White-Collar Crime 2021

Last Updated October 21, 2021

India

Law and Practice

Authors



Trilegal has wide experience in advising and assisting clients in matters relating to white-collar crimes, including anti-corruption and corporate frauds. The firm’s experience in this practice involves a substantial volume of matters on both the non-contentious and contentious sides. It has a strong employment practice and partners work closely on white-collar crime matters. The seamless integration and collaboration among its teams is the firm's biggest strength. On the contentious side, Trilegal has in-depth expertise in advising and assisting clients and their employees during criminal investigations, as well as in conducting criminal trials relating to economic offences. As a part of the practice, the firm advises its clients on various complex white-collar crime issues, including those relating to anti-corruption/anti-bribery matters, money-laundering cases, economic fraud and cyberfraud. Trilegal regularly advises and assists its corporate clients during investigations conducted by police authorities and other enforcement agencies, including the Central Bureau of Investigation, the Enforcement Directorate and the Directorate of Revenue Intelligence.

In India, there are various categories of white-collar offences which are primarily covered under four legislations. Mens rea (criminal intent) is an essential constituent element of these offences. A brief overview of the substantial offences under the said legislations is provided below.

Offences Related to Bribery and Corruption

The Prevention of Corruption Act, 1988 (PCA) makes both giving and taking of bribes to/by public servants (to perform improperly or dishonestly a public duty) and certain other related actions (such as criminal misconduct, abetment) punishable offences. Commercial organisations can also be held vicariously liable for these offences and are liable to pay a fine if an offence of bribery is committed by person(s) associated with it. Also, an attempt is seen at par with actual completion of the offence.

Offences Related to Money Laundering

The Prevention of Money Laundering Act, 2002 (PMLA) deals with the offence of money laundering. To constitute an offence of money laundering under the PMLA, a person (including companies) must knowingly assist or knowingly be a party to any process or activity connected with the proceeds of crime and in the projection or claiming of such proceeds of crime as untainted property. Further, any direct or indirect attempt to commit the offence of money laundering is also punishable under the PMLA and is treated at par with actual commission of the offence.

Offences under the Companies Act, 2013 (Companies Act)

The Companies Act contains, inter alia, the following major white-collar crime-related offences.

  • True and fair financial statements: the Companies Act mandates that the financial statements shall give a true and fair view of the state of affairs of the company, comply with accounting standards, etc. In the event of a contravention, the managing director (MD), the whole time directors (WTDs) in charge of finance, the chief financial officer (CFO) or any other person charged with the duty of complying with these requirements may be punished with fine or imprisonment or both.
  • Fraud: under the Companies Act, fraud is any act, omission, concealment of any fact or abuse of position committed by a person with intent to deceive, gain undue advantage from, or injure the interests of the company (including shareholders, creditors and other associated persons).

Other Penal Offences

The Indian Penal Code, 1860 (IPC) contains various provisions that apply to white-collar crimes in India. These provisions, along with their constituting elements, are discussed below.

  • Criminal breach of trust: under the IPC, if a person voluntarily entrusted with property, or with any dominion over it, dishonestly misappropriates or converts the same for his or her own use, that person is said to commit the offence of criminal breach of trust.
  • Cheating: cheating is committed when a person is misled into giving up property or granting permission for the retention of property or into doing (or omitting) anything that they would not do (or neglect to do) if they were not so deceived.
  • Forgery: falsifying a document or an electronic record with the intent to injure or damage someone else, support a claim or a claim's title, induce someone to part with property, engage into a contract (explicit or implicit), or to commit fraud is considered forgery under the IPC.
  • Falsification of accounts: falsification of accounts by a clerk, office, or servant, whether employed or acting in the role of a clerk, officer or servant, is penalised by this section.
  • Conspiracy: criminal conspiracy is an act where two or more persons agree to do or cause to be done an illegal activity or a legal activity by illegal means. It is immaterial whether the illegal act is the ultimate object of such agreement or is merely incidental to that object.

Further, the IPC makes attempt to commit these offences punishable with one-half of the longest term of imprisonment provided for that offence.

In India, the Code of Criminal Procedure, 1973 (CrPC) deals with the limitation period for taking cognisance of offences in 1.1 Classification of Criminal Offences.

The period of limitation is: six months for offences that are punishable with only fines; one year, for offences punishable with imprisonment for up to a year; and three years for offences punishable with imprisonment for one to three years. Further, for an offence punishable with imprisonment greater than three years, there is no limitation period. Therefore, offences related to bribery and corruption, money laundering, fraud, cheating and falsification of accounts do not have any limitation period. However, criminal breach of trust and forgery carry a limitation period of three years. Lastly, the limitation period for the offence of not providing true and fair financial statements is one year.

The period of limitation commences on: the date of the offence; or the first day on which such offence comes to the knowledge of any person or to any police officer; or the first day on which the identity of the offender is known to the person aggrieved by the offence or to the investigating police officer. For continuing offences, a fresh period of limitation shall begin to run at every moment of the period during which the offence continues.

For offences under the IPC, an Indian citizen may be prosecuted for anything done in foreign jurisdictions if the act committed is an offence in India, although the same may not be an offence in the foreign country where it is committed. Likewise, a foreigner – even if he or she had not been in India at the time the actual occurrence took place – would be still liable if the offence under the IPC was completed in India. The exercise of criminal jurisdiction under the IPC depends on the locality of the offence and not on the nationality of the alleged offender. Therefore, the provisions of the IPC are applicable to a foreigner who has committed an offence in India while not physically present therein at that time.

India has also entered into mutual legal assistance treaties (MLATs) with 42 countries. Under MLATs, the Indian Ministry of Home Affairs, on the request of a local enforcement authority, can make a request to the relevant authority of another country to obtain formal assistance in prevention, suppression, investigation and prosecution of offences provided under 1.1 Classification of Criminal Offences. Indian courts may also issue a letter of request to the courts of another country for obtaining assistance in investigation or prosecution of a criminal matter.

