Chapter 5

Gap in the management and Administrative legal system

1. No in-house procedural legal order; No best practice code:

The banks and financial institutions, by and large, have notdeveloped any ‘best practice code’ for the management and functional staff.The Best Practice Code (BPC) relates to detail procedural rules for enteringinto transactional relations. Generally speaking, detailed procedural practicesfollowed in each transactional relation on each table by each staff and officerinvolved in any transaction are documented. The same document is then examinedwith the comparative document of national and international practices followedby comparable institutions. The Expert Committee thereafter, recommends the bestpractice principles at micro-level transactional relation. BPC suggested, isthen experimented and if found providing ideal result, recommended to all staffand officers to follow. BPC is then used as the threshold prescription for thestaff and officers to follow. Any variation thereafter is scrutinized by themanagerial process to evaluate the variation in the interest of the trade. Oneexample will make the BPC clear. Say for example, there is a proposal of an NRIto open an account in a bank. It must be clearly prescribed in the BPC as to whocan introduce, how the introduction shall be scrutinized, how the identity shallbe established, what would be the procedure of affirmation of the identity, soon and so forth. Detailed procedural rules followed in general when welldocumented and experimented with desired result become BPC. BPC then providesthe comparative index to rationalize and proportionalise the management controland accountability according to the degree of deviation from the BPC. In theabsence of BPC, there is no established procedural rules to lead relationalgrowth.

2. Use of discretionary power at every level :

While the discretionary power is an essential ingredient indecision making both in the private sector as well as the public sector, theonly difference perhaps is that in the private sector, if the result of thediscretionary power is adverse to the entity, the decision maker is shown thedoor. In the public sector, the official is provided with the insulation for bonafide act. One has to deeply understand that discretionary power mustnot be confused with arbitrary and ad hoc power. The discretionary power isgenerally ‘the power of judging’. The power of judging has three essentialelements - (a) fact and fact analysis; (2) decision and (3) rationale for thedecision. This is a skill that can be developed with sustainable training andretraining. This is one of the most challenging tasks of management skill andadministrative law to be imparted to the staff and officials. It is alwaysnecessary to well document case studies in an organization and thenconceptualize the BPC for guiding the exercise of discretionary power. There isa very vague notion of discretionary power to be distinguished from ad hoc andarbitrary power among officials. Most of the officials exercising suchwide discretionary power do not have any idea of the administrative law of thecountry. As such, whenever there is any suggestion on the ‘rule of law’based system to be used in India, the attempt is shelved because of the pressureof the apprehensive management of the banks and financial institutions that itwould then not be possible for the officials at various stages to take anybusiness decision. The fear is primarily because there is no BPC fordiscretionary power use. But it has to be borne in mind that discretionary poweris a double-edged sword, in the hand of a capable person it sparkles and in thehand of a mediocre, it destroys the system. It also makes the system invariablywork under pressure in the absence of any BPC. The use of discretionary powerhas been seriously injured by political hegemony in India. No economicinstitution can survive in such a situation.

But the rule of law is itself an infrastructure, especiallyin the financial industry. Therefore, the fear that a ‘rule based system’would stand in the way of use of discretionary power is unfounded. An arbitraryuse of power by way of adventurism and under external pressure has to stop. Takethe example, just for the purpose of thinking; Microsoft could have done what ithas, with impunity and acclamation in India. But in US, it had to be disciplinedwithin a very strict rule based system. No rule based system permits arbitraryuse of power in any ad hoc manner.

3. No legal system audit, no compliance certificate :

The financial sector is based on the principle ofcontract-sovereignty, and constant creation of right-duty. As such, law andlegal system is a ‘raw material’ in the financial service industry.Unfortunately, there is no legal system audit and functional accountability.There is no system of submission of legal compliance certificate even if thevalue and volume of transaction is very high. There is also no responsibilityfor the system auditor to report any instance to the regulator.

4. Non-compliance of RBI guidelines and FCNR/NRI accountrelated fraud :

It appears to the Committee that in spite of varioussafeguards advised by the Reserve Bank, the facility of loans and advancesagainst the security of such deposits was misused, more often fraudulently, asit was open to the banks to accept such non-resident deposits through the agentsor brokers. The banks were granting loans against such deposit accounts to theIndian residents, immediately after opening of such accounts. Even though thenormal requirement of verification of the signature of depositor on the power ofattorney and verification of such power of attorney by Indian Consulate Generalin the concerned country was generally followed, it was found that theattestations on such power of attorney by the Indian Consular Offices were oftenforged and no such powers of attorney were ever granted by the depositors. Inone case, the bank staff was suspected to have sanctioned loans without properverification and in another case; the fake deposit receipts were prepared out ofstolen deposit receipts for grant of loans. In yet another case, depositreceipts were handed over to power of attorney holders who sent fake duplicatesto depositors and availed loans against the originals. In all the actual fraudcases reported and made available to the Committee, involvement of the staff wasevident in all cases.

There is one missing link in the facts of reported fraudsi.e. how the NRI chooses a particular bank to keep his foreign currency funds.That link is usually a resident who acts as a broker between the depositor andthe bank. Since the depositor has choice of banks to keep his funds even withoutthe help of broker, he does not pay anything to the broker. But the broker mayreceive his commission from or through the bank. In fact, it is the loanfacility against such deposits as can be seen in the reported frauds of thebank. In certain cases where the banks are facing liquidity problems, the banksadvise their borrowing customers to arrange for deposits so that their loans canbe sanctioned/released. During such time, deposits fetch a price over and abovethe regular interest. Such kick-backs are shared by the brokers with thedepositors so that they patronize such banks in preference to others who may notarrange for the additional interest in cash. Since such practices arefraud-prone, the banks will have to be advised of the need to take steps toensure that in their zeal to mobilize more and more deposits, the branchmanagers of banks do not indulge in any such mal practices and as far aspossible avoid dealings with middlemen in the matter of mobilization ofresources.

After several such instances of frauds in respect ofnon-resident deposit accounts came to the notice of the Reserve Bank, it issueda circular on 8^th January 2001. Though this circular also does notprohibit the brokers from soliciting the deposits on behalf of the banks inIndia, the banks have now been directed to follow the following safeguardsmeticulously, viz.:

1. Fixed deposit receipts should be handed over or sent to depositors directly against acknowledgement.
2. Loans against NRI/FCNR(B) deposits to third parties should be granted only when the depositor himself executes the loan documents in the presence of bank officials and a witness acceptable to the bank. Advances to third parties against such deposits should not be granted on the basis of power of attorney.
3. Where a fraud has been perpetrated in a non-resident account and there is no involvement of the concerned non-resident depositor and his innocence has been proved to the satisfaction of the bank, banks may pay the deposit proceeds to the depositor on due date even when the investigation is in progress. Bank may, however, obtain necessary documents including an indemnity bond with an acceptable surety from the non-resident depositor before releasing the amount.
4. In the event of death of non-resident depositor, banks need not insist on succession certificate as a matter of routine. Since different countries follow different procedures for issuing succession certificates, banks should take a practical view and ascertain the procedure followed in the country of residence of the depositor and, thereafter, obtain such minimum documents for their record as would satisfy the requirements of their having rightful claimant.

The Committee is of the view that if the bankers follow theRBI guidelines more carefully; the number of such frauds can be brought downsubstantially. The Committee, however, does not find any infirmity in legalprovisions and, therefore, refrains from making any recommendations on this itemof reference.

5. Role of Reserve Bank of India in Frauds reported bybanks :

The Committee is required to examine the role of the ReserveBank of India with regard to frauds reported by banks. The Committee hasexamined the position obtaining in respect of commercial banks (other thanRegional Rural Banks) in this regard. It is observed that the Reserve Bank ofIndia has a comprehensive reporting mechanism whereby all banks are required toreport actual/suspected frauds either to the Central Office or Regional Officesof the Department of Banking Supervision (DBS) of RBI. The banks are required toreport all actual/suspected frauds in excess of Rs.1 lakh each to the RegionalOffices of DBS with full particulars in the prescribed proforma as soon as suchfrauds come to their notice but within three weeks of detection. The CentralOffice of DBS receives individual reports on actual/suspected frauds of Rs.1crore and above and also in respect of frauds by unscrupulous borrowersinvolving an amount of Rs.5 lakh and above. The fraud reports are required toindicate, among other things, the modus operandi of the fraud, amount involved,the amount of expected loss, chances of recovery, staff involvement and theaction taken against the delinquent members of the staff. Cases of individualfrauds involving amounts up to Rs.1 lakh each are not required to be reportedindividually. The banks are, however, required to report such frauds in aconsolidated form category-wise on a quarterly basis in the prescribed format.

