FRAUD - Motives, Risk Areas,forensic audit


Amrapali Fraud


ICAI to Look into Alleged Financial Misdeed at Fortis

It has been alleged that Fortis founders Malvinder Singh and Shivinder Singh took at least ₹500 crore ($78 million) out of the publicly-traded hospital company they control without board approval about a year ago.
"We are looking into Fortis case. We have to be vigilant about any misconduct by a chartered
accountant," Gupta said. Stock exchanges have issued notice to Fortis following reports of the alleged

ICAI is also hoping the government will consider its demand to be allowed to look into the conduct of firms and not just the chartered accountant in case of a wrong-doing.
The institute had renewed its demand to penalise the erring audit firms following the action by the
Securities Exchange Board of India against Price Waterhouse in the Satyam Computer case.
"We can take action against the member who conducts the audit but the firm should also be held
responsible for misconduct… Government has not denied our request but we are yet to get a final
word," Gupta said.
ICAI has also written to the ministry of corporate affairs to provide two nominees to set up one more
bench of the disciplinary committee for faster disposal of cases.
The institute also plans to have a separate committee for public interest litigations and also start
e-hearing of disciplinary matters to reduce pendency of cases. The pendency of cases against ICAI has
come down to two years from four years in 2016. "We are taking proactive measures to fasten the
processes and reduce pendency," Gupta added.
The institute has disposed four of the five cases of misconduct by CAs referred to it by the Serious
Fraud Investigation Office after the demonetisation exercise



Examples of fraud done by ledger keeper in purchase ledger are:

.  Crediting the account of a supplier on the basis of ficticious invoice, showing that certain supplies have been received from the firm, whereas in fact no goods have been received or on the basis of duplicate invoice from a supplier, the original amount whereof has already been adjusted to the credit of the supplier in the purchase leger, and subsequently misappropriating the payment made against the credit in the supplier’s account.

Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an amount equivalent thereto of the payment made to him. For if a credit note issued by a supplier either in respect of goods returned to him or for an allowance granted by him, is not debited to his account, the balance in his account in the purchase ledger would be larger than the amount actually due to him. The ledger keeper thus will be able to misappropriate the excess amount standing to the supplier’s credit.

.  Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance.


Examples of fraud done by ledger keeper in sales ledger are:

.  Teeming and lading: Amount received from a customer being misappropriated; also to prevent its detection the money received from another customer subsequently being credited to the account of the customer who has paid earlier. Similarly money is received from the customer who has paid thereafter being credited to the account of the second customer and such a practice is continued so that no one account is outstanding for payment for any length of time, which may lead the management to either send out a statement of account to him or communicate with him.

.  Adjusting an authorized credit or fictitious rebate, allowance, discount, etc. in the account with a view to reduce the balance and when payment is received from the debtor, misappropriating an amount equivalent to the credit.

.  Writing off the amount receivable from a customer’s bad debt account and misappropriating the amount received in payment of the debt.


Frauds done by ledger keeper in supplier’s ledger are:

Wrongly allocating income or expenditure.

Understating or overstating stock or prepaid expenses or liabilities

Satyam fraud -methodology of inflating sales- revealed
 April, 29th 2009
Indian investigators disclose how computer systems were subverted to generate false invoices
The Central Bureau of Investigation (CBI) of India has revealed details of the fake invoicing system used by Satyam Computer Services Ltd as part of the US$1 billion-plus fraud that has rocked the company.
Documents released to the general public in India showed how the company's standard billing systems were subverted to generate 'false invoices to show inflated sales,' before its former boss Ramalinga Raju admitted his role in India's largest ever corporate scandal.
The CBI said it had used cyberforensics to uncover how in-house computer systems were exploited to generate fake invoices.
Regular Satyam bills were created by a computer application called 'Operational Real Time Management (OPTIMA)', which creates and maintains information on company projects.
The 'Satyam Project Repository (SRP)' system then generates project IDs; there is also an 'Ontime' application for entering the hours worked by Satyam employees; and a 'Project Bill Management System (PBMS)' for billing. An 'Invoice Management System (IMS)' generated the final invoices.
CBI officers have concluded that the scandal involved this system structure being bypassed by the abuse of an emergency 'Excel Porting' system, which allows 'invoices [to] be generated directly in IMS…by porting the data into the IMS.' This system was subverted by the creation of a user ID called 'Super User' with 'the power to hide/unhide the invoices generated in IMS'.
By 'logging in a Super User, the accused were hiding some of the invoices that were generated through Excel Porting. Once an invoice is hidden the same will not be visible to the other divisions within the company but will only be visible to the [company's finance division sales team]' concluded the CBI.
The CBI said their inquiries revealed there are 7,561 invoices found hidden in the invoice management system, worth INDRupees 51 billion (US$1.01 billion).
As a result, 'concerned business circles' would not be aware of the invoices, which were 'also not dispatched to the customers'. The note added: 'Investigation revealed that all the invoices that were hidden using the Super User ID in the IMS server were found to be false and fabricated.' The value of these fake invoices 'were shown as receivables in the books of accounts of [Satyam] thereby dishonestly inflating the revenues of the company.'
And there were a lot of these bills. The CBI said their inquiries revealed there are 7,561 invoices found hidden in the invoice management system, worth INDRupees 51 billion (US$1.01 billion). 'As a result of this analysis, the individuals who have generated and hidden these false and fabricated invoices have been identified,' said the law enforcement agency.

Forensic Accounting,Forensic Investing, investigative accountants, forensic auditors or fraud auditors

Forensic Accounting
Forensic just means "relating to the application of scientific knowledge to a legal problem" or "usable in a court of law." Most of the crimes, such as homicides, investigated on a show like "CSI" are known as "crimes against the person." Forensic accounting is simply a specialty field within the broader arena of accounting.

They investigate crimes such as fraud and give expert testimony in court trials. They also perform work related to civil disputes. Forensic accountants are also known as fraud investigators, investigative accountants, forensic auditors or fraud auditors.

 It is the practice of utilizing accounting, auditing, Computer Aided Auditing Tools, Data Mining Tools, and investigative skills to detect fraud/ mistakes. Computer Software

Forensic Investing

Forensic investing involves looking beyond the obvious. A normal investor acts like a watchdog, but a forensic investor acts like a bloodhound looking for red flags. Investors must look beyond the numbers on financial statements and dig into the corpse of a company or a mutual fund. The author and creator of Sherlock Holmes [Sir Arthur Conan Doyle] said that "detection is, or ought to be, an exact science, and should be treated in the same cold and unemotional way."

Many investors and creditors are discouraged from using financial statements and the related footnotes because of their complexity. And, indeed, a thorough knowledge of financial statements of a company of any size can required considerable time and effort. But it is possible to glean important information about a company's prospects by spending time looking for specific indications of potential problems or red flags.

But suppose the financial statement is wrong? Some companies use creative accounting techniques to disguise damaging information, to provide a distorted picture of the financial health of the business, to smooth out erratic earnings, or to boost anemic or no earnings. Investors should have a healthy skepticism when reading and evaluating financial reports. Businesses are often clever in hiding these accounting tricks and gimmicks, so investors must be ever alert to the signs of outright financial shenanigans. Investors must attack financial statements and company information the way the fictional Sherlock Holmes approached murder cases.

Wells Fargo Scandal 9th Sep 2016
Everyone hates paying bank fees. But imagine paying fees on a ghost account you didn't even sign up for.
That's exactly what happened to Wells Fargo customers nationwide.
On Thursday, federal regulators said Wells Fargo  employees secretly created millions of unauthorized bank and credit card accounts -- without their customers knowing it -- since 2011.

The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money.
"Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses," Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.
Wells Fargo confirmed to CNNMoney that it had fired 5,300 employees over the last few years related to the shady behavior. Employees went so far as to create phony PIN numbers and fake email addresses to enroll customers in online banking services, the CFPB said

