Economics

A Project on

“A Study On Financial Crimes And Pertaining Legislation ”

Economics

Semester III

2020-21

Submitted to

Prof. Parinaaz Mehta | Kirit P. Mehta School of Law

Submitted by

Chandragupta Patil | Roll no. D020

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Table of Contents

1. Abstract............................................................................... Error! Bookmark not defined.

Chapter I ................................................................................................................................... 4

2. Introduction ...................................................................................................................... 4

Chapter II ................................................................................................................................. 6

3. Material and Methods ..................................................................................................... 6

3.1 Objectives.................................................................... Error! Bookmark not defined.

3.2 Research Methodology ............................................................................................ 6

3.3 Hypothesis................................................................................................................. 6

3.4 Review of Literature ................................................................................................ 7

Chapter III.............................................................................................................................. 10

4. Study and Findings ........................................................................................................ 10

4.1 Types of Economic Crimes.................................................................................... 10

4.1.1 Primary Market Fraud:......................................................................................... 10
4.1.2 Secondary Market Fraud : .................................................................................... 10
4.1.3 Bank Fraud :......................................................................................................... 11
4.1.4 Import and Export Frauds: ................................................................................... 11
4.1.5 Insurance Fraud :.................................................................................................. 11
4.1.6 Intellectual Property Fraud: ................................................................................. 11
4.1.7 Finance Company Fraud (Non-Banking): ........................................................... 12
4.1.8 Counterfeiting Currency ...................................................................................... 12
4.1.9 Stamp Fraud ......................................................................................................... 12
4.1.10 Economics of Financial Crimes ....................................................................... 13

4.2 Overview of Economic Crimes in India ............................................................... 14

4.3 Legislations dealing with Economic Crimes ........................................................ 16

4.4 Financial Crimes in India...................................................................................... 16

4.4.1 Satyam Scam........................................................................................................ 16
4.4.2 Aftermath: ............................................................................................................ 17

4.5 Economic Fugitives ................................................................................................ 19

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4.5.1 Vijay Mallya ........................................................................................................ 19

4.5.2 Nirav Modi ........................................................................................................... 19

4.6 Economic Offenders Act........................................................................................ 21

Chapter IV .............................................................................................................................. 22

5. Conclusion ...................................................................................................................... 22

5.1 Recommendations for the following measures include – ................................... 22

5.1.1 Revision of laws regulating economic infractions: .............................................. 22
5.1.2 Depriving Financial criminals of profits from crime: .......................................... 23
5.1.3 Getting a bail must be made difficult ................................................................... 23
5.1.4 Separate Tribunals ............................................................................................... 23
5.1.5 Information about Economic Offenders must be spread. .................................... 24

Chapter V ............................................................................................................................... 25

6. References ....................................................................................................................... 25

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Chapter I

1. Introduction

Crimes in society are quite common and occur very often , the topic in focus in this paper
Financial Crime , Financial crime covers a large areas which include and involve the illegal
transfer of land ownership to one's own personal use and advantage. Financial crimes include
manipulation of the economy for fraud, payment; theft; scams or tricks of trust; tax avoidance;
bribery; sedition; embezzlement; identity theft; money laundering; and forging money or
documents and counterfeiting, including the manufacture of counterfeit money and consumer
products.

They are defined by the NCRB, Government of India as “Economic crimes are a manifestation
of criminal acts done either solely or in an organised manner with or without associates or
groups with an intent to earn wealth through illegal means, and carry out illicit activities
violating the laws of the land, other regulatory statutory provisions governing the economic
activities of the Government and its administration” widely referred to as "white collar crime"
. These white collar crimes include cheating, fraud, misappropriation and larceny,
embezzlement, abuse of trust and to some degree, forgery, Counterfeit of money and
corruption1. The types and ways of committing financial crimes are every growing and
dynamic in nature .

Individuals, companies, or organised crime groups can carry out financial crimes. Victims of
financial crimes can include citizens, companies, governments, and even international
economies.

Crimes under the economics banner are of many different types and of various types, the UN
Crime survey classifies financial crime under 11 types and heads while a similar classification
of 10 types is done by the Interpol2. These classification are general, similar but use different
terminology in few cases. This similarity on international scale helps countries to work together
to fight against economic offenders and crimes in various countries.

1
Dr. Gilbert Geis in Sociological Inquiry, Vol. XXXII, No.2 (1962) at pp. 162-71
2
Donald R. Crassey, “Foreword” in Sutherland, White-Collar Crime (Holt, Rinehart Winston, New york 1961)
at p.xii.

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But despite of set definitions by international organisations, ‘Economic Crimes’ have and
includes various different methods and ways and are ever growing As far as crime is concerned,
these economic crimes are related and although similar to conventional crimes, they constitute
a different class on account of their size. Modus operandi; and the ability to make
people/state/society as collective victims of Economic losses. Economic crimes cause
considerable harm to the country's general economy by negatively affecting the country's
economy.

financial crime on a large scale affect the nation's development and growth. It weakens trust
internationally of the country and its economic interests, nation's financial integrity and
stability, thus undermining its global competitiveness, also being repulsive to investors both
from within and outside. Where the level of occurrence of economic crime is high, and
government and administration is found to be corrupt3.

White collar and economic crimes are considered same by many but they have few vital
differences , crimes of the white collar may be said to be crimes committed by professionals
such as chartered accountants, civil servants, private employees in the proceedings of their
work, Economic Crimes are crimes committed by intelligent yet cunning individuals with a
huge amount of money which belongs to the public , private or government bank.

