A rising tide lifts all boats.
It is only when the tide goes out that you learn who has been swimming naked.
A financial crisis is often followed by a rise in financial crimes. A crisis, such as the one we now face, not only presents an opportunity (and greater motivation) for all sorts of financial shenanigans but also lays bare – the true financial position of a lot of corporations.
You’d recall when the proverbial economic tide went-out in 2008 (because of the global financial crisis) there was an increase in both, the number of failed businesses, and the number of white collar crimes. Though certainly, a failed business, by itself, is not a crime but the run-up to insolvency – the period known as the twilight period – provides for a breeding ground for all sorts of financial chicanery.
If history teaches us anything, it is certain that there is going to be a rise in white collar crime – yet again, on the other side of COVID. In fact, we are already seeing widespread allegations of illegal profiteering. Rising economic pressures would also lead to misconduct in the form of accounting frauds, forward-invoicing, revenue recognition frauds, misrepresentation/fraud, cheating, criminal breach of trust, etc; things done out of pressure – merely with a view to survive just one more quarter.
Further, in areas such as logistics and supply chain management – areas where the COVID-19 outbreak has crippled the course of business – the parties may engage in acts like bribery and corruption in order to expedite government processes. Leakages in public procurement and procurement of undeserved economic aid is another area which is prone to financial crimes – in times such as these.
But are the laws and our law enforcement agencies equipped to be dealing with all these cases? In recent years, an increasing number of high profile cases of corporate criminal liability have been initiated, and with great fanfare, but with precious little to show – in terms of outcomes. It seems that the court of public opinion is where the victories are sought to be scored and not the real courts. Many of these prosecutions, it appears, had been initiated to either answer society’s perceived cry for retribution against people who are touted as having looted the nation, or for other reasons. In either case, except the initial perp-walk/photo-ops of people being paraded in handcuffs or sent behind bars, there is little else that has been achieved.
Genuine cases of bona fide business decisions ought to be protected, while cases of clear criminality – which do deserve to be prosecuted – ought to be investigated and prosecuted better; much better than how we do them now.
The way we investigate and prosecute white collar crime needs a total re-imagination.
Apart from the other more general issues endemic to our justice system, a few words on some specific reasons why white collar crime prosecutions fail and what can be done to remedy the same:
Lack of clarity on responsibility and lack of culture of Pardon/Leniency for White Collar Crime Offences:
There is a serious need to rethink ‘how’ and ‘who’ we prosecute for white collar crimes. A typical white collar crime may involve not only a corporation, but individuals/top-executives, and other gate-keepers of the system such as auditors, merchant bankers, valuers, etc. The decision to prosecute all or some of them is often is taken by the investigators themselves – with little guidance in terms of established principles. This leads to both : over-prosecution and under-prosecution. We need more objective principles here.
Also, Indian investigators have been seen to be reluctant in the more pro-active use of ‘approvers’ and ‘accomplices’ in making out a good prosecution case. Complex white collar investigations require that the investigators take the help of insiders and companies’ rabbis to guide them through the transactions. Since even the smartest ‘outsiders’ are unable to make sense of or rely on the documents, they almost always have to get someone from the inside to flip and that can happen only when this ‘insider’ is provided proper protection and the right incentives.
Making a company ‘insider’ capitulate and turncoat is of profound importance in a white collar crime investigations, given the nature of the crime and the sophistication with which they are committed and considering how carefully they are hidden.
We also need to put in place robust leniency/pardon mechanisms for companies willing to disclose any criminality on their part (or on the part of any of their executives), and willing to make amends/restitution. A similar mechanism for disclosure for companies is already there in the competition law regime. We need a parallel here in criminal law. The existing system of tendering pardon to an accused (under the CrPC)- with a view to get a true and fair disclosure from her about the case – may be unsuited in its application to a corporation.
Prosecutors Should Play a More Pro-Active Role in Investigations:
An overwhelming number of cases fail on account of (totally avoidable) defects in the investigation. Either due to lack of proper training of investigators, heavy case load, or simply, an attitude of general apathy to rules and procedural requirements. Failure to maintain proper records, improper management of documentary evidence, and delay in recording witness statements are some of the factors afflicting the investigative process. Most, if not all, of these infirmities can be corrected by timely intervention on behalf of the prosecutor who should carefully handhold & advice an investigator (who is not a trained legal mind) in investigating properly.