Capital Market  Frauds

Sudden resignations by the auditors of a couple of companies have triggered a sharp drop in their share prices in recent times. Deloitte Haskins & Sells India quit as auditor of Manpasand Beverages a few days before the declaration of annual results. The stock plunged nearly 50 per cent in five sessions following the announcement. Shares of Atlanta tumbled 20 per cent on Friday after Price Waterhouse chartered accountants resigned as its auditors. Earlier, Vakrangee witnessed a similar development. An auditor is responsible for the reliability of company’s financial statements, as it is entrusted with carefully checking accuracy of business records. An unexpected resignation leaves shareholders as well as lenders in the lurch, as they wonder if there is anything amiss in its books of accounts. Why auditors quit? Auditors have become bold and do not shy away from putting in papers if they find something suspicious in the accounts of a company. Some recent regulatory developments have also made auditors more conscious.
An auditor normally takes an easy way out, if he finds that the company management would not like his opinion, Dinesh Kanabar, CEO, Dhruva Advisors, told ETNOW. He said there were issues earlier with the disciplinary powers of the Institute of Chartered Accountants and they have now been moved to an independent body, which looks at disciplinary cases. Therefore, there is a heightened fear among the auditors.
In a couple of cases, auditors have also been arrested and sent behind bars. No auditor would like to face that ignominy. Therefore, there is a heightened awareness within the profession about the audit role. “If something goes wrong in accounts of the company, there is an awareness that the regulators, be it CBI or SFIO or an institute, would pile on the auditors,” Kanabar said.
Top Red Flags spoke to various market experts to identify early signs that something may be not above board in a company. Arpinder Singh, Partner and Head - India and Emerging Markets, Fraud Investigation & Dispute Services, Ernst & Young, shared five pointers
Skewed business performance
 Organisations exhibiting unusual profitability in saturated markets or in comparison to peers can possibly have trouble brewing within. Another red flag could be organisations with significant changes in financial ratios from previous year to current.
Absence or low implementation of policies or frameworks Most organisations with global operations would need to comply with applicable Indian and foreign laws, which would require instituting policies or frameworks around whistle-blowing, code of conduct, code of ethics, anti-bribery or anti-corruption. Absence or low implementation of these policies can be a serious red flag, raising questions around corporate governance and ethical concerns.
 Unusual related party transactions
 Red flags can also be in the form of unusual related party transactions that would include inadequate disclosure of such transactions, fictitious or circuitous transactions.
Behavioural factors
 Perpetrators of fraud can show certain behavioural signs that may be red flags. These include an apparent change in lifestyle, financial or legal issues, frequent disagreements with the company (compensation/ job rotation) and unusually close association with key vendors or customers. Lack of tone at the top level as well as information or decision making generally restricted to few important individuals and lack of transparency in regular transactions can also be matters of concern. Value investors have a different way of looking for such aberrations. Generally, they try to look for such signs in the books of accounts.
 Frequent fundraising/equity dilution
Normally, one should avoid companies that keep on raising funds by diluting equity. Value investor Ekansh Mittal, who is a Research Analyst at Katalyst Wealth, said, “While it’s not a sureshot sign of trouble brewing in a company, it does tell us the fact that either the company is trying to be too aggressive or the business is not self-sufficient enough to generate funds for expansion. It also tells us that promoters themselves don’t value their equity much in the company and a lot of times such promoters have even siphoned out funds from the company.”
Too many acquisitions
 It’s well known that no matter how much the promoters talk about the synergies from the acquisition, most of the times the acquisitions turn out bad or the price paid turns out to be too high with a subsequent write-off. “An occasional acquisition of a company and that too of a manageable size (with respect to the acquiring company) is understandable; however frequent acquisitions are most definitely a red flag for us,” said Mittal.
Consistently increasing debt
 There have been several examples such as Bhushan Steel, Amtek Auto where the companies’ debt on balance sheets increased with every passing year. The common pattern that market experts have found is sales and profits of such companies grow every year just like their debt, and suddenly one year, they report huge losses and become bankrupt.
While debt is a lifeline for capital-intensive businesses, however, if the company is not taking a breather and consistently expanding by taking on huge debt then some day or the other it will find itself in trouble. Value investor Gaurav Sud, who is Managing Parner at Kanav Capital, said, “Many companies take debt to fund growth. While this strategy works well in good times, when the cycle turns, high debt levels cannot be served by cash flows, resulting in huge problems. While there is no golden rule, but any company where the debt-to-equity ratio is more than 1:1, one should study it carefully to see if it can sustain that debt in the case of a cyclical downturn (eg Jaiprakash Associates, Bhushan Steel, Reliance Communications).” One should also look at debt servicing ratio of a company, Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP said, “If the debt servicing coverage ratio is decreasing every year. It is being calculated by dividing EBIDTA with interest and loan repayment obligation in a year. If this ratio has come down to less than 1, it means that company has difficulties in repaying its debt and interest obligations. The possibility of converting the account into NPA is very high.”
 Formation of too many subsidiaries
 It has been observed that companies that form too many subsidiaries are generally up to something. “A lot of times, such subsidiaries are formed for the purpose of siphoning off funds. Basically, the modus operandi is that parent company offers loans to such subsidiaries, which then are unable to perform up to the mark or report losses and finally the loans and advances are written off. While there could be genuine cases as well, but a lot of times promoters take out money through such subsidiaries,” said Mittal of Katalyst Wealth.
High receivables
 When you see that the debtors of a company are growing at a rate faster than that of sales then there is a big red flag. Gaurav said, “This implies one of two things - either the company is trying to increase sales by giving more credit in the market or the company is unable to collect money in a timely manner. This could happen due to lack of negotiating power with customers or they have a hard time to give money. At times this reflects outright fraud (Ricoh India).”
No or low tax payment

Sud also highlighted another important issue. “Many a time, there are companies reporting good profits but paying no or very low tax. This can happen because of tax exemptions or because the company is operating in a jurisdiction where there is no tax (eg Dubai / Mauritius). While there could be genuine reasons for paying no taxes, sometimes a company may be showing profits because there is no cost for show increased profits. Satyam Computers is a great example, which showed non-existent profits as there was no tax it for IT companies.”

Analysis of Bank Frauds
Central Vigilance Commission

Gem & Jewellery Sector

The cases of frauds perpetrated by three companies in this sector have been analysed.  The companies  were  in  business  of  the  Diamonds  &  Jewellery.  The  companies  had  adopted  a business  model  by  which  they  imported  gold/gem  through  foreign  Banks/private  parties against SBLC/LC/ Cash Credit for value addition and production of Jewellery for export to its customers located aboard. The Companies availed credit facilities from the banks under consortium arrangement led by one of the banks.

Modus operandi:

      The  companies  deliberately  inflated  the  valuation  of  diamonds  with  the  malafide intention  to  avail  higher  credit  facilities  from  the  lenders  and  also  to  indicate  the security coverage available with the lenders.

      Export bills which remained unpaid on due date were purchased by the consortium Banks.  Simultaneously,  the  disruption  of  the  cash  flow  led  to  the  devolvement  of SBLCs and outstanding of cash credit remained unpaid.

      The group of the companies informed that as their receivable were not being realized in  time  due  to  financial  difficulties  of  the  foreign  buyers;  they  could  not  meet  the SBLC (Standby Letter of Credit) commitment on time.

      The details of receivable/debtors submitted by the companies to the bank in order to avail credit facilities appeared to be manipulated, false and fabricated.

      The companies acted cleverly to avail entire pre-shipment as Standby Letter of credit instead of packing credit loans, for which consortium succumbed to their innovative funding  ideas.  The  companies  also  resorted  to  availing  post-shipment  finance  by discounting  “Export  Bills”  from  one  of  the  member  banks,  while  pre-shipment finance was obtained from another member bank by way of SBLC, leading to double financing.


  Due diligence report on borrowers were not obtained before submitting the sanction/ renewal  proposal.  While  recommending  the  proposal  for  enhancement  in  limits, quantum  of  export  was  focused  to  get  the  limit  enhanced.  However  comforts  like LC/SBLC  were  not  insisted  to  ensure  timely  payments  of  exports  whereas  imports were on the basis of SBLC.

  The entire group of existing buyers companies was controlled by a single person. No credit assessment was done for these customers. There was no evidence for proof of delivery of the goods to customers. Later on, the investigating agency have raised the issue  regarding  proof  of  delivery  of  sales  of  gold  and  diamond  jeweller  to  foreign companies.

  In  the absence  of any effective  mechanism to  monitor the movement  of discounted Export  bill  proceeds  towards  liquidation  of  SBLCs  across  member  banks,  the companies manipulatively diverted and round tripped the funds to their related/ shell companies.

  Consortium Mechanism under the leadership of lead bank broadly failed to check and monitor  the  transactions.  The  exchange  of  information  was  more  a  ceremonial formality rather than to sift the data. The lead bank did not share the areas of concern. They did not take  note of warning signals mentioned in the business rating reports. The  lead bank did not exchange  the information in meetings to alert  other member banks at early stages.

  It is evident that Bullion Trade and Merchant Trading were not genuine transactions carried out in the ordinary course of the business. The losses were deliberately booked through  related  party  transactions  to  siphon  off/  divert  the  funds  availed  from  the consortium thus committing default in making payment/ repayment thereof. The high value transactions were made without the specific approval of the consortium.

Systemic Improvement:
   There should be control of financers on movement of stocks. Genuineness of buyers should  have  been  verified  to  ascertain  whether  buyer  is  capable  of  such  a  huge buying.

       Banks  should  have  exercised  due  diligence  on  the  buyers  and  have  executed  a tripartite agreement with the buyers & exporters to remit proceeds to bank account of the companies in India. Confidential Report (CR) on all foreign buyers should have been obtained/ analyzed.

   Gem  &  Jewellery  Sector  credit  facilities  to  these  companies  increased  manifold within  a  short  span  of  time  in  an  effort  by  the  banks  to  increase  their  credit dispensation.  There  should  have  been  some  segment  related  limits  on  such  type  of credit exposures.

   There were frequent attempts by fraudsters to fabricate documents and avail finance from   banks.   Heightened   awareness   of   loopholes,   consequences   of   bypassing procedural aspects and  check  points for evaluating genuineness of  various essential documents was very much necessary. These points should be the learning lesson for future.

   It should be ensured that appropriate accountability is fixed in the chain of command including  sanctioning  authority  in  the  event  of  such  frauds  instead  of  fixing  entire responsibility on lower functionaries.

   Investigation should be done to find out the trail of diversion so as to find as to where the money has gone whether any money has been remitted /parked aboard.

   Bank     must     immediately     delist     such     third     party     valuers,     Chartered Accountants/Chartered    Engineers,    Advocates    etc.     who    have    questionable credentials/have been negligent in their professional duties or have caused financial loss to the bank by their willful acts of omission/commission/dishonesty. A periodical review of all empanelled professionals should to be ensured by banks for weeding out undesirable third party service providers.

   In  such  cases  of  frauds  the  concerned  banks  should  get  forensic  audit  done  and concerted efforts should be made by banks to get back the money lost.

   Jewellery sector units may also be asked to furnish a monthly declaration to its lender Banks declaring details of all transactions /financial agreement/ contract entered into by its subsidiaries with their business associates.

Manufacturing Sector

The  cases  of  frauds  perpetrated  by  five  companies  in  this  sector  have  been  analysed.  The companies   were   in   business   of   manufacturing   in   Pharmacy,   Textile,   Ferrous   metals, pharmaceuticals products  and  various ranges of steel products.  The Companies had started availing credit facilities in form of working capital (Fund based & Non fund based) from the banks under consortium arrangement led by one of the banks.

Modus operandi:

      One  of  the  Companies  had  exported  the  goods  against  the  shipping  bills  and  had discounted export bills on different dates. Since the bills were long outstanding, the lead  bank  requested  Commissioner  of  Customs  Duty  to  verify  the  genuineness  of these bills.

       As per Commissioner’s report, out of all  shipping bills,  only a small number were genuine, a few shipping bills pertained  to  ICD, Ludhiana  and  rest  of  shipping bills were not genuine, and were forged.

      The  other  Company  made  purchases  to  the  tune  of  Rs.6740  crore.  Out  of  this, Rs.1679.45 crore was for purchase of fancy shirting.

      On review of purchase invoices and stock records of this item indicated that purchase invoice did not define any code, grade, make etc. It was unable to confirm physical movement of fancy shirting material.

      Mismatches were found in products mentioned in LC invoice documents and products mentioned as per books of the company.

      In case of  another company, the turnover was inflated. There was no actual purchase or movement of stocks as depicted by the borrower company in its books of accounts and financial statements.

      There had been misappropriation of funds by the management of the company. They explored all possible avenues to divert the funds. There was mis-match of accounting data vis-à-vis the banking statements and the non-reporting of the same in the audited financials by the auditors of company.
      The  payment  made  to  the  beneficiaries  of  LCs  was  diverted  to  the  accounts  of  the debtors of the company from where it was finally routed either to the account of the borrower company or to its subsidiaries.
      Another company had  been  importing pharmaceutical products and chemicals from overseas suppliers based at Singapore and were exporting its products to Hong Kong and Singapore having a branch office at Dubai. The exporting company owned by the same proprietor as the supplier company.

