Legislative Developments and Enforcement Actions in respect of Anti-corruption Laws

Introduction

Recent years have been marked with a growing dissatisfaction amongst the public over corruption and its impact on the Indian economy. The Indian government has introduced several legislative measures aimed at tackling corruption in India, including the appointment of India’s first Lokpal as an independent ombudsman, strengthening laws to prosecute bribe-givers, facilitators and influence peddlers, recognizing corporate criminal liability under anti-corruption legislations, expansion of anti-money laundering legislations and enforcement of new laws to target undisclosed income and assets held abroad along with the accused persons absconding from prosecution.

Recent legislative developments

1. Prevention of Corruption Act, 1988 (“PCA“)

The PCA, being the primary legislation in India which targets corruption by public servants, was overhauled in 2018 wherein its scope was significantly expanded to cover a wider multitude of offences and offenders. Certain key changes are as follows:

(a) the PCA criminalises the receipt of any ‘undue advantage’ by a public servant, which includes any gratification and is not limited to pecuniary gratifications capable of estimation in monetary terms, and therefore includes gifts;

(b) the obtaining, accepting, or attempting to obtain any undue advantage is in itself an offence, even if the ultimate performance of a public duty is not improper;

(c) bribe-givers have been targeted by criminalising the act of providing or promising to provide a bribe to any person to induce or reward a public servant to dishonestly perform a public duty.  The prior sanction of the government is not required for initiating prosecution against persons accused of giving bribes;

(d) an additional offence of ‘criminal misconduct’ has been introduced which includes possession of disproportionate assets, misappropriation of property and unjust enrichment.  Higher penalties have also been included for a habitual offender;

(e) ‘middlemen’, influence peddlers or intermediaries who facilitate bribery have been targeted by criminalising the act of taking any undue advantage to cause the improper or dishonest performance of public duty;

(f) provisions pertaining to attachment and confiscation of property procured by way of an offence have been included;

(g) there shall be an endeavour to conclude the trial within a period of two years since the date of initiation of proceedings subject to a maximum time period of four years;

(h) corporate criminal liability has been recognized where in case an offence is committed by a commercial organisation, it shall be liable to a fine if any person ‘associated with the commercial organisation’ provides any illegal gratification intended at obtaining or retaining business or advantage in the conduct of business, for such commercial organisation. A person is considered to be associated with a commercial organisation if such person provides services on behalf of such commercial organisation;

(i) an ‘adequate procedures’ defence is available to a company where it may demonstrate its lack of mens rea by proving compliance with guidelines prescribed by the central government, to prevent persons associated with it from undertaking such conduct.  The central government is yet to issue such guidelines regarding the compliances required to be undertaken by a commercial establishment; and

(j) vicarious criminal liability has been incorporated where the directors, managers, secretaries and any other officers of an entity, with whose consent and connivance the offence has been proved to have been committed, shall be liable to penalties.

2. Prevention of Money Laundering Act, 2002 (“PMLA“)

As regards the concept of ‘proceeds of crimes’ under the PMLA, the Finance Act, 2019 has clarified that proceeds of crime now include any property which may be directly or indirectly derived or obtained as a result of any criminal activity relatable to such identified offence.  A crucial aspect of this provision is that it permits the attachment of properties of accused persons under the PMLA (and other parties who are connected with the proceeds of crime) at a preliminary stage of the investigation.

Recent legislative changes to the PMLA in 2018 have also included ‘fraud’ under the Companies Act, 2013 as one of the identified crimes which will attract the application of the PMLA.  As a result, any property obtained pursuant to a fraud will be considered ‘proceeds of crime’ under the PMLA.  Unlike the PCA, ‘fraud’ under the Companies Act, 2013 is not linked only to bribery of public servants, but covers a much wider ambit.

All offences under the PMLA are now cognisable and non-bailable. Further, the prerequisite of a first information report or charge sheet being filed in relation to a scheduled offence under the PMLA, prior to the Enforcement Directorate being competent to investigate the offence of money laundering resulting from such scheduled offence, has been removed.

3. Companies Act, 2013 (“Companies Act“)

The Ministry of Corporate Affairs has recently established the National Financial Regulatory Authority (“NFRA“) under the Companies Act by way of a notification dated October 01, 2018 (notification S.O. 5099(E), which monitors and enforces compliance with the accounting and auditing standards under the Companies Act.  The NFRA has also been vested with powers of investigation into the matters of professional or other misconduct committed by any member or firm of chartered accountants registered under the Chartered Accountants Act, 1949.

