The enemy within: Financial firms must be vigilant about employee fidelity

India is a corrupt country. Over the last fortnight or so, events have again borne out this unfortunate reality. The Rs 114 billion Punjab National Bank-Nirav Modi fraud is symptomatic of a culture of weak systems and lax oversight made worse by a lack of moral compass among a majority of our politicians, businessmen and workers in 
public and private sectors. 

Global corruption watchdog Transparency International or TI places India at rank 81 (the lower the rank, the less corrupt a country) amongst 180 countries it ranked for 2017, two notches below 79 in 2016. TI released its 2017 ranking globally on February 21.  Businesses in the country, it seems, are even more corrupt than other countries. 

A year-old study by consultants EY—the EY Europe, Middle East, India and Africa (EMEIA) Fraud Survey 2017 — ranked India ninth among 41 countries on prevalence of bribery and corrupt practices in businesses, just behind Ukraine, Cyprus, Greece, Slovenia, Croatia, Kenya, South Africa and Hungary. The EMEIA perception survey showed a marginal improvement in India’s rank from six in 2015 to nine 2017, but that is hardly any reason for celebration as we remain amongst the top corrupt nations for business. Such is the prevalence of corporate fraud in the country that an overwhelming majority (89 per cent) of executives surveyed said that their companies were victims to at least one fraud in the last 12 months in a report put by another global consultant, Kroll, last month.

And fraud in Indian financial sector seems to be endemic. A Reuters’ right-to-information based story with data obtained from the Reserve Bank of India is a revelation on the extent of rot in the system. India’s two dozen-odd state-run banks reported 8,870 cases of ‘loan fraud’— defined as intentionally deceiving the lending bank and not paying up the debt — totaling Rs 612 billion over the last five financial years ending March 31, 2017. In the current financial year (FY2018) so far, loan frauds at state-led banks reached Rs 176 billion, not counting the Rs 114 billion in the recent PNB case. Loan frauds at PNB till FY17 topped the list with 389 cases involving a total sum of Rs 65 billion, and this was before the Nirav Modi fraud came to light. The country largest lender, the State Bank of India, reported 1,069 cases but did not disclose the amount. 

Though the Reuters story did not have details of the nature or method of loan frauds, an older, 2015 survey on fraud in Indian banking by Deloitte lists top reasons for increase in incidence of frauds in banks — lack of oversight by line and senior managers of deviations from standard or existing processes, collusion between employees and external parties and lack of tools to identify potential red flags. And the annual Kroll Fraud and Risk Report goes on to add that junior employees were the second most common perpetrators of frauds, just behind joint-venture partners.

The PNB-Nirav Modi is the biggest, and the most high-profile case of employee infidelity, but just look around and you will find more such instances being unearthed at Indians banks of late. Bank of Baroda’s South African unit will close down soon because of almost decade-old irregularities by the bank’s employees posted and based in South Africa. More recently, one of the country’s leading private banks, Axis Bank, asked its chief information officer to quit on suspicion of irregular deals in its technology department that the lender is still probing. Market regulator Sebi asked HDFC Bank and Axis Bank to internally probe its June 2017 earnings leakage over social media groups and to identify people/employees responsible for the leak. And the fear is that such PNB like scams may be hiding in many other banks’ cupboards, waiting to be exposed. And not to forget scores of bank officials being arrested during demonetisation — perhaps the only people to face the state’s wrath on notebandi so far — on charges of helping launder black money.

In a people-dominated sector like financial services, where the critical business and customer-level information is increasingly accessible to even operational-level employees, such breach of trust by the very people who are supposed to be custodians of it can be lethal for the business. A new culture of vigilance about employee fidelity is the call of the day.



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