Fraud as an aspect of corruption normally happens in companies where the governance structures are weak or have become corrupted themselves.
For many years, there have been no records of frauds and types of frauds committed in finance companies in India
In contrast, MNCs give a lot of importance to frauds and more to internal frauds. They record all the suspected frauds, get them investigated thoroughly, ensure severe punishment, ensure legal action in severe cases and improve policies, processes and procedures to mitigate similar future occurrences.
Reserve Bank of India
More importantly, frauds contribute the most to credit losses in finance companies. It is estimated that 1-2% of asset financed are lost due to frauds.
What is fraud?
A fraud is an intentional deception made for personal gain or to damage another; Fraud is a crime, and also a civil law violation.
Defrauding people or entities of money or valuables is a common purpose of fraud.
It is a false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.
Fraud has five elements: (1) a false statement of a material fact, (2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.
The Association of Certified Examiners of Fraud in the USA
The Collins English dictionary (1999) defines fraud as “a criminal offence in which a person acts in a deceitful way. Fraud can therefore be categorized as either internal or external.”
How does RBI classify Fraud?
RBI based mainly on the provisions of the Indian Penal Code and frauds have been classified as under
- Misappropriation and criminal breach of trust.
- Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
- Unauthorized credit facilities extended for reward or for illegal gratification.
- Negligence and cash shortages.
- Cheating and forgery.
- Irregularities in foreign exchange transactions.
- Any other type of fraud not coming under the specific heads as above.
RBI guidelines for reporting frauds to police:
Finance companies should follow the following guidelines for reporting of frauds such as unauthorized credit facilities extended by the NBFC for illegal gratification, negligence and cash shortages, cheating, forgery, etc. to the State Police authorities:
(a) In dealing with cases of fraud/embezzlement, NBFCs should not merely be actuated by the necessity of recovering expeditiously the amount involved, but should also be motivated by public interest and the need for ensuring that the guilty persons do not go unpunished.
(b) Therefore, as a general rule, the following cases should invariably be referred to the State Police:
(i) Cases of fraud involving an amount of Rs. 1 lakh and above, committed by outsiders on their own and/or with the connivance of NBFC staff/officers.
(ii) Cases of fraud committed by NBFC employees, when it involves NBFC funds exceeding Rs. 10,000/-.
Can 'handling of fraud' be left to the police?
Our law enforcers are too busy to detect fraud. Crimes involving personal injury or loss of life usually demand more immediate attention by police officers than do frauds. Besides, being a fraud investigator requires something more: a measure of financial knowledge and a criminal bent of mind.
Why fraud?
It is important to understand why people commit frauds. Crime group and / or employees, commit frauds because of:
- Greed ; they want to have it all and more than any one else
- Peer pressure especially where the peers have done very well financially
- Personal financial difficulties like gambling, drug abuse or alcoholism, habits that must be supported and which are very expensive
- Revenge or grudges that will motivate one to commit fraud
- Dishonesty by customer,employee, agents,etc.
- Greediness of customer and enticement og employee or agent
- Inefficient process, procedures, lack of control and oversight
- Fear of intimidation or threats that will lead to commit fraud
- Unrealistic targets that cannot be achieved
- Lenient penalty given to those who have been caught committing fraud; it will encourage others to attempt fraud since they will get away lightly
- Concealment of major incidences of fraud by companies earlier
- Employees’ awareness that management is window dressing accounts
How to prevent?
Companies must eliminate one or more of these three elements: perceived pressure, perceived opportunity, and rationalization. Only these three elements, which make up what's called the fraud triangle, are needed to make an honest employee do dishonest things.
Perceived pressure can be anything from pressure at work to produce results to pressure to cover personal financial obligations. Perceived opportunity is the perception that someone can commit fraud without getting caught. And rationalization is how employees convince themselves that there's really nothing wrong with their actions
There are two major factors involved in preventing fraud.
The first factor creates a culture that takes away opportunities to commit fraud and has the following components:
- Hire honest people and then provide fraud awareness training.
- Create a positive work environment.
- Have a well-understood and respected code of ethics.
- Create an expectation that dishonesty will be punished.
The second factor is directed at eliminating opportunities to commit fraud. Here are ways to do that:
- Have a good system of internal controls.
- Discourage collusion between employees and customers or vendors.
- Clearly inform vendors and other outside contacts, of the company's policies against fraud.
- Monitor employees.
- Provide a hotline for anonymous tips.
- Conduct proactive auditing.
Common frauds in retail finance companies:
- Theft and embezzlement of cash by employees
- Misapplication of installment received
- Misuse of cash receipts by employees, customers and/ or debt collection agencies
- Wrong identity of applicant; fudged documents by employees and/or by direct marketing agents
- Conditions of disbursement are not fulfilled
- Misuse of credit; no underlying asset bought
- Defective titles to the underlying asset
- Lien not marked; lien wrongfully cancelled; and lien of other financier marked
- Intentional misplacement of the file including, contract/agreement
- Asset repossessed, but not reached the yard; dilapidated asset repossessed; wrong asset repossessed; theft of components from the repossessed asset; and repossessed asset missing from storage
- Repossessed vehicle sold for lower price; unapproved sale; and unathorised return to customers
- Unauthorized settlement with customers by employees, repossessing agency and debt collection agencies; Unauthorized "No due" letters issued
- Over statement of expenses, charges and fees by employees and/or service providers.
- Unauthorized software alteration; data manipulation; and cyber crimes by accountants.
How proactive is your company?
(a) To what extent has the company established a process for oversight of fraud risks?
(b) To what extent has the company created “ownership” of fraud risks by identifying a member of senior management as having responsibility for managing all fraud risks ?
(c) To what extent has the company implemented an ongoing process for regular identification of the significant fraud risks to which it is exposed?
(d) To what extent has the company implemented measures to eliminate or reduce through process reengineering each of the significant fraud risks identified ?
(e) To what extent has the company implemented measures at the process level designed to prevent, deter and detect each of the significant fraud risks identified ?
(f) To what extent has the company implemented a process to promote ethical behavior, deter wrong doing and facilitate two-way communication on difficult/ confusing issues?
