Abstract
Corporate fraud and white-collar crimes in India pose significant challenges to economic stability, investor confidence, and corporate governance. This paper aims to present a historical perspective of corporate fraud and categorization of offences including financial statement fraud, bribery, insider trading, and money laundering. This paper looks at the laws regulating corporate wrongdoing, such as the Companies Act, 2013, the Prevention of Money Laundering Act, 2002 and SEBI regulation and the part played by the enforcement agencies in investigation and prosecution. In the major scandals such as Satyam Computer Services and Punjab National Bank case, the paper identifies system weaknesses and enforcement issues. It also discusses precautions such as internal controls, employee reporting systems, and ethical standards. The application of emerging technologies such as artificial intelligence and machine learning in fraud detection are evaluated. The paper ends with a discussion of policy implications for improving corporate governance and regulation.
Keywords: Corporate Fraud; White-collar Crimes; SEBI; Money Laundering Act, 2002; Companies Act, 2013.
1. Introduction to Corporate Fraud and White-Collar Crimes
White-collar crime and corporate fraud are interconnected nonviolent crimes committed by businesses and government professionals for financial gain. These crimes include product deception, false advertising, bribery, and medical fraud. Edwin Sutherland coined "white-collar crime," which spans activities in government, medical, and corporate sectors, often exploiting a facade of legitimacy. Currently, it's a global issue worsened by globalization and an increasingly liberal market economy, generating immense wealth for employers while driving employees into poverty and exploitation. Many ancestral rights remain unrecovered, leading to poor workplace conditions. In India, significant tax evasion by industrialists occurs through collusion with officials, with contracts often secured via bribery. This fosters white-collar crimes, while socio-economic disparities, hunger, and malnutrition afflict employees under severe conditions.
2. Historical Overview of Corporate Fraud in India
On 22nd April 2014, the Supreme Court of India established a Special Court to tackle VVIP cases related to the 2G Scam, one of the country's largest telecom frauds. Previous scandals, such as the Harshad Mehta and UTI scams, resulted in few convictions. The 2G Scam, among others like the Antrix-Devas Scam, was documented but often lacked enough evidence for prosecution. This Special Court emerged amidst recurring corporate crimes in India’s capital market since the early 1990s. Following the 1991 scam, financial scandals arose continuously, marked by significant fraud and manipulation of data. Post-financial liberalization, many companies thrived through these abusive practices. Although the 1991 and 2001 scams were major, they are overshadowed by the complex, high-scale "Second Generation Scams."[1]
3. Types of Corporate Fraud and White-Collar Crimes
India, the second-most populous country, is an emerging global leader with a growing economy. Yet, it faces challenges like poverty, corruption, pollution, illiteracy, and nepotism. Financial malpractices, particularly fraud, affect both companies and investors. Recently, some listed companies have been implicated in fraud, harming public interest.
The term white-collar crimes was coined in 1949 by criminologist Edward Sutherland, defining it as crimes committed by high-status individuals during their occupation. These crimes, characterized by deceit or violation of trust, do not involve violence or threats. They include various offenses by corporate organizations and professionals, using their occupational skills. The first case of corporate fraud in India was registered on April 24, 1956, and over 295,000 cases have been filed since. There are three main types of corporate fraud: banking frauds, stock-market frauds, and other corporate frauds. Investigation success rates remain low in India.[2]
3.1. Financial Statement Fraud
Corporate fraud and white-collar crimes are globally widespread, causing significant losses for shareholders, investors, banks, and economies. In India and worldwide, certain types of fraud receive high publicity, notably financial embezzlement and investment swindle, with swindles being particularly prominent. However, corporate fraud can manifest in various ways, including rocketing, window dressing, foot waggling, fire deer, goat eating grass, nighthawk, and catapulting. These high-profile swindles are part of general fraud, with white-collar crime defined as non-violent offenses by businesses for personal or corporate gain.
