Rahul Tiwari Profitability Vs Welfare

Dr.
SHAKUNTALA MISRA NATIONAL REHABILITATION

UNIVERSITY
Lucknow
Faculty of Law
PROJECT ON
“ CORPORATE FRAUDS: AN ELABORATIVE EXPLANATION
For
COURSE ON‘ PROFITABILITY VS. WELFARE: THE LEGAL PERSPECTIVE’
Course: B.Com., LL.B (Hons.) 8th Semester
Submitted by
RAHUL TIWARI
B.Com LL.B/2017/18
Roll No. - 174140034
Under the Supervision of
Dr. Vijeta Dua Ma’am
Asst. Prof. in Law
Faculty of Law
Dr. Shakuntala Misra National Rehabilitation University
Profitability V. Welfare : The legal Perspective Page 1

ACKNOWLEDGMENT
I would like express my special thanks of gratitude to my teacher Asst.Prof. Dr. VIJETA DUA
MA’AM who gave me the golden opportunity to do this wonderful project on “CORPORATE
FRAUDS and I came to know many new concepts about the topic. I am really thankful to her for her
support and co operation.

INDEX
1. INTRODUCTION................................................................................4-5
2. TYPES OF FRAUD.................................................................................5
3. CORPORATE FRAUDS UNDER COMPANIES ACT, 2013.............6-9
4. PUNISHMENT FOR FRAUD (S.447)...............................................9-10
5. HOW TO PREVENT FRAUD..............................................................10
6. NIRAV MODI SCAM......................................................................11-13
7. CONCLUSION .....................................................................................13

CORPORATE FRAUDS: MEANING, TYPE AND LEGAL
PROVISIONS AND EMERGING ISSUES IN CORPORATE
FRAUDS
INTRODUCTION:
Corporate fraud consists of 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. These frauds harm the company in a very prudent manner focusing on its
1
performance and other relevant issues. Corporate fraud schemes go beyond 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. A corporate fraud occurs when a company or an
entity deliberately changes and conceals sensitive information which then apparently makes it
look healthier. Companies adopt various modus-operandi to commit such corporate frauds,
which may include miss-information in the prospectus, manipulation of accounting records, debt
hiding etc. 2The aspect of falsification of financial information includes false accounting entries,
false trades for inflation of profits, disclosure of price sensitive information which comes under
the ambit of insider trading and showing false transactions which result in attracting more
investors and lenders for funding. 3 This generally involves the employees or the person directly
or indirectly connected to the company. These people have the direct or indirect excess to the
company, thus are the trusted one. 4These frauds include act or omission of the work which are
deemed to be done by the person. For understanding corporate fraud more clearly we can take an
example of a person who is a shareholder of the company thus has the access to the company,
buys a stake and provide the false information to the company thus this person is involved in the
1
What is corporate Fraud, My accounts, available at https://www.myaccountingcourse.com/accounting-
dictionary/corporate-fraud last seen on 29/03/2019
2
Tracy and Andrew Wington, Corporate Fraud and Business Condition,63, 21, The Journal of Finance, (2010)
available at https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2010.01615.x last seen on 29/03/2019
3
Corporate fraud, Meaning and Types, Tax guru, available at https://taxguru.in/corporate-law/corporate-fraud-
meaning-type-how-to-avoid-legal-provisions.html last seen on 29/032019
4
Supra 2

corporate fraud as he has omitted the job which is required to be done by him. There are many
regulation which deals with the fraud in the corporate sector, mainly the listed acts are involved:
1) Indian Contract Act 1872.

2) Indian Penal Code 1860.
3) Prevention of Corruption Act 2013.
4) Prevention of Money laundering Act 2012.
5) The Companies Act 1956& 2013.
6) Information Technology Act 2008.
7) Prohibition of Insider Trading.
TYPES OF FRAUD:-
There are many types of corporate fraud like, Theft of cash, physical assets or confidential
information, Misuse of accounts, Procurement fraud, Payroll fraud, Financial accounting mis-
statements, Inappropriate journal vouchers, Suspense accounting fraud, Fraudulent expense
claims, False employment credentials, Bribery and corruption, Fraudulent Financial Statements,
5
Employee Fraud, Vendor Fraud, Customer Fraud, Investment Scams, Bankruptcy frauds and
miscellaneous. Some of the common types of frauds are:
 Financial frauds - Manipulation, falsification, alteration of accounting records,

