Amendments to the Prevention of Corruption Act: Corporate Criminality

The previous post discussed amendments to Section 8 of the Prevention of Corruption Act, 1988 [PC Act], which will now punish giving bribes as a standalone offence rather than a case of abetting bribe taking by the public servant. The post did not discuss one proviso that the amended Section 8(1) carries: providing that when an offence under Section 8 is committed by a "commercial organisation", it is punishable by fines. This is my gateway to discuss the new regime on corporate criminal liability that the PC Act will introduce, the fulcrum of which is amended Sections 9 and 10. This second post in the series focuses on what this new regime is, and its potential positives and pitfalls. 

Prosecuting Corporate Corruption: The New Text 

Before moving to the text, let's take a step back and cover some basics on the criminal liability of commercial organisations [called "corporation" hereafter]. Corporations are purely legal creatures, so to hold them criminally responsible we need to use the conduct and mental state of some humans. So far so good. But which humans are to be considered? Some jurisdictions, like the U.K., recognise a narrow basis for affixing liability to corporations. Commonly called the "alter-ego" or "directing-mind" theory, under this rule only the acts of humans in management roles or other decision-making capacities can be the basis for imputing liability to corporations. Contrary to this, other jurisdictions - most prominently the United States, adopt a much broader rule where the conduct of any employee can be imputed to a corporation, as long as this resulted in some benefit to the corporate entity.

When the Indian Supreme Court recognised criminal liability for corporations it chose to follow the U.K. model and adopted a narrow basis of liability. Because of this, corporate prosecutions in India needed allegations against management-level persons for the case against a corporation to stick. In what is a seismic shift, the legislature has marked a break away from this position for corruption offences in the recent amendments. India will now follow a model more akin to the U.S., potentially making it much easier to prosecute corporations. Let's turn to the text:

Section 9. (1) Where an offence under this Act has been committed by a commercial organisation, such organisation shall be punishable with fine, if any person associated with such commercial organisations gives or promises to give any undue advantage to a public servant intending -  

(a) to obtain or retain business for such commercial organisation; or 

(b) to obtain or retain an advantage in the conduct of business for such commercial organisation: 

Provided that it shall be a defence for the commercial organisation to prove that it had in place adequate procedures in compliance of such guidelines as may be prescribed to prevent persons associated with it from undertaking such conduct [to be created under Section 9(5) read with Section 29A].

Some further points of interest:

• While "an offence under this Act" indicates this regime applies to all offences under the PC Act, Section 9(2) clarifies that it is unnecessary for the human to be prosecuted under Section 8 for the Section 9(1) offence to stick against a corporation. 

• Section 9(3) explains various terms, such as "commercial organisation" [Section 9(3)(a)], "business" [Section 9(3)(b)], and "person associated ..." [Section 9(3)(c)].

• A person is "associated" with the corporation if she performs "services for on or behalf" of the corporation, which shall be determined by looking at all the relevant facts and not merely the nature of relationship between the two [Section 9(3)(c), Explanation 2]. 

• The "person associated" need not be an employee, and can equally be an "agent or subsidiary" of the corporation [Section 9(3)(c), Explanation 1]. 

• Lastly, if the "person associated" is an employee, it is presumed that she performed "services for or on behalf of" the corporation [Section 9(3)(c), Explanation 3].    

Before moving on, note that Section 9 is not the only relevant provision in context of corporate crime. Section 10 goes after management level officers after Section 9 cases are proved in court:

Section 10. Where an offence under Section 9 is committed by a commercial organisation, and such offence is proved in the court to have been committed with the consent or connivance of any director, manager, secretary or other officer ... such [person] shall be guilty of the offence and shall be liable to be proceeded against and shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years.

The Promises and Pitfalls of Reform
A directing-mind test can prove too limiting in a corporate context where decision-making authority is increasingly decentralised. Not only this, it also offers an easy escape hatch to avoid corporate liability by concentrating focus on a select corps of officers. Recognising both of these problems, many jurisdictions - even the U.K. - moved away from the rule in the corruption context. The 2010 U.K. Bribery Act carries a "Failure to Prevent Bribery" offence under Section 7, which seems to have inspired our legislature the most. More recently, Argentina and Malaysia both took radical steps to move away from a directing-mind approach for corruption cases, to impute corporate liability based on acts of any employee. In finally shedding the alter-ego in Section 9, the Indian statutory regime better reflects the realities of the modern corporate context and offers a potentially more robust tool to prevent and prosecute corporate corruption in the country.

