Companies should take legal action against rogue employees

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Economic Times


Arpinder Singh
Partner and National Director – FIDS,
EY India


Devendra Pardeshi
Senior Manager – FIDS
EY India

With the recent spurt in corporate scams, there is greater reason for corporates to put on their vigilance hats. It has been observed that in the corporate sector, companies typically prefer to stay away from reporting any economic offence to a regulator due to the real or imagined impact to their reputation in the public eye.

In government establishments, it is mandatory to follow the procedure of inquiry in misconduct involving violation of conduct rules but not involving financial integrity of employees, and criminal misconduct, involving the serious offence of bribery and corruption as described in Section 13 of The Prevention of Corruption Act, 1988, and report them to the Central Bureau of Investigation, Anti-Corruption Bureau and Police.

Corporates deal with such instances in a discreet manner by not letting even their employees know about the incident, fearing that it would tempt others to attempt a similar misadventure. They are generally interested in recovering the defrauded money rather than getting the culprit punished under the law of the land as it is not legally binding on them.

Section 39 of the Code of Criminal Procedure, 1968, imposes no legal binding on any person to report cases of economic offences under the IPC, such as theft, dishonest misappropriation of property, criminal breach of trust, cheating and dishonestly inducing the delivery of property, forgery for the purpose of cheating, using as genuine a forged document and other offences of corruption and bribery, to the police.

Companies also hesitate to report the matter to the police, apprehending hardships that they may face during the investigation and prolonged judicial trials.

One, police could interrogate other employees, even remotely-connected, and this could demoralise an innocent employee. Two, police investigation is time-consuming. Three, it may be an embarrassment for senior company officials to be questioned by the police. Four, a significant amount of spending could be involved in engaging services of lawyers to register the criminal case and, thereafter, till completion of proceedings. Five, expenses may also be involved on corporate communications to salvage the image of a firm or give updates.

However, there are many advantages in reporting the matter to the police and opting for investigation of offences and prosecution of errant employees. The registration of a criminal case will be a deterrent to rest of the employees. A message would go out to all employees that the consequences of defrauding the company will not be merely removal from the company, but the person would also be subjected to criminal investigation that may include prosecution.

Other companies can take a page from this company to comply with law, thereby following good corporate governance practices. The possibility of seizure and recovery of the defrauded amount by police (u/s 102 CrPC) is very high.

Advantages and disadvantages of taking legal recourse against the alleged employees apart, corporates should also adhere to the principle of 'zero tolerance', which means corruption will not be tolerated and the corrupt would be punished.

Zero tolerance is an affirmation of strict adherence by a company to corporate governance. There are three stages in the process towards zero tolerance. In the first stage, a company can devise checks and balances to prevent any form of misadventure.

In the second stage, it can be followed by periodic checks to identify systemic vulnerability. And lastly, the company needs to take immediate corrective action, including analysis of the event to plug loopholes and punish the perpetrators.

While the first and second stages are within the domain of every manager, the third stage requires specialised skills. These include an impartial and objective attitude so that persons involved or otherwise in the misadventure do not feel victimised.

It also requires an in-depth knowledge of the business processes and analytical ability to corroborate allegations with evidences. Allegations have to be 'proved or disproved' and not merely 'not proved'. Companies must also ensure that the dignity and self-respect of employees are not offended during enquiry.

Corporate reluctance to seek legal recourse is a ground reality, and the reasons behind this cannot be undermined. But it is imperative to report the wrongdoing, so that the perpetrator is punished and the company can send a strong message of zero tolerance towards misdemeanours to its employees and stakeholders.

 (A Singh is partner and national director, and D Pardeshi is senior manager, for fraud investigation and dispute services at EY. Views are personal)