Tag Archives: Interrogation
Fraud Risk Management in Ancient India
Presently, the Serious Fraud Investigation Office of India lacks sufficient powers to initiate investigations and prosecute. The Central Bureau of Intelligence isn't independent due to which politicians escape prosecution for corruption and money laundering. Indian police force Economic Crime wing doesn't have expertise in dealing with electronic and financial frauds. The legal system is pathetic and takes a long time to prosecute white-collar criminals. India has a shortfall of trained fraud investigators as it hardly has any courses for students in this line.
All these aspects may make you think that Indians are new to the concept of fraud risk management. This is far from the truth. Kautilya addressed financial fraud risks in 4th century BC and most of the concepts are still used presently. Let me narrate you some of the concepts he formulated in earlier times.
1. Formation of a Central Investigation Agency
Kautilya proposed a central investigation agency for a kingdom to do espionage work. A network of spies located in different parts of the kingdom reported information to their handlers. The handlers in turn checked the authenticity of the information from three sources and if correct reported to the agency. The spies did not have direct contact with the agency to conceal true identities..
Spy selection depended on character and social position. Spies were recruited from all sections of society. Spies were positioned in all the departments and commercial ventures of the king to ensure that the head of the departments do not abuse their power or cheat the king. Women were considered particularly useful to penetrate wealthy households to get the inside story. In current India, there is a scarcity of female fraud investigators as it now considered a masculine job. However, in ancient India, women investigators and spies were quite common.
2. Types of Financial Frauds
Kautilya identified 40 ways of embezzlement. Some of them are mentioned below:
Overpricing and under-pricing of goods
Incorrect recording of quantity of raw material and other stocks
Misappropriation of funds
Teaming and lading
Misrepresentation of sources of income
Incorrect recording of debtors and creditors
Incorrect valuing and distribution of gifts
Inconsistency in donations and distributions for charity
Misappropriating goods during barter exchange
Manipulating weights and tools for measurement
Misrepresentation of test marks or the standard of fineness (of gold and silver)
It is interesting to note that Kautilya mentioned most of the frauds that occur in accounting and preparation of financial statements. It shows human psychology has remained the same. However, in India the value system has deteriorated that has resulted in increased fraud and corruption. In olden times, the value of honour was held high. For example, the prime thought in Hindi was – "prann jiye pur vachan na jiye." (meaning – it is better to lose one's life rather than go back on a verbal promise given)
3. Mechanism for Investigation and Punishment
The investigation process was quite similar to the current process followed. Information was initially gathered regarding the fraud from informants, spies, whistle blowers and audits. Background information of the suspects was gathered by sending spies to their residence and business premises.
Subsequently, the people involved, the suspects and witnesses were interrogated. Kautilya suggested separately examining " the treasurer (nidháyaka), the prescriber (nibandhaka), the receiver (pratigráhaka), the payer (dáyaka), the person who caused the payment (dápaka), the ministerial servants of the officer (mantri-vaiyávrityakara)" for financial frauds. If any person lied, s/he received the same punishment as the main culprit.
Another fascinating aspect is that India doesn't not have any law similar to the whistle blower provisions of Dodd Frank Act. However, Kautilya proposed – "Any informant (súchaka) who supplies information about embezzlement just under perpetration shall, if he succeeds in proving it, get as reward one-sixth of the amount in question; if he happens to be a government servant (bhritaka), he shall get for the same act one-twelfth of the amount."
The punishment for fraud depended on the nature and value of fraud. It ranged from nominal fines to death penalty. The victim was compensated for the losses suffered.
The processes proposed by Kautilya for fraud detection were followed even until the Moghul rule. However, these were dismantled during the time of British Rule as the Indian Penal Code was formulated. The difference between Mogul rule was that Moguls settled in India, marriages took place between Indian royalty and Mogul rulers and the culture got integrated over time.
The British came to rule for economic purposes. They wished to take advantage of India's natural resources and vibrant economy. They levied their own rules and did not integrate them with the Indian culture. Hence, over time the Indian value system was lost or kept for namesake only. Overtime, as even after independence the British education system was used, a split ethical value system developed between personal values and business ethics. Therefore, corruption increased in the business environment till it became all-pervasive in the society. It is going to take a lot of effort to change the system now. No short-term solutions will work.
By Sonia Jaspal • Posted in Business Ethics, Ethics, Fraud Risks, GRC Dept. Functioning, Methodologies & Procedures, Personal Ethics, Risk Management	• Tagged Auditor, Corruption, Ethics, Financial Crime, Fraud, India, Interrogation, Investigation, Risk, Whistleblowing
Bharti Walmart India – Internal FCPA Investigation – Part II
The previous post raised more questions than gave answers. In light of the on-going investigation, it is difficult to predict results. However, I looked at the recently released FCPA Resource Guide to the U.S. Foreign Corrupt Practices Act by the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission. It sets some clear guidelines and mentions earlier cases with similar issues. It is a good read for Indian managers working in multinationals dealing with FCPA compliance requirements. I am sharing below some insights about the implications of the case.
