AN ANALYSIS OF CORPORATE CRIME
Introduction to Corporate Crime Corporate crime is a phenomenon that marked the 20th century. The first half was marked with two major world economic crises (The Great Depression) and the second with an increasing number of massive corporate scandals. What is significant is the fact that this type of fraud is spreading, and as a consequence there has… Read More »
Introduction to Corporate Crime
Corporate crime is a phenomenon that marked the 20th century. The first half was marked with two major world economic crises (The Great Depression) and the second with an increasing number of massive corporate scandals. What is significant is the fact that this type of fraud is spreading, and as a consequence there has emerged a need to study this concept from the scientific and professional perspectives, so as to find a solution and enable corporate crime prevention.
Corporate crime stems from business activities and although there were financial scandals in previous centuries, corporate crime was in full swing in the last two decades. Modern business has significantly dematerialized and transformed into virtual reality, which on one hand represents a significant breakthrough, but on the other hand it opens a wide space and offers modalities for perpetrating crimes in the field of finance. Nevertheless, regardless of the condition of modern business, the basic reason for corporate crime derives from human greed, namely, the wish to acquire resources which are limited by nature.
A big number of professionals studied and have been studying this field, but since it is very dynamic, a number of diverse and more complex business combinations have appeared with the aim of concealing corporate crime. For this reason, numerous experts from different fields (accounting, auditing, tax advisors, lawyers) have been engaged to implement their knowledge in order to present certain business changes, which are a part of a criminal scheme, in the most regular way. The essence is to present the overall business of a company in business records and summarize it in financial statements, so they have become the tools with which corporate crime is committed.
Corporate crime is a rather broad concept and it refers to different types of frauds and abuses related to business. The concept of corporate crime refers to acts committed to harm or benefit a company and includes criminal acts ranging from different types of frauds, misuse of assets, corruption, money laundering, tax evasion, forgeries, to fraudulent financial reporting. Corporate crime refers to acts perpetrated by individuals or companies which enable them to obtain certain benefits which they would not be able to obtain otherwise in regular business circumstances. Therefore, companies resort to different types of corporate crime in order to reach their goals, or to enable individuals who are creators of such acts and who are involved in them to reach their aims.
Corporate crime is an activity carried out “on behalf of and for the benefit of the company” by individuals who in that way promote their personal interests, so in that situation the company interests and individual interests are integrated. However, when personal interests overpower the company interests and when individuals strive to fulfil only their personal interests which may cause damage to the company, so in that situation the company is seen as a victim and the damaged party. Therefore, corporate crime acts are a creation of an individual or a group of people who can use their professional competencies to reach the goals of the company, hereby they appear as perpetrators and beneficiaries of the fraud. However, we should not neglect the fact that persons who are creators and perpetrators can equally use their abilities to harm the company and for their personal benefit.
NATURE OF CORPORATE CRIMES
Corporate crimes are considered to be general varieties of the White Collar Crime. Corporate crimes are also known with reference to occupational crimes. The distinction between corporate crime and occupational crime is that whereas corporate crime refers to situations in which corporate managers commit a criminal act for the benefit of the corporation, the occupational crimes are committed by individual employees against the corporation itself or the customers or consumers of the corporation, in the course of employment. When we deal with ‘corporate crime’ the first question that emerges is whether the corporate actually commit crime. This question can be answered by looking at the situations in which substantial harm is caused in the operation of the corporations which is much more than the traditional crimes committed by individuals.
Looking the matter from criminological perspective, the criminal behavior in corporate crimes it is altogether different from the traditional crimes committed by the individuals. The criminological theories have developed in different settings by placing the behavior of the individual as an individual in focus and not in the organizational structure. Still these are the acts and activities of individuals in the corporate crimes which are attributed to the corporation.
As such there is no separate branch of criminology dealing with corporates. The criminal behavior of corporations is tried to be understood by applying the existing theories applicable to individual delinquency. However, there is a need to analyse the corporate crime and criminal behavior in the new settings in which corporations operate.
Another significant aspect of corporate crime is that while the response of the criminal justice to the individual crime is prompt and aggressive it is lacking or mild to the corporate crime. At the same time oblivious societal response also tends to minimize the seriousness of the corporate crime. Therefore corporate crime has acquired a new meaning which is required to be understood and addressed, if we are to control and combat this emerging form of criminality
CONSEQUENCES OF CORPORATE CRIME
Corporate crime in the broadest sense of the word is an act which provides certain benefits to the perpetrators, but it also has its victims and damage which can be bigger than the benefits obtained.
Victims of the corporate crime can be: The company; Business partners; Employees; The state.
