The European Lawyer

India Corporate/Commercial

18 May 2012

International Fraud and Asset Tracing - India

Editors: Amarchand & Mangaldas & Suresh A Shroff & Co – MP Bharucha and Justin Bharucha

1. INTRODUCTION
Civil remedies available to victims of fraud are not well developed. Typically, victims of fraud need to find redress under criminal law (the Penal Code). Consequently, tracing assets in the hands of the delinquent or third parties is a remote possibility.

The normal recourse against an employee suspected of misappropriating funds is termination. Depending on the gravity of the delinquency, recourse may be had to the Penal Code and occasionally, a civil suit claiming damages.

2. UNCOVERING A FRAUD – THE INTERNAL INVESTIGATION
Indian law currently does not require companies to adopt whistleblower policies. Some listed companies have voluntarily adopted such policies which prescribe reporting procedures and provide the cover of confidentiality to the whistle blower.

When fraud is suspected, it is permissible to put the suspect employee(s) under suspension. During suspension the employee is on gardening leave and he continues to receive his emoluments. Keeping an employee under suspension enables the employer to complete the internal investigation. If the delinquency is established, the employer may terminate the employment as punishment and if permissible under the employment contract or service regulations, withhold payment of retirement benefits to the delinquent employee. Industrial law permits suspension, under certain circumstances, on reduced benefits typically, one half of the last drawn salary.

3. MANAGING THE INTERNAL INVESTIGATION
In a typical situation an internal investigation will likely precede legal proceedings, civil
and/or criminal. The internal investigation may pose some challenges.

4. EMPLOYEES’ RIGHT TO PRIVACY
4.1 Would a search of employees’ desks for hard copies of documents be permissible under the laws currently in force in India?
There is no specific Indian statute to protect privacy. The right to privacy has been evolved by the Supreme Court as a necessary adjunct of the Constitutional protection of ‘Right to Life’. Under article 21 of the Constitution of India: ‘No person shall be deprived of his life or personal liberty except according to procedure established by law.’ Kharak Singh v State of UP [AIR 1963 SC 1295]; Rajagopal v State of Tamil Nadu [(1994) 6 SCC 632] and District Registrar and Collector, Hyderabad v Canara Bank [AIR 2005 SC 186]. However, Constitutional guarantees protect individuals against actions of the state. Therefore, article 21 will not apply in respect of ‘invasion of privacy’ by individuals.

In the absence of any statutory protection of privacy, an employer may search an employee’s desk should circumstances so warrant. The employer should take care that the search does not destroy the employee’s personal effects and the search is conducted in a manner to preclude the employee from complaining that his personal effects were stolen. Conducting a search in the presence of witnesses is recommended.

4.2 Does the tracking of employees’ internet access and monitoring of emails amount to a contravention of Indian laws?
Under the Information Technology Act 2000 (IT Act) electronic data has the same recognition and effect as manuscript, type written or printed documents. Electronic data generated by an employee in the course of his employment belongs to the employer. The employer can, therefore, access the computer used by the employee for the purposes of employment. Similarly, an employer may monitor an employee’s internet access and the employee’s email. Most prudently managed entities proscribe access to objectionable websites and also caution employees that their internet access and emails may be monitored. Obviously, the employer cannot access an employee’s personal email account without a court order.

Employers would be well advised to put in place proper policies and systems and caution employees that:

• The employer’s computer systems and network is strictly for work related use;
• No personal data should be stored nor should the communications network be used for personal purposes;
• Company data and information is confidential and should not be copied or otherwise removed from the workplace;
• The employer will monitor use of the computer systems and the communications network;
• Access to websites considered objectionable by the employer will be barred. Abuse of internet access may result in sanctions; and
• The employer reserves the right to monitor and copy all data stored on individual terminals located in the work place and on laptops provided by the employer for use by employees outside the workplace.

