Study Notes: Serious Fraud Investigation Office

By Sahil Kumar 12 Minutes Read

Introduction

With the advancement of technology and the passage of time, a relatively new type of crime has emerged, known as white-collar or corporate crimes. These offenses are typically linked to individuals within the corporate system driven by greed, selfishness, cunning, and strong social and political connections. This issue has become a significant concern for the current government, which is dedicated to the welfare of the state and society. White-collar crimes are predominantly found within the upper echelons of the business community. To effectively control and manage corporate offenders and crimes, it is essential to enforce laws rigorously and ensure the proper functioning of enforcement agencies. Aristotle also noted that human greed is the root cause of the rise in corporate and financial crimes.

Corporate criminal liability refers to the extent to which corporations, as legal entities, can be held responsible for the actions of their employees. In India, this concept was initially unrecognized, but its importance has grown over time. The Companies Act of 2013 introduced provisions addressing corporate fraud. Specifically, Section 447 of the Act outlines the punishment for fraud, including financial statement fraud, fraud by company officers, corporate crimes, and money laundering within the company. This section defines fraud, wrongful gain, and wrongful loss, encompassing any act, omission, or concealment intended to deceive or gain unlawful profit at the expense of the company’s stakeholders.

The Companies Act of 2013 treats fraud as a serious, non-compoundable offense, punishable by imprisonment and fines. In addition to Section 447, the Act includes approximately 20 other sections addressing fraud committed by directors, key managerial personnel, auditors, and company officers. The Act holds professionals liable for fraud, extending to personal liability if the company violates these provisions. Consequently, when an employee is found guilty of criminal conduct, they face both criminal and personal liability.

Meaning

As per the Companies Act, 2013, Serious Fraud Investigation Office (SFIO) has been established through the Government of India vide Notification NO. S.O.2005(E) dated 21.07.2015.[1]

The Central Government shall, by notification , establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company : Provided that until the Serious Fraud Investigation Office is established under subsection (1), the Serious Fraud Investigation Office set-up by the Central Government in terms of the Government of India Resolution No. 45011/16/2003-Adm-I, dated the 2nd July, 2003 shall be deemed to be the Serious Fraud Investigation Office for the purpose of this section.[2] It is a multi-disciplinary organization under the Ministry of Corporate Affairs, comprising experts in accountancy, forensic auditing, banking, law, information technology, investigation, company law, capital markets, and taxation. This organization is tasked with detecting and prosecuting, or recommending for prosecution, white-collar crimes and frauds. Investigations into the affairs of a company are assigned to the Serious Fraud Investigation Office (SFIO) when the Government deems it necessary, based on:

• A report from the Registrar or an inspector under Section 208 of the Companies Act, 2013;
• Notification of a special resolution passed by a company indicating the need for an investigation;
• Public interest considerations; or
• Requests from any department of the Central Government or a State Government.

The SFIO is headed by a director, who holds the rank of Joint Secretary to the Government of India. The Director is supported by Additional Directors, Joint Directors, Deputy Directors, Senior Assistant Directors, Assistant Directors, Prosecutors, and other secretarial staff. The SFIO’s headquarters are located in New Delhi, with five regional offices in Mumbai, New Delhi, Chennai, Hyderabad, and Kolkata.

Operation

The Serious Fraud Investigation Office (SFIO) began operations on October 1, 2003, established by the Government of India following recommendations from the Naresh Chandra Committee on Corporate Governance. The committee proposed the creation of the SFIO to investigate corporate frauds under the Companies Act, 2013. The agency’s formation was driven by the need to address white-collar crimes after notable incidents such as the Stock Market scam and issues with non-financial banking companies.

The SFIO is a multidisciplinary organization comprising experts in capital markets, forensic auditing, finance, taxation, accountancy, information technology, corporate laws, customs, and investigation. It is led by a director, supported by a team of additional directors, joint directors, deputy directors, senior assistant directors, assistant directors, prosecutors, and secretarial staff.