    The company was dealing in computers, computer peripherals and other commodities.
There   were   consignment   transactions   of   computers   and   computer   peripherals, whereby the company was sending computers and computer peripherals to its branch office at Dubai by way of Branch transfers.

      The  export  and  import  documents  submitted  to  bank  by  company in  respect  of  the Merchanting Trade transactions purported to be relating to pharmaceutical and allied products appeared to have been falsified.

      The other Company finalized its Balance sheet for the year 2011-12 and got it audited on 30.04.2012 showing profit of Rs.23.74 crores. On the basis of the Balance Sheet, the company got credit facilities from consortium banks. Subsequently, the company revised  its  audited  B/s  for  2011-12  on  05.09.2012  without  informing  any  of  the member Banks. The profit in the revised balance sheet was reduced to Rs.0.34 crore.

      The Company was maintaining current accounts with the Banks, which were not part of  consortium.  The  credit  turnover  in  these  accounts  was  Rs.176.96  crore.  The Company  had  incurred  loss  of  Rs.241.83  crore  during  2012-13  as  against  profit  of Rs.0.34 crore during 2011-12 against  same volume of turnover of Rs.2178 crore in both years.

      The  Company  routed  sales  proceeds  through  account  with  non  consortium  Banks without prior permission of consortium. The Company had not submitted Book Debt statements certified by CA.

      The Companies had defrauded the banking system by unscrupulous activity such as manipulation of books of accounts, removal, depletion & disposing of hypothecated stocks without the bank’s knowledge.


  The Company had submitted forged Bills of Entries/Postal documents to banks and huge amounts of foreign exchange were remitted to various overseas accounts.

  The  status  of  Bill  of  Entry  in  the  ICEGATE  system  under  option  “Bill  of  entry  at ICES” was not checked and “Out of Charge” (OOC) date in the concerned column of OCC was not verified with the print out of exchange control copy of the Bill of Entry submitted by the importer as proof of import.

  The  company  had  generated  entire  set  of  documents  for  exporting  the  goods,  but cancelled  later  on.  Directorate  of  Revenue  Intelligence  had  submitted  details  of  13 shipping Bills.

  It was also found that 35 shipping bills were issued by CFS (container freight station)
and rests of shipping bills were not genuine but were forged.

  Apart from Bank accounts with consortium members, transactions were carried out in other Bank accounts of company. The nature and purpose of these transactions could not be ascertained.

  Incorrect  and  non  existing  debtors  were  included  in  the  debtors’  statement  of  the company.   The   company   resorted   to   circular   transactions   to   report   higher sales/purchases figures, Mismatch were noticed in the stocks/debtors as per the books of the company and as per the stock statement submitted by the company.

  In  circular  transactions,  the  parties  were  related  to  each  other  either  by  way  of common  directorship  in  other  companies  in  individual  capacity  or  through  family members.

  The majority of the transactions reflected in their respective Bank’s statements were in  nature  of  the  same  day  fund  transfers  to  connected  parties.  The  majority  of  LC payments  used  for  circular  rotation  of  money  had  been  made  against  purchase  of Fancy Shirting which was trading product of the company.

  Most  of  the  debtors  were  not  available.  The  debt  confirmation  letters  sent  by  the consortium  leader  by  Regd.  post  were  returned  undelivered  in  most  of  the  cases. Confirmations were received only from 22 debtors, but they denied the dues reported by the borrower company to the consortium lenders.

  Perusal of the statement of bank accounts of beneficiaries of the LCs revealed that the payments  received  were  re-routed  through  various  accounts  and  channelized  back either  to  the  account  of  the  borrower  company  or  one  of  its  subsidiary/  associate concern.

  Out  of  the  12  transport  operators,  two  were  fictitious  and  enquiries  in  the  vicinity revealed  that  no  such  transport  operators  ever  existed  at  these  addresses.  The  two available  transport  companies  informed  that  the  lorry  receipts  attached  with  the invoices were fake which were not issued by them.

  To find out the authenticity of the data of the debtors, the audit company selected 10 top  buyers  of  the  borrower  company  and  found  that  all  the  10  parties  were  not traceable at the given addresses.

  The  company/  firms  to  whom  payments  were  made  by  banks  were  dealing  with products not related to the business of the borrower company.

  The Company had made sale/purchase transactions of the same products with same companies/related   companies.   There   was  no  evidence   of  any  processing  value addition to the products.
  The Company had sold goods to a firm on merchant export basis which was dealing in information and technology, telecommunications, office automation and electrical appliances.  The  company  had  made  purchases  from  a  firm  which  was  engaged  in manufacturing  and  distribution  of computer components,  consumer electronics,  and digital electronics.

  Three  associates/subsidiaries  were  shown  in  the  balance  sheet  of  the  company.
However,  these  companies  virtually  existed  on  papers  without  any  functional  or business activities.

  The bills of lading were wrongly generated by non-existent forwarders. Their Dubai office  responded  that  they  could  not  trace  the  details  of  bills  of  lading.  Four companies were involved in fake merchant trade transactions with the company.

  A  complaint   lodged  by  the  bank  with  CBI  has  revealed  that  the  directors  of  the company in collusion with each other fabricated the records and faked non-existent transactions as genuine transactions and indulged in fabrication of purchases and sales of    the    same    products    from    firms    which    were    actually    dealing    in    IT, telecommunication, electric and electronic products.

  The stock audit was conducted on 20.05.2013 and 21.05.2013. It was observed that Drawing Power comes to Rs.20.64 crore against total sanctioned limit of Rs.465.00 crore  whereas  the  company  submitted  stock  statement  showing  D.P.  of  Rs.467.59 crore in Feb 2013. The company did not submit stock statement after Feb2013.

  The Company had reduced the holding of sundry debtors at the end of March 2013 in the  age  group  of 90  days  from  Rs.  525.76  crore to  Rs.216.04 crore.  The Company could not produce documentary evidence for such reduction.

  From  the  stock  statement,  it  was  observed  that  holding  had  substantially  increased from  Rs.58.74 crore  as on 31.03.2012  to Rs.1216.17 crore  as on  31.03.2013  which represented increase by 114.78% in comparison to previous year.

  No records were maintained for stores & consumables which constituted Rs.47 crore during  2012-13  indicating  lack  of  internal  control  system.  Due  to  lack  of  detailed information the auditors had not commented in respect of end use of funds.

  The  Company  had  not  complied  with  bank’s  instruction  to  submit  Book  Debt statement certified by CA along with VAT returns for the financial year 2011-12 and
2012-13 which implied that Book Debt statement submitted to Bank were inflated.

Systemic Improvement:
   Due  diligence  of  major debtors should  be  carried  out by direct  visit,  direct balance confirmation, engaging agencies and comparing the realization of receivables as per stock/BD  statements  with  routing  of  funds  through  lending  banks  to  ascertain diversion  through non lending banks.

   Meaningful analysis of stock statements should be carried out. Confirmation should be  obtained  from  debtors  at  periodic  intervals.  Regular  monitoring  of the  operative account should be ensured.

   The past track record of the borrower or the length of his satisfactory association with the Bank should be one of the considerations. The status of the customer should be more critically analyzed while renewing the existing facilities.

   The field level functionaries  should be advised to scrutinize the financial statements submitted by the borrowers thoroughly and where ever it is observed that the short term funds are used for long term purposes and vice versa they should be advised to ascertain from the borrower the reasons and purpose of there and record the same in appraisal notes.

   Investigation should be done to find out the trail of diversion of fund so as to where the money has been done and whether any money has been remitted /parked aboard.

   The irregularities arising out of credit transactions should be meticulously looked into to  satisfy  whether  these  were  on  account  of  genuine  trade/business  transactions, market  conditions,  general  state  of  industry  and  economy  or  overflow  of  corporate fraudulent transactions, which were being attempted to or were being concealed.

   Field functionaries should be advised to ensure end use of funds. They should follow the  proper  due  diligence  and  not  to  rely  entirely  on  documents/papers  produced, before them. Documents and disbursement should be cross verified.

Agro Sector:

The cases of frauds perpetrated by three companies in this sector have been analysed.  The companies were in business of processing of basmati Rice, manufacturing of sandal wood oil and  producing  of  castor  oil.  The  Companies  had  started  availing  credit  facilities  from  the banks under consortium arrangement led by one of the banks.

Modus operandi:

      One  of  the  companies  resorted  to  diversion  of  funds  through  group/  associate concerns, inflated level of debtors for availing higher limits/DP, higher cost of capital expenditure.

      Capital   expenditure   advances   were   given   to   3   vendors   without   any   purchase transactions  and  the  same  was  used  for  investment  in  acquiring  shares  of  another company. All these vendors were holding shares of that company.

      The debtors’ levels more than doubled during the last two years while sales turnover had  come  down.  It  was  also  observed  that  the  sale  had  been  made  to  debtors throughout the year without any amount having been realized from them during the year.

      The  Company  had  capitalized  the  warehouse  building,  the  cost  of  construction  of which was shown on a higher side compared to similar type of buildings that were constructed  at  much  lower  cost.  Thus  the  Company  inflated  the  cost  of  capital expenditure.

      Another Company obtained drawing powers in the account from consortium against the book debts outstanding in their books majority of which were found to be non- existent and were based on fake invoices/debtors. In this way, the Company diverted working capital funds.

      The Company did not route proportionate sales with the member Banks. The matter was  taken  up  with  the  company  repeatedly,  but  the  turnover  in  the  accounts maintained with member Banks did not improve.

      The  company  had  shown  debtors  which  were  non-  existent.  The  company  got  the enhanced facilities sanctioned on the  basis of fake  inventories of debtors and funds were siphoned through personal accounts of Directors.

      Packing credit advance had been taken from member Banks, but the company failed to execute export business.

      Another Company initiated an alternate procurement model whereby pre-harvest farm loans were extended to farmers through Village Level Aggregators (VLA) supported by Post Dated Cheque (PDC) as collateral security.

      With  the  introduction  of  pre-harvest  financing,  its  traditional  practices  and  controls failed  resulting  in  embezzlement  of  funds.  Fake  inventories  were  created  through collusion of employees and associates involved in procurement.

      The company suppressed the facts regarding depletion of stocks and did not inform the misappropriation of stocks by their employees to the consortium. It was reported that their employees had embezzled the stocks.

