Financial Frauds - An Analysis - Final 2 PDF

FINANCIAL FRAUDS IN INDIA – AN ANALYSIS
BACHELOR OF MANAGEMENT STUDIES
SEMESTER V
2016-2017
SUBMITTED BY:
KAHINI MEHTA
ROLL NO. 35
NAME OF PROJECT GUIDE: PROF. POONAM JAIN
H.R. COLLEGE OF COMMERCE AND ECONOMICS

VIDYASAGAR PRINCIPAL K.M. KUNDNANI CHOWK
123, D.W. ROAD, CHURCHGATE, MUMBAI – 400 020
SUBMISSION: OCTOBER 2016
FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 1

DECLARATION
I, Kahini Mehta, student of H.R. College of Commerce & Economics of T.Y.BMS
(SEMESTER V), hereby declare that I have completed this research project, ‘Financial
Frauds in India - An Analysis’ in the Academic Year 2016 – 2017. This information
submitted in true and original to the best of my knowledge.
__________________________________
SIGNATURE OF THE STUDENT

CERTIFICATE
I, Prof. Poonam Jain, hereby certify that Kahini Mehta of H.R. College of Commerce &
Economics of T.Y.BMS (SEMESTER V) has completed a project, ‘Financial Frauds in India
- An Analysis’ in the Academic Year 2016-2017. This information submitted is true and
original to the best of my knowledge.
______________________________ ______________________________
PROF. POONAM JAIN PROF. PARAG THAKKAR
SIGNATURE OF PROJECT SIGNATURE OF PRINCIPAL OF
CO-ORDINATOR COLLEGE
INTERNAL EXAMINER EXTERNAL EXAMINER

ACKNOWLEDGEMENTS
Firstly, I would like to thank the Mumbai University for introducing research projects as a part of the
Bachelor of Management (BMS) Curriculum thereby giving me the opportunity to work on this
project. I am indebted to the H. R. College of Commerce and Economics for allowing me to choose
this topic, from a range of topics, to do my project on.
The project has truly been an incredible learning experience. I would like to thank Prof.
Poonam Jain, my project guide, for her invaluable advice, guidance and support at every stage of this
research project. Without her constant encouragement and assistance this project would not be
possible.
I would further like to thank all the respondents who undertook my primary research survey. Their
responses have formed the basis for this research project.
I would also like to thank my parents and friends for all of the help and support throughout.

EXECUTIVE SUMMARY
The purpose of this research project is to study the various types of financial frauds occurring in India,
along with assessing the trends of fraud awareness and occurrence in corporate organizations.
While conducting my research, the survey methodology was employed in order to understand the
current scenario of financial crime occurrence and awareness levels amongst people, to gain an
insight into their perceptions of fraud and to ascertain the current trends of frauds in corporate
organizations.
Financial frauds have emerged as an inevitable unwanted byproduct of economic growth. This
research project describes the various types of financial frauds in detail, and explains how they are
carried out. It further aims to provide an overview on the role of technology in transforming frauds
into a systemic crisis, the changing regulatory landscape, and the ways for fraud prevention and
control. It showcases several case studies that highlight the adverse impact such crimes have had on
the Indian Economy.
Thus, this research project’s motive lies in increasing financial fraud awareness and promoting fraud
prevention measures. It recognizes that frauds are an extremely pressing problem for the economy
and need immediate attention in order to mitigate them.

TABLE OF CONTENTS
SR. NO. TOPIC PAGE NO.
1. INTRODUCTION 9
2. RESEARCH OBJECTIVES 12
3. HYPOTHESIS 13
4. RESEARCH METHODOLOGY 14
5. REVIEW OF LITERATURE 17
6. MEANING OF FINANCIAL FRAUDS 19
 MEANING
 WHO COMMITS FRAUDS
 WHY DO PEOPLE COMMIT FRAUDS
7. FRAUD LANDSCAPE 24
8. EVOLUTION OF FRAUD 25
9. TYPES OF FINANCIAL FRAUDS 26
10. BANK FRAUDS 27
11. MOBILE BANKING RISKS 35
12. INSURANCE FRAUD 38

13. CHEQUE FRAUD 41
14. ACCOUNTING FRAUD 42
15. CREDIT CARD FRAUD 43
16. TAX EVASION 45
17. INTERNET FRAUD 47
18. SECURITIES FRAUD 48
19. CORPORATE FRAUD 52
20. PONZI SCHEME 56
21. EMBEZZLEMENT 56
22. CASE STUDIES 58
 HARSHAD MEHTA
 SATYAM SCANDAL
 SAHARA SCAM
 KETAN PAREKH
 SARADHA SCAM
 PACL

23. LEGAL FRAMEWORK AND KEY REGULATORY DRIVERS 71
24. CIVIL/ADMINISTRATIVE PROCEEDINGS 78
25. FRAUD PREVENTION AND DETECTION 79
26. RESEARCH FINDINGS AND ANALYSIS OF DATA 87
27. CONCLUSION 113
28. BIBLIOGRAPHY 115
29. ANNEXURE - SURVEY 119

INTRODUCTION
According to the Association of Certified Fraud Examiners (ACFE), fraud is “deception or
misrepresentation that an individual or entity makes knowing that the misrepresentation could result
in some unauthorized benefit to the individual or to the entity or some other party.”
With India having topped the World Bank’s growth outlook for 2015–16 for the first time and
achieved economic growth of 7.3% in 2014–15, there is an upsurge of optimism in business corridors.
Although the general business sentiment remains positive, the threat of fraud, bribery and corruption
looms large. The Indian financial services sector has witnessed exponential growth in the last decade,
however this growth that has not been without its pitfalls, as incidents of fraud have also been on the
rise. Financial frauds have emerged as an inevitable unwanted byproduct of economic growth. Taking
advantage of the basic human attributes of aspiration and greed, fraudsters have duped millions across
the world. They have also taken advantage of the lack of financial literacy amongst the masses.
Global financial world is replete with such examples and India too has had its share of such scams.
Investors had little idea about a complex financial product such as Credit Default Swap (CDS) which
triggered the global financial crisis in 2008. In India, people were unaware about ponzi schemes; yet
time and again people have lost their hard earned savings in a bid to make quick profits through such
schemes. Thus, financial frauds have emerged in all shapes and sizes throughout history.
In fact, things are becoming more challenging now. The devious ingenuity of the human brain is now
leveraging technology to indulge in more sophisticated methods of crimes which are very much
capable of creating systemic instability. Technology has overcome the barrier of distance
and infiltrated almost every sphere of the networked life that we live today. A security threat today
can be orchestrated by the click of a mouse. Phrases such as phishing, vishing, SMSishing, identity
theft, data theft, online surveillance, digital espionage, ransomware, Dark Web, etc., which were

beyond our imagination few years back, are now part and parcel of our lexicon. Technology has been
a facilitator, but it can also be a disruptor if it is used by people with ulterior motives.
According to the PWC Global Crime Survey 2016, more than one in every four organisations in India
are impacted by economic crime—a finding that reflects the pervasiveness of the problem in India. In
the globalised and liberalised business environment of the last few years, we face a drastically
increasing volume of frauds, especially in the financial sectors in India. Fraud results in significant
losses to the public exchequer, thus adversely affecting service delivery. Financial fraud has become a
big business, contributing to an estimated Rs. 14000 crore (20 billion USD) in direct losses annually.
Industry experts suspect that this figure is actually much higher, as firms cannot accurately identify
and measure losses due to fraud.
With India positioning itself as the world’s fastest growing big economy and the country getting
digitally connected both within and with the outside world, instances of financial fraud are bound to
rise. It is therefore imperative to prepare our country for coping with the emerging challenges. Our
institutions should earmark budgets to make their systems fool-proof and train their people
accordingly. Our regulatory bodies should be aware of what is happening on this front around the
world and shape regulations accordingly. Financial literacy for the masses must figure
on government’s priority agenda.
Thus, this research project aims to provide an overview on the trends on financial frauds, the role
of technology in transforming frauds into systemic crisis, the changing regulatory landscape, and the
ways for fraud prevention and control. It showcases several case studies that highlight the adverse

impact such crimes have had on the Indian Economy. It further aims to evaluate the current scenario
of financial crime occurrence and awareness.
Thus, this research project’s motive lies in increasing financial fraud awareness and promoting fraud
prevention measures.

RESEARCH OBEJECTIVES
 To discuss the meaning and types of financial frauds
 To ascertain the current scenario of fraud awareness and occurrence
 To determine fraud elements and trends in corporate organizations
 To review the risks posed by financial frauds and evaluate various methods to prevent the
occurrence of frauds
 To examine case studies that highlight the impact of financial frauds and crimes in India

HYPOTHESIS FOR RESEARCH
1. Technology is abused to commit frauds.
2. Payment/ Finance processes are the most vulnerable to fraud risk in an organization.
3. Employees are the most likely to commit financial frauds in a corporate organization.
4. It is perceived that Indian law enforcement agencies are not adeqautely resourced and trained
to investigate and prosecute financial frauds.
5. Organizations have become more sensitive to fraud risks.
6. Frauds are an inevitable cost of doing business.

RESEARCH METHODOLOGY
 RESEARCH SCOPE:
The scope of the research extends to studying the various types of financial frauds and their respective
cases that have occurred in the past in India.
 RESEARCH METHODS:
Primary as well as Secondary research were employed in this project.
Primary research is the first hand research that the researcher collects, by interacting with the sample
population and the conclusions and analysis he/she draws from the data that has been obtained.
Primary research in this project involved interacting with 100 respondents to evaluate their awareness
of financial frauds and the degree of its occurrence.
Secondary research is the background research done by the researcher on already existing information
regarding the topic. This helps the researcher in determining whether previous research papers have
been written on that particular topic and if and how new ground on that particular topic can be
covered. It also helps the researcher in building a base for the questions to be asked to the sample
population and to construct an informative questionnaire and ask all the right questions. Secondary
research in this project involved reading and examining various research papers, journals, newspaper
articles and books written on or related to Financial Frauds.

 DATA COLLECTION METHOD:
Quantitative Data:
Surveys: This method captures information through the input of responses to a research instrument
containing questions (such as a Questionnaire). Information can be input either by the respondents
themselves (E.g.: An Online Survey) or, the researcher can input the data (E.g.: a phone survey, a
one-on-one survey, a mall intercept, etc). The main methods for distributing surveys are via a website,
postal mail, phone, or in person. However, newer technologies are creating additional delivery options
including through wireless devices, such as smart phones and technologies wherein the information
gets recorded in real time and can be viewed and intercepted very easily through pie charts and bar
graphs.
The surveys for this project were in the form of a questionnaire, which was filled by 100 respondents
in the city of Mumbai, India.
 RESEARCH DESIGN:
Descriptive research is used to describe characteristics of a population or phenomenon being
studied. The research conducted is descriptive in nature as it seeks to assess the current
scenario and trends of financial frauds occurring in India.

 RESEARCH LIMITATIONS:
 The paucity of time and resources was the major constraint.
 The research respondents are only from Mumbai, India. Thus, the research scope is
restricted to India only.
 The respondents are limited to 100 in number. Thus, the sample size is restricted.
 The possibility of respondents being biased cannot be ruled out.
 The limited knowledge of the respondents regarding the topic may hamper the true
conclusion of the study

REVIEW OF LITERATURE
 With white-collar crime almost doubling from 2009, financial fraud by insiders remains the
single greatest fear of Indian companies, according to the results of a survey by audit and
consulting firm KPMG. Of the 1,000 companies covered in the survey, 87% said they had
incurred losses of at least Rs10 lakh due to fraud in 2009.The previous survey, carried out in
2008, had only 47% complaining on this count. At least 75% of Indian firms said instances of
fraud had increased over the past two years. A lack of objective and independent internal
audits, inadequate overseeing of senior management’s activities by the audit committee, and
weak regulatory environment were pinpointed as culprits for the spike in financial statement
frauds.
 The 10th Biennial India Fraud Survey Report 2010 reveals that 81% of the companies
surveyed felt that financial statement fraud was the biggest threat in India, with at least 60% of
them saying inadequate enforcement of regulations had increased such fraud. The findings of
the report suggested that weak internal control systems, eroding ethical values and lack of
legal action against fraudsters created an environment conducive to such crimes. The survey,
conducted by KPMG’s forensic wing in India, covered leading Indian firms from the public
and private sectors. The respondents included chairman and managing directors, chief
operating officers, chief financial officers, internal auditors, heads of investigation divisions
and other senior management officials. Indian companies, according to the study, remained
highly vulnerable to fraud in the absence of “inadequate internal control framework” that can
identify and deal with such crimes. The report suggested that 41% of Indian firms did not have
fraud risk management systems. The KPMG report showed that 45% of the firms had
experienced fraudulent activities in the past two years, with financial services and consumer
markets showing the highest levels of risk. However, more than the lack of monitoring
systems, what was prevalent and disturbing was the reluctance of companies to report
incidence of frauds. According to the survey, only 35% of the companies initiated legal action
against a perpetrator of fraud. A majority of the frauds had been investigated internally.
 India is increasingly becoming a victim of online financial fraud. Symantec Corporation,
internationally known provider of computer security solutions, said on October 10, 2007, “that
India was another country rapidly participating in financial fraud on the Internet and has was
also becoming a victim of it.” Such online financial fraud in India has increased by 81%
during the last few months. According to the Internet Security Threat Report of the company
that was published in September 2007, India occupies the 14th position globally in hosting
phishing sites. The city of Mumbai accounted for 30% of all phishing Websites in the country,
Delhi for 29%, and Chennai and Bangalore hosted 12% each of all phishing Websites. “In the
online food chain fraud, India has a major involvement where 33 Websites have been turned
into phishing sites. These sites leveraged attacks to allow identity theft in 2006”, Vishal
Dhupar, Managing Director of Symantec, India told reporters. The Economic Times published
this in news on October 10, 2007. According to Symantec, cyber criminals are increasingly
targeting victims by taking advantage of trusted environments. Symantec's study mentioned
that India was sixth in the global ranking of countries for computers having multiple
infections. Incidentally, the top most rank goes to USA. China also placed itself among the top
countries with malicious activity, top countries suffering DoS (Denial of Service) outbreaks,
countries with bot-infected PCs, countries as origin of attacks, and countries with multi-
infectious computers. Cyber criminals who sell stolen data do so using underground servers.
Such data include identification details like Social Security numbers, bank cards, credit cards,
PINs, e-mail addresses and user accounts.

