india fraud indicator 2012

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India Fraud Indicator 2012Increasing magnitude of fraudA study by Ernst & Young’s Fraud Investigation & Dispute Services

India Fraud Indicator 2012 | 2

About theIndia Fraud IndicatorThis edition of our India Fraud Indicator consolidates articles on fraud published in the media in 2011–12 (1 April 2011–31 March 2012). A thorough research, using various databases, was conducted to shortlist articles pertaining to fraud that took place in the automobile, consumer product, financial services, life sciences, media and entertainment, real estate, retail and wholesale, technology, telecommunications, health care, chemicals, transportation and logistics, food and beverage, clothing and textile, machinery, industrial internet and online services, pharmaceuticals and diversified industries segments. A total of 1,80,000 articles were screened to shortlist 204 fraud- related cases in FY12. There are however some limitations in this approach.• ► The cases included in the analysis pertain to incidents

reported by the media in 2011–12. These incidents may have occurred at a time earlier than this period.

• It is only an estimation of the real size of the problem. • ► Some of these cases are under investigation and are

pending judgment. The outcome of the judgment may or may not confirm the allegations and ascertain the actual quantum of loss due to fraud.

Contents


This is the first edition of India Fraud Indicator from Ernst & Young India. It elaborates on fraud in all spheres of society, including the business and government segments, as well as in the case of financial institutions and individuals during 2011–12.

This report looks into potential losses (amounting to around INR66 billion) suffered by the Indian economy due to fraud.* It showcases an increase in the magnitude of fraud in the country in the second half (2H) of 2011 –12, with the value of such incidences rising by 36% over the first half (1H) of the year and the number of fraud cases rising by 8%.

The report also highlights the growing vulnerability of financial services, and more specifically, the banking sector, to fraud. (Ernst & Young India Fraud Survey 20121 showcased the high exposure of the banking sector to fraud).

Furthermore, it will draw your attention to some interesting fraud enablers, including identity and cyber fraud, and most importantly, insider-enabled fraud, which account for 61% of all reported fraud cases.

The key to identifying fraud lies in the ability to comprehend what lies beneath. This is especially true of cyber fraud, where it is difficult to identify the perpetrator (s) with certainty and establish an offense. This is where new forensic technology can help governments, regulatory bodies and corporate organizations counter the increasingly complex nature of fraud.

We hope you gain some useful insights from this report and that it helps you become aware of and understand the various types of fraud that can impact your business.

* The impact of the telecom (2G) scam on the Government is not part of this report.

1 Fraud and corporate governance: changing paradigm in India, a report based on India Fraud Survey 2012, Ernst & Young, 2012.

ForewordArpinder SinghPartner and National DirectorFraud Investigation & Dispute ServicesErnst & Young Pvt. Ltd.


The latest analysis of Ernst & Young’s India Fraud Indicator indicates that businesses are constantly exposed to fraud risk. The losses suffered due to fraud, recorded in this report, amount to INR66 billion. Delhi witnessed the largest number of fraud cases and suffered the highest aggregate losses by fraud (as compared to the rest of the country) in 2011–12.

Financial services the worst hit• ► The financial services sector was the worst hit, with

more than 63% of the total fraud cases reported in 2011–12, followed by technology and transportation.

• ► In the financial services sector, banking was the major victim with 84% of the total number of reported fraud cases.

According to the data compiled by the Reserve Bank of India (RBI), the money lost by banks due to scams and fraud has doubled in the past four years. Losses incurred by banks due to fraud increased by 88% in 2010-11 to exceed INR37.9 billion (more than INR20.1 billion in 2009–10).

India’s banking sector is also reeling under the threat of mounting non-performing assets (NPAs) that rose by 46% to INR1.37 trillion in fiscal 20123. Several cases, involving irregularities in lending to the infrastructure and telecom sector, have come to light over the last couple of years.