3
Santhanam Committee report on the Prevention of Corruption (1964) at pp.18 and 65.at pp. 34

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Chapter II

2. Material and Methods

2.1 Research Methodology

This paper is a doctrinal research paper and is based on secondary data. Due to the paucity of
time and resources, the Primary data could not be collected. To gain a holistic understanding
of the research questions, the author has studied and referred several articles and papers
pertaining to the objectives of this study.

Sources of secondary data for the study includes national and international journals, research
articles, books, newspapers, government publications, research reports as well as online data
sources. In addition, online reports published by many popular newspapers, online news
journals were also referred for the study.

However, lack of financial and logistical resources acts as a limitation to the study.

2.2 Hypothesis

H0- Economic Crimes are prevalent in India.

H1-Econmic Crimes are not Prevalent in India.

H2- There exists efficient laws against Economic crimes in India

H2!-There does not exists efficient laws against Economic crimes in India

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2.3 Review of Literature

2.4.1. “Legislative measures to Deal with Economic crimes in India4” – In this paper author
defines different set of criminal offences comprises economic offences and how impact
of economic offences is faced by Members of society with financial losses but also they
could have severe impacts on the national economy. This paper presents a trends and
the pattern of economic crimes and legal steps in India to deal with these kind of crimes
along with that this paper provides insight on money laundering and financial
cybercrimes.

2.4.2. “The growing challenge of economic offences in India5”-This article highlights India’s
struggles to cope with rising financial offences and how while the number of reports of
economic crimes has risen, the reports of the police dealing with them has been patchy.
This article states that together with less arrests and low conviction rates, the rising
number of economic offences may enable unlawful elements to partake in more of these
activities. According to the article this will mean rising losses of both private and public
capital and will erode the reputation of India as a rule-based democracy.

2.4.3. “Study of Economic Crimes in India with Special Emphasis on Financial Market
Crimes and Control Measures6”- Author in his paper gives an overview of economic
crime in India and mentions how crime in itself hinders growth and development of any
country and economic development is adversely affected by the crimes that are being
committed. Author then focus on financial markets and criminal acts pertaining to them
while also mention certain measures that if effectively applied can be used to control
and mitigate such crimes.

2.4.4. “What are Economic offences in India?” 7- Author in her paper introduces readers to
economic offenses and states certain characteristics of a crime which results in it being
classified as an economic crime. Author then defines the types of economic crimes and
then the laws present in the country in regards to dealing with them. Author finally
concluded by stating that the current laws present on this topic will not be adequate in
challenging and dealing with economic crimes. Author states that there is the need of
global response against such acts. More specifically author states that confiscation of
assets acquired through illegal acts would be a positive step in combatting such crimes.

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2.4.5. “8 states account for 67.2% of financial crimes in 20178” - This article presents readers
with more factual data on economic crimes . And as the title would suggest this article
highlights the states with the most number of financial crimes , with Rajasthan, UP,
Telangana being the hub of economic crimes. This article brings to the reader’s
attention the fact from the year 2016 to 2017 the number of economic crimes rose
substantially. This article is a fact based one which highlights to the readers the rise in
economic crimes , but at the same time this article fails to mention what factors have
led to the rise of these crimes .

2.4.6. “Satyam Scam – The Story of India Biggest Corporate Fraud9”- In this article author
deals with one the biggest scam in our country, the Satyam Scam, he goes in to the
general history of the company and the main accused and highlighted information
closely connected to the commission of the Scam. Author tells us about the illegal
functioning of the company, how the main accused was able to escape liability for such
a long time and how events folded ounce the scam was revealed to the general public
and the authorities.
2.4.7. “Vijay Mallya declared a ‘fugitive economic offender’ by PMLA court”- This article
deals with the declaration of Vijay Mallya as an economic offender by an Indian Court.
This article tell us which court and why have decided to declare Vijay Mallya in such
a way along with shedding slight amount of light on the “Fugitive Economic Offender
Act”. This article tells us that Under, the Prevention of Money Laundering act (PMLA)

4
Animesh Bharti, LEGISLATIVE MEASURES TO DEAL WITH ECONOMIC CRIMES IN INDIA,
UNAFEI, https://www.unafei.or.jp/publications/pdf/RS_No67/No67_22PA_Bharti.pdf (Last visited on Dec 2 =,
2020 ).
5
Vineet Sachdev, The growing challenge of economic offences in India, Hindustan Times , (Oct 7,2020),
https://www.hindustantimes.com/india-news/the-growing-challenge-of-economic-offences-in-india/story-
CC1uaeBv1vQCuFKd3fkVtL.html.
6
Salman Agha, Study of Economic Crimes in India with Special Emphasis on Financial Market Crimes and
Control Measures,SSRN, (Oct 15, 2003).
7
Aparajita Jha, What are Economic offences in India?,Law Crica, (June 16,2020 ), https://lawcirca.com/what-
are-economic-offences-in-india/ .
8
Gireesh Prasad and Utpak Bhaskar, 8 states account for 67.2% of financial crimes in 2017, Mint,(Oct
22,2019), https://www.livemint.com/news/india/eight-states-accounted-for-bulk-of-economic-crimes-in-india-
11571741063964.html .
9
Aron Almedia, Satyam Scam – The Story of India’s Biggest Corporate Fraud!, Trade Brains, (Oct 20 ,2020 ),
https://tradebrains.in/satyam-scam/ .

