I The present century is well known for the remarkable development in the field of science and technology; simultaneously industry and commerce have also spreaded the wings of revolution all over the world. This Industrial Revolution abruptly changed the entire social, economical and political structure of our society throughout throu ghout the world, such that people have ha ve abandoned the high cultural goals and socially approved techniques of achieving them, because an overwhelming emphasis is made on achieving certain objectives, e.g. political powers, monopolistic control over business and high economic status without due regard to the question of whether they can be achieved by legally approved means or not. Therefore, high ethical standards and moral values were discarded in favour of power, money and material things. Such circumstances have made the environment more conducive for the monstruous growth of the newer form of criminality, particularly in developing countries like India. Thus all sorts of anti-social activities, i.e. frauds, corruption, adulteration of food stuffs, misappropriation and misrepresentations are now carried on a large scale by the .persons of upper and middle socio-economic class in the course of their trade, commerce, industry and other professions as well. Economic crimes in India, like else where, are linked to several other offences, or even organised crimes, having bearing on national security. Every day a greater degree of sophistication is being noticed in the activities of the criminals indulging in these activities. There is a growing recognition in the world that the economic offences are, many times, part of other serious crimes posing serious threat to the security of the nation. Problems such as international terrorism, narco-terrorism, money laundering, IPR violations, cyber crimes, import of hazardous substances etc. continue to occupy centre stage as the global threats. A multi-pronged approach by various arms of the Government could help in effectively dealing with this menace. Crimes in whatever form or category they may fall in, impact mankind in multifarious ways. They damage democratic development, skew social development, inhibit industrial development and endanger economic development. Overall crime is the antithesis of development and is strongly pitted against it. Development is an innate urge nurtured by nations. Economic development, a prerequisite for development of any other kind, and development is also intrinsically linked to mutual and international cooperation. Economic crimes create black market or underground economy, a market in which goods or services are traded illegally. The key distinction of a black market trade is that the transaction itself is illegal. The goods or services may or may not themselves be illegal to own, or to trade through other legal channels because the transactions are illegal, the market itself is forced to operate outside the formal economy, supported by the established state power. Two common motives for operating in black markets are to trade contraband, or to avoid taxes or price controls. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services, e.g. ―the black black market in bush meat‖.
II Economic offences form a separate category of crimes under Criminal offences. These are often referred as White/Blue Collar crimes. Economic offences not only inflict pecuniary losses on individuals but also damage the national economy and have security implications as well. The offences of Smuggling of Narcotic substances, Counterfeiting of currency and valuable securities, Financial Scams, Frauds, Money Laundering and Hawala transactions etc. evoke serious concern about their impact on the National Security. Economic crimes are crimes against property, involving the unlawful conversion of the ownership (belonging to one person) to one‘s own personal use and benefit.1 These crimes also involve fraud (cheque fraud, credit card fraud, mortgage fraud, medical fraud, corporate fraud, securities fraud (including insider trading), criminal misappropriation, payment (point of sale) fraud, health-care fraud), corruption, scams or confidence tricks, tax evasion, bribery, embezzlement, identity theft, money laundering, and forgery and counterfeiting, including the production of counterfeit money and consumer goods and include computer and cyber-crimes. It may be carried out by individuals, corporations, or by organised crime groups. Victims may include individuals, corporations governments and entire economy. In a broad way, the former can be subclassified as: crimes involving government finances (eg. tax evasion, duty evasion, subsidy frauds etc.), crimes involving individuals‘, finances (eg. cheating, misappropriation, breach of trust etc.), crimes related to corporate management (eg. commissions as bribes, illegal gratification, floating fake firms, copyright violations etc.), crimes affecting national economy (eg. foreign exchange, stock & commodity market manipulations, counterfeiting currency etc.). Economic crimes create black market or underground economy, a market in which goods or services are traded illegally. The key distinction of a black market trade is that the transaction itself is illegal. The goods or services may or may not themselves be illegal to own, or to trade through other legal channels because the transactions are illegal, the market itself is forced to operate outside the formal economy, supported by the established state power. Two common motives for operating in black markets are to trade contraband, or to avoid taxes or price controls. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services, e.g. ―the black market in bush meat‖. Money itself is traded in the black market. This may happen for one or more of several reasons: the government sets (―pegs‖) the local currency at some arbitrary level to another currency that does not reflect its true market value, government makes it difficult or illegal for its citizens to own much or any foreign currency, the government taxes exchanging the local currency with 1
Mahesh Chandra: Socio-Economic Crimes, N.M. Tripath
other currencies, either in one direction or both (e.g. foreigners are taxed to buy local currency, or residents are taxed to buy foreign currency). The currency is counterfeit. The currency has been acquired illegally and needs to be laundered before the money can be used.2
The term "white-collar crime" was first used by the American criminologist Edwin H. Sutherland to define a violation of the criminal law committed by "a person of respectability and high social status in the course of his [or her] occupation" (White Collar Crime, 1949). In 1981 the U.S. Department of Justice developed a further definition, which included "nonviolent crime for financial gain utilizing deception and committed by anyone who has special technical and professional knowledge of business and government, irrespective of the person's occupation" ( Dictionary Dictionary of Criminal Justice Data Terminology, Bureau of Justice Statistics).3 White-collar crimes include the following categories investigated by the Federal Bureau of Investigation (FBI) (FBI) Money laundering, securities and commodities fraud, bank fraud and embezzlement, environmental crimes, fraud against the government, election law violations, copyright violations, and telemarketing fraud. White-collar crime is a generic term that refers to a broad range of illegal acts committed by seemingly respectable people in business settings as part of their occupational roles. There are many different types of white-collar crime, ranging from antitrust offenses to environmental violations to health care frauds and beyond. These types of crime are important because they impose enormous financial, physical, and social harms on individuals, communities, and society in general. Because of their special characteristics and the techniques by which they the y are committed, they pose significant problems for law enforcement and regulatory agencies interested in controlling them. Evidence suggests that white-collar crime is pervasive, widespread, and growing. Regardless of how it is defined, white-collar crime is widely acknowledged to cause tremendous financial, physical, and social harms. The amount of money lost to white-collar crime annually is impossible to establish with any precision, but it clearly exceeds the losses due to ordinary street crime. For example, according to the Federal Bureau of Investigation (FBI, 2007), in 2006 traditional property crimes such as larceny, burglary, auto theft, and robbery accounted for an estimated $17.6 billion in losses. By comparison, the FBI estimates annual losses due to whitecollar crime at $300 billion. Although typically thought of as a financial crime, certain types of white-collar crime can have physical effects as well. These include violations of workplace safety laws, the manufacture and distribution of unsafe consumer products, and violation of environmental laws and regulations. Like ordinary street crime, white-collar crime also has social or moral costs that extend beyond its affects on individual victims. Many scholars believe that white-collar white-collar crime damages the moral climate in society by undermining people‘s faith in 2 3
ECONOMIC AND ORGANIZED CRIME:Challenges CRIME:Challenges for Criminal Justice, R.T. Naylor, Professor of Economics, McGill University
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the legitimacy and fairness of business and government. White-collar crime is thought to create distrust and to undermine public confidence in the morality of big business. 4
White-collar crime comes in a variety of forms and can be found in every industry, profession, and occupation. In this section, five major forms of white-collar crime are defined and described: antitrust violations, securities violations, consumer fraud, health care fraud, and environmental offenses.
