TOP 100 BANK FRAUDS
CVC analyses 100 top bank frauds – identifies loop holes- suggests systemic improvements
Central Vigilance Commission (CVC) has reviewed and analyzed Top 100 Bank Frauds, as on 2017.
Sharing the details Dr. T.M. Bhasin, Vigilance Commissioner, CVC informed that the Commission has sub divided the study into 13 sectors comprising of Gems and Jewellery, Manufacturing, Agro sector, Media, Aviation, Service Sector, Discounting of cheques and bills, Trading sector, IT Sector, Exports sector, Fixed deposits and Demand Loan etc.
Dr. Bhasin said that as a conscious decision and with a view to maintaining discreteness, the names of borrower accounts/entities and the names of the Banks have not been disclosed in the report. However, steps are being taken for all encompassing actions such as investigation by the Premier investigative agencies, fixing staff accountability and recovery measures, etc. for effective action.
Dr. Bhasin said that the modus operandi of these loans has been thoroughly analysed and various loopholes/lapses have been identified. Based on the findings, various industry specific suggestions for systemic improvement have been given in the final report, which have also been sent to Deptt. of Financial Services (DFS)and RBI, in order to plug the loopholes observed by the Commission. The measures suggested include strengthening of SOPs, monitoring system and also highlighting the role of controlling offices, so as examine the aspect of quality of business.
Dr. T.M. Bhasin said that this analytical study was initiated by the Commission as a Preventive Vigilance measure so as to minimize the occurrence of such type frauds in future. RBI has also confirmed to the Commission that inputs given by CVC are very useful and shall be used for systemic improvements to mitigate the risks. Dr. Bhasin said that the intention of the Commission is to bring about awareness among the field functionaries by enhancing their knowledge towards the existing lapses, so that the frauds of similar nature do not recur. These studies have been done by the Commission as a preventive Vigilance tool by utilizing its vast experience of handling various cases of frauds and Staff accountability related matters.
A copy of the Analysis of Top 100 Bank Frauds by CVC for ready reference:
**********************
ANALYSIS OF TOP 100 BANK FRAUDS
By
CENTRAL VIGILANCE COMMISSION NEW DELHI OCTOBER, 2018
Analysis of Top 100 Banks Frauds
The rising trend in
Bank frauds has been a cause of concern at all levels. In view of
the alarming rise in Bank frauds, the Central Vigilance
Commission has undertaken a review
and analysis of top 100 Banks Frauds, as on 31.03.2017.
1. The analysis mainly focused on the Modus- operandi;
Amount involved; Type of
lending viz. Consortium/ Multiple/Individual; anomalies
observed; loopholes that
facilitated perpetration of concerned fraud and systemic
improvements required to
plug the loopholes in the system & procedures, etc.
2. The Top 100 Banks frauds were classified and analysed for
the following sectors :-----
S. No. Sector
(i) Gem & Jewellery
(ii) Manufacturing/Industry
(iii) Agro
(iv) Media
(v) Aviation
(vi) Service/project
(vii) Discounting of Cheques
(viii) Trading
(ix) Information Technology
(x) Export Business
(xi) Fixed Deposits
(xii) Demand Loan
(xiii) Letter of Comfort
3. The findings have been shared with Reserve Bank of India
and Deptt. of Financial
Services, (Ministry of Finance). The Deptt. of Financial
Services has circulated the
above analysis done by CVC amongst all Public Sector Banks.
Similarly, the RBI has
also acknowledged the analysis to be very useful and assured
the Commission to use
the findings for Systemic Improvements in relevant areas.
4. A consolidated report is enclosed for your kind perusal/
ready reference. We hope that
the suggestions given for systemic improvements shall pave a
long way in reducing /
obviating Bank frauds.
(Dr. T.M. Bhasin)
Vigilance
Commissioner
Central Vigilance
Commission
New Delhi,
15.10.2018
INDEX
S.No. Sector Page
no.
1. Gem &
Jewellery 1-3
2.
Manufacturing/Industry 4-8
3. Agro (Agriculture
related Industry) 9-12
4. Media 13-16
5. Aviation 17-18
6. Service/Project
19-23
7. Discounting of
Cheques 24-26
8. Trading 27-30
9. Information
Technology 31-34
10. Export Business
35-37
11. Fixed Deposit
38-40
12. Demand Loan 41-42
13. Letter of Comfort
43-44
*******
Gem & Jewellery Sector
The cases of frauds perpetrated by three companies in this
sector have been analysed. The
companies were in business of the Diamonds & Jewellery.
The companies had adopted a
business model by which they imported gold/gem through
foreign Banks/private parties
against SBLC/LC/ Cash Credit for value addition and
production of Jewellery for export to
its customers located aboard. The Companies availed credit
facilities from the banks under
consortium arrangement led by one of the banks.
Modus operandi:
• The companies deliberately inflated the valuation of
diamonds with the malafide
intention to avail higher credit facilities from the lenders
and also to indicate the
security coverage available with the lenders.
• Export bills which remained unpaid on due date were
purchased by the consortium
Banks. Simultaneously, the disruption of the cash flow led
to the devolvement of
SBLCs and outstanding of cash credit remained unpaid.
• The group of the companies informed that as their
receivable were not being realized
in time due to financial difficulties of the foreign buyers;
they could not meet the
SBLC (Standby Letter of Credit) commitment on time.
• The details of receivable/debtors submitted by the
companies to the bank in order to
avail credit facilities appeared to be manipulated, false
and fabricated.
• The companies acted cleverly to avail entire pre-shipment
as Standby Letter of credit
instead of packing credit loans, for which consortium succumbed
to their innovative
funding ideas. The companies also resorted to availing
post-shipment finance by
discounting “Export Bills” from one of the member banks,
while pre-shipment
finance was obtained from another member bank by way of
SBLC, leading to double
financing.
Loopholes/Lapses:
Due diligence report
on borrowers were not obtained before submitting the sanction/
renewal proposal. While recommending the proposal for
enhancement in limits,
quantum of export was focused to get the limit enhanced. However
comforts like
LC/SBLC were not insisted to ensure timely payments of
exports whereas imports
were on the basis of SBLC.
…1/…..
The entire group of
existing buyers companies was controlled by a single person. No
credit assessment was done for these customers. There was no
evidence for proof of
delivery of the goods
to customers. Later on, the investigating agency have raised the
issue regarding proof of delivery of sales of gold and
diamond jeweller to foreign
companies.
In the absence of any
effective mechanism to monitor the movement of discounted
Export bill proceeds towards liquidation of SBLCs across
member banks, the
companies manipulatively diverted and round tripped the
funds to their related/ shell
companies.
Consortium Mechanism
under the leadership of lead bank broadly failed to check and
monitor the transactions. The exchange of information was
more a ceremonial
formality rather than to sift the data. The lead bank did
not share the areas of concern.
They did not take note of warning signals mentioned in the
business rating reports.
The lead bank did not exchange the information in meetings
to alert other member
banks at early stages.
It is evident that
Bullion Trade and Merchant Trading were not genuine transactions
carried out in the ordinary course of the business. The
losses were deliberately booked
through related party transactions to siphon off/ divert the
funds availed from the
consortium thus committing default in making payment/
repayment thereof. The high
value transactions were made without the specific approval
of the consortium.
Systemic Improvement:
There should be
control of financers on movement of stocks. Genuineness of buyers
should have been verified to ascertain whether buyer is
capable of such a huge
buying.
Banks should have
exercised due diligence on the buyers and have executed a
tripartite agreement with the buyers & exporters to
remit proceeds to bank account of
the companies in India. Confidential Report (CR) on all
foreign buyers should have
been obtained/ analyzed.
Gem & Jewellery
Sector credit facilities to these companies increased manifold
within a short span of time in an effort by the banks to
increase their credit
dispensation. There should have been some segment related
limits on such type of
credit exposures.
There were frequent
attempts by fraudsters to fabricate documents and avail finance
from banks. Heightened awareness of loopholes, consequences
of bypassing
procedural aspects and check points for evaluating
genuineness of various essential
documents was very much necessary. These points should be
the learning lesson for
future.
….2/…..
It should be ensured
that appropriate accountability is fixed in the chain of command
including sanctioning authority in the event of such frauds
instead of fixing entire
responsibility on lower functionaries.
Investigation should
be done to find out the trail of diversion so as to find as to where
the money has gone whether any money has been remitted
/parked aboard.
Bank must immediately
delist such third party valuers, Chartered
Accountants/Chartered Engineers, Advocates etc. who have
questionable
credentials/have been negligent in their professional duties
or have caused financial
loss to the bank by their willful acts of
omission/commission/dishonesty. A periodical
review of all empanelled professionals should to be ensured
by banks for weeding out
undesirable third party service providers.
