A report by the apex national agency, the Central Vigilance Commission (CVC) on banking frauds was released recently. The report, ‘Analysis of Top 100 Bank Frauds’ was initially submitted to the Finance Ministry, the Reserve Bank of India and other organisations on 15 October and was thereafter made available in public domain.
The report is an overview of the deep malaise that afflicts the country’s regulatory system in general, specifically the framework that governs the economic and financial sectors. The CVC, in fact, is the organisation that should have been made the “overseer” of all the other organisations (except the RBI) that regulate and control the Indian government apparatus. In practice, it is not so, as we will see later.
This commentator and analyst has always been mystified and amazed by the impunity (and audacity) with which the criminals and wrongdoers in the corridors of Indian industry, banking and finance have violated, defied, sidestepped and mocked the numerous laws, regulations, rules and norms that govern this swathe of the economy. Going through the CVC’s exercise that has just been made public, I think I can understand why.
Clearly, the CVC occupies a very important position in the country’s governance apparatus. It is necessary at this stage to understand the constitution of this body and the powers and constraints it has. Following the recommendations of the Santhanam Committee on Prevention of Corruption, the CVC was set up by a resolution of the Union government in 1964. Thus, the very origins of the organisation were woolly; as is typical of many initiatives in legal and administrative reforms that have been initiated in this country since Independence, the progress in making CVC an effective institution in its designated area was slow, uneven and tardy.
It took 34 years before the CVC acquired a statutory status through an ordinance in 1998, under which it was granted powers to exercise superintendence over the functioning of the CBI, and also to review the progress of the investigations pertaining to alleged offences under the Prevention of Corruption Act, 1988 conducted by the latter. The ordinance was finally replaced by an Act of Parliament in 2003. Finally, in 2004, the Government of India made the CVC the "designated agency" to receive written complaints for disclosure on any allegation of corruption or misuse of office and recommend appropriate action. Since then, the CVC has also been publishing a list of corrupt government officials against whom it has recommended punitive action.
Returning to the report on bank frauds, the study analyses the top 100 frauds in the nation’s banking sector that had been reported as on the 31 March 2017. The study categorises the industries in which the offences occurred – the 13 sectors are : (1) gem and jewellery (2) trading (3) manufacturing/industry (4) information technology (5) agro (6) export business (7) media (8) fixed deposits (9) aviation (10) demand loans [sic] (11) services/projects (12) letters of comfort and (13) discounting of cheques.
Because of some bizarre logic, the names of offending companies and parties are not mentioned. Straightaway, this reduces the impact of the study and compels the researchers and analysts who go through this exercise to do a supplementary one of identifying the perpetrators. The CVC top brass should be asked why they adopted this indefensible stance.
Nevertheless, in this essay, it is necessary to bring to the attention of our readers the litany of crimes and misdemeanours that have been mentioned in this study. The variety and ingenuity of the illegalities and offences committed are breathtaking; it reinforces the notion that many Indian citizens have about the dubious talents that the Indian businessman/woman possesses.
In the gem and jewellery segment (and readers will have a very good idea of the crime-perpetrating entities), the scamsters imported gold and gems through foreign banks/private parties against financial facilities extended by a consortium of Indian banks led by one bank. The imported gold and gems were supposed to go through value addition and production in India for eventual re-export. The importing entities grossly inflated the value of diamonds brought into the country, in order to obtain higher credit facilities from the Indian banks.
The end chain was to claim defaults by the overseas buyers in order to default on the repayments to Indian banks. All documents and details about foreign buyers were manipulated, false and fabricated. There was absolutely no effort by the lead banker in the consortium to cross-check the claims of the borrowers.
In the manufacturing sector, the modus operandi was equally innovative. Circular transactions with overseas product suppliers and buyers were involved, with both sellers and buyers being controlled by the defaulting Indian company. In all the fraudulent cases, there was widespread manipulation of books of accounts, removal, depletion and disposal of hypothecated stocks without the knowledge of the lending banks. Incorrect and non-existent debtors were included in the debtors’ statement of the company.
The company resorted to circular transactions to report higher sales/purchases figures and there were major mismatches in the list of stocks/debtors. Preliminary audit exercises showed that the top 10 buyers of the company were not traceable in the addresses in the records. At almost every stage of manufacturing and sales, false statements and returns were routine.
In the cases of companies in other sectors like agricultural produce, aviation and services/projects, the same culture of falsification of accounts, entries, statutory reporting and funds flows was widespread and endemic. The variations in the patterns of crime and malfeasance were on account of the specific nature of operations in each industry.
