Author(s):Abd El Ghany

The Essence of Financial Crimes

'Rather fail with honor than succeed by fraud."

Sophocles

On a bright morning in March 2009, Bernard Mardoff pleaded guilty to defrauding his clients of sixty-five (65) billion dollars in one of the largest Ponzi schemes the world has witnessed. The former chairman of Bernard L. Mardoff Investment Securities LLC is now serving a 150-year imprisonment after he was demanded to forfeit more than 17 billion dollars to reinstate his clients. Moving on, the coverage page of most business magazines and newspaper has the smiling face of Vijay Mallya, the millionaire who owes his millions to various banks in India. Media have published his defaults like a fairy tale of the twenty-first century. The commercial and financial industry is the backbone of any economy. Over the last thirty (30) years financial and business crimes have increasingly become a concern for governments throughout the World. This concern arises from a variety of issues as the impact of these crimes varies in the different contexts. Today, the prevalence of economically motivated crime in many societies serves as a substantial threat to the development and stability of their economies. The recent global financial crisis unveiled several fictitious projects from companies that exploit and degrade the financial system. Therefore, it is imperative for governments to find different legislations to curb the rise of future Mardoffs and Mallyas.

Frequently, crimes committed by companies are considered more serious than the crimes perpetrated by individuals due to a surfeit of finances involved and prescribed limitations as to the extent of penalties. Such acts encourage companies' executives to hide behind the protection of the corporate veil to 'act' under the latter's name.

Taxation

When does a legal, financial activity of an individual turn into an illegal muddle? The moment he decides to attain benefits by evading or defaulting the provisions of the law of the land. Governments of different countries have varying regimes regarding taxation. However, all these systems are equally stringent. Hence, corporate giants attempt to illegally elevate their profits by their non-compliance to the tax legislations of the country by:-

refraining from acknowledging the actual revenues;

submitting incomplete and untrue financial statements; and

preparing fake records and entries.

Individuals and corporations also often take advantage of legal provisions to refrain from higher tax liabilities. However, the predominant reasons of tax-evasion are a lack of cultural awareness of the importance of tax economy, shortage of income, the absence of parity and social justice, non-transparency of procedures, and the like.

Hence, governments should endeavor to unify in the battle against tax evaders who create a disturbed sense of financial imbalance in the society. Various countries have instituted double tax avoidance agreements (the DTAAs ) to ensure that individuals and corporations are unhindered due to the payment of tax over the same subject matter in two different countries. Therefore, corresponding tax authorities could enforce a similar legislation or treaty to clinch the increasing amount of evaded tax. The predicament of tax-evasion has to be effectively curbed by the administration as the crime also leads to execution of other criminal acts such as fraud and money laundering. Tax evaders succor to the aid of money laundering to transfer the tax money to other countries through illegal means. However, tax-evasion is likely to land one behind bars considering the story of millionaire Jack Abramoff who was fined 24.7 million dollars and sentenced to 70 months of imprisonment after pleading guilty to tax evasion in the United States.

Stealing Finances

Money has its value only when it is available at the right place, at the right time. Further, individuals and corporations are subject to tax in the event of transferring finances from one country to other. That said, the tax is an expensive matter to law-evading, white-collar criminals. The crime of money laundering is a process that aims at legalizing and relocating finances that get acquired from illegal sources such as drugs, smuggling, tax evasion, fraud, weapons trade, corrupt practices, and other unfair activities. This process leads to an indirect growth in the foreign direct investment through which the finances get accumulated in the advanced and developed countries. However, money laundering is not an overnight process. The illegality of money laundering travels through many stages - the first stage involving extraction of money into the financial system. After that, the money is transaction is cleansed or purified and given legal form in the financial system with (or “intending to”) invest or spend the same.

The need for this illegal practice arises when an individual acquires liquid finances which are unaccounted by the authorities. Funds deposited with a bank get accounted for by the concerned authorities or central bank of a country. However, monies illegally attained are not accounted in any of the official statements of accounts. Therefore, the illegality of money laundering initiates when illegally obtained liquid finances are invested in purchases or bank deposits with the view to transfer or encash it elsewhere illegally. Subsequently, money is transferred, scattered and concealed in other different accounts as the financial-segments through multiple local and global electronic transfers. The money may be moved back and forth via a network of multiple accounts, companies and countries to hide their origins. Further, the money is illegally hidden in foreign accounts or other legal entities under the cloak of commercial profits to legitimize the funds.

Meanwhile in Dubai

The judgment of the Dubai Court of Cassation in Appeal number 75 of 2008 had provided for the extent of liability of the shareholders of a limited liability company in financial crimes. Article 218 of Federal Law, Number 8 of 1984 concerning Commercial Companies (the Old Law), had provided that the limited liability company was a separate entity. Accordingly, the partners of the entity would be liable for the latter’s actions or debts only to the extent of their share in the capital of the organization. However, the court held that the partner of a limited liability company would be personally liable when he has fraudulently acted in contrast to the company’s memorandum. However, the Old Law has been repealed by the legislators. The new Federal Law Number 2 of 2015 regarding Commercial Companies (the New Law) has provided for stringent penalties on the company and its management in the event of fraud or default in adhering to the law. Further, Article 84 and 162 has also provided that the managers or partners shall be liable against the company if they have fraudulently acted in contravention to their powers or the provisions of the New Law.

Further, Article 65 of Federal Law Number 3 of 1987 on the Issuance of Penal Code (the Penal Code) has provided for the penal liabilities of a company. The provisions of the Penal Code have stated that the 'liability of the companies would lie only to the extent of a fine.' However, the accused of a case could be held personally liable per the provisions of the Penal Code. This outline implies that an executive in a company who has committed a fraudulent act would be responsible for that act in his personal capacity and cannot hide under the armor of the corporate veil. The Dubai Court of Cassation interpreted this provision in Appeal number 49 of 2003 and held that the manager of a company would be criminally liable if he has committed fraud by imitating the trademark of another company.

Conclusion

Various countries have enacted legislations and other treaties due to the peril that money laundering possess to the domestic and global economy. Further, multiple international agreements have been entered into to fight those crimes and further undermine its prevalence. Therefore, financial crimes adversely affect the domestic economy and foreign investment of every nation as it leads to a decrease in the value of the local currency which ultimately culminates in the obstruction of economic growth and the prevalence of unemployment.