MEANING OF FINANCIAL FRAUDS
“Financial crimes are crimes against property, involving the unlawful conversion of the ownership
of property (belonging to one person) to one's own personal use and benefit. Financial crimes may
involve fraud (Cheque fraud, credit card fraud, mortgage fraud, medical fraud, corporate
fraud, securities fraud (including insider trading) bank fraud, market manipulation, payment (point of
sale) fraud, health care fraud, theft; scams or confidence tricks, tax evasion, bribery; embezzlement,
identity theft; money laundering, and forgery and counterfeiting, including the production of
counterfeit money and consumer goods.”
Frauds and financial crimes are a form of theft/larceny that occur when a person or entity takes money
or property, or uses them in an illicit manner, with the intent to gain a benefit from it. These crimes
typically involve some form of deceit, subterfuge or the abuse of a position of trust, which
distinguishes them from common theft or robbery. In today's complex economy, fraud and financial
crimes can take many forms.
 It is possible to divide financial crime into two essentially different, although closely related,
types of conduct :
 First, there are those activities that dishonestly generate wealth for those engaged in the conduct
in question. For example, the exploitation of insider information or the acquisition of another
person’s property by deceit will invariably be done with the intention of securing a material
benefit. Alternatively, a person may engage in deceit to secure material benefit for another.
 Secondly, there are also financial crimes that do not involve the dishonest taking of a benefit,
but that protect a benefit that has already been obtained or to facilitate the taking of such
benefit. An example of such conduct is where someone attempts to launder criminal proceeds of
another offence in order to place the proceeds beyond the reach of the law.

WHO COMMITS FRAUDS?
Fraudsters usually fall into one of three categories:
1. Pre-planned fraudsters, who start out from the beginning intending to commit fraud. These
can be short-term players, like many who use stolen credit cards or false social security
numbers; or can be longer-term, like bankruptcy fraudsters and those who execute complex
money laundering schemes.
2. Intermediate fraudsters, who start off honest but turn to fraud when times get hard or when
life events, such as irritation at being passed over for promotion or the need to pay for care for
a family member, change the normal mode.
3. Slippery-slope fraudsters, who simply carry on trading even when, objectively, they are not
in a position to pay their debts. This can apply to ordinary traders or to major business people.
There are essentially seven groups of people who commit the various types of financial crime:
 Organised criminals, including terrorist groups, are increasingly perpetrating large-scale
frauds to fund their operations.
 Corrupt heads of state may use their position and powers to loot the coffers of their (often
impoverished) countries.
 Business leaders or senior executives manipulate or misreport financial data in order to
misrepresent a company’s true financial position.
 Employees from the most senior to the most junior steal company funds and other assets.
 From outside the company, fraud can be perpetrated by a customer, supplier, contractor or by
a person with no connection to the organisation
 Increasingly, an external fraudster who colludes with an employee to achieve bigger and better
results more easily.

WHY DO PEOPLE COMMIT FRAUDS?
There is no single reason behind fraud and any explanation of it needs to take account of various
factors. Looking from the fraudster’s perspective, it is necessary to take account of:
 Motivtion of potential fraudsters
 Conditions under which people can rationalize their prospective crimes away
 Opportunities to commit crime
 Perceived suitability of target for frauds
 Technical ability of fraudster
 Expected and actual risk after the actual fraud has been carried out
 Expectations and actual consequences of discovery
A common model that brings together a number of these aspects is the Fraud Triangle. This model is
built on the premise that fraud is likely to result from a combination of three factors: motivation,
opportunity and rationalisation.

Motivation:
In simple terms, motivation is typically based on either greed or need. Stoy Hayward’s (BDO) most
recent FraudTrack survey found that greed continues to be the main cause of fraud, resulting in 63%
of cases in 2007 where a cause was cited. Other causes cited included problems from debts and
gambling. Many people are faced with the opportunity to commit fraud, and only a minority of the
greedy and needy do so. Personality and temperament, including how frightened people
are about the consequences of taking risks, play a role. Some people with good objective principles
can fall into bad company and develop tastes for the fast life, which tempts them to fraud. Others are
tempted only when faced with ruin anyway.
Opportunity:
In terms of opportunity, fraud is more likely in companies where there is a weak internal control
system, poor security over company property, little fear of exposure and likelihood of detection, or
unclear policies with regard to acceptable behaviour. Research has shown that some employees are
totally honest, some are totally dishonest, but that many are swayed by opportunity.
Rationalisation:
Many people obey the law because they believe in it and/or they are afraid of being shamed or
rejected by people they care about if they are caught. However, some people may be able to
rationalise fraudulent actions as:
 Necessary- Especially when done for the business
 Harmless- Because the victim is large enough to absorb the loss
 Justified- Because ‘the victim deserved it’ or ‘because I was mistreated’

One of the most effective ways to tackle the problem of fraud is to adopt methods that will decrease
motive or opportunity, or preferably both. Rationalisation is personal to the individual and more
difficult to combat, although ensuring that the company has a strong ethical culture and clear values
should help.

FRAUD LANDSCAPE
 According to the RBI, while the number of fraud cases has declined from 24,791 cases in
2009–10 to 13,293 cases in 2012–13 — i.e. a 46% drop—the amount involved has increased
substantially from Rs. 2037.81 crore to Rs. 8646.00 crore —i.e. an increase of 324%.14. This
implies fewer instances but an increased financial impact.
 A granular analysis in this study reveals that nearly 80% of all fraud cases involved amounts
less than 1 lakh INR, while on an aggregated basis, the amount involved in such cases was
only around 2% of the total amount involved.
 Major risk areas: Corruption and cash in hand are the most fraud vulnerable areas in the
financial services sector.
 Latest reported facts and figures: In India, frauds worth 11,022 crore INR were unearthed in
public sector banks between April–December 2014; 2,100 cases of fraud were reported to the
RBI.

TYPES OF FINANCIAL FRAUDS
BANK
FRAUD
EMBEZZLEMENT INSURANCE
FRAUD
PONZI CHEQUE
SCHEMES FRAUD
FINANCIAL
CORPORATE FRAUDS ACCOUNTING
FRAUD FRAUD
CREDIT
SECURITIES CARD
FRAUD FRAUD
INTERNET TAX
FRAUD EVASION

BANK FRAUD:
Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or
held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or
other financial institution.
TYPES:
 Fraudulent Documentation:
It involves altering, changing or modifying a document to deceive another person. It can also involve
approving incorrect information provided in documents knowingly. Deposit accounts in banks with
lax KYC drills/ inoperative accounts are vulnerable to fraudulent documentation. Some examples:
• An individual illegally obtains personal information/ documents of another person and takes a loan
in the name of that person.
• He/she provides false information about his/her financial status, such as salary and other assets, and
takes a loan for an amount that exceeds his eligible limits with the motive of non-repayment.
• A person takes a loan using a fictitious name and there is a lack of a strong framework pertaining to
spot verifications of address, due diligence of directors/promoters, pre-sanction surveys and
identification of faulty/incomplete applications and negative/criminal records in client history.
• Fake documentation is used to grant excess overdraft facility and withdraw money.
• A person may forge export documents such as airway bills, bills of lading, Export Credit Guarantee
Cover and customs purged numbers/orders issued by the customs authority.

 Multiple Funding/ Diversion/ Siphoning of Funds :
Siphoning of funds takes place when funds borrowed from financial institutions are utilised for
purposes unrelated to the operations of the borrower, to the detriment of the financial health of the
entity or of the lender. Diversion of funds, on the other hand, can include any one of the following
occurrences:
• Use of short-term working capital funds for long-term commitments not in conformity with the
terms of sanction
• Using borrowed funds for creation of assets other than those for which the loan was sanctioned
• Transferring funds to group companies
• Investment in other companies by acquiring shares without the approval of lenders
• Shortage in the usage of funds as compared to the amounts disbursed/ drawn, with the difference not
being accounted for
 Identity Theft:
Fraudsters are devising new ways to exploit loopholes in technology systems and processes. In case of
frauds involving lower amounts, they employ hostile software programs or malware attacks, phishing,
SMSishing and whaling (phishing targeting high net worth individuals) apart from stealing
confidential data. In February 2013, the RBI advised banks to introduce certain minimum checks and
balances such as the introduction of two-factor authentication in case of ‘card not present’
transactions.

Some examples:
• Unauthorised emails asking for account information for updating bank records are sent by
fraudsters. The customer information is then misused for misappropriating funds.
• Access rights for making entries are given to unauthorised people.
• Bank employees keep original Fixed Deposit (FD) receipts with themselves and hand over phony
FD receipts to customers. They then revoke FDs by forging signatures.
• Lost/stolen card: It refers to the use of a card lost by a legitimate account holder for
unauthorised/illegal purposes.
• Account takeover fraud: An individual illegally obtains personal information of valid customers
and takes control of the card account.
• Theft of valuables: Fraudsters open bank lockers to take key impressions of other lockers and then
use duplicate keys to steal assets
 Internet Banking and Related Frauds:
Around 65% of the total fraud cases reported by banks were technology-related frauds (covering
frauds committed through/ at an internet banking channel, ATMs and other payment channels like
credit/debit/prepaid cards), whereas advance-related fraud accounted for a major proportion (64%) of
the total amount involved in fraud.
Some examples:
• Triangulation/site cloning: Customers enter their card details on fraudulent shopping sites. These
details are then misused.

• Hacking: Hackers/fraudsters obtain unauthorised access to the card management platform of
banking system. Counterfeit cards are then issued for the purpose of money laundering.
• Online Fraud: Card information is stolen at the time of an online transaction. Fraudsters then use
the card information to make online purchases or assume an individual’s identity.
• Lost/Stolen Card: It refers to the use of a card lost by a legitimate account holder for
unauthorised/illegal purposes.
• Debit Card Skimming: A machine or camera is installed at an ATM in order to pick up card
information and PIN numbers when customers use their cards.
• ATM fraud: A fraudster acquires a customer’s card and/or PIN and withdraws money from the
machine.
• Social engineering: A thief can convince an employee that he is supposed to be let into the office
building, or he can convince someone over the phone or via e-mail that he’s supposed to receive
certain information.
• Dumpster diving: Employees who aren’t careful when throwing away papers containing sensitive
information may make secret data available to those who check the company’s trash.
• False pretences: Someone with the intent to steal corporate information can get a job with a
cleaning company or other vendor specifically to gain legitimate access to the office building.
• Computer viruses: With every click on the internet, a company’s systems are open to the risk of
being infected with nefarious software that is set up to harvest information from the company servers.
• Incorrect Sanctioning or External Vendor-Induced Fraud:
According to PwC’s Global Economic Crime Survey 2014, external fraudsters are still the main
perpetrators of economic crime for the majority of financial service organisations (57% in 2014 and
60% in 2011). Financial institutions are prime targets for external frauds, given the amount of money
fraudsters can potentially obtain as well as the sensitivity of data held by these organisations (credit
card and personal identity details, for example). The financial services sector also tends to be more
strictly regulated and as a result, many business processes and functions have corporate controls in
place. This makes it more difficult for frauds to be internally perpetrated without discovery. The
absence of a proactive and robust monitoring framework, however, does not allow the entity to
identify conflict of interest issues such as employees or agents having a close relationship with other
entities.
Some examples:
• Falsified Valuations: External consultants advising loan borrowers to fabricate their valuation
report and inflate the amount of funds that can be borrowed
• Corporate Espionage: Sharing trade secrets or confidential customer information with the
competitor for commercial benefits
• Merchant Collusion: Merchant owners and/or their employees conspiring to commit frauds using
their customers’ accounts and/or personal information
• Ponzi Scheme: A type of pyramid scheme, where money from new investors is used to provide
returns to previous investors
• Off shore investing: External vendors convincing investors to invest in outside companies by
showing higher returns when the companies don’t exist in reality
• Bogus offerings: Investing in a bogus company (no operations, earnings or audited financial
statements)

• Misappropriation of Loan Disbursements: Loans of lesser value being disbursed to farmers and
funds being misappropriated by intermediators through false documentation
• Inflation of projected sales figures or past income: Large and unusual year end transactions
resulting in profit for the enterprise.
• Others: Faking net worth of directors, faking CA certificates or financial statements, inflating sundry
debtors or reducing sundry creditors, reference checks not being conducted, irregularities in repayments
for loans availed from other banks, frequent start-ups, maintenance of a large number of small
enterprises, etc.
 Counterfeit cheques:
Counterfeit or fake cheques that look too good to be true are being used in a growing number of
fraudulent schemes, including foreign lottery scams, cheque overpayment scams, internet auction
scams and secret shopper scams. Unsuspecting sellers get stuck when scammers pass off bogus
corporate or personal cheques.
 Tunnelling/ Phoenixing or Asset Stripping:
Even though the above-mentioned terms are interchangeably used, in the banking world, asset
stripping primarily implies taking company funds or assets of value, and leaving behind debts. This
can happen when a company’s directors transfer only the assets of one company to another and not
the liabilities. The result is a dormant company which has to be liquidated as it has large liabilities
that cannot be met.