In such cases of
frauds the concerned banks should get forensic audit done and
concerted efforts should be made by banks to get back the
money lost.
Jewellery sector
units may also be asked to furnish a monthly declaration to its lender
Banks declaring details of all transactions /financial
agreement/ contract entered into
by its subsidiaries with their business associates.
…3/…..
Manufacturing Sector
The cases of frauds perpetrated by five companies in this
sector have been analysed. The
companies were in business of manufacturing in Pharmacy,
Textile, Ferrous metals,
pharmaceuticals products and various ranges of steel
products. The Companies had started
availing credit facilities in form of working capital (Fund
based & Non fund based) from the
banks under consortium arrangement led by one of the banks.
Modus operandi:
• One of the Companies had exported the goods against the
shipping bills and had
discounted export bills on different dates. Since the bills
were long outstanding, the
lead bank requested Commissioner of Customs Duty to verify
the genuineness of
these bills.
• As per Commissioner’s report, out of all shipping bills,
only a small number were
genuine, a few shipping bills pertained to ICD, Ludhiana and
rest of shipping bills
were not genuine, and were forged.
• The other Company made purchases to the tune of Rs.6740
crore. Out of this,
Rs.1679.45 crore was for purchase of fancy shirting.
• On review of purchase invoices and stock records of this
item indicated that purchase
invoice did not define any code, grade, make etc. It was
unable to confirm physical
movement of fancy shirting material.
• Mismatches were found in products mentioned in LC invoice
documents and products
mentioned as per books of the company.
• In case of another company, the turnover was inflated.
There was no actual purchase
or movement of stocks as depicted by the borrower company in
its books of accounts
and financial statements.
• There had been misappropriation of funds by the management
of the company. They
explored all possible avenues to divert the funds. There was
mis-match of accounting
data vis-Ã -vis the banking statements and the non-reporting
of the same in the audited
financials by the auditors of company.
• The payment made to the beneficiaries of LCs was diverted
to the accounts of the
debtors of the company from where it was finally routed
either to the account of the
borrower company or to its subsidiaries.
…4/…..
• Another company had been importing pharmaceutical products
and chemicals from
overseas suppliers based at Singapore and were exporting its
products to Hong Kong
and Singapore having a branch office at Dubai. The exporting
company owned by the
same proprietor as the supplier company.
• The company was dealing in computers, computer peripherals
and other commodities.
There were consignment transactions of computers and
computer peripherals,
whereby the company was sending computers and computer
peripherals to its branch
office at Dubai by way of Branch transfers.
• The export and import documents submitted to bank by
company in respect of the
Merchanting Trade transactions purported to be relating to
pharmaceutical and allied
products appeared to have been falsified.
• The other Company finalized its Balance sheet for the year
2011-12 and got it audited
on 30.04.2012 showing profit of Rs.23.74 crores. On the
basis of the Balance Sheet,
the company got credit facilities from consortium banks.
Subsequently, the company
revised its audited B/s for 2011-12 on 05.09.2012 without
informing any of the
member Banks. The profit in the revised balance sheet was
reduced to Rs.0.34 crore.
• The Company was maintaining current accounts with the
Banks, which were not part
of consortium. The credit turnover in these accounts was
Rs.176.96 crore. The
Company had incurred loss of Rs.241.83 crore during 2012-13
as against profit of
Rs.0.34 crore during 2011-12 against same volume of turnover
of Rs.2178 crore in
both years.
• The Company routed sales proceeds through account with non
consortium Banks
without prior permission of consortium. The Company had not
submitted Book Debt
statements certified by CA.
• The Companies had defrauded the banking system by
unscrupulous activity such as
manipulation of books of accounts, removal, depletion &
disposing of hypothecated
stocks without the bank’s knowledge.
Loopholes/Lapses:
The Company had
submitted forged Bills of Entries/Postal documents to banks and
huge amounts of foreign exchange were remitted to various
overseas accounts.
The status of Bill of
Entry in the ICEGATE system under option “Bill of entry at
ICES” was not checked and “Out of Charge” (OOC) date in the
concerned column of
OCC was not verified with the print out of exchange control
copy of the Bill of Entry
submitted by the importer as proof of import.
The company had
generated entire set of documents for exporting the goods, but
cancelled later on. Directorate of Revenue Intelligence had
submitted details of 13
shipping Bills.
…5/…..
It was also found
that 35 shipping bills were issued by CFS (container freight station)
and rests of shipping bills were not genuine but were
forged.
Apart from Bank
accounts with consortium members, transactions were carried out in
other Bank accounts of company. The nature and purpose of
these transactions could
not be ascertained.
Incorrect and non
existing debtors were included in the debtors’ statement of the
company. The company resorted to circular transactions to
report higher
sales/purchases figures, Mismatch were noticed in the
stocks/debtors as per the books
of the company and as per the stock statement submitted by
the company.
In circular
transactions, the parties were related to each other either by way of
common directorship in other companies in individual
capacity or through family
members.
The majority of the
transactions reflected in their respective Bank’s statements were
in nature of the same day fund transfers to connected
parties. The majority of LC
payments used for circular rotation of money had been made
against purchase of
Fancy Shirting which was trading product of the company.
Most of the debtors
were not available. The debt confirmation letters sent by the
consortium leader by Regd. post were returned undelivered in
most of the cases.
Confirmations were received only from 22 debtors, but they
denied the dues reported
by the borrower company to the consortium lenders.
Perusal of the
statement of bank accounts of beneficiaries of the LCs revealed that the
payments received were re-routed through various accounts
and channelized back
either to the account of the borrower company or one of its
subsidiary/ associate
concern.
Out of the 12
transport operators, two were fictitious and enquiries in the vicinity
revealed that no such transport operators ever existed at
these addresses. The two
available transport companies informed that the lorry
receipts attached with the
invoices were fake which were not issued by them.
To find out the
authenticity of the data of the debtors, the audit company selected 10
top buyers of the borrower company and found that all the 10
parties were not
traceable at the given addresses.
The company/ firms to
whom payments were made by banks were dealing with
products not related to the business of the borrower
company.
The Company had made
sale/purchase transactions of the same products with same
companies/related companies. There was no evidence of any
processing value
addition to the products.
…6/…..
The Company had sold
goods to a firm on merchant export basis which was dealing
in information and technology, telecommunications, office
automation and electrical
appliances. The company had made purchases from a firm which
was engaged in
manufacturing and distribution of computer components,
consumer electronics, and
digital electronics.
Three
associates/subsidiaries were shown in the balance sheet of the company.
However, these companies virtually existed on papers without
any functional or
business activities.
The bills of lading
were wrongly generated by non-existent forwarders. Their Dubai
office responded that they could not trace the details of
bills of lading. Four
companies were involved in fake merchant trade transactions
with the company.
A complaint lodged by
the bank with CBI has revealed that the directors of the
company in collusion with each other fabricated the records
and faked non-existent
transactions as genuine transactions and indulged in fabrication
of purchases and sales
of the same products from firms which were actually dealing
in IT,
telecommunication, electric and electronic products.
The stock audit was
conducted on 20.05.2013 and 21.05.2013. It was observed that
Drawing Power comes to Rs.20.64 crore against total
sanctioned limit of Rs.465.00
crore whereas the company submitted stock statement showing
D.P. of Rs.467.59
crore in Feb 2013. The company did not submit stock
statement after Feb2013.
The Company had
reduced the holding of sundry debtors at the end of March 2013 in
the age group of 90 days from Rs. 525.76 crore to Rs.216.04
crore. The Company
could not produce documentary evidence for such reduction.
From the stock
statement, it was observed that holding had substantially increased
from Rs.58.74 crore as on 31.03.2012 to Rs.1216.17 crore as
on 31.03.2013 which
represented increase by 114.78% in comparison to previous
year.
No records were
maintained for stores & consumables which constituted Rs.47 crore
during 2012-13 indicating lack of internal control system.
Due to lack of detailed
information the auditors had not commented in respect of end
use of funds.
The Company had not
complied with bank’s instruction to submit Book Debt
statement certified by CA along with VAT returns for the
financial year 2011-12 and
2012-13 which implied that Book Debt statement submitted to
Bank were inflated.
Systemic Improvement:
Due diligence of
major debtors should be carried out by direct visit, direct balance
confirmation, engaging agencies and comparing the
realization of receivables as per
stock/BD statements with routing of funds through lending
banks to ascertain
diversion through non lending banks.
…7/…..
*******
Agro Sector:
The cases of frauds perpetrated by three companies in this
sector have been analysed. The
companies were in business of processing of basmati Rice,
manufacturing of sandal wood oil
and producing of castor oil. The Companies had started
availing credit facilities from the
banks under consortium arrangement led by one of the banks.
