Prevention of Corruption Act, 1988

The primary anti-corruption statute in India, the Prevention of Corruption Act, 1988 (‘PCA’) criminalises receipt of any ‘undue advantage’ by ‘public servants’ and the provision of such undue advantage by other persons.  The PCA states that an ‘undue advantage’ is any gratification (not limited to being pecuniary in nature or estimable in money) other than the legal remuneration of such public servant.  Further, the term ‘public servant’ has a wide definition under the PCA, and includes, inter alia, any person in the service or pay of any government, local authority, statutory corporation, government company, or other body owned or controlled or aided by the government, as well as judges, arbitrators, and employees of institutions receiving state financial aid.  The Supreme Court of India has also held that employees of banks – public or private – are considered ‘public servants’ under the PCA.^[i]

The offences under the PCA, inter alia, include the following: (1) public servants obtaining or attempting to obtain any undue advantage with the intention of, or as a reward for improperly or dishonestly performing or causing performance of public duty either by himself or by another public servant; (2) public servants obtaining any undue advantage without (or for inadequate) consideration from a person concerned in proceedings or business transacted either by the public servant or any other public servant to whom such public servant is a subordinate; and (3) criminal misconduct by a public servant (which includes possession of disproportionate assets).

The PCA also targets the conduct of ‘middlemen’, influence peddlers or intermediaries who facilitate bribery by criminalising the act of obtaining any undue advantage to cause the improper or dishonest performance of public duty.  Until 2018, bribe-givers were brought within the ambit of the PCA through the offence of ‘abetment’ of the offences mentioned above; however, legislative changes made to the PCA in 2018 have expressly targeted bribe-givers by criminalising the act of providing or promising to provide a bribe to any person (irrespective of whether such person is a public servant or not) to induce or reward a public servant to improperly or dishonestly perform a public duty.  The bribe-giver may also be charged with ‘criminal conspiracy’ to commit offences under the PCA.  The penalties for various offences under the PCA include imprisonment ranging from six months to 10 years, and a fine (for which no maximum amount is prescribed).  Further, legislative changes to the PCA in 2018 also introduced provisions pertaining to attachment and confiscation of property procured by way of an offence under the PCA.  It is not inconceivable for investigating authorities to allege that any advantage received by a bribe-giver pursuant to the bribery (which is an offence under the PCA) could also be subject to attachment and confiscation, and not just the property of the public servant(s) in question.

Under the PCA, if there is an agreement or attempt to give or receive a bribe, this in itself is sufficient to constitute an offence (and attract prosecution), and the actual payment of a bribe is not necessary.  Further, it is immaterial whether the bribe has been obtained for a public servant’s own benefit or the benefit of any other person, either directly or through any other person.  The 2018 amendment states that the obtaining, accepting, or attempting to obtain an undue advantage in itself is an offence under the PCA, even though the ultimate performance of a public duty by a public servant is not improper.  Offences under the PCA are generally investigated by a special enforcement unit called the Central Bureau of Investigation (‘CBI’) or the anti-corruption departments of the relevant state police.

It may also be noted that the prior sanction of the government is required for the initiation of prosecution under the PCA against public servants.  However, this safe harbour applies only to proceedings against serving and retired public servants and not persons accused of giving bribes.

Legislative changes to the PCA in 2018 have included provisions which expressly state that where an offence is committed by a commercial organisation, such commercial organisation shall be liable to a fine, i.e., if any person ‘associated with the commercial organisation’ provides any illegal gratification with the intention of obtaining or retaining business or an advantage in the conduct of business for such commercial organisation.  A person is considered to be associated with a commercial organisation if such person provides services on behalf of such commercial organisation.  This is a question of fact – such person could be acting as an employee, agent or subsidiary of such commercial organisation.

