WHISTLEBLOWING AND CORPORATE GOVERNANCE: STRENGTHENING ETHICAL COMPLIANCE

Yash Roy, Upasna Upadhyay, Kusha Mehta, Battimedi Mokshagna, N. Veera Syamala Devi

ABSTRACT

White-collar crimes, which range from insider trading and fraud to money laundering and cybercrime, cause significant financial and psychological harm to people, companies, and entire economies. Using laws like the Dodd-Frank Act and the Bribery Act, nations including the United States, the United Kingdom, and Singapore have created stringent legal structures to tackle these crimes. India continues to grapple with significant challenges related to enforcement, the protection of whistleblowers, and corporate accountability. In this context, could innovative technological solutions such as blockchain and artificial intelligence provide viable answers?

Consider the notorious Enron scandal, which serves as a quintessential example of corporate malfeasance. Executives engaged in the manipulation of financial records, concealing billions in liabilities while deceiving investors. The repercussions of this scandal resulted in one of the most substantial bankruptcies in history and spurred essential regulatory reforms, including the Sarbanes-Oxley Act, which was designed to improve financial transparency.

This paper intends to delve into the nature of white-collar crime, examining its ramifications and the associated corporate liability. By scrutinizing international legal frameworks and enforcement strategies, it aims to identify the strengths and weaknesses of current legislation and investigate potential reforms that could enhance accountability within the corporate sector.

Keywords: White collar crime, corporate liability, whistleblower, governance, fraud.

1. INTRODUCTION

Sociologist Edwin Sutherland used the term “white collar crime” in 1939 to describe non-violent crimes carried out for financial gain by people in positions of authority and trust, usually in their workplaces. Instead than using physical force, this type of crime is defined by dishonesty, secrecy, and a breach of trust. White collar crimes can be subtle and impact a wide spectrum of victims, including people, companies, and governments, in contrast to blue-collar crimes, which are frequently violent and emotionally motivated.

Possibly the most significant recent development in criminology, especially since World War II, has been the emergence of the concept of “white-collar” crime as an area of scientific inquiry and theoretical speculation. It is true, of course, that this crime itself is not wholly new; robber barons have been exposed in the past, and muckrakers have long decried corruption and venality in high places. But the generalization of such phenomena and the incorporation of facts concerning illegal behavior of the higher classes into theories of crime causation is a product of recent effort^[1].

A wide range of illegal behaviors, including fraud, embezzlement, insider trading, money laundering, and cybercrime, are included in the broad category of white collar crime. These crimes are frequently committed by those in positions of authority within businesses or government agencies, such as managers, executives, accountants, and public officials, who use their position to commit dishonest business activities for their own benefit. Legal and Sociological Opposition to the Concept of White-Collar Crime- The very narrowest legal conceptions of the criminal view him not only as a person who has engaged in acts or omissions forbidden by the penal law, but as a person convicted by due process. Hence, the unapprehended or undetected violator is not a criminal for either “practical” or “theoretical” purposes^[2].

The non-violent nature of white collar crime is one of its distinguishing features.  White collar crimes are based on dishonesty and manipulation, as opposed to traditional crimes that include threats or physical harm to someone.  Because there is less violence, these crimes may seem less serious, but the repercussions can be disastrous.  Victims may experience severe financial losses, psychological anguish, and a decline in confidence in the organizations that are meant to safeguard them. The recent explosion of interest in white-collar illegality has not greatly changed matters. Scholars have concentrated on  corporate crime and given less attention to illicit occupational behavior^[3].

Corporate liability determines how much a company can be held legally responsible for the actions or negligence of its employees and business partners. Many business owners choose to incorporate their companies to protect themselves from personal liability related to the company’s operations. Legally, corporations are treated as independent entities, separate from their shareholders—almost like a legal “person.” This means a corporation can own assets, take on debt, and be held accountable for its actions without directly impacting the personal finances of those who own it.