Some examples:
• Asset stripping: Fraudsters deliberately target a company or companies to take ownership, move
the assets and then put the stripped entity into liquidation.
• Phoenixing: Directors of a company move the assets from one limited company to another to
‘secure’ the benefits of their business and avoid the liabilities. Most or all directors will usually be the
same in both companies. This usually is a way of ‘rescuing’ the assets of a failing business rather than
targeting a company.
• Teeming and lading: In order to maintain the liquidity situation artificially, amounts received from
the subsequent debtor are credited to the earlier debtor’s account so that one debtor’s account does not
show an outstanding balance for a long time. Such a process is continued till the time the original
amount misappropriated is finally replaced or till the time the cashier is caught.
 Overvaluation or Absence of Collaterals:
Absence of stringent guidelines on the due diligence of professionals assisting borrowers at the time
of disbursement of loans may result in valuation agencies or advocates facilitating the perpetration of
frauds by colluding with the borrowers to inflate security valuation reports. Some examples:
• Concealing liabilities: Borrowers concealing obligations such as mortgage loans on other properties
or newly acquired credit card debts in order to reduce the amount of monthly debt declared on the
loan application
• Misstatement: Deliberately overstating or understating the property’s appraised value; when
overstated, more money can be obtained by the borrower in the form of a cash-out refinance, by the
seller in a purchase transaction, or by the organisers of a for-profit mortgage fraud scheme

• Cash back schemes: The true price of a property illegally being inflated to provide cash-back to
transaction participants, most often the borrowers, who receive a ‘rebate’ that is not disclosed to the
lender
• Shot gunning: Multiple loans for the same home being obtained simultaneously for a total amount
greatly in excess of the actual value of the property

MOBILE BANKING RISKS:
There are two types of mobile financial services that are currently offered in the Indian market—
mobile banking and mobile wallets. Being an easy and convenient mode of transacting, there has been
a 55 times rise in value usage of mobile banking and 5.5 times rise in the volume of transactions
between FY12 and FY15. After the recent changes to RBI policy, customers of semi-closed pre-paid
instruments (PPIs) can now do the following:
• Load up to 1,00,000 INR in wallets
• Transfer money from their wallet to any bank account
This move, on one hand, enhances the convenience and adoptability of a mobile wallet and on the
other, makes it more susceptible to fraud risks. These are:
• Mobile banking application being mapped to an incorrect mobile number: For bank customers
who do not use mobile banking, an employee of the bank could attach an associate’s mobile number
to the bank account and install a mobile application on his mobile device. The customer’s account is
compromised by the associate and he or she does not get any notification about the same.
• Creating fake and non-existent users on the mobile financial services platform: Most of the
banks appoint a third party vendor to develop a mobile application to be integrated with their core
banking system. The vendor may create two unauthorised users with rights to initiate and verify
transactions, and transfer funds from the organisation to his associates’ wallets, effectively stealing
money from the bank.
• Malware: The increase in the number of mobile banking users is accompanied by a rise in attacks
through malware.

• Data theft: Mass attacks are possible through the theft of credentials which can be used for personal
benefits.
• SIM swap: SIM swap means replacing the old SIM with a new one, when the old gets lost or
damaged, or when one needs a differently sized SIM card. If a fraudster manages such a swap, he can
carry out numerous fraudulent transactions using the mobile number of the victim. For instance, the
valid mobile station international subscriber directory number (MSISDN) is moved to another
handset. The user has no access to their account and receives no notification. The user with the other
handset, on knowing the PIN, can transact in the account.
• Fake or similar interface apps: Fake applications, with exactly the same user interface as the
original application, are being created to steal confidential information shared by the user. Risks
associated with mobile wallets
• Increased risk of money laundering: Transfer of money into and out of a mobile wallet from or to
a bank account is now possible. Cash-in from the bank account of an individual and cash-out to a
different bank account of another individual can be used as a platform for laundering unaccounted
money.
• Unauthorised deductions from the wallet of a customer (especially a dormant or infrequent
customer account): Employees of the mobile wallet service provider may misuse the balance stored
in the wallet of a customer by making unauthorised deductions. Moreover, in case of a mishap to a
customer with no nomination facility, the balance in the customer’s account is not passed on to his
family members and remains with the service provider, which ultimately becomes a low-hanging fruit
for the fraudsters.

•Failure to conduct proper due diligence of merchants: If the merchant on-boarded by the service
provider is a fraudster, and the payment is made by the customer for fictitious goods or services from
the merchant, cash can be rotated with minimum transaction fees.
• No auto log off facility: An individual usually opens the application on his mobile device for
availing of the services and closes the application, instead of logging out. If the mobile device is
stolen or lost and a fraudster opens the application, he can misuse the remaining balance in the service
provider’s wallet.

INSURANCE FRAUD:
Large accumulations of liquid assets make insurance companies attractive for loot schemes. These
companies are under great pressure to maximise the returns on investing the reserve funds, making
them vulnerable to high-yielding investment schemes. The insurance industry has witnessed an
increase in the number of fraud cases over the last couple of years. A growing number of
organisations are realising that frauds are driving up the overall costs of insurers and premiums for
policyholders, which may threaten their viability and also have a bearing on their profitability. To
keep these risks under check, a detailed framework for insurance fraud monitoring has been laid down
with effect from 2013–14 and is applicable to all insurers and reinsurers.
• Policy Holder and Claims Fraud: Policy holder committing fraud against the insurer at the time of
purchase and/or execution of an insurance product
• Intermediary Fraud: Intermediaries committing frauds against the insurer and/or policyholders
• Internal Fraud: Employees commit fraud ‘suo moto’ or in collusion with external parties or
amongst themselves against the insurer
TYPES:
 Misrepresentation:
Misrepresenting critical information relating to a profile (incorrect income, educational qualification,
occupation, etc)
Example: The proposal form mentioned that the client had a shop in the market, whereas
investigations revealed that the client was a small-time vendor sitting on a footpath.

 Forgery or tampering documents:
Forging the customer’s signature in any document, proposal or any supporting document Example:
The client (staying in one city) and working as a surgeon was required to countersign the application
form for some corrections. The form came back and it was found that the signatures were forged by
the advisor, who was the client’s brother.
 Bogus business:
Proposal forms submitted for non-existent customers
Example: A sales manager or broker logs in the proposal of a non-existing client
 Cash defalcation:
Agent collecting the premium but not remitting the cheque to the insurance company, owing to which
the insured has no coverage
Example: The advisor had collected the premiums from the customer and had not deposited the same
for almost a month; it came to the insurer’s notice when the customer was sent the lapsed letter.
 Mis-selling:
A selling practice wherein the complete, detailed and factual information of a product is not given to
the customer (also called product misinformation); can include incomplete or incorrect representation
of the terms and conditions such as guaranteed returns, rider features, charges, linked product vs
endowment, facility of top-up vs regular premium, premium holiday, etc Example: The customer was
given a cover of Rs.1 lakh and the premium was Rs. 5 lakh.
This was a clear case of mis-selling as even the facility of a top-up was not explained to the client.

 Pre-signed forms:
Obtaining pre-signed blank forms and filling the address change request (ACR)/contact number
change (CCR) without actually physically seeing the client or satisfying oneself about the client
Example: While the proposal form mentioned that the customers were working in an electronic
agency, in reality they were working in some other business.
 Doctor’s nexus:
Doctor being involved with the perpetrators in committing life insurance fraud
Example: A doctor gave clean medical reports, while the fraudster influenced the doctor to conceal
the information.

CHEQUE FRAUD:
Cheque fraud refers to a category of criminal acts that involve making the unlawful use of cheques in
order to illegally acquire or borrow funds that do not exist within the account balance or account-
holder's legal ownership. Most methods involve taking advantage of the float (the time between the
negotiation of the cheque and its clearance at the cheque-writer's bank) to draw out these funds.
TYPES:
 Cheque Kiting
Cheque kiting refers to use of the float to take advantage and delay the notice of non-existent funds.
 Embezzlement
While some cheque kiters fully intend to bring their accounts into good standing, others, often known
as paper hangers, have pure fraud in mind, attempting to "take the money and run."
 Bad cheque writing
A cheque is written to a merchant or other recipient, hoping the recipient will not suspect that the
cheque will not clear. The buyer will then take possession of the cash, goods, or services purchased
with the cheque, and will hope the recipient will not take action or will do so in vain.
 Abandonment
The paper hanger deposits a cheque one time that he/she knows is bad or fictitious into his/her
account. When the bank considers the funds available (usually on the next business day), before being
informed that the cheque is bad, the paper hanger withdraws the funds in cash. The offender knows
the cheque will bounce, and the resulting account will be in debt, but the offender will abandon the
account and take the cash.
Such crimes are often used by petty criminals to obtain funds through a quick embezzlement, and are
frequently conducted using a fictitious or stolen identity in order to hide that of the real offender.
 Forgery
Sometimes, forgery is the method of choice in defrauding a bank. One form of forgery involves the
use of a victim's legitimate cheques, that have either been altogether stolen and then cashed, or

altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits
in order to inflate the amount.
 Counterfeiting
This involves creating a cheque on non-bank paper to look genuine. It relates to a genuine account, but
has actually been created and written by a fraudster for the purposes of committing fraud.
Cheque fraud is among the oldest and most common forms of financial crime. Even with the advent
of electronic payment products, cheques still account for billions of payments each year, making them
a prime target for criminals.
ACCOUNTING FRAUD:
In order to hide serious financial problems, some businesses have been known to use fraudulent
bookkeeping to overstate sales and income, inflate the worth of the company's assets, or state a profit
when the company is operating at a loss. These tampered records are then used to seek investment in
the company's bond or security issues or to make fraudulent loan applications in a final attempt to
obtain more money to delay the inevitable collapse of an unprofitable or mismanaged firm.
Examples: Enron and WorldCom and Ocala Funding: These companies "cooked the books" in order
to appear as though they had profits each quarter, when in fact they were deeply in debt.

CREDIT CARD FRAUD::
It is a wide-ranging term for theft and fraud committed using or involving a payment card, such as
a credit card or debit card, as a fraudulent source of funds in a transaction. The purpose may be to
obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is
also an adjunct to identity theft.
Credit card fraud happens when consumers give their credit card number to unfamiliar individuals,
when cards are lost or stolen, when mail is diverted from the intended recipient and taken by
criminals, or when employees of a business copy the cards or card numbers of a cardholder.
TYPES:
Credit card frauds can happen in several ways. But the biggest point of concern is that, criminals are
using latest technologies to come up with new methods of frauds regularly.
 Stolen Cards:
Stolen cards are one of the very well-known modes of credit card frauds. Stolen credit cards remain
usable until and unless credit card holders call up the card users and block their cards. Criminals can
use the stolen cards to purchase any products or services if the card is not blocked.
 Phishing Mails:
Internet is a huge medium of credit card frauds. In case of CNP (Card Not Present) transactions,
merchants have to rely on the person who is providing the information on the credit cards. Hence, if
one can provide all the information relating to the credit card (such as credit card number, name of
card holder, expiry date of the credit card and the CVV or verification number) during an online
purchase, one can easily use the card while buying products/services. As correct information about the
card is provided, the merchant recognizes him/her as the original owner of the credit card. Phishing
mails are one of the most well-known methods of stealing credit card information, where mails are
sent to the credit card holders asking to provide information on the cards. Phones are also used to
collect credit card information from the card holders.
 Skimming:
Skimming is stealing credit card information through various means in an otherwise genuine
transaction. In these cases, some ‘insiders’ or dishonest employees of the merchant, help criminals to
steal information on the credit cards. Here, small electronic devices are used to read the information
stored in the magnetic tape of the credit cards. Photocopies of the receipts are also used to steal the
information.
 Carding:
Carding is the process to verify the authenticity of the stolen data of the credit cards. Criminals
provide the information of the card in the website that deal with real-time transaction processing. If
the information is accepted, it is understood that the information is correct.
 Application Fraud
Application fraud is the scam during the application process. Here fake or stolen data is used to open
an account in the name of others. Utility bills, bank statements are used to open fake accounts.
 Account Takeover:
Account takeover is taking possession of other's account. Criminals gather all the necessary
information about the credit card and the cardholders. Then they contact the card issuer and
masquerade as genuine cardholder and request them to change their billing address. At a later stage,
they report a card loss and request for a new card (replacement) at the new address.

TAX EVASION:
Rooting for taxes is never an easy thing because most people question that concept of giving away
part of their earning to a government but the fact is that taxes are an important source of income for
the government. This is the money that is invested in various development projects that are meant to
improve the company's situation. But the country has been facing a massive problem with tax
evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may
be said that the income of the country has been suffering.
 Common Methods of Tax Evasion:
There are two aspects of not paying taxes when they are due. The first is tax avoidance and the other
tax evasion. The difference between the two is that tax avoidance is basically finding a loophole that
exempts you from paying taxes and is not strictly illegal, while evasion is not paying the taxes when
they are actually due, which is absolutely illegal. These are some of the ways in which people may
avoid/evade taxes.
 Failing to pay the due:
This is the simplest way in which someone may evade taxes. They simply won't pay it to the
government, not even when the dues are called for. A person engaged in this sort of tax evasion won't,
willingly or unwillingly, pay the tax before or after the due date.
 Smuggling:
When certain goods move from one location to another, across international or state borders, a tax or
charge may be payable in order to move the goods. However, some individuals may move these
goods in surreptitious ways in order to avoid paying those taxes that evading the tax altogether.