Modus operandi:
• One of the companies resorted to diversion of funds
through group/ associate
concerns, inflated level of debtors for availing higher
limits/DP, higher cost of capital
expenditure.
• Capital expenditure advances were given to 3 vendors
without any purchase
transactions and the same was used for investment in
acquiring shares of another
company. All these vendors were holding shares of that
company.
• The debtors’ levels more than doubled during the last two
years while sales turnover
had come down. It was also observed that the sale had been
made to debtors
throughout the year without any amount having been realized
from them during the
year.
• The Company had capitalized the warehouse building, the
cost of construction of
which was shown on a higher side compared to similar type of
buildings that were
constructed at much lower cost. Thus the Company inflated
the cost of capital
expenditure.
• Another Company obtained drawing powers in the account
from consortium against
the book debts outstanding in their books majority of which
were found to be nonexistent
and were based on fake invoices/debtors. In this way, the
Company diverted
working capital funds.
• The Company did not route proportionate sales with the
member Banks. The matter
was taken up with the company repeatedly, but the turnover
in the accounts
maintained with member Banks did not improve.
• The company had shown debtors which were non- existent. The
company got the
enhanced facilities sanctioned on the basis of fake
inventories of debtors and funds
were siphoned through personal accounts of Directors.
• Packing credit advance had been taken from member Banks,
but the company failed
to execute export business.
…9/…..
• Another Company initiated an alternate procurement model
whereby pre-harvest farm
loans were extended to farmers through Village Level
Aggregators (VLA) supported
by Post Dated Cheque (PDC) as collateral security.
• With the introduction of pre-harvest financing, its
traditional practices and controls
failed resulting in embezzlement of funds. Fake inventories
were created through
collusion of employees and associates involved in
procurement.
• The company suppressed the facts regarding depletion of
stocks and did not inform
the misappropriation of stocks by their employees to the
consortium. It was reported
that their employees had embezzled the stocks.
• The management of the company had misrepresented the
performance of the
company to the consortium lenders at various occasions.
Loopholes / Lapses :
Proportionate sales
transactions were not routed through working capital limits with
consortium member banks. Round-tripping of funds was
resorted between various
working capital limits with member banks.
The percentage of
working capital loan vis-a vis Sales turnover of the Company was
on higher side sometime, even crossing 100%. This ratio was
not commensurate with
its peers in the industry.
There was no system
of preparing sales order. In majority of the cases, the companies
did not maintain the supporting documents except for
invoices.
The Companies
resorted to round-tripping of funds between various working capital
limits with member Banks for diverting the funds raised from
various Banks.
Purchase was mainly
confined to two suppliers and sales to three buyers only. The
units of buyers were found inoperative.
Commodities were not
exported in the case of export finance availed from the
consortium member Banks. Working capital fund was diverted
to another entity
controlled by a company and various other accounts including
current accounts of
promoters of the company.
The funds were
diverted on a large scale which establishes the fact that fraudulent
activities were undertaken.
Alternate procurement
model was initiated by which pre-harvest farm loans were
extended to farmers through Village Level Aggregators (VLA)
supported by Post
Dated Cheque (PDC) as collateral security.
…10/…..
Fake inventories were
created through collusion of employees and associates involved
in procurement. With the introduction of pre-harvest
financing, traditional practices
and controls failed resulting in embezzlement of funds.
Facts regarding
depletion of stocks were suppressed and were not intimated to
consortium. The management of the companies had
misrepresented their performance
to the consortium lenders at various occasions.
Systemic Improvement:
Assessment of working
capital limit should be done as per Bank guidelines/procedure.
While assessing working capital limit, the scale of
operations as reflected in VAT
returns, stock records and sales register etc should be
examined properly. This process
should also be followed at the time of further enhancing the
limit.
Any enhancement by
the member Bank should be first discussed in consortium
meeting to maintain maximum permissible Bank finance and to
ascertain the position
of advance taken from other members of consortium.
A proper scrutiny
with respect to the number of debtors and the amount due from
each debtor be done with reference to the records maintained
by the firm and the
debtors.
There are frequent
attempts by fraudsters to fabricate documents and avail finance
from Banks. Creating awareness about loopholes, consequences
of bypassing
procedural aspects and check-points for evaluating
genuineness of various essential
documents become necessary.
Investigation should
be done to find out the trail of diversion so as to find as to where
the money has gone and whether any money has been remitted
/parked aboard.
Immediately after
filing the case with CBI, all the accounts of the promoters be
confiscated and bank should take adequate measures like
appointment of
administrator /receiver to take stock of all the accounts.
CBI files the charge
sheet in the trail court for criminal action without investigating
the trail of money on account of fraud. Therefore, CBI
should also investigate the trail
of money so that action could be taken for recovery of money
lost.
Bank must immediately
delist such third valuers, Chartered Accountants/ Chartered
engineers, Advocates etc. who have questionable credentials/
have been negligent in
their professional duties or have caused financial loss to
the bank by their willful acts
of omission/ commission/dishonesty. A periodical review of
all empanelled
professionals should be ensured by banks for weeding out
undesirable third party
service providers.
The Banks should pay
the required attention to the area of internal control system and
the fraud prevention measures to ensure compliance of
instructions issued by them
from time to time. The controlling offices should play their
role of overseeing the
functioning of branches effectively.
…11/…..
*******
Media Sector:
The cases of frauds perpetrated by two companies in this
sector have been analysed. The
companies were in business of broadcasting on television
channels, printing and publishing
news paper and periodicals. Their projects were financed by
banks under consortium led by
one of the banks and the company also availed other credit
facilities from various banks.
Modus operandi:
• The funds disbursed were got transferred from no lien
account to various suppliers
and group accounts by way of DDs or RTGS. The funds credited
in suppliers a/cs
were transferred to other companies where promoters were
Directors or authorized
signatories.
• Funds were diverted through suppliers’ accounts which were
the associates/connected
accounts of the borrowing companies. Further, there was huge
difference in cost of
equipments as per investigation report and the invoices
submitted by the party.
• The Companies had submitted inflated and fabricated
invoices which amounted to
misrepresentation of facts to the Banks for securing higher
limits and misutilisation of
the same.
• One of the Companies had submitted a certificate from CA
regarding infusion of
capital. The Chartered Accountant had in writing denied
having issued the said
certificate. Hence, the company had submitted fabricated
certificate to avail loans.
• Fraud element had been apprehended due to the fact that
one of the suppliers was
non-existent and in case of 3 major suppliers, the promoters
had managerial interest
by virtue of being on board of the supplier companies at
different times.
• Funds were thus siphoned off and re-routed into the
accounts of the promoters and
their group companies which were further misused.
• One of the Companies raised loans from various Bank/ FIs
through its two balance
sheet periods by concealing the information/ details of its
borrowers/ names of the
lenders.
• The balance sheet figures were fudged/ fabricated with
particular reference to the
outside borrowings from Banks/ FIs. The company did not give
the details of the
lender wise exposure in the schedules of the audited balance
sheets.
• The Company effectively prevented the lenders from
insisting on NOC/ Confidential
opinion from other lenders which otherwise would have
revealed the true picture of
total borrowings of the company.
…13/…..
• The funds were diverted to their accounts with other banks
and were not utilized for
the purpose for which these were given and the company
misrepresented the facts and
cheated the bank.
• The Company produced end use certificate issued by an auditor
other than the one
who audited company’s balance sheet. The company concealed
the information on
existence of prior charge on one of the machineries offered
as collateral security to the
bank.
Loopholes/Lapses:
Public money availed
from banks in the form of loans, had been diverted through
shell companies. The loans were granted at the highest level
by most of the banks.
Bank financed one of
the companies overseas and end use was not ensured. Instead,
the funds were remitted to various other companies not
connected with the related
activities of the company.
Banks, which were not
members of consortium had allowed the company to open
account and transferred the money to siphon it off.
No appraisal and due
diligence was exercised by member Banks independently as
they depended entirely on the lead bank for this purpose.
Operations in cash
credit account were neither monitored nor scrutinized/analysed
properly. No enquiry was made to ascertain sources of funds
brought by the company
to build-up/ increase in tangible net worth.
There were also a
large number of credits in the accounts from group companies. The
terms of sanction clearly stipulated that funds should not
be diverted to
sister/group/associates concerns.
There was lack of
competence & skills to appraise technical aspects of a project for
finance from banks & invariably banks accepted whatever
was stated by the borrower.
There was no
mechanism to verify & counter check the antecedents of suppliers of
equipments regarding their capacity, life of equipments,
maintenance etc.
The objective of
forming different companies for similar activities was not enquired.
No action was taken by the banks to ensure segregation of
securities.