The shift to a broader basis of liability carries a downside: law enforcement agencies get extremely powerful tools to regulate corporate conduct which can be misused. By making offences cognizable and empowering police to arrest "persons associated" with corporations, the problem becomes more stark. Naturally, then, we need some corresponding protections for corporations to protect against abuse and ensure a degree of fairness in legal enforcement. The global norm seems to be having protections for corporations that install adequate compliance procedures. The U.K., Argentinian, and Malaysian examples mentioned above all have such provisions. The new Indian amendments also provide corporations this kind of protection in the proviso to Section 9(1), as extracted above.

But there is a catch. Having a defence at a criminal trial is not a protection against prosecution, and the difference can be huge in the corporate context. Installing adequate compliance procedures is a cost, and the bigger the corporation, the higher that cost is bound to be. For the corporation to make these expenditures, it needs incentives to do so. Since potential prosecutions for management level personnel under Section 10 have been pegged to the corporate crime under Section 9, there is certainly some incentive to install adequate compliance regimes. But is that enough? I would argue that it isn't. Effectively, the law is telling corporations to spend the money, but that more money will still have to be spent in facing a criminal trial for years, where eventually it can plead innocence by pointing to compliance procedures.

Nobody, especially corporations whose reputation carries considerable financial value, want to go to court and have their name dragged through mud. Which is why globally, it is more common for the legal system to reward those corporations with adequate compliance regimes by helping them avoid prosecutions altogether. They do not get a get-out-of-jail-free card, mind you, and still end up having to cooperate with investigators, paying fines, and being monitored for a few years afterwards under Deferred Prosecution or Non Prosecution Agreements. In the United States, the Department of Justice has been issuing "Principles of Federal Prosecution for Business Organizations" that implement this regime. Similarly, in the U.K., the Crown Prosecution Service is instructed to not prosecute cases where it finds corporations met the Statutory Guidance. Within India itself, this idea of avoiding prosecutions exists in context of the Information Technology Act, 2000, which triggers legal action only if online platforms do not pull down objectionable content within 36 hours after a takedown notice or court order. Since the statutory rules on compliance under the PC Act are yet to be drafted, I expect the powerful corporate lobby in India will try and push for a regime which avoids prosecution altogether. In the event that comes to pass, it will be fascinating to see what follows: will India start seeing innovations of the kinds seen in the U.S., or will corporations be getting a clean chit. 

The Big Lapse on Sentencing Reform

At the end of the day, what matters most is the eventual punishment. What happens to corporations if they are found guilty of paying bribes? Do they fear hefty penalties, or a situation like the infamous case of Arthur Andersen in the United States - the accounting firm that went bust facing criminal charges? Not really. The new amendments to the PC Act leave untouched the sentencing formula of the earlier system, where penal provisions only provide for a "fine" to be imposed on corporations. This is not statutorily linked to wrongful advantage gained by the paying bribes, nor is there any clear authority to revoke corporate licenses or impose curbs on business activities if the corporation is found guilty (such powers seem to exist for charitable organisations). Sentencing will remain entirely dependent on the judges' discretion. From my limited experience of seeing corruption trials with corporate defendants, I saw three scenarios most commonly play out: judges either levied no separate fine on corporations, imposed the same fine as the human defendant, or simply doubled the amount of fines imposed. In all of these, often no explanation was offered for how the amounts were fixed. 

This is where the tendency to ape foreign legislation can become problematic. Yes, Section 7 of the U.K. Bribery Act also only stipulates a fine to be imposed. But the U.K. has an entirely different sentencing regime to that of India. Not only are courts mandated to explain their reasons for awarding the sentence, but the Sentencing Council issues Guidelines for courts to follow in figuring out how to arrive at that sentence as well. In 2014, the Council published Guidelines for Fraud, Bribery and Money Laundering Offences that requires courts to consider ten different factors to fix a sentence for Section 7 offences, in which removing all gains from corruption is almost a pre-requisite. 

