Legasis Fusion of Lawyering and Information Technology

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1 Legasis Fusion of Lawyering and Information Technology Corruption, Anti-Bribery Legislations & Financial Crimes February 26, 2017 MCCIA Pune Mr. Ramesh Sharma IPS (R) Ms. Marilyn Coelho

2 India of Today? It is the best of times, it is the worst of times, it is the age of wisdom, it is the age of foolishness, it is the epoch of belief, it is the epoch of incredulity, it is the season of Light, it is the season of Darkness, it is the spring of hope, it is the winter of despair, we have everything before us, we have nothing before us, we are all going direct to heaven, we are all going direct the other way Charles Dickens, A Tale of Two Cities English novelist ( ) 2

3 India Ranks 79 (76/2015) out of 176 Countries On the corruption scale (1-100), India scores 40 (38/2015). 3

4 Corruption is Boundryless And Timeless BCE 4

5 Bribery and Corruption Global Overview The business ecosystem today, both in India and the world over, face increasing Regulatory and Enforcement challenges There is international consensus among comity of nations to effectively combat fraud, bribery and corruption. Following Conventions/Summits clearly show the intent of the International community: OECD : Convention on Combating Bribery of Foreign Public Officials in international business transaction, 1997 United Nations Convention Against Corruption, Vienna 2005 G20 Summit Australia : Anti Corruption Action Plan, 2014 Group Companies 5

6 Bribery and Corruption Glocal Overview In the US the SOX, Dodd Frank Act (The Wall Street Reforms and Consumer Protection Act) or the Yates Memo or the widening of the scope of the US FCPA or the BA in the UK all point to the trend of stringent demand for compliance to anti-bribery laws In India also the Government has shown the political will to combat bribery, corruption and black money through a spate of legislations, including The Companies Act, The Lokpal and Lokayuktas Act, The Public Liability Insurance Act, The Benami Transactions (Prohibition) Amendment Act, 2016 and The Bankruptcy and Insolvency Act Thus, companies can be covered not only under the Indian laws but also by the extra territorial jurisdiction of the US FCPA and the UK BA Group Companies 6

7 Anti- Corruption Laws in US & UK 7

8 Anti-Bribery Provisions: Prohibits bribery of foreign officials. Accounting Provisions: Requires companies to: a) maintain accurate books and records and b) devise and maintain robust internal controls. US Foreign Corrupt Practices Act, 1977 (FCPA) Regulators Department of Justice (DOJ) Securities and Exchange Commission (SEC) 8

9 US Foreign Corrupt Practices Act, 1977 (FCPA) : Applicability Issuers and their officers, directors, employees, agents, and shareholders. Domestic Concerns and their officers, directors, employees, agents, and shareholders Certain Persons and Entities, other than issuers and domestic concerns, acting while in the territory of the United States. Non US persons engaging in business in the US either directly or indirectly. A foreign national or company may also be liable under the FCPA if it aids and abets, conspires with, or acts as an agent of an issuer or domestic concern. 9

10 Accounting Provisions: Internal Controls FCPA Mandates: Keeping of books, records and accounts that accurately & fairly reflect your transactions & dispositions of your assets Devising and maintaining a system of internal accounting controls, sufficient to assure management`s control, authority and responsibility over the firm`s assets Fiat (Oil-For-Food-Programme) (2008) From 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments to Iraqi Foreign Officials The kickbacks were characterized as "after sales service fees, but no bona fide services were performed Criminal Penalty: $7 Million penalty Deferred Prosecution Agreement: For failure to maintain adequate internal controls to detect and prevent the uncharacterized payments Civil Penalty: $3,600,000 Disgorgement: $5,309,632 10

11 United Kingdom Bribery Act: Applicability Companies registered in the UK. Foreign Subsidiary of a UK company. Employees, Subsidiaries, Agents or Service Providers of the United Kingdom company Foreign Companies doing business in the UK: Includes bribery taking place outside UK Advantage accrues outside UK British nationals or ordinarily resident in UK. A Scottish partnership. 11

12 Major Differences between the FCPA and the UKBA FCPA 1977 UKBA 2010 Does not cover private-to-private bribery Covers only active bribery(only the giving of the bribe) Intent necessary to establish offence of bribery Facilitation payments are exempt from liability under the Act. Legitimate promotional expenditure by an entity is not an offence under the Act Penalties are clearly defined. For offences committed under the FCPA an individual can be fined up to US$250,000 per violation and may also be given up to five years imprisonment. A company guilty under the FCPA is liable for a fine of up to US$2,000,000 per violation. Necessary to prove corrupt intent. Covers private-to-private bribery Covers both active and passive bribery(covers both the giving and taking of the bribe) Intent is unnecessary to establish bribery of foreign public official No exception for facilitating payments Position as to legitimate promotional expenditure is not clear. An individual found to have committed an offence under the Bribery Act is liable to imprisonment of up to ten years and/or to an unlimited fine. A company found guilty is subject to an unlimited fine. Proving corrupt intent is not necessary for establishing bribery of foreign corrupt official 12

