Open Access Research Article
IS CORPORATE VEIL AN IMPEDIMENT AGAINST MONEY LAUNDERING?
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Article Details
IS CORPORATE VEIL AN IMPEDIMENT
AGAINST MONEY LAUNDERING?
AUTHORED BY - SHAYNA DAS
PATTANAYAK
ABSTRACT
In order to establish a connection
between the unlawful concealment of money and piercing the veil, the paper
attempts to resolve the complexities and refine the idea of Corporate Veil.
Through the case of Adams Vs. Cape Industries Plc which stated that
corporations exploit the corporate forms to dodge the wicked crimes perpetrated
by the, the common law concept of piercing the veil was incorporated in the
late 1900s. Additionally, corporation avoid legal liability by doing this. The
crime of obtaining money by corruption or other means is money laundering. Such
acts fall under the corporate veil concept when they are committed by a
corporate entity to avoid legal repercussions. This paper will discuss the
tactics used by companies to wield this theory as a weapon. It also highlights
the struggle the courts have in raising the curtain. In order to put forth, the
articles present some recent case laws. Additionally, it makes an effort to
connect the links by highlighting the reasoning behind a corporation through
significant rulings and suggests the potential courses of action to stop such
crimes.
INTRODUCTION
The English Companies Act of 1844
introduced the long-standing idea of forming a company. The Joint Stock
Companies Act of 1850 was a result of the appreciation and recognition of this
concept. Prior to the Companies Act of 2013, the Act was amended twenty-five
times. The Latin words "panis," which means bread, and "com,"
which means together, are the sources of the English word "company,"
which suggests a partnership between two or more individuals who eat food and
talk business over bread. The corporate veil is a notion that is incorporated
into the law and holds that a company is a separate legal body with many
characteristics, including common seal and everlasting succession.
The ability to sue and be sued is
given upon an artificial person. However, the essential query that runs across
the entire study is: Under what conditions might this curtain be raised?
Salomon v. Salomon and Co Ltd is a seminal case involving a footwear business
owned by Mr. Salomon that he later restructured into a limited liability
corporation with a £40,000 shareholding. There were seven subscribers in all,
including Salomon, his wife, four boys, and one daughter. Following the
company's liquidation, the liability of the unsecured creditors was £ 7,000. The
ruling addressed the pertinent questions raised by the business, including
whether or not the limited liability company was formed with the goal to
deceive its creditors and whether or not it is a legally recognised artificial
person. Another concern raised was whether an individual operating under a
company's name would be held liable and accountable for covering the debts. The
court decided that a business is assumed to be a distinct legal entity at the
time of its establishment. Salomon is a distinct debenture holder and would
have precedence over the creditors, thus he cannot be held accountable in this
situation. It is not possible to say that he committed fraud in this instance.
Certain share classes have the right to dividends based on the amount
subscribed for them. The priority of a debenture holder is higher than that of
an unsecured creditor. In contrast, the court rendered its decision in the
Vodafone International Holdings BV v. Union of India case after penetrating the
veil. Over the years, Vodafone, a telecom firm, gained recognition in India for
its services. The idea that capital gains weren't covered by the tax collection
method when transactions were made between two non-resident establishments was
prevalent during the Voda era. The Bombay High Court further disputed the
Income Tax Authority's ruling, concluding that a considerable controlling
interest was involved in the transaction between the two massive telecom
companies. Additionally, it demonstrated a plausible connection between the
action and the claim in cases where the capital assets originated in India; as
a result, Section 195 of the Income Tax Act will apply to non-resident firms
when it comes to deductions. Despite the Supreme Court's decision in favour of
the telecom behemoth, the Chief Justice at the time expressed the opinion that
removing the corporate veil is a crucial step in identifying the wrongdoer. An
organisation is a collection of real people, and those real individuals are the
ones who carry out the actual work. Therefore, when an employee of that
specific corporation commits a crime, the company's existence alone should not
be cited as justification for the accused's release. The following paper will
concentrate on the aspect of corporate fraud that gave rise to instances of
money laundering.
THE PURPOSE OF STUDY
The purpose of this study is to
determine whether corporate forms of business are significantly related, with
the separate entity serving as a cloak to support the improper goal. Even
though "Mens Rea" is clearly present in these situations, the
offender is protected by the corporate veil statutes. The paper covers several
aspects of the theory to counter such fraudulent conduct.
