Serious Fraud Investigation Office: A panacea for corporate frauds

In view of the burgeoning cases of corporate fraud, it is imperative to arm the Serious Fraud Investigation Office with sufficient teeth

Serious Fraud Investigation Office: A panacea for corporate frauds
Representational image

By Sandeep Das

The recent engrossing Netflix documentary ‘Bad Boy Billionaires: India’ has once again highlighted instances of monumental corporate frauds. YES Bank, Dewan Housing, IL&FS, Kingfisher Airlines, Gitanjali Group and Nirav Modi (the fugitive diamantaire), which had once enjoyed stellar reputation, are now reeling under the allegations of gigantic corporate frauds.

While these scams involve mind-boggling amounts, their tracing and recovery have been slow and ineffectual. In most cases, a fraction of the sum involved is traced after protracted and arduous investigations. These frauds impair the economy and also jeopardise interests of public shareholders since large corporates are mostly public-listed companies where promoters conduct business with funds from others.

In most such cases, the promoters/management siphon off corporate funds through structured and seemingly legitimate transactions, which are actually illegal. A classic ploy has been companies transacting business with entities that on paper appear legitimate third parties, but are either de facto controlled by the promoters/management or act in cahoots with them to conceal the ultimate beneficiary of such transactions. Often, there is an offshore leg of such transactions to ensure that monies are routed through foreign jurisdictions with the connivance of sophisticated professionals.

The sophisticated nature of financial crimes required a specialised agency to investigate and prosecute white-collar criminals. While most state police forces have a separate Economic Offences Wing, these departments were found to be inept in investigating complex financial crimes. A major hurdle in investigating complex financial crimes across the globe has been jurisdictional overlap between investigative agencies, leading to divergent findings.

Against this backdrop, the Serious Fraud Investigation Office (SFIO) was established on the recommendation of the Naresh Chandra Committee. The objective was to create a multidisciplinary body that could single-handedly tackle complex corporate frauds. Patterned on the Serious Fraud Office (SFO) of the UK and the Corporate Fraud Task Force of the US, the SFIO is envisaged as the single agency for directing and supervising investigations and prosecutions under various economic legislations.

Initially, the SFIO was established by a government resolution within the Department of Company Affairs to take up investigation of frauds having complex and interdepartmental and multidisciplinary ramifications; substantial involvement of public interest in terms of monetary misappropriation or number of persons affected; and the possibility of investigations leading to a clear improvement in systems, laws or procedures.

However, instead of being the premier investigative agency, the SFIO remained a paper tiger, looking into offences under the Companies Act, 1956. Shockingly, it lacked even the power to arrest an accused, a power that came to the agency only in August 2017. The biggest hurdle was the lack of legislative backing, which was remedied by according it statutory recognition in the Companies Act, 2013. It could now arrest the accused while the threshold for obtaining bail was made incredibly high. However, the issue whether it could exclusively investigate and prosecute offences related to corporate frauds but punishable under other statutes remained unaddressed.

Also, the SFIO has been granted recognition through the Companies Act and not a separate statute like the Criminal Justice Act, 1987, in the UK. This has led to many believing that it is only responsible for offences punishable under the Companies Act, and not under other statutes. Due to such doubt, multiple law enforcement agencies are still conducting investigations into the same financial crime. This appears to be the case in the matters concerning IL&FS, YES Bank and Dewan Housing.

The report that formed the basis of setting up of the SFIO envisaged it as a new ‘super agency’ to tackle intricate frauds that could only be unravelled by a multidisciplinary task force. Such a goal could only be fulfilled if the SFIO were to move beyond the scope of the Companies Act and also work in tandem with other agencies by supervising and assisting them with the investigation (as is the case with the SFO). Thus, for the SFIO to fetch the desired results, it must either look into investigations alone or at least act as a supervising agency.

Under the Companies Act, investigation into corporate frauds by other investigation agencies under various statues, including the IPC, are to be transferred to the SFIO, once it begins its probe. It also directs other investigative agencies, including the police, to provide all the information/documents available with them to the SFIO so as to avoid duplication of work. Under the Companies Act, special courts have been established to adjudicate upon cases of corporate fraud. Such special courts are empowered to try offences under other statutes which emanate from the same transaction. Thus, no other court can take cognisance if the offence is punishable under this Act. A combined reading of the provisions of law makes it evident that once the SFIO is investigating a case of corporate fraud, it may also investigate offences punishable under other statutes but part of the same transaction.

By ignoring all the benefits of having a single, all-encompassing investigative agency, the existing situation is one of considerable overlap, which leads to prolonged litigation. In view of the burgeoning cases of corporate fraud, it is imperative to arm the SFIO with sufficient teeth and remove all ambiguities.

(The author is founding partner, AP & Partners, a New Delhi-based law firm)

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First published on: 07-01-2021 at 07:00 IST