In summary

This article offers an overview of India’s white-collar crime landscape, recent regulatory developments and enforcement measures. It examines the central legislation governing white-collar offences and explores judicial trends in interpreting and expanding financial crime laws. The article also delves into penalties for contravention, international case studies concerning Indian subsidiaries, and the obligations and risks that companies face in relation to white-collar crime and compliance within the country.

Discussion points

  • Overview of legal framework governing white-collar crime in India
  • Penal consequences for violations of key laws
  • Judicial precedents that have shaped the jurisprudence of white-collar crime regulations
  • Key developments in laws and regulations

Referenced in this article

  • Prevention of Money Laundering Act, 2002
  • Prevention of Corruption Act, 1988
  • Companies Act, 2013
  • Indian Penal Code, 1860
  • The Companies (Auditor’s Report) Order, 2020
  • Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013

Overview

India, with its diverse economy and business landscape, relies on its extensive white-collar-crime laws and regulatory framework to provide a safe and reliable environment in which companies and individuals alike can function. This article provides a broad overview of India’s white-collar crime laws, enforcement mechanisms and regulatory framework, with a discussion on the country’s efforts to combat financial misconduct and promote corporate transparency.

Over the past few years, India has witnessed legislative developments aimed at addressing financial crimes, including by introducing key statutes such as the Prevention of Money Laundering Act, 2002 (PMLA), the Companies Act, 2013 (CA) and the Prevention of Corruption Act, 1988 (POCA) to bolster enforcement and hold individuals and corporations accountable for their actions. Alongside legislative reform, India has also engaged in international cooperation and has adopted best practice to tackle cross-border financial crimes.

Indian framework pertaining to white-collar crime

While white-collar crimes can trigger consequences under various laws, the Indian regulatory framework comprises three principal pieces of white-collar crime legislation: the PMLA, the POCA and the CA. These laws have been amended routinely, and Indian courts continue to develop the jurisprudence arising out of them.

The POCA is the key legislation against anti-corruption in India, penalising actual or attempted ‘promise’ or acceptance of any ‘undue advantage’ for performing any public duty improperly or dishonestly. The legislation also covers those circumstances in which an individual causes or induces another public servant to commit these offences. Within the context of the POCA, the term ‘undue advantage’ is not restricted to bribes in the form of cash or cash equivalents, but covers any form of gratification, including gifts, favours and any form of quid pro quo in a manner that amounts to corruption.

The POCA primarily covers public servants. Broadly speaking, public servants are defined as any individual in service or pay of the government for the performance of any public duty. The Supreme Court of India included employees of private banks and deemed universities, as well as trustees of charitable trusts established to operate these deemed universities, within the definition of ‘public servants’, in its 2016 judgment in CBI v Ramesh Gelli.The Supreme Court has also included hospital workers and doctors of private hospitals within the ambit of the POCA.

The Prevention of Corruption (Amendment) Act, 2018, specifically brought commercial organisations within the purview of the POCA. As a result, the law treats the act of giving bribes by corporate organisations through agents and third parties as a specific offence under the POCA.

The PMLA seeks to prevent money laundering and authorises the Indian government to confiscate any earnings or property accrued from illegal proceeds. The scope of the PMLA is to prohibit and penalise money laundering and regulate the freezing or seizure of illegally acquired wealth, as well as to specify the procedure for adjudication of money laundering-related offences.

While some laws, such as the Indian Penal Code, 1860 (IPC) and the Indian Contract Act, 1872, cover various offences that involve fraud, the CA, India’s primary legislation governing the corporate sector, sets out the concept of corporate fraud in India and empowers the Serious Fraud Investigation Office to investigate allegations of fraudulent conduct in relation to companies and their officers. The Companies Act defines fraud as any attempt by an individual to gain undue advantage from, and significantly disadvantage the interests of, the company in question.

In addition to the laws set out above, the IPC is also used to charge white-collar crime offenders with various charges such as cheating and criminal breach of trust. Various ancillary laws and regulations govern financial crimes, such as the Foreign Contribution Regulation Act, 2010, the Lokpal and Lokayuktas Act, 2013, the Central Vigilance Commission Act, 2003, the Prohibition of Benami Property Transaction Act, 1988, the Fugitive Economic Offenders Act, 2018 and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Companies with overseas operations alongside their Indian presence may fall under the extraterritorial reach of the laws of the jurisdictions in which they carry out business, such as the United Kingdom Bribery Act (UKBA) and the United States Foreign Corrupt Practices Act (FCPA).