1. Liability of Indian Employees
As per reports, the CFO and the legal team were suspended during the course of the investigation. If the US Department of Justice decides to pursue a criminal case, these employees can be prosecuted.
Interestingly enough, the Indian managers consider their capability to bribe various government officials to get a job done as strength. One often hears them saying – "Oh, I have a contact; s/he will do the job for X amount of money. Don't worry about the legal provisions, they can be circumvented." Since one rarely hears any action being taken by regulators on the provisions of Prevention of Corruption Act of India, hardly anyone hesitates to take or accept a bribe.
However, Indian employees working in multinationals have to think twice about paying a bribe to get a job done. The FCPA guidelines are strict. It states – "The FCPA's anti-bribery provisions can apply to conduct both inside and outside the United States. Issuers and domestic concerns—as well as their officers, directors, employees, agents, or stockholders—may be prosecuted for using the U.S. mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official." Hence, even sending mails to US boss or colleague that involves a discussion of a bribe payment can make an Indian employee liable. Considering the provisions, the best policy for Indian employees is to keep their hands clean and follow the legal process diligently.
Another aspect to note is that a bribe does not need to be paid to hold an employee liable. The guidance note says – "Also, as long as the offer, promise, authorization, or payment is made corruptly, the actor need not know the identity of the recipient; the attempt is sufficient. Thus, an executive who authorizes others to pay "whoever you need to" in a foreign government to obtain a contract has violated the FCPA—even if no bribe is ultimately offered or paid." Hence, Indian management and employees both can be prosecuted on this basis.
2. Challenges for Licenses
With the opening of the retail sector, multinationals need to obtain various licenses to operate in India. The challenge is getting the licenses according to their business strategy and plan.
For instance, IKEA recently obtained from Foreign Investment Promotion Board (FIPB) to invest euros 1.5 billion to open 25 stores in India. However, IKEA was granted permission to open single brand stores for furniture only. It was denied permission to sell textiles, office supplies, food and drinks.
Now the question is, under these circumstances what options will the foreign investor consider? Will they agree to sell products according to permission? The permissions maybe denied for the most profitable lines of products. It may not make sense to sell products with low margins. Hence, they will have the difficult choice of either not entering the Indian market or attempt to influence the government agencies to grant permissions for selling other products. If the second option is chosen, there is a high probability of bribes being paid. More so, since Indian government officials know what will hurt the business venture of the foreign company, they might use denial tactics to coerce the organization into paying bribes. Hence, it is a vicious circle.
A LinkedIn member gave a useful suggestion to curb bribes in the licensing process. Rangarajan Gopalan, Investigator US Department of Homeland Securities in New Delhi, suggested a single window concept for obtaining licenses in retail industry. If government implements the suggestion, the retail companies will not have to run around 32 different agencies to get licenses.
3. Partner Liabilities
In the event of the holding-subsidiary relationship or joint venture partnership, the Indian company can be charged jointly and/or separately.
The guidance note illustrated the implications with a previous case. For instance, "a four-company joint venture used two agents—a British lawyer and a Japanese trading company—to bribe Nigerian government officials in order to win a series of liquefied natural gas construction projects. Together, the four multi-national corporations and the Japanese trading company paid a combined $1.7 billion in civil and criminal sanctions for their decade-long bribery scheme. In addition, the subsidiary of one of the companies pleaded guilty and a number of individuals, including the British lawyer and the former CEO of one of the companies' subsidiaries, received significant prison terms."
Hence, if the US company is ignorant of the bribes being paid by Indian employees to conduct business, the Indian employees can face criminal charges and the Indian organization may have to pay hefty fines.
The Indian organizations need to assess their FCPA compliance level and not take the issue lightly. The repercussions of ignoring the issue are huge. The legal and reputation risks can put the company to a great disadvantage. Moreover, the employees must follow the legal process rather than find ways to circumvent it.
FCPA Resource Guide to the U.S. Foreign Corrupt Practices Act by the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission.
FIPB clears IKEA retail store plan
By Sonia Jaspal • Posted in Compliance, Government & Corruption, Risk Management	• Tagged CFO, Code of Conduct, Controls, Corporate Behavior, Corruption, Ethics, Financial Crime, India, Integrity, Interrogation, Investigation, Risk
Bharti Walmart India – Internal FCPA Investigation – Part I
Walmart after the Mexico US Foreign Corrupt Practices Act investigation identified India operations as a high risk. It commenced an internal investigation with the help of KPMG India and law firm Greenberg Traurig. Recently CFO and five officers of legal team were suspended. The legal team's job entailed procuring licenses required for stores and other real estate approvals, taxation etc. Bharti Walmart has opened 18 stores till date. Hence, the suspicion is that these officers paid bribes to get the licenses.