The 2018 amendments also provide for liability of senior management or directors for offences committed by a company.  When an offence has been proved in court to have been committed by a commercial organisation with the consent or connivance of a director, manager, secretary or any other officer of such commercial organisation, such persons shall be liable to be proceeded against, and be punished with imprisonment and a fine if found guilty.  The maximum term of imprisonment provided is seven years.

Additionally, the PCA now includes an ‘adequate procedures’ defence for commercial organisations; however, the central government is yet to issue guidelines regarding the compliance measures required to be undertaken by a company.

Service rules for government officials

Government officials in India are also bound to conduct themselves in accordance with the ‘service rules’ applicable to different classes of officials, including the Central Civil Services (Conduct) Rules 1964 and the All India Services (Conduct) Rules 1968 (‘Service Rules’).  The Service Rules prohibit government officials from receiving gifts, hospitality, transport, or any other service or pecuniary advantage that exceeds certain specified thresholds from individuals other than near relatives or personal friends (with whom such official has no business dealings) without the sanction of the government; however, a casual meal, a casual lift, or other social hospitality is permitted.  Further, companies typically have internal policies governing offering of gifts and non-pecuniary benefits to public servants.

The Service Rules also provide that government servants are not permitted to accept lavish or frequent hospitality from persons with whom they have official dealings, and prohibit government servants from engaging in any trade, business, or other employment, canvassing in support of any business and participating, except in the discharge of official duties, in the registration, promotion or management of any company for commercial purposes.  A contravention of the Service Rules can lead to the initiation of disciplinary proceedings against the official concerned, the consequences of which can include a termination of service.

Foreign Contribution Regulation Act, 2010

The Foreign Contribution Regulation Act, 2010 (‘FCRA’) prohibits the acceptance of hospitality or contributions from ‘foreign sources’ by persons including legislators, judges, political parties or their office-bearers, government servants and employees of bodies owned or controlled by the government, except with the permission of the central government.  The FCRA defines the term ‘foreign source’ to include, inter alia, any foreign citizen, company, entity, multinational corporation, trust or foundation.  Further, non-governmental organisations (including charities) receiving contributions from a ‘foreign source’ are required to be registered under the FCRA and report such contributions.  The FCRA provides for an exception for personal gifts valued up to INR 100,000 (approximately USD 1,209, based on a value of USD 1 = INR 82.74); therefore, personal gifts under such valuation are not prohibited.  There are also provisions that restrict receipt of ‘foreign hospitality’ (i.e. hospitality outside India) by certain persons.

In addition to the requirement of obtaining the central government’s consent or registration for the purpose of receiving contributions from a foreign source, the FCRA provides for suspension and cancellation of a registration granted by the central government in case of a contravention of the terms of the registration, the FCRA, or in the larger public interest.

The FCRA also specifies punishments for various offences, including (in certain cases) imprisonment of up to five years in addition to a fine.  The FCRA also has provisions of seizure and confiscation of any article/currency which has been received in contravention of the provisions of the FCRA.  For repeat offenders, the FCRA imposes a five-year prohibition (from the date of subsequent conviction) on accepting foreign contribution for any person convicted of offences which relate to acceptance or utilisation of foreign contribution.  Where the offender is a company, persons such as directors and other managerial personnel may be held liable for the offence.  The FCRA also has provisions of composition (i.e. monetary settlement) of certain offences.

Right to Information Act, 2005

The Right to Information Act, 2005 (‘RTI Act’) allows Indian citizens to obtain information held by any public authority, subject to specified exceptions for national interest, legislative privilege and right to privacy.  The information requested by a citizen is required to be provided in a timely manner (within a period ranging from 48 hours (if the life and liberty of any person are involved) to 30 days from receipt of request).  Authorities have been set up at the central and state levels to monitor complaints from citizens under the RTI Act (including a refusal of access or a failure to respond).

Central Vigilance Commission Act, 2003

The central government constituted the Central Vigilance Commission (‘CVC’) pursuant to the Central Vigilance Commission Act, 2003.  The CVC is the government watchdog that is tasked with inquiring into (or commissioning an inquiry into) offences alleged to have been committed under the PCA.