The Central Government can refer complex cases involving significant public interest or multidisciplinary matters to the SFIO. The agency’s role is to uncover complex corporate processes and fraudulent behavior, which are challenging for state-level law enforcement agencies to handle due to a lack of specialized training, intelligence, and skills.

Under the Companies Act, 2013, the SFIO investigates company affairs based on:

1. Reports from the Registrar of Companies or an inspector.

2. Requests by companies through special resolutions.

3. Matters of public interest.

4. Appeals from any Central or State Government department.

Powers

Once a matter is referred to the SFIO by the Central Government, no other investigating agency or state government can continue investigations related to the same offenses. All relevant documents and records must be transferred to the SFIO. The Director of the SFIO appoints an Inspector to lead the investigation, who has the authority to conduct searches and seizures under the Companies Act, 2013[3]. The Inspector can enter company premises, examine financial records, and access auditor reports and related documents.

If the Director, Assistant Director, or Additional Director of the SFIO has sufficient evidence of guilt, SFIO officers have the power to arrest the person involved and forward all relevant materials to the SFIO. The SFIO must produce any arrested individual before a Judicial Magistrate or Metropolitan Magistrate within 24 hours.

After completing an investigation, the SFIO submits a report to the Central Government’s Ministry of Corporate Affairs. The report is reviewed for legal advice, and the Central Government may instruct the SFIO to initiate legal action against the company and its implicated officers and employees. The SFIO’s investigation report is considered equivalent to a report by a Police Officer under Section 173 of the Code of Criminal Procedure, 1973.

Function

The Central Government sets criteria for referring cases to the SFIO:

a. Involvement of interdepartmental and multidisciplinary complexities.

b. Significant public interest implications, judged by the number of affected persons or the scale of monetary misappropriation.

c. Potential for inquiry outcomes to improve systems, laws, and procedures.

During an investigation, all company directors, managers, and employees are required to provide information and documents to the SFIO officers. The work of this agency/ organisation is to investigate the fraud cases^[4] only.

The agency investigates various types of financial fraud, including falsification of financial statements, fake invoicing, capital market fraud, and fraudulent transactions by real estate companies.[5]

Complaints are registered by the SFIO in competent courts. By 2016, 1,184 cases of prosecution had been filed, resulting in orders for recovery, fines, and imprisonment in 103 cases, while some cases were dismissed due to limitations or ongoing appeals and revisions.

Conclusion

The Serious Fraud Investigation Office (SFIO) occupies a critical position in safeguarding India’s corporate sector from fraud and economic offenses. Since its inception, the SFIO has demonstrably unraveled intricate financial misconduct, ensured accountability of actors, and preserved the integrity of the business landscape. Its multidisciplinary composition, leveraging expertise in law, finance, accounting, and information technology, empowers it to confront sophisticated fraudulent schemes that threaten economic stability and public trust.

While navigating numerous challenges, including resource limitations and the dynamic nature of financial crimes, the SFIO exhibits continuous adaptation and capability enhancement. The agency’s proactive initiatives, such as strengthened collaboration with regulatory counterparts and the integration of advanced forensic tools, represent positive strides. However, ongoing reforms, enhanced autonomy, and increased resource allocation remain essential to further empower the SFIO in accomplishing its mission.

Ultimately, the SFIO’s effectiveness extends beyond investigation and prosecution, encompassing a crucial role in deterring potential fraudsters. By ensuring rigorous enforcement of corporate governance regulations and advocating for ethical business practices, the SFIO significantly contributes to fostering a transparent and robust economic environment in India. As the corporate landscape continues to evolve, the SFIO’s unwavering commitment to upholding principles of justice and financial propriety remains indispensable for sustaining long-term economic growth and public confidence.

[1] https://sfio.gov.in/en/about-department/introduction/

[2] The Companies Act, 2013, s. 211.

[3] The Companies Act, 2013, s. 209.

[4] Kingsley Napley, “Serious Fraud Investigation and Trial” (Fourth edition, LexisNexis, 2010).

[5] Tabrez Ahmed & Radheshyam Prasad, “Role of Serious Fraud Investigation Office (SFIO) in Protection of Investors Interest ”, 1 AD VALOREM III.

Sahil Kumar