Financial Crimes And Regulatory Enforcement
Introduction
Financial crimes broadly cover illegal acts involving money or financial assets. They include:
Fraud (corporate, banking, securities)
Money laundering
Insider trading
Tax evasion
Ponzi schemes
Counterfeiting and forgery
These crimes undermine economic stability, erode investor confidence, and affect the integrity of financial institutions.
Regulatory Authorities Involved
SEBI (Securities and Exchange Board of India): Regulates securities market, prevents insider trading, fraud.
RBI (Reserve Bank of India): Regulates banking and NBFC sector.
Enforcement Directorate (ED): Investigates money laundering under PMLA.
Central Bureau of Investigation (CBI): Investigates serious financial frauds.
Income Tax Department: Deals with tax evasion.
Serious Fraud Investigation Office (SFIO): Investigates corporate frauds.
Financial Intelligence Unit (FIU): Tracks suspicious financial transactions.
Legal Framework
Prevention of Money Laundering Act (PMLA), 2002
SEBI Act, 1992
Companies Act, 2013 (Provisions for fraud)
Indian Penal Code (IPC)
Income Tax Act, 1961
Foreign Exchange Management Act (FEMA), 1999
Benami Transactions (Prohibition) Act, 1988
Key Case Laws on Financial Crimes and Regulatory Enforcement
1. Sahara India Pariwar Case (2012–2020)
Facts: Sahara group raised over ₹24,000 crore through optionally fully convertible debentures (OFCDs) without SEBI approval.
Legal Issues:
Violation of SEBI regulations for raising money from the public.
Non-disclosure and fraudulent misrepresentation.
Judgment:
Supreme Court ordered Sahara to refund the entire money collected along with interest.
Sahara was held liable for contempt of court for non-compliance.
Ordered refund to investors under SEBI supervision.
Significance:
Strengthened regulatory authority of SEBI.
Emphasized investor protection and transparency in securities market.
2. Nirav Modi and PNB Fraud Case (2018)
Facts: Nirav Modi and associates defrauded Punjab National Bank (PNB) by obtaining fake Letters of Undertaking (LoUs) worth over ₹13,000 crore.
Legal Actions:
Investigated by CBI, ED for criminal conspiracy, cheating, and money laundering.
Charges under PMLA.
Outcome:
Nirav Modi fled India; arrested later in the UK.
Enforcement Directorate froze assets worth thousands of crores.
Multiple arrests and prosecutions ongoing.
Significance:
Highlighted need for better internal banking controls.
Increased scrutiny on LoUs and cross-border financing.
3. Harshad Mehta Securities Scam (1992)
Facts: Harshad Mehta manipulated stock prices by exploiting banking system loopholes, siphoning ₹4,000 crore via fake bank receipts.
Legal Proceedings:
SEBI barred Mehta from trading.
CBI investigated under criminal conspiracy and cheating.
Mehta was arrested and charged under various provisions.
Impact:
Reforms in stock market operations and banking regulations.
Establishment of NSE, improved SEBI powers.
4. Ketan Parekh Stock Market Scam (2001)
Facts: Ketan Parekh manipulated stock prices through circular trading and preferential loans from banks.
Legal Proceedings:
SEBI investigated market manipulation.
RBI took action against banks lending irresponsibly.
CBI arrested Parekh for fraud.
Outcome:
Banned from stock market for 14 years.
Highlighted banking sector's role in financial crimes.
5. Satyam Computers Fraud Case (2009)
Facts: Ramalinga Raju confessed to inflating revenues by ₹7,000 crore.
Legal Action:
SFIO, CBI, ED investigated under Companies Act and PMLA.
Charges of cheating, criminal breach of trust, and money laundering.
Judgment:
Convictions and jail sentences for Ramalinga Raju and others.
Corporate governance reforms introduced.
Significance:
Raised awareness on auditor accountability.
Strengthened corporate regulation.
6. Sahara QFL Case (Supreme Court Ruling on Regulatory Powers, 2012)
Facts: Question of whether Sahara’s issuance of OFCDs violated SEBI regulations.
Supreme Court Decision:
Affirmed SEBI’s jurisdiction over raising money from the public through OFCDs.
Sahara was directed to refund money to investors under SEBI supervision.
Impact:
Affirmed SEBI’s broad regulatory mandate.
Set precedent for investor protection enforcement.
7. Vodafone Tax Evasion Case (2012)
Facts: Vodafone’s acquisition of Hutchison’s Indian operations was questioned by Indian tax authorities for alleged tax evasion through offshore transactions.
Legal Journey:
Tribunal ruled in favor of Vodafone.
Indian Government appealed to Supreme Court.
Outcome:
Supreme Court ruled in Vodafone's favor, stating that offshore transaction is outside Indian tax jurisdiction.
Significance:
Landmark ruling on cross-border taxation.
Clarified scope of tax laws on foreign investments.
Conclusion
Financial crimes pose a serious threat to economic integrity.
Enforcement agencies like SEBI, ED, CBI, SFIO play a critical role in investigation and prosecution.
Legal provisions under PMLA, Companies Act, SEBI Act, and IPC provide the framework for action.
Landmark cases have reinforced investor protection, regulatory authority, and the need for corporate governance reforms.
Judicial pronouncements have clarified jurisdictional and procedural issues enhancing enforcement efficacy.
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