1. ANTITRUST VIOLATIONS
Antitrust violation can be divided into two broad groups: restrictive trade agreements, and monopolies or monopolistic practices. Restrictive trade agreements involve an illegal agreement or understanding between competitors in an industry to restrict how the industry works. Two examples of restrictive trade agreements are price fixing and market sharing or division. Price fixing refers to agreements between competitors to set prices at a certain level. For example, if milk producers get together and agree among themselves to charge schools a set price for the milk used in school lunch programs, that is price fixing. Market sharing occurs when competitors get together and divide up an area, so that only one of them operates in any one area at a time. For example, two paving contractors might divide up a town so that one takes the east side and the other the west side of town. These sorts of agreements are illegal because they restrain trade. In these examples, the prices for these goods and services (milk and paving) are not being set by open competition in the marketplace, as they should be in a free market economy. Rather, prices are being set by collusion between or among competitors. Monopolies and monopolistic practices involve unfair attempts to corner a market or to drive out competitors from a marketplace. A monopoly is said to exist if one company controls an entire market, but a company can have monopolistic control even though it has competitors if it controls a large enough share of a market. Micr osoft‘s osoft‘s Windows operating system, for example, was declared a monopoly even though there are other operating systems available. The other systems have such a small market share and Windows has such a large share that it effectively controls the market. There are two main techniques of monopolistic practices. The first is to use predatory pricing, which occurs when a company sets a price for its products or services that is economically unfeasible in order to drive competitors out of business. A second technique is for a company to pressure or control other companies that supply or deal with competitors so as to put them at a 4
126TH INTERNATIONAL SENI OR SEMINAR VISITING EXPERTS’ PAPERS 71 , ECONOMIC CRIME IN A GLOBALIZING SOCIETY:ITS IMPACT ON THE SOUND DEVELOPMENT OF THE STATE - AN INDIAN PERSPECTIVE BY Deepa Mehta.
competitive disadvantage. Microsoft was accused of doing this with computer manufactures. It forced computer manufactures who wanted to preload their machines with the Windows operating system to agree not to install software from some rival companies when selling computers to the public. In effect, this destroyed the t he market for rival software companies. 2. SECURITIES VIOLATIONS
A security is evidence of ownership, creditorship, or debt. It is a piece of paper, or an account number, or something that indicates that someone has a financial interest or stake in an economic undertaking. For example, stocks, bonds, shares in a mutual fund, promissory notes, and U.S. government savings bonds are all securities. Publicly traded securities are bought and sold on exchanges, such as the New York Stock Exchange. There are five major types of security offenses. Misrepresentation involves lying about the value or condition of a security. Stock manipulation occurs when an individual or a group of individuals attempts to artificially manipulate the price of a security. Misappropriation is an offense committed by brokers or other financial advisors who take money that their clients have given them to invest and misappropriate it for their own use. Insider trading is perhaps the most publicized security offense. It arises when people trade on the basis of inside, nonpublic information. It is illegal for insiders to buy or sell stock on the basis of information that is not available to the public. Finally, in an investment scheme, the perpetrator tricks people into investing money in an undertaking or security by falsely promising investors that they will receive a high rate of return on their investment. In reality, the undertaking has little or no chance of paying off, and the perpetrator p erpetrator simply makes off with the investors‘ money. 5 3. CONSUMER FRAUD
Consumer fraud is one of the most common forms of white-collar crime. It involves the use of deceit or deception in the marketing and selling of goods or services. This offense usually involves the deliberate use of false, deceptive, or misleading statements about the cost, quality, or effectiveness of a product or service. Consumer fraud offenders are drawn from all types of businesses and represent a continuum of o f size and complexity. Fraud against a gainst consumers has been perpetrated by offenders ranging from fly-by-night con artists to major multinational corporations, such as Sears and K-Mart. Fraud also occurs in businesses that fall between these two extremes, including local ―legitimate‖ businesses that may on occasion resort to fraud in order to make extra profit or to avoid going out of business. The following are seven of the more common forms of consumer fraud: 1. Mislabeled products and misleading advertising .- Many consumer products come with labels that purport to tell about the ingredients in a product or about its performance or 5
The Growing Global Threat of Economic and Cyber Crime, The National Fraud Center, Inc. – a LEXIS-NEXIS Company A member of the Lexis-Nexis Risk Solutions Group, December 2000 National Fraud Center, Inc. –