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Vijay Mallya, was declared a fugitive economic offender under Section 12 of the Act,
was by M.S. Azmi in his verbal order on a request from the Enforcement Directorate
(ED) .This article also briefly states the articles under which such a declaration was
made.
2.4.8. “What is PNB Scam10”- Through this article we find the details of the Punjab national
bank scam , and of the main accused Nirav Modi. This article tells us about the
background of the accused , a little background of his enterprise and then proceeds to
tell readers on how the 10,000 crore scam occurred. Through this article we find that it
was with the help of Fake letters of Understanding that a fraud of such a level was
committed. This article also indulges into details about the aftermath that occurred
when the fraud unfolded, the current proceeding and whereabouts of the prime accused
Nirav Modi.
2.4.9. “After Vijay Mallya, Nirav Modi: Who is a ‘fugitive economic offender’?11”- This
article explains who can be considered as an economic offender under the Prevention
of Money Laundering Act. After a brief analysis of the act, this article discusses the
cases of Vijay Mallya and Nirav Modi and the extent of proceedings against them. This
article tells us that Nirav Modi is only the second person to be declared as an economic
fugitive after Vijay Mallya. This article tells us why there was need of such a law ,
reason stated was the fact that no recourse existed when economic offender takes
asylum in other countries. And that the laws already present were not adequate and time
consuming.
2.4.10. “Measures To Combat Economic Crime, Including Money-Laundering12” In this report
submitted in the United Nations there is extensive explanation in regards to the common
economic crimes being committed around the world. The reports concludes by stating
the need to counter crimes efficiently and the need of collaboration among countries
and also gives five recommendation which intend to address the issues more efficiently.

10
What is PNB Scam , Business Standard, https://www.business-standard.com/about/what-is-pnb-scam , (Last
Visited on Dec 2, 2020).
11
After Vijay Mallya, Nirav Modi: Who is a ‘fugitive economic offender’?, Indian Express, (December 7 ,
2019), https://indianexpress.com/article/explained/after-mallya-nirav-modi-who-is-a-fugitive-economic-
offender-6152543/
12
Measures To Combat Economic Crime, Including Money-Laundering report by Swedish National Economic
Crimes Bureau, (April 2005 ),
https://www.peacepalacelibrary.nl/ebooks/files/UNAFEI_MeasuresToCombatCrime.pdf .

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These measures includes, sharing success details of stories and investigations against
economic offenses and offenders. And to implement common standards in countering
money laundering worldwide.

Chapter III

3. Study and Findings

3.1 Types of Economic Crimes

Economic offenders are found in various different areas, they have found and taken benefit of
the many loopholes in various different economic areas, it is with their fraudulent activities
that huge amount of money is being sucked away from people and economic institutions13.
Types of Economic crimes include –

3.1.1 Primary Market Fraud:

The primary market works with new securities and its issuance. Millions of small investors in
the nation were impacted by the stock market fraud of the 90's. Flyby-night competitors entered
the primary markets and collected hundreds of crores through Initial Public Offers (IPOS) and
disappeared .The irony is that the locations of over 100 businesses who collected the money
and securities are still not known either to SEBI or the government. As a result, the value of
their stock plunged, causing investors to incur heavy losses.

3.1.2 Secondary Market Fraud :

The market where previously issued securities and financial instruments are bought and sold
is known as secondary Market. Insider trading has the dangerous ability for a fortunate few
insiders in control of private information to manipulate the market and misuse undisclosed
price-sensitive information. In addition to spelling a doom for the common and tiny investors,
this kind of malpractice violates the very principal of fair and ethical business practises in
Stock Markets. In India, this malpractice has led to suffering for years, particularly when stock
market attracted small investors to the markets. There are also common instances of falsely

13
Hermann Mannheim, Comparative Criminology, Vol. II (1965) at p.479

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jacking up share prices and thus causing naive individuals to buy them. On account of frauds
of this type committed by unprincipled market actors, people have suffered heavily.

3.1.3 Bank Fraud :

Economic criminals attacked nationalised and cooperative banks and diverted off thousands of
crores by creating a criminal link with bank management. The major borrowers alone are
responsible for the enormous non-performing assets the nationalised banks are burdened
within the 90's disreputable economic criminals who set up in the States of Andhra Pradesh,
Maharashtra, Gujarat large number of UCBs (Urban Cooperative Banks) through which they
were providing unsustainable high rate of loans to themselves or to the creditors with whom
they had illegal ties14, they received thousands of crores. Of course, such banks failed, creating
chaos for the millions of small investors.

3.1.4 Import and Export Frauds:

Money laundering activities by under invoicing imports and over-invoicing exports were
primarily used by unlawful merchants and thus transformed their black money into white and
at the same time, received liberal incentives offered by the Government by the way of
exemptions of income tax earnings, etc. This is in addition to import/export fraud committed
on the basis of forgery and misrepresentation of income tax earnings, etc.

3.1.5 Insurance Fraud :

The insurance firms became victims of fraud committed by unprincipled claimants, with or
without the active intervention of insurance officials. There are very common instances of
purposely setting fire to the insured products, vehicles , warehouse, making more than one
claim on the basis of the same accident, exaggerated claims backed by dishonest surveyors.

3.1.6 Intellectual Property Fraud:

The US Federal Bureau of Investigation (FBI) reported that $3 billion worth of money was lost
globally in 2003 on its own as a result of offenders distributing copyright secured and published
digital copies of songs, videos, software and games via websites, online forums, e-mails. The
Indian music and film industry is losing about Rs. 1800 crores due to piracy, according to a
music and film market report, because there are corrupt individuals who illegally make and

14
15 Vivan Bose Commission Report, quoted in N.R. Menon, White-Collar Crime in India(1968).

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share copies of DVD films and MP3 songs without obtaining permission and paying royalties
to the producers concerned. Some websites offer the latest music from hit movies free of
charge15.

