Citizens' Issues
Some examples of everyday fraud and what you can do about them

The real scams in the corporate world are seldom revealed, and this is a scam in itself, given that these same corporates expect transparency from others, not just in governance, but also from their employees

Here's a quick re-cap on some new scams that were discussed offline during the recently concluded 'Fraud Investigation and Control Knowledge Summit' in Delhi, how they can impact you and what steps you must take. (Read the earlier report, 'Learning the tools and processes to detect and control corporate fraud'.)

# The double-joined cheque fraud. In this case, the upper half of one cheque was cut along the line and joined very carefully with the lower already signed half of another cheque from the same bank, that was cut along the same line. The amount was substantially increased and a new name substituted. It was taped front and back, as is often done to protect the alpha-numerics, and presented. The cheque flowed through the cheque truncation system and was paid out.

The fraud came to light only when the accountholder reconciled the numbers. The original cheque was then sourced, and at first, nobody from either bank could figure out what went wrong. Especially since the person who had issued the cheque had retained a photocopy. Even the technician from the security press could find no flaws. Till the person who had signed the cheque recalled that he never put tape on the cheque. That's when they pulled the tape off from one side, and the cheque literally came apart.

# High quality photo-copies of blank cheques are first obtained, by some means or the other, by copying genuine blank cheque leaves, on paper matching as closely as possible the security paper on which cheques are printed. Next, the cheque filled and signed fraudulently, is issued and presented to a bank which is known to be part of the cheque truncation system on a high volume day, where it is likely to simply go with the flow. They even resolve the MICR part.

A bank employee will know by the feel and touch of the cheques issued by his own bank, whether it is genuine or not, but s/he may not know the touch and feel of cheques issued by all other banks. By the time the fraud is detected, the person who has collected the money on more than a few cheques in this manner has vanished. Nothing much you can do other than secure your blank cheque leaves.
# An acquaintance, or a tenant approaches you, saying that he has a problem with opening a bank account, so whether he can receive funds in your account, perhaps for a small commission? Since you may know the person, you agree, and after a few days a few cheques or transfers are deposited in your account. The acquaintance then requests you to withdraw the amount in cash, which you do, and then vanishes.

After some time, it turns out that your bank account was being used as a 'mule' to receive money drawn from a vast variety of frauds, and that you may now be liable. Incidentally, this can happen without your knowledge too, as somebody may simply deposit money in your account using pay-in slips or wire transfers, and then also quietly withdraw the funds in cahoots with the bank.

Simply keep checking your balance regularly, and refuse to let others use your account at all times. There is no dearth of cases where tenants or paying guests have used this method, cleaned out the accounts of the landlords and put them into trouble.

# In another case, a bank manager was issuing fake fixed deposit receipts to genuine customers, while issuing the genuine FD receipts for shorter tenures on a series of fake accounts. That he got caught before he could take it much further was sheer coincidence, during the investigation on some other unrelated issue, and one of the customers chose to visit the bank to terminate the FD early, and the game crumbled.

That was not all; further investigation revealed that the manager had faked all his educational qualifications, from the 10th standard onwards, and that he had played the fake FDs game at two other bank branches also, one of these of the same bank in another part of the country. His services were quietly terminated because no bank likes such publicity, it seems.

# In a large family-controlled business, one of the family directors took a lift from the CFO of one of the companies on a couple of occasions, and realized, that for a person drawing a Rs50 lakh per annum kind of salary, the CFO was doing well with cars, driving different brands of luxury cars every time. Quiet enquiries revealed that the CFO had a fairly impressive stable of cars, at which point it was decided that a discreet investigation be done, and in due course certain lacunae as well as corrupt practices were unearthed.

However, the CFO had kept a full record of all the financial games that the family had been playing for decades, and in the end, despite overwhelming evidence, they had to let him go, after agreeing to a decent severance package. This, by the way, is the stuff that urban legends are made of, except that in this case the name of the corporate was discussed over lunch, and this writer quietly double-checked matters.
# More than one of the consultants who participated in the conference mentioned how the transport fraud is one of the biggest issues with the new generation 24x7 companies, especially the IT and ITES companies, but how despite more than a few solutions available, the issue had become so deeply routed across companies, that it was difficult to withdraw from it.