1. WHISTLEBLOWERS: INDIA’S CHIEF ARMAMENT AGAINST WHITE-COLLAR CRIMES

A whistleblower in accordance with the Oxford English Dictionary is “a person who informs on a person or organization engaged in an illicit or unethical activity.”^[4] This means that a whistleblower in the corporate field can either be a company’s own corporate employee or could be an external auditor, journalist or a public official. Whistleblowers play a very crucial role in uncovering frauds and acts of malfeasance in the corporate ecosystem. They also play a major contributory role in exposing corporate swindles and financial scams before major public losses can occur. Deeds of corporate deceit and dishonesty are often hidden from the public eyesight; hence whistleblowers act as a safeguard in the prevention of white-collar crimes by reaching those places where the general public usually can’t.

India has one major provision pertaining to protecting whistleblowers in India, which is the Whistle Blowers Protection Act, 2014^[5], but this legal provision has its fair share of ramifications which if not improved acts as a vacuum in the prevention of corporate crimes. The Whistle Blowers Protection Act, 2014 was enacted by the Government of India to protect individuals exposing corruption in government offices. This act provided anonymity and penalised threats against whistleblowers ensuring the safety of whistleblowers in India. But a major negative pushback of this act is its exclusion of the private sector. This act provides no protection for corporate whistleblowers and neither encourages whistleblowing by providing financial incentives like other countries such as the United States of America.

Some regulations under statutory governmental bodies like the Securities and Exchange Board of India commonly known as the SEBI allow reporting acts of dishonesty, financial cheating, and fraud in listed corporations but there is no strict enforcement or no strict policing of the same. Without any protection or financial incentive from the government whistleblowers find it futile to report white-collar crimes or frauds. The hole in the whistleblower legislation of the Indian Government is explicitly seen in the Manjunath case^[6] which revolved around the death of Shanmugam Manjunath who was murdered after exposing petrol adulteration in the Indian Oil Corporation, and even though the 2014 act had been introduced after this case whistleblowers in India still face prominent threats to their lives due to the ineffectiveness of Indian laws pertaining to this issue.

Taking insight from the Dodd- Frank Act (2010)[7] would help India in developing whistleblower friendly laws as well as provide the Indian legislation with an efficient force in fighting corporate crimes. This would also in turn increase corporate liability and help in diminishing corporate malfeasance in India. India has an urgent need to amend the Whistle Blowers Protection Act, 2014, the first and major step would be to extend the act to the corporate ecosystem. Introducing monetary incentives and autonomous whistleblower organizations or entities could also play a positive force in navigating through corporate white-collar crimes aiding in reducing them.

• PRECEDENTS

White-collar crime has attracted a lot of attention over the years because of its complexity and the widespread harm it can do to people, companies, and the economy.  In addition to influencing judicial precedents and regulatory changes, a number of high-profile cases have influenced how the general public views white-collar crime.

Enron Scandal^[8]: One of the most well-known cases of corporate fraud in history was the Enron scandal, which surfaced in the early 2000s.  Once a well-known energy business with headquarters in Houston, Texas, Enron Corporation became associated with corporate wrongdoing after it was discovered that it had committed significant accounting fraud, which finally caused it to file for bankruptcy in December 2001. Enron executives misled investors and regulators about the company’s financial stability by inflating profits and hiding debt through intricate accounting techniques.  A number of high-ranking executives, including Chairman Kenneth Lay and CEO Jeffrey Skilling, were convicted as a result of the scandal’s aftermath.  The Sarbanes-Oxley Act was passed in 2002 as a reaction to the scandal, imposing more stringent rules on financial disclosures and corporate governance to shield investors from dishonest practices.

WorldCom Accounting Scandal[9]: When it was discovered that WorldCom had used dishonest accounting techniques to inflate its assets by almost $11 billion, the accounting scandal broke out in 2002.  Investors suffered large losses and bankruptcy filings as a result of the incident.  Bernard Ebbers, the CEO of WorldCom, was sentenced to 25 years in prison after being found guilty of conspiracy and securities fraud.  Increased supervision by regulatory agencies like the SEC resulted from this case, which further highlighted the need for regulatory reforms in financial reporting.

1. COMPARATIVE ANALYSIS OF INDIA’S WHITE-COLLAR CRIME LAWS AND CORPORATE LIABILITY WITH OTHER COUNTRIES
2. Legal frameworks and enforcement mechanisms^[10]

United States: One of the strongest legal systems for white-collar crimes is found in the United States, where stringent corporate governance is ensured by legislation like the Dodd-Frank Act (2010)[11] and the Sarbanes-Oxley Act (2002)[12]. Financial fraud is regularly investigated and prosecuted by organizations such as the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC).

