By Sandeep Das, The author leads the Disputes and Investigations practice at Touchstone Partners
The recent extradition proceedings against Mehul Choksi and the allegations of money laundering against Reliance ADAG have once again spotlighted instances of monumental corporate frauds in India.
While such corporate frauds involve mind-boggling amounts, tracing and recovery of the proceeds of the crime have been sluggish and ineffective. In most cases, a fraction of the sum involved is traced after protracted investigations. At the same time, given the quantum of monies involved, courts are typically cautious in granting bail to the accused. The lengthy incarceration of the accused pending the completion of investigation / trial is often seen to be violative of their right to a speedy investigation and a fair trial. In many cases, the process itself becomes the punishment.
On the other hand, these frauds impair the economy and jeopardise interests of public shareholders and lenders since large corporates are mostly public-listed companies. In many cases, the promoters / management siphon corporate funds through a labyrinth of structured but ostensibly legitimate transactions. A classic ploy has been transacting business with entities camouflaged as legitimate third parties, but which act in concert with the promoters to conceal the ultimate beneficiaries. Often, there is an offshore leg of such transactions to ensure that the money is routed through tax friendly foreign jurisdictions.
The sophisticated nature of financial crimes requires a specialised agency to investigate and prosecute white-collar criminals. While most state police forces have a separate ‘Economic Offences Wing,’ these departments have been found to be inept in investigating complex financial crimes. A major hurdle has been the jurisdictional overlap between investigative agencies, often leading to conflicts between the agencies themselves.
Against this backdrop, the Serious Fraud Investigation Office (SFIO) was established as 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 was envisaged as a single agency for directing and supervising investigations and prosecutions under various economic legislations.
However, instead of becoming the premier investigative agency (as it was supposed to be), the SFIO remained a paper tiger, investigating minor 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 the SFIO with statutory recognition under the Companies Act, 2013.
While the Naresh Chandra Committee envisaged the SFIO as a ‘super agency’ to tackle intricate frauds by a multidisciplinary and specially trained task force, this vision could only be fulfilled if the SFIO were to move beyond the scope of the Companies Act, 2013. A financial transaction / corporate fraud could give rise to distinct offences under distinct statutes (in addition to the Companies Act).
However, whether the SFIO could investigate and prosecute offences related to corporate frauds punishable under other statutes remained unaddressed. Many believe that since the SFIO is a creature of the Companies Act (and not a separate statute like SFO), it could only investigate offences punishable under the Companies Act. Due to such doubts, multiple law enforcement agencies are still conducting investigations into the same financial crime despite an SFIO investigation.
The Companies Act, 2013, however, mandates that all investigation(s) should be transferred to the SFIO once it begins its probe into any corporate transaction. It further directs other investigative agencies to provide all the information and/or documents available with them to the SFIO. Under the Companies Act, 2013, Special Courts have been established to adjudicate upon cases of corporate frauds. Such courts are empowered to try offences under other statutes which emanate from the same transaction. 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, if they form part of the same transaction.
This view was also supported by the Delhi High Court in the case of Ashish Bhalla v. State. The judgement reinforces streamlining of cases for increased efficiency and avoidance of multiplicity of proceedings by having one investigative agency dealing with all aspects of a case.
In view of the burgeoning cases of corporate fraud, it is imperative to arm the SFIO with sufficient teeth and remove all ambiguities. Injecting more steel in the spine of a dedicated agency like the SFIO would balance the objectives of the prosecution vis-a-vis the rights of the accused. A speedy and sophisticated investigation would mean faster recovery. It would also mean that instead of being shuttled haphazardly between multiple agencies, the accused would benefit from a single, coordinated mechanism that ensures a fair, timely and efficient investigation.
