India fraud indicator 2012


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India Fraud Indicator 2012 is a first-of-its kind initiative in India conducted by the Fraud Investigation & Dispute Services team to look into fraud in all spheres of society, including the business and government segments, as well as in the case of financial institutions and individuals. In-depth analysis of the report suggests that businesses are continuously exposed to fraud risks, with losses recorded in this edition accumulating to around INR66 billion.

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India fraud indicator 2012

  1. 1. tIndia Fraud Indicator 2012Increasing magnitude of fraudA study by Ernst & Young’sFraud Investigation & Dispute ServicesNext
  2. 2. India Fraud Indicator 2012 | 2About theIndia Fraud IndicatorThis edition of our India Fraud Indicator consolidatesarticles 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 articlespertaining to fraud that took place in the automobile,consumer product, financial services, life sciences, mediaand entertainment, real estate, retail and wholesale,technology, telecommunications, health care, chemicals,transportation and logistics, food and beverage, clothing andtextile, machinery, industrial internet and online services,pharmaceuticals and diversified industries segments. A totalof 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 incidentsreported by the media in 2011–12. These incidents mayhave 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 arepending judgment. The outcome of the judgment may ormay not confirm the allegations and ascertain the actualquantum of loss due to fraud.ContentsForeword Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsForewordExecutive summaryIncreasing magnitude of fraudWho are the victims?Meet the perpetratorsWhere is fraud occuring?Concluding thoughtsPrevious / Next
  3. 3. India Fraud Indicator 2012 | 3This is the first edition of India Fraud Indicator from Ernst & Young India. It elaborates onfraud in all spheres of society, including the business and government segments, as wellas in the case of financial institutions and individuals during 2011–12.This report looks into potential losses (amounting to around INR66 billion) suffered by theIndian economy due to fraud.* It showcases an increase in the magnitude of fraud in thecountry in the second half (2H) of 2011 –12, with the value of such incidences rising by36% 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 morespecifically, the banking sector, to fraud. (Ernst & Young India Fraud Survey 20121showcased the high exposure of the banking sector to fraud).Furthermore, it will draw your attention to some interesting fraud enablers, includingidentity and cyber fraud, and most importantly, insider-enabled fraud, which account for61% of all reported fraud cases.The key to identifying fraud lies in the ability to comprehend what lies beneath. This isespecially true of cyber fraud, where it is difficult to identify the perpetrator (s) withcertainty and establish an offense. This is where new forensic technology can helpgovernments, regulatory bodies and corporate organizations counter the increasinglycomplex nature of fraud.We hope you gain some useful insights from this report and that it helps you becomeaware 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.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  4. 4. India Fraud Indicator 2012 | 4The latest analysis of Ernst & Young’s India FraudIndicator indicates that businesses are constantlyexposed to fraud risk. The losses suffered due to fraud,recorded in this report, amount to INR66 billion. Delhiwitnessed the largest number of fraud cases andsuffered the highest aggregate losses by fraud (ascompared to the rest of the country) in 2011–12.Financial services the worst hit• ► The financial services sector was the worst hit, withmore than 63% of the total fraud cases reported in2011–12, followed by technology and transportation.• ► In the financial services sector, banking was themajor victim with 84% of the total number ofreported fraud cases.According to the data compiled by the Reserve Bank ofIndia (RBI), the money lost by banks due to scams andfraud has doubled in the past four years. Losses incurredby banks due to fraud increased by 88% in 2010-11to exceed INR37.9 billion (more than INR20.1 billion in2009–10).India’s banking sector is also reeling under thethreat of mounting non-performing assets (NPAs)that rose by 46% to INR1.37 trillion in fiscal 20123.Several cases, involving irregularities in lending to theinfrastructure and telecom sector, have come to lightover the last couple of years.2 “CBI registers bank fraud cases worth Rs 2,500 cr in 2012”, Statesman website, , accessed 11 September 2012.3 “Fear grips public sector banks”, Livemint website, , accessed 11 September 2012.Executive summaryThe Central Bureau of Investigation’s (CBI’s) BankSecurities and Fraud Cell registered criminal casesamounting to a total of INR40 billion in 2011, whilefraud cases worth INR25 billion have already beenregistered from January to July 20122.Increasingincidents of fraud indicate that there is an urgent needfor banks to have an enhanced system of checks andbalances.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPage 1 of 2Page 2 of 2Previous / NextContents /Foreword
