Employees are an integral part of any organisation. They are entrusted with integral and important resources of the organisation to help the organisation grow. However, sometimes the employees are more concerned about their gain which leads to misuse of the aforesaid company resources. In this article, we aim to provide organisations with a brief concept of what typically constitutes employee fraud and the distinct remedies that the organisation has in such cases.
Employee fraud refers to the intentional deception or misrepresentation by an employee for personal gain, causing financial or reputational loss to the employer. Some of the most common types of employee fraud in India are:
a) Financial Fraud: This includes embezzlement, misappropriation of funds, forging of documents, and falsification of accounts to misrepresent the company’s financial position.
b) Intellectual Property Theft: This includes theft or unauthorized use of the company’s intellectual property, such as patents, trademarks, copyrights, and trade secrets.
c) Insider Trading: This refers to the illegal use of confidential information to trade securities for personal gain.
d) Data Theft: This includes stealing, copying or downloading sensitive company data, such as customer information, trade secrets, or financial data.
e) Bribery and Corruption: This includes giving or accepting bribes to influence business decisions or gain unfair advantage.
f) Time Theft: This includes submitting false timesheets, falsifying attendance records, or using company time and resources for personal work.
g) Vendor Fraud: This includes accepting kickbacks or bribes from vendors in exchange for giving them preferential treatment or awarding them contracts.
h) Travel Expense Fraud: This includes submitting false or inflated travel expenses, such as claiming for fictitious expenses or personal expenses as business expenses.
These types of frauds can occur in various industries, including banking and finance, healthcare, retail, and manufacturing. Such frauds do attract major criminal and civil provisions which can help employers recover for any losses caused and further punish the offenders. However, every employer must, to the best of their abilities, have proper internal controls and policies in place to prevent, detect and investigate such frauds.
INTERNAL PROCESS FOR THE EMPLOYERS TO DEAL WITH FRAUD:
The employer shall set up a committee or team for vigilance against the aforesaid types of fraud. This team shall not only be responsible for fraud investigation but shall be responsible for compliant handling with appropriate legal authority and policy-making for fraud prevention. After the detection of potential fraud, a typical fraud investigation for a vigilance team to take action against an employee for fraud involves the following steps:
a) Conduct an Internal Investigation: The first step is for the employer to conduct an internal investigation into the allegations of fraud against the employee. This investigation should be conducted impartially, and the employer should follow proper procedures to ensure that the employee’s rights are protected.
b) Issue a Show Cause Notice: If the investigation reveals evidence of fraud, the employer should issue a show-cause notice to the employee. The notice should contain the details of the alleged fraud and allow the employee to respond.
c) Conduct a Domestic Enquiry: After receiving the employee’s response to the show cause notice, the employer should conduct a domestic inquiry to determine the veracity of the allegations in light of the employee’s response. The inquiry should be conducted fairly and impartially, and the employee should be allowed to present evidence and defend themselves.
d) Issue a Charge Sheet: If the enquiry confirms the allegations of fraud against the employee, the employer should issue a charge sheet outlining the charges against the employee.
e) Hold a Disciplinary Hearing: The employee should be allowed to respond to the charges at a disciplinary hearing. The employer should follow proper procedures during the hearing, and the employee should be allowed to present their case.
f) Impose Disciplinary Action: If the disciplinary hearing confirms the allegations of fraud against the employee, the employer can impose disciplinary action, which can range from a warning to termination of employment. The action should be proportionate to the severity of the fraud.
g) Legal Action: In addition to the disciplinary action, the employer can also file a police complaint against the employee for fraud. The police will investigate the complaint and file a charge sheet in court if they find evidence of fraud. The court will then conduct a trial, and if the employee is found guilty, they will be punished according to the law.
It is highly recommended for the employer to follow proper procedures make themselves aware with basic forms of fraud, possible mechanisms of how such frauds can be carried out and the methods of internal investigation procedures to ensure a water-tight trial and a favourable outcome.