4. The Fugitive Economic Offenders Act, 2018 (“FEOA“)

To prevent offenders accused of economic offences from evading prosecution within the India, the FEOA was recently enacted on July 31, 2018 and targets fugitive economic offenders against whom an arrest warrant has been issued for certain predicate economic offences involving INR 100,00,00,000 or more and who have either left the country to avoid criminal prosecution or are abroad and refuse to return to face criminal prosecution.  Predicate offences under the FEOA cover cheating and counterfeiting under the Indian Penal Code, 1860, offences under the PCA, PMLA, fraud under the Companies Act, benami transactions and tax evasion.  The strength of the FEOA lies in its far-reaching measures of immediate confiscation of all properties of any abscondee, which act as a strong deterrent against any desertion from the country.

Overview of recent enforcement activity

1. In order to cure India’s perceived weakness in its anti-corruption machinery, the government in March 2019, appointed Justice Pinaki Chandra Ghose as the first Lokpal under the Lokpal and Lokayuktas Act, 2013.

2. In early 2019, the former chairman of United Spirits Limited was declared as India’s first Fugitive Economic Offender under the new law, thus enabling the government agencies to confiscate his properties in the INR 9,000 crore loan default case.

3. Government agencies have also shown a willingness to take the assistance of specialists such as private forensic auditors or investigators to provide expertise that they may lack themselves.  The Supreme Court in August 2019 had directed that a forensic audit report be given to the Enforcement Directorate, the Delhi Police and the Institute of Chartered Accountants in India for taking appropriate action against the Amrapali directors and auditors for siphoning off over Rs. 3,000 crore of homebuyers’ money.  Further, The Central Bureau of Investigation (“CBI“) relied upon a forensic audit report commissioned by bankers and filed a first information report against Ratul Puri and other directors of Moser Baer India Limited in connection with a bank fraud case.  Infosys Limited, a leading information technology company recently received a whistleblower complaint alleging matters such as bidding for contracts with low or nil margin and over-recognising revenues. Infosys in its filing with the stock exchanges mentioned that its internal auditor and a law firm will conduct an independent probe in the matter.

4. While the legislation protecting whistle-blowers is currently pending before the Indian parliament, the Securities and Exchange Board of India has meanwhile offered a monetary reward to whistle-blowers upto a maximum amount of INR 1,00,00,000 for cases where the whistle-blower’s information leads to a disgorgement of at least INR 1,00,00,000.

5. The offence of fraud under Section 447 of the Companies Act, 2013 was introduced as a scheduled offence under the PMLA on April 18, 2018.  It is interesting to note that pursuant to Article 20 of the Constitution of India, any finding of fraud prior to such date should not trigger the provisions of the PMLA since Article 20 expressly states that no person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. However, this principle in relation to PMLA proceedings is in the process of being tested at the level of the Supreme Court. While the High Court of Karnataka has upheld this principle in Directorate of Enforcement v. Obulapuram Mining Company Private Limited, the order passed by the High Court of Karnataka has been appealed before the Supreme Court, which has passed an interim order stating that the high court’s order will not operate as a precedent, pending the conclusion of proceedings before the Supreme Court.

6. The Supreme Court has recently released P. Chidambaram on bail in relation to the INX Media scam, citing aspects such as fragile health during incarceration, him not being held as a ‘flight risk’, the possibility of tampering with evidence or influencing witnesses being ruled out and the duration of his custody. The Supreme Court also set out certain principles in relation to grant of bail, stating that the gravity of an offence can be a factor for denying bail and that even economic offences would fall under the category of “grave offences”.  In such circumstances the application for bail should be considered keeping in mind the nature of allegation made against the accused. Even if the allegation is one of grave economic offence, it is not a rule that bail should be denied in every case since there is no such bar created neither under law nor under bail jurisprudence established by the courts in India.

7. The Ministry of Corporate Affairs has been the front runner in prosecuting the directors, management and the statutory auditors of Infrastructure Leasing and Financial Services in relation to an alleged fraud amounting to the tune of approximately INR 91,000 crores. The assets and bank accounts of the accused management had been frozen pending the investigation by the SFIO and pursuant to an interim report submitted by the SFIO, proceedings for fraud under Section 447 of the Companies Act, 2013 have been initiated by the MCA before a special court in Mumbai, India. Further, the MCA has also moved the National Company Law Tribunal to ban the statutory auditors, being Deloitte Haskins and Sells and KPMG, under Section 140(5) of the Companies Act, 2013.

8. The Securities and Exchange Board of India had banned Pricewaterhouse Coopers in India from auditing the books of accounts of any company whose securities are listed on any recognised stock exchange in India, pursuant to its alleged involvement in the fraud committed by the management of Satyam Computer Services Limited. The Securities Appellate Tribunal revoked the ban stating that a ban on auditing was punitive in nature, violative of the principles under Article 19 of the Constitution of India and beyond the scope of the powers granted to SEBI. The order has now been further appealed to the Supreme Court, which has stayed the SAT’s orders pending proceedings.

Authors:
Aditya Vikram Bhat, Partner
Shantanu Singh, Associate

Date: January 9, 2020