misrepresentation or intentional omission of amounts, misapplication of accounting
principles, intentionally false, misleading or omitted disclosures.6
 Misappropriation of Assets - Theft of tangible assets by internal or external parties, sale
of proprietary information, causing improper payments. 7
 Corruption - making or receiving improper payments, offering bribes to public or
private officials, receiving bribes, kickbacks or other payments, aiding and abetting fraud
by others.
5
Madan Lal Bhasin, Corporate Accounting Fraud: A case study of Satyam Computer Limited, 32, 21 Open Journal
of Accounting available at https://file.scirp.org/pdf/OJAcct_2013042509481787.pdf last seen on 1/04/2019
6
7
Micheal S. Flynn &James, Regulator Joins in Event, 12, 34 Harvard Law School, available at
https://corpgov.law.harvard.edu/tag/corporate-fraud/ last seen on 01/04/2019

CORPORATE FRAUDS UNDER COMPANIES ACT, 2013
The Companies Act, 2013, is the legislation which focusses on issues related to corporate frauds.
Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the
Companies Act 2013, includes any act, omission, concealment of any fact or abuse of position
committed by any person or any other person with the connivance in any manner, with 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. In order to amount to Fraud, an act must be confined to acts committed by a party
to contract with an intention to deceive another party or his agent or to induce him to enter into a
contract.8Fraud, which vitiates the contract, must have a nexus with the acts of the parties
entering into the contract. This definition highlights the precondition to prove the intention of the
person who has committed fraud. If that person has willingly committed a fraud, then he will be
punished. Here the person means himself or his agent. The acts which include fraud are wrong
suggestions or concealment of facts or false promises or any fraudulent act to deceive others. 9
PUNISHMENT FOR FRAUD (S.447)
Any person who is found guilty of fraud shall be punishable with imprisonment for a term which
shall not be less than six (06) months but which may extend to ten (10) years and shall also be
liable to fine which shall not be less than the amount involved in the fraud, but which may
extend to three (03) times the amount involved in the fraud. Where the fraud in question involves
public interest, the term of imprisonment shall not be less than three (03) years. 10
PENALTY OR PUNISHMENT UNDER THE VARIOUS ACTS:-
As Per Section 447 of Companies Act 2013, prescribes that the person who is guilty of fraud
shall be punishable with imprisonment for a term not less than 6 months and up to 10 years and
fine, which shall not be less than the amount involved in the fraud and may extend to thrice of
such amount. If the fraud involves public interest, the minimum imprisonment to be awarded
8
Ibid at 14
9
10
Nirav Modi Scam: How PNB is defraud available at https://www.businesstoday.in/sectors/banks/nirav-modi-
case-pnb-fraud-11400-crore-scam-ed-cbi-raid/story/270708.html last seen on 4/04/2019

shall be 3 years. As per Prevention of Money laundering Act 2012 if any person convicted
offence in this act, there can be punishment of imprisonment up to 3-7 years with fine up to 5
lakh rupees. As per Indian Penal Code 1860, punishment of offences, every person shall be liable
to punishment under this Code and not otherwise for every act or omission contrary to the
provisions thereof, of which he shall be guilty within India. As per Section 66F (Acts of cyber
terrorism) of Information Technology Act 2002, If a person denies access to authorized
personnel to a computer resource, accesses a protected system or introduces contaminant into a
system, with the intention of threatening the unity, integrity, sovereignty or security of India,
then he commits cyber terrorism and he is liable for Imprisonment up to life. The corporate
world is witnessing various changes. Corporate world’s networks are increasingly being targeted
11
by cyber criminals. Each passing day comes up with some news about breaches on corporate
networks at global and Indian levels. For running the day-to-day affairs of corporates, the
electronic format is the defacto format. Corporates need to be aware to the facts that the law has
gone ahead and given an expansive definition of personal information to mean any information
that relates to a natural person, which, either directly or indirectly, in combination with other
information available or likely to be available with a body corporate, is capable of identifying
12
such person. Further, the law has gone ahead and defined what constitutes sensitive personal
data or information. Sensitive personal data or information of a person has been defined to mean
such personal information which consists of information relating to; ―
1. Password;
2. Financial information such as Bank account or credit card or debit card or other payment
instrument details;
3. Physical, physiological and mental health condition;
4. Sexual orientation;
5. Medical records and history;
6. Biometric information
7. Any detail relating to the above clauses as provided to body corporate for providing
service; and
11
12