White-collar crime has eroded confidence in the economy, government, and public productivity, affecting personal potential. These crimes are often perpetrated by influential community leaders in business and government. Despite numerous penal statutes, the success rate of prosecuting white-collar crime remains low. This is partly due to the perpetrators’ significant political and financial power. Factors such as victim fear, loss of large sums, and systemic issues like immunity agreements and lack of enforcement agency knowledge contribute to the challenge of detecting and prosecuting these crimes, resulting in few convictions for prominent businessmen and politicians.[3]
3.2. Bribery and Corruption
Bribes are crucial to India’s transactions, where what is normal elsewhere often involves baksheesh. The term ‘facilitation fees’ masks corrupt practices, which can take many forms: cash, shares, favors, or promises. Bribery is rampant in Delhi, spreading from low-level officials to ministers and even prime ministers. The roots of this corruption are often linked to Hindu beliefs, where a bribe can yield guaranteed results. However, for those ensnared in corruption’s web, work and family life suffer greatly. In Delhi, those familiar with the bureaucracy may find that a small bribe can lead to a better understanding of local corruption, especially at popular sites asking for donations. Employers face frustrations when dealing with corrupt employees due to mandatory child support deductions or bankruptcy orders. The bribe-giver and taker conspire against the law, often entangled in international regulations such as the US Foreign Corrupt Practices Act, particularly when foreign officials are involved. The VVIP market largely revolves around the bribes suppliers are willing to pay. Many companies have resorted to paying commissions to gain an edge in a shrinking market, with corrupt officials benefiting from this money flow, typically laundered through various accounts. Despite the corruption, India's growth has been bolstered by government-managed auctions, often linked to the coal mafia, which has been called out for a significant revenue loss. Perks of power extend beyond mere homage; opportunities can be bought with the right gifts to officials. Corruption transcends political affiliations, evidenced by an opposition candidate's incarceration over charges. A whistleblower website aims to expose corruption, revealing the market price for it and encouraging narratives that highlight common experiences in this pervasive culture. While initially underwhelming, the site has led to increased stories of cautionary tales, breaking the silence surrounding corruption. Now, people have the option to download a physical form of the content to share and discuss both online and in print.[4]
3.3. Insider Trading
Insider trading involves buying or selling a company's stocks or securities based on significant non-public information. This type of trading occurs without public awareness. While it often involves company professionals, it can also include anyone who temporarily possesses the information. Advances in technology have made it more challenging to identify and track these trading activities. Generally, insider trading refers to transactions conducted by company insiders, who have a fiduciary duty to prioritize shareholders' interests over personal gain. This duty prohibits them from profiting from non-public information. Legality hinges on whether insiders act on confidential information; it is permissible to trade on publicly available information, regardless of its scope. [5]
3.4. Money Laundering
Money laundering involves concealing the origins of funds from illegal activities like embezzlement and drug trafficking, posing a serious global economic issue. Corrupt bank accounts exacerbate the situation, with criminals using technology to exploit banking systems, necessitating increased vigilance. While this crime harms individuals and states, it paradoxically benefits the financial sector. Banks work to combat money laundering, yet often unintentionally facilitate it. Criminals execute wash transactions through a network of banks, using seemingly legitimate businesses as fronts. Casinos also play a role by cashing out "winnings" from illicit funds. Lawyers have included legal institutions in global Anti Money Laundering (AML) efforts. The relationship between money laundering and diamond values is notable. Local crime proceeds, often reinvested internationally, pose challenges in a globalized economy. In 2000, South Africa faced scrutiny due to findings from the G8 and others. Tracing funds reveals intricate networks that standard oversight struggles to penetrate, complicating efforts to apprehend key players in these operations.
4. Regulatory Framework and Laws in India
Recent weeks have exposed numerous instances of corporate fraud and white-collar crime in the financial markets, notably the Satyam scam by Ramalinga Raju. This scheme lasted from March 2001 to November 2008, during which Raju and his relatives inflated Satyam Computers' asset and bank balances by 50%. The misleading financial statements falsely claimed over 6,000 crore in cash and bank balances when the actual figure was merely Rs 5 crores. The promoters profited around 70,000 Rupees through share sales and stock price manipulation. Each financial system has legal frameworks to address such misconduct, regardless of societal developments. When banks engage in white-collar crime, it necessitates involvement from law enforcement. The banking sector is highly regulated, requiring investors to adopt long-term growth strategies and support regulatory measures to prevent fraudulent activities that undermine economic growth.