The interesting example of the aviation company in the CVC’s study needs some elaboration. The Indian company ran its operations mostly with leased aircraft and it had set up an overseas entity (vendor) whose job was to fabricate fictitious and inflated invoices. Remittances to the overseas entity were through legal transfers. The actual dues to the leasing company would be disbursed and the balance would be retained by the overseas partner.
The Indian company deliberately cheated its banks and siphoned off funds to many shell companies in seven countries. The promoter wilfully and with malafide intentions did not pay the dues covered by his personal guarantees. Readers may like to speculate if this promoter fellow is the same chap who did a running act to the old colonial land where he is still ensconced in luxury.
If this modus operandi sounds familiar to many of our informed readers, the report highlights some novel techniques employed in the case of two media companies that it had studied. The CVC report actually covers the operations of one of the companies it put under the scanner. Funds were diverted through suppliers’ accounts belonging to associates/connected companies. Moreover, there was huge difference in the cost of machinery and equipment between the investigation report and the invoices submitted by the party.
However, chicanery was raised to a different level altogether. A “certificate” from a chartered accountant was flatly repudiated by the concerned CA in writing. Non-existent suppliers were detected and balance sheet figures were fudged/fabricated and end-use certificates from unauthorised experts were used. The company concealed the existence of a prior charge on one of the machines it had offered as collateral security to the bank.
The quality and relevance of the CVC report taper off sharply in four chapters that deal with fixed deposits, demand loans (sic), letters of comfort and discounting of cheques. These appear to be after-thoughts and have little to contribute to the importance of the study.
However, this report once again underlines the importance of institutionalised safeguards against bank frauds. Throughout the study, the dismal failure of all the organisations in discharging their fiduciary and statutory responsibilities and duties is highlighted. The examples are sad and glaring. The roll call of shame includes corporate executives, directors (including public-interest nominees and independent directors) on the boards of the banks as well as the borrowing corporates, chartered accountants, auditors, company secretaries, rating agencies and statutory regulators like SEBI et al.
In an interview to one of the United Nations organisations that tried to understand the Satyam affair, this analyst had made it clear in January 2009 that “all the supervisory and regulatory agencies failed to detect and prevent the Satyam scam, and that this failure is structural and pervasive.” I also added in a subsequent essay in 2014 that “the saga still continues. .... As far as seeing the end of the tunnel in this case is concerned, and given the multiple legal avenues that are available to the accused if they are held guilty, I would not be surprised if it takes another 10 years or so for the law to take its course (as they say so grandly in Indian legalese). If this is not Alice in Blunder land, nothing is.”
For the information of the readers of this essay, the auditors of Satyam, Price Waterhouse (PW), an international firm of repute, have got away almost scot free with their manifest crimes of omission and commission. It is only in January 2018, almost nine years after India’s biggest corporate finance scandal was detected, the apex capital market regulator, SEBI, banned PW from auditing listed companies in India for two years because of its role in the Satyam imbroglio. Two partners of PW’s Bangalore office were also fined relatively modest amounts for having wrongly certified the accounts of Satyam.
Before we get overly enthused by this development, it must be pointed out that PW promptly appealed against SEBI’s order to the Securities Appellate Tribunal (SAT), the appellate authority for the capital market, where the matter is still pending. This is despite the fact that the Supreme Court, on 23 February 2018, had ordered a comprehensive enquiry into the working of PW by the Enforcement Directorate (ED) and the Institute of Chartered Accountants (ICAI).
All this brings us back to the basic issues highlighted by the CVC study and the concerns raised earlier in this essay. If this country genuinely wants to have an efficient market-driven economy that also protects and ensures the rights of consumers and investors, we need to do an enormous amount of house cleaning. Powerful interest groups and pressure groups will also need their wings to be clipped.
The CVC is an agency that is widely respected. However, it just does not have the clout and the legal authority to undertake a cleansing act. At this juncture, it is sounding a warning but the nation’s governing apparatus should hear the alarm bell before the situation deteriorates further and spins out of control.
(Jay Bhattacharjee is a policy and corporate affairs analyst based in Delhi)
As you are no doubt aware, Swarajya is a media product that is directly dependent on support from its readers in the form of subscriptions. We do not have the muscle and backing of a large media conglomerate nor are we playing for the large advertisement sweep-stake.
Our business model is you and your subscription. And in challenging times like these, we need your support now more than ever.
We deliver over 10 - 15 high quality articles with expert insights and views. From 7AM in the morning to 10PM late night we operate to ensure you, the reader, get to see what is just right.
Becoming a Patron or a subscriber for as little as Rs 1200/year is the best way you can support our efforts.