Keywords: Corporate Criminal Liability, Corporate Frauds, Scams, Crime, Corporations.

INTRODUCTION:

Non-natural persons, like companies, charities and local authorities, can commit criminal offences. Numerous of these crimes are related to regulatory offences such as breaches of environmental or trading regulations which are frequently created with corporations in mind. However, corporations are also competent in committing severe criminal offences which include manslaughter or fraud. They may also be accessories to crimes which can only be committed by natural persons – for instance by encouraging or carrying the commission of an offence. Applying criminal law to corporations can give rise to difficulties. The first complexity is that companies do not “act” except through other people – their directors, managers, employees and agents. The second is that while some offences are created alone or basically with corporations in mind, most criminal offences were created originally or primarily with natural persons in mind, and often include a mental element that is presumed on the actor having a single “mind”. These complications give rise to a series of allied questions. Whose acts should enumerate as the acts of the company? For whose act should the company be criminally liable? How should elements which the criminal law treats as essential to liability – like intent, recklessness, knowledge and dishonesty – be applied to non-natural persons?

Let us find out the answer to the following questions.

CONCEPT OF CORPORATE CRIMINAL LIABILITY

 A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings – Glanville Williams

 Corporations are becoming an integral part of our society, and with the expansion of corporations they have grown as a significant factor in our economy, our society runs the risk of getting victimized by these corporations. The conception of corporate criminal liability is grounded on the doctrine of “respondent superior”. Respondent superior in general terms means that a corporation can be held liable for the acts of its employees and agents working out for the corporation. Other than this section 11 of the Indian Penal Code,1860 defines a person and reads as “the word person includes any company or Association or a body of persons, whether it is incorporated or not”. This states that corporations do have their own identity, they do have separate legal personalities and corporations are different from their members, and this is sufficient to make them held liable. However, the corporations can be held liable for the conduct of the agent, If there is any connection between the criminal acts of the agent and his corresponding corporate duties. For levying the criminal liability on the corporation it becomes mandatory and essential that the act of the employee is committed to incur advantage to the corporation directly or indirectly and in an annexe, to this, the corporation can be criminally liable if it was found that the act was committed to draw some personal benefit but it also ended up serving the corporation as well.

Besides this, the doctrine of corporate criminal liability has faced numerous major issues throughout the period. Firstly, the default to prove or identify the criminal intention of the agent or the employee, as it is important to find the mens rea for the commission of the criminal act to be proved as a corporation is a separate legal identity. Secondly, during the court proceedings, the courts required the accused to be physically present in the court, but this was not possible in the case of a corporation. Thirdly, and the most faced issue is that in the case of corporate criminal liability is of Sanction that is a corporation cannot be imprisoned or put to death. Thus, the fear of imprisonment which plays a major role in criminal law cannot be enforced in the case of corporations. There are a few requisites which are necessary to be established before criminal liability can be imposed on a corporation or any other kind of legal entity.

REQUIREMENTS FOR ESTABLISHING CORPORATE CRIMINAL LIABILITY

1. Act within the scope of employment

For corporate criminal liability to arise there are certain requirements which need to be fulfilled. One of the main requirements is that the employee accomplishing the offence must be acting within the scope of employment. This states that there must be a master and servant relationship between them which creates a vicarious liability and he must be doing the duties which are vested to them by their parent company.

This ticket was sold, not by either Mr Shah or Mrs Shah, but by their employee Mr Hob day. Unfortunately, but inevitably, his offence was, at once, their offence, given the principles of vicarious liability as explained in Mousell Bros Ltd v London and North-Western Railway Co3.

• Benefit to the corporation

 The alternate requirement which is required is that the corporation should have entered any benefit out of the act of the employee or the agent for a corporate criminal liability to arise. However It is not needed that the company must have received any benefit, the only requirement is that the act is done by the employee or the agent for benefitting the corporation.

There are various methods through which corporations can be held liable is the collective and wilful blindness doctrine. In the Collective blindness doctrine, it is not mandatory that a person can be made liable for the act benefitting the corporation, there can be a group of people made liable for the act, establishing that each person in the group knows totality. Whereas in the wilful blindness doctrine, the corporation is in the knowledge of the illegal practices but they turned a blind eye towards them, if this is the case the employee along with agents will be liable for the illegal practices. Rest from this the employees along with agents can be held liable for conspiracy together in corporate criminal liability.

