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Conmen employ ingenious means to hoodwink banks

Conmen employ ingenious means to hoodwink banks
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"It is always right to detect a fraud and to perceive a folly, but it is very often wrong to expose either. A man of business should always have his eyes open, but must often seem to have them shut," – Philip Stanhope, 4th Earl of Chesterfield.

The man of wit and letters Philip Stanhope, a British Statesman from the 17th century, used to write letters to his illegitimate son in the early 1700s educating him on Classical Literature, Geography, History and Politics.
The letters were eventually published in a book – 'Letters to His Son on the Art of Becoming a Man of the World and a Gentleman' (1774) and the quote remained buried inside the book, however, his keen understanding of the world communicates through space and time, as his observations on fraud has been adopted by many corporate honchos and senior bank officials, embroiled in a multitude of bank fraud cases.

The Central Bureau of Investigation (CBI) has been at the forefront of fighting a war on bank frauds. Over the years bank frauds have grown into a gargantuan monster, with its tentacles spreading across several continents, in the form of shell companies, syphoning off several thousand crores of banks money, never to be seen again.

Fraudsters these days use extremely sophisticated methods to dupe banks, by setting up a myriad network of shell companies, diversion of bank loans, round tripping, Benami loan accounts, shotgunning and the good old fashioned forged bank documents, leading to an estimated loss of Rs 22, 700 crores in the past three years.

The investigators from the agency may be doing a commendable job in clamping down on bank frauds, but the fact that sometimes senior bank officials are hand in glove with the fraudsters or following Stanhope's maxim on not reporting bank frauds, the agency seldom gets time to initiate a decisive strike against fraudsters.

By the time the agency has investigated the intricate web of networks and followed the money, the culprits manage to clean their tracks, destroy crucial documents and leave the country.

"It is always right to detect a fraud and to perceive a folly, but it is very often wrong to expose either. A man of business should always have his eyes open, but must often seem to have them shut," – Philip Stanhope, 4th Earl of Chesterfield.

The man of wit and letters Philip Stanhope, a British Statesman from the 17th century, used to write letters to his illegitimate son in the early 1700s educating him on Classical Literature, Geography, History and Politics.
The letters were eventually published in a book – 'Letters to His Son on the Art of Becoming a Man of the World and a Gentleman' (1774) and the quote remained buried inside the book, however, his keen understanding of the world communicates through space and time, as his observations on fraud has been adopted by many corporate honchos and senior bank officials, embroiled in a multitude of bank fraud cases.

The Central Bureau of Investigation (CBI) has been at the forefront of fighting a war on bank frauds. Over the years bank frauds have grown into a gargantuan monster, with its tentacles spreading across several continents, in the form of shell companies, syphoning off several thousand crores of banks money, never to be seen again.

Fraudsters these days use extremely sophisticated methods to dupe banks, by setting up a myriad network of shell companies, diversion of bank loans, round tripping, Benami loan accounts, shotgunning and the good old fashioned forged bank documents, leading to an estimated loss of Rs 22, 700 crores in the past three years.

The investigators from the agency may be doing a commendable job in clamping down on bank frauds, but the fact that sometimes senior bank officials are hand in glove with the fraudsters or following Stanhope's maxim on not reporting bank frauds, the agency seldom gets time to initiate a decisive strike against fraudsters.

By the time the agency has investigated the intricate web of networks and followed the money, the culprits manage to clean their tracks, destroy crucial documents and leave the country.

'Too Big to Fail' and the King of Good Times
After the Wall Street crash of the 1930s in the USA, the Glass-Steagall Act(GSA), was enacted as a firewall between commercial and investment banking, in a bid to eradicate the conflict of interest and risky investments which tanked the world economy.

Even though the fraud of the century which led to two world wars, was never seen until 2008, bank frauds of low magnitudes were reported from several parts of the world. A case in point - the State Bank of India fraud in 1992, in which senior politicians from Tamil Nadu, using their political clout got sanctions for loans to the tune of Rs 1,336 crore.

Even back then the CBI had to bear the brunt of investigating a highly sensitive case, as Prime Minister, Deve Gowda had pulled up the then CBI director, Joginder Singh for taking action against the Indian Bank's Executive Director.