 Submitting false tax returns:
In some cases, when an individual files taxes, they may submit false or incorrect information in order
to either lessen the tax that they are supposed to pay or not pay it at all. This is also tax evasion since
the complete information is not provided and they may actually be paying less than what they should.
 Inaccurate financial statements:
The taxes that are payable by an individual or an organisation may be decided on the financial dealing
that have taken place during the assessment year. If false financial documents or accounts books are
submitted, ones that show incomes less than what was actually earned, the tax may come down.
 Using fake documents to claim exemption:
The government may have provided certain exemptions and privileges to certain strata or members of
society in order to ensure they have a bit more financial freedom to progress. In some cases, members
who actually don't qualify for such privileges will get documents created to support their claim of
being a part of that group thus claiming exemptions where they are not suited
 Not reporting income:
It could be said that this is one of the most common methods of tax evasion. In this case, individual
just won't report any income that they receive during a financial year. Not having reported any
income, they don't pay any tax thus successfully evading tax all together. The simplest example of
this would be a landlord who has kept tenants but has not informed the authorities that he has rented
the house and is actually receiving an income from it.

 Bribery:
There may be a situation where there a certain amount due in taxes which the individual may not be
willing to pay. In such a case he or she may actually offer a bribe to officials to not make them pay
the tax and to make it 'disappear'.
 Storing wealth outside the country:
Offshore accounts are accounts maintained outside the country and information about the dealing in
these accounts is not disclosed to the income tax department thereby evading any and all taxes due on
that wealth. Example: Swiss Banks.
INTERNET FRAUD:
An Internet fraud (online scam) is the use of Internet services or software with Internet access to
defraud victims or to otherwise take advantage of them; for example, by stealing personal
information, which can even lead to identity theft. A very common form of Internet fraud is the
distribution of rogue security software. Internet services can be used to present fraudulent solicitations
to prospective victims, to conduct fraudulent transactions, or to transmit the proceeds of fraud to
financial institutions or to others connected with the scheme. Research suggests that online scams can
happen through social engineering and social influence. It can occur in chat rooms, social media,
email, message boards, or on websites.

SECURITIES FRAUD:
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the
stock or commodities markets that induces investors to make purchase or sale decisions on the basis
of false information, frequently resulting in losses, in violation of securities laws.
These purchases often result in monetary loss for the buyer. Securities fraud can be committed a
variety of ways, including printing untrue information on a company's financial statement or SEC
filings, insider trading, falsifying information in dealings with corporate auditors, stock manipulation
schemes, and stockbroker embezzlement.
This includes offences such as buying, selling and dealing in securities fraudulently, or manipulation
or deception. These are covered under the:
 SEBI Act.
 Securities and Exchange Board of India Rules 1993 (SEBI Rules).
Regulation 3 and 4 of The Securities and Exchange Board of India (Prohibition of Fraudulent and
Unfair Trade Practices Relating to Securities Market) Regulations 2003 lay down the list of
prohibited acts as follows:
 The prohibitions on dealings in securities include:
 buying, selling or dealing in securities in a fraudulent manner;
 using or employing, in connection with the issue, purchase or sale of any security listed or
proposed to be listed in a recognised stock exchange, any manipulative or deceptive device or
contrivance in contravention of the Act or its rules and regulations;
 employing any device, scheme or artifice to defraud in connection with dealing in or issue of
securities that are listed or proposed to be listed on a recognised stock exchange;

 engaging in any act, practice or course of business that operates or would operate as fraud or
deceit upon any person in connection with any dealing in or issue of securities that are listed
or proposed to be listed on a recognised stock exchange, in contravention of the provisions of
the SEBI Act or the SEBI Rules.
 Manipulative, fraudulent and unfair trade practices are prohibited. Dealing in securities
is a fraudulent or an unfair trade practice if it involves fraud. This may include all or
any of the following:
 indulging in an act that creates a false or misleading appearance of trading in the securities
market;
 dealing in a security not intended to effect transfer of beneficial ownership but intended to
operate only as a device to inflate, depress or cause fluctuations in the price of such security
for wrongful gain or avoidance of loss;
 advancing or agreeing to advance any money to any person thereby inducing any other person
to offer to buy any security in any issue only with the intention of securing the minimum
subscription to such issue;
 paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or
money's worth for inducing such person for dealing in any security with the object of inflating,
depressing, maintaining or causing fluctuation in the price of such security;
 any act or omission amounting to manipulation of the price of a security;
 publishing or causing to publish or reporting or causing to report by a person dealing in
securities any information that is not true or that he does not believe to be true prior to or in
the course of dealing in securities;
 entering into a transaction in securities without intention of performing it or without intention
of change of ownership of such security;

 an intermediary reporting trading transactions to his clients entered into on their behalf in an
inflated manner in order to increase his commission and brokerage;
 an intermediary not disclosing to his client transactions entered into on his behalf including
taking an option position;
 circular transactions in respect of a security entered into between intermediaries in order to
increase commission to provide a false appearance of trading in such security or to inflate,
depress or cause fluctuations in the price of such security;
 encouraging the clients by an intermediary to deal in securities solely with the object of
enhancing his brokerage or commission;
 an intermediary buying or selling securities in advance of a substantial client order or whereby
a futures or option position is taken about an impending transaction in the same or related
futures or options contract;
 planting false or misleading news that may induce sale or purchase of securities.
TYPES:
 Corporate Fraud:
Corporate fraud consists of activities undertaken by an individual or company that are done in a
dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or
company. Corporate fraud schemes go beyond the scope of an employee's stated position, and are
marked by their complexity and economic impact on the business, other employees and outside
parties.

 Internet Fraud:
This involves criminals spreading false information through various channels on the internet (i.e.
forums, spam emailing, chat rooms, and internet boards) to increase the price on either seldom traded
stock or the stocks of shell companies. Then the instigators of the swell in purchasing sell all of their
own stock once the price has met their standards. They walk away having made a huge profit, while
the victims are now left with stock that has settled at its usual low price, substantially lower than the
price it was purchased at.
 Insider Trading :
This involves individuals that hold more than ten percent of a particular company's stock or other
individuals that have access to non-public information regarding a certain company. There are various
legal ways for a person with this knowledge to trade stock legally, as long as the non-public
information does not influence the trade in any way. If a person with non-public information uses that
knowledge to trade to their advantage, or convinces anyone else to trade stock based on that
knowledge, it is considered a fraudulent offense.
 Accountant Fraud:
This type of fraud is committed by an accountant who neglects to point out and halt the release of
inaccurate financial reports, written by a corporate client, which misrepresents the financial stability
and position of the company in question.

CORPORATE FRAUD:
Corporate fraud can be classified in three broad areas:
1. Financial fraud or Accounting fraud consists of falsifying financial information by fudging
the books thereby misleading the investors. The most popular accounting schemes are
capitalising expenses, side deals, swap transactions, channel stuffing, accelerated revenues and
deferred expenses. This is usually perpetuated by management.
2. Self-dealing by corporate insiders is mostly related to misappropriation of corporate assets
by senior executives such as loans granted to senior management that are never intended to be
repaid, failure to disclose forgive loans, reimbursed personnel expenses and extra ordinary
personnel expenses charged to the company. Other such frauds are insider trading, misuse of
corporate property for personal gain, kickbacks and individual tax violations related to self-
dealing.
3. Obstructive conduct is falsifying testimony to regulators, erasing computer files, shredding
documents, creating or altering document to support illegal conduct.
TYPES:
 Fraudulent financial reporting:
Financial statement fraud is deliberate mis-representation, mis-statement or omission of financial
statement data for the purpose of misleading the reader and creating a false impression of an
organisation’s financial strength.

Financial statement frauds include improper revenue recognition, manipulation of liabilities,
manipulation of expenses, improper disclosures on financial statements and overstating assets, misuse
of accounts, inappropriate journal vouchers, and suspense accounting fraud.
The finance and accounting function of any organisation can misuse their position within the
organisation and manipulate the processes and bypass controls to derive personal gains or any other
malafide motif.
 Related party transactions:
There are many types of related party transactions that might potentially be used to mis-state financial
reports. The most frequent type of transactions that require regulatory action are concessionary loans
to related parties, payments to company officers for services
that were either unapproved or non-existent, transfer of funds through overvalued purchases of assets/
investments, and sales of goods or services to related entities in which the existence of the
relationship was not disclosed.
Generally, related party transactions are not necessary a mechanism for fraud. Their presence need not
indicate fraudulent financial reporting. At first sight a related party transaction is represented to be of
a benevolent/ benign nature. An implication is that it is important
for the auditor to understand the benign nature of most related party transactions, the differentiating
features between benign and fraudulent transactions, and the importance of evaluating a company’s
related party transactions in light of its broader corporate governance structure.

 Procurement Fraud:
Procurement fraud can be of multiple types and is one of the most widely used modus operandi for
siphoning off funds and window dressing the financial statements. Often defined as any illegal
conduct through which the offender gains advantage, avoids an obligation or causes damage to an
organisation. Procurement fraud can also be defined as the unlawful manipulation of the procurement
process to acquire goods /services, obtain an unfair advantage, avoid an obligation or cause a loss to
public property during the procurement process by public servants, contractors, or any other entity
involved. Some of the methods to do so are:
o bid rigging/bid splitting;
o creation of shell companies to facilitate fraudulent payments;
o collusion between employee and suppliers;
o purchase order and contract variation orders;
o unjustified single source awards;
o false invoices for products and services for suppliers who do not exist
 Payroll fraud:
Payroll fraud is the theft of cash from a business via the payroll processing system. There are several
ways in which a payroll fraud can occur such as:
o Advances not paid back
o Buddy punching
o Ghost employee
o Pay check diversion
o Pay rate alteration
o Unauthorised hours

 Tax evasion and money laundering:
Money laundering is a criminal offence aimed at presenting wealth of illicit origin or the portion of
wealth that has been illegally acquired or concealed from the purview of tax and other authorities, as
legitimate, through the use of methods that hide the identity of the ultimate beneficiary and the source
of the ill-gotten profits.
 False employment credentials
Falsified credentials are a growing concern for organisations, as job applicants fill their resumes with
bogus academic degrees and job titles. The real risk comes when these applicants get the job and
perhaps land in high-profile positions, as in the case of former Yahoo CEO Scott Thompson, whose
four-month tenure ended after controversy over whether he had embellished his official bio.
 Fraudulent expense claims
This is the easiest means of stealing some money from an organisation. Employees inflate their
expense reimbursements and derive gains from the company.
 Misappropriation of Assets:
Asset misappropriation schemes include both theft of company assets, such as cash or inventory, and
the misuse of company assets, such as using a company car for a personal trip.
 Mutual Fund Fraud:
Market timing and late trading are used to dupe unaware and unsuspecting investors into investing in
dubious mutual fund schemes.

 Short Selling Abuses:
Short selling, when abused, can cause a decrease in stock prices. Unscrupulous naked short selling
involves a buyer who sells the stock before borrowing and, in truth, without even planning to borrow.
Distributing inaccurate information on stocks with the purpose of driving down prices is named "short
and distort."
PONZI SCHEMES:
This is an investment fund from which withdrawals are taken from the most recent investors, rather
than money made through the investment itself. A Ponzi scheme is “an investment fraud that involves
payment of purported returns to existing investors from funds contributed by new investors”.
EMBEZZLEMENT:
Embezzlement is defined in most states as theft/larceny of assets (money or property) by a person in a
position of trust or responsibility over those assets. Embezzlement typically occurs in the employment
and corporate settings.
Accounting embezzlement, a common form of the crime, is the manipulation of accounting records to
hide theft of funds. Offenders are given lawful possession of the property, and then are accused of
converting the property to their personal use.
A person is often given access to someone else’s property or money for the purposes of managing,
monitoring, and/or using the assets for the owner’s best interests, but then covertly misappropriates
the assets for his/her own personal gain and use. This is clear embezzlement.
This type of crime is most common in the employment and corporate fields. Some embezzlers simply
take a large amount of money at once, while others misappropriate small amounts over a long period
of time. The methods used to embezzle can vary greatly and are often surprisingly creative. They can

include fraudulent billing, payroll checks to fabricated employees, records falsification, “Ponzi”
financial schemes and more.
 In order for a charge of embezzlement to be supported, four factors must be present:
• There must be a fiduciary relationship between the two parties; that is, there must be a reliance by
one party on the other
• The defendant must have acquired the property through the relationship (rather than in some other
manner)
• The defendant must have taken ownership of the property or transferred the property to someone
else
• The defendant's actions were intentional.

CASE STUDIES
HARSHAD MEHTA SCANDAL (1992)
Harshad Mehta was an Indian stockbroker, well known for his wealth and for having been charged
with numerous financial crimes that took place in 1992. Of the 27 criminal charges brought against
him, he was only convicted of four, before his death at age 47 in 2001. It was alleged that Mehta
engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm
brokered in "ready forward" transactions between banks. Mehta was convicted by the Bombay High
Court and Supreme Court of India for his part in a financial scandal valued at 49.99 billion
(US$740 million or Rs. 5000 Crores) which took place on the Bombay Stock Exchange (BSE). The
scandal exposed the loopholes in the Bombay Stock Exchange (BSE) transaction system and SEBI
further introduced new rules to cover those loopholes. He was tried for 9 years, until he died in late
2001.
MODUS OPERANDI
The banks at that time were not allowed to invest in the equity markets. Harshad Mehta had very
cleverly squeezed some capital out of the banking system. Another instrument used in a big way was
the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality.
Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. The BR
confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence,
the name, ‘Bank Receipt’. It promises to deliver the securities to the buyer. It also states that in the
mean time, the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any
government securities. Two small and little known banks - the Bank of Karad (BOK) and the
Metropolitan Co-operative Bank (MCB) - came in handy for this purpose.
Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave
money to Mehta, plainly assuming that they were lending against government securities when this
was not really the case. He took the price of ACC from Rs. 200 to Rs. 9,000. That was an increase of
4,400%. The stock markets were overheated and the bulls were on a mad run. Since he had to book
profits in the end, the day he sold was the day when the markets crashed.