The other Company did
not publish its audited balance sheet for the relevant period.
The company made the lenders to forcibly fall back on the
immediately previous
audited balance sheet for appraising the loan proposals.
The Company had
committed the purported fraud with the connivance of Chartered
Accountant of the agency responsible for due diligence. The
balance sheet of the
company does not reveal true picture of the financial
position of the company.
…14/…..
The Company had also
got the valuation of the securities manipulated by reporting
inflated value in connivance with the valuers.
Systemic Improvement:
The main company had
formed further companies which were engaged in similar
business of post production activities and were actually
working in close
clusters/premises. Banks should scrutinize the objective of
forming different
companies for similar activities.
At the time of
carrying out the review, the past track record of the borrower or the
length of his satisfactory association with the bank should
be one of the
considerations. The status of the borrower should be more
critically analysed.
The field
functionaries should find out the kite flying operations from the nature of
transactions and their respective character.
The field level
functionaries should be advised to scrutinize the financial statements
submitted by the borrowers thoroughly and where ever it is
observed that the short
term funds are used for long term purposes and vice versa,
they should be advised to
ascertain from the borrower the reasons and purpose of the
same and record the same
in appraisal notes.
Due diligence of
suppliers of machinery equipment should be done by the branches
even when it is not specified in the sanction letter. In
some cases no efforts were made
by the branch to enquire whether the supplier is a manufacture
or a trader.
Branches should read
and study the Audited balance Sheet of the borrower as
expected. Adverse observations by the auditors should be
read and critical
observations be discussed in the credit appraisal.
Field functionaries
should be advised to ensure end use of funds. They should follow
the proper due diligence and not to rely entirely on
documents/papers produced before
them. Documents and disbursement should be cross verified.
The Banks should pay
the required attention to the area of internal control system and
the fraud prevention measures to ensure compliance of
instructions issued by them
from time to time. The controlling offices should play their
role of overseeing the
functioning of branches effectively.
Any enhancement by a
member Bank should be first discussed in consortium meeting
to maintain maximum permissible bank finance and to
ascertain the position of
advance taken from other members of consortium.
…15/…..
*******
Aviation Sector:
The case of frauds perpetrated by a company in this sector
has been analysed. The company
commenced its commercial operations in this sector in May
2005. The company was a
leading Airlines company of India with a market share of 21%
in domestic operations. The
company was promoted by another group which had presence in
several countries.
The company was one of the domestic companies offering
service on international routes and
operated in both segment of the market, i.e. low-cost segment
and full serve segment. The
company availed credit facilities from the banks under
consortium arrangement led by one of
the bank.
Modus operandi:
• The Company cheated the bank by suppressing facts in the
financial statements and
diverting the funds to related entities for the purpose
other than those for which
finance was made.
• The Company ran its operations mostly on leased aircraft
for which an overseas entity
(vendor) was created which in turn had created fictitious
invoices with inflated bills.
The money was transferred to it through legal means.
Whatever the money the
company owed to the leasing company would be disbursed and
rest parked with the
entity.
• The entire transaction carried out was legal as it was
done through proper banking
channels. The vendor had submitted invoices and created
intermediaries which had
nothing to do with the leasing of aircraft. Therefore, funds
received by the vendor
were illegal.
• The Company willfully cheated the banks with an intention
to siphon off funds. The
money apparently was diverted to several shell companies in
seven countries.
• The Company’s promoter willfully and malafide intension
did not pay the dues
covered by his personal and corporate guarantees. Despite
restraining orders from
High Court, the promoter entered into an arrangement with
overseas company to
receive a big amount for stepping down from his office and
position as Director and
Chairman of group.
Loopholes/Lapses :
The lapses with
respect to loans extended to the defunct airline which was under
scanner. The company’s balance sheet was never strong and
its credit rating was
lower than what was required for sanctioning loans.
All Banks under
consortium financed the company on the basis of brand
capitalization. Valuation got done through a private company
which was much higher
than what was valued by other valuers.
…17/…..
There was alleged
conflict of interest of at least three independent Directors on the
board of the airline. SFIO had alleged that certain private
companies and three
independent board Directors of company had a commercial
relation-ship with the
airlines.
Systemic Improvement:
Advances/credit
facilities were sanctioned to the company on the basis of Brand name
which does not form any tangible security for the purpose of
recovery. The practice
should be discontinued in future.
The Company submitted
brand evaluation done by private entities. Banks blindly
accepted the higher one. Bank considered report of only one
valuers for the valuation
of brand and based on that loans were given to the carrier.
Regulations issued by RBI
require that at least two different valuation reports should
be considered before
deciding credit facility on the basis of brand in case the
brand name is to be
considered as security.
The past track record
of the borrower or the length of his satisfactory association with
the bank should be one of the considerations. The status of
the customer should be
more critically analyzed while renewing the existing
facilities.
Managing fraud risk
in large value advances need a comprehensive approach. There
has to be changes in mindsets, fine tuning of work processes
and human resources
skills. There has to be better information sharing among
banks. There has to be more
effective fraud management systems. There has to be better
support from enforcement
agencies and there has to be legislative.
Multiple banking
arrangements in large value financing have done more harm than
good to banks. This type of arrangement enabled corporate to
secure multiple finances
from various banks far in excess of their requirements.
Funds raised were easily
diverted through company’s accounts with various banks in
the absence of effective
exchange of information between the banks.
Banks do not have a
fool-proof system of checking and confirming whether the
company has actually working on the contracts and whether
the contracts were
genuinely business based.
The Government should
consider examining the role of third parties such as Chartered
Accountants, Advocates, Auditors and rating agencies that
figure in accounts related
to bank frauds and put in place strict punitive measures for
future deterrence.
…18/…..
*******
Service/Project Sector
The cases of frauds perpetrated by three companies in this
sector have been analysed. The
companies were in business of providing corporate logistic
services, Industrial and
engineering projects, plants & machineries, equipments
etc under lease agreement. The
Companies were enjoying working capital/ term loans from the
banks under consortium
arrangement led by one of the banks.
Modus operandi:
• One of the companies induced the bank to sanction and
disburse loans for 2804
vehicle to the company and its’ employees/drivers on the
basis of false assurances and
tampered/forged vehicle registration documents.
• In respect of the loans availed by giving false assurance
of getting the vehicles
transferred to the drivers/ employees by clearing past dues
of the existing lenders, the
Directors of the company deliberately and with intent to
cheat, willfully neglected to
transfer the ownership to the said drivers/employees as a
result of which amount
disbursed by bank towards finance of vehicles became
overdue.
• The loans availed for purchase of new trucks was willfully
diverted by the accused
Directors and the trucks were never purchased. The funds for
transfer of old vehicles
to the drivers were also diverted for other purposes. In
most of the instances, even the
registration documents were not submitted to the bank
whereas in several other
instances old vehicles were passed off as new.
• Another Company got issued performance cum mobilization
advance guarantees in
favour of aggregators. The mobilization advance should have
been utilized for
execution of contracts against which the advances had been
remitted by the
beneficiary.
• A part of the funds was utilized for giving margin/charges
to the banks instead of
providing such margin by the promoters from their equity.
The Company also partly
remitted the fund back to the mobilization advance received
from the Aggregator
which was not comprehensible and was highly questionable.
• The Banks sanctioned enhancement in bank guarantee limits
for more than 10 years
based on such information as provided by the Company. The
guarantees were
eventually invoked. Defaulted guarantees account was debited
and after adjusting the
cash margins available with Banks amount was paid to
overseas Banks. It was
dishonesty on the part of the Company to avail the facility
by misrepresenting and
concealment of facts.
• Another company did not have loan policy approved by board
as envisaged for NonBanking
Financial Companies (NBFC). The company had not fixed
prudential
…19/…..
• limits as part of Assets Liability Management (ALM) for
individual gaps and
cumulative mismatches as envisaged by RBI.
• Thereafter, the company was reclassified from Deposit
taking NBFC to Non-deposit
taking NBFC. After an inspection of the company’s accounts
for a particular period,
RBI directed that until further orders, the company would
not sell, transfer, create
charge or mortgage or deal in any matter with its property
and assets without prior
permission from RBI.
• As per report of the forensic auditors, the fraud was
perpetrated by camouflaging the
Balance Sheet in collusion with Statutory/Internal Auditors
to avoid detection.
• It was identified that the methodology followed by the
company was for window
dressing. It was found that the company had inflated income
and assets by creating
falsified entries.
• The financial accounting and loan assets data of the
company were maintained in
Oracle data-base. This software being a proprietary one,
lacked security controls. The
company’s top management, senior executives and employees
manipulated the
records by using this software.
Loopholes/Lapses:
The signatures of
applicants/ borrowers were not obtained in person. Bank handed
over the documents to the officials of the company for
getting them executed.
