This document discusses auditing for fraud detection. It outlines the fraud triangle, which consists of three elements necessary for fraud to occur: pressure/motivation, opportunity, and rationalization. It then provides examples of each element and differences between audit and fraud. The document details various procedures that are prone to fraud due to non-adherence to systems or system loopholes across different departments. It also includes case studies of past fraud instances and remarks on them. Finally, the document outlines an action plan adopted to investigate surrendered policies and provides various final observations from the investigation.

1. AUDITING FOR FRAUD DETECTION
R. Ravindra Kumar
Secretary (Audit)
Ahmedabad

2. Auditing for
Fraud Detection
R. Ravindra Kumar
Secretary (Audit)
LIC OF INDIA
AHMEDABAD

3. Three elements must be present for fraud to be
executed:
a.a. Pressure/ motivation usually individual
characteristics and situational factors
b.b. opportunities eg available targets ie lack of controls
c.c. rationalization/justification/ neutralization
This is known as the fraud triangle
The Fraud triangle

4. The Fraud triangle

5. Pressure/ Motivation :
1. Greed
2. Gambling
3. Financial strain - personal
4. Financial strain - business
5. Maintaining own/ family business
6. Influenced/ implicated by others

6. Pressure/ Motivation (Cont.):
7.Pleasing others
8. drug/alcohol addiction
9. Financing new business interests
10. Terminal illness
11. Dissatisfaction with employer

7. Opportunity
Weak or non-existent internal control
1. Lack of segregation of duties
2. Highly decentralized organization
3. Lack of knowledge/awareness
5. Opportunity is the perception by someone believing they can
commit a fraud without getting caught
6. Management control and influences “opportunity” more than any
other factor in the Fraud Triangle

8. Rationalization:
1. Intention to conduct a reasonable business
2. Intention to repay
3. Influenced/ implicated by others
4. Underpaid by employer
5. Helping clients
6. Tone at the top: poor corporate governance

9. 9
Difference between Audit and Fraud
Audit

10. 10
Separate Audit and Fraud
How to deal with this issue?
Auditors are policemen

11. Sales Department
Procedure FraudPronareaduetononadherencetosystem Systemloophole
Publicity Notfollowthestorecodeprocedure NospecificguidelinefromCO,CCdeptt
GIFTARTICLES CompetitionGiftArticle&SPGIitems PurchasequantitynotdefineatthetimeofOrder
OfficeAllowance OfficeAllowancesBills Authenticityofbillsassubmissioninlumpsum
Peopleinvolved Beneficiary Detection
Vendor Vendor ViolationofStorecode
Vendor+Employees Vendor+Employees Violationofprocedurewhileplacingorder
Agents+Mos Agents OfficeallowanceBills

12. Category Case Study Remark
Diary and
calendar
Sold diary and calendar and collected
cash.
J.V. passed : debiting renewal
commissioncreditingD&C.
**Fraudbyemployee**
Excess
commissionpaid
Through add option commission of
orphan policies added and with the
connivance of agent shared the excess
amount.
**Fraudbyemployee**

13. P.S. Department
Procedure FraudPronareaduetononadherencetosystem Systemloophole
ADDRESSCHANGE KYC PASSWORDUSEDBYUNATHORISEDPER
DUPLICATEPOLICY PROPERDOCUMENTSNOTOBTAINED VERFICATIONOFDOCU.ARENOTDONE
SURRENDER EXITINTERVIEW NOTGIVINGIMPORTANCETOEXITINT.
Peopleinvolved Beneficiary Detection
AGENT/CUST. FRAUDSTER VERIFICATIONOFKYC
AGENT/CUST. FRAUDSTER VERIFICATIONOFKYC
AGENT/CUST. FRAUDSTER VERIFICATIONOFKYC