By the early 2000's, the world bid goodbye to the Glass Steagall Act and the major banking giants had merged giving birth to the concept too big to fail.

Vijay Mallya had by this time played his card, and was banking on globalisation to further fuel his ambitious business ventures. He had launched his own airline, turned around his father's UB Spirits into the biggest spirits maker. But the 2008 financial crisis was a death blow to global commerce and with that Vijay Mallya found himself playing musical chairs with an open grenade. His airline did not make profits, several of his business ventures started to take a toll on his empire, and he did what defaulters have hitherto done, take loans to pay debt and keep the Ferris wheel going. But by the time the CBI had got its hand on the case and the money trail was followed, banks reported that Mallya owed them Rs 9000 crore.
Forged Cheques, Round Tripping and Shell Companies
Vijay Mallya's Kingfisher started to accrue debts of Rs 934 crores because of the rising oil prices, later the debt increases to a massive Rs 7000 crore. However, the bank officials from IDBI looking at Kingfisher Airlines' initial good performance decided to provide a loan of Rs 900 crore to the airline.

"When the alarm bells had started ringing, we had approached IDBI as we had crucial leads in the case. However, since he was their coveted customer, the officials did not cooperate. Later, when the consortium of banks approached UBHL asking them to pay Rs 6,493 crore on behalf of Kingfisher Airlines, the full extent of the case was unravelled," said a CBI officer.

The loans then stood at a mammoth Rs 9000 crore! Mallya managed to pull this off by taking loans based on his good will and back channel talks with senior bank officials. However, not every bank fraud is straight forward. Many fraudsters employ sophisticated methods to defraud a bank.

In some cases Round Tripping is employed, in which the fraudster stakes a barter on an unused asset to another company, while at the same time agreeing to buy back the same or similar asset at the same price. This adds an extra revenue in the company accounts without any genuine transaction for which a loan was originally sanctioned.

CBI had arrested four persons, including the Directors of Surya Vinayak Industries – Sanjay Jain and Rajeev Jain, for causing an alleged loss of Rs 2,240 crores to Punjab National Bank (PNB) in the month of April this year. "The accused had set up 100 shell companies for round tripping and diversion of funds, with no genuine business transactions between the firm and shell companies. The firm had diverted the money to subsidiaries based in Singapore, Hong Kong, Dubai, Indonesia, Ghasa (South Africa) and China," said CBI spokesperson RK Gaur. In a case of bank fraud, the devil lies in the detail, but sometimes the details appear to be so immaculate that even trained eyes of bank officials are unable to detect the fraud. But in the Pune-based Singhad Technical Educational Society fraud case, the Assistant General Manager had sanctioned loans against bogus projects. However, the culprits had gone out of their way to come up with bogus expansion plans, certificates from architects to keep the con going.

CBI had registered a case against the Assistant General Manager, AG Sawant, Vidhyadhar Pednekar, Senior Manager Central Bank of India (Pune) and the President and Chief Managing Trustee of Sinhgad Technical Education Society, MN Navale on April 21, 2017. Navale had applied for financial facilities to the AGM to the tune of Rs 81.30 crore, including fresh term loan of Rs 60 crore and taking over of existing term loans from Punjab & Sind Bank and Canara Bank.

In the Project Report submitted with the application, Navale gave false information that the loan amount would be required for various construction works and supply of materials at different campuses of their Society including the construction of Dental college and hospital building.

"The accused had produced detailed construction layout plans of the Dental college including a certificate of an architect showing an expenditure of Rs 21.20 crore. The college was never constructed," said a CBI officer.
Even the gold markets have been used by fraudsters to conceal their nefarious designs. Winsome Diamonds and Jewellery, now branded as India's second largest corporate defaulter after Vijay Mallya's Kingfisher Airlines, had defrauded the banks to the tune of Rs 7, 000 crore.

The firm had raised Rs 3,420 crore from 14 different banks by 2011. And these loan limits were raised again to Rs 4,617 crore by the first quarter of 2012. The firm then diverted the money to three group companies: Rs 4,366 crore to Winsome Diamond & Jewellers, Rs 1,932 crore to Forever Precious Diamond and Jewellery and Rs 283 crore to Suraj Diamonds. The banks had issued standby letters of credit (SBLC) similar to guarantees in favour of international bullion banks like Standard of South Africa, Standard Chartered London and Scotiabank, which were supplying gold to Winsome Group. When Winsome failed to pay the bullion banks, they went knocking on the doors of CBI, as the banks had to now pay for the gold consignment. As all the loans were grounded, within months Jatin Mehta, Director resigned from the company and several arrests followed.

