FINANCIAL FRAUDS NOTES

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 UNIT 1: Introduction

04th March, 2021

Financial Frauds

1. Financial fraud or financial crimes are not a novel concept. Although it does not have a set
definition, it has been occurring since time immemorial. Frauds, scams, insurance frauds,
securities frauds, money laundering and such other frauds are commonplace today. The bank
frauds in India are increasing every year. This depicts the importance and need of laws and
legislation in this arena.
2. Historical Developments
a) Industrial Revolution: Before the industrial revolution, there were not many financial
crimes. With industrialization, the earning gap started to grow. The industrialists earned
more while the common people earned less. The economic crimes started with the
industrial revolution.
b) Introduction of Technology: The gap between rich and poor increased and the financial
crimes also increased. The persons well versed in technology earned more in
comparison to those who were not conversant with technology. Through the advent of
technology, the world became closer and instances of financial crime increased.
c) Artificial Intelligence: This enabled commission of such crimes.
d) The ease of doing business is usually followed by the ease of committing a crime.
e) These crimes are in the nature of white-collar crimes, wherein the rich use their status,
position and resources to procure more money. As the earning gap increased, these
crimes increased.
3. Economic Crimes
a) Economic crimes are different from social crimes. The SC, while making this
distinction between economic and general crimes.
b) In P. Chidambaram v. Directorate of Enforcement (2009) the SC discussed about the
availability of anticipatory bail. It is an extraordinary remedy. Before giving this
remedy, the SC stated such remedies should be applicable differently in an economic
crime since they affect the economic fabric of the society.
c) Economic offenses directly affect a large number of people, as opposed to other social
crimes. This direct impact on people is what aggravates the gravity of economic
offences.

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 d) The Economic offence also affects the social and economic development of the country
adversely. It affects the GDP, the general market environment and the subsequent
developments. Eg: When a bank fraud is committed in the public sector bank, in
practicality, the money involved in such crime is not recovered by the bank. The
government then has to make special provisions in order to bail out such bank from the
adversity.
e) Economic crimes also cause a social damage, which is usually immeasurable and
invisible.
f) Economic crimes tend to diver the much-needed resources for boosting the country’s
public services. While under normal circumstances, these funds would have been used
for improving public services.
g) In a country like India, the impact of economic crimes is exponentially more since
social welfare in ingrained into every aspect of governance and adversely affects the
same.
h) In India, corruption and financial frauds are rampant and prevalent from a long time.
4. Reasons for Rampant corruption and financial frauds:
a) Selective judicial action- Sometimes the judiciary does not take action against certain
influential persons.
b) Insufficient prosecution of these types of crimes- In addition, the prosecution may be
compromised, and with the sufficient funds, form a strong defense.
c) Link of various powerful actors backed with political and economic influence.
d) Low levels of democracy, weak civil participation and low political transparency.
e) Lack of transparent laws and procedures.
f) Greed for money.
 Meaning:
1. Financial crimes or economic crimes involve crimes committed through deceit, by making
false promises and false representations, with the motive of financial gain.
2. It often involved the unlawful conversion of the ownership of the property to one’s own
personal use.
3. It is separate from common theft or robbery by abuse of position of trust. Thus, where an
influential person misuses his position for such unlawful financial gains, it is in this ambit.
4. Financial frauds are also a type of Economic Crime.
5. The financial fraud can be committed by a group of people, or a single person or a corporate
entity. The common aspect is such crime is committed against State and its authorities.
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6. The NCRB (National Crime Records Bureau) defined financial crimes as “a manifestation
of criminal acts in an organized manner with the intent to earn wealth through unlawful
means.” Unlawful includes violation of any State or central law or legislation.
7. Such crimes are called ‘White Collar Crime’ usually because such persons occupy some
office and have a position of responsibility. White Collar Crimes are financial crimes but
all financial crimes are not white-collar crimes, since even any individual who is not in
such position can commit a financial offence, but it is not a white-collar crime.
8. Financial crime can be committed by:
a) an institution, irrespective of private or public. This is usually seen in insurance frauds,
tax evasion, money laundering, market manipulation etc.
b) An individual, including public officials. These include bribery, embezzlement, identity
theft or other financial crimes.
 Financial Frauds:
1. ‘Fraud Omnia Vitiate’ – Fraud vitiates everything. Fraud in the broadest sense is an
intentional deception made for any personal gain or damage to another persons’ money or
identity etc.
2. Fraud is defined under Sec. 17 of the Indian Contract Act. It is an inclusive definition. It is
not limited to its verbatim only. It includes committing any act to financially detriment
another person by deceiving him. The intention to deceive is important.
3. Such act is motivated by greed for financial gains.
4. A weak control environment in an organization also results in commission for deceitful
acts. The KPMG report states that where the control environment is weak, the persons
working there would be more likely to commit such a financial fraud.
5. A corporate fraud occurs when a company or an entity deliberately changes and conceals
sensitive information. The person who has such information and a person who is believed
to have such information would be involved in the financial fraud in such case.
6. Although a financial crime can also be committed by a person who is not in a position of
responsibility, it is more likely that a person in a position of responsibility commits such
act since he has more info and more bargaining power.
7. Companies adopt various means such as misinformation in prospectus, manipulation of
accounts and debt hiding etc. to commit financial frauds.
8. As per the KPMG Report ‘India is unprepared to handle fraud’, India is perceived as a fraud
haven due to:
a) Inadequacy of anti-fraud measures (lack of laws and implementation).
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 b) Unethical behavior of employees. This involves greed and inclination for doing the
crime, combined with weak control environment in the organization.
9. As per this report, the senior members are more likely to commit fraud since, they are
considered to be trust-worthy, they have lesser control environment over them, they have
access to sensitive data and they have decision-making power. It may also be committed
by outsiders such as service provides and suppliers etc., since they also have the trust of the
company.
10. When a financial crime is reported within the company, it is rarely reported to the State
authorities in order to protect the repute of the company and to avoid the hassles of legal
proceedings. Most importantly, the loss of goodwill of the company would occur when
such crime is reported and this would result in financial losses as well. Thus, the company
avoids reporting such offence to the State authorities despite getting to know of the same
through internal reporting. This is the reason why only big amounts come into the news.
The smaller amounts are usually not disclosed and internally managed.

05th March, 2021

Impact of Financial crimes on National Economy

1. It weakens the stability and international reputation of the country. It also affects the
common people. It affects the tax-payers’ money as well, since this money is supposed to
be spent on their welfare but that money gets lost in order to mitigate these financial crimes.
This is linked to the GDP and economy of the country. If a number of fraudulent activities
are reported in a country, then the reputation and foreign investments are affected.
2. Leads to unequal distribution of resources amongst the population. Less money is spent on
social welfare activities. The criminal keeps earning money until it is found out, the gap
between rich and poor increases.
3. The abundance of black money i.e., the money not accounted for during the calculation of
national income in a financial year. It won’t become part of GDP or national income and it
would reduce the tax collection. Usually, such black money is used for illegal activities.
Thus, financial crime of tax evasion leads to commission of social crimes.
4. It creates a parallel economy with people investing in fictitious sources that are not
registered with the government. This results in less money with government and gap
between rich and poor.

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5. Stagnation of government development projects across the country which weakens the
citizens’ trust in the efficiency of the government and results. The creation of black money
affects the development of the country, weakens welfare efforts, leads to social crimes etc.

Classification of financial offences from other criminal offences

1. The financial crimes are non-violent in nature. However, the negative impacts it creates
directly or indirectly are graver.
2. There are a set of organized crimes dealing with money and matters of finance.
3. Tax evasion, bank frauds, insurance frauds, havala scams etc. are examples of financial
crimes.

Financial Crimes in the IPC

This list is not exhaustive. There are other crimes in the IPC and other laws which are financial
crimes.

1. Sec. 415 – Cheating

2. Sec. 420 – Fraud
3. Sec. 409 – Criminal breach of trust
4. Sec. 232 – Counterfeiting
5. Sec. 265 – Fraudulent use of false weight or measure
6. Sec. 481 – Using a false property mark
7. Sec. 489 – Tampering property mark
8. Sec. 464 – Forgery
9. Sec. 477A - Falsification of accounts

TYPES OF FINANCIAL FRAUDS/CRIMES

 Ponzi Schemes
These are very common in occurrence. These are schemes wherein the investment schemes
promise to pay relatively high rates of return for fixed term investments. It requires people
to invest in the company and promises high returns after the fixed period.
Such schemes stay afloat till new investments keep coming in. however, once the new
investment ceases, the concerned persons flee with the money.
The money so given by the people is not invested anywhere at all. Every new investment
is used to pay off earlier investors. Thus, once the new investments stop, the scheme
collapses.

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 This is similar to the Sahara Scam. Although Sahara genuinely used to invest the money in
investment opportunities, the stoppage of inflow of investments led to the collapse of the
scheme.
Ponzi Schemes do not invest the money into any investment opportunity at all.
 Pyramid Scheme
This is similar to Ponzi scheme. This is where a company which requires the person to buy
some thing or membership and keep adding more people and bringing in more people as
members. Thus, it stays afloat till the new members keep coming in.
A sham company is created. They appoint agents who receive commission on making more
agents. The newly joined agents/members have to invest some money into the company.
This becomes a pyramid.
The incentive for the existing members/agents is the commission they receive on bringing
in new membership which invests. The incentive for new members is the high rate of return
promised for their investment amount.
Finally, at the end, the company is dissolved, and the company never repays at all.
Some schemes may purport to sell a product, but they often simply use the product to hide
their pyramid structure.
 Identity Fraud
This is impersonation and it can be offline or online (cyber crime). The criminal would act
like the person by forgery or hacking and using the personal information to steal such
person’s money.
This is more common on the internet through hacking since it is comparatively easier.
The fraudsters give instructions to the banks for fraudulent money transfer.
 Phishing
Internet banking clients receive e-mails which are tricky asking them to give account and
personal details to the website which looks like a legitimate bank.
It may also be like a link which redirects to a page which looks like a genuine bank website
OR the entire screen of the user is mirrored at the hackers’ end. The end result is stealing
personal and account details and stealing the money.
 Card Fraud
It starts with stealing or loss of card. If it is not blocked on time, then it is still used by the
criminal. Thief makes unauthorized purchases with card until the bank blocks the same.

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 Skimming
This involves stealing information off a credit card during a legitimate transaction.

06th March, 2021

 Skimming
It is a type of card fraud, where a machine is involved. When the card is swiped on the
machine, the information and data on the magnetic chip is read and accordingly the
transaction is made.
The fraudsters swipe the card through an electronic device known as “wedge” or
“skimming device” which records all information contained on the magnetic strip.
They use the stolen information for online purchase or to reproduce the card. The victim
does not know about it since the card is in his own hand.
In order to avoid this, the user must be vigilant about debit and credit alerts on the card.
 Counterfeit cards
The fraudsters steal cards’ info to make fake cards or sell card information. The victim
rarely knows because he still has the card.
 Advance fee scams
These scams are through a letter, email or phone call offering the person a large sum of
money if you can help someone transfer millions of rupees or other currency out of his
country.
Thus, the person is offered a huge commission and for transferring such amount to another
account. This makes the victim a party of a crime. To initiate the transaction, you are asked
to send the details of the bank account and some administration fee.
 Fake Prizes
The person claims that you have won a non-existent prize. They are asked to pay some
amount in order to claim the prize. They ask you to send a cheque to pay taxes or credit
card details or your account details for shipping or handling charges.
Here, they do not ask the victim to pay a huge amount. They only require the person to pay
a small amount.
Since the same message is sent to millions of people, the fraudsters collect a huge amount.
 Investment fraud
This type includes selling investments or securities, misleading information. Incorrect
insider trading tips are given. It could be false promises, hiding facts and wrong insider
trading tips.
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 The fraudsters would solicit investments through such means and this causes losses to the
investor. They might even create a fake security or fake share, which does not even exist.
 Fake Currencies
In India, only RBI has the power to issue currency. There is a system according to which
they decide the amount of currency to be issued etc. they have many options and
instruments to control the flow of money into the market i.e., liquidity.
There are certain entities which issue fake currencies by simple means such as
photocopying or by intricate means such as acquiring the prints and the minting machine
etc. The difference between the original currency and counterfeit currency is difficult to be
recognized.
Usually, the person minting the fake currency does not release it in bulk. They distribute it
in such manner that it gets into the flow of the market and mixes with the normal currency.
It is therefore very difficult to find their origins
 NBFC Frauds
It is similar to bank frauds. The commit fraud by not paying the money to the investor as
per the interest rate promised. If the borrowers do not pay back the NBFC, the NBFC would
not be able to pay back to the RBI or the other bank from which it took the money.

ROLE OF MENS REA AND ACTUS REUS IN FINANCIAL CRIMES

 In criminal law, mens rea means a guilty mind and actus reus is guilty act. Liability for
one’s actions is based on the presence of both mens rea i.e., guilty intention and actus reus.
It is given under IPC as well, as a general defense, i.e., acting in good faith without mens
rea (Sec. 81).
 The maxim actus non facit reum, nisi mens sit rea: explains the principle of criminal
liability as “an act in itself is not criminal unless it is accompanied by a guilty mind”.
 This is the general principle. However, strict liability is an exception to this general
principle.
 The principle of strict liability is imposed when atleast one element of mens rea is absent.
Strict liability crimes are those types of crimes where the defendant is responsible for
criminal action even if he does not possess the required intention for the alleged offence.
The principle was developed in the torts law case of “Rylands v. Fletcher”.
 Strict liability principle has been evolved in crimes where the impact is so huge and
magnanimous that the aspect of mens rea becomes minute in comparison.

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 This tortious principle was incorporated into criminal law as well. Acts such as keeping
hazardous materials on one’s land, counterfeiting (although here, the person should know
that the money is counterfeit), offences against government etc.
 The offence of kidnaping is another example of strict liability. It does not require mens rea.
Rape of woman less than 18 years of age, a woman below 15 years of age even though
married (Sec. 375), in such cases even where the intercourse is by mutual consent,
irrespective of mens rea, the person would be liable.
 R v. Queen: The man ran away with a girl below 18 years of age, out of love and mutual
consent. The court still held the person guilty of kidnapping.
 In offences of strict liability, the element of mens rea is presumed and it need not be proved.

Mens Rea in economic crimes

 This involves two types of cases, firstly, where an individual commits the crime and
secondly, where an organization commits the crime.
 In individual crimes, the court has given different judgments. In some cases, where the
ruling was that the person should not take ignorance of law as a defense, the strict liability
was applied. In some cases, where the act of person is not very grave, the mental element
is also seen.
 State of Maharashtra v. M. H. George (Imp. case): The case involves FERA which
prohibits the possession of gold beyond a certain threshold. The amount of gold carried by
the respondent was more than this. The respondent pleaded that he was not aware of such
law and further, his flight was only taking a halt in India and he was not staying in India.
The court held that the intentia legis is not to inquire into the mens rea. The intention is to
protect the economy of the country and preventing the crime, since the impact of the crime
is grave. Thus, mens rea is not important.
 Mak Data Pvt. Ltd. v. CIT: The court considered mens rea, and the company actually had
a guilty mind and thus became liable. The petitioner concealed income in order to evade
taxes. Upon receiving notice from the CIT, the petitioner made the payment of the amount
alleged to be evaded. The notice required the person to surrender before the court and
provide reasons. The petitioner said that he made the payment after the notice was sent.
The court stated that if you did not have the intention to evade, then he would not have
waited till the notice was sent. The court held that he had the intention to commit the offence
and therefore made him liable.

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 The Court sees whether strict interpretation must be given to the law and what is the
intention of the law.
 Sec. 11 IPC: Person includes natural and artificial person. Thus, artificial person can also
commit crime and have a guilty mind (in theory).
 A company works through its directors, members etc. When the act of the company hurts
another, in addition to such directors, members etc., the company itself must also be made
liable.
 When the director of a company commits a crime by exploiting his position, he is
personally responsible however, the victims relied upon the repute of the company, and
therefore the whole company is made liable.
 The intention of a company is difficult or impossible to be proved. Therefore, the court
does not consider the same, in the light of the grave harm caused by the crime in question.
Thus, in white-collar crimes, mens rea is not important.
 SEBI v. Cabot International Capital Corporate: The CICC has a subsidiary company in
India, Cadot India Ltd. (CIL). The CICC wished to issue preferential shares in the company,
the permits etc. were obtained from the RBI & SEBI. The actual issue was not made. Before
the actual issue, the new Takeover Code by SEBI got implemented. The company followed
the previous rules and did not follow the subsequent Takeover Code. The SEBI initiated
the case. The company pleaded that all the permits were received prior to the enactment of
the Takeover Code and thus, it was not intentional that the Code was not followed. The
SEBI Appellate Tribunal held that in such crimes, the question of mens rea does not arise
and strict liability would be applicable. They therefore, held them liable.
 47th Law Commission Report deals with socio-economic crimes and white-collar crimes.

08th March, 2021

 In case of chit-funds, the persons come together and pool an amount together. It is regulated
by the Chit Funds Act. If the company is registered under the Companies Act, then it can
be considered to be an NBFC. The RBI provides the exception that Chit funds which are
NBFCs then they are not needed to be registered under the RBI Act.

Role of Mens Rea and Actus Reus in Financial Crimes

 Multi-Level Marketing (MLM) is another kind of ponzi-scheme. Such schemes promise

benefits to persons for inducting new persons into the company. The pyramid collapses
when the company is unable to fulfill its promises.

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 State of Maharashtra v. M.H. George: There are individual crimes and crimes committed
by a company. If the purpose of the act is to cover or reduce the economic crimes, or to
regulate such activities, then it invites strict liability. If it is related to heinous crimes
affecting the body of a person, then the court includes mens rea in the crime.
 In case of companies, since no single person is involved and the impact of crime is greater,
the strict liability is applied and the company as a whole is made liable.
 Vicarious Liability principle is added into tort law since the principle has the capacity to
pay compensation to the people suffering. This is why the strict liability is applied.
 Justification for removing requirement of mens rea:
a) It is difficult to prove mens rea in such cases. The impact is too high to go into such
questions.
b) They are penalized under social welfare legislations, a purposive construction is
required to further the objectives of the Act. The object of the Act is taken into
consideration. The object is to address and reduce the economic crimes.
c) Punishment in these cases is usually light. The ultimate aim of the Act in such cases is
to protect the economy of the country and to compensate the persons who lost their
money. The punishment is not the aim of the Act. The perpetrator must repay the
amount along with penalty or compensation.
d) The intention of the criminal is immaterial in such crimes. The outcome is detrimental
impact on the economy and that is sufficient to prove the guilt.
e) They are offences in the nature of mala prohibitia and not mala in se. Mala prohibitia
is not morally wrong but wrong in law. Mala in se is both morally wrong and wrong in
law. Mala prohibitia includes some of the white-collar crimes, gambling, drugs etc.
While mala in se includes rape, murder, theft etc.