14. Category Case Study Remark
Fraud in loan
payment
Fake policy bond printed.
Loan raised by submitting fake policy bond.
Green voucher prepared: debited loan interest,
credited a/c-4 favoring fake party.
Loan interest debit to the extent of loan interest
payment to avoid adverse balance.
**Fraud by one
person**
Other: Negligence of
duty.
-
Fraudulent death
Claims , case of
revival.
Charge Sheet was issued to a Sub-staff for
helping in reviving a policy on a policy-holder
who had died and making a fraudulent claim and
also misleading the Claim Investigation Officer
regarding illness and date of death of L.A.
Creation of
NEFT master
Neft Payments were manipulated by AGENTS.
Given own./spouse account no for creation of
NEFT master
NEFT master created
with pre-printed
cheque leaf & Original
Passbook not verified.
Signature was not
verified.

15. O.S. Department
Procedure Fraud Pron area due to non adherence to system System loophole
STORE CODE (TENDERING) LAPSE IN EXERCISE OF DUE CONTROL NON ADHERENCE TO PRESCRIBED PROCEDURE.
CASUAL/CONTRACT
LABOUR/DUMMY EMPLOYEE LAPSE IN EXERCISE OF DUE CONTROL NON ADHERENCE TO PRESCRIBED PROCEDURE.
L.T.C /P.L. ENCASHMENT. DUPLICATE PAYMENTS FOR SAME BLOCK. LACK OF CONTROL IN TR.IN /OUT CASES
STATIONERY ITEMS /I.T.
CONSUMEABLES
EFFECTIVE QUALITY CONTROL CHECK (TENDER
V/S ACTUAL.) NO SYSTEM CONTROL
A.M.C AUTHENTICITY OF REPORTS SUBMITTED WITH TECHNICAL ASPECTNO ESTABLISHED SYSTEM OF CROSS VERIFICATION
People involved Beneficiary Detection
VENDOR/EMPLOEE VENDOR/ EMPLOYEE VERIFICATION OF RECORDS/AUTHENTICITY
EMPLOYEE EMPLOEE VERIFICATION OF APPOINTMENT LETTER /IDENTITY
EMPLOYEE EMPLOYEE
VERIFICATION OF L. T. C CARD AND AUTHENTICITY OF
BILLS.
VENDOR/EMPLOEE VENDOR/ EMPLOYEE
VERIFICATION OF ITEMS RECEIVED & REPORTS OF Q.C.
COMMITTEE.
VENDOR/ EMPLOYEE VENDOR/EMPLOYEEVERIFICATION OF REPORT RECONCILIATION OF REPORTS AND BILLS SUBMITTED BY VENDOR.

16. Category Case Study Remark
Supply by
venders(Stores
item)
Bad quality of printed material supplied.
No proper QC done
Payment released
**fraud by vender**
**negligence by office staff**
Short supply by
vender
No proper register for incoming stocks
and distribution maintained
**fraud by vender**
**negligence by office staff**
Inferior quality /
duplicate supplied
by vender
No proper quality control by QCC **fraud by vender**
**negligence by office staff**

17. Claim Department
Procedure FraudPronareaduetononadherencetosystem Systemloophole
EARLYDEATHCLAIM INVESTIGATIONBYMO MISGUIDEBYAGENTSINTERMEDIATES
DEATHCERTIFICATE FAKEDEATHCERTIFICATE DEATHCERTIFICATEW/OQRCODE
PAYMENTBYCHEQUES PAYMENTBYCHEQUES THIRDPARTYPAYMENT/LICFAVOUR
PAYMENTWITHOUTPOLICYDOCUMENTS PROPERIDENTITYPROOF
Peopleinvolved Beneficiary Detection
INVESTIGATINGOFFICER/BENEFICIARYNOMINEE/AGENTS/EMPLOYEE INVESTIGATIONTOOTHERTHANSERVICINGBO
AGENT/DEVOFFICERS NOMINEE/AGENT DEATHCERTIFICATEWITHQRCODE
EMPLOYEE/AGENT/D.O. EMPLOYEE/AGENT/D.O. VERIFCATIONOFADJUSTMENTDETAILS
CLAIMANT/EMPLOYEE CLAIMANT/EMPLOYEE VERIFICATIONOFIDPROOF&FAMILYHISTORY