In India, the liability of individuals and the company is guided by the particular statute under which the offence has been committed, as well as principles of attribution of corporate criminal liability which have been developed by courts.

For, offences under the PCA, both individuals and corporate entities may be held liable for bribery-related offences. Liability is also imposed on the person in-charge (ie, director, manager, secretary or other officer) of the commercial organisation with whose consent and connivance the offence has been committed.

Similarly, for offences under the PMLA, both individuals and corporate entities may be held liable for money laundering-related offences. Liability is also imposed on every person who, at the time the contravention was committed, was in charge of or was responsible to the company for the conduct of the business of the company as well as the company.

Under the IPC, the definition of "person" includes any company or association or body of persons, whether incorporated or not. Similarly, the Companies Act also provides for sanctions for the company and/or its officers or for any other person who contravenes any of its provisions or rules. Hence, both individuals and companies may be held liable for the offences under the IPC and the Companies Act.

In India, the management of the successor entity may not be held criminally liable for the acts of its predecessors and criminal liability would be limited to the erstwhile management of the company. However, the successor entity may be subject to fine/criminal penalty or any civil claims that may be made in the future for the actions of the predecessor entity.

The CrPC states that a court while imposing a sentence may, order the accused person to pay compensation to the person who has suffered any loss or injury as a result of the offence, including inter alia, white-collar offences. Furthermore, employers can file civil suits against employees to claim damages/compensation for any fraud, embezzlement of funds, etc, committed by the employee.

The above compensation under the CrPC may be awarded by trial courts, as well as the appellate courts while exercising their powers of revision. Further, in certain cases, the civil courts may also award damages or compensation for wrongful loss suffered by plaintiff.

Further, the Companies Act does provide for class action suits for members/dispositors or any class of them, who may claim damages from the company or its directors, or auditors or any expert for any fraudulent, unlawful and wrongful act.

In 2019, the Indian government appointed the first Lokpal (anti-corruption ombudsman) under the Lokpal and Lokayuktas Act, 2013. Further in 2020, the Indian government notified the Lokpal (Complaint) Rules, 2020 which enable the Lokpal to act on pleas made against public servants in corruption-related issues.

The Companies (Amendment) Act, 2020 was passed soon after the notification of the 2019 amendments to the Companies Act, 2013. While the 2019 amendments decriminalised 16 corporate offences, the 2020 amendments further focused on decriminalising, re-categorising and rationalising of less serious offences. Around 48 provisions have been decriminalised, however, offences involving serious fraud, public interest and which are of non-compoundable nature still attract criminal sanctions.        

The Companies (Auditor’s Report) Order, 2020 was introduced, requiring certain companies to report all whistle-blower complaints to their auditor. This development is expected make companies take steps to improve procedures to deal with whistle-blower complaints that they may receive.

In 2021, the Institute of Chartered Accountants of India (ICAI), which is the statutory regulator for auditors, has issued 20 Forensic Accounting and Investigation Standards (FAIS). The standards are intended to guide law enforcement agencies, corporates, banks and other stakeholders and help in formation of common practices and procedures for conducting forensic accounting and investigations.

The capital markets regulator, the Securities and Exchange Board of India (SEBI), also amended the listing regulations in 2020, requiring listed companies to disclose to stock exchanges the initiation of any forensic audit, the name of the entity initiating the audit, the reasons for the same and the final forensic audit report (other than where the audit is initiated by regulatory/enforcement agencies).

Landmark Judicial Developments

In Babulal Verma v Enforcement Directorate [2021 SCC OnLine Bom 392] the court held that once an offence under the PMLA is registered on the basis of a scheduled offence (scheduled offences are the predicate offences for the commission of the offence of money laundering), even if the scheduled offence is compromised, compounded, quashed or the accused therein is acquitted, the investigation by the Enforcement Directorate under the PMLA is not affected and can continue.

In Deepti Kapur v Kunal Julka [AIR 2020 Delhi 156] the Delhi High Court considered the question of whether illegally procured evidence is admissible in courts in light of the doctrine of fruits of a poisonous tree. The court held that any evidence collected by breaching someone’s privacy does not automatically make it inadmissible in court. The court further held that even though privacy is recognised as a fundamental right, that alone cannot make evidence collected in breach of that inadmissible.

Deputy Director, Directorate of Enforcement v Axis Bank [(2019) 259 DLT 500] ruled that the process of attachment of proceeds of crime under the PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-à-vis the offence of money laundering. The empowered enforcement officer has the authority of law in the PMLA to attach not only a “tainted property” – ie, a property acquired or obtained, directly or indirectly, from proceeds of criminal activity constituting a scheduled offence – but also any other asset or property of equivalent value of the offender of money laundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money laundering.

The authorities that have the power to investigate, prosecute and enforce white-collar offences are as follows.

  • The Enforcement Directorate (ED) is a multi-disciplinary organisation tasked with investigating and prosecuting cases under the PMLA.
  • The Central Bureau of Investigation (CBI) is the premier investigation agency for white-collar offences. The CBI's jurisdiction covers central government and union territories (extendable to states, on special order from the government).
  • The Serious Fraud Investigation Office (SFIO) is a multi-disciplinary organisation constituted under the Companies Act.
  • The Anti-Corruption Bureau operates as a state-specific agency responsible for the detection, investigation and prosecution of cases of corruption that fall within the jurisdiction of the respective Indian states.
  • The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity markets in India.
  • Police – the police force of each state in India has powers to investigate white-collar offences within their territorial jurisdiction. The Economic Offence Wing (EOW) is a specialised unit set up within the police force to prevent, detect and investigate economic crimes, including corporate fraud.
  • Public prosecutors and company prosecutors are responsible for the second step in the criminal procedure (that is, the prosecution phase).
  • Courts are responsible for the final step in the criminal procedure (that is, adjudicating liability and enforcement).

