India: Internal Investigations

Background

In recent years, India has gained a reputation for being one of the fastest growing economies in the world. However, at the same time, it is also perceived to be one of the most corrupt countries in the world, being ranked 81 on the 2017 Transparency International Corruption Perceptions Index. To tackle the issue of corruption and curb the massive reserves of black or unaccounted money in India, the government of India has taken radical legislative and administrative measures over the past few years.

Among the initiatives taken by the government of India, there has been an introduction of a wide array of new legislation and policies aimed at combating the huge reserves of undisclosed money in India (commonly known in India as 'black money'). The indirect taxation system has been revamped, more stringent remedies for enforcement against white-collar crimes have been introduced, and fraud, corruption and economic offences are being tackled through innovative means. This is accompanied with a strong intention to change the country from a primarily cash-centric economy to a cashless one. There has been a renewed focus on bringing India into the digital age by moving the country to more information technology-friendly platforms. The digital transformation has allowed for simpler processing of government-related documentation, as most states have moved the processing of documents online and increased paperless payment systems, allowing for a move to cashless transactions through the introduction of the Unified Payments Interface (UPI) and other e-commerce payment systems.

This chapter aims to provide a brief overview of the existing anti-corruption regime in the country, as well as regulatory changes, reforms and enforcement actions initiated in the past few years.

Overview of enforcement legislations

Prevention of Corruption Act 1988

The Prevention of Corruption Act 1988 (POCA) is a long-standing legislation that prohibits taking of bribes or any other gratification by a public official. It penalises bribe givers and public officials who accept bribes, as well as intermediaries who induce or exercise influence over such public officials. As per POCA, the term 'gratification' has wide connotations, and includes both monetary and non-monetary benefits. Its provisions apply to Indian citizens in India as well as Indian citizens residing abroad.

Recently, the government of India has passed an amendment to POCA with the intention of expanding the scope of the legislation. This amendment provides for additional offences of commercial bribery by corporate organisations, inducement of a public servant by other public servant, provision for prior permission from government before commencing investigation against public servants and a prescribed time for completion of cases involving bribery.

Prevention of Money Laundering Act 2002

The objective of this statute is to prevent and control money laundering in India. Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes originated from a legitimate source.¹ All major financial institutions, banks, mutual funds, insurance companies and their financial intermediaries are also covered under the ambit of the Prevention of Money Laundering Act 2002 (PMLA). The legislation provides for an obligation to maintain records of all transactions for a period of five years from the date of the transaction, to enable enforcement authorities to reconstruct individual transactions and ascertain their legality. The PMLA also provides for confiscation and seizure of property obtained from the laundered money. The punishment for the offence of money laundering under the PMLA includes payment of fine, along with a rigorous imprisonment that may be extended up to 10 years.

Indian Penal Code 1860

The Indian Penal Code is the principal substantive criminal code of India, which consolidates the penal provisions concerning the majority of criminal offences in India.

Information Technology Act 2000

The Information Technology Act deals with issues relating to cybercrimes, data security, digital signatures and electronic commerce transactions, and also provides for obligations with respect to data privacy in India.

Income Tax Act 1961

The Income Tax Act governs taxation of income in India specifically with respect to direct taxes under various heads, such as income from salary, house property, business or profession, capital gains and other sources.

Foreign Contribution Regulation Act 2010

The Foreign Contribution Regulation Act (FCRA) regulates the acceptance and utilisation of foreign contributions or foreign hospitality by certain individuals and organisations, so as to ensure that the national interests are not adversely impacted. The FCRA specifically excludes applicability of certain types of transactions and organisations, such as where contributions are accepted by way of salary, wages or other remunerations due to individuals in the ordinary course of business transacted in India; contributions made by way of payment in the course of international trade or commerce in the ordinary course of business transacted outside India; or contributions from a relative or gifts to members of a delegation, among others.