Powers and functions of the CVC include, inter alia, exercising superintendence over the Delhi Special Police Establishment for the examination of offences under the PCA, and inquiring or causing an investigation to be made on the recommendation of the central government for offences under the PCA.  The CVC has the same powers as a civil court to summon and enforce attendance, receive evidence on affidavits, etc.

Lokpal and Lokayuktas Act, 2013

The Lokpal and Lokayuktas Act, 2013 is a relatively recent piece of legislation which provides for the establishment of corruption ombudsmen (called ‘Lokpal’ at the central level, and ‘Lok Ayuktas’ at the state level), which act independently from the executive branch of the government.  These bodies have been empowered to investigate allegations of corruption against public functionaries, including offences under the PCA (including allegations against the prime minister and other central ministers, members of parliament and other public servants).  Further, public servants are required to declare the assets held by them (together with their spouse and dependent children) on an annual basis.  The Lokpal also has powers of confiscation of assets, proceeds, receipts and benefits that have arisen or been procured by means of corruption in special circumstances.

Companies Act, 2013

The Companies Act, 2013 (‘Companies Act’) is India’s law that governs companies and places a strong emphasis on corporate governance and the prevention of corporate fraud.  Under the Companies Act, auditors and cost accountants are mandatorily required to report certain suspected frauds to the central government.  Certain types of companies are also mandated to establish a vigilance mechanism for the reporting of concerns.

The Companies Act defines the term ‘fraud’ quite broadly, and this could encompass acts of private or commercial bribery.  While the laws referred to in the preceding paragraphs relate to corruption involving public servants, the Companies Act is also attracted to cases of private bribery (which does not involve any public servant).  Fraud is a criminal offence under the Companies Act and is punishable with imprisonment ranging from six months to 10 years and/or a fine.

The Companies Act has also led to the empowerment, and practically the operationalisation, of the Serious Fraud Investigation Office (‘SFIO’), which is empowered to detect, investigate and prosecute white-collar crimes and fraud.  The SFIO has broad powers to conduct inspections, discover documents, search and seize evidence, carry out arrests, among others.  Besides the SFIO, the Companies Act also establishes the National Financial Regulatory Authority (‘NFRA’), which monitors and enforces compliance with the accounting and auditing standards under the Companies Act.

Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 (‘PMLA’) criminalises ‘money laundering’, which it defines as direct or indirect attempts to indulge in, knowingly assist or become party to, or actually involving in, a process or activity connected with the ‘proceeds of crime’ (including its concealment, possession, acquisition or use)^[ii] and projecting or claiming such property to be untainted property.  Under the PMLA, ‘proceeds of crime’ are defined to mean any property derived or obtained, directly or indirectly, by a person as a result of certain underlying identified crimes (which are considered predicate offences for the application of the PMLA).  Legislative changes to the PMLA in 2018 included ‘fraud’ under the Companies Act as one of the predicate offences which would attract the application of the PMLA.  As a result, any property derived or obtained pursuant to fraud is considered ‘proceeds of crime’ under the PMLA.  Offences under the PCA are also predicate offences under the PMLA.

The PMLA provides for the attachment of properties of accused persons (and other parties who are connected with the proceeds of crime) at a preliminary stage of the investigation (and even prior to conviction).

In March 2023, the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023 was introduced which widened the ambit of reporting entities under money laundering provisions to incorporate more disclosures for non-governmental organisations, and defined politically exposed persons under the PMLA in line with the recommendations of the Financial Action Task Force.  The recent amendments have also broadened the scope of the PMLA and imposed additional compliance obligations on various individuals and entities which, inter alia, include practising chartered accountants, company secretaries, cost and works accountants who conduct financial transactions on behalf of their clients, directors or secretaries of a company, partners of a firm, trustees of an express trust, and nominee shareholders of a company.  The central government also issued a notification bringing transactions involving crypto assets under the PMLA and laid out the nature of transactions to be covered under the PMLA.