4.3 Would a search of any stored data on employees’ computers offend any legal provision?
Section 43 of the IT Act inter alia stipulates that any person who, without permission of the owner or of the person in charge of a computer, computer system or computer network, accesses such computer, computer system or computer network, or downloads, copies or extracts any data, database or information, shall be liable to pay damages by way of compensation to the affected person. This stipulation is for the protection of the ‘owner’ of the computer system/network. The IT Act does not define ‘owner’ but clearly the employer who provides the computer/network would be the owner. By definition, an employee who makes unauthorised use of the employer’s data would be liable in damages to the employer. The employer would also be entitled to an injunction restraining the employee(s) from using the employer’s data. Diljeet Titus v Alfred A. Adebare and others [130(2006) DLT330].

The employer may, therefore, search the data on the employee’s terminal/laptop. If the employer believes that the employee has stored data on his own (personal) computer or on a removable storage device in the possession of the employee, the employer would have to obtain orders from the court to search the employee’s premises and to impound the computer/storage device.

5. EMPLOYEES’ RIGHT AGAINST SELF-INCRIMINATION
5.1 Does an employee have a right to remain silent during the course of interrogation?
The right against self-incrimination in criminal proceedings is guaranteed by the Constitution. Article 20(3) of the Constitution provides that no person accused of any offence shall be compelled to bear witness against himself. In MP Sharma v Satish Chandra [AIR 1954 SC 300] the Supreme Court clarified that article 20(3) applies as soon as a person is considered ‘accused’ in the eyes of the law and such person has the right to remain silent even during the investigation. The investigation contemplated by MP Sharma is an investigation into a criminal office.

In civil proceedings there is no right against self-incrimination. What is more, there is no right against self-incrimination in informal investigations conducted by an employer.

So far as witnesses are concerned (as opposed to persons accused), there is no right against self-incrimination. Section 132 of the Evidence Act expressly provides that a witness shall not be excused from answering any question relevant to a matter in issue on the ground of self-incrimination. However, no answer that the witness is compelled to give shall subject him to arrest or prosecution or be proved against him in any criminal proceedings except a prosecution for giving false evidence by such answer. Section 132 applies to civil and to criminal proceedings. Section 132 can have no application to questions asked by an employer to an employee in the course of internal investigations conducted by the employer. The answers given by the employee may be used, if otherwise relevant and admissible, as admissions in proceedings instituted by the employer against the employee.

In criminal proceedings, an accused may be questioned by the court to explain any circumstances appearing in evidence against him; and the court may also question the accused generally. The accused, however, need not answer and the accused may also answer falsely. Should the accused choose to answer, that answer should not be on oath. The answers given by the accused may be taken into consideration in the criminal proceedings and may also be put in evidence, for or against the accused, in any other criminal proceedings for any offence which such answers tend to show that the accused has committed (section 313 of the Criminal Procedure Code 1973).

While there is no right against self-incrimination in investigations conducted by the employer, an employee cannot be compelled to answer. The employer certainly cannot use force except on pain of criminal/civil proceedings that the employee may institute.

5.2 Does an employee have any right to claim legal assistance during office interviews?
An employee has no right to legal representation during an office interview if such interview is of a fact finding nature and will not directly result in any sanctions being imposed against the employee. It is important to distinguish such an interview from disciplinary proceedings ie, formal proceedings instituted by an employer against an employee to assess whether the employee is guilty of misconduct and if so, to mete out punishment. In disciplinary proceedings, the alleged delinquent has a right of representation though ordinarily, such representation is not through a lawyer. Disciplinary proceedings are confined, under industrial law, to proceedings against a ‘workman’ ie, a low level employee generally engaged in clerical work.

In legal proceedings (civil or criminal) the right to legal representation is regarded as an adjunct of the constitutional right to life under article 21 of the Constitution. Sunil Batra v Delhi Administration [AIR 1978 SC 1675; Hussainara Khatoon v State of Bihar [AIR 1979 SC 1369].