Therefore, there was no base document with the specimen
signature of the borrower
which could be relied upon to conclude that the documents
were signed by the
respective borrowers only.
The company
transferred only 227 vehicles in the name of drivers as against 1652
vehicles financed by the bank for the purchase of second
hand vehicles. The company
had failed to transfer the vehicles although it had received
sale consideration from the
bank and thus it had defrauded the bank in respect of second
hand trucks.
Bank had sanctioned
the loans for purchase of new vehicles to drivers of the company
but the vehicles were not transferred /registered in the
name of drivers. Thus the
company had defrauded the Bank in respect of new trucks.
There was
inter-relationship between the buyer, vehicle dealer and body building unit.
The Proforma invoices issued for body building /trailer were
inflated. There was
diversion of funds/ round tripping of funds.
Business model of the
company including the existence of Master Agreement with
Aggregators/ Agreement between the company and its vendors,
were not disclosed to
bank/consortium. Thus, it concealed the existence of the
said agreement and
misrepresented its lenders with regard to it business model.
It was found that there
were a number of clauses which were exclusively in favour of
the Aggregators which
were not informed to the bank.
…20/…..
The Company did not
utilize the funds for the purpose i.e. for execution of the
contracts. 30-35% of the funds were utilized for giving
margin/charges to the banks
from the mobilization advance as against the normal practice
of providing such
margin by the promoters from their equity.
The Company had not
provided the bankers any evidence of having utilized the
mobilization advance for execution of the contracts for
which these guarantees were
issued which in normal case should have been remitted to its
vendors for the
execution of the specific contracts.
The Company had not
utilized the mobilization advances received under BGs/SBLCs
for execution of the projects for which BG/SBLCs had been
issued. Further, reports of
various consultants appointed by the Consortium indicated
lapses on the part of the
company with regard to compliance of FEMA regulations, ROC
regulations etc.
It was also revealed
that the overseas beneficiaries had discounted the BG/SBLCs
with banks in Europe and remitted the funds back to the
company as mobilization
advance. However, the company had not utilized the funds for
execution of projects;
but instead diverted the same and utilized as margin for the
guarantees issued on their
behalf.
The Company had
submitted end use verification certificate issued by Chartered
Accountants stating that the loan had been utilized by the
company for its working
capital requirement and general corporate purpose which was not
correct.
The facts of the case
reveal that the fraud occurred due to dishonesty on the part of
company who got the limit sanctioned by misrepresenting
& concealment of facts
coupled with lapses in pre-sanction appraisal and post
sanction follow up.
The stocks on hire
under hire purchase agreement were calculated as per the
agreement value less the installments received from the
corporate and net of unmatured
financial charges.
The Company availed
finance from the banks against the value of stock on hire under
hire purchase agreement. The company had financed other
companies in the form of
corporate loans and was refinancing hire purchase loans for
purchasing of old assets.
The promoter of the
company and statutory auditors of the company engineered the
fraud in a systematic way against the bank by flouting the
relevant provisions of
Companies Act, incorrect filing of returns under service
Tax, VAT and income Tax.
Various lease
transactions were pre closed, but the assets were not written off and the
same were continuing in the books of account of the company.
Part of the amounts
received through pre closure was directly booked as income
and part amount was kept
in debtor suspense account. The lease rentals as per the
original tenure were continued
and income was recognized.
…21/…..
The Company formed
satellite companies with employees of the company as
directors. The satellite companies were formed mainly to
acquire share of the
company and to transfer the NPA of the company to these
satellite companies.
The satellite
companies were granted loans by the company through bogus loan
agreement for acquiring NPA accounts of the company. With
this NPA provisions
were reduced and profit of the company boosted.
Systemic Improvement:
Genuineness of quotations
should be verified through visits and direct contact with
dealers. In case of vehicle loans visit to the dealer must
be performed to check
genuineness of dealership. The credentials, genuineness,
capability to supply of
vehicle and line of trade of the dealers should be verified
through documents and
personal visits before sanction of loan.
Bank may issue supply
orders in consultation with dealer on the basis of quotations or
contract agreement between supplier and borrower duly
considered by Bank in the
proposal /sanction instead of direct payment to the supplier
before supply. This will
ensure generation of bills/invoices and facilitate delivery
of goods in proper custody
before payment.
Field functionaries
should be advised to ensure end use of funds. They should follow
the proper due diligence and not to rely entirely on
documents/papers produced before
them. Documents and disbursement should be cross verified.
The contractual
obligations between the parties need to be verified from the point of
view of onerous clauses by legal advisor. Banks should take
extra care when advance
payments under BGs are received and ensure end use as being
done in the fund based
limits.
While
considering/sanctioning such limits in future, it may be stipulated that amount
received as mobilization advance be credited to an Escrow
account and its end use be
monitored.
There are frequent
attempts by fraudsters to fabricate documents and avail finance
from banks. Heightened awareness of loopholes, consequences
of bypassing
procedural aspects and check-points for evaluating
genuineness of various essential
documents become necessary.
The Banks should
clearly outline requirement of field visits by the controllers and
also stock inspection of large borrowal accounts above a
cut-off point by an external
agency. This would be in addition to the regular
inspection/filed visits by the line staff
and the controller. Observations of the visiting
officers/stock/ credit Auditors must
necessarily find place in every review/enhancement proposal
of the borrower.
The Banks should pay
the required attention to internal control and fraud prevention
measures in addition to instructions issued by them from
time to time. The controlling
offices should play their role of overseeing the functioning
of branches effectively.
…22/…..
*******
Discounting of Cheques & other issues:
The case of fraud perpetrated by a Chartered Accountant
& others in this sector has been
analysed. A firm was empanelled for conducting concurrent
audit of the bank branch. A
qualified CA who was a sleeping partner in the firm had gone
through the nitty-gritty of the
CBS system while conducting audit of the branch. The CA had
created several fake and false
documents pertaining to his clients. Misusing this
information, CA committed a mind
boggling fraud against the bank.
Modus operandi:
• The CA accessed the Pan and Voter ID cards, business
details, financial statements
and IT returns etc pertaining to his client who was required
for opening of accounts
and availing of bank loans.
• The CA had created several fake and false documents for
his own manufacturing
factory at a location. He had forged signatures in various
documents.
• The officials of the Banks at branches in the different
cities and also at controlling
office of bank colluded with a group of customers and
defrauded the bank by
purchasing/ discounting fake/fraudulent cheques, discounting
of fake inland bills,
arranging overdraft/loan limits against non- existent LIC
policies and also arranging
housing Loan /Loan against property without proper
title/security or through dummy
borrowers. The CA was the main person behind all the
fraudulent transactions.
• The fraudulent transactions had been taking place since
2011.These transactions were
nullified with proceeds of new fraudulent transactions to
avoid deduction.
• There was inter-link between transactions in three
branches with many customers
having accounts at all the three branches. The fraudulent
transactions were carried out
mainly through the discounting of cheques, discounting of
fake bills and overdraft
against LIC policies.
• The surrender values of the policies were unusually high,
often not found in such
numbers. Verification of policies with LIC of India revealed
that these policies were
issued in the name of different LIC offices, for different
terms and sum assured.
• There were number of accounts involving a huge amount
under the Housing loan
category which had either a commonality of the name and/or
had some linkage to the
audit trail of the fraudulent transactions. In most of the
cases security/ assets were not
created.
Loopholes/Lapses:
The accounts were
opened without complying with KYC guidelines. The customers
would not come to the branch for opening the accounts. No
personal interaction took
…24/…..
place. Their credentials were never cross verified with the
original/through net and
there was no practice of independent verification of
addresses provided in the
application.
The accounts were
opened with an intention to allow discounting of cheques on a
continuous basis to selected parties which were related to
each other either by blood
or bondage or through financial considerations.
No standard operating
procedures ; may it be purchase/discounting of cheques/bills,
sanctioning of loans/overdrafts against LIC policies and /or
sanctioning loan/
overdrafts for acquiring house/commercial properties were
followed.
The system in the
bank did not furnish any alert when the account was opened with
the same officially valid documents of a person already
having account with the bank.
As a result, accounts of the borrowers were opened at three
branches to facilitate
fraudulent transactions.
The concurrent
auditors failed to take note of such fake transactions. The Internal
Inspectors also failed to detect and comment about unabated
purchase and discounting
business, KYC norms, non compliance of systems and processes
and the bogus/
fictitious documents produced by the branch officials while compiling
the reports.
The officials of the
controlling office of the bank ignored the alerts communicated by
off-site monitoring cell (OMC), HO, and communicated their
full satisfaction about
the genuineness of the transactions.
