Global Perspective of General Insurance Fraud: General insurance fraud is undergoing a sea change in its character. It is no more confined to the domain of white-collar crime, but surpassed into a full fledged scam, world over, posing a serious threat to the global economy. What's visible is only the tip of the iceberg and a lot more underneath.

After tax evasion, insurance fraud is officially acknowledged as the second biggest financial crime in the US costing Americans about $100 billion each year reports National Insurance Crime Bureau. Did you know Insurance Fraud is akin to an industry in the West. Special classes are held to make people proficient in perpetrating insurance fraud. There are organized gangs that specialize in staging vehicular accidents, arson and sabotage of property - all to one end - getting a fat insurance claim. Unlike the rest of the world, in India, there is so little information in the public domain about insurance fraud that easily mislead one to believe that the malaise has skipped us. But in reality we are ahead of others. Though a preliminary estimate puts fraud claims at 6% of the total number in India but If insurance fraud levels in India are to be rated in the international range of 10%-15%, the Indian general insurance industry would be losing between Rs.2,500-3,500 crore in a year. Channels of Frauds Against Insurance Companies : Fraud against the Insurance Companies committed at different stages are phenomenal and alarming which can be from outside known as external sources or from within the industry, known as internal source, but very often caused due to the unholy alliance of both the sources. Collusion between insurance employees, intermediaries and insured : It would not be an exaggeration to say that in most of the cases the insurer cannot be defrauded except without an unholy nexus between the employee/intermediary in one hand and the insured/beneficiary at the other. Most of the frauds committed by way of a concerted effort of agents, brokers, insurance employees, insured member and the provider of services and other stakeholders of the general insurance system. Not necessarily, the policy holder/beneficiary always bribe surveyors and officials of insurance company to get false claims passed. Some time insurance employees and or intermediaries or the fraudsters

approach the policy holder/beneficiary and suggest ways and means to exaggerate the genuine claim by fabricating documents. Various stages of insurance fraud : Fraud can occur at any stage during the process of applying, buying, using, selling, underwriting insurance or while staking a claim which can be broadly categorized as pre-insurance otherwise known as application fraud and post insurance comprising eligibility and claims fraud. Pre-insurance stage : Application fraud : This is committed when material misrepresentations are made on an application for insurance with the intent to defraud. Application Fraud differs from claim fraud in that the perpetrator is not seeking to illegitimately obtain a benefit payment-rather the perpetrator is seeking to illegitimately obtain a general insurance coverage only. Planned non-disclosure by clients has always been a major problem faced by Insurance industry, which sadly is socially acceptable. Hiding relevant and potentially damaging information is almost a norm in India. Even if the customer wants to disclose, his/ her insurance agent advises to the contrary and convinces the customer not to tell as it may attract extra premium. Agent is after all interested only in his commission and is worried that faced with extra premium, for which client may decide not to take the policy. Post insurance stage: Frauds at this stage can be either an eligible fraud or claims fraud. Eligibility fraud: Eligibility fraud most commonly involves misrepresentations of the status of beneficiary. In such cases, the benefit is paid to a person not eligible to receive benefits because of various factors.. Fraud by way of identity theft where people stole other person's identity to make false insurance claim, widely prevailing in the west is another species of the eligibility fraud. Claims fraud: Most common where the losses are concocted, exaggerated, inflated, manipulated, manufactured, stage managed, to name a few. Magnitude and frequency of any insurance fraud is greater at the claim stage in comparison to pre-insurance stage. Types of insurance claims frauds Insurance fraud is generally of two types - one the 'opportunity fraud' - otherwise known as 'soft fraud' and the other is deliberate act to cheat known as 'hard fraud'.