3.1.7 Finance Company Fraud (Non-Banking):

In a financial sector, NBFCs engaged in a wide range of activities such as hiring finance, loans
and investments for hire-purchase finance , facilities have played an huge role in the finance
sector. Which resulted in market participants targeting NBFCs. With deposits of Rs. 45,000
crores, the number of NBFCs, numbers rose from 24,009 in 1990, to 55,995 in 1995.
Thousands of crores of rupees were raised from investors by providing very high interest rates
and commissions that were economically unviable in the long run. Due to these high interest
many companies collapsed which led to investors and companies losing around 1200 crores
Then Reserve Bank of India established compulsory registration of NBFCs with the RBI in the
wake of the CRB scam. It is interesting to learn that of the 37,880 applications received for
registration by the RBI as at 31 March 1994, only 9000 were found eligible. Around 28,500
NBFCs did not have Rs. 25.00 lakhs of net owned funds required but they still collected crores
of rupees from investors16. To leave an investor without repayment is an Non-cognizable
offense.

3.1.8 Counterfeiting Currency

On a massive scale fake currency circulation damages the economy as well as the national
security of even old currency, and with the advent of technology, high-quality fake currency
notes have been recovered from border-crossing terrorists and in the country. In general, fake
currency are printed overseas and are channelized into India . In addition to high-quality fake
currency from across the border, computers and sophisticated printers are used by criminal
gangs and people inside the country to create and use fake currency.

3.1.9 Stamp Fraud

A massive fake stamps racket was run by Adbul Krim Telgi for many years with the active
country for many years across the length and breadth of India with the active complicity of

15
7 President‟s Commission on “Law Enforcement and Administration of Justice”, Task Force Report: Crime
and its Impact- An Assessment at pp. 102-109.
16
Pharmaceutical Enquiry Committee, Ministry of Commerce and Industry, (1954) , pp. 146-147.

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Police, Security Media and authorities of banks and insurance companies which revealed the
system's vulnerability17. The extent of the financial losses caused by this gangs alone is
estimated to be in 25000 crores. Since many other gangs are also active in various parts of the
world and in the country , the losses caused are still a issue and need to be resolved by the
efforts of government and investigative forces.

3.1.10 Economics of Financial Crimes

There are many underlying effects of an economic offense but it can generally computed that
the major loss is economically against an individual or society as whole. The activity of the
criminal justice system and the direct expense of crime reduction measures is very significant
in itself. The U.N. Survey (1990) found that on average, highly developed nations spend 2%
to 3% of their budgets on crime prevention and justice administration. A high percentage
ranging from 9 percent to 14 percent of national budgets showed the same in developed
countries. In both direct and indirect words, victims face colossal losses.

Although specific costs are available for different kinds of property loss, there are no guidelines
for measuring indirect costs. Even with regard to the former, which constitutes the direct kind,
it is always alleged that the lost property is undervalued and that the recovered properties are
overvalued accordingly18. It is not possible to easily measure and calculate the expense of the
same being indirect. Witnesses, for example, expend hours and days conducting inquiries and
trials. Consumers pay high prices for crimes related to their business in an economic crime,
without recognising that they do. Tax avoidance by the certain people leads to honest tax payers
to be more taxed. Economic Crimes discourage investment and prevents growth in the
economy.t When ravaged by crime, the low-income slums and ghettos of countries in
developing countries bear the brunt when capital is redirected to more capitalistic business . In
the rise of economic crimes of a developing country , crime's potential to distort economic
activities is more evident”.
Critical Observations were made by Justice M.C. Chagla in regards to the case of Mundhara
Scam and how big corporations and famous individuals use dubious methods to create huge
industrial empires out of scratch. In the case of Y.S., the Supreme Court Jagan Mohan

17
Monopolies Inquiry Commission Report at p. 162
18
Dr. Gilbert Geis in Sociological Inquiry, Vol. XXXII, No.2 (1962) at pp. 162-71

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Reddy v. CBI held that economic offences are deeply rooted conspiracies which involve
enormous loss of public funds and need to be taken seriously and treated as serious crimes
affecting the country's economy as a whole, posing a serious threat to the country's financial
health19.

3.2 Overview of Economic Crimes in India

India has undergone a burst of massive economies since the early 1990s. And since then
millions of investors have lost crores of rupees. Economic crimes have also caused
harm and loss of reputation in government-run institutions such as banks, public sector
undertakings Department of Telecom, Assurance Firms, etc. The extent and the modern
methods of economic crime is a growing threat to both the government and to the people.20
The concept of financial crimes were not unknown to Indians even during the times when
our constitution and criminal code were drafted. These include penalties in the Indian Penal
Code for Criminal Breach of trust which falls under section 409 , Cheating which is covered
under section 420 , provisions were also made for counterfeiting of Coins under section
232 , Selling adulterated substances and drugs under section 274, illegal use , that is
fraudulent use of Measures and weights was dealt under section 265, counterfeiting and
sale of Government stamps, And also includes the sale of fake goods which is dealt under
sections 481-489 .

Money laundering in general is the process of converting up dirty money into lawful and
accounted money in order to conceal its origins and allow it to be used in a legal way later
on. This mechanism creates a network to conceal these funds original existence. In India
this offence was covered under the violation of foreign exchange laws under the Foreign
Exchange Regulation Act (FERA) and later under the Foreign Exchange Regulation Act
(FERA) prior to the enactment of the Prevention of Money Laundering Act, 2002.
In December 2003, the Parliament of India passed the Prevention of Money Laundering
Act (PML), 2002. This Act extends to all Provinces, including Jammu & Kashmir, of the
Union Territories of India and overrides any other law in effect. The law remains effective

19
EXPLAINED: FUGITIVE ECONOMIC OFFENDERS ACT LEXLIFE INDIA, https://lexlife.in/2019/12/22/explained-
fugitive-economic-offenders-act/ (last visited Nov 30, 2020)
20
2 Paul W. Tapan, “Who is the Criminal?” 12 American Sociological Review 96-102

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under the PML Act. In India, the PML Act aims to tackle money laundering and has three
main goals:
• To prevent, combat and control money laundering
• To confiscate and seize the property obtained from the laundered money; and
• To deal with any other issue connected with money laundering in India.