9th March, 2021

 In case of individual crimes, the court applies the test of whether, the person should be held
liable under strict liability of not. In case of corporate crimes, the court does not apply the
mens rea principle and makes the corporation strictly liable.
 Test for applying mens rea:
a) The court refers to the statute. It may be possible that one act is made an offence under
one or more statutes. In IPC, offences where mens rea is mentioned, it is applied and
where it is not mentioned, the court deems that the intentia legis is to remove the mens
rea as requirement.

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 b) Reference to other statutes: A single act may be governed under multiple laws. Eg:
Fraud under IPC, contract etc, Defamation etc. The court not only looks at the statute
in question but also refers to other statutes and analogous offences. The will of the
legislature is inquired with respect to mens rea.
c) The court also looks at the legislative history and statement of purpose of the law in
order to ascertain whether the mens rea is required to be included. The external aids
and internal aids of interpretation are used.
d) Social context of the offence: if the offence is intended to be truly criminal, the court
includes mens rea. If the offence is simply regulatory in nature or preventive in nature,
the mens rea may be excluded. In such cases, the aim is to establish control and not to
punish the offender.
e) Severity of punishment and level of stigma attached: where harsh punishments are
involved, the court would look into mens rea, since it directly affects Art. 21. If the
punishment is not that severe, the mens rea may not be proved.
f) Whether the offence is of/aimed at to be of very serious nature/danger: if the offence
causes serious danger to large number of people and severe social harm, the court
adopts strict liability and does not regard mens rea.
g) Whether rendering any offence with strict liability would assist in reducing the
instances of the offence: this provides a preventive overtone to the crime. If the persons
would be discouraged from committing the crime, the court would invoke strict liability
principle. Barnfather v. Islington - That if the application of strict liability would
discourage the commission of the offence, only then the strict liability principle must
be applied.

THEORIES OF CORPORATE CRIMINAL LIABILITY

 There are three theories in this regard.

 The liability of the company does not absolve the person from his liability to the company
and also his personal criminal liability. He may even be imprisoned and penalized.
 The aim of these theories is to provide remedy to the victims of such offence. That is why,
the company is made liable.
 Agency Theory/Doctrine of Vicarious Liability
a) The doctrine of vicarious liability makes the master liable for the act of the agent,
without any fault on part of the master.

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b) Essentials: (1) The act of the servant must be in the course of the business and, (2) even
without fault and knowledge of the master, the master would be liable.
c) Thus, the company shall be liable for the act of the agent. This is based on the principle
of respondeat superior.
d) Master is liable for the acts of the servant in course of master’s business without proof
of any personal fault of the master.
e) This principle is applied strictly in the USA in case of all corporate offences. In the
USA, in such cases, the company would be liable, even if the offence requires mens
rea. If the agent has mens rea, the company would be liable.
f) In other countries, this theory is applied in cases of strict liability offences and hybrid
offences such as pollution, drugs, food, health and safety. They do not apply this
principle when mens rea is involved in the offence.
g) In USA, the reason is that even if the companies do not have intention, someone within
the companies must have it. Intention of this individual as a part of the company is the
intention of the company itself.
h) USA has formulated a three-tier test to determine vicarious liability in United States
v. One Parcel of Land (1992):
(1) Employee should be acting within the scope and course of his employment. This is
similar to meaning of course of employment under tort law.
(2) Employee acting, atleast in part, for the benefit of the company. It is not necessary
that the company receives actual benefit. The employee intends to give benefit to
the company, even in some minute part, then it is sufficient. Even if the employee
keeps himself and his own benefit in priority and attributes a small benefit to the
company, even then it is sufficient.
(3) The act and intent must be imputed to the company. It should be related to the
company. The act must have some relevant connection to the company and its
operations.
i) Eg: an employee offering bribes, colluding with third-parties etc. while getting permits
for a company, would still make the company responsible and liable, although the
company was not involved directly in the corruption at all.
j) Within the scope and course of employment
(1) New Hampshire v. Zeta Chi Fraternity (1997): this is the first case of the SCOTUS,
although previously there were a number of cases by federal courts. The officers in
this case gave certain rebates and advantages against shipment of sugar. The court
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 held that since the officers had the work, acting in the course of their employment
and discharging their duty, they misused the same and thus, the company was made
liable.
(2) Federal courts held that the employee’s act can bind the company even where the
company has implemented strict policies prohibiting the behavior. As long as the
three-tier test is satisfied, the company is made liable. This was held in United
States v. Automated Med Labs Inc. (1985). The court held that when the
employee’s conduct is contrary to company’s compliance policies and specific
directives, the company can still be liable. Existence of effective compliance policy
will not provide an absolute defense from criminal liability but the penalty may be
reduced to some extent.
k) Benefitting the Company
(1) The benefit need not be real, simply the potential of the same is sufficient. It is
irrelevant whether the company actually receives the benefit or whether the activity
might even have been expressly prohibited. Eg: Mere attempt to do a crime or
conspiracy for a crime is punishable, although not actually committed.
(2) Employee’s mere intention to bestow a benefit will suffice. It need not be primary
aim. Even if the primary aim is personal benefit and ancillary aim is giving benefit
to the company, that also suffices.
 Identification Theory
a) This contemplates the identity between the company and the persons who constitute its
directing mind.
b) This is different from the agency theory since here, not everyone would be liable. The
person who has authority, the person who can direct the company can be made liable.
If the person has power to direct people in the company, then the company will be
liable. If not, the company will not be liable.
c) The course of duty of these individuals is not to take orders or directives from any
higher authority within the organization. It is not necessary that he must be the ultimate
director. However, if one person is the manager or the director of one particular field
wherein, he has the power to give directions and take decisions, then the company will
be made liable.
d) If the person does not have the said decision-making authority, the company would not
be held liable.

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 e) The doctrine provides that the action and mental stage of the company is found in the
actions and state of mind of the employees and officers of the company who are
considered the directing mind of the company. This is different from agency theory
wherein, act of every employee makes the company liable.
f) This theory developed as an attempt to overcome the problem of imposing primary
corporate liability for offences that insisted on proof of criminal fault. In case of mental
state of company, the mens rea cannot be proved. However, the mens rea is attributed
to the persons working for the company.
g) Unlike the agency theory, individual employee is presumed to be acting as the company
and NOT for the company. The directing mind IS the company.
h) Main underlying principle is:
(1) Detection of guilty mind
(2) Identification and recognition of the individual who will be identified as the
company itself. It must pin-point to the decision-maker and not merely name the
company as a whole.
i) Botton Engineering Company Ltd. v. Graham & Sons (1957): the court linked and
compared the company to a human body. Lord Denning stated that human has brain
and nerve centers, which give commands. In company, the directors and managers give
the aforesaid commands and other employees follow the command, just as hands, legs
etc. Therefore, the company can be made liable for the acts of the directing mind.
 Thus, in cases where strict liability is applied, agency theory is applicable. Where the mens
rea is required, the identification theory test is applied to see the mens res of the decision-
makers.
 Doctrine of Direct Liability
a) Identification theory would not make the company liable if the company proves that it
exercised due diligence to prevent the conduct.
b) In direct liability, to fill this gap, the fault of the company can be established by proving
that the company failed to create and maintain a corporate culture that required
compliance with the laws of the country.
c) Thus, the company omits or fails to create such compliance and corporate culture
ensuring the compliance. Thus, the company would be liable.

16
 d) The company was not sufficiently vigilant on the non-compliance, or it encouraged
non-compliance, or it sleeps over such issues etc. Corporate culture existed within the
company that encouraged, tolerated or led to non-compliance of the legal responsibility.
e) This makes the company liable for the crime so committed.
 In India, the court makes the company liable in case of strict liability. Mens rea is not
required in such cases. In cases where mens rea is important, it is not very clear till now as
to whether the company would be liable or not.
 Eg: In Satyam Computers, M. R. Raju was held liable and he was held to have cheated the
company and the investors of the company as well. In India, it is not very clear yet as to
whether the company can be made liable. If the company is not liable, the people affected
would not have effective remedies. However, if the company is made liable, the investors
and shareholders would suffer without any fault of theirs, and without being part of the
decision-making process.

17
 UNIT 2: Theories of Financial Crime

10th March, 2021

THEORIES OF FINANCIAL CRIMES

 These theories are meant to understand what and how financial crimes are committed. It
deals with what motivates people to commit such crimes and investigates the predictions
and constructions about criminal behavior.
 There are 3 theories in this regard:
a) Behavioral Theory
b) Organizational Theories
c) Managerial Theories
 It does NOT deal with liability of the company. These theories only deal with what prompts
the commission of such crimes.
 In the case of Sahara, it is considered that the whole of Sahara was responsible. The highest
managerial position person was the criminal however, the other persons were not
responsible. If the main aim of the organization is to commit crime, then the whole
organization would be responsible.
 Managerial Theories overlaps between behavioral and organizational theories. It deals with
the management system involved in the commission of a crime.
 Every organization is divided into various levels for managerial convenience. The
managerial theory is not about any particular structure. It talks about how the management
of any company, involving both people and policies, how it favors the commission of a
crime.
 Thus, the managerial theory stipulates that the company must enact both policies and
workforce sensitization in order to prevent the commission of such crimes. If the
management refrains from the same, then the crime is more plausible.
 Behavioral Theory:
a) It deals with individualistic approach towards the crime. It can be committed by anyone,
even a freelancer who is remotely related to the company. It can be committed by
anyone who is freewheeling, who is unattached with any organization or any individual
who is employed in a legitimate organization.

18
b) Usually, from the past experiences, it is seen that the persons employed in organization
commits such crimes. This is because, they have both incentive and opportunity to
commit the crime. Although a freelancer has the incentive, he does not usually have the
opportunity to commit the crime.
c) It stipulates that the crime is usually committed for their own enrichment, rather than
for the organization. Most of the times, it is only for the selfish interest of the company.
It does not mean that the person is not loyal towards the company, he is simply taking
advantage of his position in the company.
d) Reasons:
(1) Differential Association Theory – Usually people associate themselves with other
people working in the organization. This theory is also known as “Social Learning
Theory” i.e., the person learns from the people with whom he is working. This
stipulates that if a person associates with people who are committing frauds, or
people who plan to commit such acts, then such person would also become involved
in these activities. Thus, they learn from such persons they associate with and
commit such crimes.
(2) Self-Control Theory – People in any organization as an individual, have less self-
control. They tend to do that which makes them earn money easily, without looking
into morals. It is not necessary that every person in a high managerial position
would commit a financial crime, but usually, given a high incentive, the persons
who lack self-control would commit such crimes.
(3) Social Bonding Theory – This is not only about association with people from one
organization, but across organizations. People in managerial positions associate
with people of such stature across organizations. In order to supplement such bond
and give benefits to each other across organizations, they might engage in such
crimes. They have a feeling of belief, attachment, commitment and involvement
towards each other. Such acts may be committed out of greed as well. It may be out
of mere feeling of friendship and attachment as well.
(4) Exchange Theory – If one has given a favour to you, you would also provide an
advantage in exchange or return of the same. Thus, this is similar to the above, but
involves the element of exchange.
(5) Control Balance Theory (Imp.) – Every person in a company has some type of
control, which may be more or less. The control balance theory makes a relation
between the control exercised by you (the power you actually have) and the control
19
 experienced by you (the power you think you have). The ratio between the same is
known as the control balance. If this ratio is unbalanced, the person exercises more
power than he actually has, this results in commission of financial crime.
(6) Role Theory – This deals with what role you have in a particular situation. This is
mostly dealing with people who are “Politically Exposed Persons - PEPs”. They are
persons who have the power to sway public opinion and influence the mind of
others at their own whims. His role will influence the commission of financial
crime. This is different from organizational theory because the people do not want
to commit the crime, but believing the PEP to be correct, they commit the crime
believing that what they are doing is right and legal. Eg: People of Sahara being
influenced by Subroto Roy.
(7) Utility Theory (Imp.) – A person commits a crime if he thinks that the utility of the
commission of the crime is in his favour. If he is getting maximum benefit/utility
of the crime, he commits the crime. This is in relation to the cost-benefit ratio. Thus,
if the cost of commission of crime is lesser than the utility or benefit derived from
the crime, then he commits the crime. Thus, the utility must be more than cost
involved in commission of crime. The cost also includes the probability of him
being caught, the penalty which might be imposed thereafter. Since the probability
of being caught is less, since the time period of being caught is very long, the utility
of committing the crime is seen to he more than the cost involved.
e) The behavioral theory conceptualizes Three Conditions of Fraud:
(1) Incentives involved in the crime / Pressure from superiors and peers for indulging
in such acts. The person may also be forced to commit such crimes by threats etc.
(2) Opportunities – This envisages whether the company policies prohibit and make
such commission difficult or whether it is easy to commit such crimes.
(3) Attitude / Rationalization – This is the attitude of the company towards these crimes
and whether they rationalize such things. It is not related to individual.
 Organizational Theory
a) Financial crimes occurring as a part of organized crimes. This includes terrorist
organizations, mafia etc. The organization itself is formed for the commission of the
crime.
b) The reason given is that a person who wishes to or intends to earn money through
unlawful means does not have the opportunity and the means for the same. They then

20
 join the organized crime rackets with the aim to earn more and more money, and obtain
the means and opportunities to do so.
c) Such crimes include money laundering, drug trafficking, smuggling, arms trade etc.
d) This includes both: Person finding the organization OR organization finding the person.
The organization has a particular goal, which is the commission of unlawful/illegal
activities. To fulfill this goal, the people are expected to commit the crime, i.e., financial
crimes.
e) The organization forces the person to commit the crime. The person cannot leave the
organization easily and forced to continue to work for the same.
f) The organization also motivates the person to such an extent that the person is overly
engrossed in fulfilling the goals of the organization to such an extent that he does not
concern himself with his own well-being.
g) Alien Conspiracy Theory – According to the USA, organized crime is committed by
people from outside the country. People from within the country commit such crimes
to gain some economic or other benefit. This theory was criticized since the alien
motivation is not necessary, people commit crimes for the purpose of incentive itself.
h) Although organized crime includes social crimes, the main motive is to earn money out
of it.

11th March, 2021

i) Potential criminals have no other choice than to join the criminal organizations, if they
want to commit crime. Model runs showed that the method adopted to allocate the
criminal organization’s payoffs and extra benefit provided by the criminal organization
play crucial role in individual’s decision to commit a crime and the way in which he or
she commits that crime.
j) These crimes are therefore more dangerous, since both individual and
group/organizational approaches are involved.
k) Two important theoretical relationships are involved:
(1) The organization forces the individual to commit the crime. It makes it difficult to
leave the organization. The organization itself promotes the persons to commit the
crime even though it involves violation of laws.
(2) The person by himself commits himself to the goals of the organization and they
feel a kind of belongingness to the organization, thus, fulfilling the goal of the
organization by their own accord.

21
l) Theories under Organizational Theory:
(1) Alien Conspiracy Theory – Perpetuated by the USA, that the alien enemies i.e.,
people from foreign countries propagate the organized crime in the USA. This was
criticized later stating that not only aliens, but even locals indulge in financial
crimes in order to earn more money. Thus, criminal organizations need not be
formed by aliens only, it is formed by locals too.
(2) Rational Choice Theory – It applies on the choice a person is making. Similar to
utility theory, here, the risk of detection of crime in comparison to the reward to be
received for commission of crime, the person tries to balance these things. After
evaluating the risk and reward, they choose to commit or not commit the crime.
Since the incentive involved is huge and the risk of getting caught is lesser due to it
being organized crime, the individual chooses to commit such crimes. Eg: Russian
Mafia taking advantage of admin corruption and bribery to propagate organized
crime, taking advantage of lower chance of detection and getting caught.
(3) Cultural Deviance Theory – The people who come from the lower strata of the
society, such as slum dwellers, usually indulge in such crimes in order to come and
blend into the upper classes of the society. When such cultural gap is more, more
organized crime is seen. Since such persons do not have the means to commit crimes
on an individual level, the behavioral theory would not have application and
organized crime is preferred.
(4) Social Control Theory – This deals with the involvement of the community. Thus,
the community gets influenced. Certain social norms are established which are
followed by the members of the society. The theory deals with why people follow
the societal norms and do NOT commit crimes. A person who is living in a society
has bonds with the members of the society. This theory stipulates that when such
bonds are broken, some disrespect is shown to him, then he would break these bonds
and go against the societal norms and commits crime. He then joins another society
which commits the crime, i.e., joining organized crime. It gives incentive and also
fulfills the need for bonding with other members. The factors which break the bond
with society are both (1) internal factors and, (2) external factors.
m) Organizational Theory is also based on the Theory of Network Structure or Network
Coverage. The criminal organizations have their own network structures and they work
in that structure itself. The work is divided and delegated. They carry out their
operations as per this network structure.
22
 Managerial Theory
a) It stipulates either people being giving power by the organization and managing the
affairs of the organization OR people directly becoming part of management and
acquiring power by themselves and directly getting control.
b) It deals with both individual and organizational perspective.
c) These theories have been applied to the financial crimes committed by the management:
(1) Agency Theory – This is a vertical relationship. Where there is a relation of
principal and agent, this involves a decision-making authority being given to the
agent. It results in commission of crime in 2 cases: (A) Conflict in desires and goals
- where there is a difference between the goal of principal and agent. Their points
of view do not match and there is a difference between the goals and aims of the
principal and agent. Thus, there is a difference of opinion between principal and
agent. (B) Conflict in risk preferences - Problem related to risk-sharing or risk
preferences. The amount of risk which the principal is comfortable with is different
from the amount of risk the agent is willing to take.
Garoupa opined that the organization acts as a principal and all the persons involved
are agents. The criminal firm thus works as a family business. Since it is a family,
without getting hold of the agent, it is not possible to get to the firm or the principal.
The agents, once caught, try to prove that they are acting independently so that the
other agents or the principal firm is not caught. They minimize the disadvantage
they can cause to each other.
(2) Alliance Theory – This talks about partnership. This is a horizontal relationship.
Here, there is no principal above the agent. Here, the partners are at equal footing.
In addition to the contract of the persons to act as partners, trust plays a very
important role. Trusts involved includes:
 Individualized trust relates to specifically agreeable behavior of an individual.
Thus, the trust placed on different persons is different. What an individual
offers is different from one person to another. Thus, based on this, the trust
placed on different individuals differs.
 Trust based on reputation relates to trust based on publicly formed and held
opinion about the ones to be trusted. Here, even without direct relation with the
person, the trust is based on the reputation of the person. The reputation is not
an individualistic approach, it is based on the reputation of the person as held

23
 by the public at large. Here, “public” in context of organized crime would mean
the reputation of the said criminal amongst the criminal circles.
 Generalized trust which comprises constellations in which trust is linked to
social groups rather than to a particular individual. This is general trust placed
by a thief upon another thief, who is not known to him. Thus, it is linked to
social group and not to the individual. It is based on the trust associated with
the social group of smugglers, thieves, drug traffickers etc. and not based on
individual criminal. Eg: Trusting another thief not to disclose your identity to
the police upon completion of successful robbery.
 Stages of Alliance Development Process:
a) Formation Stage – forming the alliance, introducing each other, setting
goals and ground rules.
b) Operation Stage – Start working towards the goals laid down. The alliance
might even grow at this stage and involve more people.
c) Outcome Stage – This deals with the outcome of the alliance. If you are
happy with it, it would lead to stability of alliance. If not, it might lead to
termination or alliance. Sometimes, after successful completion of the
crime, the alliance gets dissolved or terminated. The status quo may or may
not be maintained later.
d) One important characteristic is “Partner Selection”. The entire theory is
based on Partner Selection. If a good partner is not involved, the entire
theory will have no relevance.
(3) Network Theory – The criminals are said to have a network, i.e., a mix of criminals
who have knowledge, expertise, contacts, powers etc. Whenever any crime is
committed, this network is used. This network is also used in order to form a new
group are recruit members to existing groups in order to commit crimes.
(4) Contractual Theory – On the basis of the cooperation between the different criminal
organizations, two or more organizations may come together to commit a crime.
The contract would stipulate every aspect from commission, role of each criminal,
sharing proceeds of crime etc. Despite such contractual stipulation, a sense of
cooperation and belonging is needed for the criminals to work together and for
successful commission of the crime.