Solutions like providing buses to nearest public transport points, providing dormitories on-site till the morning for night workers, or similar facilities, were simply trashed because the lobbies inhouse from HR, finance, admin and others were simply so strong that the concept of "removing call-centre cabs" was impossible to implement. It was also indicated that this was a quiet way to generate cash incomes for such companies, which otherwise had no cash components, inbound.
# Then there was, of course, the energetic discussion on how one-line bills from a variety of 'support services' like advertising agencies, PR agencies, 'consultants' and others were blatantly passed even by companies which otherwise carried the reputation of being absolutely lily-white and pure despite their histories and origins in the opium smuggling days.

Specific mention was made about the best corporates, based out of Mumbai for generations, but now increasingly with roots in Ireland for tax reasons, that are known to use specific ad agencies as well as religious leaders and their trusts for these monetary re-cycling efforts. At one time nobody would have dared even mention the names of these companies, but now, with the advent of more open information, these names were openly being discussed with little nuggets of information that could subsequently be checked quietly on the Internet, or with a little bit of spadework. Maybe that's why their corporate heads could sleep easier, knowing fully well that despite everything, they were always one step ahead of any fraud investigation.
In all this, it is easy to get lost in the 'smaller corruption' stories, which is what the mainstream media seems to be reverting to again. Let the truth be told, for with Anna Hazare out of the way, matters seem to be rapidly reverting to that sort of direction. But, the Internet is a strange organic creature, and unlike other media, simply refuses to let things get buried, so it does appear as though some issues will raise their heads again and again.

Readers are invited to let us know their views and experiences in the matter of corporate fraud in India. Identities will be, of course, be protected.



Raghunath P Gawde

6 years ago

The article on fraud by using cheques in two part is really good and informative and one has to be really cautious while letting their account to be used. Also as mentioned need to keep checking frequently the Bank Account Balance.

Vikas Gupta

6 years ago

Your article is a real Eye opener particularly Scam of Cheques. I can't even dream that this could happen too.
About CFOs & Call centre Cabs issues , they look like normal in day to day activities as we are accustomed to Corruption to that extent.

p k

6 years ago

what is the email id??



In Reply to p k 6 years ago

Please write in to the magazine, information is on the CONTACTS pages

Microfinance institutions should be permitted to transform into banks as it will help them improve services and reduce costs

Before allowing MFIs to become banks, the Reserve Bank of India must ensure that these institutions are equipped with adequate due diligence and sound KYC policies and procedures

The idea of microfinance institutions (MFIs) converting to banks is an intrinsically attractive one, and without question those MFIs that meet the requirements set out by the Reserve Bank of India for a banking licence should consider applying for it. This will help carry the sustainable delivery of a wide range of need-based financial services to low-income people across the country, thereby enhancing the cause of financial inclusion.

That said, let us look at what a banking licence would mean for the crisis-ridden MFIs.

First, this will enable them tap public deposits, which are the cheapest source of non-subsidised capital. It will also allow MFIs to offer a wide range of savings-related services to low-income people, for savings is a much-needed financial service which is the first insurance that enables people to cope better with crisis situations and emergencies.

Second, it would reduce considerably the total cost of servicing the last mile (especially in remote rural areas, as many MFIs have branches there) and this may make it possible for many of them to have a lower, but sustainable cost of financial services delivery for low-income people. That would be no mean achievement by any standards!

Well, given these aspects and that the cause of financial inclusion is likely to be enhanced, the Reserve Bank of India (RBI) must seriously look at providing banking licences to MFIs that meet the stipulated criteria. On its part, the RBI must take into account the following characteristics that are peculiar to micro-finance.

  •  Microfinance loan assets tend to be predominantly small in amounts, but large in number.
  •  While the transactions are small, they are numerous (repetitive) and most often, predominantly cash-oriented, which makes it difficult to trace the source of the funds as well as the end use.
  •  The geographic diversity is huge and these assets tend to be spread over remote rural areas and/or urban slums that make it difficult to physically locate. Therefore, establishing the identity of the microfinance borrower and, hence, the loan asset is difficult.
  • As a result, the KYC documentation can be far from accurate.

Therefore, establishing the integrity of micro-finance assets becomes important and given the 2010 experience with multiple, ghost and over-lending in Indian microfinance, this is an aspect that needs to be closely considered by the RBI, prior to granting a banking licence to any MFI. Thus, the RBI would need to seriously focus on ensuring implementation of KYC norms in a rigorous manner by all MFIs that desire to transform and become banks.