There can be several reasons cited for which companies commit such frauds like making
more falsified money, creating a false image of the company for the market scenario and
misguiding Governmental authorities for tax evasion. In India, the Commission on
'Prevention of Corruption', in its report, observed, There are many reasons through which
businesses commit frauds, such as making more falsified profits, presenting a false image
of the business for the consumers , and evaded tax by misguiding government authorities.
In India, in its report, the Commission on 'Prevention of Corruption' observed, "The
advancement of technological and scientific development is contributing to the emergence
of mass society with a large rank in file and a small controlling elite, encouraging the
growth of monopolies, the rise of a managerial class and intricate institutional mechanisms.
There is a necessity for a strict adherence to high standards of ethical behaviour for even
the honest functioning of the new social, political and economic processes. The report of
the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of
companies in 1963, highlighted as to how the big industries indulge in frauds, falsification
of accounts and record tampering for personal gains and tax evasion etc.”

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3.3 Legislations dealing with Economic Crimes

A large number of economic crimes falling under the broad categories of "Cheating,"
"Counterfeiting," and "Criminal Breach of Trust," are dealt with by local police. The foregoing
special laws controlling tariffs, excise duty, taxation, foreign exchange, narcotic substances,
banking insurance, trade and commerce relating to exports and imports have been passed and
enforced in compliance with the legislative requirements by the respective Governmental
Enforcement Agencies. Law enforcement agents are also empowered to summon witnesses,
search and seize goods, record and confiscate the records. However there is no reduction in the
crime rate despite the special laws and separate regulatory authorities for the handling of
economic crimes, rather it is constantly increasing, which is a major cause of concern for all of
those concerned with the criminal justice and Laws.

3.4 Financial Crimes in India

3.4.1 Satyam Scam

In 2009, the Satyam Scam sent shock waves across India Inc and permanently altered the
corporate governance landscape in India in its aftermath. On January 7, 2009, Ramalinga Raju,
Chairman of Satyam Software Services Ltd, admitted to a Rs 7,136 crore fraud committed at
the company by him and a few others. Indian corporate governance system was shook as the
scam exposed many loopholes - unethical conduct, false accounting, insider trading, Satyam
Scandal is a result of dishonest auditing practises in collusion with auditors and chartered
accountants in corporate governance.

Towards its board, stock exchanges, regulators, investors and all other stakeholders, the
company misrepresented its accounts21. It is a fraud which included lying about the financial
health of the company, deceiving the public and other stakeholders. To illustrate the company's
good health, even simple facts such as sales, operating income, interest liabilities and cash
balances were grossly exaggerated. The promoters are the main culprits, but without the
collusion by the auditors and some members of the executive board, it is almost impossible to

21
SATYAM SCAM: ALL YOU NEED TO KNOW ABOUT INDIA’S BIGGEST ACCOUNTING FRAUD HINDUSTAN TIMES,
https://www.hindustantimes.com/business/satyam-scam-all-you-need-to-know-about-india-s-biggest-
accounting-fraud/story-YTfHTZy9K6NvsW8PxIEEYL.html (last visited Nov 30, 2020)

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misrepresent such evidence. Independent directors, it seems, had been kept in the dark about
the real account books or can be said to be involved in it. The damage and loss incurred are -
• Rs 7,855cr total amount of financial irregularities in Satyam Computer Services scam.
• 7500 Fictious invoices discovered between 2002 and 2008
• Rs 5,352.8cr of fictious revenue was reported bet.
• Rs 899.8cr of fictious interest income was recorded between 2002 and 2008.
• Rs 206.1cr of fictious foreign exchange gains between 2002 and 2008.

To allegedly divert funds from Satyam, a network of 356 investment companies was used. ·
Such companies had many transactions inside and between them in the form of inter-corporate
acquisitions, advances and loans. One such company made an investment of Rs 90.25 crore
with a paid-up capital of Rs 5 lakh and obtained unsecured loans of Rs 600 crore.

3.4.2 Aftermath:

Criminal charges against B. had also been started. In connection with the matter, Ramalinga
Raju and his brother, Rama Raju (former Managing Director), and 8 others. On April 9, 2015,
all ten defendants were found guilty of cheating, criminal conspiracy, criminal breach of trust,
forgery, and obstruction of evidence by the Special Court in Hyderabad. B Ramalinga Raju
and his brother Rama Raju were sentenced to seven years in prison and each sentenced to a
fine of 5 crore. The people convicted have appealed against the verdict. In 2009, a task force
led by former cabinet secretary Naresh Chandra was set up by the Confederation of Indian
Industries to recommend reforms. The Ministry of Corporate Affairs released Voluntary
Guidelines for Corporate Governance in 2009 based on the recommendations of this task force.
A corporate governance and ethics committee was also set up by the National Software and
Services Companies Association. The Committee recommended legislation concerning audit
committees, shareholder rights, whistle-blower policies22.SEBI amended the Listing
Agreement in April 2014 to include provisions relating to the establishment of a watch
mechanism, the role of the Audit Committee in cases of suspicious fraudulent activity or
irregularity, and the role of the Chief Executive Officer and the Chief Financial Officer in the
financial reporting and disclosure to the Audit Committee.