24
 UNIT 3: Unethical Practices in Public Sector

15th March, 2021

UNETHICAL PRACTICES BY CIVIL SERVANT

 This deals with the corruption and embezzlement by public officials. Ethics is not
specifically defined. It is derived from the general perception of the society and certain acts
are classified as unethical.
 In context of public officials, the most unethical act is corruption, which also includes
embezzlement.

Corruption

 The foremost law in this regard is the Prevention of Corruption Act. Other than this, the
IPC also prescribes certain offences in this regard. Certain Rules, Directions etc. made by
State and Central Government have also been enacted in order to keep a check and exercise
control over the menace of corruption.
 Meaning of Corruption:
a) It is receiving illegal gratification for performing or not performing the duties of the
public official.
b) World bank defines it as the abuse of public office for private gain. This can be by a
private individual by means of giving bribe and by a public official by taking or asking
for money.
c) It is not necessary that private gain is only money. Any type of exchange, whether in
money or in kind, is also a private gain within meaning of corruption. Eg: Property,
Car, jewellery etc. may also be given.
d) World Bank has recognized corruption as a global/universal problem. However, it
stated that corruption is more prevalent in developing or poor countries. This is because
the regulatory mechanism is not developed and transparent. Moreover, the lack of
transparency and politicizing result in corruption.
e) It further stated that corruption is seen mostly only in civil services and politics. This is
because it is possible to abuse the power conferred upon the person. Such corruption is
harmful for the society and the nation at large. It hampers growth of country, sabotages
social justice for the people and disrupts the political and democratic fabric of the
nation.

25
 f) Corruption is independent of race, caste, creed, social status etc. It can exist anywhere
irrespective of these criteria.
g) It constitutes ethical violation on the part of the public officials including elected
(politicians) and appointed (civil servants) poses as a serious challenge to public trust.
Thus, public officials includes both civil servants and politicians.
h) Corruption strikes at the belief placed by the people in the government. It is ever present
in all governments and it is found in democratic and dictatorial systems, feudal,
capitalist and socialist economies. Thus, it is present everywhere in all forms of
government.
i) Corruption eats the wealth or people, hinders investment, weakens the rule of law
besides undermining the legitimacy of government, democratic values, human rights
and respect for rule of law. It also enables the rich and powerful people to influence the
equal opportunity given in tender processes, economic growth and representation.
j) UN Secretary General, Kofi Annan: “Corruption is the key element in economic
underperformance and a major obstacle to poverty alleviation and development”. Thus,
corruption not only hinders the economy, it also adversely affects social justice and
welfare initiatives.
k) Distinctive between political corruption and administrative corruption:
Political corruption is where the politicians manipulate the instruments of the state for
their personal benefit and terribly distort policy, to the point that they effectively own
the state and its institutions and resources.
Administrative corruption is where civil servants i.e., bureaucrats, especially street
level bureaucrats, who work on the ground level, exploit the system for their person
gains.
 Corruption in Civil Services:
a) It encompasses government officials’ behaviors and actions that involve lack of
accountability, unethical behavior and corrupt behavior. This is with respect to civil
servants.
b) Corrupt practices include bribery, patronage, nepotism, embezzlement, self-
enrichment, partiality, absenteeism, abuse of public property, abuse of government
information, bestowing favors on others etc.

26
 Bribery
a) It involves the promises, offering or giving of a benefit that improperly affects the
actions or decisions of a public servant. This includes any gratification, offering or any
money with the aim that it would change the decision of the public servant. It need not
necessarily change the decision, even if it has the capacity to do so, it is bribery.
b) It is a means to get the bureaucratic machinery to move forward, enriching himself at
public expense and may not be seen as particularly loathsome. Thus, it may not require
him to do something extraordinary. Sometimes, it is asking for gratification for simply
discharging their basic duties and functions.
 Extortion
a) This is not in reference to IPC. With reference to corruption, it involves coercing a
person or entity to provide a benefit to a public servant in exchange for acting or failing
to act in a particular manner.
b) Thus, extortion is the coercion is exercised upon the person to provide a public servant
some benefit.
c) The difference is, bribery is voluntary and the person gives a benefit to the public
servant. However, in extorsion, there is the element of force. The person is forced to
give some benefit to the public official.
d) In extortion, the bribe-giver is offering bribe to avoid the wrath of overbearing and
bribe-seeking public official.
 Embezzlement
a) The public servant misusing the money assigned for one purpose, for some other
purpose altogether. It involves theft of public resources, monetary or otherwise, by
public servants entrusted with the authority and control of such resources.
b) This involves betrayal of trust of the people by the public officer.
c) It results into plundering of public resources. It involves misuse of amount allocated for
a particular purpose.
 Fraud
a) It is not necessary that fraud is restricted to corruption. Its meaning as under IPC, or
contract act etc. may be considered as fraud, as long as it is done by a public servant.
Thus, it involves actions or behaviors by a public servant which misleads other persons
or entities into providing benefit that would not normally accrue to the public servant.

27
 b) The common man believes such representation, which is deceitful information, given
by the civil servant. Fraud is considered as an economic crime that involves some kind
of deceit for the purpose of individual or group enrichment.
c) The element of deceit and enrichment by public official is necessary.
 Abuse of Power
a) This involves a public servant using his vested authority to improperly benefit another
person, public servant or entity. This involves public servant using his vested authority
to discriminate against other persons, public servant or entity.
b) For such abuse of power, the public servant expects some personal benefit or
enrichment.
c) Thus abuse of power involves the practice of misusing discretion for personal gain
without external inducement or extortion.
 Insider Trading / Abuse of Privileged Information
a) This is information which the civil servant has, which is confidential and privileged
communication. The public servant reveals such information to unauthorized persons
for some benefit.
b) It is use of privileged information or knowledge that a public servant possesses by virtue
of occupying a public office, in order to advance his interests or the interest of persons
or entities related to the official.
c) Eg: leaking information relating to tender process etc.
d) Eg: leaking of examination paper of UPSC, giving information about government
contracts, amount allocation for certain projects etc. The person receiving the
information would get some undue advantages out of such information.
 Favoritism
a) The public official gives some benefit to persons close to or related to him, irrespective
of merit.
b) It is the preferential treatment by the public official on basis of prejudices such as family
relationship, ethnic, party or religious affiliation or even friendship. It is not necessary
that the person asks for such favor, the public official himself bestows such favor.
c) No regard is given to qualification, merit.
d) It involves nepotism, i.e., giving favor to members of certain family, related to the
public official. It also includes Cronyism i.e., giving benefit to friends and
acquaintances.

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 Other forms of corruption would also include influencing opinion of the public to get undue
advantages. Using any power or privilege to get any personal advantage, whether monetary
or otherwise, is corruption.

16th March, 2021

 Corruption, for the purpose of this unit, includes embezzlement as well.

 Causes of Corruption
a) The main aim is to get some benefit, since the possibility of getting caught is less. Thus,
as under the utility theory, the benefit or utility is more than the chances of getting
caught. This motivates the person towards committing corruption.
b) It occurs where the corrupt gain is greater than the penalty multiplied by the likelihood
of being caught and prosecuted. In India, the probability of getting caught is very less.
Further, even if found guilty, which is rare, the penalty imposed is lesser than the actual
benefit received over the years.
c) Degree of Corruption = Monopoly + Discretion – Transparency – Morality.
d) Monopoly: The chances of corruption decreases if there is no monopoly and there is
competition. Thus, where there is monopoly, the person has lesser options and this
allows monopoly. This is proportional to corruption.
e) Discretion: This means the discretion or authority or power vested in the public official.
This is proportional to corruption.
f) Transparency: It is inversely proportional to corruption.
g) Morality: This is the personal morality of the person involved i.e., the public official.
This is inversely proportional to corruption.
h) The most important reason for corruption is the greed for money and desires.
i) Higher levels of market and political monopolization makes corruption easier.
j) Low levels of democracy, weak civil participation and low political transparency allow
corruption.
k) Other reasons include:
(1) Higher level of bureaucracy and inefficient admin structures. If the powers and
checks and balances are not laid out properly, it allows corruption.
(2) Low press freedom. It reduces disclosure and transparency and allows for arbitrary
action. Press is considered as fourth pillar of democracy, with the duty of revealing
such corrupt practices.

29
 (3) Low economic freedom. This means the right to spend, the regulation of Banks,
NBFCs, regulation of liquidity etc. Sufficient freedom is not given to people and
thus, people tend to hide such money.
(4) Large ethnic divisions and high levels of in-group favoritism.
(5) Gender inequality also enhances corruption. The under-represented gender or the
privileged gender may indulge in corruption.
(6) Poverty is an important reason for facilitating corruption. The greater the gap
between rich and poor, more the discrimination, more the scope of undue
influencing etc.
(7) Political instability allows for corruption in order to gain advantage over the
political rival. If the government is stable, there would be less insecurity amongst
representatives and corruption would be reduced.
(8) Weak property rights make the persons involved to give money to the revenue
officials to resolve the matter, to avoid the case from going into litigation.
(9) Contagion from corrupt neighboring countries. Due to the integrated economies,
the exchange of people increases corruption. The dealings of the government would
also be corrupt with such countries.
(10) Low levels of education makes the persons to think that the corruption is a
common practice. They are unaware that their acts constitute corruption.
(11) Lack of commitment to society leads to lack of individual initiative to stop
corruption.
(12) Extravagant family requires the person to spend and have the greed to earn more
money and indulge in corrupt activities.
l) The corruption index in India shows that Rajasthan and MP have the highest corruption,
although in reality, it is the highest in UP & Bihar. In UP and Bihar, the corrupt
activities have been so common that they are no longer reported actively.
 Impact of Corruption
a) Individual impacts of corruption include:
(1) Disciplinary action and enquiry.
(2) Termination of employment of the public official.
(3) Criminal charges under prevention of corruption act, IPC etc.
(4) It may affect relationships with the family, friends and colleagues etc. due to the
stigma attached to being convicted or accused of corruption.

30
 b) Community impacts of corruption:
(1) Wastage of taxpayer’s funds.
(2) Loss of goods and services, in case of abuse of power, embezzlement, abuse of
public property etc.
(3) Lower community confidence in public authorities.
(4) Disadvantage to honest businesses that miss out on government contracts.
 Regulatory Provisions:
a) Prevention of Corruption Act, 1988 (PCA) is the most important legislation for dealing
with corruption. It covers individuals, civil servants, private members etc. and bribe-
giver and bribe-taker are all encompassed. It is applicable to whole of India.
b) Provisions of IPC and Companies Act can also be considered to cover bribery,
including bribery committed in the private sector. Higher degree of punishment is given
under Companies Act, as compared to IPC.
c) Central Civil Services (Conduct) Rules, 1961 and All India Services (Conduct) Rules,
1968 regulate the function of the civil and public servants.
d) Foreign Contribution Regulation Act, 2010 covers the money we receive from foreign
countries. It regulates the corruption in such transactions, including corruption under
foreign investments etc.
e) Lokpal and Lokayuktas Act, 2013 provides for ombudsman to deal with corruption.
f) Prohibition of Benami Property Transaction Act, 1988 does not deal with corruption
directly. But benami transactions may be used for corruption.
g) Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015 has encouraged people to disclose their black money for some lesser penalty. Such
Acts promote the disclosure of black money, curbing the black money and corruption.
h) Prevention of Money Laundering Act, 2002 which prohibits the money laundering and
corruption involved in the same.
 India has ratified the below mentioned international conventions on corruption and bribery:
a) UN Convention against Corruption, 2003 (Corruption Convention).
b) UN Convention of Transnational Organized Crime, 2000.
 India is also a member of international forums such as:
a) G20 Anti-corruption Action Group
b) Financial Action Task Force, which works against corruption, money laundering etc.

31
 c) India-Brazil-South Africa Cooperation Agreement, one of the aims of which is curbing
corruption.
 The World Bank has also tried to give data and stimulus in order to prevent the countries
from indulging into corruption.

17th March, 2021

CORRUPTION AND EMBEZZLEMENT UNDER THE PCA

 There is a difference between abuse of power and misuse of power. Abuse of power is
where the public official does an act which is not legal. Misuse of power is wrongful use
of power, although not illegal. Abuse of power is corruption and misuse of power is merely
morally wrong.
 Two important terms under the PCA are:
a) Public servant: The PCA came into force to punish the public servants. When they
indulge in corruption, it shakes the belief of the people. The concept of public servant
is very wide and it covers:
(1) Any person in the service of the government or remunerated by it, corporation
established under central or state act, or an authority or a body owned or controlled
or aided by the government or government company.
(2) Any person who holds an office by virtue of which he or she is authorized or
required to perform any public duty. Eg: Sec. 146-147 CrPC empowers the
executive magistrate to empower a private person to control certain situations. Thus,
only in the discharge of such public duties, to that extent, he becomes the public
servant.
b) Undue Advantage: The term undue advantage means any gratification (other than legal
remuneration) that a public servant is not permitted to receive. The term gratification is
not limited to financial or monetary gratifications. It could be in kind as well, such as
property etc. Undue advantage is any gratification which is not legally permitted, which
the public servant receives for discharging his duties dishonestly.
 Offences provided under the PCA:
a) Where a public servant takes (or attempts to take) undue advantage (for himself or any
other person) with the intention to perform/forbear (or cause performance/forbearance
of) his/her public duty, improperly or dishonestly, either by himself/herself or another
public servant.

32
 (1) Here, dishonest intention is the crux of the matter. If the person receives
gratification from the government even though he is not entitled to the same, this
also constitutes under advantage.
b) Where a public servant takes (or attempts to take) undue advantage from any person as
a reward for the improper or dishonest performance of a public duty or for forbearing
to perform such duty either by himself or by any other servant.
(1) It is not necessary that the public official himself does the job improperly or
dishonestly. Even if he convinces another public official to do so, both can be held
liable.
(2) Here too, the dishonest intention is important.
c) Where a person induces another public servant to perform improperly, or dishonestly a
public duty or to forbear performance of such duty in anticipation or in consequence of
accepting an undue advantage.
(1) Here, the inducement can be by any person i.e., private individual.
(2) If the inducement is against the will and not voluntary, it would be extortion.
d) Where any person takes (or attempts to take) undue advantage as a motive or reward to
induce a public servant, by corrupt or illegal means or by exercise of his or her personal
influence to perform (or to cause performance of) public duty improperly or dishonestly
or to forbear (or cause to forbear) such public duty by such public servant or by another
public servant.
(1) Here, the aspect of personal influence is crucial.
e) Where a person (or commercial organization) gives an undue advantage to another
person, with the intention to induce a public servant to perform improperly, a public
duty or to reward such public servant for the improper performance of public duty.
(1) Here, the bribe-giver is responsible. This provision is intended to penalize the bribe-
giver.
 Indirect bribery is also covered under the PCA. The public servant asking another public
servant to take money on his behalf is also bribery. Therefore, it is immaterial whether the
person to whom an undue advantage is given is the same person as the person who is to
perform the concerned public duty. It is also immaterial whether the undue advantage is
given by the person directly or through a third party.
 Giving any kind of benefit (favoritism) even without taking a bribe also qualifies as
corruption.

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 Defenses available under PCA:
a) If a person is compelled to give undue advantage, this will not be punishable if they
report the matter to the enforcement or investigation agency within 7 days from the date
the undue advantage was given.
(1) Here, even if the undue advantage is already given, yet the person has the option to
report the same within 7 days.
b) A person who, after informing a law enforcement authority or investigating agency,
gives (or promises to give any) undue advantage to another person in order to assist the
enforcement agency in its investigation of the alleged offence, the person would be
exempted from liability.
(1) This is for the purpose of laying the trap for the said official.
(2) The person must prove that he had the intention and willingness to stop the activity
of corruption.
 Associated persons can also be held liable as abettors, even if not involved directly.
 The authorities competent to inspect, inquire, investigate, prosecute/enforce bribery and
corruption and enforcement are:

18th March, 2021

 Authorities competent to investigate corruption:

a) CBI: The CBI was constituted by the Delhi Special Police Establishment Act. However,
it is not restricted to one State. The CBI has jurisdiction over all states. However, it
requires the permission/authorization of the State Government and the Central
Government as well in order to initiate investigation.
(1) The CBI has a special wing, called the Anti-Corruption Division, to investigate
offences relating to corruption committed by the Public Officials.
(2) CBI never gets any case on its own, it has to be transferred to the CBI. It requires
permission of the State Government to allow the CBI for investigating in their State.
(3) Without consent of the State Government, even the Central Government cannot
transfer the case to the CBI from the Police. The State Government has more powers
because Law and Order is under State List.
b) Anti-Corruption Bureau: This is different from the CBI’s Division. The Anti-
Corruption Bureau is established in each State. These are State-specific agencies, which
are responsible for detecting and investigating into corruption in each State.