2 “CBI registers bank fraud cases worth Rs 2,500 cr in 2012”, Statesman website, http://www.statetimes.in/news/cbi-registers-bank-fraud-cases-worth-rs-2500-cr-2012/ , accessed 11 September 2012.

3 “Fear grips public sector banks”, Livemint website, http://livemint.com/Industry/DI2lX6zPWfBcl7pkFuzEPM/Fear-psychosis-grips-public-sector-banks.html , accessed 11 September 2012.

Executive summary

The Central Bureau of Investigation’s (CBI’s) Bank Securities and Fraud Cell registered criminal cases amounting to a total of INR40 billion in 2011, while fraud cases worth INR25 billion have already been registered from January to July 20122. Increasing incidents of fraud indicate that there is an urgent need for banks to have an enhanced system of checks and balances.


Who is committing fraud?• It has been observed that fraud is generally

committed by young people below the age of 35 to support their lavish lifestyles, which are not commensurate with their incomes. (The India Fraud Survey 2012 report stated, “A typical fraudster is an internal male employee, who is in his 30s, is far from the age of retirement and is an average performer in middle management.”)

• Internal employees at various management levels were involved in 61% of reported fraud cases.

• According to our study, senior management members of companies are involved in 23% of fraud cases in the country. However, our study reveals that they are involved in 79% of major fraud cases by value (with each of these amounting to more than INR100 million) due to their positions and their ability to directly influence their companies’ decisions. (According to the India Fraud Survey 2012 report, “Fraud committed by senior management ranks among the top five fraud risks to which organizations are exposed.”)

• ► Cases of identity theft involving external parties are increasing, whereby a fraudster uses forged or stolen documents to commit fraud.

Fraud against investorsIn this report, we elaborate on the fact that investors are the most adversely impacted by fraud, and the total value of fraud committed against them exceeds INR27 billion. The greed to earn high returns in a short time makes investors vulnerable to scams. In April 2011, the police unearthed a major fraud against a multi-level marketing company (MLM), which described itself as the country’s “premier financial consultancy” firm and defrauded investors of INR10 billion by promising a high return of 20% a month to them. Several other MLM companies are alleged to have defrauded investors of millions of rupees over the past few years.

Around 58% of fraud was committed by people below the age of 35*.

* Age of fraudster was not available for all the cases. 4 “Government constitutes committee to frame laws for direct and network marketing”, The Economic Times website, http://articles.economictimes.indiatimes.com/2012-07-21/news/32776703_1_idsa-chavi-hemanth-money-circulation-schemes , accessed 11 September 2012.

The Government constituted a seven-member inter-ministerial committee, headed by a Consumer Affairs Secretary, in July 2012 to frame legislation and rules for unregulated direct selling and network marketing businesses. The committee is looking at framing guidelines for these companies, based on legislation implemented by Kerala, the first state in India to put in place regulations for MLM companies4.


Increasing magnitude of fraudThe total number of fraud cases reported in 2H 2011–12 increased by around 8% over 1H, but their value grew by 36% during the same period.

The financial services sector, including banking, insurance and Non-banking Financial Companies (NBFCs), was the most vulnerable to fraud and accounted for 63% of the total number of fraudulent incidents that occurred during the year. Within the financial sector, banks were the most common victims of fraud, followed by insurance and mutual fund companies.Table 1: Cases by fraud value (INR) — 2011-12

Value Number of cases

1H 2H

1 or less than 1 million 18 14

1.01 to 10 million 35 36

10.01 to 100 million 20 24

100.01 million and above 8 20

Total amount Involved (In INR billions) 27.9 38.1The total number of cases does not add up to 204, since the value of fraud was not available in some cases.

