Corporate Criminal Liability Under the Companies Act 2013 in IndiaSeptember 20, 2023 By Shruti Nair
Not only individuals but also companies commit crimes which are mostly called scams or white-collar crimes and there is a law under which they can be punished and that is the Companies Act 2013. Let’s learn more about Corporate Criminal Liability in India and how it helps people and spoils the plan of scammers.
Scams/White Collar Crimes
Not all crimes are violent, some are non-Violent But Are Not Victimless. Scams And White-collar Crimes Are Finance-focused Crimes Planned And Carefully Committed By Individuals, Businesses, Or Organizations To Confuse, Manipulate, And attract people through fraudulent or deceptive means with the intention of extracting money or property from them. A lot of sweet talks and brainwashing happen in such crimes and once the trust is gained, they play their cards and trap their victims either by emotion or greed. Some common types of scams and white-collar crimes include -
Investment Fraud -
Fraudulent schemes like Ponzi, pyramid, and pump-and-dump schemes are where individuals are convinced emotionally to invest in fake or non-existent ventures.
Identity Theft -
Resuming the identity of some person and illegally using their personal IDs or bank information such as credit card details, for financial gain.
An online scam where perpetrators send deceptive emails or messages that appear to be from legitimate sources to trick recipients into revealing sensitive information like login credentials or credit card numbers.
Credit Card Fraud -
Fraudulent usage of someone’s credit card for purchases and transactions.
Stealing or mismanagement of money or assets that have been entrusted to someone like an employee or financial advisor.
Insider Trading -
Trading stocks or securities based on non-public, material information, often obtained by individuals within a company.
Wire Fraud -
Using electronic communication, such as emails or phone calls, to defraud individuals or organizations.
Creation or alteration of documents, signatures, or financial instruments with the intent to deceive and gain a financial advantage.
Mortgage Fraud -
Misrepresenting information on mortgage applications or engaging in deceptive practices to secure a mortgage.
Tax Evasion -
Intentionally underreport income, overstate expenses, or engage in other illegal activities to reduce tax liability.
Insurance Fraud -
Making false claims or exaggerating losses to receive insurance payouts.
Producing fake currency, goods, or documents with the intent to deceive and profit from the sale of counterfeit items.
Corporate Fraud -
Various fraudulent activities within a company, such as accounting fraud, financial statement manipulation, and misleading shareholders or investors.
These crimes are serious because they can wipe out the entire life savings of the victim, bring a company down, cost billions of losses to investors, cause public humility, and erode trust among other people and organizations. Thanks to the Indian judicial system, such corporate crimes and other scams are punishable under the Companies Act 2013 which we will understand in detail ahead.
Corporate Criminal Liability
It is quite natural to wonder how a non-living thing such as a corporation/business can commit a crime. Well, a corporation/business is run by an individual or a group of people, and when anyone among them be it the (Key Managerial Person) KMPs such as a CEO, CFO, whole-time CS, MD, an employee, or a group of them; engages in fraudulent activities that are forbidden by the law, with a common purpose or to achieve financial gain, in course of their occupation, can be defined as Corporate Criminal Liability.
Corporations have a separate legal identity of their own. The corporation itself can be prosecuted for the acts of its KMPs. Additionally, the KMPs can be held personally liable for the acts of the corporation. The KMPs can also be ordered to pay damages for any losses caused by the corporation's actions. The corporation may also be fined or penalized. In short, any illegal action caused by a living being affects the business and makes the entire corporation suffer as a whole, both criminally and financially. As a result, corporations can be held responsible for criminal wrongdoings separately from their individual members.
In India, corporate criminal liability is primarily based on the Indian Penal Code, which explicitly defines companies as "persons" and subjects them to punishment like any other individual. Criminal liability is based on the principle of "actus non facit reum nisi mens sit rea," which means that a wrongful act is not criminal unless it is accompanied by a wrongful state of mind. However, companies may be held criminally liable for offenses that occur during business operations, even if they do not intend to commit the offense.
Because corporations lack intent, they are traditionally believed not to be able to commit crimes. Eventually, corporate criminal liability became popular under the Companies Act and criminal law, particularly in consumer protection, environmental law, and occupational health and safety. It is closely tied to an organization's corporate governance policies, as good governance can mitigate the possibility of criminal activity. Additionally, Indian courts have acknowledged that corporations can be part of criminal conspiracies and held criminally liable.
Now since this concept is primarily governed by the Companies Act of 2013 in India, let's take a closer look at its key aspects.
