Introduction:
In India, there is no legislation as such that defines an ‘economic offence’. Economic offences encompass all crimes which occur during the course of any economic or business activity.
In the beginning, such offences including corruption and criminal misconduct were dealt with under the provisions of the Indian Penal Code, 1860 (‘IPC’). However, with the steady increase in economic offences of many varieties, such as tax evasion, trafficking, smuggling etc., all of which are too specific to be brought under the purview of IPC alone, the Government of India felt the need for creating different legislations dealing with such offences.
The salient features of an economic offence were first discussed in the Report of the 47th Law Commission of India (1972), formulated on the topic of ‘Trial and Punishment of Social and Economic Offences’ (‘Report’). The Government of India, while formulating this Report, had recognized economic offences as a separate category of crimes that require special attention, to ensure swift disposal of cases and meting of punishment. Thereafter, special legislation such as the Prevention of Money Laundering Act, 2002 (‘PMLA’) was brought out to prescribe the procedures and penalties for economic offences.
It goes without saying that, due to such an ad-hoc arrangement, one set of facts expose an offender to prosecution under multiple legislations. Consequently, the gravity of the crime as well as the parameters for granting bails or deciding punishments for such crimes have not been very clear and there is an overlap of procedures. Therefore, in order to fully understand and organize how economic offences are being tackled today, we have examined the existing laws in relation to such offences, the amendments to the regime brought out by the Companies Act, 2013 (‘2013 Act’), the judicial history of granting of bails/ anticipatory bails with respect to economic offences, and scope for further changes.
We summarize the legislations related to economic offences as follows:
- The IPC provides the punishment for certain economic offences such as criminal misappropriation, criminal breach of trust, receiving or dealing in stolen property, cheating, creating fraudulent deeds, concealment of property, forgery, falsification of accounts, sale of adulterated drugs etc.
- The Central Excise Act, 1944 provides the punishment for evasion of excise duty.
- The Income Tax Act, 1961 criminalizes tax evasion, income concealment etc. The Act also imposes a penalty on failure to furnish returns, comply with notices issued under the Act or concealment of particulars of income as well as any fringe benefits.
- The Customs Act, 1962 regulates how the goods should be moved in or out of the country, confiscation for improperly imported goods, and for safeguards against smuggling.
- The PMLA is a landmark legislation in India that lays down what acts constitute money laundering, punishment for money laundering, etc.
- Section 3 of the PMLA defines ‘Money laundering’ as the direct or indirect attempts to indulge or knowingly assist or knowingly be a party or be actually involved in any process or activity connected with the proceeds of crime and protecting it as untainted property.
- ‘Proceeds of crime’ has been defined under Section 2(u) as any property derived or obtained, by any person as a result of criminal activity being directly a Scheduled Offence or relating to a Scheduled Offence or the value of any such property.
- The Schedule mentioned in the PMLA classifies the various offences, referred to as ‘Scheduled Offences’, into 3 parts, basis which the penalty is prescribed. Even though the offences described under the Schedule have already been covered under existing legislations like the IPC, the PMLA has been created to cater particularly to the handling of the proceeds from such offences.
- The Bombay High Court, in the case of Hasan Ali Khan v. UOI[1] , stated that an offence is committed under the PMLA when an attempt is made to demonstrate a legitimate source of earning with respect to a tainted property. The decision thus gave judicial support to the type of offences outlined under the PMLA.
- Money laundering is not just tackled through the PMLA. The Reserve Bank of India (RBI), in exercise of its powers conferred under the Foreign Exchange Management Act, 1999, as well as PMLA, has come out with the Master Circular on Know-Your-Customer (KYC) norms/ Anti-Money Laundering Standards/ Combating of Financing of Terrorism (CFT)/ Obligations of banks under PMLA, in 2008, that has made it mandatory to identify customers through KYC, to prevent money laundering. This Circular has been revised periodically and the introduction of this Circular, along with additional guidelines dealing with anti-money laundering have been instrumental in the efforts to address serious economic offences.
- The Insolvency and Bankruptcy Code, 2016 deals with fraudulent initiation of bankruptcy proceedings, by imposing penalty of not less than INR 1 lakh which may extend to INR 1 crore in such cases.
- Other offences include land grabbing, for which many States have enacted legislations, including the P. Land Grabbing (Prohibition) Act, 1982; credit card fraud, dealt with in the IPC and the Information Technology Act, 2002; and stock market manipulations, regulated by the Securities and Exchange Board of India (SEBI) through the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, and other such rules and regulations.
- Various laws such as the Transplantation of Human Organs and Tissues Act, 1994, which punishes trafficking of human organs, the Arms Act, 1959 against trafficking of arms etc., have also been instituted to combat specialized instances of crime that affect the economy.
- Keeping in mind the offenders that have crossed the Indian borders and are evading arrest, the Central Government had also passed the Fugitive Economic Offenders Act, 2018 (‘FEO Act’) which specifically caters to deter fugitive economic offenders from evading the process of law in India. While said Act does not define ‘economic offences’, the Schedule to the Act once again contains a list of offences for which, if any person has committed and has thereafter left India to avoid criminal prosecution, or being already abroad refuses to return to India, he is deemed a ‘fugitive economic offender’. The FEO Act borrows a lot of definitions from PMLA and empowers the Directors and Deputy Directors appointed under PMLA with additional rights to report/ declare fugitive economic offenders, details of their properties, etc., for attachment of the same.
Fraud under the Companies Act, 2013:
The list of legislations mentioned above show the many branched way in which economic offences are provided for in the country. While these legislations are structured in a ‘cure-based’ manner viz., post commission of the offences, certain types of fraud as falling under the 2013 Act are subject to a ‘prevention-based’ model i.e., as soon as any event of fraud is detected, various steps are mandated under the Act to tackle them quickly and efficiently.
