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Corporate Criminal Liability - White Collar Crime

A corporation is considered as a separate legal entity distinct from its shareholders. It can be described to imply as an association of persons for some common object and it has no strictly any legal or technical meaning. It is understood that criminal liability is attached where there is violation as per criminal law. The criminal liability of any act is based on the Latin maxim Actus non facit reum mens sit rea which means that to make a person or any entity liable it must be shown that there is an act or omission which is forbidden by law and with mens rea which is legally understood as having guilty mind. It comes under the category of White-collar crimes.

Corporate criminal liability can be defined as a crime which has been committed by individual or association of individuals who for pursuing a common purpose or make business gain in course of their occupation commit such acts or omission which is forbidden by law and with guilty mind where it is for the benefit of the corporation or any individual out of the association of individuals. Earlier in many situations when the concept of holding a corporation liable was not introduced there was not any corporation held liable for any criminal act as the it is an artificial legal person, so it could not be imprisoned, and corporation not being natural person there was absence of mens rea.

When a Corporation is hold criminally liable it not only affects the business of corporation but also the individuals in the corporation who are engaged in criminal conduct it may make them suffer criminally and financially. However, it has been suggested in case of punishment to be imposed on corporation it has been suggested that fine should be imposed rather than imprisonment.

Development of concept of Corporate Criminal Liability-

Corporate crimes are those crimes which are committed by corporations or members of corporations where liability is imposed for performing any acts or omissions which are punishable by law. In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd, where a company was discharged form liability arising out of defamation where there was absence of mens rea which is considered as an implicit requirement under law. In the case of State of Maharashtra v. Syndicate the High court had held that company could not be prosecuted for offences which entail corporeal punishment which entailed corporeal punishment or imprisonment prosecuting a company for such offences would result in trial with verdict of guilty but no effective order could have been implemented. However, in case of Iridium v. Motorola a different viewpoint was held then the above case referred where the Supreme Court held that a company could be held liable for statutory offences as well as common law offences which includes those offences where there is a requirement of mens rea.

However, in earlier times major issues were faced for evolution of concept of corporate criminal liability wherein-
There was a failure to identify presence of mens rea in corporation as there was absence of criminal in tent by corporations who are fictional and artificial legal person in eyes of law,
A Corporation could not be imprisoned or given death punishment which is usually given in criminal law.

As per the Court the accused must be physically present in the proceedings which is not possible in case of corporations as them being artificial legal persons.

However today, the directors or officers are made liable for the acts committed in actual authority to perform in when they direct their subordinates to commit any crime and failed to exercise any due care or supervise their acts which falls under the category of accomplice theory and further this theory also states that due to concept framed of responsible relation that a person will be made criminally liable due to responsible relation found regardless of whether he possessed the knowledge that the act was criminally liable. However, it can be said that apart from being an asset corporation can also be hazardous to the society.

Indian social legislations like the Essential Food commodities Act 1955, The Environment Protection Act,1986, The Negotiable instruments Act,1881 state that along with the corporation also its employees shall be held liable for that offence and if pronounced guilty imprisonment shall be given as punishment to those involved in the crime. In this day of economic progress such principle has assumed importance in corporate governance.

However, there are certain criticisms attached to the Doctrine of Corporate Criminal Liability in which the first one would be Imprisonment and second would be Mens Rea.Whenever certain crimes are committed there is mandatory imprisonment in case of punishing which also includes Companies along with natural persons. In case of Fraud under section 447 there is mandatory punishment of imprisonment wherein companies being an artificial legal person cannot be imprisoned and can be only be punished with fine and not otherwise.

For the Commission of the Crime there has to be requisite Mens rea for committing the Crime, however in case of Companies there is absence of Mens rea to hold a Company liable for crime. The Courts have applied the doctrine of Alter ego in order to hold the companies/corporations liable in case of Mens Rea which is considered as an essential element of Committing a Crime.

The Supreme Court in the case of New York Central and Hudson River Railroad Co. v. United States which was 1909 case first endorsed that since the corporations were held liable for civil cases would also be liable under the criminal law. In the case of Municipal Corporation of Delhi v. J.B Bolting Company (P) Ltd, very interesting question was confronted by the Court wherein the Company can be awarded with punishment of Fine when mandatory punishment is both imprisonment and fine.

