Investigating Corporate Legal Fraud

White Collar Crimes are those which are committed by respectable persons, holding enviable positions, either in public or private entities. One such white collar crime is Corporate Fraud. In the broad sense, “fraud” is an intentional deception made for personal gain or to damage another person/entity. It is understood that ‘Fraus Omnia Vitiate’, i.e., fraud vitiates everything.

Corporate Fraud takes place when a corporation purposely provides dishonest information with the primary objective of obscuring the “truth” and deceiving the recipient of the data. The provider of such information hopes to gain an advantageous position in the relationship.

Corporate Fraud investigations aim to locate assets owned or used by defendants and identify the ownership and use of property which can then be restraint.

The purpose of this paper is to identify and examine the nature of corporate frauds and the investigation mechanism related to it.

How does Corporate Fraud Work?

Corporate Fraud can be challenging to prevent and tricky to catch, as the persons involved employ vicious tricks making it difficult to point fingers. By creating effective policies, a system of checks and balances and physical security a company may limit the extent to which fraud can take place[1]

Corporate Frauds in India

1. Rotomac Bank Fraud

According to senior CBI officials, the scam began in 2008 and amounted to “misappropriation of funds”, “criminal breach of trust” and violation of FEMA (Foreign Exchange Management Act) guidelines. The agency stated in the FIR that Rotomac had cheated a consortium of seven banks by siphoning off bank loans of Rs.2,919 crore, including interest, the amount coming up to Rs. 3,695 crore[2].

2. Punjab National Bank Scam

A fraudulent letter of undertaking worth Rs. 11,600 crore (US$1.77 billion) was issued at the Punjab National Bank branch in Brady House, Mumbai making the bank liable for that amount, the fraudulent transactions were however linked to Nirav Modi, and were first noticed by the employees of the Bank[3].

3. Maharashtra Scholarship Notice

A probe into allegations of swindling of government scholarships which were actually meant for backward class students revealed that hundreds of institutes across the state pocketed several thousand crores by adopting different ploys since 2010. This particular scam also raised questions on the working of CM Devendra Fadnavis’ government.

Types of Corporate Fraud

1. Payment Fraud

This type of fraud basically involves falsely creating or diverting payments. Examples include creating fake records and bank accounts which enable the fraudulent payments to be made[4]. Other examples include generating false payments, making fraudulent payments to oneself, intercepting and altering payee details and amounts on cheques and other forms of payment orders and then attempting to bank those payments and processing false claims by accomplices for later repayments.

2. Pyramid or Ponzi Schemes Fraud

These are well known type of fraud which involve a non-sustainable business model in which the investments of to-beinvestors are used to pay earlier investors, giving the appearance that the investments of the initial participants dramatically increases in a very short period of time.

3. Long and Short Term Fraud

This type of fraud occurs when an apparently legitimate business is set up with the intention of defrauding its suppliers and customers.

4. Insolvency and Bankruptcy Fraud

Insolvency related fraud occurs when a company is trading fraudulently and often takes place prior to the anticipated insolvency of the Company Directors. The parties in question often set up phony companies just prior or after the insolvency of the first company with a view of taking assets from the first company and avoiding paying its debts at the same time. The financial and corporate frauds or scams like Harshad Mehta Case required the attention of law makers.

Insider Trading

Insider Trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason[5]. The Jenkins Report recommended that a director who, in any transaction relating to the securities of his/her company or any other company in the same group, makes improper use of a particular piece of confidential information which might be expected materially to affect the value of such securities, should be liable to compensate a person who suffers loss from his action that information was known to that person.

Prohibition on Insider Trading

According to sec.195(1) of the Companies Act, 2013, no person including any director or key managerial personnel of a company shall enter into “Insider Trading”[6]. However, the above mentioned prohibition shall not apply to any communication required in the ordinary course of business or profession under any law.

Punishment For Fraud

Certain Punishments for the Corporate Fraud have been prescribed in the section 447 of the Companies Act, 2013 which says that “Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to a fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in fraud[7]


There are certain mechanisms that have been cited by the Government by which the frauds can be prevented under Companies Act 2013.

Section 211 empowers the Central Government to establish an office called Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies. No other investigating agency shall proceed with investigation in a case in respect of any offence under the Act, once the case has been assigned to SFIO. The SFIO has power to arrest individuals if it has reason to believe that he/she is guilty based on the material in possession. SFIO shall submit a report to the Central Government on conclusion of investigation.

Auditors shall report material fraud to the Central Government within 30 days. The Audit Committee is required to monitor every listed company, to ensure they establish a vigilance mechanism for directors and employees to report genuine concerns. This mechanism shall provide for adequate safeguard against victimization of persons who use such mechanism.

Central Government can order investigation into the affairs of a company on the receipt of  a report of the registrar or inspector, on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated, or in public interest.

[1] JAMES CHAN-Corporate Frauds ,Investopedia updated 14th Jan 2018 accessed 12th May 2020,19:55 Pm

[2] Shaswati Das- Rotomac Bank Fraud , updated 10th July 2018 accessed 14th May 2020, 20:00 Pm

[3] VISHWANATH NAIR-“The Nirav Modi Case”: How the $1.77 billion Fraud detected at PNB unfolded” Bloomberg|Quint, accessed 15th May 2020,|6:30 pm|

[4] Kartik Verma- Different Types of Corporate Fraud Explained ,Francis Wilks and Jones Accessed 15th May 2020 ,7:00 Pm

[5] AKHILESH GANTI- Insider Trading, Investopedia, accessed 16th May 2020, |1:24 Pm|  

[6] The Companies Act, 2013  Section 195(1)

[7] The Companies Act,2013   Section 447

Prabhjot Singh from Fairfield Institute of Management and Technology


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