22
WHAT CHANGED IN THE LEGAL LANDSCAPE POST SATYAM SCAM MONEYCONTROL,
https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-landscape-post-satyam-
scam-2480623.html (last visited Nov 30, 2020)

Kirit P. Mehta School of Law 17

 Economics

SEBI framed , SEBI (Listing Responsibilities and Disclosure Requirements) Regulations

('LODR'),2015 applicable to all listed companies, in 2015, and provided for specific guidelines
on reporting/disclosure of material events and proven and suspected fraud.

With the latest Companies Act 2013, the Companies Act 1956 had been repealed (Act). The
new Act has brought in clear changes from the old Act and has implemented many steps to
support the wider group of stakeholders, with the resulting rise in the company's compliance
costs. This Act deems corporate fraud as criminal offense . It provides specific responsibilities
for auditors, cost accountants and company secretaries to disclose instances of fraud. The duty
and accountability of auditors and independent directors, who are supposed to take a more
active role, is clearly defined. In the interest of shareholders, creditors, vendors, consumers and
other stakeholders in the business, the checks and balances are implemented to ensure proper
governance and management in the company and require the previously passive stakeholders
to play a critical role. The Act provides for all listed firms to provide a monitoring mechanism
to identify and report instances of fraud and other violations, and requires a Directors'
Responsibility Statement to be part of the Board of Directors Report. It provides for
compulsory rotation every five years for individual auditors and after ten years for auditing
firms to rule out fraud and financial oversight and ensure auditors' independence.

The Serious Fraud Investigation Office has a statutory authority under the new Act and the
right to arrest which has recently been extended to them . Cases involving corporate fraud
have been aggressively prosecuted by the SFIO.

From when the Satyam scam came out, major reforms have been made in India in terms of
corporate governance. Parliament's use of criminal penalties to regulate corporate behaviour
has been on the rise. The authorities and the investigating bodies are more proactive compared
to years before Satyam Scam was unveiled. Companies' higher compliance costs only work
well to safeguard the interests of all business stakeholders23.By its sheer size and boldness, the
Satyam scam had shook both Indian and India’s regulatory authorities, but over the years it has
led to significant changes in the corporate law system of the country to safeguard shareholder
interests, greater accountability in decision-making and autonomy of statutory audits.

23
What Changed In The Legal Landscape Post Satyam Scam MONEYCONTROL,
https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-landscape-post-satyam-
scam-2480623.html (last visited Nov 30, 2020)

Kirit P. Mehta School of Law 18

 Economics

3.5 Economic Fugitives

3.5.1 Vijay Mallya

Vijay Mallya, currently awaiting extradition from the UK, is an Indian businessman. It is
reported that he defaulted on loans estimated to Rs 9,000 crore to 17 Indian banks, is accused
of fraud and money laundering in the country. The former chairman of United Spirits is also a
former Rajya Sabha member. He is also working as President of the United Breweries Party at
the moment. He has also previously worked, among other firms, as chairman of Sanofi India
and Bayer CropScience. Mallya fled to the UK in 2016, facing pressure from lenders following
the airline's crash. Mallya has promised publicly to make good on his debts and said that since
2016 he has been doing so.

Kingfisher Airlines which was one of the biggest plan of Kingfisher group was grounded in
2012 after a huge debt burden made it impossible for the famous airline to continue operations.
The airline is also being investigated for suspected diversion of funds and financial
irregularities.
On a plea from the Compliance Directorate, a special court in Mumbai ruled that absconding
liquor baron Vijay Mallya was a fugitive economic offender (FEO). Under the provisions of
the new Fugitive Economic Offenders Act that came into being in August 2019, Vijay Mallya
became the first businessman to be declared as an Economic Fugitive Offender 24.

3.5.2 Nirav Modi

He is the prime suspect and among the accused in the Punjab National Bank Scam , by
profession a jeweller and designer . Nirav Modi is a designer and luxury diamond jeweller who
was ranked 57th in the 2017 Forbes billionaires list. He is also the founder of the diamond
jewellery retail chain Nirav Modi. Modi is the president of Firestar International, the parent of
the Nirav Modi chain, which has stores in key markets around the world. He has 16 business
outlets in different locations. He is now in the United Kingdom and is in Britain seeking
political asylum against his involvement in The Punjab National Bank Scam, which is said to
be the largest scam in the Indian Banking history.

24
WHO IS VIJAY MALLYA, BUSINESS STANDARD INDIA, , https://www.business-standard.com/about/who-is-
vijay-mallya (last visited Nov 30, 2020)

Kirit P. Mehta School of Law 19

 Economics

PNB Scam
Bankers at the Brady House branch of PNB in Fort, Mumbai, used fake Letters of Undertakings
(LoUs). The LoUs were used for the importation of pearls for a period of one year for branches
of Indian banks, for which the Reserve Bank of India guidelines set a total period of 90 days.
This guidelines were oversighted by Indian banks' overseas branches. They refused to share
with PNB any documents/information made available to them by the companies at the time
they received credit from them.
On March 10, 2011, Nirav Modi issued his first fraudulent guarantee from PNB and managed
to get 1,212 more such guarantees over the next 74 months.

The Compliance Directorate (ED) obtained the international dummy companies' bank token
machines used by the fugitive diamond dealer to move the fraudulent funds. The SWIFT
network was misused by PNB workers to relay messages about fund specifications to
Allahabad Bank and Axis Bank. While all this was accomplished using SWIFT passwords, the
transactions were never registered in the core system of the bank, leaving the PNB management
for years in the dark25. Nirav Modi is the Second person to be declared as an Fugitive Eocnomic
Offender after Vijay Mallya, This declaration gave authorites to confiscate all properties and
assets of Nirav Modi and would make the much complex extradition process simpler and would
help recover losses caused to the banks the economy 26.