Doctrines established in Corporate Criminal Liability-

1.The Doctrine of Vicarious Liability-

Under the Doctrine of Vicarious liability as in law of torts its stated that the Master is vicariously held for the acts committed by the servants. Similarly, in the case of Ranger v. The Great Western Railway Company it was held that the company is held vicariously liable for the acts committed by its employees if it is done in the course of its employment. In the case of Gunston and Tee Ltd v. Ward this doctrine is applicable as same as Respondent Superior was applicable as in civil law, but it does not find in criminal law as in criminal law it states that every person is liable for the acts committed by them and not for acts committed by others.

2.The Doctrine of Identification-

Under the Doctrine of Identification the acts of Corporate officers are identified with that of a company wherein the corporation being a artificial legal person having no physical existence the acts committed or guilt by senior officers in their official capacity, the company shall be held accountable.

3.The Doctrine of Collective Blindness-

Under the Doctrine of collective blindness, courts have held that corporations will be held liable even if single individual was not at fault and considered sum total knowledge of all employees in order to make a corporation liable.

4.The Doctrine of Wilful Blindness-

Under such doctrine if any illegal or criminal act is committed and the corporate agent does not take action or measures to prevent happening of such activities then doctrine of wilful blindness is applicable.

5.The Doctrine of Attribution-

Under the Doctrine of attribution, as in case of sentencing or imprisonment in event of act or omission leading to violation of criminal law, the mens rea i.e. the guilty mind is attributed towards the directing mind and will of the corporations. This doctrine is being used in India however this doctrine was developed in United Kingdom.

6. The Doctrine of Alter Ego-

Under the Doctrine of Alter Ego, it is described as someone’s personality which is not seen by others. The owners and persons who manage the affairs of the Company are considered as the Alter Ego of the Company. The Directors and other persons who mange the affairs of the company can be held liable for the acts committed by or on 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. However, it has always been relied that the principle of Alter ego has been acted in reverse so the acts of individuals who are managing the affairs of the Company are attributed to the Company and not vice-versa.

Models of Corporate Criminal Liability-
The models under the Corporate Criminal Liability are as follows-

1.The Identification Doctrine-

It is an English law Doctrine wherein it tries to identify that certain persons who acts on behalf of corporation and whose directing mind and conduct can be attributed to the corporation. The liability of these persons where the persons acting on behalf of corporation is limited to the scope of them working in employment or authority.

2.The Organizational Model-

In terms of criminal cases model of corporate criminal liability in India focuses on organizing model while defining the corporate criminal liability of an organization. The Corporate culture may provide an environment for which will lead to Commission of Crime.

3.The Derivative Model-

The liability of an organization is derived liability in terms of Corporate Criminal liability wherein the liability is put on the organisation because the individuals who commit the crime are in connection with the organization.

Concept of corporate criminal liability in India-

Until the concept of corporate criminal liability was established, Courts in India did not punish corporations as they felt that essential ingredient ie. Mens rea is absent in corporation it being a fictitious legal entity having no physical existence so also could not be brought physically for the proceedings. However due to such concept many legal difficulties started arising which was noticed by the Law Commission in its 41st report of Law Commission of India where amendment was suggested in section 62 of the IPC but the bill which was made was lapsed but the view of Courts in terms with this concept changed in a landmark case of Standard Chartered Bank and Ors. v. Directorate of Enforcement , the bank was prosecuted for violation of provisions of the Foreign Exchange Regulation Act ,1973 where the Supreme Court did not go by the strict penal provisions and held that a corporation can be held liable regardless of the mandatory punishment as under the statue.

When a corporation is held criminally liable, the criminal conduct of employees may make them suffer criminally and financially. Everyone in the corporate entity is held liable be its officers, directors and even corporation where the penalties include civil penalties, criminal penalties, loss of government contracts, permanent or temporary loss of deposit insurance, conservatorship etc.

