South Asia follows parallel roads of burgeoning economy and escalating fraud

It’s a familiar story. A country or region finally is prosperous, but inevitably fraud and corruption increase. Here are some infamous South Asian cases and ways the region has battled what affluence wrought.

Multibillion-dollar frauds involving jewelers-to-the-stars, cryptocurrency scams and movie stars, sophisticated bank hacks, and real-estate scams linked with global hedge funds and prestigious university endowments invoke flashy Western socioeconomics rather than a region generally considered “developing.” Yet these fit-for-Hollywood headlines all represent recent scandals from South Asia and showcase the evolving fraud landscape in the region.

The scale of these schemes reflects the ambitious growth of South Asian economies (spearheaded by India), the embrace of globalization and the exploitation of technology — all of which likely wouldn’t have been associated with the region two or three decades ago in economies closed off from the rest of the world. Perhaps the largest of these frauds involved Punjab National Bank (PNB) issuing fraudulent loan guarantees to famous jeweler Nirav Modi and companies related to his uncle, Meul Choksi, in the form of “letters of undertaking” sent through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.

The SWIFT network provides a secure environment for the international transmission of financial messages such as payment orders — or loan guarantees in the case of the PNB fraud — among more than 11,000 financial institutions in more than 200 countries. However, it’s not a means to transfer actual funds. A global member-owned cooperative of financial institutions founded SWIFT in Brussels in 1973. (See the Fraud-Magazine.com Online Exclusive Preparing for a SWIFT message investigation, by Jim Bracken, CFE, May 2017.)

The seven-year, $2 billion fraud reflected poorly on government anti-corruption efforts led by Prime Minister Narendra Modi, especially when a picture of the two Modis (unrelated) posing together surfaced shortly after the fraud’s exposure. (See Modi Under Fire as Alleged $2 billion Fraud Hits Anti-Graft Image, by Iain Marlow and Archana Chaudhary, Bloomberg, March 18. Also see the “Big Frauds” column for more on the PNB fraud.)

The infamous Bangladeshi central bank heist in 2016 similarly exploited the SWIFT system. In that case, hackers infiltrated the bank’s system and attempted to steal $1 billion by issuing instructions through the SWIFT network for withdrawals from the bank’s account at the Federal Reserve Bank of New York, but they could only (only!) successfully steal $81 million. (See What’s common between the PNB fraud and Bangladesh bank heist in 2016? by Jeanette Rodrigues and Bhuma Shrivastava, livemint, Feb. 21.)

India didn’t escape cryptocurrency scams this year. In March, Indian entrepreneur Amit Bhardwaj was arrested for his part in a $300 million cryptocurrency scam that resembled a Ponzi scheme and used Bollywood stars to promote it. And an investigation into the Asia head of Bitconnect — an online bitcoin community — and its India division resulted in the Aug. 19 arrest of Divyesh Ddarji. Losses connected to the scam could be as much as $12.7 billion. (See Gujarat Cryptocurrency Scam: Divyesh Darji of Bitconnect Is The New Amit Bhardwaj, by Suprita Anupam, Inc42, Aug. 20.)

Also, this year, two high-profile hedge funds accused one of India’s largest real estate developers (IREO Management) of a criminal fraud conspiracy that fleeced foreign investors of up to $1.5 billion. The endowments of Notre Dame and Stanford also lost funds to the company, which had previously partnered with the Trump Organization to build a New Delhi office tower. (See Hedge funds alleging $1.5bn Indian fraud fear they’ll ‘bleed dry,’ Arabian Business, June 26.)

“In my view, these are not outliers,” says ACFE Regent Vidya Rajarao, CFE, ACA. Rajarao is a partner at Grant Thornton India. “On the contrary, they’re indicative of a deep-seeded malaise of greed, entrenched corruption, money laundering, conflict of interest and lax enforcement by investors, companies and regulators.” She’s national leader for forensic and investigation services in India and the sub-continent and a member of the firm’s global forensic steering committee.

Significant growth since the ’90s

These high-profile Indian scandals illustrate the significant economic development in the country since India opened up its economy in the early ’90s. Without a drastic policy shift toward integration into the global economy, it’s easy to imagine SWIFT banking, foreign real estate investment and initial coin offerings not existing in India — or at least not in the forms that fraudsters exploited for these massive frauds.

The Indian economy increased in size more than twentyfold after the reforms of the early ’90s with an average of 5 percent annual real GDP growth from 1991-2012, a decrease in poverty, improvement of many living conditions, a large increase in exports, imports and foreign investment, and stronger foreign reserves.

Due diligence is a basic — but critical — fraud prevention technique that could’ve potentially saved the victims of these schemes billions of dollars.

