FINANCIAL CRIMES IN INDIA

Authors:

Ishwita Mondal, Presidency University, Bangalore

Himanshu Rana, School of law Christ University


Editor:

Sri Sai Kamalini, School of Law, Sastra University, Chennai


INTRODUCTION

Financial Crime manly means offences relating to monetary issues. Since the last few years, it has also increased and drawn the attention of the govt. It also becomes widespread throughout the world. Financial crime only does not affect the individual but in a wider sense, it affects the country and it is also the threat to the economic development of the country.

RELEVANT PROVISIONS AND LEGISLATION

Financial crimes can be divided into two aspects:-

· ‘First, there are those activities that dishonestly generate wealth for those engaged in the conduct in question.’[1]For example:- Taking of things by deceit to gain material thing.

· ‘Second, there are also financial crimes that do not involve the dishonest taking of benefit, but that protect a benefit that has already been obtained or to facilitate the taking of such benefit. For example:- the conduct where someone attempts to launder criminal proceeds of another offence to place the proceeds beyond the reach of the law.’[2]

There are different groups of people who can commit the financial crime:-

(i) Terrorist Group:- They involve in financial crime to fund for their different activities.

(ii) The leaders of the country or State:- They often use their power and position and involves in laundering money for their interest.

(iii) Business leader:- Some business leader misrepresent their financial data.

(iv) From outsider:- customer, supplier, employee or by a person financial fraud can be committed.


Types of Financial Crime

· Fraud:-The Indian Penal Code, 1860 governs most of the criminal Offences in India and the procedure is laid down in Code of Criminal Procedure 1973. Under IPC, misrepresentation, breach of trust, cheating etc. are punishable. Section 403 of IPC states that a person who ever misappropriates property for self-interest is liable to pay fine and can be also imprisoned for 2 years. Under section 406 a breach of trust can be punished by three years of imprisonment or fine. Section 477 A deals with falsification where the accused can be punished for 7 years or with fine.

The Companies Act of 2013 also provides information on fraudulent activities on companies. As per companies Act if any Person in the company, by using his position tries to gain some personal advantage by involving in any unfair means then it is punishable. Section 447 states that whoever will commit fraud need to pay the amount of fraud along three times of the amount of fraud and a person can be imprisoned maximum up to 10 years.

Prevention of Money Laundering Act 0f 2002 & Prevention of Corruption Act 1988 also provides provision against fraud. The activities like concealment, possession, acquisition are also regarded as criminal activities under these provisions.

Serious Fraud Investigation has been set up to look investigate the matter relating to fraud.

· Bribery and Corruption:- The Prevention of Corruption Act 1988, deals with any matter relating to bribery and corruption. It criminalises the following action:-

‘1.Taking of gratification by a public servant in respect of an official act other than legal remuneration.

2. Taking gratification by corrupt legal means to influence a public servant.

3. Taking gratification, for the exercise of personal influence with a public servant.

4. Abetting in corrupting or influencing by a public servant.

5. For a public servant, obtaining anything of value, without consideration from any person concerned in any proceeding or business transacted or about to be transacted by such public servant.

6. Criminal misconduct by a public servant. The offence of abetment under the PCA is also an independent, distinct and substantive offence. Whether or not the offence is committed in consequence of the abetment is irrelevant.’[3]

India has signed two conventions two promote anti-corruption policies:-

(a) The United Nations Convention against Corruption comprises all most All kind of corruption within it. As per its provision state need to take steps to curb corruption.

(b) United Nations Convention against Transnational Organised Crime, it criminalized bribing and corruption in offices.

The authorities like Central Vigilance Commission, Central Bureau of Investigation and State Anti-corruption Bureau, are responsible for the investigation of the issues related to bribery and corruption.


· Insider Dealing and Market Abuse:- The Companies Act 2013 and Prohibition of Insider Trading Regulation 2015 controls all this.

‘Under Section 195 of the Companies Act 2013, the offence of insider trading includes:

(a) Any act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price-sensitive information in respect of the company.

(b) Any act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person’[4]

The Securities and Exchange authority is the body which investigates on such matter.

Section 195 of Companies Act says, between INR 500,000 is liable to pay as fine or three times of the money of the profit which is made of insider trading.

And those who will violate Prohibition of Insider Trading Regulation need to give the penalty of INR 250 million or three times of the profit out of the insider market, whichever will be high.

· Money Laundering, Terrorist Financing and Trade Sanctions:- It is mainly dealt under Prevention of Money Laundering Act 2002. The Unlawful Activities Prevention Act 1967 tries to prevent all kind of unlawful activities which may harm our society.

As per the money laundering Act, money laundering is defined as involving in any kind of activities which is connected with the proceeds of crime.

As per unlawful activities Prevention Act, to involve in a conspiracy which is considered as a terrorist activity through any illegal circulation of currency and harbouring of the terrorist is considered as strict liability.

The Enforcement Directorate and the Director of the Financial Intelligence Unit of India responsible for controlling this. Under the Prevention of Money Laundering Act, if anyone is guilty under this provision, his/her property can be seized. And the accused can also be imprisoned up to 7 years and can be fine up to INR500,00.