34
 c) Police: It is also State specific. The States empower the police and make necessary
modifications to the Police Act. The police work under the control of the State
Government. The Police is the first agency which receives a complaint of the corruption
since it is the first point of contact. The police starts the investigation and after that the
State government takes the decision of whether the case needs to be transferred to
another agency or not.
d) Central Vigilance Commission (CVC): It is an independent body, NOT under control
of executive authorities. It also has power to direct other investigating agencies
regarding corruption matters. It can also investigate the case itself or with the help of
other agencies. It is both autonomous and independent.
e) Lokpal (Central Level) and Lokayuktas (State Level): These are also independent of
executive authorities, function as ombudsman in corruption cases of public servants.
f) Public Prosecutors: They are the government appointed advocates. They deal with
criminal cases only. They are different from Advocate General are in HC and Solicitor
and Attorney General is in SC. The public prosecutors are present in lower levels of
judiciary as well, as Asst. Public Prosecutor or Addl. Public Prosecutor. They represent
the Government (NOT the accused) and prove how corruption was committed.
g) Comptroller and Auditor General (CAG): It looks after the accounts of the State and
Central Government and acts as a watchdog for the financial transactions of the country
and the States. It has the power to check for corruption and abuse of power by the public
officials as well. It can also act as an investigating agency in such cases.
h) Special Judges: Special Courts and Special Judges specially appointed for the purpose
of dealing with corruption cases.
 The aforesaid list is not exhaustive. These agencies have additional powers as well and
other agencies also function in this regard. Their powers are not limited merely to
corruption cases.
 Safeguards to the Public Servants:
a) There are certain cases where the public servant has not actually committed corruption.
Certain cases may be false as well. Therefore, the public servants need to have some
safeguards from false cases, malicious complaints etc. The Act recognizes that they are
more vulnerable to false complaints.
b) Strict Timelines: The corruption cases must be resolved within a strict timeline. The
fast-track trial should be on daily basis. The conclusion of the case must be in 2 years.

35
c) Prior Sanction requirement: For the filing of any complaint against a public servant, the
prior sanction of the “competent government (central or state) or authority” is required.
It is usually the appointing authority. Otherwise, it is the authority which has the power
to remove such official from the office.
d) Provision of Appeal to HC or SC: The judgment of the lower courts can be subject to
revision, review and appeal before HC and SC so as to ensure that the judgment is
subject to scrutiny as well.

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 UNIT 4: Money Laundering and Regulatory Responses

MONEY LAUNDERING

 Money laundering is showing illegally earned money as white money by transferring it

through different channels. The illegal money is transferred multiple times through
different channels, so that ultimately when it is received back, it is received as white money.
 In simple terms, it is converting black money into white money. This is through various
transfers through various channels.
 Black Money is the money upon which taxes are not paid, or illegally acquired. The
illegally earned money or untaxed money may placed in offshore accounts, then through
multiple transactions it is layered and placed into the genuine system.
 Placement: the black money is placed into the bank account.
Layering: Multiple transactions are performed in order to make the money untraceable to
the illegal sources.
Integration: the money reaches the mainstream economy in a legitimate looing form.
 Money Laundering may be by splitting the large amount into smaller amounts and deposit
into bank accounts, it may be by investing in small legal businesses, it may be by shell
companies, it may be by offshore accounts in tax haven countries.
 Steps involved in Money Laundering:
a) Placement – Black money is placed into such a place where the source of the money is
not asked. This may be small deposits in bank amounts, or real estate, or new
businesses, or art etc.
b) Layering – This is where the money is transferred multiple times in order to mask the
illegal source of the same. In such layering process, the transactions involve payment
of transaction tax at multiple places and through multiple channels.
c) Integration – The money is then brought into completely legitimate channels and it is
white-washed, integrated into the economy.

19th March, 2021

 Meaning of Money Laundering

a) It means the process of transforming illegal funds of criminal origin into legal funds
flowing in the legal economy. In simple words, it is the act of making money which
comes from one illegal source to look like it comes from another legal source.

37
 b) INTERPOL’s definition of money laundering is: “any act or attempted act to conceal
or disguise the identity of illegally obtained proceeds so that they appear to have
originated from legitimate sources”.
c) The important aspect is earning money through illegal sources. Simply black money
(money on which tax is not paid) is also money laundering. However, the money has to
be obtained from illegal activities and sources OR involved in tax crime/tax evasion.
d) Reason is to conceal money or other assets from the State so as to prevent its loss
through taxation, judgment, enforcement or blatant confiscation. This is because the
money is obtained through illegal sources and this involves the risk of imprisonment,
freezing of proceeds of crime, paying of additional penalty and other enforcement
actions. Thus, escaping taxation is not the sole consideration in money laundering.
 Stages of Money Laundering:
a) Placement – Introduction of illicit cash into the financial system. This may be by deposit
in banks in small amounts over a period of time, depositing in offshore accounts,
opening a new business and showing the illicit money as revenue etc. At this stage,
when showing the money as revenue, tax is paid on it.
b) Layering – it is transfer from one account to another or the change in nature of the initial
inserted funds in order to hide the criminal source of the funds. This makes it difficult
to trace the source of the money. There are certain countries which give absolute
secrecy to account holders which makes such countries as tax havens. The details of
the same would not be given to India and thus, the source of the money would be
undisclosed.
Such tax havens have such high secrecy involved since it attracts lucrative investments
from all across the world. This brings in foreign currency and makes the banking system
flush with funds. It enriches the economy and finances of such tax haven countries.
This money is then used for developing business, increasing the value of their currency
etc.
Finally, this money is then returned to the Indian bank accounts, and as such, this
becomes untraceable to its source.
c) Integration – The money is finally brought back into the mainstream economy, i.e.,
back into the India economy. The money is then invested into shares of shell companies
created for this purpose. Thus, on paper, the money is completely white money. The
shell companies are usually in the name of relatives and family members.

38
 Finally, when such person is caught while doing some illegal activity, the court would seize
and freeze the assets of such person. However, the shell companies in the name of family
members would remain safe and even if caught, such person would be able to earn money
out of the shell companies.
 Sometimes Art exhibitions etc. are also used for the purpose of money laundering in the
layering and integration process.

22nd March, 2021

MONEY LAUNDERING REGULATIONS

 Any illegitimately earned money or black money can be turned into white money through
money laundering. Thus, it involves the process of making black money (on which tax is
not paid OR obtained from illegal sources) look legitimate is money laundering.
 In the placement stage, the illegally earned money is placed into the financial system.
Layering is the transfer from one account to another or the change in nature of the initially
inserted funds in order to hide the criminal source of the funds. It is also to cut the links
with the offenders. The integration stage involves investing the illegal gains in the legal
economy and making it general legal profits.
 Source of Income: May be through tax crimes, fraud, embezzlement, drugs, theft, bribery,
corruption etc.
 Placement: The goal is to deposit criminal proceeds into financial system. It involves
change of currency, change of denominations, transport of cash, cash deposits etc.
 Layering: The goal is to conceal the criminal origin of proceeds through wire transfers,
withdrawal of cash, deposits in other accounts etc., split and merge between bank accounts
etc.
 Integration: The goal is to create an apparent legal and legitimate origin for criminal
proceeds. It may be through creating fictitious loans, shell companies with false turnover,
sales, capital gains, deeds, contracts and other financial statements, or disguise ownership
of asset, or criminal funds being used for third party transactions.
 Various measures adopted all over the world for money laundering:
a) Structuring Deposits (Smurfing): The money is broken into smaller amounts and placed
over a period of time. This is a method of placement whereby cash is broken into
smaller deposits of money, used to defeat suspicion of money laundering and avoid
anti-money laundering reporting requirements.

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 b) Shell Companies: These are fake companies which exist solely for the purpose of such
illegal activity. The illicit money is taken as payment for goods and services and they
create false legitimate accounts and fake invoices and fake financial statements.
c) Bulk Cash Smuggling: This is similar to Hawala. The physically smuggling of cash to
another jurisdiction and depositing it in a financial institution, such as an offshore bank
in tax haven countries.
 Impacts of Money Laundering
a) Potential damage to reputation of financial institutions and market
b) Weakens the “democratic institutions” of the society
c) Destabilized economy of the country causing financial crisis
d) Gives impetus to criminal activity
e) Policy distortion occurs because of measurement error and misallocation of resources
f) Discourages foreign investors – this is because it would lead to frequent currency value
fluctuations, and their returns being in rupees, the foreign investors’ would receive
lesser returns, because of depreciation of currency value.
g) Causes financial Crisis
h) Encourages tax evasion culture
i) Results in exchange and interest rates volatility
j) Provide opportunity to criminals to highjack the process of privatization
k) Contaminates the legal transactions
 Legislation and Regulatory provisions:
a) Prevention of Money Laundering Act, 2002 is the foremost legislation in this regard to
control and criminalize money laundering. In addition to this, the regulators such as
RBI also make rules and directions to prevent money laundering.
b) The SEBI also makes regulations relating to shares and stock market, in order to
regulate FDI and FII in this regard.
c) The IRDA (Insurance Regulatory and Development Authority of India) also makes
regulations and rules relating to insurance sector and how it is used in money
laundering.
d) Since banking channels can be used for money laundering:
(1) The Indian Banks Asso. has taken a lead role in evolving a self-regulatory code to
combat money laundering activities in the banking industry.
(2) This is because money laundering adversely affects the entire banking sector.

40
 e) Standards set by international financial institutions and other such bodies are generally
accepted as good principles, practices and guidelines.
f) The Black Money Act, 2015 is aimed at taxing undisclosed foreign assets of Indian tax
payers. It also allows CGI to investigate and seek details regarding sources and carry
out discovery on undisclosed bank accounts and assets.
g) In addition, some provisions of IPC are also applicable.
 Provisions of PMLA:
a) Activities that constitute the offence of money laundering are:
(1) Directly or indirectly attempting to indulge in any process or activity which is
connected with proceeds of crime.
(2) Knowingly assisting in any process or activity connected with proceeds of crime.
This includes concealment, harboring such proceeds of crime or being involved in
the transaction.
(3) Knowingly being a party or to being actually involved in any process or activity
connected with proceeds of crime.
(4) It also includes concealment, possession or acquisition or use of proceeds of crime
and trying to project that the money is not proceeds of crime.
b) This is based on both knowledge and intention of person involved. The knowledge that
the money is black money is necessary and the intention of the person to launder the
money is also important.
c) Proceeds of crime means any property or value derived from property derived or
obtained directly or indirectly, by any person, as a result of the criminal activity
mentioned in the schedule to PMLA. The value derived from such property is also
proceeds of crime.
d) In A K Mukherjee v. State (1994) it was held that the term knowingly means the
requirement of means rea is present on the part of the person concerned.
e) Any person/entity attempting to indulge in any process or activity connected with the
proceeds of crime becomes guilty of offence of money laundering. Thus, he must know
that the money is proceeds of crime and the intent to launder it must be present.
Knowingly means knowing that the money that the person is involved with is proceeds
of crime.

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24th March, 2021

 Prevention of Money Laundering – Global Initiatives:

a) The most active international organization in this regard is the UN. There is also the
EU and association of other countries aimed at combating money laundering. The
international cooperation is important since money laundering usually involves other
countries in order to create a complex layering of transactions.
b) Money laundering is an international phenomenon, transnational cooperation is of
critical importance in the fight against this menace.
c) A number of initiatives internationally include:
(1) The UN Convention against Illicit trafficking in Drugs and Psychotropic Substances
(Vienna Convention) – this was the first convention to control money laundering
involved in trafficking of drugs. However, its scope was limited to drug trafficking.
(2) Council of Europe Convention on Laundering, Search, Seizure and Confiscation of
the proceeds of Crime – this is applicable in the EU and outside the EU as well.
This aims to address money laundering through various crimes, including but not
limited to, drug trafficking. The various crimes were discussed here. Non-EU
countries also had the option to ratify this convention and adopt the same.
(3) Basle Committee statement on Banking regulation Supervisory Practices – It called
the banking sector to come together, adopt some regulations and supervisory
practices to combat money laundering.
(4) Financial Action Task Force (FATF) – the aim of this international body was to
control money laundering and combat terrorist financing. The body gives various
recommendations from time to time, such as the 1994 recommendations. FATF was
formed in the G7 Summit. The members of the G7 Summit and other international
organizations receive the recommendations of the FATF, however, they are not
mandatorily binding. Most of the times, the countries follow it.
(5) UN Global Programme Against Money Laundering – this provided the
recommendations and the conduct of countries required, principles to be adopted
etc. to the countries.
 Vienna Convention:
a) It was the first major initiative, held in December 1988. It laid down the groundwork
for efforts to combat the money laundering by obliging the member states to criminalize
the laundering of money from drug trafficking.

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 b) The aim was on drug trafficking and the resultant money laundering. It promotes
international cooperation in investigations and makes extradition between member
states applicable to money laundering. Thus, the UN would help cooperation between
member states for extradition in cases of money laundering involved in drug trafficking.
c) Convention also establishes the principle that domestic bank secrecy provisions should
not interfere with international criminal investigations. This makes layering through
deposits in offshore accounts and tax haven more difficult. Thus, the investigation is
paramount and the secrecy must not hinder the same.
d) There is difference between signing and ratification. A Signatory country must
subsequently ratify the convention based on the discussion with domestic legislature.
 The Council of Europe Convention:
a) The 1990 convention establishes a common policy on money laundering. It deals with
the common policy on money laundering.
b) It gives definition of money laundering and common measures for dealing with the
same. This was decided by the EU Countries and it was open to other countries to adopt
as well.
c) Promotes international cooperation among member states, including states outside
Council of Europe. The reason for this is that money laundering is a global crime and
restricting the laws to EU only would not be effective in curbing and combating it.
d) It facilitates international cooperation as regards to investigative assistance, search,
seizure and confiscation of proceeds of all types of criminality. The criminal activities
include drug offences, arms dealing, terrorist offences etc. and other offences as well.
The criminal activities may be individual crimes or organized crimes as well.
 Basle Committee’s Statement of Principles
a) In December, 1988 the Basle Committee on banking Regulations and Supervisory
Practices issues a statement of principles:
(1) It aimed at encouraging the banking sector to adopt common position in order to
ensure that banks are not used to hide or launder funds acquired through criminal
activities.
(2) Since money laundering makes use of banking channels, it is the responsibility of
the banking sector to adopt such practices.

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 b) This does not restrict itself to drug-related money laundering, like the Vienna
Convention. These principles extend to all aspects of laundering through the banking
system.
c) It denied the banking system to those involved in money laundering by application of
4 basic principles:
(1) Identify the customer – Gauge whether the customer is genuine or whether he aims
at placing illicit money.
(2) Compliance with laws – This includes compliance with domestic laws, notifying
law enforcement regarding large deposits, enquiring source of large cash etc.
(3) Cooperation with Law Enforcement Agencies
(4) Adherence to the Statement – the banks must adhere to this Statement while
engaging with customers and law enforcement agencies.
 Financial Action Task Force (FATF)
a) It is an inter-government body established at the G7 Summit at Paris in 1989 with the
aim to set standards and promote effective implementation of legal, regulatory and
operational measures to combat money laundering and terrorist financing and other
related threats to the integrity of the international financial system.
b) It made recommendations recognized as international standards for combating money
laundering and the financing of terrorism. It is not mandatory to follow but since it is
based on on-ground research, data and analysis, the countries usually follow it.
c) These form a basis for a coordinated response to these threats to the integrity of the
financial system and help ensure a level playing field. International cooperation is of
essence.
 UN Global Programme Against Money Laundering:
a) It was established in 1997 to increase effectiveness of international action against
money laundering through comprehensive technical cooperation services to
Governments.
b) It is aimed at providing inclusive approach and providing facilities to countries who
need help to combat money laundering.
c) It has 3 activities:
(1) Technical cooperation is the main task of the programme.

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 (2) The Research and Analysis aims at offering the States Key Information to better
understand money laundering, and devise efficient and effective counter-measures.
This saves domestic resources, time and effort.
(3) The commitment to support the establishment of Financial Investigation Services,
including FATF, at both national and international level, for increasing overall
effectiveness of law enforcement measures.
 Ways to combat Money Laundering:
a) During the Stage of Placement: Raids may be conducted to seize the large amounts of
cash by the IT Department. It requires frequent surveillance and raids. It may receive
information through Industry Analysis, so that sham businesses which register false
revenues are discovered. Industry Analysis would allow the authorities to compare the
businesses with industry standards to determine whether the transactions and data is
genuine or fake. Sec. 40A (3) of the Income Tax Act states that if any person/business
is spending more than Rs.10,000/- for any purpose, they must justify the expense and
may even by investigated by the IT authorities.
b) During Layering: The concept of Notified Jurisdictional Area u/s. 94A under the IT Act
which promotes investment in such countries which disclose the identities of the
investors. Notified Jurisdictional Areas are those countries which are notified by the
Indian Government as countries with which we have good relations, the information
would be disclosed by the banks in those countries, and the investor would, in turn, get
some benefits such as tax rebates etc. when he invests in such notified area. When
money is deposited in countries other than those under Sec. 94A, multiple restrictions
are imposed and it would raise suspicions. Thus, investing money in tax havens
becomes more difficult. The placement itself becomes difficult.
c) During Integration: Integration means bringing the money back into the country. This
is monitored through FDI & FII regulations. The FDI regulations are stricter in India.
However, it requires more restrictions on FIIs since there is scope of money laundering
through these means.
d) Prevention and Control through the PMLA provisions.
e) Enforcement Directorate, which investigates these offences. Such body must be
empowered to a greater extent.
f) Educating people about the repercussions of money laundering, and also about earning
legitimate money.

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g) Global pressure may be created on the countries which refrain from revealing the
identity of the foreign investors and helping in combat money laundering. The
international cooperation is mandatory in this regard.

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 UNIT 5: Bank Frauds and Use and Misuse of Banks in Frauds

25th March, 2021

BANK FRAUDS

 The meaning of fraud as defined under Sec. 17 of the Indian Contract Act is applicable
everywhere, however, with necessary modifications as per the context. Thus, the essence
lies in deceitful representation with the intent that the other person relied on such false
information.
 There is no specific Act which deals specifically bank frauds. The activities which are
characterized as bank frauds are usually penalized through the various provisions of the
IPC. The RBI has agreed to make IPC applicable to the concept of Bank Frauds.
 The Bank Frauds are regulated and controlled through the rules and directions of the RBI.
The RBI also suggests certain measures to prevent the commission of such offences. The
instances of bank frauds have become lesser through the enforcement of such standards.
However, the lesser number of frauds which happen have huge amounts involved. Thus, it
is not about the number of instances of frauds, rather the huge amount involved which
makes bank frauds a menace till date.
 Meaning:
a) Bank fraud is a fraud in a bank. It may be done (1) by a bank employee, or (2) an
outsider, i.e., a customer/depositor etc. It may be committed by anyone, in a group or
individually. It may include a huge amount or a meagre amount as well.
b) RBI defines Bank Fraud as “a deliberate act of omission or commission by any person
(intention) carried out in the course of a banking transaction or in the books of accounts
maintained manually or under computer system in banks, resulting into wrongful gain
to any person for a temporary period or otherwise, with or without any monetary loss
to the bank.” The elements include:
(1) Intention of the fraudster.
(2) Committing the fraud during transaction OR making changes to accounts.
(3) Wrongful gain to any person (may be temporary or otherwise). Wrongful gain is
defined under IPC as an amount which the person is not legally allowed to get.
(4) It is not necessary that the benefit must accrue to the fraudster. It may benefit some
third party also.