Fraud reporting

Section 143 of the CA mandates internal auditors to report fraud to the central government within the prescribed time frame in certain situations, such as where the fraud involves an amount of at least 10 million rupees. The Ministry of Corporate Affairs, via the Companies (Auditor’s Report) Order, 2020 (CARO), introduced stricter financial reporting requirements from 1 April 2021, which entails enhanced due diligence, disclosure requirements for auditors, and greater transparency in financial reporting and whistle-blower complaints. The CARO now requires the auditor to consider any whistle-blower complaints received by the company during the year under audit. It also requires the auditor to report whether any fraud has been noticed or reported either on the company or by the company during the year and is not limited to frauds carried out by officers or employees of the company (as was the case previously).

Statutory auditors, through the CARO, have also been made subject to disclosure obligations within audit reports, if fraudulent transactions or conduct are observed. However, as per the ‘Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013’ issued by the Institute of Chartered Accountants of India in 2016, these disclosure obligations are only mandatory where the statutory auditor is the first to discover the fraud in question in the course of their duty. As per the Note, the auditor must use professional judgement to assess whether fraud has taken place, as well as review the steps taken by the company’s management to report or mitigate the fraud. Furthermore, the Indian government has indicated that it intends to amend the CA to disallow statutory auditors from performing non-audit services for clients.

Under Section 134(5) of the CA, directors are required to disclose measures taken by the company to combat fraud, through a director’s responsibility statement. Directors must attest to having taken adequate care for the maintenance of accurate accounting records, to detect fraudulent behaviour or any other irregularities. Additionally, in listed companies, directors are required to list the internal financial controls deployed by the company and confirm that these controls are sufficient and effective in combating fraud and other inconsistencies.

Further obligations on listed companies include a compliance certification, provided by the chief executive officer as well as the chief financial officer to the board of directors. These obligations are set out under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Rules, which mandates that directors must notify the auditors and audit committees of any fraud in which the perpetrator has significant control over the company’s system of financial reporting. Additionally, the listed entity must disclose to stock exchanges any instances of fraud by a promoter or key managerial person (or any arrest in connection with fraud) as soon as reasonably possible within a 24-hour window, along with any information regarding any fraud committed by directors or employees if the fraud is construed as a material event.

Key developments

India’s enforcement landscape has taken notable strides, in terms of both judicial precedent and regulatory developments. At the cusp of a digital revolution, India has seen a significant overhaul of its technological infrastructure, including the introduction of mechanisms pertaining to fraud reporting and streamlining of resources between multiple enforcement agencies and organisations.

Additionally, India has an active judiciary that shapes the interpretation and enforcement of laws. Evolving judicial precedents, along with regulatory and enforcement developments, reinforce India’s commitment to regulate situations in which corporates or individuals engage in corrupt, unethical or illegal conduct while carrying on business operations and administrative processes.

Set out here are some key developments arising out of regulatory action and judicial discourse from recent judgments that shape the area of white-collar crime law in India.

Regulators in action

India’s laws continue to evolve rapidly, both in reactive response to emerging forms of crime and proactively to address potential risks and concerns that may arise in the future. While the POCA has not been amended recently, the PMLA has seen significant changes and expansion in scope, making it one of the most actively enforced white-collar crime laws in the country. Some of these changes appear to be in preparation for the upcoming mutual evaluation to be undertaken by Financial Action Task Force (FATF), which has scheduled an on-site assessment in November 2023, delayed due to the onset of covid-19. The FATF mutual evaluations analyse the effectiveness of a country’s anti-money laundering regulations wherein the subject country demonstrates that it has a robust mechanism in place to combat money laundering and ancillary risks.

The Ministry of Finance, through a notification dated 3 May 2023, widened the ambit of the term ‘reporting entity’ under the PMLA to include certain practising corporate professionals, such as company secretaries and chartered accountants, when they act on behalf of their clients to undertake financial transactions. By categorising these professionals as reporting entities, a number of responsibilities and obligations are imposed upon them, such as enhanced due diligence, maintenance of records over the course of transactions and identity verification. Identity verification is not only limited to the individual carrying out the transaction but also includes identification of beneficial ownership. Corporate professionals are brought under the ambit of the PMLA when engaging in transactions for clients concerning:

  • sale and purchase of immovable property;
  • management of money, securities or any other assets;
  • management of bank, securities or savings accounts;
  • assistance with the organisation of capital for creating, operating or managing companies;
  • sale and purchase of business entities; and
  • any activity pertaining to the creation, management or operation of companies, limited liability partnerships (LLPs) or trusts.