4.1. Companies Act, 2013
In the case of corporate liability, liability arises not only because of acts committed by directors, key managerial personnel or employees of the company. In case any person or concern other than directors, employees or companies commits any offence under the companies act, 2013, every person who, at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company shall be liable for investigation of such an offence in the same manner as if it was committed by the company.[6]
Liability means one may be penalized or may be imprisoned for the offence or act which is committed by the other person But, it is a defence which is taken by the concerned person or considered liable in case of conviction. The burden of proof that the concerned person is convicted for the same act or offence which is done by the other person will lie with the prosecution and the person will not be liable if he proves that the offence was committed without his knowledge and that he had exercised due diligence to prevent the commission of such an offence The explanation to this section is clear to cover up that every person who was in charge of and was responsible to the company for the business of the company shall be liable for the contravention if it is proved that the offence was done without its knowledge.
Other than companies, offences by other person works as corporate Liability Offences (CLO) and in this chapter, the ideas laid down on synthesis of the studied literature on theoretical and practical issues concerning a selected subject or topics for a specific problem will be critically analyzed in depth. This chapter, Companies Act, 2013, and amendments done in respect to the chapter title will critically be analyzed.
4.2. Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002, enacted on 17th January 2003 and effective from 1st July 2005, aims to combat money laundering and enable the confiscation of properties linked to such activities. This legislation was essential to specifically tackle money laundering, adhering to the Financial Action Task Force (FATF) standards for combating money laundering and terrorist financing. The FATF outlines 40 recommendations for implementing these international standards. The Act allows for the seizure of properties and proceeds from crime and enforces obligations for those involved in money laundering. It also ensures anonymity for individuals providing public interest information, protecting those assisting investigations. Violations of these requirements can incur fines. Concerns arose regarding financial institutions’ protection and the quality of information, particularly a provision limiting their disclosure of reports related to libel defenses.
4.3. Securities and Exchange Board of India (SEBI) Regulations
The Preamble to the SEBI Act, 1992 emphasizes the importance of protecting investors and regulating the securities market. SEBI has various punitive measures at its disposal, allowing it to penalize market intermediaries for rule violations. Consequences include monetary fines, suspension of business, or trade exclusion, depending on SEBI's discretion. The Indian capital market has experienced significant abuse, driven by both vested interests and negligence, with enforcement mechanisms deemed weak. Notable incidents like the K-10 stocks, Harshad Mehta’s scam, and the 1992 payment crisis highlight these deficiencies. Recent market turmoil has underscored the necessity for a robust surveillance system designed to detect irregularities early on, enhancing overall market transparency.
5. Investigation and Enforcement Mechanisms
A search for corporate fraud and white-collar posts in secondary and primary literature has revealed that there is very little such literature in India. While the mainstream print media frequently publishes reports of business crimes by large corporations and government officials, there is very little academic or policy-oriented analysis of this phenomenon. Most of the coverage is ad hoc in nature, resulting from breaking news on individual corporate scandals or governmental reports on corruption.
This review outlines media coverage, governmental reports, and research articles on corporate fraud and white-collar crimes in India, organized by issue. It includes a search for secondary (academic) and primary (media, reports, interviews) sources regarding Indian corporations, their managements, auditors, government officials, financial regulators, and stock market participants. The research conducted on these matters is documented. The writer created the outline without other contributions to the project. Any additional research could serve as background if the project progresses. Various individuals were consulted before publishing this report, and while some academic publications are referenced, there was no intention to suggest those individuals were involved in this project.[7]
5.1. Role of Enforcement Agencies
Corporate fraud extends beyond financial misstatements and misappropriation. It includes white-collar crimes such as bribery, cheating, violation of Pro-farmer policies, smuggling, and foreign exchange violations that harm the economy. This chapter presents an overview of various scams involving professionals. It outlines strategies for Central and State governments, including amendments to the Indian Penal Code, Code of Criminal Procedure, Companies Act, and Essential Commodities Act. It also discusses the roles of the Associated Chamber of Commerce and Industry, the Institute of Chartered Accountants of India, and lawyers. Recommended offences include cheating, fraud, misrepresentation, extortion, forgery, and violation of listing agreements, emphasizing the need for reforms in Indian law to combat these issues. Recommendations are provided to strengthen the legal system against frauds and scams.
