Corporate Fraud and Corporate Criminal Liability
Rather fail with Honor than Succeed by Fraud-Sophocies
A business is a distinct legal entity set up by a statute or registration
process. They are separate from their shareholders' rights and liabilities. Some
of these firms have properties and services, and they are known as multinational
companies ( MNCs), in several countries aside from their own countries. In most
facets of human life today multinational firms have come to play a huge role. In
the last few centuries, their power has grown at an amazing rate, so much so
that it is often compared to whole nations.
It is therefore of paramount importance that we implement some form of
accountability and regulation of these multinationals and corporations and
should be high on each nation's priority list. In terms of laymen, the doctrine
of criminal corporate accountability is simply the doctrine of superior
respondeat imported from tort law into criminal law.
This doctrine says that, provided these agents act in the sense of their
existing or apparent authority, an organization can be made criminally liable
and convicted of illegal actions of any of its agents. The apparent authority is
an authority that can be deduced from an agent by an ordinary rational citizen,
while the real authority is an authority wholly delegated to its agent or
employee by a company.
For simplification, the company would be held criminally responsible for the
actions of the employee if the reasonable relationship between his or her
criminal activity and his or her corporate duties can be identified.
What is a Corporation?A business is treated as a separate legal body distinct from its owners. It can
be defined as an association of individuals for a common object and has no
strict legal or technical significance. In the case of offenses pursuant to
criminal law, it is recognized that criminal liability is attached. The criminal
responsibility of any act is based on the Latin maxim �Actus non facit reum mens
sit rea�, which implies that it should be shown that an act or omission is
prohibited by law and by mens rea, which is interpreted legally as possessing a
guilty mind, for the purpose of making a person or any individual responsible.
What is Corporate Fraud?The Black Law Dictionary describes fraud as: "All the various means that human
naivety can think of, and which an individual can use to obtain an advantage
over an individual by manipulating or suppressing the facts. Both surprises,
tricks, riddles, or dissembling, and all unfairness are part of it.
What is Corporate Criminal Liability?Corporate criminal liability may be regarded as a crime committed by individuals
or associations of persons who perform certain actions or omissions which are
prohibited by law or in guilty minds, for the sake of the organization or of any
entity from an association of persons for the purpose of achieving their common
purpose of obtaining business during their work. In certain cases historically,
in which the principle of holding a company accountable was not implemented, no
company had been held responsible for any illegal activities as an artificial
legal person so it could not be detained.
In criminal law, corporate responsibility defines the extent to which the
actions and omissions of the natural persons it hires can be liable to a
corporation as a legal entity. It is often considered to be an aspect of
criminal vicarious liability, as distinct from the case in which the wording of
a statutory crime expressly imposes liability on the company as the principal or
joint principal with a human agent.
The Doctrines established under Criminal Liability
The Doctrine of Vicarious LiabilityThe accused is responsible for the crime of another person in Vicarious
liability. The theory of Respondeat Superior is based on that doctrine, which
implies that the master responds or answers. This doctrine is applicable to
criminal offenses as well as to the responsibility of companies and fines for
property seizure. It has also been concluded that the company is vicariously
responsible for actions performed by its employee as it conducts in the course
of its job, with Ranger vs. the major western railway company 4 De
G & J 74. The act and intention of the employee must be credited to the company
for vicarious liability and should be done in the course of the job.
The Doctrine of IdentificationIt needs organizations to take responsibility instead of the individuals
enforcing those policies for the people with decision-making authority. The
doctrine focuses on the reality that the company's purpose and behavior is the
product of the company's employees. Detection of the culprit is the fundamental
premise of this theory.
The Doctrine of Collective Blindness
Under the Collective Blindness doctrine, courts held that firms are liable even
though no one was guilty and deemed the cumulative amount of information of each
employee, so that a company may be held liable.
The Doctrine of Willfulness BlindnessAccording to that doctrine, the doctrine of intentional blindness is valid when
any unlawful or criminal act is performed and the corporate agent takes no steps
or measures to deter certain activities.
The Doctrine of Attribution
The theory of attribution means that mens rea, i.e. the guilty conscience, is
assigned to the mind and resolve of companies, in the case of a penalty or
incarceration in the event of an act or omission that leads to breach of the
criminal law. In India, this doctrine is used but in the United Kingdom, it was
The Doctrine of Alter EgoUnder this doctrine of Alter Ego, it is described as someone's personality which
is not seen by others. The owners and persons who manage the company are
considered as the Alter Ego of the company. The directors and other persons who
manage the affairs of the company can be held liable for the acts committed by
or on the behalf of the company under this doctrine since the corporation has no
mind, body, or soul so the people are the directing mind and will.
Legal Position in India:In the Indian Penal Code there are offenses that define offenses of a serious
nature in which, according to a corporate body, the penalty prescribed is an
obligatory prison term. The corporation was considered liable to be fined and
prosecuted for offenses in the case of Standard Chartered Bank vs.