The 14th Law Commission Report noted that : lack of legal assistance at the investigation stage often leads to acquittal of the accused. More than 61 years have passed since the publication of the above mentioned Report, yet the more we change – the more we remain the same.
The prosecutor, while not investigating the case herself, must be involved in the investigative process and not just after the filing of the charge-sheet. The Investigator should have the option of seeking legal advice from the prosecutor as and when the need arises. Crown Prosecution Service (“CPS”) in the UK does that. This would ensure that the prosecutor is not incapacitated in the prosecution of the case due to terrible quality of an investigation and not handed a fait accompli each time. Timely interventions by the prosecutors may go a long way in ensuring qualitative investigations and better results/outcomes. This would require legislative/policy changes.
What is notable in this regard is that, recently, under the directions of MHA/GOI, the Delhi Police vide order dated 23.04.2020 has resolved to set up a separate Directorate of Prosecution for Delhi Police tasked with the responsibility of rendering legal assistance to Investigating Officers during investigation.
A Comprehensive Review of the Law on Whistle-Blowers:
The integrity of the system is dependent on the number of people willing to speak ‘truth to power’ and those who have the courage to say that the emperor has no clothes. If not to the emperor himself – then to the investigators. A whistle-blower is a person who exposes information or, as the name suggests, ‘blows the whistle’ regarding certain wrongdoings happening within a governmental organization or a company. He is, in that sense, the eyes and ears of the justice system. These disclosures are either at the institutional level (known as ‘internal whistle-blowing’) or in the public domain in the form of reports to the media or the appropriate authorities (‘external whistle-blowing’).
The Companies Act, 2013 (“CA”), Section 177 read with Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014 provides for the establishment of a vigilance commission for the directors and employees of a company to report their genuine concerns or grievances. Further, as per Sections 206 of the CA, the Registrar of Companies has the power to investigate a company on the basis of information received by him and if the Registrar submits a report to the Central Government, then the Central Government may order an investigation into the affairs of the company.
Provisions similar to Section 177 of the CA are also found in the Securities and Exchange Board of India (Listing and Disclosure Requirements), 2015 and the Listing Agreement of the Securities and Exchange Board of India. The recent Companies (Auditor’s Report) Order, 2020 provides that an auditor’s report must include details about whistle-blower complaints. Further, there is protection in the CA, 2013 against adverse steps against employees when the company is under investigation
Despite these provisions, whistle-blowers are more often than not discriminated against and are fired/laid off. The scope of protection isn’t adequate and these provisions are mostly not taken seriously. Resultantly, out of fear of losing their jobs (or worse), most of the ‘insiders’ do not act on or report blatant occurrences of corporate malfeasance. A two-pronged approach, as we shall see below, can mitigate these factors to an extent: Incentivising whistle-blowing and protection of whistle-blowers/witnesses.
We need to properly incentivise whistle-blowers who risk their own lives to blow the whistle on crimes within large organisations and government departments. After all, the key reason why whistle-blowing is successful in the US is its incentive scheme. With organisations like The Securities and Exchange Commission and The Internal Revenue Service having given out incentives running into millions of dollars, it is no surprise that the scheme works as well as it does.
Some Indian agencies do provide for a rewards scheme for informants which can be adopted for white collar crimes. E.g. – The Informants Rewards Schemes used by the Central Board of Direct Taxes (“CBDT”) or the provisions for Informant Reward under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“PIT”).
It must be kept in mind, however, that the need to provide incentives is over and above the protection that a whistle-blower should be provided. The remedy lies in proper incentives and protection. The fate of the Whistle Blowers Protection Act, 2014, which is yet to come in force and might get diluted, shows the legislature’s lackadaisical approach towards providing a safe harbour to whistle-blowers. Further, except a few provisions under the CA which protect employees from dismissal during an investigation conducted by the Serious Fraud and Investigation Office and provide safeguards against victimisation of employees and directors, there is nothing in any other law providing similar protection.
Keeping aside the need to protect whistle-blowers, witness protection itself in India also remains grossly insufficient. While the Supreme Court in Mahender Chawla v. Union of India declared the Witness Protection Scheme, 2018 to be law in accordance with Article 141 of the Constitution of India, the Scheme itself is far from perfect. Due to infirmities such as: providing extremely limited protection of only three months and lack of penal provisions on breach of confidentiality of personal information, it is improbable that the scheme will be able to instil confidence in the witnesses.