THE ORIGIN OF THE FALLING BLOCK:
MONEY
Even if money is simply a piece of
paper, it matters to the entire cosmos. It serves as a medium for
consideration, acquisition, exchange, or sale of products and/or services. In
today's world, we recognise the need of paying consultation fees when hiring a
doctor or lawyer, or using a piece of paper to purchase a plot of property.
However, are we making ends meet with that meagre note?
It was revealed in recent headlines
that medical professionals, IVF centres, and hospitals were suspected of being
complicit in child trafficking. The following statement provides more clarity
on the solution to the question above. Human trafficking is a crime for which
the Penal Code's Section 370 imposes a seven-year prison sentence. Gluttony
drives people to commit such horrible acts, even if the Indian legal system
lists these prohibitions. A coin does, in fact, have two sides, as this
instance effectively demonstrates. Greed is another factor that influences
money laundering, a sophisticated crime.
INTERPRETATION OF MONEY LAUNDERING
It is possible to characterise this
as a crime involving the element "money." One is considered to have
engaged in this crime if they participate in any of the following four
activities: concealment (where a party is involved in the act of concealing
money; for instance, Mr. X may have hidden Rs. 70,000 from the company's
locker). Possession (where a party is involved in having ownership of the
element specified in the provision).
Acquisition/Use: The money is
acquired through personal effort, even if it does not belong to any one person.
For instance, Mr. P purchases and becomes the owner of a flat. The flat that Mr
P brought is mistakenly occupied by Mr Q. The flat has been wrongfully
possessed by Mr Q. (Even though the
terms "possession" and "acquisition" sound similar, there
is a subtle distinction between them. In this instance, "acquire"
refers to obtaining legal ownership of the object, whereas "possess"
refers to having or asserting physical authority over the object.)
Project or Claim an Untainted
Property: To falsely represent a specific piece of property as one's own.
Another way to define this would be as a continual process. The individual need
not necessarily be connected to it directly. Each person who assisted in the
offence will be held equally accountable. Section 4 of the Prevention of Money
Laundering Act, 2002 lists the penalties for the offence.
MONEY LAUNDERING: A TECHNIQUE OF
EVADING TAXES
Since this case satisfies every need
set forth by the Financial Action Task Force for the sophisticated crime of
money laundering, it may be said that money laundering includes tax evasion.
Adopting the FATF Recommendation is an international norm that nations should
follow in order to tackle issues like money laundering. The goal of the
launderers' systematic attempts to carry out these kinds of activities is to
protect themselves from liability and tax payment. The following are the steps:
-
Step 1: Cash Introduction
When an accused party enters the
finance market with unapproved funds, the first step automatically establishes
the offence; it aims to conceal, possess, acquire, or claim profit in a bank
located within the Indian Territory.
Step 2: Divide The Unlawful Funds
When a sizable sum is deposited in a
territorial bank, the specific bank frequently follows up to ensure that the
transaction was authorised. Thus, the con artists divided the large cash into
smaller amounts.
Step 3: Determine How to Use the
Divided Cash.
The depositor chooses how to use the
divided funds: by making direct deposits in a domestic bank or cross-border
institutions, buying assets, or using any other method they see fit.\
Step 4: Procter Multiplex Layering
Several anonymous transactions are
conducted to make the computation even more difficult in an attempt to deceive
the Income Tax Authorities.
Step 5: Pumping the Illegal Money
This crucial stage is carried out in
all money laundering sequences when cash is later reintroduced into the economy
to confer credibility on financial transactions.
The nuances of the doctrine will be
covered in the next part.
EXPLORING THE CORPORATE VEIL
DOCTRINE
The Latin word velum, which meaning
to conceal or protect, is where the word "veil" first appeared. This
term was originally intended to refer to a face-covering garment used by
ladies, but in more recent years, it has gained use in the business sector.
According to the Companies Act of
2013, Section 2(20), a company is a legal establishment. A business can be
divided into a number of broad groups based on factors such as ownership,
obligations, and controlling power. Depending on what suits them best, many
entrepreneurs select different company models. There is a chance that
corporations will get into liabilities from the transactions after deciding on
a company structure and incorporating in accordance with the Act's or any prior
companies Act's rules. These obligations, which are further divided into
current and non-current obligations, can take many various shapes, including:
Liability that results from investing
in an asset. As an illustration, PQR Ltd used $5,000 of its company capital to
purchase machinery for use in its operations. The current liabilities incurred
by the organisation is INR 5,00,000. One type of a company's liability is the
payment of taxes. Many businesses attempt to avoid paying taxes, which is
illegal. A loan obtained by a business for the purpose of cooperation or any
unpaid interest. current obligations, such as salary and wage payments.