18. Category Case Study Remark
Creation of
NEFT master
Neft Payments were manipulated by
AGENTS.
Given own./spouse account no for
creation of NEFT master
NEFT master created with
pre-printed cheque leaf &
Original Passbook not
verified.
Signature was not verified.
MHR Charge Sheet issued to a Development
Officer for suppressing material
information about health of the Proposer
in MHR
**Fraud committed by D.O. /
M.O. of Branch.
Fake death claim Submitted proposal by suppressing
material fact. Policy continues for more
than 3 years. Fake death certificate
submitted.
**Fraud committed by Policy
holder**
Policy taken for
large S.A. And
submitted death
claims.
1. Policy taken on the life of 80
years old lady- showed 55 years
in proposal. Presented other
person.
2. Taken policy on the life of
mentally retarded person.-
presented healthy person.
3. Presented forged document
before Agent & DO.
4. CBI unearthed the scandal.
**case of impersonation**

19. Account Department
Procedure FraudPronareaduetononadherencetosystem Systemloophole
SURPLUSTRANSFER MANUALVOUCHER PAYEENAME/ACCOUNTDIFFER
CANCELLEDTRANSACTION EFFECTIVEQUALITYCONTROLCHECK MISUSEOFCASHTRANSACTION
PAYMENTFROMINCOMECODES&CHEQUECANCELLEDACCOUNTSEFFECTIVEQUALITYCONTROLCHECK WRONGPAYMENTS
MISUSEOFJOURNELENTRIESTOCREATEERRONEOUSEFFECTSONASSETSANDLIABILITIESEFFECTIVEQUALITYCONTROLCHECK WRONGPAYMENTS/ADJUSTMENTS
Peopleinvolved Beneficiary Detection
EMPLOYEE EMPLOEE/RELATIVEOFEMPLOYEE BANKSTATEMENTS
EMPLOYEE EMPLOEE CANCELLEDRECEIPTS/REGISTER
EMPLOYEE EMPLOEE/RELATIVEOFEMPLOYEE JOURNELBOOKS
EMPLOYEE EMPLOEE JOURNELBOOKS

20. Category Case Study Remark
Payment to
wrong person
through Green
Voucher.
Payments made without supporting vouchers
amounting to 2.10 crore.(CBI FIR RC 03(A) 2014
dt 13.03.2001
Cheques were blindly signed.
Reconciliation was not done, payments by
“Green Vouchers”
Cheque signing
authorities did not
verify supporting
bills/pay order.
Prepayment
vouching not done.
***Fraud***
***Negligence of
duty***
MI unit: Green Vouchers were used to draw LIC
of India Cheques debiting competitions, Publicity
expenses!
SO: Green vouchers were used for LIC of India
Cheques operating CLIA head of accounts!
MI :Claim proceeds were diverted for NB. The
police report indicates that the Death Certificates
were fake.( 49 lacs D/CL amt and 1.38 cr
unremitted amt.)
MI :over adjustment of MI Collections was made
for NB!
Short lodgments
of Cash
Denomination of cash wrongly mentioned in
DCB and Pay-in-slip.
Concerned person did
not reconcile the
amount of DCB &
pay-in-slip from Cash
Book.
** Negligence of
duty**
** Cash lifting
person took
advantage of
negligence**

21. Category Case Study Remark
Control over
R.R. Register
Cheques towards Renewal Premium of a
Employer Employee scheme were diverted to NB
and others RP
On the basis of a complaint, case was filed under
EOW,R No 81/2013 ( RS 3.72 crore)
Missing cash
box
Charge Sheet was issued to a Cashier for i) Not
locking the cash counter from inside and ii) Not
getting the fishplate in counter fixed.
Facts were called and it was observed from FIR
that the cashier was not handed over the cash
box by sub-staff/key-holders
As per Accounts Manual (before 2006) key-
holders have to hand over cash box to cashier
**Negligence of
duty**
Cash stolen
from Bank
premises
Rs.20 lacs misplaced from Bank premises.
Officer accompanied the cash came to office
when cash reached in the bank premises.
He did not receive the Pay-in-slip after
acknowledgement of Bank.
**Negligence**

