Rise In Frauds: A Matter Of Concern

There has been a scary rise in the number of frauds that have come to fore in recent times. The Indian Economy has been highly shaken by the recurring frauds that are being brought to light in recent times. So what is exactly fraud?

According to the Black’s Law Dictionary, Fraud means “An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words

or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.” Fraud is defined in section 17 of the Indian Contract Act, 1872. It is defined as means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent. Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak , or unless his silence, is, in itself, equivalent to speech.

In the Companies Act, section 447 provides for the punishment for fraud. In the explanation part it is given that: “fraud” in relation to affairs of a company or anybody 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;

In Indian Penal Code (IPC), 1860, the word fraudulently is defined in section 25. It states “a person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.” (The Information Technology Act, 2000 refers to section 25 for defining fraudulently.)

The common man’s hard earned money, is being siphoned off by PSUs giving huge loans to the perpetrators of such frauds. With the economy already at a slowdown, the emergence of such economic offences has further added to the burdened economy. There have been several cases like the recent case of fraud by the PMC bank, which has resulted in deaths of innocent depositors whose hard earned life savings have disappeared overnight Recently, SEBI by its order has suspended the trading license of Karvy Broking (IFSC) Ltd. (‘Karvy’) due to its non-compliance with the regulations of the stock exchanges. The main allegation raised against Karvy, was that it had been accused of misusing the fund of the customers. In an investigation by the NSE, it was found that Karvy committed unauthorized transfer of securities worth Rs 2,300 Crores of more than 95,000 clients. SEBI is on the job of investigating the fraud. This recent case is a new addition to the already large number of fraud cases that are existing in the country. As per the

, in 2019 there are over 6,800 cases of bank frauds that involve an amount up to Rs. 71,500 Crores, which is alarming and a real cause of concern.

The emergence of new cases of fraud are alarming and an added burden to the already slowed down economy faced by the country. The classic examples are Nirav Modi in the PNB bank case and Vijay Mallya in the SBI loan default case. One of the most worrying part about the recent frauds are that in the majority of the cases the PSU’s are involved, where the bulk investments are that of middle class/ lower middle class working people.

WHY DO FRAUDS OCCUR SO FREQUENTLY?

Few of the major reasons for frauds happening in the PSUs:

1. One of the major reasons for frauds taking place in the PSUs is the delayed detection of fraud that has already taken place. It has been

that the banks are not prompt in detecting the fraud that is being perpetrated. There is no mechanism by which a fraud can be detected at the stage it is being occurred.

The PSU’s are owned by the government and therefore the top management are representatives of the government appointed by the government who are responsible for the functioning of the banks. The appointment of board members, influence of the government over the board, political affiliations etc. are some of the major reasons which affect the functioning of the PSUs and thereby having no proper internal checks and balances of the PSUs.

The banks also have not been strictly complying with the rules and regulations laid down by the RBI from time to time. The classic example is with regard to the PNB bank fraud case. The RBI had laid down the bank’s core banking system must be connected to SWIFT (Society for Worldwide Interbank Financial Telecommunications), which is a network for the Financial Institutions that help in securely transmitting information and instructions through standardized system. But, PNB bank had not connected with SWIFT, thus allowing Nirav Modi’s companies to secretly issue the fake letters of undertaking, thus bypassing any scrutiny and violating the RBI’s order.

There are several co-operative banks which have been set up through political nexus. These banks grant huge loans to their big clients to fund their business interests, but no tab is kept upon the client’s credit ratings, the financial position and whether the funds are being used effectively or not. No proper collateral security to secure such loans are taken from the favored clients.

The banks do not give the correct picture and thereby underreport the cases of frauds that are occurring. The RBI suspects that certain banks may not have conducted proper due diligence before approving the loan of certain clients for certain projects which might be stalled or also categorized as ‘zombie projects’.

The banks are apprehensive of reporting such frauds, which according to them would adversely affect the reputation of the bank and in turn lead to loss of their valuable customers as well as their working staff.

The lack of Cyber Awareness among people also leads to frauds. People tend to give away their email IDs and phone numbers very easily to the fraudsters which is then misused. Another mistake committed by people in general is not changing their passwords periodically. There are several individuals’ data and information available and sold by such fraudsters thus endangering their savings.

The last and the biggest problem is that, although the powers are given to the RBI to look for any infirmities with regard to any fraud in banks, RBI has not been granted any powers in relation to giving any orders or taking any swift actions with regard to certain transactions. The investigative powers have been granted to the Central Investigation Agencies which leads to certain long processes and delays, thus providing the persons responsible possible escape routes.

