Satyam Scandal-
The biggest fraud in India’s business world was the Satyam scandal. The news portal has referred to the Satyam accounting fraud case as “India’s Enron.”[1] Understanding the elements that influenced the executives’ ‘unethical’ choices is crucial for assessing and comprehending the gravity of the Satyam scam.[2]
Mr. Ramalinga Raju founded Satyam Computer Services Limited in 1987 in Hyderabad. It provided services for business process outsourcing (BPO) and Information Technology across a range of industries. The firm had measurable growth between 2003 and 2008 across almost all economic indicators of importance to investors. The company’s total sales revenue had increased more than thrice during this period. In a letter to the corporation’s board of directors dated January 7, 2009, Mr. Raju revealed that “he was already altering the company’s accounting statistics for years.” Mr. Raju said that he exaggerated assets by 1.47 billion dollars on Satyam’s balance sheet. There was no such thing as the company’s reported 1.04 billion dollars in cash and bank borrowings. On its financial profile, Satyam also under recognized debts. Over the span of several years, Satyam inflated earnings almost every quarter to satisfy analysts’ estimates.[3] The scam was carried out by Mr. Raju and the company’s worldwide head of internal audit using a variety of methods. Mr. Raju advanced the deception by producing many account statements on his personal computer. When Mr. Raju found that the company’s accounting gaps have become unbearable, he tried to acquire Maytas Infrastructure Ltd. and Maytas Properties, two real estate firms owned and controlled by his family members. But their deal could not be completed. Ultimately, Satyam hired investment firm DSP Merrill Lynch to find a partner or buyer for the corporation, but after discovering financial problems, Lynch exposed the corporation and came clean and ended its relationship with the company.
From June 2000 until the scam was discovered in 2009, PricewaterhouseCoopers (PwC), a leading international auditing company, examined Satyam’s financial records. PwC received strong criticism from a number of experts for missing the scam.[4] According to Indian law, PwC was in charge of the figures and certified Satyam’s accounting information. The Satyam scam lasted for a considerable amount of time and included falsifying both income statements and balance sheets. Satyam merely generated “fictitious” sources whenever it required more money to match analyst projections, and it did it repeatedly without the auditors ever catching the scam. In addition, Merrill Lynch identified the wrongdoing as part of his due diligence in just 10 days, although PwC audited the firm for approximately 9 years and failed to find it. Ignoring these crucial details and failing to exercise due diligence suggested that the examiners have either been utterly incompetent or complicit in the deception along with the corporation.
PNB Scandal-
The second-largest public sector bank, Punjab National Bank, disclosed extraordinary transaction records with a potential for fraud on February 14, 2018, before the stock markets, Central Bureau of Investigation and the Indian Reserve Bank.[5] These deals had an estimated price of 1.77 billion dollars (Rs. 11,400 crores). The fraudulent activity were made to benefit a small group of chosen account holders, primarily the diamond merchant Nirav Modi as well as his uncle Mehul Choksi. 54 PNB workers created false Letters of Undertaking (LOU) that allowed Hong Kong branches of Axis and Allahabad Bank to finance PNB’s NOSTRO account, which in turn allowed Nirav Modi and other foreign parties to receive money.[6] The two PNB workers have been using SWIFT exclusively for the previous seven years, but they failed to pay attention to the core banking system (CBS) while doing so. Following the appointment of the new manager, it was discovered that these companies had received almost 100 LOUs without any type of collateral security.[7]
Under the terms of a LOU, a bank may borrow funds from an Indian bank branch located abroad. As a result, the client is receiving the funds in the form of buyer’s credit from a foreign branch of another Indian bank. Officials at PNB were at fault for wanting to create a flawed process for issuing LOUs for their personal gain.[8] This form of fraud was made possible by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) bypassing the CBS and the absence of internal collaboration and effective monitoring.[9] In this technique, the firm asks the bank in their home nation (in this example, India) for a bank guarantee. Then, the corporation travels to an overseas office of another Indian bank and obtains a credit at a reduced interest rate by displaying those bank guarantees. The business receives affordable and quick finance. While the Indian bank receives fees for such LOU issuance, the overseas Indian bank would get minimal risk payment from the Indian bank offering the guarantee.[10] The most significant operational risk element in this instance was the circumstance that the principal perpetrator of the scam was one of the workers who had access to SWIFT. By disclosing the SWIFT passwords to Nirav Modi’s corporate managers, he violated the system. The borrower’s creditworthiness is also crucial, but because local banks are frequently trusted, loans from Indian banks abroad are frequently given to buyers with little regard for the borrower’s creditworthiness.