According to the Economic Times article, multiple government permissions are required from the government. The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments' function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?
1. Dubious Dealings
Considering the huge operations of Bharti group, I would be very surprised if the bribes were paid without senior management approval. Most of the liaisons work has senior managers' tacit or explicit approval. Therefore, is it right to suspend some after obtaining licenses. What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?
2. Joint Venture Liabilities
The second issue that crops up is the working of the joint venture in such circumstances. Let us assume the investigation reveals bribes were paid. In such a situation, will Bharti group be expected to pay back the bribe money? Secondly, if the US authorities under a civil case fine Walmart for FCPA contravention, will Bharti be expected to pay the fine. Seeing the trend the fine could be huge and would wipe out profitability of the company. Moreover, US Department of Justice can pursue criminal liabilities. Then will the Indian officers be implicated for the same.
3. Foreign Direct Investment (FDI) in Retail Industry
The government has recently allowed FDI in retail industry. The challenge is that in India, most of the retail operations operate by paying bribes at different levels. Hence, a foreign investor will not get a level playing field as the anti-corruption laws of their country bind them. The situation is serious. For instance, the next stage after obtaining licenses would require importing goods. The FCPA strictly prohibits paying bribes to custom officers whereas in India this is a common business practice. Can an organization wait for months to get its stock cleared by the custom officers? Now the foreign investors will analyse the reward versus risk scenario of their business plans for investing in retail industry in India.
The case opens up interesting aspects of risks of doing business in India. Corruption poses serious obstacles in doing fair business dealings. The FCPA and laws of various countries strictly prohibit paying bribes to foreign officials. The US government has followed some stringent measures against companies contravening the laws. Under such circumstances will the joint ventures between foreign investors and Indian counterparts work? India cannot change overnight, so what is the solution? Share your thoughts with me on this.
Bharti Walmart suspends CFO, legal team due to FCPA bribery probe
By Sonia Jaspal • Posted in Business Ethics, Compliance, Ethics, Fraud Risks, Government & Corruption, Risk Management	• Tagged CFO, Corruption, Ethics, Financial Crime, Illicit Money, India, Integrity, Interrogation, Investigation, Leadership, Risk
Why Auditors Fail To Detect Frauds?
When media reports a new fraud, the first few thoughts of public are – "What were the auditors doing? How did they miss it? Were they involved?" The auditors get labelled as morons, conspirators or criminals. Generally most people jump to the conclusion that auditors had malafide intentions and became accomplices to get more business. While this may be true in some cases, auditors need the benefit of doubt. They sometimes genuinely miss the cases despite their best effort to diligently perform their duties. This post is an attempt to explain why auditors miss the frauds.
I want to share a joke with you before I explain. Two drunkards were walking on a railway track. The first said to other – "I am really tired, I hope the steps will end soon." The second replied – 'Yeah. I wish they had put the handrails at a better height, my back is killing me."
1. Auditors responsibility to detect frauds
We can laugh at this, but if I say most of us don't see clearly, there will a lot of angry reactions. So I am not saying anything, and am requesting you to watch this video.
Now did you see the moon walking bear?
Auditors have the same problem. They have to to give a true and fair opinion on the financial statements. They are not required to focus on detecting frauds. Hence, the audit programs are not designed to conduct tests to detect fraud symptoms and probability. Therefore, with no specific coverage auditors fail at detecting frauds. Extract from Section 143 of New Companies Bill is given below:
"The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company's affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed."
2. Auditors punishment on failure
The second question frequently debated is – "Should auditors be punished if they fail to detect frauds?" Section 147, clause 4 of New Companies Bill states auditor's liabilities in respect to fraud in the following words:
"Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners of the audit firm and of the firm jointly and severally and such partner or partners of the audit firm shall also be punishable in the manner as provided in section 447."
This clause puts auditors on shaky ground. It is difficult to prove innocence once a fraud is detected. How can an auditor state – "I did my work properly, saw these documents, looked at the same audit evidence but didn't find anything wrong with it." Most will jump to the conclusion that the auditor knowingly ignored all the evidence. So here is another video. Watch it, and then you will see how this situation can occur.
According to various experiments, 75% of the people failed to observe the person swap in the experiment.
Think of this from an audit evidence perspective. An auditor is checking 100 vouchers with supports. One voucher among the 100 is fraudulent. What is the probability of the auditor noticing it? One can safely assume that it will be less than 25%.
Is it surprising that auditors fail to detect frauds after seeing these experiments. Though they are trained, they are human. The same psychology works with them too.
The success rate of detecting frauds will be higher when the auditors – external and internal – have specific responsibility to detect frauds. Without the specific responsibility, regulators can continue to complain and investors will share their anguish, however all will be futile. The laws need to be devised to hold someone responsibly for detecting frauds. What is your opinion?