8. Any of the information received under above clauses by body corporate for processing,
stored or processed under lawful contract or otherwise.
9. Companies are required to have detailed terms and conditions, rules and regulations as
also privacy policies, while handling or dealing with information including sensitive
personal information or data. Companies should also have policies for collection,
preservation, retention, disclosure and transfer of sensitive personal information.
WHO CONDUCTS THE INVESTIGATION?
HR managers are increasingly being called upon to conduct in-house investigations. The
question of whether to bring in law enforcement, a regulatory agency, external audit teams, a
private law firm, or handle the matter in-house is an open one. This decision is fact and case
specific, and will depend upon the duration and breadth of the potential problem as well as
potential in-house investigatory skills. Many times the in-house investigations are coordinated
with outside counsel. If the company initially decides that it will conduct an internal
investigation instead of an external investigation, the roles of the individuals involved in the
investigation should be clearly delineated. 13If the investigation is conducted in-house under the
supervision of an HR manager, the benefits may include:
1. Heightened knowledge about the company’s business, employees, and procedures;

2. Increased control over the investigation as well as the possible resulting publicity;
3. An unfiltered view of the fraud and the extent of it.14
Keeping the investigation in-house will also prevent possible problems with the Fair Credit
Reporting Act (FCRA). The FCRA applies generally to workplace investigations, but does not
apply when the investigation is done completely in-house. On the other hand, the disadvantages
to keeping the investigation in-house may include:
1. Lack of attorney-client privilege;

2. Insufficient training In carrying out fraud investigations;
3. Less objectivity than an external investigation;
13
Madan Lal Bhasin, Corporate Accounting Fraud: A case study of Satyam Computer Limited, 32, 21 Open Journal
of Accounting available at https://file.scirp.org/pdf/OJAcct_2013042509481787.pdf last seen on 1/04/2019
14

4. Possible conflicts between the company’s well-being and management’s professional
obligations; and
5. Possible loyalty issues between the investigator and the employees and lack of support.4
although some of the disadvantages are not damaging to the company generally, the
existence of such factors when conducting an in-house investigation might be
problematic.15
HOW TO PREVENT FRAUD:-
One of the best ways to develop policies and procedures that are effective in prevention
corporate fraud is with the assistance of an experienced anti-fraud professional who has
investigated hundreds of frauds to develop the most relevant and most effective anti-fraud
controls including:
1. Establish clear and easy to understand standards from the top down. Have an employee
manual that clearly outlines these standards and keeps the rules from becoming arbitrary.
2. Always check references and perform background checks that include employment,
credit, licensing and criminal history for all new hires. 16
3. Secure physical assets, access to data, and money at all levels including monitoring and
using pre-numbered checks, keep checks locked up, have a “voided check” procedure and
never sign blank checks. Review all disbursements regularly. 17
4. Segregation of duties of employees. Divide activities so one employee doesn’t have too
much control over an area or duty. Separate important accounting and account payable
functions. Small-business owners and managers should review every payroll check
personally. The person who has custody of the checks should never have check signing
authority. The person opening the mail should not record the receivables and reconcile
the accounts.
15
16
17
All you need to about Nirav Modi Scam available at https://www.thehindu.com/business/Industry/all-you-need-
to-know-about-nirav-modi-and-the-177-billion-pnb-fraud/article22753973.ece last seen on 7/04/2019

5. Proper authorization of transactions, ensuring that employees aren’t exceeding their
authority.
6. Independent checks on performance, using audits, surprise check-ups, inventory counts,
or other procedures to verify compliance with policies and procedures, as well as
accuracy.
7. Instill an anonymous reporting mechanism, such as an employee fraud hotline.
8. Small-business owners should control who first receives the bank statements and other
sensitive documents. Consider a separate post office box for the purpose of receiving
bank statements, customer receipts or any other sensitive documents.
9. All account reconciliations and general ledger balances should have an independent
review by a person outside the responsibility area such as an outside accountant. This
allows for reviews, better ensuring nothing is amiss and providing a deterrent for
fraudulent activities. 18
10. Conduct annual audits to motivate all bookkeeping- related staff to keep things honest
because they can never be sure what questions an auditor is going to ask or what
documents an auditor may request to review.
11. While no company, even with the strongest internal controls, is completely protected
from fraud, strengthening internal control policies, processes and procedures will go a
long way towards making your company a less attractive target to both internal and
external criminals. 19
18
19