In India, for offences under the PCA or IPC, investigation is initiated by investigation authorities such as the police or the CBI, after a First Information Report (FIR) is lodged as per the provisions of the CrPC. Thereafter, the investigating authority investigates the matter and, after sufficient evidence is gathered, a charge-sheet is filed in the court.

However, for offences related to money laundering, the ED is the primary investigation agency, and it cannot take a suo moto action. The ED only initiates investigation into matters that are referred to it by other investigation agencies such as the police, CBI, etc. Thereafter, the ED registers an Enforcement Case Information Report (ECIR) and commences its investigation.

The SEBI, on the other hand, may take suo moto action and direct any of its officers not below the rank of Division Chief to investigate a matter if it believes that either: the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or any person associated with the securities market has violated any securities laws. 

For offences such as fraud under the Companies Act, the central government of India may order the SFIO for an investigation into the affairs of the company on receipt of a report from the registrar of companies, another government department, etc, or on request of the company or in public interest.

The investigation agencies primarily derive their authority from the CrPC in regard to search and seizure, investigation and production of documents. Under the CrPC, investigation authorities have the power to, inter alia, summon production of documents, search a place suspected to contain stolen property or forged documents, seize property, etc. The authorities also have the power of examination and attendance.

Specialised agencies such as the CBI, ED, SFIO and SEBI derive additional powers from their respective enabling acts.

The CBI derives its primary authority from the Delhi Special Police Establishment Act, 1946 and the PCA. The CBI, where it has received any information regarding the commission of an offence, or has the reason to suspect the commission of an offence and considers that an investigation into such offence is necessary, may exercise its power of search and seizure, production of documents, examination and attendance of suspects, etc, under the CrPC. Furthermore, in accordance with the PCA, it also has the power to inspect bankers’ books, in so far as they relate to the accounts of the persons suspected to have committed the offence.

The ED has the power to survey any area or premises where they have the reason to believe that an offence of money laundering has been committed. Where the ED has such reason to believe, it has the power to search and seize documents, records, property or proceeds of crime and enter and search any building or premises with the power to break open locks. The ED can also examine on oath of any person who is found in possession or control of such records or property.

The SFIO has the power to call for information or explanation. In circumstances where the information requested is not produced by the person, the SFIO may inspect and seize books of accounts and other documents, conduct inquires, summon and enforce the attendance of persons and may examine them on oath.

In circumstances where SEBI has a reasonable ground to believe that either the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market, or any intermediary or any person associated with the securities market has violated any securities law, it may ask any person to produce all the books, registers, documents and records that may be relevant. Further, if such documents and records are not produced, SEBI may, after an order from the court, also seize such books, registers, documents and record. The investigating authority also has power to examine a person on oath.

In India, there are no statutory mandates or procedural directives for conducting internal investigations. Internal investigations are generally viewed from the perspective of best practices and good corporate governance. There is no set mechanism or strict rules which need to be adhered to for conducting such investigations. Hence, internal investigations are generally conducted as per procedures defined in internal policies of the company.

The SEBI LODR, by way of a recent amendment, requires listed companies to disclose to stock exchanges the initiation of any forensic audit, the name of the entity initiating the audit, the reasons for the same and the final forensic audit report.

India has entered into MLATs with various countries (see 1.3 Extraterritorial Reach) and has ratified various international conventions and multi-lateral treaties, including the United Nations Convention Against Corruption, 2003. India has also ratified the Hague Convention on Civil Procedure, 1954, which lays down procedures for civil and commercial matters and also highlights procedures for letter of requests. The SAARC Convention and Commonwealth Scheme (Harare Scheme) also helps India to be on the same footing with the international community in the fight against crime, both domestic and international. India is also one of the oldest and most active members of INTERPOL and an active member of the international Financial Action Task Force. Indian courts, by virtue of powers conferred by various statutes may also seek mutual legal assistance (see 1.3 Extraterritorial Reach for more details).

India does not have any specific blocking statutes.

Further, the Indian government has ratified bilateral extradition treaties with 48 countries and has entered into extradition arrangements with 11 other nations. The provisions of the Indian Extradition Act, 1962 regulate the extradition of a fugitive from India to a foreign nation or vice versa. Extradition could be based on a treaty between India and a foreign country, or, in the absence of a treaty, an extradition agreement. Extradition may be carried out for the offences either enumerated under the extradition agreement or for the offence punishable with imprisonment for more than one year under the laws of India or of a foreign state.

After an investigation is initiated into a white-collar crime (see 2.2 Initiating an Investigation), the investigation agency (such as the police or CBI) will, based on the investigation and the evidence available, prepare the final report of its investigation. If the investigative agency has reason to believe that a person is involved in an offence, it will submit the final report (ie, a charge-sheet containing its version of events and identifying the offences with which the accused is charged) to the court. Thereafter, based on the report submitted by the investigating agency, hearing is afforded to the accused and, on the basis of the information and evidence available, the court may form the charges in relation to any particular offence.

Charges for bribery and corruption cases are generally brought by the CBI/Anti-Corruption Bureau or the police. However, the PCA provides that courts can take cognisance of certain specified offences committed by a public servant if this is previously sanctioned by a competent government authority (usually, his or her employer).

Under the PMLA, once the ED's investigation is complete, it will file a prosecution complaint before the special court. On receiving the complaint, the court may take cognisance of an offence.

In case of initiation of proceedings under the Companies Act, the SFIO shall submit the investigation report to the central government. After a thorough examination of report by the central government, it may on its option direct the SFIO to initiate prosecution against the company and its officers or employees. Thereafter, the SFIO files the investigation report with the special court for framing of charges.