‘Under the UAPA, individuals who participate, commit or abet the commission of an unlawful activity are liable to face imprisonment for a term extending to seven years and a fine. Individuals who assist in any unlawful activity face imprisonment of up to five years and/or a fine. Further, crimes that result in death are punishable with the death penalty or life imprisonment. Terrorist financing and conspiracy are punishable with imprisonment from five years to life with the fine. Harbouring terrorists is punishable with imprisonment exceeding three years. Lastly, membership in a terrorist organisation and holding proceeds of terrorism are both punishable with life imprisonment and a fine.’[5]


FAMOUS SCANDAL

Imagine you were born in a middle-class family and by the time you were in your 30s you had so much money that you can’t even count. People start calling you the big bull of the stock market, whichever stock you chose started to fly like a rocket.

Does it bring chills down to your spine, well this just a glimpse of the life of a man called Harshad Mehta, the big bull of the stock market, or as some like to call – the mastermind behind the stock market scam of 1992. The scam was so big that if accounted today it would be around 24000 crores, more than any of the recent famous bank scams, whether it be the Nirav Modi scam or Vijay Mallya's scam. Harshad Shantilal Mehta was born on 29 July 1954 in Rajkot district of Gujarat, his childhood was spent in Mumbai where he completed his education. After graduating Harshad did a lot of small jobs in many places for 8 years,

After having a good knowledge of the stock market in 1984 Harshad Mehta started his own company named grow more research and asset management and got a blocker membership at Bombay stock exchange. After this Harshad did not look back and became the emperor of the stock market, and seeing his achievements people started calling him Amitabh Bachchan and the big bull of the stock market. He owns 9 apartments in the Madhuri housing cooperative society and merged them to accommodate his joint family. Harshad was also fond of luxury cars and had a fleet of imported cars including Toyota Lexus, which even the rich in Mumbai could not easily buy. You must be wondering how did an ordinary man go from an employee in a brokerage firm to owning a fortune. To understand the scam, you need to know a little about ready forward deals and bank receipts.

Ready forward deal or RFD was a deal between two banks where one bank approached a broker to sell its securities to another bank for money and vice versa. When one bank sells securities it issues bank receipts or BRs to confirm the sale and RFD the bank had to issues the checks in the name of another bank and not individuals, but this didn’t happen in the case of Harshad Mehta. Since he was a very reputed broker, and banks issued checks directly to him. He used to ask for some time to go to another bank an get money against the securities and vice-versa. During this time since checks were in his name, he invested all the bank’s money in the stock market, when a bank wanted money for their securities, Harshad went to another bank, took money from them and gave it to the first bank, he repeated this process and it almost became a whole chain, he started using fake Bank receipts to get unsecured loans from banks, Harshad realized the flaws in Indian finance or banking systems and used them as a tool. He used small banks to do this, two of them being the bank of Karad and the metropolitan cooperative bank, since the banks were not big enough, he could also hold the BRs for a longer period. He injected so much money into the stock market using RFD and BR flaws, that once he took ACC share price from just rs. 200 to 9000, an increment of 4400% within a short period. This scam was busted by a journalist named Suchitadalal and the moment the Harshad Mehta stock market scam came out in public domain, the share market saw the biggest drop in history, it shook the banking system in India, and after a lot of investigation, it was found that it also involved several bank officials and people with authorities after the outbreak of news of fake bank receipts Vijaya bank’s chairman committed suicide.

It also led to the resignation of P. Chidambaram and after getting bail Harshad even accused former prime minister, Mr P.V Narasimha Rao, of accepting rs. 1 crore bribe in a conference. congress party denied any allegation against Mr Narsimha Rao and CBI also didn’t find any solid evidences. Several people at that time lost their money in the stock market, once gone from all the investors, Harshad's proved him to be a curse for a lot of them.

He was charged with 72 criminal offences; he was taken into custody for three months and then released on bail. He was barred from any trading in the share market and income tax department claimed that he owed them over rs. 11,000 crores. After a lot of investigations, he was later sentenced for five years imprisonment by the high court in 1999 and sent to thane jail, on the night of 31st December 2001, he reported chest pain, and was immediately taken to the hospital where he died at the age of 47, some people still believe that Harshad Mehta did not commit the crime but only utilise the loopholes that were already present in the system. some say Harshad was not the only one but several other investors too might have a part of this, but since his name came into the lime light, they all blew the whistle on him by having a journalist expose him.

There is a movie coming on his life story namely big bull and which his role will be played by Abhishek Bachchan, a web series is also being made on him. Once a king of the stock market later became a lesson to what a loophole in the system can lead too.

[1]What is Financial Crime? ICA, available at https://www.int-comp.org/careers/your-career-in-financial-crime-prevention/whatisfinancialcrime/#:~:text=electronic%20crime,money%20laundering,market%20abuse%20and%20insider%20dealing, last seen on 5/10/2020 [2]Ibid. [3]Aditya Bhat and Rhea Mathew, Financial Crime in India:Overview, Practical Law, available at https://uk.practicallaw.thomsonreuters.com/w0098768?transitionType=Default&contextData=(sc.Default)&firstPage=true, last seen on 5/10/2020 [4]Ibid. [5]Ibid.

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