White-Collar Frauds

In what could be described as an unprecedented crackdown, the CBI over the last week raided around 61 places in connection separte bank fraud cases. While the probe agency registered 17 separate cases of over the last few days, bringing the total number of bank fraud cases registered this year to at least 31, the gargantuan task of walking them down to their logical conclusion has now begun.

But what does it take to investigate bank frauds? How do so many fraudsters get away with it? How come most of these cases take years, sometimes decades to get to the point of a conviction?

According to data released by the Reserve Bank of India, more than 50,000 cases of bank fraud involving around Rs 2.05 lakh crore have been reported in the last 11 fiscal years i.e. between 2008-09 and 2018-19. The data clearly points to a disturbing trend of an increasing number of bank frauds being reported. Between 2015-16 SCBs reported 4,096 cases of fraud amounting to Rs 18,698.82 crore, in 2016-17 it rose to 5,076 cases amounting to Rs 23,933.85 crore, and the following fiscal year the number further rose to 5,917 cases amounting to Rs 41,167.03 crore. The number grew to more than 6,800 cases in 2018-19, amounting to a whopping Rs 71,500 crore.

Moreover, the number of bank fraud cases registered by the Central Bureau of Investigation also points to an upward trend. In 2017, the probe agency registered 31 such cases, amounting to a fraud of at least Rs 11,352 crore. The number rose to 52 in 2018, with the amount further increasing to around Rs 16,091 crore. And so far, 2019 has seen the agency register 31 such cases amounting to a fraud of at least Rs 8,587 crore.

However, it is pertinent to note that this data just points towards the number of frauds 'reported' during a fiscal year. So, most of these cases are a result of frauds that were committed years, and in some cases decades ago, and are just now being detected and reported. But the question again arises as to how and why these frauds were allowed to be perpetrated for years without hindrance.

Establishing fraud

Well for starters, there is a difference between the fraud amount and the default amount. As part of their business, banks end up lending to several companies and projects with the promise of returns but some of these loans end up turning bad as a result of natural market forces and/or shelving of projects.

So, once natural and uncontrollable external factors are excluded, the banks must be able to find enough evidence that the borrower had the intention of defrauding the lender. For example in the case of Bhushan Power and Steel, while it currently owes around Rs 47,204 crore to a consortium of banks, lenders found evidence to suspect fraud of only around Rs 2,348 crore.

Now, once banks or financial institutions detect the fraud, they must report it to the Reserve Bank of India and in cases where the fraud amount exceeds Rs 5 crore, the fraudulent account must be reported to the CBI's Bank and Securities Fraud division for investigation.

The mechanism

In the wake of Vijay Mallya, Nirav Modi, and Sterling Biotech, the obvious question is how not only one bank, but a consortium kept lending to them for years before realising what was being done with the loan amount. The most common way these bank frauds are perpetrated is first by way of applying for loan amounts higher than required.

A lot of the times, like in the case of former Aircel boss C Sivasankaran, subsidiaries of a single company apply for separate loans to take up different projects. And by the time banks realise what has happened, it turns out that one company of the group is paying off the other company's old loans with fresh ones. Siva Group of Companies, according to the CBI managed to defraud IDBI Bank off around Rs 1,339 crore in this manner, with alleged involvement of senior bank officials.

Further, in order to get loans sanctioned and disbursed, offending companies often rely on producing fake documentation like over-invoicing of purchases, and presenting a suspiciously healthy profit projection. And as it happens to be in most cases, investigators end up discovering the complicity of bank officials of varying seniorities, who get such dubious documentation processed and approved without scrutiny. Case in point – the ICICI Bank-Videocon bank fraud case; where former Chairperson Chanda Kochhar is accused of complicity.

Once the loans get disbursed, the fraudsters use a complicated network of subsidiaries, shell companies, and frontmen to move the money around to mislead auditors for as long as possible. The problem, however, is that this network has both genuine and paper companies, making identification difficult.

This is where the Enforcement Directorate comes into play. In bank fraud cases where there is evidence of loan amounts being diverted through third-party concerns, the ED picks up investigations under PMLA and starts establishing the money trail in an attempt to prove how the proceeds of crime were diverted and used to what end.

While establishing the fraud itself can take years, it can take longer for the ED to prove money-laundering charges.

The Getaway

While investigative agencies embark on their massive journey to establish the fraud and money-trail, it is often seen that high-profile offenders manage to flee the country, further delaying the case against them.

In fact, according to data provided by the government and the ED, around 36 persons, identfied as economic offenders have fled the country, including Mallya, Nirav Modi, Mehul Choksi, the Sandesara brothers (Sterling Biotech), C Sivasankaran, Jatin Mehta, and Sanjay Bhandari.

Even when probe agencies take measures to prevent such offenders from fleeing, most manage to leave the country, largely due to their accumulated influence in political, bureaucratic, and legal circles as a result of their wealth.

Mallya, Sivasankaran, and the Sandesara brothers managed to flee the country despite a Look Out Circular issued against them. In most bank frauds, larger wealth can be connected to higher influence among power players, which in turn allows fraudsters to avoid scrutiny.

Although extradition proceedings for Mallya and Modi are underway and Choksi has been called a criminal by the Prime Minister of the country he is currently in, the process to bring such fugitives back remains a long and arduous one.

The investigation

Meanwhile, investigators at home face considerable challenges in proving crimes of bank fraud and especially money-laundering. While extracting financial information from countries that are not obliged to share such information is a daunting task, ED investigators also have to explain the evidence to prosecutors here so that a case can be made out.

Some ED officials say that prosecutors often have trouble understanding the crime and spend weeks trying to comprehend how to translate years' worth of evidence in terms that can get them a PMLA conviction. In fact, among the many PMLA cases the ED has registered, convictions are yet to reach double-digits. And given the influence that some economic offenders carry, often times investigators themselves are found to be compromised.

Moreover, the accused always has the most common explanation i.e. blaming unpredictable markets for their loan defaults. Mehta's Winsome Diamonds is a classic example, with Mehta claiming that his buyers in the UAE had faced massive losses, resulting in the default over Rs 6,500 crore.

In addition, the sheer volume of documents that require specialised scrutiny add to the challenges faced by investigators. Both the CBI and the ED lack specialised manpower in this regard to be able to sift through such documentation in a speedy manner, with the CBI having only four Bank and Securities Fraud divisions in the country and the ED not having enough officials to be able to expedite cases.

And while high-profile economic offenders are guided by some of the "best minds" money can buy to design their crimes, it follows that probing agencies should also have equally talented human resources, both in numbers and quality.