6. COERCION/UNDUE INFLUENCE
6.1 What is the significance of ‘free consent’?
As noted earlier, the right against self-incrimination is only available to an accused in criminal proceedings. Therefore, the question of ‘free consent’ is not really relevant. It may, however, be that the employer may wish to use statements made by an employee in civil or criminal proceedings that the employer may institute. In such situations, it is possible that the employee may claim that he was coerced by the employer to make such statement. To preclude that, the employer should take basic precautions such as keeping witness(es) present (to testify that the employee was not threatened or coerced) and to reduce the statement to writing and have the employee sign that statement. A statement made under threat of legal proceedings is not vitiated as having been obtained by force or coercion since it is the duty of every individual to report a crime; and it is the right of every individual to seek redress from civil courts.

6.2 What would constitute an exercise of ‘undue influence’ by an employer to elicit information?
The concept of undue influence is usually relevant in the realm of contract or for avoiding testamentary dispositions. Undue influence is exercised where relations between parties are such that one of the parties is in a position to dominate the will of the other and that position is used to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of the other where such person holds real or apparent authority over the other or, where such person stands in a fiduciary relationship to the other or, where the mental capacity of the other is temporarily or permanently affected because of age, ill health, mental or bodily distress (section 16 of the Contract Act 1872). The mere existence of a master and servant relationship is not sufficient to lead to an inference of undue influence. Reshmi v Gungaria [AIR 1952 HP 20]; Bhangwan Das v. Bitton [AIR 1945 Allahabad 227]. Further, it cannot be said generally that an employer is always in a strong bargaining position. JK Cotton Manufacturers Ltd. v J.N. Tiwari [AIR 1959 Allahabad 639].

A statement made by an employee during internal investigations if tendered in court would, at best, constitute an admission of the employee. It would be open to the employee that the admission was made under some misapprehension; or, to explain it away; or, to recant claiming that the admission was made under duress. What weight should be given to such admission is a matter within the court’s discretion.

7. ADMISSIBILITY OF EVIDENCE PROCURED BY WAY OF SUCH   INVESTIGATION
7.1 What is the admissibility of data clandestinely sourced from employees’ personal papers and past emails?
As a general proposition, evidence otherwise relevant and admissible would not be rendered inadmissible merely because it has been obtained by illegal or unfair means (B.M. Jatia v M.L. Wadhawan [(1987) 3 SCC 367]). These principles have generally been applied in the context of an illegal search or seizure by public authorities. In the context of civil proceedings, a single judge of the Bombay High Court has taken the view that the court has discretion to rule out evidence procured unlawfully (in that case, by theft) Larsen & Toubro v Prime Displays Pvt. Ltd. [2002 (2) BOM C.R. 158].
These principles have not been tested in the context of an employer obtaining data clandestinely from an employee’s computer. The proper position seems to be that since the data is that of the employer, such evidence would be admissible.
 
7.2 What is the admissibility of notes taken during office interviews?
Interview notes per se are not evidence. Such notes may be relevant and admissible if the notes were themselves in issue. Such notes may be used as an aidé-memoire to refresh the memory of the witness.

8. DISCLOSURE FROM THIRD PARTIES
8.1 Does the principle established in Norwich Pharmacal apply in India?
The principle in Norwich Pharmacal has so far not been considered by Indian courts. With its common law background, Indian courts may refer to English decisions as authorities of high persuasive value in the absence of a binding decision of the Indian courts (Forasol v ONGC [1984 (Supp.) SCC 263]). Unless a very strong case is made out, it is unlikely that Indian courts would follow the Norwich Pharmacal principle since under the Code of Civil Procedure, disclosure or interrogatories can only be required from parties to the suit and not from third parties, though evidence from third parties may be summoned in the course of the proceedings. Interrogatories cannot be issued even to a defendant who has not entered an appearance to contest the suit. Thakur Prasad v Mohamed Sohayal [AIR 1977 Patna 233].

