Behind Closed Doors: Where Business Conduct Ends And White-Collar Crime Begins

Corporate governance serves as a powerful deterrent against white-collar crimes by instilling ethical values and establishing robust control mechanisms within organizations

Anatomy of White-Color Crime

White-color crimes encompass a wide spectrum of activities perpetrated by individuals in positions of trust and authority within the corporate world. Such crimes are also committed by entities for financial gains or to conceal corporate wrongdoings.

While traditional forms of fraud such as bribery, counterfeiting, tax evasion and embezzlement continue to persist, with the rapid growth and increasingly digitized world, white-collar crimes can now be seen in the form of sophisticated cyber fraud, data breaches, environmental crimes, securities fraud, insider trading, money laundering and financial crimes.

This article briefly explores the Indian framework pertaining to white collar crimes, the crucial role of regulatory authorities in preventing and prosecuting such crimes, and also the significance of corporate governance in preventing white-collar crimes, supported by relevant legal precedents.

Regulatory Framework and Authorities

In ancient India, instances of financial misconduct and corruption were documented in texts such as the Arthashastra, which outlined principes of good governance, policies, and effective administration.

Laws related to White-collar crime have evolved over time.

In India, a number of laws and mechanisms are available to deter, investigate and prosecute perpetrators of white collar crimes, besides ensuring accountability, transparency, and good corporate governance. Key legislations include the Prevention of Money Laundering Act (PMLA) 2002; Prevention of Corruption Act (PCA) 1988; Companies Act, 2013; Foreign Exchange Management Act (FEMA) 1999; and Securities and Exchange Board of India Act, 1962.

A comprehensive statute that regulates and controls the operations of the company in India is the Companies Act. It contains provisions dealing with corporate governance, financial reporting, disclosures and filings and auditing standards to be adopted by the companies. It also provides for penalizing offenses like fraud, mismanagement, and insider trading. In SEBI v. Price Waterhouse (2018), the role of auditors to ensure corporate accountability and consequences of professional misconduct get highlighted.

The PMLA aims to stop money laundering activities, funding of terrorism, and related offences by establishing mechanisms for prevention and prosecution of illicit financial activities and reporting any questionable transactions. Some of the notable provisions include the identification of proceeds of crime, guilty until proven innocent, and imposition of stringent penalties and jail terms for the offenders. Additionally, the PMLA gives enforcement agencies the right to seize criminal proceeds. The provisions of this law have been invoked in numerous high-profile money laundering cases.

FEMA regulates foreign exchange transactions involving inbound and outbound flow of funds and other capital and current account transactions to prevent any unauthorized transactions, unlawful dealings and illegitimate transfer of funds. It also provides for suitable mechanisms to punish and penalize the offenders. In cases of contravention, such as, those having a money laundering angle, national security concerns and/or involving serious infringement of the regulatory framework, FEMA also makes provisions for referring such offenses to the Directorate of Enforcement for further investigation.

The Prevention of Corruption Act aims to curb corruption among public officials and individuals associated with public services by criminalizing the acceptance of bribes by public servants. In the case of State of Punjab v. Barkat Ram, the Supreme Court emphasized the broad interpretation of undue advantage, illustrating its applicability to diverse forms of corruption beyond monetary bribes.

SEBI Act which regulates the securities markets to prevent malpractices such as insider trading, market manipulation, fraudulent schemes and securities fraud, besides publishing rules and guidelines to support ethical and clean business practices. SEBI v. Shara India Real Estate Corporation Limited, exemplified the authority of SEBI to safeguard stakeholders’ interest through stringent enforcement actions.

A statute that acts as a foundation of the criminal law in India, Code of Criminal Procedure covers a variety of white-collar crimes, including those that involve cheating, fraud, forgeries, criminal breach of trust, and more recent variations including data theft and hacking.

Role of the Indian Regulatory Authority in Combating White-collar crimes

Indian Regulatory Authorities play a vital role in safeguarding the interest of the stakeholders and ensuring compliance with laws and stopping fraudulent activities.

The Reserve Bank of India, SEBI, Serious Fraud Investigation Office, Central Bureau of Investigation, Enforcement Directorate and Competition Commission of India are some of the important regulatory authorities and agencies to tackle and stop financial fraud and money laundering besides looking into serious cases of corporate fraud, and stopping anti-competitive behavior such as abuse of a dominant market position.

The Nirav Modi PNB Fraud Case highlighted lapses in banking regulations and internal controls which prompted the RBI to ensure enhanced checks and balances and strengthen risk management practices. In another recent case, SEBI fined a group of entities including promoters for engaging in fraudulent trading practices to manipulate stock prices. SEBI also cracked down on illegal collective investment schemes and Ponzi schemes that defraud investors.

Corporate Governance and its Role in Mitigating white collar Crimes

Corporate governance is guided by principles including transparency, accountability, fairness and responsibility. It serves as a powerful deterrent against white-collar crimes by instilling ethical values and establishing robust control mechanisms within organizations.

The Board of Directors with the inclusions of independent directors can play a crucial role in compliance with laws and policies, formulating policies, overseeing management, providing impartial views, scrutinizing management decisions and challenging unethical practices.

The framework of corporate governance can be structured to identify, assess, and mitigate risks associated with fraud, corruption, and financial misconduct and cover aspects relating to employee training and engagement initiatives to deter individuals from engaging in unlawful activities.

Conclusion

Regulatory gaps and weak corporate governance are the key factors which contribute to the prevalence of financial misconduct and white-collar crimes. By addressing the underlying factors like effective implementation of laws, strengthening regulatory oversight and ethical leadership, it is possible to mitigate the risk of white-collar crimes and promote transparency, accountability, and ethical conduct in the corporate sector and beyond.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.