Any misrepresentation of facts or circumstances while making a claim is fraud. This could include hiding your previous driving record or padding up the claims sheet. But unfortunately most people like to consider these as little exaggerations rather than fraud. Hard fraud : Premeditated fabrication of claim: Hard fraud is a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss. A hard fraud is committed by faking incidents, accident, burglaries or illnesses, backdating claims, identity theft claims etc. Soft fraud : Opportunistic padding up of claim: In these kinds of fraud, the claimant demands more than what he otherwise deserve. Approximately, 90% of the general insurance fraud results from soft fraud . Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim i.e. seeking more than the loss. Immaterial fraud : In some cases, what can described as 'immaterial' fraud occurs, where a policyholder acts fraudulently simply to obtain legitimate payment of a genuine insured loss. A classic example is where the policyholder has lost the receipt for a stolen item and, facing pressure from the insurer, produces a forged receipt to substantiate the claim. The loss is genuine but the policyholder has lied in the course of making the claim, thereby breaching the duty to act 'in utmost good faith'. Motor insurance frauds ; MOTOR: World over auto or motor insurance constitute the single largest portfolio ranging between 40% to 70% of total general business insurance segment. Motor insurance is the most potential and vulnerable fraud ridden sector in the industry in comparison to other line of insurance. The Association of British Insurer said motor insurance is now the leading area for fraud, with its member uncovering 24000 fraudulent car insurance claims worth 260 million during 2007- the equivalent of 5 million every week. Motor Own Damage Claim Fraud : Motor own damage claims fraud committed at pre and post insurance stage involving both hard and soft fraud. Hard frauds includes total damage to the vehicle deliberately to get rid of the same or to earn more money than its market value. Some of the examples are staging collision, theft of the vehicle, burnt by fire, fall into river, owner vehicles give ups, loss under an excluded peril etc.

A real accident may occur, but the dishonest owner may take the opportunity to incorporate a whole range of previous minor damage to the vehicle into the garage bill associated with the real accident. Soft fraud accounts for the majority of the motor insurance frauds. Some of the common soft frauds are filing more than one claim for the single loss, higher costs for repair, damage caused earlier, replacement of old spare parts etc. With the advent of orgnised gangs in auto insurance fraud, it become more complex and sophisticated., which are much difficult to detect, if detected difficult to prove. Motor TP : From chasing ambulance to organise accidents, fraud in motor third party insurance come a long way . Fraudulent motor TP claims is a multi million dollar business today involving highly orgnised gangs. More than one of every three bodily-injury claims from car crashes involves fraud. Insurance Research Council (1996). More than one-third of people hurt in auto accidents exaggerate their injuries.. (Rand Institute for Civil Justice). Recently in USA, criminal charges were filed against Quentin Hawkins, also known as "Flint Hawkins," the leader of a ring and 64 others for their participation in a large-scale insurance fraud ring that either staged or fabricated at least 14 automobile accidents between February 1999 and July 2000 and filed number of bogus bodily injury and medical treatment claims under no-fault insurance policies. Such gangs have their code words for communication among themselves, where accident is referred to as Movie, vehicles as cans, hospitals as fruit stand and victims as pineapple. Some of its modus operandi are as under : Exaggerated claims: Many instances have been discovered in which corrupt attorneys and health-care providers (combine to bill insurance companies for nonexistent or minor injuries. Hit and run cases : Conversion of natural death into a hit and run case or converting a hit and run case to an accident is very common in India as well as abroad. Paper accidents : Many a times documents created in collusion with various authorities to fake an accident and claim compensation. Staged accident: Where the fraudsters will use a vehicle to stage an accident with the innocent party. Typically, there would be 4 or 5 fraudsters in the vehicle, which makes an unexpected manoeuvre causing the innocent party to collide with the fraudster's vehicle.

Swoop and Squat: Where one or more drivers in "swoop" car force an unsuspecting driver into position behind a "squat car. This squat car, which is usually filled with several passengers, then slows abruptly, forcing the driver of the chosen car to collide with the squat car. In India : Whatever is practiced in west easily find its way to India. A recent survey has shown that more than 50% of the TP claims in India are bogus. There are several claims that are based on bogus accidents carried out with the connivance of law enforcing agencies. In India one public sector insurance company become richer by around Rs.184 Crores due to withdrawal of 427 number of Motor Third Party claim cases, including 40 cases where award have been made, fearing action following investigation by the CBI in pursuance to the direction of the Madras High Court. Last year it is reported that the Insurance companies were defrauded of around Rs.500 Crores for over five years in seven South Bengal districts. It is apprehended that the figures could be around Rs.1500 Crores over the past ten years. (Times of India Mumbai Edition dated 25-07-2007) Some of the common Modus operandi of TP frauds in India are conversion of ordinary death / other accidental death cases to Hit and Run cases. Conversion of hit and run cases by implanting another vehicle. Most of the hit and run cases are fixed at a later stage in collusion of the police. In some cases it was found that the person making the claim changes but all the other details remain the same like 20 claims made on the same car. It was also found that the same vehicle involved in 18 different accidents, all in the same city and the same years. Death due to own negligence and without involvement of TP vehicles was converted to cases where accident shown to be caused by another vehicle. Accident caused under influence of alcohol converted to cases where accident caused by another vehicle. On Dec 2, 2000 M. Palanivel was injured in an accident while riding pillion on a two wheeler. Investigation reveals he was riding the two wheeler and fell down when he lost balance. (Moneycontrol .com) Mr. Shankar died in an accident when his car was hit by an Ambassador car. Investigation revealed that he died in an accident when his car hit a tamarind tree. There was no involvement of any Ambassador car. (Money Control .com) Mr. Periyaswanmy was injured in an accident when his two-wheeler hit by an auto-rickshaw. Investigation revealed that he was allegedly driving under the influence of alcohol and fell off his bike. (Moneycontrol .com)