Besides, to enable Reserve Bank of India and the Governmentof India to have full information about the incidence of frauds and the actiontaken by banks to prevent them, the banks are required to furnish to RBI certainstatements on quarterly/half-yearly basis. While quarterly statements deal withfurther developments in respect of frauds reported to RBI, half-yearly statementon frauds is required to indicate the stage of Police/CBI investigation as wellas the recoveries made. Quarterly statements are also required to be sent by thebanks on frauds outstanding and closed during the quarter. Besides, there arereporting systems in place for following up vigilance aspects in the publicsector banks.

The above reporting system seems to have been designed toserve the following objectives :

1. To examine new modus operandi, if any, adopted in respect of a fraud and circulate the same among banks.
2. To issue caution advice to banks giving details of unscrupulous borrowers so that they will be careful while dealing with such borrowers.
3. To ensure that banks have taken prompt steps to recover their dues and have reported to fraud cases to CBI/Police.
4. To collate date relating to frauds and vigilance cases in order to report to the Board for Financial Supervision.
5. To consolidate data pertaining to frauds/vigilance cases (in respect of public sector banks) to report to Government of India/Parliament from time to time.

The Committee feels that while violations of any regulationcome within the purview of the regulator, any act of omission or commission by abank or any of its employees or constituents or others attracts the provision(s)of a criminal law, it goes outside the purview of the regulator. The regulatorhas no further role to play. The Committee is, therefore, of the view that thepresent system for monitoring fraud and its investigation is burdened by toomany layers imposing large regulatory costs on the banks. Furthermore, it isfelt that rather than following up each individual case of fraud, the RBI as aregulator/supervisor should be more concerned about the systemic impact of suchfraud. For instance, a fraud of Rs.10 crore in a large public sector bank maynot be of much regulatory/supervisory concern; at the same time, a similar fraudin a small private sector bank may be of serious concern to theregulator/supervisor. It is, therefore, felt that the response of the RBI tosuch frauds should take into account the whole picture. Furthermore, individualmonitoring of frauds could be left to the banks themselves. A review of suchmonitoring could be made at the time of the periodical inspections of the banks.

The investigating agencies, viz., CBI and the Police takeunduly long time to complete the investigation and to close a case. In view ofthis, the RBI would be spreading its supervisory resources too thin if it wereto follow up each individual fraud case up to its logical end. The Committee is,therefore, of the view that the reporting system for frauds needs to berationalized so that there is no duplication of efforts and that the reportingis done only in respect of information necessary for the Reserve Bank of Indiain exercising its regulatory/supervisory responsibilities.

6. Credit transaction data registration and informationsharing :

In India there is no one law for credit transaction, nopublic registry and sharing of information. We follow the common law system ofprivity of contract. But there has been system reform in the home country ofcommon law, but we have not changed. There is no one law for security interestcreation, priority determination and enforcement. All these supplemented with noinformation sharing amongst the institutions and also with the regulatorconcerned, cripple the financial service industry. Fraud is only the resultantaction. Control, prevention and prohibition of financial fraud call for reformin both financial sector law and criminal law.

Chapter 6

RECOMMENDATIONS

1. Prologue : The Committee, in its critical review ofthe system as obtained presently, observed two very wide systemic gaps in thelaw and practice in dealings of the banks and financial institutions with thepublic frauds. These systemic gaps are as follows :

Firstly, wide gap in the law and practice of banking law andpractice. As for example :

# No clear and certain best practice code in theorganization;

# Weak internalization system of the rule of law beingthe best practices in the organization and management;

# No discipline in the use of discretionary power tobe used in the manner and circumstances as laid down;

# No appreciation of administrative law to use discretionary power asbeing the judging power that involves decision and reasoning to be welldocumented; and

# No institutional plan for the judging power to be linked with incentive andpromotional system in the organization.

Secondly, the poverty in the criminal jurisprudence isalso very apparent in India. Many jurists argued for a long time that criminallaw in India is heavily class biased. Absence of financial fraud in the list ofoffences in the penal code is evidence in itself that ‘white collar crime’is treated differently in India with all leniencies. The Committee has,therefore, prepared its suggestions in two parts.

Part I deals with the preventive aspects of management offinancial fraud to keep it happen only in rare cases. This part suggestssteps to contain a clean in house financial management.

Part II deals with prohibition of financial fraud andintroduction of a deterrent jurisprudence so that financial fraud, being aserious offence to derail a system as a whole, is adequately and firmly dealtwith.

PART I

In-house preventive management as a part of good governance :

Administrative legal order

The Committee has emphasized the role of preventive aspectsto minimize institutional frauds with the participation of any internal staff.In the presentations made to the Committee, various in-house committees of theinstitutions and of the regulators pointed out that it would be very difficultto perpetrate a fraud without the assistance, co-operation and involvement of aninsider. The Committee considered the essential elements of good management inorder to have a clean system in deployment of public funds both on short termand long-term investments. The recommendations to this regard are as follows :

1. Development of Best Practice Code : Each bank andfinancial institution and intermediary must, within the time-frame indicated bythe regulator, prepare a Best Practice Code (BPC) for its officers andstaff to provide detailed rule based procedural system in customer relatedmatters and application of judging power.

2. System of internalization of BPC : There has to beadequate in-house training-retraining system for internalizing the BPC and alldirectives of the Institution and the Regulator.

3. Internal Check and Internal Control : There must beintroduced system of internal check and internal control in the systemmanagement and reporting.

4. Legal Compliance Certificate : A legal compliancecertificate needs to be mandated in all transactions exceeding a value limit. Incase of exercise of judgment power (discretionary power), an explanation shouldbe needed about the circumstances requiring the exercise of discretionary powerand the manner in which the same is exercised with a comment as to whether all duediligence care been taken or not.

5. Legal Compliance Audit : Every institution shouldhave legal compliance and due diligence audit every year and submission of thereport to the regulator and to the shareholders.

6. Data building on the exercise of discretionary powerand monitoring the same : Discretionary power is the judging power ofexercising the power in circumstances only when it is essentially needed andthere is no other method left. It is not wild and fact-divorced speculativepower or an arbitrary power. As such, every institution should build up data ofits management and staff exercising discretionary power recording all thereasons for such exercise and the consequences. A very close monitoring shallreveal how people use the power and with what result.

7. Appropriate incentive system : Use of discretionarypower must be result oriented either positively or negatively. Incentive andpromotion system in an organization may have some correlation with the data ofexercise of judging power and the rationality and appropriateness of suchdecision.

8. Liability of the accounting and auditing profession : Ifan accounting professional, whether in course of internal or external audit orin the process of institutional audit find anything susceptible to be fraud orfraudulent activity or use of excess power, or smell any foul in anytransaction, he should refer the matter to the Regulator. Any failure should beconsidered as professional incompetence and attach liability.

9. System of credit registration and data informationsharing : Legal support to quality improvement of credit system, prioritydetermination and enforcement is poor. The record of registration of the creditdata would in itself improve the quality of information and reduce the chancesof financial fraud. Such information sharing system among the constituentinstitutions shall also simplify the evidential process and enforcement.

10. Responsibility of Reserve Bank of India in Fraudsreported by banks : The Committee feels that while violations of anyregulation come within the purview of the regulator, any act of omission orcommission by a bank or any of its employees or constituents or others attractsthe provision(s) of a criminal law, it goes outside the purview of the regulatorand the regulator has no further role to play. The Committee is, therefore, ofthe view that the present system for monitoring fraud and its investigation isburdened by too many layers imposing large regulatory costs on the banks.Furthermore, it is felt that rather than following up each individual case offraud, the RBI as a regulator/supervisor should be more concerned about thesystemic impact of such fraud. For instance, a fraud of Rs.10 crore in a largepublic sector bank may not be of much regulatory/supervisory concern; at thesame time, a similar fraud in a small private sector bank may be of seriousconcern to the regulator/supervisor. It is, therefore, felt that the response ofthe RBI to such frauds should take into account the whole picture. Furthermore,individual monitoring of frauds could be left to the banks themselves. A reviewof such monitoring could be made at the time of the periodical inspections ofbanks.

The investigating agencies, viz., CBI and the Police takeunduly long time to complete the investigation and to close a case. In view ofthis, the RBI would be spreading its supervisory resources too thin if it wereto follow up each individual fraud case up to its logical end. The Committee is,therefore, of the view that the reporting system for frauds needs to berationalized so that there is no duplication of efforts and that the reportingis done only in respect of information necessary for the Reserve Bank of Indiain exercising its regulatory/supervisory responsibilities.

PART II

Prohibitive aspects in the recommendation to deal withFinancial Fraud : Administration of criminal justice

1. Separate Act to deal with Financial Fraud : Financialfrauds commonly understood as ‘scam’ have now become a major concern forgovernance. All the market players now should get a signal that financial fraudsspecifically the major ones disturbing the public life have to be criminalizedwith deterrent punishment. The criminalisation of financial fraud and itsinvestigation and prosecution will depend upon – (a) amendment to the IndianPenal Code, (b) amendment to the Criminal Procedure Code and (c)institutionalization of investigation procedure if a special procedure is neededfor treating serious financial fraud.