In the case of Assistant Commissioner v. Velliappa Textiles Ltd, it was held that the corporations cannot be imprisoned as they cannot be punished and prosecuted under IPC which directs imprisonment. The concept of corporate criminal liability has been established under the Companies Act. The liability of Directors under the Companies Act 2013 has been increased which has replaced the Companies Act 1956.Under the Companies Act 2013 it holds not only the Directors liable but also include the officer in default wherein it includes in broad framework a whole-time director, key managerial personnel and such other officers in absence of KMP who have been specified by the Board of directors and every other director who has information related to it or has participated to be part of that act without raising the objection under the concept of corporate criminal liability in India.

The concept of Corporate Criminal Liability has been recognised under the Companies Act 2013 under-

Section 53-Prohibition of shares at a discount.
Section 118(12)-Minutes of proceedings of General Meeting, Meeting of Board of Directors and other meetings and resolutions passed by Postal Ballot.
Section 128(6)-Books of Account, etc, to be kept by Company.
Section 129(7)- Financial Statement.
Section 134- Financial Statement, Boards report, etc.
Section 188(5)- Related Party transactions.
Section 57-Punishment for personation of Shareholder.
Section 58(6)- Refusal for registration and appeal against refusal.
Section 182(4)- Prohibitions and restrictions regarding Political Contributions.
Section 184(4)- Disclosure of Interest by Director.
Section 187(4)- Investments of the Company to be held in own name.
Section 447- Punishment for fraud.

Section 21 in the Transplantation of Human Organs Act 1994 states about Offences by Companies as-

(1). Where any offence, punishable under this Act, 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: Provided that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2). Notwithstanding anything contained in sub-section (1), where any offence punishable under this Act has been committed by a company and it is proved that the offence has been committed 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 offence and shall be liable to be proceeded against and punished accordingly.

Explanation: For the purposes of this section:
(a) “Company” means any body corporate and includes a firm or other association of individuals.

As per Section 66 of the Food and Safety Standard Act 2006 offences by Companies:

(l) Where an offence under this Act which 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.

Provided that where a company has different establishments or branches or different units in any establishment or branch, the concerned Head or the person in-charge of such establishment, branch, unit nominated by the company as responsible for food safety shall be liable for contravention in respect of such establishment, branch or unit.
Provided further that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence. (2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed 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 offence and shall be liable to be proceeded against and punished accordingly. Explanation. -For the purpose of this section, - (a) “company” means anybody corporate and includes a firm or other association of individuals.

As per section 305 of the Code of Criminal Procedure mentions Procedure when corporation or registered society is an accused.-

(1) In this section, Corporation means an incorporated company or other body corporate, and includes a society registered under the Societies Registration Act, 1860 (21 of 1860).

(2) Where a corporation is the accused person or one of the accused persons in an inquiry or trial, it may appoint a representative for the purpose of the inquiry or trial and such appointment need not be under the seal of the corporation.

(3) Where a representative of a corporation appears, any requirement of this Code that anything shall be done in the presence of the accused or shall be read or stated or explained to the accused, shall be construed as a requirement that that thing shall be done in the presence of the representative or read or stated or explained to the representative, and any requirement that the accused shall be examined shall be construed as a requirement that the representative shall be examined.

(4) Where a representative of a corporation does not appear, any such requirement as is referred to in subsection (3) shall not apply.

(5) Where a statement in writing purporting to be signed by the managing director of the corporation or by any person (by whatever name called) having, or being one of the persons having the management of the affairs of the corporation to the effect that the person named in the statement has been appointed as the representative of the corporation for the purposes of this section, is filed, the Court shall, unless the contrary is proved, presume that such person has been so appointed.

(6) If a question arises as to whether any person, appearing as the representative of a corporation in an inquiry or trial before a Court is or is not such representative, the question shall be determined by the Court.

As per the Section 38 of the NDPS Act,1985 mentions Offences by Companies-

(1) Where an offence under Chapter V 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.

Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to Prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where any offence under Chapter IV has been committed by a company and it is Proved that the offence has been committed 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 of other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation-For the purposes of this section, - (a) "Company" means any body corporate and includes a firm or other association of individuals.

The corporation can be held criminally responsible for a variety of Crimes namely-

a. Conspiracy.
b. Maintaining public nuisance.
c. Violations of Consumer Protection laws.
d. The illegal practice of Medicine.
e. Antitrust laws Violations.