Mr. Mohan died in an accident when a lorry hit him when he was driving a motorcycle. Hospital record shows that he died in an accident when his motorcycle rammed into a bullock cart. (Moneycontrol .com) Mr. Senthilkumar was injured as a pedestrian when he was run down by a tempo. Fire Dept. records show that he was injured when he fell down the village well. (Moneycontrol .com) Father and son succeeded in receiving compensation of Rs. 3,55,000/- and Rs. 1,52,000/- for the alleged injury sustained while proceeding in a motorcycle, which was dashed by a car, actually they are operating their own tractor, which jilted into a ditch as result of which the occupants slipped down and sustained injuries. United India vs. Rajendra Singh : 2000(3) SCC 581. Inclusion of some stock victims name in the list of persons as injured persons even though they are not traveling. Substitution of un-insured vehicle with a insured vehicle. X claiming compensation for the treatment to an injury sustained by Y in vehicle accident. Passengers traveling in a truck converted to either owner of goods or coolies carried in the vehicle. Impersonating the victim, claimant, owner, driver sometimes advocates had been a norm. Fraud on grand scale committed in MACT and labour Courts in the State of Gujarat by invisible Advocates reports Yong Lawyers. CBI books Ambala based Advocate for insurance frauds to the tune of Rs. 200 Crores reports Hindustan Times. Filing cases without consent of the claimants, and in the name of advocates who do not exist had been widely prevalent. Filing of bogus injury report / medical certificate etc. to inflate compensation considered to be a right. FIR field against a Doctor from Godhra General Hospital for issuance of false certificate to get compensation u/s 161 / 167 / 193 / 196 / 197 / 198 / 199 / 200 / 406 /417 / 420/ 465/ 471/ 472/ 476/ 474/ 475 IPC. The list is endless. Health Insurance : 80 percent of healthcare fraud is by medical providers, 10 percent is by consumers and the balance is by other sources. Health Insurance Association of America (1998)

Health insurance fraud is described as an intentional act of deceiving, concealing, or misrepresenting information that results in health care benefits being paid to an individual or group. Fraud can be committed by both a member and or a provider. Member fraud consists of ineligible members and/or dependents, alterations on enrollment forms, concealing pre-existing conditions, failure to report other coverage, prescription drug fraud, and failure to disclose claims that were a result of a work related injury. Provider fraud consists of claims submitted by bogus physicians, billing for services not rendered, billing for higher level of services, diagnosis or treatments that are outside the scope of practice, alterations on claims submissions, and providing services while under suspension or when license have been revoked. Independent medical examinations are used to debunk false insurance claims and allow the insurance company or claimant to seek a non-partial medical view for injury related cases. Global Scenario : Health insurance fraud and abuse is common and very costly to America's healthcare system. Industry analysts argue that out of every $7 spent on Medicare $1 is lost to fraud and abuse that forced the Congress of the United States, to pass the Health Insurance Portability and Accountability Act of 1996 (HIPAA) declaring health care fraud as a federal criminal offense with punishment of up to ten years of prison in addition to significant financial penalties. In India : In India, the health insurance statistics is alarming. According to a survey conducted by one of the leading TPAs, the estimated number of false claims in the industry is estimated at around 10-15 per cent of total claims. The report suggests that the healthcare industry in India is losing approximately Rs 600 crore on false claims every year. Health insurance is a bleeding sector with very high claims ratio. Various types of Health Insurance Fraud: False claims are the most common type of health insurance fraud. The goal is to obtain undeserved payment for a claim or series of claims. Such schemes include any of the following, when done deliberately for financial gain: Some physicians charge insured patients more than uninsured ones but represent to the insurance companies that the higher fee is the usual one. Charging for a service that was not performed, or excessive charging for a service or providing unnecessary services or ordering unnecessary tests. Billing for inappropriate tests-Both standard and nonstandard-appears to be much more common among health-care providers. management of the patient. Unbundling of claims: Billing separately for procedures that normally are covered by a single fee. Double billing: Charging more than once for the same service. Upcoding: Charging for a more complex service than was performed.