By retaining the old system, the amendments have seriously missed out an opportunity of ushering in much-needed reforms. It means that the significant deterrent and regulatory force that anti-corruption legislation carries ends up lost on other bad actors in the field, undermining one of the main reasons for creating corporate criminal liability in the first place. Thus, despite having a broader scope for corporate liability, it might remain worryingly common that corporations brush off corruption charges and continue to engage in illegal acts.

Conclusions and Next Post

The PC Act amendments have ushered in a new regime for holding corporations criminally liable for engaging in corruption offences, one which theoretically renders it easier to prosecute corporations than before. Having moved to this legal theory in the corruption context, one wonders whether the Indian legal system will witness an en masse shift abandoning the old alter-ego theory altogether. As discussed in the post, once the amendments come into force, there is probably going to be immense lobbying as corporates try to create rules that gives them more benefits than merely a legal defence at trial after making costly outlays for installing a compliance regime to check bribery. In the long run, it might also result in disrupting how India regulators prosecute corporate bribery, encouraging more conversations between regulators and corporate defendants to keep a case away from court. Having now discussed two of the major new avenues explored by the PC Act, the next post returns to more familiar terrain for the law and discusses changes made by the 2018 amendments to prosecuting public servants for corruption.

Long Armed Laws - Summoning Alien Accused Companies

Consider this. The police, after completing investigation, file a Final Report alleging that X, an Indian company, and its directors be summoned for offences under Section 420 IPC. It also alleges that Y, the American holding company of X, be summoned as a co-accused. The Indian company is a wholly-owned subsidiary of the foreign company. Today, can a Magistrate in India summon the foreign company by serving the summons on its wholly-owned Indian subsidiary? If you think this is an innocuous question, you're mistaken. These problems are coming to the fore as more companies are prosecuted for the various strict liability offences on the Indian statute book. The issue shot to prominence last year in the U.S.A., when a District Court upheld service of summons on the American wholly-owned subsidiary of a Chinese company, in a trial with counts of espionage [See, here, here and here].

The question: 'Summoning' Persons/Companies Abroad

States across the world contain something or the other on summoning corporations in their criminal procedure laws. The U.S.A. has Rule 4 of the Federal Rules of Criminal Procedure explaining this process. India has Section 63 of the Cr.P.C. which says that service may be effected on a corporation by either (i) serving it on the secretary, local manager or other principal officer of the corporation, or (ii) by letter sent by registered post, addressed to the chief officer of the corporation in India. Section 65 may also be attracted to serving summons on a company, for it applies when service cannot be effected as per the method under Section 63 (and Sections 62 and 64). The officer may affix one of the duplicates of the summons to some conspicuous part of the house or homestead in which the person summoned ordinarily resides.

Section 105 Cr.P.C. tells us what the Court must do whenever it desires to issue a summons/warrant for any person residing in any country/place outside India. The Court is required to send the summons to the authority in the foreign country notified by the Central Government in this behalf. This notification usually occurs through a Mutual Legal Assistance Treaty [MLAT] that India may enter into with a State. This authority, upon receiving the summons/warrant, is then responsible for its execution within its territory. Can it be argued that a foreign company is not in any country or place outside India if that company has a wholly-owned Indian subsidiary? Serving summons of the parent upon its subsidiaries and agents is permitted in civil proceedings in certain situations [Order V, Rules 12-14 Civil Procedure Code 1908]. If permitted in criminal cases, the Government can effect service on that Indian subsidiary for the foreign parent through Section 63 without having to resort to the rigmarole of Section 105 Cr.P.C. Since the latter is a cumbersome process involving two governments and many authorities, allowing service of summons in the ordinary course would undoubtedly hasten the legal proceedings.