IMPACT ON THE COMPANY
When speaking about corporate crime, the company can be the perpetrator, but also a victim of a fraud. Corporate crime is committed by a certain group of managers or employees, possibly in cooperation with third parties, with an aim to get certain benefits for the company, and in that way obtain certain benefits for themselves. However, other people from the company are not included in these activities, as well as the state and business partners, so they appear as potential victims. According to the study the biggest number of companies involved in corporate crime do not manage to recover afterwards, whereas a smaller number of companies manage to recover to a lesser or greater extent. The mildest consequence of corporate crime will be a reduction of disposable resources and depreciation of the company value; whereas the most severe consequence will be the company bankruptcy, hereby both options leave consequences on other participants in business.
IMPACT ON THE BUSINESS PARTNERS AND EMPLOYEES
Bankruptcy of the company is not a desirable outcome from the economic aspect because in that way the scope of business activities is reduced, which can have numerous consequences. With bankruptcy the company ceases to exist, which causes employees to be left without their jobs and earnings, which except for personal consequences has influence on the economy by reducing the purchasing power of individuals. Business partners, banks and other creditors are left without their receivables which cannot be collected from a bankrupt company, whereas buyers cannot receive their goods, so their business activities are reduced until they find a solution. There is multiple damage inflicted to the state, which above all, refers to the lack of regular tax revenue from VAT, profit tax, social welfare and other public revenues. Furthermore, apart from having a reduced revenue, the state has to shoulder the burden of the unemployed who were made redundant because of the bankruptcy caused by corporate crime which increases its social expenditures. A collateral damage which is a consequence of all the above mentioned is a reduced tax revenue, because of the reduced income of the citizens who were left without their earnings and creditors who had to reduce their profit after writing off the receivables form the company which had bankrupted.
IMPACT ON THE NATIONAL INCOME
Except for the above mentioned damage which stems from corporate crime, there is another form of intangible damage which can have serious consequences on the level of national economy – it is the country risk which refers to reputation and susceptibility of the country to corporate crime. When an economic system is in order, corporate crime is less common, and as long as the economy is not so well-organized, especially when it is under the influence of specific circumstances (crisis, transition), corporate crime is far more common. Every national economy is interested in attracting as many investments as possible in order to start and maintain economic activity. In regular circumstances investors are interested in investing their funds wishing to maximize their profit with minimal risk. Moreover, investors who earned money in “gray economy” are also interested in laundering that money and investing it with minimal risk, so not even they are ready to accept an excessive risk of a disorganized economic system. Nevertheless, there are investors who do not mind disorganized economy, because in that way their profit made in “gray economy” is increased, and on the other hand the process of money laundering is facilitated. Yet, it often happens that investment in unstable economies is made within the process of money laundering in order to withdraw or transfer those funds in the next phase to some more stable economy, so this refers to one-off investments with no intention of continuity. If corporate crime becomes a common phenomenon in a certain economy, there will be no quality long-term investments and suspicious short-term investments will increase, which will not contribute to the stability and growth of the economy.
In ex-socialist countries, corporate crime investigations start from the state interests and tax evasion, and they are not sufficiently focused on the interest of other participants in business and the public. The investigation strategy should focus on collecting evidence, establishing facts and liability, as well as proving everything in court, with an aim to take care of long-term interests of the state and the company, to let the company maintain its business activity. Not every company whose management has committed corporate crime should go bankrupt, because it is not in anybody’s interest – the interest of the state, creditors, buyers, employees and others is to keep the company, make it continue its business activities and thus settle its liabilities regularly.
CRIMINAL LIABILITY OF CORPORATES
In the modern day world, the impact of activities of corporations is tremendous on the society. In their day to day activities, not only do they affect the lives of people positively but also many a times in a disastrous manner which come in the category of crimes. For instance, the Uphar Cinema tragedy or thousands of scandals especially the white collar and organized crimes can come within the categories that require immediate concern. Despite so many disasters, the law was reluctant to impose criminal liability upon corporations for a long time. This was for basically two reasons that are:
- That corporations cannot have the mens rea or the guilty mind to commit an offence; and that corporations cannot be imprisoned, the only other remedy being left is that of fine which merges criminal liability with that of a civil one.
These two obstacles were in the late 20th century and very early 21st century. The general belief in the early sixteenth and seventeenth centuries was that corporations could not be held criminally liable. In the early 1700s, corporate criminal liability faced at least four obstacles. The first obstacle was attributing acts to a juristic fiction, the corporation. Eighteenth-century courts and legal thinkers approached corporate liability with an obsessive focus on theories of corporate personality; a more pragmatic approach was not developed until the twentieth century. The second obstacle was that legal thinkers did not believe corporations could possess the moral blameworthiness necessary to commit crimes of intent. The third obstacle was the ultra vires doctrine, under which courts would not hold corporations accountable for acts, such as crimes, that were not provided for in their charters. Finally, the fourth obstacle was courts’ literal understanding of criminal procedure; for example, judges required the accused to be brought physically before the court.