Miscoding: Using a code number that does not apply to the procedure. Kickbacks: Receiving payment or other benefit for making a referral. Indirect kickbacks can involve overpayment for something of value. Misuse: Criminals sometimes obtain Medicare numbers for fraudulent billing by conducting such as health survey or offering a free "health screening" test etc. Attitude towards general insurance fraud Insurance fraud is a globally accepted white collared crime, more so in India where till recently defrauding an insurance company meant cheating the Government and, by and large, people took as their right. Cost of general insurance fraud Fraud cost the insurance industry an estimated $96.2 billion in 1999. (Conning & Co.) In the United States insurance fraud is estimated to cost US$875 per person per year. Australian Institute of Criminology say that 10% of the claims paid by Australian insurance companies are fraudulent and they add about A$70 to the premium of each Australian policy. (Australian Institute of Criminology) In the UK, about 1.50 billion is paid out on account of bogus and exaggerated claims. This adds almost 5% to the premium of an average insurance policy. The South African Insurance Association (SAIA) estimates that approximately 10% of claims paid out are fraudulent. Closer home, insurance frauds in Malaysia are estimated to be 10%-15% of premiums collected. Impact Since the very basis of general insurance system revolves around the principle of "collecting from large to pay a few" ultimately it is the policy holders who bear the brunt of the fraud for no fault of its own. Existing system of fraud management: Anti fraud programme Individual insurance companies do make attempts to combat fraud, but they are more concerned about maintaining profitability and not being out-of-line with peer companies, rather than with reforming the

system. In most developed and developing countries, insurance associations and insurers have joined hands with the government to combat fraud and mange to promulgate anti-insurance-fraud legislation. As far as Indian insurers are concerned, companies are in a denial and forfeiture mode and, hence, unable to formulate a strategy to combat fraud. Is there any speciality in a financial fraud requiring a separate treatment? Difficulties In Proving Fraud : Evidential Complexity: Insurance fraud is considered an 'invisible and victimless crime' and all over the world. An allegation of fraud should not be made lightly. From the point of view of law of Evidence, it becomes a challenge to prove fraud. The burden of proof is on the insurer, if it suspects that fraud has taken place. Therefore, insurers often end up paying the claims because they find it difficult to prove the fraud and reject false claims. Tools for fraud management: Constitution or formation of Statutory Fraud Committee. There is a need for establishment of a exclusive Statutory fraud committee for the insurance industry. Amendment to Indian Penal Code to criminalize financial fraud : Insurance fraud to be defined as an offence with severe punitive punishment with the burden of proof to be shifted on the accused to prove absence of commission of fraud by amendment to the IPC, Indian Evidence Act. System reforms in insurance practice: Every insurance company should be required to develop Best Practice Code (BPC) within a time frame and submit the same to the regulator; make effective measures to internalize the BPC in its staff, effectively supervise the fictionalization of the BPC, control and monitor variation from the BPC, enforce BPC in the use of discretionary power and make documentation of the same, periodically review the use of discretionary power, conduct periodical legal system, audit and obtain compliance certificate. Adherence to International Best Practices against prevention of fraud : In the UK, the Association of British Insurers has set up databases that detect multiple insurance, multiple claims, break in insurance, etc. They have taken the service of experts to do data-sifting to detect potential fraudulent claims. Frauds have a pattern and data-sifting helps insurers detect those patterns.

Law for data sharing: Sharing of data amongst the General Insurance Companies in India could be a very effective tool for identification, detection control and combat the fraud. However, for this they require legal immunity from sharing information on fraudulent claims among themselves, as well as with other financial institutions, regulators, statutory agencies and departments. At present, there are no guidelines with regard to sharing of information among insurers on such fraudsters. Specific Tool For insurance fraud management : The National Insurance Academy (NIA) has devised a "scientific method" that would facilitate insurers and tackle these third party motor claims. The NIA method is based on seven processes, four preventive and three retrospective tools. Preventive tools brought about are: Stress analysis that would detect the strain and tension in a claimant's voice to figure out if he/she is truthful about the accident. Red flagging' which essentially means reporting bogus claims, thereby creating some sort of a bank. The next time a surveyor deals with a particular accident case, he can dip into the bank to help him identify a pattern. Predictive modelling is a third tool by which an insurer can lay his hands on information on the type of vehicles making a claim in a certain area. The fourth preventive process is database searching. A record of various places and conditions surrounding that area will be kept. This would help an insurer to be extra cautious while settling claims in that area." Retrospective tools that to be implied are; 'Exception report' which would point out any exception in the number of claims in various branches of the insurance company. 'Online analytic processing', to maintain a person's records to keep track of the claims he has made. 'Link analysis', where a link would be searched for similar types of accident in different parts of the country. Last word : We may not eliminate fraud but we can surely reduce it.