THE JURISDICTIONAL EVOLUTION

The controversy on criminal liability of corporations in India started with the Supreme Court’s decision in Standard Chartered Bank v. Directorate of Enforcement. In this case, the Court held that corporations could be prosecuted and convicted for an offence or crime which set out a mandatory sentence of imprisonment and a fine. This judgment also cleared that in cases where the offence assessed both imprisonment and fine, the court would be authorised to apply only the fine in cases where the impugned party was a corporation. This marked a convergence from the established line of precedents where courts refused to convict corporations for crimes and decide to impose only the fine and not mandatory imprisonment.

 After Six years, in Iridium India Telecom Ltd. v. Motorola Inc., the Supreme Court for the first time laid mens rea to Indian corporations. In Iridium a company was charged with cheating and criminal conspiracy, based on alleged false representations framed by the company in its prospectus in linkage with the offering of securities to the public. The Supreme Court in this case held that a corporation is in the same position as any person and may be convicted under common law, as well as for statutory offences, including those bearing mens rea. Iridium judgment held that when an offence is committed about the business of the corporation by a person or body of persons a corporation would be held criminally liable in control of its affairs. However, the Supreme Court noted that

In such circumstances, it is material to ascertain to discover that the degree and control of the person or persons are so deep to the point that a corporation might be said to think and act through the person or the body of persons.

TYPES OF CORPORATE FRAUD

Many types of corporate fraud can be committed by different means. However, the most common types of corporate fraud amongst them are employee fraud, Financial fraud, customer fraud, Misappropriation of Assets, vendor fraud and investment scams.

Other types of fraud are related to bribery, corruption, payment, false accounting, fraudulent expense claims, false employment credentials, information, insolvency and bankruptcy-related frauds, procurement, theft of cash, physical assets or confidential information, misuse of accounts, procurement fraud, payroll fraud, financial accounting misstatements, inappropriate journal vouchers and suspense accounting fraud.

PENALTIES UNDER VARIOUS STATUTES

Section 447 of the Companies Act 2013 states the punishment for fraud which ranges from 6 months to 10 years along with a fine and which may extend to three times the amount involved in fraud. Section 36 of the above-mentioned act is also important in that account which prescribes punishment for fraudulently inducing or getting persons to invest money. Along with these, Sections 448-451 and 454 of the said act also deal with various penalties and punishments related to corporate fraud.

Under the Prevention of Money Laundering Act 2012, where punishment is extended to imprisonment from 3 to 7 years and with a fine of up to 5 lakh rupees.

Section 66F (Acts of Terrorism) of the Information Technology Act 2002 punishment is extended to be up to life imprisonment which endangers the security, unity, integrity, and sovereignty of India by rejecting access to authorized personnel to a computer resource or if tries to enter a protected system or introduces any contamination into a system. 

Other regulatory legislations which provide punishment are the Prevention of Corruption Act 2013, Indian Penal Code 1860,  Indian Contract Act 1872, Information Technology Act 2008 and Prohibition of Insider Trading.

FAMOUS CASES OF CORPORATE FRAUD

East Indian Company

The East India Company was possessed privately but had the authorization to benefit the British State commercially and politically. First and foremost, the EIC was a representative of the Crown. 

It was the first Multinational Corporation in the world that ran investment opportunities as well as territorial power. EIC workers based in India sought marketable gains for themselves, the Crown, and East India House while they get Indian Territory aggressively on behalf of the Empire. In the late 1700s, Edmund Burke had Robert Clive and Warren Hastings brought up on impeachment charges with corruption issues. But the trial failed to convict anybody.

The EIC’s corporate act was inconsistent. On some occasions, the Company complied with ethical practices in safety and financial matters. But At other times it engaged in economic theft and bribes or breached human rights and civil liberties. The company was latterly wound up under the East India Company Stock Redemption Act.

Mundhra Scam- First Scam of Independent India

Haridas Mundhra who was a stock speculator and industrialist sold fictitious shares to Life Insurance Corporation (LIC) and after that defrauded LIC by 125 crores. Mr Jawahar Lal Nehru set up a one-man commission headed by Justice Chagla to Investigate the matter. Justice Chagla found Haridas guilty and he was sentenced to imprisonment of 22 years. T.T. Krishnamachari who was the then Finance Minister resigned from his position.

Enron Scam 

Enron Corporation was an American energy company which was based in Houston. The Enron scandal, publicized in October 2001, ultimately lead to the bankruptcy of the Enron Corporation and the De-Facto dissolution of Arthur Andersen.