Recent legislative and policy reforms in India

Enactment of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015

The Enactment of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (the Act) was introduced in 2015, with provisions relating to foreign undisclosed income and assets, the procedure for dealing with such income and assets and provides for imposition of tax on any undisclosed foreign income and assets held outside India by Indian residents. The Act provided a flat tax rate of 30 per cent and penalty of up to three times the tax payable on the undisclosed foreign income and assets. At the time of its enactment, taxpayers were provided with a one-time compliance window, ie, from 1 July 2015 to 30 September 2015, for making declarations of their undisclosed foreign assets that had not been declared previously. On making such disclosure within the compliance window, the undisclosed foreign asset would be taxed at the rate of 30 per cent, together with a penalty amount equalling the total tax amount levied.

The Act empowered the Central Board of Direct Taxes as the authority responsible for supervising the administration of applicable tax on the foreign income or assets. The Act also provided for a penalty of up to 1.03 million rupees in the case that an assessee with foreign income and assets failed to furnish the income tax return before the end of the relevant assessment year.

Income Declaration Scheme 2016

Through an addition in chapter IX of the Finance Act 2016, the government of India introduced the Income Declaration Scheme 2016, thereby making provisions for a compliance window for declaration of undisclosed income other than foreign income or assets through the said scheme, which stipulated payment of tax, surcharge and penalty totalling in all to 45 per cent of such undisclosed income declared. This was followed by another similar scheme in the post-demonetisation phase.

Demonetisation

With an aim to tackle the problem of corruption, restrict unaccounted income, and promote cashless and digital monetary transactions, on 8 November 2016, the Prime Minister of India announced the cancellation of legal tender status of existing 500 rupee and 1,000 rupee denomination banknotes. The government also introduced new 500 rupee and 2,000 rupee denomination banknotes, which could also be availed by exchanging the old banknotes.

The sudden announcement of demonetisation by the government has been termed as the greatest financial reform in India targeting black money, corruption and counterfeit currency notes. To an extent, it did not create shockwaves for people who were not involved in malpractices and was regarded as a right move towards making India corruption-free.

The announcement of demonetisation without any prior initiation by the government also created prolonged cash shortages in the weeks that followed after demonetisation and significant disruption throughout the Indian monetary base, thereby, threatening economic output. Demonetisation also resulted in temporary reduction of terrorism-related activities because of the interruption of the cash flow required for sponsoring such activities.

The police also reported a setback to Hawala transactions² post-announcement of demonetisation. The decision of demonetisation was also hailed by e-commerce companies, as it led to a surge in digital payments. According to a statement by Central Board of Direct Taxes, income tax returns for the year 2016–2017 grew by 25 per cent and the advance tax collections during that period rose by approximately 42 per cent over the one-year period.

The Benami Transactions (Prohibition) Amendment Act 2016, which amended the Benami Transactions (Prohibition) Act 1988

This statute prohibits benami transactions and allows confiscation of benami properties. Before the amendment, a benami transaction was defined as a transaction where a property in India is held by or transferred to a person but has been provided for or paid by another person. The amendment has expanded the definition (with certain prescribed exceptions) to add other transactions that qualify as benami, such as property transactions where:

• the transaction is made in a fictitious name;
• the owner is not aware of and denies knowledge of the ownership of the property; or
• the person providing the consideration for the property is not traceable.

The amendment also brought changes in terms of specifying penalties for entering into benami transactions and established adjudicating authorities and an appellate tribunal to deal with benami transactions, which has resulted in attachment of benami properties worth millions of dollars.

Goods and services tax

Goods and services tax is a single indirect tax system aimed at making India's economy a unified common market. It is imposed on the supply of goods and services within India and replaced a multitude of former taxes, such as value added taxes and service taxes. Multiple indirect taxes that were imposed at central or state levels on suppliers of goods and services that have been replaced by the single tax system of goods and services tax.