In India, there are no provisions related to deferred prosecution agreements, non-prosecution agreements or equivalents. However, there are provisions related to compounding of offences – ie, private disposal/settlement of pending criminal complaints. The CrPC provides that offences such as cheating and criminal breach of trust are compoundable offences. On the other hand, an offence which is punishable under the Companies Act with imprisonment only, or with imprisonment plus a fine, is not compoundable. Further, under the PCA and the PMLA, compounding of offences is not allowed.

Any offence punishable under the SEBI Act can be compounded, provided it is not an offence which is punishable only with imprisonment or with imprisonment and fine. Therefore, only where a fine is an alternative to imprisonment does the provision apply; the offence may be compounded either before or after the institution of any proceeding.

Further the SEBI has formulated SEBI (Settlement Proceedings) Regulations 2018 which regulates settlement proceedings and lays down the procedure to be followed for such settlements. A person against whom any specified proceedings have been initiated and are pending or may be initiated, may make an application to the SEBI for settlement. Upon receiving such application the SEBI shall by an appropriate order dispose of the proceeding pending before it on the basis of the approved settlement terms. The SEBI has the discretion to not to admit such settlement proceedings in that event that the defaulter is either a wilful defaulter, a fugitive economic offender or has the opinion that default has caused marketwide impact, caused losses to a large number of investors or affected the integrity of the market.

The provisions of the CrPC deal with plea bargaining. In India, plea bargaining is only available for offences where the punishment is not death, life imprisonment or imprisonment for a term exceeding seven years. Hence, this means that it will be available for certain white-collar crimes such as criminal breach of trust, forgery and fraud as they are punishable with imprisonment of less than seven years.       

Please see 1.1 Classification of Criminal Offences and 1.4 Corporate Liability and Personal Liability

In India, the main offences for bribery are enumerated under the PCA. Further, the exercise of personal influence with a public servant is a punishable offence (see 1.1 Classification of Criminal Offences).

At present, India does not have any specific legislation in place which makes bribery of foreign public officials or bribery between private parties a criminal offence.

While there is no express obligation to prevent bribery or influence peddling, in certain circumstances it is an offence for a company to have failed to prevent bribery by persons associated with it, such as its subsidiaries, employees or agents.

Further, the PCA provides for the defence of “adequate procedures” to the above offence of failure to prevent bribery. Therefore, if a company is able to satisfactorily prove that adequate procedures to prevent bribery had been put in place, it shall be a valid defence to such charges. However, as of this date, statutory guidelines defining what “adequate procedures” would entail have not been prescribed yet.

Insider Trading is prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). PIT Regulations prohibit any insider from communicating, providing, or allowing access to Unpublished Price Sensitive Information (UPSI), relating to a company or securities, to any person, except in furtherance of a legitimate purpose, performance of duties or discharge of legal obligations. Further, it prohibits any person from procuring or causing the communication by an insider of UPSI, except in furtherance of a legitimate purpose and also prohibits any person in possession of UPSI from trading in securities listed (or proposed to be listed) on a stock exchange.

Further, any person who violates the above-mentioned provision may be subject to a fine ranging from INR1 million to INR250 million, or three times the amount of profit made from the insider trading offence (whichever is higher). The SEBI may also prohibit an insider from investing in or dealing in securities, declare violative transactions as void, or order for securities purchased or sold to be returned.

Fraudulent and unfair trade practices are prohibited under the SEBI Act. The SEBI has also promulgated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP) which deal with market abuse such as manipulative, fraudulent and unfair trade practices under it. They prohibit any person from:

  • directly or indirectly dealing in securities in a fraudulent, unfair and manipulative manner;
  • using or employing any manipulative or deceptive device or scheme to defraud, in connection with the issue, purchase or sale of any securities; and
  • engaging in any act, which would operate as fraud or deceit on any person in connection with any dealing securities.

Any person indulging in fraudulent and unfair trade practice relating to securities may be subject to a fine ranging from INR0.5 million to INR250 million, or three times the profit made from such practices (whichever is higher).

Further, mens rea is not a prerequisite for establishing the above offences.

Under the Income Tax Act, 1976 (ITA), if a person wilfully attempts to in any manner to evade tax, penalty or interest chargeable or imposable under ITA, such person shall be liable to be punished with imprisonment ranging between three months and seven years. Penalty is also imposed in a case where a person: has in his or her possession or control any books of account or other documents or containing a false entry or statement; or makes or causes to be made any false entry or statement in such books of account or other documents; or wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents.

In cases where an offence has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

In any prosecution for any offence under ITA which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state, but it shall be a defence for the accused to prove the fact that he or she had no such mental state with respect to the act charged as an offence in that prosecution. In this regard, the Supreme Court has opined that, unless there is something in the language of the statute indicating the need to establish the element of criminal intent, it is generally sufficient to prove that a default in complying with the statute has occurred.

The Central Goods and Services Tax Act, 2017 (GST Act) prescribes the tax relation between the state government and the central government in regard to goods and services. The GST Act provides for a list of offences which include fraudulently obtaining refund of tax, suppression of turnover leading to evasion of tax, etc. Such persons may be held liable to pay a penalty of INR10,000 or an amount equivalent to the tax evaded or the tax not deducted.

The Companies Act prescribes the law in regard to book-keeping and maintaining true and fair financial records (see 1.1 Classification of Criminal Offences for details). 

The SEBI LODR also mandates listed entities to submit quarterly, year-to-date and annual financial results to the stock exchange within a stipulated time period and failing to do so may attract monetary penalty.

Furthermore, reporting entities under the PMLA must maintain exhaustive records of inter alia, transactions, client information, beneficial owners of specific documents involving transactions that exceed certain monetary thresholds, suspicious transactions, etc. The penalty for contravention of this provision is imprisonment for a term which shall not be less than three years, but which may extend to seven years and a fine which may extend to INR0.5 million.