CBI alleged that the officers of various public sector banks and financial institutions received bribes from the private financial services company Money Matters, which acted as a mediator for corporate loans and other facilities from financial institutions. The bank officials sanctioned large-scale corporate loans to realty developers, overriding mandatory conditions for such approvals along with other irregularities.[1] The Central Bureau of investigation arrested number of high official from the several financial institutes in India in connection with the housing scam in November 24, 2010. Smith (2010) stated that findings are shocking where the head officers of several banks and financial institutes are involved in corporate corruption. Precisely, the banks and financial officials were from the public sectors including LIC, Bank of India, Central Bank of India and Punjab National Bank. However, ) stated that since the matter was related to the erosion of funds from the LIC housing and Finance Limited, event was named as the LIC housing and Finance Scandal. Lamont (2010) cited that the officers from the high rank including the secretary of LIC Investment, general managers, directors and deputy managers of banks were involved in taking out the funds from LIC in appropriate and unethical way. Smith (2010) said that these officials were acting as the middleman to provide the funds to the main parties and in return they were having hefty amount of funds from the real investors, insurers and other consumers. Smith (2010) regarded this as the distortion of the corporate governance system where the business ethics were neglected to sustain the core business activities of the public sector banking firm. Meanwhile, Economic Times stated that the officials were charged with the exploiting of funds, looting, corrupting corporate loan process and manipulating and overriding with the regulations of the LIC Housing and Finance Limited in regard to the approvals and other rules and regulations. Nonetheless, The loans provided through this manner were estimated to be worth of 85 Billion Dollars, comes as the biggest scandal in the Housing Finance in Asia However, the stock price took a sharp dip soon after the event. Apparently, LICHF had a good run till September 2010 when it reached Rs.299 and the growth rate undoubtedly, received the appreciation by the investors and other shareholders. The stock recorded no significant changes thereafter but the appearance of corporate scandal shook the stock price chart and the price dip to Rupees 150 by the end of year 2010. At present the stock price is stands at around rupees 190 and gaining its momentum over a period of time but however, Lamont (2010) felt that the combination of factors that happened in the last quarter of FY10 were accountable for the sharp decline in the LIC Housing and Finance Share price. Reuters stated that LIC Housing and Finance is looking forward to raise the capital to the tune of Rupees 25000 Crores in 2011-12 through debt. Eventually, the technical experts believed that company is developing its core competencies and capabilities and undoubtedly, investors would revive the stock price and current Market changes and companys development will be seen through the price momentum. However, experts believed that the Housing and Finance Scandals by the top officials in LIC and other banking institutes will always stand to harm the future potential of such companies but however, the future and the endless opportunities lies in the hand of ultimate investors. Eventually, Online newspaper, Rediff quoted as saying that most of the brokers are taking up the stock of LICHF after the scam as related to the current project being performed by the company. Namely, IIFL, Aditya Birla, IL&FS are impressed by the current progress by the company and building up the stock ay higher rate. However, Reuters stated that the Financial Budget introduced by the Indian Planning Commission had slightly adverse effects on the stock of banking, insurance, mortgages and other related sector in the industries. However, the company has been quoted as saying that they would

include the margin between 2.8 to 3 % in relation to the rising interest rates and their effects on the share price. However, In response the scam, the Reserve Bank of India and other regulatory and financial bodies attempted to reform the housing finance sector by making several supervision and security measures in this regard. Eventually, the corporate scam destroyed the interest and confidence of investors and thus, the monetary and regulatory authorities must execute their task in relation to safeguarding the interests of investors.Apparently, Smith (2010) stated that the Central Bureau of Investigation exposed the stock price dip to 18% of the prevailing market rate after the scam and other banks who were involved saw a decline between 5 to 15% during the time.