Fugitive Economic Offenders Ordinance 2018

The government of India has recently promulgated the Fugitive Economic Offenders Ordinance 2018, which lays down provisions for confiscation of properties and assets of economic offenders, who are categorised as 'fugitive economic offender' under the said ordinance. As per the ordinance, a fugitive economic offender means any individual who either leaves or has left India so as to avoid criminal prosecution, or being abroad, refuses to return to India to face criminal prosecution and has a warrant for arrest in relation to any of the Scheduled Offences under the Ordinance (which includes fraud, forgery, counterfeiting, corruption, money laundering and insider trading). Only those cases where the total value involved in the offence is 1 billion rupees or more will be within the purview of the Ordinance. The Ordinance is already being used by enforcement agencies to seize assets of individuals accused of fraudulent activities and money laundering.

Aadhaar Initiative

The unique identification number, or Aadhaar number, is a unique 12-digit number issued by the Unique Identification Authority of India to each citizen of India after satisfying a verification process that includes biometric verification and obtaining demographic data. The objective behind issuance of Aadhar number was to:

• eliminate duplicate and fake identities; and

• verify and authenticate Indian citizens in an easy and cost-effective way.

Enforcement authorities for economic offences

The Economic Offences Wing

The Economic Offences Wing (EOW) is established under various police departments in each state throughout India and investigates various types of complex crimes, primarily involving different types of fraud resulting in wrongful gain or wrongful loss to the victim, in accordance with the offences specified under the Indian Penal Code and various other offences such as bank fraud, money circulation defrauding schemes, foreign currency trading frauds, large-scale misappropriation by bank employees, credit and debit card-related fraud and other economic offences. The EOW comes under the supervision of the state governments and the state police, and is headed by a senior police official such as the Joint Commissioner or the additional director general of police. The Economic Offences Wing came under the supervision of the Central Bureau of Investigation of India up until 1994, when it was made into a separate entity.

Central Vigilance Commission

The Central Vigilance Commission was established to enquire into offences alleged to have been committed under the Prevention of Corruption Act 1988 by certain categories of public servants of the central government, corporations established under any central legislation, government companies, societies and local authorities owned or controlled by the central government. The Central Vigilance Commission is an autonomous and advisory body for central government agencies.

Serious Fraud Investigations Office

The Serious Fraud Investigations Office (SFIO) is a multidisciplinary fraud-investigating agency under the authority of the Ministry of Corporate Affairs of India. The SFIO consists of experts from sectors such as accountancy, forensic auditing, law, information, technology, investigation, company law, capital markets and taxation. These experts are responsible for detecting and prosecuting, or providing recommendations for the prosecution of, white-collar crimes. The SFIO also has the power to arrest with respect to violations of company-related law.

Central Bureau of Investigation

The Central Bureau of Investigation (CBI) was set up in 1963 and is the chief investigative agency under the Department of Personnel and Training, Ministry of Public Grievance and Pensions (the CBI was previously under the supervision of the Ministry of Home Affairs) and now reports directly to the Prime Minister's Office. The CBI's prime roles include enquiring into and investigating certain specified offences, and providing high-level direction and support to the police force in combating corruption and related malpractices involving public servants, as well as economic offences. The CBI is also the nodal agency for carrying out coordination on behalf of Interpol member countries. The various divisions of the CBI include:

• the Anti-Corruption Division;
• the Economic Offences Division;
• the Special Crimes Division;
• the Directorate of Prosecution;
• the Administration Division;
• the Policy and Coordination Division; and
• the Central Forensic Science Laboratory.

The CBI primarily investigates cases related to:

• corruption and fraud committed by public servants of all central government departments, central public sector undertakings and central financial institutions;
• economic crimes, including large-scale smuggling of narcotics, import/export and foreign exchange violations, financial fraud and bank fraud; and
• special crimes, such as cases of terrorism and bomb blasts.

Enforcement Directorate

The Enforcement Directorate (ED) is a multidisciplinary organisation under the supervision of the Ministry of Finance, which investigates economic crimes such as contraventions of the Foreign Exchange Management Act 1999, and suspected contraventions of the Exchange Control Laws and Regulations, and the Prevention of Money Laundering Act 2002. The powers of the ED include the powers to initiate enquiries and provisionally attach assets derived from acts of specified Scheduled offences. It also renders cooperation to foreign countries in matters relating to money laundering.

