Law on Economic Offences

In India, there is no legislation as such that defines an ‘economic offence’. Economic

offences encompass all crimes which occur during the course of any economic or business
activity.
In the beginning, such offences including corruption and criminal misconduct were dealt with
under the provisions of the Indian Penal Code, 1860 (‘IPC’). However, with the steady
increase in economic offences of many varieties, such as tax evasion, trafficking, smuggling
etc., all of which are too specific to be brought under the purview of IPC alone, the
Government of India felt the need for creating different legislations dealing with such
offences.
The salient features of an economic offence were first discussed in the Report of the 47th Law
Commission of India (1972), formulated on the topic of ‘Trial and Punishment of Social and
Economic Offences’ (‘Report’).  The Government of India, while formulating this Report,
had recognized economic offences as a separate category of crimes that require special
attention, to ensure swift disposal of cases and meting of punishment. Thereafter, special
legislation such as the Prevention of Money Laundering Act, 2002 (‘PMLA’) was brought
out to prescribe the procedures and penalties for economic offences.
It goes without saying that, due to such an ad-hoc arrangement, one set of facts expose an
offender to prosecution under multiple legislations. Consequently, the gravity of the crime as
well as the parameters for granting bails or deciding punishments for such crimes have not
been very clear and there is an overlap of procedures. Therefore, in order to fully understand
and organize how economic offences are being tackled today, we have examined the existing
laws in relation to such offences, the amendments to the regime brought out by the
Companies Act, 2013 (‘2013 Act’), the judicial history of granting of bails/ anticipatory bails
with respect to economic offences, and scope for further changes.
We summarize the legislations related to economic offences as follows:
 The IPC provides the punishment for certain economic offences such as criminal
misappropriation, criminal breach of trust, receiving or dealing in stolen property,
cheating, creating fraudulent deeds, concealment of property, forgery, falsification of
accounts, sale of adulterated drugs etc.
 The Central Excise Act, 1944 provides the punishment for evasion of excise duty.
 The Income Tax Act, 1961 criminalizes tax evasion, income concealment etc. The Act
also imposes a penalty on failure to furnish returns, comply with notices issued under
the Act or concealment of particulars of income as well as any fringe benefits.
 The Customs Act, 1962 regulates how the goods should be moved in or out of the
country, confiscation for improperly imported goods, and for safeguards against
smuggling.
 The PMLA is a landmark legislation in India that lays down what acts constitute
money laundering, punishment for money laundering, etc.
1. Section 3 of the PMLA defines ‘Money laundering’ as the direct or indirect attempts
to indulge or knowingly assist or knowingly be a party or be actually involved in any
 process or activity connected with the proceeds of crime and protecting it as untainted
property.
2. ‘Proceeds of crime’ has been defined under Section 2(u) as any property derived or
obtained, by any person as a result of criminal activity being directly a Scheduled
Offence or relating to a Scheduled Offence or the value of any such property.
3. The Schedule mentioned in the PMLA classifies the various offences, referred to as
‘Scheduled Offences’, into 3 parts, basis which the penalty is prescribed. Even though
the offences described under the Schedule have already been covered under existing
legislations like the IPC, the PMLA has been created to cater particularly to the
handling of the proceeds from such offences.
4. The Bombay High Court, in the case of Hasan Ali Khan v. UOI , stated that an
offence is committed under the PMLA when an attempt is made to demonstrate a
legitimate source of earning with respect to a tainted property. The decision thus gave
judicial support to the type of offences outlined under the PMLA.
 Money laundering is not just tackled through the PMLA. The Reserve Bank of India
(RBI), in exercise of its powers conferred under the Foreign Exchange Management
Act, 1999, as well as PMLA, has come out with the Master Circular on Know-Your-
Customer (KYC) norms/ Anti-Money Laundering Standards/ Combating of Financing
of Terrorism (CFT)/ Obligations of banks under PMLA, in 2008, that has made it
mandatory to identify customers through KYC, to prevent money laundering. This
Circular has been revised periodically and the introduction of this Circular, along with
additional guidelines dealing with anti-money laundering have been instrumental in
the efforts to address serious economic offences.