A substantive procedure will need to be inserted definingfinancial fraud in the Indian Penal Code as well as providing for the nature ofthe offence and terms of punishment. Similarly, for providing a specialprocedure for investigation and for conferring power of investigation to aspecialized agency, the Criminal Procedure Code may be required to be amended.Similarly, it would be necessary to shift the burden of proof and as such theprovision of Evidence Act may be required to be amended.

The same can be done in two ways. Individual statutes may beamended as suggested or an Act can be passed on financial fraud, which maycontain schedules for containing other statutes in the model outlined in theInformation Technology Act, 2000. The Committee after scrutinizing variousprevious reports including the Narasimham Committee strongly recommends aseparate statute to deal with financial fraud. The Act may be named as theFinancial Fraud (Investigation, Prosecution, Recovery and Restoration ofproperty) Act, 2001. The Act may have the long title as "An Act toprohibit, control, investigate financial fraud; recover and restore propertiessubject to such frauds; prosecute for causing financial fraud and mattersconnected therewith or incidental thereto".

2. Financial Fraud to be Criminalised : Financialfraud needs to be criminalized by inserting a definition for the offence on ‘financialfraud’ and a penal provision in the Indian Penal Code in a new Chapter XXIVwith Section 512 and 513. The definition may be as follows : "Financialfraud means and includes any of the following acts committed by a person or withhis connivance or by his agent, in his dealings any bank or financialinstitution or any other entity holding public funds : (a) the suggestion as afact, of what which is not true, by one who does not believe it to be true; (b)the active concealment of a fact by one having knowledge or belief of the fact;(c) a promise made without any intention of performing it; (d) any other actfitted to deceive and (e) any such act or omission as the law specially declaresto be fraudulent."

A few illustrations can be added with the above definitionsuggesting the following acts or omissions as offence : (a) Insider trading; (b)Price rigging in the financial market; (c) Any act of deceiving a bank or afinancial institution; (d) Any act, which can be a fraudulent preference in aninsolvency or bankruptcy proceeding; (e) Any unauthorized act or marketinterception or deceit whether done through institutions in India or abroad; (f)Vanishing company; (g) Any company raising public money through equity or loanwithout having any intention to perform the objectives laid down by the companyor by any unincorporated body of group of persons. Such illustrations may onlynarrate the wide scope and dimension of the offence.

The offence must be made cognizable with imprisonment up toseven years and also fine. But a serious fraud must be made punishable withimprisonment up to ten years and fine of double the amount involved in thefraud. However, the minimum punishment should be for five years. Such aprovision can be provided in Section 513 of the Indian Penal Code.

3. Serious Financial Fraud to be separately treated : Afterreviewing the Criminal Justice Act, 1987 of UK and also the procedure ofhandling the major frauds in US the Committee is of the opinion that seriousfinancial frauds must be investigated by separate specialized agency whereasother financial frauds may be treated in the similar manner as is done in thecase of cheating. Serious financial frauds have major public concern and oftenhave serious impact on the financial system. Therefore, such serious frauds arerequired to be specially investigated and dealt with through a fast-trackprocedure by a specialized agency. Serious financial, market and bank frauds maybe referred to such specialized agency for investigation and prosecution by (a)the regulator; (b) the concerned bank or SRO; and (c) by any State or CentralGovernment. The Judiciary also nowadays asks for investigation by the CBI.

However, the major problem is one of classifying seriousfinancial fraud. The Committee is of the opinion that the general recommendationof Davie Committee report of England can be the guideline for classifying theserious financial fraud, which may be as follows : (a) cases involved should besuch that sums involved are ten crores and above; (b) cases likely to give riseto national publicity and wide spread public concern; (c) cases whereinvestigation and prosecution require high specialized knowledge of financialmarket prices or of the behaviour of banks and SROs; (d) cases involvingsignificant international dimension; (e) cases where legal, financial,investment and investigative skills are required to be brought together; and (f)cases which appear to be complex to the regulators, banks, SROs or to theappropriate government. Since the above classification is reasonable, it isnot violative of any constitutional principles.

The above provision can be included in the body of theFinancial Fraud Act itself.

4. Strict Liability and Shift of Burden of Proof : TheCommittee recommends that the financial fraud and banking fraud should notbe rigidly defined excepting that the basic character of this fraud-drivenoffence would involve third parties’ interest in the contractual relationshipbetween the two parties which may be shareholders of an entity at large orinvesting public or depositors of the bank. The Committee also examined thestrict liability of proof on apriori intention and observed that in majorfrauds apriori conditions are not so important as that of financialimpact. In a series of transactional relations, the Committee feels that thestrict liability needs to be imposed on the contracting party to maintain theobligation of disclosure continuously throughout the agreemental relationship.The impact of activity of the contracting parties ought to be considered as astrict liability. Therefore, the Committee has recommended the inquisitorialsystem of proof in the evidential process. This can be done by amending theprovision of the Indian Evidence Act by inserting a new section, say Section114B, on presumption as to the intention to cause fraud as follows :

"When a financial fraud has been committed by a personor an abetment or criminal conspiracy made for such financial fraud, the Courtshall presume intention of the party or parties committing act of abetment orcriminal conspiracy or attempt for such financial frauds, of the partiescommitting such offence as the case may be unless such intention is disproved bythe accused."

5. Special responsibility of the regulator : Once anentity like a bank or a financial institution or a self-regulatory organizationalleges any financial fraud, it may refer the matter to the regulator. All theregulators jointly may constitute a fraud committee to make a preliminaryinquiry about the allegation and advise the regulator either to refer the matterto the investigating authority if there is an offence committed as alleged or todeal with such incidences of contractual or tortuous fraud that might becommitted by the parties. The Committee may also inquire into the incidenceof involvement of any banking staff. An officer of the bank or financialinstitution acting bonafide with due diligence and not violating the bestpractices or violating the best practices for business prudence may be advisedto be treated departmentally and not to be prosecuted against.

6. Criminal behaviour not within the fold of Regulatoryfunction : The Committee examined the functions of the regulators and alsothe suggestion that the market regulators should be responsible for regulatingmarket frauds. While appreciating the opinion, the Committee likes to underscorethe point that criminalization of fraud is the exclusive jurisdiction oflegislative process. It does not come into the realm of regulatorsresponsibility. No regulation can criminalize any fraud. It can only stipulatethe conditions of market and suggest that the market players would bedisciplined in case of such conditions are violated. This discipline includestortuous liability of compensation and also penal compensation. The marketregulators can even expel the player from the market altogether. The Committeestrongly recommends that major financial frauds should ipso facto becomean offence. Perpetration of financial fraud even diminishes the credibility ofgovernance. Market regulators have to discipline the market players for theinterest of the game by standardizing the rules of behaviour, development ofprofessional and ethical standards amongst the market players, self-regulation,standardized rules of qualification, capital adequacy, etc. and also withdefinite rules for de-memberment by way of expulsion from the market game in awell defined situation, liability of paying compensation (damages) in the caseof fraud and paying penalties to the professional body.

7. Separate Institution for Investigation of SeriousFinancial Fraud cases : After examining the pros and cons of having separateinvestigational institutions, the Committee strongly feels that investigatinginto the affairs of serious financial fraud requires not only the skills forinvestigation through professional training in police sense but it also requiresspecial institutional knowledge and experience in investment system, financiallegal structure, market systems and finance and monetary system. It requires anin-depth knowledge of market regulatory process. Therefore, the Committeestrongly recommends that there should be a special institution for dealing withserious financial fraud. Presently, serious financial and bank frauds areinvestigated by a special cell of the CBI. The cell, which is under the chargeof a Special Director, draws expertise from various fields. There are bankingexperts, financial market experts, chartered accountants involved in thesespecial cells. The Committee envisages that with the growing numbers ofincidents of market frauds and the serious complexities of such transactions,often in cross-border activities. The strength of the present cell is reallyinsignificant. The strength of the cell needs to be increased and theautonomy of this investigational special body is also required to be emphasized.This is the reason why the Committee has recommended that the cell should now begiven the status of a bureau and separated from the CBI and brought under theMinistry of Finance. Such provision can be incorporated in the body of theFinancial Fraud Act.

8. Office of Director for Investigation of Financial Fraud: The Committee recommends the establishment of office of Director forinvestigation of financial fraud and a multi-disciplinary body under hischairmanship. The Director must be sufficiently qualified to become the Directorof CBI. Such a person may be appointed by a Cabinet Sub-Committee of the PrimeMinister, Finance Minister and Home Minister and shall be directly responsibleto the Finance Minister. The office must have sufficient number of experts fromvarious fields into its investigating team. These investigating officials may bedrawn from the Police force, banking sector, SEBI, IRDA, Chartered Accountants,Financial Analysts and Information Technologists. Each investigating team is tobe composed by the Director keeping in view the sectoral needs forinvestigation. The investigation team shall have all powers as provided underCriminal Procedure Code. While providing for the legal structure, the Committeerecommends that the provisions of the Criminal Justice Act, 1987 of England maybe taken as a model. Such provisions can be stipulated by amending the relevantprovision of the Criminal Procedure Code.