Unearthing Rationale - Summons and Corporate Veil
To answer these questions, we need to understand the rationale behind 'summons'. To me, it serves at least two objectives. One: giving notice to the person of there being a set of allegations against her which is the basic premise of a fair trial. Two: through summons, a court assumes jurisdiction over the person/company and can thus ensure appearance of the accused. Service of summons creates a link between the person and Court; the presumption of knowledge so created allows a Court to take coercive steps to ensure participation in proceedings. Think about Proclaimed Offender proceedings under Section 82/83 Cr.P.C. - a Court only moves to that measure on the basis that an accused is knowingly evading the process of law. Along with these two objectives is the underlying difference between allegations in civil and criminal cases, which makes personal service of summons important rather than being always satisfied with a presumption of knowledge. Criminal liability is necessarily personal, only extraordinarily vicarious, and a trial and conviction entails stigma. Thus, only as a last resort are we permitted to derogate from having to make the accused personally aware, Remember, though, that knowledge can be deemed [the proclaimed offender example], and that today there are several strict liability offences which test the generalisations about criminal law.

If you agree with my perfunctory analysis, let us reconsider the initial question. Would the accused foreign parent company get personal notice of allegations upon service of summons to its co-accused Indian wholly-owned subsidiary? In arguing this, the Government seeks to pierce the veil of incorporation and suggest they are the same legal entity. This would in theory mean personal service is effected on the foreign parent by serving summons on the officers of the domestic subsidiary under Section 63 Cr.P.C. Taking this path is problematic. Piercing the corporate veil by its very definition would require appreciating evidence and facts; would it be proper for a Court to engage in that analysis at this primary stage of proceedings? Perhaps not. But allowing this analysis carries strong policy benefits, so even if summons are treated as served cannot the foreign company challenge that exercise of jurisdiction? On principle, one might say it is finely balanced. Looking at practice in the USA, it seems a different yardstick is applied while dealing with civil/tort liability where piercing for jurisdictional purposes is common, and criminal liability where it is not so. Importantly though, American Courts have not held piercing of corporate veil to be impermissible at this stage.

Consequences of Irregularly Exercising Jurisdiction
Assume in our case a Court issued summons to co-accused wholly-owned domestic subsidiary under Section 63 Cr.P.C. for the accused foreign parent as well, and found that service is properly effected. Today if the foreign company chooses to appear - either at the outset or after it is convicted - and raise a jurisdictional challenge, will it succeed?

The company would argue this piercing of corporate veil is improper at the outset for it relies upon an analysis of evidence. Such a technique would amount to subverting the clear process of law, as laid out in Section 105 Cr.P.C. The rationale behind that provision would be found in International Law. While International Law permits domestic statutes to have extraterritorial jurisdiction, it prohibits States from enforcing this jurisdiction extraterritorially. For example: International Law permits the IPC to criminalise offences committed abroad, and the IPC does so through Section 4. While the IPC does then apply to a murder committed by an Indian in California, this does not enable the CBI/police to fly out to California and arrest the accused. Summons are effected through police officers, and thus are no different. The company would argue that these limits are recognised in the Cr.P.C. beyond Section 105 as well. Section 77 Cr.P.C. provides a warrant of arrest may be executed at any place in India. Similarly, Section 60 Cr.P.C. ordains an officer may pursue and arrest persons in any place in India. The extraterritorial enforcement of laws is barred for good reasons too. Imagine a situation where every state's laws apply globally, and every state can enforce these laws globally through its officers. Persons across the world would be subject to multiple sets of laws while having the remotest links to that legal system. There would be no sanctity of international borders left, and states would be at the mercy of wanton external interference in handling its domestic affairs.

The problem is this. States haven't always been willing to set aside proceedings on the basis of an irregular exercise of jurisdiction. For this, I rely upon the practice of states as seen in cases where accused persons were illegally arrested abroad and brought to face trial in domestic courts. We discussed this earlier on the blog and I highlighted a divergence in practice. One view considers the illegal arrest as one circumstance to be relied upon for arguing the unfairness of trial. The other view considers the circumstances of arrest inconsequential to determining the fairness or legality of the subsequent trial. India follows the latter view. In Om Hemrajani the Supreme Court observed: "How the accused gets there [to court] is immaterial. It does not matter whether he comes voluntarily or in answer to summons or under illegal arrest." If the individual can be brought to face trial after an illegal arrest, why would a company be treated any differently if it is brought to court through illegal summons?