Figure 1: Fraud cases by sector classification, 2011-12

1H12 (Total cases = 98)

2H12 (Total cases = 106)

Banking

Banking

Insurance & NBFC*

Insurance & NBFC*

Technology

Real Estate

Transport

Transport

Healthcare

Telecom

Telecom

Technology

Consumer Goods

Healthcare

Real Estate

Consumer Goods

Others

Others

56%

7%9%

6%

4%4%

4%3%

7%

51%

12%5%

6%

5%4%

4%4%

9%

*NBFC refers to non-banking financial institutions including mutual fund companies.

Banking — the main targeted segmentThe banking segment witnessed around 84% of reported fraud cases within the financial services sector, with a high percentage (41%) of asset or loan fraud. Forged documentation was the primary mode of fraud committed in the banking segment.

“Fraudulent documentation, multiple funding, overvaluation/non-existence of collaterals and siphoning of funds are some of the areas in which banks have witnessed major incidents of fraud.”


A fraudster can easily obtain your personal account details from gullible courier boys, who carry credit card/account details and then use these to change official contact information such as a mail/email address or add another user to your account. This is known as account takeover fraud.

Did you know? Case study

A case took place in Kolkata, where the agency executive (in charge of collecting documents) would share the personal details (card numbers, last few transactions, address and date of birth) of customers with the bank as well as the fraudster. The fraudster would use these details to generate a One-time Telephone Pin (TPIN). Using the details, he would call up the bank’s customer care division to request a change of address and register a new mobile number. He would again call to freeze the current credit/debit card and request a new one at the changed address. Using the new card, the fraudster would shop across the city, causing losses running into huge amounts for the card owners.

There were several significant features in this case. • ► It was fairly easy for the fraudster to

persuade the agency executive and courier delivery boys to share details with him.

• ► He used the jewelry brought through a customer’s credit card to avail a loan against the jewelry using the customer’s forged documents.

• ► He was able to apply for a personal loan (an innovation developed by banks to offer easy loans to preferred customers with a good credit history) of INR1 million and also opened a bank account using fake documents.

Source: “Rs 34L credit card fraud busted”, The Times of India website, accessed 16 September 2012.


Who are the victims?As observed in our sector-wise analysis, financial institutions are the principal victims of fraud (by number of cases), followed by customers and commercial businesses.

Table 2: Fraud by victims — 2011–12

Number of cases Value of fraud (INR billion)

Victim 1H 2H Indicator 1H 2H Indicator

Financial institutions 31 44 1.2 8.1

Customer 26 25 14.1 0.3

Commercial businesses 11 8 0.1 0.1

Investors 7 7 12.3 14.8

Government 2 10 0.1 14.4

Others 21 12 0.1 0.4

Value rounded off to one decimal place Increasing Decreasing No change

Some interesting trends emerged while looking at fraud against financial institutions in 2011–12: • ► Financial sector entities continue to be targeted,

mainly by internal fraudsters. Around 60% of fraud against financial institutions was committed by employees at various levels within the organization, 26% by customers, and the remaining by former employees and external parties including employees of outsourced organizations.

• ► Employees of outsourced companies, including the ones responsible for loading cash in ATMs and security guards, are increasingly getting involved in ATM fraud.

Investors suffered the highest fraud losses (amounting to more than INR27 billion) in 2011–12, followed by the Government, which incurred a total loss of around INR14 billion. Fraud targeting investors primarily included investment fraud (INR14.2 billion), where private companies duped millions of investors by promising them high returns on their investments. The bulk of fraud committed against the Government included tax evasion cases.

The CBI is developing a Bank Case Information System (BCIS), which will include the names of bank fraudsters. The database will be made accessible to field functionaries in the banking sector and will help banks keep a check on fraud committed by existing fraudsters.

4 “RBI frames rules to prevent fraud; wants vigilance officers in banks”, Livemint website, http://m.livemint.com/Politics/A908ubyZThTGQMXc7j5OYP/RBI-frames-rules-to-prevent-fraud-wants-vigilance-officers.html , accessed 11 September 2012.

