CATEGORIES OF CORPORATE FRAUD

Asset misappropriation
This is a theft or misuse of the company’s assets which belong to the company. It can be committed by any
individual who ranks from directors to employees who are entrusted with the company’s assets. For
example, this fraud wherein the perpetrator employs tricks to steal or misuse the company’s assets. Assets
can be tangible and intangible, modus operandi of fraud will be fictitious sales, false inventory, falsifying
asset requisition and transfer.

Bribery and corruption

This is a heinous crime when compared to other frauds because this essentially affects the company’s
economic development. The act of bribery involves offering, giving or receiving anything which can hamper
the official act of the company. While corruption is more heinous than bribery, it includes illegal
gratification, bribery and economic extortion. Employees use their power improperly for business
transactions by this the employee gains an advantage for themselves or for a third person.

Financial statements

This involves acts wherein the company’s financial statements of the company are misrepresented. This
damages the company internally and externally. The forms of fraud are manipulating accounts, overstating
revenue assets and investments, understating liabilities and non-disclosure of financial information.

Money Laundering

This is an illegal process of making lump sum money that is generated by crimes such as drug trafficking or
terrorist funding which is coming from a legitimate source. Most financial companies have anti-money
laundering policies to scrutinise and prevent this activity.

Ponzi Scheme

This is an investment fraud that pays investors an amount by collecting money from new investors.
Essentially, in Ponzi schemes, the organisers encourage investors by promising high returns with little risk.
The fraudsters take a small portion of the newly invested money before paying the former investors, that’s
how they keep moving forward.

Accounting misappropriation

In accounting fraud, the company manipulates financial statements to create impressive corporate financial
stability. This can be committed by employees, accountants, or by the whole organisation misleading the
stakeholders. It can be done by overstating its revenue, not recording expenses, etc.

1. The desire or perceived need to attract or retain investors

Corporate fraud commonly occurs for the same reason as any other fraud scheme – greed. However, amid
the highly competitive global business environment of the modern world, it may also occur for other
reasons. Many corporate fraud schemes consist of fraudulent accounting schemes used to make a company
appear more profitable than it actually is. The impetus behind such schemes is the desire or perceived need
to attract or retain investors.
2. Problems or defects with a company’s products

Another cause of corporate fraud may be problems or defects with a company’s products, which it tries to
hide. Several recent corporate fraud cases have occurred with pharmaceutical companies that attempted to
hide certain side effects or dangers associated with using certain medicines they manufactured and sold.

Government regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United
States, use laws and regulations to try to prevent, detect, and punish corporate fraud. However, fraud may go
undetected for many years before it becomes apparent to authorities, especially if the guilty company is a
private company that is not required to publicly disclose its financial records.

Economic Pressure

India’s economy is revolving rapidly because of intense competition and profit-driven businesses. This led
the business to opt for an easy way to make more business by doing fraudulent activities so that they could
cope with the economic conditions. Also, companies under financial strain may resort to unethical practices
to achieve targets, increase investors and other factors such as securing loans.

Competition in the market

Most of the time, companies engage in fraudulent practices to match their advantage with other competitors.
The pressure to outperform the peers leads to breaking the legalities. This leads to the manipulation of
financial statements, securing contracts in an unethical manner and much more.

Less protection for whistleblowers

The lack of a whistleblower protection mechanism impacts the reporting of fraudulent activities. The fear of
snitching and lack of confidence to reveal the wrongdoing of the colleague is the major issue in
whistleblowing. This essentially allows the fraudulent practices to persist and remain undetected for a long
period of time.

SEBI

Section 12A – Prohibition of manipulative and deceptive devices, insider trading and acquisition of
securities or control. This section prohibits manipulative and deceptive devices and insider trading to any
person directly or indirectly to commit it. It says that no person shall directly or indirectly indulge in
employing devices that are manipulative in nature or engaging in insider trading etc.

