Chapter-16

REGULATORY MATTERS AND

INVETIGATING AUTHORITIES
 Objective

The objective of discussion on this chapter is to understand………

• Frauds
• Tax Crime
• Bribery and corruption
• Insider trading
• Other regulatory acts
• Whistle blowing and
• Details of law enforcing authorities
• While handling / undertaking day to day activities, branch
managers also come across regulatory matters also.
• Many time branches receives notices form court, Enforcement
directorate, Directorate of revenue intelligence, CBI, EOW, RBI
etc and other regulatory authorizes.
• When it comes to the notice of the branch manger he cannot
sidetrack it.
• Time bound action is expected from the branch Manager by
regulatory authorities.
• Let us understand some brief outline on the nature of the
transaction, irregularities and role of authorizes conducting
enquiries under the provision of laws
 Fraud

• Regulatory provisions and authorities

• India has a quasi-federal political structure comprising of 28
states and seven centrally administered union territories
• Each state establishes and maintains its own police force.
• Investigations are normally handled by the police force of the
state where the crime was committed.
• The central government has established a central
investigative agency called the Central Bureau of Investigation
(CBI).
• CBI investigates and prosecutes cases of serious fraud or
cheating that may have ramifications in more than one state
• The central government under the Department of Revenue has set
up various agencies to fight economic crimes. Some of the
significant ones are:
1. Central Economic Intelligence Bureau (for economic offences and
implementation of the Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act (COFEPOSA)).
2. Directorate of Enforcement (for foreign exchange and money
laundering offences).
3. Central Bureau of Narcotics (for drug related offences).
4. Directorate General of Anti-evasion (central excise related offences).
5. Directorate General of Revenue Intelligence (customs, excise and
service tax related offences).
6. The Securities and Exchange Board of India (SEBI). This was
established on 12 April 1992 under the Securities and Exchange
Board of India Act 1992 (SEBI Act
• Offences
• Specific offences relating to business or corporate fraud
include insider trading, money laundering, fraud and
misrepresentation related with sale of securities, forgery,
falsification of accounts, dishonest misappropriation of
property, criminal breach of trust, cheating and tax crimes.
1. Fraud and misrepresentation related with sale of securities.
• This includes offences such as buying, selling and dealing in
securities fraudulently, or manipulation or deception. These
are covered under the:
• SEBI Act.
• Securities and Exchange Board of India Rules 1993 (SEBI
Rules).
2. Forgery (section 463, Penal Code)
• Forgery is defined under the Penal Code as making any false
documents or false electronic record or part of a document
or electronic record, with the intention to either:
• Cause damage or injury, to the public or to any person.
• Support any claim or title, or to cause any person to part with
property, or to enter into any express or implied contract,
with intent to commit fraud.
• Falsification of accounts (section 477A, Penal Code)
• An employee is guilty of falsification of accounts if he willfully
and with an intention to defraud either:
• Destroys or falsifies any book, electronic record, paper,
writing, valuable security or account that belongs to or is in
the possession of his employer, or has been received by him
for or on behalf of his employer.
• Willfully, and with intent to defraud, makes or facilitates the
making of any false entry in, or omits or alters or facilitates
the omission or alteration of, any material particular from or
in, any such document.
3. Dishonest misappropriation of property (section 403, Penal
Code)
• A person commits the offence of dishonest misappropriation
of property if he dishonestly misappropriates or converts to
his own use any movable property.
4. Criminal breach of trust (section 405, Penal Code)
• Criminal breach of trust is when a person who is entrusted
with property or any dominion over property is dishonestly
misappropriating, converting the property to his own use, or
dishonestly using or disposing of that property in violation of
any direction of law or legal contract.
• Cheating (section 415, Penal Code)
• This offence consists of deceiving any person and either:
• Fraudulently or dishonestly inducing the deceived person to
deliver property to a person or allow a person to retain
property.
• Intentionally inducing the deceived person to do or omit to do
anything that he would not do or omit if he were not so
deceived, and that causes or is likely to cause damage or harm
to that person in body, mind, reputation or property.
 Tax crimes
There are various tax crimes (such as tax evasion, smuggling,
customs duty evasion, valued added tax evasion, and tax
fraud) that can be prosecuted under the:
• Income Tax Act 1961.
• Customs Act 1962.
• Central Sales Tax Act 1956.
• Central Excise Act 1944.
• These offences require a deliberate act by the accused rather
than an act of negligence.