SATYAM SCANDAL (2009)
The Satyam Computer Services scandal was a corporate scandal affecting India-based IT services and
back-office accounting company, Satyam Computer Services, in 2009, in which Chairman Ramalinga
Raju confessed that the company's accounts had been falsified.
Company: Indian IT services and back-office accounting firm.
What happened: Falsely boosted revenue by $1.5 billion.
Main player: Founder/Chairman Ramalinga Raju.
How he did it: Falsified revenues, margins and cash balances to the tune of 50 billion rupees.
How he got caught: Admitted the fraud in a letter to the company's board of directors.
Penalties: Raju and his brother charged with breach of trust, conspiracy, cheating and falsification of
records. He was released after the Central Bureau of Investigation failed to file charges on time.
A special court under India’s Central Bureau of Investigation (CBI) on April 10, held the founders
and former officials of the outsourcing firm, guilty in the accounting scam worth Rs. 7,000 crores
($1.1 billion). B Ramalinga Raju, the company’s former chairman, has been sentenced to seven years
in jail.
The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju wrote a
letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders,
admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—
or 94% of the cash—on the books was fictitious.
In an immediate reaction to the confession, investors lost as much as Rs. 14,000 crores ($2.2 billion)
as Satyam’s shares tanked.

Raju explained his reasons for inflating earning in the letter thus: “As the promoters held a small
percentage of equity, the concern was that poor performance would result in a takeover, thereby
exposing the gap.”
“What started as a marginal gap between actual operating profit and the one reflected in the books of
accounts continued to grow over the years,” Raju said in the letter. “It has attained unmanageable
proportions as the size of the company operations grew significantly.”
Raju was once the poster boy of India’s IT revolution—rubbing shoulders with top CEOs and
politicians across the world, including Bill Clinton.
The following timelines showcases what went wrong at Satyam:
1987: Thirty three-year-old Raju establishes Satyam Computer with his brother and a brother-in-law
in Hyderabad.
1991: The company is listed on the Bombay Stock Exchange, where its initial public offering is
oversubscribed by as much as 17 times.
1993: Satyam Computer signs a deal with US-based Dun & Bradstreet to set up Dun & Bradstreet
Satyam Software. Satyam holds 24% stake in the venture, while Dun & Bradstreet holds the
remaining. In 1996, Satyam sells its stake to Dun & Bradstreet, ahead of a restructuring, and the new
company is called Cognizant Technologies.
1999: Satyam Infoway, a subsidiary of Satyam Computer, becomes the first Indian information and
communication technology company to be listed on Nasdaq, and Satyam expands footprint to 30
countries.
2006: Satyam’s revenues cross 1200 crores ($1 billion). Raju becomes the chairman of industry body,
The National Association of Software and Services Companies.

2007: Raju is named Ernst & Young Entrepreneur of the Year. The company bags contract to be the
official IT services provider of the FIFA World Cups in 2010 and 2014.
2008: Satyam’s revenues cross 2400 crores ($2 billion). In December, the company decides to buy
out Maytas Infra—owned by Raju’s sons—for 1920 crores ($1.6 billion). The deal falls through after
investors and board members object, and in a span of four days, four directors of the company quit.
(Maytas is Satyam spelt backwards.)
January 2009: Satyam is barred from doing business with the World Bank for eight years. The
World Bank alleges that Satyam was involved in data thefts and staff bribery. Shares fall to record
low in four years. Satyam employees receive a letter from Raju admitting to the fraud, following
which he resigns as chairman.
Raju and his younger brother B. Rama Raju are arrested by police, while the Indian government steps
in and disbands Satyam board.
June 2009: Tech Mahindra, owned by the Mahindra Group, and Satyam merge to form India’s fifth
largest IT exports company. The merged entity is called Mahindra Satyam.
November 2011: Raju gets bail from India’s supreme court after the CBI fails to file charge-sheet.
October 2013: India’s enforcement directorate files a charge-sheet against Raju and 212 others under
money-laundering charges.
July 2014: India’s market regulator SEBI bars Raju from the capital markets for 14 years, and also
seeks Rs1,849 crore as fine.
April 2015: The special CBI court holds Raju and nine other officials guilty of cheating. Among
those held guilty are two former partners at PwC. “We are disappointed with this verdict given by the

court of the Additional Chief Metropolitan Magistrate at Hyderabad,” accounting firm PwC said in a
statement.
Raju, who also has to pay a fine of about $800,000 (Rs. 5 crore), has served 32 months in prison so
far.

SAHARA SCAM (2010)
Subrata Roy, founder of Sahara India, has been in jail since 2014.
Once a powerful and influential businessman who owned an airline, sponsored India’s cricket team,
and even had a stake in a cricket team in the Indian Premier League, Roy is now accused of duping
investors of around $5.4 billion (Rs36,000 crore).
The case relates to an investment option that Sahara ran in 2008 where investors had deposited money
in schemes launched by Sahara India Real Estate Corp Ltd and Sahara Housing Investment Corp Ltd.
SEQUENCE OF EVENTS:
A Pin Drops
• In 2010, Roshan Lal, a chartered accountant based out of Indore, sent a letter requesting the National
Housing Bank (NHB) to investigate housing bonds issued by Sahara India Real Estate Corporation
(SIREC) and Sahara Housing Investment Corporation (SHIC).
• The letter was forwarded to the market regulator Securities and Exchange Board of India (Sebi).
Regulator in Action
• The SEBI ordered an investigation based on Lal's letter.
• Investigations hit a hurdle as SIREC and SHIC were not listed on stock exchanges.
A Few Shreds of Evidence
• Luckily for the SEBI, Sahara Prime City, a real estate arm of the Sahara Group, had filed a draft red
herring prospectus (DHRP) for an IPO.

• The SEBI, reviewed information regarding the bond issued by the two companies in question, which
was mentioned in the DRHP itself.
• The SEBI concluded that SIREC and SHIC violated the Companies Act by collecting money
through optionally fully convertible unsecured debentures (OFCDs) and ordered the company not to
raise any further funds using these instruments.
Courtroom Battle Begins
• The Allahabad high court stayed the SEBI order and the SC also turned down SEBI's plea to stop the
two firms from raising money from investors
• The SC, however, empowered the regulator to seek information
Out in the Open
• The SEBI issued a public notice cautioning investors against buying bonds issued by SIREC and
SHIC
• Lucknow bench of Allahabad high court vacated earlier stay on the SEBI order
• The SEBI then alerted investors about a ban on fund raising schemes by the two Sahara companies
• Sahara challenged the Allahabad high court order in Supreme Court; the SC told Sahara to share
details of investors and asked the company to approach the Securities Appellate Tribunal (SAT).
• The SAT ruled in SEBI’s favour, upholding the order and asking the company to refund the money.
• The Sahara Group accused the SEBI of refusing to accept documents of the investors, which the
company was required to submit to the market regulator to meet the deadline set by the SC
• Sahara alleged that the trucks carrying documents were waiting since the evening of September 10
outside SEBI headquarters but not allowed inside

• In August 2012, the SC ordered the Sahara Group to return Rs. 24,000 crore, plus 15% interest, to
millions of investors, within three months.
Ad Fest
• In newspaper advertisements, Sahara said it would return the money to investors. "You need not
worry about anything and be at absolute peace as Sahara is the most dutiful and absolute honest
custodians of your money," it said.
The Final Move
• In December, 2012, the company was allowed to pay the money in three installments, including an
immediate payment of Rs. 5,120 crore, followed by an installment of Rs. 10,000 crore in the first
week of January and remainder by the first week of February 2012.
• The SEBI said neither of the latter two installments were paid
• The SC allowed the SEBI to freeze accounts and seize properties of Sahara Group's two companies
for defying court orders
• The properties being attached by the SEBI included the land owned by Sahara Group firm Aamby
Valley near Pune and land in Mumbai, Delhi and Gurgaon.
• The SEBI also ordered freezing of all bank and demat accounts as well as attachment of properties
of Roy and three directors.
• The Lucknow Police took Sahara Group chief Subrata Roy into custody from his home in Uttar
Pradesh capital Lucknow.

KETAN PAREKH SCAM
Ketan Parekh, popularly known as KP, is a former stock broker from Mumbai, India, who was
convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001.
Currently he has been debarred from trading in the Indian stock exchanges till 2017.
Parekh is alleged to have been involved in circular trading throughout the time period and with a
variety of companies, including Global Trust Bank and Madhavpura Mercantile Cooperative Bank.
Parekh's sole conviction, which carried a one-year sentence, came as a result of a transaction he
conducted involving a unit of Canara Bank in 1992.
MODUS OPERANDI:
 KP borrowed from various companies and banks
 His financing methods were fairly simple
 He bought shares when they were trading at low prices and saw the prices go up in the bull
market while continuously trading
 When the price was high enough, he pledged the shares with banks as collateral for funds.
 This could not have been possible out without the involvement of banks.
 A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was
KP's main ally in the scam
 KP and his associates started tapping the MMCB for funds in early 2000
 In December 2000, when KP faced liquidity problems in settlements he used MMCB in two
different ways:

METHOD 1:
 Pay Order Route, wherein KP issued cheques drawn on BoI to MMCB, against which MMCB
issued pay orders.
 The pay orders were discounted at BoI.
 It was alleged that MMCB issued funds to KP without proper collateral security and even
crossed its capital market exposure limits
 As per a RBI inspection report, MMCB's loans to stock markets were around Rs.10 billion
of which over Rs. 8 billion were lent to KP and his firms.
METHOD 2:
 Borrowing from a MMCB branch at Mandvi (Mumbai)
 Different companies owned by KP and his associates had accounts
 KP used around 16 such accounts, either directly or through other broker firms, to obtain
funds
 Few Brokers were also believed to have taken loans on his behalf
 Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh,
had acted on behalf of KP to borrow funds
 KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion
between January and March 2001
 BoI's losses eventually amounted to well above Rs 1.2 billion
 The MMCB pay order issue hit several public sector banks very hard

SARADHA SCAM
The Saradha Group financial scandal was a major financial scam and alleged political scandal caused
by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies
that was believed to be running collective investment schemes popularly but incorrectly referred to as
chit funds, in Eastern India. The Saradha scam, where more than 1.74 million people lost their savings
and investments worth $3.7 billion, was exposed when Kolkata-based Saradha group went bankrupt
in January 2014. The crisis did not end just there. It led to some 35 people committing suicide.
Politicians from the ruling Trinamool Congress Party in West Bengal were alleged to have been the
beneficiaries of the scam.
On 18 April, an arrest warrant for Sudipto Sen, the chairman and managing director of the Saradha
Group, was issued. By 20 April, the news of potentially the largest Ponzi scheme in India had become
headline news in West Bengal, and then front-page news nationally. After evading the authorities for
a week, Sudipto Sen, Debjani Mukherjee and Arvind Singh Chauhan were arrested in Sonmarg,
Kashmir, on 23 April 2013.

PACL SCAM (2016)
Some three decades ago, Nirmal Singh Bhangoo was a milk seller near the India-Pakistan border in
Punjab’s Attari. In 1996, he founded PACL Ltd—then known as Gurwant Agrotech—selling
magnetic pillows, among other things.
Soon, PACL diversified into real estate and hospitality. Today it owns more than 183,000 acres of
landacross India—equivalent to around 1,700 Central Parks in New York.
However, Bhangoo’s business empire is in trouble.
On Jan. 08, 2016, India’s federal investigative agency, the Central Bureau of Investigation
(CBI), arrested Bhangoo and three others in connection with an alleged Rs. 45,000 crore ($6.7 billion)
Ponzi scam. The scheme promised depositors returns on investments in agricultural land, the
regulator said. PACL has argued it was selling land to customers and not investment schemes, and so
was not subject to Sebi's regulations.
Some 55 million investors who joined the massive scheme are said to have been duped–making
it perhaps the biggest financial scam in Asia’s third largest economy.

