Forensic Audit: Laws and Regulations: formula sheet

Key formulas

SFIO establishment (Companies Act, section 211)

Central Government notification → SFIO, headed by a Director (not below Joint Secretary rank)

Experts come from banking, corporate affairs, taxation, forensic audit, capital market, IT, law or other prescribed fields.

Grounds to assign a case to SFIO (section 212(1))

Registrar/inspector report under s.208 | company special resolution | public interest | request from a Government department

Four grounds. The Central Government assigns by order; SFIO does not choose its own cases.

Exclusivity once assigned (section 212(2))

Case assigned to SFIO → no other Central or State agency proceeds for offences under the Companies Act

Earlier investigations stop and documents are transferred to SFIO.

Duty to cooperate (section 212(5))

Company, officers and past or present employees must give information, explanation, documents and assistance

The Investigating Officer has the powers of an inspector under section 217.

Offences covered by section 447 (section 212(6))

Cognizable; bail only if Public Prosecutor heard and court satisfied of reasonable grounds of not guilty and no likelihood of offence on bail

Persons under 16, women, and the sick or infirm may be released on bail if the Special Court so directs. Cognizance only on a written complaint by the SFIO Director or an authorised Central Government officer.

Arrest (section 212(8) and (10))

Officer not below Assistant Director, authorised by Central Government, reason to believe recorded in writing; produce within 24 hours

The 24 hours exclude journey time to the Special Court or Magistrate.

Report and prosecution (section 212(12), (14))

SFIO report → Central Government examines → directs SFIO to initiate prosecution

The report filed with the Special Court is deemed a police report under section 173 of the Code of Criminal Procedure, 1973.

Disgorgement (section 212(14A))

Report states fraud and undue advantage taken → Central Government may apply to the Tribunal

Tribunal may order disgorgement and personal liability without limit.

Information sharing (section 212(17))

Other agencies → SFIO (information on the same offence); SFIO → other agencies (relevant to other laws)

Two-way sharing, including income-tax authorities.

PMLA section 72A

Central Government may constitute an Inter-ministerial Co-ordination Committee by notification

Purpose: operational and policy co-operation among Government, law enforcement, FIU-India and regulators on AML/CFT.

Offence of money-laundering (section 3)

Attempt / knowingly assist / knowingly a party / actually involved + activity connected with proceeds of crime = offence

Activities: concealment, possession, acquisition, use, projecting or claiming as untainted property. It is a continuing activity while the person enjoys the proceeds.

Punishment (section 4)

Rigorous imprisonment: minimum 3 years, maximum 7 years, plus fine

No upper limit on fine now, as the earlier cap of five lakh rupees was omitted with effect from 15-2-2013.

Enhanced punishment (proviso to section 4)

Maximum extends to 10 years

Applies where the proceeds of crime relate to an offence specified under paragraph 2 of Part A of the Schedule. The minimum stays 3 years.

Provisional attachment (section 5(1))

Order in writing by Director or officer not below Deputy Director; period not exceeding 180 days

Needs recorded reason to believe, based on material, that the person has proceeds of crime likely to be concealed, transferred or dealt with so as to frustrate confiscation.

Condition before attachment (first proviso)

Report under section 173 CrPC forwarded to Magistrate, or complaint filed before Magistrate or court for the scheduled offence

A similar report or complaint under the corresponding law of another country also qualifies. The second proviso allows attachment of property without this where non-attachment immediately is likely to frustrate proceedings, with reasons recorded.

Procedure after attachment

Copy of order + material to Adjudicating Authority in sealed envelope (immediately); complaint before Adjudicating Authority within 30 days

Sections 5(2) and 5(5). The order ceases to have effect after 180 days or on an order under section 8(3), whichever is earlier.

Excluding stay period

180 days exclude High Court stay period + further period up to 30 days after vacation of stay

Third proviso to section 5(1).

Section 12AA(1): steps before each specified transaction

Verify identity (Aadhaar authentication) + examine ownership, financial position and source of funds + record purpose and intended nature of relationship

Done prior to commencement of each specified transaction. Where the person cannot obtain an Aadhaar number, another prescribed process or mode is used. Manner is as prescribed.

Section 12AA(2): consequence of client's failure

Client fails conditions → reporting entity shall not allow the specified transaction

This is a mandatory bar, not a discretion.

Section 12AA(3): suspicious clients

Suspicious or likely proceeds of crime → increase future monitoring and scrutiny of the relationship

Applies to a specified transaction or a series of them. Manner is as prescribed.

Section 12AA(4): retention of EDD information

Retention period = 5 years from the date of transaction between client and reporting entity

This is for information obtained under enhanced due diligence. Do not apply it blindly to all records.

Specified transaction (Explanation to s. 12AA)

Cash withdrawal or deposit above prescribed amount | foreign exchange above prescribed amount | high value imports or remittances | other prescribed high-risk transactions

Do not quote a rupee threshold unless the question gives it.