The company for the conduct of its business, may be guilty of an
offence committed by the company either:
• The offence was committed without his knowledge or
• He exercised all due diligence to prevent the commission of
the offence.
• Enforcement
• The CBI derives its legal powers of investigation from the Delhi
Special Police Establishment Act 1946 (DSPE).
• Under the Companies Act 1956 the central government can inspect
the books of accounts of a company, direct special audits, order
investigations and launch prosecutions for any offence.
• SEBI has the powers of a civil court, such as ordering discovery and
production of books of account, summoning and enforcing the
attendance of persons and examining the inspection of books,
registers and other documents and issuing commissions for the
examination of witnesses or documents.
• Sanctions
• Civil/administrative proceedings or sanctions
• Civil sanctions can include fines, an order to pay compensation and
disqualification from the organization.
Fraudulent and unfair trade practices relating to securities:
• The higher of either: a fine of INR250 million; or
• Three times the amount of profits made out of such practices.
• Forgery. Two years' imprisonment and/or a fine.
• Falsification of accounts. Seven years' imprisonment and/or
fine.
• Dishonest misappropriation of property. Two years'
imprisonment and/or fine.
• Criminal breach of trust. Three years' imprisonment and a
fine.
• Cheating. Simple cases of cheating are punishable with one
year's imprisonment and a fine. Cheating accompanied with
delivery of property or destruction of any valuable security is
punishable by seven years' imprisonment.
 Bribery and corruption
• The Prevention of Corruption Act 1988
• This is a central government law enacted by Parliament to
combat corruption and bribery among public servants.
• Under this Act there is a presumption that a public servant or
a person expecting to be a public servant, who accepts or
obtains or agrees or attempts to obtain from any person any
recompense as a motive or reward for doing or forbearing to
do any official act, or for showing favour or disfavor, is guilty
of the crime of taking a bribe.
• Public service rules
• These are applicable to various categories of public servants.
They prescribe a code of conduct to be observed by public
servants and outline the rules pertaining to, among other
things, accepting gifts and hospitality.
The Benami Transactions (Prohibition) Act 1988
• A "benami" transaction is a transaction under a false name or
identity. The Act prohibits any benami transaction except when a
person purchases property in his wife's or unmarried daughter's
name. (This Act was necessary as benami real estate purchases
were historically part of the law in India). Other legislation includes:
• The Prevention of Bribery of Foreign Public Officials and Officials of
Public International Organizations Bill (2011).
• The Citizen's Ombudsman Bill 2011 (Lokpal and Lokayukta Bill).
The three main regulators responsible for inquiring, investigating and
prosecuting corruption cases are the:
• Central Vigilance Commission.
• CBI.
• Anti-Corruption Bureau of each state.
• International anti-corruption conventions and jurisdiction
• India is an active participant in the cross-border fight against
corruption and has signed and ratified the UN Convention
against Corruption. The purpose of the Convention includes:
1. Promoting and strengthening measures to prevent and
combat corruption efficiently and effectively.
2. Strengthening internal co-operation and technical assistance
to check and fight corruption and promote the integrity,
accountability and proper management of public affairs and
property.
• India is an executive member of International Association of
Anti-Corruption Authorities.
• It is also actively involved with the Organization for Economic
Co-operation and Development in its Anti-Corruption
Initiative for Asia-Pacific.
 Enforcement
In order to detect corrupt or improper practices the central
vigilance commissioner and the state vigilance commissions
have, among other things, the power to:
• Summon and enforce the attendance of any person.
• Examine on oath.
• Order discovery and production of documents.
• Receive evidence on affidavit.
• Requisition public records.
• Issue commissions.
• Conduct surprise inspections.
The CBI and police officers have the power to arrest persons if
they reasonably suspect that a person is guilty of an offence
under the Prevention of Corruption Act.
 Insider dealing and market abuse
• Regulatory provisions and authorities
• SEBI prohibits insider trading.
• "Insiders" must not (directly or indirectly) deal in securities of
a listed company when in possession of unpublished price-
sensitive information.
• An "insider" is any person who is connected with the
company and expected to have access to unpublished price-
sensitive information in relation to the company's securities.
• Prosecutions for insider trading in securities are launched by
SEBI.
• The SEBI (Prohibition of Insider Trading) Regulations 1992
(Insider Trading Regulations) have been framed under Section
30 of the SEBI Act and are intended to prevent and curb
insider trading in securities.
Offences
Insider trading can be committed in three ways (Regulation 3,
Insider Trading Regulations):
• Dealing in securities the price of which will be affected by the
inside information that is in that person's possession.