As per the P C Amendment Act Bill 2013, Section 9(1)- A commercial organisation shall be guilty of an offence and shall be punishable with fine, if any person associated with the commercial organisation offers, promises or gives a financial or other advantage to a public servant intending- (a) to obtain or retain business for such commercial organisation; and (b) to obtain or retain an advantage in the conduct of business for such commercial organisation: Provided that it shall be a defence for the commercial organisation to prove that it had in place adequate procedures designed to prevent persons associated with it from undertaking such conduct.

(2) For the purposes of this section, a person offers, promises or gives a financial or other advantage to a public servant if, and only if, such person is, or would be, guilty of an offence under section 8, whether or not the person has been prosecuted for such an offence. (3) For the purposes of section 8 and this section, - (a) "commercial organisation" means-
(i) a body which is incorporated in India and which carries on a business, whether in India or outside India;

(ii) any other body which is incorporated outside India and which carries on a business, or part of a business, in any part of India;

(iii) a partnership firm or any association of persons formed in India and which carries on a business (whether in India or outside India); or

(iv) any other partnership or association of persons which is formed outside India and which carries on a business, or part of a business, in any part of India;
(b) "business" includes a trade or profession or providing service including charitable service;
(c) a person is said to be associated with the commercial organisation if, disregarding any offer, promise or giving a financial or other advantage which constitutes offence under sub-section (1), such person is a person who performs services for or on behalf of the commercial organisation. Explanation 1. -The capacity in which the person performs services for or on behalf of the commercial organisation shall not matter irrespective of whether such person is employee or agent or subsidiary of such commercial organisation.

Explanation 2. -Whether or not the person is a person who performs services for or on behalf of the commercial organisation is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between such person and the commercial organisation.

Explanation 3. -If the person is an employee of the commercial organisation, it shall be presumed unless the contrary is proved that such person is a person who performs services for or on behalf of the commercial organisation.

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offence under section 8 and this section shall be cognizable.

Section 10 (1)- Where a commercial organisation has been guilty of an offence under section 9, every person who at the time the offence was committed was in charge of, and was responsible to, the commercial organisation for the conduct of the business of the commercial organisation shall be deemed to be guilty of the offence and shall be punishable with imprisonment which shall not be less than three years but which may extend to seven years and shall also be liable to fine Provided that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he has exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under section 9 has been committed by a commercial organisation and it is proved that the offence has been committed 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 commercial organisation, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly under this section.

Explanation.-For the purposes of this section, "director", in relation to a firm, means a partner in the firm.

Corporate Culture-

It is the one which comprises of corporate ethics and rules relating to behaviour in a Company. The corporate culture is the one wherein the Culture of the Company depends from organization to organization. It is the beliefs and attitudes which guides the practices of the Company. It can also be termed as the organizational culture.

There are six components of a great corporate culture which can be explained as follows-
1.Vision- One of the components of the great corporate culture is to have a good vision and have a vision or mission statement. It is simple and is considered as foundation element.

2.Values-It is one such element which provides guidelines on the pattern of behaviour to achieve the vision or mission set by the Corporation. Originality of values are to be considered less important than authenticity.

3.Practice – The values which are set by the corporation need to be practised and the company needs to practice what it professes.

4.People – One of the most important elements is people wherein if people follow the culture which has been set by the organization it adds to the value structure of that organization. Stringent policies are been followed by the recruiting firms.

5.Narrative -It has been considered as the core element of the Culture Creation wherein every organisation has a unique story and a unique history.

6.Place -Place has been considered as the one which shapes the culture. Place in terms of architecture or Aesthetic design determines the Behaviour and mindset of the people at workplace and the workplace as a whole.
These six components provide for a foundation for shaping the culture of a new organization. When a Company is looking for a change the first step is to identify and understand them carefully when in the existing organization.