• In February 2000, Enron was chosen as its “Best Managed and Most Innovative Company” in Fortune magazine.
• August 2000: Stock at $73 Billion.
• March 2001: Financial Year 2000 earnings at $100 Billion.
• September 16, 2001: Enron buys further shares.
• October 2001: Enron pays its regular Dividend.
• October 16, 2001: 3^rd quarter loss was shown as $618 million and a deduction of $1.2 billion in equity shares was made.
• October 31, 2001: SEC inquiry into a formal investigation.
• December 2, 2001: Enron lines for Bankruptcy.

The conclusion of this was 4,000 employees were fired, 20,000 employees loses their jobs and $73 billion was lost in stock value.

The reason behind Enron Fiasco: Enron Senior Management used complicated and misty accounting schemes,

• To reduce Enron’s tax payments.
• To Inflate Enron’s income and profits.
• To inflate Enron’s stock price and credit rating.
• To hide losses in off-balance-sheet subsidiaries.
• To fraudulently misrepresent Enron’s financial condition in the public report.

Satyam Scam, 2009:

Satyam was one of the biggest scams in the history of India. The Satyam scam of 2009 has destroyed investors’ peace and calmness in the share market. The chairman Ramalinga Raju has exploited the books of accounts and financial statements. Satyam’s books of account show:

• Over stated Assets of Rs. 490 crores.
• Over Rs. 5000 crores Fake cash balance in the balance sheet.
• Interest component of Rs. 376 crores which never showed in the company’s resources.
• Understated Liabilities of Rs. 1,230 crores.

He has also inflated the company’s revenues and net profit figures, with which he was charged with a heavy penalty.

Aftermath Effect

• Investors were shocked as Stock Plummeted.
• Employees were stranded in numerous ways, like; morally, legally, financially and socially.
• The incident backfired unjustifiable damage to Brand India and Brand IT in particular.
• Chairman, Managing Director, Chief Executive Officer, Chief Finance Officer and the Key Managerial Personal were arrested.
• Partners of the audit firm were also arrested.
• People lost a stunning Rs. 100 billion in Satyam in market capitalization as investors responded sharply and dumped shares which as a result pushed down the scrip by 78 per cent to Rs. 39.98 on the Bombay Stock Exchange (BSE).

Harshad Mehta Scam Case 

The Harshad Mehta Scam floored the entire economy of India. He fooled many investors by taking the edge of the loopholes in the system.

Scandal details

• Harshad Mehta makes fake Bank receipts from small Banks.
• The above-mentioned Bank Receipts were then passed on to other banks as security to gain cash.
• Afterwards this money was used to drive up the prices of stocks in the stock market.
• Bubble of stock market manipulation and fake bank receipts busted.
• Drastically affected the stock market and economy of the country.
• Banking system was swindled at a whopping Rs. 5000 crores.
• Even, suicide was committed by one of the chairmen of the bank.

This scam is reminded as one of the biggest white-collar crimes as the case was mainly regarding the manipulation of accounts and providing misleading information. 

Sahara vs. SEBI 

It was a case of issuing deceiving information and clause in the prospectus of the company. 

• Here the question upheld whether the private placement of shares can be treated as an offer? 
• In this case, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) came up with an issue of an option of completely convertible debenture (OFCDs) to more than a million investors and termed their issued debenture as a private placement, with protection that the company did not aim to get their OFCD’s listed because the security which has been issued is a Hybrid Security. 
• During this time, the company had a whole collection of over Rs. 17,656 crores and This was collected from 30 million investors.
• on 31^st august, 2012 The Hon’ble Supreme Court in one of the most awaited judgments of recent times directed the Sahara Group with its two group companies SIRECL and SHICL to refund around Rs. 17,400 crores to their investors within a period of 3 months.
• Supreme Court also held that SEBI has powers to invest in listed and unlisted companies functioning relating to the issue of securities to secure the interest of investors. This was the milestone judgment in the field of Indian corporate Law.

2G Spectrum Scam Cases

2G scam was generally a telecommunication and a political scandal. In this scandal, numerous Politicians and governments were involved. This scam was about the allocation of a unified access service license. The former telecom minister A Raja avoided standards at every level and carried out the shaky 2G scam in the year 2008.

There are also numerous corporate scams which have taken our economy of the country to a greater loss, Coal Scam, the Bofors scandal etc. were also famous scam cases in this regard.