A modified version of this article was published in the Middle East Accountant Magazine.
By Sonia Jaspal • Posted in Audit, Fraud Risks, Human Resource Risks	• Tagged Accounts, Audit Committee, Auditor, Financial Crime, Fraud, Illicit Money, Interrogation, Investigation, Psychology, Risk, Scam
SEBI Revises Consent Process
While Rajat Gupta, ex-board member of Goldman Sachs is facing the trial by fire on insider trading charges in US, Stock Exchange Board of India (SEBI) has tightened the screws on the consent process for stock market manipulations and offences.
SEBI last week revised the earlier rules passed in March 2007. Some of the critical features of the revised consent process are:
1. Face the Music
"Certain defaults including insider trading, front running, failure to make an open offer, redress investor grievances and respond to the summons issued by SEBI are excluded from the consent process. The defaults falling in the category of fraudulent and unfair trade practices, which in the opinion of SEBI are very serious and/or have caused substantial losses to the investors, shall also not be consented."
The details are below:-
"SEBI shall not settle the defaults listed below:
i. Insider trading i.e. violation of Regulation 3 and 4 of the SEBI (Prohibition of Insider Trading)Regulations, 1992;
ii. Serious fraudulent and unfair trade practices which, in the opinion of the Board, cause substantial losses to investors and/or affects their rights, especially retail investors and small shareholders or have or may have market wide impact, except those defaults where the entity makes good the losses due to the investors;
iii. Failure to make the open offer (except where the entity agrees to make the open offer or if in the opinion of the Board, the open offer is not beneficial to the shareholders and / or the case is referred for adjudication);
iv. Front-running; for the purpose of this circular, front running means usage of non public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options
contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change;
v. Defaults relating to manipulation of net asset value or other mutual funds defaults where the actions of the asset management company (AMC)/ mutual fund (MF)/sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the Board;
vi. Failure to redress investor grievances(except cases where the issue involved is only of delayed redressal);
vii. Failure to make such disclosures under the ICDR and Debt Securities Regulations, which in the opinion of the Board, materially affect the right of the investors Non-compliance of summons issued by SEBI;
ix. Non compliance of an order passed by the Adjudicating Officer (AO), Designated Member (DM) or Whole Time Member (WTM);
x. Any other default by an applicant who continues to be non-compliant with any order passed by the (AO) or (DM) or (WTM)."
This means that where SEBI considers breach of law or listing guidelines, the companies, investment managers, brokers etc. won't be able to pay a fine and get away with it. Previously, on such charges, SEBI allowed them to pay the fine while not admitting guilt and sometimes by voluntarily agreeing to debar from the from stock markets. Now without being allowed to go through the consent process, the organizations and persons alleged to have committed the above-mentioned acts will have to go through a legal process for criminal offences except in some exceptional cases. SEBI has allowed itself some room for maneuverability for some cases. In regular cases, now an organization can go through the consent process only for small technical breaches.
2. One Time Lucky
"No consent application shall be considered, if any violation is committed within a period of two years from the date of any consent order. However, if the applicant has already obtained more than two consent orders, no consent application shall be considered for a period of three years from the date of the last order."
Hence, this clause allows leeway once only in a couple of years. If an organization has already gone through a consent process, it is not going to get away easily without some criminal charges the next time round. The practice of organizations to claim a mistake has been made every year whenever they get caught will have to stop.
The rules are good. SEBI is finally gearing itself to govern and regulate the stock markets properly. This move in the long-run will build investor confidence and dissuade asset managers, brokers and organizations from indulging in malpractices. Reliance Industries has an ongoing case for insider trading, along with a couple of other banks for front running and stock market manipulations. Reliance has appealed to the Bombay Courts to be allowed to go through the consent order process available before as it's case is from 2007.
The method SEBI chooses to deal with the older cases, will decide the fate of many organizations. It appears the organizations are worried, and that for regulators is a good strategy. The last high profile case of consent was of Anil Ambani group in which the group paid a Rs 50 crore (USD 8.93 million ) fine. Hence, in all likelihood the organizations with pending cases will either have to pay high fees or face criminal charges.
Streamlining of Consent Process
Modified Consent Process Circular
Reliance Industries moves Bombay High Court on new consent order rules
By Sonia Jaspal • Posted in Compliance, Financial Risks, Fraud Risks	• Tagged Code of Conduct, Financial Crime, Fraud, Illicit Money, India, Interrogation, Investigation, Risk, Scam, SEBI
Adidas India Euro 125 Million Fraud Story
The traders of good soles appear to have sold their souls. Adidas has filed a criminal complaint for euro 125 million irregularities reported in Indian operations in the first quarter results of 2012. The complaint mentions "commercial irregularities uncovered at Reebok India". After Satyam, this is the biggest fraud reported in a private sector organization in India.