47
 (5) With or without monetary loss to the bank. This prevents one from stating that it is
not bank fraud because the bank did not suffer loss.
c) Robustness of a country’s banking and financial system helps to determine its
production and consumption of goods and services. Thus, it directly affects the
economy of the country. The production and earning capability of the people is also
affected, which in turn affects consumption. This benefits the economy, since banking
sector is closely integrated with production, consumption and in turn, the economy. The
ratio of deposits and loans advanced by a bank indicates the financial status of the
people and in turn, the economy.
d) It is an indicator of the well-being and standard of living of the people of the country.
Therefore, the large number of NPAs is indicative of the economy crumbling and the
lack of capacity to pay the bank back.
e) According to N. Vittal, former CVC Commission, our system encourages corruption
and fraud due to the following factors:
(1) Scarcity of goods and services. This shows a disbalance of demand and supply,
which leads to corruption and fraud.
(2) Lack of transparency.
(3) Delay and Red Tape. Delaying in decision making and implementation and red-tape
(delay in bureaucracy) leads to corruption. Such delays also facilitate frauds.
(4) Cushions of safety have been built for the corrupt on the principle that every person
is innocent until proven guilty. This delays punishment and lacks deterrent effect.
(5) Tribalism and the tendency to shield the corrupt. Thus, people involved in the
corrupt activities usually shield their own kind and protect each other.
f) The RBI has classified frauds into the following categories for the purpose of
uniformity of reporting by the banks to the RBI and in keeping with the provisions of
the IPC:
(1) Misappropriation and criminal breach of trust, bank can report crime under this.
(2) Forging of documents and instruments and manipulation of the books of accounts.
(3) Negligence and cash shortages.
(4) Cheating.
(5) Irregularities in extension of credit facilities against illegal gratification. This
includes any undue advantage i.e., illegal gratification, in exchange of loans etc.
(6) Cases of fraud not covered above. This is an inclusive provision.

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 Provisions under the IPC:
a) Sec. 403 – Dishonest misappropriation of property: This means converting the property
of another, illegally, for one’s own use. This is an intention-based crime. Eg: A person
finding something and keeping it safe with the intent to return to actual owner.
However, if the intent is to use the property for one’s own purpose, it is an offence.
b) Sec. 405 – Criminal Breach of Trust: Here, the property is entrusted to the person and
then it is misused. However, in Sec. 403, the concept of finding the property is involved.
In criminal breach of trust, the property is entrusted to the person.
c) Sec. 415 – Cheating: This involves a number of acts and omissions, with the aim of
deceiving a person to deliver a property or gaining advantage. The main concept is
deceiving a person with the intent to get some unlawful gains.
d) Sec. 463 – Forgery: This means altering a document (usually bank cheques) which is
then misrepresented as original with the intent of getting some unlawful advantage.
e) Sec. 489A – Counterfeiting of Currency Notes: This includes mens rea. This includes
depositing and using counterfeit currency notes as well.

Major bank frauds and preventive measures

 Deposit account frauds

This fraud is committed by depositing any amount into the bank. This includes:
(1) Value of cheque deposited is inflated by inserting numbers.
(2) Nature of cheque is altered by deleting words. Eg: crossed cheques (money goes to
the account) are made bearer cheques (cash is paid to bearer of the cheque).
(3) Name of the payee in the cheque is altered and the money is withdrawn by the
fraudster.
(4) A dormant account is fraudulently operated by forging signature.
(5) Collection of the mini deposit account are not deposited with the bank and
misappropriated by the agent/middleman.
Preventive Measures:
a) The cheque or draft being deposited must be examined under strong light and preferably
UV light. In case of material alteration, it will be noticed on the document’s surface
since it will not be uniform. It would be apparent that there are changes on the surface
of the cheque on the background, printing may be disturbed, different ink would be
visible, handwriting may not be uniform or flow of writing would be disturbed.

49
 b) There should be surprise checks on cashier’s cash and cashiers should be rotated at
frequent intervals. This keeps a check on the cashier since they handle large amounts
of money. If they are not rotated, they would build contacts and accomplices for
commission of crime. This is the reason of frequent transfers.
c) Cash handling operations and book-keeping operations should be different. Thus, these
employees should not be known to each other. If they are close associates, then the
fraud would become untraceable.
d) Balancing of day books should be done everyday in the evening. This would reveal the
frauds at the earliest instance.
e) Bank statements should be issued and pass books should be updated at frequent
intervals. Updating pass books makes it easier to spot fraudulent activities.
f) The customers should be asked to confirm their balances appearing in the bank
statements/pass books. The practices of sending monthly statements to the customer via
email has also been started.
 Fraud relating to Loans and Advances:
a) A large number of loans and advances in the priority sector lending schemes turn into
NPAs since these loans are either taken by ineligible persons or used for some social or
consumption purpose rather than utilizing them for agricultural operations. This also
applies to MSME loans and agricultural loans. However, such loans usually become
NPAs.
b) Other sectors such as renewable energy, agriculture, animal husbandry, MSME etc.
come under priority sector lending. The benefits of low interest rate, ease of acquiring
loan, lower security requirements etc. are given to the person.
c) It is noticed that such loans become into NPAs more frequently. It is usually a 90-day
default period after which a lending becomes an NPA. The cause of this may be giving
the loan to an ineligible person or the loan amount being used for personal consumption.
d) Proper appraisal of the project for which the loan is advanced is not done by the staff
for a consideration. Project appraisal is most important, however, if the person gives
some consideration to the staff member, then such skewed project appraisal is possible.
e) Collaterals lodged with the bank are inadequate or valueless.
f) Value of hypothecated or pledged stocks is inflated.
g) Goods pledged with the bank are removed with the connivance of the bank staff. This
means that the actual and correct valuation is made but with collusion with bank staff,
the goods are removed from the possession of the bank.
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 h) The hypothecated stock is wrongfully sold and the go-down is set on fire to show loss
of stock due to fire. This is also by collusion with bank staff.
i) False title deeds of immovable property are lodged with the bank.
j) Duplicate title deeds lodged with several banks simultaneously. Thus, this means a loan
of a certain amount is taken from different banks, the same property is given as security.
This makes recovery process difficult and each bank gets a fraction of the loan amount.

31st March, 2021

Imp.: Difference Between Hypothecation and Pledging of Goods:

(1) In Pledge: Possession is delivered to the bank
(2) In Hypothecation: Possession need NOT be transferred. Hypothecation may be of
movable or immovable property.
Suggested Preventive measures:
a) There should be random and regular checking of the pledged and hypothecated goods.
b) The personnel deployed for the purpose should be men of proved integrity and such
persons should be subjected to frequent rotation. This is why the concept of transfer
exists.
c) Trained personnel should scrutinize the loan applications and check the quality and
quantity of goods hypothecated.
d) Project should be properly appraised. Factory site should be inspected before sanction
of loan.
e) It is preferable to disburse loan by way of direct payment to the supplier of the plant
and machinery to ensure that loan is not diverted for any other purpose. Thus, payment
is made to supplier for the goods or property involved, and not given to the person.
Thus, the money is used for the concerned purpose.
f) Verification of title of the immovable property should be done by obtaining proper
search report from the empaneled lawyer of the bank.
g) Where loan is advanced against hypothecation of vehicles, lien of the bank should be
registered with the RTO office. The bank’s right to lien is to get back charge over
property and to retain the property till the loan amount is repaid.
h) The hypothecates/pledged goods should be insured jointly with the borrower for fire
and burglary. This allows for mitigation of losses of both, borrower and bank. It also
prevents mischief, and even in case of mischief, the interest of the bank is protected.

51
 The insurance company will also investigate and if there is any mischief, it would be
revealed.

1st April, 2021

 Fraud related to computers:

a) With the advent of technology, banking has adopted the usage of computers. Frauds are
committed through:
(1) Spy software are devised by the cyber criminals to crack passwords. They enter into
the computer system of the banks and manipulate the data to transfer the money
from others’ accounts. They might use screen mirroring or other methods to get the
passwords. Once the transfer is made, it is made from one account to multiple
accounts in order to make it difficult to track the original source. This is similar to
layering in money laundering.
(2) Computer viruses are created by the mischief mongers which find way into the
computer system by way of emails. This is through phishing by malicious links.
These viruses destroy the data stored in the computers and slow down the entire
computer system. They even transmit data to some other computer and destroy it
on the actual server. Sometimes the antivirus companies themselves make viruses
so that their products are sold.
(3) Hackers can get access to the stored classified information confidential data and
they use such data for malicious purposes. It is very difficult to track them. This
may be by two ways; they may use the data and get money directly OR they may
sell the classified information to someone. Hackers even hack into military
databases, government servers, banking machinery etc.
(4) Sometimes such acts are committed not for any material gain but to derive mental
satisfaction out of other’s sufferings. Sometimes the hacker simply erases or
manipulates data, causing losses to others.
(5) Wire tapping is a crime committed by tapping the wire of the ATMs of the banks
to withdraw money out of another person’s account. The fraudster attaches a
wireless microphone to the telephone line connecting the ATM with the bank’s
computer and records signals through wire tapping while a customer is using the
ATM. These signals are later utilized for withdrawing the money.
b) The solution for such cyber crimes or usage of technology to commit bank frauds, the
Information Technology Act, 2000 and the Amendment of 2008 would be applicable.

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 CASE STUDY – PNB & NIRAV MODI CASE

 Before going into the facts of the case, it is important to understand the following concepts:
1) Buyer’s Credit – It is the credit which bank gives to purchase anything on credit and
later on, it is paid back to the bank. This is like an overdraft facility. It is a facility
given by a bank to a buyer.
This is where the buyer in India can make a promise to a seller in a foreign country,
stating that based on buyer’s credit, the seller’s bank will pay the money to the seller.
This is based on a Letter of Undertaking given by the buyer’s bank.
Eg: N is a seller of diamonds while B wants to purchase these diamonds. N’s Bank is
HSBC (in Hong Kong) and B’s Bank is PNB (in India). As soon as B receives the
diamonds, HSBC transfers the amount in N’s account, thus giving Buyer’s credit to B
based on a Letter of Undertaking given by PNB. At this stage, the Buyer’s Bank is not
involved yet. The Buyer’s Credit based transaction is done by the Seller’s Bank only.
2) Letter of Undertaking – Now, B has cash which he is supposed to give to his own bank
i.e., PNB. It also includes some charges and commission for such transaction. B may
either give cash or some security to PNB. Now, PNB (India) will have an account in
HSBC (in Hong Kong). Then, PNB (Buyer’s bank) will give a Letter of Undertaking
to HSBC (Seller’s Bank) asking HSBC to make transfer to the Seller. PNB further
promises and undertakes to transfer the amount on a later date to HSBC.
Thus, based on PNB’s promise in the LoU, HSBC makes the transfer to the Seller.
It must be noted that before giving the LoU, the PNB will conduct an evaluation of the
security offered by the Buyer.
3) SWIFT – Society for Worldwide Interbank Financial Telecommunication. This is used
for communication between banks internationally. The banks give information to each
other. Thus, PNB would communicate with HSBC through SWIFT. This is for
financial transactions and communication between banks on an international level.
4) NOSTRO Account – It is an Indian Bank having an account in a foreign bank. Thus,
PNB (India) having an account in HSBC (Hong Kong) is a NOSTRO Account.
Note: Foreign Bank having account in Indian Bank is VOSTRO Account.
5) Core Banking Solutions (CBS) + SWIFT – In CBS, all the data of transactions is noted
down to maintain transparency. It is like a log book of all transactions. The CBS is also
for all banks and it is linked with SWIFT. Thus, each transaction is revealed in both
CBS and SWIFT as well.

53
 Nirav Modi had an account in the PNB Bank. He transacted in Axis bank of Hong Kong
and Allahabad Bank of Hong Kong.
 Nirav Modi went to the PNB bank with money stating that he wished to buy diamonds from
Hong Kong. Now, Nirav Modi is the Buyer, he wanted the PNB to issue LoU to Hong
Kong Bank. Now, ideally before issuing LoU, he must give either security or the amount
to PNB.
 Based on the LoU, the Hong Kong Bank would transfer the amount into the Seller’s
account.

Nirav Modi Security/Amount PNB LoU Hong Kong Bank Amt. Seller

Diamonds

 Now, the money in the NOSTRO Account was given by Axis Bank. Although it was
NOSTRO Account of PNB, the money went out from the Axis Bank. The amount would
then be transferred by PNB to Axis Bank.

Seller Diamonds Nirav Modi Amount PNB

NOSTRO ACCOUNT
Paid by Axis Bank

 Thus, the Honk Kong Bank (Seller’s bank) was Axis Bank. The Buyer’s bank was PNB.
Axis bank only receives the LoU. The actual amount would be received only after Nirav
Modi pays to PNB and then PNB pays to Axis Bank.
 In this case, Nirav Modi did not deposit the cash neither did he give any security. The
Deputy manager of PNB and some other employees issued the LoU without due diligence
and without acquiring the cash or security.
 In PNB, the link between CBS and SWIFT is not there. The employees did not mention or
log the transactions’ details in CBS, and thus, since 2011 Nirav Modi was able to collude
with the employees and escape liability. From 2011 to 2018, such fraudulent transactions
continued.
 In 2018, the Deputy Manager got transferred and a new Deputy manager was appointed.
When Nirav Modi came in 2018, the new manager refused to issue LoU without security.

54
 Thus, the investigation was initiated and the scam of Rs. 11,000 Crores was brought to
light.
 The investigation was done by CBI and ED, by seizure of property, around Rs. 5,000 Crores
was procured. However, he then left India and the case continues to remain pending.

2nd April, 2021

Revision Class.

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 UNIT 6: Financial Frauds and Tax Evasion

3rd April, 2021

TAX EVASION

 Tax is one the most important aspects when it comes to financial crimes. Majority of the
financial crimes are in relation to taxes only. The money upon which tax is not paid is black
money. This black money is then involved in a number of other social and financial crimes.
 Meaning of tax evasion:
a) Tax evasion is different from tax avoidance. Tax evasion is illegally concealing income
or using illegal means to escape tax liability. However, tax avoidance is the use of legal
means in order to reduce one’s tax amount. Here, the income is revealed and not
concealed illegally.
b) Tax evasion is an illegal practice where a person intentionally avoids paying his true
tax liability. Those caught evading taxes are generally subject to criminal charges and
substantial penalties. It is illegal.
c) Oliver Wendell Holmes (former Justice of SCOTUS): “When the law draws a line, a
case is on one side of it or the other, and if on the safe side is none the worse legally
that a party has availed himself to the full of what the law permits. When an act is
condemned as evasion, what is meant is that it is on the wrong side of the line.” – Bullen
v. Wisconsin.
d) Tax evasion is an activity commonly associated with the underground economy. It is
money which is hidden from the purview of tax authorities. One measure of the extent
of tax evasion is, the amount of unreported income i.e., the difference between the
amount of income that should legally be reported to the tax authorities and the actual
amount reported, which is also referred as “tax gap”.
e) Gary Becker (Nobel laureate - 1968) first theorized the economics of crime on the basis
of which, Allingham and Sandmo produced in 1972 an economic model of tax evasion.
(1) It deals with the evasion of income tax, the main source of tax revenue in the
developed countries.
(2) According to them, the level of evasion of income tax depends on the level of
punishment provided by law. They opine that stricter laws would deter the evasion.
However, it is criticized on the ground that in the USA based on the ground that the
tax evasion is present even though the laws are very strict.

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 f) Tax evasion means reduced government revenues, which results in larger deficit,
forcing the government to go for borrowing or to print more money, leading to inflation.
Thus, tax evasion adversely affects the economy of the country. The monetary policies
of the RBI regulate the liquidity in the domestic markets.
g) Income tax evasion is positively influenced by:
(1) Tax Rate – Earlier, the tax rate on income was very high. The extent of evasion is
higher. Thus, the tax rate should be proportional to the income of the people, so as
to encourage the persons to pay tax and thus, having a greater amount of tax-payers.
This is better than imposing higher taxes on the small fraction of honest tax payers.
If the tax rate is low, the risk-reward ratio is such that the persons would be more
inclined to pay tax rather than to take the risk of evasion.
(2) The unemployment rate – The unemployment rate is calculated based on the
organized sector and unorganized sector poses a challenge. The higher the
unemployment rate, the more the urge to protect the existing income and reluctance
to pay tax.
(3) The level of income and dissatisfaction with government – If the level of income is
already low, the person would be reluctant to pay taxes. Further, if the government
policies are ineffective, the taxpayers would not be happy to pay taxes since their
money is not being used properly.
(4) Social Psychology for taxpayer – The social perceptions of the taxpayer may
positively or negatively motivate the person to pay tax.
(5) The complexity of tax system – if the system is simple, they would be motivated to
pay the taxes. If the system is complex, they would have to employ a CA to do their
taxes, this leads to reluctance.
(6) Complexity of tax laws
(7) Unwillingness of taxpayers to pay taxes
(8) Corruption in tax administration
 Activities relating to tax evasion:
a) Under-reporting income
b) Inflating deductions or expenses
c) Hiding Money in certain places such as lockers, false ceiling etc.
d) Hiding interest in offshore accounts. This helps in hiding source of income.
e) Overstated expenses
f) Accepted corruption
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 g) Procurement of materials without bill. A bill gives a physical evidence of the
transaction. Paying through cash and not getting the bill makes the transaction
untraceable.
h) Lack of responsibility and integrity of tax officials. This may include bribery,
reluctance to discharge duties properly.
i) Discretionary powers of tax officials. This enables corrupt activities and bribery,
enabling tax evasion.
 Perception of Judiciary on Tax Evasion:
a) UOI v. Playworld Electronics Pvt. Ltd. (1989): It is the obligation of every citizen to
pay taxes honestly without resorting to illegal means.
b) Calcutta Chromotype Ltd. v. Collector of C. Ex., Calcutta (1998): Anything which is
not legal or which is illegal, used to conceal income cannot be tax avoidance.
Colourable devices cannot be part of tax planning. Dubious methods resorting to artifice
or subterfuge to avoid payment of taxes on what really is income cannot be applauded
and legitimated. It has to be condemned and punished with the severest of penalties.
Thus, tax avoidance has to be legal. Using complex, dubious methods to maliciously
under-state income or over-state expense is not tax avoidance.
 Tax Avoidance:
a) It is the art of dodging tax without breaking the law. It is legal.
b) A situation in which a taxpayer reduces his tax liabilities by taking advantage of the
loopholes and ambiguities in the legal provisions.
c) Former British Chancellor, Denis Healey said the difference between tax evasion and
avoidance is the thickness of the prison wall.
 Features for tax avoidance:
a) Tax avoidance involves the legal exploitation of tax laws to one’s own advantages.
b) Every attempt by legal means to prevent or reduce tax liability which would otherwise
be incurred, by taking advantage of some provisions or lack of provisions in the statutes
of the country.
c) An arrangement entered into solely by or primarily for the purpose of obtaining a tax
advantage. This allows creation of another arrangement or contract or enterprise for the
purpose of obtaining a tax advantage. However, it must be legal and not merely a sham
or shell company.