To begin with, as economic crime has taken on new and larger forms, the definition of ‘fraud’ in Section 447 of the 2013 Act has also been expanded to include any act, omission, concealment of fact, or abuse of position that is intended to gain an unfair advantage over, or harm the interests of the company, its shareholders and creditors. This brings all forms of corruption, deception, conflicts of interest, and bribery under its purview.
As per the new legislation, as soon as fraud is detected, it is recommended to reopen account books, and go for voluntary amendment of financial statements or the Director's Report, with the agreement of the jurisdictional National Company Law Tribunal (NCLT). Until now, auditors were only mandated to report serious fraud and were not required to evaluate whether fraud had occurred in any and every transaction. However, auditors now have an additional burden to pose as whistle-blowers by reporting immediately to the Central Government any fraud being perpetrated in the company’s affairs.
The Serious Fraud Investigation Office (SFIO), subsisting under the 2013 Act, is now a statutory entity with the authority to make arrests for fraud-related offences. The National Financial Reporting Authority (NFRA) is meant to regulate auditors and has extensive powers to investigate professional or other misconduct by chartered accountants. Shareholders can also initiate class action suits against the company, its officers and auditors for failing to protect their interests. Accordingly, the penalties under the revamped law are more severe and are not compoundable. With the introduction of the new Act, even offences such as not filing of balance sheet, non-distribution of dividends without legitimate reasons, etc., are also open to judicial action.
Law relating to grant of bail/ anticipatory bail:
With the nature of these offences being severe, the protection offered to the accused in such offences also needs to be held with the highest safeguards. That means the strictest standards are to be employed when it comes to granting bail/ anticipatory bail to the accused in such economic offences.
This has been observed by the Supreme Court in the case of Y.S. Jagan Mohan Reddy v. C.B.I.[2], while considering a bail application, that:
‘The economic offence having deep-rooted conspiracies and involving huge loss of public funds need to be viewed seriously and considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country. While granting bail, the Court has to keep in mind the nature of accusations, the nature of evidence in support thereof, the severity of the punishment which conviction will entail, the character of the accused, circumstances which are peculiar to the accused, reasonable possibility of securing the presence of the accused at the trial, reasonable apprehension of the witnesses being tampered with, the larger interests of public/State and other similar considerations.’
This stance has also been maintained by the Supreme Court in Chidambaram v. Directorate of Enforcement[3], where anticipatory bail was denied by the Apex Court stating that the powers of anticipatory bail under Section 438 of the Code of Criminal Procedure, 1973 is an extraordinary power and that should be exercised sparingly, more so in cases of economic offences which affect the very fabric of the economy in our society.
In the recent cases of Ashwini Kumar Patra v. Republic of India[4] and Pankaj Grover v. Directorate of Enforcement[5], the prayers for bail have been dismissed outright by the High Courts, citing the huge amount of proceeds of crime. The Court also observed that the economically sound position of the accused would make them a flight risk, as they could abscond to any other country avoiding arrest as well as judicial proceedings. In short, a common yardstick adopted by all Courts when granting bail, that comes out from all these cases, is the amount of proceeds of crime, the apprehension of witness tampering or the chance for the accused to abscond, etc.
Scope for amendments in the law for economic offences:
With the steep rise in economic offences in India, the existing judicial system is over-burdened with cases, in turn resulting in decrease of arrests and convictions. Such dire situations call for a special court/ body that is dedicated solely to dealing with economic offences, to ensure that there is speedy disposal of cases.
Various attempts have been made over the past few years to pave way for this. The Special Court (Trial of offences relating to transactions in securities) Act, 1992 recommends constitution of special courts for trying offences related to securities. The PMLA also provides for setting up of special courts in relation to dealing with proceeds of crimes specified under the Schedule of said Act. The Special Courts set up under PMLA are also to oversee cases under the FEO Act. Basis such legislations, various special courts have been set up in the country.
That being so, while the special courts under said legislations have thus been constituted, sadly, the number of such designated courts are very limited and the Government has been slow in implementing these legislations.
Further, not just a procedural gap with the dealing of economic offences, but when it comes to substantive laws, the Banking Regulation Act, 1949 which is charged with regulating banking companies does not deal explicitly with any cases of fraud. Accordingly, Section 403 of IPC (Criminal misappropriation) is to be relied upon heavily for cases of bank fraud. This lapse is evidenced by the frequent reporting of scams, such as the misappropriation of funds from the Punjab National Bank (PNB), the more recent Bike Bots scam case, amongst others. Even with respect to insurance frauds, the Insurance Act, 1938 does not define or provide effective legal remedies for such acts. One has to once again resort to action under the IPC. Therefore, there is much scope for change in the existing laws, on both the procedural and substantive front.
Conclusion:
The position of economic offences is one that is riddled with lacunae and is not yet on solid ground. With the statistics of economic offences showing a definite increase, the Government is now compelled to start coming up with ways to reduce the cases already piled in courts, by instituting separate special courts or tribunals, and by passing special legislations. It is clear that the Government is aware of the burgeoning economic offences in the country and is conducting research into improving the existing laws and streamlining them, to reduce confusion and overlaps.
However, looking at the slow evolution and execution of laws related to economic offences, it cannot be concluded that we are in a satisfactory regime for such offences at the moment. Developing more judicial or quasi-judicial fora to ensure speedier and more efficient disposal of cases has become the need of the hour.
[The authors are Joint Partner and Senior Associate, respectively, in the Corporate and M&A advisory practice in Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[1] (2011) 10 SCC 235
[2] (2013) 7 SCC 439
[3] (2019) 9 SCC 24
[4] 2021 SCC OnLine Ori 438
[5] MANU/UP/1223/2021