The RBI constantly issues new guidelines for banks. These are aimed at preventing fraud. Some of the recent initiatives of the RBI include4:• ► In 2011, it asked banks to frame staff rotation and

mandatory leave policies for employees in sensitive areas such as the treasury and for relationship managers handling high-value clients.

• ► It has also directed private and foreign banks to appoint Chief Internal Vigilance (CIV) officers, with responsibilities similar to those of Chief Vigilance Officers in public sector banks.


Meet the perpetrators According to the India Fraud Indicator, 61% of fraud cases committed against businesses are “inside jobs” committed by the employees of organizations.

Figure 2: Fraud by perpetrator — 2011-12

Involvement of employees: Fraud involving employees increased from 50% in 1H to 71% in 2H 2011-12. Middle to low-level employees accounted for 38% of total fraud cases in 2011–12, mainly due to their involvement in the daily operations of the organizations in which they worked. On the other hand, senior management was only involved in 23% of reported fraud cases. However, due to their authority and direct access to funds, senior management members were involved in 79% of fraud cases, each of whose value amounted to more than INR100 million. External parties: This comprises the second-largest perpetrator group among which 23% of fraud cases

12

9

27

20

48

8

20

19

26

30

0 10 20 30 40 50 60

Others

Customers

Senior management

External party

Internal employees

Number of fraud cases1H2H

The total number of fraudsters exceeds total cases, since more than one party is involved in some cases.

were reported during the year. Fraud involving external parties generally include cases of identity theft, where the fraudster uses forged or stolen documents to assume someone else’s identity, typically to access resources or obtain credit and other benefits in that person’s name. Out of the 45 cases involving external parties, the fraudsters committed identity theft in almost 46% of them. Another area of concern relates to the number of fraudulent incidents involving collusion between external parties (including customers) and internal employees. Out of the 25 cases, in which collusive behavior was observed, 21 involved financial institutions and 60% of these included asset or loan fraud. Gender: Although gender has nothing to do with ability to commit fraud, according to this edition of the India Fraud Indicator, the majority (74%) of fraudulent incidents were planned and executed by men. Women were mainly involved in fraud against banks. Table 3: Cases by gender — 2011-12

Gender Number of cases in 1H

Number of cases in 2H

Male 74 77Female 3 3Both male and female

11 10

The total number of cases does not add up to 204, since the required data was not available for some cases.

Recruitment and lottery scams are becoming increasingly common, with fraudsters posing as representatives of reputed multinationals to dupe people by offering them jobs in a company or money purportedly won by them in a company’s promotional events or lottery. Companies generally issue warnings on their websites and in newspapers, stating that they are in no way associated with these emails, text messages, unauthorized websites or programs offering jobs and money.

• ► Such emails generally come from a free, public domain email account (e.g., gmail.com or hotmail.com).

• ► They make a request for a cash deposit in a bank account or payment in some other form.

• ► There is improper use of a company’s trademark.

• ► If the email begins with “Dear sir” or “Dear user,” this implies that its sender does not know the recipient’s name.

How to identify fake email job offers and lottery scams?

Out of the 204 cases of fraud reported in 2011–12, the police was able to catch the fraudsters in nearly 66% of the cases, while in another 8% FIRs were lodged against the suspect.


Delhi witnessed the largest number of fraud cases and suffered the highest aggregate losses by fraud (as compared to the rest of the country) in 2011–12.*

The spread of fraud across India has been consistent, with fraudulent incidences being reported in 24 out of 29 states (including Delhi). Although tier II cities accounted for around 53% of total fraud cases, their value was higher in tier I cities and accounted for 87% of the total fraud value in 2011–12. 74% of the cases reported in tier II cities took place in the financial services sector. Employees in these cities are more likely to commit fraud, since they are away from the direct control of management and are less likely to follow stringent auditing procedures on a regular basis.Figure 3: Fraud cases by city/type — 2011–12

Tier I45%Tier II 55%

1H (Total cases = 98)