      The   management   of   the   company   had   misrepresented   the   performance   of   the company to the consortium lenders at various occasions.

Loopholes / Lapses :

  Proportionate sales transactions were not routed through working capital limits with consortium  member  banks.  Round-tripping  of  funds  was  resorted  between  various working capital limits with member banks.

  The percentage of working capital loan vis-a vis Sales turnover of the Company was on higher side sometime, even crossing 100%. This ratio was not commensurate with its peers in the industry.

  There was no system of preparing sales order. In majority of the cases, the companies did not maintain the supporting documents except for invoices.

  The Companies resorted to round-tripping of funds between various working capital limits with member Banks for diverting the funds raised from various Banks.

  Purchase was mainly confined to two suppliers and sales to three buyers only. The units of buyers were found inoperative.

  Commodities  were  not  exported  in  the  case  of  export  finance  availed  from  the consortium  member  Banks.  Working  capital  fund  was  diverted  to  another  entity controlled  by  a  company  and  various  other  accounts  including  current  accounts  of promoters of the company.

  The  funds  were  diverted  on  a  large  scale  which  establishes  the  fact  that  fraudulent activities were undertaken.

  Alternate  procurement  model  was  initiated  by  which  pre-harvest  farm  loans  were extended  to  farmers  through  Village  Level  Aggregators  (VLA)  supported  by  Post Dated Cheque (PDC) as collateral security.

  Fake inventories were created through collusion of employees and associates involved in  procurement. With the  introduction of pre-harvest  financing,  traditional practices and controls failed resulting in embezzlement of funds.

  Facts  regarding  depletion  of  stocks  were  suppressed  and  were  not  intimated  to consortium. The management of the companies had misrepresented their performance to the consortium lenders at various occasions.

Systemic Improvement:

   Assessment of working capital limit should be done as per Bank guidelines/procedure.
While  assessing  working  capital  limit,  the  scale  of  operations  as  reflected  in  VAT returns, stock records and sales register etc should be examined properly. This process should also be followed at the time of further enhancing the limit.

   Any  enhancement  by  the  member  Bank  should  be  first  discussed  in  consortium meeting to maintain maximum permissible Bank finance and to ascertain the position of advance taken from other members of consortium.

   A  proper  scrutiny  with  respect  to  the  number  of  debtors  and  the  amount  due  from each  debtor  be  done  with  reference  to  the  records  maintained  by  the  firm  and  the debtors.

   There  are  frequent  attempts  by  fraudsters  to  fabricate  documents  and  avail  finance from   Banks.   Creating   awareness   about   loopholes,   consequences   of   bypassing procedural aspects and  check-points for evaluating genuineness of  various essential documents become necessary.

   Investigation should be done to find out the trail of diversion so as to find as to where the money has gone and whether any money has been remitted /parked aboard.

   Immediately  after  filing  the  case  with  CBI,  all  the  accounts  of  the  promoters  be confiscated   and   bank   should   take   adequate   measures   like   appointment   of administrator /receiver to take stock of all the accounts.

   CBI files the charge sheet in the trail court for criminal action without investigating the trail of money on account of fraud. Therefore, CBI should also investigate the trail of money so that action could be taken for recovery of money lost.

   Bank must immediately delist such third valuers, Chartered Accountants/ Chartered engineers, Advocates etc. who have questionable credentials/ have been negligent in their professional duties or have caused financial loss to the bank by their willful acts of   omission/   commission/dishonesty.   A   periodical   review   of   all   empanelled professionals  should  be  ensured  by  banks  for  weeding  out  undesirable  third  party service providers.

   The Banks should pay the required attention to the area of internal control system and the  fraud  prevention measures  to  ensure  compliance  of  instructions  issued  by them from  time  to  time.  The  controlling  offices  should  play  their  role  of  overseeing  the functioning of branches effectively.

   The irregularities arising out of credit transactions should be meticulously looked into to satisfy whether these are on account of genuine trade/business transactions, market conditions, general state of industry and economy or overflow of corporate fraudulent transactions, which are being attempted to or are being concealed.

   Field functionaries should be advised to ensure end use of funds. They should follow proper  due  diligence  and  not  to  rely  entirely on  documents/papers  produced  before them. Documents and disbursement should be cross verified.

   It may be ensured that proportionate accountability is fixed in the chain of command including   sanctioning   authority   in   the   event   of   fraud   instead   of   fixing   entire responsibly on lower functionaries.

Media Sector:

The  cases  of  frauds  perpetrated  by  two  companies  in  this  sector  have  been  analysed.  The companies were in business of broadcasting on television channels, printing and publishing news paper and periodicals. Their projects were financed by banks under  consortium led by one of the banks and the company also availed other credit facilities from various banks.

Modus operandi:

      The  funds  disbursed were  got  transferred from no  lien account  to  various suppliers and  group  accounts  by way  of  DDs  or  RTGS.  The  funds  credited  in  suppliers  a/cs were  transferred  to  other  companies  where  promoters  were  Directors  or  authorized signatories.

      Funds were diverted through suppliers’ accounts which were the associates/connected accounts of the borrowing companies. Further, there was huge  difference in cost of equipments as per investigation report and the invoices submitted by the party.

      The  Companies  had  submitted  inflated  and  fabricated  invoices  which  amounted  to misrepresentation of facts to the Banks for securing higher limits and misutilisation of the same.

      One  of  the  Companies  had  submitted  a  certificate  from  CA  regarding  infusion  of capital.  The  Chartered  Accountant  had  in  writing  denied  having  issued  the  said certificate. Hence, the company had submitted fabricated certificate to avail loans.

      Fraud  element  had  been  apprehended  due  to  the  fact  that  one  of  the  suppliers  was non-existent and in case of 3 major suppliers, the promoters had managerial interest by virtue of being on board of the supplier companies at different times.

      Funds were thus siphoned off and re-routed into the accounts of the promoters and their group companies which were further misused.

      One of the Companies raised loans from various Bank/ FIs through its two balance sheet  periods  by  concealing  the  information/  details  of  its  borrowers/  names  of  the lenders.

      The  balance  sheet  figures  were  fudged/  fabricated  with  particular  reference  to  the outside  borrowings  from  Banks/  FIs.  The  company  did  not  give  the  details  of  the lender wise exposure in the schedules of the audited balance sheets.

      The Company effectively prevented the lenders from insisting on NOC/ Confidential opinion from other lenders which otherwise would have revealed the true picture of total borrowings of the company.

      The funds were diverted to their accounts with other banks and were not utilized for the purpose for which these were given and the company misrepresented the facts and cheated the bank.

      The  Company produced  end  use certificate  issued by an  auditor other than  the  one who  audited  company’s  balance  sheet.  The  company  concealed  the  information  on existence of prior charge on one of the machineries offered as collateral security to the bank.

  Public  money  availed  from  banks  in  the  form  of  loans,  had  been  diverted  through shell companies. The loans were granted at the highest level by most of the banks.

  Bank financed one of the companies overseas and end use was not ensured. Instead, the  funds  were  remitted  to  various  other  companies  not  connected  with  the  related activities of the company.

  Banks,  which  were  not  members  of  consortium  had  allowed  the  company  to  open account and transferred the money to siphon it off.

  No  appraisal  and  due  diligence  was  exercised  by  member  Banks  independently  as they depended entirely on the lead bank for this purpose.

  Operations  in  cash  credit  account  were  neither  monitored  nor  scrutinized/analysed properly. No enquiry was made to ascertain sources of funds brought by the company to build-up/ increase in tangible net worth.

  There were also a large number of credits in the accounts from group companies. The terms   of   sanction   clearly   stipulated   that   funds   should   not   be   diverted   to sister/group/associates concerns.

  There was lack of competence & skills to appraise technical aspects of a project for finance from banks & invariably banks accepted whatever was stated by the borrower.

  There was no mechanism to verify & counter check the antecedents of suppliers of equipments regarding their capacity, life of equipments, maintenance etc.

  The objective of forming different companies for similar activities was not enquired.
No action was taken by the banks to ensure segregation of securities.

  The other Company did not publish its audited balance sheet for the relevant period.
The  company  made  the  lenders  to  forcibly  fall  back  on  the  immediately  previous audited balance sheet for appraising the loan proposals.

  The Company had committed the purported fraud with the connivance of Chartered Accountant  of  the  agency  responsible  for  due  diligence.  The  balance  sheet  of  the company does not reveal true picture of the financial position of the company.

  The Company had also got the valuation of the securities manipulated by reporting inflated value in connivance with the valuers.

Systemic Improvement:

   The  main  company  had  formed  further  companies  which  were  engaged  in  similar business   of   post   production   activities   and   were   actually   working   in   close clusters/premises.   Banks   should   scrutinize   the   objective   of   forming   different companies for similar activities.

   At the time of carrying out the review, the past track record of the borrower or the length   of   his   satisfactory   association   with   the   bank   should   be   one   of   the considerations. The status of the borrower should be more critically analysed.

   The field functionaries should find out the kite flying operations from the nature of transactions and their respective character.

   The field level functionaries  should be advised to scrutinize the financial statements submitted by the borrowers thoroughly and where ever it is observed that the short term funds are used for long term purposes and vice versa, they should be advised to ascertain from the borrower the reasons and purpose of the same and record the same in appraisal notes.

   Due diligence of suppliers of machinery equipment should be done by the branches even when it is not specified in the sanction letter. In some cases no efforts were made by the branch to enquire whether the supplier is a manufacture or a trader.

   Branches  should  read  and  study  the  Audited  balance  Sheet  of  the  borrower  as expected.   Adverse   observations   by   the   auditors   should   be   read   and   critical observations be discussed in the credit appraisal.

   Field functionaries should be advised to ensure end use of funds. They should follow the proper due diligence and not to rely entirely on documents/papers produced before them. Documents and disbursement should be cross verified.

   The Banks should pay the required attention to the area of internal control system and the  fraud  prevention measures  to  ensure  compliance  of  instructions  issued  by them from  time  to  time.  The  controlling  offices  should  play  their  role  of  overseeing  the functioning of branches effectively.

   Any enhancement by a member Bank should be first discussed in consortium meeting to  maintain  maximum  permissible  bank  finance  and  to  ascertain  the  position  of advance taken from other members of consortium.

   Immediately  after  filing  the  case  with  CBI,  all  the  accounts  of  the  promoters  be confiscated and bank should take adequate  major like appointment  of administrator
/receiver to take stock of all the accounts.

