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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.

The Concept
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 Liability

The 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 [1859]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 Identification

It 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 Blindness

According 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 created.

The Doctrine of Alter Ego

Under 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 indictment.

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 74].

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 income.

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 Prevention

The 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 balances.

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 Audit

An 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.

Whistle Blowing:
A corporation has many companies (clients, shareholders, etc.) dealing with it. It can be beneficial to report any suspected fraud or any other fraud.

Conclusion
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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