Briefly, Adidas acquired Reebok a few years back, however, the Indian operations were merged in 2011. Subhinder Prem Singh, head of Reebok India was appointed as the managing director of the merged entity. In March 2012, both Subhinder Prem Singh and the chief operating officer Vishnu Bhagat left the company. Very few details are available of the case till date, but the twists and turns are interesting. From the looks of it, this is going to be full-blown war and a lot of skeletons are coming out. Below are the events till date.
1. Adidas announcement on 30 April 2012
Following extract is from the Adidas press release. The statement states that commercial irregularities to the tune of euro 125 million ( Rs 870 crore, USD 161 million) have occurred prior to 2012 and prior year financial statements may require re-statement.
"In addition, Management also announces that commercial irregularities discovered at Reebok India Company, in India, will likely affect the consolidated financial statements of the adidas Group. The currently estimated maximum negative impact could be up to a pre-tax amount of € 125 million. Due to the sensitivity of the on-going investigation, specific details will be disclosed as appropriate in due course. As these irregularities have been deemed to have occurred prior to the 2012 financial year, the adidas Group might have to restate prior-year consolidated financial statements in line with the requirements of IAS 8. The financial statements of adidas AG will not be affected by this issue. Management assures its stakeholders that it has, and will continue to, vigorously pursue a course of action to protect the Group's interests, which has already resulted in the appointment of a new local leadership team in India at the end of March.
Under this new leadership team, Management is further planning an accelerated restructuring of its business activities in India, including significant changes to its commercial business practices. This could lead to additional one-time charges in the remaining quarters of 2012 in an estimated amount of up to € 70 million."
2. Counter attack by Subhinder Prem Singh
After this announcement, Mr. Singh who initially reported that he left the organization on his own, clearly stated that he was terminated. He filed a case for damages of Rs 15 crore (USD 2.83 million, Euro 2.19 million) against Adidas. The Economic Times gave his version of the story. He says:
a) Adidas headquarters were "fully in the loop" on how Indian operations are run and it is not a one-man show. The finance chief of Indian operations was appointed by Adidas group last year.
b) He was called to Arizona, US on March 25, 2012 and after he presented the annual business plan, he was forced to leave and promised a severance package. Adidas did not give him a reason at the time of termination and he received a mail from Adidas subsequently that he was terminated due to "financial irregularities". He denied any involvement in financial irregularities.
3) Further on he alleges that he exposed three major frauds in Adidas. He has given this statement on record – "The biggest scam was the scavenger deal (dumping rejects) running into Rs 200 crore, where about Rs 20 crore was illegally made by senior officials. However, the scam was brushed under the carpet because it related to Adidas and not Reebok, and the request to notify the fraud to the auditors at the year-end was turned down by the headquarters." .
3. A few quick ones
a) Previous Frauds – While details are still not known, Mr. Singh's statement about three previous frauds is definitely jaw dropping. He mentions Rs 200 crore (USD 37.36 million, Euro 28.15 million)) fraud in which senior officials made money. He doesn't mention whether he terminated the senior officials or took legal action against them. As the managing director of the organization, he was required to investigate the frauds, take action and report the same to headquarters and auditors. He mentions that he sought permission from head office to report fraud to auditors. How can that nullify his responsibility as the head of the entity?
b) Dumping rejects – In Indian organizations sometimes, in rejects sales there is a percentage cut taken by the management. The modus operandi is that some good stuff is passed by the quality inspection team as sub-standard or rejects. These rejects are then sold at nominal values to previously selected vendors. The vendors unofficially give a percentage of the real value of the products to the management. This risk can be easily mitigated by frequently checking the quantum and quality of rejects and getting an independent valuation done of the products. Ideally, Mr Singh should have initiated these risk mitigation steps if he knew the problem. He doesn't mention this, so can he escape liability?
c) Auditors Role – An Indian firm N. Narasimham & Co. is the auditor of Reebok India. In this case, KPMG is the group auditor, and till now neither of the auditors have made any statements. However, KPMG has stated that they did not audit Adidas or Reebok India for the past several years. But, as per recent reports in 2010 KPMG was appointed as a forensic investigator for Reebok and gave a clean report. If so many frauds were occurring in the organization, how come they did not detect and report anything previously?
In India, sometimes auditors take kickbacks to hide frauds, or don't report frauds because they wish to maintain client relationships. Hence, again the question of auditor independence, liability and involvement are likely to arise. One has to wait and see whether this becomes another incident similar to Satyam PWC case.
d) Risk Management– The 2011 annual report of Adidas states that they upgraded the risk management IT solution in 2011. The Group Risk Management department maintains the risk and opportunity management system. The description of risk management process and techniques used is at par with the best-in-class. The supervisory board is responsible for monitoring the risk management system. According to the annual report, the audit committee in September 2011 checked group wide effectiveness of risk management, internal control system, internal audit and compliance organization. In November 2011, it discussed the internal audit report for the year and then also planned scope for 2012. The question is that if the frauds relate to previous years, then how come with all this narration in the annual report, the frauds remained undetected. Is the description risk management practices for the consumption of the investors, or do these practices actually function?
