SFIO fights on

High-profile probes into alleged scams have brought the agency back into the news

High-profile probes such as those into alleged scams at Reebok and cartelisation among major cement firms have brought the agency back into the news.

It is almost six in the evening. At this time, when most office employees start calling it a day, the Serious Fraud Investigation Office (SFIO), the government’s corporate investigative wing, is pulsating with energy. At the office, located at an isolated corner of the second floor of Paryavaran Bhavan in New Delhi’s CGO complex, visitors are waiting, files are being moved from one room to another and multiple meetings are underway.

Known best for its probe into the Satyam scam in 2009-10, SFIO is again making headlines, thanks to various high-profile cases of alleged frauds being referred to it in the last few months. The latest include the alleged Rs 870-crore fraud in Adidas AG’s Indian subsidiary, Reebok India. Also, earlier in July, the Ministry of Corporate Affairs had ordered SFIO to scrutinise nine companies of the Radia group, including Vaishnavi Corporate Communications and Neucom Consulting , after the Registrar of Companies found inconsistencies in their financial accounts, an SFIO official said.

KEY CASES HANDLED BY SFIO

• Daewoo Motors: Was referred in 2003 for alleged financial mismanagement involving Rs 1,000 crore
   
• Mardia Chemicals: Probed in 2005 for diversion and siphoning of funds.
   
• DSQ Software: The first company referred to SFIO in 2003 for its role in the securities scam
   
• Usha India: Referred in 2006 for siphoning funds, fudging accounts and diverting money via 250 front companies
   
• Classic Shares, Goldfish Computer, Panther Group, Nakshatra Software: Ketan Parekh group of companies involved in the stock market scam
   
• Morepen Laboratories: New Delhi-based antibiotics maker was probed in 2006 for alleged mismanagement and financial irregularities
   
• Satyam Computer: Referred in 2009, for accounting fraud
   
• JVG group companies: Includes 13 companies like JVG Hotels Ltd, JVG Techno India, JVG Holdings, and JVG Publications. Since 2005, accused of defrauding thousands of investors of Rs 1,000 crore
   
• Sesa Goa: SFIO recommended prosecution against mines major Sesa Goa on nine grounds, including over- and under-invoicing of export and import, respectively, of Rs 1,000 crore

“It (SFIO) is a very competent agency. In the Satyam case, it showcased one of the best probes ever conducted in the world. We need to strengthen it and give it more powers so that it can carry out its job even better. But that is a gradual process,” says Minister of Corporate Affairs Veerappa Moily. His ministry, which oversees the investigative agency, recently indicated it might refer the OnMobile case to SFIO. Various liquidating and multi-level marketing companies such as Singapore-based SpeakAsiaOnline are currently under SFIO’s scanner.

However, some feel the agency lacks teeth and resources to intimidate companies. A look at how the agency functions and what it needs to match its foreign counterparts:

Inception
SFIO, currently a non-statutory body, was established in 2003 on the basis of recommendations of the Naresh Chandra committee on corporate governance. This followed various stock market scams, irregularities in non-financial banking companies and vanishing plantation companies. The idea behind its inception was to tackle white-collar crimes, especially those committed on a large scale or involving great complexity.

“While corporate culture is growing in the country, it is important to have an investigative agency that can not only keeps a check, but also deals with complex frauds that have inter-departmental and multi-disciplinary ramifications,” says Pavan Kumar Vijay, managing director, Corporate Professionals, a capital markets consultancy firm. Pradeep S Mehta, secretary-general of CUTS International, agrees. “The increasing economic activity led to a rise in economic crimes in the country. Therefore, you require a beefed-up, well-equipped SFIO,” he says.

However, SFIO’s role is not limited to policing companies. Besides corporate governance and financial frauds, SFIO also monitors the public interest in terms of monetary misappropriation or the number of people affected. It also probes investor frauds, disappearing companies and cartelisation by firms.

Since inception, it has probed several complex cases, including the Ketan Parekh scam and the Satyam financial scam. More recently, it probed cartelisation among major cement firms, a case later referred to the Competition Commission of India for prosecution.

Structure
A multi-disciplinary organisation, SFIO employs about 60 people, deputed from services such as banking, taxation, police, customs and company law. Its Director, Nilimesh Baruah, recently deputed from the government’s taxation department, heads the team of joint directors. These joint directors, each having a team of his/her own, separately handle taxation, law, information technology, financial transaction, corporate law, capital market, forensic auditing, customs and excise. SFIO’s core investigative team comprises 40 officers.

While people with different expertise help the agency in probing a case from all dimensions, some argue this is not enough. The government must develop a separate cadre for SFIO, as it has for the Central Bureau of Investigation, they say. “Until and unless you develop a cadre, your purpose is not fully addressed. Without a cadre, one is unable to develop a proper structure of the organisation, as there is no ownership,” says Vijay.

To investigate the alleged Reebok fraud, SFIO has used imaging and cloning of computer systems to gather digital evidence. The agency is also looking at adopting recent technologies like data mining, which would enable it to secure a pattern of data for managing risks in corporate governance.

Need teeth
Given the purview of SFIO, some say it is not adequately staffed and needs more power to carry out its mandate. According to Mehta, unlike agencies in the US and Europe, SFIO lacks financial and legal resources to investigate the number of cases. “As it exists today, it is more of a token effort. It requires much more efficiency and powers,” he said. In the US, agencies like the Department of Justice are much stronger, he added.

In Britain, the Serious Fraud Office, an independent government department, investigates and prosecutes serious or complex fraud and corruption. The agency is part of the UK’s criminal justice system and has special legislative powers to secure evidence needed to build successful cases and bring criminals to justice. The European Anti-Fraud Office, popularly known as OLAF, is another agency which keeps an eye on such frauds. OLAF is part of the European Commission, with a special and independent status.

However, unlike its counterparts, SFIO lacks legislative recognition. Though the Naresh Chandra Committee had recommended a separate statute for SFIO, it continues to remain a body under the ministry of corporate affairs. Though the concept behind the organisation is “brilliant”, it is still a “toothless tiger”, says Vijay. “The team is competent, but it does not have powers to search, seize and arrest. SFIO can only do a post-mortem, not work on the surveillance process.”

Experts say during the investigation into the Satyam scam, SFIO found it difficult to secure court approvals to interrogate suspects or carry out searches, something seen as a handicap for such an agency.

Empowerment
To address this, the government is gearing up to give legislative recognition to the agency through the new Companies Bill. “We have proposed provisions that would enable SFIO to seize property and assets and conduct investigations independently. It would also empower it to interrogate anyone outside the country,” Moily said. Currently, the investigative agency takes up a case only when it is referred to it from the administrative ministry or from the judiciary; the new law would enable it to take up investigations on its own accord.