The lists of liabilities are not
all-inclusive, and the concept of the corporate veil was first applied in
situations where obligations arose from unforeseen events that occurred during
business operations. A company's stakeholders, stockholders, and employees can
work hard without worrying about discomfort or stress. This doctrine guarantees
a reduction in the burden of liability up to the amount they have pledged. It
guarantees the owners' safety under any conditions when the business is first
established.
ANATOMY OF THE DOCTRINE
Certain owners exploit the theory to
their advantage in order to avoid being caught by the law. They incorporate the
businesses in order to take advantage of them and commit fraud in order to make
money. The provisions intended to penalise wrongdoers through statutory lift
were effectively applied by the latest modification to the Companies Act. Among
the clauses that have been listed are:
1. Criminal and Civil Liability for
Prospectus Misstatement
A prospectus that is
released by a publicly traded firm or a promoter with a stake in the venture
must abide by all Act requirements. The attestation and date are required by
the Promoter or the individual who is interested in this engagement. It must
also state that the relevant provisions have been followed. Section 34 of the
Act establishes criminal accountability and Section 35 establishes civil
liability in situations where the provisions of Section 26 of the Act are
flagrantly broken. It also lists the penalties for the harm caused by this kind
of false statement.
2. Illegally obtain financial gains
Only when the appropriate
process is followed, as specified by Section 73 of the act, can deposits be
received. This requires the company to have a general meeting and adopt a
resolution before accepting a deposit. A few prerequisites must be met first,
such as the distribution of a notice outlining the company's financial
situation and credit rating. Within thirty days of the notice being circulated,
the Registrar should be notified of the same. Punishment under Section 76A
results from failure to comply with Sections 73 and 76.
3. The Scrutiny Procedure
In situations where the
Central Government designates an officer to investigate a financial concern in
order to identify the company's owner, Section 216 takes effect.
4. Embezzlement during winding-up
In situations when a
company is established solely for the intention of deceiving investors and
misappropriating funds, Section 339 of the Act imposes penalties that may
include imprisonment, a fine, or both. Section 447 lists the penalties for
violating Section 339.
5. Providing inaccurate information
In accordance with
Section 449, the party who fails to provide accurate information and evidence
faces punishment of either a fine of rupees one hundred thousand or less,
imprisonment for a maximum of six months, or both.
Courts can order the lifting of the
corporate veil using this legislation. The goal of the next part is to draw a
thin line of similarity between the two ideas that were covered in the previous
ones.
THE RELATIONSHIP BETWEEN THE TWO
CONCEPTS
The notions of Money Laundering and
Piercing of Corporate Veil are closely related, as the former involves an
individual committing an act under Section 3 of the Act and attempting to evade
punishment by utilising the Corporate Veil theory. In certain Indian
circumstances, the doctrine's exception is applied to penalise the offender.
Big business magnate Vijay Mallya was
the owner of Kingfisher Airlines, which was embroiled in the well-known
scandal. Mr. Gopinath created Air Deccan in 2003, which the business acquired.
However, the airline suffered significant losses as a result of its inability
to maintain operating costs. In order to boost profits, the Kingfisher Company
chose to acquire the Air Deccan airlines. However, because of the airline's
declining marketability, the billionaire had to borrow a sizable sum of money
from many banks in order to maintain control of the aircraft transport
industry. However, the business experienced a heartbreaking loss in the ensuing
years and failed to repay the loans, which totalled about Rs. 9000 crores. He
deliberately avoided paying taxes by laundering money to foreign incorporations
in order to get around such defaults. He enlisted the help of fictitious
directors to transfer the borrowed funds. Money diversion occurred on multiple
occasions. Sadly, the Serious Fraud Investigation Office, which was established
in accordance with the Companies Act, 2013, looked into the Kingfisher
Company's affairs and produced a report indicating the serious fraud that
overpowered the corporate and financial sphere. The entire scam was
orchestrated by using the corporate veil as a shield to protect the
perpetrator. Despite being a part of a major scandal, he managed to avoid
consequences by utilising a bail extradition warrant that was carried out by
the Metropolitan Police Service in London. As a result, even though India has a
vast legal system, it is evident that wrongdoers have skilfully slipped through
the Corporate Veil.