  5. 5. India Fraud Indicator 2012 | 5Who is committing fraud?• It has been observed that fraud is generallycommitted by young people below the age of35 to support their lavish lifestyles, which are notcommensurate with their incomes. (The India FraudSurvey 2012 reportstated, “A typical fraudster is aninternal male employee, who is in his 30s, is far fromthe age of retirement and is an average performer inmiddle management.”)• Internal employees at various management levelswere involved in 61% of reported fraud cases.• According to our study, senior managementmembers of companies are involved in 23% of fraudcases in the country. However, our study revealsthat they are involved in 79% of major fraud casesby value (with each of these amounting to morethan INR100 million) due to their positions andtheir ability to directly influence their companies’decisions. (According to the India Fraud Survey 2012report, “Fraud committed by senior managementranks among the top five fraud risks to whichorganizations are exposed.”)• ► Cases of identity theft involving external partiesare increasing, whereby a fraudster uses forged orstolen documents to commit fraud.Fraud against investorsIn this report, we elaborate on the fact that investorsare the most adversely impacted by fraud, and the totalvalue of fraud committed against them exceeds INR27billion. The greed to earn high returns in a short timemakes investors vulnerable to scams. In April 2011,the police unearthed a major fraud against a multi-levelmarketing company (MLM), which described itself asthe country’s “premier financial consultancy” firm anddefrauded investors of INR10 billion by promising ahigh return of 20% a month to them. Several other MLMcompanies are alleged to have defrauded investors ofmillions of rupees over the past few years.Around 58% of fraud was committed bypeople 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, , accessed 11 September 2012.The Government constituted a seven-member inter-ministerial committee, headed by a Consumer AffairsSecretary, in July 2012 to frame legislation and rulesfor unregulated direct selling and network marketingbusinesses. The committee is looking at framingguidelines for these companies, based on legislationimplemented by Kerala, the first state in India to put inplace regulations for MLM companies4.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPage 1 of 2Page 2 of 2Previous / NextContents /Foreword
  6. 6. India Fraud Indicator 2012 | 6Increasing magnitude of fraudThe total number of fraud cases reported in2H 2011–12 increased by around 8% over1H, but their value grew by 36% during thesame period.The financial services sector, including banking,insurance and Non-banking Financial Companies(NBFCs), was the most vulnerable to fraud and accountedfor 63% of the total number of fraudulent incidents thatoccurred during the year. Within the financial sector,banks were the most common victims of fraud, followedby insurance and mutual fund companies.Table 1: Cases by fraud value (INR) — 2011-12Value Number of cases1H 2H1 or less than 1 million 18 141.01 to 10 million 35 3610.01 to 100 million 20 24100.01 million and above 8 20Total amount Involved (In INR billions) 27.9 38.1The total number of cases does not add up to 204, since the value offraud was not available in some cases.Figure 1: Fraud cases by sector classification,2011-121H12 (Total cases = 98)2H12 (Total cases = 106)BankingBankingInsurance& NBFC*Insurance& NBFC*TechnologyReal EstateTransportTransportHealthcareTelecomTelecomTechnologyConsumer GoodsHealthcareReal EstateConsumer GoodsOthersOthers56%7%9%6%4%4%4%3%7%51%12%5%6%5%4%4%4%9%*NBFC refers to non-banking financialinstitutions including mutual fund companies.Banking — the main targetedsegmentThe banking segment witnessed around 84% of reportedfraud cases within the financial services sector, with ahigh percentage (41%) of asset or loan fraud. Forgeddocumentation was the primary mode of fraud committedin the banking segment.“Fraudulent documentation, multiplefunding, overvaluation/non-existence ofcollaterals and siphoning of funds aresome of the areas in which banks havewitnessed major incidents of fraud.”Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPage 1 of 2Page 2 of 2Previous / NextContents /Foreword