8.2 What are the provisions of the Bankers Book Evidence Act for documents which would be admissible as evidence?
The Banker’s Book Evidence Act 1891 applies to bankers and to certain notified Indian financial institutions. The Act defines ‘banker’s books’ as including ledgers and accounts books used in ordinary business, whether kept in written form or as printouts of data stored in a computer or electromagnetic storage device. Under section 4, a certified copy of any entry in a banker’s book must be received as prima facie evidence of the existence of such entry and shall be admitted as evidence of the matters, transactions and accounts recorded in such certificate to the same extent as the original entry. Where such certified copy is a printout, it must be accompanied by a certificate of the principal officer or a branch manager that it is a printout of such entry. Further, there must be a certificate of the person in charge of the computer system. That certificate must contain a brief description of such system and, among other things, of the safeguards adopted to ensure that the data is entered and accessed only by authorised persons; safeguards to prevent and detect unauthorised change in data; safeguards for retrieving data lost due to systemic failure or otherwise; and any other factor to vouch for the integrity and accuracy of the system. There must also be a further certificate from the person in charge of the computer system that to the best of his knowledge and belief, the system operated properly at the material time; that he was provided with all the relevant data; and the printout correctly represents the position or is appropriately derived from the relevant data.

Section 5 of the Act prevents a bank officer from being summoned to produce any banker’s books or to appear as a witness to prove matters, transactions and accounts recorded in banker’s books unless the court is satisfied that proper cause for such summoning or production has been made out.
Section 6 enables a party to a legal proceeding to apply for and obtain an order from the court to inspect and take copies of entries in a banker’s book for the purposes of such proceedings or, for the banker to provide certified copies of such entries accompanied by a further certificate that no other entries are found in the banker’s books relevant to the matters in issue in such proceedings. The court may make such order in respect of entries of parties to the litigation or even of strangers. The court may make such order ex parte but the bank must be given an opportunity to contest such order.

8.3 What is meant by the pre-claim disclosure rule and its applicability in India?
There is no legislation empowering courts to order pre-claim disclosure as noted in paragraph 8.1.

9. INTERIM RELIEF
9.1  In what circumstances are courts empowered to grant an order for temporary injunction without notice to the defendant?
Courts have wide powers to grant temporary injunctions including to prevent removal of property from the court’s jurisdiction or to prevent disposal of property with intent to defraud creditors. The power extends to issuing ad-interim mandatory injunctions. Dorab Caswaji Warden v Coomi Sohrab Warden [(1990) 2 SCC 117]. A mandatory injunction would issue if:

• There is a strong probability that the plaintiff will obtain the final relief prayed for in the action.
• The plaintiff’s case should be of a higher standard than a prima facie case;
• The injunction is necessary to prevent irreparable or serious injury which normally cannot be compensated in terms of money; or
• The court must be satisfied whether the comparative mischief or inconvenience likely to result from withholding the injunction would be greater than that likely to arise from granting such injunction (Dorab Caswaji Warden v Coomi Sohrab Warden [(1990) 2 SCC 117]).

Ordinarily, the court will not issue an injunction without notice to the opposite party. The court does, however, have power to grant an injunction without notice if sufficient cause is shown by the plaintiff. In that situation, the court must record reasons for its opinion that the object of granting the injunction would be defeated by delay were the opposite party given notice. Additionally, the court must require the applicant: (a) to serve the defendant(s), immediately after granting the injunction, with a copy of the proceedings; and (b) file an affidavit, on the day on which the injunction is granted or, the day immediately following, that copies have been so delivered to the defendant(s) (Order XXXIV Rule 3 of the Code of Civil Procedure).

Where the court has issued an injunction without notice to the opposite party, the court must endeavour to dispose of the application within 30 days from the date that the injunction was granted. If the court is unable to do so, it must record reasons for its inability (Order XXXIX, Rule 3A of the Code of Civil Procedure).