The primary legislation governing cartels is the Competition Act, 2002 (Competition Act). The following are the main offences under the Act.

Anti-competitive agreements – any agreement for goods or services which has appreciable adverse effect on competition in India is prohibited and is considered void. No enterprise shall enter into any agreement with respect to production, supply distribution, storage, acquisition or control of goods/provision of services which is anti-competitive and likely to cause appreciable adverse effect on competition in a relevant market in India. Cartels are covered under this offence.

Abuse of dominant position – this involves a position of strength, enjoyed by an enterprise, in the relevant market in India, which enables it to either operate independently of competitive forces prevailing in the relevant market or affects its competitors or consumers of the relevant market in its favour.

The Competition Commission of India (CCI) may inquire into any contravention on its own motion or on receipt of any information from any person or a reference made to it by the central government, a state government or a statutory authority. If the CCI finds that an agreement or abuse is in contravention of the Competition Act, it can impose such penalty, as it may deem fit, which shall be not more than 10% of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse.

In case of a contravention by companies, every person who was in charge of and was responsible to the company for the conduct of business, as well as the company, shall be liable to be proceeded against and punished accordingly. In case it is proved that such contravention has taken place with the consent or connivance of or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that contravention and shall be liable to be proceeded against and punished accordingly.

The primary legislation dealing with consumer law in India is the Consumer Protection Act, 2019 (CPA). The CPA contains several provisions imposing criminal liability, for the following offences.

False or misleading advertisement – any manufacturer or service provider who causes a false or misleading advertisement to be made which is prejudicial to the interest of consumers shall be punished with imprisonment for a term which may extend to two years and with a fine which may extend to INR1 million.

Manufacturing for sale or storing, selling or distributing or importing products containing adulterant – any person who by himself or herself or by any other person on his or her behalf, manufactures for sale or stores or sells or distributes or imports any product containing an adulterant shall be punished.

Manufacturing for sale or for storing or selling or distributing or importing spurious goods – any person who manufactures for sale or stores or sells or distributes or imports any spurious goods shall be punished.

The quantum of the punishment relies on the injury (no injury, grievous hurt, death, etc) to the consumer and ranges from imprisonment of six months to life imprisonment and a fine.

The Information Technology Act, 2000 (IT Act) and IPC are the primary legislations that define and penalise offences in the cyberspace. The following are some of the main offences.

Hacking and data theft – the IT Act makes it illegal to hack into a computer network, steal data, introduce and spread viruses through computer networks, damage computers, computer networks, or computer programs, disrupt any computer, computer system, or computer network, and deny an authorised person access to a computer or computer network. The above offence may attract a penalty of imprisonment up to three years or a fine up to INR0.5 million.

Receiving stolen property – dishonesty such as receiving any stolen computer resource or communication equipment is punishable under the IT Act. The above offence is punishable with imprisonment for up to three years or a fine of INR0.5 million, or both.

Identity theft and cheating by impersonation – any person who fraudulently or dishonestly makes use of another person's electronic signature, password or other unique identification feature shall be punished with imprisonment for a term that may extend to three years and shall also be fined.

Breach of confidentiality and privacy – any person who has secured access to any electronic record, book, register, correspondence, information, document or other material under contract or otherwise without the consent of the person concerned, and subsequently discloses such material or other material to any other person shall be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to INR0.1 million, or with both.

Further, Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 prescribe a duty on all body corporates in regard to collecting, storing and disclosing of sensitive personal information. The IT Act prescribes compensation in case of failure to protect the data causing wrongful losses to the person so affected.

India does not have an autonomous sanctions authority or consolidated list of financial/trade sanctions. However, the Indian government may implement UN sanctions through the United Nations (Security Council) Act, 1947 (UNSCA). Under the UNSCA, the government of India is authorised to take any measures to give effect to any decision of the UN security council.

Furthermore, where any person attempts, makes or abets the carrying out of any import or export in contravention of the provisions of the Foreign Trade (Development and Regulation) Act, 1992 (FTDRA) and the Foreign Trade Policy (FTP), that person will be liable to a penalty of not less than INR10,000 and not more than five times the value of the goods or services or technology in respect of which any contravention is made or attempted to be made, whichever is more. The person may also be liable to a penalty under the Customs Act 1962 which includes imprisonment.

Moreover, the Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) list issued by Directorate General of Foreign Trade (DGFT), governs the export of dual-use items from India with a view to ensuring that sensitive items do not fall into the hands of non-state actors.

If a person exports any item listed under the SCOMET without authorisation, they will be liable to punishment in accordance with the provisions of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (WMDA). The penalties under the WMDA depend on the nature of the offence committed. The FTDRA has not prescribed a limit for the penalty pertaining to the export of SCOMET items.

Further, the Foreign Exchange Management Act, 1999 (FEMA) which regulates the exchange control regime in India provides that if a person contravenes any provision of FEMA or any rule, regulation, notification, direction or order issued under FEMA, then such person shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to INR0.2 million where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to INR5,000 for every day after the first day during which the contravention continues.

In India, concealing design to commit an offence is punishable under the IPC. The quantum of punishment for such concealment depends on the intent behind the offence concealed and the actual commission of such offence. Mens rea is prerequisite for the offence of concealment under IPC.

If such concealment was designed to commit an offence punishable with death or imprisonment for life, and such an offence is committed, it is punishable by imprisonment for up to seven years and a fine. Even if the concealed offence is not committed, the concealment will be punishable with imprisonment for a term of up three years and a fine.

Further, if such concealment was designed to commit an offence punishable with mere imprisonment, and such an offence is committed it is punishable for imprisonment for a term which may extend to a quarter part of the longest term provided for the offence or a fine, or both. Even if the concealed offence is not committed, the concealment be punishable with imprisonment for a term which may extend to one-eighth part of the longest term provided for the offence or a fine, or both.

A person who conspires with or assists another to commit an offence can be held liable in India.