  7. 7. India Fraud Indicator 2012 | 7A fraudster can easily obtain your personal account details fromgullible courier boys, who carry credit card/account details and thenuse these to change official contact information such as a mail/email address or add another user to your account. This is known asaccount takeover fraud.Did youknow? Case studyA case took place in Kolkata, where the agencyexecutive (in charge of collecting documents)would share the personal details (cardnumbers, last few transactions, address anddate of birth) of customers with the bank aswell as the fraudster. The fraudster would usethese details to generate a One-time TelephonePin (TPIN). Using the details, he would call upthe bank’s customer care division to request achange of address and register a new mobilenumber. He would again call to freeze thecurrent credit/debit card and request a newone at the changed address. Using the newcard, the fraudster would shop across the city,causing losses running into huge amounts forthe card owners.There were several significant features in thiscase.• ► It was fairly easy for the fraudster topersuade the agency executive and courierdelivery boys to share details with him.• ► He used the jewelry brought througha customer’s credit card to avail a loanagainst the jewelry using the customer’sforged documents.• ► He was able to apply for a personal loan(an innovation developed by banks to offereasy loans to preferred customers with agood credit history) of INR1 million andalso opened a bank account using fakedocuments.Source: “Rs 34L credit card fraud busted”, The Times of India website, accessed 16 September 2012.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPage 1 of 2Page 2 of 2Previous / NextContents /Foreword
  8. 8. India Fraud Indicator 2012 | 8Who are the victims?As observed in our sector-wise analysis,financial institutions are the principal victimsof fraud (by number of cases), followed bycustomers and commercial businesses.Table 2: Fraud by victims — 2011–12Number of cases Value of fraud (INR billion)Victim 1H 2H Indicator 1H 2H IndicatorFinancial institutions 31 44 1.2 8.1Customer 26 25 14.1 0.3Commercial businesses 11 8 0.1 0.1Investors 7 7 12.3 14.8Government 2 10 0.1 14.4Others 21 12 0.1 0.4Value rounded off to one decimal place Increasing Decreasing No changeSome interesting trends emerged while looking atfraud against financial institutions in 2011–12:• ► Financial sector entities continue to be targeted,mainly by internal fraudsters. Around 60% of fraudagainst financial institutions was committed byemployees at various levels within the organization,26% by customers, and the remaining by formeremployees and external parties including employeesof outsourced organizations.• ► Employees of outsourced companies, includingthe ones responsible for loading cash in ATMs andsecurity guards, are increasingly getting involved inATM fraud.Investors suffered the highest fraud losses (amountingto more than INR27 billion) in 2011–12, followedby the Government, which incurred a total lossof around INR14 billion. Fraud targeting investorsprimarily included investment fraud (INR14.2 billion),where private companies duped millions of investors bypromising them high returns on their investments. Thebulk of fraud committed against the Government includedtax evasion cases.The CBI is developing a Bank CaseInformation System (BCIS), which willinclude the names of bank fraudsters.The database will be made accessibleto field functionaries in the bankingsector and will help banks keep acheck on fraud committed by existingfraudsters.4 “RBI frames rules to prevent fraud; wants vigilance officers in banks”, Livemintwebsite, , accessed 11 September2012.The RBI constantly issues new guidelines for banks.These are aimed at preventing fraud. Some of therecent initiatives of the RBI include4:• ► In 2011, it asked banks to frame staff rotation andmandatory leave policies for employees in sensitiveareas such as the treasury and for relationshipmanagers handling high-value clients.• ► It has also directed private and foreign banks toappoint Chief Internal Vigilance (CIV) officers, withresponsibilities similar to those of Chief VigilanceOfficers in public sector banks.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  9. 9. India Fraud Indicator 2012 | 9Meet the perpetratorsAccording to the India Fraud Indicator,61% of fraud cases committed againstbusinesses are “inside jobs” committed bythe employees of organizations.Figure 2: Fraud by perpetrator — 2011-12Involvement of employees: Fraud involving employeesincreased 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 theirinvolvement in the daily operations of the organizationsin which they worked. On the other hand, seniormanagement was only involved in 23% of reportedfraud cases. However, due to their authority and directaccess to funds, senior management members wereinvolved in 79% of fraud cases, each of whose valueamounted to more than INR100 million.External parties: This comprises the second-largestperpetrator group among which 23% of fraud cases1292720488201926300 10 20 30 40 50 60OthersCustomersSenior managementExternal partyInternal employeesNumber of fraud cases1H2HThe total number of fraudsters exceeds total cases,since more than one party is involved in some cases.were reported during the year. Fraud involving externalparties generally include cases of identity theft, wherethe fraudster uses forged or stolen documents to assumesomeone else’s identity, typically to access resources orobtain credit and other benefits in that person’s name.Out of the 45 cases involving external parties, thefraudsters committed identity theft in almost 46% ofthem.Another area of concern relates to the number offraudulent