The Regional Office
of the bank failed to take notice of the way the business was
being conducted in these branches. The branches discounted
cheques beyond their
delegated powers on several occasions without obtaining
permission/ approval from
the Regional Office of the bank.
All the discounted
cheques were serially numbered and all were for round figures
which were the characteristics for accommodation purpose.
The wrong practice which
was going on in the branches of bank was well within the
knowledge of officials of
the bank.
Systemic Improvement :
Bank should set up
centralized processing centers for opening of accounts. This will
be an additional tier for online cross verification of KYC
documents like PAN,
Aadhar etc. These measures would minimize the incidence of
fraudulent KYC
documents. Bank should also introduce alerts in the system
while opening the account
on the basis of same KYC (i.e. Pan Card, Aadhar etc.)
document in different
branches.
Bank should set up
centralized loan processing hubs which will help in streamlining
the selection of borrowers with enhanced due diligence,
assessment of proposal etc,
thus delinking the sanction process from the business owner
i.e. branch heads.
…25/…..
*******
Trading Sector
The cases of frauds perpetrated by three companies in this
sector have been analysed. The
companies were in business of trading in coal, pulses and
agro commodities, and aluminum
foil rolls. The companies had adopted a business model by
which they imported goods from
foreign banks/private parties against SBLC/LC/ Cash Credit
for trading in domestic market.
The Companies availed credit facilities from the banks under
consortium arrangement led by
one of the banks.
Modus operandi:
• The company had diverted a substantial amount of fund to
related parties/ associate
concerns. The creditors had not been deducted for the
purpose of calculation of
drawing power. The scrutiny of purchases and sales of the
company revealed that
there were many cases where the same party was the customer
as well as the supplier.
• The Company violated accounting principles and misutilised
funds for other purposes.
Funds were utilized towards purchase of real estate in the
name of the director and his
relatives.
• The other Company submitted the documents with the bills
drawn under the letters of
credit issued/opened on behalf of the borrowers which were
fabricated and the
underlying transactions were not real merchant trade
transactions. The letter of credit
mechanism/ RTGS facility for kite flying transactions
involving unconnected parties
were grossly misused by the borrowers.
• When the bills drawn under the letters of Credit (LC),
opened on behalf of the
company, started devolving, the bills were met by creating
overdrafts in the accounts
as fund was not provided by the company.
• In case of another company, the credit facilities were
given by the banks to the
borrower for the purpose of manufacturing and exporting of
aluminum foil containers,
its lids and covers. However, the company instead of
utilizing the funds for which the
credit were granted, utilized the same for granting loans
for the other entities without
any security or documents and that too in the sectors which
were not even remotely
related to the core business activity of the company.
• The Company resorted to falsification of the account by
manipulating the position of
LCs/ Buyers credit outstanding in the monthly stock
statement thereby overstating the
drawing power in the cash credit account.
• The company’s debts increased substantially during a
particular period. The funds
were utilized for investments mainly by way of loans and
advances, the returns of
which were not immediately forthcoming.
…27/…..
• During Investigation, some unusual transactions were observed
in the account of
another company. Funds were diverted to finance various
sister concerns/associates
dealing in various areas of business ranging from real
estate development to gambling
business (breeding price bulls and race horses).
Loopholes/Lapses:
The Company dealt
with many related parties including subsidiaries/associates
including their key management. The gross amount receivable
from the related parties
was much higher while amount payable was much less.
The bills which
remained unrealized from the associate concerns reflected funds
which had already gone out of working capital cycle for long
since in many cases
there were cross transactions of sales and purchases from
the same party i.e the same
party was the buyer as well as the supplier on different
occasions.
The Company had not
made transactions in accordance with RBI guidelines on
merchant trade. In the case of LC opened, it was noticed
that major transactions had
taken place in a bank with 2 parties with same address where
they had acted as
customers as well as suppliers.
The Company had
routed transactions from banks outside the consortium to keep the
business going as devolvement had taken place in majority of
banks. The 60% sale of
the company had such cases where records of delivery/
movement of goods had not
been maintained.
The promoters in
connivance with their Chartered Accountants had submitted
doctored financial papers for getting finance from different
banks. The Chartered
Accountants wrongly certified the balance sheets for three
years from 2007-08 to
2009-10 overstating the profits /understating the losses.
The bills drawn under
LCs opened by the bank were suspected to be accommodation
bills for the purpose of raising finance. The method adopted
by the company revealed
that the underlying transactions were not real merchant
trade transactions and were
only kite flying transactions.
During investigation,
it was observed that there were major diversion of funds from
the borrower company’s cash credit account to personal SB
and CD accounts of the
promoter directors and other unrelated accounts.
The company was
consistently showing inflated sales, stock holding levels and trade
debtors. Book debts statement was given with assumed and
artificial figures. Names
of debtors were not mentioned by the company.
Out of loans &
advances sanctioned, a substantial amount of loan was free of interest
by the company extended to various entities. Loans were
extended in accounts,
wherein no movement of receipt or payment was observed
during a particular period.
…28/…..
The Company had
advanced loans various companies engaged in trading of bullion.
Out of these advances, a large amount had been adjusted
against expenses not directly
attributable to company’s business.
On review of stock
statement submitted to the lead bank, it was observed that the
scrap was included as stock in monthly statements. Hence,
stock statements were
inflated.
As per the monthly
stock & statement submitted to the Bank, it was observed that
creditors had substantially decreased as compared to
creditors as reported in the
previous month.
Systemic Improvement:
End use of fund
disbursed should be monitored and due diligence procedures should
be applied to identify instances of utilization of funds for
purposes not related to the
business of the client.
Even in the cases
where the funds were disbursed for the purpose of working capital,
its end use should be verified so as to avoid diversion of
funds. Confirmation may be
obtained from the customer on the utilization of funds.
Periodic balance
confirmation from top five suppliers/ buyers (creditors/ debtors)
should be obtained/ ensured in stock audits and should be
analyzed as a part of stock
statement.
Banks should have a
fool-proof system of checking and confirming whether the
company is actually working on the contracts and whether the
contracts are genuinely
business based.
Corporate governance
in banks in the present form is a matter of concern and has to
be strengthened. Housekeeping and internal control of banks
have to be strengthened.
Multiple banking
arrangements in large value financing have done more harm than
good to banks. This type of arrangement enabled corporate to
secure multiple
finances from various banks far in excess of their requirements.
Funds raised are
easily diverted through company’s accounts with various
banks in the absence of
effective exchange of information between the banks. There
is a need to review the
multiple banking arrangements.
Realization of
receivables and payment to creditors are required to be monitored. In
case transactions routed through the accounts with
consortium members do not tally
with corresponding movement reflected in the stock
statements, Concurrent Auditors
to monitor the transactions need to be appointed by the
member banks.
…29/…..
*******
Information Technology (IT) Sector
The cases of frauds perpetrated by three companies in this
sector have been analysed. The
companies were engaged in assembling of computer
peripherals, system integration/solution,
data center activity, software solution & consultancy,
integration & other hardware related
products and networking. The Companies availed credit
facilities from the banks under
consortium arrangement led by one of the banks.
Modus operandi:
• One of the companies did not take off the project of two
organizations as planned for
various reasons including the company not agreeing to
certain terms and condition of
both the projects.
• Earnest Money Deposit (EMD) in the form of a Bank
Guarantee issued by a bank in
favour of one organisation was invoked on account of non-
agreement on certain
terms and conditions of Letter of Intent by the company. The
project of the other
organization was also cancelled in June 2013, as the other
bank did not issue
performance Guarantee of Rs.69 crore.
• After the disappearance of CMD of the company, it emerged
that the employees’
salaries had not been paid. Thereafter, the business
operations of the company came
to standstill.
• As per Annual Balance Sheet of the company as on
31.03.2013, stock and book-debts
were shown at Rs.204.75 crore and Rs.587.97 crore
respectively. The account became
NPA on 29.05.2013 with bank. After 01.04.2014, there was
negligible turnover in the
accounts with banks. As per audit report, stock as on date
was Rs.30 to 35 crore and
book-debtors were Rs.7 to 15 crore. Sudden decline in value
of stock/book debt
without corresponding credits in the accounts aroused
suspicion.
• It appeared that the company had fudged the figures in the
balance sheet and had
represented wrong/inflated financials to avail credit
facilities from all members of
banks in the consortium. Further, the debtors did not
acknowledge the debts when
banks wrote to them.
• Another company availed credit facilities to implement ISP
services in three states.
The promoter of the company obtained loan from the banks by
making false and
misleading disclosure with an intention to cheat the banks.
• The Company did not create assets out of bank’s fund and
diverted funds through fake
companies floated for the purpose. The company had created 3
fly by night operator
companies in a state as vendors for raising fake bills who
never supplied any
software/ hardware.