Hence, it was anticipated that investors believed in the core values and companys relation with the investors and the stock changes occur in the short span of time but however, the stock is futuristic for the long term. CBI's Economic Offences Wing (EOW) raided offices of the public sector banks and LIC Housing Finance in six cities (Mumbai, Delhi, Chennai, Jaipur, Kolkata and Jalandhar), to recover incriminating documents.[1] According to CBI, the companies to which the loans in question were given include:[2]y y y y y y y y

Lavasa Corp., a unit of Hindustan Construction Co. Oberoi Realty Ltd. Ashapura Minechem Ltd. Suzlon Energy Ltd. DB Realty Ltd., a part of the Dynamix Balwas Group Emaar MGF Land Ltd. Mantri Realty Kumar Developers Ltd.

The CBI EOW also suspected that the companies may have inflated their assets value and balance sheets in order to make themselves eligible for the loans.[3] According to CBI, an employee of Money Matters expressed his willingness to turn witness in the case.[4]

[edit] ReactionsMost firms, including BGR Energy and Oberoi Realty denied any role in the scam.[5] The scam was discovered shortly after the 2010 Commonwealth Games corruption controversy and the Adarsh Housing Society Mumbai scam. The investors were rattled as news of the arrests broke in Mumbai. The share of the LIC Housing Finance, Central Bank of India, Punjab National Bank, Bank of India, Money Matters Financial Services Ltd. as well as other banking and realestate stock declined.[2][6]

The Union finance ministry initially claimed that the case was a bribery incident, and not a largescale scam. The CBI officials had indicated that the size of the scandal could be worth over Rs 1,000 crore, but the finance ministry officials claimed that the magnitude of the scandal was too insignificant to have an impact on the Indian financial sector.[7] The income-tax (IT) department decided to investigate the books of those involved in the scam, after receiving primary reports from CBI.[8] However, many political analysts believe innocent bankers were implicated in this falsely created scam to defuse attention of the common man against the much larger & serious scams done by the ruling Indian government, notably of corrupt politicians like CWG minister Suresh Kalmadi & ex-telecom minister A Raja.

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Proactive fraud monitoring for banks in IndiaFinancial institutions today should adopt a proactive, intelligence-led approach to manage fraud risk. Our team can assist you in identifying, assessing and improving fraud monitoring process and system to tackle the unique risks faced by your company.

Buying an off-the-shelf system may not equip the bank with the most effective technical paraphernalia or strategic methods to deal with frauds. Selecting the right framework and a seamless integration of bank systems with the fraud monitoring system is integral to safeguard business and customer interests. Why is fraud monitoring imperative?y y

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According to RBI-released data, banking-related frauds have doubled in the five-year period between 2004 and 2009. In 2009, the total number of bank frauds was recorded at 23,914, amounting to a loss of INR18.83 billion, where less than 1% of the fraud cases amounted to INR10 million each or even more. The last reported count of online fraud cases was 269, amounting to INR590 million. With acquisitions and expansions spurring the growth in size and customer base, banks are witnessing a substantial rise in the numbers and complexity of fraud scenarios. As such, there is a stringent need for robust monitoring. The regulator has directed financial institutions to continuously monitor transactions and establish an integrated fraud risk management framework. There is an increasing need to identify early warning signals to capture frauds close to their occurrence.

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A centralized framework can address fraud risks associated with various business units and products and provide insights to stakeholders to take preventive action at the right time. This also eliminates uncertainty around losses due to fraud and helps the management have a more focused strategy to address fraud-related risks.

What should your company consider while evaluating a fraud management strategy?y y y y y y

How well do existing fraud identification and monitoring methods control current and emerging risks and are they commensurate with the size/operations of the organization? How effective have they been in preventing frauds before/at occurrence? What is the vision for fraud monitoring in the next five years to overcome challenges? How responsive are they to new threats and how quickly can they be adapted to detect new fraud patterns? Do they allow the management to make changes to detection rules without the need for the involvement of IT? Does it provide a comprehensive MIS for the senior management for oversight and supervisions for the organization as a whole?

How can we help you establish an enterprise-wide fraud monitoring system?