VARIOUS PROVISIONS WHICH ATTRACT CORPORATE CRIMINAL LIABILITY IN INDIA
Section 141 of the Negotiable Instruments Act, 1881. It states that when any sort of offence committed under Section 138 of the Negotiable Instruments Act, then every person who ever have committed the offence shall be charged for the criminal act and conduct of the business of the company. If the person is the company itself even then the company shall be held to be guilty of the offence and shall be held liable to be proceeded against and will be punish accordingly. Balaji Trading Company v. Kejriwal Paper Ltd. and Anr.
Section 7 of the Essential Commodities Act, 1955. Section 7 states about penalties under the Act. It states that if any person contravenes any order made under Section 3 of the Act then he shall be liable to imprisonment to a minimum of three month and maximum of seven years and will also be liable to pay a fine of certain amount. State of M.P. v. N. Singh
By this it can be seen that it is not a compoundable offence as it attracts both imprisonment as well as penalty provision. And the term “person” includes “individuals as well as corporations and companies” as per the GENERAL CLAUSES ACT, 1897.
Section 276-B of The Income Tax Act, 1961. The section states about the failure to pay tax deducted at source [TDS] In case of this section it attracts criminal liability if any sort of contravention occurs in the payment of TDS then it will lead to rigorous imprisonment which will be minimum of three months and maximum it may extend to seven years and also certain amount of fine will be levied. M.V. Javali v. Mahajan Borewell & Co.
Sections. 45, 63, 68, 70(5), 203, etc of the Indian Companies Act wherein only the officials of the company are held liable and not the company itself; it is also reflected through the Takeover Code.
The various sections of the IPC that direct compulsory imprisonment does not take a corporate into account since such a sanction cannot work against the corporation.
These are the major statutes in their respective field that are devoid of necessary legal aspects. On the other hand, law has also developed to an extent with regard to certain other statutes and their respective penal provisions wherein a fine has been imposed on the corporations when they are found to be guilty.
Till now, the Courts have been able to impose only fine as a form of punishment because of statutory inadequacy and lack of new forms of punishments which could be imposed upon corporates.
The Feasibility of Fine
Fine is the most common punishment in every part of the world and it is a punishment the advantages of which are so great and obvious that we propose to authorize the courts to inflict it in every case… Imprisonment, transportation, banishment, solitude, compelled labour are not equally disagreeable to all men. With fine the case is different. In imposing a fine it is necessary to have regard to the pecuniary circumstances of the offender, as to the character and magnitude of the offence. The mullet which is ruinous to the labourer is easily borne by a tradesman and is absolutely unfelt by a rich zamindar.”
Towards New Forms
Presently, all the sections include only fine as a form of punishment that can be imposed on a company. So is the case with judicial pronouncements on the aspect of sentencing. In addition to this, the Law Commission in its 41st Report also speaks of introducing only fine as an additional punishment to be imposed upon corporations in lieu of fines. This restrictive thinking, according to Courts is based on the maxim lex non cogit ad impossibilia, which tells us that law does not contemplate something which cannot be done. This reasoning in itself shows that the law lacks in a non holistic viewpoint in the concept of corporate criminal liability.
The Courts have no doubt been efficient in evolving the concept of criminal liability of corporates and have imposed the same on the convicts but the only way of imposition that has been thought of is by way of fines. It is now for the legislature to evolve new forms of punishments and incorporate them in the criminal justice system of the land. The legislature may take the following suggestions.
These other forms (including fine), can be classified into the following major heads:
- Economic Sanctions
- Social Sanctions.
These sanctions are all designed keeping in view that deterrence is the ultimate objective of penal law making companies liable since other accepted theories like reformation cannot be introduced where a juristic mind is concerned.
Economic Sanctions: these sanctions would include various kinds of monetary and other forms which would cause huge losses to the company as a whole. Apart from fine, they can include the following:
- Corporate Death or order for winding up only in cases of continuous criminal behaviour in the given field.
- Temporary closure of the company for a given period depending upon the gravity of the act till the time compliance with norms can be ensured.
- Rehabilitation of victims of crime.
- Section 357, CrPC, empowers a Court imposing a sentence of fine or a sentence (including a sentence of death) of which fine forms a part, in its discretion, inter alia, to order payment of compensation, out of the fine recovered, to a person for any loss or injury caused to him by the offence.