Conclusion
With the ever-burgeoning scope of strict liability offences and corruption trials in India, we may find a thorough judicial discussion of this issue soon. As this post suggests, the judiciary is bound to have its hands full. To put in my two cents, I would argue that the position in Om Hemrajani must be revised to make illegal arrests important for determining the validity of subsequent trial. Flowing from this, a strict interpretation of Section 105 Cr.P.C. should be adopted requiring that procedure to be followed for every company located abroad, regardless of its domestic presence.

And an FIR is registered against Uber + Addendum

I just read news items suggesting that an FIR under Section 420 IPC has been registered by the Delhi Police against Uber, for its role in the recent alleged rape incident in Delhi. Some murmurs are also being heard about possible criminal liability for its negligence, and possible abetment of the crime by the driver. 

Abetting the Driver?

The latter can be dismissed earlier, partly for reasons already discussed in the last post. With respect to abetment, a reference to Section 107 IPC would settle the dust. Abetment, by definition, requires one to do something. This may be anything from goading someone on towards commission of an offence, to staying silent when they offence is being committed. The crucial part is my intention/knowledge at that time must reveal that I helped the offence occur. If, at that time I do not know about the offence, it is impossible to say that I am abetting its commission.

Think about it this way. A sells a gun, which is subsequently used to commit murder. This does not mean A abetted murder, even though it occurred mainly because of the sale. If it were otherwise, a lot of local shopkeepers may be in jail for no other reason than for doing their business. Such imposition of criminal liability offends the idea that there must some culpable mental state accompanying the act/illegal omission [see, on this point, A.P. Simester, 'The Mental Element in Complicity' 122 Law Quarterly Review 578-601 (2006)]. This is recognised in Section 107 as well, where crucially the Section says that a person may abet by intentionally aiding, by way of an act or illegal omission.

Cheating the Customers?

Uber has allegedly been cheating customers in representing that they were providing safe commutes with verified drivers, while they failed to conduct the necessary background checks under law. The cheating charges shouldn't stick at all though. Uber in its terms of service never guarantees third-party (driver) suitability. They don't offer you the safe ride. The Police earlier this week admitted to not knowing at all about Uber, and its clear they need to do their homework thoroughly. 

Assume, though that the charge for cheating can stick. Two questions then arise: (1) can a company be liable for cheating and other crimes requiring intent? (2) would the requirements of cheating be satisfied? Both are rather premature, but important nonetheless.

On (1), the question was settled by the Supreme Court in Iridum India Telecom v. Motorola Inc. A company can be guilty of cheating, and the mental element necessary can be derived by turning to the directing mind and will of the company, those who are responsible for its control. So, if the directors at Uber can be pinned with the intent, so can the company.

(2), is a harder question, simply because there is so little information currently available. Ex facie though, I think a cheating case is difficult to sustain. The mental element required for cheating is intention, not negligence. To say that the company intentionally didn't conduct background checks seems to go against the current case, where there is agreement on this being corporate negligence.

Addendum

This helps me to go back to some points I made in the previous post, with respect to the law on these background checks. The news is repeatedly referring to alleged failures by Uber and other app-based cab companies in conducting background checks as the clinching proof of their criminal negligence. There are two leading allegations here: (1) absence of a PSV Badge, and (2) not fitting vehicles with GPS. 

(1) PSV Badge: Allegedly the driver didn't have a PSV (Public Service Vehicle) Badge and Uber didn't care to check and constituted a breach of Rule 6 of the Delhi Motor Vehicle Rules 1993. I read the Rules, and guess what, there is no criminal liability created therein and a breach of Rule 6 does not even carry a penalty. 

(2): Vehicles without GPS: The Uber cabs supposedly didn't have a GPS, which enabled the driver to switch off his phone and disappear. This non-fitting of GPS was improper. With what? The Terms and Conditions of the "Radio Taxi Scheme 2006"  issued by the Transport Department of Delhi. The validity of this statutory instrument notwithstanding, it does not create any liability whatsoever for breach of terms. The license granted to Uber may be revoked, and that's it.

My point stands. A thorough reassessment of the legislative scheme behind taxi operators is needed, and fast.

Banning Uber: Responsibily, Negligence and Criminal Liability

Another night, another ghastly incident of violence against women in India's capital. A lady hailed a cab using the Uber App to take her home at night. She had dozed off on the way, only to be woken up by the driver who allegedly raped her and threatened her with death if she screamed or resisted in any manner. An FIR was immediately filed at P.S. Sarai Rohilla in Delhi and investigation is underway following which a man has been arrested and is in police custody at the moment. 

