Making of a scam

Holy grail of criminality is littered with scoundrels and scallywags; men and women who have walked the path of chicanery and duplicity, making a career in hoax and swindle. The CVC in its detailed elucidation of the top 100 bank frauds provides amazing access to such fiddles and goes on to list the antidotes that could provide the cure. It is actionable intelligence imbued with a sense of purpose. And one only hopes that the people it is addressed to are paying attention. India’s socio-economic-political landscape is such that its financial system mainframe is easy to breach. Rampant corruption, collusion to profiteer, preying on the hapless to ensure malleability convinces one that evil is evil and not necessarily rooted in social circumstance. This befoulment at a molecular level is endemic to India. The innards placed before us reinforce the fact that Fraud Inc. is commonplace. Across sectors, human ingenuity and good old fashioned Indian Jugaad or reverse engineering exposes the ugly underbelly. Sometimes the sheer simplicity of the construct of the fiddle leaves you amused, perplexed and befuddled at the same time.

Like a putrescent odour that bubbles up out of tar, scams and swindles have had this uncanny knack of sitting up, waiting to be in your face, to get noticed, remaining firmly etched in our collective psyche. Presenting a systemic risk to the economic vector, the most recent case in point being IL&FS where the termites have eaten up pretty much everything, it now turns out that the new board has discovered profligacy across 348 entities, almost double the number of companies earlier envisaged, such was the code of silence practiced by the secret society which ran it into the ground at the cost of personal prosperity for 30 long years. The forensic fraud of these entities will reveal the true extent of the malaise.

In the manufacturing sector where fraud is all pervasive, CVC recommends a whole host of changes


*Due diligence of major debtors should be carried out by direct visit, direct balance confirmation, engaging agencies and comparing the realisation 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 analysed while renewing the existing facilities.

*The field level functionaries should be advised to scrutinise the financial statements submitted by the borrowers thoroughly and wherever 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.

This is primarily because the malfeasance is widespread. Below are some examples.

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 6,740 crore. Out of this, Rs 1,679.45 crore was for purchase of fancy shirting.

*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 mismatch 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 was 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 the bank by the 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 finalised its balance sheet for the year 2011-12 and got it audited on April 30, 2012 showing profit of Rs 23.74 crore. On the basis of the balance sheet, the company got credit facilities from consortium banks. Subsequently, the company revised its audited balance sheet for 2011-12 on September 5, 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 the 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 2,178 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 and disposing of hypothecated stocks without the bank’s knowledge.

In India's blue riband IT services and hardware sector, three specific cases of frauds perpetrated by three companies have been thrown into stark relief. The companies were engaged in assembling of computer peripherals, system integration/solution, data centre activity, software solution and consultancy, integration and other hardware related products and networking. The companies availed credit facilities from the banks under consortium arrangement led by one of the banks. Again, human ingenuity is at its finest here as the food chain fails us. From the CAs to the auditors, everyone with questionable credentials was complicit and in the loop to commit fraud.

Modus operandi

*One of the companies did not take off the project of two organisations 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 organisation 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 a standstill.

*As per the annual balance sheet of the company as on March 31, 2013, stock and book-debts were shown at Rs 204.75 crore and Rs 587.97 crore respectively. The account became NPA on May 29, 2013 with bank. After April 1, 2014, there was negligible turnover in the accounts with banks. As per audit report, stock as on date was Rs 30 crore to Rs 35 crore and book-debtors were Rs 7-15 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.

*Whereabouts 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 the 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 June 29, 2013 for availing drawing power. Accordingly 34 major debtors were selected and job of verification of debtors was distributed among the member banks of the consortium.

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

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

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

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


*It appeared that CMD of the company, in connivance with other directors, had provided false book debts/ stock statements and had inflated the profit and 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 cooperate 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 utilised 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 realise 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 and 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-realisation 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 finalised 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 wilful acts of omission/commission/dishonesty. A fair transparent procedure needs to be devised in appointing such professionals.

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

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