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India lost Rs 6,600 crore to fraud last year

N Sundaresha Subramanian/New Delhi 01 Nov 12 | 06:44 PM

Businesses in India recorded losses worth a whopping Rs 6,600 crore last year with a significant portion of these frauds occurring in the financial services sector that includes banking, investments and insurance businesses.

63% of the total fraud cases in FY12 were reported in the financial services sector, banks being the most common victim of frauds followed by insurance and mutual fund companies, according to Fraud Indicator, a first of its kind report by Consulting firm Ernst & Young.

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The report said, the high incidence of fraud in the financial sector was majorly to oversight from the senior management on deviation from processes, lapses in the system, daily cash transactions etc. “With banks and NBFCs still struggling to recover from the 2008 financial crisis, it’s a double blow for them when they are being exposed to increasing incidents of fraud, loan scams, and regulatory bodies raising questions against the soundness of their compliance practices" said Arpinder Singh, partner and National director Fraud Investigation and Dispute Services, Ernst & Young Pvt Ltd.

The study reveals that losses incurred by banks due to fraud increased by 88% in 2010-11 to exceed Rs 3,790 crore (more than Rs 2001 crore in 2009-10).

The study also states that 79% of the major fraud cases (majority cases above INR100 million) were due to involvement of senior management of the company owing to their authority and direct interference in the company’s decisions.

Another interesting finding reveals that investors were the biggest sufferers with total value of frauds against them exceeding  Rs 2700 crore. The short term goal to get higher returns in less time makes the investors vulnerable to scams and instigates them to make decisions which are may be at times irrational.

 Singh said there was an increase in the magnitude of fraud in the country in the second half (2H) of FY12,with value of such incidences rising by 36% over the first half the year and the number of fraud cases rising by 8%.

 Fraud Indicators is a first-of-its kind initiative in India that looks into fraud in all spheres of society, including the business and government segments, as well as in the case of financial institutions and individuals. Over 1.8 lakh instances of different kinds of fraud reported in the media was analysed for the study.

Singh added, “What we found alarming in this edition was that insider enabled fraud accounted for 61% of the reported fraud cases in this edition. Entrusting your employees with confidential information, giving them a right to access company’s bank accounts etc may be essential, but this should be done with some skepticism. This makes it imperative for companies to take some ground-breaking steps like monitoring employee behavior and taking appropriate action against the rogue employees."  

The current edition reveals a growing threat of fraud arising out of collusion between employees and external parties where a fraudster uses forged or stolen documents to commit fraud. Mr. Singh feels that “The rising incidents of identity theft are becoming a major concern for corporations as well as individuals, since the repercussion of frauds committed with stolen identity go beyond financial and reputational losses, and can lead to serious security threats"

With fraud cases reported in 24 of total 29 states and small difference between Tier I and Tier II cities (47% and 53% respectively) it is evident that the spread of fraud is consistent across the country. Delhi witnessed the largest number of fraud cases and highest aggregate losses by fraud in 2011-12. It also recorded the highest average losses (Rs 80 crore) followed by Rs 50 crore for Andhra Pradesh. 

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