9. Search, Seize and Attachment : The investigatingofficer shall have the power to search, seize and attach all tangible andintangible assets including bank accounts, which may be alleged to be acquiredfully or partly by perpetrating the offence. Such properties may be confiscatedby the court order and restored to the institution, which suffered on account ofthe fraud. The investigating authority shall have the power to trace allproperties acquired with the fruits of fraud directly and indirectly and attachthe same.

10. Special Courts : The Committee strongly recommendsSpecial Courts for trying the accused under the proposed Financial Fraud Act soas to provide a fast-track justice delivery mechanism for this type of offences.The Committee also underscores the necessity of having Judges sufficientlyknowledgeable in the economic system, market functioning and regulatorymechanism. The Presiding Officers of such Special Courts will need to bestrengthened by accrediting financial assessors who can provide the financialsystematic advise to the Judge in case of need.

11. Cross-border Financial Fraud : The Committee alsorecommends to integrate legal principles for cross-border financial fraudincluding rules for, (I) foreign representatives; (ii) foreign courtproceedings; (iii) sharing of information; (iv) implementation of foreign courtjudgment; (v) seeking assistance of foreign courts; (vii) Indian representativein foreign courts; and (ix) co-operation between the institutions. The CriminalJustice Act, 1987 of England has some provisions in this respect. Similarprovisions can be provided in the Financial Fraud Act to be followed in the caseof countries with which India has a treaty of extradition.

12. Draft Legislation : The Committee has proposeddraft legislation for illustrative purpose.

An illustrative legislation

The Financial Fraud (Investigation, Prosecution, Recovery andRestoration of property) Bill, 2001

An Act to prohibit, control, investigate financial frauds;recover and restore properties subject to such fraud; prosecute for causingfinancial fraud and matters connected therewith or incidental thereto.

CHAPTER I

PRELIMINARY

(1) This Act may be called "The Financial Fraud(Investigation, prosecution, recovery and restoration of property) Act, 2001.

(2) It extends to whole of India.

(3) It shall come into force on such date as the CentralGovernment may, by notification in the official Gazette, appoint, and differentdates may be appointed for different provisions of this Act and any reference insuch provision to the commencement of this Act shall be construed as a referenceto the coming into force of that provision.

1. Definitions:
1. Attachment means prohibition of transfer, conversion, disposition or movement of property or any part thereof by an order issued under this Act.
2. Bank means ‘bank’ as defined in Recovery of Debts Due to the Banks and Financial Institutions Act 1993 and includes a society carrying on the business of banking and registered under Central or State law relating to cooperative societies.
3. Committee means Financial Fraud Enquiry Committee constituted under Section 3 of the Act.
4. Financial institution shall have the same meaning as assigned to it under clause (c) of section 45-I of the Reserve Bank of India Act, 1934.
5. Financial Intermediary means and includes a share-broker; sub-broker; financial agent; share transfer agent; mutual fund banker to the issue; trustees under a trust deed; registrar to the issue; merchant banker; underwriter, portfolio manager; investment adviser; insurance agent; Commission agent; depository; and any other person engaged in the task of intermediation for another person in any transaction associated with a financial market, whether registered with the Security and Exchange Board of India or not.
6. Investigating authority means an authority, which is responsible to investigate an allegation of financial fraud under this Act or under the Code of Criminal Procedure, 1973.
7. Notification means a notification published in the Official Gazette.
8. Person means and includes:-
1. an individual’
2. a Hindu Undivided Family
3. a firm
4. a trust governed under Indian Trust Act
5. a society registered under a society Registration Act
6. a company
7. an association of persons or body of individuals, whether incorporated or not
8. every artificial juridical person, not falling within any of the preceding sub-clauses and
9. any agency, office or branch owned or controlled by any of the above persons.
10. Societies registered under the Central or State law relating to co-operative societies
9. Prescribed means prescribed by rules made under this Act.
10. Property means any property or assets of every description, whether corporal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets wherever located.
11. Public Fund means funds collected from public either by deposit or by issue of equity or loan instruments or through public investment in any scheme or the Government fund or any amount collected from public otherwise.
12. Regulator for the purpose of the Act, means all or any of the following:

(i) the Reserve Bank of India established by The Reserve Bank of India Act 1934 (ii) Security Exchange Board if India established by the Securities & Exchange Board of India Act, 1992 and (iii) Insurance Regulatory and Development Authority established by Insurance Regulatory and Development Authority Act, 1997 (iv) any other regulator under a statute passed by the Parliament.

13. Special Court means the Special Court established under this Act.
14. Transfer means and includes sale, purchase, mortgage, pledge, gift, loan or any other form of transfer of property, alienation of right, title, possession or lien.

CHAPTER II

Financial Fraud Enquiry Committee and Bureau of Investigationof Financial Fraud

3. Financial Fraud Enquiry Committee: There shallbe a Financial Fraud Enquiry Committee constituted as follows:

1. Chairman of the Committee to be nominated by the Governor of the Reserve Bank of India;
2. One member nominated by the Chairman of the Security Exchange Board of India;
3. One member to be nominated by the Chairman of the Insurance Regulatory and Development Authority;
4. One member to be nominated by the Department of Company Affairs, Ministry of Law and justice, Government of India;
5. One member to be nominated by the Ministry of Financeto inquire into the cases referred to the Committee to make appropriate inquiry and to advise the appropriate regulator on whether to proceed further into the allegation of commission of an offence, under Section 512 of the Indian Penal Code or to take any other action or not.

4. Qualification of the Chairman and members of theCommittee: The Chairman and members of the Committee shall have thefollowing qualification and tenure:

1. Chairman of the committee shall be a person of proven ability having sufficient experience in the administration and management of a banking institution and may be a serving or retired officer having held the position not below the rank of Executive Director of the Reserve Bank of India or Chairman or Managing Director of a Banking Institution;
2. A member nominated by the Chairman, SEBI having adequate knowledge of finance with sufficient experience in capital market operations and management and who may be a serving or retired officer having held the position of Executive Director of SEBI or position of a Chairman of a Stock Exchange;
3. A member nominated by the Chairman, IRDA having proven ability and knowledge of insurance industry and who may be a serving or retired officer of an insurance company having held a position not below the rank of a Chairman of a Company.
4. Members nominated by the Ministries must be holding position not below the rank of a Joint Secreta

5. Tenure:

(a) The Chairman and members of the Committee shall be appointed for a period of three years;

(b) The age of retirement shall be seventy years;

(c) If there is any vacancy on account of resignation, death or incapacity or due to operation of law, the appropriate authority shall nominate to fill up the vacancy.

(d) No decision of the Committee can be challenged merely onthe ground that all the vacancies of the Committee are not filled in.

6. Function of the Committee:

1. The Committee shall have the power of inquiry in all matters referred to it by a regulator or by the Union Government in order to examine whether a decision of an officer of a bank or any other financial institution or a financial intermediary or any other higher official involved in such decision making and its implementation, has been taken in the best interest of the business of the institution within the parameter laid down by the appropriate regulator.
2. For the purpose of enquiry, the Committee shall have the following powers of the Civil Court namely :
1. summoning and enforcing the attendance of any person and examining him on oath;
2. requiring the discovery and production of documents;
3. receiving evidence on affidavits;
4. issuing commissions for the examination of witnesses or documents;
5. reviewing its decisions;
3. The Committee shall endeavour to advise the appropriate Government or the regulator within 3 month on matters referred to it under clause (a) above.
4. No member of a Committee shall be personally responsible for any advice given.

7. Bureau of Investigation for Financial Fraud:There shall be a Bureau of Investigation for Financial fraud to beconstituted by the Central Government as under :

1. Director of the bureau as its Chairman; and
2. Not less than four other members to be nominated by the Ministry of Finance from such officials not below the rank of executive director from any bank or financial institution or experts who have wide knowledge and experience in law, banking, investment, capital market operation and management, finance, market regulations and regulatory functions.

8. Powers of the Central Government to appoint the Director: TheCentral Government shall appoint the Director of the Bureau from amongst personswho are sufficiently qualified to be the Director of Central Bureau ofInvestigation, on such terms and conditions determined by rules.

Provided that the bureau shall follow the same rules and regulations of the Central Bureau of Investigation until it has separate rules and regulation of its own.

9. Powers and Functions of the Bureau: The Bureau shall have following powers and functions:

1. It shall investigate all cases of serious financial frauds referred to it by the bank or Financial institution affected by such an offence alleged to be committed under Section 513 of the Indian Penal Code, 1860 or by a regulator or by the Union Government or by the District Superintendent of Police under whose jurisdiction a case to this effect is registered in a police station.