13 Anti- Corruption Laws in India 13

14 Corruption is a Crime: Period!!! The Prevention of Corruption Act, 1988 The Prevention of Money Laundering Act, 2002 (PMLA) The Lokpal & Lokayuktas Act, 2013 (Maharashtra Lokayukta/1972), Justice (Retd) Tahaliyani ML The Companies Act, 2013 The Benami Transactions (Prohibition) Act, 2002 The Central Vigilance Act, 2003 The Right to Information Act 2005 Group Companies 14

15 Prevention of Corruption Act, sets of offenders who are covered: A bribe (gratification) taker who is a public servant (S. 7 or 11) The giver of a bribe (through abetment S. 12 and S. 120 B IPC) Any middlemen who influences a public servant (either by a payment or personal influence) Includes employees of government-owned and statutory corporations. Prevention of Corruption (Amendment) Bill, 2015 The Bill defines the offence of bribe and makes specific provisions related to giving a bribe to a public servant, and giving a bribe by a commercial organisation. 15

16 Enforcement & Regulatory Environment: Future Scenario The Public Procurement Bill, 2012 Transparency in procurement Code of Integrity for Officials, procuring agencies and bidders Mandates publication of all procurement related information Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill, 2011: Provides a mechanism to deal with bribery among Foreign Public Officials (FPO) and Officials of Public International Organizations (OPIO). The Bill criminalizes the following acts: Acceptance or solicitation of bribes by FPO and OPIO for acts or omissions in their official capacity; Offering or promising to offer a bribe to any FPO and OPIO for obtaining or retaining business; Abetment or attempting either of the above acts. 16

17 Prevention of Money Laundering Act,

18 Objective & Applicability The Prevention of Money Laundering Act, seeks to combat money laundering Three main objectives: To prevent and control money laundering To confiscate and seize the property obtained from the laundered money To deal with any other issue connected with money laundering in India The Act and Rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information in prescribed form to Financial Intelligence Unit India 18

19 Predicate Offence: Pre-Requisite for PMLA Predicate Offense: Offences covered under the Schedule given belwo. Pre requisite for initiating investigation into the offence of money laundering Acts covered in the Schedule: (a) Indian Penal Code, 1860; (b) NDPS Act, 1985; (c) Unlawful Activities (Prevention ) Act, 1967; (d) Prevention of Corruption Act, 1988; (e) Customs Act, 1962; (f) SEBI Act, 1992; (g) Copyright Act, 1957; (h) Trade Marks Act, 1999; (i) Information Technology Act, 2000; (j) Explosive Substances Act, 1908; (k) Wild Life (Protection) Act, 1972; (l) Passport Act, 1967; (m) Environment Protection Act, 1986; (n) Arms Act, 1959 Investigating Agencies: Police, Customs, SEBI, NCB and CBI, etc. under their respective Acts Money Laundering Investigatory Bodies: S. 48 & 49 of the PMLA, the officers of the Directorate of Enforcement have been given powers to investigate cases of Money Laundering. The officers have also been authorised to initiate proceedings for attachment of property and to launch prosecution in the designated Special Court for the offence of money laundering. 19

20 Money Laundering Cycle Corruption & Bribery Fraud Organized Crime Drug and Human Trafficking Environment al Crime Terrorism Other crimes Predicate crimes Placement Initial introduction of criminal proceeds into the stream of commerce Most vulnerable stage of money laundering Involves distancing the money from its criminal source Movements of money to different countries Movements of money to different accounts Increasingly difficult to detect Layering Integration Movement of previous laundered money into the economy through banking system as normal business earnings Creates appearance of legitimate wealth 20

21 Financial Crimes: Fraud 21

22 Accounting Fraud: Satyam SATYAM ( ) Misreporting its non-existent cash balance of $0.8 billion Forged invoices, bank statements, manipulated accounting entries Over reporting of sales, profits and debtors understatement of liability Criminal Breach of Trust (S & 420 IPC) Forgery (S A IPC) Cheating (S ) Fabricated board resolutions in order to obtain $260 million of bank loan and acquire $74 million of property through shell companies The key accused- Raju, two partners from PWC arrested, found guilty and jailed for 7 years PWC, the statutory auditor fined $7.5 million by SEC and Accounting Oversight Board An accounting fraud of colossal magnitude was carried out with the connivance of the company s auditors, revealed through self confession 22

23 Accounting Fraud: Worldcom WORLDCOM ( ) Accounts forged and profits grossly overstated- $3.8 billion dollars in improper accounting as per the auditors Total fraudulent accounting $9 billion dollars- as per SEC- one of the largest accounting scandal in the history of US Entire top management was found guilty Former CEO Bernard Ebbers awarded prison sentence of 25 years Chief Financial Officer Scott Sullivan and Controller David Myers arrested on charges of fraud and filing false statements $ 6.1 billion as settlement to shareholders 23