NIRAV MODI SCAM:
Billionaire jeweller Nirav Modi allegedly acquired fraudulent letters of undertaking from one of
its branches for overseas credit from other Indian lenders. The Enforcement Directorate (ED) on
Thursday conducted raids on jeweller Nirav Modi's properties in Mumbai, Surat and Delhi. A
case of money laundering has also been lodged against Nirav Modi and others. In a statement
issued to exchanges, Punjab National Bank on Wednesday said it has detected some fraudulent
and unauthorised transactions (messages) in one of its branch in Mumbai for the benefit of a few
select account holders with their apparent connivance. "Based on these transactions other banks
appear to have advanced money to these customers abroad. In the Bank these transactions are
contingent in nature and liability arising out of these on the Bank shall be decided based on the
law and genuineness of underlying transactions," it said. PNB has suspended 10 officers over the
Rs.11,400 crore scam and referred the matter to CBI for investigation. According to media
reports, Nirav Modi left the country on January 1 weeks before the CBI received complaint from
PNB on January 29. His brother Nishal, a Belgian citizen, also left the country on January 1,
while wife Ami, a US citizen, and business partner Mehul Choksi, the Indian promoter of
Gitanjali jewellery chain, departed on January 6. When Nirav Modi companies asked for LoUs
for raising buyers' credit after the retirement of the PNB employee involved in the scam, the
Punjab National Bank sought 100 per cent cash margins for issuing LoUs. This was contested by
the Nirav Modi firms, saying they had availed of the facility from as early as 2010.
Chronological event of the scam is stated below:
 January 29, 2018: Punjab National Bank (PNB) files police complaint against Nirav
Modi, Mehul Choksi and others accusing fraud to the tune of Rs 2.81 billion.
 February 5, 2018: The Central Bureau of Investigation (CBI) launches an investigation
into the alleged scam. 34
 February 16, 2018: The Enforcement Directorate (ED) seizes a cumulative Rs 56.74
billion worth of diamonds, gold and jewellery from Nirav Modi's home and offices.
33
34

 February 17, 2018: The CBI makes first arrest in the case. Two PNB employees and an
executive of Nirav Modi's group detained. 35
 February 17, 2018: Government suspends passports of Nirav Modi and Mehul Choksi for
four weeks in connection with the PNB fraud. 36
 February 21, 2018: CBI arrests CFO of Nirav Modi's firm and two other senior
executives of his firms. It also seals his farmhouse in Alibaug.
 February 22, 2018: The ED seizes nine luxury cars belonging to Nirav Modi and his
firms.
 February 27, 2018: A magistrate's court issues a bailable arrest warrant against diamond
trader Nirav Modi.
 June 2, 2018: The Interpol issues Red Corner Notice against Nirav Modi for money
laundering.
 June 25, 2018: The ED moves a special court in Mumbai seeking Nirav Modi's
extradition.37
 August 3, 2018: The Indian Government sends a request for the extradition of Nirav
Modi to the UK authorities.
 August 20, 2018: The CBI officials request Interpol Manchester to detain Nirav Modi
after the latter informs about his presence in London to Indian authorities.
 December 27, 2018: The UK informs India that Nirav Modi is living in the country.
 March 9, 2019: British newspaper 'The Telegraph' confronts Nirav Modi on London's
streets and confirms his presence in the country. 38
 March 9, 2019: The ED says government of the UK has sent an extradition request of
fugitive diamantaire Nirav Modi to a UK court for further proceeding.
35
Explained how 11Cr Fraud is Unnoticed, Scroll available at https://scroll.in/article/868825/explained-how-did-
the-alleged-rs-11000-crore-nirav-modi-punjab-national-bank-scam-go-unnoticed last seen on 6/04/2019
36
37
38
Explained how 11Cr Fraud is Unnoticed, Scroll available at https://scroll.in/article/868825/explained-how-did-
the-alleged-rs-11000-crore-nirav-modi-punjab-national-bank-scam-go-unnoticed last seen on 6/04/2019

 March 18, 2019: Westminister Court in London issues arrest warrant against fugitive
Nirav Modi after the Indian government request was forwarded to the court by the UK
Home Office
 March 20, 2019: Nirav Modi arrested in London and produced in Westminister Court,
which denies him bail. 39
 March 20, 2019: Nirav Modi sent to Her Majesty's Prison (HMP) Wandsworth till March
29
 March 29, 2019: A Westminster Magistrates Court in London rejects Nirav Modi's
second bail application, saying there are "substantial grounds" to believe that he will fail
to surrender. The judge fixes April 26 as the next date of hearing when he will appear via
video link from jail.
CONCLUSION:
Corporate frauds and scams greatly erode corporate wealth. Corporate India as a whole has a
vested interest in preventing and minimizing corporate frauds and scams. Independent directors
on audit committees provide one of the best ways of reinforcing internal audit and annual
statutory audit. Their independence must be strengthened. With respect to incentives, in end
executive compensation is about ethics and can only be sparingly controlled. The solutions to
corporate fraud must be comprehensive and all encompassing. The frauds indicate the loop hole
in the system which needs to be taken care of. Rules and regulations should be made more
binding and reliable.
39