Explanation: An offence committed under Section 513 of the Indian Penal Code, 1860 shall be a serious offence, if and only if, the case (i) involves a sum exceeding Rs.ten crore; or (ii) is likely to give rise to widespread public concern; or (iii) its investigation and prosecution require high specialized knowledge of financial market or of the behavior of banks or other financial institutions; or (iv) involves significant international dimensions; or (v) in the investigation of which there is requirement of legal, financial, investment and investigative skills to be brought together; or (vi) which appear to be complex to the regulators, banks, Union Government or any financial institution.

2. The Bureau shall have the power to open its office at such places with such investigating and supportive staff as may be decided by the Bureau from time to time.

Provided that the Bureau shall have its headquarters at Bombay and offices at Kolkata, Chennai, Delhi, Bangalore, Hyderabad and Ahmedabad as such other places as may be decided by the Bureau from time to time for the quick investigation, recovery of property and prosecution.

3. The Bureau shall appoint such number of investigating officers from the members of Indian Police Service and from other services as may be decided by the Bureau and request the appropriate Government to make the services of such officers available to the Bureau.
4. All the investigating officers of the Bureau shall have the powers of officer in charge of the police station for the purpose of investigation under the code of Criminal Procedure, 1973 (Act No.2 of 1974)
5. The Bureau may also procure the services of such number of experts in accountancy, banking, investment, insurance, financial market regulation, capital market organization and management, and information technology as may be required by the Bureau from time to time for the purpose of advising its investigating officers on matters involving special knowledge and technique to investigate.
6. The Bureau may arrange for training of its investigational and supporting staff in all branches of financial system.
7. The investigating officers of the Bureau shall have the powers provided in Chapters VII-A and VII-B of the Code of Criminal Procedure, 1973 for search, seizure and attachment of the properties and the proceeds of financial fraud involved in the offence committed in any contracting country or within India as the case may be.

CHAPTER III

Special Court

10. Establishment of Special Court:

(1) The Central Government may by notification in theofficial gazette establish such number of Special Courts as may be necessaryfrom time to time.

(2) A Special Court shall consist of a sitting or a retiredjudge of the High Court nominated by the Chief Justice of the High Court withinthe local limits of whose jurisdiction in which the Special Court is situated,in consultation the Chief Justice of India.

(3) When the office of the judge of the Special Court isvacant by reason of absence or leave, the duties of the office shall beperformed by such judge of the High Court who may be temporarily posted by theChief Justice of High Court concerned, in consultation with the Chief Justice ofIndia.

11. Jurisdiction of Special Court: Notwithstandinganything contained in any other law for the time being in force, any prosecutionin respect of financial fraud referred to in Section 512 of the Indian PenalCode, 1860 and investigated by the Bureau of Investigation for Financial Fraudunder Section 9 of this Act, shall be instituted only in the Special Court.

12. Jurisdiction of Special Court as to joint trials: TheSpecial Court shall have the jurisdiction to try offences relating to seriousfinancial fraud including conspiracy, abetment and all other offences relatingto the same as can be jointly tried therewith as one trial in accordance withthe Code of Criminal Procedure, 1973.

13. Procedure and Powers of Special Court:

1. The Special Court shall, in trial of all cases, follow the procedure prescribed under the Code of Criminal Procedure, 1973.
2. Save as expressly provided in this Act, the provisions of the Code of Criminal Procedure, 1973 shall, in so far as they are not inconsistent with the provisions of this Act, apply to the proceedings before the Special Court and the Special Court shall be deemed to be a Court of Sessions.
3. The persons conducting a prosecution before the Special Court shall be deemed to be a Public Prosecutor.
4. The Special Court may pass upon any person convicted by it, any sentence authorized by law for the punishment of the offence of which such person is convicted.
5. The Special Court may pass an order for tracing and attachment of the property defrauded. When the order for attachment is passed by the Special Court, the property will vest in the Receiver and Administrator of the Court.
6. While dealing with any other matter brought before it, the Special Court may adopt such procedure as it may deem fit consistent with the principles of natural justice.

14. Appeal : (1) Notwithstanding anything in the Code of Criminal Procedure, an appeal shall lie from any judgment, sentence or order, not being interlocutory order, of the Special Court to the Supreme Court both on facts and on law.

(2) Except as aforesaid, no appeal or revision shall lie to any court from any judgment, sentence or order of the Special Court.

(3) Every appeal under this section shall be preferred within a period of thirty days from the date of any judgment, sentence or order of the Special Court :

Provided that the Supreme Court may entertain an appeal after the expiry of the said period of thirty days, if it is satisfied that the appellant had sufficient cause for not preferring the appeal within the period of thirty days.

15. Restoration of the property : Where an order of attachment has been made under sub-section (4) of section 13 in respect of any property of a person and thereafter an order for forfeiture and restoration of property is made by the Special Court, all the rights and titles in such property shall vest in the bank or financial institution affected by such financial fraud as if the fraud has not taken place.

16. Receiver and administrator: All properties seized byinvestigating officer and attached by the Special Court in a financial fraudcase shall be vested in the Receiver and Administrator appointed by the SpecialCourt who shall take possession and administer the property until such propertyis restored to the 8concerned bank or financial institution, as the case may beor is disposed of in such manner as has been directed by the Special Court.

CHAPTER IV

Miscellaneous

17. Bar of suits in civil court: No suit or other legalproceeding shall lie against the Central Government or the regulator or anyother person or authority under the Act for any damage or loss caused or likelyto be caused by anything done or intended to be done under this Act or inpursuance of any order, regulation or direction made or given thereunder.

18. Special responsibility of the Auditors: (1) It shallbe the duty of a statutory auditor of every bank, financial institution orfinancial intermediary to report to the regulator whether or not he has detectedany financial fraud in the affairs of the business of a person.

(2) Where the auditor detects any financial fraud, he shallmake a report to the regulator giving details of the frauds so detected and theaggregate amount of the money involved in such financial fraud.

(3) Failure by the auditor to report any financial fraud tothe regulator will render him liable to a fine up to rupees one lakh by theconcerned regulator after providing him reasonable opportunity of being heard.

19. Act to have overriding effect: The provisions of thisAct shall have effect notwithstanding anything inconsistent therewith containedin any other law for the time being in force or in any instrument having effectby virtue of any law other than this Act.

20. Power of the Union Government to make rules: (1) TheCentral Government may, by notification, make rules to carry out the provisionsof this Act.

(2) Without prejudice to the generality of the foregoingpowers, such rules may provide for all or any of the following matters, namely:-

1. the salaries and allowances and other terms and conditions of service of the Chairman and members of the Fraud Committee and other officers and employees attached to the Committee;
2. the salaries and allowances and other terms and conditions of service of director and members nominated by the Ministry of Finance and investigating officer.
3. Any other matter which is required to be, or may be, prescribed.

21. Amendment to Act 45 of 1860: The Indian Penal Codeshall be amended in the manner specified in the First Schedule to this Act.

22. Amendment to Act 1 of 1872: The Indian Evidence Act,1872 shall be amended in the manner specified in the Second Schedule to thisAct.

23. Amendment to Act 2 of 1974: The Code of CriminalProcedure shall be amended in the manner specified in the Fourth Schedule tothis Act.

Schedule – I

Amendment to the Indian Penal Code,1860

After Chapter XXII, the following shall be inserted :

Chapter XXIV

512 - Financial Fraud – Financial fraud meansand includes any of the following acts committed by a person or with hisconnivance, or by his agent, in his dealings with any bank or financialinstitution or any other entity holding public funds;

1. the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. the active concealment of a fact by one having knowledge or belief of the fact;
3. a promise made with out any intention of performing it;
4. any other act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.

Provided that whoever acquires, possesses or transfers any proceeds of financial fraud or enters into any transaction which is related to proceeds of fraud either directly or indirectly or conceals or aids in the concealment of the proceeds of financial fraud, commits financial fraud.

Illustrations:

1. A, B & C, the directors of a public limited company raise capital by public issue and thereafter neither the directors nor the company is traceable. The directors are guilty of financial fraud.
2. "A" takes project finance from a banking company creating a security interest by hypothecating his plant and machinery. He afterwards sells the plant and machinery without knowledge or permission of the banking company. "A" is guilty of financial fraud.
3. At the request of "A", a banking company opens a letter of credit on goods on transit by ship. "A" transfers the goods on high seas and takes the consideration without informing the banking company. "A" is guilty of financial fraud.
4. "A" opens a foreign currency non-residence account with a power of attorney from non-resident Indian and uses the same as a security of his over-draft borrowings. Subsequently "A" removes money from his over-draft account. "A" is guilty of financial fraud.
5. The directors of a plantation company collects contributions from the public with a promise that after 20 years, each contributor of Rs.1,000/- would be paid Rs.1 lakh being the value of contributors’ teak plan. There are no plantations at all. The directors of a plantation company are guilty of financial fraud.
6. "A", a computer engineer is engaged by a bank to repair the computers. "A" transfers funds from the accounts of the customers of the bank by means of electronically operated system and without any authority from the bank. "A" is guilty of financial fraud.