In July 2022, in Vijay Madanlal Choudhary v Union of India,^[iii] the Supreme Court of India decided on the constitutional challenges to various provisions of the PMLA.  The Supreme Court’s verdict validated the wide gamut of powers relating to search, seizure and attachment of assets conferred on the investigation and enforcement authorities under the PMLA.  The court observed that there are adequate safeguards enshrined in the PMLA to prevent abuse of these powers.

This judgment of the Supreme Court has been the subject of widespread debate.  While discussing the confiscation proceedings under section 8 of the PMLA, the three-judge bench of the Supreme Court in Union of India v Ganapati Dealcom Pvt Ltd^[iv] noted that the ratio of the Vijay Madanlal Choudhary case requires further expounding, without which much scope is left for the arbitrary application of the provisions of the PML Act.  Amid concerns regarding arbitrary action under the PMLA, a review petition has been fled in the Vijay Madanlal Choudhary case.  At the time of writing, the petition is pending before the Supreme Court.

The offence of money laundering is punishable with imprisonment of between three to 10 years, and a fine.  Offences under the PMLA are cognisable and non-bailable in nature (i.e., an accused could be arrested without a judicial warrant and grant of bail is a matter of discretionary power in the hands of the court).

An investigation in relation to a contravention of the PMLA is initiated and conducted by the Enforcement Directorate in India.

The PMLA also requires banks, financial institutions and intermediaries (such as brokers and money changers) to maintain records of transactions and ‘know your customer’ details (as per norms specified by sectoral regulators), and to report suspicious transactions and transactions exceeding a specified value.

Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’)

This enactment levies penal rates of tax on any undisclosed asset or income held abroad by a person resident in India, and penalises individuals for non-disclosure of foreign income or assets, wilful attempt to evade tax, failure to furnish requisite returns, etc.  The objective of this Act is to target undisclosed income and assets (potentially derived through illegal means, including corruption) which have been ‘stashed’ offshore by resident Indians.

Fugitive Economic Offenders Act, 2018

In order to prevent offenders accused of economic offences from evading prosecution within the country, the Fugitive Economic Offenders Act, 2018 (‘FEOA’) was enacted on July 31, 2018.  The FEOA targets fugitive economic offenders against whom an arrest warrant has been issued for certain predicate economic offences involving INR 1,000 million (approximately USD 12.08 million, based on a value of USD 1 = INR 82.74) or more and who have either left the country to avoid criminal prosecution or are abroad and refuse to return to the country to face criminal prosecution.  Predicate offences under the FEOA cover, inter alia, cheating and counterfeiting under the Indian Penal Code, 1860, offences under the PCA and the PMLA, corporate fraud under the Companies Act, benami transactions and tax evasion, among others.  The strength of the FEOA lies in its far-reaching measure of immediate confiscation of all properties.

Endnotes:

The past few years have witnessed a stark change in the approach towards enforcement of anti-corruption laws in India.

The government has introduced (and strengthened) several laws specifically targeting corruption, and enforcement action on the same has also increased.  Law enforcement agencies have also initiated proceedings against various corporate giants and businessmen for defrauding public and private sector banks.  Another growing trend is that enforcement agencies have become more sophisticated in unravelling complex corporate or financial structures and have increased their reliance on technological tools.  Importantly, government agencies have also shown a willingness to take the assistance of specialists such as private forensic auditors or investigators to help them in this endeavour and provide expertise that they may lack themselves.  Indian enforcement agencies have also strengthened their relationships with agencies from other jurisdictions, and we have witnessed far more cooperation and coordination in cross-border enforcement efforts.