…31/…..
• Where about of these India based suppliers were not known.
RTGS were sent to the
accounts of these companies with private Banks on
disbursement of term loan.
Thereafter, money from these accounts was transferred to
company’s accounts of
interested parties maintained with these Banks.
• SEBI in its order, based on the preliminary investigation
into the matter of violation
of SEBI Act, observed that the company had diverted the loan
funds for playing in
stock market through entities. These entities played with
the scrip of the company
presumably to jack up its price.
• Another Company had submitted debtor’s statement as on
29.06.2013 for availing
Drawing power. Accordingly 34 major debtors were selected
and job of verification
of debtors was distributed among the member banks of the
consortium.
• Three member banks informed that the list of debtors
provided by the company was
false having no outstanding in the books of debtors.
• Drawing Power (DP) calculation could not be justified as
the basis for calculation of
DP was not provided such as valuation of work in progress,
debtors position etc.
Moreover, the damaged goods and or obsolete goods were
included in the stock
statement.
• The Company had submitted a statement of fake receivable
to the consortium for
availing DP. Loans from other financial institutions were
availed without permission
of consortium.
• One of the member banks had disbursed limits on the basis
of the allocation letter
purportedly issued by the lead bank which had denied having
issued such allocation
letter. It was revealed that the company had produced forged
letter and got the limit
disbursed.
Loopholes/Lapses:
It appeared that CMD
of the company, in connivance with other directors, had
provided false book debts/ stock statements and had inflated
the profit & loss account.
There was transfer of
funds including siphoning off funds, diversion of term loans
disbursed by the banks for creation of Data Centre Racks by
the company. There was
an involvement of group companies in misappropriation of
funds.
Finance was made on
the basis of stock statement. The company did not co-operate
for conducting stock audit. The auditors expressed their
inability to carry out audit.
Majority of
receivable were non-existing. Information from debtors of the company
was sought. The replies of debtors pointed to suppression of
facts and falsification of
financial statements.
The Company created
hypothecation over stock, book-debts/receivable through
hypothecation agreement. However, it conspired against the
banks and siphoned of
funds by disposing of hypothecated goods.
…32/…..
Loans availed from
two banks were not reflected in the financial statement as on
31.12.2012. Similarly, loan availed from L & T finance
was not reflected in the books
of account in spite of creating charge in its favour. The
liabilities with four other
banks were shown as other current liabilities which were
apparently borrowings.
Verification of
invoices revealed raising of multiple invoices. With reference to all
contracts entered into with customers, though the work was
supposedly executed in
India or controlled from India and the invoices were raised
from India, there was no
direct remittance through Indian Banking channel from the
customers.
The funds released
under Packing Credit were seen directly transferred to the bank
accounts of the company in USA and utilized for US
operations, which was a clear
indication of diversion of funds. Book debts were
hypothecated to the bank as floating
charge and no registered power of attorney was there so the
bank could not realize the
dues directly from the debtors.
The stock position
was not satisfactory/encouraging in view of outstanding level of
debt and fast obsolescence of computer items. All the
debtors were more than 180
days and chances of recovery were bleak.
The Company had not
furnished clarification regarding non-confirmation of debts by
some of the debtors. This indicates the fraudulent intention
of the company & its
promoters. The Company did not route sales proceeds through
accounts of any bank
in the consortium.
The investigation
revealed that the borrowers/promoters had indulged in fraud with
another financial institution which was being investigated
by EOW, Delhi police.
Risk Based Internal
Auditor revealed certain irregularities such as CA certified age
wise statement of book debt, credit report of overseas
parties were not obtained.
Monitoring of the
time schedule of supply as per the order was not done by lead bank
which resulted in non- realization of debtors and liquidity
crunch. During
investigation, it was revealed that the lead bank had failed
in discharging its duty as
the DP communicated to the members was not properly
calculated.
Systemic Improvement:
Adequacy of credit
monitoring measures. It must be ensured that all the required
safeguards in disbursement of loan and ensuring intended end
use of funds are in
place.
Advising the
operating offices that all term loans details of major suppliers/vendors
should be finalized at the time of sanction of term loan and
disbursements made to the
specified parties directly.
In consortium banking
arrangement, any new bank entering into the consortium must
take credit opinion report at least from the lead bank if
not from all the existing banks
and must take written consent from the lead bank before
release of funds.
…33/…..
*******
Export Business
Sector
The cases of frauds perpetrated by four companies in this
sector have been analysed. The
companies were engaged in exporting cotton bales, cotton
& synthetic yarn, agro/engineering
goods and readymade garments to China, Dubai, Singapore and
other countries. The
Companies availed credit facilities from the banks under
consortium arrangement led by one
of the banks.
Modus operandi:
• Bank was discounting the export bills of the company
against LCs from prime banks
of the buyer. The payment/acceptance of bills was delayed.
On the request of the
company bank had extended the due date of bills.
• As per information gathered from Custom authorities,
export had not taken place
against most of the bills. Goods produced for exports
against packing credit (PC) were
also not available. It appeared that either goods were not
produced against PC or
disposed off locally and funds were siphoned off.
• The Customs authorities had informed that exports did not
take place in 200 cases out
of the pending 203 bills, as these consignments did not
relate to any exports.
• Another company availed multiple loans from different
banks/ institutions for
acquisition of the same set of equipments from the same
suppliers at almost similar
estimated cost.
• Completion of projects was confirmed to respective
banks/institutions by submitting
false/ fabricated certificates from Chartered Accountants
and false status reports.
Term loans were not accounted for in the year of their
receipt/payment.
• The cash inflows and out flows were dealt with outside the
books of accounts and not
reflected in the audited balance sheets of the company
during respective years.
• One other company had given the same export orders to
various banks in consortium
and availed packing credit facility. The company did not
submit the export documents
to the same bank from whom the packing credit was availed.
• The Company submitted contract documents to member bank
for availing the credit
facilities. The company had obtained export packing credit
disbursement from another
bank against the same contract document.
• The list of book debtors submitted by the party showed
that most of the debtors were
foreign buyers. In the backdrop of payment received from
third parties and the bills
…35/…..
getting returned,
earlier the company had stated that the goods were sold to alternate
buyers as the original buyers were renegotiating the price
after dispatch of
consignments.
• In respect of the creditors for suppliers, full details of
such suppliers were not
available. The investigating officer stated that the
creditors for the supply were
fabricated in order to artificially boost the purchase, sale
and receivable.
• The borrower companies cheated the bank by submitting fake
and forged export bills
for purchase/discount which were drawn in nonexistent
overseas buyers.
Loopholes/Lapses:
The bank had
discounted the bills against the terms of the sanction without ensuring
acceptance of bills and confirmation of due date for payment
from LC issuing bank.
The bank did not obtain GR form of shipping bills
verified/issued by custom
authorities.
There were several
apparent major discrepancies in set of bills submitted for
discounting which should have aroused suspicion about
genuineness of bills. Due date
of bills extended at the request of the company without
ensuring acceptance of bills,
analyzing reasons for non acceptance of bills and delay in
acceptance of bills.
The Chartered
Accountants including Statutory Auditors tended to collude and
conspired to be a party in submitting false, fabricated and
misleading financial
statements and certificate to the institutions/banks with
the only intention of obtaining
disbursement of the financial assistance.
The company had
managed affair of the company based on false and fabricated books
of accounts to ensure easy and smooth flow of credit without
any restraint by way of
term loan from financial institutions for funding cash
losses.
The proceeds of
packing credits & FBPs credited to the account were withdrawn on
the same day in clearing suggesting improper end use and
diversion of loan proceeds.
The export
transaction undertaken by the company was suspect considering the fact
that within a span of less than 3 months the utilization of
the limit was to the brim
under PC and negotiation of bills under LC.
Realization proceeds
of export bills credited to current account of the company which
was subsequently withdrawn by the company when bank packing
credit was
outstanding.
Credit report of all
associates/ sister concerns was not obtained from their banker as
per terms of sanction. Periodical inspection for packing
credit disbursement to ensure
end use was not carried out.
Systemic Improvement:
Monitoring of systems
and MIS generation has to be strengthened. Housekeeping and
internal control of banks also have to be strengthened.
…36/…..
*******
Fixed Deposit Fraud
The miscreant pretended to the Govt Organizations/Corporates
as representative of a Bank
and to the Bank as financial advisor of these Organizations/
Corporates, brought bulk
deposits to the branch of different Banks. He kept the original
TDRs issued by the branches
with them and submitted fake copies to the depositors.
Thereafter the miscreant opened loan/overdraft accounts in
the name of depositors by
submitting fabricated documents along with original TDRs to
the branch. They had siphoned
off the money through RTGS in his various associate accounts
with different banks.