LEGAL FRAMEWORK AND KEY REGULATORY
DRIVERS
LAW OR REGULATOR SALIENT FEATURES
 Is aimed at advising banks about fraud

Reserve Bank of India Act, 1934
prone processes and the safeguards
necessary for prevention of fraud
 Has made fraud reporting a mandatory
process
 Mandates all banks to file suspected
transaction reports
 Instructs them to follow KYC, AML
and CFT guidelines
 Issues guidelines for the classification
and reporting of frauds
Securities and Exchange Board of India Act,  Protects the interests of investors from
1992
fraudulent activities of corporates
 Empowers the regulatory authority to
appoint an investigating authority to
conduct investigations

Companies Act, 2013  Empowers the Serious Fraud
Investigation Office (SFIO) with
powers to probe companies suspected
of fraud
 According to the act, the SFIO’s
report filed in a court for framing
charges is to be equivalent to a police
report under the Code of Criminal
Procedure, 1973
 Authorises the auditor to act as a
whistleblower and report fraud to the
central government, audit committee
or the board, depending on the
quantum of fraud (as prescribed)
 Places the primary responsibility for
prevention and detection of fraud on
the company’s board of directors and
management
Insurance Regulatory and Development  Protects the interests of policy holders

Authority Act, 1999
and secures fair treatment for them
 Prescribes the IFMF to address and
manage fraud risks

 According to this act, all insurance
companies are required to have in
place an anti-fraud policy, duly
approved by their respective boards
Pension Fund Regulatory and Development  Directs an investigation into the

Authority Act, 2013
affairs of intermediaries or persons
associated with the pension
 Entrusts the Central Recordkeeping
Agency (CRA) or the annuity service
provider with managing the
withdrawals from the national
pension
Forward Contracts (Regulation) Act, 1952  Makes provisions for investigation,
enforcement and penalty in case of
contravention of the provisions of the
act

Prevention of Money Laundering Act, 2002  Prevents money laundering and
provides for the confiscation of
property derived from, or involved in,
money laundering and for related
matters
 Requires banks and other specified
institutions to maintain a record of
clients and transactions, and furnish
them to the prescribed authority; this
record needs to include full-fledged
money changers, money transfer
service providers, and casinos under
its reporting regime
The Black Money (Undisclosed Foreign  Deals with the problem of black
Income and Assets) and Imposition of Tax
Act, 2015 money (undisclosed foreign income
and assets)
 Penalises the concealment of foreign
income and makes attempting to
evade tax in relation to foreign income
a criminal liability

 Specifies the applicable tax rates or
assets, scope of income to be taxed,
tax authorities, penalty and
prosecution in relation to undisclosed
foreign income and assets
The Benami Transactions (Prohibitions)  Defines a “benami transaction” as a

Amendment Bill, 2015 (to be passed)
transaction where a property is held
by or transferred to a person, but has
been provided for or paid by another
person
 Seeks to amend the Benami
Transactions Act, 1988
 Aims to:
a) Broaden the horizon of the existing
b) Establish adjudicating authorities and
an appellate tribunal to deal with such
transactions
c) Specify the penalty for entering into
benami transactions

National Bank for Agriculture and Rural  Authorises banks to frame an internal
Development Act, 1981
policy for fraud risk management and
fraud investigation
 Instructs to form an audit committee
Small Industries Development Bank of India in terms of RBI guidelines for

Act, 1989
reviewing cases of fraud and action
taken thereon
National Housing Bank Act, 1987  Issues guidelines on causes and
remedial action in terms of incidence
of frauds in housing finance
 Shares the modus operandi and
causative factors of housing finance
frauds (The Fraud Management Cell
has been collecting such information
from housing finance companies, the
RBI, IBA, etc, and circulating the
same to HFCs to enable them to take
adequate precautions, exercise due

diligence and initiate timely corrective
actions to avoid such fraudulent
incidences in future).
The Prevention of Corruption Act 1988  This is a central government law
enacted by the Parliament to combat
corruption and bribery among public
servants. Under this Act there is a
presumption that a public servant or a
person expecting to be a public
servant, who accepts or obtains or
agrees or attempts to obtain from any
person any recompense as a motive or
reward for doing or forbearing to do
any official act, or for showing favour
or disfavour, is guilty of the crime of
taking a bribe.
Other legislation that is proposed and pending before Parliament includes:
 The Prevention of Bribery of Foreign Public Officials and Officials of Public International
Organisations Bill (2011).
 The Citizen's Ombudsman Bill 2011 (Lokpal and Lokayukta Bill).

CIVIL/ADMINISTRATIVE PROCEEDINGS OR SANCTIONS
Civil sanctions can include fines, an order to pay compensation and disqualification from the
organization.
Criminal Proceedings:
The prescribed sanctions are as follows:
 Fraudulent and unfair trade practices relating to securities: The higher of either:
 A fine of Rs. 250 million;
 Three times the amount of profits made out of such practices.
 Forgery: Two years' imprisonment and/or a fine.
 Falsification of accounts: Seven years' imprisonment and/or fine.
 Dishonest misappropriation of property: Two years' imprisonment and/or fine.
 Criminal breach of trust: Three years' imprisonment and a fine.
 Cheating. Simple cases of cheating are punishable with one year's imprisonment and a fine.
Cheating accompanied with delivery of property or destruction of any valuable security is
punishable by seven years' imprisonment.
Civil Suits:
 An aggrieved party can file a claim for damages. Class actions are permitted under the Code
of Civil Procedure (Order 1, Rule 8).
 Punitive actions are not available under civil suits.

FRAUD PREVENTION AND DETECTION
Several financial frauds in the past and since the beginning of the century have repeatedly breached
the trust of investors. Despite incidents of frauds, organisations still lack a formal system of fraud
detection, prevention, and a response mechanism. A robust control environment is vital to reduce the
risk on account of fraud and misconduct within companies and their dynamic business environment.
The following are some key aspects of the anti-fraud framework that an organisation should
implement to mitigate the fraud risks.
Leadership setting the tone:
Board of directors are responsible for setting the “tone at the top”, which flows across the entire
company and its various locations. Management views on mitigating fraud, corruption and
misconduct should be revealed to the employees. It is recommended that management should actively
assess frauds, corruption and misconduct risks and controls. Without ensuring that all suspected
allegations of misconduct are independently investigated, management might not be able to develop
the requisite neutral and balanced environment within the organisation. Disciplinary action and zero
tolerance for violations should also be part of the message that the Board sends out to employees.
Fraud prevention policies:
Organisations willing to counter fraud should develop sound fraud prevention policies that must have
the following key components:
 Extensive background checks on new-hires, promotion candidates, suppliers, customers and
business partners (including international third parties);
 Segregation of duties;
 Position rotations;

 Limitations of physical access to assets; and
 Removal of unauthorised and old system users.
 Whistle blower mechanism
Ethics Code:
The ethics code of the company should be developed keeping in mind the size of the organisation, the
mix of employees, the number of employees, and the key risk areas. Once developed, this code must
be formally documented and communicated to the employees, third parties, and other stakeholders
(official website of the organisation, if any). It should describe the disciplinary actions that can be
initiated against people. This function should be continuously monitored.
Whistleblower or complaint mechanism:
A whistleblower is a person(s) who has and reports insider knowledge of illegal activities occurring in
an organisation. Whistleblowers can be employees, suppliers, contractors, clients or any individual
who becomes aware of illegal or fraudulent activities taking place in a business either through
witnessing the behaviour or being told about it.
The organisations need to consider the following:
 Maintaining anonymity of the complaint mechanism
 Ensuring confidentiality of information reported through the whistle-blower mechanism
 Policy of non-retaliation against the whistle-blower
 Actions that can be initiated based on the nature and seriousness of the issue reported?
 Issues that are “not serious” taking up senior executives’ time.
 Concern about potential misuse of the channel, driven by personal agendas.
 Concern about compliance of policies or procedures with laws and regulatory guidance and
global best practices.

 Concern about effectiveness of the mechanism.
 What more can be done using the mechanism.
As previously stated, whistleblowers are the most common source of detection for frauds. However, it
is helpful and crucial to understand who is most likely to report fraud to the organisations.
Training/awareness programmes to employees:
After policies and procedures are developed they must be effectively communicated and employees
must be periodically trained. Some of the aspects to consider include:
 Management involvement in delivering the message
 In-person and web-based training
 Positive affirmation of policies
 Periodic reminders – once is not enough
 Consider annual confirmation for high risk functions
 Training people to recognise and report red flags to frauds
 Special training for finance professionals
 Special training for senior executives
 Special training for others in high-risk positions (i.e. business developers, sales and marketing)
 Broad roll-out of anti-corruption measures
Enhanced focus on identifying fraud risks:
The purpose of fraud risk assessments can be established with the below:
 Assessing the types of frauds that can impact business and identifying relevant types of fraud,
such as fraudulent financial reporting, possible loss of assets, and corruption methods through
which fraud and misconduct can be done

 Developing scenarios and considering the ways that frauds can occur, including management’s
stand (e.g., in the selection of accounting principles), susceptibility to management overriding
and inculcating potential methods to circumvent existing control activities
 Understanding frauds through business partners and assess the manner in which work is
performed by vendors, outsourced agencies and other third parties doing business for and on
behalf of the company.
 Identifying and evaluate frauds and risks that bring change in the operating environment
 Identifying where the company should focus its anti- fraud resources and periodically review
the results of the fraud risk assessment with the audit committee. Such periodic assessment
should be helpful in challenging certain key aspects such as management override of controls
 Identifying areas of improvement
Continuous monitoring using data analytics:
Business data is increasingly being managed and stored by IT systems. The pressure to improve
efficiencies and integrate supply chains has meant that many organisations are now heavily reliant on
IT systems to support business processes. Such systems have also reduced the level of human
intervention required, which has traditionally acted as a fraud control. As a result, organisations are
placing more reliance on automated controls to both prevent and detect fraud.
The key aspects steps that organisations can consider to start are the following:
 Proactively monitoring key processes and run data analytics modules on internal/external
communication, payroll and reimbursements, receivables and collections, sales and
distribution, time and physical access controls and vendor payments.
 Develop a robust log maintenance policy and retention period of logs in line with fraud risk
management requirements

 Develop notifications/alarms by which senior management can receive automated messages in
case of process overrides
 Adequate control on devices containing confidential data, encrypt devices and use reliable
software tools with remote data wiping capabilities to safeguard against device theft or
intrusions
Due diligence on third parties:
Organisations mostly use services of third parties to manage their business operations and other
activities. Sometimes working with third parties can significantly increase the
risk of frauds. Organisations are able to extend limited control over their third party ecosystems and
unlike some of the other countries, incorporating right to audit clauses in vendor contracts may be
perceived as a breach of trust, damaging the business relationship. In these circumstances due
diligence can be a useful tool to understand one’s vendors and business partners.
These areas mentioned here can be covered by due diligence on third parties in order to address
related fraud risks:
 Knowledge of third party background information, including ultimate beneficial ownership
and affiliates, experience and competence/track record, any information on these fronts/shell
companies for money laundering etc.
 Business interests/ affiliations, conflict of interest
 Any adverse news in media about unethical business practices, involvement in tax evasion,
money laundering , terrorist financing or any bribery/corruption incidents
 Any Involvement in legal proceedings/ convictions for malpractice/crime etc.
 Any political affiliations, Inappropriate political support and links to politically exposed
persons/entities
 Credit defaults and bankruptcies • Other reputational concerns

CURRENT SCENARIO
Financial institutions are enhancing their processes, controls and fraud risk management frameworks
to minimise the opportunities for fraud as well as reduce the time taken in their detection. Funding
continues to compete with other business initiatives and is mostly challenged on a cost-benefit basis.
Many financial institutions are thus implementing their fraud control and reporting frameworks to
generate information in a way that the level of fraud identified, prevented and actual losses incurred
are identified. This approach has enabled the benefits of skilled resources and automated tools to be
quantified more precisely.
ROLE OF REGULATORS
Regulators and investigative agencies are trying to gear up for the changed environment. In 2012, the
Central Bureau of Investigation (CBI) announced that it is developing a Bank Case Information the
correlation between fraud, This database contains the names of accused persons, borrowers and
public servants compiled from past records.
The RBI has relased a new framework to check loan frauds by way of early warning signals for banks
and red flagging of accounts where defaulters have no access to further banking finance. It also plans
to set up a Central Fraud Registry that can be accessed by all Indian banks. In addition, the CBI and
Central Economic Intelligence Bureau (CEIB) will share their databases with banks.
Similarly, the IRDA is also in the process of setting up an insurance fraud repository in order to
reduce monitoring costs, using advanced detection and prevention systems deployed at the industry
level. The initiative is expected to identify fraudulent claims right at the processing stage, before the
payment occurs, and is aimed to ensure better screening of proposals at the underwriting stage. This
project aims at establishing an industry wide single fraud database that will eliminate the need for

individual insurers to do the same, and targets to ensure better flow of information among the
insurers.
SEBI is currently in the process of getting its existing business intelligence software which is used
for detecting fraudulent activities in the capital market, upgraded.
INDUSTRY- WIDE TRENDS
Whilst the legal environment and regulators have pushed the financial sector in the right direction,
individual institutions are also taking the lead in protecting their earnings and reputation.
It has been found that suspicious transaction reporting, effective fraud risk management measures,
whistleblowing processes and tip-offs helped financial services organisations to detect most frauds.
TOP TRENDS
 Automated analysis tools: Today, the industry is increasingly aware of the need for
automated analysis tools that identify and report fraud attempts in a timely manner. Solution
providers are providing real-time transaction screening, third-party screening as well as
compliance solutions.
 Sector-oriented benchmarking solutions: Solutions aimed at assessing the fraud
vulnerability of financial institutions are now available. They help in formulating a targeted
and cost-effective action plan against fraud risks.
 Data visualisation tools: These are being used to provide a visual representation of complex
data patterns and outliers to translate multidimensional data into meaningful pictures or
graphics.
 Behavioural analytics: This is helping businesses identify enemies disguised as customers.
The data analytics implemented by the institutions to understand customer behaviour,

preferences, etc are also helping in the detection of fraudulent activity either in real-time or
post mortem.
 Deep learning: Internet payment companies providing alternatives to traditional money
transfer methods are using deep learning, a new approach to machine learning and artificial
intelligence that is good at identifying complex patterns and characteristics of cybercrime and
online fraud.
 The internal audit function: This function is being altered to include fraud risk management
in its scope. The changed technological landscape requires the old ways of internal auditing to
give way to new, technologically equipped audit functions. Annual audit planning
may no longer be fully effective and flexible audit plans are the need of the hour, as fraud risk
assessments require extensive use of forensic and data analytics solutions.
The key components of an effective Anti-Fraud Programme for an organization are as follows:

RESEARCH FINDINGS AND ANALYSIS OF DATA
SAMPLING:
Definition of the Population:
The survey was sent across to respondents who are working in various corporate organizations across
the world. Thus, the sample includes respondents from all levels of an organization right from interns
to Chief Information Officers (CIOs) and Chief Executive Officers (CEOs). This was intentionally
undertaken in order to gain a holistic perspective.
Sample Size:
The sample size was 200 respondents across India.
Age:
The sample size included respondents from the following age groups:
 20 - 30 years: 8.1%
 30 - 40 years: 12.6%
 40 - 50 years: 39.4%
 50 - 60 years: 36.4%
 Above 60 years: 3.5%

ANALYSIS:
QUESTION 1:
Have you experienced any fraud in the past 12 months?
o Yes
o No
On analysis of the survey, it was found that 67.8% of the respondents had not experienced any
financial fraud in the past 12 months as opposed to 32.2% that had faced such a situation.
This finding highlights that although every single individual does not experience financial frauds
regularly, its existence in society cannot be ignored. If financial frauds were monitored and controlled
properly, statistics would show a very low number of respondents facing such crimes. However, this
is not the case. Thus, this is a warning bell that the problem is real and action needs to be taken before
these numbers rise further.