efficiency — for for example, prepared foods, computers, water heaters, furnaces, and a host of other products. One way to sell cheap or shoddy products is to put inaccurate or misleading information on the label to make them seem better or more attractive than they really are. Misleading advertising is another way to influence buying decisions. For example, food manufacturers may make questionable claims about the nutritional or heath value of their products. 2. Real estate fraud .- Real estate fraud involves lying or being deceptive about the condition of real property, things such as land, houses, and buildings. 3. Free prize scams .- In these types of scams, people are told that they have won a valuable free prize, but in order to collect it they must send in money or make a phone call. The money that is sent in will greatly exceed the value of the prize, or the victim will be charged for the phone call at a rate that greatly exceeds the value of the prize. 4. Bait-and-switch advertising .- Popular with ―legitimate‖ retail businesses, this fraud involves advertising some well-known product, such as a TV or major appliance, at a ridiculously low price. However, when consumers come to the store, they are told that the item is sold out or temporarily out of stock and then are steered toward other more expensive products that are available. 5. Repair frauds .- Repair frauds typically involve big-ticket items such as homes, automobiles, or major appliances (dishwashers, washing machines, furnaces, and the like). The fraud involves either doing unnecessary repairs or doing substandard work and then charging the victim full price. 6. Charity and advocacy frauds . - Charity frauds appeal to the emotions. The victims think they are donating money or goods to help a worthy cause, when in reality the money is kept by those who collected it. Advocacy frauds are slightly different in that the offender promises to advocate for the victim with some other governmental gov ernmental body, body, such such as the U.S. Congress or a state legislature. The offender promises to see that the victim‘s interests are protected on Capitol Hill or at the state capitol. However, in reality, like charity frauds, little or none of the money is actually used to promote these ends. Rather, it finances the lifestyles of the so-called advocates. 7. Advance-fee swindles . - Anytime someone is asked to pay in advance for a service or product, he or she is vulnerable to an advance-fee swindle. Typically, in these swindles someone promises to do something for the victim, but the offender asks the victim to pay first and then the offender never delivers on the promise. Often, the promised service is one where it may be difficult to confirm one way or the other whether the service was provided. For example, advance-fee swindles may involve such services as finding housing, or educational loans, or employment. In these cases, the swindler promises to help the victim find an apartment, or a college loan, or a new job in return for a fee. The victim pays the
fee, but does not get what he or she wanted in return. The swindler claims to be working for the victims but really is just taking their money. 6
4. HEALTH CARE FRAUD
Health care fraud involves fraud against health care insurers and government programs such as Medicare and Medicaid. These two programs are particularly ripe for fraud because of their size and complexity. They process literally billions of dollars worth of claims annually.Although the exact cost of health care fraud is unknown, it is estimated to be in the hundreds of billions of dollars per year. Health care fraud can be committed by any person or organization in the health care industry who is involved with the provision of health care services to patients, including physicians, mental health professionals, hospitals, nursing homes, equipment suppliers, and pharmaceutical companies, as well as many others. Because physicians deal most directly with patients, their involvement in fraud is particularly serious. The following are three common forms of health care fraud involving physicians: 1. Unnecessary procedures . Because most people know very little about their bodies and the various problems they can have, they rely on the expertise of physicians. Physicians are supposed to provide treatment based on their best assessment of the patient‘s medical needs. Some physicians, however, make decisions based not on the medical needs of patients but rather on their financial goals. Physicians may recommend that patients undergo unnecessary procedures, ranging from relatively simple but unnecessary tests to life-threatening surgery. So-called So-called ―Medicaid mills‖ make a business out of providing unnecessary procedures. These operations often are run in low-income neighborhoods. A group of unscrupulous doctors sets up a shop and recruits low-income patients — drug drug addicts, alcoholics, homeless people, and so forth. The patients are paid a small fee, are run through a battery of unnecessary tests, and then the federal government is billed for the cost of the tests. 2. Fee splitting . Most general practitioners cannot handle serious illnesses or medical conditions. When confronted with these types of cases, they often refer patients to specialists. To the extent that referrals are made on the basis of the physician‘s medical judgment, that is appropriate. But sometimes, physicians make referrals because they have h ave a financial arrangement with a particular specialist. In return for referring patients to the specialist, the general practitioner gets a kickback in the form of a cut of the specialist‘s fee. 3. Fraudulent billing . Probably the most common type of fraud is fraudulent billing. This can be accomplished in a variety of different ways, but basically it involves submitting claims 6
Mahendra Kumawat ‘Economic Crimes’ published under India Audits And Account Department , Regional training Institute by Mahendra IPS
for reimbursement for services that were never really provided. For example, a physician may submit a claim saying that he or she performed some medical service for a patient when the service really was not provided, or when the service that was provided was somehow less than the physician is claiming.