Concept of Corporate criminal liability in other Countries-

a) United States of America (USA)-

Earlier in the USA the corporations were considered as a fictitious legal entity and the Mens Rea required to commit a crime was absent in corporations so they weren’t held criminally liable but this notion was changed and however in the present scenario although the federal statues may apply but they cannot overrule the sate laws in case where it overlaps with state laws and hence a Corporation can be prosecuted for both Federal and State laws. The punishment given under the laws of this country is that there is punishment by fine or confiscate Property which can be levied by the orders of the Court. Generally, when there is violation of a Statue the punishment is either fine or imprisonment or both as per the Courts order but it does it applies to corporation as well and the rule applies that if fine is not paid then punishment of imprisonment can be given.

b) Switzerland-

The concept of Corporate Criminal liability in Switzerland was introduced in the late of 2003 where it was based on the subsidiary liability which stated that corporations can be held liable when fault cannot be attributed to a specific individual due to lack of organisation within the enterprise and also the Criminal fines range upto five Swiss francs.

c) France-

The concept of Corporate Criminal liability was codified in French law under Article 121-2 of the new French Penal code. According to the law in this country there are three requirements which need to be fulfilled in order to impose a liability on a legal entity. The first requirement is that French legislature must have enacted a substantive criminal offence which the corporation must have contravened, the second requirement being that the actual criminal liability must lie with the agents or representatives of that corporation on which liability of corporate criminal liability will be imposed. The third requirement is that the acts which are criminal in nature and criminal liability can be imposed must be for the benefit of the Corporation. It provides a list Statutory Criminal Liability.

d) Germany-

In present situation in Germany companies cannot be held liable as per the German Law but those individuals who commit crime can be held accountable for their actions even if those actions are for Company’s benefit however fines can be imposed on companies under the Administrative offences Act. In order to make a company to hold liable the individuals who commit the criminal or administrative offence must belong to the person mentioned in the group of persons under section 30 para 1 OWiG.

e) Japan-

In Japan there is a provision of known as dual criminal liability provision wherein the Company as well as the business operator and the perpetrator can be held liable and this provision was introduced in the Act which is the Prevention of Capital Outflow in the year 1932.A company will be held liable when the crime is committed not only by the Senior Executives but also any of the employees of the Company however the company will not be held liable in case the crime has been committed by the Act of Third parties.

f) Russia-

In Russia the liability of a Company is either Civil or Administrative in case it commits illegal conduct as there is no concept of criminal liability for companies which exists in case of individuals. In this country under their administrative legislation Company is considered as a separate legal entity and may commit acts known as the Administrative offences.

g) UK-

The EU General Data Protection Regulation along with the UK Legislation is set to introduce new criminal offences for corporates which will not be relied on the basis of identification principle where prosecutions will be in instances of cyber crime and misuse/manipulation of personal data.

Conclusion-
The 47th Law Commission Report has recommended various solutions to deal with Corporate criminal liability namely that the judges should have the discretionary powers to impose penalties as it deems fit to them. In case of a corporation it would be competent enough if it is a corporation to sentence the offender with fine only rather than imprisonment and fine or only imprisonment. However, the legislatures have ignored this recommendation by the Law Commission and failed to incorporate any of this due to which it has become difficult for courts to punish the offenders. It is to be noted that corporate criminal liability can arise from various circumstances.

The corporate scandals is having a bad effect in India. However, with the growth and developments which take place in India the corporations are not made criminally liable and if punishments are given then no other than except fines are to be imposed.

There is a need to attach the significance of Corporate Culture in both formal and informal polices, in rules and practices wherein the corporation is considered as a conduct element of offence which has been committed by it when their cause was encouraged by the culture of Corporation. Through this concept it becomes possible for a corporation in cases where there is no involvement of individual in committing an offence.

The existing standards in terms of assessing the Corporate Criminal liability has often been criticized and has also been termed unrealistic, inconsistent with the fundamentals of the criminal laws. In terms of corporate context in order to deter crimes the state should induce the firms to take policing measures. In case of professional assessment of the corporation, the court should have the power to appoint suitable person or persons to prepare report on corporation. When a corporation is sentenced in addition to imposing a fine or instead of imposing a fine it should make one or more orders in such a way that it considers that it will achieve the objectives of sentencing. Stricter punishments need to be imposed like corporate dissolution wherein the courts will be able to see whether any reincorporation can happen in cases where there is penalized corporate.

Nowadays the concept of Sustainable Development which is professed by the Government has substantially failed in its efforts to control such crimes affecting largely the society.

Writteb by: Kumar Saurav and Krupa Savajiyani

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