Social Sanctions: Goodwill, for any body corporate is its heart and Soul. Once, that is lost, the entire strength comes to a standstill. The term ‘reputation’ carries with it more than one meaning. For individuals, reputation loss connotes both the individual’s sense of shame and others’ increased reluctance to do business in the future with the individual or corporations, however, reputation loss refers only to the reluctance of others, such as customers and workers, to deal with the corporation in the future. Of course, the managers of the corporation may feel shame about their corporation’s conviction. As applied to corporations, reputation refers, for example, to the super competitive price that a firm with a good reputation can charge customers for its products or the lower wages that a ‘good’ employer can pay while still attracting workers.
Corporate crime is referred as the conduct of a corporation or employees acting on behalf of a corporation which is prescribed or punishable in law. Thus corporate crimes are committed for corporate gain or to bring harm to any other person or body corporate. Such crimes are committed in a quite environment. These are also considered to be general varieties of white collar crimes. However the criminal behaviour in corporate crimes to different from the traditional crimes committed by individuals. Corporate crimes are socially injurious or blameworthy acts which cause financial, physical or environmental harm or harm caused to the workers and the general public.
It is believed that corporate criminal behaviour is also a result of learning process from with the working of the corporations. This behaviour is also attributed to major social and moral change. In a pursuit to meet targets or goals there could be adoption of unlawful means. Further there is neutralization theory where in the given circumstances conduct is tried to be justified. Lack of adequate control could also promote criminal behaviour. In addition there are factors like cost benefit considerations, socio-economic developments, organizational structure and crimologic market which are attributed to corporate criminal behaviour.
In the corporate control there is criminality of the corporation itself and also the liability of the responsible persons which can be vicariously fixed. Law in this repeat needs to be more clearly defined.
BY – SANMIHA
Content Writer @ Legal Bites
 Dr.Jelena Slovic, Assos. Prof. Snezana Mojsoska, Dr. Igor Pejovic , Financial Reporting As A Factor Of Corporate Crime
 Brian K. Pyne Susannah Tapp, Corporate Crime, Oxford Bibliographies at www.oxfordbibliographies.com
 Gray (informal) economy – a part of economy characterised by irregular and illegal business practices. It can be observed as gray economy, namely business operations which can be legalised by undertaking certain measures (for example by paying tax) and black economy, which cannot be legalised (for example drug dealing). It is characteristic of undeveloped and developed countries, but with economic development its share in GDP is reduced. All countries take measures to supress it in order to increase tax revenue. Ekonomski Rečnik, (2006) Belgrade University, The Faculty of Economics, page 463
 Dr. Jelena Slovic, Assos. Prof. Snezana Mojsoska, Dr. Igor Pejovic , Financial Reporting As A Factor Of Corporate Crime
 Zee Telefilms Ltd. v. Sahara India Co. Corporation Ltd., 2001 (3) Recent Criminal Reports (Criminal) 292; Motorola Inc. v. UOI, 2004 Cri LJ 1576.
 V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 Harv. L. Rev. 1477; Beck & O’Brien, Corporate Criminal Liability, 37 American Criminal Law Review 261; Reinier H. Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 Yale L.J. 857, 857-58 (1984)
 Shreya Bhattacharjee, Corporate Criminal Liability In The Globalizing World: A Means To Achieve Social Justice, Journal On Contemporary Issues of Law (JCIL) Vol. 2 Issue 2.
 Ahmed Siddiqui, Criminology, page120
 Commissioner of Sales Tax v. Union Medical Agency MANU/SC/0396/1980; Kartick Chandra v.Harsha M. Dasi, AIR 1943 Calcutta 35 at 354; Edmund N. Schuster v. Assistant Collector of Customs, New Delhi, AIR 1967 Punjab 189; State of Maharashtra v. Syndicate Transport, AIR 63 (1966) Bom 197; Knightsbridge Estates Trust Ltd. v. Byrne and Ors. , 1940 (2) All ER 401
 Sub-section (1) of the section reads: When a Court imposes a sentence or fine or a sentence (including a sentence of death) of which fine forms a part, the Court may, when passing judgement, order the whole or any part of the fine recovered to be applied-
- in defraying the expenses properly incurred in the prosecution;
- in the payment to any person of compensation for any loss or injury caused by the offence, when compensation is, in the opinion of the Court, recoverable by such person in a Civil Court;
 David Charny, Nonlegal Sanctions in Commercial Relationships, 104 Harv. L. Rev. 373, 393-94 (1990).
 V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 Harv. L. Rev. 1477