5. ENVIRONMENTAL CRIME
There is no clear, widely accepted definition of the term environmental crime. Implicitly, it is defined as any violations of local, state, or federal ―environmental laws.‖ Environmental laws seek to protect the quality of the air, water, and soil by regulating both harmful additions to the environment (water, air, and soil pollution) and harmful subtractions from the environment (destruction of habitats). Environmental crime comes in a variety of forms and sizes. Offenders may be homeowners who dump leftover paint into a city sewer system in violation of local ordinances, or they may be multinational corporations that manufacture, ship, and dispose of hazardous materials under conditions that are criminally negligent and morally outrageous. Because different types of environmental crimes are associated with different industries and businesses, the nature of environmental crime in a community tends to reflect local economic activity. Certain types of environmental crime problems, however, are widespread. A study of local law enforcement responses to environmental crime concluded that illegal waste tire disposal, improper disposal of furniture stripping and electroplating waste, used motor oil disposal, and hazardous wastes dumped into streams and rivers, are found in nearly all communities (Rosoff, Pontell, &Tillman, 2006). Along with these generic forms of environmental crime, some communities suffer unique problems as a result of their particular mix of local industries and businesses. For example, in some rural communities, most of the local environmental problems may be caused by one particular business, such as a tannery or textile manufacturer. The states of Maine and New Jersey both have problems with illegal disposal of hazardous waste, but the type of waste is specific to each state. In Maine, waste cases tend to involve the textile, wood, and fishing industries. In New Jersey, on the other hand, they involve the chemical and petrochemical industries. in dustries. In a strictly legal sense, what counts as environmental crime varies a great deal across jurisdictions. Statutory inconsistencies and the lack of uniform codification in state environmental laws pose difficulties for prosecutors and investigators. At the same time, they create opportunities for environmental offenders, who can evade prosecution merely by moving their operations to jurisdictions that are legally more ―user -friendly‖ from the offender‘s point of view. One of the most important types of environmental crime is the illegal disposal of hazardous waste materials. In recent years, research suggests that environmental criminals have become more sophisticated. Rather than simply dumping hazardous waste in some isolated area late at
night (often called ―midnight dumping‖), today‘s more sophisticated environmental criminal may forge a waste transportation manifest or bribe public officials to look the other way. Other techniques involve mixing hazardous waste with nonhazardous waste, known as ―cocktailing‖; mislabeling drums, or disposing of the waste on the generator‘s own property. Cocktailing is particularly common in the oil industry when dumping used oil.7
III Though ‗economic crime‘, being non-violent non-violent in nature with often organized or collective perpetrators, could be precisely set as a major classification distinctively from ‗violent crime‘ and ‗property crime‘ , its minor classification based on nature and form could generate a healthy debate. The popular understanding of ―economic crime‘ at the functional level is that these offences concern money and matter of finance. The traditional classification of ‗white collared crime‘ covers cheating, fraud or larceny, larceny, misappropriation or embezzlement, breach of trust and counterfeiting principally involving money. To attempt a sub-classification of economic crimes purely on a criteria that it concerns money and matters of finance will be contestable, c ontestable, as it would exclude some important types already characterized as economic crimes. Correspondingly, there may arise logical questions as to traditional offences where gain, in terms of money and offences where gain, in terms of money and value figures, may be included under economic crimes. These are all matters to consider before a sub-classification is attempted. Largely the following forms of crimes have been characterized as constituting economic crimes or offences:8
Tax evasion is the illegal evasion of taxes by taxes by TAX EVASION individuals, corporations individuals, corporations and trusts. and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions. Tax evasion is an activity commonly associated with the informal the informal economy. One economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported. Tax evasion is using illegal means to avoid paying taxes. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income to the Internal Revenue Service. Misrepresentation may take the form either of
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underreporting income, inflating deductions, or hiding money and its interest altogether in offshore accounts.9
lau ndering is the process whereby the proceeds of MONEY LAUNDRING - Money laundering crime are transformed into ostensibly legitimate money or other assets. However, in a number of legal and regulatory systems the term money laundering has become conflated become conflated with other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities, digital securities, digital currencies, currencies, credit cards, and traditional currency), including terrorism including terrorism financing, tax evasion and evading of international of international sanctions. sanctions. Most anti-money laundering laws openly conflate money laundering (which is concerned with source of funds) with terrorism financing (which is concerned with destination of funds) when regulating the financial system. 10
fraud is the use of potentially illegal means to obtain BANK FRAUD/ SCAMS- Bank fraud money, assets, or other property owned or held by a financial a financial institution, institution, or to obtain money fromdepositors fromdepositors by by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence. offence. While the specific elements of particular banking ban king fraud laws vary between jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-collar a white-collar crime. 11
STOCK MARKET MANUPULSTION- Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity security, commodity or currency. Market currency. Market manipulation is prohibited in most countries, in particular, it is prohibited in the United States under Section 9(a)(2)[of the Securities the Securities Exchange Act of 1934, in 1934, in Australia under Section 1041A of the Corporations the Corporations Act 2001, and in Israel in Israel under Section 54(a) of the securities act of 1968. The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security. The act of artificially inflating or deflating the price of a security. In most cases, manipulation is illegal. It is much easier to manipulate the share price of smaller companies, such as penny stocks, because they are not as closely watched by analysts as the mediumand large-sized firms. Also known as "price manipulation."
9
www.investopidia.com
10 11
ncrb.nic.in/ciiprevious/Data/CD-CII2000/CONTENTS/CHAP9.DOC
‘Economic Crimes’ published under India Audits And Account Department , Regional training Institute by Mahendra Mahendra Kumawat IPS
CORPORATE FRAUD- Activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. compan y. Corporate fraud schemes go beyond be yond the scope of an employee's stated position, and are marked by their complexity and economic impact on the business, other employees and outside parties. Corporate fraud can be difficult to prevent and to catch. By creating effective policies, a system of checks and balances and physical security, a company may limit the extent to which fraud can take place. It is considered a white collar crime.