United Kingdom: The Bribery Act (2010)[13] of the United Kingdom makes corruption and bribery illegal, even if they are carried out abroad. Large-scale financial crimes are prosecuted by the Serious Fraud Office (SFO), which makes sure that both individuals and businesses are held accountable.

Singapore: Singapore’s Corrupt Practices Investigation Bureau (CPIB) oversees enforcing the country’s zero-tolerance policy against financial crimes. Corporate fraud is subject to severe penalties under the Companies Act, and white-collar offenders are subject to prompt prosecution.

1. Speed and Efficiency of Prosecution

United States and United Kingdom: Specialized financial crime courts frequently expedite trials involving white-collar criminality. Justice is severed quickly since convictions are obtained in a matter of months or years, Enron executives (2001) were convicted within five years, but executives involved in the Volkswagen emissions scandal (2015) were tried quickly.

1. Corporate Criminal Liability and Punishment

United States: Corporations are held accountable for misconduct all around the world under the Foreign Corrupt Practices Act (FCPA). CEOs may face decades in prison) for example, Bernie Madoff [14]was sentenced to 150 years for security fraud). United Kingdom: Companies are held legally responsible for fatalities brought on by carelessness under the 2007 Corporate Manslaughter and Corporate Homicide Act. Penalties include the possibility of the company’s liquidation and limitless penalties.

1. Whistleblower Protection and Corporate Governance^[15]

United States: The Dodd-Frank Act gives whistleblowers a reward of up to 30% of money that is recovered. More workers will disclose fraud if they are protected from reprisals.

 United Kingdom and Singapore: Laws protecting whistleblowers are robust, gathering privacy and providing cash rewards.

1. Corporate Liability in White-Collar Crimes: Legal Provisions and the Need for Stronger Reforms

Though there is no specific legislation exclusively dealing with corporate liability regarding white-collar crimes, certain provisions in various acts cover this aspect to some degree. Under the Bharatiya Nyaya Sanhita, 2023, Section 1(3) stipulates that every person who violates the act can be made liable[16]. Further, Section 2(26) defines a ‘person’ to include any company or association, or body of persons, whether incorporated or not[17]. The Prevention of Corruption Act, 1988 under Section 8(1) (third proviso) prescribes only a fine as a punishment when a commercial organization commits the offense of bribing a public servant[18]. Similarly, Section 62 of The Prohibition of Benami Transactions Act, 1988 imposes liability for offenses relating to Benami transactions committed by companies. This liability extends not only to the company itself but also to individuals in charge and responsible for operations. However, this liability can be avoided by presenting the evidence that the individual had no knowledge of the offense[19]. Additionally, Section 62(3), holds the director, manager, and secretary liable if their consent, negligence, or connivance is proved[20]. Section 70 under the Prevention of Money Laundering Act 2002[21] governs offenses by companies and aligns with Section 62 of The Prohibition of Benami Transactions Act, 1988[22].

India must implement more robust legislative changes and enforcement measures in order to successfully combat white-collar crime. Here are a few crucial areas that need work:^[23]

• Stricter Penalties for Executives: Prolonged incarceration and confiscation of personal property are necessary.
• Better Protection for Whistleblowers: More financial incentives and legal protections are needed.
• Cross-Border Enforcement: Increasing MLATs and applying diplomatic pressure to expedite extradition.
• Technology-Driven Prevention: Blockchain for transparency and artificial intelligence for fraud detection.

1. CONCLUSION

As Corporations continue to expand their operations, ensuring accountability and liability for white-collar crimes within corporate bodies becomes more and more crucial. This study analyses the legal principles governing Corporate Liability in India, relevant judicial precedents, concept of whistle-blowers and provides a comparative analysis with the international frameworks.

There are different models of corporate liability, including vicarious liability, which holds the entire corporation responsible, and the identification doctrine, which makes specific individuals within the Corporation liable. Although Indian Courts frequently hold entire corporations liable for white-collar crimes that occur within them, the effectiveness of such rulings remains questionable. This is because in most cases, penalties are limited to monetary fines, which do not serve as adequate deterrents for large corporations with substantial finances.