A person who is a party to a criminal conspiracy to commit an offence punishable with death, imprisonment for life or rigorous imprisonment for a term of two years or upwards, shall be punished in the same manner as if he or she had abetted such offence (see 1.1 Classification of Criminal Offences for details of criminal conspiracy). Further, a person abetting an offence is punishable with the same punishment provided for the abetted offence. Moreover, a person who is a party to a criminal conspiracy other than as punishable above, shall be punished with imprisonment of either description for a term not exceeding six months, with fine, or with both.

Separately, the PCA also provides for a punishment for abetment of offences under the Act, which includes imprisonment for a term which shall not be less than three years, but which may extend to seven years and shall also be liable to a fine.

The offences in relation to money laundering in India are governed by the PMLA (see 1.1 Classification of Criminal Offences). The punishment for the crime of money laundering is rigorous imprisonment for a term which shall not be less than three years, but which may extend to seven years and fine which may extend to INR0.5 million. The ED is a multi-disciplinary organisation tasked with investigating and prosecuting cases under PMLA.

Furthermore, the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 cast a duty on all reporting entities to verify and maintain records of the identity of all clients including beneficial owners and to maintain a record of all transactions and submit such reports to the Director at prescribed intervals. The PMLA and the rules thereunder also require reporting entities to inter alia, furnish information relating to suspicious transactions (STR). The penalty for contravention of this provision is imprisonment for a term which shall not be less than three years, but which may extend to seven years and a fine which may extend to INR0.5 million.

The enforcement authority for STRs is the Financial Intelligence Unit (FIU), reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. Based on such reports, the FIU shall have the power to conduct search and seizure, impounding of records and shall forward the same to the adjudicating authority.

The PCA provides for exemptions from liability in a situation where a person is compelled to give undue advantage and they report the matter to the enforcement or investigating agency within seven days from the date the undue advantage was given. Further, a person who, after informing a law enforcement or investigating agency, gives or promises to give any undue advantage to another person in order to assist the enforcement or investigating agency in its investigation of the offence alleged against the latter will be exempted from liability. The management and officials of any commercial organisation may avoid liability for offences committed by such commercial organisations if it is proven that such offences were committed without their consent or connivance. The PCA also provides the defence of “adequate procedures” (see 3.3 Anti-bribery Regulation).

Further, if a person proves that the contravention took place without his or her knowledge or that he or she exercised all due diligence to prevent such contravention, it may be a defence under PMLA.

Under the Companies Act, intention or lack of connivance may be claimed as a defence for the offence of fraud.

The IPC further provides general exceptions and defences such as mistake, accident, necessity, insanity, etc.

India does not have any de minimis exceptions for white-collar offences, nor any exempted industries/sectors.

In India, self-disclosures are seen as a condition precedent to pardons and plea bargains. Under CrPC, the courts, with a view to obtaining the evidence of any person concerned with or privy to an offence, may tender a pardon to such person on condition of his or her making a full and true disclosure of the whole of the circumstances within his or her knowledge relative to the offence and to every other person concerned, whether as principal or abettor, in the commission. Self-disclosure and co-operation may also lead to successful plea bargaining under the CrPC.

The Competition Act provides that the CCI may, if it is satisfied that any person or organisation which is alleged to have entered into an anti-competitive agreement, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such person or organisation a lesser penalty (as it may deem fit) than leviable under this Act or the rules or the regulations.

Self-disclosure under the PCA is also a defence in certain circumstances (see 4.1 Defences for such exception).

The Whistle Blowers Protection Act, 2014 (WBP Act) aims to protect anyone who exposes alleged wrongdoing in government bodies, projects and offices or assists in a consequent investigation. However, the WBP Act has not been operationalised by the Indian government. The WBP Act provides for the protection of the identity of the complainant and provides safeguards for witnesses. The WBP Act, however, does not cover the private sector.

The Companies Act provides for the establishment of a vigil mechanism (see 2.4 Internal Investigations). The Companies Act provides that there shall be safeguards against victimisation of persons who use the vigil mechanism. The SEBI LODR further provides for a specific obligation to provide for adequate safeguards against victimisation of director(s) or employee(s) or any other person who avail themselves of the vigil mechanisms.

The SEBI under PIT Regulation, 2015 gives the board of directors the sole discretion to declare a whistle-blower eligible for reward. Such incentives can also be provided by companies in their internal polices but there is no specific legal requirement to do so.

Under the Indian Evidence Act, 1872, the person who alleges the existence of any fact, bears the burden of proof. This is to say that, as a general principle, the burden of proof would ordinarily lie on the prosecution in criminal proceedings. 

Specifically, for offences under the PCA, Companies Act and IPC, the burden of proof initially lies on the prosecution. It is only when such initial burden is successfully discharged by prosecution that the burden of proving any matters related to the defence of the accused shifts upon the accused. In India, the standard of proof in criminal cases is beyond reasonable doubt. Furthermore, an accused is presumed to be innocent until proven guilty under the PCA, Companies Act and IPC.

However, under the PMLA, the individual claiming that proceeds of crime are not involved in money laundering has the burden of proof. Thus, unless the contrary is proven, the court shall presume that proceeds of crime are involved in money laundering. Therefore, the accused is presumed to be guilty until the accused proves his or her innocence, but this burden has to be discharged by the standard of preponderance of probability and not beyond reasonable doubt.

In India, once it is proved that an offence has been committed, the judge will pronounce a judgment. The punishment imposed by the judge is not fixed and is variable at the discretion of the judge. For example, the PMLA prescribes imprisonment between three to seven years and fines up to INR0.5 million. Similarly, under Companies Act, imprisonment may range between six months to ten years and fines may range between three times the amount of fraud or may extend to INR0.25 million.