CORRUPTIONS (POLITICAL/ GOVERNMENT/ CORPORATE)In philosophical, In philosophical, theological, theological,or or moral moral discussions, corruption is spiritual is spiritual or moral impur moral impur ity or deviation from an ideal. an ideal. Corruption may include many activities including bribery including bribery and embezzlement. and embezzlement. Government, or 'political', corruption occurs when an office-holder or other governmental employee acts in an official capacity for personal gain. The word corrupt when used as an adjective literally means "utterly broken".The word was first used by Aristotle by Aristotle and later by Cicero by Cicero who added the terms bribe and abandonment of good habits. Morris, a professor of politics, corruption is the illegitimate use of public power to benefit a private interest. Economist I. Senior Senior [4] defines corruption as an action to (a) secretly provide (b) a good or a service to a third party (c) so that he or she can influence certain actions which (d) benefit the corrupt, a third party, or both (e) in which the corrupt agent has authority. authorit y. Kauffman, from the World Bank Ban k extends the concept to include 'legal corruption' in which power is abused within the confines of the law - as those with power often have the ability to shape the law for their protection. Political corruption is the use of powers by government officials for illegitimate private gain. An illegal act by an officeholder constitutes political corruption only if the act is directly related to their official duties, is done under color color of law or involves trading involves trading in influence. influence. Forms of corruption vary, but include bribery, include bribery, extortion, extortion, cronyism, cronyism, nepotism, nepotism, patronage, patronage, graft, graft, and embezzlement. and embezzlement. Corruption may facilitate criminal facilitate criminal enterprise such as drug as drug trafficking, money trafficking, money laundering, and human trafficking, trafficking, though is not restricted to these activities. Misuse of government power government power for other purposes, such asrepression of political opponents and general police general police brutality, is brutality, is not considered political corruption. Neither are illegal acts by private persons or corporations not directly involved with the government.The activities that constitute illegal corruption differ depending on the country or jurisdiction. For instance, some political funding practices that are legal in one place may be illegal in another. In some cases, government officials have broad or ill-defined powers, which make it difficult to distinguish between legal and illegal actions. Worldwide, bribery
alone is estimated to involve over 1 trillion US dollars annually. A state of unrestrained political corruption is known as a kleptocracy, a kleptocracy, literally literally meaning "rule by thieves"12
IV Economic crimes cause significant damage to the general economy of the country, adversely affecting the growth and development of the nation. Internationally, it erodes confidence in the financial credibility and stability of the nation, thus weakening its global competitiveness and further, becoming unattractive to investments from within as well as outside. Where there is a high incidence level of economic crime, the government and bureaucracy are also viewed as being corrupt and weak. Some of the major impacts on the national economy that tha t may be caused by the economic crimes are: increase in inflationary pressure, uneven distribution of resources and creation of elitism, marginalisation of tax base, generation of abundant black money, creation of parallel economy, undermining of developmental works/efforts, becomes a breeding ground for corruption, illicit businesses thrive affecting licit business, resources of financial and commercial institutions are diverted and distorted, weakens morale and commitment of citizens, poor/weakest continue to be at risk, countries‘ economic equilibrium with at stake. Economic offences, such as counterfeiting of currency, financial scams, fraud, money laundering, etc. are crimes which evoke serious concern and impact on the nation‘s security and governance.13 A significant corollary to the above is the diversion and investment of the black money acquired by committing such crimes into furthering crimes and the hegemony of the criminal syndicates rule. The threats to public security and eventually national security, would appear imminent as an ultimate consequence.14 The black money market situation in India is epidemic. India currently tops the list for illegal monies in the entire world, estimated to be almost 90,54,136 crore stored in Swiss banks in the form of unaccounted money as per the data provided by the Swiss Banking Association. India has more black money than the rest of the world combined. Indian Swiss bank accounts assets are worth 13 times the country‘s national debt, and, if this black money is seized and brought back to the country, India will have the potential to become one of the richest countries in the world. If we take an example for the black money existing in the Indian economy we find that in 2007, Indian authorities began investigating Hasan Ali Khan, an Indian businessman for suspicion of money laundering. He reportedly had a Swiss bank account with $8 billion in deposits and has stashed away billions into Swiss bank accounts with the help of Kolkata based 12 13
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www.unafei.or.jp/english/pdf/RS_No55/No55_12VE_Amarnathan.pdf www.unodc.org and www.unis.unvienna.org
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businessman, Kashinath Tapuria using hawala. In December 2012, Finance Ministry told the Standing Committee on Finance that recovery of Hasan Ali‘s tax arrears (of approximately Rs 91,000 crore) is not possible. Evidence available with Enforcement Directorate shows that he had transactions of over 112,000 crore between years 2005 and 2006, and he is only one of the big tax offenders and this stash is only a part of the huge illicit outflow from India. This amount is enough to fund the national drinking water project in all the six lakh villages in India for the next 10 years. Most of the economic crimes in India are committed through the cooperation and nexus between the corrupt politicians, bureaucrats, industrialists, businessman and middle-men. As far as criminality is concerned these economic offences, while bearing similarity to traditional offences, constitute a separate class by virtue of their scale and dimension; modus operandi; and in making individuals/state/society as collective victims of financial loss. With general acceptance on on this fundamental, the call of tomorrow may be a comprehensive ―economic offences code‖,15 distinct from penal codes, to effectively counter economic crimes. Criminologists, prestigious commissions and research bodies agree that government must go beyond law l aw enforcement and criminal justice to tackle the risk factors that cause crime, because it is more cost effective and leads to greater social benefits than the standard ways of responding to crime. Interestingly, multiple opinion polls also confirm public support for investment in prevention. Criminologist Waller uses these materials in Less Law, More Order to propose specific measures to reduce crime as well as a crime bill. OPERATIONAL RISK - Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses". This definition from the Basel II regulations was also adopted by the European union Solvency II Directive. 16 Operational risk is a broad discipline, close to good management and and quality management17. Banks and financial institutions are undergoing a sea change and today face an environment marked by growing consolidation, rising customer expectations, increasing regulatory quirements, proliferating financial engineering, uprising technological innovation and mounting competition. This has increased the probability of failure or mistakes from the operations point of view – resulting in increased focus on managing operational risks. Operational risk losses have often led to the downfall of financial institutions. These economic offences have impact over the banks also. There are frauds done to the banks by taking the on false identity, on false name of the company i.e. Benami Transactions which apparently give rise to the operational risk to the market.