But what about Uber, the app-service using which the cab was hired. Is there any criminal liability for its apparent negligence? 

Understanding Uber and Responsibility

"Responsibility" can mean a variety of things, a point well argued by HLA Hart in his collection of essays entitled Punishment and Responsibility [2nd edition available here]. He presented four distinct classes of responsibility: (1) role-responsibility, (2) causal-responsibility, (3) liability-responsibility, and (4) capacity-responsibility [pages 211-212]. 

Uber is an app which "connects riders with drivers". It does not own taxis or hires drivers as employees. Rather, it invite drivers to sign up and in this manner Uber provides a network of vehicles in every city where it operates. Such a model reduces initial investment and helps earn greater profits. So, as a customer, Uber is how I get access to a particular car and driver. I assume that the service (cab provided) is safe, and this is not by looking at the cab itself but by having used Uber to hire it. The responsibility to provide a safe vehicle flows from its role. 

An important analogy, I think, can be offered. Think of Uber as another Buyer-Seller platform like eBay. The platform invites sellers to become part of its network, and subsequently is able to offer customers a wide range of products for sale. Customers, then, assume some guarantee of quality because the product is on eBay. 

From Responsibility to Liability 

A liability for failing to discharge this responsibility arises due to the contractual relationships created between parties. Uber would offer compensation if the cab doesn't arrive, or is a faulty vehicle. eBay, similarly, offers compensation where the product sold is broken etc. This liability flows from the role-responsibility that we first established for the service provider. What if the driver assaults you, or as in this case, (allegedly) rapes you, or obscene/illegal products are being sold online. To prevent these situations, the service provider is required to conduct background checks. For Uber, this entails maintaining driver profiles to ensure quality. eBay, similarly, maintains filters to block listings of illegal/obscene products.

But even though there are such checks, negligence may often creep in. You might have guessed what I'm leading up to. Famously now, in 2004 eBay - then Baazee.com - suffered such a case of negligence with respect to listing for sale allegedly obscene material (an MMS video of minors engaging in sexual activity) [The trial is ongoing in Delhi at present. For more facts, read the Delhi High Court judgment quashing charges against one of the Accused]. What this incident did reveal, was the absence of any regulatory framework creating duties and liabilities upon intermediaries in those situations. 

There was no legal requirement at the time for eBay to immediately remove the listing. Today, if an intermediary fails to act within 36 hours it can be liable under the 2011 Intermediary Guidelines. Currently, a similar lacuna is present with respect to the liability of such intermediaries in the private taxi market. The driver checks run by Uber are not a legal mandate, but internal company policy. The liability to enforce such a policy is vastly different from the idea of liability attracted by breaking a legal rule.

Criminal Liability for Uber?

Can there be criminal liability for negligence, or recklessness? Absolutely. Criminal liability ordinarily depends upon existence a culpable mental state. This mental state was denoted as mens rea at the common law and determined by judges. But in India it is determined by how an offence is defined by statute. Uber, and other service providers, can certainly be held liable for being negligent and failing to discharge their duty of care where the law so provides. Currently though, these opportunities are limited [see, Section 304-A, IPC].

Could Uber be made liable for the acts of drivers? Such vicarious liability in criminal law was uncommon. It also offends principle: the culpable mental state of an actor is imputed to a third party. However, such an imposition of liability today is fairly common in socio-economic offences. Statutes contain "offences by companies", where for an offence committed by the company, specific officers are made vicariously liable owing to their position of responsibility [see, Section 138 & 141, Negotiable Instruments Act].

In the case currently being reported, Uber cannot be held criminally liable for their alleged failure to conduct sufficient background checks on the concerned driver. As already mentioned, there are no legal rules requiring such checks in the first place. With respect to the specific offence, rape, again no case is possible. Vicarious liability for rape is not provided for, nor is negligence a culpable mental state to fulfil the conditions Section 375 IPC which defines rape. 

It will be highly interesting to see if a criminal case is filed against the company. In the meanwhile, let us hope the legislators plug the gap this horrendous incident has brought to the nation's attention.