Section 15 E – Penalty for failure to observe rules and regulations by an asset management company. The
section explains that where any asset management company of a mutual fund registered under this Act, fails
to comply with any of the restrictions on the activities of asset management, then such company shall be
liable for penalty. The penalty can be not less than one lakh rupees but which extends to a maximum of one
crore rupees. Under this section, the SEBI provides penalties in cases of insider trading, nondisclosure of
shares, failure to refund to the investors and other fraudulent and unfair trade practices.

Corporate fraud provisions under Companies Act, 2013

Section 447: Punishment for Fraud

This section provides punishment for an individual who committed fraud against the company. It explains
that any individual who is guilty of fraud shall be punished with a fine and imprisonment with a maximum
period of 10 years. The fine should be not more than three times the amount involved in fraud. But in certain
conditions, the fine may extend up to three times the amount of fraud involved.

Section 447A: Punishment for False Statement

Section 447A says that if any individual makes a false allegation in any return, report, or any other
document which is related to the registrar will be punished with imprisonment for a maximum of three years
or a fine of five thousand rupees or both.

Sections 448, 449 and 450: Punishment for forgery

Section 448 deals with the forgery offences against the company. Any individual who is considered guilty of
forgery, when either a new forged document is created or existing documents of the company that are false
and misleading statements with respect to the company. Then the person shall be punished with
imprisonment which may extend up to 7 years and can be along with a fine of five thousand rupees or in
certain cases the amount maybe three times the amount involved in fraud.

Section 542: Liability for fraudulent conduct of business

While winding up of a company, the persons who are carrying the business are personally liable for all the
fraudulent conduct of business, and also if the company has any debts or other liabilities.

Punjab National Bank vs. Union of India (2022).

This is a case of major banking fraud in the nation, which is INR 15000 crores. The fraud was committed by
the proficient jewellers of the country, Nirav Modi and Mehul Choksi. They both engaged in exporting
polished diamond business. They had strong retail chains of diamond business in India and other
international destinations. The question of funding arose after some point. Apparently, the company was
defrauding Punjab National Bank and other banks. They transacted large amounts of money without any
underlying assistance from junior-level banking officials. The estimated amount involved was more than
around INR 16000 rupees. RBI issued red alerts to all banks, advising the banks to have right system
deficiencies. After this scam in 2018, the government approved the Fugitive Economic Offenders Bill to
deter economic offenders from evading the process of Indian law by giving powers to the government to
confiscate the assets of fugitives, including the Benami assets of absconding loan defaulters. The bill covers
a wide range of economic offenders including loan defaulters, fraudsters, individuals who violate the laws
governing taxes, black money, Benami properties, financial sector and corruption.

Union of India vs. Infrastructure Leasing & Financial Services Ltd (2022).

This is the case of the largest fraud in the country, as the company Infrastructure Leasing & Financial
Services (ILFS) played a key role in infrastructure development in India. The company was backed by large
shoulders like LIC and SBI and had representatives on the board. The debt amount was a sum of INR 91000
crores including the PF and pension funds. The fraud happened mainly as a result of the diversion of
borrowed money associated with entities by some members of the senior management team among other
factors. The company had a high credit rating and this made most of the asset management, and insurance
companies invest large sums in its debt issuance. The rating agencies did not downgrade the rating of the
company even when they had clear financial stress signals due to its high reputation. Even if the rating
agencies had hints the actual rating was changed abruptly to the lowest from the highest after defaulting on
repayment obligations. The company had a reputed top management, and no one challenged the decisions of
the directors.
Subrata Chattoraj vs. Union of India (2014).

This case was a Ponzi scheme scam, the scheme was started by the Saradha Group. They collected money
from investors by issuing bonds which are redeemable, debentures and promised high profits from
investments. The agents were hired from throughout West Bengal with high salaries to expand quickly. This
made the scheme get investments from around 200 companies. The company used a nexus of companies to
avoid regulatory bodies. Later, in 2013, the scheme collapsed, incurring a loss of around 200 billion to the
depositors and agents. The Securities Exchange Board of India barred the group from the securities market
till the company was shut down.