THE LEGAL REMEDIES FOR EMPLOYEE FRAUDS:
In any case of employee fraud, it is suggested that a company shall at the very first stage conduct its detailed investigation as has been highlighted in the previous section as it allows to bring to light substantial and material evidence of wrongdoing. After the discovery of such evidence, the Company can approach the legal authorities under civil and criminal legal statutes and provisions. In this section, we aim to point out the specific civil, criminal, and/or special legislation remedies available for the aforementioned employee fraud mentioned in this article:
a) Financial Fraud: Financial fraud generally includes within its definition and interpretation thereof, money laundering, misappropriation of funds, falsification of accounts statements, etc., which directly attracts provision of the Indian Penal Code (“IPC”) such as cheating[i], criminal breach of trust[ii] and such other provisions which are based upon the type of financial fraud committed by the employee. These are classic examples where employers absorb a direct hit. The civil remedy for such type of fraud is through a suit for recovery of money[iii]. To proceed with the same, one must file the same in the court which has territorial and pecuniary jurisdiction over the matter. The employers can further file for a Summary Suit[iv] to expedite the process. A summary suit is one of the most common civil remedies for the recovery of monies in cases of financial fraud. Once the suit is filed the court issues a summons to the defaulter in order to appear before the court and defend their case, within a period of 10 days from the date of the first hearing. If they fail to appear then the court assumes the petitioner’s claims are valid and awards the petitioner accordingly. In addition to the above, one can also file a suit for Misrepresentation[v], Fraud[vi], and Breach of Contract (only if specific contractual provisions exist). The contract between the employer and the employee ideally consists of the actions that an employer can take against an employee in case he is guilty of financial fraud such as
b) Intellectual Property Theft: Theft involves robbing someone’s property without his consent. Intellectual property is not the subject of theft in the literal sense due to its intangible nature. However, theft in the case of intellectual property can be of some physical property associated with the infringement of IP wherein the infringer steals someone’s idea, inventions, creative expressions, trade secrets, etc. which are valuable intangible intellectual assets for him. Though theft is the subject matter of criminal proceedings, IP theft can be remedied by both civil and criminal procedures. Criminal procedures are mandatory when trademark counterfeiting or copyright piracy is willful and on a commercial scale. In the case of IPR infringement, multiple civil remedies such as Interlocutory Injunction[vii] can be obtained against such infringers in addition to Mareva Injunction, Anton Pillar orders[viii], John Doe orders, Permanent Injunction, Damages or Accounts of Profit. These civil remedies are for immediate relief as well permanent relief from any form of infringement. In the case of criminal remedies, as mentioned earlier, penal provisions of theft can be brought on against the infringer by way of lodging an FIR[ix] as per the Criminal Procedural Code, 1973 as is described under the next section. A civil remedy and criminal remedy can be sought together in the case of intellectual property infringement at the option of the victim of the infringement.
c) Bribery and Anti-Corruption: Bribery is one of the most famous forms of white-collar crime in India. In layman’s language, it essentially means when one person gives, offers, or solicits any item of value to another person who is in a position of authority to get some favor in return from that person. This is primarily done either to make the person do something or prevent them from doing something. This form of criminal act attracts the Criminal Breach of Trust[x] provision and punishment under the IPC. As the same is also a cognizable offense, a victim can approach the police in a manner described in the above section or further approach the court[xi] with appropriate jurisdiction to try the matter. There are no specific civil remedies against bribery and corruption, however, it is a good practice to include such legal clauses within an employee contract to enforce civil remedies such as damages and breach of contractual obligations in such cases.
d) Money Laundering: Transforming funds obtained unlawfully into legal funds is known as money laundering. Money laundering thus serves as a method of concealing the proceeds of unlawful activity. Money laundering is often through three major methods:
- Placement: Investing black money in the market is the initial step in this process. By entering into formal or informal agreements with several agencies and banks, the launderer deposits unlawful funds in cash.
- Layering: The launderer conceals his true income during this process by engaging in dishonest behavior. Funds are laundered and then placed in foreign bank accounts or investment vehicles like bonds, equities, and traveler’s checks. This account is frequently formed in banks located in nations that keep the information of their account users private. The ownership and funding source are so concealed in this procedure.
- Integration: The final stage at which the ‘laundered’ property is re-introduced into the legitimate economy or returned the money into the financial world as legal money
Similar to financial fraud and bribery, the provisions of criminal breach of trust and cheating are attracted and a similar procedure as described under bribery and anti-corruption followed. In addition to the same, we have provided a detailed procedure for dealing with such cases under the head of ‘Procedure Of Filing A Case For Money Laundering’ in this article. The legislative body has also introduced The Prevention of Money Laundering Act, 2002 whose main objectives are to; (i) prevent and control money laundering; (ii) confiscate and seize the property obtained from laundered money and (iii) deal with any other issue connected with money laundering in India.
e) Cyber Crimes: Cybercrime is a broad term that refers to illegal action using computers or computer networks as a tool, a target, or a venue. Examples range from electronic theft to denial-of-service. It is a catch-all phrase for crimes including phishing, credit card fraud, bank robbery, illegal downloading, industrial espionage, kidnapping minors through chat rooms, scams, cyber terrorism, production and/or distribution of viruses, spam, and more. The General Assembly resolution adopting the Model Law on Electronic Commerce by the United Nations Commission on Trade Law was adopted by the Indian Government. As a result, on May 17, 2000, the Information Technology Act 2000 was approved and put into effect. The Indian Evidence Act 1872, the Banker’s Book Evidence Act 1891, and the Reserve Bank of India Act 1934 are among the various laws that this Act seeks to further reform in addition to legalizing e-commerce, according to its preamble.