RECENTS STEPS TAKEN TO PREVENT FRAUD CASES

To ensure that such frauds do not take place in the future, the Ministry of Finance had issued a circular–

, which was issued on 9th July, 2019. This circular directed the banks to take following steps:

1.The government had issued “Framework for timely detection, reporting etc. relating to large value bank frauds” to Public Sector Banks (PSBs) which provide that NPAs exceeding Rs. 50 Crores, must be examined by the banks for a possible fraud.

The Fugitive Economic Offenders Act, 2018 has also been enacted to prosecute the economic offenders who are evading the courts prosecution by evading the jurisdiction. This provides for the attaching of the offender’s property and disentitlement of the offender from defending any civil claim.

The Central Fraud Registry has been set up by the RBI, which collects the fraud monitoring returns which are filed by the banks and financial institutions and will be used by the banks as a database for the banks themselves.

After reporting of the fraud to the RBI, there must be immediate detailed examination against the offender.

There must be proper publishing of the photos of the willful defaulters. Further, the PSB’-s have been given the power to issue lookout circulars against the offenders.

The other authorities such as the MCA, SEBI etc. have also taken steps to ensure that fraudulent acts can be curbed in the future. A formal Memorandum of Understanding (MOU) was signed between the Ministry of Corporate Affairs (MCA), Government of India and the Securities and Exchange Board of India (SEBI) for data exchange between the two regulatory organizations. The

was entered into due to the increase in need for surveillance in the context of Corporate Frauds affecting important sectors of the economy, with the aim to have a robust system for Corporate Governance.

,deals with the establishment and the powers that are given to the Serious Fraud Investigation Office (SFIO). The role of the SFIO is to submit a report to the Central Government on conclusion of investigation. Central Government may direct SFIO to initiate prosecution against the company. SFIO shall share information they possess regarding a case being investigated by the latter and vice versa.

The SFIO has been given the power to arrest individuals if it has the reason to believe that he/she is guilty based on the material in possession.

was promulgated on 21st February, 2019. It aimed to provide a comprehensive code for ban unregulated deposit schemes, to protect the interest of the depositors. It divides the offences into 3 parts: i) any kind of promotion of the unregulated deposit schemes, ii) if there is a fraudulent default during repayment, in case of a regulated deposit scheme and iii) deliberately misleading or falsifying certain data or concealing facts about the unregulated deposit scheme. It imposes punishment up to 10 years of imprisonment and fine up to 50 Crores.

STEPS REQUIRED TO BE TAKEN

Even with these legislations or rules in place it has not benefitted in reducing the cases of frauds. Instead, there has been a rise in the fraud cases which does not seem to have any end. In view of raising fraud cases, it is therefore suggested that the following steps need to be taken to minimize such cases of frauds:

1)There needs to be an effective system of corporate governance to ensure that the proper due diligence is being done before granting of any loan further,

,follow up must be done by the banks to check from time to time how the funds are being utilized by the borrower,and whether it is used for the intended purpose.

2)Other important thing is to give powers to the RBI. It is important at this point of time that the RBI must not just be a mere regulator of funds but must also be given powers to take immediate actions against the persons responsible for such frauds. Further, they must also be given investigative powers for avoiding any fraud to take place and powers to pass an order along with such investigating powers.

3)The banks must ensure that they must comply with any rules and regulations that are notified either by the RBI or the government, so that they do not act in total contravention to the guidelines that are set up.

4)The RBI must also ensure that the new cooperative banks which are permitted to be set up do not have any political motives or nexus behind it. There must be proper checks that no individual has influence over the functioning of such cooperative banks, which might result in a possible case of fraud committed in future under their influence.

5)It is important that people must be made aware about the possible fraudulent sites or messages which can be received and can cause major losses to them. Further, it is also the duty of the citizen to report any such messages or e – mails or websites that they come about or they receive.

CONCLUSION

Frauds if not detected in time can adversely affect the economy of any country in a big way.

It can only worsen the situation during the time when a country is facing an economic slowdown. In the interest of boosting the economy and giving a shot in the arm it is high time that the SEBI, MCA and the other regulators take speedy steps to plug the loopholes and ensure that the fraud practices are detected and thereby curbed at a very early stage to avoid any major setbacks in the future. This highlights the very need to improve the Corporate Governance of the banks and ensure that the process is transparent, so that the stakeholders have an idea as to how their money is being used.