This would call for:

  • Customer acceptance, customer identification and record-keeping standards to be implemented with consistent policies and procedures throughout the MFI, according to standards laid down by the RBI for banking companies.
  •  Each branch office of an MFI should maintain and transparently monitor information on its accounts and transactions, using a standardised process recognised and approved by the RBI. This local monitoring should be complemented by a robust process of information sharing between the head office and its branches and especially, regarding accounts and activity that may represent heightened risk.
  •  MFI internal auditors (reporting independently to the board or audit committee) should verify that appropriate internal controls for KYC are in place and that the MFI is in compliance with the supervisory and regulatory guidance for them to become banking companies. The audit process would have to be according to the minimum standards set by the RBI and it should include not only a review of policies and procedures, but also a review of customer documentation and records, along with sampling of a significant number of random accounts. The role of the auditors is particularly important in the evaluation of adherence to KYC standards on a consolidated basis. The RBI should ensure that appropriate frequency, resources and procedures are established in this regard and that they have full access to any relevant reports and documents prepared through the audit process.
  •   Some MFIs do have multiple (related) institutions and many MFIs share clients. Customer due diligence here poses issues that may not be present for a single entity. Thus, the RBI should ensure that there are systems and processes in place to monitor and share information on the identity of customers and account activity of the entire group (with all related institutions) as also other MFIs.

To summarise, while granting banking licences to MFIs is a welcome aspect and must be actively and seriously considered by the RBI, there is a need for the central bank to ensure client-related controls at MFIs which desire to transform into banks accessing public deposits.

These controls would emphasise and ensure that: (a) MFIs know the clients they are dealing with. (b) There is adequate due diligence on new and existing clients. (c) There are sound KYC policies and procedures that go beyond simple record-keeping, with the transforming MFIs having a customer acceptance policy and a tiered client identification programme that involves more extensive due diligence and proactive monitoring across headquarters and branches. Without this client-level due diligence, transforming MFIs could become subject to reputational, operational, legal and political and concentration risks, which could result in significant financial cost for the financial sector. The lessons from the 2010 Andhra Pradesh microfinance crisis should not be forgotten.

Therefore, it is imperative that the RBI closely examine the KYC procedures in place at MFIs, draw up (appropriate) standards applicable to all MFIs that desire to transform into banks, and most importantly, handhold and build the capacity of MFIs which desire to transform into microfinance banks.

Without question, the time has finally arrived for microfinance banks in the country, and the RBI needs to put in place a rigorous enabling transformation programme that will facilitate MFIs to become real torchbearers of financial inclusion, through the delivery of a wide range of need-based financial services to low-income people in India.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).


Insecticides India plans to raise Rs70 crore

Insecticides India is in talks with private equity firms and other institutional investors to raise funds

Insecticides India plans to raise about Rs70 crore through qualified institutional placement of shares or a private equity infusion for funding its proposed capacity expansion programme, which includes setting up a new plant in Rajasthan.

The company, which has five plants in Rajasthan, Jammu and Gujarat, is in talks with private equity (PE) firms and other institutional investors to raise funds.

"We are planning to increase the capacity of our existing plants and also set up a new plant in Rajasthan. This will involve an investment of Rs60-Rs70 crore," Insecticides India Ltd Managing Director Rajesh Aggarwal told PTI.

The company is looking to finance the expansion plans through Qualified Institutional Placement (QIP) or private equity funding, he said.

Aggarwal said the company would issue fresh shares to raise funds, which would dilute the promoter's stake.

"Promoters have about a 75% stake in the company. We would like to keep a two-thirds stake in it," he added.

Aggarwal said the company has just completed one round of expansion at an outlay of Rs80 crore with internal accruals and "we do not want to put more pressure on our cash flow".

Under the proposed expansion programme, the company would ramp up its formulations production capacity to 5 lakh tonnes per annum from the current 3.5 lakh tonnes, while its technicals (basic chemicals) production capacity would be increased to 22,000 tonnes from 12,000 tonnes at present.

Insecticides India is scouting for land for its third plant in Rajasthan, Aggarwal said.

The company has a presence in almost all parts of the country. Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu contribute about 40% to the company's turnover, which stood at nearly Rs480 crore last fiscal. Its net profit was Rs32.21 crore in the 2010-11 fiscal.

Insecticide India's turnover grew by 20 per cent, while its net profit rose by 14 per cent in the 2010-11 fiscal vis-a-vis the previous year.

About one-third of the company's revenues come from four products--Monocil, Lethal, Victor and Thimet. The company had recently acquired insecticide brand Monocil from Nocil Ltd.


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