25
WHAT IS PNB SCAM, BUSINESS STANDARD INDIA, , https://www.business-standard.com/about/what-is-pnb-
scam (last visited Nov 30, 2020)
26
Rashmi Rajput , PNB fraud: PMLA court declares Nirav Modi as fugitive economic offender, ETTimes, (Dec
19 , 2019 ), https://economictimes.indiatimes.com/news/politics-and-nation/pnb-fraud-pmla-court-declares-
nirav-modi-as-fugitive-economic-offender/articleshow/72379898.cms .

Kirit P. Mehta School of Law 20

 Economics

3.6 Economic Offenders Act

• The Law enables an individual to be declared as fugitive economic offender (FEO) if: (i)
an arrest warrant has been issued against him for any stated offences where the value
involved is more than Rs 100 crore, and (ii) he has fled the country and refuses to face
prosecution.
• An application will be submitted to the Special Court which is being designated under the
Prevention of Money Laundering Act, 2002, to declare a person as an Fugitive Economic
Offender , and would contain details of the property that can be and will confiscated. The
Special Court will allow the person to appear at a specified place at least six weeks from
issue of notice and if the person appears the Proceedings will be terminated .
• If a individual is declared as an FEO, properties of a person can be confiscated and be
handed to the central government, free of rights and claims in the property. The central
government if it pleases dispose of the properties after 90 days. The FEO or any company
associated with the individual may be barred from filing or defending civil claims.
• An Fugitive economic offenders property may be confiscated and be in the possession of
the Central Government. The Act enables the Special Court to leave out properties where
certain people may have an interest. But it does not specify whether the central government
will share sale proceeds with any other claimants who do not have an interest.
• This Act does not require the officials to obtain a search warrant or ensure that the witness
is present before a search. This is different from other laws, such as the Code of Criminal
Procedure (Cr.P.C), 1973, which contain such safeguards. These safeguards protect against
harassment and planting of evidence. It is pertinent and must be noted that the Fugitive
Economic Offenders act of 2019 specifies that the procedure under Cr.P.C will still apply
in case of a search.
• This Act enables the authorities to confiscate property of a person who has being declared
an FEO. The provisions of this act differs from other laws, such as Cr.P.C, 1973, is that
the confiscation is final two years after proclamation as fugitive.

Kirit P. Mehta School of Law 21

 Economics

Chapter IV

4. Conclusion

There is neither a decrease in the overall amount of economic crimes, nor an increase in
the number of major scams that occur regularly in the world despite a number of steps taken
by the Governments. There is increasing agreement that the existing global structure for
the battle against financial crime is not as effective as it should be and that more needs to
be done at international, regional and national levels to better identify and reduce the flow
of illicit money, an operation of financial crimes which supports some of today's worst
problems facing society, including terrorism, sexual abuse, modern slavery. Indeed the
danger of economic crimes has taken on a severe proportion, which must be handled in a
comprehensive manner.
Hypothesis proved after conducting this study are – H0 – Economic Crimes are prevalent
in India.
And
H2!- There does not exist efficient laws against economic crimes in India.

4.1 Recommendations for the following measures include –

4.1.1 Revision of laws regulating economic infractions:

Compared to the laws enacted to deal with violent crimes such as killings, dacoits, etc the laws
regulating economic crimes are weak. Moreover the laws and the punishment present on
financial crimes have become outdated in the modern time where the innovation and the
instances of crime have increased which only tells us that there needs to be revamping of Laws
which govern economic offenses. To put things in perspective telecom fraud is causing
companies hundreds of crores of rupees annually, but the Indian Telegraph Act,1885 is the
only law through which action against the perpetrators can be taken. Three years of
imprisonment with a maximum fine of just one thousand rupees is the highest penalty given
under the Act which leads to meagre fines for crimes which caused damage crores this leads
to there to being not enough fear which would discourage people for committing fraud .
Another example which deals with there not being proportionate penalty being in place is, The
Drugs & Cosmetic Act, and the provision in IPC which relate to adulterated drugs , which

Kirit P. Mehta School of Law 22

 Economics

directs only a fine of thousand Indian rupees for the production and sale of spurious drugs while
at the same time and offender would earn from this crimes in lakhs or even crore.

4.1.2 Depriving Financial criminals of profits from crime:

While economic criminals drain off thousands of crores of rupees every year, they continue
enjoying a luxurious lifestyle on the stolen money which continue to remain with them in most
cases. Laws for economic crime should also make every attempt to ensure that the proceeds
of crime are stripped off from financial criminals and that offenders pay a price propionate to
the crime or the money stolen .

4.1.3 Getting a bail must be made difficult

In order to protect them and secure bail, economic criminals are willing to employ the best
legal minds, while they would have duped lakhs of investors that would cause investors
unparalleled anguish. The State should also include attorneys with sound legal experience and
impeccable honesty to ensure that economic criminals are not released on bail and that solid
convictions are obtained accordingly . In the judgement of Supreme Court in Narenderjeet
Singh Sahni v. Union of India it was said, “The White Collar Crimes are akin to ECONOMIC
GENOCIDE and considering for bail ofsuch accused, would be misplaced sympathy of the
Court because accused have deceived millions of countrymen who had invested their entire
life’s saving in fictitious and frivolous companies.”