Tier I49%Tier II 51%

2H (Total cases = 106)

Table 4: Fraud by state — 2011-12

Number of cases Value of fraud (INR billion)Victim 1H 2H Indicator 1H 2H Indicator

Delhi* 15 26 17.2 15.9Maharashtra 18 13 7.8 3.8

Andhra Pradesh 15 12 0.1 13.9

Gujarat 7 8 1.5 0.7Tamil Nadu 8 5 0.1 0.1Karnataka 6 5 0.1 0.1

Others 29 37 1.1 3.6The fraud value was not available for all the cases. *Cases in the NCR have not been included while calculating the total number of cases in Delhi.

Value rounded off to one decimal place Increasing Decreasing No change

Where is fraud occuring?

* It is only an estimation based on the articles on fraud published in the media (1 April 2011–31 March 2012)


How can companies mitigate their risks in this scenario? While it is not possible for organizations to operate in a zero fraud environment, proactive steps such as conducting risk assessments of procedures and policies can help them hedge their risk of contingent losses due to fraud.

The importance of regularly assessing and reviewing systems and processes for fraud risk cannot be emphasized enough. Just as in a fire safety exercise, where you constantly assess your premises, systems and equipment, and conduct regular drills, a fraud risk assessment will help you to recurrently review your policies and built-in checks, and use advanced technology to mitigate the fraud risk in your organization.

Proactive forensic data analysis: technological defense against new-age fraud

Some techniques such as data visualization have proved to be effective, since humans can absorb larger pieces of information when this is presented in a visual format rather than when it is displayed in plain numbers or text. A large amount of useful and “not so apparent” information related to a fraud scenario can be reviewed at one go by this technique. Fuzzy logic is another technique, which can be used on the data records of a company, e.g., the Employee Master, Vendor Master and Customer Master. These, clubbed with a social network analysis, can indicate possible threat of collusion.

Progressive reviews of unstructured data can help organizations analyze the sentiments, tones and elements described in the fraud triangle (incentive, pressure and rationalization). This, together with unsupervised pattern recognition, can proactively help them to put in place fraud parameters.

Although a company cannot be 100% secure against unknown threats, a certain level of preparedness can go a long way in countering fraud risk. It can limit damages and protect the reputation of organizations.

A careful study of the latest fraud cases in India suggests:

• Banks the most vulnerable: Increasing cases of fraud against banks is a worrying sign for organizations and the regulator.

• Difficult to detect collusion: Another point of concern is the increasing collusion between the employees of organizations and external parties. Collusion can be difficult to detect, and this makes it easier for external parties to steal large amounts quickly.

• Need for investors to be vigilant: The large value of fraud committed against investors is alarming. Although the regulator is constantly mandating regulations to safeguard investors, it is an investor’s duty to closely screen advisers and companies offering abnormally high returns.

• Reputational loss to companies due to recruitment scams: This report also emphasizes the increasing use of companies’ identities/names in recruitment fraud and lottery scams. While the companies cannot be held responsible for such incidents, this certainly besmirches their reputation.

Concluding thoughts This information is intended to only provide a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making

decisions, nor should it be used in place of professional advice.


About Ernst & Young’s Fraud Investigation & Dispute Services

Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to achieve your company’s potential. Better management of fraud risk and compliance exposure is a critical business priority — no matter the industry sector. With our more than 1,500 fraud investigation and dispute professionals around the world, we assemble the right multidisciplinary and culturally aligned team to work with you and your legal advisors. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference.

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• Global exposure: Our team members have been trained on international engagements to obtain global exposure on fraud scenarios.

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• Thought leadership: We serve a variety of leading clients, which gives us a deep insight into a wide range of issues affecting our clients and business globally.

• Qualified professionals: We have a qualified and experienced mix of chartered accountants, certified fraud examiners, lawyers, CIAs, CISAs, engineers, MBAs and computer forensic professionals.

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india fraud indicator 2012

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