5.2. Challenges in Investigating White-Collar Crimes
Organized crime groups play a role in facilitating white-collar crimes, making investigations into corporate fraud particularly challenging. The connection between the fraud event and suspects is often difficult to establish, as multiple individuals across various levels within a company may be involved. Fraud typically involves a group effort and may utilize organized criminals to support its execution. While corporate fraud leads to operational losses, it generates high profits that are divided among the perpetrators. The increasing complexity of business and technological advancements necessitate skilled personnel for committing fraud. Effective investigations depend on sophisticated information systems and technology to aid the process.
Advances in information technology facilitate cybercrimes, as the development of tech aligns with global needs. Telecommunications and IT play a crucial role in supporting life today, but security systems are often overlooked. Technological progress allows easier fraud and cybercrime, as many rely on it for a simpler life, ignoring ethical considerations. Cybercrime poses threats to economic, financial, and political spheres, with indicators such as fake electronic money fraud, hoax transfers, and data breaches. While commonly perpetrated by individuals, these crimes are often executed by groups. This group behavior stems from the need for diverse expertise and the complexity of coordinating large-scale criminal activities that require extensive preparation and advanced technology.
6. Case Studies of Notable Corporate Fraud Cases in India
Corporate fraud has existed since capitalism's inception, but it has become increasingly prominent in emerging economies like India. It includes theft of stock, check fraud, false credit applications, and document manipulation. Often hidden by legal loopholes, corporate fraud commonly emerges during mergers and acquisitions, harming individuals and breaching laws such as tax evasion, embezzlement, and extortion. In tech-driven markets, it involves deceiving stockholders for personal gain. In India, these frauds indicate broader issues linked to governance failures and a discipline gap. Complex governance can inadvertently enable fraud. With rising public equity prices, concerns about earnings management and accounting quality have intensified, central to corporate governance discussions among stakeholders. Public companies are particularly vulnerable, and these frauds represent a two-stage process of preparation and execution, often accompanied by extensive cover-ups. Analyzing corporate fraud requires both structured and unstructured perspectives to understand the regulations and the innocence of the involved parties.
6.1. Satyam Computer Services Scandal
The Satyam Computer Services scandal involved significant corporate fraud at one of India’s largest IT firms. On January 7, 2009, founder B. Ramalinga Raju confessed to a $1.02 billion accounting fraud, leading to Satyam being blacklisted by the World Bank and delisted in India by month's end. Raju admitted to years of inflated revenues and profits. In February, the Central Bureau of Investigation (CBI) charged him, while the Securities and Exchange Board of India (SEBI) investigated insider trading and fake pay-orders to recover illegal profits. SEBI also examined Raju's land acquisition dealings. Attempts by Maytas' Managing Director to acquire linked construction firms were vetoed due to shareholder protests, causing Satyam shares to plummet nearly 70%.
6.2. Punjab National Bank Fraud Case
In February 2018, one of India's largest banking frauds was uncovered, involving Nirav Modi, Mehul Choksi's firms, and certain PNB officials defrauding the bank of INR 114 billion. This scandal triggered a stock market impact and prompted the government to mandate public sector banks to halt the LoU and LoC business starting March 23, 2018. Out of 1,290 fraud cases totaling 12,012 crores in 2017-2018, only 64 cases worth 3,016 crores were recovered. Consequently, the Reserve Bank of India revamped its reporting procedures, requiring banks to report suspected fraud to the Central Bureau of Investigation within three weeks, guided by a committee established in November 2017.
