Financial Crimes And Reforms Needed In Our Laws To Avoid It
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This Blog is written by Punit Agrawal from Narsee Monjee Institute of Management Studies, Indore. Edited by Harsh Sonbhadra.
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INTRODUCTION
The definition of financial crime is not universally recognized. [1] Financial crime is often defined as a property crime, which involves illegally transforming another’s property into his/ her personal use and benefit. Financial crime means “any non-violent crime generally occurring in a loss of money.” Researchers and government institutions are not clear on how financial-crime, money abuse, and white-collar crime are distinguished from each other and use them interchangeably. IMF (2001) argues that inadequate regulatory and supervisory structure and lax tax regimes promote financial abuse and that financial misuse requires a financial loss as a consequence of financial abuse. Pickett and Pickett (2002) define financial crime as ‘using disappointment illegal gain, normally implied infringement of confidence and some disguise of the true nature of the activities’, using interchangeably financial crime, white-collar crime, and fraud.
Components of financial crimes
1) Deceitful
2) Intentional
3) Resulting in pecuniary losses
4) Possible concealment
5) Breach of trust
6) Possible appearance of outward respectability.
Based on the definitions and elements described above, some elements are important in designing financial crime; consequently, deceitful, deliberate, disguise, and financial loss. Of all components, a financial loss is known as the central factor, since certain forms of fraud involving a financial mechanism or a network would be misunderstood without such a factor.
CLASSIFICATION OF FINANCIAL CRIMES BY IMF (2001)
1) Financial sector crime-
- Money laundering
- Fraud
- Tax evasion
- Circumvention of exchange restrictions and other
2) Other financial crime-
- Sale of fictitious financial instruments or insurance policies
- Embezzlement
- Tax evasion
- Stock manipulation and other
- Tax avoidance
- Connected party lending
- Stock manipulation and other
CLASSIFICATION OF FINANCIAL CRIMES BY GOTTSCHALK
1) Corruption-
- Kickbacks
- Bribery
- Extortion
- Embezzlement
2) Fraud-
- Identity
- Mortgage
- Occupational
3) Theft-
- Cash
- Intellectual
- Fraud
4) Manipulation-
- Laundering
- Cybercrime
- Bid rigging
- Insider trading
AUTHORITIES IN INDIA
Under the federal system of government followed in India, both the Central and respective state governments are competent to legislate on criminal law and criminal procedure (see the concurrent list under Schedule VII of the Constitution of India). The maintenance of public order is regulated by the respective state governments, through the police and the jurisdictional court.
The Code of Criminal Procedure 1973 (CrPC) authorizes a police officer to arrest a person without an order from the magistrate if they have reasonable suspicion that the person has committed an offense that could be punishable with imprisonment of up to seven years. Additionally, the CrPC also empowers the jurisdictional court to issue a proclamation against a person who is evading an outstanding warrant.
A police officer who has reasons to suspect the commission of an offense can, after submitting a report to the concerned magistrate, proceed to investigate such an offense. Once the magistrate receives this report, they may direct an investigation or proceed to depute any magistrate who is subordinate to them to hold a preliminary inquiry, or otherwise dispose of the case. A police officer can also arrest a person without a warrant or orders from a magistrate if they know that such a person has planned the commission of an offense.
Serious Fraud Investigation Office (SFIO) has been set up by the Ministry of Corporate Affairs (MCA) and has the power to detect, investigate and prosecute white-collar crimes and frauds with multi-disciplinary ramifications or involve public interest. The investigations of the SFIO are carried out based on orders received from the central government. The central government recommends investigations based on reports received from the Registrar of Companies or an inspector under the Companies Act, or if a company passes a special resolution stating that the affairs of the company must be investigated, or on requests received from central or state government departments. Once a case is assigned to SFIO, all other investigating agencies of the Central Government or any State Government must suspend their investigation in respect of any offense under the Companies Act. Officers of SFIO are vested with the power to arrest the accused and the SFIO report will be considered as a charge sheet for the purposes of the Code of Criminal Procedure, 1973 (CrPC). On receipt of the investigation report, the central government can direct SFIO to initiate prosecution.
The Central Bureau of Investigations (CBI) is a central investigative department established by the central government which handles matters relating to corruption and fraud committed by public servants of the central government departments, central public sector undertakings, and central financial institutions. The CBI also looks into economic crimes, including fraudulent activities of banks, financial fraud, import-export, and foreign exchange violations, large-scale smuggling of narcotics, antiques, cultural property, and smuggling of other contraband items, etc.
Enforcement Directorate (ED) deals with the investigation and prosecution of cases under the Foreign Exchange Management Act 1999 and certain provisions of PMLA.
Regulatory investigations initiated under statutes such as the FEMA or the PMLA are adjudicatory and do not constitute criminal investigations. The Supreme Court in Director of Enforcement V. M/s. MCTM Corporation Private Limited AIR 1996 Supreme Court 1100 [2], it was held that the proceedings under Section 23(1)(a) FERA, 1947 are “adjudicator” in nature and character and are not “criminal proceedings”. The officers of the Enforcement Directorate and other administrative authorities are expressly empowered by the Act to adjudicate only. They must act “judicially” and follow the rules of natural justice to the extent applicable but, they are not judges of the Criminal Courts trying an accused for commission of an offense, as understood in the general context. They perform quasi-judicial functions and do not act as courts but only as administrators and adjudicators. In the proceedings before them, they do not try an accused for commission of any crime (not merely an offense) but determine the liability of the offender for the breach of his obligations imposed under the Act. They impose a penalty for the breach of the civil obligations laid down under the Act and not impose any sentence for the commission of an offense. An order made by an adjudicating authority under the Act is not that of conviction but determination of the breach of the civil obligation by the offender.
