CVC analyses top 100 bank frauds

New Delhi: The Central Vigilance Commission (CVC) during an analysis of 100 top bank frauds identified several loop holes and modus operandi of the companies involved in such frauds. The analysis was conducted of top 100 bank frauds that took place in India up to March 31, 2017.

The analysis focused mainly 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 and procedures, etc. The CVC has sent its analysis to Department of Financial Services (DFS) and Reserve Bank of India, in order to plug the loopholes observed by it.

Sharing the details Dr. T.M. Bhasin, Vigilance Commissioner, CVC said that the Commission had 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 though names of borrower accounts/entities and the banks have not been disclosed in the report, steps are being taken for actions such as investigation by investigative agencies, fixing staff accountability and recovery measures, etc. for effective action. He added that this analytical study was initiated by the Commission as a preventive vigilance measure to minimise the occurrence of such type frauds in future.

In the Gems and Jewellery sector, the cases of frauds perpetrated by three companies were analysed. These companies were in business of diamonds and jewellery. The CVC found that 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.
As part of their modus operandi, these 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, the CVC analysis said. It added that 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 (Standby Letter of Credit) 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 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 report said.

It added that 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.

In the manufacturing sector, the cases of frauds perpetrated by five companies were analysed. These companies were in business of Pharmacy, Textile, Ferrous metals, pharmaceuticals products and various ranges of steel products. These companies had started availing credit facilities in form of working capital (Fund based and Non fund based) from the banks under consortium arrangement led by one of the bank. The CVC said that the Companies had defrauded the banking system by unscrupulous activity such as manipulation of books of accounts, removal, depletion and disposing of hypothecated stocks without the bank’s knowledge.

“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 CVC said.

“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,” the CVC found.

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.

In the Agro sector, the cases of frauds perpetrated by three companies were 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.

The CVC mentioned several lapses and loopholes by the banks that led to these companies defrauding banks. It was found that 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 per cent. 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. 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,” the CVC analysis found.

The cases of frauds perpetrated by two companies in media sector were 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. It was found that funds disbursed were 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. Besides, 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.

In Aviation sector, case of frauds perpetrated by one company was 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.

It was found that this aviation 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.

An analysis of a case of fraud perpetrated by a Chartered Accountant and others in this sector was also done. The firm was empanelled for conducting concurrent audit of the bank branch and 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, CVC analysis said.