July 08, 2013

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Deter Corporate Fraud: Need of the Hour

- Aseem Chawla, Partner (Co-founder) [ MPC Legal ]

Aseem Chawla

“ Despite several scams having come to light in the recent past, there haven't been any significant changes in the laws and mechanisms to combat these scams and the overall corruption in the Indian economy ”

Businesses going global, uncertain economic policies and India being an emerging market, all factors have cumulatively made the otherwise flourishing Indian Corporate sector more susceptible to corporate frauds and corruption. Financial insecurities and the prevailing environment have also contributed in morally depleting the work force, thereby making them vulnerable to indulgence in corporate fraud.

With trade and investments flowing in multi-directions, it's not that the problem of corporate fraud and malpractices is only related to India, but it is a polycentric problem influencing multiple spheres across globe.

Now the larger question which needs to be answered is that if corruption and malpractices continue to be the biggest challenge in the global corporate scenario, why is it that India too has added to this rattle? An irresistible answer might lie in the fact that while other countries have proactively enforced anti corruption laws, India has somehow failed to show the same urgency and intent to demystify the problem.

The corporate sector in India, hitherto, has relied more on traditional ways such as internal and forensic audits as an anti fraud measure, isolated risk assessment measures etc, with a complete neglection of proactive fraud risk management initiative and whistle blowing mechanism. With ever changing and evolving technological development, corporate frauds have become more sophisticated, thereby making the traditional checks and balances even more vulnerable and hostile, leave alone their ability to counter the futuristic frauds.

Corporate reluctance coupled with unstructured enterprise data, has made matters worse for Indian Companies. With the kind of ineffective enterprise resources data management in Indian companies, large transactional data makes it virtually impossible even for exchequers to detect the problem in its initial stages and with passing of considerable time, the impact of fraud becomes colossal.

Misappropriation of assets, financial misreporting, procurement frauds, regulatory non-compliance, bribery, attempts to conceal losses or poor performance, misstatement of performance, personal financial gains, money laundering etc directly or indirectly continues to be the prime driving factor of fraud.

The multi crore mis-stating of financial accounts by Satyam, wherein the Company's Chairman is being investigated for alleged involvement in falsifying the accounts and inflating the revenues and profit figures of the Company was unearthed in the year 2009 and though the Government in a spirited fashion did everything possible to bail out the Satyam enterprise from the inevitable, prosecution and penalty in this case seems inevitable. Similarly, another fraud largely at operational levels was detected at Reebok India Co during forensic audit. Allegedly, fake transactions with non-existent customers, inflation of invoices and over valuation of bills to exaggerate the revenue of the company was being carried out by a few officials and employees of the Company. The matter is still under investigation.

With an increase in corporate irregularities in global business, it is imperative for law makers to take effective measures in ensuring a strong mechanism where regulatory bodies act in a coherent manner in achieving the desired objective, within the given legal framework

Despite emergence of these frauds, there have been no significant changes in law to combat corporate frauds and corruption in India. There are several competent agencies such as Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Income Tax Department, Directorate of Revenue Intelligence (DRI), Income Tax Department, Directorate General of Central Excise Intelligence (DGCEI), Financial Intelligence Unit etc which can deal with corporate frauds, but all such bodies can be viewed as sector specific and their scope and reach is rather narrow. Though by no means it may be suggested that the role of such regulators and implementing bodies is not important but yes, to a certain extent, their contribution in checking the problem of corporate fraud and corruption holistically has not yielded the desired results.

One of the major factors for not achieving the desired results, despite having so many sector specific bodies, is that there is no communication link between such bodies. For instance, when any non-compliance or any irregularities are found by one Government body pertaining directly or indirectly to the scope of some other Government body, there is no mechanism in place for sharing of such leads, information and intelligence of one body with the other body, resulting in missing the warning signs and letting off the corporate fraudsters.

There is a lack of one central body integrating the intelligence and information of all such sector specific bodies. This coupled with weak enforcement and judicial system has only intensified the problem. Not surprisingly, three years after the Satyam scam was unearthed in 2009, the matter is pending any kind of meaningful resolution. More stringent laws substantiated by a stronger enforcement mechanism is the need of the day in order to deal with such frauds. An iron hand approach needs to be adopted to deter such scams. Present laws to deal with corporate frauds are either obsolete or just not good enough to tackle the sophisticated corporate frauds. India must borrow a leaf out of the book of the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. Both the Acts have been strong deterrents for MNCs connected with US and UK which are becoming increasingly cautious of the perils associated with bypassing of these statutes.

As understood, the FCPA regulations do prohibit US persons and businesses from undertaking corrupt practises anywhere in the world and these US persons and businesses are even held accountable for the corrupt activities of their foreign subsidiaries even though undertaken at a place entirely or mostly outside US. The enactment of such laws by US and UK has not only made Companies having some or the other business connections with US/UK more vigilant, but has also encouraged companies to implement strong anti corruption plans in their organisations in order to reduce the risk of violating the provisions of these anti-corruption statutes.

In Summary

With increased reporting of corporate irregularities in an environment where business today has become more complex, multifarious with global reach, it is imperative that Law makers do take effective measures in ensuring a strong mechanism and enforcement environment where regulatory bodies do act in a coherent manner in achieving the desired objective, within the given legal framework which does not get succumbed to the technicalities resulting in deprivation of justice which should seem to be done.


* Shashank Goel, Senior Associate, MPC Legal, has usefully contributed to this article.


Disclaimer-The views expressed in this article are the personal views of the authors and are purely informative in nature.

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