Corruption has also increased since the ’90s. However, South Asia was the lowest-ranked sub-region in Transparency International’s (TI) Corruption Perceptions Index in 2014. TI supplemented the 2014 rankings with a regional report that blamed symptoms of corruption — such as nepotism, bribery and fraud — on opaque public institutions and anti-corruption watchdogs that lack the protection and autonomy to effectively function without political interference guiding enforcement decisions. (See Fighting Corruption in South Asia, Transparency International, 2014.)

In TI’s most recent Corruption Perceptions Index (2017), Bhutan ranked higher than any other South Asian country, at 26th out of 181, but none of the other countries ranked higher than India (81st) and Pakistan, Afghanistan, Bangladesh, Nepal and the Maldives all ranked outside the top 100. (See Corruption Perceptions Index 2017, Transparency International, Feb. 21.)

“Historically, the biggest and most common fraud risks in the region have been asset misappropriation, bribery and corruption, and financial statement fraud,” says Rajarao. “Generally, these three remain the biggest fraud risks for most South Asian countries.”

Anti-fraud measures

The economic growth in India brought welcome prosperity to the country and region but also led to new fraud risks that the government needed to address. It set up a Committee on Corporate Governance to respond to stock market scams and the failure of non-banking companies causing huge economic losses. The committee’s recommendations led to a resolution in July 2003 officially constituting the SFIO, which is a multidisciplinary organization that would detect and prosecute — or recommend prosecution related to — complex fraud cases with inter-departmental ramifications, substantial public interest, and the potential for improvement in systems, laws or procedures. (See History of SFIO, Ministry of Corporate Affairs.)

Although the creation of the SFIO marked an important step in the fight against corporate fraud in India, the agency faces limitations, according to A glimpse into the working of the Serious Fraud Investigation Office, by Pallav Gupta, June 19. Gupta said the SFIO is a reactive force, isn’t capable of taking pre-emptive measures against fraud and depends on the national government for accountability or authorization and inadequate resources. Rajarao agrees. The SFIO “is a ministerial body and is not equipped with professionals adept in combating white-collar crime,” she says. “However, they are planning to revamp their cadre to include anti-fraud professionals or seek external help in combating white-collar crime.”

The prime minister of India, Narendra Modi, won the 2014 election by focusing a significant amount of his campaign rhetoric on battling corruption. He’s had mixed results. His government has identified 300,000 shell companies and canceled more than half of their registrations. However, his demonetization policy, which pulled 86 percent of cash out of circulation in an effort to stem bribery and decrease tax evasion, has disrupted businesses and harmed the economy, say many Indians. (See Modi’s Bumpy Anticorruption Drive, by Yigal Chazan, Sept. 22, 2017.)

Some of the Indian scandals have prompted actions to curb similar frauds. After the PNB fraud, the Reserve Bank of India (RBI) directed the country’s public banks to link the SWIFT system to its centralized core banking solutions system and stop issuing letters of undertaking. (See RBI ban on LoUs: Lenders tighten process, import costs may go up, by George Mathew, March 16.)

The government also reacted to the PNB fraud in March 2018 by approving legislation authorizing the creation of a National Financial Reporting Authority to regulate auditors for private and public organizations. (See What is the National Financial Reporting Authority? by T.C.A. Shrad Raghavan, The Hindu, March 17.)

In response to cryptocurrency issues, the RBI banned local banks from dealing in the virtual currencies and the Indian government created an interdisciplinary committee to examine a regulatory framework for cryptocurrencies that could produce recommendations later this year. (See Reserve Bank of India Urges Supreme Court to Regulate Bitcoin and Cryptocurrencies, by Sakshi Viswanathan, BloqTimes, July 25.)

A recent amendment to India’s Prevention of Corruption Act (PCA), passed in July, could help address some of the country’s corporate fraud and white-collar crime issues. The amendment establishes a new offense for anyone offering any bribe to a public servant (regardless of whether they accept) and limits the immunity previously available to them in exchange for cooperation with the prosecution.

“This enactment addresses the supply side of bribery and imposes obligations of a corporate entity or commercial establishment to take adequate measures to ensure that it does not participate in bribery,” says Rajarao.

The results of these regulatory efforts and reforms remain to be seen in a country with an obvious need for improved anti-fraud controls as shown by these high-profile scandals that parallel the ambition driving the country’s major economic development.

Takeaways for fraud examiners

These major Indian frauds in the banking and real estate sectors, as well as the cryptocurrency scams, involved weak or non-existent due diligence, according to Rajarao. Due diligence is a basic — but critical — fraud prevention technique that could’ve potentially saved the victims of these schemes billions of dollars.

It’s up to fraud examiners to look for the red flags and potential indicators of fraud in their industries and act at the earliest warning signs to protect their clients or employers, since, according to Rajarao, “cases take forever to be heard, and the perpetrators move on to new fraud schemes in the interim.”

Mason Wilder, CFE, is a research specialist with the ACFE. Contact him at mwilder@ACFE.com.