New Government Authority to Investigate Financial Frauds
by: CA Anil Kumar Jain
Introduction - Taking clue from the developed nations Indian Government has also established a multi-disciplinary organization under Ministry of Corporate Affairs to investigate serious financial frauds committed in India. This office known as “SFIO” is working with the help of experts in the filed of accountancy, forensic science, auditing, law, information technology, investigation, company law, capital market and taxation. SFIO is extensively being used by the government for detecting and prosecuting white-collar crimes / frauds. The SFIO investigation is generally undertaken in the circumstances where public interest is involved or the fraud has multi-disciplinary ramifications.
Serious Fraud Offices Abroad
United Kingdom - The Serious Fraud Office is an arm of the Government of the United Kingdom, accountable to the Attorney General. Established by the Criminal Justice Act 1987, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud where 1 million Pounds or more are involved or covers more than one national jurisdiction, though it is rare for cases involving less than 1 million to be taken. It has jurisdiction over England and Wales and Northern Ireland but not Scotland, the Isle of Man or the Channel Islands, though the Serious Fraud Office's compulsory information powers contained in section 2 of the Criminal Justice Act 1987 do so under invitation from the relevant prosecuting body. The vast majority of fraud in the United Kingdom remains the responsibility of police forces. The SFO is not a police force and its members have no direct personal executive powers, such as the power of arrest. Each case is dealt with by a case team made up of various professionals such as lawyers, forensic accountants and police officers seconded from police forces. The police officers remain members of their relevant police force for the duration of their secondment and it is they who would arrest if the investigation .
New Zealand - The New Zealand Serious Fraud Office is based upon the British model. The SFO works closely with the New Zealand Police in trying to prevent serious and complex fraud. Established by the Serious Fraud Office Act 1990, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud. Suspects questioned by the SFO have no right to silence and must answer questions and produce requested evidence, even if it incriminates them. Anyone who refuses to comply can be jailed.The New Zealand Government announced in September 2007 that the SFO would be replaced by a new Organised Crime Agency. However, the bill to disband the SFO was delayed by the inquiry into donations received by the political party New Zealand First.
Structure - The Government approved setting up of this organization on 9th January 2003 on the basis of the recommendations made by the Naresh Chandra Committee which was set up by the government to study corporate governance. The Charter of SFIO was issued by the Government on 21st August 2003. Serious Fraud Investigation Office started functioning from 1st October 2003. This organization was set up in the backdrop of stock market scams, failure of non financial banking companies, phenomena of vanishing companies and plantation companies etc. This is a new organization and does not have separate statute to govern it for the present and in the interim period the investigations are being carried out under the provisions of Companies Act 1956. SFIO takes up investigation of the cases of alleged frauds referred to it by the Central Government under section 235 / 237 of the Companies Act 1956.
Companies Act - The Central Government is empowered under the provisions of sub-section (1) of section 235 of the Companies Act, 1956 to appoint one or more competent persons as Inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct where a report has been made by the Registrar under sub-section (6) of section 234.
Similarly, the Central Government under the provisions of section 237 of the Companies Act 1956 shall appoint one or more competent persons as Inspectors to investigate the affairs of the company if –
(a) The company, by special resolution or the Court, by order declares that the affairs of the company ought to be investigated.
(b) In the opinion of the Company Law Board there are circumstances suggesting that,
(i) That the business of the company is being conducted with intend to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose.
(ii) That persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members.
(iii) That the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.
The Powers - The powers of the Inspector for carrying out the investigation, as listed in section 239, 240 and 240 (A) of the Companies Act are as follows:-
The appointed inspectors may investigate the following entities and may use other avenues of investigation mentioned herein below:
(a) Any other body corporate which is, or has at any relevant time been the company’s subsidiary or the holding company, or a subsidiary of its holding company, or a holding company of its subsidiary;
(b) Any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was at the relevant time, the managing director or the manager of the company;
(c) Any other body corporate which is, or has at any relevant time been, managed by the company or whose board of directors comprises of nominees of the company or, is accustomed to act in accordance with the directions or instructions of the company, or any of the director of the company, or any company, any of whose directorships is held by the employees or nominees of those having; the control and management of the first mentioned company;
(d) Any person who is or has at any relevant time been the company’s managing director or manager, the Inspector shall subject to the prior approval of the Central Government have power so to do and shall report on the affairs of the other body corporate or of the managing director or manager, so far as he thinks that the results of his investigation thereof are relevant to the investigation of the affairs of the first mentioned company.