Stanhope's Maxim: Why banks do not report frauds
Despite the RBI constituting a Fraud monitoring cell and instructing all banks to set up fraud risk management committees, several banks do not report the fraud until it threatens to vanquish the bank.
While talking to Millennium Post on the condition of anonymity, a senior PNB official said, "In the banking system, frauds are detected early on. But fearing that it will tarnish the image of the bank it seldom gets out. It is handled internally before the investigating agencies are informed. The senior level managers are under a lot of pressure to deliver and sometimes look the other way when they detect a fraud thinking that the money will be eventually paid back making everyone rich". Many members from the internal investigating committee lack the understanding of investigating a fraud and sometimes even miss out on crucial details.

It takes at least two years in standard bank fraud cases to file a charge sheet and then several more years until the Special CBI court finally passes the sentence. Take the case of Sanjeeva Shetty, then Branch Manager, Oriental Bank of Commerce, Yelahanka Branch, Bangalore, who was sentenced to five years of imprisonment with a fine of Rs 5,10,000 in 2017. He had been fighting the legal battle for the past 17 years.

By the time the fines are imposed and the banks finally get their money by selling off the assets of the accused, one final fraud awaits them as, after all, all that glitters is not gold. "In several cases when the banks try to sell off the assets they realise that it was never worth the sanctioned loan and hardly manage to recover their money," the CBI officer said.


After the Wall Street crash of the 1930s in the USA, the Glass-Steagall Act(GSA), was enacted as a firewall between commercial and investment banking, in a bid to eradicate the conflict of interest and risky investments which tanked the world economy.

Even though the fraud of the century which led to two world wars, was never seen until 2008, bank frauds of low magnitudes were reported from several parts of the world. A case in point - the State Bank of India fraud in 1992, in which senior politicians from Tamil Nadu, using their political clout got sanctions for loans to the tune of Rs 1,336 crore.

Even back then the CBI had to bear the brunt of investigating a highly sensitive case, as Prime Minister, Deve Gowda had pulled up the then CBI director, Joginder Singh for taking action against the Indian Bank's Executive Director.

By the early 2000's, the world bid goodbye to the Glass Steagall Act and the major banking giants had merged giving birth to the concept too big to fail.

Vijay Mallya had by this time played his card, and was banking on globalisation to further fuel his ambitious business ventures. He had launched his own airline, turned around his father's UB Spirits into the biggest spirits maker. But the 2008 financial crisis was a death blow to global commerce and with that Vijay Mallya found himself playing musical chairs with an open grenade. His airline did not make profits, several of his business ventures started to take a toll on his empire, and he did what defaulters have hitherto done, take loans to pay debt and keep the Ferris wheel going. But by the time the CBI had got its hand on the case and the money trail was followed, banks reported that Mallya owed them Rs 9000 crore.
Forged Cheques, Round Tripping and Shell Companies
Vijay Mallya's Kingfisher started to accrue debts of Rs 934 crores because of the rising oil prices, later the debt increases to a massive Rs 7000 crore. However, the bank officials from IDBI looking at Kingfisher Airlines' initial good performance decided to provide a loan of Rs 900 crore to the airline.

"When the alarm bells had started ringing, we had approached IDBI as we had crucial leads in the case. However, since he was their coveted customer, the officials did not cooperate. Later, when the consortium of banks approached UBHL asking them to pay Rs 6,493 crore on behalf of Kingfisher Airlines, the full extent of the case was unravelled," said a CBI officer.

The loans then stood at a mammoth Rs 9000 crore! Mallya managed to pull this off by taking loans based on his good will and back channel talks with senior bank officials. However, not every bank fraud is straight forward. Many fraudsters employ sophisticated methods to defraud a bank.

In some cases Round Tripping is employed, in which the fraudster stakes a barter on an unused asset to another company, while at the same time agreeing to buy back the same or similar asset at the same price. This adds an extra revenue in the company accounts without any genuine transaction for which a loan was originally sanctioned.

