India fraud indicator 2012

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India Fraud Indicator 2012
Increasing magnitude of fraud
A study by Ernst & Young’s
Fraud Investigation & Dispute Services
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India Fraud Indicator 2012 | 2
About the
India Fraud Indicator
This 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
Foreword Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughts
Foreword
Executive summary
Who are the victims?
Meet the perpetrators
Where is fraud occuring?
Concluding thoughts
Previous / Next

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 Singh
Partner and National Director
Fraud Investigation & Dispute Services
Ernst & Young Pvt. Ltd.
Executive summary Increasing magnitude of fraud Who are the victims? Meet the perpetrators Where is fraud occuring? Concluding thoughts
Previous / NextContents /
Foreword

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.
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Page 2 of 2
Foreword

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 reportstated, “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 investors
In 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
.
Page 1 of 2
Page 2 of 2
Foreword

The 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 38.1
The 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
segment
The 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.”
Page 1 of 2
Page 2 of 2
Foreword

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.
Page 1 of 2
Page 2 of 2
Foreword

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.
Foreword

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 cases1H
2H
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 77
Female 3 3
Both 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.
Foreword

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 15.9
Maharashtra 18 13 7.8 3.8
Andhra Pradesh 15 12 0.1 13.9
Gujarat 7 8 1.5 0.7
Tamil Nadu 8 5 0.1 0.1
Karnataka 6 5 0.1 0.1
Others 29 37 1.1 3.6
The 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)
Foreword

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.
Foreword

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.
FIDS India
• Deep competencies: Our FIDS team has specific domain
knowledge, along with wide industry experience
• Forensic technology: We use sophisticated tools and
established forensic techniques to provide the requisite
services to address individual client challenges.
• Global exposure: Our team members have been trained
on international engagements to obtain global exposure
on fraud scenarios.
• Market intelligence: We have dedicated field
professionals, who are specifically experienced and
trained in corporate intelligence, and are capable
of conducting extensive market intelligence and
background studies on various subjects, industries,
companies and people.
• 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.
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 us
Arpinder Singh
Partner and National Director
Direct: +91 22 6192 0160
Email: arpinder.singh@in.ey.com
Sandeep Baldava
Partner
Direct: +91 40 6736 2121
Email: sandeep.baldava@in.ey.com
Vivek Aggarwal
Partner
Direct: +91 12 4464 4551
Email: vivek.aggarwal@in.ey.com
Foreword

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