 The Insolvency and Bankruptcy Code, 2016 deals with fraudulent initiation of
bankruptcy proceedings, by imposing penalty of not less than INR 1 lakh which may
extend to INR 1 crore in such cases.
 Other offences include land grabbing, for which many States have enacted
legislations, including the P. Land Grabbing (Prohibition) Act, 1982; credit card
fraud, dealt with in the IPC and the Information Technology Act, 2002; and stock
market manipulations, regulated by the Securities and Exchange Board of India
(SEBI) through the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Markets) Regulations, 1995, and other such rules and
regulations.
 Various laws such as the Transplantation of Human Organs and Tissues Act, 1994,
which punishes trafficking of human organs, the Arms Act, 1959 against trafficking of
arms etc., have also been instituted to combat specialized instances of crime that
affect the economy.
 Keeping in mind the offenders that have crossed the Indian borders and are evading
arrest, the Central Government had also passed the Fugitive Economic Offenders
Act, 2018 (‘FEO Act’) which specifically caters to deter fugitive economic offenders
from evading the process of law in India. While said Act does not define ‘economic
offences’, the Schedule to the Act once again contains a list of offences for which, if
 any person has committed and has thereafter left India to avoid criminal prosecution,
or being already abroad refuses to return to India, he is deemed a ‘fugitive economic
offender’. The FEO Act borrows a lot of definitions from PMLA and empowers the
Directors and Deputy Directors appointed under PMLA with additional rights to
report/ declare fugitive economic offenders, details of their properties, etc., for
attachment of the same.
Fraud under the Companies Act, 2013:
The list of legislations mentioned above show the many branched way in which economic
offences are provided for in the country. While these legislations are structured in a ‘cure-
based’ manner viz., post commission of the offences, certain types of fraud as falling under
the 2013 Act are subject to a ‘prevention-based’ model i.e., as soon as any event of fraud is
detected, various steps are mandated under the Act to tackle them quickly and efficiently.
To begin with, as economic crime has taken on new and larger forms, the definition of ‘fraud’
in Section 447 of the 2013 Act has also been expanded to include any act, omission,
concealment of fact, or abuse of position that is intended to gain an unfair advantage over, or
harm the interests of the company, its shareholders and creditors. This brings all forms of
corruption, deception, conflicts of interest, and bribery under its purview.
As per the new legislation, as soon as fraud is detected, it is recommended to reopen account
books, and go for voluntary amendment of financial statements or the Director's Report, with
the agreement of the jurisdictional National Company Law Tribunal (NCLT). Until now,
auditors were only mandated to report serious fraud and were not required to evaluate
whether fraud had occurred in any and every transaction. However, auditors now have an
additional burden to pose as whistle-blowers by reporting immediately to the Central
Government any fraud being perpetrated in the company’s affairs.
The Serious Fraud Investigation Office (SFIO), subsisting under the 2013 Act, is now a
statutory entity with the authority to make arrests for fraud-related offences. The National
Financial Reporting Authority (NFRA) is meant to regulate auditors and has extensive
powers to investigate professional or other misconduct by chartered accountants.
Shareholders can also initiate class action suits against the company, its officers and auditors
for failing to protect their interests. Accordingly, the penalties under the revamped law are
more severe and are not compoundable. With the introduction of the new Act, even offences
such as not filing of balance sheet, non-distribution of dividends without legitimate reasons,
etc., are also open to judicial action.
Law relating to grant of bail/ anticipatory bail:
With the nature of these offences being severe, the protection offered to the accused in such
offences also needs to be held with the highest safeguards. That means the strictest standards
are to be employed when it comes to granting bail/ anticipatory bail to the accused in such
economic offences.
