Master thieves and ever susceptible Indian banks

CVC dissects modus operandi and loopholes in 47-page study of top 100 bank frauds.

New Delhi: Human ingenuity knows no bounds, if you add Indian jugaad to the mix, it gets remarkably twisted. Criminality has been turned into an art form using this eclectic and deadly dangerous mix in India. Fraudsters and scamsters are commonplace across the financial vector.

The CVC analysis of Top 100 Bank Frauds submitted to the Department of Financial Services (DFS) and RBI is instructional, educative and informative for not only does it examine these frauds across sectors — gems & jewellery, manufacturing/industry, agro, media, aviation, service/project, discounting of cheques, trading, IT, export, fixed deposits. demand loan and letter of comfort — but it provides a detailed exposition of cause and effect by giving specific examples.

The RBI and DFS have in turn sent this primer to all public sector banks. A copy of the 47-page report, now in possession of FC, breaks down each fraud by highlighting modus operandi, loopholes/lapses and systemic improvements.

The inventiveness and creativity used by the perpetrators of fraud are significant for they show originality and resourcefulness. The CVC has obviously got stuck into several of these frauds for the analysis is equally pithy. We have heard of evergreening of loans, fresh lines of credit being given despite red flags and of course in the Nirav Modi case, the same low-level bank officials openly indulging in jiggery pokery. Take, for instance, this company which obtained drawing powers in the account from a 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.

Funds were diverted through suppliers’ accounts which were the associates/connected accounts of the borrowing companies. Further, there was a huge difference in cost of equipment 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 a CA regarding infusion of capital. The chartered accountant had in writing denied having issued the said certificate. Hence, the company had submitted a fabricated certificate to avail of loans.

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

This open and naked defiance of the regulatory framework and no fear of punitive action is writ large across the fraud narratives compiled by CVC, now handed over as textbook crimes to RBI and DFS. It takes CBI to task saying:

Immediately after filing the case with CBI, all the accounts of the promoters should be confiscated and bank should take adequate action 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 compartmentalised approach.

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

The CVC report slams many others in this food chain. It says categorically that the government should consider examining the role of third parties such as CAs, advocates, auditors, rating agencies that figure in accounts related to bank frauds and put in place strict punitive measures for future deterrence. This is very important given what has once again happened in the IL&FS case where all these people were asleep on the wheel.

Another instance provided by CVC is of an entity in the aviation sector:

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 wilfully 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 wilfully and with mala fide intention did not pay the dues covered by his personal and corporate guarantees. Despite restraining orders from the 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 a group. Any guesses on who this is?

Another specific example given is: Multiple banking arrangements in large value financing have done more harm than good to banks. This type of arrangement enabled a 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 foolproof system of checking and confirming whether the company has actually working on the contracts and whether the contracts were genuinely business based.

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