Corporate Frauds

FRAUS OMNIA VITIATE

“Fraud violates everything”
• Corporate fraud consists of activities undertaken by an individual or
company that are done in a dishonest or illegal manner, and are
designed to give an advantage to the company.
• In the broadest sense, a fraud is an intentional deception made for
personal gain or to damage another person/entity
As per section 17 of Indian Contract Act
1872:
• Fraud means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive another
party thereof or his agent, or to induce him to enter into the contract.

• 1) The suggestion, as a fact, of that which is not true, by one who does not
believe it to be true.
• 2) The active concealment of a fact by one having knowledge or belief of the fact
• 3) A promise made without any intention of performing it
• 4) Any other act fitted to deceive
• 5) Any such act or omission as the law specially declares to be fraudulent.
RBI’s definition of Fraud
• “A deliberate act of omission or commission by any person, 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.”
As per Section 447 of Companies Act, 2013:
• “Fraud” in relation to affairs of a company or any body corporate,
includes any act, omission, concealment of any fact or abuse of
position committed by any person or any other person with the
connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss.
• “Wrongful gain” means the gain by unlawful means of property to
which the person gaining is not legally entitled.

• “Wrongful loss” means the loss by unlawful means of property to

which the person losing is legally entitled.
Categories of corporate frauds
• Asset misappropriation: It is a theft or misuse of organization’s cash
or assets belonging to a company.
• It can be done by directors, employees or persons who are entrusted
with the company’s assets.
• Asset misappropriation schemes include those frauds in which
perpetrator employ tricks to steal or misuse organization’s assets.
• Assets stolen can be in the form of cash, credit note or vouchers.
• Modus operandi for such frauds is fictitious sales, false inventory,
falsifying asset requisition and transfer.
Bribery and corruption:
• Bribery involves offering, giving or receiving anything that influences
an official act.
• Corruption is much wider concept which includes bribery, illicit
gratification and economic extortion.
• Employees improperly use their power in business transactions to
gain some advantage for themselves or another person.
Financial fraud statements:
• It usually involves misrepresentation of financial statements of the
company.
• It can be most damaging to the company.
• This type of frauds take the form of manipulating accounts,
Overstating revenue assets and investments , understating liabilities
and non-disclosure of certain vital information.
• Enron, WorldCom and Satyam are high profile cases involving
financial statement fraud.
Corporate espionage:
• With the increase in competition in business ventures, corporates
started resorting to innovative methods to obtain information about
other companies or competitors.
• Officials steal the trade secrets by removing or copying confidential or
valuable information of a competitor for its company’s benefit.
• Corporates gets benefited financially through this kind of frauds.
Insider trading:
• Insider trading is defined as a trading in company’s stocks or securities
by persons who are predicted to gain access to the subtle information
in respect to such securities.
• Taking advantage of such information is prohibited under the
respective securities laws of different countries.
• The Rajat Gupta Case is one of the biggest scandals in history of US
for the offence of insider trading.
Occupational Fraud 2024: A Report To The Nations®
by ACFE