• Encouraging another person to deal in such securities.
• Disclosing the inside information to another person.
Defenses
• Available to a company dealing in the securities of another
company while in possession of any unpublished price
sensitive information if cumulatively
• The decision to enter into the transaction or agreement was
taken on its behalf by a person
• The company has put in place such systems and procedures
that demarcate the activities of the company who enters into
a transaction in securities on behalf of the company cannot
have access to information that is in possession of other
officers
• The company had in operation at that time, arrangements
that could reasonably be expected to ensure that the
information was not communicated to the person who made
the decision
• The information was not communicated and no relevant
advice was given.
• That acquisition of shares of a listed company is as per the
Securities and Exchange Board of India
• Enforcement
• SEBI has the powers of a civil court, such as ordering discovery
and production of books of account, summoning and
enforcing the attendance of persons and examining the
inspection of books, registers and other documents and
issuing commissions for the examination of witnesses or
documents. SEBI can………………………………….
• Suspend the trading of any security in a recognised stock
exchange.
• Restrain persons from accessing the securities market and
prohibit any person associated with the securities market
from buying, selling or dealing in securities.
• Suspend any office-bearer of any stock exchange or self-
regulatory organisation from holding such position.
• Impound and retain the proceeds or securities in respect of
any transaction that is under investigation.
• Direct any intermediary or any person associated with the
securities market in any manner not to dispose of or alienate
an asset forming part of any transaction that is under
investigation.
• Appoint one or more officers to inspect the books and records
of insider(s) or any other persons.
• Appoint a qualified auditor to investigate into the books of
account or the affairs of an insider
 Money laundering and terrorist financing
• Regulatory provisions and authorities
• Money laundering is dealt with under the Prevention of
Money Laundering Act 2002.
• Under Money Laundering Act 2005 -imposed an obligation on
banking companies, financial institutions and intermediaries
to verify the identity of investors and maintain records of
transactions with each investor.
• The Unlawful Activities (Prevention) Act deals with terrorism
and combating terrorist funding.
• RBI issued KYC Guidelines AML Standards on 16 August 2005,
under which Banks are advised to follow certain customer
identification procedures for opening of accounts and
monitoring transactions of a suspicious nature and reporting
it to the appropriate authority.
• Government has established a central national agency called
the Financial Intelligence Unit (FIU-IND) responsible for
receiving, processing, analyzing and disseminating
information relating to suspect financial transactions.
Offences
• Money laundering consists of (directly or indirectly) knowingly
assisting, being a party to or actually involved in any process
or activity connected with the proceeds of crime and the
presentation of it as legally obtained property
• Money laundering is an offence only if it is related to an
activity connected with the proceeds of a crime specified as a
scheduled offence.
• The Unlawful Activities (Prevention) Act deals with terrorism
and terrorist funding.
• Defenses
• There are no exemptions or qualifications applicable to such
offences.
• Enforcement
• Investigation can be initiated only by authorities designated
by the central government such as the Directorate of
Enforcement.
• These authorities can carry out interim measures such as the
survey, search, seizure and arrest of the accused.
• The Prevention of Money Laundering Act gives the
requirements for:
• Financial institutions' disclosure requirements in relation to
reportable transaction
• Confiscation of the proceeds of the crime.
• Declaring money laundering as an extraditable offence.
• Promoting international co-operation in investigation of
money laundering.
• Unlawful Activity (Prevention) Act provides for the following
sanctions:
• Unlawful activities. Individuals, who take part, commit or
abet the commission of an unlawful activity face
imprisonment for up to seven years and a fine. In addition,
individuals who assist in any unlawful activity face
imprisonment of up to five years and/or a fine.
• Terrorist activities. The sanctions applicable are:
• Terrorist acts. Acts that result in death are punishable with
death or life imprisonment. Other cases range from five years
to life imprisonment;
• Raising funds for terrorist activity and conspiracy.
Imprisonment from five years to life and a fine;
• Harbouring terrorists. Imprisonment from three years to life;
• Membership of a terrorist organization. Life imprisonment
and a fine;
• Holding proceeds of terrorism. Life imprisonment and a fine.
• These sanctions apply to both individuals and corporate
bodies.
• Financial record keeping
• Banks, financial institutions and intermediaries must (section
12 (1), Prevention of Money Laundering Act):
• Maintain records detailing the nature and value of prescribed
transactions.
• Furnish information on prescribed transactions under the
Prevention of Money Laundering Act.