4.1.4 Separate Tribunals

Due to the general increase in the number of cases pending before courts it is pertinent for the
government to create separate forums where financial crimes and criminal scan be dealt with,
these courts would specialise in financial crimes will , with expertise in financial laws and
economics. This would aim to bring justice to offenders and victims quickly. Further It is
established that economic offenders with their enormous ill-gotten riches have taken the
criminal justice system in India for a ride either they corrupt it or derail it by delay of trial, the
end result is that hardly any economic offender is prosecuted in a fair time period, examples
include the case against late Harshad Mehta the who was accused of a large financial crime the
90s and his associates are still pending trial. It is need of the hour to simplify the court
procedures involved , so as to the legal system is not undermined or subverted by economic

Kirit P. Mehta School of Law 23

 Economics

offenders and the trial can be concluded within a year or two which will be beneficial for all
involved ,namely the accused, victims and the justice system.

4.1.5 Information about Economic Offenders must be spread.

Economic criminals target various financial institutions such as banks, etc., as well as
individuals at various different locations both nationally and internationally. Therefore it is
important to alert about recognised economic criminals on online platforms along with their
photos, which will allow financial institutions and the public to become aware of their modus
operandi so as not to fall victim to fraudulent schemes.

Kirit P. Mehta School of Law 24

 Economics

Chapter V

5. References

• Dr. Gilbert Geis in Sociological Inquiry, Vol. XXXII, No.2 (1962) at pp. 162-71
• Donald R. Crassey, “Foreword” in Sutherland, White-Collar Crime (Holt, Rinehart
Winston, New york 1961) at p.xii.
• Santhanam Committee report on the Prevention of Corruption (1964) at pp.18 and
65.at pp. 34
• Animesh Bharti, LEGISLATIVE MEASURES TO DEAL WITH ECONOMIC
CRIMES IN INDIA, UNAFEI,
https://www.unafei.or.jp/publications/pdf/RS_No67/No67_22PA_Bharti.pdf (Last
visited on Dec 2 =, 2020 ).
• Vineet Sachdev, The growing challenge of economic offences in India, Hindustan
Times , (Oct 7,2020), https://www.hindustantimes.com/india-news/the-growing-
challenge-of-economic-offences-in-india/story-CC1uaeBv1vQCuFKd3fkVtL.html.
• Salman Agha, Study of Economic Crimes in India with Special Emphasis on Financial
Market Crimes and Control Measures,SSRN, (Oct 15, 2003).
• Aparajita Jha, What are Economic offences in India?,Law Crica, (June 16,2020 ),
https://lawcirca.com/what-are-economic-offences-in-india/ .
• Gireesh Prasad and Utpak Bhaskar, 8 states account for 67.2% of financial crimes in
2017, Mint,(Oct 22,2019), https://www.livemint.com/news/india/eight-states-
accounted-for-bulk-of-economic-crimes-in-india-11571741063964.html .
• Aron Almedia, Satyam Scam – The Story of India’s Biggest Corporate Fraud!, Trade
Brains, (Oct 20 ,2020 ), https://tradebrains.in/satyam-scam/ .
• What is PNB Scam , Business Standard, https://www.business-
standard.com/about/what-is-pnb-scam , (Last Visited on Dec 2, 2020).
• After Vijay Mallya, Nirav Modi: Who is a ‘fugitive economic offender’?, Indian
Express, (December 7 , 2019), https://indianexpress.com/article/explained/after-
mallya-nirav-modi-who-is-a-fugitive-economic-offender-6152543/
• Measures To Combat Economic Crime, Including Money-Laundering report by
Swedish National Economic Crimes Bureau, (April 2005 ),

Kirit P. Mehta School of Law 25

 Economics

https://www.peacepalacelibrary.nl/ebooks/files/UNAFEI_MeasuresToCombatCrime.
pdf .
• Hermann Mannheim, Comparative Criminology, Vol. II (1965) at p.479
• 15 Vivan Bose Commission Report, quoted in N.R. Menon, White-Collar Crime in
India(1968).
• 7 President‟s Commission on “Law Enforcement and Administration of Justice”, Task
Force Report: Crime and its Impact- An Assessment at pp. 102-109.
• Pharmaceutical Enquiry Committee, Ministry of Commerce and Industry, (1954) , pp.
146-147.
• Monopolies Inquiry Commission Report at p. 162
• Dr. Gilbert Geis in Sociological Inquiry, Vol. XXXII, No.2 (1962) at pp. 162-71
• Explained: Fugitive Economic Offenders Act Lexlife India,
https://lexlife.in/2019/12/22/explained-fugitive-economic-offenders-act/ (last visited
Nov 30, 2020)
• 2 Paul W. Tapan, “Who is the Criminal?” 12 American Sociological Review 96-102
• Satyam scam: All you need to know about India’s biggest accounting fraud Hindustan
Times, https://www.hindustantimes.com/business/satyam-scam-all-you-need-to-
know-about-india-s-biggest-accounting-fraud/story-
YTfHTZy9K6NvsW8PxIEEYL.html (last visited Nov 30, 2020)
• What changed in the legal landscape post Satyam scam Moneycontrol,
https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-
landscape-post-satyam-scam-2480623.html (last visited Nov 30, 2020)
• What Changed In The Legal Landscape Post Satyam Scam MONEYCONTROL,
https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-
landscape-post-satyam-scam-2480623.html (last visited Nov 30, 2020)
• WHO IS VIJAY MALLYA, Business Standard India, , https://www.business-
standard.com/about/who-is-vijay-mallya (last visited Nov 30, 2020)
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standard.com/about/what-is-pnb-scam (last visited Nov 30, 2020)
• Rashmi Rajput , PNB fraud: PMLA court declares Nirav Modi as fugitive economic
offender, ETTimes, (Dec 19 , 2019 ),
https://economictimes.indiatimes.com/news/politics-and-nation/pnb-fraud-pmla-
court-declares-nirav-modi-as-fugitive-economic-offender/articleshow/72379898.cms .

Kirit P. Mehta School of Law 26