Directorate of Regulation, In cases where a custodial sentence is required,
the Supreme Court rejected the notion that the corporation should escape
The Court can not impose the punishment because the company can not be sentenced
to jail, but the court may punish the company by imposing a penalty of fines
that could be imposed. Aneeta Hada vs. Godfather Travels and Tours Pvt. Ltd,
[2012 5 (SCC 661)]. The dispute was in this instance related to the
determination of corporate responsibility in a search dishonor, In the case of a
corporation, the Supreme Court questioned the extent of assignment liability.
As a legal person, the corporation is responsible for other people's conduct.
The Supreme Court ruled that in all jurisdictions around the globe regulated by
the rule of law corporations and company corporations can not claim further
protection from criminal prosecutions because they are unable to keep men rea in
other cases of Iridium India Telecom Ltd vs. Motorola Inc.[(2011) 1 SCC
In the Indian Penal Code, 1860, "Fraudulent" is described in section 25
of the IPC as "If a person does this in a fraudulent way but does not do so."
Section 420 describes cheat and fraud when any property or a valuable part of
safety is delivered. It also stipulates the sentence as a term of seven years
and is also liable to be fined.
In the Code of Criminal Procedure 1973, The procedural element of all such laws
is described in CrPC, although substantive legislation can be expressed in
different statuses (Company Law, 1956, IPC, Prevention of Food Adulteration
Act). The CrPC complies with the trial of offenses under these laws.
Article 4 of the CrPC states that the CrPC shall review and prosecute all crimes
pursuant to the IPC and other rules and that they shall also be subject to
legislation at this time.
There are other legislations also which regulate the activities of the
corporations like the Companies Act, 2013, The Factories Act, 1948, The
Information Technology Act, 2000, etc. but still, we need separate legislation
to regulate the activities of the corporations and also to prevent these
Fraudulent activities from happening in the future.
Major Corporates Frauds in India
Mundhra Scam 1958:�Life Insurance Corporation of India vs Hari Das Mundhra and Ors.�
This was one of Independent India's first big scandals. The trial in this case
led to the accused's conviction, i.e. HaridasMundhra. Mundhra. The defendant was
a businessman who sold forged shares to the Indian Life Company, causing the LIC
to lose 125 crores of rupees. In order to investigate this matter, the Prime
Minister formed a commission led by Justice Chagla. Ultimately, Haridas was
convicted and sentenced to 22 years in jail.
Satyam Scam 2009:M/S. Satyam Computer Services Limited vs. Directorate Of Enforcement,
Government of India
Computers Satyam was a leading IT company in the industry. The charges against
him showed reservations of the case which have proven fake in the courtroom. The
statements and balances were drafted. The company's revenue was found to be fake
and its share price rose, attracting investors to the company. After this scam,
the lawmakers thought that fraud was one of the greatest in history and the need
for stronger regulations.
Ketan Parekh Scam 2001:Ketan Parekh vs Securities and Exchange Board Of India
The 12000 crore scam was an investment scam where the convict converted bank
money into the market and invested a large amount of it in a number of
companies. Parekh was immediately arrested and sentenced to a year's stringent
detention after a trial.
Sharda Chit Fund Scam 2013:After a multi agencies survey by the CBI, Income Tax Department, the Government
of Bengal declared a commission headed by Justice Shyamal Sen. Sudipta Sen has
been convicted by the jury following a suit in the Supreme Court and was
sentenced to a sentence for imprisonment in the case of small and low-income
investors. This fraud headed them to invest in a chit fund, a promising large
India has been inundated with different Ponzi schemes that profit unsuspecting
investors in search of alternative banking options. Little Indians also rely
upon informal banking for lack of access to formal banks. These informal banks
consist inevitably of moneylenders charging interest at inflated rates and are
soon replaced in more advanced forms by veiled Ponzi schemes.
The fundraising process is carried out by legitimate activities such as joint
investment schemes, non-transparent debentures and desires, and fraudulent
financial fraud instruments such as building and tourism fictitious
undertakings. There are numerous causes of the rapid proliferation of Ponzi
schemes, in particular, in North India, including a lack of knowledge about
banking standards, continuously dropping interest rates, a scarcity of legal
proceedings, and protection of patronage.
The Saradha Group's Ponzi scheme has earned investors ' money through the
issuance of redeemable bonds, secured bonds, and promising amazing returns.
Local agents in the entire state of West Bengal were hired and massive investor
deposit cash payments were given to grow rapidly and eventually to create a
conglomerate of over 200 businesses.
This union has used money laundering and regulators such as SEBI. In the month
of April 2013, a system totally collapsed and many of its low-income investors
went bankrupt and lost about the US $5 billion.