513(a) - Punishment for Financial Fraud – Whoevercommits financial fraud shall be :

(a) punished with rigorous imprisonment for a term, which may extend to seven years and shall also be liable to fine.

(b)Whoever commits serious financial fraud shall be punished with rigorous imprisonment for a term which may extend to ten years but shall not be less than five years and shall also be liable for fine up to double the amount involved in such fraud.

Provided that in both (a) and (b) all funds, bank accounts and properties acquired using such funds subjected to the financial fraud as may reasonably be attributed by the investigating agency shall be recovered and restored to the rightful owner according to the procedure established by law.

Explanation : (1) Public fund means funds collected from public either by deposit or by issue of equity or loan instruments or through public investment in any scheme or the Government fund or any amount collected from public otherwise.

Explanation : (2) For the purpose of this section, serious financial fraud means if and only if, the case (i) involves a sum exceeding Rs.ten crore; or (ii) is likely to give rise to widespread public concern; or (iii) its investigation and prosecution are likely to require high specialized knowledge of financial market or of the behavior of banks or other financial institutions; or (iv) involves significant international dimensions; or (v) in the investigation of which there is requirement of legal, financial, investment and investigative skills to be brought together; or (vi) which appear to be complex to the regulators, banks, Union Government or any financial institution.

Schedule II

Amendment to Indian Evidence Act, 1872

After Section 114A of the Indian Evidence Act, 1872 thefollowing shall be inserted.

Section 114 B – Presumption as to financial fraud – When a financial fraud has been committed by a person or an abetment or criminal conspiracy made for such financial fraud, the Court shall presume intention of the party or parties committing act of abetment or criminal conspiracy or attempt for such financial frauds, of the parties committing such offence as the case may be unless such intention is disproved by the accused.

 

Schedule III

Amendment to Code of Criminal Procedure, 1973

1. After Chapter VII A of the code of Criminal Procedure,1973,Chapter VII B shall be inserted as under.

CHAPTER VII B

Procedure for search, seize and attachment of properties,bank accounts & funds and forfeiture and restoration of such properties andfunds under Financial Fraud

Section 105 M – Right of the investigating officer tosearch

Where the officer-in-charge of a Police Station, on the basisof information in his possession, has reason to believe that any person –

1. has committed any act which constitutes financial fraud, or
2. is in possession of any proceeds of crime involved in financial fraud, or
3. is in possession of any records relating to financial fraud,

then, subject to other provisions of the Code, he or anyofficer authorised by him may -

1. enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such records or proceeds of crime are kept;
2. break open the lock of any door, box locker, safe, almirah or other receptacle for exercising the powers conferred by clause (a) were the keys thereof are not available;
3. place marks of identification on such record or make or cause to be made extracts or copies therefrom;
4. make a note or an inventory of such record or property;
5. examine on oath any person, who is found to be in possession or control of any record or property, in respect of all matters relevant for the purposes of any investigation.

Section 105 N – Right of the investigating officer toseize movable properties and documents

1. An officer-in-charge of a Police Station or any officer authorised by him may seize any record, property or fund found as a result of any search under section 105 M.
2. Where the officer-in-charge of a Police Station is satisfied that any evidence of financial fraud may be or is likely to be concealed or tampered with, he may, for reasons to be recorded in writing, enter and search the building work place where such evidence is located and seize that evidence.
3. An officer-in-charge may seize any property or fund which may be alleged or suspected to be the proceeds of a financial fraud or which may be found under the circumstances which create suspicion of the commission of financial fraud .
4. The officer-in-charge of a police station seizing any record, property or fund under this section shall within a period of 30 days from such seizure, report to the court having jurisdiction to try the offence and may file an application, requesting for retention of such record, property or fund.

Section 105 O – Right of the investigating officer to trace theproperties and funds

The officer-in-charge of a Police Station shall have thepower to take all steps necessary for tracing and identifying any property orfund derived or obtained by any person, directly or indirectly, by such personfrom the commission of a financial fraud.

Section 105 P – Right of the investigating officer totemporarily attach immovable properties and funds

1. Where the officer-in-charge of a Police Station has reason to believe, that : -

1. any person is in possession of any proceeds of financial fraud;
2. such person has been charged of having committed an offence stated in Section 513 of Indian Penal Code; and
3. such proceeds of financial fraud have either been invested in any immovable property or are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of financial fraud, he may, by order in writing, provisionally attach such property or fund for a period not exceeding 30 days from the date of the order.

Provided that no such order of attachment shall be made unless, in relation to a financial fraud a report has been forwarded to a court of session under Section 173 of the Code.

1. The officer-in-charge of a Police Station who provisionally attaches any property or fund under sub-section (1) shall, within a period of 30 days from such attachment, file a complaint, stating the fact of such attachment before the court having jurisdiction to try the offence and seeking direction of the court to hold custody of such property as may be stipulated by the court.
2. Every order of attachment under sub-section (1) shall cease to have effect after the expiry of the period specified in that sub-section or on the date of confirmation by the court having jurisdiction to try the offence, whichever is earlier.

Section 105 Q - Court’s confirmation of attachment

1. When a complaint is submitted by the concerned officer-in-charge of a Police Station either under Section 105N or Section 105P, the court may confirm the attachment.
2. The court may direct officer-in-charge of the Police Station to keep in custody all movable properties and documents seized and the District Collector of the District in whose jurisdiction any immovable property and funds attached lie, to administer the same until the court otherwise decides; or to transfer possession of all properties, movable and immovable, tangible or intangible and funds to the Court Receiver and Administrator, if any, to manage such property until the conclusion of the trial.

Section 105 R - Court’s order of forfeiture

If as a result of the inquiry, investigation or search, thecourt trying the offence of financial fraud has reason to believe that all orany of the properties or funds are proceeds of financial fraud, it may forfeitsuch property or fund by following similar procedure prescribed under Section105-G and Section 105-H of the Code.

Section 105 S - Court’s order for restoration

When an inquiry or trial in any court having jurisdiction totry the offence of financial fraud is concluded, the court may make such orderas it thinks fit for the restoration of the property to the institution fromwhich the property had been fraudulently acquired or with the proceeds of whichthe property seized or attached had been acquired and in the event of suchrestoration is made impossible by intervening circumstances, the court maydirect disposing the property or fund in such manner as the court deems fit.

2. In the First Schedule to the Act, after the last entry,the following shall be inserted, namely :

 

Section	Offence	Punishment	Cognizable or Non-cognizable	Bailable or Non-bailable	By what Court triable
513	Financial Fraud	Rigorous imprisonment for seven years and also fine	Cognizable	Non-bailable	Court of Session
	If serious financial fraud	Rigorous imprisonment for ten years and fine up to double the amount	Ditto	Ditto	Ditto

 

Footnotes

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1. Section 17 of the Contract Actdefines fraud as follows: "Fraud means and includes any of the followingacts committed by a party to a contract, with his connivance, or by his agent,with intent to deceive another party thereto or his agent, or to induce him toenter into the contract: (a) suggestion as a fact, of that which is not true, byone who does not believe it to be true; (b) active concealment of a fact by onehaving knowledge of belief of that fact; (c) a promise made without anyintention of performing it; (d) any other fact fitted to deceive; (e) any suchact or omission as the law specifically describes to be fraudulent".
2. Section 2 (14) of the Act provides as follows – "A person who,in purported compliance with a requirement under this section, (a) makes astatement which he knows to be false or misleading in a material particular; or(b) recklessly makes a statement which is false or misleading in a materialparticular shall be guilty of an offence". Section 2(16) even makesactivities by the parties consequent upon the investigation, an offence. Itstipulates, " Where any person, (a) knows or suspects that an investigationby the police or the serious fraud office into serious or complex fraud is beingor is likely to be carried out; and (b) falsifies, conceals, destroys orotherwise disposes of, or causes or permits the falsification, concealment,destruction or disposal of documents which he knows or suspects are or would berelevant to such an investigation, he shall be guilty of an offence unless heproves that he had no intention of concealing the facts disclosed by thedocuments from persons carrying out such an investigation".
3. However in the conversation with our delegates SFO informed that itmay even investigate a fraud with the involvement of lesser amount if the SFOthinks it serious.
4. See supra note. 1.
5. As a matter of fact the Criminal Law (Second Amendment) Bill, 1995 wasintroduced in the Lok Sabha as Bill 65 of 1995 which inter alia includedthe provision for creation of Bank frauds in a separate Section under section424 A of the Indian Penal Code, 1860 which provided as follows – "Whoeverdishonestly or fraudulently, (a) removes or conceals, or transfers or causes tobe transferred any property in his custody or control which is subject to anyform of security interest created in favour of any bank without the express orimplied consent or concurrence of such banks or he furnishes any statement whichis false in any material particular, to any bank concerning any property whichis in his custody or control and which is either subject to any form or securityinterest in favour of any bank or which is offered by him to any bank to be madesubject to any security interest in favour of the bank, shall be punished withimprisonment of either description which may extend to two years or with fine orboth".
6. According to Section 2 (h) of the Criminal Procedure Code, 1973investigation includes all the proceedings under this Code for the collection ofevidence conducted by a police officer or by any person (other than amagistrate) who is authorized by a magistrate in this behalf.
7. A part of the Lord Roskill Committee on which the Serious FraudOffice(SFO) was established, submitted in 1986 was quoted as follows by RobertWardle, Assisstant Director, SFO, London in the SFO information detailing the‘SFO Ten Years On’ in press inquiries 0170-239 7003 published in April 1998,"the public no longer believes that the legal system in England and Walesis capable of bringing the perpetrators of serious frauds expeditiously andeffectively to book. The overwhelming weight of the evidence laid before ussuggests that the public is right. In relation to such crimes and to theskillful and determined criminals who commit them the present legal system isarchaic, cumbersome and unreliable. "
8. The Civil Law system is predominantly conceived on normativejurisprudence of Emanuel Kant. According to this philosophy the requirements ofan effective legal systems are as follows, (1) heuristic conditions like (a) thelegal propositions shall take into account the physical capacities of thepersons to whom the propositions are applied; (b) the appropriate factualsystems shall be taken into account in building the legal proposition; (c)average intelligence of the people must be taken into account in building thelegal proposition; (d) the proposition must be clear, distinct and easilyunderstandable; (e) prioritized aims and objectives of legal propositions mustbe clear; (f) detailed procedures to achieve objectives; (g) effectiveinstitutional structure; (2) proper epistemological conditions for theparticipants and institutions for acquiring skills and systemic learning; ( i)adequate hermeneutic conditions for appropriate teleological structure ofsufficient abstraction of the principle of the legal proposition. [See, fordetails, Chhatripati Singh, Law from Anarchy to Utopia(OUP, 1985, NewDelhi)pp.40-62. On the other hand effective merit of Common Law is dependent on(a) clarity of legal proposition based on empirical behaviour on similar factsituation; (b) natural law principles as an extension to the principle of law ofnature protecting individual rights and (c) ability of those who take decisions.
9. Ms. Juhi Mehta & Ms. Deepa Bharathi Sharma, Research Scholars fromNLSIU, Bangalore compiling and commenting on the issue.