PROCEDURE TO LODGE A COMPLAINT AGAINST WHITE COLLAR CRIMES ESPECIALLY EMPLOYEE FRAUD AND MONEY LAUNDERING:
The first step is to file a First Information Report at the local police station. After filing the FIR against the employee the police or the agency of the state in which the crime has been committed investigates the accused. This investigation is carried out under the procedure mentioned under CRPC[xii]. In cases of corporate fraud, a special economic offence wing is set up that is responsible to investigate such crimes. The police might arrest the accused depending on the nature of the crime committed. The investigation process includes but is not limited to:
- Collecting evidence by inspecting any books and records of the company, questioning witnesses to gather information required by them, inspecting the crime scene, and recording statements.
- Forensic testing/audit- this is a process by which evidence is gathered by looking into the past and present financial records of the company to see if there is any evidence of fraud being committed which can be used in the court of law. This can be done by gathering clues through scientific and latest investigation techniques, analysis of human behaviour through questioning and cross-questioning and documentation of evidence for legal proceedings. The Indian Evidence Act, 1872 sections 45 and 47 talk about the report of forensic auditors. Various other regulations such as the Insolvency and Bankruptcy Code, Prevention of Money Laundering Act etc also emphasize forensic audits.
Once the investigation process is over the police record all their findings in a challan or a charge sheet. If they find enough evidence against the suspect through their findings the case is then taken to the magistrate court. If the facts disclosed in the complaint/FIR do not disclose the commission of any alleged offence, or when there is a patent irregularity visible on the face of the FIR/ECIR, the High Court’s jurisdiction can be invoked by way of a writ petition under article 226.
However, this is not the only mechanism that is available to a victim of white-collar crime, depending on the nature of the crime one can even approach the Enforcement Directorate and lodge an Enforcement Case Information Report or lodge a Regular Complaint recorded by the CBI.
PROCEDURE OF FILING A CASE FOR MONEY LAUNDERING:
In case of money laundering cases first, the FIR of the said offense is filed. If based on the FIR it is found that the scheduled offence has been committed then the Enforcement Directorate may file the Enforcement Case Information Report. Upon registration of the said ECIR, the ED approaches the special court by filing a complaint or a charge sheet before the commencement of the trial of the offense of money laundering or they would provisionally move forward under sections 5,17, or 18 of the Prevention of Money-laundering Act to initiate proceedings before the adjudicating authority. In addition, an FIR must be immediately submitted to the magistrate who has jurisdiction. The practice of not filing an ECIR upon registration before the competent court and handling it separately from an FIR is supported only because just registering an ECIR against a person does not automatically make him an accused, as it does in the case of FIR. Since registering an ECIR is not a legal duty, there is no equivalent obligation for the ED to send a copy of the ECIR to the defendant at the threshold stage. At the stage of attachment proceedings before the Adjudicating Authority the accused receives a copy of the ECIR for the very first time along with all the documents that were relied upon by the Enforcement Directorate.
OTHER AGENCIES WHICH CONDUCT INVESTIGATION OF CRIMES CONCERNING FRAUD:
Serious Fraud Investigation Office (SFIO) – this is an organization that has been established by the Ministry of Corporate Affairs to investigate cases of corporate fraud. Companies Act, 2013 provides the SFIO with legal backing. The procedure of investigation by the SFIO is laid down under section 212 of the Companies Act 2013. This section states that if an investigation of a company is assigned to a SFIO by the Central Government then no other agency can proceed with the investigation process. The SFIO prepares an investigation report and depending on the findings the SFIO has the power to arrest under section 212(8) and the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017.
As discussed under this article employers have multiple options against the various kinds of white collar crimes that are prevalent under not only the criminal and civil provision but specific special legislation as well. It is essential for an employer shall possess basic knowledge for such criminal and civil remedies and the procedure, so as to help in the process of mitigation and limitation of different crimes that may be conducted by the employees of different levels across an organization.
[i] Section 415 to 418, 420 of the Indian Penal Code, 1860
[ii] Section 405 to 409 of the Indian Penal Code, 1860
[iii] Order IV of the Code of Civil Procedure 1908 (CPC)
[iv] Order 37 of the Code of Civil Procedure 1908 (CPC)
[v] Section 18 of the Indian Contract Act,1872
[vi] Section 17 of the Indian Contract Act,1872
[vii] Order 39 of the Civil Procedure Code, 1908
[viii] Anton Piller KG vs Manufacturing Process, (1976) 1 All ER 779
[ix] Section 378 of the Indian Penal Code, 1860
[x] Section 154 of the Criminal Procedural Code, 1973
[xi] Section 190, Criminal Procedural Code, 1973
[xii] Section 154 to 176 of the Criminal Procedure Code, 1973
Author: Abhishek Gupta, Senior Associate and Akarsh Deep, Associate
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at email@example.com