24 Relevant provisions of Indian Penal Code (IPC) Elements of Fraud have to be made out by: Criminal Misappropriation (S ) - Dishonest misappropriation or conversion to one`s own use any movable property. Punishment of 2 years imprisonment or with fine, or with both Criminal Breach of Trust (S ) - Dishonest misappropriation or conversion in respect of movable and immovable property entrusted to that person. Punishment of 3 years imprisonment or with fine, or with both Cheating (S ) - Deceiving any person, fraudulently or dishonestly induces the person so deceived to acts of commission or omission. Punishment of up to 7 years imprisonment with fine. Fraudulent Deeds and Disposition of Property (S ) - Dishonest or fraudulent removal, concealment or delivery to any person, any property through certain acts. Punishment of 2 years imprisonment or fine, or both Forgery, Counterfeiting & Falsification of Accounts (S A IPC) Making of any false documents or false electronic record or part of a document or electronic record with intent to cause damage or injury, to the public or to any person commits forgery. Punishment of 2 years imprisonment or fine or both 24

25 Companies Act,

26 Companies Act, 2013: Definition of Fraud What is Fraud? Fraud is defined u/s 447 of the Act as An act in relation to affairs of a company or any body corporate, and includes: any act; Omission; Concealment of any fact; or Abuse of position committed by any person or any other person with connivance of another in any manner: With the 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 27

27 Companies Act, 2013: Punishment for Fraud Punishment for fraud in the 2013 Act: A person found guilty of fraud, will be punishable with: Imprisonment for a term between 6 m - 10yrs and Fine at least for the amount involved in the fraud, extendable up to 3 times the amount involved The relevant Sections : U/s 447 in around 20 Sections of the Act e.g. u/s 7(5), 7(6), 8(11), 34, 36, 38(1), 140(5) etc. for directors, KMPs, auditors and/or officers of company The new Act goes beyond professional liability for fraud and extends to personal liability of the concerned person 28

28 Companies Act, 2013: Reporting Duty Responsibility of the Auditor (Sections 143 [SA], 148 [CoA) read with Rule 13 of the Companies (Audit and Auditors) Rules 2014 Auditors to report about the fraud of more than Rs. 1 Crore no later than two days to the Audit Committee and the Board and seek their comments within 45 days. Within 15 days of receipt of comments, the Auditor should forward his/her report to the Ministry of Corporate Affairs with own observations on the comments of the Board. Reporting of fraud by the auditors shall also extend to concerned branch auditor Responsibility to report fraud also applies equally to secretarial and cost auditors Punishment for Auditor Fine of Rs. 25,000 Rs. 5 Lakh Additional penalty for knowingly indulging in deception: Imprisonment up to 1 year and fine from Rs. 1 Lakh to Rs. 25 Lakhs 30

29 Companies Act, 2013: Scope of Internal Audit The scope of internal audit is broad and it may include topics such as: Organization's governance Risk management Management controls over efficiency/ effectiveness of operations (including safeguarding of assets) The reliability of financial and management reporting Compliance with laws and regulations Proactive fraud audits to identify potentially fraudulent acts Participating in fraud investigations under the direction of fraud investigation professionals Conducting post investigation fraud audits to identify control breakdowns and establish financial loss Existence and operating effectiveness of internal financial controls Pointing out any qualification, reservation and adverse remark relating to maintenance of accounts Reporting of any fraud by officers or employees on the Company is being or has been committed 31

30 Enforcement Agencies As with other crimes, Corruption Crime sets the Criminal Justice System in motion: Preliminary Enquiry/FIR >>> Enquiry/Investigation>>> Charge Sheet >>> Trial >>> Conviction/Acquittal. Investigation/Prosecuting Agencies at the National Level: CBI/Enforcement Directorate/Income Tax Department/SFIO/Lokpal Investigation/Prosecuting Agencies at the State Level: Police Station Anti Corruption Bureau/Economic Offences Wing/Vigilance Department/ Lokayuktas 32

31 Closure of a Corruption Case Takes Approx. 20 Years Preliminary Enquiry and Investigation Trials and Proceedings Average time taken for the enforcement agencies is more than 4 years. During which, the persons of interest are frequently called for interrogations. Average time taken to complete the proceedings by a Trial Court, High Court and the Supreme Court is nearly about years. Thus, an acquittal will nevertheless take approximately 20 years of the lives of a company/accused. Moreover, if the closure ends in conviction, the sentence would leave the lives of the individuals in utter ruin! Setting in motion of the criminal justice system will, therefore, have a disastrous impact on the reputation of company. 33

32 Big Brother Watching: Financial Intelligence Agencies Financial Intelligence Unit (FIU) (18 Nov 2004) Economic Intelligence Council (EIC) Central Economic Intelligence Bureau (CEIB) Comptroller & Auditor General of India (CAG) Central Vigilance Commission (CVC) Securities & Exchange Board of India Reserve Bank of India Insurance Regulatory & Development Authority of India (IRDA) Telecom Regulatory Authority of India Financial Intelligence Unit India (FIU-IND) was set by the Government of India on 18 November 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. 34

33 THANK YOU 35

34 THANK YOU 36

35 THANK YOU