Legal Provisions in the Companies Act 2013
The Companies Act 2013 is a comprehensive legislation in India that governs the incorporation, functioning, and regulation of companies. It replaced the Companies Act 1956 and brought significant reforms to corporate governance and company law in India. The Act provides a comprehensive legal framework governing the formation, functioning, and regulation of companies in the country which includes everything from the -
- Types of Companies
- Its Incorporation and Registration
- Corporate Governance
- Share Capital and Debentures
- Directors and Management
- Related Party Transactions
- Meetings and Resolutions
- Accounts and Audit
- Corporate Social Responsibility (CSR)
- Insider Trading and Prevention of Oppression and Mismanagement
- Mergers and Acquisitions
- Dissolution and Winding Up
- Investor Protection
- Penalties and Offenses
- National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)
- to even Electronic Voting
Doctrines Established in Corporate Criminal Liability
For any crime happening in a corporation to be defined as criminal liability, some legal doctrines and principles have been established, based upon which the circumstances under which a corporation can be held criminally responsible for the actions of its employees or officers and its severity are analyzed. Also, since each corporate criminal liability varies from one jurisdiction to another while assessing, its legal framework must be taken into consideration. The following are the key doctrines established in corporate criminal liability.
Identification Doctrine -
If high-level officers or managers become liable for the organization's actions, then a corporation can also be held criminally liable under this doctrine.
Vicarious Liability -
If employees or agents commit unlawful activities during their tenure of employment for the benefit of the corporation, the corporation can also be held responsible.
Alter Ego Doctrine -
The alter ego doctrine allows a court to "pierce the corporate veil" and treat the corporation as the alter ego or alter the identity of its shareholders or owners. This doctrine is typically invoked when a corporation is used to commit fraud or other illegal activities.
Willful Blindness Doctrine -
When a corporation is found willfully ignoring or turning a blind eye to illegal activities occurring within the organization, then the doctrine of wilful blindness is applicable.
Collective Knowledge Doctrine -
The collective knowledge doctrine considers the collective knowledge and actions of a corporation's employees or agents in determining corporate criminal liability. It is used to assess whether the organization as a whole had knowledge of and participated in criminal conduct.
Due Diligence Defense -
Some jurisdictions allow corporations to assert a due diligence defense if a corporation demonstrates that it took all reasonable steps to prevent criminal conduct and to promote compliance with the law, which may avoid or mitigate criminal liability.
Self-Reporting and Cooperation -
Corporations that self-report wrongdoing, cooperate with authorities in investigations, and take remedial actions may receive leniency or reduced penalties as part of plea agreements or settlements.
Corporate Criminal Liability Models
To help legal systems understand when and how a corporation can be held criminally responsible for the acts or omissions of individuals acting on its behalf and determine the scope of punishments, two approaches have been established namely - Derivative and Organizational, explanation of each follows:
Derivative Model of Corporate Criminal Liability
An individual-focused model, a derivative model is under which the liability of a corporation is derived liability because it is derived from the wrongful actions of either an employed individual or someone who is connected with the organization. In other words, the criminal actions or intentions of specific individuals within the organization result in the corporation being held criminally liable. It is divided into two categories - Vicarious Liability and Identification Doctrine.
To establish derivative liability, prosecutors typically need to prove that the responsible individuals within the corporation acted with criminal intent (mens rea) and that their actions were within the scope of their employment or agency. Although it is a fair way to hold corporations accountable, it can be challenging to identify and prove the criminal intent of specific employees, especially in large organizations.
Organizational Model of Corporate Criminal Liability
A corporate-focused model, an organizational model focuses on the failure of the corporation to prevent criminal conduct within the organization. For a crime to take place, both the presence of men's rea (intent to commit a crime) and actus reus (criminal act or omission) are required but, the issue arises in holding a corporation criminally liable because how can an artificial person i.e. the company can have a mental intent to commit a crime.
However, certain factors like the environment in the corporation can be blamed for having directed or provoked the offender working in the corporation to commit such a crime and that the corporation has psychologically supported the commission of the offense. Or that the corporation itself created an environment that led to the commission of crime.
To establish corporate liability under the organizational model, prosecutors typically need to show that the corporation failed to implement adequate compliance programs, internal controls, or supervision measures that would have prevented or detected criminal conduct. However, this liability can arise even if no specific individuals within the corporation had criminal intent.
Please note that the application of these models can vary by jurisdiction. In order to meet the needs of a particular legal system, both models can be combined or adapted. Moreover, corporate governance, compliance, and enforcement in a given jurisdiction can also be significantly affected by the choice of model.