THE ROLE PLAYED BY GOVERNMENT AGENCIES IN DETECTING THESE SCANDALS:
CBI-
On February 19, 2009, the Central Bureau of Investigation filed a complaint accusing Mr. B. Ramalinga Raju, chairman of M/s Satyam Computer Services Limited, and others. To find and look into the problem, CBI has assembled a Multi-Disciplinary Investigation Team (MDIT). Approximately 7,561 fake bills created by Mr. Ramalinga Raju and valued at Rs. 5,117 crore have been confiscated by CBI. The CBI has discovered how the Satyam fraud operates by using cyber forensic methods. The fake invoices were discovered in the Invoice Management System (IMS), as per CBI sources. Additionally, CBI discovered fraudulent loan approval paperwork. Ramalinga Raju allegedly routed money to other nations, according to CBI officials. According to sources, Ramalinga Raju skimmed off the money for tax purposes before rerouting it back to India. While conducting research on Satyam Fraud while travelling to various nations, CBI discovered these pieces of evidence. The Special Court issued the decision in the CBI trial on April 9, 2015. Ramalinga Raju and other individuals were found guilty of violating the Indian Penal Code, 1986’s[11] Sections 120B[12] (Criminal Conspiracy), 420[13] (Cheating), 467[14] (Forgery for Valuable Security), 471[15] (Forgery for Cheating), 477A[16] (Falsification of Accounts), and 201[17] (Disappearance of Evidence).
In the PNB Scam case, since Nirav Modi had already left the nation for the United Kingdom to evade legal action under the law of the land, CBI had submitted a plea for proclamation and seizure of properties. After looking into Modi’s office personnel further, the CBI charged him with concealing crucial and extensive records that proved his participation in both money laundering and fraudulent activities.[18] The Punjab National Bank’s Chairman and Chief Executive Officer (CEO), Usha Ananthasubramanian, was accused by the CBI of failing to take the necessary precautions to assist both before and after the probe. The bank personnel were reluctant to trace the SWIFT account’s movement and how Letters of Understanding (LOU) had been generated with booking those within the bank, despite having submitted several charge sheets.[19]
SFIO-
A specific breach of the 2013 Companies Act’s provisions has been discovered by SFIO. The investigation team discovered that in 2009, the scheme cost its owners and investors a staggering Rs 14,162 crore.[20] The scheme included Price-water House Cooper as a participant. When SFIO looked at the company’s independent directors, it discovered that the Chairman had allegedly premeditated the scam. The inquiry revealed a breach of both the Companies Act and the Indian Penal Code. SFIO was unable to trace every instance of money being taken out of the business. The investigation team discovered irregularities in the distribution of dividends, portraying an accurate and equitable picture of the business, in the compensation of directors, and in the making of false claims.
According to the Serious Fraud Investigation Office (SFIO), the independent directors of the firm did not manage the company’s business as required by their roles as mentors and risk mitigators in the PNB Scam case.[21] Most of the tampering was done by the company’s independent directors. According to SFIO findings, the company’s independent directors broke regulations pertaining to their roles, obligations, and responsibilities given under the Companies Act, 2013.[22]
ED-
The Rs. 7,000 crore Satyam Computer Services Ltd (SCSL) Scandal was the subject of a court request by the Enforcement Directorate for prosecution. B. Ramalinga Raju, the owner of SCSL, and 177 other workers, which included his close relatives, have all been the subject of an investigation. According to the Enforcement Directorate’s investigative report, Ramalinga Raju and a few Company workers were involved in activities that are related to one another. The rationale for related transactions was so that the victims of the crime may be separated from the perpetrators of the crime. Under the protection of the corporate veil, the corporation was able to cover up the crime. This was done in order to present the purchased properties as clean ones. In accordance with the Prevention of Money Laundering Act (PMLA), the Enforcement Directorate (ED) has looked into the main suspect and filed a charge – sheet against Ramalinga Raju and many others.[23] According to the Enforcement Directorate, the suspects had participated in interlinked transfers of illegal earnings. The Enforcement Directorate investigation further emphasizes the fact that the selling of exaggerated bonus shares and business shares put a barrier between the initial recipients and the unlawful gains.