   The  Bank  should  adopt  coordinated  approach  in  expeditiously  taking  the  issues  in hand instead of adopting compartmentalized approach.

   CBI files the charge sheet in the trail court for criminal action without investigating the trail of money on account of fraud. Therefore, CBI should also investigate the trail of money so that action could be taken for recovery of money loss.

Aviation Sector:

The case of frauds perpetrated by a company in this sector has been analysed. The company commenced  its  commercial  operations  in  this  sector  in  May  2005.  The  company  was  a leading Airlines company of India with a market share of 21% in domestic operations. The company was promoted by another group which had presence in several countries.

The company was one of the domestic companies offering service on international routes and operated in both segment of the market, i.e.  low-cost segment and full serve segment. The company availed credit facilities from the banks under consortium arrangement led by one of the bank.

Modus operandi:
      The Company cheated the bank by suppressing facts in the financial statements and diverting  the  funds  to  related  entities  for  the  purpose  other  than  those  for  which finance was made.

      The Company ran its operations mostly on leased aircraft for which an overseas entity (vendor) was created which in turn had created fictitious invoices with inflated bills. The  money  was  transferred  to  it  through  legal  means.  Whatever  the  money  the company owed to the leasing company would be disbursed and rest parked with the entity.

      The  entire  transaction  carried  out  was legal  as  it  was  done  through  proper  banking channels.  The  vendor  had  submitted  invoices and  created  intermediaries which  had nothing  to  do  with  the  leasing  of  aircraft.  Therefore,  funds  received  by  the  vendor were illegal.

       The Company willfully cheated the banks with an intention to siphon off funds. The money apparently was diverted to several shell companies in seven countries.

       The  Company’s  promoter  willfully  and  malafide  intension  did  not  pay  the  dues covered  by  his  personal  and  corporate  guarantees.  Despite  restraining  orders  from High  Court,  the  promoter  entered  into  an  arrangement  with  overseas  company  to receive a big amount for stepping down from his office and position as Director and Chairman of group.

Loopholes/Lapses :
  The  lapses  with  respect  to  loans  extended  to  the  defunct  airline  which  was  under scanner.  The  company’s  balance  sheet  was  never  strong  and  its  credit  rating  was lower than what was required for sanctioning loans.

  All   Banks   under   consortium   financed   the   company   on   the   basis   of   brand capitalization. Valuation got done through a private company which was much higher than what was valued by other valuers.

  There was alleged conflict of interest of at least three independent Directors on the board  of  the  airline.  SFIO  had  alleged  that  certain  private  companies  and  three independent  board  Directors  of  company  had  a  commercial  relation-ship  with  the airlines.

Systemic Improvement:

   Advances/credit facilities were sanctioned to the company on the basis of Brand name which does not form any tangible security for the purpose of recovery. The practice should be discontinued in future.

   The  Company  submitted  brand  evaluation  done  by  private  entities.  Banks  blindly accepted the higher one. Bank considered report of only one valuers for the valuation of brand and based on that loans were given to the carrier. Regulations issued by RBI require  that  at  least  two  different  valuation  reports  should  be  considered  before deciding  credit  facility  on  the  basis  of  brand  in  case  the  brand  name  is  to  be considered as security.

   The past track record of the borrower or the length of his satisfactory association with the bank should be one of the considerations. The status of the customer should be more critically analyzed while renewing the existing facilities.

   Managing fraud risk in large value advances need a comprehensive approach. There has  to  be  changes in  mindsets,  fine  tuning of  work processes  and  human  resources skills. There has to be better information sharing among banks. There has to be more effective fraud management systems. There has to be better support from enforcement agencies and there has to be legislative.

   Multiple  banking arrangements  in  large  value  financing have  done more harm  than good to banks. This type of arrangement enabled corporate to secure multiple finances from  various  banks  far  in  excess  of  their  requirements.  Funds  raised  were  easily diverted through company’s accounts with various banks in the absence of effective exchange of information between the banks.

   Banks  do  not  have  a  fool-proof  system  of  checking  and  confirming  whether  the company  has  actually  working  on  the  contracts  and  whether  the  contracts  were genuinely business based.

   The Government should consider examining the role of third parties such as Chartered Accountants, Advocates, Auditors and rating agencies that figure in accounts related to bank frauds and put in place strict punitive measures for future deterrence.

Service/Project Sector

The cases of frauds perpetrated by three companies in this sector have been analysed.  The companies   were   in   business   of   providing   corporate   logistic   services,   Industrial   and engineering  projects,  plants  &  machineries,  equipments  etc  under  lease  agreement.  The Companies  were  enjoying  working  capital/  term  loans  from  the  banks  under  consortium arrangement led by one of the banks.

Modus operandi:

      One  of  the  companies  induced  the  bank  to  sanction  and  disburse  loans  for  2804 vehicle to the company and its’ employees/drivers on the basis of false assurances and tampered/forged vehicle registration documents.

      In  respect  of  the  loans  availed  by  giving  false  assurance  of  getting  the  vehicles transferred to the drivers/ employees by clearing past dues of the existing lenders, the Directors of the company deliberately and with intent to cheat, willfully neglected to transfer  the  ownership  to  the  said  drivers/employees  as  a  result  of  which  amount disbursed by bank towards finance of vehicles became overdue.

      The loans availed for purchase of new trucks was willfully diverted by the accused Directors and the trucks were never purchased. The funds for transfer of old vehicles to the drivers were also diverted for other purposes. In most of the instances, even the registration  documents  were  not  submitted  to  the  bank  whereas  in  several  other instances old vehicles were passed off as new.

      Another  Company got  issued  performance  cum  mobilization  advance  guarantees in favour  of  aggregators.  The  mobilization  advance  should  have  been  utilized  for execution   of   contracts   against   which   the   advances   had   been   remitted   by   the beneficiary.

      A  part  of  the  funds  was  utilized  for  giving  margin/charges  to  the  banks  instead  of providing such margin by the promoters from their equity. The Company also partly remitted  the  fund  back  to  the  mobilization  advance  received  from  the  Aggregator which was not comprehensible and was highly questionable.

      The Banks sanctioned enhancement in bank guarantee limits for more than 10 years based  on  such  information  as  provided  by  the  Company.  The  guarantees  were eventually invoked. Defaulted guarantees account was debited and after adjusting the cash  margins  available  with  Banks  amount  was  paid  to  overseas  Banks.  It  was dishonesty  on  the  part  of  the  Company  to  avail the  facility  by misrepresenting and concealment of facts.

      Another company did not have loan policy approved by board as envisaged for Non- Banking Financial Companies (NBFC). The company had not fixed prudential

       limits  as  part  of  Assets  Liability  Management  (ALM)  for  individual  gaps  and cumulative mismatches as envisaged by RBI.

      Thereafter, the company was reclassified from Deposit taking NBFC to Non-deposit taking NBFC. After an inspection of the company’s accounts for a particular period, RBI  directed  that  until  further  orders,  the  company  would  not  sell,  transfer,  create charge or mortgage or deal in any matter with its property and assets without prior permission from RBI.

     As per report of the forensic auditors, the fraud was perpetrated by camouflaging the
Balance Sheet in collusion with Statutory/Internal Auditors to avoid detection.

      It  was  identified  that  the  methodology  followed  by  the  company  was  for  window dressing. It was found that the company had inflated income and assets by creating falsified entries.

      The  financial  accounting  and  loan  assets  data  of  the  company  were  maintained  in Oracle data-base. This software being a proprietary one, lacked security controls.  The company’s  top  management,   senior  executives  and   employees  manipulated   the records by using this software.


  The  signatures  of  applicants/  borrowers  were  not  obtained  in  person.  Bank  handed over  the  documents  to  the  officials  of  the  company  for  getting  them  executed. Therefore, there was no base document with the specimen signature of the borrower which  could  be  relied  upon  to  conclude  that  the  documents  were  signed  by  the respective borrowers only.

  The  company  transferred  only  227  vehicles  in  the  name  of  drivers  as  against  1652 vehicles financed by the bank for the purchase of second hand vehicles. The company had failed to transfer the vehicles although it had received sale consideration from the bank and thus it had defrauded the bank in respect of second hand trucks.

  Bank had sanctioned the loans for purchase of new vehicles to drivers of the company but  the  vehicles  were  not  transferred  /registered  in  the  name  of  drivers.  Thus  the company had defrauded the Bank in respect of new trucks.

  There was inter-relationship between the buyer, vehicle dealer and body building unit.
The  Proforma  invoices  issued  for  body  building  /trailer  were  inflated.  There  was diversion of funds/ round tripping of funds.

  Business model  of  the  company  including  the  existence  of  Master  Agreement  with Aggregators/ Agreement between the company and its vendors, were not disclosed to bank/consortium.   Thus,   it   concealed   the   existence   of   the   said   agreement   and misrepresented its lenders with  regard to it business model.  It  was  found  that there were a number of clauses which were exclusively in favour of the Aggregators which were not informed to the bank.

  The  Company  did  not  utilize  the  funds  for  the  purpose  i.e.  for  execution  of  the contracts. 30-35% of the funds were utilized for giving margin/charges to the banks from  the  mobilization  advance  as  against  the  normal  practice  of  providing  such margin by the promoters from their equity.

  The  Company  had  not  provided  the  bankers  any  evidence  of  having  utilized  the mobilization advance for execution of the contracts for which these guarantees were issued  which  in  normal  case  should  have  been  remitted  to  its  vendors  for  the execution of the specific contracts.

  The Company had not utilized the mobilization advances received under BGs/SBLCs for execution of the projects for which BG/SBLCs had been issued. Further, reports of various consultants appointed by the Consortium indicated lapses on the part of the company with regard to compliance of FEMA regulations, ROC regulations etc.

  It  was  also  revealed  that  the  overseas  beneficiaries  had  discounted  the  BG/SBLCs with  banks  in  Europe  and  remitted  the  funds  back  to  the  company  as  mobilization advance. However, the company had not utilized the funds for execution of projects; but instead diverted the same and utilized as margin for the guarantees issued on their behalf.

  The  Company  had  submitted  end  use  verification  certificate  issued  by  Chartered Accountants stating that the loan had been utilized by the company for its working capital requirement and general corporate purpose which was not correct.

  The facts of the case reveal that the fraud occurred due to dishonesty on the part of company  who  got  the  limit  sanctioned  by  misrepresenting  &  concealment  of  facts coupled with lapses in pre-sanction appraisal and post sanction follow up.