Through a subsequent notification in May 2023, the following additional activities carried out in the course of business on behalf of or for another person were brought within the ambit of person carrying on designated business or profession’(which qualifies as reporting entities):

  • acting as a formation agent of companies or LLPs;
  • acting as (or arranging for) a director or secretary of a company or partner of a firm or a similar position in relation to other companies and LLPs;
  • providing a registered office, business address or accommodation, correspondence or administrative address for a company, LLP or trust;
  • acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and
  • acting as (or arranging for another person to act as) a nominee shareholder for another person.

Activities carried out by an advocate, chartered accountant, cost accountant or company secretary engaged in the formation of a company to the extent of filing a declaration under the CA are excluded from the above, along with any activity carried out by an employee on behalf of his or her employer (during or in relation to his or her employment).

Collectively, these notifications bring a range of professionals acting in a consulting capacity under the purview of the PMLA.

Additionally, in March 2023, through a notification, the Ministry of Finance brought virtual digital assets (VDAs) within the scope of the PMLA. VDAs are digital assets such as cryptocurrencies, non-fungible tokens and other blockchain-based assets. Entities conducting business involving VDAs are now construed as reporting entities under the PMLA and are subject to more stringent diligence and reporting requirements, including know-your-customer verification and maintenance of records.

The Ministry of Finance further introduced the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, in May 2023, which obligates entities such as financial institutions and banking companies to make certain disclosures regarding beneficial owners. Further, the amendment widened the scope of ‘controlling owner interest’ to those with ownership or entitlement to more than 10 per cent of shares, capital or profits of the company, down from the previous threshold of 25 per cent.

Enforcement agencies

Enforcement agencies play a crucial role in enforcing white-collar crime laws in India, ensuring accountability and maintaining the integrity of the financial system. These agencies, which include the Central Bureau of Investigation (CBI), the Serious Fraud Investigation Office and the Enforcement Directorate (ED), have been empowered with investigative and regulatory powers to combat financial fraud and economic offences.

Their responsibilities encompass a wide range of activities, including conducting investigations, gathering evidence and prosecuting individuals and entities involved in white-collar crimes such as fraud, money laundering, insider trading and corruption. These agencies work in coordination with various stakeholders, including government departments, regulatory bodies and financial institutions, to identify and tackle complex financial offences.

The ED is reportedly developing the Core ED Operations System, a piece of software designed to allow information sharing and shared access between organisations such as the ED, the CBI, the Central Board of Direct Taxes and the Financial Intelligence Unit. Concurrently, the Reserve Bank of India (RBI) launched DAKSH, a web-based end-to-end workflow application to allow for more convenient and efficient fraud reporting mechanisms.

India, being the president of the G20 in 2023, hosted the first meeting of the G20 Anti-Corruption Working Group (ACWG) in February 2023, with Italy as co-chair. A second meeting of the ACWG was held in India in May 2023. The ACWG aims to present a united effort against global economic offenders, strengthening international cooperation and law enforcement with respect to financial crimes, promoting the integrity and effectiveness of public bodies and authorities, and strengthening asset recovery mechanisms.

Judicial discourse

As a common law jurisdiction, India’s hierarchical court system plays a significant role in shaping the contours of Indian laws. The courts’ interpretation of laws and their application of legal principles through evolving judicial precedents and interpretive lawmaking significantly influence the development of Indian laws. Courts at different levels, from lower courts to high courts and ultimately the Supreme Court, contribute to the body of case law that forms the foundation of Indian jurisprudence. Each judgment sets a precedent that guides future cases and serves as a reference point for legal professionals, ensuring consistency and predictability in the application of the law.

In August 2022, in Sayaji Dashrath Kawade v The State of Maharashtra, the Bombay High Court held that a person cannot be convicted under the POCA until the basic requirement of demand and acceptance of a bribe is proven by the prosecution. The Bombay High Court overturned the conviction of a government official and observed that ‘a person for the charges of corruption under the Act cannot be convicted on morality and ethics. When the law provides certain mandatory requirements for proving offence, no shortcut is permitted.’

In January 2023, in Prem Prakash v Union of India, the Jharkhand High Court, through the Directorate of Enforcement, held that money laundering is an independent offence, and that merely proving innocence in a connected crime does not discharge one from being implicated for money laundering. The accused was arrested in connection with illegal mining activities and charged with laundering the proceeds of crime. The Court held that even if the accused was innocent in the stone mining case, money laundering would be treated as an independent offence and adjudicated accordingly.