It was observed that since public sector banks in India are subject to direct guidelines regarding regulations and governance from the government, it implies less endurance of fear among the fraudsters. An increase in the amount of domestic and forex related frauds was seen after the Institution of Bilateral Letter of Undertaking and Letter of Comfort facilities. Taking advantage of these instruments, two Indian diamond firms used multiple LoUs/LoCs since 2011 to raise short term buyer’s credit from foreign branches of Indian PSBs and later issued a further LoU to the same bank. As the above term was coming near, a new LoU was issued to finance the previous one. In 2011, PNB officials set the new terms, indicating that the potential fraud would be less probable and the “LOU margin would not exceed 25%.”[8]
7. Impact of Corporate Fraud on the Economy and Society
Business fraud is a white-collar crime affecting companies, investors, and the economy, causing significant harm. The economic damage results from both the fraud itself and its revelation. Awareness of these damages can bring about poetic justice. Social damage is often lasting; corporate fraud trials can take years, compromising marketplace integrity and investor confidence, triggering economic downturns. This leads to viewing corporate fraud as a strategic practice rather than just crime. In response, the U.S. government and corporations implement financial reforms and apply the COSO framework. This paper explores themes of corporate fraud, including its occurrence, timing, and location, focusing on responses from the initial unethical act through its discovery. Undetected fraud often escalates until exposed by whistleblowers or authorities, prompting a business response. Additionally, the time from response to trial is analyzed, along with the investigation and legal processes. Severe corporate fraud cases evaluated by the U.S. Attorney’s Office aim to identify recurring themes and Japan's financial reforms post-2000s crisis.
8. Preventive Measures and Best Practices for Companies
Corporate fraud and white-collar crimes impact stakeholders, including employees, investors, and consumers. This analysis examines three major corporate fraud cases in Indonesia, demonstrating how they fit within the broader category of white-collar crime through financial statement manipulation that undermines market trust. Findings reveal a troubling rise in fraudulent activities, underscoring the necessity for improved transparency and accountability among public firms. Strengthened supervision and corporate governance by relevant authorities are essential in addressing this issue. Organizations should implement preventative measures, emphasizing employee understanding of legal frameworks to effectively mitigate risks. The paper suggests adopting best practices in training and awareness, equipping employees to avoid white-collar crime. Companies must prioritize an ethical leadership culture and create a robust anti-fraud environment, consistent with corporate guidelines.
8.1. Internal Controls and Governance
Since 1991, corporate fraud has gradually increased in India following privatization, yet inquiries into these events have been modest. This survey examines the reasons and types of corporate fraud in Bombay Stock Exchange (BSE)-200 listed companies. Data shows that owners and senior male employees with a D rating from BCAS are more prone to fraud. This research reveals steps of fraud and is the first of its kind in India. In 2012, the Department of Economic Affairs and Ministry of Corporate Affairs initiated the National Corporate Governance report with the International Finance Corporation, but it yielded only academic conclusions. According to BSE, only 93 companies published these reports online. A 2015 report found that a quarter of fraud in India occurs predominantly in the stock exchange, yet BSE has only canceled trading for 30 companies. Despite understanding the fraud types, responses to reduce occurrences remain limited.
8.2. Whistleblower Policies
Whistleblower policies should be mandatory for companies, as junior employees, like peons or security guards, may be the only witnesses to fraud. These policies can be vital in revealing fraud, especially in entrepreneur-driven organizations where the entrepreneur might be involved in the crime, making independent mechanisms difficult. Legal requirements have expanded from public companies with over 20 employees to all companies over time. However, many policies lack details on whistleblower protections. The engagement of external auditors during fraud investigations can deter whistleblowers due to concerns about confidentiality. Understanding the chaos following a whistleblower complaint reveals why organizations often fail to respond. Individuals aware of corporate fraud may have negative perceptions of whistleblowing due to the risk of hostile reactions and minimal rewards. This pervasive "pionic" image suggests a significant barrier to making disclosures. Factors influencing the decision to blow the whistle include fears of retaliation, the possibility of legal action, and the belief that reporting will yield little benefit, stemming from past experiences.[9]
8.3. Ethical Leadership
Corporate frauds have proliferated in a privileged society, marking a breach of trust and abuse of power. This chapter aims to educate readers on the causes, remedies, and necessary actions against such crimes. In developing nations like India, these illegal activities are rampant, as offenders believe the financial rewards are secure from legal repercussions, which often hinge on having infallible evidence. To combat this, strict laws like the Prevention of Corporate Frauds and specialized courts have been established. White-collar crimes are appealing for their ease of execution and minimal costs. They inflict significant damage and can misappropriate vast sums without detection, thanks to numerous loopholes within the existing system. Shell and dummy companies are often created specifically to facilitate such fraud. This crisis is exacerbated by advancements in information technology and the government’s liberalization policies. Despite the growing awareness and preventive measures among professionals, corporate fraud remains on the rise, leaving a troubling outlook for the future.