In the group's events, SEBI first noticed anything odd in 2009. It called into
question Saradha because the company had not complied with the Indian Companies
Act, which includes a formal prospectus and categorical authorizations of SEBI,
the market regulator, to any company raising capital from more than 50
investors. In expanding the number of firms, the Saradha Party tried to evade
prosecution to build a complex network of interconnected players.
This caused countless problems for SEBI, which worked despite them to
investigate Saradha. In 2012, Saradha decided to turn it on using various
fund-raising practices, such as Collective Investment Schemes (CIS) disguised as
packages for travel, real estate ventures, and so forth. Many investors were
duped into investing in a chit fund. This too was an effort to abolish SEBI
because chit funds are the responsibility of the state administration, not SEBI.
Nevertheless, SEBI managed to ascertain that the group was not actually raised
by chit funds and directed Saradha to stop its activities immediately until it
had been approved by SEBI. SEBI previously warned the West Bengal State
government about the hoax chit fund activities of the Saradha Party in 2011 but
without profit. SEBI was largely ignored by the government and Saradha until the
firm eventually came to power in 2013.
Following the collapse of the scandal, the Organization was investigated by the
Investigative Commission and a low-income covered relief fund of around USD 90
million. In 2014, in the course of charges of political inference to the state
inquiry, the Supreme Court transferred all inquiries into the Saradha case to
the Central Bureau of Investigation ( CBI).
5. Sahara Group (Case Study)The two parties have been engaged in an aggressive regulatory dispute ever since
2009 when the Sahara Group was first put within the SEBI radar leading to Sahara
India's Pariwar member, Subrata Roy, arrested in 2014. SEBI submitted that the
option of full convertible debentures (OFCD) has been collected illicitly by the
Sahara India Immobilien Corp (SIRECL) and the Sahara Housing Investments Corp
Ltd (SHICL). Meanwhile, Sahara denied the competence of SEBI to do so.
The Sahara has also been ordered by SEBI, before the Securities Appellate
Tribunal (SAT), to provide full reimbursement to its investors. In August 2012,
SAT upheld SEBI 's order and the Sahara demanded that the Sahara repay the SEBI
by depositing it with the Supreme Court. Sahara then said it already paid back
much of the US $3.9 billion to investors, saving US$ 840 million for a small sum
it handed over to SEBI. SEBI denied this, arguing that the details of reimbursed
investors were not given. The Supreme Court of India released in February of
2014 an arrest warrant for the Sahara Chief when Sahara did not deposit the rest
with SEBI and Subrata Roy missed his hearings.
Sahara vehemently rejected all charges and kept defying SEBI, despite
allegations of black cash laundering and the abuse of political links. It
continued through the so-called "ridiculous game of the mouse" by the Supreme
Court and eventually succeeded in pinning down Sahara's Chief of Staff Subrata
Roy in 2014. SEBI brought Sahara to justice in this unusual win, but also made
an excellent case why the regulator, and other parties like this, require
increased autonomy and punishment.
Early Corporate Fraud Identification and PreventionThe completion of financial and financial control systems loopholes and the
streamlining of funds and credit flows can be a successful technique for
financial fraud prevention. Different frauds occur because the law is
manipulated which leads to false profits for the fraudster. The possibilities of
fraud are avoided by routine training, data controls, and other checks and
Various measures through which we can prevent corporates frauds are:Effective Corporate Governance
Management levels in an organization play various tasks and have a say in the
company's plans and strategies. These managers will work to battle fraud through
the inspiration and ethical training of their subordinates. Failure to regulate
companies would lead to an increase in financial statement fraud.
Internal and External AuditAn organization conducts many financial transactions every day, the corporate
internal audit department is the first entity that can perceive fraud. Deloitte
found that 53% of cases of fraud have been detected by internal audit. Companies
can track their activities routinely by means of internal audits to detect any
system loophole which could lead to fraud. External audits refer to thorough
checks made either by a governmental external entity or by a private company,
while external audits detect very few frauds, and can be audited to indicate an
abnormality in the internal audit.
A corporation has many companies (clients, shareholders, etc.) dealing with it.
It can be beneficial to report any suspected fraud or any other fraud.
A business can commit fraud in different ways, such as account manipulation and
the production of false monetary information. As an organization, business is of
great significance to a country's economic growth because it generates large
quantities of employment and revenue. Corporate fraud, on the other hand, will
make the economy worse and frighten investors. In order to make the corporate
output ethically possible, there should also be some legislation and obligations
resulting from the violation of this legislation.
The question of whether a fine or an imprisonment fine should be levied in the
case of an offense is contentious. The 47th report of the Law Commission
recommended that the judges have discretionary authority to act against
corporate fraud and that they decide on their own penalties.
The laws regulating it must also be dynamic, the modifications to company laws
and other regulations of the same sector are bound to occur periodically, as its
features continue to change, so as to accommodate changes in the economic
structure. Corporate enterprises are a vital component of the economy and
regulation that encourages ethical growth must be dealt with.
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