Perhaps the most welcome change has been an increased appetite among enforcement agencies to aggressively investigate and pursue corruption cases, even against high-profile politicians and powerful bureaucrats.  Additionally, enforcement agencies have initiated proceedings against statutory auditors of entities who have been subject to financial fraud.  The Ministry of Corporate Affairs, the Securities and Exchange Board of India (‘SEBI’) and the NFRA have been at the forefront of prosecuting audit firms who, while being appointed as statutory auditors of companies in India, have allegedly colluded with the management in perpetrating fraud upon the entity, its shareholders, banks and the public at large.

It is interesting to note that as regards the PMLA, the offence of fraud under the Companies Act was introduced as a scheduled offence on April 19, 2018.  Pursuant to Article 20 of the Constitution of India, any finding of fraud prior to such period should not trigger the provisions of the PMLA, since Article 20 of the Constitution of India expressly states that no person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence; neither shall they be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.  However, this principle in relation to the PMLA proceedings is in the process of being tested at the level of the Supreme Court of India.  While the High Court of Karnataka has upheld this principle in light of Article 20 of the Constitution of India in Directorate of Enforcement v. Obulapuram Mining Company Private Limited,^[v] the order passed by the High Court of Karnataka has been appealed before the Supreme Court of India, which has passed an interim order^[vi] stating that the High Court’s order will not operate as a precedent, pending the conclusion of proceedings before the Supreme Court.

Endnotes:

Attorney-client privilege

Indian law recognises that communications between an attorney and a client are privileged.  It is, however, important that advice on Indian law be sought when evaluating the availability of privilege in the specific facts of every case.  In the context of an investigation, we suggest that the company should appoint an Indian law firm to conduct the investigation, and (although this position remains untested as a matter of law) any experts, investigators or auditors should be appointed by the law firm to extend the privilege (to the extent available) to any work product prepared by such experts, investigators, or auditors to assist the lawyers in providing legal advice, especially in anticipation of litigation.

Data privacy concerns

Companies are generally permitted under Indian law to collect and review electronic data stored on their servers or electronic equipment (such as laptops or phones) in the context of an investigation, and this right should be specifically reserved by the company in its policy manuals or employee handbooks.  The Information Technology Act, 2000 and the rules issued thereunder regulate the collection, storage, use and disclosure of sensitive personal information (‘SPI’), such as passwords, financial information, medical records, biometric information, etc.; therefore, a company should obtain the consent of an employee before accessing or reviewing data from an employee’s personal electronic devices.  Recently, the Union government has brought in the Digital Personal Data Protection Act, 2023, which could potentially impact several aspects relating to data privacy.  However, at the time of writing this chapter, it is not yet operational, and could evolve further.

Reporting

There is no express obligation under Indian law to self-report offences under the PCA.  However, a reporting obligation imposed upon auditors may be triggered if the act also qualifies for reporting under the Companies Act, and frauds are required to be disclosed as a part of an auditor’s report.  Although the Code of Criminal Procedure, 1973 contains provisions relating to reporting obligations, it remains to be seen whether Indian courts will extend these obligations to offences under the PCA.

Proactive self-reporting of the kind available in the US (and related incentives regarding penalty and prosecution) is not currently available in India.

Presumptions and exemptions under the PCA

Where the authorities can establish the receipt of gratification or a valuable thing by a public servant, the PCA creates a legal presumption that the receipt was pursuant to an offence under the PCA – the burden of proof is then on the accused to demonstrate that such receipt was not improper.  Additionally, legislative changes made to the PCA in 2018 provide immunity to individuals accused of providing gratification, if such individual has been compelled to give such gratification and is willing to report the matter to the law enforcement authority or investigating agency within a period of seven days from the date of giving such gratification.