(e) To call all officers and other employees and agents of the company to preserve and produce before him or any person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the company or, as the case may be, or of relating to the other body corporate which are in their custody or power.
by: CA Anil Kumar Jain
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Introduction - Taking clue from the developed nations Indian Government has also established a multi-disciplinary organization under Ministry of Corporate Affairs to investigate serious financial frauds committed in India. This office known as “SFIO” is working with the help of experts in the filed of accountancy, forensic science, auditing, law, information technology, investigation, company law, capital market and taxation. SFIO is extensively being used by the government for detecting and prosecuting white-collar crimes / frauds. The SFIO investigation is generally undertaken in the circumstances where public interest is involved or the fraud has multi-disciplinary ramifications.
Serious Fraud Offices Abroad
United Kingdom - The Serious Fraud Office is an arm of the Government of the United Kingdom, accountable to the Attorney General. Established by the Criminal Justice Act 1987, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud where 1 million Pounds or more are involved or covers more than one national jurisdiction, though it is rare for cases involving less than 1 million to be taken. It has jurisdiction over England and Wales and Northern Ireland but not Scotland, the Isle of Man or the Channel Islands, though the Serious Fraud Office's compulsory information powers contained in section 2 of the Criminal Justice Act 1987 do so under invitation from the relevant prosecuting body. The vast majority of fraud in the United Kingdom remains the responsibility of police forces. The SFO is not a police force and its members have no direct personal executive powers, such as the power of arrest. Each case is dealt with by a case team made up of various professionals such as lawyers, forensic accountants and police officers seconded from police forces. The police officers remain members of their relevant police force for the duration of their secondment and it is they who would arrest if the investigation .
New Zealand - The New Zealand Serious Fraud Office is based upon the British model. The SFO works closely with the New Zealand Police in trying to prevent serious and complex fraud. Established by the Serious Fraud Office Act 1990, the Serious Fraud Office is responsible for the investigation and prosecution of suspected cases of serious or complex fraud. Suspects questioned by the SFO have no right to silence and must answer questions and produce requested evidence, even if it incriminates them. Anyone who refuses to comply can be jailed.The New Zealand Government announced in September 2007 that the SFO would be replaced by a new Organised Crime Agency. However, the bill to disband the SFO was delayed by the inquiry into donations received by the political party New Zealand First.
Structure - The Government approved setting up of this organization on 9th January 2003 on the basis of the recommendations made by the Naresh Chandra Committee which was set up by the government to study corporate governance. The Charter of SFIO was issued by the Government on 21st August 2003. Serious Fraud Investigation Office started functioning from 1st October 2003. This organization was set up in the backdrop of stock market scams, failure of non financial banking companies, phenomena of vanishing companies and plantation companies etc. This is a new organization and does not have separate statute to govern it for the present and in the interim period the investigations are being carried out under the provisions of Companies Act 1956. SFIO takes up investigation of the cases of alleged frauds referred to it by the Central Government under section 235 / 237 of the Companies Act 1956.
Companies Act - The Central Government is empowered under the provisions of sub-section (1) of section 235 of the Companies Act, 1956 to appoint one or more competent persons as Inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct where a report has been made by the Registrar under sub-section (6) of section 234.
Similarly, the Central Government under the provisions of section 237 of the Companies Act 1956 shall appoint one or more competent persons as Inspectors to investigate the affairs of the company if –
(a) The company, by special resolution or the Court, by order declares that the affairs of the company ought to be investigated.
(b) In the opinion of the Company Law Board there are circumstances suggesting that,
(i) That the business of the company is being conducted with intend to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose.
(ii) That persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members.
(iii) That the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director or the manager, of the company.
The Powers - The powers of the Inspector for carrying out the investigation, as listed in section 239, 240 and 240 (A) of the Companies Act are as follows:-
The appointed inspectors may investigate the following entities and may use other avenues of investigation mentioned herein below:
(a) Any other body corporate which is, or has at any relevant time been the company’s subsidiary or the holding company, or a subsidiary of its holding company, or a holding company of its subsidiary;
(b) Any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was at the relevant time, the managing director or the manager of the company;
(c) Any other body corporate which is, or has at any relevant time been, managed by the company or whose board of directors comprises of nominees of the company or, is accustomed to act in accordance with the directions or instructions of the company, or any of the director of the company, or any company, any of whose directorships is held by the employees or nominees of those having; the control and management of the first mentioned company;
(d) Any person who is or has at any relevant time been the company’s managing director or manager, the Inspector shall subject to the prior approval of the Central Government have power so to do and shall report on the affairs of the other body corporate or of the managing director or manager, so far as he thinks that the results of his investigation thereof are relevant to the investigation of the affairs of the first mentioned company.
(e) To call all officers and other employees and agents of the company to preserve and produce before him or any person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the company or, as the case may be, or of relating to the other body corporate which are in their custody or power.
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