The Scheme is undoubtedly a positive step but, without any reform or change to its present structure, it may change little on the ground.
The Plea Bargaining Structure is Broken or ill-equipped to deal with Socio-economic offences.
Plea Bargaining is not permissible for offences punishable with more than 7 years or offences which are characterised as “socio-economic” in nature. Most socio economic offences are punishable with more than 7 years but even for those which are punishable with 7 years or less, there is considerable ambiguity regarding applicability of plea bargaining in white collar crime cases given the use of the fairly nebulous term – “socio-economic offences”. The legislature has laid down certain offences as socio-economic offences but the list/notification does not mention offences under Prevention of Corruption Act (“POCA”) and Prevention of Money Laundering Act (“PMLA”). This is a bit of a vacuum and needs to be fixed. In my opinion, given the fact that our conviction rates are dismal and most prosecutions ultimately fall in any case, there is a need to widen the scope of plea bargaining.
In this respect, we may profitably look at the practice of using either a Deferred Prosecution Agreement (“DPA”) or a Non-Prosecution Agreement (“NPA”), as is used in Foreign Corrupt Practices Act cases in US, which have been successfully used to fix liability, make companies correct their own organizations, disgorge profits, and impose billion dollar sanctions. Generally, under a DPA, the defendant company agrees to pay a monetary fine, waive the statute of limitations, admit facts relevant to the alleged offence, and agree to compliance and remediation measures. Under an NPA on the other hand, charges are not filed in order to provide an opportunity to the company accused of an offence to demonstrate its good conduct.
We need to remember that an initial arrest (followed by bail) of the individual accused and a prolonged trial (which often ends in exoneration) is not the only deterrent to white collar crime; the real deterrent is the certainty of punishment and actual financial sanctions. Most DPAs and NPAs provide for appointing independent corporate monitors whose role is to ensure that a corporation abides by the terms of the settlement agreement. These agreements help companies set their house in order (as a condition of the specific agreement) and result in companies actually coughing-up/disgorging profits. In order to ensure that is not the innocent shareholders or taxpayers who end up paying for the fines/penalties, appropriate individual penalties/executive salaries/bonusess/assets should be carefully targeted and focussed upon.
Adopting this method in the Indian legal framework would also strengthen the system of corporate accountability and institutionalise internal investigations in India – making the companies participate in cleaning their respective houses and self-regulate (of course, subject to broad guidelines).
There may be concern that this allows big corporations to get away with impunity. This concern is to a great extent off-set by having a Court take a final call on the permissibility of settlement in any given case. The Court may be trusted to ensure the conscionability of the agreement and the fact it serves larger public interest, before allowing the same.
Principles regarding prosecution of corporations in India are underdeveloped and not at par with global norms. Although the Standard Operating Procedure Manual for conducting prosecutions under the Companies Act calls for aligning the Indian system with the international practices, it does not provide a substantive test which would aid the investigators/prosecutor in determining whether a company should be charged or not.
We may look towards the American approach, where Section 300 of the 9th Title of the Justice Manual of the United States Department of Justice, in addition to providing usual factors, such as “sufficiency of evidence, likelihood of success at trial” etc., also provides ten other factors that the prosecutors should consider in reaching a decision as to the proper treatment of a corporation:
- the nature and seriousness of the offence including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime;
- the pervasiveness of wrongdoing within the corporation;
- the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it;
- the corporation’s willingness to cooperate, including as to potential wrongdoing by its agents;
- the adequacy and effectiveness of the corporation’s compliance program at the time of the offence, as well as at the time of a charging decision;
- the corporation’s timely and voluntary disclosure of wrongdoing;
- the corporation’s remedial actions;
- collateral consequences as well as the impact on the public arising from the prosecution;
- the adequacy of remedies such as civil or regulatory enforcement actions; and
- the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance.
De-Criminalising & Narrowing Down Certain Offences
In addition to the above, there is an urgent need to decriminalise certain provisions and modify the definitions of certain offences. The Indian judicial system is undeniably choked and decriminalizing certain offences is a step in the right direction. Removing the penal sanctions as imposed on some of these offences will also make doing business in India a little less dangerous and uncertain.