  The  stocks  on  hire  under  hire  purchase  agreement  were  calculated  as  per  the agreement  value  less  the  installments  received  from  the  corporate  and  net  of  un- matured financial charges.

  The Company availed finance from the banks against the value of stock on hire under hire purchase agreement. The company had financed other companies in the form of corporate loans and was refinancing hire purchase loans for purchasing of old assets.

  The promoter of the company and statutory auditors of the company engineered the fraud  in  a  systematic  way  against  the  bank  by  flouting  the  relevant  provisions  of Companies Act, incorrect filing of returns under service Tax, VAT and income Tax.

  Various lease transactions were pre closed, but the assets were not written off and the same were continuing in the books of account of the company. Part of the amounts received through pre closure was directly booked as income and part amount was kept in debtor suspense account. The lease rentals as per the original tenure were continued and income was recognized.

  The   Company  formed  satellite  companies  with  employees  of  the  company  as directors.    The  satellite  companies  were  formed  mainly  to  acquire  share  of  the company and to transfer the NPA of the company to these satellite companies.

  The  satellite  companies  were  granted  loans  by  the  company  through  bogus  loan agreement  for  acquiring  NPA  accounts  of  the  company.  With  this  NPA  provisions were reduced and profit of the company boosted.

Systemic Improvement:

   Genuineness of  quotations  should be  verified through  visits  and  direct  contact  with dealers.  In  case  of  vehicle  loans  visit  to  the  dealer  must  be  performed  to  check genuineness  of  dealership.  The  credentials,  genuineness,  capability  to  supply  of vehicle  and  line  of  trade  of  the  dealers  should  be  verified  through  documents  and personal visits before sanction of loan.

   Bank may issue supply orders in consultation with dealer on the basis of quotations or contract  agreement  between  supplier  and  borrower  duly  considered  by  Bank  in  the proposal /sanction instead of direct payment to the supplier before supply. This will ensure generation of bills/invoices and facilitate delivery of goods in proper custody before payment.

   Field functionaries should be advised to ensure end use of funds. They should follow the proper due diligence and not to rely entirely on documents/papers produced before them. Documents and disbursement should be cross verified.

   The contractual obligations between the parties need to be verified from the point of view of onerous clauses by legal advisor. Banks should take extra care when advance payments under BGs are received and ensure end use as being done in the fund based limits.

   While considering/sanctioning such limits in future, it may be stipulated that amount received as mobilization advance be credited to an Escrow account and its end use be monitored.

   There  are  frequent  attempts  by  fraudsters  to  fabricate  documents  and  avail  finance from   banks.   Heightened   awareness   of   loopholes,   consequences   of   bypassing procedural aspects and  check-points for evaluating genuineness of  various essential documents become necessary.

   The  Banks  should  clearly  outline  requirement  of  field  visits  by  the  controllers  and also stock inspection of large borrowal accounts above a cut-off point by an external agency. This would be in addition to the regular inspection/filed visits by the line staff and  the  controller.  Observations  of  the  visiting  officers/stock/  credit  Auditors  must necessarily find place in every review/enhancement proposal of the borrower.

   The Banks should pay the required attention to internal control and fraud prevention measures in addition to instructions issued by them from time to time. The controlling offices should play their role of overseeing the functioning of branches effectively.

   The loan asset management should require to be prudentially monitored with a view to ensure that no potential fraud in the garb of temporary irregularity, liquidity crunch etc  is allowed  to  go  undetected for  an  unduly  long period.  The  appraisal,  sanction, monitoring,  review  and  renewal  of  borrowal  accounts  should  be  objective  and discretion free.

   The irregularities arising out of credit transactions should be meticulously looked into to satisfy whether these are on account of genuine trade/business transactions, market conditions, general state of industry and economy or overflow of corporate fraudulent transactions, which are being attempted to or are being concealed.

   The system of credit audit should ensure that all the credit decisions beyond a cut-off point would be scrutinized to ensure that the norms of appraisal, review and renewal have been duly complied.

Trading Sector

The cases of frauds perpetrated by three companies in this sector have been analysed.  The companies were in business of trading in coal, pulses and agro commodities, and aluminum foil rolls. The companies had adopted a business model by which they imported goods from foreign banks/private parties against SBLC/LC/ Cash Credit for trading in domestic market. The Companies availed credit facilities from the banks under consortium arrangement led by one of the banks.

Modus operandi:

      The company had diverted a substantial amount of fund to related parties/ associate concerns.  The  creditors  had  not  been  deducted  for  the  purpose  of  calculation  of drawing  power.  The  scrutiny  of  purchases  and  sales  of  the  company  revealed  that there were many cases where the same party was the customer as well as the supplier.

    The Company violated accounting principles and misutilised funds for other purposes.
Funds were utilized towards purchase of real estate in the name of the director and his relatives.

      The other Company submitted the documents with the bills drawn under the letters of credit  issued/opened  on  behalf  of  the  borrowers  which  were  fabricated  and  the underlying transactions were not real merchant trade transactions. The letter of credit mechanism/ RTGS facility for kite flying transactions involving unconnected parties were grossly misused by the borrowers.

      When  the  bills  drawn  under  the  letters  of  Credit  (LC),  opened  on  behalf  of  the company, started devolving, the bills were met by creating overdrafts in the accounts as fund was not provided by the company.

      In  case  of  another  company,  the  credit  facilities  were  given  by  the  banks  to  the borrower for the purpose of manufacturing and exporting of aluminum foil containers, its lids and covers. However, the company instead of utilizing the funds for which the credit were granted, utilized the same for granting loans for the other entities without any security or documents and that too in the sectors which were not even remotely related to the core business activity of the company.

      The Company resorted to falsification of the account by manipulating the position of LCs/ Buyers credit outstanding in the monthly stock statement thereby overstating the drawing power in the cash credit account.

      The  company’s  debts  increased  substantially  during  a  particular  period.  The  funds were  utilized  for investments  mainly  by  way  of  loans  and  advances,  the  returns  of which were not immediately forthcoming.

      During  Investigation,  some  unusual  transactions  were  observed  in  the  account  of another company.  Funds were  diverted  to finance  various sister concerns/associates dealing in various areas of business ranging from real estate development to gambling business (breeding price bulls and race horses).


  The   Company  dealt  with  many  related   parties  including  subsidiaries/associates including their key management. The gross amount receivable from the related parties was much higher while amount payable was much less.

  The  bills  which  remained  unrealized  from  the  associate  concerns  reflected  funds which  had  already  gone  out  of  working  capital  cycle  for long since  in  many  cases there were cross transactions of sales and purchases from the same party i.e the same party was the buyer as well as the supplier on different occasions.

  The  Company  had  not  made  transactions  in  accordance  with  RBI  guidelines  on merchant trade. In the case of LC opened, it was noticed that major transactions had taken  place  in  a  bank  with  2  parties  with  same  address  where  they  had  acted  as customers as well as suppliers.

  The Company had routed transactions from banks outside the consortium to keep the business going as devolvement had taken place in majority of banks. The 60% sale of the company had such cases where records of delivery/ movement of goods had not been maintained.

  The   promoters   in  connivance   with   their  Chartered  Accountants  had   submitted doctored  financial  papers  for  getting  finance  from  different  banks.  The  Chartered Accountants  wrongly  certified  the  balance  sheets  for  three  years  from  2007-08  to
2009-10 overstating the profits /understating the losses.

  The bills drawn under LCs opened by the bank were suspected to be accommodation bills for the purpose of raising finance.  The method adopted by the company revealed that  the  underlying transactions  were  not  real  merchant  trade  transactions and  were only kite flying transactions.

  During investigation, it was observed that there were major diversion of funds from the borrower company’s cash credit account to personal SB and CD accounts of the promoter directors and other unrelated accounts.

  The company was consistently showing inflated sales, stock holding levels and trade debtors. Book debts statement was given with assumed and artificial figures. Names of debtors were not mentioned by the company.

  Out of loans & advances sanctioned, a substantial amount of loan was free of interest by  the  company  extended  to  various  entities.  Loans  were  extended  in  accounts, wherein no movement of receipt or payment was observed during a particular period.

  The Company had advanced loans various companies engaged in trading of bullion.
Out of these advances, a large amount had been adjusted against expenses not directly attributable to company’s business.

  On  review  of  stock  statement  submitted  to  the  lead  bank,  it  was  observed  that  the scrap  was  included  as  stock  in  monthly  statements.  Hence,  stock  statements  were inflated.

  As  per  the  monthly  stock  &  statement  submitted  to  the  Bank,  it  was observed  that creditors  had  substantially  decreased  as  compared  to  creditors  as  reported  in  the previous month.

Systemic Improvement:

   End use of fund disbursed should be monitored and due diligence procedures should be applied to identify instances of utilization of funds for purposes not related to the business of the client.

   Even in the cases where the funds were disbursed for the purpose of working capital, its end use should be verified so as to avoid diversion of funds. Confirmation may be obtained from the customer on the utilization of funds.

   Periodic  balance  confirmation  from  top  five  suppliers/  buyers  (creditors/  debtors) should be obtained/ ensured in stock audits and should be analyzed as a part of stock statement.

   Banks  should  have  a  fool-proof  system  of  checking  and  confirming  whether  the company is actually working on the contracts and whether the contracts are genuinely business based.

   Corporate governance in banks in the present form is a matter of concern and has to be strengthened. Housekeeping and internal control of banks have to be strengthened.

   Multiple banking arrangements in large value financing have done more harm than good  to  banks.  This  type  of  arrangement  enabled  corporate  to  secure  multiple finances  from  various  banks  far  in  excess  of  their  requirements.  Funds  raised  are easily  diverted  through  company’s  accounts  with  various  banks  in  the  absence  of effective exchange of information between the banks. There is a need to review the multiple banking arrangements.

   Realization of receivables and payment to creditors are required to be monitored. In case transactions routed through the accounts with consortium members do not tally with corresponding movement reflected in the stock statements, Concurrent Auditors
to monitor the transactions need to be appointed by the member banks.

   The debtors’ position of the borrowers should be closely monitored. It should be a part of the Stock Audit and Inspection and audit report. Controller should critically go  into  on  the  quality  of  business  booked  by  branches  and  sudden  spurt,  if  any, observed in business growth should be thoroughly investigated.

   Operating  officials  are  being  equipped  with  inputs  on  Forensic  Audit  areas  and  to understand the complex business models especially transactions through Associates concerns/ wholly owned joint ventures.

