The Hindu Business Line : Get serious about white-collar crime

For generations we Indians have been quite conscious of low-level fraud. Some of us remember our grandmothers watching with a hawk eye to make sure that the milkman did not dilute the milk with water.

But what about corporate fraud involving thousands of crores of rupees? This seemed to be the domain of Enron-types, fast-moving wheeler-dealers, who had secret bank accounts in tiny countries.

Till the Satyam fraud exploded on India’s consciousness with an only-in-India resignation letter. While the letter was Indian in nature, the fraud was on a global scale.

Ready to tackle fraud?

The Government was quick to fire Satyam’s board of directors. This gave the company a chance to start afresh. The Government then named professionals with diverse backgrounds as the new directors, thus assuring employees and clients that untainted, competent people were in charge.

This is good news, but it should not distract us from realising that Satyam’s problems are a wake-up call to improve corporate governance. Does India have the capacity to prevent large-scale white-collar crime? Does it have the systems needed to assign responsibility in cases where such crimes are committed? Does it have the ability to prosecute the accused in a court when the charges and evidence relate to complex financial trickery? Are the likely fines and jail terms significant deterrents?

To begin with, warning signs that Satyam was facing some problems were ignored. On October 12, 2008, Business Line reported that Satyam “refuted reports in the international media that World Bank has barred it from doing offshore work.”

This denial was a lie. In December 2008, the Bank publicly declared Satyam “ineligible for contracts for providing improper benefits to Bank staff.” Did anyone in authority take notice of this? Surely not the police, because they wait to receive a complaint. There are no reports about SEBI questioning Satyam about this.

What about the various stock market watchers and analysts who could form a powerful informal regulatory mechanism? There are no reports of they doing anything. What about Satyam’s board of directors? Did they ask for explanations?

Let us move to the fraud itself. Rightly, the question on everyone’s mind is: How could Satyam’s books show non-existent cash and bank balances of Rs 5,040 crores? It is only fair to wait for a detailed investigation. The police have now arrested two partners of Price Waterhouse. If they are not guilty of criminal actions, as the police have charged, but of malpractice, what would be their punishment? Would they be required to compensate anyone who suffered financially because of their actions?

The police were quick to arrest Satyam’s former head, Mr Ramalinga Raju. But are there financial experts who have the ability to look for, amass, and present in court, the evidence needed to prosecute devious, complex white-collar crimes of the type he is accused of?

SFIO role

The Government has established a Serious Fraud Investigation Office (SFIO) under the Ministry of Corporate Affairs. What is the SFIO’s role in a criminal court? The police have told SFIO that it would need the magistrate’s permission to question Mr Raju.

The magistrate denied SFIO’s request, stating that the latter needed to specify the correct legal provisions to question the accused. These police and court actions imply that SFIO may not fit in well within a criminal proceeding.

What is SEBI’s responsibility? To whom is it accountable and liable if unable to spot financial fraud? In 1956, Lal Bahadur Shastri resigned as Railway Minister, taking responsibility for a train accident. Yes, that was a long time ago, but it is still meaningful to ask: Will some regulatory personnel step forward, acknowledge responsibility, and resign?

And what about the investigative skills of the police themselves? The police told a court that Satyam had 13,000 fictitious employees, whose salaries were used to siphon off funds from the company. However, following a statement issued by the HR department of Satyam, this does not appear to be true.

Systemic weakness

The picture that emerges is that there are no well-defined roles and system of collaboration within the investigative agencies. None of them appears to have all the skills or authority to successfully prevent or prosecute white-collar crime.

Without meaningful actions to redress these fundamental weaknesses, corporate governance in India will remain weak. In turn, this would make the public hesitant to invest their money in the shares of any company. Potential clients would wonder whether they should do business with the firm, notwithstanding its technical expertise.

The message is clear: India, get serious about fighting white-collar crime.

(The author is a professor at American University, Washington, DC and an independent consultant. blfeedback@thehindu.co.in)

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