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Riya Krishna,
Maharashtra National Law University, Aurangabad
Corporate Fraud Definition
Fraud basically implies the use of deceit to dishonestly benefit oneself and/or cause harm to others.
Corporate fraud is the term used to describe any illegal activity or dishonest act committed by an individual or organisation in order to circumvent laws and regulations and make money in an unethical way. Corporate fraud refers to unlawful activities carried out by businesses or their officers in order to make money, conceal earnings, or avoid paying taxes. The most common types of corporate fraud are bribery, insider trading, and fraudulent financial reporting. The purpose of these actions is to mislead interested parties. Corporate fraud has detrimental repercussions on a firm's reputation, the market as a whole, shareholders' capital losses, and legal issues for both the company and the shareholders. Business fraud is a major problem that affects businesses not just in India but all over the world. Corporate fraud is on the agenda of even multinational organisations such as the EU, G20, SAARC, QUAD, etc.
Types of Corporate Fraud
1. Financial Statement Fraud
Financial statement fraud is the deliberate forging or manipulation of financial data in order to stifle or exaggerate sales or to employ any other tactic to trick the financial statement's final consumer. Tricking stakeholders, such as investors, loan officers, regulators, or tax authorities, is the aim of financial fraud. A corporation that commits financial statement fraud benefits from a better financial position than it actually has. This contributes to increasing revenue, demonstrating a higher asset value, or eliminating debt in its original form.
2. Asset Misappropriation
This is an unlawful practice in which management or staff members abuse their position of authority to commit theft or mishandle the company's assets. Asset misappropriation is any act by which a business steals or misuses its assets. Corporate fraud can take many different forms, such as the use of fictitious invoices, payroll fraud, the recording of unauthorised expenses in the books of accounts, stock theft, etc. Such conduct has the potential to seriously impair the companies' financial standing and undermine their credibility.
3. Corruption and Bribery
These terms describe the abuse of authority for one's own gain. Usually, this entails making unlawful monetary requests or accepting them. A wide range of individuals can be involved, including top executives, employees, suppliers, and representatives of the government. Bribery and corruption damage the economy and provide room for illicit money.
4. Insider Trading
Insider trading is the illegal purchase or sale of a company's securities by individuals who possess confidential information or significant data about the business. This is frequently seen to be done by the company's administration and staff, including executive officers, board members, and workers. They have access to secret information, which they trade for cash to have a clear edge in the stock market.
5. Tax Evasion and Fraud
These occur when businesses unlawfully lower their tax obligations in an effort to deceive tax authorities. It could entail utilising dishonest tax techniques, logging excessive expenses, concealing earnings or profits in foreign accounts, or declaring the erroneous revenue, which decreases the profits.
6. Cyber Fraud and Data Breaches
These refer to the unauthorised access to or theft of critical firm data, such as customer information, trade secrets, intellectual property, receivables records, etc. Cyberattacks are the source of cyber fraud. For the companies, this fraud may result in financial loss, reputational harm, fines, and legal issues.
7. False employment credentials
Organisations are becoming increasingly concerned about falsified credentials as job seekers stuff their applications with phoney academic degrees and positions held. The real danger arises if these candidates are hired and go on to hold prominent positions, as was the case with former Yahoo CEO Scott Thompson, whose four-month term was cut short due to a scandal around whether or not he had falsified his official bio.
8.Fraudulent expense claims
This is the simplest way to embezzle money from a company. Employees take advantage of the company and inflate their reimbursements for expenses.
SOME EXAMPLES
The Harshad Mehta Scam (1992) involved a stockbroker named Harshad Mehta who organised a massive financial fraud in India. He was referred to as the "Big Bull" by many. Finding and utilising weaknesses in the financial system, Harshad Mehta took advantage of the openings and employed ruses on the Bombay Stock Exchange. He mostly did this by stealing bank receipts and engaging in "circular trading," which is against the law[i].
The Saradha Group Scam (2013) Several Eastern Indian firms made comprised the Saradha Group. The business participated in a massive Ponzi scheme that deceived millions of investors. The group's chief executive, Sudipta Sen, promised investors that they would make money. The business promised to invest in real estate, media, and lodging, among other things. However, in practice, this was not the case. Rather, the public funds raised went towards compensating other investors.The business promised to invest in real estate, media, and lodging, among other things. However, in practice, this was not the case. Rather, the public funds raised went towards compensating other investors[ii].