REGULATORY PROVISIONS AND AUTHORITIES
The Prevention of Corruption Act 1988 (PCA) is the primary legislation relating to the prevention of corruption and other connected matters connected. Ancillary legislation, the Benami Transactions (Prohibition) Act 1988, deals with the purchase of property in the name of a person who has not paid the consideration for such property also seeks to curb the generation of black money (that is money earned on the black market), evasion of taxes, and so on.
Additionally, government officials are bound by the relevant service rules that apply to them, such as the Central Civil Services (Conduct) Rules 1964, All India Services (Conduct) Rules 1968 and the Indian Foreign Service (Conduct and Discipline) Rules 1961.
India is a signatory to the following two international conventions which promote developing anti-corruption policies:
1) The United Nations Convention against Corruption (UNCAC) is the most comprehensive anti-corruption convention, which covers a wide-range of corruption offenses, including domestic and foreign bribery, embezzlement, trading in influence, and money laundering. The UNCAC provisions obligate state parties to take several public and private anti-corruption measures.
2) United Nations Convention against Transnational Organised Crime (UNTOC), which mandates that the corruption and the bribing of public officials are criminalized.
India is a party to the trilateral India-Brazil-South Africa Cooperation Agreement which provides for transparency and co-operation between the three nations. India is also a member of the Financial Action Task Force, an inter-governmental body that sets standards and promotes effective implementation of various legal, regulatory and operational measures for combating money laundering, terrorist financing, and similar threats.
OFFENSES
Foreign public officials
There are currently no laws penalizing foreign public officials for bribery.
Domestic public officials
The Prevention of Corruption Act 1988 (PCA) criminalizes the following acts:
1) Taking of gratification by a public servant in respect of an official act other than legal remuneration.
2) Taking gratification by corrupt legal means to influence a public servant.
3) Taking gratification, for the exercise of personal influence with a public servant.
4) Abetting in corrupting or influencing by a public servant.
5) For a public servant, obtaining anything of value, without consideration from any person concerned in any proceeding or business transacted or about to be transacted by such public servant.
6) Criminal misconduct by a public servant. The offense of abetment under the PCA is also an independent, distinct, and substantive offense. Whether or not the offense is committed in consequence of the abetment is irrelevant.
The Supreme Court has held that the quantum of the amount paid as gratification is immaterial and that conviction will ultimately depend on the conduct of the delinquent public official and the proof established by the prosecution regarding the demand and acceptance of such illegal gratification (AB Bhaskara Rao v Inspector of Police, CBI, Visakhapatnam, 2011 (4) KLT (SN) 35 [3]). Even “speed money” and “facilitation payments” are prohibited under the PCA (Som Prakash v State of Delhi, AIR 1974 SC 989 [4]).
Under the service rules applicable to government officials are prohibited from receiving gifts, lavish hospitality, free transport, boarding, or other financial advantages (from persons other than near relatives or personal friends) other than to the extent of certain de minimis amounts set out under the service rules. While the de minimis thresholds may vary depending on the service, cadre, and seniority of the official in question, a violation may result in the initiation of disciplinary action that is independent of prosecutions initiated under the PCA.
PRIVATE COMMERCIAL BRIBERY
At present, there are no regulations relating to private business/commercial bribery.
However, the Supreme Court has held that chairmen, managing directors, and officers of a private banking company will be covered under the definition of ‘public servants’ under the PCA (Central Bureau of Investigation, Bank Securities and Fraud Cell v Ramesh Gelli and Ors. Criminal Appeal No. 1077-1081 of 2013 decided on 23 February 2016 [5]).
REFORM, TRENDS, AND DEVELOPMENTS
The Prevention of Corruption (Amendment) Bill 2013 (PCA Amendment Bill), which is pending before the Indian parliament seeks to introduce the act of bribing a public official as a separate offense. This offense is punishable with imprisonment for a term between three years and seven years and a fine. Under the PCA Amendment Bill, if any person who is associated with a commercial organization offers, promises or gives financial or other advantages to a public servant with the intent of obtaining or retaining business or a business advantage for such commercial organization, such person will be liable to imprisonment and fine in the manner stated previously and the commercial organization will also be liable to a fine.
The Whistle Blowers Protection (Amendment) Bill 2015, which has been passed by the lower house of parliament, has proposed certain amendments to the Whistle Blowers Protection Act 2011 (WPA). The amendment prohibits the reporting of corruption-related disclosures that fall under any of the ten specified categories of information, including:
1) Economic, or scientific interests and the security of India.
2) Cabinet proceedings; intellectual property.
3) Those received in a fiduciary capacity, and so on.
The amendment also makes a provision for reference of public interest disclosure to a government authority if it falls under any of the ten prohibited categories. The decision made by the authority on the matter will be binding.
REFERENCES
[1] IMF, 2001; Ryder, 2011
[2] https://indiankanoon.org/doc/212683/
[3] https://indiankanoon.org/doc/1624404/