incidents involving collusion between externalparties (including customers) and internal employees.Out of the 25 cases, in which collusive behavior wasobserved, 21 involved financial institutions and 60% ofthese included asset or loan fraud.Gender: Although gender has nothing to do with abilityto commit fraud, according to this edition of the IndiaFraud Indicator, the majority (74%) of fraudulent incidentswere planned and executed by men. Women were mainlyinvolved in fraud against banks.Table 3: Cases by gender — 2011-12Gender Number of cases in1HNumber of cases in2HMale 74 77Female 3 3Both male andfemale11 10The total number of cases does not add up to 204, since the requireddata was not available for some cases.Recruitment and lottery scams are becomingincreasingly common, with fraudsters posing asrepresentatives of reputed multinationals to dupepeople by offering them jobs in a company or moneypurportedly won by them in a company’s promotionalevents or lottery. Companies generally issue warnings ontheir websites and in newspapers, stating that they arein no way associated with these emails, text messages,unauthorized websites or programs offering jobs andmoney.• ► Such emails generally come from a free, public domainemail account (e.g., or• ► They make a request for a cash deposit in a bank accountor payment in some other form.• ► There is improper use of a company’s trademark.• ► If the email begins with “Dear sir” or “Dear user,” thisimplies that its sender does not know the recipient’s name.How to identify fake email joboffers and lottery scams?Out of the 204 cases of fraudreported in 2011–12, the police wasable to catch the fraudsters in nearly66% of the cases, while in another 8%FIRs were lodged against the suspect.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  10. 10. India Fraud Indicator 2012 | 10Delhi witnessed the largest number of fraudcases and suffered the highest aggregatelosses by fraud (as compared to the rest ofthe country) in 2011–12.*The spread of fraud across India has been consistent,with fraudulent incidences being reported in 24 outof 29 states (including Delhi). Although tier II citiesaccounted for around 53% of total fraud cases, theirvalue 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 thefinancial services sector. Employees in these cities aremore likely to commit fraud, since they are away from thedirect control of management and are less likely to followstringent auditing procedures on a regular basis.Figure 3: Fraud cases by city/type — 2011–12Tier I45%Tier II 55%1H (Total cases = 98)Tier I49%Tier II 51%2H (Total cases = 106)Table 4: Fraud by state — 2011-12Number of cases Value of fraud (INR billion)Victim 1H 2H Indicator 1H 2H IndicatorDelhi* 15 26 17.2 15.9Maharashtra 18 13 7.8 3.8Andhra Pradesh 15 12 0.1 13.9Gujarat 7 8 1.5 0.7Tamil Nadu 8 5 0.1 0.1Karnataka 6 5 0.1 0.1Others 29 37 1.1 3.6The fraud value was not available for all the cases. *Cases in the NCR have notbeen included while calculating the total number of cases in Delhi.Value rounded off to one decimal place Increasing Decreasing NochangeWhere is fraud occuring?* It is only an estimation based on the articles on fraud published in the media (1 April 2011–31 March 2012)Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  11. 11. India Fraud Indicator 2012 | 11How can companies mitigatetheir risks in this scenario?While it is not possible for organizations to operatein a zero fraud environment, proactive steps suchas conducting risk assessments of procedures andpolicies can help them hedge their risk of contingentlosses due to fraud.The importance of regularly assessing and reviewingsystems and processes for fraud risk cannot beemphasized enough. Just as in a fire safety exercise,where you constantly assess your premises, systemsand equipment, and conduct regular drills, a fraudrisk assessment will help you to recurrently reviewyour policies and built-in checks, and use advancedtechnology to mitigate the fraud risk in yourorganization.Proactive forensic data analysis: technologicaldefense against new-age fraudSome techniques such as data visualization haveproved to be effective, since humans can absorblarger pieces of information when this is presentedin a visual format rather than when it is displayedin plain numbers or text. A large amount of usefuland “not so apparent” information related to afraud scenario can be reviewed at one go by thistechnique. Fuzzy logic is another technique, whichcan be used on the data records of a company, e.g.,the Employee Master, Vendor Master and CustomerMaster. These, clubbed with a social networkanalysis, can indicate possible threat of collusion.Progressive reviews of unstructured data can helporganizations analyze the sentiments, tones andelements described in the fraud triangle (incentive,pressure and rationalization). This, together withunsupervised pattern recognition, can proactivelyhelp them to put in place fraud parameters.Although a company cannot be 100% secure againstunknown threats, a certain level of preparednesscan go a long way in countering fraud risk. Itcan limit damages and protect the reputation oforganizations.A careful study of the latest fraud cases in India suggests:• Banks the most vulnerable: Increasing cases of fraudagainst banks is a worrying sign for organizations and theregulator.