15
www.icisa.cag.gov.in/resources%5CPublications%20Of%20Regional%20.. "Basel II: Revised international capital framework". Bis.org. framework". Bis.org. Retrieved 2013-06-06 17 Operational Risks in Financial Services: An Old Challenge in a New Environment". Credit Credit Suisse Group. Retrieved 2014-04-29. 16
THE 2G SCAM
This was one of the most hyped financial scam of present day. Corruption in India has taken a high toll. News Channels and paper media are both flushed with various scams be it Commonwealth games scam, 2G scam list goes on and on. In this article 2G scam is being explained in detail. "2G" stands for "Second-generation wireless telephone technology". In common man's language it means wireless transfer of data from one place to another. 2G networks were first launched in 1991. The main points that distinguish 2G network are:
Digital signals were used. Greater penetration levels can be achieved making 2G more efficient on the spectrum. Introduction of transfer of text messages (SMS service).
India is divided into 22 telecom zones and there are total 281 zonal licenses in the market. In the year 2008 total 122 new second generation Universal Access Service licenses were granted to telecom companies at the price of 2001 on First Come First Served (FCFS) basis. The same applications were invited by the Department of Telecommunications on 25th September 2007 giving last date as 1st October 2007. According to the charge sheet rules were violated and bribes were paid by b y certain firms so that the spectrum shall be allotted to them also the officials of the Government of India under charged the companies for allocation of licenses. The Prime Minister wrote to Mr. A.Raja (Telecom Minister during the scam) to issue the allotment in a fair and transparent manner. Mr A.Raja rejected most of the recommendations given by the Prime Minister and made the allotment on first come first serve basis advancing last date for submitting the applications by 1 week to 25th September. There were two main cases relating to the 2G scam: 1. Centre for public interest Litigation vs. Union of India 2. In re. Special Reference no. 1 of 2012
The first case had the widest material impact with not much substantial legal reason and the second case had legal implication but not much of a material impact on the economy. The first issue discussed in the case of CPIL was whether the Department of Telecommunication had violated the norms and laws laid down for the allocation of the spectrum licenses, whether the action of the administration was ultra vires while dealing with the allocation of the licenses for the 2G spectrum and that whether the administrative process was properly followed.
The court concluded that the Department of Telecommunication had failed to follow the administrative process according to which the licenses are to be allotted. The court has also discussed the statutory power of the DOT to grant license. The court held the allocation of the offences as unconstitutional and and arbitrary" and quashed all 122 licenses issued in 2008 during the tenure of A. Raja (then minister for communications & IT from 2007 to 2009) the main official accused in the 2G scam case. The other people who were involved in the said scam were M. K. Kanimozhi, Pramod Mahajan, Siddharth Behura
The power of DOT to grant license to the telecom companies has been laid down in Section 4(1) of the Indian Telegraph Act, 1885 which specifies no method for the allocation and issue of licenses. This clearly states that the auction as a method of allocation of license is not a statutory requirement. But the power of DOT must be exercised in accordance with the rulings of the government and state policies for the benefit of the people, because Art 77 of the Constitution of India binds it with the Rules for conduct of business. There are rules laid down under the National Telecom Policy, 1999 even there the auction as a method of allocation of licenses is not a mandate. The telecom regulatory authority also did not make any specific recommendation as to allocation. The DOT had leveled down to maintain a parity between the existing and new license applicants and therefore same conditions were granted to the incumbent operations. The existing market conditions were taken into consideration by the executive while granting licenses. It was admonished by the court and it was made clear that such executive decisions are open to judicial review. Alteration of First Come First Serve basis of priority ordering of the licenses was considered as arbitrary and was therefore quashed. DOT had received about over 200 applications since 2002. All the applicants were made to comply with the new requirements and also the date of submission of the application was pre-poned without any specific reason and prior intimation to the people. This was done in order to eliminate the non serious applicants according to the DOT, who remained in queue for a long time as a result of the inordinate delay. This approach by the court was taken to be very suspicious. Therefore this was declared as arbitrary and illegal and was of the opinion the procedure of FCFS was motivated by corruption. The court also held the imposition of the new deadline was held to be illegal by the court. The ground for judicial review decided by the court was a Bias on the part of the government officials for few of the applicants in order to get specific financial benefit. The court brought in a constitutional doctrine of ―Natural Resource‖ and observed that state is the owner of the natural resources and therefore should act as a trustee while dealing with the same and should use it in such a manner that the same results in the benefit of the public. The directive principles under the constitution also deal with the protection and proper allocation of the natural resources.
The court also brought in the concept of public trust doctrine which puts an embargo upon the rights of the state to transfer the public property to private party if the same adversely affects the rights of the public. The court also stated that non discriminatory method such as auction should be undertaken so that all the people get equal opportunity. In the second case though, the concept of directive principles have been discussed and has received more attention, Justice Jain held that the mandate of the procedure of auction of all natural resources in CPIL distorts the ‗constitutional principle under article 39(b)‘. the objective of Article 39 is to work for the benefit of the people, according to the court this does not made a particular method of transferring the ownership. Any such activity so long as it does not affect the public and public good is achievable in that case the article does not come into play. Therefore the court held that the method of distribution of the spectrum cannot be restricted to auction. It was held that the court cannot conduct a comparative study of the methods of distribution of natural resources, it respects the mandates of the executive in such matters. The methods of disposal of the natural resources is an economic policy which entails intricacies and therefore the same cannot be put in as a constitutional mandate. Although the court retains the jurisdiction to conduct a judicial review of the same, it rejects the claim of auction being the sole method of allocation of spectrum. There are two reasons why CPIL continues as valid law; first, the 2G Reference court clarified that ‗the learned Attorney General has more than once stated that the government of India is not questioning the correctness of the directions in the 2G Case in so far as the allocation of spectrum is concerned and in fact the government is in the process of implementing the same in the letter and spirit. Second the 2G reference court charitably concludes that as long as the decision with respect to the allocation of spectrum licenses in untouched, this court is within its jurisdiction tp evaluate and clarify the ratio of the judgment in the 2G case. Justice D.K. Jain then promptly goes on to strip the CPIL judgment of any legal or constitutional basis.