Source and power

PMLA s. 72A: Central Government MAY, by notification, constitute the Committee

Enabling power. Inserted by Act 23 of 2019, w.e.f. 1-8-2019. It is not a Companies Act body.

Purposes (a) to (e)

(a) operational co-operation; (b) policy co-operation and co-ordination; (c) consultation with authorities, financial and other sectors; (d) developing and implementing AML/CFT policy; (e) other matters notified

Operational co-operation is between the Government, law enforcement agencies, FIU-IND and regulators or supervisors.

Nature of the Committee

Coordination body, not an investigating or punishing authority

The section gives no power to investigate, prosecute or penalise.

Company officers under PMLA

s. 70(1): persons in charge of and responsible for the company's business, with the company, are deemed guilty; defence if no knowledge or all due diligence exercised

Section 70(2) adds directors, managers, secretaries or officers where consent, connivance or neglect is proved.

Audit Committee composition

Companies Act s. 177(2): minimum 3 directors, independent directors in majority

Do not confuse this internal board committee with the Inter-ministerial Co-ordination Committee.

Establishment (s. 211)

Central Government + notification → SFIO, headed by a Director

Director must be not below Joint Secretary rank, with corporate affairs experience. Experts come from the fields listed in s. 211(2).

Triggers for assignment (s. 212(1))

(a) s. 208 report of Registrar/inspector; (b) special resolution of company; (c) public interest; (d) request from Central/State Government department

Assignment is by Central Government order, after it forms the opinion that SFIO investigation is necessary.

Exclusivity (s. 212(2))

Case assigned to SFIO → other agencies stop and transfer records

Applies to offences under the Companies Act in that case.

Duty to cooperate (s. 212(5))

Company + present/past officers and employees must provide information, explanation, documents, assistance

Investigating Officer has the powers of an inspector under s. 217.

Bail for s. 447 offences (s. 212(6))

Public Prosecutor heard + court satisfied of reasonable grounds for believing not guilty and not likely to offend on bail

Relaxation by Special Court for a person under 16, a woman, or a sick or infirm person. This is in addition to other bail limits (s. 212(7)).

Arrest (s. 212(8)-(10))

Officer not below Assistant Director, authorised by Central Government + reasons to believe recorded in writing → arrest; inform grounds; produce within 24 hours

The 24 hours exclude journey time. Produce before the Special Court or Judicial Magistrate or Metropolitan Magistrate.

Reports and follow-up (s. 212(11)-(14A))

Interim report (if directed) → final report → Central Government examines → directs prosecution; may seek disgorgement before Tribunal

Report filed with Special Court for framing charges is deemed a police report under section 173 CrPC, 1973 (s. 212(15)).

Fraud (section 447 Explanation)

Fraud = act / omission / concealment of fact / abuse of position + intent to deceive, gain undue advantage or injure

Wrongful gain or loss is not required. Connivance by another person is covered.

Punishment: fraud at or above threshold

Imprisonment 6 months to 10 years + fine of at least the amount involved, up to 3 times that amount

Threshold is ₹10 lakh or 1% of turnover, whichever is lower. If public interest is involved, imprisonment is at least 3 years. This threshold is for punishment only, not for the reporting route.

Punishment: smaller fraud

Imprisonment up to 5 years, or fine up to ₹50 lakh, or both

Applies where the amount is below the section 447 threshold and public interest is not involved.

Auditor's duty: section 143(12)

Reason to believe + offence involving fraud + by officers or employees → report immediately to Central Government if the amount is at or above the specified amount (₹1 crore under the rules)

Section 143(12) says only 'specified amount'. The Companies (Audit and Auditors) Rules, 2014 (Rule 13) set it at ₹1 crore. It is separate from the section 447 punishment threshold. Below ₹1 crore, report to the Audit Committee or the Board, as prescribed.

Disclosure where reported only to Audit Committee or Board

Company discloses details of such frauds in the Board's report

Applies where the auditor reported to the Audit Committee or Board and not to the Central Government.

Penalty for non-compliance: section 143(15)

Listed company: ₹5 lakh. Other company: ₹1 lakh

Applies to an auditor, cost accountant or company secretary in practice who does not comply with section 143(12).

Protection: section 143(13)

Good faith reporting does not breach any duty of the auditor

Protects the auditor from a claim of breach of confidentiality.

PMLA, section 71

PMLA provisions prevail over anything inconsistent in any other law for the time being in force

The override applies only to inconsistent provisions. Consistent laws continue to apply alongside PMLA.

Companies Act, section 378ZQ

Producer Company Chapter overrides inconsistent provisions of the Act, any other law, or any instrument having effect under such law

Other laws still apply to the Producer Company where they are not varied by or inconsistent with the Chapter.