   Bank  must  immediately  delist  such  as  third  party  valuers,  Chartered  Accountants/ Chartered  engineers,  Advocates  etc.  who  have  questionable  credentials  have  been negligent  in  their  professional  duties  or  have  caused  financial  loss  to  the  bank  by their  willful  acts  of  omission/commission/dishonesty.  A  periodical  review  of  all empanelled professionals should to be ensured by banks for weeding out undesirable third party service providers.

Analysis of Bank Frauds
Central Vigilance Commission

Information Technology (IT) Sector

The cases of frauds perpetrated by three companies in this sector have been analysed.  The companies were engaged in assembling of computer peripherals, system integration/solution, data center activity,  software  solution &  consultancy,  integration  &  other hardware  related products  and  networking.  The  Companies  availed  credit  facilities  from  the  banks  under consortium arrangement led by one of the banks.

Modus operandi:

      One of the companies did not take off the project of two organizations as planned for various reasons including the company not agreeing to certain terms and condition of both the projects.

      Earnest   Money Deposit (EMD) in the form of a  Bank Guarantee issued by a bank in favour  of  one  organisation  was  invoked  on  account  of  non-  agreement  on  certain terms  and  conditions  of  Letter  of  Intent  by  the  company.  The  project  of  the  other organization  was  also  cancelled  in  June  2013,  as  the  other  bank  did  not  issue performance Guarantee of Rs.69 crore.

      After  the  disappearance  of  CMD  of  the  company,  it  emerged  that  the  employees’ salaries had not been paid. Thereafter, the business operations of the company came to standstill.

      As per Annual Balance Sheet of the company as on 31.03.2013, stock and book-debts were shown at Rs.204.75 crore and Rs.587.97 crore respectively. The account became NPA on 29.05.2013 with bank. After 01.04.2014, there was negligible turnover in the accounts with banks. As per audit report, stock as on date was Rs.30 to 35 crore and book-debtors  were  Rs.7  to  15  crore.  Sudden  decline  in  value  of  stock/book  debt without corresponding credits in the accounts aroused suspicion.

      It  appeared  that  the  company  had  fudged  the  figures  in  the  balance  sheet  and  had represented  wrong/inflated  financials  to  avail  credit  facilities  from  all  members  of banks  in  the  consortium.  Further,  the  debtors  did  not  acknowledge  the  debts  when banks wrote to them.

    Another company availed credit facilities to implement   ISP services in three states.
The  promoter  of  the  company  obtained  loan  from  the  banks  by  making  false  and misleading disclosure with an intention to cheat the banks.

      The Company did not create assets out of bank’s fund and diverted funds through fake companies floated for the purpose. The company had created 3 fly by night operator companies  in  a  state  as  vendors  for  raising  fake  bills  who  never  supplied  any software/ hardware.

      Where about of these India based suppliers were not known. RTGS were sent to the accounts  of  these  companies  with  private  Banks  on  disbursement  of  term  loan. Thereafter,  money  from  these  accounts  was  transferred  to  company’s  accounts  of interested parties maintained with these Banks.

      SEBI in its order, based on the preliminary investigation into the matter of violation of SEBI Act, observed that the company had diverted the loan funds for playing in stock  market  through  entities.  These  entities  played  with  the  scrip  of  the  company presumably to jack up its price.

      Another  Company  had  submitted  debtor’s  statement  as  on  29.06.2013  for  availing Drawing power. Accordingly 34 major debtors were selected and job of verification of debtors was distributed among the member banks of the consortium.

      Three member banks informed that the list of debtors provided by the company was false having no outstanding in the books of debtors.

      Drawing Power (DP) calculation could not be justified as the basis for calculation of DP  was  not  provided  such  as  valuation  of  work  in  progress,  debtors  position  etc. Moreover,  the  damaged  goods  and  or  obsolete  goods  were  included  in  the  stock statement.

      The  Company  had  submitted  a  statement  of  fake  receivable  to  the  consortium  for availing DP. Loans from other financial institutions were availed without permission of consortium.

      One  of  the  member  banks  had  disbursed  limits on  the  basis  of  the  allocation  letter purportedly issued by the lead bank which had denied having issued such allocation letter. It was revealed that the company had produced forged letter and got the limit disbursed.

  It  appeared  that  CMD  of  the  company,  in  connivance  with  other  directors,  had provided false book debts/ stock statements and had inflated the profit & loss account.

  There  was  transfer  of  funds  including  siphoning  off  funds,  diversion  of term  loans disbursed by the banks for creation of Data Centre Racks by the company. There was an involvement of group companies in misappropriation of funds.

  Finance was made on the basis of stock statement. The company did not co-operate for conducting stock audit. The auditors expressed their inability to carry out audit.

  Majority of receivable were non-existing. Information from debtors of the company was sought. The replies of debtors pointed to suppression of facts and falsification of financial statements.

  The   Company   created   hypothecation   over   stock,   book-debts/receivable   through hypothecation  agreement.  However,  it  conspired  against  the  banks and  siphoned  of funds by disposing of hypothecated goods.

  Loans  availed  from  two  banks  were  not  reflected  in  the  financial  statement  as  on
31.12.2012. Similarly, loan availed from L & T finance was not reflected in the books of  account  in  spite  of  creating  charge  in  its  favour.  The  liabilities  with  four  other banks were shown as other current liabilities which were apparently borrowings.

  Verification  of  invoices revealed raising  of multiple  invoices.  With  reference  to all contracts entered into with customers, though the work was supposedly executed in India or controlled from India and the invoices were raised from India, there was no direct remittance through Indian Banking channel from the customers.

  The funds  released  under Packing Credit were seen directly transferred  to  the bank accounts of the company in USA and utilized for US operations, which was a clear indication of diversion of funds. Book debts were hypothecated to the bank as floating charge and no registered power of attorney was there so the bank could not realize the dues directly from the debtors.

  The stock position was not satisfactory/encouraging in view of outstanding level of debt  and fast  obsolescence  of  computer  items.  All  the  debtors  were  more  than  180 days and chances of recovery were bleak.

  The Company had not furnished clarification regarding non-confirmation of debts by some  of  the  debtors.  This  indicates  the  fraudulent  intention  of  the  company  &  its promoters. The Company did not route sales proceeds through accounts of any bank in the consortium.

  The  investigation  revealed  that  the  borrowers/promoters had  indulged  in fraud  with another financial institution which was being investigated by EOW, Delhi police.

  Risk Based Internal Auditor revealed certain irregularities such as CA certified age wise statement of book debt, credit report of overseas parties were not obtained.

  Monitoring of the time schedule of supply as per the order was not done by lead bank which   resulted   in   non-   realization   of   debtors   and   liquidity   crunch.   During investigation, it was revealed that the lead bank had failed in discharging its duty as the DP communicated to the members was not properly calculated.

Systemic Improvement:

   Adequacy  of  credit  monitoring  measures.  It  must  be  ensured  that  all  the  required safeguards  in  disbursement  of  loan  and  ensuring  intended  end  use  of  funds  are  in place.

   Advising the operating offices that all term loans details of major suppliers/vendors should be finalized at the time of sanction of term loan and disbursements made to the specified parties directly.

   In consortium banking arrangement, any new bank entering into the consortium must take credit opinion report at least from the lead bank if not from all the existing banks and must take written consent from the lead bank before release of funds.


   The  business  model,  especially  in  an  IT  company  needs  to  be  understood  in  its entirety.  Highly  technical/complex  projects  need  to  be  subjected  to  independent verification by subject expert, invariably.

   Meaningful  analysis  of  stock  statements  to  be  carried  out.  Confirmation  to  be obtained from debtors at periodical intervals. D & B Report/Opinion Report on major debtors  to  be  obtained.  Also  regular  monitoring  of  the  operative  account  to  be ensured. Scrutiny of large withdrawal/transfer to be made.

   The debtors position of the borrowers to be closely monitored. It has been made a part of the stock audit and Inspection & Audit Reports.

   A member bank under consortium released the limits based on the allegedly forged letters purportedly issued by Leader Bank. The lead bank must send intimation to the other     members     about     the     drawing     limits     released     by     it     and     seek confirmation/acknowledgement of the same.

   Bank   must   immediately   delist   such   third   party   valuers,   Advocates/   Chartered Accountants/  Chartered engineers  etc.  who  have  questionable  credentials/have  been negligent in their professional duties or have caused financial loss to the bank by their willful acts of omission/commission/dishonesty. A fair transparent procedure needs to be devised in appointing such professionals.

   The Government should consider examining the role of third parties such as Chartered Accountants, Advocates, Auditors and rating agencies that figure in accounts related to bank frauds and put in place strict punitive measures such as cancellation of the registration by respective regulatory authorities for future deterrence.

   There should be no deviation from Bank’s extent operating instructions in handling discounting of bills  drawn  under LCs.  Suitable briefing to  stock auditors and using stocks & receivable audit as an effective tool for control and supervision of advances.

Analysis of Bank Frauds
Central Vigilance Commission
Export Business Sector

The  cases  of  frauds  perpetrated  by  four  companies  in  this  sector  have  been analysed.  The companies were engaged in exporting cotton bales, cotton & synthetic yarn, agro/engineering goods  and  readymade  garments  to  China,  Dubai,  Singapore  and  other  countries.  The Companies availed credit facilities from the banks under consortium arrangement led by one of the banks.

Modus operandi:

      Bank was discounting the export bills of the company against LCs from prime banks of  the  buyer.  The  payment/acceptance  of  bills  was  delayed.  On  the  request  of  the company bank had extended the due date of bills.

      As  per  information  gathered  from  Custom  authorities,  export  had  not  taken  place against most of the bills. Goods produced for exports against packing credit (PC) were also  not  available.  It  appeared  that  either  goods  were  not  produced  against  PC  or disposed off locally and funds were siphoned off.

      The Customs authorities had informed that exports did not take place in 200 cases out of the pending 203 bills, as these consignments did not relate to any exports.

      Another   company   availed   multiple   loans  from   different  banks/   institutions  for acquisition of the same set of equipments from the same suppliers at almost similar estimated cost.

      Completion of projects was confirmed to respective banks/institutions by submitting false/  fabricated  certificates  from  Chartered  Accountants  and  false  status  reports. Term loans were not accounted for in the year of their receipt/payment.

      The cash inflows and out flows were dealt with outside the books of accounts and not reflected in the audited balance sheets of the company during respective years.

      One other company had given the same export orders to various banks in consortium and availed packing credit facility. The company did not submit the export documents to the same bank from whom the packing credit was availed.