The ED is also empowered to make arrests during investigations, issue show cause notices, confiscate assets under the Foreign Exchange Management Act, and impose applicable penalties and file suits against accused persons. As per the last reported numbers by the ED, there were a total of 1,326 cases pending with the ED for investigation, with the monetary contraventions amounting to a total of 51.525 billion rupees.

Major enforcement action

Nirav Modi Group case

On 14 February 2018, one of India's largest state-managed banks, Punjab National Bank (PNB), declared that it had detected fraudulent transactions worth more than 123.66 billion rupees at one of its Mumbai branches. PNB is India's second-largest public lender among state banks, and the amount of the fraud is purportedly about 8.5 times PNB's profits for the financial year 2016–2017.

The bank has alleged that the fraud involves companies connected to the Nirav Modi Group, one of the biggest jewels and stones trading organisations in India, and involves its major subsidiaries, including, but not limited to, Firestar Diamond Inc in the United States, Firestar Diamond International Private Limited in India and the Gitanjali Group, also based in India. Both groups are engaged in the trade of jewellery and have clients all over the world. As per the PNB, a junior-level branch official issued letters of undertakings (LOUs) 'unauthorised and fraudulently' on behalf of companies connected to the Nirav Modi group, such as Solar Exports, Seller Diamonds and Diamonds R Us. An LOU is a letter of credit, through which a bank provides assurances for meeting the liability of the customers.

These LOUs allowed the accused companies to obtain buyer credit (loans for purchasing raw material, which would be imported to India) from foreign branches of other Indian banks. With the LOUs, the Nirav Modi group obtained buyer credit and loans without providing any additional security. Further, as per PNB officials, these loans and buyer credit (meant for purchase of raw material to be imported into India) were misappropriated for other means, such as making payments for loans from other banks.

The fraud has sparked a massive outcry in India's banking sector, as even though PNB has promised to pay back the liabilities that are owed to other banks on account of the LOUs issued by PNB, it has also contested that other banks that have provided buyer credit to the Nirav Modi Group based on fake LOUs have acted without proper diligence, and PNB should not be held liable for the same.

Following PNB's statement, the CBI, the ED, the income tax authorities, the Central Vigilance Commission, the Ministry of Corporate Affairs, Interpol and the Ministry of External Affairs have started investigating the matter. A Special Prevention of Money Laundering Court has also issued non-bailable warrants against the owners of the Nirav Modi Group and the Gitanjali Group, and the PNB has approached courts in Hong Kong as part of the recovery process.

Firestar Diamond Inc, the flagship of the Nirav Modi Group in USA, has filed for Chapter 11 voluntary bankruptcy in the New York Southern Bankruptcy Court. Reportedly, the company has claimed liquidity and supply chain challenges as the reason for bankruptcy. Further reports suggest that the prime accused in the PNB scam (ie, the owners of the Nirav Modi group) have not been mentioned in the bankruptcy petition.

Latest reports indicate that the ED has filed a 12,000-page charge sheet against the Nirav Modi group, along with confiscating property worth 51.525 billion rupees. Following the non-bailable warrant issued in India, a red corner notice has also been issued by Interpol against the founder and owner of the group.

Black-money haul from Income Declaration Schemes

Reportedly, under Pradhan Mantri Garib Kalyan Yojna and the Income Declaration Scheme, 21,000 declarations amounting to a sum of approximately 50.597 billion rupees, and 71,726 declarations amounting to a sum of approximately 695.79 billion rupees were made, with the average declaration per declarant coming to approximately 10 million rupees.

Proposed amendments to the PMLA

The umbrella legislation for cases relating to money laundering in India is the PMLA. The new government has proposed certain amendments to the PMLA through the Finance Act 2018, intending to enhance the act's scope. Few of the major amendments proposed are the amendment to the definition of proceeds of crime to include properties located outside India, thereby allowing for confiscation of such properties in cases of money laundering ongoing in India. The crime and punishment for fraud are provided for in the Companies Act 2013. These are also being included as scheduled offences under the PMLA, thereby allowing for the designated authority (the Registrar of Companies, which also holds records for all companies in India) to report cases to the ED directly. Therefore, concerned authorities under the PMLA will now have the power to deal with such cases.

