CORPORATE FRAUD INVESTIGATION

Introduction: Corporate fraud occurs when a person or a company are involved in deceiving and deceptively committing activities which are punishable by law. It can be difficult to prevent and to catch, therefore it requires certain regulating policies which predict and prevent such frauds from happening. Corporate Fraud is often called ”White Collar Crime” as it does not involve an sort of violence but is most financially motivated and committed by business and government professionals.

The Companies Act 2013 defines fraud as “Fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. ‘Wrongful gain’ means the gain by unlawful means of property to which the person gaining is not legally entitled and ‘wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled.”

HISTORY OF CORPORATE FRAUD :

  1. EAST INDIA COMPANY FRAUD – One of the very first Fraudulent Financial reporting and corrupt business practices having its existence since the era of footprints of Public corporation. ESI was the first multinational corporation in the world and the first company to issue stock. In the late 1700s Edmund Burke had Robert Clive, “the founder of the empire” and Warren Hastings, India’s Governor-General, brought up on impeachment charges laden with corruption issues. Though the trials failed to convict anybody. The Company was subsequently wound up under the East India Company Stock Redemption Act, 1874
  2. THE MUNDHRA AFFAIR – Exactly 59 years ago in 1957, took place Independent India’s first big financial scam. It was called the Mundhra Scandal. Haridas Mundhra, a Calcutta-based industrialist and stock speculator got the government owned Life Insurance Corporation (LIC) to invest a sum of Rs 1,26,86,100 (one crore, twenty-six lakh, eighty-six thousand and hundred) in the  shares of six of his troubled companies. And there was a huge political conflict during the Independence Era and the agreement between Haridas and LIC bore some complication and then Mr. Nehru appointed former chief justice M.C. Chagla as a one-man commission of inquiry. In just 24 days. The hearings of the Chagla commission were conducted in public. Several leading stockbrokers who were in the LIC Investment Committee testified that the investment could not have been made for the purpose of propping up the market, as was claimed by the Finance Ministry. They also stated that had the LIC consulted the Investment Committee, they would have pointed out Mundhra’s forged shares episode from 1956. After Mr. Chagla filed his report Mr. Krishnamachari resigned from his post of Finance Minister on February 18, 1958. Mr. Mundhra was also arrested and he went to jail for 22 years. And this situation was also labeled as The  First successful trial of a financial scandal in Independent India.
  3. CADBURY INDIA – The Directorate General of Central Excise Intelligence (DGCEI) has detected two cases of tax evasion by Cadbury India, one case is related to evasion of Central excise and the other is concerned with evasion of service tax. It involves evasion of approximately over Rs. 200 crore.
  4. SAHARA SCAM – Sahara Group chairman Subrata Roy and Vijay Mallya had a lot in common. Both successful businessmen had a passion for sports. The two also had their own IPL teams, Sahara Pune Warriors and Royal Challengers Bangalore (after resigning as the chief of UB Group Mallya is technically not the owner of RCB). In fact, the duo jointly owns the Sahara Force India Formula 1 team. Sahara Group was accused of failing to refund over Rs. 20,000 crore to its more than 30 million small investors which it collected through two unlisted companies of Sahara. B Ramalinga Raju, the founder of Satyam Computers, got into trouble after he admitted to inflating the company revenue, profit and profit margins for every single quarter over a period of 5 years, from 2003-2008. The amount embezzled by him is estimated to be around Rs. 7,200 crore. In April 2015, Ramalinga Raju and his brothers were sentenced to 7 years in jail, and fined Rs. 5.5 crore.
  5. WALMART INDIA – When certain authorities who are responsible to carry the name of their respective company but are eventually seduced by bribes often lead to fall in the name of the company’s name one such company is Walmart India. Walmart India operates 20 Best Price modern wholesale stores across nine states. The company is also launching business-to-business online ventures. In 2013, Walmart had shelved plans to open retail stores, severing a joint venture with Sunil Mittal’s Bharti Enterprise but in a major report by The Wall Street Journal, Walmart India suspended several executives at its joint venture with Bharti, including its CFO and CEO, as it examined potential violations of US anti-bribery laws. Certain charges involves thousands of small payments to low-level local officials to help move goods through customs or obtain real-estate permits. These payments ranged from around 5$ USD to 200$ USD, though these amount seem small, but when added together make millions of dollars
  6. KINGFISHER AIRLINE CRISIS – Kingfisher Airlines was set up in 2003 but hasn’t seen a single year of profit since it got listed in 2006. Vijay Mallya a.k.a the King of Good Times, ex-chairman of United Spirits Ltd  is being described as the biggest fraud in Indian history, is in the news for failing to repay the nearly Rs. 7,000 crores to various banks and his subsequent fleeing from India, whose many frauds also involve payroll fraud.

CURRENT SCENARIO

India is one of the worst countries when we speak about Corporate Fraud. India a democratic country where the government is elected by the people. There have been scams and frauds committed even by the highest authority of the Country. Ministers, Councilors, Mayors etc., have all been held for taking bribes, involving in corruption and many other things.

One of the major reasons for corporate fraud to prevail is because of the lack of strong internal audit mechanism along with over-riding powers of the top management in the companies have resulted in corporate frauds in India. The corporate frauds have risen by over 45% in the last two years. And corporate fraud will always have ripple effect on the overall business of a company. Apart from the financial losses that the victim has to incur, a fraud also makes a dent in the brand and the reputation of the company. Recently, the Prime Minister, Shri. Narendra Modi pointed out the corporate frauds in the system and the involvement of Chartered Accountants in White Collar Crimes. The Ministry of Corporate Affairs has issued notification to close/strike-off shell companies off its list

Right from our Independence until now there are crimes and corruption which are prevailing and now we have Corporate Frauds, and since they are easy to commit and hard to trace, people have taken advantage of this whole scenario to make their pockets deeper.