Under the PCA, the court in fixing the amount of the fine shall take into consideration the amount or the value of the property which the accused person has obtained by committing the offence or the pecuniary resources or property for which the accused person is unable to account satisfactorily. However, there are no specific guidelines under Indian law that govern assessment of penalties. Such an assessment primarily depends on the adjudication or application of mind by the courts, which in turn depends on the facts and circumstances of each case.

Furthermore, under the CrPC, certain white-collar offences may be compounded, based on the terms of the victim (see 2.7 Deferred Prosecution for further details). On the other hand, in cases involving plea bargaining, the court may, after giving a chance of mutually satisfactory disposition to the accused and the victim, release the accused on probation, reduce the term of imprisonment, etc.

Further, while arriving at the settlement under the SEBI Act and SEBI (Settlement Proceedings) Regulations 2018, SEBI may consider:

  • the conduct of the applicant during the specified proceeding, investigation, inspection or audit;
  • the role played by the applicant in case the alleged default is committed by a group of persons;
  • the nature, gravity and impact of alleged defaults;
  • whether any other proceeding against the applicant for non-compliance of securities laws is pending or concluded;
  • the extent of harm and/or loss to the investors and/or gains made by the applicant;
  • processes that have been introduced since the alleged default to minimise future defaults or lapses.
Trilegal

311 B
DLF South Court, Saket
New Delhi 110017
T: +91 11 4163 9393
India

+91 11 4259 9270

Kunal.Gupta@trilegal.com www.Trilegal.com
Author Business Card

Trends and Developments


Authors



Trilegal has wide experience in advising and assisting clients in matters relating to white-collar crimes, including anti-corruption and corporate frauds. The firm’s experience in this practice involves a substantial volume of matters on both the non-contentious and contentious sides. It has a strong employment practice and partners work closely on white-collar crime matters. The seamless integration and collaboration among its teams is the firm's biggest strength. On the contentious side, Trilegal has in-depth expertise in advising and assisting clients and their employees during criminal investigations, as well as in conducting criminal trials relating to economic offences. As a part of the practice, the firm advises its clients on various complex white-collar crime issues, including those relating to anti-corruption/anti-bribery matters, money-laundering cases, economic fraud and cyberfraud. Trilegal regularly advises and assists its corporate clients during investigations conducted by police authorities and other enforcement agencies, including the Central Bureau of Investigation, the Enforcement Directorate and the Directorate of Revenue Intelligence.

Key Reporting Requirements for a Sustainable Business in India’s Post-COVID-19 Landcape

Introduction

Conducting business in India has always been challenging. The reasons for this include high vulnerability to bribery and corruption-related risks, as evidenced by India's dip in rankings for the last three consecutive years in Transparency International's Corruption Perceptions Index. The other important roadblocks include the multiplicity of laws on a single subject, which result in various compliance and reporting requirements, and the involvement of multiple investigative agencies in a single matter.

In India, as businesses are trying to open up after the second wave of COVID-19, companies are expected to adhere to the applicable statutory reporting requirements, especially concerning certain white-collar crimes (ie, bribery, corruption, fraud, etc) committed by their employees, officers, agents and third parties. For companies to safeguard themselves against the regulatory punishments that may further shallow their pandemic-hit business, it is important to bear in mind the reporting requirements for companies for any misconduct that may arise.

Reporting of potential bribery and corruption-related concerns

The Prevention of Corruption Act, 1988 (PCA) is the primary legislation in India that deals with, among other things, the offence of bribes given to/received by a "public servant". The definition of "public servant" in the PCA is broad, including government officials, employees and office-bearers.

When companies receive complaints (through the whistle-blower mechanism or otherwise), especially related to potential bribery and corruption-related concerns, they generally conduct comprehensive internal investigations to check the veracity of such allegations. It is possible that during such internal investigations, companies may come across certain information or evidence which suggests that bribes may have been paid to a public servant by its employee, officer, agent or any third party. However, the law on reporting any such information to the appropriate authorities (local police) by companies is not settled.

In that regard, Section 39 of India’s Code of Criminal Procedure, 1973 (CrPC) mandates the furnishing of information to the local police by every person (which includes a company) who is aware of the commission of, or of the intention of any other person to commit, certain offences punishable under the provisions of the Indian Penal Code, 1860 (IPC). Such reportable offences under the IPC include offences related to illegal gratification (bribery). However, the offences related to bribery under the IPC were omitted by amendments and the same were consolidated under the PCA on its passage in 1988. Therefore, strictly going by Section 39 of the CrPC as it now stands, this does not cover offences under the PCA, and so implies that there are no reporting obligations for offences under the PCA. While certain High Courts in India support this view, the Supreme Court of India, in a passing reference, has been inclined towards the reporting of such information.

Even if a conservative view (in favour of reporting) is taken, it is a pre-requisite to such reporting that companies must be aware of the commission of, or of the intention of any other person to commit, an offence of bribery. In that regard, Indian courts have clarified that "awareness" under Section 39 of CrPC could be reached by making a due inquiry or reasonable deductive process, but not on the basis of mere suspicions or assertions. If any such reporting is made against third parties merely based on suspicions or assertions, it may expose companies to legal action for defamation.

Due to the jurisprudence not being settled on this matter, it is observed that instances of corporate reporting of such information under Section 39 of CrPC are low. However, this goes with the risk that a different interpretation of the provision may be taken by the authorities/courts in the future. Nevertheless, there exists no reporting obligation under this provision for potential commercial bribery.

Reporting of potential fraud

Though the Indian Companies Act, 2013 (Companies Act) does not per se impose an obligation on companies to report any incidents of fraud, it essentially requires under Section 143(12) that if the statutory auditor of a company, in the course of the performance of his duties, has reason to believe that an offence of fraud (which is defined very broadly and may include incidents of bribery, corruption, financial misappropriations, intentional misrepresentations, etc) is being or has been committed in the company by its officers or employees, the statutory auditor shall report the matter. Depending on the monetary amount of the fraud, the matter should be reported to either the central government (if the amount of fraud is INR10 million or above), or to the audit committee or board of directors of the company (if the amount of fraud is less than INR10 million).

