanisms. After every scam, the government and the regulatory machinery were strengthened to reduce fraud by placing responsibility on each of the parties involved in the scam and to reduce the frauds which essentially impose a verification of connections between the company and professions and between banks and bureaucrats that can be achieved by further publication.
New fraud occurs every year in the world of companies. India is in the top fraud lists, more crucially. These scams reveal the regulatory gaps and impose severe penalties on defaulters. The market fraud impacts not only the reputation of the firm, the interest of the investor but also the country’s growth as if it were scammed, then the public would not invest in a company, therefore causing a lack of financing which would in turn damage country development. India has also, like other nations, adopted numerous laws and set up different authorities to control the market and safeguard investors’ interests. This law would also ensure the Board of Directors’ responsibility and transparency. But in India, fraud is rampant in spite of a lot of regulations.
The increasing legal remedy to fight against economic crimes, widely known as money laundering and the trading of crime profits, is by introducing laws that bring the money illegally earned and seize the proceeds. Some of the country’s current legislation allows the income from the crime to be confiscated and assets to be forfeited. These are as follows:
ANALYSIS FROM AN INDIAN POINT OF VIEW
We know that the managers of corporate frauds are those of the Board of Management, CEO, Senior Managing Directors, CFO’s, Internal Auditors, IT Dept., Middle and Operational Management and are deeply involved and responsible for them following the recent frauds like Ketan Parik scam, IPL Scam and Citibo fraud. The reasons and remedies can be based on the following five main categories:
It is commonly acknowledged that effective corporate governance is based on the ethical behaviour of the organization’s senior leadership. Whistleblower policies are a crucial part of establishing a culture of ethics and values. In Clause 49 of the Listing Agreement, which deals with corporate governance requirements, the Securities and Exchange Board of India (SEBI) specifies a whistleblower system. It has been in place since 2003, but it has not proven to be as beneficial as hoped.
Companies can administer psychological tests to potential employees in order to determine their ethical temperament, and they can inquire about someone’s reputation with previous employers. Firms should not only aim to hire individuals with strong personal ethics, but it is also in the best interests of potential workers to learn about the ethical atmosphere of the company they would be joining.
In India, corporate fraud is not a new occurrence. Various corporate scams have been uncovered and the perpetrators have been punished on occasion. These financial scams cost investors and the government a lot of money. Although the perpetrators are punished, the public who invested their money suffers a significant loss in the long term. Victims of corporate financial fraud do not have easy access to their funds. It takes years to make up for the lost time. Various laws impose heavy penalties and strong corporate obligations but we see that every year, fresh corporate scams are discovered, suggesting that legislation alone will not be enough to stop these crimes. Corporate fraud is both a social and a financial burden. The fundamental cause of this terrible ailment is a failure of ethical principles at both the individual and organizational levels. A fundamental social revolution that touches the core of human hearts, as well as strong leadership capable of instilling discipline at all levels, may be the only way out of the quagmire.
Written By: Aayush Akar, Student, National Law University Odisha & Apoorv Bansal, Student, Bharati Vidyapeeth New Law College, New Delhi
[i] K. Santhanam, Chairman, Report of the Committee on Prevention of Corruption https://indianculture.gov.in/report-committee-prevention-corruption (last visited – 14th July 2021).
[ii] Report of the commission of Inquiry into the administration of certain Dalmia-Jain companies https://rsdebate.nic.in/bitstream/123456789/545968/2/ID_44_20081963_5_p828_p935_8.pdf (last visited – 15 July 2021).
[iii] Kanika Datta, The treadmill of business frauds: From 1957 LIC scandal to PNB scam https://www.business-standard.com/article/opinion/the-treadmill-of-business-frauds-from-1957-lic-scandal-to-pnb-scam-118030701426_1.html (last visited – 14 July 2021).
[iv] FE Online, What was Satyam scam that toppled India’s fourth-largest IT company from the top slots https://www.financialexpress.com/industry/what-was-satyam-scam-which-toppled-indias-fourth-largest-it-company-from-the-top-slots/1010389/ (last visited – 17th July 2021).