THE SATYAM SCAM
Frauds Scenario in India: A Case Study of Satyam Computer Services Limited
Satyam scam has been the greatest scam in the history of the corporate world of the India. The case of Satyam accounting fraud has been dubbed by the media as ―India‘s Enron‖. In order to evaluate and understand the severity of Satyam fraud, it is important to understand the factors that contributed to the ‗unethical‘ decisions made by the company‘s executives. Therefore, it is necessary to examine in detail the rise of Satyam as a competitor within the global IT services
market-place. In addition, it is also helpful toevaluate the driving-forces driving-forces behind Satyam‘s decisions under the leadership of Mr. Ramalinga Raju(Chairman). Finally, attempt may be made to draw some broad conclusions and to learn some ‗lessons‘ from Satyam fraud. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. The firm began with 20 employees and grew rapidly as a ‗global‘ business. It offered IT and business process outsourcing (BPO) services spanning various sectors. Satyam was as an example example of ―India‘s growing success.‖ Satyam won numerous awards for innovation, governance, and corporate accountability. In September 2008, the World Council for Corporate Governance awarded Satyam with the ‗Global Peacock‘.Award‘ for global excellence in corporate accountability.‖ Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the centerpiece of a ‗massive‘ accounting fraud. On January 7, 2009, Mr. Raju disclosed in a letter, , to Satyam Computers Limited Board of Directors that ―he had been manipulating the company‘s accounting numbers for years.‖ Mr. Raju claimed that he overstated assets on Satyam‘s balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent. Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations. Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam‘s Satyam‘s books from June 2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing to detect the fraud (Winkler, 2010). Indeed, PwC signed Satyam‘s financial statements and was responsible for the numbers under the Indian law. One particularly troubling item concerned the $1.04 billion that Satyam claimed to have on its balance sheet in ―non-interest―non-interest- bearing‖ bearing‖ deposits. According to accounting professionals, ―any reasonable company would have either invested the money into an interest-bearing account, or returned the excess cash to the shareholders. The large amount of cash thus should have been a ‗red‗red-flag‘ for the auditors that further verification and testing was necessary. Furthermore, it appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits‖ Investigations into Satyam scam by the Crime Investigation Department (CID) of the State Police and Central agencies have established that the promoters indulged in nastiest kind of insider trading of the company‘s shares to raise money for building a large land bank. According to the SFIO findings, promoters of Satyam and their family members during April 2000 to January 7, 2009 sold almost 3.9 crore shares collecting in Rs 3029.67 crore. During this course, the founder ex-chairman Ramalinga Raju sold 98 lakh shares collecting in Rs 773.42 crores, whereas, his brother Rama Raju, sold 1.1 crore shares pocketing Rs894.32 crores. The CBI is also in the course of investigating the th e CEO‘s overseas assets. There were also several civil charges filed in the U.S. against Satyam by the holders of its ADRs. The investigation also implicated several Indian politicians.
Numerous factored contributed to the Satyam Sat yam fraud. The independent board b oard members of Satyam, the institutional investor community, the SEBI, retail investors, and the external auditor — none none of them, including professional investors with detailed information and mod els available to them, detected the malfeasance. The following is a list of factors that contributed to the fraud: greed, ambitious corporate growth, deceptive reporting practices — lack lack of transparency, excessive interest in maintaining stock prices, executive incentives, stock market expectations, nature of accounting rules, ESOPs issued to those who prepared fake bills, high risk deals that went sour, audit failures (internal and external), aggressiveness of investment and commercial banks, rating agencies and investors, weak independent directors and audit committee, and whistle-blower policy not being effective It is widely accepted that corporate entities of all sizes across the world are susceptible to accounting scandals and frauds. Undoubtedly, various types of frauds and scams reduced the creditability of financial information that investors use in making decisions. It was also a contributing factor to the recent financial crisis and it threatened the efficiency, liquidity and safety of both debt and capital markets.
THE DEMAT SCAM:
Industries and finance sector always tried to tap the primary market during a boom. Mobilize the financial resources through Public Issues Issues and IPOs. IPOs. In 2004-05, more than Rs.24,000 crores have been mobilized from the primary market through Public Issues and IPOs. It is a tragedy on the part of the Indian regulators that the scam is going on since August 2004. Banks finance so-called Public Issue applications without even asking them to open a bank account. It is Bharat Overseas Bank, Citibank and others gave IPO finance of hundreds of crores of Rupees to a single person such as Roopalben-Syndicate in the name of tens of thousands of fictitious applicants/names. There were various other people who created fictitious DEMAT accounts and used the same. Financiers with an intention to defraud, lent money to agents who created thousands of fictitious individual bank and DEMAT accounts with the same address. The agent then applied for a company‘s IPO in the quota earmarked for small investors through multiple applications from these fictitious account holders. Once the shares were allotted to the fictitious investors, the agent transferred them into the financier‘s account, after deducting commission valued in the form of the allotted shares. There were various factors which led to the occurrence of the scam, which are as follows:
With the revival of primary market, investors demanded for quality IPOs. The allotment to application ratios was low. In such cases multiple applications were rampant.
Banks colluded by opening the benami accounts and funding the unscrupulous agents. It was a failure of the banking system- they failed to follow RBI‘s Know Your Customer guidelines (KYC) before opening accounts. Larger subscriptions for issues ensured a better price for the shares of companies in the book building process.