• Report available at
https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations
Regulators to curb Corporate Frauds
• Regulators for corporate frauds as per the Companies Act are
• Serious Fraud Investigation Office (SFIO)
• National Company Law Tribunal (NCLT).
Serious Fraud Investigation Office
• It is a multifunctional investigative agency consisting of experts for
timely and effective detection of frauds.
• It investigate into affairs or cases of company involving financial frauds
as may be assigned to it from time to it from time to time by the
Central Government.
• It also has the power to arrest in cases where a person is believed to
be guilty of offence under the Companies Act
Sec 211. Establishment of Serious Fraud
Investigation Office
• (1) The Central Government shall, by notification, establish an office
to be called the Serious Fraud Investigation Office to investigate
frauds relating to a company
• (2) The Serious Fraud Investigation Office shall be headed by a
Director and consist of such number of experts from the following
fields to be appointed by the Central Government from amongst
persons of ability, integrity and experience in,—
• (i) banking; (ii) corporate affairs; (iii) taxation; (iv) forensic audit; (v)
capital market; (vi) information technology; (vii) law; or (viii) such
other fields as may be prescribed.
The Director
• (3) The Central Government shall, by notification, appoint a Director
in the Serious Fraud Investigation Office, who shall be an officer not
below the rank of a Joint Secretary to the Government of India having
knowledge and experience in dealing with matters relating to
corporate affairs.
• (4) The Central Government may appoint such experts and other
officers and employees in the Serious Fraud Investigation Office as it
considers necessary for the efficient discharge of its functions under
this Act.
• (5) The terms and conditions of service of Director, experts, and other
officers and employees of the Serious Fraud Investigation Office shall
be such as may be prescribed.
National Company Law Tribunal
• Sec 408. Constitution of National Company Law Tribunal.—
• The Central Government shall, by notification, constitute, with effect
from such date as may be specified therein, a Tribunal to be known as
the National Company Law Tribunal consisting of a President and such
number of Judicial and Technical members, as the Central
Government may deem necessary, to be appointed by it by
notification, to exercise and discharge such powers and functions as
are, or may be, conferred on it by or under this Act or any other law
for the time being in force.
Sec 409. Qualification of President and
Members of Tribunal
• (1) The President shall be a person who is or has been a Judge of a
High Court for five years.
• (2) A person shall not be qualified for appointment as a Judicial
Member unless he—
• (a) is, or has been, a judge of a High Court; or
• (b) is, or has been, a District Judge for at least five years; or
• (c) has, for at least ten years been an advocate of a court.
• (3) A person shall not be qualified for appointment as a Technical
Member unless he—
• (a) has, for at least fifteen years been a member of the Indian
Corporate Law Service or Indian Legal Service out of which at least
three years shall be in the pay scale of Joint Secretary to the
Government of India or equivalent or above in that service; or
• (b) is, or has been, in practice as a chartered accountant for at least
fifteen years; or
• (c) is, or has been, in practice as a cost accountant for at least fifteen
years; or
• (d) is, or has been, in practice as a company secretary for at least fifteen
years; or
• (e) is a person of proven ability, integrity and standing having special
knowledge and experience, of not less than fifteen years, in law,
industrial finance, industrial management or administration, industrial
reconstruction, investment, accountancy, labour matters, or such other
disciplines related to management, conduct of affairs, revival,
rehabilitation and winding up of companies; or
• (f) is, or has been, for at least five years, a presiding officer of a Labour
Court, Tribunal or National Tribunal constituted under the Industrial
Disputes Act, 1947 (14 of 1947)
Corporation Finance Investigation
Department (CFID)
• SEBI forms this new department in 2020
• The Corporation Finance Investigation Department is
responsible for carrying out preliminary/ detailed investigations
on fraud, diversion/ siphoning or misappropriation of funds;
material mis-statement in financial statements; fraudulent
related party transactions; non-compliance with Objects of the
issue of IPO; and suspected diversion of funds, etc.
Mundhra Scam
• First successful trial of a financial scandal in Independent India.
• Haridas Mundhra, industrialist & stock speculator sold fictitious
shares to LIC and thereby defrauding LIC by Rs 1,26,86,100 (one crore,
twenty-six lakh, eighty-six thousand and hundred)
• Feroze Gandhi, son-in-law to the then Prime Minister Jawaharlal
Nehru, and a Member of Parliament from Indian National Congress,
demanded an explanation for LIC’s decision.
• There was a well-known rift between Mr Gandhi and his father-in-law,
which sensationalized the matter when Feroze Gandhi raised the issue
in the Parliament and charged the Principal Finance Secretary, H.M.
Patel and Finance Minister, T.T. Krishnamachari of pressurizing LIC’s
investment.
• He also claimed that he had possession of confidential letters between
Mr. Patel and Mr. Krishnamachari regarding this investment.
• Seeing such allegations, Mr. Nehru appointed former chief justice
M.C. Chagla as a one-man commission of inquiry.
• In one of the most transparent investigations ever, Mr. Chagla worked
remarkably fast and submitted his report in just 24 days.
• The hearings of the Chagla commission were conducted in public.
• Several leading stockbrokers who were in the LIC Investment Committee
testified that the investment could not have been made for the purpose of
propping up the market, as was claimed by the Finance Ministry.
• They also stated that had the LIC consulted the Investment Committee, they
would have pointed out Mundhra’s forged shares episode from 1956.
• After Mr. Chagla filed his report Mr. Krishnamachari resigned from his post of
Finance Minister on February 18, 1958.
• Mr. Mundhra was also arrested and he went to jail for 22 years.
Enron Scam
• Enron was a company that provided energy, commodities and services to a large variety of
Americans.
• However, during the early 2000’s, the company became known as the poster child for
corporate fraud in the new millennium.
• It was discovered that Enron was using special purpose entity (SPE) to hide its losses and debt,
by keeping those losing businesses off of the main company’s books and financial statements.
• Although this practice was commonplace.
• Enron took it to a new level by capitalizing the SPE’s with Enron stock and making guarantees
to the partners of the SPEs.
• Additionally, its accounting firm, a well-known and respected organisation, Arthur Andersen,
either willfully ignored or was complacent in the fraud.
• Enron hid over $59,10,00,000 in losses by December 2000.
• It later filed for bankruptcy the following year.
Rajat Gupta’s Insider Trading Case
• The India born former Goldman Sach’s Director Rajat Gupta was
convicted by a US District Court in New York in connection with the
biggest insider trading case in the US history.
• He has been sentenced to two years in prison for leaking Goldman
Sachs boardroom secrets.
• The Security and Exchange Commission also obtained $13.9 million as
civil penalty apart from permanently barring him from acting as an
officer or director of a public company
• Gupta, an IIT Delhi and Harvard Business School alumnus, was
charged with breach of fiduciary duties and for passing on inside
information to Raj Rajaratnam, billionaire founder of the Galleon
Group hedge fund, who is already serving an 11-year prison sentence
after being convicted for securities fraud.
• Mr Gupta was accused of leaking information to Mr Rajaratnam about
investment guru Warren Buffet’s plan to invest $5 billion in Goldman
Sachs at the height of the financial crisis of 2008.
• Goldman Sach’s CEO Lloyd Blankfein was among those who testified
against Mr Gupta during the trail.
Harshad Mehta Case
• Mehta obtained fake Bank Receipts from small banks.
• The said Bank Receipts were further passed on to other banks as
security to obtain cash.
• This money was used to drive up the prices of stocks in the stock
market.
• Drastically impacted the Stock Market, Economy and progress of the
Country.
• Banking system was swindled of a whopping of Rs. 4,000 crore.
• Even, the Chairman of one of the Bank committed suicide.
• Mr. Mehta was charged with 72 criminal offenses, and more than 600
civil action suits were filed against him.
• Mehta died in 2002 with many litigations still pending against him.
Other famous scams
• The Hawala scandal
• Ketan Parekh’s share scam
• Sukh Ram Telecom Scam
• Bofors scandal
• Satyam Scam
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