However, as per the Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013, issued by the Institute of Chartered Accountants of India (a body set up by an act of the Indian Parliament), if the management of a company has itself identified or detected the fraud internally (for example, through the company’s vigil mechanism or whistle-blower mechanism, or generally after an internal investigation) and the necessary measures for remediation have been taken by the company, and such case is intimated to the statutory auditor, then the statutory auditor is not required to report any fraud.

However, as part of the statutory auditors’ regular audit procedures, in the course of preparing audited financial statements for the year, the company’s statutory auditor makes regular inquiries as to whether any concerns of fraud were detected within the company in the assessment year. Therefore, in the event of any internal investigation of potential fraud, statutory auditors should be informed of the material findings and remedial steps being taken to address them, to minimise risks of the statutory auditors considering their obligation to report under Section 143(12) to have been triggered. Nevertheless, there is now enhanced scrutiny of auditors by the Indian government in light of regulatory action against certain audit firms for alleged lapses in their audits of major companies whose financial (and other) governance were found to be riddled with problems. Due to this environment, statutory auditors have been more inclined to note or report instances of fraud under Section 143(12) of the Companies Act.

Separately, the Companies (Auditor’s Report) Order, 2020, which is applicable from the current financial year, requires certain companies to report all whistle-blower complaints to their statutory auditors.

Additional requirements for listed companies

Listed companies (trading on the Indian stock exchanges) are also required to comply with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). Amongst others, Regulation 30 is relevant, which requires disclosure of information (to the stock exchanges) considered material by the company’s board of directors. Events deemed to be material, which must be disclosed, include cases of “initiation of forensic audit, (by whatever name called)”, where the fact of such initiation must be disclosed (along with certain attendant details).

The capital market regulator of India – the Securities and Exchange Board of India (SEBI) – has issued responses to FAQs on this disclosure requirement, clarifying that it applies to audits (by whatever name called) initiated with the objective of detecting any misstatement in financials, misappropriation/siphoning, or diversion of funds, to ensure information symmetry amongst all investors. These also state that disclosures of audit of matters such as supply chain process including procurement and matters that would not require any revision to financial statements disclosed by the listed entity are not covered. It was also clarified that the initiation of any forensic audit (by whatever name called) by the management of a listed entity, lenders, regulatory/enforcement agencies for the purposes listed in the preceding sentence, is covered under the disclosure requirement.

Commentators have observed that this disclosure requirement could lead to premature disclosures, creating unnecessary volatility in the market, especially in cases where the ultimate findings of the forensic audit may not be adverse or material. It may also affect the stock prices of companies which may take a hit due to speculations that forensic audits may result in certain adverse findings. Similar disclosures, in the past, have attracted the attention of multiple investigative authorities who have then opened inquiries into the same conduct from different perspectives.

Regulation 30 of LODR also includes the requirement to disclose, without any materiality threshold, to stock exchanges any “fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or promoter”. “Fraud/defaults, etc, by directors (other than key managerial personnel) or employees of listed entity” are also required to be disclosed to stock exchanges upon satisfaction of the materiality threshold as per the company’s internal policies. However, to avoid any premature disclosures, such disclosures are made once an internal investigation/inquiry is completed, a due opportunity is provided to directors/employees to provide their justifications in respect of the adverse findings, and it is determined that the impugned conduct amounted to “fraud” or a “default”.

Conclusion

With enhanced regulatory scrutiny and improving norms of corporate governance in companies operating in India, we expect a sharp uptick in compliance with these reporting requirements by India Inc. Companies are expected to take these reporting requirements seriously – otherwise, it may cause serious repercussions such as penal consequences and/or hefty fines.

Trilegal

311 B
DLF South Court, Saket
New Delhi 110017
T: +91 11 4163 9393
India

+91 11 4259 9270

Kunal.Gupta@trilegal.com www.Trilegal.com
Author Business Card

Law and Practice

Authors



Trilegal has wide experience in advising and assisting clients in matters relating to white-collar crimes, including anti-corruption and corporate frauds. The firm’s experience in this practice involves a substantial volume of matters on both the non-contentious and contentious sides. It has a strong employment practice and partners work closely on white-collar crime matters. The seamless integration and collaboration among its teams is the firm's biggest strength. On the contentious side, Trilegal has in-depth expertise in advising and assisting clients and their employees during criminal investigations, as well as in conducting criminal trials relating to economic offences. As a part of the practice, the firm advises its clients on various complex white-collar crime issues, including those relating to anti-corruption/anti-bribery matters, money-laundering cases, economic fraud and cyberfraud. Trilegal regularly advises and assists its corporate clients during investigations conducted by police authorities and other enforcement agencies, including the Central Bureau of Investigation, the Enforcement Directorate and the Directorate of Revenue Intelligence.

Trends and Development

Authors



Trilegal has wide experience in advising and assisting clients in matters relating to white-collar crimes, including anti-corruption and corporate frauds. The firm’s experience in this practice involves a substantial volume of matters on both the non-contentious and contentious sides. It has a strong employment practice and partners work closely on white-collar crime matters. The seamless integration and collaboration among its teams is the firm's biggest strength. On the contentious side, Trilegal has in-depth expertise in advising and assisting clients and their employees during criminal investigations, as well as in conducting criminal trials relating to economic offences. As a part of the practice, the firm advises its clients on various complex white-collar crime issues, including those relating to anti-corruption/anti-bribery matters, money-laundering cases, economic fraud and cyberfraud. Trilegal regularly advises and assists its corporate clients during investigations conducted by police authorities and other enforcement agencies, including the Central Bureau of Investigation, the Enforcement Directorate and the Directorate of Revenue Intelligence.

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