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 Perception of Courts on Tax Avoidance:
a) Mcdowell & Co. Ltd. v. Commercial Tax Officer (1997-SC): Chinnapa Reddy J.
distinguished between tax evasion and avoidance. Tax avoidance is the art of dodging
tax without breaking the law. Its inception can be traced back to England in the case of
IRC v. Duke of Westminster (1936).
b) IRC v.Duke of Westminster (1936): Lord Tomlin stated that every man is entitled, if
he can, to order his affairs, so that the tax attaching under the appropriate Acts is less
than it otherwise would be. If he succeeds in ordering them so as to secure this result,
then, however unappreciative the commissioners of Inland Revenue may be of his
ingenuity, he cannot be compelled to pay an increased amount of tax.
 Measures taken by the Government to control tax evasion:
a) Statutory Provisions: This includes the Income Tax Act and any other penal provision
which penalizes tax evasion.
b) Conduct of Surveys: The IT Dept. regularly conducts surveys and Industry Analysis in
order to ascertain whether the income and expense reported seems dubious.
c) Drastic measures: These include raids, search and seizure. This is conducted by IT
officers without giving information to the assessee, and forcing such person to disclose
his true income.
d) Penalties and Prosecution: Where it is found that a person is involved in tax evasion,
penalties may be imposed and he would be prosecuted.
e) Door to Door Surveys u/s. 133 B IT Act: This is different from raid. Here, the IT
Officials conduct a door-to-door survey in order to procure information and ensure that
the system is running smoothly.
f) Special procedure for assessment of search cases: This is in case of special cases such
as the recent Income Disclosure initiative of the government under the Black Money
Act, 2015.
 Tax havens are countries or any jurisdiction wherein the percentage of tax imposed on the
companies or individuals is very less. The opening of a genuine company in such areas is
legal however, opening shell companies in such countries would be illegal.
 The parent company puts in headquarters in the tax havens and it opens its subsidiaries in
different nations. These subsidiaries have to pay taxes to the host country. However, they
reduce their tax liability by showing high expenses. The expenses are actually being sent

59
 to the parent company (this is also shown transparently). Thus, although the amount the not
concealed, the tax liability is reduced.
 Tax havens are criticized since they allow for such activities.

6th April, 2021

First Tutorial Question Paper discussion. Revision of Tax Evasion Class.

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 UNIT 8: Insurance Frauds

7th, 8th April, 2021

INSURANCE FRAUD

 This is the most common fraud in the world after tax fraud. Insurance is a risk distribution
system that requires the accumulation of liquid assets in the form of reserve funds that are,
in turn, available to pay loss claims. Insurance companies generate a large, steady flow of
cash through insurance premiums. This makes it lucrative to attractive to opt for loot
schemes or committing frauds.
 Meaning of Insurance Fraud:
a) Insurance is a contract between an insurer and an insured. The insurer indemnifies the
insured against losses, damages, or liability from an unknown event. A preexisting
condition must not exist, for insurance to be valid, like obtaining insurance after the
occurrence of the event is not an insurance.
b) Insurance fraud exists when individuals attempt to profit by failing to comply with the
terms of the insurance agreement.
c) When any act is committed with the intent to fraudulently obtain some benefit or
advantage to which they are not otherwise entitled or someone knowingly denies some
benefit that is due and to which someone is entitled, it constitutes insurance fraud.
 Who can commit insurance fraud:
Insurance fraud can occur at any stage.
a) Individuals applying for insurance: At the time of applying, the applicant may
fraudulently give wrong information. This may be giving false info of terminal disease
or co-morbidities during health insurance.
b) Policyholders: Policyholders can do insurance fraud such as soft fraud and hard fraud.
They may show exaggerated losses (soft fraud) or false losses (hard fraud).
c) Third-Party Claimants: Third-party claimants are involved in Motor Vehicle accidents.
Here, the insurance company not only insures the policyholder, but the third-parties
who may incur losses due to the accident. This is compulsory under law, i.e., to obtain
third-party insurance. In such insurance, fraud may be committed by third-party
claimants by exaggerating losses to vehicles or colluding with doctors for payment of
medical bills.

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 d) Professionals who provide services to claimants (Agents): Professionals who provide
services to the claimants i.e., by insurance employees/companies. They seek to escape
their liability to meet the claim of the person, or hidden charges, or hidden provisions
etc. They seek to not pay the claim by resorting to such methods.
 Types of Insurance Fraud:
a) Internal Fraud:
(1) This is committed within the company. This may be by the company employees by
fraudulent financial reporting, the premium is shown as unpaid or forging
signatures, stealing money from people’s accounts.
(2) This is fraud against the insurer by its Director, Manager and/or any other officer,
staff member. Eg.: Misappropriating funds, fraudulent financial reporting, forging
signatures and stealing money from customers’ accounts.
(3) Control Mechanisms: Internal audit teams independently examine the processes and
report weaknesses in control mechanisms.
b) Intermediary Fraud:
(1) The agents can commit the fraud against the policyholder or the company.
(2) They can represent to the policyholder that he has to pay a higher amount, and take
the excess amount.
(3) They can do commission fraud wherein they create fake policyholders or customers,
which is difficult to trace later on.
(4) It is fraud against the insurer or policyholders by an agent or any other third-party
administrator. Eg.: Non-disclosure or misrepresentation of risk to reduce premiums,
commission fraud.
(5) Control Mechanisms: Having documented policy for appointment of new
intermediaries and appropriate sanction policy in case of non-compliance by the
intermediary.
c) Customer Fraud:
(1) This is fraud against the insurer in the purchase or execution of an insurance product
(2) This includes: Soft Fraud and Hard Fraud
(3) Control Mechanisms: Adequate client acceptance policy, Client should be
identified and identity verified, Professional judgment based on experience should
be used.
(4) Soft Fraud: When a legitimate loss occurs, such as theft of a cell phone, and the
insured adds an item to the claim (e.g., a phone accessory) to cover the deductible,
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 it is considered a soft fraud. Soft fraud occurs when a legitimate claim is
exaggerated. Eg: Exaggerating damages/loss, deliberate or subtle lagging of claims
resolution.
(5) Hard Fraud: A hard fraud occurs when an accident, injury, or theft is contrived, or
premeditated to obtain money from insurance companies. Eg.: Staging the
occurrence of incidents, Medical claims fraud.
 Impact of Insurance Fraud:
a) Fraudulent claims and the cost of investigating suspected frauds lead to higher
premiums for honest customers.
b) It impacts the insurers’ ability to deal with genuine claims quickly.
c) Insurance frauds are used to fund and facilitate other serious crime.
d) It leads to a lot of restrictions and paper work for the insured.
e) Difficulty to insurer in satisfying the genuine customers and also catch hold to the
genuine claims.
 Examples:
a) In the UK, a man faked his own death by drowning. He was traced to Panama, where
he was living with his wife off the proceeds of his life insurance policy. Both were
convicted and served several years in prison.
b) In Slovenia, three individuals took out several life and injury insurance policies each
before travelling to Canada on holiday. While there, they allegedly sustained personal
injuries in a car accident and claimed for their injuries under their policies. It was later
discovered that all three had made insurance claims for other accidents during the
period of injury. Criminal and civil charges were brought and the individuals were made
to pay all the costs of investigating the fraud and to repay the sums already paid out
under the insurance policies.
c) In France, a well-known surgeon faked the circumstances of how he sustained injuries
that he had suffered in an off-piste skiing accident; an activity not covered by his travel
insurance. He first alleged the injuries had been caused by another skier. When this was
investigated and rejected, he made an exaggerated fake claim, alleging the injuries had
been sustained in a car accident with a third party. Again, the claim was investigated
and disproved. The man received no payment for his genuine injuries.

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 UNIT 9: Cyber Crimes and Financial Frauds

9th April, 2021

CYBER CRIMES AND FINANCIAL FRAUD

 Cyber crimes are the crimes committed in the cyber space. This relates to the use of
computers and technology to commit crimes. With the advent of technology, the instances
of misuse of such processes also started.
 Computers have made the life of humans easier. It is used by every individual and
organization across the globe. This has given birth to cybercrime. This is not limited to
computers and it includes the entire cyber space.
 Crimes are committed using computers or computer network and usually take place over
the cyber space especially the internet.
 Cyber Law:
a) Cyber law is the law which governs cyber space. Cybercrimes, digital and electronic
signatures, data protection and privacy etc. are covered by cyber law. In India, the laws
relating to the same are insufficient since technology is highly volatile and ever-
changing.
b) In India, the law regulating the cyber space is the IT Act, 2000 and the Amendments
thereto. Under these Acts, the Government also issues guidelines from time to time in
order to regulate various aspects of the Cyber Space. The recent guidelines (2021) dealt
with the admissibility of the electronic evidences, documents and communications on
online platforms. The 2021 guidelines also sought to regulate the OTT platforms.
c) The first IT Act was based on the UN Model Law on Electronic Commerce based on
the UNCITRAL Model to regulate the cyber laws in India.
d) “Cyber law” the legal issues that are related to utilization of communications
technology, concretely “cyberspace” i.e., the Internet. It is an endeavor to integrate the
challenges presented by human action on the Internet with the legacy system of laws
applicable to the physical world.
e) Thus, cyber space is not a physical space and it is expanding. The laws made were
similar to the outer space itself. The comparison was made with nuclear attack, since
the impact made by cyber space is similar to a nuclear attack itself. Eg: cyberattack on
the defense system of a nation. Such attacks affect the entire economy of the countries,
and set them back by a number of years.

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 f) “Cyber Crime” can be defined as any malefactor or other offences where electronic
communications or information systems, including any device or the internet or both or
more of them are involved.
g) The term cybercrime was first proposed by Sussman and Heuston in 1995. It is also
referred to as electronic crimes, computer-related crimes, e-crime, high technology,
information age crime etc.
h) Cyber Crime are the offenses or crimes that take place over electronic communications
or information systems. These types of crimes are basically illegal activities in which a
computer (any computing device) and a network are involved. Network may be
internet, Bluetooth, cloud, optic fiber.
i) Due to the development of the internet, the volume of the cybercrime activities is also
increasing because for such crime, there is no need of physical presence of the criminal.
By being in any place in the world, the criminal can target a system in another part of
the world altogether.
j) There is no need of contact between victim and the offender. The cyber criminals
usually operate out of countries with non-existent or weak cyber laws in order to reduce
chances of detection. Even if detected, they can take advantage of weak laws and escape
liability.
 Evolution of Cyber Crime:
a) 1997 – Cyber crimes and viruses were initiated, that includes Morris Code worm and
other. A virus needs another medium such as a file or a download to be attached in
order to attack. The worm does not need to be attached to another file, it may be in form
of cookies etc. as well. This is the distinction between worm and virus.
b) 2004 – Malicious code, trojan, advanced worm etc. evolved.
c) 2007 – Identity theft, phishing etc.
d) 2010 – DNS Attack, Rise of Botnets, SQL attacks etc.
e) 2013 – Social engineering, DOS Attach, Botnets, malicious emails, ransomware attack
etc.
f) Present – Banking malware, keylogger, bitcoin wallet, phone hijacking, android
hacking, cyber malware, banking malware etc.
 Classification of Cyber Crime:
It can be divided into 4 main categories:
1. Cyber crime against individuals.

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 2. Cyber crime against property (i.e., intellectual property)
3. Cyber crime against organization
4. Cyber crime against society
 Cyber Crime against Individual:
a) Email Spoofing – Email seems to be from a legitimate source but upon interacting with
it, virus gets installed and the system is compromised.
b) Spamming – A number of emails are sent to an individual’s account. There are more
chances that the person will open atleast one email and then become the victim of cyber
crime. This also makes it difficult to use the email services properly. This is also known
as Junk Mail. Usually, the email ID of the victim is obtained by the spammer through
the means of spam-bots, which scan the entire internet and databases and obtain such
emails.
c) Cyber Defamation – This is defamation on cyber space. This includes making
defamatory remarks against a person on the cyber space amounts to cyber defamation.
d) IRC Crime (Internet Relay Chat) – It is a platform used for chatting with people from
all around the world, without disclosing the identity of the person. The criminals make
a chatroom wherein they conduct meetings to discuss how to commit crimes. This may
be used by hackers etc. as well to conspire and conduct meetings. Individually, the
victim may be manipulated, harassed, blackmailed with personal information etc. Fake
jobs, lotteries, prizes are also sometimes announced in order to mislead the victim
personally.
e) Phishing – This is similar to email spoofing. The difference is that through phishing
sometimes the hacker gets access to the entire system of the victim. It may be mirrored
on the system of the hacker. This is used for obtaining confidential log-in information,
passwords, financial details etc. Email spoofing simply installs a virus on the computer.
Phishing occurs on a more severe scale; it need not be only through email. Phishing
may be through malicious links, pop-ups, downloads, QR code scanning etc.
f) Net-extortion, Hacking, Indecent Exposure etc.
 Cyber Crime against Property:
a) This is usually related to intangible property and intellectual property.
b) Software piracy – this envisages unauthorized copying and selling of copies of a
software without valid license.

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 c) Copyright Infringement – The copyrighted material of a person is published as one’s
own or published without his permission. Even when the author makes posts on
internet, reposting it without his permission is copyright infringement.
d) Trademark Infringement – The usage of the trademarks without permission of the
owner, for one’s own benefit or for creating confusion in minds of the audience. Thus,
trademark infringement means the same as that in physical space, being committed in
cyber space.
 Cyber Crime against Organization:
a) Unauthorized changing or deleting of data
b) Reading or copying of confidential information unauthorizedly, but the data is being
neither changed not deleted.
c) DOS attack – This is Denial-Of-Service attack. Here, the server is overburdened with a
lot of traffic. This impacts the economy and might even stall the organization’s work
for a number of days. Eg: A DOS attack in Egypt involved an attack on online shopping
sites, government sites etc. This impacted the economy of the country since it was
heavily reliant on websites. From metro, to traffic lights, everything was compromised
and stopped.
d) Email Bombing – This is overburdening the emails of the organization (from a specific
domain name such as “@slsh.edu.in”). This would slow down or shut down the email
IDs and the work would be stalled.
e) Salami Attack/Salami Slicing – Online databases are used to steal the personal
information of the customers. Eg: A hacker hacks into the database of a bank, gains
access to the finances of the customers. Then, he steals/deducts a meagre amount from
each account. Here, the individual customer loses a small/negligible “slice” of his
money. However, since there are lakhs of customers, the cumulative amount is huge
and the hacker earns a lot. It is difficult to track since even after commission, the crime
seldom comes to light.
f) Trojan – Something which seems to be beneficial but ultimately, it attacks the system.
It may be a link for downloading an antivirus or a programme for protecting the
computer, which ultimately installs a virus into the computer.

19th April, 2021

 Cyber Crime Against Society:

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 a) Forgery – The definition is same as given under IPC, which involve false signatures,
false documents etc. Here, forgery is online documents which have been changed or
manipulated. This is fake documents being circulated over electronic networks.
b) Web jacking – This is relating to hijacking over the web. The attacker creates a fake
website which collects information of users. Here, the hacker may also gain access and
control over the website of another person or organization, he would operate such
website and uses the data of the users. The actual owner loses all control over the
website.
c) Cyber terrorism – The internet is used to do violent acts, the result of which is loss of
life or bodily harm to a large number of people. This is usually for the purpose of
furthering one’s ideology or organization. This may also involve attacking the
electricity, transportation, water, banking systems etc. of an organization or the entire
nation. This affects the people at large. This makes it difficult to find the actual origin
of such attack and the perpetrator behind it. This makes it more difficult to address and
makes the crime complex.
 Cyber Law:
a) Importance of law enforcement: Without these agencies, it is not possible to enforce
and control the cyber laws and cyber crimes.
b) Cyber Law awareness program: This is initiated by the government, law schools and
other bodies in order to increase awareness about cyber crimes, their reasons and
measures to prevent. It also provides awareness about the laws, such as IT Act in India
and real-life cases. It shows the impact of technology on the crimes. It shows how
technology can function as a medium for crimes, not only online but also physically.
c) IT Act, 2000: the provisions given under this Act help the victim to protect himself
when a cyber crime occurs. It came into force on 17th October, 2000. It is an emerging
field and not developed yet, which makes it easier for criminals to operate and difficult
for enforcement authorities.
(1) The IEA makes the emails a legal form of communication. It is not necessary that
the emails are signed by the said person himself.
(2) The IT Act made laws on digital signatures, made email a legal form of
communication, the communication between companies and with government can
be done through internet. It also addresses the issue of security.
(3) It introduced the construct of digital signatures that verifies the identity of
individuals on the internet.
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 Important Sections:
a) Sec. 65 – It relates to tampering with computer source code documents. It includes
changing, altering, deleting the computer source code documents, which are used for
ascertaining the identity of the computer. The section provides for punishment also.
b) Sec. 66 – It deals with hacking of computer systems. Whenever a person uses the
computer resources of another person for gaining undue advantage or causing loss to
another. The punishment is also provided.
c) Sec. 66A – Sending offensive messages through any communication services. This
includes offensive messages, pictures, pornography etc. The punishment is also
provided. The intention is to cause annoyance, or insult, injury etc.
d) Sec. 66B – Deals with receiving stolen computers, resources etc. dishonestly. It means
stealing any computer device or resource. The definition is similar to theft. Here, the
person knowingly or with reason to believe that the computer resource or
communication device is stolen, receives or retains it.
e) Sec. 66C – This deals with identity theft, through forging the face, digital signature or
password of another person.
f) Sec. 66D – This is cheating by personation by use of computer resources.
g) Sec. 66E – Violation of Privacy
h) Sec. 66F – Cyber terrorism
i) Sec. 67 – Transmitting or publishing obscene material in electronic form
j) Sec. 67A – Publishing or transmitting of material containing sexually explicit act. This
is different from pornography.
k) Sec. 67B – Publishing or transmitting material depicting children in sexually explicit
act.
l) Sec. 67C – Preservation and retention of intermediaries beyond specified duration.
m) The various provisions from Sec. 66 and various sub-parts thereof, deal with cyber
crimes. Sec. 69 provides for power to issue direction for monitoring, decryption or
interception of any information through computer’s resources.