      The Company submitted contract documents to member bank for availing the credit facilities. The company had obtained export packing credit disbursement from another bank against the same contract document.

      The list of book debtors submitted by the party showed that most of the debtors were foreign buyers. In the backdrop of payment received from third parties and the bills

getting returned, earlier the company had stated that the goods were sold to alternate buyers   as   the   original   buyers   were   renegotiating   the   price   after   dispatch   of consignments.

      In  respect  of  the  creditors  for  suppliers,  full  details  of  such  suppliers  were  not available.  The  investigating  officer  stated  that  the  creditors  for  the  supply  were fabricated in order to artificially boost the purchase, sale and receivable.

      The borrower companies cheated the bank by submitting fake and forged export bills for purchase/discount which were drawn in nonexistent overseas buyers.

  The bank had discounted the bills against the terms of the sanction without ensuring acceptance of bills and confirmation of due date for payment from LC issuing bank. The  bank  did  not  obtain  GR  form  of  shipping  bills  verified/issued  by  custom authorities.

  There  were  several  apparent  major  discrepancies  in  set  of  bills  submitted  for discounting which should have aroused suspicion about genuineness of bills. Due date of bills extended at the request of the company without ensuring acceptance of bills, analyzing reasons for non acceptance of bills and delay in acceptance of bills.

  The  Chartered  Accountants  including  Statutory  Auditors  tended  to  collude  and conspired  to  be  a  party  in  submitting  false,  fabricated  and  misleading  financial statements and certificate to the institutions/banks with the only intention of obtaining disbursement of the financial assistance.

  The company had managed affair of the company based on false and fabricated books of accounts to ensure easy and smooth flow of credit without any restraint by way of term loan from financial institutions for funding cash losses.

  The proceeds of packing credits & FBPs credited to the account were withdrawn on the same day in clearing suggesting improper end use and diversion of loan proceeds.

  The export transaction undertaken by the company was suspect considering the fact that within a span of less than 3 months the utilization of the limit was to the brim under PC and negotiation of bills under LC.

  Realization proceeds of export bills credited to current account of the company which was   subsequently   withdrawn   by   the   company   when   bank   packing   credit   was outstanding.

  Credit report of all associates/ sister concerns was not obtained from their banker as per terms of sanction. Periodical inspection for packing credit disbursement to ensure end use was not carried out.

Systemic Improvement:
   Monitoring of systems and MIS generation has to be strengthened. Housekeeping and internal control of banks also have to be strengthened.

   There are lacunae in bank’s credit and risk management policies. Proper mechanism to  be  devised  for  review  of  the  policies  of  the  bank  and  to  keep  it  updated  as  per change of environments.

   Multiple  banking arrangements  in  large  value  financing have  done more harm  than good to banks. This type of arrangement enabled corporate to secure multiple finances from  various  banks  far  in  excess  of  their  requirements.  Funds  raised  are  easily diverted through company’s accounts with various banks in the absence of effective exchange of information between the banks. There is a need to review the multiple banking arrangements.

   There should be no over confidence on the borrowers based on their stature. Bank’s top  management  should  take  considered  decision  on  the  merits  of  the  proposal irrespective of the reputation of the company.

   Fraud monitoring in financial services should be a specialized area and a specialized cadre may be created to monitor and investigate such cases. The skill gaps in banks should be addressed through proper training.

   Management of fraud risk in large value advances need a comprehensive approach. It requires being changes in mindsets, fine tuning of work progress and human resources skills. Banks need to have a system of real time information sharing among them. To deal the fraud effectively, there has to be better support from enforcement agencies coupled with strong legislative.

Cox & Kings created layers of onshore and offshore subsidiaries

 The Enforcement Directorate (ED) conducted searches on 8th June2020 on the premises of the promoter, directors, CFO and auditor of the Cox & Kings Group (CKG) in Mumbai, which is allegedly involved in the Rs 3,642-crore Yes Bank fraud case.

Cox & Kings, the ED alleged, had created multiple layers of onshore and offshore subsidiaries across the globe, through which it siphoned off money.

The ED also alleged that the company forged its consolidated financials by falsifying the balance sheets of the overseas subsidiaries to get loans.

A formal complaint in this regard was filed on 18 March by Yes Bank, and during investigation irregularities were noticed in relation to the loan sanctioned to Cox & Kings Group.

The ED said in a statement that it searched “premises of Ajay Ajit Peter, Pesi Patel, Abhishek Goenka, Anil Khandelwal and Naresh Jain, promoter/ directors /CFO /auditor of Cox & Kings Group in Mumbai in Yes Bank fraud case under the provisions of Prevention of Money Laundering Act”.

8K Miles

Deloitte Haskins & Sells, the auditors of 8K Miles Software, has announced that it has informed the central government about suspected fraud in the affairs of the cloud computing company.The company's board met, as it faced suspension from trading in stock exchanges recently, for non-completion of audit for FY19, to approve the previous fiscal's accounts.After the board meeting, the company made a filing to the stock exchanges that its auditors have flagged several transactions, right from inconsistencies between initial and subsequent bank statements provided for subsidiaries, inadequate details on receivables and payables balances, existence of probable related parties not disclosed previously, and lack of access to books of some subsidiaries.However, auditors were unable to conclude on the validity of around Rs 378 crore of revenue recognised during the fiscal year, and could not check for the veracity of a consultancy charge of Rs 17 crore paid to a vendor.It has emerged that 8K Miles has also not assessed and paid GST on such services. Also, during the year, the group capitalized around Rs 323 crore in costs towards intangible assets, for which no appropriate documentation was provided, its auditors Deloitte stated.Responding to Deloitte's qualifications in the audit report, 8K Miles Software said it has provided all information and resolutions to auditors with respect to the financial statements. "The management has made full inquiry into affairs of the business as a result of which, they firmly believe that there is a going concern assumption as there are requisite business, operations, customers, and employees," the management noted.The 8K Miles management also clarified that a forensic audit has cleared all allegations and there is no relationship between 8K Miles Media and itself, except for common promoter.

Jet Airways

·         Forensic audit May 2019 : SBI, the lead banker of the lenders’ consortium, had ordered a forensic audit of the books of Jet Airways to examine the feasibility of restructuring its debts and identify accounting problems, Mint reported on 14 December. EY was asked to probe the troubled airline’s books between 1 April 2014 and 31 March 2018.

·         Serious Fraud Investigation Office (SFIO) : The Ministry of Corporate Affairs (MCA) on 4th July 2019 order a probe by the SFIO. MCA in the order said that seven companies belonging to Jet Airways group of companies need for a formal fraud probe based on an inspection report by ROC in May 2019. The report would be submitted in 6 weeks."Company was prima facie indulging into malpractices, mismanagement through siphoning/ writing-off/ diversion of funds and other financial irregularities, including but not limited to preferential/ related party transactions prejudicial to the public interest," said MCA in the order.
    MCA also wants a probe as to how Jet suddenly turned in a loss in FY18 after posting a profit for a couple of years. This was despite the company receiving fund infusions in the form of Etihad’s investments twice during the period.Investigations into the books of Jet Airways were initiated in 2018 as a result of a complaint filed by Arvind Mehta, trustee, Indian Investor Protection Council

·         The income tax department has ordered a special audit of Jet Airways in Jan 2020, after investigations by its arms found a number of suspicious-looking transactions in the accounts of the now-grounded airline, people in the know said.The department has engaged chartered accountancy firm Shah & Taparia to carry out the special audit, the people said.

·         Enforcement Directorate (ED) — is probing Jet Airways for allegations of money laundering.The ED has confronted Goyal with documents related to 19 privately held companies, of which 14 are registered in India and five abroad, the people said.The central agency has also gathered details of the offshore entities with which Jet and its group companies entered into lease and maintenance and general sales agreements, on the basis of information shared by the Egmont Group.Toronto-based Egmont is an international network of 164 financial intelligence units formed for combating money laundering as well as terror financing, they said. Enforcement Directorate is also understood to be probing investments made by the Abu-Dhabi based Etihad Airways into JetPrivilege Private Limited (JPPL) in 2014

Crime Proceeds :PMLA - Placement, Layering & Integration
Aug2020 :The Enforcement Directorate (ED) has filed a prosecution complaint against Vijayasarathi, former cluster manager of ICICI Bank, Vijayapura, and five others, under the provisions of Prevention of Money Laundering Act, 2002 (PMLA) in a cheating case.
“Vijayasarathi and his associates have acquired the proceeds of crime by cheating ICICI Bank and have layered it in the form of various movable and immovable properties,” said an official spokesperson.  The agency will attach assets of the accused worth around Rs 12.11 crore, which include immovable properties in Bengaluru, Vijayapura, Belagavi and Udupi districts worth Rs 5.31 crore and movable assets like cash, bank accounts totalling Rs 6.53 crore and gold and silver jewellery worth Rs 27 lakh,” added the spokesperson.
The ED had initiated a money-laundering investigation based on the four FIRs, which were registered at the APMC police station, Vijayapura and the FIRs were transferred to the CID for investigation. The CID had filed the chargesheet against the accused under Sections 120B, 201, 409, 465, 468, 471, 477A read with Section 36 of the IPC before the jurisdictional court in Vijayapura.

Investigations revealed that Vijayasarathi and other employees of ICICI Bank – Sachin Annappa Patil, Renuka Shetty, Sudeep Shetty, Sajjade Peeran Mushrif and Vijayendra had committed fraud of Rs 70.44 crore by using cancelled cheques, unused cheques, through fraudulent transfers, issuing fake fixed deposit receipts, not crediting the cash which was received for credit in the bank accounts of ICICI Bank, BDCC bank, Siddeshwara Co-operative Bank.

     Creative Accounting by Bombay Dyeing

     Booking fictitious sales to a controlled entity, hiding the ownership of that entity. This is the most basic of creative accounting. 

Wadia’s are claiming there is no diversion of funds because there is none. This MO was used to increase the share price for better financing or asset sale or getting a big tender, any!

Wadia’s also claim that these were opined by statutory auditors. And finally Wadia’s claim it’s all legal. Ofcourse it is, that is the whole point of creative accounting, taking advantage of loopholes. Making illegal legal

Eros international fraud

In its interim order, Sebi, prima facie, had found that the books of accounts of the company have been overstated and do not present a true and fair picture of its financial health.

"The transactions between the content advance entities and the trade receivable entities, raise the possibility that Eros International was circulating funds whereby amounts transferred as content advances were subsequently recognised as revenue by routing it through trade receivables entities," Sebi had stated.