Prevention of Corruption Act, section 18A(1)

Save as otherwise provided in PMLA, the Criminal Law Amendment Ordinance, 1944 applies as far as may be to attachment, administration and execution of attachment or confiscation of property procured by an offence under the PC Act

PMLA takes priority where it has its own provision.

Prevention of Corruption Act, section 18A(2)

References to 'District Judge' in the 1944 Ordinance are read as 'Special Judge'

Applies for the purposes of the PC Act.

Companies Act, section 326(1)

Workmen's dues, and the shortfall of a secured creditor or the workmen's portion in his security (whichever is less), rank pari passu and ahead of other debts in winding up

The proviso gives the two-year workmen's dues in sub-clauses (i) and (ii) priority even over secured creditors, payable within thirty days of sale of assets.

Workmen's portion (section 326 Explanation)

Workmen's portion = Value of security × Workmen's dues ÷ (Workmen's dues + Debts due to secured creditors)

Illustration: ₹1,00,000 × 1,00,000 ÷ 4,00,000 = ₹25,000.

Quick revision

• The SFIO is established by the Central Government by notification to investigate frauds relating to a company (section 211).
• The SFIO is headed by a Director, who must be an officer not below the rank of Joint Secretary with corporate affairs experience.
• Its experts come from banking, corporate affairs, taxation, forensic audit, capital market, information technology, law and other prescribed fields.
• Under section 212 the Central Government assigns a case to the SFIO on a Registrar or inspector report, a company special resolution, public interest, or a request from a Government department.
• Once a case is assigned to the SFIO, no other Central or State agency proceeds with an investigation of that offence under the Act, and records are transferred to the SFIO.
• The company, its officers and past or present employees must give the Investigating Officer all information, explanation, documents and assistance.
• An offence covered under section 447 is cognizable, and bail is restricted: the Public Prosecutor must be heard and the court must be satisfied on the stated grounds.
• The Special Court takes cognizance only on a written complaint by the SFIO Director or an authorised Central Government officer.
• Arrest needs an authorised officer not below Assistant Director, reasons recorded in writing, grounds told to the person, and production before a court within twenty-four hours, excluding journey time.
• After an investigation report, the Government may direct prosecution, and where fraud gave undue benefit it may apply to the Tribunal for disgorgement and personal liability without limit.
• The Inter-ministerial Co-ordination Committee is formed by notification of the Central Government under PMLA section 72A for coordination among the Government, agencies, FIU-IND and regulators.
• The SFIO and other agencies, including police and income-tax authorities, must share relevant information with each other (section 212(17)).

Common mistakes

• Saying the SFIO starts investigations on its own. Fix: State that the Central Government assigns the case by order under section 212(1) on one of four grounds.
• Forgetting that other agencies must stop once SFIO has a case. Fix: Always mention that no other Central or State agency proceeds for offences under the Companies Act, and records are transferred.
• Saying PMLA punishes the original crime such as bribery. Fix: Remember they are separate. The scheduled offence is under its own law. PMLA punishes dealing with the proceeds of that crime.
• Thinking all six activities must be proved together. Fix: The Explanation says one or more of them is enough, in any manner whatsoever.
• Treating FIU-IND as the body that prosecutes money launderers. Fix: Write that FIU-IND receives, analyses and disseminates financial information. Enforcement and prosecution lie elsewhere.
• Quoting a fixed rupee threshold for cash or forex specified transactions. Fix: The section says 'exceeding such amount' as prescribed. Use the amount only if the question gives it.
• Saying the Committee is constituted under the Companies Act, 2013. Fix: Write that it is under section 72A of the PMLA, 2002, and relate it to company-related offences only as context.
• Writing that the Central Government must constitute the Committee. Fix: Use the word "may". The power is enabling and exercised by notification.
• Saying the SFIO can start an investigation on its own. Fix: Write that the Central Government must first assign the case by order under section 212(1).
• Saying the SFIO investigates every offence and every arrest is allowed. Fix: Link arrest and the stricter bail conditions to offences covered under section 447, the fraud provision, and to an authorised officer not below Assistant Director.

Exam tips

• Write the framework as a list of laws with one-line roles, then go deeper on the law the question asks about.
• Learn the four grounds in section 212(1) and the exclusivity rule in section 212(2); these are easy marks.
• In case questions, follow the order: provision, analysis of facts, conclusion, then a practical compliance point.
• Add section numbers only where certain; plain-word statements of the rule earn marks safely.
• Link the topic to evidence law and PMLA in your answer to show the framework works together.
• Write the section 3 activities as a list. Examiners look for all six words: concealment, possession, acquisition, use, projecting, claiming.
• Always give numbers exactly: 3 years, 7 years, 10 years, 180 days, 30 days. These are easy marks.
• In case questions, link the facts to the scheduled offence first, then to the laundering activity.