INDIAN LEGAL MECHANISM
The legally recognised means of fighting economic crimes that are becoming more and more commonplace is called money enacting laws that provide it the authority to seize and attach proceeds in order to prevent the illicitly obtained financial benefit is one way to combat money laundering and trading in proceeds of crime. Certain laws now in effect in the nation allow for asset forfeiture and the confiscation of criminal proceeds. Among these are the following:
1. Criminal Law (Amendment) Ordinance, 1944
2. Customs Act, 1962 (Sec. 119 to 122)
3. Law of Criminal Procedure Code 1973 (Sec. 452)
4. Foreign Exchange Regulation Act, 1973 (Sec. 63)
5. Smugglers and Foreign Exchange Manipulators (Forfeiture of property) Act, 1976[iii]
SECTIONS UNDER COMPANY ACT 2013
When the Companies Act 2013's Section 447 defines a fraud offence, the individual who has been guilty of committing such a fraud shall be:
Imprisoned for a period that may extend to ten years but not less than six months, and
Shall be liable to pay a fine that may extend to three times the amount involved in the fraud but not less than the amount involved in the fraud.
Section 448: Punishment for False Statements
If, during the publication or approval of any return, report, certificate, financial statement, prospectus, statement, or other document needed in accordance with this section, any individual who makes a statement, whichever, knowing it to be false, omits a material fact, knowing it to be material, or is untrue in material particulars, will be held accountable for the actions taken under Section 447.[iv]
Section 449: Punishment for False evidenceThe Registrar, any other authority, or any person appointed under the Companies Act may impose a fine of not more than one hundred thousand rupees or imprisonment for up to six months, or both, upon any individual who provides forged, false, or incorrect evidence in a document that is filed, delivered, or signed by the individual. The provision of fraudulent evidence is a severe offence that is punishable under Section 449 of the Companies Act, 2013. The purpose of the provisions in this section is to effectively discourage individuals from engaging in fraudulent or dishonest business practices.
Section 450: Punishment where no specific penalty is provided
Any corporation or authorised official of a company that violates any of the provisions of the Companies statute of 2013 is guilty of any violation for which the statute does not specify a penalty or punishment. In the event that this occurs, the company and its defaulting officer will be fined ten thousand rupees, and if the violation persists, they will also be penalised one thousand rupees for each additional day that the violation persists. The maximum penalty for a company will be two lakh rupees, and for an officer, it will be fifty thousand rupees.[v]
Section 517: Punishment for non-compliance with orders of the central government
The Companies Act of 2013's Section 517 lays out the legal penalties and sanctions for breaking the directives of the Central Government about any fraud or misconduct carried out by a firm or any of its officers. According to this section, if a company or any of its officers is found to have violated the orders of the Central Government, they may be fined up to one lakh rupees. If the default persists, they may also be fined up to five thousand rupees for each day that the default persists.[vi]
Sec. 542 to 548: Penalty for non-compliance with various provisions of the Companies Act, 2013
Sections 542 through 548 of the Companies Act of 2013 set forth the legal consequences and penalties for any company or defaulting official that fails to comply with the different provisions listed in the Act. If an officer is found to be in violation of any of the provisions outlined in the Companies Act of 2013, they may be fined up to five thousand rupees. If the default persists, they may also be fined an additional one hundred rupees for each day that the default persists.[vii]
CONCLUSION
Corporate fraud is not a new occurrence in India. Various frauds in the corporate sector have been identified and the offenders have been penalised on occasion. These financial scams lead the government and investors to suffer massive losses. Even when those responsible are punished, the general public who invested their money eventually loses a lot of money. It is difficult for victims of corporate financial crimes to recover their invested capital. Years pass before loss is recovered. The recently enacted Companies Act, 2013 imposes stringent obligations and severe penalties on enterprises. The fact that new corporate frauds are discovered every year suggests that laws by themselves are unable to completely eradicate these crimes. Additionally, there must be a whistleblower mechanism with full protection, zero tolerance for corruption, and stringent enforcement of the code of conduct. Whistleblower protection and secrecy, government non-interference during the criminal justice system's sentencing process, and a prompt and impartial judiciary are all necessary to stop financial crimes by Indian corporations.
REFERENCES
[i] Gupta Sanjeev Dr: Corporate Frauds and Their Regulation in India, Bharat Law House Pvt. Ltd., New Delhi, First edition, 2016, pg no 64.
[ii] Dr. Mini Amit Arrawatia and Mr. Vikram Pande: ‘A study of ponzi scheme with reference to Sharada scam’, International Journal of Science, Technology and Management’, Vol. 5 Issue 2, 2016, available at http://www.ijstm.com/images/short_pdf/1455286111_558Y.pdf.
[iii]Khan, Aqueeda, “Problem of White Collar Crimes in India,” Plebs Journal of Law, (July 2016), Vol. 2, No.1, Haryana, pp. 191-92.
[iv]Section 448 of Company Act,2013
[v]Section 449 of Company Act,2013
[vi]Section 450 of Company Act,2013
[vii]Section 542- 548 of Company Act,2013
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