Investors are biggest sufferers of frauds

Fraudulent documentation, multiple funding, non-existence of collaterals and siphoning of funds are some of the areas in which banks have witnessed major incidents of fraud, says Ernst & Young’s India Fraud Indicator report

Over 63% of the total fraud cases in FY12-13 were reported in the financial services sector, banks being the most common victim of frauds followed by insurance and mutual fund companies, according to Ernst & Young’s India Fraud Indicator report.

High incidence of fraud in the financial sector was due to oversight from the senior management on deviation from processes, lapses in the system, daily cash transactions, etc. 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.

Who is committing fraud?

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 report said, “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. Senior management members of companies are involved in fraud cases in the country. They are involved in 79% of major fraud cases by value (with each of these amounting to more than Rs. 100 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

Investors are the most adversely impacted by fraud, and the total value of fraud committed against them exceeds Rs. 27 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.

The Government constituted a seven-member interministerial 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 companies.

The total number of fraud cases reported in H2 FY11-12 increased by around 8% over H1 FY11-12, 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.

Banking—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.”

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

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.

How to identify fake email job offers & lottery scams?

Phishing is a way of attempting to acquire sensitive information such as usernames, passwords and credit card details by making a duplicate or fake site asking you for details. This is somewhat similar to the fishing activity, where the fisherman puts a bait at the hook pretending to be food for fish but actually it is to trap the fish.

  • Such emails generally come from a free, public domain email account (e.g. or
  • 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.

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.

The report, India Fraud Indicator 2012 is a study by Ernst & Young’s Fraud Investigation & Dispute Services. The report 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.

Read more:

Increase in frauds drives up premiums

Tips to handle a bank fraud

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