Housing Loans & Various Types of Frauds Detected by BanksHOUSING LOANS & VARIOUS TYPES OF FRAUDS DETECTED BY BANKS After the various big Bank scams of the period from 1990s, Banks felt that it is necessary to spread their risks by advancing monies to individuals, specially against mortgage of immovable property, by means of housing finance. This kind of advance has not only spread the risk and also generated lot of economic and civil construction activities. The defaults in housing finance was almost negligible. Therefore, it was considered as a very good business proposal for all the Banks to go in for housing finance. Thus, there was an unhealthy competition between various Banks/Financial Institutions and many Banks/FIs aggressively tried to capture the housing finance business and many a times circumventing the requisite security aspects of such advances. Since competition between Banks & FIs was so severe, many Banks & FIs ignored the basic safety measures. Thus the entry of large scale fraudsters in the housing finance became easy. Many Banks did not insist upon taking Legal Scrutiny Reports i.e. prior to entertaining the loan proposal, copies of the documents submitted by the intending borrower is given to the panel lawyers, who would take search in the Land Records and other records to ascertain that the documents submitted by the borrower are genuine and there are relevant entries in the Land

Records maintained by the State and that there is chain documents atleast for a period of 13 years, so that the credentials of the borrower is established. Obviously, this verification of documents takes time in view of the fact that in Sub-Registrars Office and Land Records Office, there is hardly any facilities and since large number of such Applicants for housing loan are emanating, Banks feel that is causing delay in disbursing of their loan and to meet the competition and to avoid cost and delay in making disbursal of loans, Banks/FIs avoided taking Legal Scrutiny Reports. Therefore, Banks started disbursing loans without taking search, thus opening flood gates for the fraudsters to submit bogus documents and submit coloured zerox to show that they hold original documents and Banks/FIs were cheated by unscrupulous people. Various types of frauds could easily be committed on the financial sector by these unscrupulous people, because Banks/FIs started resorting to unhealthy competition, ignoring safety device. Various types of frauds committed are as under:(1) Fabrication of Income Certificate, Balance Sheets,etc. With a view to get larger amount of money than the capacity of the borrower to repay, the borrowers were induced to produce bogus income certificate and balance sheets,etc. Thus Banks granted larger amount of loan, which the borrower could not repay resulted into frauds. Verification of documents was not made compulsory to avoid disbursal. Thus number of frauds took place on this methodology. (2) The 2nd type of fraud committed are that the Bankers hand over the Bankers Pay Order while disbursing loan in the hands of the borrower himself, and in many cases the borrower resorted to frauds by opening a false Bank Account in the name of the Payee of the Pay Order, which should be actually the Vendor or the Builder, but the Pay Order issued by the Bank are encashed through opening a bogus bank account and the borrower himself started decanting the money without handing over the Pay Order to the Vendor, thereby the Vendor has not received any money and the borrower has encashed the same. This kind of frauds could take place, because Banks were very negligent in handing over the Pay Order of the sale price to the Borrower himself, and many borrowers out of their ingenuinity, open separate bank account and encash the same without there being a sale transaction or procuring any immovable property. Thus the borrower has not purchased any property but the amount has been paid to him by the Bank, which he has encashed fraudulently. Thus Banks money are at stake. This kind of fraud could have been avoided by making the borrower to write the Account No., Bank and Branch Name of the Vendor and the Banks insisting upon issuing Pay Order stating the Account No., Bank and Branch Name of the Vendor, so that the Pay Order could have been encashed in that account only, and the borrower is asked to produce a request letter from the Vendor that the money should be paid by means of Pay Order payable to his specified Bank Account. The Pay Order ought to have been handed over to the Vendor or his representative who visits the Registration Office for executing the Sale Deed and his signature should have been

obtained against delivery of the Pay Order. Under no circumstances, the Pay Order should be handed over to the Borrower. (3) Over valuation of the property In this kind of fraud, the Valuers in the panel of the Bank join hands with the borrower and give an exorbitant Valuation Report and induce the bank to give higher loans than what the property deserves. Thus borrower would use the money for other than procuring the property and he will not be in a position to repay the same, as there is no asset to sustain the repayment. This kind of frauds can be avoided by giving valuation work to 2 different Valuers, if the amount advanced is more than Rs.10 Lacs or so, and even the Bank Officers must enquire about the market price of the said property, before disbursal of the loan. (4) Multiple Financing The borrower make one genuine document and pay the stamp duty, Register the same with SubRegistrar, etc. Thereafter, take a colour zerox of the same and make some changes in the documents and submit to various Banks for the same property and if these coloured zerox are handed over to Panel Advocates, and Panel Advocates take inspection of the records, he could find out that this property has already been mortgaged to another bank and the fraud can be detected prior to disbursement of the Loan. Where the Banks are not engaging Advocates for taking search, the incidence of coloured zerox fraud are more and frequent. (5) Title Deeds are forged There are instances of borrower producing false title certificates by printing Advocates Letter Heads and submitting the same to the Bank, showing that the Banks Panel Advocate has given the Title Certificate. To avoid such type of frauds, the Bank should hand over the papers directly to the Panel Advocates and the Advocates should send the Legal Scrutiny Report in a Sealed Envelope to the Bank. If this kind of procedure is followed, producing false Certificates can be avoided. In early 2000, even stamp duty was shown to have been paid by franking the Sale Agreement with huge amount of stamp duty,shown as paid. It came to be subsequently known as Telgi Scam. Telgi has purchased Franking Machine from Government Printing Press as scrap and he started using parallel franking work and received crores of Rupees from various fraudsters causing thousands of crores of loss to the Exchequer and Banks, as the Banks advanced huge money and the entire transactions were bogus. In many cases, even all stationery, receipts,etc. belonging to Government were printed and made forged documents and the Banks relied upon the same and disbursed the loan. If search would have been taken, this kind of frauds can come out openly before disbursal of the loan. (6) Bookings of Under construction Flats