CBI had arrested four persons, including the Directors of Surya Vinayak Industries – Sanjay Jain and Rajeev Jain, for causing an alleged loss of Rs 2,240 crores to Punjab National Bank (PNB) in the month of April this year. "The accused had set up 100 shell companies for round tripping and diversion of funds, with no genuine business transactions between the firm and shell companies. The firm had diverted the money to subsidiaries based in Singapore, Hong Kong, Dubai, Indonesia, Ghasa (South Africa) and China," said CBI spokesperson RK Gaur. In a case of bank fraud, the devil lies in the detail, but sometimes the details appear to be so immaculate that even trained eyes of bank officials are unable to detect the fraud. But in the Pune-based Singhad Technical Educational Society fraud case, the Assistant General Manager had sanctioned loans against bogus projects. However, the culprits had gone out of their way to come up with bogus expansion plans, certificates from architects to keep the con going.

CBI had registered a case against the Assistant General Manager, AG Sawant, Vidhyadhar Pednekar, Senior Manager Central Bank of India (Pune) and the President and Chief Managing Trustee of Sinhgad Technical Education Society, MN Navale on April 21, 2017. Navale had applied for financial facilities to the AGM to the tune of Rs 81.30 crore, including fresh term loan of Rs 60 crore and taking over of existing term loans from Punjab & Sind Bank and Canara Bank.

In the Project Report submitted with the application, Navale gave false information that the loan amount would be required for various construction works and supply of materials at different campuses of their Society including the construction of Dental college and hospital building.

"The accused had produced detailed construction layout plans of the Dental college including a certificate of an architect showing an expenditure of Rs 21.20 crore. The college was never constructed," said a CBI officer.
Even the gold markets have been used by fraudsters to conceal their nefarious designs. Winsome Diamonds and Jewellery, now branded as India's second largest corporate defaulter after Vijay Mallya's Kingfisher Airlines, had defrauded the banks to the tune of Rs 7, 000 crore. The firm had raised Rs 3,420 crore from 14 different banks by 2011.

And these loan limits were raised again to Rs 4,617 crore by the first quarter of 2012. The firm then diverted the money to three group companies: Rs 4,366 crore to Winsome Diamond & Jewellers, Rs 1,932 crore to Forever Precious Diamond and Jewellery and Rs 283 crore to Suraj Diamonds. The banks had issued standby letters of credit (SBLC) similar to guarantees in favour of international bullion banks like Standard of South Africa, Standard Chartered London and Scotiabank, which were supplying gold to Winsome Group. When Winsome failed to pay the bullion banks, they went knocking on the doors of CBI, as the banks had to now pay for the gold consignment. As all the loans were grounded, within months Jatin Mehta, Director resigned from the company and several arrests followed.

Stanhope's Maxim: Why banks do not report frauds
Despite the RBI constituting a Fraud monitoring cell and instructing all banks to set up fraud risk management committees, several banks do not report the fraud until it threatens to vanquish the bank.
While talking to Millennium Post on the condition of anonymity, a senior PNB official said, "In the banking system, frauds are detected early on. But fearing that it will tarnish the image of the bank it seldom gets out. It is handled internally before the investigating agencies are informed.

The senior level managers are under a lot of pressure to deliver and sometimes look the other way when they detect a fraud thinking that the money will be eventually paid back making everyone rich". Many members from the internal investigating committee lack the understanding of investigating a fraud and sometimes even miss out on crucial details. It takes at least two years in standard bank fraud cases to file a charge sheet and then several more years until the Special CBI court finally passes the sentence. Take the case of Sanjeeva Shetty, then Branch Manager, Oriental Bank of Commerce, Yelahanka Branch, Bangalore, who was sentenced to five years of imprisonment with a fine of Rs 5,10,000 in 2017. He had been fighting the legal battle for the past 17 years.

By the time the fines are imposed and the banks finally get their money by selling off the assets of the accused, one final fraud awaits them as, after all, all that glitters is not gold. "In several cases when the banks try to sell off the assets they realise that it was never worth the sanctioned loan and hardly manage to recover their money," the CBI officer said.
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