On May 2, 2012 Transworld Business reported that a former senior marketing manager of Adidas, Britney Obstar, was sentenced for master-minding a fraud scheme of USD 336,000. She got payments made to her husband's company for services that were never rendered. She continued the fraud for over a year. This definitely shows that there are some loop holes in internal control systems for monitoring senior management activities and transactions.
This will be an interesting case to watch. It is apparent that global organizations face challenges in managing local subsidiaries. Without an efficient management and effective internal control and risk management systems, the corporate office will remain blissfully ignorant until it is too late. In India, the corporate governance practices applicable to public listed companies do not apply to private limited subsidiaries of international companies. Hence, the practices that are strictly followed at head offices may not be adhered to at local Indian offices, unless the organization is culturally and technologically integrated. This case will bring out a number of risk management lessons for global organizations. Hence, let us wait for the story to unfold further.
AD-HOC: adidas Group announces preliminary first quarter 2012 results
Criminal complaint filed by Adidas
Ex-MD Subhinder Singh sues Adidas over fraud charge, seeks Rs 15 crore in damages
Former Adidas Marketing Manager Sentenced for Fraud.
By Sonia Jaspal • Posted in Audit, Financial Risks, Fraud Risks, Risk Management	• Tagged Auditor, Board, CEO, Fraud, Illicit Money, India, Interrogation, Investigation, Leadership, Psychology, Risk, Risk Analysis, Scam
A Philosophical Discussion on Murder of Whistle Blowers
This Sunday, Anna Hazare is fasting in Delhi in support of Whistle Blower Protection Act. Indian laws don't provide for whistle-blower protection and the damage is evident. Over the years, numerous whistle-blowers have lost their life. A few cases are covered up as personal dispute due to the high level corruption in the system.
Corruption benefits the majority, so does it make it acceptable? Legally, public will say – of course not. But even Hazare's big protests in 2011 have lost public support. The government used delay tactics and maligned the name of key leaders of his team. Most state leaders didn't want a Lokayukta in their states. There is no political will among the politicians, bureaucrats and business to pass a strong bill against corruption.
Then it isn't surprising, that even on witnessing the death of whistle blowers, public doesn't protest about it. On the other hand, most keep quiet, lest they become the target. In such circumstances, majority of the people have given implicit consent to murder for their own self-interest. Of course readers would be outraged by this suggestion and claim they were no way involved in the murder. They didn't give implicit consent!
Let us discuss this from a philosophical lens. Micheal Sandel, the Havard professor discusses this point in his video lectures : Justice – The Moral Side of Murder and The Case of Cannibalism. In the episode "Moral Side of Murder" he discusses a hypothetical case:
"Suppose you were driving a trolley on a rail track and its breaks failed. Five workers are ahead on the track, if you continue to drive straight, all five will die. On the other hand, in a diverging track, there is just one worker. If you change track, that one worker will die but the other five will live. What is the right thing to do?"
Most students responded that they will swerve to the diverging track and chose to kill one to save five. At a psychological level, they have given moral justification of murder. Then Mr. Sandel gives another example :
"Suppose you are standing on a bridge with the track below, and you see this trolley hurtling without breaks. There are five workers on the track. There is a fat man standing next to you. If you push the fat man over the bridge, on the track, the lives of five workers would be saved. Would you do it?"
Majority of the students said – "No, they wouldn't do it". The reason is that it would involve explicitly murdering a person. Can we conclude from these examples, that human race is fine with implicit consent to murder however have qualms on explicitly murdering?
Some whistle blowers due to the psychological torture have committed suicide. That is an indirect attempt to murder. The rich and middle class gain from corruption, hence they give an implicit consent to murder of whistle-blowers. Does this statement hold true, or would you debate it?
Mr. Sandel discusses this in the next part of the lecture on cannibalism. He discusses The Queen v. Dudley and Stephens case, and the facts are as follows:
"At the trial of an indictment for murder it appeared, upon a special verdict, that the prisoners D. and S., seamen, and the deceased, a boy between seventeen and eighteen, were cast away in a storm on the high seas, and compelled to put into an open boat; that the boat was drifting on the ocean, and was probably more than 1000 miles from land; that on the eighteenth day, when they had been seven days without food and five without water, D. proposed to S. that lots should be cast who should be put to death to save the rest, and that they afterwards thought it would be better to kill the boy that their lives should be saved; that on the twentieth day D., with the assent of S., killed the boy, and both D. and S. fed on his flesh for four days; that at the time of the act there was no sail in sight nor any reasonable prospect of relief; that under these circumstances there appeared to the prisoners every probability that unless they then or very soon fed upon the boy, or one of themselves, they would die of starvation."
