Last decade has seen many financial frauds of different size and share tumble out of the corridor. Many books and TV series have tried to cover these frauds in recent times. In a book published by Bloomsbury India titled The Great Indian Fraud: Serious Frauds Which Shook the Economy, Smarak Swain discusses financial frauds earlier times and draws parallels with the marquee frauds detected in recent years. He draws many parallels and asks: why do the same kind of fraud recur again and again?
Swain is a serving officer of the Indian Revenue Service (IRS). He has divided financial frauds into five kinds: bank fraud, accounting fraud, EXIM fraud, securities fraud, and get-rich-quick schemes.
After discussing some of the most notorious frauds of independent India, he draws parallels in the modus operandi in these frauds. His theory is that each kind of fraud follows a simple logic. Fraudsters try to misuse a system boundary where control does not exist. Once a large fraud is detected, regulators try to plug the loophole by placing controls on the boundary. However, frauds move on to a new boundary where control does not exist. New systems keep developing every few years due to the rapid pace of digitization and financialization. New systems mean new loopholes, which can be exploited by fraudsters.
Swain has also touched upon some controversial cases of earlier years and made startling revelations about them. For instance, his take on the Hasan Ali case is that Hasan Ali was not a serious launderer but a swindler. His ostentatious lifestyle was meant to fool gullible investors, but it also managed to fool the taxman. IT officials raided Hasan Ali under mistaken belief that he had lots of black money – but most of the Swiss accounts he boasted about to his investors were later found to be fake.
While Mehul Choksi remains in limelight due to the fraud committed by him and his nephew Nirav Modi on Punjab National Bank (PNB), few people are aware that he was under SEBI investigation for a stock market manipulation much before the PNB fraud came to light. The market manipulation by Mehul Choksi, as alleged by SEBI, is uncannily similar to HaridasMundhra’s (who committed the first major fraud of independent India).
Swain concludes by making significant suggestions on controlling financial frauds, based on his experience in tax investigations. His principal argument is that bureaucracy should be replaced by adhocracy for conducting fraud investigations. He advocates a whole-of-government approach, under which all anti-fraud agencies should work under a single umbrella. Every time a serious fraud is detected, a small group consisting of officers from RBI, CBI, ED, SFIO, IT department, SEBI, and MCA should be formed to tackle the fraud wholistically. Better, these different bodies should be integrated, so that agencies do not work on cross-purposes.