9. Future Trends and Technologies in Detecting Corporate Fraud
Financial fraud investigators have noted several weaknesses in future trends. Electronic frauds, including internet banking card fraud, mobile banking fraud, and fraudulent electronic funds transfers, are on the rise. These activities involve unauthorized access to customer accounts through methods like phishing and spyware. To combat this, anti-fraud machine learning technologies must be integrated into core banking software to mitigate fraud and illegal transactions. Advanced controls are necessary for transaction analysis, and XML message standards should be utilized for fund transfers. Customers’ electronic transactions should be digitally signed, and passwords must be updated monthly for internet and ATM transactions. The rise of fraud in electronic channels has shifted towards white-collar crimes in IT and financial sectors, with approximately $1.6 billion lost to corporate fraud in India over the past three years. Stringent measures are needed to prevent this.
9.1. Use of Artificial Intelligence and Machine Learning
With the increasing demand for rapid development in modern technologies, the world faces a surge in fraud issues. Factors like the growth of the Internet, electronic transactions, and vast amounts of data have rendered traditional fraud detection techniques insufficient. Financial institutions recognize this challenge and consider fraud detection vital, adopting intelligent, scalable methods to address detection difficulties. Unauthorized theft leads to a loss of customer privacy, reputation, and significant financial losses that affect not only institutions but also customers and the economy at large. Recently, Artificial Intelligence (AI) has advanced to enable machines to think, learn, and act like humans; within this, Machine Learning helps software applications train on data and predict outcomes with minimal errors. Moreover, complex models can be derived from this training. Parametric-based models, which are simpler and less costly to develop, have gained popularity in recent years for addressing fraud detection challenges, particularly for specific white-collar crimes in India.
10. Conclusion and Key Takeaways
With over two years as a forensic researcher for the U.S. government, a CFE, a Ph.D. in accounting, and teaching fraud examination, I possess in-depth knowledge of forensic accounting and fraud education. This position paper has five aims: to assert my qualifications for leading teaching in forensic/fraud examination, to outline the current state of education, certifications, literature, and techniques, to indicate necessary advancements in the next few years, to describe plans for evolving forensic examination, and to seek funding to address gaps in research and education programs. This paper concludes with the importance of these efforts in light of recent scandals in accounting in the U.S. and Europe and acknowledges ongoing media focus on this critical area of research.[10]
Refrences
[1] S. Narayanan, Financial Market Regulation—Security Scams in India with Historical Evidence and the Role of Corporate Governance (2004).
[2] S. Narayanan, Financial Market Regulation—Security Scams in India with Historical Evidence and the Role of Corporate Governance (2004).
[3] W.A. Pettigrew, The Changing Place of Fraud in Seventeenth-Century Public Debates about International Trading Corporations (2018).
[4] A. Jebamani, Social Order and the Culture of Corruption in India (2017).
[5] M.I. Steinberg and W.K.S. Wang, Introduction: Insider Trading (PLI, New York, 2nd edn., 2006).
[6] A. Naicker, Money Laundering: Fiscal and Economic Implications and the Potential Impact of the Financial Intelligence Centre Act (FICA) (2004).
[7] R.B.M. Sadique, A.M. Ismail, J. Roudaki, N. Alias and M.B. Clark, Corporate Governance Attributes in Fraud Deterrence (2019).
[8] S. Ramamoorti, D. Morrison and J.W. Koletar, Bringing Freud to Fraud: Understanding the State-of-Mind of the C-Level Suite/White Collar Offender through “A-B-C” Analysis (2009).
[9] C.N. Mbonu and R.E.K. Worlu, Ethical Leadership in Organisations: A Synthesis of Literature (2018).
[10] L. Inaya and E. Ochuko Isito, An Empirical Analysis of Social Impact of Fraud on the Nigerian Banking Industry (2016).