• Verify and maintain the records of the identity of all its clients.
• Records must be maintained for ten years after the
transaction concludes.
Every banking company or financial institution or intermediary
must maintain a record of:
• Cash transactions of more than INR1 million or its equivalent
in foreign currency.
• Series of cash transactions integrally connected to each other
that have been valued below INR1 million or its equivalent in
foreign currency where such series of transactions have taken
place within a month.
• Cash transactions where forged or counterfeit currency notes
or bank notes have been used as genuine and where any
forgery of a valuable security has taken place.
• Suspicious transactions whether or not made in cash.
• Due diligence
• Banks are required to undertake customer due diligence
(CDD) measures depending on the type of customer, business
relationship or transaction.
• CDD measures typically comprise the following:
• Obtaining sufficient information in order to identify persons
who beneficially own or control a securities account.
• Verifying the customer's identity using reliable, independent
source documents, data or information.
• Identifying beneficial ownership and control. That is,
determining which individual(s) ultimately own(s) or control(s)
the customer and/or the person on whose behalf a
transaction is being conducted.
• Verifying the identity of the beneficial owner of the customer
and/or the person on whose behalf a transaction is being
conducted, corroborating the other information.
• Conducting ongoing due diligence and scrutiny.
• That is, performing ongoing scrutiny of the transactions and
account throughout the business relationship to ensure that
the transactions being conducted are consistent with the
registered intermediary's knowledge of the customer, its
business and risk profile, taking into account, where
necessary, the customer's source of funds.
 Cross-border co-operation
• Obtaining evidence
• During the course of an investigation into an offence, an
application can be made by an investigating officer that
evidence is available in a country or place outside IndiaThe
court may then issue a letter of request to a court or authority
outside India to:
1. Examine any person acquainted with the facts and
circumstances of the case and record his statement.
2. Require such person or any other person to produce any
document or thing that may be in his possession pertaining to
the case.
3. Forward all the evidence to the court issuing the letter.
• Seizing assets
• In India, if any court has reasonable grounds to believe that a
property has been obtained by committing an offence, it can
make an order of attachment or forfeiture of such property
under the provisions of the CRPC. The court can issue a letter
of request to any authority or court of the contracting state
for execution of such order.
• India has also entered into mutual legal assistance treaties for
asset recovery with many jurisdictions, including the US, UK
and UAE.
 Whistle blowing
• The law relating to whistleblowers is fairly recent. The
Parliament passed the Public Interest Disclosure and
Protection to Persons Making the Disclosures Bill 2010 on 27
December 2011.
• The Bill aims to set up a regular mechanism to encourage
persons to disclose information on corruption or willful
misuse of power by public servants, including ministers.
• It also aims at providing adequate protection to persons
reporting corruption or willful misuse of discretion that causes
demonstrable loss to the government, or commission of a
criminal offence by a public servant.
• The Companies Act 2013 has been passed by Parliament.
Among other things, the Act provides for self-regulatory
mechanisms to combat corruption. It also provides for
stringent compliance provisions.
 Regulatory Authorities
• Central Bureau of Investigation (CBI)
• www.cbi.nic.in
• Government Organization
• Principal Responsibilities: The CBI normally investigates and
prosecutes the cases of serious fraud or cheating that may
have ramifications in more than one state. It also investigates
corruption cases.
• Serious Fraud Investigation Office
• www.sfico.nic.in
• Government organization
• Principal Responsibilities: A multi disciplinary organization
under Ministry of Corporate affairs, it detects and prosecutes
or recommends for prosecution of white collar crime / fraud
• Central Vigilance Commission
• www.cvc.nic.in
• Statutory body
• Principal Responsibilities: The central vigilance Commission
supervises corruption cases in government departments. It
has supervisory powers over the CBI, but does not have
authority to prosecute individuals.
• Central Economic Intelligence Bureau
• www.ceib.nic.in
• Government organization
• Principal Responsibilities: The central Economic intelligence
Bureau monitors economic offences and coordinates
cooperation with international agencies in relation to
economic offences.
• Directorate of Enforcement (DOE)
• www.directorateofenforcement.gov.in
• Government organization
• Principal Responsibilities: Enforcement of Foreign exchange
Management Act 1999 and prevention of money laundering
act 2002. The organization falls under Ministry of Finance,
Government of India.
• Economic Intelligence Council (EIC)
• www.ceib.nic.in
• Government organization
• Principal Responsibilities: Established under the Ministry of
Finance to facilitate coordination among the enforcement
agencies dealing with economic offences.