In this case, under construction flats are booked and the documents are registered and after taking the loan, the borrower would go to the Builder and cancel the booking and the Builder refunding the money to the borrower without the knowledge of the Bank. Many a times, original documents of Sale Deed deposited are with the Bank while creating Equitable Mortgage and Banks do not insist upon all relevant documents, thereby, as and when the Share Certificate is issued by the Society, the borrower would take the Original Share Certificate alongwith zerox copies of Sale Deed,etc. and go to another Bank and take loan on the same property. Hence, Banks should insist upon Original Sale Deed, Societys NOC,etc. In Mumbai or places where Unit Holders in a building are forming into a Statutory Body, NOC from that Body must be taken on record signed by atleast 2/3 office bearers of the said Body and preferably the Bank should verify from the Society about the genuineness of the NOC issued by the Society to mortgage the flat and the Society should certify that there is no earlier mortgage and they will not register any further mortgage on the said property. Interest Rate on housing loans are reduced to the minimum, so that maximum number of genuine borrowers can get the benefit of having their own residence or business premises. Therefore, the margin of profit in such transactions for the Bank was so low that they could not take up the huge bad debts. Hence, the Banks have now tightened the screws and also increased the rate of interest and by that genuine borrowers are suffering. Banks and FIs must be properly guided by Indian Banks Association or some Statutory Authority and see that minimum basic parameters for disbursal of housing loan must be set, and all Banks must comply with the same, so that all are on equal ground level. Because there was no Statutory Body regulating the housing finance disbursement, each Banks/FIs started competing with each other and flouting the rules & regulations and safety requirements, thus burned their fingers in housing finance. Now many of the Banks are facing huge financial burden on account of this fraudulent transactions. It is our experience that if the Banks were to insist upon taking search of the Land Records by engaging Lawyers, the chances of detecting the frauds are more, though inspite of having searches by Advocates, the incidence of frauds cannot be totally eliminated but in most of the cases it can be arrested. State Government must give more importance to safety for these Banks/FIs, by providing adequate facilities at the Land Records Department, so that Advocates Search Clerks may have adequate infrastructure made available, so that he can take inspection of the records without any haste. In many of the places, the Land Record Books are in torn condition for years together and Search Clerks cannot verify for these particular number of years, and thereby there is large scale scope for frauds. In many of the progressive States, there is a system of Advocates applying to the Land Records Office and they give Certificate of Non-Encumbrance at a nominal cost. Thus the chances of frauds are eliminated in such States on this account. In Land Records Department, there is hardly any sitting arrangement to enable Search Clerks to take search comfortably, and one book is available and there are more than 100 people waiting to take search. Hence, the Court Clerks to meet the deadline of time limit, just pay the search fee and bring the receipt and say that they have taken the search. This kind of frauds can be avoided,

if the State Government takes adequate care to maintain Land Records and make available extract and Non-Encumbrance Certificate, without any delay. In Maharashtra, the entire Land Records are being computerized. May be down the line in 2 or 3 years, we may be in a position to get Non-Encumbrance Certificate on the computer itself. If that happens, all Banks may go in for Non-Encumbrance Certificate before disbursal of the loan. The Banks should also insist upon the State Governments maintaining a detailed Register at the SubRegistrars Office so that even if Equitable Mortgage is created by the Bank, must be entered compulsorily in that Register, so that the instances of double mortgage by using coloured zerox and fabricated documents could be arrested.