PROMETRICS Finance : FRAUD - Motives, Risk Areas,forensic audit

PCH FRAUD

Amrapali Fraud

FORTIS 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

irregularities.

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

FRAUD THAT CAN BE DONE BY LEDGER KEEPER IN PURCHASE LEDGER, SALES LEDGER AND SUPPLIER’S LEDGER ARE GIVEN BELOW

PURCHASE LEDGER:

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.

SALES LEDGER:

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.

SUPPLIER’S LEDGER:

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 9^th 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

HOW TO SPOT RED FLAGS EARLY

BY , ETMARKETS.COM | JUN 01, 2018

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

ETMarkets.com 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.”

BANK FRUADS

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.

Loopholes/Lapses:

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.

Loopholes/Lapses:

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.

Loopholes/Lapses:

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.

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.

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.

Loopholes/Lapses:

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.

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 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).

Loopholes/Lapses:

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.

Loopholes/Lapses:

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.

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.

Loopholes/Lapses:

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.

…36/…..

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 8^th 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 4^th 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.