10. Abichandani, R.K., Pollock and Mulla on Indian Contract and Specific Relief Acts, Volume 1, N.M. Tripahti Pvt. Ltd., Bombay, 1994 at 241. English law also recognises the concept of ‘constructive fraud’. This means that a court of equity will set aside a transaction entered into as a result of conduct, which though not amounting to actual fraud or deceit, is contrary to good conscience. Such conduct, which is described as constructive fraud includes the procurement of a gift or other benefit by the exercise of undue influence and the making of an unconscionable bargain. For details see: Infra n.2, para 838.

11. (1889) 14 App. Cas 337 HC, c.f. Halsburys Laws of England, Volume 11(2), 4^th edition, Reissue 1990, para 780.

12. Ibid, para 755.

13. Ibid, para 781.

14. Aldridge, Anthony, Jacques Parry and Ian Gatt, Aldridge and Parry on Fraud, Sweet and Maxwell, London, 1996 at 33.

15. Deception however is not an essential element of criminal fraud. In Scott v. Metropolitan Police Commissioner, [1974] 2 All.E.R. 204, the appellant had bribed cinema staff to make illicit copies of films. The appellant had not intended to defraud the owners, and therefore it was argued that there was no intention to defraud. Rejecting this argument, the court held that in order to constitute a conspiracy to defraud, what is important is that the purpose and the intended means of achieving the purpose must be dishonest. They need not involve fraudulent misrepresentation such as is needed to constitute the civil tort of deceit. Dishonesty of any kind is enough.

16. Supra n. 5 at 34-35.

17. Supra n. 5 at 35-36.

18. Att.-Gen.’s Reference (No. 1 of 1981), [1982] 2 All.E.R. 417.

19. Section 12(3) of the Criminal Justice Act, 1987, c.f. Aldridge and Parry on Fraud at 45.Conspiracy to defraud is now a statutory offence under English law. It is defined as "…if a person agrees with any other person or persons that a course of conduct shall be pursued which, if the agreement is carried out in accordance with their intentions, either

1. will necessarily amount to or involve the commission of any offence or offences by one or more of the parties to the agreement, or
2. would do so but for the existence of facts which render the commission of the offence or any of the offence impossible, he is guilty of conspiracy to commit the offence or offences in question"(Section 1(1) of the Criminal Justice Act, 1977, c.f. Aldridge and Parry on Fraud at 45.)

20. Att.-Gen.’s Reference (No. 1 of 1982), [1983] 2 All.E.R. 721.

21. Supra n. 5 at 52.

22. Somchai Liangsirirasert v. Government of the U.S.A. [1990] 2 All.E.R. 866; R v. Sansom [1991] 2 All.E.R.145.

23. This is also a well-settled principle of private international law that courts will not enforce foreign criminal law.

24. Section 25 of the Indian Penal Code, 1860.
25. Section 415 of the Indian Penal Code, 1860.
26. Section 416 of the Indian Penal Code, 1860.
27. Section 408 of the Indian Penal Code, 1860.
28. Section 409 of the Indian Penal Code states, "Whoever, being in any manner entrusted with the property, or with any domination over property in his capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent commits criminal breach of trust in respect of that property, shall be punished with imprisonment for life or with imprisonment of either description for a term which may extend to ten years and shall also be liable to fine".
29. Section 463 of the Indian Penal Code, 1860 which stipulates as follows, "whosoever makes any false document or false electronic record or a part of a document or electronic record with intent to cause damage or injury, to the public or to any person, or to support any claim or title, or cause any person to part with the property, or to enter into any express or implied contract, with the or intent to commit fraud or that fraud may be committed, commits forgery".
30. Section 464 of the Indian Penal Code, 1860.
31. Section 467 of the Indian Penal Code, 1860.
32. Section 468 of the Indian Penal Code, 1860.
33. Section 474 of the Indian Penal Code, 1860.
34. Compendium of Instructions Relating to Frauds in Commercial Banks, Department of Supervision, Reserve Bank of India, 1996.
35. Kite flying stands for transactions where one party and its associate or two different parties having accounts in two branches indulge in availing of ‘withdrawal against clearing’ facility against instruments known to have been drawn without funds. Funds are obtained from banks wherein false cheques/bills drawn on sister concerns are submitted to banks for purchase/discounting. The bills/cheques are then sent to the concerned company’s bank for payment. After some time, the false bills/cheques are returned unpaid by the sister concern by which time the money has been utilised for purposes other than what it was intended for.
36. Report of the Study Group on Large Value Bank Frauds, Board of Financial Supervision, Reserve Bank of India, 1999.
37. Ms. Juhi Mehta & Ms. Deepa Bharathi Sharma, Research Scholars from NLSIU, Bangalore compiling and commenting on the issue.

38. Hereinafter referred to as the "S.F.O.".

39. The S.F.O. finds its origins in various commissions and committee recommendations made to the UK government. In 1983, Lord Roskill as the chairman of a Fraud Trials Committee recommended the establishment of a unified organisation responsible for all the functions of detection, investigation and prosecution of serious fraud". These recommendations gave rise to the Criminal Justice Act, 1987 which set up the S.F.O.

40. Supra n. 5 at 419.

41. Hereinafter referred to as "the Act".

42. Supra n.5.

43. Supra n.5 at 421.

44. These powers of the S.F.O. will be dealt with later.

45. Supra n. 5 at 421-422. A senior lawyer usually undertakes the task of vetting. The S.F.O. aims to make a decision within 10 days, although this may be extended if additional information is required. The vetting officer prepares a discussion document for consideration by a vetting committee, which consists of the Director, the Deputy Director, the vetting officer and a senior from the appropriate police force. In certain cases other persons, e.g., an accountant or the person or organisation who made the complaint, may be invited to attend.

46. Serious Fraud Office: What it does and how it works, http://www.sfo.gov.uk/, Visited on 9.12.2000.

47. Ibid.

48. Ibid.

49. Supra n.5 at 424.

50. [1992] 1 All.E.R. 730.

51. [1988] Crim L.R.837, c.f. Aldridge and Parry on Fraud at 445.

52. Supra n.5 at 433-434.

53. The Financial Services Act, 1986 in Sections 177 and 178 while dealing with the offence of insider trading, defines the term reasonable excuse as [Section 178 (6)]:
    "A person shall not be treated…as having a reasonable excuse for refusing to comply with a request or answer a question in a case where the contravention or suspected contravention being investigated relates to dealing by him on the instructions or for the account of another person, by reason that at the time of the refusal-

1. He did not know the identity of that other person; or
2. He was subject to the law of a country or territory outside the United Kingdom which prohibited him from disclosing information relating to the dealing without the consent of that other person, if he might have obtained that consent or exemption from that law."

54. [1993] 3 All.E.R. 861.