LATEST ANALYSIS ON CORPORATE FRAUD

In 2021-22, the amount involved in frauds reported by banks and other financial institutions:
Union Minister of State for Finance, Bhagwat Karad released that the amount involved in frauds declined from Rs 32,178 crore in 2019-20 to Rs 3,785 crore in 2021-22. As per the RBI data, frauds involving an amount of Rs 11,800 crore were detected during the year 2020-2021.

the Reserve Bank of India’s (RBI) annual report released on 27 May showed. Frauds reported by banks and different financial institutions in value terms more than halved during the year 2021-22, despite the number of cases of fraud increasing.

In 2021-22, frauds to the value of Rs 60,414 crore were reported, down 56.28 per cent from Rs 1.38 trillion in 2020-21. In terms of the number of frauds, these institutions reported 23.69 per cent higher frauds at 9,103 in 2021-22 as against 7,359 frauds in 2020-21. However, The RBI data considers frauds of Rs 1 lakh and above only.

“An evaluation of bank group-wise fraud cases within the last three years of the country states that when private sector banks reported a maximum no. of frauds, public sector banks of the country has contributed the maximum to the fraud amount”, the RBI annual report showed.

“While the no. of frauds reported by private sector banks were mostly on account of small value card/internet frauds, the fraud amount reported by public sector banks was mostly in loan portfolio”, the report added.

Also, frauds have come off in the loan portfolio, both in terms of no. and value. In the no. of frauds, advances constituted 42.2% and in value terms, it was almost 97 % at Rs 58,328 crore. However Cards/internet constituted 39.5 per cent of the number of frauds but in value terms, it was just 0.2 per cent.

An analysis of the data of frauds reported during 2020-21 and 2021-22 proved a significant time lag between the date of occurrence of fraud and its detection. Around 93.73 per cent of the frauds in 2021-22 by value occurred in previous fiscal years as against 91.71 per cent recorded in 2020-21, the RBI said.

CONCLUSION

The central government is warranted with numerous powers in the form of making laws and channelling proper investigations and preventing such corporate frauds and scams. But still, to date, these misrepresentations are being committed by veritably reputed corporations despite the fact new stricter laws are also being made for the same.

It has also been observed many times that many companies, that are listed in the BSE list themselves, earn huge profits and then disappear. Their only motive is to raise money from investors. The rapid growth of technologies and industries is the main reason behind corporate fraud in India.

However, To prevent such corporate crimes more strict steps can be taken not only by the government at the central level but also by the corporations at their organizational level.

ABSTRACT

A perception that only humans can commit a crime is an invalid conception. A company being a different legal entity, an artificial person can also commit a crime. Primarily in the 16th and 17th Centuries, it was concluded that a corporation cannot commit any crime. There were numerous contradictions in the proposition of a company being a separate legal entity, but it does not have a soul and body of its own. Thus, they cannot commit any crime or any illegal act for which they can be held liable. But slowly and over time the concept of corporate criminal Liability has been developed, through various judgments of the courts like Standard Charter Bank V. Directorate of enforcement. It was derived that even a company through its representatives and agents can commit a crime and it can also be held liable. The concept of corporate criminal liability derives from a Latin maxim i.e. Actus non facit reum, nisi mens sit rea which means in broader terms that to make one liable it must be shown or proved that act or omission has been done which was forbidden by law and has been done with a guilty mind. The doctrine of corporate criminal liability has gained and built up worldwide importance after the landmark judgment of Standard Charter Bank.

Endnotes

[1] Section 447 of the Companies Act 2013

[2] section 36

[3] section 448-451

[4] section 454

[5] Dr S.S Srivastava, Criminology, Criminal Administration (3^rd Edition, Central Law Agency, 2007) pg. no. 40.

 [6]Ahmad Siddique’s’ criminology and penology (16^th Edition, Eastern Book Company, 2011) pg. no. 438.

[7] The prevention of money laundering Act, 2012

[8] Section 66F (Acts of Terrorism) of the Information Technology Act 2002

[9] are the Prevention of Corruption Act 2013,

[10] Indian Penal Code 1860,  Indian Contract Act 1872, Information Technology Act 2008

[11] Survey on Fraud in India

[12] 2020

[13] 2021

[14] 2022

[15] Sangeet Kedia’s Economic and Commercial Law (June 2018, Pooja Law Publishing Co.)

[16] The Companies Act (12 of 2013)