A well reputed news paper quoted that “Mumbai tops the list of cities with the highest number of frauds reported by banks, with the money involved totaling Rs400 crore per year for the past five years”, and majority of the time Corporate Frauds Cases go unregistered and even the registered ones recovery rate is pathetic, and when banks are approached with complaints they bully the customers into believing that they themselves are responsible. The Companies Act, 2013 provides for mechanism for Corporate Fraud Reporting in India.

Some forms of Corporate frauds are

  • Financial statement fraud is deliberate mis-representation, mis-statement or omission of financial statement data for the purpose of misleading the reader and creating a false impression of an organisation’s financial strength. Financial statement frauds include improper revenue recognition, manipulation of liabilities, manipulation of expenses, improper disclosures on financial statements and overstating assets, misuse of accounts, inappropriate journal vouchers, and suspense accounting fraud
  • Procurement fraud: Procurement fraud can be of multiple types and is one of the most widely used modus operandi for siphoning off funds and window dressing the financial statements. Often defined as any illegal conduct through which the offender gains advantage, avoids an obligation or causes damage to an organisation. Some of the methods to do so are:
  • bid rigging/bid splitting;
  • creation of shell companies to facilitate fraudulent payments;
  • collusion between employee and suppliers;
  • purchase order and contract variation orders;
  • unjustified single source awards;
  • false invoices for products and services for suppliers who do not exist
  • Payroll fraud: Payroll fraud is the theft of cash from a business via the payroll processing system. There are several ways in which a payroll fraud can occur such as:
  • advances not paid back
  • buddy punching
  • ghost employees
  • pay check diversion
  • pay rate alteration
  • unauthorised hours
  • ESIC Fraud
  • EPF Fraud
  • Ponzi Scheme such as Pyramid Scheme where a member recruits other members via a promise of payments or services for enrolling others into the scheme and get commission therefrom
  • Tax evasion and money laundering: Money laundering is a criminal offence aimed at presenting wealth of illicit origin or the portion of wealth that has been illegally acquired or concealed from the purview of tax and other authorities, as legitimate, through the use of methods that hide the identity of the ultimate beneficiary and the source of the ill-gotten profits.
  • False employment credentials Falsified credentials are a growing concern for organisations, as job applicants fill their resumes with bogus academic degrees and job titles. The real risk comes when these applicants get the job and perhaps land in high-profile positions, as in the case of former Yahoo CEO Scott Thompson, whose four-month tenure ended after controversy over whether he had embellished his official bio.
  • Fraudulent expense claims This is the easiest means of stealing some money from an organisation. Employees inflate their expense reimbursements and derive gains from the company.
  • Misappropriation of Assets: Asset misappropriation schemes include both theft of company assets, such as cash or inventory, and the misuse of company assets, such as using a company car for a personal trip
  • NGO Fraud– International Organization like Ford Foundation, Open Society Institute and the Levi Strauss Foundation, who have been providing funds for various Indian NGOs have been duped by them. These NGOs swindle away funds which have been collected for the purpose of helping their respective causes. They have been caught moving the money into their own private accounts. In Delhi the Government has said accounts of 23 NGOs have been frozen, 20 other NGOs have been prohibited from receiving contribution and registration of one NGO has been cancelled.
  • Financial statement fraud– is a serious threat to market participants’ confidence in published audited financial statements. Capital market participants expect vigilant and active corporate governance to ensure the integrity, transparency and quality of financial information
  • Corporate espionage– It is a threat to any business whose livelihood depends on information. The information sought after could be client list, supplier agreement, personal rewards, research documents or prototype plans for a new product or service. Companies under the law and different legislations make applications to the different authorities to cover up the frauds committed by them,
  • Payment Fraud: This type of fraud involves falsely creating or diverting payments. Examples include creating fake records and bank accounts which enable the fraudulent payments to be made. Other examples include generating false payments, making fraudulent payments to oneself, intercepting and altering payee details, and amounts on cheques and other forms of payment order and attempting to then bank those payments and processing false claims by accomplices for later repayments.
  • Ponzi schemes are ‘get rich quick’ investment scams which pay returns to investors from their own money, or from money paid in by subsequent investors. There is no actual investment scheme as the fraudsters siphon off the money for themselves.
  • Pyramid scheme fraud involves an unsustainable business which rewards people for enrolling others into a business that offers a non-existent or worthless product.
  • Plastic card fraud is defined as using plastic card payments (such as bank, debit, credit or store cards) to take money without the account. holder’s permission or prior knowledge from a bank or building society, or to charge money to a. credit or debit card.

Sources:

  1. https://www.actionfraud.police.uk/a-z-of-fraud/ponzi-schemes
  2. http://racolblegal.com/critical-analysis-of-frauds-in-corporate-world
  3. https://www.sciencedirect.com/science/article/abs/pii/S1045235403000728
  4. https://www.coursehero.com/file/45587175/financial-and-corporate-fraudspdf/
  5. http://docshare.tips/frauds-in-banks1_57614dabb6d87f02898b4802.html
  6. https://www.slideshare.net/tibrewaldivya/analysis-of-financial-statements-of-kingfisher
  7. https://economictimes.indiatimes.com/blogs/Musings/corporate-ethics-why-companies-should-beware-of-internal-fraud/
  8. https://www.business-standard.com/article/international/walmart-paid-millions-in-bribes-in-india-wsj-115101900120_1.html
  9. https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-india-251861.html
  10. https://www.thehindubusinessline.com/companies/2-tax-evasion-cases-by-cadbury-india-detected-govt/article20531423.ece1
  11. A treaties on contraventions under Companies Act, Securities Laws and FEMA- (Third Edition) By K.S. RaviChandran

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