The expansion of the law through judgments is a fundamental aspect of India’s legal system. This interpretive approach allows for the law to adapt to changing societal needs and circumstances, ensuring that it remains relevant and effective in addressing emerging legal issues. Previous instances of the courts expanding the ambit of the law include CBI v Ramesh Gelli in 2016, where the Supreme Court held that the managing director and executive director of a private bank that was operating under a licence issued by the RBI will be considered ‘public servants’ under the POCA; and State of Gujarat v Mansukbhai Kanjibhai Shah in 2020, where the Supreme Court included trustees and administrators of ‘deemed universities’ under the ambit of the POCA.

The courts are also called upon to assess the validity of various laws and provisions. In Vijay Madanlal Choudhary v Union of Indiain 2022,[8] the Supreme Court upheld key provisions of the PMLA, including contentious provisions such as the ‘twin conditions’ for bail, which are that: (1) the accused must show that they are prima facie not guilty; and (2) there is no threat of an offence being committed if granted bail.

Penalties

Enforcement organisations such as the CBI and the ED are vigilant in monitoring and ensuring that any fraudulent or otherwise unethical business activity is addressed. The table below sets out the penalties covered in key legislation.

Offence Penalty
Prevention of Money Laundering Act, 2002

Money laundering: under Section 3, any involvement in the process of utilising proceeds of a crime and using or projecting it as untainted property. Money laundering in connection with offences under the Narcotic Drugs and Psychotropic Substances Act, 1985

Rigorous imprisonment of three years, which may extend to seven years

Any property involved in the carrying out of money laundering may be attached

If connected with offences pertaining to narcotic drugs or psychotropic substances, maximum imprisonment increases to a period of 10 years

Prevention of Corruption Act, 1988

Corruption: giving or taking undue advantage* with the intention to perform or cause performance of public duty improperly or dishonestly

Imprisonment for a period of six months, which may be increased to five years, plus a fine

Gratification with the objective of influencing a public servant attracts a penalty of imprisonment of between three and seven years, plus a fine

Use of personal influence with a public servant results in imprisonment of between six months and five years, plus a fine

Criminal misconduct by a public servant attracts imprisonment of between one and seven years, plus a fine

Companies Act, 2013

Fraud: any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss

Imprisonment of between six months and 10 years, and a fine of at least the amount involved in the fraud up to three times that amount

For fraud involving public interest, minimum imprisonment of three years

For fraud pertaining to amounts lower than 1 million rupees or less than 1 per cent of the company’s turnover, whichever is lower, the penalty is either imprisonment for up to five years or a fine up to 5 million rupees, or both

Indian Penal Code, 1860

Criminal Breach of Trust: misappropriation or dishonest use of property by an individual entrusted with that particular property

Imprisonment for a period of up to three years, plus a fine

Criminal breach of trust by a public servant, banker, merchant or agent is punishable with imprisonment for a term of up to 10 years, plus a fine

Cheating: deceit of an individual by inducing any person to carry out or omit to carry out any act that the individual would not have done otherwise

Imprisonment for a period of up to one year, plus a fine

* ‘Undue advantage’ refers to any gratification other than legal remuneration. The term ‘gratification’ is not limited to pecuniary gratifications, and the corruption offence includes an actual or attempted act or a ‘promise’ to give or take an undue advantage

Extraterritorial laws

India is subject to the application of extraterritorial anti-corruption laws, including the FCPA and the UKBA. The FCPA prohibits bribery and corrupt practices involving US companies or individuals, even if the acts occur outside US jurisdiction. Indian entities that have US parent companies or form part of a group of companies to whom the FCPA is applicable must be aware of and comply with the FCPA to avoid legal consequences. Similarly, the UKBA extends its jurisdiction beyond the UK’s borders, making it applicable to Indian companies that have business dealings with UK-based entities or that have their own operations in the UK.

Further, authorities in India have been noted to initiate suo moto action on the basis of enforcement actions by the US Securities and Exchange Commission or the Department of Justice in FCPA matters, leading to companies having to deal with more than one set of penalties for the same offence.

Conclusion

India’s white-collar crime laws have dynamically evolved over time to combat financial and corporate crimes and mandate corporate accountability for actions taken by companies. Key pieces of legislation have continued to be augmented and amended to expand their ambit and better regulate newer forms of white-collar offences.

While some challenges persist in terms of enforcement effectiveness, lengthy investigations and legal complexities, businesses operating in India can effectively tackle these by prioritising the creation of a robust compliance programme backed with proactive risk management strategies. As India continues to refine its enforcement mechanisms and foster international cooperation, it is crucial for stakeholders to remain vigilant and ensure compliance with evolving legal requirements.

This article was first published in GIR