Consequences of Corporate Criminal Liability
When a corporation is found criminally liable under the Companies Act 2013, several consequences may ensue, and to deter future wrongdoing; their penalties and punishments are decided depending on the jurisdiction and the nature of the offense.
Financial Penalties -
Companies may face substantial fines, which can significantly impact their financial stability and reputation.
Director Disqualifications -
Directors found guilty of corporate criminal offenses may be disqualified from holding such positions in other companies.
Restitution and Compensation -
Companies may be required to make restitution to victims or compensate for losses incurred due to their criminal actions.
Asset Forfeiture -
A court may order asset confiscation if illegally acquired assets or proceeds are at the core of the criminal liability of a corporation.
Probation and Monitoring -
Courts may place corporations on probation, requiring them to adhere to specific conditions and monitoring by government agencies, and implement or enhance compliance programs, ethics training, and internal controls to prevent future criminal conduct.
Corporate Integrity Agreements (CIAs) -
Regulatory agencies may enter into CIAs with corporations to outline specific compliance measures, training programs, and reporting requirements aimed at preventing future misconduct. Violations of CIAs can result in further penalties.
Debarment and Exclusion -
Some government contracts and programs may be denied to corporations that have been convicted of certain offenses.
Criminal Charges Against Individuals -
Individuals who are involved in criminal conduct may face criminal charges and personal liability, including imprisonment, in addition to the penalties imposed on corporations.
Loss of Licenses and Permits -
A corporation may lose its licenses, permits, or certifications necessary for its operations if it is convicted of a crime.
Public Relations and Reputation Damage -
Corporate criminal liability can tarnish a company's reputation and brand, and shake the public’s trust and perception of a company's ethical standards and integrity, leading to financial, customers, partners, and investors losses, and reducing their market value.
Compliance Measures to Mitigate Risks
Implementing effective compliance measures is crucial for corporations to mitigate the risks associated with corporate criminal liability. These measures help prevent illegal conduct, detect wrongdoing early, and demonstrate a commitment to ethical and legal business practices. Here are some key compliance measures that can help mitigate corporate criminal liability risks:
Ethical Guidelines and Code of Conduct -
Establish and enforce a clear code of conduct and ethical guidelines to promote a culture of compliance within the organization.
Regular Audits and Due Diligence -
Conduct regular risk assessments to identify potential compliance risks, vulnerabilities, and areas of concern within the organization. Implement due diligence processes for hiring employees, contractors, and suppliers. Screen individuals and entities for any history of unethical or illegal conduct.
Training and Awareness Programs -
Train employees on relevant laws and regulations, ensuring they understand their responsibilities and the consequences of non-compliance.
Legal Counsel and Compliance Advisors -
Seek legal counsel and consult with compliance advisors who specialize in corporate compliance and regulatory matters to ensure that the corporation stays up-to-date with changing legal requirements.
Designated Compliance Officer -
Appoint a Chief Compliance Officer (CCO) or compliance team responsible for overseeing and implementing the compliance program.
Internal Controls -
Implement robust internal controls to prevent and detect financial irregularities, fraud, and corruption. Regularly review and strengthen these controls as needed.
Record-Keeping and Documentation -
Maintain accurate and detailed records of all business transactions, financial activities, and compliance efforts. Proper documentation can be crucial in demonstrating a commitment to compliance.
Culture of Compliance -
Foster a corporate culture that prioritizes ethics, integrity, and compliance at all levels of the organization. Leadership should set a positive example.
Board Oversight -
Ensure that the board of directors actively oversees and supports the compliance program, including receiving regular reports on compliance activities.
Response Plan for Violations -
Develop a clear and effective response plan for handling compliance violations, including conducting internal investigations, taking corrective action, and reporting to relevant authorities when required.
Regular Reporting and Certification -
Require management and executives to periodically certify compliance with company policies and legal requirements.
Continuous Improvement -
Continuously evaluate and improve the compliance program based on lessons learned from past incidents, changing regulations, and emerging risks.
In spite of so much awareness of scams, corporate scandals are happening, and it's not only the government or the judicial system’s responsibility to stop them. Every individual and the whole company has to work together to put an end to such scams from arising. The corporate culture needs to be improved and maintained well, strict actions must be taken against such offenders, and so on to build a defense wall against such corporate crimes.
If you need more information or assistance regarding corporate criminal liability, seek the IP law legal services of Parker and Parker Co. LLP to stay updated and vigilant.