This has been observed by the Supreme Court in the case of Y.S. Jagan Mohan
Reddy  v. C.B.I., while considering a bail application, that:
‘The economic offence having deep-rooted conspiracies and involving huge loss of public
funds need to be viewed seriously and considered as grave offences affecting the economy of
the country as a whole and thereby posing serious threat to the financial health of the
country. While granting bail, the Court has to keep in mind the nature of accusations, the
nature of evidence in support thereof, the severity of the punishment which conviction will
entail, the character of the accused, circumstances which are peculiar to the accused,
reasonable possibility of securing the presence of the accused at the trial, reasonable
apprehension of the witnesses being tampered with, the larger interests of public/State and
other similar considerations.’
This stance has also been maintained by the Supreme Court in Chidambaram v. Directorate
of Enforcement, where anticipatory bail was denied by the Apex Court stating that the
powers of anticipatory bail under Section 438 of the Code of Criminal Procedure, 1973 is an
extraordinary power and that should be exercised sparingly, more so in cases of economic
offences which affect the very fabric of the economy in our society.
In the recent cases of Ashwini Kumar Patra v.  Republic of India and Pankaj
Grover v. Directorate of Enforcement, the prayers for bail have been dismissed outright by
the High Courts, citing the huge amount of proceeds of crime. The Court also observed that
the economically sound position of the accused would make them a flight risk, as they could
abscond to any other country avoiding arrest as well as judicial proceedings. In short, a
common yardstick adopted by all Courts when granting bail, that comes out from all these
cases, is the amount of proceeds of crime, the apprehension of witness tampering or the
chance for the accused to abscond, etc.
Scope for amendments in the law for economic offences:
With the steep rise in economic offences in India, the existing judicial system is over-
burdened with cases, in turn resulting in decrease of arrests and convictions. Such dire
situations call for a special court/ body that is dedicated solely to dealing with economic
offences, to ensure that there is speedy disposal of cases.
Various attempts have been made over the past few years to pave way for this. The Special
Court (Trial of offences relating to transactions in securities) Act, 1992 recommends
constitution of special courts for trying offences related to securities. The PMLA also
provides for setting up of special courts in relation to dealing with proceeds of crimes
specified under the Schedule of said Act. The Special Courts set up under PMLA are also to
oversee cases under the FEO Act. Basis such legislations, various special courts have been set
up in the country.
That being so, while the special courts under said legislations have thus been constituted,
sadly, the number of such designated courts are very limited and the Government has been
slow in implementing these legislations.
Further, not just a procedural gap with the dealing of economic offences, but when it comes
to substantive laws, the Banking Regulation Act, 1949 which is charged with regulating
banking companies does not deal explicitly with any cases of fraud. Accordingly, Section 403
of IPC (Criminal misappropriation) is to be relied upon heavily for cases of bank fraud. This
lapse is evidenced by the frequent reporting of scams, such as the misappropriation of funds
from the Punjab National Bank (PNB), the more recent Bike Bots scam case, amongst others.
Even with respect to insurance frauds, the Insurance Act, 1938 does not define or provide
effective legal remedies for such acts. One has to once again resort to action under the IPC.
Therefore, there is much scope for change in the existing laws, on both the procedural and
substantive front.
Conclusion:
The position of economic offences is one that is riddled with lacunae and is not yet on solid
ground. With the statistics of economic offences showing a definite increase, the Government
is now compelled to start coming up with ways to reduce the cases already piled in courts, by
instituting separate special courts or tribunals, and by passing special legislations. It is clear
that the Government is aware of the burgeoning economic offences in the country and is
conducting research into improving the existing laws and streamlining them, to reduce
confusion and overlaps.
However, looking at the slow evolution and execution of laws related to economic offences,
it cannot be concluded that we are in a satisfactory regime for such offences at the moment.
Developing more judicial or quasi-judicial fora to ensure speedier and more efficient disposal
of cases has become the need of the hour.