To protect oneself or the majority, is murdering someone else justified? The students raised interesting aspects :
1) Some said if selection was done by lottery, then maybe it is illegal but more acceptable. Reason given was they would consider it that all participants on the boat knew the risks of losing.
2) A few students stated that if the boy would have volunteered to die for the benefit of others, it would be acceptable. The boy was an orphan and all others had family responsibilities.
In case of whistle-blower murders, the person dies without have consented to die or being made aware of the decision of the most. The majority votes behind his/her back for murder to safeguard themselves. Does that make majority behavior acceptable?
Watch the hour-long video, and share your thoughts.
In whistle blowing, most feel threatened about the repercussions from people in power and say that they have family responsibilities and cannot expose themselves to the risk. Hence, it is better to go against the whistle-blower attempting to do the right thing, than the person who is doing the wrong thing. Do the same psychological reasons as given in the above mentioned case apply when society goes against whistle blowers?
Harvard University – Justice with Michael Sandel
By Sonia Jaspal • Posted in Audit, Business Ethics, Compliance, Corporate Governance, Corporate Social Responsibility, Ethics, Financial Risks, Fraud Risks, Government & Corruption, Human Resource Risks, Organization Culture, Personal Ethics, Risk Management	• Tagged Accounts, Audit Committee, Auditor, Bribes, CEO, Code of Conduct, Corporate Behavior, Corruption, Culture, Destructive Management, Ethics, Financial Crime, Fraud, Illicit Money, Integrity, Interrogation, Investigation, Leadership, Personal values, Psychology, Risk, Scam, Whistleblowing
2011 Kroll Global Fraud Survey Report- An India Perspective
2010-2011 Annual Global Fraud Survey report of Kroll conducted by Economist Intelligence Unit gives expected results. Fraud continues to be a big problem worldwide and more so in India. Of the companies surveyed, globally 75% reported experiencing fraud during the year. Though the figure has reduced in comparison to previous year's 88%, the situation is still dismal.
In India, the situation is disastrous, with 84% organizations reporting that they suffered from fraud during the year. It is wake-up call for India, as it is ranked second worldwide after Africa and shares the position with China
The chart below compares the top six fraud categories at global level with India. In most of the cases, India is doing much worse than its global counterparts are. Worldwide management conflict of interest, internal financial fraud, corruption and bribery and vendor procurement related frauds have increased. Physical theft of assets and information theft decreased. Indian business crucial pain points are corruption and bribery, information theft, internal financial fraud, financial mismanagement and vendor procurement.
1. Cost of Fraud
The report answers the most relevant question relating to fraud – what is the loss caused by fraud? The estimated figure given in the report is that globally organizations suffered 2.1% revenue loss due to fraud. For India, the percentage is higher at 2.4%.
Further analysis available in the report says that 18% of the companies reported an earnings loss of more than 4%. A quarter of these most affected companies suffered losses more than 10%. These companies are reporting corruption, bribery, money laundering and regulatory breaches frequently. However, they are doing nothing about it. The lack of fraud prevention and investigation measures is causing huge losses in these companies.
Indian companies are ill prepared to the fight fraud menace. Just 50% companies have background screening, third-party due diligence and other fraud prevention measures in place. In my view, India does not have adequately trained fraud investigators as part of the risk management teams. Overall, the focus is on financial statements audits and internal audits. These audits are not done to detect frauds.
2. The Inside Job
Management finds it hard to accept this fact that internal employees and related parties conduct most frauds. The report mentions that insiders conducted 60% of the frauds globally. That is, 28% junior employees, 21% senior employees and 11% third-party agents conducted frauds. In India, 59% of the frauds were conducted by internal sources.
The frauds conducted by senior employees cause more damage to the company. Not only are the financial figures larger, the reputation damage is huge. However, the companies in India still do not have adequate focus on internal controls and management controls.
However, government has initiated some steps to address the high level of frauds in Indian private sector. In my view, the Indian government's decision to give more power to the Serious Fraud Investigation Office (SFIO) in the new Companies Bill is a step in the right direction. SFIO will be in a position to conduct more investigations, arrests, raids and seizures. This would put some brakes on the escalating financial fraud cases in India.
3. Corruption & Bribery in India
The report has a special coverage on corruption in India. It shows that the 2010-2011 corruption and fraud cases in India – 2G telecom scam, Adarsh Society scam, CWG fraud, various land scams etc. – have negatively impacted India's reputation internationally.
Last decade depicted India's growth story. The government and private sector post independence never had it so good. Huge investments were planned to improve infrastructure. With liberalization foreign investment flows increased. The sudden spurt in economy also resulted in higher greed and corruption soared. The cases show how senior level politicians and business heads who were much revered and respected compromised their ethics.