However, while criminal sanctions such as imprisonment can prevent such crimes, an excessive focus on punitive measures alone may impede encouragement in the corporate sector. Therefore, a well-balanced approach that imposes stringent penalties for white-collar crimes in corporations while also promoting ethical corporate behaviors such as tax incentives for maintaining transparency is essential.

Moreover, since many white-collar crimes occur beyond national borders, international cooperation is also vital for the effective enforcement of a law dealing with corporate liability. A strengthening collaboration between regulatory authorities, and developing well-organized extradition treaties can greatly improve the prosecution of offenders of such crimes.

One of the key challenges in tackling corporate crimes is proving guilty intent. In addition, corporate influence over regulatory bodies and political authorities can result in weak enforcement of the laws, which makes accountability even more difficult. To overcome these challenges effectively, proper legislation is essential for the corporate sector. Emphasizing the need for the same, the Honourable Supreme Court of India has also underscored the importance of a well-defined framework to establish clear liability in corporate crimes. With the growing rise of white-collar crimes in India, the Indian legal system must continuously strive to adapt to tackle these issues.

In Conclusion, developing a comprehensive legal framework with a multi-dimensional strategy that consists of strict penalties, ethical governance and oversight, and international collaboration is the need of the hour for effectively addressing corporate white-collar crimes and affirming corporate liability.

[1] DONALD J. NEWMAN ‘WHITE-COLLAR CRIME’ (Law & Contemp., 1958) <https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2775&context=lcp>

[2] JEROME MICHAEL & MORTIMER ADLER ‘CRIME, LAW AND SOCIAL SCIENCE’ (Washington University Law Review, 1934)<https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=4574&context=law_lawreview>

[3] Stanton Wheeler, Mitchell Lewis Rothman ‘THE ORGANIZATION AS WEAPON IN WHITE-COLLAR-CRIME’(Mich.L.Rev.,1981) <https://openyls.law.yale.edu/bitstream/handle/20.500.13051/3588/80MichLRev.pdf?sequence=2>

[4] whistle-blower, n. meanings, etymology and more | Oxford English Dictionary.

[5] The Whistle Blowers Protection Act, 2014.

[6] Pawan Kumar v. State of U.P., (2015) 7 SCC 148

[7] Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010.

[8] In re Enron Corporation, Case No. 01-16034-AJG (Southern District of New York), Adversary Nos. 03-3522, 03-3721 (Bankr. S.D. Tex. Dec. 9, 2005)

[9] The WorldCom Scandal (2002)

[10] Vikramaditya S. Khanna ‘Corporate Crime Legislation: A Political Economy Analysis’ (Harv. L. & Econ. Discussion Paper No. 612, 2008) <https://ssrn.com/abstract=1096607.>

[11] Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010

[12] Sarbanes–Oxley Act of 2002

[13]  Bribery Act (2010)

[14]  U.S. v. Madoff, 08-MAG-02735.

[15] Rajiv Kumar ‘White-Collar Crime in India: A Socio-Legal Perspective’ ( Int’l J. Crim. Just. Sci., 2014) <https://www.sascv.org/ijcjs/pdfs/rajivijcjs2014vol9issue2.pdf.>

[16] Bharatiya Nyaya Sanhita,2023, Section 1(3)

[17] Bharatiya Nyaya Sanhita,2023, Section 2(26)

[18] Prevention of Corruption Act, 1988, 3rd Proviso to Section 8(1)

[19]  Prohibition of Benami Transactions Act, 1988, Section 62

[20]  Prohibition of Benami Transactions Act, 1988, Section 62(3)

[21] Prevention of Money Laundering Act 2002, Section 70

[22]  Pradeep Kumar Singh, “Corporate Criminal Liability in India”, Athens Journal of Law 2021

[23] Anuj Jain, Corporate Criminal Liability in India: A Critical Analysis, 8(3) NUJS L. Rev. 123 (2015), http://nujslawreview.org/wp-content/uploads/2016/12/anuj-jain.pdf.