9.2  Are courts empowered to order search without notice to the intended defendant?
In civil proceedings the court does not order a search. Instead, the court appoints a receiver to visit the relevant site and to take possession of the relevant material if found at such location. Such orders are generally passed for the purposes of preserving evidence.

10 CIVIL PROCEEDINGS
10.1 What civil remedies are available against a person who knowingly assisted the employee or knowingly received trust property?
A person who is knowingly assisting an employee may be liable as a tortfeasor. A person who knowingly receives trust property acquires no title to such property and must deliver it up to the claimant. Such person may also be liable for damages.

10.2  What is meant by ‘asset tracing’ and how is the process of asset tracing important in internal fraud?
Asset tracing is an equitable remedy founded on principles of trust. Tracing is available to beneficiaries when trust assets have been wrongfully disposed of or misappropriated by trustee(s). The process enables the beneficiary to follow the trust property in the hands of third parties. There are no reported rulings in respect of asset tracing. During the early 1990s when a major security scam broke, the Standard Chartered Bank applied for tracing of assets. That application was not pursued.

10.3  What are the methods that can be employed by the management of a company to trace the assets?
The ordinary remedy of an employer who has been defrauded is a civil action for damages or, in a given situation, restitution of the property in specie. If the employer has strong evidence showing misappropriation, the employer may resort to an asset tracing application based on the theory of trust. However, as noted in paragraph 10.2 asset tracing is an untested remedy.

If the employer has reasonable grounds to know the whereabouts of the assets, he may apply for appointment of a receiver. The employer may also apply for an injunction to freeze the employee’s bank account provided the employer has a strong prima facie case and is able to demonstrate plausibly that the proceeds of the fraud are deposited in a given employee’s bank account. A blanket order freezing all bank accounts of an employee would not be available.

Recourse to criminal proceedings may be more efficacious since the police and the magistrate have power, for the purposes of any investigation, enquiry or trial, to require the production of any document or other thing by issue of a summons for that purpose. The court also has power to issue a search warrant if the court has reason to believe that a summons for production has not or will not be obeyed. The court may also issue a search warrant, for the purposes of any enquiry or trial, for a general search or inspection. Moreover, if a magistrate has reason to believe that any place is used for the deposit or sale of stolen property he may, by warrant, authorise a police officer to enter and search such place and take possession of any property or article found in it which the officer reasonably suspects to be stolen property. Such officer may also take into custody every person found in such place who appears to have been knowingly privy to the deposit or sale of such property (sections 91–94 of the Code of Criminal Procedure 1973).

10.4  Can assets be recovered from the employee?
In order to recover assets, the employer must show his entitlement. If the stolen asset has been sold by the culprit and from the proceeds of such sale it can be shown that the culprit had bought some other assets, conceivably, the employer can claim such substitute assets.

In criminal proceedings, assets found in the possession of the accused would be handed over to the complainant and in appropriate cases, compensation can also be awarded against the accused.

10.5  What are the remedies available to an employer for tracing the assets in the hands of the employee?
As noted in paragraph 10.2, an asset tracing application is an untested remedy.

10.6  Are other claims in the nature of tort of conspiracy and fraudulent misrepresentation available?
A delinquent employee may be liable to the employer in tort. The tort may be trespass to goods (seizure or removal of goods) or of conversion. Conversion is an act of wilful interference, without lawful justification, with movable property in a manner inconsistent with the right of another whereby that other is deprived of the use and possession of the movables.

A third party who abetted the delinquent employee may also be liable to the employer in tort. Those who abet a tortious act are equally liable as those who commit the wrong. A person procuring a wrongful act by another is liable if he knowingly induces such wrongful act. All persons who aid, counsel, direct or join in the commission of a wrongful act are joint tortfeasors and liable jointly and severally to the injured party. Whether the third party is a joint tortfeasor or liable severally to the employer will depend on the facts.