Ministry of Corporate Affairs striking off shell companies

The Finance Ministry of India released a list of 9,500 non-banking financial companies, categorising them as 'High Risk Financial Institutions'. A government panel set up in July 2017 has come up with 18 new parameters for defining shell companies, which include any company that: transfers large sums to a related party; lacks beneficial ownership; makes disproportionate investments in shares of other companies; has dubious directors; and makes repeated transactions with no apparent business purpose.

The list, which was released by the Financial Intelligence Unit, states that the named companies have not complied with provisions of the PMLA. Reportedly, the listed companies came under the scrutiny of the government for illegally converting banned currency notes into legal tender after demonetisation in late 2016. Investigations into shell companies led to the Ministry of Corporate Affairs ordering nearly 200,000 shell companies to be deregistered. The SFIO, regional Registrar of Companies offices, Department of Financial Services, Indian Bank's Association and other departments are monitoring and creating criteria for identifying and ensuring the efficient deregistration of shell companies.

Louis Berger case

In around July 2015, Louis Berger Group agreed to pay 1.17 billion rupees as part of a deferred prosecution agreement and also agreed to retain a compliance monitor for three years as part of the deferred prosecution. The company admitted to bribing officials in countries such as India, Indonesia, Vietnam and Kuwait to obtain the construction management contracts.

Investigations were initiated against Louis Berger by various enforcement agencies in India for bribing various Indian government officials for the purpose of securing two major water development projects in the states of Goa and Assam, based on evidence from the FCPA deferred prosecution agreement.

The ED launched a money-laundering probe after taking cognisance of cases registered in the states of Goa and Assam against Louis Berger. The ED has relied on the confessions of various Louis Berger employees before the courts in the US, where it was stated that Louis Berger employees had paid bribes to various government officials for the purposes of securing a water augmentation and sewerage pipeline project in the states of Goa and Assam under the Japan International Cooperation Agency funding scheme. As per media reports, ED officials have also raided certain places in Goa and are examining the documents recovered during the raids. A chargesheet was filed by the crime branch of the Goa police against Louis Berger, naming a former Louis Berger vice president, a former executive at Louis Berger, the former PWD minister of Goa and several others as accused. The Goa police have already commenced recording statements from ex-Louis Berger officials and summons have been issued against various other officials.

The former Chief Minister of Goa, who has been accused of accepting bribes, has been given anticipatory bail by the district criminal court. The Ministry of Home Affairs issued a letter of rogatory to a US court, seeking Louis Berger's former senior vice president's statement and other documents from the concerned court in New Jersey.

As per the latest reports, a High Court in the state of Assam has put the CBI, the nodal investigative agency of India, in charge of the investigation.

Conclusion

While India still has the dubious distinction of being one of the most corrupt countries in Asia, there have been significant developments in terms of legal framework that have lowered and are further intended to lower the rate of corrupt practices in the country. The government's toughest job has been to control the massive reserves of undisclosed money in the market and the increasing levels of corruption in India to the widest possible extent. Considering that multiple legislations have been introduced to provide mechanisms and provisions to fight corruption, along with introduction of various measures to curb the rising volumes of black-money accumulating in India, it does seem like India is on the right track to move to a less corrupt system of functioning.

The various income declaration schemes have been widely successful and brought massive inflow of taxes for the government. Further, the various digital incentives introduced by the government, such as the Aadhaar initiative and the shifting of most licensing applications to a completely online model have been introduced to eliminate the risk of bribery. The government has also laid down markers with respect of enforcement against black money hoarders, or companies or persons carrying out economic offences, with various amendments providing the government with the right tools to combat these economic offences. Such bold actions are expected to produce benefits in the years to come.