• Difficult to detect collusion: Another point of concernis the increasing collusion between the employees oforganizations and external parties. Collusion can bedifficult to detect, and this makes it easier for externalparties to steal large amounts quickly.• Need for investors to be vigilant: The large value offraud committed against investors is alarming. Althoughthe regulator is constantly mandating regulations tosafeguard investors, it is an investor’s duty to closelyscreen advisers and companies offering abnormally highreturns.• Reputational loss to companies due to recruitmentscams: This report also emphasizes the increasing useof companies’ identities/names in recruitment fraudand lottery scams. While the companies cannot be heldresponsible for such incidents, this certainly besmirchestheir reputation.Concludingthoughts This information is intended to only provide a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for makingdecisions, nor should it be used in place of professional advice.Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  12. 12. India Fraud Indicator 2012 | 12About Ernst & Young’s Fraud Investigation & Dispute ServicesDealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to achieve your company’spotential. Better management of fraud risk and compliance exposure is a critical business priority — no matter the industry sector. Withour more than 1,500 fraud investigation and dispute professionals around the world, we assemble the right multidisciplinary and culturallyaligned team to work with you and your legal advisors. And we work to give you the benefit of our broad sector experience, our deep subjectmatter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference.FIDS India• Deep competencies: Our FIDS team has specific domainknowledge, along with wide industry experience• Forensic technology: We use sophisticated tools andestablished forensic techniques to provide the requisiteservices to address individual client challenges.• Global exposure: Our team members have been trainedon international engagements to obtain global exposureon fraud scenarios.• Market intelligence: We have dedicated fieldprofessionals, who are specifically experienced andtrained in corporate intelligence, and are capableof conducting extensive market intelligence andbackground studies on various subjects, industries,companies and people.• Thought leadership: We serve a variety of leadingclients, which gives us a deep insight into a wide range ofissues affecting our clients and business globally.• Qualified professionals: We have a qualified andexperienced mix of chartered accountants, certifiedfraud examiners, lawyers, CIAs, CISAs, engineers, MBAsand computer forensic professionals.Our services• Anti-fraud and fraud risk assessment• Fraud investigation• Dispute advisory services• Forensic technology and discovery services• Regulatory compliance• Brand protection and IP risk• Forensic business intelligence• Anti-bribery program• Third-party due diligence/Vendor due diligence.• Anti-bribery program• Third-party due diligence/Vendor due diligence.Contact usArpinder SinghPartner and National DirectorDirect: +91 22 6192 0160Email: arpinder.singh@in.ey.comSandeep BaldavaPartnerDirect: +91 40 6736 2121Email: sandeep.baldava@in.ey.comVivek AggarwalPartnerDirect: +91 12 4464 4551Email: vivek.aggarwal@in.ey.comExecutive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughtsPrevious / NextContents /Foreword
  13. 13. Ernst & Young Pvt. Ltd.Assurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide, our167,000 people are united by our shared values andan unwavering commitment to quality. We make adifference by helping our people, our clients and ourwider communities achieve their potential. Ernst & Youngrefers to the global organization of member firms ofErnst & Young Global Limited, each of which is a separatelegal entity. Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide services to clients.For more information about our organization, please visitwww.ey.comErnst & Young Pvt. Ltd. is one of the Indian client serving member firms ofEYGM Limited. For more information about our organization, please & Young Pvt. Ltd. is a company registered under the Companies Act,1956 having its registered office at 22 Camac Street, 3rd Floor, Block C,Kolkata - 700016© 2012 Ernst & Young Pvt. Ltd. Published in India.All Rights Reserved.This publication contains information in summary form and is thereforeintended for general guidance only. It is not intended to be a substitute fordetailed research or the exercise of professional judgment. Neither EYGMLimited nor any other member of the global Ernst & Young organizationcan accept any responsibility for loss occasioned to any person acting orrefraining from action as a result of any material in this publication. Onany specific matter, reference should be made to the appropriate advisor.EYIN1210-085ED None