22. Category Case Study Remark
Short lodgment
of cash in the
Bank
Bank peon deposit less cash in the bank.
Siphoned more than Rs.20 lacs.
Submit original pay-in-slip in BO.
Lodged cash through Different pay-in-slip in
bank.
Bank reconciliation was pending the branch.
Charge sheet given to cashier, HOD A/C,
Officer accompanied the cash and Bank
Peon.
**Fraud by Bank
Peon**
**Negligence(other
officials)**
Delayed Bank
reconciliation
Absence of Reconciliation/ too much coincidence
are the most prone areas for an intelligent person
to exploit.
Of late Indemnity Bonds/duplicate policies are
used more often to siphon off money.
Non remittance of cash within time frame from
premium points, NGO's(MI)
Third Party
Cheque
Collected cash from Policy holder. Deposited self
cheque. Subsequently, it got dishonored
*Fraud on the part of
intermediaries**
*Negligence of Staff**

23. ACTION PLAN ADOPTED
1. Listing of Policies Surrendered during the period from
01/01/2012 to 31/03/2014.
2. Listing of Payment Details of Surrendered Policies.
3. Listing of Cheques cleared through A/C IV in bank drawn
in favour of LIC of India
4. Sorting out and Matching the cheques of Surrender Value
payments cleared in favour of LIC of India.
5. Matching of Cheque numbers recycled to Transaction
number in Collection books (From Cheque number to
Transaction Number) in respect of the SV cases
6. Matching of Transaction Numbers to BOC in respect of the
SV cases.

24. ACTION PLAN ADOPTED
CONTD.,7. Listing of Adjustment Details of the BOCs recycled from
Surrender Payments.
8. Matching of Completion Details with that of Surrendered
Policy details.
In the above process 1000 dockets of NB cases completed
in respect of 275 cases from Surrender were physically
verified to list out the discrepancies.

25. Hindrances in the process
1. Cheques issued in favour of LIC of India if cleared
in other branch offices could not be matched.
2. Recycled cheques where details of only one
cheque were entered for consolidated sum of
multiple cheques in the amount column also could
not be matched through system.
3. Log files for the same could not be obtained from
Branch Office as it is only extracted on weekly
basis.

26. Final Observations
1. Master modification for status code
RFMs through RFM93 for status code corrections were not
noticed in respect of the surrendered policies.
2. Issue of Alert Report:
Of all the policies surrendered during 01-04-2012 to 31-03-
2014, 2 policies were reinstated. Out of which one policy
finds place in the Audit Report for the year 2014-15 for a
large number of discrepancies and Alert Report was issued
by Audit Department.

27. Final Observations.. Contd.,
3. SV cheques not encashed :
Two cheques of SV were still lying to the credit
cheque cancelled account as on date of special audit.
4. Recycling register details
1. Cheques have been handed over to Branch Manager in large
numbers.
2. From 23-12-2013 to 21-05-2014, Details of disposal of cheques
favoring LIC of India are left blank.
3. In numerous cases, Cheques handed over to Development officer
and Agents.
4. Cheques in favor of LIC were not accounted directly at cash
counter and also disposal particulars were not noted on the
register.

28. Final Observations.. Contd.,
5. SV proceeds are recycled to NB on the lives of
unrelated proposers: In one of the recycled
cases, the amount was used for completion of
policies under CEIS.

29. Final Observations.. Contd.,
6. Accounting of SV Cheques:
1. There are cases of Accounting of Multiple
cheques under one single cheque number with
consolidated amount of Multiple cheques for
issuing a single BOC.
2. Due to this, only one cheque was being
individually accounted and the rest of them
were being lodged into the bank without being
individually accounted for.