BIBLIOGRAPHY
Journal
 Tracy and Andrew Wington, Corporate Fraud and Business Condition,63, 21, The Journal
of Finance, (2010) available at https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-
6261.2010.01615.x last seen on 29/03/2019
 Madan Lal Bhasin, Corporate Accounting Fraud: A case study of Satyam Computer
Limited, 32, 21 Open Journal of Accounting available at
https://file.scirp.org/pdf/OJAcct_2013042509481787.pdf last seen on 1/04/2019
 Micheal S. Flynn &James, Regulator Joins in Event, 12, 34 Harvard Law School,
available at https://corpgov.law.harvard.edu/tag/corporate-fraud/ last seen on 01/04/2019
Website
 What is corporate Fraud, My accounts, available at

https://www.myaccountingcourse.com/accounting-dictionary/corporate-fraud last seen on
29/03/2019
 Corporate fraud, Meaning and Types, Tax guru, available at https://taxguru.in/corporate-
law/corporate-fraud-meaning-type-how-to-avoid-legal-provisions.html last seen on
29/032019
 All you need to about Nirav Modi Scam available at
https://www.thehindu.com/business/Industry/all-you-need-to-know-about-nirav-modi-
and-the-177-billion-pnb-fraud/article22753973.ece last seen on 7/04/2019
 Nirav Modi Scam: How PNB is defraud available at

https://www.businesstoday.in/sectors/banks/nirav-modi-case-pnb-fraud-11400-crore-
scam-ed-cbi-raid/story/270708.html last seen on 4/04/2019
 Explained how 11Cr Fraud is Unnoticed, Scroll available at
https://scroll.in/article/868825/explained-how-did-the-alleged-rs-11000-crore-nirav-
modi-punjab-national-bank-scam-go-unnoticed last seen on 6/04/2019

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Dr.

SHAKUNTALA MISRA NATIONAL REHABILITATION

“ CORPORATE FRAUDS: AN ELABORATIVE EXPLANATION

COURSE ON‘ PROFITABILITY VS. WELFARE: THE LEGAL PERSPECTIVE’

Course: B.Com., LL.B (Hons.) 8th Semester

Roll No. - 174140034

Under the Supervision of

Dr. Vijeta Dua Ma’am

Asst. Prof. in Law

Dr. Shakuntala Misra National Rehabilitation University

Profitability V. Welfare : The legal Perspective Page 1

support and co operation.

Profitability V. Welfare : The legal Perspective Page 2

3. CORPORATE FRAUDS UNDER COMPANIES ACT, 2013.............6-9

4. PUNISHMENT FOR FRAUD (S.447)...............................................9-10

5. HOW TO PREVENT FRAUD..............................................................10

6. NIRAV MODI SCAM......................................................................11-13

Profitability V. Welfare : The legal Perspective Page 3

Profitability V. Welfare : The legal Perspective Page 4

1) Indian Contract Act 1872.

 Financial frauds - Manipulation, falsification, alteration of accounting records,

Profitability V. Welfare : The legal Perspective Page 5

PUNISHMENT FOR FRAUD (S.447)

PENALTY OR PUNISHMENT UNDER THE VARIOUS ACTS:-

Profitability V. Welfare : The legal Perspective Page 6

Profitability V. Welfare : The legal Perspective Page 7

WHO CONDUCTS THE INVESTIGATION?

1. Heightened knowledge about the company’s business, employees, and procedures;

1. Lack of attorney-client privilege;

Profitability V. Welfare : The legal Perspective Page 8

HOW TO PREVENT FRAUD:-

Profitability V. Welfare : The legal Perspective Page 9

Profitability V. Welfare : The legal Perspective Page 10

Profitability V. Welfare : The legal Perspective Page 11

Profitability V. Welfare : The legal Perspective Page 12

Profitability V. Welfare : The legal Perspective Page 13

 What is corporate Fraud, My accounts, available at

 Nirav Modi Scam: How PNB is defraud available at

Profitability V. Welfare : The legal Perspective Page 14

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