Although one of the two brothers
admitted to the scam and was punished, there was still another instance of
money laundering involving an amount of Rs. 7,000 crores, which is well-known
as the Satyam Scam. In this instance as well, the corporate veil was used as a
weapon to manipulate the crime in order to deceive the general public. The two
individuals that founded Satyam Computers Ltd. were B. Ramalinga Raju and Rama
Raju. They had very few workers when they first started the business, and they
were blood relatives. With time, their firm expanded internationally, and the
company's net worth rose sharply. The greatest influence in the world is money,
and this inspires people to achieve more than they have in the past. In an
attempt to attract investors, the corporation began to manipulate the accounts.
This serves as yet another illustration of how the corporate veil is a
pernicious theory that protects the perpetrator.
The case of Chanda Deepak Kochhar v.
ICICI Bank Ltd and Ors. concerns money laundering, as it involves Ms. Kochhar,
the former CEO of ICICI Bank, and her husband, Mr. Deepak Kochhar, the CEO of
NuPower Renewables, engaging in questionable activities. Investigating the
corporate swindle in which the husband and wife participated in the loan
transfer between the two companies was the task assigned to the investigating
agencies. The manifestation of nepotism was strikingly apparent in the situation
where Ms. Chanda sought to gain an unfair advantage via the Videocon Group.
Despite the fact that the spouses received bail, Mr. Dhoot, the chairman, was
taken into custody for pressuring them. According to the Money Laundering Act
of 2002, they were all accountable.
We may also conclude that corporate
entities exploited the separate legal entity as a shield to protect themselves
from legal dynamics because all three of the aforementioned cases showed a
great deal of similarity and featured information that demonstrated money
laundering. In some instances, we argue that the veil was lifted successfully,
but in others, we saw that the offenders were able to get away by taking
advantage of the gaps.
RECOMMENDATIONS
There are various obstacles courts
must overcome in order to look behind the corporate veil and uncover the truth.
In order to ascertain whether the case falls under the exception of the
principle and money laundering crime, the judiciary therefore employs the
four-factor method. It also outlines the circumstances in which this kind of
corporate fraud should raise a red signal.
·
The
first is the use of dishonest tactics to avoid responsibility; the second is
unfair and immoral; the third is a wrongdoing; and the fourth is the involvement
of components that are required to carry out money laundering activities. The
four-factor method can be defined as the combination of these four components.
Courts have the ability to highlight such circumstances and make the most of
the exception by utilising these components.
·
Businesses
that can't establish their legal identity and operate under many affiliations
ought to have their curtain lifted. A unique bar code that aids in identifying
the legal entity should be used to facilitate the smooth start of financial
transactions. There should be consistency in this code.
·
The
fact that there are insufficient methods for identifying a company's
stakeholders, stockholders, and employees demonstrates how suspicious the
organisation would be in the absence of such information. This raises red flags
once more, and the curtain needs to come down.
·
The
lifting process should be started by the court if the firm disregards the
guidelines set forth by the Companies Act of 2013. It must to adhere to legal
formalities as well as corporate social responsibility.
·
Corporate
shields shouldn't be granted to undercapitalized businesses.
Undercapitalization is the state in which a business cannot manage a firm
because of a lack of capital. Fraud and mistakes are quite likely in these
situations.
CONCLUSION
An economy is seriously threatened by
money laundering. It upends the entire system and throws off the financial
cycle. Many business tycoons have encouraged this practice, and since the
2000s, crime has increased dramatically. On January 17, 2003, "The
Prevention of Money Laundering Act, 2002" was enacted by the legislature
in response to this threat. The judiciary has made a significant contribution
to the fight against these crimes in recent decades, and going forward, new
tactics are anticipated to be developed to address the disputes. The aim to
conduct deception and selfishness are identified in the paper as the initial
causes.
Despite efforts to solve these
problems, examples involving billions of dollars continue to surface,
indicating the need for stricter legislation that is applied more effectively.
The purpose of the article was to
demonstrate a significant connection between the corporate veil concept and the
money laundering process. The study effectively demonstrates how criminals
exploit the well-known corporate veil theory as a shield, and how crucial it is
to breach the shield in order to stop crimes like money laundering.
Article Information
IS CORPORATE VEIL AN IMPEDIMENT AGAINST MONEY LAUNDERING?
Authors: SHAYNA DAS PATTANAYAK
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/11
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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