The Enforcement Directorate has confiscated items, comprising jewellery made of gold and diamonds, worth Rs. 56.7 billion in the PNB Scam case. All of Nirav Modi’s luxury vehicles were seized, along with 30 crores in bank deposits, by the Enforcement Directorate (ED), who determined their value to be Rs. 13.8 crores.[24] All of Nirav Modi and Mehul Choksi’s mutual funds and shares, totaling Rs. 94.52 crores, were seized. The Enforcement Directorate confiscated jewellery cost of Rs. 5100 crore in gold and diamonds and attached 21 Nirav Modi moveable properties, including a penthouse and a farmhouse, totaling Rs. 5.23 crore. A solar power station amounting to Rs. 70 crore and a sea-facing Samundra Mahal apartment worth Rs. 15.45 crore were confiscated by the Enforcement Directorate in the Kajrat region. Two office buildings worth Rs. 80 crore have also been confiscated by the Enforcement Directorate.
CONCLUSION:
The Serious Fraud Investigation Office (SFIO), Enforcement Directorate (ED), and Central Bureau of Investigation (CBI) are the main government agencies responsible for investigating corporate fraud. However, these agencies are often understaffed and underfunded, and they lack the specialized training necessary to investigate complex financial crimes.
As a result, many corporate fraud cases go undetected or are not properly investigated. This lead to financial losses for investors and damage the reputation of Indian businesses. To improve the effectiveness of investigating agencies, the government should increase funding and provide more training to investigators. Additionally, the government should create a more independent and transparent system for investigating corporate fraud.
Here are some recommendations that the government can take to improve the effectiveness of investigating agencies:
- Increase funding for investigating agencies. This would allow agencies to hire more staff and acquire better equipment.
- Provide more training to investigators. This would help investigators to develop the skills and knowledge necessary to investigate complex financial crimes.
- Create a more independent and transparent system for investigating corporate fraud. This would help to ensure that investigations are conducted fairly and impartially.
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[1]Basilico, E., Grove, H, and Patelli, L., “Asia’s Enron: Satyam (Sanskrit word for truth)”, Journal of Forensic & Investigative Accounting, (2012).
[2]Ahmad, T., Malawat, T., Kochar, Y. and Roy, A., “Satyam Scam in the Contemporary corporate world: A case study in Indian Perspective”, IUP Journal (2010).
[3]Chopra, A., “Satyam fraud, not an accounting failure”, Business Standard, 25 January 2011.
[4]ICAI, ICIA finds ex Satyam CFO, Price Waterhouse auditors guilty, available at Outlook India.com (2009).
[5]Bandopadhyay, T., The Anatomy of PNB fraud, available at https://www.livemint.com/Opinion/oiMKS98wBunYNviWCVq6hJ/The-anatomy-of-the-PNB-fraud.html
[6]Bharadwaj, S, Nirav Modi case: PNB fraud affects stocks of Union Bank, Allahabad Bank, SBI, Axis Bank, available at https://www.businesstoday.in/markets/stocks/nirav-modi-case-pnb-fraud-affects-stocks-of-union-bank-allahabad-bank-sbi-axis-bank/story/270786.html
[7]Dugal, I, PNB-Nirav Modi Fraud: Understanding the Deceptively Low Risk World of Buyer’s Credit, Bloomberg, (2018).
[8]Krishna, N, All you need to know about Nirav Modi and the $1.77 billion PNB fraud, The Hindu (2018).
[9]Press Trust of India, Nirav Modi Fraud Effect: Moody’s Downgrades Punjab National Bank, NDTV (2018).
[10]Tiwari, D., PNB fraud impact: PSBs told to keep foreign branches in check, Economic Times (2018).
[11]Indian Penal Code, 1986.
[12]Indian Penal Code, 1986, § 120B.
[13]Indian Penal Code, 1986, § 420.
[14]Indian Penal Code, 1986, § 467.
[15]Indian Penal Code, 1986, § 471.
[16]Indian Penal Code, 1986, § 477A.
[17]Indian Penal Code, 1986, § 201.
[18]Abhirup Roy, “PNB bank fraud: CBI set to file fresh charges in $2 billion scam, says report”, Live Mint (2019).
[19]Anurag Tripathi, “CBI registers separate cases against 3 firms for defrauding”, The Times of India (2020).
[20]A.C Fernado, “Business Ethics–An Indian Perspective”, Pearson Education India (2013).
[21]PTI, “SFIO yet to submit report on Modi, Choksi in PNB scam”, The Hindu (2018).
[22]PTI, “PNB scam: SFIO interrogates senior bankers on Nirav Modi deals”, Times Now (2019).
[23]Dr Madan Lal Bhasin, “Fraudulent Accounting Practices at Satyam: How Senior Management Abused Creative Accounting Methodology?” International Journal of Management Sciences and Business Research (2016).
[24]Lovejit Kaur, “PNB SCAM: Shining Diamond Trader Took Away PNB’s Shine”, IJEDR (2012).
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