We also need to define certain provisions of corporate criminal liability with greater precision. For instance, the definition of “Fraud” under Section 447 of the CA also needs to be re-examined as it is too broadly worded. Strikingly, it is an “inclusive” definition and not “exhaustive”, therefore, there is additional scope for the Investigators/Prosecutors to bring any other act/omission within the ambit of the definition. This may render this definition unconstitutionally vague and overbroad.
The Need to Institutionalise and Embrace Internal Investigations
The PoCA, as amended by the Prevention of Corruption (Amendment) Act, 2018, has introduced various progressive changes to India’s anti-corruption regime in line with the United Nations Convention Against Corruption. Among the various changes introduced by the Amendment, one is that commercial organisations can now be prosecuted for offences under the Act.
Under the amended Act, authorities may now prosecute commercial organisations ‘if any person associated with such commercial organisations gives or promises to give any undue advantage to a public servant’ Further, for an offence committed by a commercial organization any director, manager, secretary or any other officer of the organisation may be held liable if it is proven that the offence was committed with the consent or connivance of such person. However, what is important is that the existence of ‘adequate procedures’ to prevent the commission of the offences under the Act is now a valid defence
Given the above, the relevance of internal compliance frameworks and internal investigations in companies has increased. Such investigations help in monitoring the company’s internal affairs and prove effective in preventing embarrassing raids along with other disciplinary and enforcement action by the authorities.
The law and procedure governing internal investigations vary across jurisdictions. In India, there is no defined procedure or guidelines as to how such investigations are to be conducted; however, certain international best practices, such as the conduct of internal audits and compliance checks; the establishment of complaints committees, disciplinary committees, internal grievance redressal forums, internal whistle-blowing mechanisms, etc. are essential.
These would be crucial in legal risk management of organisations and ensure that adequate procedures are in place to rule out or, at least mitigate, criminal involvement. While advancements in the law have definitely provided companies the right impetus to establish and bolster systems for internal monitoring and investigation; as mentioned above, the introduction of DPAs and NPAs to India’s legal system will further add to this impetus.
It would be interesting to see though as to how internal investigations and their findings would play a part in/impact investigations by agencies such as Police, CBI, ED, SFIO, etc, in absence of statutory recognition of internal investigations and lack of precedent on use and evidentiary value of results of such an investigation.
The way forward:
It is clear that, with the increase and pervasiveness of white collar crime, the definition of “crime” itself has undergone a change. The legal tools to tackle white collar crime, however, have stayed pretty much the same.
An attempt to remove some of the tendencies which plague the investigative process would go on to ensure that we don’t, in a trigger happy way, criminalise bona fide business decisions/mistakes and at the same time, do not let go of real corporate crimes and prosecute and punish them effectively.
There is, therefore, a need to take white collar crime seriously and totally reimagine the way we investigate & prosecute it.
 Although commonly attributed to John F. Kennedy, the origin of this saying remains unknown.
 Warren Buffet
 Price Waterhouse Cooper’s Global Economic Crime and Fraud Survey, 7th South African edition, March 2020. Available at: https://www.pwc.co.za/en/assets/pdf/global-economic-crime-survey-2020.pdf
 Law Commission, Reform of Judicial Administration, (Law Comm No 14, 1958) para 34.26
 Section 177, Companies Act, 2013
 Rule 7, Companies (Meetings of Board and its Powers) Rules, 2014
 Section 206, Companies Act, 2013
 Section 210, Companies Act, 2013
 Regulation 22, Securities and Exchange Board of India (Listing and Disclosure Requirements), 2015
 Clause 49, Model Listing Agreement for listing on Institutional Trading Platform of SME Exchange
 Clause 3(xi)(c), Companies (Auditor’s Report) Order, 2020
 Benami Transactions Informants Rewards Scheme, 2018; Income Tax Informants Rewards Scheme, 2018
 Regulation 7D, Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
 Section 218, The Companies Act, 2013
 Rule 7(4), Companies (Meetings of Board and its Powers) Rules, 2014
 (2019) 14 SCC 615
 Article 141, The Constitution of India, 1950
 Standard Operating Procedure Manual for Prosecution Under The Companies Act, available at: http://www.mca.gov.in/Ministry/pdf/SOPProsecution_06092017.pdf
 U.S. Department of Justice, Justice Manual, § 9-27.300
 Section 447, The Companies Act, 2013
 Prevention of Corruption Act, 1988, Section 9(1)
 Prevention of Corruption Act, 1988, Section 10
 Prevention of Corruption Act, 1988, Proviso to Section 9(1)