Modus Operandi:
• The deposits were canvassed by the branch manager through
a private person
and mobilized bulk deposits of about Rs.604.33 crore through
the private
person from the seven Government Organizations/Corporates.
• Term deposits accounts were opened at the branch after
obtaining KYC
documents from the concerned organization. The KYC documents
were
received through the private person. Term deposit receipts
(TDR) were
delivered on the basis of the Organizations/Corporate
authority letters.
• Later on the private person submitted application for
loan, purportedly made
by Organization/Corporate holding deposits with branch for
loan / overdraft
against TDR.
• The loan applications accompanied with original TDR
receipt, duly
discharged by the signatories who had signed the documents
earlier submitted
to the branch. The sanctioning authority, after completing
the necessary
formalities, sanctioned the loan/overdraft.
• The fraudsters acted as representatives of the
organizations, created a forged
fixed deposit receipt and handed over the same to the
beneficiaries.
Subsequently, the original deposit receipt was utilized by
the fraudsters for
availing loan against the deposit without the knowledge of
the organization.
• While disbursing the loan amount, letters of request for
RTGS transfer to
parties or cheques duly signed by the authorized signatories
were received
from the Organizations/Corporates.
…38/…..
Loopholes/lapses:
The private persons
with assistance of other unknown persons falsely represented
themselves to the Government Organizations/Corporates as
representative of bank
and to the bank as financial advisors of the
Organization/Corporates.
While collecting the
KYC documents from the Organizations/ Corporates,
presumably retained the original documents with them and
generated fake documents
of KYC, signatures, stamps, letter heads etc, purported to
have been prepared by
concerned Organizations/ Corporates and handed over to the
banks.
After collecting the
original TDR receipts from the banks, private persons presumably
retained them and handed over photocopies to the concerned
Organizations/
Corporates.
To avail a loan
against original TDR retained by them, they presumably created
fabricated documents on the basis of the documents submitted
to the banks earlier.
Original TDR duly discharged by the authorized signatories
accompanied the loan
applications.
The branch managers
without assessing the genuineness of these apparently looking
genuine documents acted on the mandate and
recommended/sanctioned loan against
TDRs and also remitted the money to various accounts in
several banks as per the
mandate.
RTGS for opening TDR
accounts were sent by the Organizations/Corporates to the
banks but they declined having ever applied for loan/
overdraft availed. It also
transpired that the private persons presented themselves as
representatives of bank
and collected various papers/documents from Organizations/Corporates.
It is also suspected
that current accounts were also opened at the branches in the name
of Organizations/Corporates where funds by way of RTGS were
received and
disbursed by RTGS transfer to various other banks.
Systemic Improvement:
Proper due diligence
and precautions should be taken by the branches while dealing
with the bulk deposit accounts opened in the names of
organizations, corporates and
public sector undertaking etc. The bank’s systems and
procedures should not be
diluted.
Branches, on receipt
of bulk term deposits of Rs.1.00 crore and above should report
the complete details of such deposits to Treasury Management
Department. In the
said report branch should also confirm that KYC guidelines
have been complied with.
…39/…..
*******
Fraud Committed by Staff member
(Demand loan)
The fraud perpetrated by a staff member of PSU bank by way
of sanctioning of unauthorized
Demand loans, unauthorized entries in Demand loan accounts,
Saving Bank accounts, funds
transfer accounts etc.
Nine fraudulent Demand loans aggregating to Rs.252.34 crores
had been sanctioned by
branch manager against the deposits of a Development
Authority without the request
/authorization from the depositor. No documents were
available. The transactions had been
carried out by then senior manager of the branch.
Modus operandi:
• Fraudulent demand loans were sanctioned purportedly
against deposits of the
Development Authority. It was reported that nine fraudulent
Demand Loans
aggregating to Rs.252.34 crores had been sanctioned against
the deposits of the
Development Authority without request/ authorization from
the depositor.
• The loans had been sanctioned in the name of the
Development Authority and loan
proceeds were credited to various accounts of different
persons. While few credits had
been affected directly from demand loan, few credits had
been routed through three
fictitious Saving Bank accounts of the Development
Authority.
• No documents were available in the branch. The entire
accounts stood closed. The
transactions had been carried out by then Senior Manager of
the branch.
Indiscriminate credits and debits without any authorization,
outward RTGS
remittances, opening and closure of loan accounts etc had been
indulged by then
Senior Manager of the branch and other officials had passed
the transactions in a
routine manner.
• The said three saving bank accounts were used for parking
the proceeds of fraudulent
demand loans raised by then Senior Manager of the branch and
also for transmission
of money to various accounts for accommodation purpose. All
the transactions in
those three saving bank accounts were fraudulent.
• The Development Authority had confirmed that no request
was made by them for
opening the said three saving bank accounts. Transactions
circumventing the
provisions of Anti- money laundering approved by then Senior
Manager were noticed.
…41/…..
Loopholes/Lapses:
Fictitious demand
Loans were allowed to be opened by the branch manager
and the proceeds were misutilised to accommodate few
constituents.
Anti – Money
laundering provisions had not been adhered to. Reporting was
not done. Irregular transactions pertaining to interest
charged /paid were
passed.
Three fictitious
saving bank accounts in the name of the Development
Authority were opened and fraudulent transactions were put
through by the
staff member.
Branch officials
failed to alert controlling office regarding fictitious demand
loans. Vouchers were posted/ approved without proper verification
of its
regularity and genuineness of underlying transactions.
Outstation cheques
were debited to the branch funds transfer account.
Fictitious cheque numbers were entered and passed.
Transactions
disproportionate to the known sources of income and large
value transactions
were permitted.
Transactions
disproportionate to their known source of income were allowed.
Systemic Improvement:
Controlling offices
should critically go into the quality of business booked by the
branch and sudden spurt, if any observed in business growth
should be thoroughly
investigated.
Monitoring of systems
and MIS generation has to be strengthened. Housekeeping and
internal control of banks has to be strengthened.
Controlling Offices
have to receive the details of all the loans sanctioned under power
of the branch along with related account wise Appraisal
notes through credit appraisal
form every month. The return should be critically
scrutinized and adverse conditions,
if any, should be taken up with the concerned branch for
rectification without delay.
Due diligence for
sanctioning of loans and observations of Bank’s system and
procedures should not be diluted.
…42/…..
*******
Fraud Committed by Staff member :
(Letter of Comfort)
The fraud was perpetrated by staff member of a bank in
buyers’ credit transactions. The
matter came to light when the main branch of bank received
intimation from overseas
branches of the bank that payment towards buyers’ credit was
not received by them.
When branch records were verified, it came to light that no
such buyers’ credit had been
raised from those banks. It was further observed that
several other buyers’ credit had also
been raised from those banks through fake Letters of Comfort
(LOC) via SWIFT which
became due for payment from 01.07.2016 onwards. It was
reported that the branch had issued
20 buyers credit for Rs.429.33 crore due for payments upto
January 2017.
Modus Operandi:
• The Letters of Comfort were fraudulently conveyed through
SWIFT
messages which emanated from the main branch of bank where
there was
involvement of staff member.
• On 25.07.2016, the main branch received a message from
overseas branches
of PSU bank that payments towards buyers’ credit were not
received by them.
On verification, it was observed that no such buyers’ credit
had been raised
from these banks.
• It was reported that the branch had issued 20 buyers’
Credit for Rs.429.33
crore due for payments upto January 2017.
• On verification, it was found that there were no documents
and sanction
letters of credit facilities for such transactions. Further,
the transactions were
not routed through the bank’s Nostro Account as per
prescribed guidelines.
The SWIFT messages sent were reportedly fraudulent.
Loopholes/ Lapses:
SWIFT transactions
were not linked to the Core Banking Solution (CBS) of the bank,
which contain transaction histories and other data of the
customers.
The transmission of
the messages is usually a three layer process that did not take
place either at the branch or its office.
SWIFT transactions
were therefore automatically recorded and were not seen by
officials of the controlling offices.
…43/…..
In SWIFT system one
bank official is designated as a maker, another verifier and
third as authorizer. All have different logins and passwords
and work independently
of each other. But in the case all functions were performed
by a single person.
Systemic Improvement:
CBS-Finacle should be
integrated with SWIFT (STP-Straight Through Processing)
for all payment messages.
Each and every login
into SWIFT system would be only through biometric
authentication thereby virtually preventing any unauthorized
login through password
compromise.
SMS alert feature
should be introduced wherein all SWIFT users will get an alert
message in their mobile phones for every login into the
SWIFT with their roll number
and password including failed login attempt.
The access to SWIFT
connect should be restricted based on IP address-only 2 PCs per
branch should be permitted.
…44/…..
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