Few case studies: 1. IDFC IPO Scam, the story of greed and related system failure (15 -22 July, 2005): In July 2005, IDFC came out with its public issue of 403.6 mn equity shares of Rs. 10 each at a price of Rs. 34 per equity share. Out of the total shares, 141.3 mn were reserved for small individual investors. Roopalben Panchal and associates, Ahmedabad, opened thousands of fictitious benami demat and bank accounts bearing the same address with Karvy Stock Broking Ltd. This syndicate had as many as 43,982 applicants representing 17.3% of the total applications of the retail portion of the IDFC IPO. These fictitious accounts received IPO allotment of about 11.7 mn shares or ~8.3% of total retail portion of shares. SEBI Action- Roopalben and five other members of the Panchal family were found guilty of cornering shares meant for retail individual investors in 18 IPOs during the period 2003-2006 using multiple and fictitious demat accounts. They were barred from accessing the securities market for a period of three months. In February 2011, SEBI directed them to disgorge the unlawful gains they made, amounting to Rs 24 crore and also pay simple interest at 10% for five years from 2005 to 2010 (Rs 12 crores)- a total of Rs 36 crore. If they failed to disgorge the money within 45 days, they would be barred from the securities market for nine years. 2. Jet Airways IPO: Rs. 1899.3 crores (Feb 18-24, 2005): Jet Airways made an IPO issue size of 17.2 mn shares of Rs.10 each. Of the total issue, 25% or ~4.3 mn shares were reserved for retail investors. The key operators involved used 1,186 fictitious accounts to corner 20,901 shares which were equal to 0.5% of the total number of shares allotted to retail investors. SEBI ordered the involved entity linked with the Jet Airways and IDFC issue, Opee Stock Link to disgorge Rs. 1.2 crores and barred it from trading for one year.
The global march from the industrial age to the economic age is confronted principally by the growth of crime that impedes progress towards an egalitarian society. The disruptive effects of crime, particularly economic crime, that makes mankind collective victims, can not be checkmated unless countries stand united. The effective countermeasures against economic crime need, therefore, to be on a firm foundation of international cooperation. National strategies are inherently inadequate for responding to challenges that cross multiple borders and involve multiple jurisdictions and a multiplicity of laws. The rapid growth in global economic crime and the complexity of its investigation requires a global response. At present, the measures adopted to counter these crimes are not only predominantly national, but these measures differ from one country to another. It is absolutely imperative to increase cooperation between the world‘s law enforcement agencies and to continue to develop the tools, which will help them effectively counter global economic crime. Tracing the money trail, including the origin of funds, combating money laundering through reduction of bank secrecy and seizure of assets are issues of paramount importance. Putting in place legislation on forfeiture and confiscation of properties acquired through criminal activities and sharing of available technology on the subject would be a step in the right direction. Extradition is one of the most important tools used for bringing transnational fugitives to justice and extraditable crimes include unlawful seizure of aircraft; unlawful acts against the safety of civil aviation; crimes against internationally protected persons; common law offences like murder, kidnapping, hostage taking; and offences relating to firearms, weapons, explosives and dangerous substances, etc. when used as a means to perpetrate indiscriminate violence involving death or serious injury, or serious damage to property. However, it is also an area that poses the greatest problems. A large number of countries have not entered into extradition treaties and even where such treaties exist, they are mostly embroiled in complicated procedures leading to undue delay in extradition. There is a need for simplifying procedures and expediting the process. Preventing, detecting, investigating, and prosecuting economic crimes must become a priority, in order to lessen their impact on the economy and the public‘s confidence. public‘s confidence. Law enforcement, as it stands now, is in danger of slipping further behind the highly sophisticated criminals. New resources, support for existing organizations, e.g. The National Fraud Center, The National White Collar Crime Center, The Internet Fraud Council, and The Economic Crime Investigation Institute, and innovative solutions are needed to control this growing problem in America and the world. This is not to say that the focus should be entirely on economic crime to the detriment of investigation and prosecution of violent crime. Certainly, it would not be in society‘s best interest to have violent crime increase, while economic crime decreases. However, it has often been questioned and argued whether the psychological and financial impact of economic crime on its victims is as great or greater in many instances as violent crime. Rather, higher priority must be given to the provision of necessary resources and the passage of relevant legislation to counter the near-epidemic impact of economic crime on American society and the world.
This can only be accomplished with the cooperation of the private, public, and international sectors. All stakeholders must be more willing to exchange information on the effect economic and cyber crime has on them and the methods they are using to detect and prevent it. No one sector holds all the resources, tools or solutions. In fact, in man y instances, industry has moreã resources than government, but must be motivated and authorized to partner and communicate. All parties must be willing to work together to effect change in existing laws and regulations and to promulgate new initiatives. The ―victims‖ need to follow the lead of the ―criminals‖ and and organize themselves, so that the organized ―bad guys‖ are not operating in a lawless environment, where culpability is at a minimum.
1. Minimum Sentencing for Offences in India: Law and Policy by Mahendra R. Sharma. 2. ‗Economic Crimes’ Crimes ’ published under India under India Audits And Account Department , Regional training Institute by Mahendra Kumawat IPS 3. Exposures: White Collar Crimes, Indian Political Scene by Janak Raj J ai . 4. www.icisa.cag.gov.in/resources%5CPublications%20Of%20Regional%20 .. 5. 126TH INTERNATIONAL SENIOR SEMINAR VISITING EXPERTS’ PAPERS 71, ECONOMIC CRIME IN A GLOBALIZING SOCIETY:ITS IMPACT ON THE SOUND DEVELOPMENT OF THE STATE - AN INDIAN PERSPECTIVE BY Deepa Mehta. 6. www.unafei.or.jp/english/pdf/RS_No55/No55_12VE_Amarnathan.pdf 7. www.unodc.org and www.unis.unvienna.org . 8. ncrb.nic.in/ciiprevious/Data/CD-CII2000/CONTENTS/CHAP9.DOC 9. WHITE COLLAR CRIMES IN INDIA G. NAGARAJAN; DR. J. KHAJA SHERIFF Vol.1 Issue 9, September 2012, ISSN 2277 3630. 10. ‘Economic Crimes’ published under India Audits And Account Department , Regional training Institute by Mahendra by Mahendra Kumawat IPS. 11. ECONOMIC AND ORGANIZED CRIME:Challenges for Criminal Justice, R.T. Naylor, Professor of Economics, McGill University.