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 UNIT 7: Securities Frauds

10th April, 2021

SECURITIES FRAUD

 Legal Framework
a) SEBI is the regulatory body which regulates the securities arena. It was incorporated in
1988 as a “non-statutory body”. It was more of a department of government, not having
many powers. Later, by SEBI Act, 1992, it became a statutory body and then it gained
its powers of regulation and rule-making.
b) The difference between RBI and SEBI is that RBI is the regulatory body for banking
instruments and everything with respect to loans, borrowings, government bonds etc.
The MCA is the regulatory body for all public and private companies.
c) SEBI on the other hand is the regulatory body only for “listed companies” i.e.,
companies (private or public) listed in recognized stock exchanges. The recognized
stock exchanges include BSE, NSE and MCX. Thus, either securities or debentures
which are listed in these recognized stock exchanges would be regulated by SEBI.
d) Sometimes, there is an overlap between the RBI, MCA and SEBI. Eg: A banking
company such as HDFC being listed in stock exchanges. Thus, such company would
be subject to all 3.
e) In 2015, SEBI came up with listing regulations which made rules relating to
appointment of directors etc., which was earlier regulated only by the MCA.
f) There are 3 laws which deal with securities in India:
(1) SEBI Act
(2) Securities Contracts (Regulation) Act, 1956 i.e., SCRA
(3) Depositories Act
g) Securities is defined under Sec. 2(h) of SCRA as:
 shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or a pooled investment
vehicle or other body corporate;
 Derivatives including commodity derivatives;
 Units of mutual funds, collective investment schemes, alternative investment funds,
business trusts.

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 h) Any company which issues any of these instruments i.e., securities, in a recognized
stock exchange would be subject to SEBI Regulations.
 Laws governing frauds in securities market:
a) The SEBI regulates the various aspects of securities laws which includes SEBI
(Prohibitions of Insider Trading) Regulations, 2015 or SEBI (Prohibition of Fraudulent
and Unfair Trade Practices related to Securities Markets) Regulations, 2003 i.e.,
(FUTP).
b) Harshad Mehta Scam: Although it started from the late 1980s, after the regulations
brought in 1990 after LPG revolution, the scam was brought to light. Initially, on a
small scale, he used to procure insider information and then use the same to invest in
the shares of the said company and gain profits. It also involved banking frauds, and
used the 14-day settlement period for banking receipts and made huge profits. After the
SEBI Act and Insider trading regulations of 1992, the scam came into light.
c) The Insider trading regulations came in 1992, amended in 2015 and 2019 as well. The
FUTP Regulations came originally in 1995, then subsequent to the Ketan Parekh Scam
of 2001-02, it was amended in 2003.
d) Ketan Parekh Scam: He invested in securities and used to ask other people to invest in
it as well, making the share prices to go up exponentially. Then, such high-valued
security was pledged with the bank and the loan was obtained at a bloated price. Then
this loan amount was used to invest in other shares and the same process was followed
again. This was circular investment, mostly in IT Companies. Then, in 2001, the IT
companies witness a large fall in value and thus, the share prices fell, bringing the scam
into light.
 Insider Trading:
a) Trading on basis of UPSI (Unpublished Price Sensitive Information). It governs both
listed and proposed to be listed entities.
b) An insider is anyone who has possession or having access to UPSI.
c) Insider also involved connected persons, i.e., the persons who is connected to another
person who has access to UPSI.
d) Primary Insiders – Those who are directly connected with the company
Secondary Insiders – Connected with the primary insiders, thus, indirectly connected
to the company.

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e) UPSI means:
Information which is not generally available
Which may affect the price of securities of the company upon becoming generally
available
Financial results, dividends, mergers, acquisitions etc. are deemed UPSI.
f) Thus, all information which has impact on prices of shares of the company, which is
not generally accessible to the public, is UPSI. While the deliberation of such trades,
mergers, acquisitions, financial results etc., the information is not published. At this
stage, it is UPSI. Disclosing this UPSI or using this UPSI to indulge in share trading is
insider trading. Thus, this UPSI, when comes into public domain, affects the price of
the share and the insider gains undue advantage.
g) WhatsApp Case (Shruti Vora v. SEBI [2021]) – the financial results of certain
companies were circulated on WhatsApp before the announcement of the same. Based
on this WhatsApp messages, the trades were made and after official announcement,
these people made profits. The SEBI could not trace the origin of the message but
caught hold of certain people such as Shruti Vora who merely forwarded the same. The
SAT (SEBI Appellate Tribunal) held that they are not guilty since they are not the
source of the UPSI and merely forwarding the same, where there was no leakage as
such, since it could have been ascertained from news as well, would not amount to
insider trading.
h) Communication of, access to or procurement of UPSI is an element essential to insider
trading. No communication is permitted and mens rea is not an essential element.
However, communications are permitted when for a legitimate purpose, such as to
lawyers, bankers etc. This may be subject to the NDAs such lawyers sign, which may
or may not prohibit them from trading in the shares of such company.
i) Trading when in possession of UPSI:
(1) Satyam Case (2009) – Ramalingam Raju bought many shares of Satyam and started
making high volumes of false invoices, the false invoices made the share prices go
up, then they sold at the bloated prices. When the fake invoices were discovered,
the share prices went down and finally, Ramalingam Raju confessed to SEBI.
(2) Dilip Pendse Case (2001) – Dilip Pendse was the director of Tata and before
publication, he stated to his family that financial results of the company were good,
and the UPSI was used in order to trade by him and his family. When the financial
results came, the shares went down, and the whole family made losses, however,
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 they were still held liable. They were made to pay penalties, barred from trading in
securities and Dilip Pendse was removed from his position in Tata.
(3) Assumption that trades undertaken while in possession of UPSI are based on UPSI,
unless proven otherwise.
(4) Exceptions: block deal transactions, inter se transfers.
j) The basis of Insider Trading lies in the concept of making unjust profits or escaping
losses in an unjust manner, simply by virtue of UPSI. The concept originated in USA,
and was later adopted by the UK as well.
 Fraud under the FUTP Regulations:
a) This is different from fraud under Indian Contract Act or IPC, since it is not based on
intention to deceive. Elements of Fraud under Reg. 2(1)(c) of the FUTP Regulations:
(1) Any act, expression, omission or concealment
(2) Committed whether in a deceitful manner or not (mens rea is not essential)
(3) While dealing in securities or in order to induce another person to deal
(4) Whether or not there is any wrongful gain or avoidance of any loss (motive is also
not essential)
b) The threshold of fraud is low in SEBI laws, since there is no need to prove ‘intention
to deceive’.
 Activities prohibited under FUTP Regulations
a) These are activities which amount to fraud. The list is not exhaustive and can include
other acts as well:
(1) Misstatements in offer documents: This is IPO fraud. It is also governed by SEBI
laws, since it is a company about to be listed. False statements, misrepresentations,
using money for some other purpose etc. constitutes IPO fraud. Eg: ICICI Bank
floated ICICI Securities, which did not use the IPO money for the intended purpose.
Rather, it used the money to pay off the loans of another sister concern. This is
fraud.
(2) Wrongful disclosure by listed entities: This is misrepresentations by listed
companies. Eg: NDTV had a Rs. 450 Crore notice from the Income Tax Authorities.
The entire NDTV itself was worth Rs. 400 Crores. The SEBI stated that not
disclosing the same and misrepresenting the same is a fraud.
(3) Unfair Trade practices – CNBC case (2021): In the CNBC case, the anchors of the
TV channel make a number of recommendations. An anchor having more than 10

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 years of experience, and influence over viewers, indulged in the fraud. The anchor
would buy the shares beforehand, then next day make recommendation to viewers,
and then sell it when the shares went up. This practice is called BTST i.e., Buy
Today Sell Tomorrow. SEBI stated that this is fraud and using his influence to gain
unfair advantage.
(4) Financial wrongs – manipulation of books of accounts – Vijay Mallya scam (2017-
19): He borrowed a huge amount of money, and manipulated the books of accounts
through fake invoices, false profits etc. Financial frauds are also frauds under the
SEBI regulations. Only after the Vijay Mallya Scam, the 2019 amendment to SEBI
was brought which empowered it to look into books of accounts.
Eg: PNB fraud (2018-19)
(5) Market Manipulation activities – unauthorized SMS trading tips: The unauthorized
entities giving buying and selling tips and recommendations, which make the prices
of the stock to manipulate.
(6) Front-running – SEBI v. Sri Kanhaiyalal Baldevbhai Patel, RIL case: An individual
usually buys shares through brokers. When the broker gets to know that a large
investor will invest a huge amount in some share, the broker himself will buy the
shares first. Then, he will sell the shares after the big investment takes the share-
prices upward. This is also a kind of fraud.
SEBI v. Sri Kanhaiyalal Patel: Explains the front-running concept
RIL Case: Reliance was planning to sell securities of Reliance Petroleum, which
would lead to its price going on. In the options market, they got an options contract.
Option contract stipulates that if the price of the securities deteriorates, the person
would have the option to sell later. Thus, this is a shot position. By entering into the
option contract, the company made a fraudulent activity since it already knew that
the share prices would fall. SEBI finally imposed large amount of penalty.
(7) Fraud by intermediaries – Karvy broking scam (2019): Karvy took huge
investments from a number of people, transferred the money into their own accounts
and started trading with their money. They issued a number of false certificates and
invoices. However, the investors actually had nothing. The SEBI investigation is
still on-going.
(8) Dealing in counterfeit securities – Dalmia Allied Dispute (2019): For entities like
companies which deal with huge value securities, they also deal with paper-backed
securities. In the Dalmia-Allied dispute, the amount involved was Rs. 350 Crores.
74
 Allied withdrew the Rs. 350 Crore securities of Dalmia by forging signatures on
withdrawal receipts, transferred the amount into their own accounts and traded in
the same. Upon complaining to SEBI, the securities were transferred back in
Dalmia’s account while Allied is still under investigation. Thus, the counterfeiting
is the counterfeiting of instrument which enables the buying and selling of
securities.
 Consequences of violation of Securities laws:
a) Adverse directions may be issued by SEBI under Sec. 11 of the SEBI Act.
1) Individuals: Debarring from securities market, no directorship.
2) Listed Entities: Prohibition on raising monies, suspend trading of securities.
b) Disgorgement of profits made or losses averted illegally under Sec. 11B, SEBI Act. No
limits: Rs. 1000 Crores in RIL Case. Thus, any money made unfairly will be given
back.
c) Cease and desist order Sec. 15D SEBI Act.
d) Penalty Sec. 15G, Sec. 15 HA, Sec. 15HB SEBI Act
(1) Maximum of Rs. 25 Crores or three times the profits made / losses averted,
whichever is higher.
(2) SEBI charges individuals, investigates the offence and then the penalty is levied.
The case is then adjudged by SAT (SEBI Appellate Tribunal). After SAT the matter
may go for appeal before the SC.

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 UNIT 10: Globalization and Financial Frauds

20th April, 2021

GLOBALIZATION AND FINANCIAL FRAUD

 Globalization is related to the relationship between different countries. It is related to

economy, defense, technology etc. The interaction of 2-3 countries is globalization.
 In India, Globalization was brought in towards the later stages, in 1990s during the LPG
revolution. This was because despite the 5-year plans, recession started coming into India
and therefore, to mitigate the losses, the LPG plan came into being.
 Before the 1990s, during Rajiv Gandhi government, the LPG had started on a very small
scale. However, only after the LPG revolution of 1990s, the momentum increased.

Meaning of Globalization

 It means developing social and economic relations around the world. It has no set
definition.
 One of the common perception is internationalization. It refers to extra-territorial relations
between countries and defines development of international equations and inter-
dependence. This includes exchange of laws, defense, money, currency, economy etc.
 The main emphasis is on the process of eliminating the restrictions that governments
impose on inter-country relations. The aim is to create a free and unrestricted global
economy. Eg: India introduced LPG to promote import and export, remove restrictions,
invite foreign currency and foreign exchange, invite foreign investments.
 Financial crimes are related to globalization since the reduction of restrictions enables
commission of crimes.
 Globalization can be considered as westernization or modernization, with concerns relating
to adverse effects on the cultural heritage of the country.
 Combined with technology and the ease of business, the financial crimes increased.

Impact of Globalization on Fraud:

 Fraud has increased a lot. According to the Global Fraud report by Kroll, a risk consultancy
company:

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 a) About 50% of Indian executives interviewed for a global survey on fraud found that
they feel that corporate fraud is much more prevalent in India today than it was 3 years
ago.
b) With the change in time and technology, the globalization and financial frauds is
increasing manifold.
c) Eg: Nirav Modi- the fraud was multi-national and it involved money of more than one
country only. The instances of such multinational frauds is increasing.
d) 42% of the people felt that corporate frauds in China has increased too.
e) In both countries, 60% of corporates felt vulnerable to bribes and corruption. This is
despite the increased restrictions faced by corporate entities. The corporate entities need
more permissions for the same nature of work as an individual. This provides for higher
scope of bribery and corruption in order to get the work done and receive the permits
faster.
f) The report says that although the businesses may be reluctant to discuss it, nearly every
business would at some point, have been a victim of corporate fraud. They do not
disclose it in order to protect the reputation of the company.
g) The extent to which industries experience corporate fraud varies according to the nature
of their business. Eg: Dealing with physical goods – theft, Dealing with technology –
Intellectual Property theft etc.
h) As the extent of business increases, the people and resources involved increases, and
therefore, the scope of financial fraud increases. Thus, with globalization, the scope of
fraud has increased.
 Jules Kroll opined that as society has become more reliant on IT, globalization and
interconnectedness, certain exposure to frauds has expanded with it.

How globalization increased transnational crimes

 Globalization facilitates international trade but also increases the difficulty of regulating
global trade, traffickers and smugglers have exploited the increase of export and import.
The scope of smuggling and corruption has increased due to the large volumes of export
and import.
 When more people are involved, the instances of corruption would increase. When the
import and export increases, regulation becomes difficult.
 Globalization has increased inequality around the globe, it has caused people to go into
organized crime and operate in illicit markets as coping mechanisms. Thus, the gap between

77
 rich and poor increases. The small-scale industries are affected adversely, mass production
has led to reduction in employment, unemployment has increased manifold. The poor are
unable to cope up with such economy.
 Smaller business ventures are killed because they are unable to compete with the large
companies. This creates inequality in the country and also, amongst countries. The people
who are at disadvantaged position resort to illicit methods such as organized crimes. This
affects the economy.
 The global financial system has undergone widespread deregulation since 1970s, which
allowed the illicit actors to launder the proceeds of crime more easily. The easing of
restrictions allows for scope of financial frauds and financial crimes.
 Today, every event affects not only one country but other countries as well. Thus, with
integrated economies, the scope of fraud increases.
 Terrorists, insurgents and warlords rely on illegal activities as a funding mechanism. Illicit
networks are challenging to states because states are military and diplomatically organized
to deal with other States. Governments around the world struggle to adapt to non-state or
sovereignty-free actors in terms of financial crimes.
 These illicit networks do not belong to any single country. However, since they are non-
state actors, they cannot be controlled by the States easily.
 Cyber crime is a result of globalization.

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 UNIT 11: Measures to Combat

COMBATING MEASURES

 Cyber crimes is one of the major crimes which has developed because of globalization.
One of the important steps is to increase awareness. The meaning of financial crimes, their
commission and other such information must be disseminated.
 The number of people indulging in organized crimes needs to be reduced to a large extent.
 The IT Act, IPC, Prevention of Money Laundering Act etc. needs to be strengthened.

Role of Police and Criminal Justice System

 As discussed previously, the mens rea needs not be proved. The role of police is important
to collect evidence under IPC & CrPC. They have power of search and seizure, in some
cases even without warrant. This is in case of cognizable offences.
 Cognizable offences are those offences in which the search and seizure can be made
without warrant, the arrest can be made without warrant etc. This is subject to certain
restrictions, however, the power still remains with the police. The police can also indulge
in questioning, take witness statements etc. They can also ask the persons to come to the
police station to give their statement.
 There are certain rules to be followed by the police but, they do have such powers. The
CrPC also provides safeguards to the police as well. They have been given immunity. They
cannot be charged per se, the complainant has to take permission of the state authorities in
order to initiate proceedings against the police.
 These are the powers of the police in order to combat such crimes.

21st April, 2021

COMBATING FINANCIAL FRAUDS

 Regulatory Provisions
a) Companies Act, 2013 – Whenever there is need to understand the liability of a person,
the extent of companies’ liability. It speaks about individual liability and the group
liability of directors, managers etc., as per the theories of liabilities.
b) IPC – This includes offences related to properties, coins, currency, fraud, forgery,
cheating, counterfeiting, criminal breach of trust etc. This is previously covered in