55. [1992] 1 All.E.R. 778.

56. Supra n.5 at 439.

57. In R v. Director of S.F.O., ex p. Johnson, [1993] C.O.D.58. the Director served a Section 2 notice on the wife of the accused, requiring her to furnish information in relating to investigation against her husband. The wife filed for judicial review on the ground that as the wife of the accused she had a ‘reasonable excuse’ for not complying with the request, since under Section 80(3) of the Police and Criminal Evidence Act, 1984 she was not a compellable witness for the prosecution. Rejecting her argument it was held that even though she may not be a compellable witness, she could not refuse requests under Section 2, since Section 2 dealt with investigation of fraud rather than admissibility of evidence.

58. Ibid.

59. Supra n.5 at 434-438.

60. Articles 6 and 8 of the European Convention on Human Rights, c.f. Janis, Mark, Richard Kay and Anthony Bradley, European Human Rights Law-Text and Materials, Clarendon Press, Oxford, Reprint 1996 at 468.

61. (No. 10828/84) (1993) 16 E.H.R.R. 297, c.f. Aldridge and Parry on Fraud at 447. In the present case customs officers accompanied by a police officer went to the Funke’s house to seek details of his assets abroad. The applicant, a German national, admitted having, or having had, several bank accounts abroad for professional and family reasons and said that he did not have any bank statements at his home. The customs officers searched his home for some four and a half hours and discovered statements and chequebooks from foreign banks, together with some other items. These were all seized. The customs officers, pursuant to powers given to them by the Customs Code, also required the applicant to produce three years’ statements for variety of bank accounts held outside France. Upon refusal, he was prosecuted and fined.

62. Supra n.39. To quote the court in this context- "…It does not accept the Government's argument that the complexity of corporate fraud and the vital public interest in the investigation of such fraud and the punishment of those responsible could justify such a marked departure as that which occurred in the present case from one of the basic principles of a fair procedure. Like the Commission, it considers that the general requirements of fairness contained in Article 6, including the right not to incriminate oneself, apply to criminal proceedings in respect of all types of criminal offences without distinction from the most simple to the most complex. The public interest cannot be invoked to justify the use of answers compulsorily obtained in a non-judicial investigation to incriminate the accused during the trial proceedings."

63. Supra n.5 at 459.

64. Supra n.5 at 460.

65. [1994] Crim.L.R. 374, c.f. Aldridge and Parry on Fraud at 461.

66. Supra n.5 at 464.

67. In Galbraith, the Court of Appeal held that in case no evidence is available against the defendant the vase must be dismissed. Where however there may be space for opposing views to be formed on the evidence, the judge should allow the case to be tried by the jury. [1981] 2 All.E.R. 1060 at 1062.

68. [1993] 1 W.L.R. 949.

69. Section 29(3) of the Supreme Court Act, 1981 provides: "in relation to the jurisdiction in matters relating to trial on indictment, the High Court shall have all such jurisdiction to make orders of mandamus, prohibition or certiorari as the High Court possesses in relation to the jurisdiction of an inferior court".

70. Supra n. 5 at 482.

71. Ibid at 484.

72. Ibid at 485. A prosecution case statement sets out:

73. http://clea.org.uk/cases/ftext/Saunders/htm,Visited on 10.12.2000.

74. Annual Report 1993-1994, Serious Fraud Office,http://www.sfo.gov.uk/,Visited on 9.12.2000. The claim to such privilege is not outright. Usually thepractice of the S.F.O. is to place the material in respect of which privilege isclaimed into sacks that are sealed. They are subsequently opened in the presenceof the solicitors advising the person entitled to claim privilege, and inspectedby an S.F.O. lawyer who is not involved in the investigation or prosecution inquestion. Each document is then separately considered, and the claim forprivilege resolved.

1. The principal facts of the prosecution case;
2. The witnesses who will speak those facts;
3. Any exhibits relevant to those facts;
4. Any propositions of law on which the prosecution proposes to rely, and
5. The consequences in relation to any of the courts in the indictment that appear to the prosecution to flow from the matters stated in pursuance of the above sub-paragraphs.

75. Ibid at 485-490.

76. Supra n.5 at 490-494.

77. [1966] 1 Q.B. 589.

78. Supra n. 5 at 511.

79. Greenfield [1973] 1 W.L.R.1151. In Greenfield, the prosecution alleged a general agreement to cause 25 explosions. There was argument at the trial as to whether, even if it were shown that the defendants were involved in some explosions, there was sufficient proof that they were involved in all. The Court of Appeal endorsed the view that it was enough if there was a core of explosions for which they were all responsible.

80. Electronic fund transfers entail a process whereby credit is extinguished from one bank account and a new account is opened in another account, with minimal human intervention. For details on online fraud see: Smith, Dr Russell G., "The Prevention of On-Line Financial Fraud", http://www.isrcl.org/Smith.htm,Visited on 5.12.2000.

81. Annual Report,1998, Serious Fraud Office, http://www.sfo.gov.uk/,Visited on 9.01.2001.

82. Wright, Rosalind, WhatDoes the Future Hold for the SFO?, April 1998, http://www.sfo.gov.uk/,Visited on 9.12.2000.

83. Supra n. 58.

84. Savona, Ernesto u., RecentTrends of Economic Crime in Europe, Paper presented to the Bank of Portugalmeeting held on July 1, 1997, http://www.jus.unintn.it/transcrime/papers/wp13.htm,Visited on 15.12.2000. To look at these statistics sector wise-The most frequenttype of fraud is the one involving tobacco and cigarettes. It occurs in Germany,Belgium, Spain, France, Ireland and Italy. Fraud concerning agriculturalproducts is insistently carried out in most Union countries; specifically forbeef (Belgium, Germany, France and the United Kingdom), cereals (Germany, Italyand Portugal), milk products (Germany, Spain, Italy and the United Kingdom), andolive oil (Spain, Italy and Portugal). Industrial goods are rarely used forfraud, with the exception of textiles. Customs offences receive the mostfrequent mention, with several reports dwelling on frauds affecting theCommunity or international transits (Belgium, Spain, France and Italy).

85. Ibid.

86. Ibid.

87. Ibid.

88. Supra n. 66. The convention also warrants criminal liability on heads of business, whose businesses are involved in the commission of a financial fraud.

89. Ibid.

90. Report bythe European Anti-Fraud Office,First Report on Operational Activities, 1 June 1999-30 May 2000, EuropeanAnti-Fraud Office, Brussels, 23.5.2000, http://europa.eu.int/comm/anti_fraud/documents/rapport_en.pdf,Visited on 2.12.2000.

91. The criminal protection of the Community’s financial interests: a European Prosecutor, Additional Commission contribution to the Intergovernmental Conference on institutional reforms, Communication from the Commission, Brussels, 29.09.2000, http://europa.eu.int/eur-lex/en/com/pdf/2000/com2000_0608en01.pdf, Visited on 15.12.2000.

92. Cited from 37 Am Jur 2d, p.18.

93. Fuller v. Scarborough, 239 Ala 196 So 875, cited from Ibid, p.19.

94. Warfield Natural Gas Co. v. Allen, 91 ALR 890.

95. Crawford v. Crawford, 134 GA 114 cited from Supra n. 1, p. 20.

96. Corabi v. Auto Racing, Inc. 264 F2d 784

97. fraud also needs to be distinguished from duress as in the latter there is an element of threat which is conspicuous in its absence from the first. Also in the latter the plaintiff is fully aware of the illegality of the transaction while fraud, by definition, is perpetrated without the knowledge of the plaintiff.

98. Supra n.1, p.21.

99. Supra n. 3.

100. It is for this reason thatequitable fraud is often equated to constructive fraud. There is a very fine, ifany, distinction between constructive and legal fraud. While the former refersto fraud in case of breach of a fiduciary relationship or in a contractuberrimae fidae while a legal fraud characterises a misrepresentation madewithout the knowledg

101. http://dictionary.lp.findlaw.com/scripts/results.pl?co=library.lp.findlaw.com&topic=30/30871e2ed1b1e92ab87cbd4c809d8c7cvisited on 9th January, 2001.

102. Protecting the Communities’ Financial Interests the fight against fraud, Annual Report 1999, Commission of the European Communities, Brussels, 8.11.2000, http://europa.eu.int/eur-lex/en/com/pdf/2000/act0718en02/com2000_0718en02_1.pdf, Visited on 15.12.2000.

103. Explanatory Report on the Convention on the protection of the European Communities' financial interests (Text approved by the Council on 26 May 1997), http://europa.eu.int/eur-lex/en/com/pdf/2000/com2000_0358en01.pdf,Visited on 15.12.200.

104. Wright, Rosalind, "The Investigation and Prosecution of Serious and Complex Fraud Towards the 21^st Century", Lecture Notes, ISCRL Commercial and Financial Fraud Conference, July 8^th-12^th 1999, Malta, http://www.sfo.gov.uk/malta.htm,Visited on 12.12.2000.