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Report No. 156

Chapter V

Financial Scams

Conspiracy to Defraud Public Institutions

5.01. There are various serious economic offences which are damaging the society. It is needless to say that the motive for commission of these crimes is the greed of the person and the method employed is nothing short of fraud. The Union Government appointed a Committee known as "Santhanam Committee"1 in the year 1962 which, after a careful survey, categorised 8 kinds of Socio-Economic offences such as, inter alia,

(i) offences calculated to prevent or obstruct the economic development of the country and endanger its economic health,

(ii) evasion and avoidance of taxes, and

(iii) profiteering, black-marketing and hoarding.

1. Committee on Prevention of corruption, (1962) Report headed by Chairman Shri K. Santhanam.

5.02. Recently, various sort of scams in various fields, e.g., banks, hospitals, investment of public shares involving crores of rupees have surfaced. In Shiv Sagar Tiwari v. Union of India, 1996 (9) Scale 680 the Supreme Court has also observed that there are various scams in the country.

5.03. Apparently, financial scams have the genesis of committing fraud with the public money running into crores and crores of rupees. The nation's economy is put in doldrums when such colossal amount is pocketed in by vested interests through fraudulent means leaving the poor citizen's hard earned money which he invested for his prosperity or to cater for his evenings of his life, for being siphoned off by few culprits.

Above all, if such culprits go scot-free after even a protracted trial, or are met with punishments similar to an accused of fraud of insignificant amount as compared to those of scams, people start loosing faith in the jurisprudence of justice prevailing in the country. This has the direct inroad into the confidence of democratic set up of the country and the very existence of an orderly society is put at stake. In A. Jayaram v. State of Andhra Pradesh by CBI, 1995 (4) SCALE 393, the Supreme Court deprecated that officials involved in a fertilizer scandal of large scale went scot free because of tardy inquiries made by State Police. It held:-

"It is really unfortunate that in fertilizer scandal of such magnitude, appropriate steps at the right time had not been taken and for want of convincing and unimpeachable evidence, the accused who were government officials have been acquitted by giving them benefit of doubt. It appears to us that such large scale scandal in transporting imported fertilizer would not have occurred if larger number of government officials and other than prosecuted were not involved.

It is not unlikely that the superior government officials had also played a vital role in perpetrating the said fraud or concealing the same. The tardy enquiries made by the State Police thereby necessitating an enquiry by the CBI at a belated stage is only a sad commentary on the efficiency of the police administration."

In Delhi Development Authority v. Skipper Construction Company (P) Ltd. AIR 1996 SC 2005, it was held:-

"The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned..."

"We feel impelled to make a few observations. What happened in this case is illustrative of what is happening in our country on a fairly wide scale in diverse forms. Some persons in the upper strata (which means the rich and the influential class of the society) have made the 'property career' the sole aim of their life. The means have become irrelevant - in a land where its greatest son born in this century said "means are more important than the ends".

A sense of bravado prevails; everything can be managed; every authority and every institution can be managed. All it takes it to "tackle" or "manage" it in an appropriate manner. They have developed an utter disregard for law nay, a contempt for it; the feeling that law is meant for lesser mortals and not for them. The courts in the country have been trying to combat this trend, with some success as the recent events show. But how many matters can we handle. How many more of such matters are still there?

The real question is how to swing the polity into action, a polity which has become indolent and soft in its vitals? Can the courts alone do it? Even so, to what extent, in the prevailing state of affairs? Not that we wish to launch upon a diatribe against anyone in particular but Judges of this Court are also permitted, we presume, to ask in anguish, "what have we made of our country in less than fifty years"? Where has the respect and regard for law gone? And who is responsible for it?"

Thus no more support is required to conclude that scams of diverse forms cited above, have to be very effectively tackled.

5.04. Needless to say that that most of the frauds generally are not committed individually but with the aid and assistance of others in an organised manner.

5.05. The Law Commission (UK) in its report1 on "Criminal Law: Conspiracy to Defraud" (LAW COM No. 228) has considered conspiracy to defraud, which remains a common law offence. The scope of conspiracy to defraud is extremely wide. As its name indicates, it cannot be committed by one person acting alone.

The Commission (UK) explained the conspiracy to defraud as follows:-

"2.7. The decision of the Court of Appeal in Moses (1991) Crim LR 617, provides a recent illustration of the use of conspiracy to defraud to deal with an agreement to deceive a public official into acting contrary to his public duty. The defendants conspired to facilitate applications for work permits by immigrants who were barred by a passport stamp from obtaining such permits. The deception consisted in the withholding from departmental supervisors of information about the applicants, which increased the likelihood of a national insurance number being issued to them.

2.8. The extent to which a conspiracy to cause non-economic loss extends beyond this category is unclear. The authorities conflict. Different judicial views were expressed in the House of Lords in Withers, 1975 AC 842, the narrower view, that this type of case was the only form of non-economic loss covered by conspiracy to defraud, was also expressed by Lord Diplock in Scott, 1975 AC 819 (841) (BC).

The wide views expressed in Welham, 1961 AC 103 by Lord Radcliffe and Lord Denning were specifically approved by the Privy Council in Wai Yutsang, 1992 (1) AC 269, in which Lord Goff of Chieveley, who delivered the Board's opinion, said that the cases concerned with public duties did not comprise a special category, but merely exemplified the general principle that conspiracy to defraud need not involve an intention to cause economic loss.


3.16. There is, however, a significant distinction in this respect between conspiracy to defraud and a conspiracy to commit an offence. Where the parties to a statutory conspiracy have carried out their scheme, they are not normally charged with conspiracy as well. On the other hand, whether or not the plan of conspirators to defraud has succeeded, they can be convicted only of conspiracy."

1. The Law Commission (UK) (LAW COM. No. 228) 'Criminal Law: Conspiracy to Defraud'-Item 5 of the Fourth Programme of Law Reform: Criminal Law.

5.06. Analysis of above position particularly the observations of the Supreme Court made in Skipper's case clearly indicate a need to carve out an aggravated form of conspiracy particularly in cases when fraud is committed against Government, Public Sector Banks or Public Financial Institutions, local authority, or any State Undertaking or Agency. In the Skipper's case, AIR 1996 SC 2005 the offence was committed by the Skipper's Construction Company (P) Ltd. in collusion with DDA officials. We are of the view that this problem can be tackled if the following new section, namely section 120BB, is inserted in I.P.C.:-

"120BB. Criminal conspiracy to defraud public institution, etc.-When two or more persons agree to defraud a public institution or a local authority, fraudulently or dishonestly, to cause, or cause to be done, wrongful gain to themselves or to any person, or to cause or cause to be done, wrongful loss to such public institution or local authority, such an agreement is designated a criminal conspiracy to defraud and whoever is a party to such criminal conspiracy shall be punished with imprisonment for life or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine:

Provided that no agreement shall amount to a criminal conspiracy to defraud unless some act besides the agreement is done by one or more parties to such agreement in furtherance thereof.

Explanation.-Any bank or financial organisation or company or body or body corporate, which is owned or controlled by the Government, shall be deemed to be a 'public institution' for the purposes of this section".

The Indian Penal Code Back

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