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 corruption, money laundering, tax evasion etc. The punishment for these offences is
under IPC.
c) Foreign Contribution Regulation Act, 2010 (FCRA) – This act regulates the foreign
currency coming in and going out of India. It is important to regulate the domestic
economy. This is important to combat money laundering and organized crime across
countries.
d) Lokpal and Lokayukta Act, 2013 – this deals with corruption and embezzlement by
public officials.
e) Prohibition of Benami Property Transaction Act, 1988 – This prohibits benami
transaction, i.e., buying property in name of someone else, who is not the ultimate actual
owner, with the aim of evading tax. This affects income tax and capital gains tax. This
act prohibits the same.
f) Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015 – The aim of this act was to reduce and prohibit circulation of black money. It
encouraged the people to disclose their black money and pay the tax under this Act, and
escape the huge penalties imposed if otherwise caught by Tax authorities. It aimed at
making people disclose their black money voluntarily.
g) Central Goods and Services Tax Act, 2017 – The aim is to stop evasion of tax.
h) IBC, 2016 – This Act not only deals with voluntary declaration of insolvency but also
initiating insolvency proceedings by financial and operational creditors. This Code
prohibits the companies from (1) not disclosing its liabilities and (2) unnecessarily
declaring itself insolvent.
i) Prevention of Money Laundering Act, 2002 – covered previously. 3 types of money
laundering.
j) The SEBI (Prohibition of Insider Trading) Regulations, 2015 – this is a type of
securities fraud. The insider information (confidential) is disclosed to a third party so
that the other party can gain maximum profit out of it. What information is confidential,
what is prohibited etc. is given under this Act.
k) SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations, 2003 (PFUTP Regulations) – this is a preventive legislation to
protect against such practices.
l) SEBI (Listing Obligations and Disclosure Requirements) regulations, 2015 (SEBI
LODR regulations) – this deals with the info which must be disclosed to the public
while listing a company and the obligations of listing companies.
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 m) RBI (Frauds classification and reporting by commercial banks and select FIs)
directions, 2016 – this gives rules for banks and financial institutions, money to be kept
liquid, minimum deposit maintained, preventive measures to prevent fraud, SLR CRR
etc. are regulated by these directions
n) Income Tax Act, 1961 – this provides for the tax liabilities, punishments etc.
 Authorities Competent to Investigate
a) CBI – This organization deals with all kinds of crimes. It includes financial crimes. It
has different branches such as anti-corruption in order to deal with different types of
financial crimes. It has power to investigate govt officials, private individuals and
corporate entities. They are given power and permission for each case by both central
and state government. Without this, they cannot proceed and investigate.
b) Anti Corruption Bureau – It is a State entity. It is present in almost all states. They have
a special jurisdiction. The cases of corruption which are not to be investigated by the
police and CBI are given to this body.
c) Police – This is the first line of response. The FIR is filed pursuant to complaint under
Sec. 154 CrPC. The Economic Offence wing of the police is specialized wing created
to deal with all kinds of economic crimes.
d) Central Vigilance Commission (CVC) – it is an autonomous body, free from control of
the government. They are not directed by any government. They have the power to
critique the investigation by different agencies as described above, for adjudging the
validity of the investigation. They can direct the investigating agencies, conduct it
themselves, or transfer it to another agency.
e) Lokpal (Central) and Lokayuktas (State) – they act as ombudsman, to try to resolve the
dispute in relation to corruption and financial crimes. They act independent from
executive branch of the government. They work without consultation and direction of
the government to maintain the sanctity of the investigation.
f) Public Prosecutors – they play an important role in investigation and proving the case.
They are advocates from the government side. They check the investigation, question
the same and present arguments before the court.
g) Comptroller and Auditor General (CAG) – it keeps a check on the monetary
transactions and finances of the country, both central and state government. It checks
the accounts, if any discrepancy is found, it can be investigated by the CAG.
h) Special Judges – they are special judges meant to only deal with cases relating to
financial crimes. These are fast-track courts and have all powers of the court. Any
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 person qualified to be a judge and having special knowledge in the field can be special
judges.
 Special Authorities Having Jurisdiction to try the case of Financial Fraud:
a) ED – FEMA and PMLA cases can be tried by the Enforcement Directorate.
b) SEBI – this body was made to check the frauds in the securities market. It makes
regulations to control the economy of the country and try cases under such regulations.
c) Central Board of Direct Taxes – Issues relating to the Tax disputes.
d) Central Board of indirect taxes and customs – Issues relating to indirect taxes and
customs are resolved through this.
e) Civil Courts – these are major and most common. In addition to a crime, financial frauds
are civil wrongs as well. The jurisdiction is as per the CPC.
f) NCLT – This body is meant to deal with cases related to companies. They above bodies
deal with specific subject matter. However, this body i.e., NCLT deals with no specific
kind of financial fraud but all types of financial fraud which can be committed by a
company. The judge can be an admin officer or judicial officer who has knowledge
about the subject matter.
 Powers given to regulatory authorities
a) Power to investigate (Sec. 157 CrPC) – The CBI, ED, Police etc. have the power to
investigate. The power comes from the offence and then they follow the procedure
under Sec. 157.
b) Power of interview by Summons (Sec. 61) – they can issue summons, ask the person to
come to the police station/office of the agency and give a statement. The various issues
involved etc. are dealt under Sec. 61.
c) Power of search/to compel disclosure (Chapter VII) – The agency has to power to
search the person, property and compel disclosure of any information the person is
hiding. This permits use of moderate force for the same.
d) Power of seizure, attachment, freezing of proceeds of crime (Sec. 102) – After the
search, if anything which can be called evidence is found, the movable objects are
seized, the immovable objects are attached and proceeds of crime are freezed.
e) Power to obtain evidence (Sec. 309/311) – This power is with agencies and the courts
both, the accused person or witness is forced to come to the court and give testimony.
This is in case where there is insufficient evidence, or persons are withholding
information etc. This is the power to ask the person to produce evidence.

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 f) Power of arrest (Sec. 41) – A person who is a suspect, or someone who is not
cooperating, or hindering the investigation, can be arrested by the agency.
g) Court orders or injunctions – can be exercised by either the civil courts or the authorities
mentioned earlier. This is under CPC and SRA.
 Measures to Combat
a) Establish strong internal policies/guidelines and effective vigilance systems for white
collar crimes. This is on part of company and individual as well, in order to prevent
non-compliance.
b) Exercise caution before engaging with third-party service providers by conducting full-
fledged pre-engagement due diligence followed by periodic checks on them. The
parties you are interacting with must be subject to regular scrutiny in order to prevent
such crimes. Avoid engaging with entities about whom such background check is not
conducted.
c) Ensure stringent anti-bribery clauses are always incorporated into contractual
arrangements. The contract itself must be stringent and strict with regards to such
activities. In case of a dispute, such terms are given importance by the courts.
d) Conduct employee training sessions with the help of experts/law firms. This helps
sensitizing the workforce against such frauds, aids in bringing such instances forward.
e) Adopt other recommended practices like:
(1) Comprehensive evaluation of risk in the relevant industry the business is operating
in and understand the prevalent practices.
(2) Continuous checks on gifts, favors and business promotion activities. These are the
early signs of corruption and induces such practices.
(3) Follow best practices and accounting standards. Adhere to the accounting
principles and conventions, in order to maintain record of every penny. Maintain
transparency and establish system of answerability.

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 UNIT 12: Financial Frauds and Punitive Policies

22nd April, 2021

PUNITIVE POLICIES
 In a country, whenever a crime is committed, it is considered to be against the legally
established rules of the society. Sovereign law transforms the social disapprobation into
defined offence.
 Such offence is subjected to just and fair investigation, duly evidenced and is reckoned as
crime. A Crime is a proved offence, which impels caustic consequences. Punishment is
aimed at reducing crime, with the aim that people would not commit the same.
 Since ancient times, the punishment for crimes is decided by the society. If the society feels
that a particular crime is serious, the law makes the punishment severe. If the general
conscience of the society feels the crime is not serious, the law makes the punishment less
severe.
 Attitude towards crime and criminals in a society represents basic values of that society.
As per Elmer Hubert Johnson, a criminal may be described by people as “a monster”, “a
hunted animal”, or “helpless victim or brutality”. Thus, the perspective of looking at a
criminal and the approach to be taken with him is different for different people.
 Because of change of attitude, 3 reactions are seen in society to punishment:
a) Traditional reaction i.e., punitive approach – To punish the offender as much as possible
so that the crime is reduced later. The approach of the society is that the crimes
committed by the criminal makes the society difficult to live in and unsafe, therefore,
such criminal must be punished. This is because loss has been done to society.
b) Therapeutic Approach – Here, sympathy is shown to criminal, he is considered to be a
sick person who needs help. The society considers the criminal as a victim of
circumstances or a sick person, and punishment is not given but reformative actions
and treatment is given. Eg: This approach is seen in case of juveniles and the aim is not
punishment. The aim is to have a therapeutic impact and reformation of the delinquent
juvenile.
c) Preventive Approach – It does not deal with commission of crime. It aims at elimination
of the conditions which facilitate crime. Therefore, it aims at reducing poverty, if such
poverty is the cause of crime. If the cause or circumstances of crime are removed, the
concerned crime would be reduced.

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 Such conditions would be existing in the society in combination to each other. It is not
necessary that a single approach is applied for all crimes.
 Objectives:
a) Punishment is aimed: To prevent perpetration or criminal acts
b) To Coerce or deter culprits
c) To Realize or reform culprits
d) To Undo injustice
e) To Protect society from mischievous and undesirable elements
f) Preventing actual offenders from committing further crimes
g) Transforming tainted convicts into law abiding citizens
 Benn and Flew gave some elements of punishment, resorting to the traditional approach:
a) It must involve pain and its consequence must be unpleasant.
b) It must be for any legal wrong. It cannot be for any moral wrong which has not been
legally prohibited.
c) Must be given to actual offender, who has committed offence. The family members of
such person cannot be punished for the crimes of the offender.
d) Pain must be inflicted by the authority which has been constituted by the legal system
for this purpose. It cannot be done by someone who is not authorized by law to do so.
 Different Theories of Punishment:
a) For safe, orderly, peaceful and prosperous society to exist and flourish, the following
tools of theory are found to be good guides:
b) Deterrent Theory
c) Preventive Theory
d) Retributive Theory
e) Reformative Theory
f) Expiatory Theory
g) Theory of Compensation
h) Multiple Approach Theory
 Deterrent Theory:
a) The aim is to give such harsh punishment to criminals that only the offenders being
punished but also the others who witness such punishment would be deterred from
committing such crimes.

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 b) “I do not punish you for stealing the ship, but so that the ship may not be stolen” is the
central cynosure of the theory. Thus, the punishment is harsh so that the commission of
the crime is stopped by everyone altogether.
c) The term “deter” means to abstain from doing an act, to both offender and others.
Usually, the punishment is not given is secrecy. In this theory, the punishment is shown
to everyone in the society so that the people have the fear of punishment. Eg: Hanging
the criminal in the middle of the public market.
d) This may include severe punishments like death by stoning, or whipping, mutilation of
limbs etc. are awarded even to minor offences. This theory lives even today in many
Muslim countries.
e) However, the theory differs as per offences. A country need not follow the same theory
for every offence. One offence may be punished as per deterrent theory and other may
be as per some other theory.
f) Criticism:
(1) This theory has proved ineffective in checking crimes.
(2) The hardened criminals have no regard for the pain or the consequences of the
crime.
(3) Excessive harshness of punishment tends to defeat its own purpose by arousing the
sympathy of the public towards those who are given cruel and inhuman punishment.
(4) Punishment loses its horror once the criminal is punished. The criminal is now not
scared of committing the same offence since he has already survived the pain.
 Preventive Theory:
a) The aim is to prevent the crime rather than avenging it. It concentrates on the prisoner
to prevent him from repetitive endeavors, to ward off recidivism.
b) The aim is to stop the criminal from committing the same crime again. The best example
is imprisonment, wherein the person is put in jail to prevent him from doing so.
c) Offenders disabled by punishments like death, exile or forfeiture of office and
incarceration, with the aim that the person would be kept away from the society.
d) According to Justice Holmes: The main aim of punishment is not to punish the criminal,
but to prevent the people from committing the crime. The main objective of any
lawmaker is to prevent the conduct being punished; this is the universal aim of criminal
law. The reason behind the punishment and pain inflicted is giving a new motive to
people NOT to do that crime.

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 e) According to Paton: The preventive theory concentrates on the prisoner and seeks to
prevent him from offending again in the future. The death penalty and exile serve the
same purpose.
f) Criticism:
(1) It has the undesirable effect of hardening first offenders, or juvenile offenders.
Usually, the first-time offenders are also put into jail wherein, the mindset of the
person is affected by the other inmates who are hardened criminals.
(2) When imprisonment is the punishment, they are put in association of hardened
criminals. The mind-set of the first-time offenders changes, their perception of pain
changes and they join the criminal networks.
 Retributive Theory:
a) “Tooth for tooth, eye for eye, limb for limb and nail for nail” is the principle of this
theory. Thus, the punishment must be the same offence he committed. Retribute means
to give in turn.
b) Earlier, the legal sanctions were grounded in vengeance and retaliation, revenge was
considered as justice rather than social welfare and transformation. The question of
social welfare, sympathy, reformation etc. is not present at all. The criminal is
considered as a monster who cannot be changed.
c) The objective is to make the criminal suffer the same pain as the pain he has inflicted.
d) According to Kant, retribution is not just a necessary condition for punishment but also
a sufficient one. Punishment is an end in itself.
e) According to Justice Holmes, Retribution could also be said to be ‘natural’ justification.
It is commonly known that the early forms of legal procedure were grounded in
vengeance.
f) Salmond opined that the criminal must be given punishment for the wrong done to the
society. “The retributive purpose of punishment consist in avenging the wrong done by
the criminal to society”
g) Criticism:
(1) Punishment per se is not a remedy for the mischief committed by the offender.
(2) It merely aggravates the mischief without giving any compensation to the victim or
reformation for the criminal.
(3) It would make the person a more hardened criminal. Eg: Instead of killing once, the
person would kill multiple times.
(4) It is archaic, inhuman and barbaric.
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 (5) Punishment itself is evil and cannot be justified unless it gives some good outcome
(6) Revenge is wild justice
(7) Retribution is only a subsidiary purpose served by punishment
h) The Retributive theory and Deterrent theory are not followed anymore usually. Today,
the society follows the Preventive and Reformative Theories.
 Reformative Theory:
a) “Condemn the Sin, not the Sinner” – Mahatma Gandhi. This is loosely based on the
therapeutic approach. It is more inclined towards the preventive approach as well.
b) It is the most humane of all theories which aims to reform the legal offenders by
individual treatment. Reformation process is like a surgeon operating on a person to
remove the pain.
c) It is a craft or skill in bringing back the tainted and condemned person and returning
him to the society as a transformed person.
d) The idea is that no one is a born criminal. The main aim is to:
(1) Treat the criminal like a diseased person.
(2) It is believed that if the criminals are trained and educated, they can be transformed
into law abiding citizens.
e) This theory has been proved to be successful and accepted by many jurists.
f) Criticism:
(1) If criminals are sent to prison to be transformed into good citizens, a prison would
not be prison, it would become a dwelling house for the homeless. This would rather
increase the crime since it is committed simply to gain a free, living house.
23rd April, 2021
 Expiatory Theory:
a) This theory is not commonly used. It is only in exceptional cases.
b) It works on the principle of expiation i.e., to “pay for the sin committed”. It deals with
the inner conscience of the criminal. It does not necessarily means that the lawful
authority will punish the criminal, here the criminal’s conscience punishes him and he
agrees to the punishment.
c) Repentance i.e., regret for committing the crime. Compunction i.e., trying to make the
wrong into a right, and not committing the wrong again. Atonement i.e., trying to come
back to the original position by righting the wrong. Reparation. These four i.e.,
repentance, compunction, atonement, reparation etc. are involved.

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 d) Theory believes that once the offender expiates or repents and realizes the mistake, he
must be forgiven.
e) The offender is to serve the victims and their dependants to compensate the deprivation.
f) Criticism:
(1) It is considered impracticable and too idealistic. It is impossible to find out whether
the person is really feeling guilty and “cleansing his conscience or not”.
(2) In some cases, it is difficult to analyze whether the criminal is actually helping the
family or not. If the person is forced to help the victim’s family, it will only push
him to commit crimes again.
(3) Experimentation of this theory is too expensive in terms of public safety and
security. The hardened criminals would get opportunities to commit more crimes.
Further, sending criminals to the victim’s family would be more dangerous and
cannot even be applied as an experiment.
g) This theory was relevant in the ancient times and not in the modern era.
 Theory of Compensation:
a) The object of the punishment must not be to merely prevent further crimes but also to
compensate the victim of the crime.
b) Criticism:
(1) The main criticism of this theory is that it tends to oversimplify the motive to crime.
(2) Further, different people have different opinions on this theory. Some people think
that heinous offences such as murder cannot be compensated at all. On the other
hand, some people opine that compensation is practically important due to the loss
of breadwinner in the family after murder. This is in addition to the punishment.
c) In some cases, involving murder or accident of a young child or someone who is not a
breadwinner, then compensation is not the sole aim for the victim’s family. Here, the
family would want harsh punishment.
 Multiple Approach Theory:
a) Application of any single theory may not render complete justice. The above theories
are applied together.
b) Application of one theory does not mean others will not be applied. Thus, the above
theories are not mutually exclusive. Eg: Rigorous Imprisonment falls under deterrent,
preventive and reformative theory as well.

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 c) Judicious combination of theories is done. Sec. 357 CrPC incorporates the theory of
compensation, in addition to imprisonment, which would be under preventive or
deterrent punishments.
d) In India, usually harsh punishments are not given. However, life imprisonment and
death penalty are the harshest, which fall under both preventive and deterrent.
 Punishments under IPC:
a) All punishments, permutations and combinations of the same, the reduction etc. of the
same are all mentioned under the IPC Sec. 53-Sec.75.
b) Sec. 53 allows for 5 types of punishments: Death, Fine, Life Imprisonment, Forfeiture
of property and Imprisonment, which may be either Simple Imprisonment or Rigorous
Imprisonment.
c) In the present times, compensation is also paid to the victim or his family. The
difference between compensation and fine is that fine is imposed as a penalty and it
goes to the court/State. The compensation is awarded to help the victim, not to penalize
the offender, and the amount goes to the victim or his family.
d) Sec. 73 and Sec. 74 also provide for solitary confinement. Although this is
imprisonment only, it is different from the other kinds of imprisonment. IPC prescribes
the time period for which one may be kept in solitary confinement. The court cannot
award this solitary confinement in its initial judgment. If the imprisoned person behaves
in an unruly manner in the prison, then only the solitary confinement is awarded.
 To exert social, psychological, more impact on criminals, new kinds of punishments are
required to be imposed:
a) Externment or Banishment – Given to habitual and hardened criminals. It is usually
given under prescribed police Acts. The person is not allowed to live in the country, his
citizenship is taken away. He may be allowed to work in the country however, certain
rights associated with citizenship are taken away.
b) Compensatory Jurisprudence (Sec. 357 CrPC):
(1) Rudul Shah v. State of Bihar (1983) – the definition of victim is different and it is
not necessary that only the offender has to give compensation. Rudul Shah was
awarded compensation because he was kept in prison for a very long time. In 1983,
the compensatory provisions i.e., Sec. 357 was not present. The compensation was
awarded under Art. 21.

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 Rudul Shah was convicted and sent to jail. In appeal however, he was acquitted and
the court directed the state government to take decision and release him. However,
due to a lapse on part of state government, he remained imprisoned for 14 years
despite acquittal.
The SC allowed for compensation under Art. 21 and it was paid by State.
(2) Bhim Singh v. State of J&K (1984) – The facts were similar to the above case. The
politician was arrested but the details of his arrest were kept secret. Only after filing
a writ of habeas corpus, the person was immediately released. It was pleaded that
since the person has been released, the petition was argued to be not maintainable.
The Court held that the compensation must be paid even though he was released,
for the period in which he was kept in arrest.
(3) Veena Sethi v. State of Bihar (1982) – PIL filed for releasing prisoners who were
of unsound mind. The court held that jail is not the right place for such people and
they must be in a mental hospital for treatment. The court held that the expenditure
for such treatment and medical help must be bourne by the State. Further, if any
person recovers and becomes of sound mind, the person must be released and he
must be maintained by State for a week and sent to his home.
c) Public Censure or Social Censure – Followed in Russia and Columbia in case of white-
collar crimes, food adulteration offences. This is through stigma attached to the crimes.
This kind of punishment is given under International Law as well. The stigma attached
to the crime makes the public to withdraw their support from the convict, he is
ostracized and he gets unfavorable treatment. There is no imprisonment etc. in such
case.
This is not followed in India but it was recommended by Indian Law Commission in its
42nd Report for certain class of offences.
d) Community Service or Corrective Labour (this is an extension of Expiatory Theory) –
this is applied in some cases in USA. This is not applied in India. It is difficult to
ascertain the conscience of the person and whether the person genuinely feels guilt or
not. This is usually applied in cases of environmental pollution etc.
e) Disqualification from holding public office and contest elections – Under
Representation of People Act, 1951, a person convicted of such offences would be
restricted from contesting elections etc. It would also be applicable for a person holding
office currently.

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 The most common punishment for financial crimes is imprisonment, fine and usually
disqualification from office as well.

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