30. Final Observations.. Contd.,
6. Accounting of SV Cheques Contd..:
3. But since all these cheques were issued by LIC
favoring LIC, the credit was received for the consolidated
amount of pay in slip in the bank statement. Hence no
difference found for the purpose of reconciliation on this
count.
4. From 01.07.2013 to 31.12.2013
Tot Cheques drawn in favor of LIC of India: 695
Total Cheques mentioned in Books : 163
Total no. of Cheques not mentioned : 512
Total amount for 695 Cheques Rs. 3966115 accounted
under 163 Cheques.

31. Final Observations.. Contd.,
7. Reconciliation and Tallying of cash and Cheques
not done on day to day basis with physical
cheques by holder of Key 1.
Eg: On 24/12/13, a cheque was entered for an amount
which was Rs. 50000/- more that the actual amount of the
cheque and rectified on 30/12/13 as given below
Date
Cheque
no.
Actual
Amount
Payin
Slip
Amount
Payin
slip no.
Payin
slip
Date.
Payin Slip
Totals
Actual
amount of
cheques
lodged
Remarks
24-12-13 471730 31472 81472 8037 24-12-13 198984 148984 Error
30-12-13 471738 81472 31472 NA 30-12-12 NA NA Rectification

32. Final Observations.. Contd.,
8. Checking of SV records recycled
Month of SV 03/2012, 08/2013, 09/2013,
12/2013
Total No. of Dockets Checked 473
NO consent letter available for
recycling 74

33. Final Observations.. Contd.,
9. Recycling of cases for third party adjustment needed to be
viewed seriously.
Total number of NB cases from SV Proceeds selected for
verification 350
Dockets made available for verification from above 275
No. of proposals completed without requirements of
recycled cases 110

34. Final Observations.. Contd.,
10. Third Party Adjustments from SV recycling
1. No controls on cheques issued in favor of LIC of India
2. These cheques were not accounted in name of Bonafide Policy
holders.
3. Cheques issued in favour of LIC of India instead of policy holder
were used to complete NB on the lives of proposers totally
unrelated to the Surrendered Policy person, with some written
consent.
4. Genuineness of the consent and motives of such consent was
questionable . The whole process was seen as though they were
done to circumvent AML and KYC norms

35. Final Observations.. Contd.,
10. Third Party Adjustments from SV recycling Contd.,
5. Amount utilisted for Third party adjustment
Financial Year
NB completed on lives of
Third party
2012-2013 Rs. 715090
2013-2014 Rs. 12180979

36. Final Observations.. Contd.,
11. QMA reports.
QMA reports do not suggest or point out
1. Third party adjustments of proposal deposits on large scale.
2. Unusual accounting of Multiple cheques for single BOC
3. Surrendering of 1242 policies with FUP less than or equal to
03/2009
4. Practice of issuing lump sum deposits in all cases by
circumventing AML/KYC norms

37. Involvement of Personnel in the process
1. PS Dept: Prepared SV Vouchers with payment in favour of LIC of
India for recycling, against the procedure. Especially for
conventional Policies.
2. F&A Dept: Not issuing BOC in name of bonafide policy holder,
Bank lodgment of the cheques without accounting individual
cheques, Issuing of Block BOCs, not maintaining register for
handing over of cheques.
3. NB dept: Completion of policies without proposal, Third party
adjustment violating AML guidelines, Bypassing the alerts given
by the module during completion of proposals.
4. Branch Manager: As per recycling register, Cheques were
personally collected by BM. Out of these, many were adjusted for
third parties thereby violating AML/KYC norms.
5. Others: Third party adjustments are scattered over such a wide
spectrum of policyholders, agents, Development officers, SBA

38. Conclusion
1. All the cases where SV amounts were recycled into NB on the
lives of third parties may result into complaints at a later date.
2. As consideration amount towards proposals was not received
from the new policy holders, validity of the policies raises serious
legal issues.
3. As a corollary, commission paid to agents, Credit to Development
officers may need to be revisited

39. Thank You
R. Ravindra Kumar
Secretary (Audit)
LIC OF INDIA
AHMEDABAD