SCRUTINIZING FINANCIAL SWINDLES IN INDIA

Updated: Jul 2, 2023

-Dhruva Brahamania & Janhavi Angal

The international community is deeply concerned about India. A surge in illicit activities has been observed along with the introduction, development, and application of information and telecommunication technology. When it comes to the internet, anonymous servers, hacked emails, and bogus Cyber scammers frequently use websites as a tool and a platform for fraud. Indian Internet fraud is a clear example of cybercrime that has been impacted by the global revolution. This category of crimes includes scams involving romance, lotteries, and charitable donations in addition to large amounts of money used to participate in business proposals. Estimates of the overall losses brought on by this fraud vary greatly.

Therefore, international collaboration is required to put an end to such illegal actions and safeguard Internet users. Although new strategies are frequently used and laws are passed to combat and outlaw various types of fraud, the internet also offers new methods and resources that make it easier to pull off these con games. In light of this, this study aims to discuss and analyse a few aspects relating to cybercriminals' use of cyberspace for fraud, particularly financial crime and the methods employed. Additionally, using crimes and instances in India as a case study, this blog will analyse the effectiveness of the current legal and regulatory framework in preventing this type of cross-border crime.

Introduction

Although Sherlock Holmes is widely regarded as a very popular forensic accountant, some of the ancient Indian scholars also made significant contributions. The forty forms of embezzlement were initially mentioned in India by Kautilya in his renowned Arthashastra[1], during the era of the ancient Mauryans (321-296 BC),

According to the findings of a poll conducted by Audit and Consultancy firm KPMG[2]Financial fraud by insiders continues to be the single greatest fear of Indian organisations, despite white-collar crime virtually doubling from 2009 to 2014. In the survey of 1,000 businesses, 87% reported having a fraud that occurred in 2009 cost them at least Rs. 10 lahks. Only 47% of respondents to the prior study, which was conducted in 2008, complained about this issue. Over the previous two years, fraud incidents, according to at least 75% of Indian businesses, have surged.

Kingfisher Airlines

He acquired Deccan Air, a failing company, and integrated it with Kingfisher Airlines to conduct foreign flights, using United Spirits and United Breweries as leverage. However, the combination failed to turn a profit, and as a result, this company lost a lot of money in Malaya in 2010. Passengers paid service tax, PF, and employee income tax to his company, Kingfisher, but it was never disclosed to the proper authorities. In 2012, the company had to cease operations. Vijay Mallya had borrowed $9,000 from several banks, but he was not able to pay them back. United Breweries, which owns United Spirits, forced Vijay Mallya to resign as chairman of the firm and offered him a $75 million severance package. Vijay Mallya was the subject of a complaint from SBI[3] and other institutions, but he left for the UK before any legal action could be taken. In yet another Vijay Mallya story, the billionaire offers the banks 4,000 crores as a settlement, but they reject him. Banks want interest in addition to the principal sum, which must be at least 4900 crores.

Harshad Mehta Scam

The Bombay Stock Exchange was influenced by a registered and well-known broker named Harshad Mehta and his associates by taking advantage of flaws in the banking system. Mehta defrauded the banks of over Rs 4,000 crore altogether. The BSE Sensex rose from the 2,000 mark in January to the 4,000 mark in March 1992 as a result. On February 28, 1992, the Mehtas were raided by the tax division after the scam was uncovered. The CBI raided the Mehtas on June 4, 1992. The tax return submitted by Harshad Mehta for the assessment year 1992-1993 was later rejected. In 1992, the Reserve Bank of India convened the Janakiraman Committee to provide a comprehensive account of the fraud. Both the Bombay High Court[4] and the Supreme Court found Mehta guilty of the 74 criminal offences for which he was charged. The Harshad Mehta affair led to various changes in the Indian financial regulatory structure. Sebi was given new regulatory jurisdiction over depositories, FIIs, venture capital funds, and credit-rating organisations after the Securities Laws Act was passed in 1995.

The Satyam Scam

The Satyam Computers scandal went public on the BSE in 1991, it had a 17-fold oversubscription because of the Raju brothers' 1987 founding of the company. It quickly and steadily expanded, breaking records every year. In 2008, the yearly income rose from $1 billion to $2 billion. The statistics were inflated numbers supported by fabricated bank records, receipts, and bills. In addition, Satyam recorded these fraudulent receipts using its ERP system rather than the widely utilised commercial ERP accounting systems. Fake bills worth around 5000 crores were stashed in a fixed deposit (FD)[5]. When the board of directors requested in 2009 that the unused cash in the FDs be invested, the Raju brothers opted to put money into Matyas, another Raju family property. Although it was opposed by the stakeholders, it was the only option that matched Satyam and Matyas' comments. The errors made by Satyam and PwC were exposed by the World Bank probe, the following decrease in share prices, and the challenge of connecting Matyas' real estate statements with an IT company. Raju and 10 additional individuals were held after that all of them were found guilty under Sections 120-B, 420, 409, 406, 467, 468, 471 and 477A of IPC.

Foreign Exchange Regulation Act (FERA) infringement act, ITC-Chitalia

An estimated $80 million was spent on FERA violations. The FERA inquiry into the export transactions between ITC and the Chitalia group of firms[6] (EST Fibres) for the years 1990 to 1995 was launched by the Enforcement Directorate (ED) in June 1996. The Chitalias and several corporate directors, including ITC Chairman Mr. K. K. Chaugh were detained before being freed on bail. Later, ITC brought a $15 million lawsuit against Chitalias. On the other side, Chitalias sued it for $55 million, claiming that ITC owed them money.

Conclusion

Accounting fraud in India is nothing new, except for the problem of family ownership in Indian corporations—or maybe just the methods used to commit it. Most recent aspects of stock-based compensation and mark-to-market accounting appear to be involved in incidents of accounting fraud. Tracking down everyone with a stake in the company—those who stand to profit if there is an exaggerated perception of the performance—must yet remain an important part of the strategies used to combat fraud.

Regarding the legislation itself, it may not be required to enact dozens of new regulations; rather, it is more crucial to comprehend the mindset of the Indian fraudster and implement regulations that are significant and original. As we advance in our fight against accounting fraud, we must learn from our European and US legal colleagues how to govern and implement them more successfully as well as how technology can both strengthen and weaken our position.

References-
[1]Shamasastry, R., (1967), Kautilya’s Arthasastra, Mysore Printing and Publishing House, Mysore, 8 th Edn.
[2]https://kpmg.com/xx/en/home/insights/2019/05/the-multi-faceted-threat-of-fraud-are-banks-up-to-the-challenge-fs.html
[3] State Bank of India and Ors. vs. Vijay Mallya (11.07.2022 - SC) : MANU/SC/0842/2022
[4] https://www.casemine.com/judgement/in/5608fa35e4b0149711146dcf
[5]https://www.researchgate.net/publication/304441053_Revisiting_the_Satyam_Accounting_Scam_A_Case_Study
[6] https://www.indiastudychannel.com/resources/52080-years-major-financial-scams-India.aspx

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