Multiplicity of enforcement proceedings and agencies

From the perspective of commercial organisations, it is important to recognise that multiple agencies with similar powers are often competent to investigate different aspects or facets of a single set of facts.  For example, the use of company funds to bribe an official of the central government may constitute related but distinct offences under the PCA, the PMLA and the Companies Act, each of which may be investigated by a different agency.  If the company in question is listed, SEBI may also initiate proceedings against the company.  SEBI has, in October 2020, mandated (with some exceptions) disclosure of commencement of forensic audits by listed companies, and of the forensic audit report with management comments on conclusion thereof.  This is, in addition to the obligation of listed companies to disclose frauds, especially those involving senior management.  Therefore, addressing any compliance issues and/or dealing with an investigation requires companies to adopt a nuanced and carefully crafted strategy.

Whistle-blowing

Although the legislation protecting whistle-blowers has been enacted by the Indian Parliament, it is still pending notification.  SEBI has meanwhile offered a monetary reward of 10% of the monetary sanctions to whistle-blowers in relevant cases, up to a maximum amount of INR 100 million (approximately USD 1.08 million, based on a value of USD 1 = INR 82.74).  The Companies (Auditor’s Report) Order, 2020 issued by the Ministry of Corporate Affairs requires disclosure on whether the auditor has considered whistle-blower complaints, if any, received during the year by the relevant company.

As noted above, we have seen greater levels of interaction between Indian authorities and their counterparts in other jurisdictions, and they have demonstrated a willingness to invoke treaties and join forces for mutual assistance to investigate corruption matters.  Therefore, corporations being investigated in other jurisdictions should also be prepared in respect of potential investigations in India.

India has ratified the United Nations Convention against Corruption (‘UNCAC’) and the United Nations Convention against Transnational Organized Crime and its three protocols; both of these Conventions mandate the criminalisation of corruption and bribery of public officials.  The legislative changes to the PCA in 2018 were introduced with the intention of removing any inconsistencies and aligning the provisions of the PCA with India’s international obligations under the UNCAC.

It may be noted that there is no existing Indian law that specifically applies to bribery of foreign public officials by Indian companies (although it could, as a general matter, be covered in the definition of ‘fraud’ under the Companies Act), and a bill introduced in Parliament in this regard (the Prevention of Bribery of Foreign Public Officials and Officials of Public Interest Organisations Bill, 2011) has since lapsed.

India has signed an Inter-Governmental Agreement with the United States to implement the Foreign Account Tax Compliance Act (‘FATCA’) in India, allowing automatic exchange of information between the two countries, and to combat tax evasion by nationals and companies in both countries.  India has been a signatory to the Convention on Mutual Administrative Assistance in Tax Matters since 2012, and has agreed to implement the Common Reporting Standard for automatic exchange of tax and financial information, with effect from 2017.

Corporate liability for bribery and corruption offences

The Supreme Court of India has recognised the principle of corporate criminal liability in India, and held that mens rea may be attributed to companies on the principle of ‘alter ego’ of the company, i.e., the state of mind of directors and managers who represent the ‘directing mind and will’ of the company.^[viii]  It has stated that in order to attribute the mens rea of a person or group of persons in a company, it is necessary to ascertain whether ‘the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons’.  Accordingly, for authorities to succeed in holding a company criminally liable, the mens rea of the relevant employees must be attributable to the company.  In practice, however, Indian authorities typically charge an employer company for the offence along with the individual employee (regardless of the seniority of the employee), and the liability of the company would need to be proved (or disproved) at trial.

Proposed reforms

In addition to incremental tightening of the stringent regulatory framework that has been put in place over the past decade or so, the three laws governing the Indian penal regulatory framework: (i) the Indian Penal Code, 1860; (ii) the Indian Evidence Act, 1972, and (iii) the Code of Criminal Procedure, 1973 are proposed to be replaced by a new set of laws.  The implications of recent developments, along with their enforcement and any practical difficulties arising therefrom, and the impact of these new laws once effective, will need to be analysed in the future.

Endnote:

^[viii]   Iridium India Limited v. Motorola Incorporated & Ors., AIR 2011 SC 20.