QUESTION 2:
Which of the following frauds have you heard/read/experienced?
o Accounting Fraud / Financial o Intellectual Property Rights
Statement Fraud Fraud
o Bribery / Corruption o Internal Reporting Fraud
o Ecommerce / Internet fraud o Corporate Espionage
o Money Laundering o Data Theft
o Bank Fraud o Securities Fraud
o Credit Card Fraud o Others
This question was included in the questionnaire in order to gain an insight into the current level
of awareness about financial fraud types and occurrence amongst people.

The results showcased the following statistics:
o Accounting fraud / Financial Statement Fraud: 44.3%
o Bribery / Corruption: 56.3%
o E-Commerce / Internet fraud: 53%
o Money Laundering: 35.5%
o Bank Fraud: 42.1%
o Credit Card Fraud: 63.9%
o Intellectual Property Rights Fraud: 25.7%
o Internal Reporting Fraud: 18%
o Corporate Espionage: 21.3%
o Data Theft: 47%
o Securities Fraud: 26.2%
o Others: 2.7%
This showcased that Credit Card Frauds were the most heard of / most occurring type frauds at
63.9%. This was followed by Bribery / Corruption at 56.3% and E-Commerce / Internet Fraud
at 53%.

QUESTION 3:
Do you think technology is abused to commit frauds?
o Yes
o No
Cyber crime comprises any form of crime where either the tool or the target of the crime is a
computer or a computer network.
Cyber crime is fast becoming a popular way of defrauding both individuals and entities. No
business or individual with an online presence can be considered as completely secure.
Perpetrators typically either attempt to steal money, or more seriously sensitive data from target

companies. In some instances, cyber attacks are also aimed at disrupting vital operations and
critical functions in target organisations, leading to not just financial loss, but also loss of
customer confidence and market reputation.
Low levels of enforcement and inadequate preventative controls have resulted in an escalation
in numbers of organized crime groups turning to cybercrime.
Between 2011 and 2015, more than 32000 cyber crimes were reported across the country. More
than 24000 of these cases were registered under the IT Act and the remaining under the various
sections of IPC and other State Level Legislations (SLL). The cases registered under the IT act
grew by more than 350% from 2011 to 2015. The cases registered under the IPC increased by
more than 7 times during the period between 2011 and 2015.
The survey results indicated that 88% of the respondents felt that technology is abused to
commit crimes. This alarming statistic is a clear reflection of the above facts. Financial frauds
have seen an increase due to technological advancements as perpetrators have easier access to
confidential data. E-commerce and Banking industries are known to use technology at every
step of its functioning. Thus, this also arises the problem of technolgical breaches in the system
making these industries easy targets. Furthermore, technology can be abused to devise new
methods to cover up financial crimes.
This calls for organizations to delve deeper into formulating prevention policies and procedures
for cyber crime. A cyber corporate crisis is one of the most complex and challenging issues an
organisation can face. Cyber breaches require sophisticated communication and investigative
strategies, including significant forensic and analytical capabilities that are executed with
precision, agility and equanimity.

Although potentially daunting, ramping up preparedness has its silver lining. It can be viewed
as an organisational stress test—one that can and should lead to improvements in the
organizational processes. In today’s risk landscape, a company’s degree of readiness to handle
a cyber crisis can serve as a marker of competitive advantage and, ultimately, its survival. Thus,
the time has come for corporate organizations to include cyber risk as a part of the due
diligence considerations.
Thus, from the above observations, the null hypothesis “ Technology is abused to commit
frauds” is proved to be true.

QUESTION 4:
Which process do you think is the most vulnerable to fraud risk?
o Procurement
o Sales and Distribution
o Inventory
o Finance / Payment
o Admin
o HR
Corporate organizations face fraud risks in every process. Hence, it is important to understand
the operational characteristics of each sector to identify vulnerable processes at each level.

The results of the survey revealed that the respondents ranked Finance/ Payment Processes as
the most vulnerable to fraud risks. This was followed by Procurement Processes at 17%.
Finance/ Payment Processes form the basis for all other business processes. This not only
makes it the one of the most vital process within the organization but also the biggest target for
frauds.
Both Finance and Procurement processes are characterized by multiple touch points along with
interactions with external stakeholders like vendors, agents, customers. Thus, these are areas
where collusion can override internal controls. Failure to implement basic controls like
segregation of duties, control over access rights, due diligence of vendors/agents before
selection can lead to the easy occurrence of frauds. Organizations must ensure that they take
every measure possible to prevent this.
Thus, the respondents’ perception depicted through the survey results can be attributed to the
above reasons.
Hence, the null hypothesis that “ Payment / Finance processes are the most vulnerable to
fraud risk in an organization” proved to be true.

QUESTION 5:
Who is most likely to commit fraud?
o Employees
o Business Associate
o Customers
o Vendors / Agents
Over the years, it has been observed that the greatest fraud threats lie within the corporate
organizations itself. Employees are often central to frauds as they either perpetrate the fraud or
assist an external team to do so.

However, most organisations tend to ignore or merely warn respective employees upon
discovery of small value frauds (such as faking personal bills or fudging of expense reports).
Therefore, when employees collude with external parties to commit fraud (such as processing
fake invoices submitted by vendors), organisations often tend to blame external parties first and
not employees.
However, this is not the correct approach. It is imperative for organisations to provide a safe,
robust channel for employees to report suspicions of malpractice. It is also important that an
organisation’s Board comprise of individuals with utmost integrity who would engage
themselves with the management.The Board needs to take a lead by setting the tone at the top
and facilitate a zero tolerance approach towards fraud. Employees must be dealt with in the
strictest manner on discovery of any malpractice or wrong-doing.
The survey results revealed that 52.6% of the respondents felt that Employees are the most
likely to commit fraud. Vendors/Agents ranked next with 29.2%.
Hence, the null hypothesis, “ Employees are most likely to commit financial frauds in a
corporate organization” proved to be true.

QUESTION 6:
Which is the most effective fraud detection method according to you?
o Whistle-blower
o Ethics hotline
o Anonymous call/ letter/ tip off
o Internal Audit Review / Data Analytics Audit
o Business Partners / Vendors / Third Party Complaints
o IT Controls
o By Accident
o Other

The survey results showed that Internal Audit Review/ Data Analytics Audit ranked as the most
effective fraud detection method with 45.7%. This was followed by IT Controls at 27.1% and
Whistle-blowers at 11.6%.
Considering most companies today deal with vast and complex data, real time analytics and
dashboard tools can be adopted to highlight any red-flags and capture any deviation from the
routine, which could be an indication of a fraud. These tools are very effective in detecting
fraud at an initial stage. Thus, Data Analytics Audit ranks first.
Whistle-blowing proves to be an effective mechanism providing comfort to the complainant, as
their identity would remain anonymous and that the information disclosed would be handled in
a safe and confidential manner. This has resulted in a number of fraud related issues being
reported on such channels. It has been observed that such hotlines also become preventive tools
over a period of time.
Global surveys by organisations like the ACFE have highlighted that presence of formal
management reviews, employee support programmes and hotlines is inversely related to the
extent of financial losses suffered due to fraud. Organisations lacking these controls
experienced a significantly higher level of fraud loss.
When one looks at the relationship between the presence of a preventive control and the
duration of the fraud, the perpetrator’s ‘perception of detection’ plays a vital role. The duration
of frauds is considerably reduced when the perpetrators perceive that robust detection
mechanisms are in place. Specifically, organisations that utilise job rotation and mandatory
vacation policies, rewards for whistle-blowers and surprise audits are known to detect their
frauds more than twice as qucikly as organizations lacking such controls. The incidence of

fraud among such companies is low as fraudsters feel the likelihood of them being caught is
high.

QUESTION 7:
Do you think Indian law enforcement agencies are adequately resourced and trained to
investigate and prosecute economic crimes?
o Yes
o No
The survey results showed that alarmingly 85.9% of the respondents felt that Indian law
enforcement agencies are not adequately resourced and trained to investigate and prosecute
financial frauds.

This statistic clearly shows that the masses do not trust law enforcement procedures. This can
be due to a variety of reasons such as increasing rates of bribery, corruption, red-tapism,
inefficient training practices, lack of adequate funds alloted for training etc.
Hence, the null hypothesis, “It is perceived that Indian law enforcement agencies are not
adeqautely resourced and trained to investigate and prosecute financial frauds.” proved to
be true.
Although several legal parameters have been set down and laws have been formulated,
implementation has always been a weak point for the Indian government. Time lags in judicial
procedures coupled with heavy corruption practices have clearly influenced the general public
perception.
Thus, it is essential that the government takes steps to strenthen its law enforcement agencies to
combat financial fruads. It must ensure the effective implementation of laws set.

QUESTION 8:
Does your organization have a fraud risk compliance policy?
o Yes
o No
The survey results showed that 52.6% respondents had a fraud risk compliance policy in their
organization while 47.4% did not.
One of the most effective ways to deal with the problem of fraud is to adopt methods that will
decrease motive, restrict opportunity and limit the ability for potential fraudsters to rationalise
their actions. In the case of deliberate acts of fraud, the aim of preventative controls is to reduce
opportunity and remove temptation from potential offenders. Prevention techniques include the
introduction of policies, procedures and controls, and activities such as training and fraud

awareness to stop fraud from occurring. It is profitable to prevent losses, and fraud prevention
activities can help to ensure the stability and continued existence of a business.
As fraud prevention techniques may not stop all potential perpetrators, organisations should
ensure that systems are in place that will highlight occurrences of fraud in a timely manner.
This is achieved through fraud detection. A fraud detection strategy should involve use of
analytical and other procedures to highlight anomalies, and the introduction of reporting
mechanisms that provide for communication of suspected fraudulent acts. Key elements of a
comprehensive fraud detection system would include exception reporting, data mining, trend
analysis and ongoing risk assessment.
Fraud detection may highlight ongoing frauds that are taking place or offences that have
already happened. Such schemes may not be affected by the introduction of prevention
techniques and, even if the fraudsters are hindered in the future, recovery of historical losses
will only be possible through fraud detection. Potential recovery of losses is not the only
objective of a detection programme though, and fraudulent behaviour should not be ignored
just because there may be no recovery of losses. Fraud detection also allows for the
improvement of internal systems and controls. Many frauds exploit deficiencies in control
systems. Through detection of such frauds, controls can be tightened making it more difficult
for potential perpetrators to act.
Fraud prevention and fraud detection both have a role to play and it is unlikely that either will
fully succeed without the other. Therefore, it is important that organisations consider both fraud
prevention and fraud detection in designing an effective strategy to manage the risk of fraud.

Thus, it is essential for organizations to have a fraud risk compliance policy in order to take
immediate steps in the case of an actual fraud occuring. Fraud prevention and fraud detection
procedures must be set in the company policies. Further, fraud response strategies and measures
against perpetrators must be set. Incentives for fraud detection methods like whistle-blowing
must be included.
Fo this, an effective Anti-fraud strategy must be put into place, as explained before. It has four
main components:
 Prevention
 Detection
 Deterrence
 Response
The following diagram summarises these components and the context within which an anti-
fraud strategy sits :

QUESTION 9:
Does your organization follow an ethics training and awareness program?
o Yes
o No
The results of the survey indicated that 65.6% of organizations followed an ethics training and
awareness program, while 34.4% did not.
Attitudes within an organisation often lay the foundation for a high or low fraud risk
environment. Where minor unethical practices may be overlooked (e.g. petty theft, expenses
frauds), larger frauds committed by higher levels of management may
also be treated in a similar lenient fashion. In this environment there may be a risk of total

collapse of the organisation either through a single catastrophic fraud or through the combined
weight of many smaller frauds.
Organisations which have taken the time to consider where they stand on ethical issues have
come to realise that high ethical standards bring long term benefits as customers, suppliers,
employees and the community realise that they are dealing with a trustworthy organisation.
Organizations have also realised that dubious ethical or fraudulent practices cause serious
adverse consequences to the people and organisations concerned when exposed.
To establish a sound ethical culture, organizations should consider the following:
 A mission statement that refers to quality, or more unusually ethics and defines how the
organization wants to be regarded externally
 Clear policy statements on business ethics and anti-fraud, with explanations about
acceptable behaviour in risk prone circumstances
 A route through which acceptable fraud can be reported
 A process of reminders about ethical and fraud policies- eg. Annual letter/ declarations
 An aggressive audit process, which concentrates on areas of risk
 Ensure the management is committed to their actions
However, a code of ethics or an anti-fraud policy is not sufficient to prevent fraud though.
Ethical behaviour needs to be embedded within the culture of an organisation. Commitment
from senior management and ‘tone at the top’ is key. Employees are more likely to do what
they see their superiors doing than follow an ethics policy, and it is essential that management
do not apply double standards.