As per the report, 78% of the Indian organizations have stated that they are highly/moderately vulnerable to corruption. In my view, this is an understatement; around 90-95% of the companies are exposed to corruption.
The multinational subsidiaries in India are also significantly affected by corruption. Though the FCPA and/or UKBA are applicable to them, the acts do not have much teeth in Indian scenario. In my view, the US/ UK authorities will be able to follow through only on the bigger cases, and the smaller ones will be ignored. Hence, the effectiveness of these acts is limited. Secondly, the developed countries have a one sided view of corruption. They prohibit their own country's companies from paying bribes. However, accept the bribe money deposits from Indian (and other countries) politicians and businesspersons in their country's banks. This encourages money laundering rather than curtailing corruption.
Although, India has a Prevention Against Corruption Act, it hasn't reduced corruption. As per the act, government officials cannot receive any form of bribes or grease payments. However, receiving 2-10% bribe of total contract value assigned is quite prevalent. The India Against Corruption moment led by Anna Hazare has forced government to issue a strong Lokpal Bill. The bill expected to be passed in this winter session of parliament. The implementation of the bill may curb the demand side of corruption to some extent.
Recently in October 2011, the Prime Minister announced, "that his government was working on proposals to criminalize private sector bribery and to also make illegal gratification of foreign public officials an offence." This is in line with United Nations Convention Against Corruption, which India had signed off earlier in the year. The government is also planning to issue a bill to protect whistle blowers. The two bills jointly would have significant impact on curbing supply side of corruption.
India to maintain its growth story needs to reduce fraud and corruption in government and private sector. As previously mentioned corruption and fraud stop multinationals from investing in the country. The decrease in foreign direct investment in 2011 and the international financial institutions outflow of funds from stock markets are clear indicators of the negative impact of fraud and corruption.
Therefore, Indian government must improve governance and take strict action against the offenders. Comptroller Auditor General is showing the way forward, the need of the hour is for political parties to have the spirit to clean up the mess. The private sector must implement fraud prevention measures and focus on ethics to reduce frauds. Both sectors have to collaborate to minimize fraud risks in India.
1. Kroll Global Fraud Survey 2011
2. Private sector graft may be made crime too: PM
By Sonia Jaspal • Posted in Fraud Risks	• Tagged Banks, Bribes, Corruption, Financial Crime, Fraud, Illicit Money, Interrogation, Investigation, Personal values
Industrial Espionage in India
In 2011, with the disclosure of 2G Telecom Scam and associated Niira Radia taped conversation, the Indian corporate world was jolted out of deep sleep. For the first time industrial espionage risks were evident to boards and senior management. A survey of KPMG indicated that 14% of the Indian companies were targets of corporate spying. The perpetrators generally target IT systems to obtain business critical information. Sometimes competitors resort to unethical practices to get competitive advantage. Sometimes, unknown external people attempt to sell the information to a bidder.
The idea of quick money makes many rationalize the white-collar crime. Even novices get hare-brained ideas of blackmailing senior management. Organizations protect themselves using the following strategies:
1. Evidence against spies and blackmailers
The success of most crimes rests on perpetrators identity being undisclosed. Their criminal activities are untraceable. Novices however, do not have the fundamentals of criminal activity. They come on the forefront and show their own hand. That moment, their game is over. An organization can issue a legal notice to them or file a criminal case against the culprits.
2. Too big for their boots
In India, logic is seldom used for participating in criminal activity. Sometimes, serial bullies with no work get together to find soft targets. They believe victims will part with money and property to have the pleasure of their company. The basic question arises- why will the victim not file a legal police complaint against them? Optimism quite frequently leads to delusion. No strategy, no resources and with just a capacity to be abusive, isn't the best method to initiate a white-collar crime. However, one cannot have an argument with ignorant people.
3. Finding moles
One of the common ways for perpetuating industrial espionage is of finding moles within the organization or ex-employees who are disgruntled. The belief is that they will be able to get information. This strategy works when competitors attempt it, as competitors provide protection and backing to the moles. However, a bunch of novices can't be successful using this strategy since, data theft in India attracts criminal punishment up to 2-3 years. A regular employee knows the law and will not assist some small group in illegal activities.
Greed takes over people when it appears that there is some quick money to be made. However, before rationalizing the crime the consequences of the actions are not considered.
Organizations however need to be careful when dealing with such situations. Ensuring business sensitive information is protected and not available with third parties is critical to shield themselves.
Global Post – Industrial espionage booming in corporate India
By Sonia Jaspal • Posted in Business Ethics, Fraud Risks	• Tagged CEO, Corporate Behavior, Corruption, Destructive Management, Financial Crime, Fraud, Integrity, Interrogation, Investigation, Psychology