To demonstrate commitment, resources should be allocated to communicating ethics and values
to all employees, suppliers and business partners, and providing training programmes where
necessary. In addition to encouraging senior management to set ethical examples by their
actions, organisations should ensure that senior management are committed to controlling the
risks of fraud. Senior management should be assigned with responsibility for fraud prevention,
as this sends a message to employees that the organisation is serious about fraud and ensures
that tackling fraud will be considered at senior levels. Adherence to policies and codes should
be regularly monitored and policed by appropriate people within the organisation (such as
management and/or internal audit), and the documents themselves should also be regularly
reviewed and amended.
Almost every time a major fraud occurs many people who were unwittingly close to it are
shocked that they were unaware of what was happening. Therefore, it is important to raise
awareness through a formal education and training programme as part of the overall risk
management strategy. Particular attention should be paid to those managers and staff operating
in high risk areas, such as procurement and bill paying, and to those with a role in the
prevention and detection of fraud, for example, human resources and staff with investigation
responsibility.
Employees may be educated through a number of mediums, such as formal training sessions,
group meetings, posters, employee newsletters, payroll bulletins or awareness pages on internal
websites. Communication should be ongoing and a combination of methods is usually most
successful.

From the above survey observations, it is clear that organizations have recognized the need for
these fraud prevention and detection methods. This is become majority were found to have a
fraud risk compliance policy, and majority incorporated an ethics and training programme.
Thus, the null hypothesis, “ Organizations have become more sensitve to fraud risk” proved
to be true.

QUESTION 10:
Do you think fraud is an inevitable cost of doing business?
o Yes
o No
The survey results showed that 61.8% respondents felt that fraud is an inevitable cost of doing
business.
This is dangerous as it could lead to organisations having a tolerant approach towards fraud and
subsequently not investing enough in the appropriate fraud risk management controls and
framework. It also translates into a culture of merely reacting to fraud and not proactively
taking steps to mitigate it.

In such a scenario the onus would be on regulatory bodies to ensure that firms follow a robust
fraud risk management framework, failing which they would face stringent action.
However, this highlights that the problem of fraud risks is extremely hard pressing and needs
immediate attention. Steps to minimize and mitigate them must be taken.

CONCLUSION
Organisations are facing a number of challenges in the current economic scenario. They
constantly deal with pressure of uncertain markets, escalating input costs, high labour turnover
and advent of technology. Additionally, companies have to meet rising consumer demand
across product categories with price innovation. Such challenges place further pressure on
companies and their business partners. Such pressures may provide opportunity and incentives
for fraudsters to commit frauds.
Hiring reliable management and building relationships with genuine clients, suppliers and
partners are of utmost importance for organizations. The lack of correct background
information can lead to both reputation and business risks. Effective background checks of
employees and associates are thus recommended.
It is difficult but also necessary to integrate data from various sources to be able to derive the
benefits of analytics techniques. Financial institutions do face challenges in maintaining the
efficiency of anti-fraud security controls at an enterprise-wide level. Challenges arise while
integrating channels or within applications and tools (integrating online and ATM transactions,
retail banking and corporate banking or integrating subsidiary banks where different
information systems are used).
The tone at the top is critical in the fight against fraud. Lack of customer and/or staff awareness
can result in failure of even the best of technology solutions. It takes a concerted effort to be
able to build, maintain and sustain an effective fraud risk management programme.

Organisations need to build awareness around the latest technological and procedural
vulnerabilities and fraud schemes, to be able to remain one step ahead of the fraudsters.
In addition, incident management procedures need to be well defined and comprehensive, in
order to ensure that incidents of fraud are managed without exposing the organisation to any
legal or reputational risks. Forensic tools can be used to navigate IT systems for evidence of
malfeasance such as information deletion, policy violations and unauthorised access. These
tools can help the company legal counsels to prepare for a suit to be filed against the fraudster.
Apart from internal controls, financial institutions need to also educate the customers. Since the
manoeuvres used by cyber-criminals to target sensitive financial data are sophisticated and
constantly changing, financial institutions must look at existing security controls with a new
approach and risk appetite.
The past decade has witnessed a steep rise in the organisations which have faced an increased
risk of fraud exposure. With any change in the environment of the businesses, the need to adapt
to these changes is a prerequisite to attain sustainable growth. Thus, in such a scenario,
business organizations must equip themselves against fraud risks and exposure through a
systematic programme of fraud risk assessment, monitoring, incident response and remediation.
However, businesses alone cannot combat the occurrences of frauds. It is imperative that the
government and other law enforcement agencies ensure the effective implementation of the
laws. This further implies the fight to reduce corruption and bribery in government agencies
itself. Actions for fraud awareness and education amongst citizens must be undertaken as well.
Thus, it is clear that the problem of financial frauds is a hard pressing one that needs immediate
attention, in order to completely mitigate it from its roots.

BIBLIOGRAPHY
BOOKS:
 Fraud Advisory Panel, (2006), Fighting Fraud: A guide for SME’s 2nd Edition
 Fisher, C. and Lovell, A., (2000), Accountants Responses to Ethical Issues at Work.
 Finn, J. and Cafferty, D., (September 2002), Defence Mechanism, Financial
Management.
 HM Treasury, (May 2003), Managing the Risk of Fraud.
 Institute of Business Ethics, (2003), Developing a Code of Business Ethics: A guide to
best practice including the IBE Illustrative Code of Business Ethics.
 Institute of Business Ethics, (2007), Does Business Ethics Pay?
 Iyer, N. and Samociuk, M., (2006), Fraud and Corruption: Prevention and Detection.
 Professional Accountants in Business committee, (2006), Defining and developing an
effective code of conduct.
 Turner, C., (2007), Fraud risk management: a practical guide for accountants.
 Wells, J., (2007), Corporate fraud handbook: prevention and detection 2nd ed.
Hoboken, NJ: John Wiley and Sons.
RESEARCH PAPER
Background Paper on Financial System Abuse, Financial Crime and Money Laundering—
Prepared by the Monetary and Exchange Affairs and Policy Development and Review
Departments.

NEWSPAPER ARTICLES:
 “Subrata Roy: Confident of swimming on swimming the troubled waters”, Amrita Nair
Ghaswalla, 8th September, 2012
 "Harshad Mehta: From Pied Piper of the markets to India's best-known scamster",
Sucheta Dalal, 31st December, 2001
 “SC upholds Harshad Mehta’s Conviction”, Times of India, 14th January, 2003
 “SAT upholds SEBI order on Sahara to refund money", The Hindu Business Line, 18th
October 2011
 "SC orders CBI probe into Saradha chit fund scam", Times of India, 10th May 2014
 “CBI investigated 171 financial fraud cases worth Rs. 20000 crore in 2015”, DNA, 2nd
March, 2016
 “Investor frauds: Vanishing cos, Ponzi schemes face Govt. probe”, The Indian Express,
13th March, 2014
 “Beware of financial fraud on social media”, Economic Times, 21st March, 2016
WEB LINKS:
 https://www.int-comp.org/careers/a-career-in-financial-crime-prevention/what-is-
financial-crime/
 http://www.kaplegal.com/upload/pdf/Corporate_Crime_Fraud_and_Investigations.pdf
 https://en.wikipedia.org/wiki/Cheque_fraud
 http://www.chequeandcredit.co.uk/information-hub/faqs/cheque-fraud

 http://www.moneycontrol.com/news/planning/increasing-cheque-fraud-cases-how-to-
prevent-it_6269261.html
 http://business.mapsofindia.com/finance/credit-cards/credit-card-frauds.html#
 http://www.experian.in/assets/Experian-launches-India-Fraud-Report-2016.pdf
 https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5861
 http://incometaxparaskochar.com/Image/BANKING%20FRAUDS.pdf
 http://www.investopedia.com/terms/c/corporate-fraud.asp#ixzz4KMHQkLQl
 http://www.accounting-degree.org/scandals/
 https://en.wikipedia.org/wiki/Internet_fraud
 https://www.bankbazaar.com/tax/tax-evasion.html
 https://www.indiafilings.com/learn/penalties-income-tax-evasion-india/
 http://www.whistleblowingprotection.org/?q=node/32
 http://qz.com/590563/yet-another-massive-ponzi-scheme-goes-pop-in-india/
 http://qz.com/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-unfolded/
 https://en.wikipedia.org/wiki/Satyam_scandal
 https://en.wikipedia.org/wiki/Subrata_Roy
 http://www.hindustantimes.com/india/sahara-scandal-4-year-chain-of-events-that-lead-
to-subrata-roy-s-arrest/story-gDfYTWadLXecqtkw08xNQJ.html
 http://www.grantthornton.in/globalassets/1.-member-firms/india/assets/pdfs/financial-
and-corporate-frauds.pdf
 https://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20505.pdf
 https://www.pwc.in/assets/pdfs/publications/2015/current-fraud-trends-in-the-financial-
sector.pdf

 http://www.accounting-degree.org/scandals/#
 http://www.ey.com/Publication/vwLUAssets/ey-global-fraud-survey-2016/$FILE/ey-
global-fraud-survey-final.pdf
 https://factly.in/cyber-crimes-in-india-which-state-tops-the-chart/
 http://www2.deloitte.com/content/dam/Deloitte/in/Documents/finance/in-finance-
annual-fraud-survey-noexp.pdf
 https://www.slideshare.net/mobile/donsquire/presentation-on-fraud-prevention-
detection-control
 http://m.economictimes.com/wealth/save/5-financial-frauds-you-need-to-keep-an-eye-
on-before-you-hand-out-your-account-details/articleshow/47455030.cms
 http://qz.com/590563/yet-another-massive-ponzi-scheme-goes-pop-in-india/
 http://www.moneylife.in/article/financial-crimes-and-frauds-when-and-how-to-
approach-the-eow/48074.html
 http://tejas.iimb.ac.in/interviews/11.php

ANNEXURE - SURVEY
FINANCIAL FRAUDS
Dear Survey Respondent,
I am a student from H.R. College of Commerce and Economics, who is conducting this
research as a part of my BMS academic requirements.
Your responses will be kept confidential. Thank you for participating in my survey!
Best Regards,
Kahini Mehta
Age:
o 20-30
o 30-40
o 40-50
o 50-60

1. Have you experienced fraud in the past 12 months?
o Yes
o No
2. Which of the following frauds have you heard/read/experienced?
o Accounting Fraud / Financial Statement Fraud
o Bribery / Corruption
o Ecommerce / Internet fraud
o Money Laundering
o Bank Fraud
o Credit Card Fraud
o Intellectual Property Rights Fraud
o Internal Reporting Fraud
o Corporate Espionage
o Data Theft
o Securities Fraud
3. Do you think technology is abused to commit fraud?
o Yes
o No

4. Which process do you think is the most vulnerable to fraud risk?
o Procurement
o Sales and Distribution
o Inventory
o Finance/payment
o Admin
o HR
5. Who is most likely to commit fraud?
o Employees
o Business Associate
o Customers
o Vendors / Agents
6. Which is the most effective fraud detection method according to you?
o Whistle-blower
o Ethics Hotline
o Anonymous call/letter/tip off
o Internal Audit Review / Data Analytics Audit
o Business Partners / Vendors / Third Party Complaints
o IT Controls
o By Accident
o Other

7. Do you think Indian law enforcement agencies are adequately resourced and trained to
investigate and prosecute economic crimes?
o Yes
o No
8. Does your organization have a fraud risk compliance policy?
o Yes
o No
9. Does your organization follow an ethics training and awareness program?

o Yes
o No
10. Do you think fraud is an inevitable cost of doing business?
o Yes
o No

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FINANCIAL FRAUDS IN INDIA – AN ANALYSIS

BACHELOR OF MANAGEMENT STUDIES

NAME OF PROJECT GUIDE: PROF. POONAM JAIN

H.R. COLLEGE OF COMMERCE AND ECONOMICS

SUBMISSION: OCTOBER 2016

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 1

I, Kahini Mehta, student of H.R. College of Commerce & Economics of T.Y.BMS

submitted in true and original to the best of my knowledge.

SIGNATURE OF THE STUDENT

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 2

Economics of T.Y.BMS (SEMESTER V) has completed a project, ‘Financial Frauds in India

original to the best of my knowledge.

PROF. POONAM JAIN PROF. PARAG THAKKAR

SIGNATURE OF PROJECT SIGNATURE OF PRINCIPAL OF

INTERNAL EXAMINER EXTERNAL EXAMINER

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 3

this topic, from a range of topics, to do my project on.

responses have formed the basis for this research project.

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 4

the Indian Economy.

and need immediate attention in order to mitigate them.

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 5

SR. NO. TOPIC PAGE NO.

6. MEANING OF FINANCIAL FRAUDS 19

 WHO COMMITS FRAUDS

 WHY DO PEOPLE COMMIT FRAUDS

9. TYPES OF FINANCIAL FRAUDS 26

10. BANK FRAUDS 27

11. MOBILE BANKING RISKS 35

12. INSURANCE FRAUD 38

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 6

13. CHEQUE FRAUD 41

14. ACCOUNTING FRAUD 42

15. CREDIT CARD FRAUD 43

16. TAX EVASION 45

17. INTERNET FRAUD 47

18. SECURITIES FRAUD 48

19. CORPORATE FRAUD 52

20. PONZI SCHEME 56

22. CASE STUDIES 58

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23. LEGAL FRAMEWORK AND KEY REGULATORY DRIVERS 71

24. CIVIL/ADMINISTRATIVE PROCEEDINGS 78

25. FRAUD PREVENTION AND DETECTION 79

26. RESEARCH FINDINGS AND ANALYSIS OF DATA 87

27. CONCLUSION 113

28. BIBLIOGRAPHY 115

29. ANNEXURE - SURVEY 119

FINANCIAL FRAUDS IN INDIA- AN ANALYSIS Page 8

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and measure losses due to fraud.

on government’s priority agenda.

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of financial crime occurrence and awareness.

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 To discuss the meaning and types of financial frauds

 To ascertain the current scenario of fraud awareness and occurrence

 To determine fraud elements and trends in corporate organizations

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1. Technology is abused to commit frauds.

to investigate and prosecute financial frauds.

5. Organizations have become more sensitive to fraud risks.

6. Frauds are an inevitable cost of doing business.