Fraud Investigation-Latest Fraud Investigation-Latest trends and novel Methods trends and novel Methods

National Housing BankNational Housing Bank

March 17 2010March 17 2010

Discussion in this sessionDiscussion in this session

Business scenario :home loan fraudBusiness scenario :home loan fraud Types and categories of fraud and Types and categories of fraud and

common Causes and illustrationscommon Causes and illustrations Novel and uncharted methods for fraud Novel and uncharted methods for fraud

detection and preventiondetection and prevention

Growth of housing loansGrowth of housing loans

Housing loans grew from a level of Housing loans grew from a level of Rs 16,000 crore in 2001 to a level of Rs 16,000 crore in 2001 to a level of Rs 1,86,000 crore in 2006 Rs 1,86,000 crore in 2006

What is more alarming isWhat is more alarming is

BrazenlyBrazenly Big numbers: In a nationalised bank Big numbers: In a nationalised bank

in Wadala Mumbai- there were 102 in Wadala Mumbai- there were 102 fraud HL between 2004 and 2006 fraud HL between 2004 and 2006 from out of just 150 accounts from out of just 150 accounts

Detected late – more than 4 – 5 Detected late – more than 4 – 5 yearsyears

Types and Categories of Types and Categories of fraudfraud

Fraud purely from forces outside the Fraud purely from forces outside the entityentity

Fraud with collusion from withinFraud with collusion from within

Causative factors for purely Causative factors for purely external fraudexternal fraud

Derelection of duty or lackadaisical Derelection of duty or lackadaisical approachapproach

Intellectual capabilities of fraudsters Intellectual capabilities of fraudsters and awareness of loopholesand awareness of loopholes

Systems have been evolving and Systems have been evolving and dynamic, giving an atmosphere or dynamic, giving an atmosphere or uncertainty and inconsistency of uncertainty and inconsistency of policy and procedurespolicy and procedures

Causative Factors for fraud Causative Factors for fraud with internal collusionwith internal collusion

Awareness of gaps in procedures etcAwareness of gaps in procedures etc Non accountabilityNon accountability Existence of Organised Crime Existence of Organised Crime

Standard Procedure for Standard Procedure for Housing LoansHousing Loans

1.1. POTENTIAL BORROWER APPROACHES BANKS / POTENTIAL BORROWER APPROACHES BANKS / INSTITUTIONS- BASIC ELIGIBILITY INSTITUTIONS- BASIC ELIGIBILITY

2.2. SUBMISSION OF APPLICATIONSUBMISSION OF APPLICATION3.3. SUBMISSION OF TITLE DOCUMENT SUBMISSION OF TITLE DOCUMENT 4.4. INSPECTION OF SITE/PLACEINSPECTION OF SITE/PLACE5.5. VALUATIONVALUATION6.6. SUBMISSION OF FINANCIAL DOCUMENTSSUBMISSION OF FINANCIAL DOCUMENTS7.7. APPRAISAL OF FINANCIAL DOCUMENTSAPPRAISAL OF FINANCIAL DOCUMENTS8.8. APPRAISAL OF TITLE DOCUMENTAPPRAISAL OF TITLE DOCUMENT9.9. VALUATION OF PROPERTY AND ASSETS.VALUATION OF PROPERTY AND ASSETS.10.10. OBTAINING INSURANCE POLICY OF BORROWERSOBTAINING INSURANCE POLICY OF BORROWERS11. GETTING NOC FROM BUILDER/SOCIETY AS RELEVANT 11. GETTING NOC FROM BUILDER/SOCIETY AS RELEVANT

AND BANK’S CHARGE CONFIRMATION FROM THE AND BANK’S CHARGE CONFIRMATION FROM THE SCOIETYSCOIETY

12.12. GETTING ORIGINAL SHARE CERTIFICATEGETTING ORIGINAL SHARE CERTIFICATE13.13. POST DATED CHEQUES FOR MONTHLY EMISPOST DATED CHEQUES FOR MONTHLY EMIS

Instances of lakadaisical Instances of lakadaisical approachapproach

Common Causes- home Common Causes- home loansloans Borrowers credentials- not examined to identify those Borrowers credentials- not examined to identify those

who cannot pay who cannot pay Guarantors merely interviewed telephonically, if at all Guarantors merely interviewed telephonically, if at all No structured procedure in place to spot fake OR No structured procedure in place to spot fake OR

modified documents, title deeds, etcmodified documents, title deeds, etc Unreliable, inflated or even fictitious valuation reports, Unreliable, inflated or even fictitious valuation reports,

if there is collusion from within the financing bank if there is collusion from within the financing bank Field checks- Laxity in field inspections of site, Field checks- Laxity in field inspections of site,

property, flat and other verifiable submissions property, flat and other verifiable submissions beforebefore sanctioning a loan have contributed to a rise in frauds, sanctioning a loan have contributed to a rise in frauds,

Absence of system in place which can detect whether Absence of system in place which can detect whether the same property has been mortgaged more than the same property has been mortgaged more than once once

Perfunctory examination of financial statements, tax Perfunctory examination of financial statements, tax returns. No application of mindreturns. No application of mind

Title checks through legal advisors- very unreliableTitle checks through legal advisors- very unreliable

Major Challenges- home Major Challenges- home loans through collusionloans through collusion

Staff Collusion with borrowers- individual levelStaff Collusion with borrowers- individual level Organised Fraud : Builder-borrower-staff-advocate-Organised Fraud : Builder-borrower-staff-advocate-

chartered accountant nexus is believed to be the chartered accountant nexus is believed to be the root cause of banks falling prey to home loan root cause of banks falling prey to home loan frauds frauds

Agents are available for forging and creation of Agents are available for forging and creation of fictitious documents and rubber stampsfictitious documents and rubber stamps

Staff Collusion helps in Staff Collusion helps in fraud being detected years fraud being detected years

laterlater HL not classified as HL but outsider HL not classified as HL but outsider

fraudfraud Teeming and lading of cheque Teeming and lading of cheque

collectionscollections EMIs not presentedEMIs not presented

Case We have seen which Case We have seen which encompassed every level of encompassed every level of

collusioncollusion Property did not existProperty did not exist Borrower was a sweeper staying on the roadBorrower was a sweeper staying on the road Borrower was not interviewedBorrower was not interviewed Guarantor did not existGuarantor did not exist

Agreement was fictitiousAgreement was fictitious Registration receipt fictitiousRegistration receipt fictitious Valuer backed out stating that he had not issued any reportValuer backed out stating that he had not issued any report Paneladvocate report was not takenPaneladvocate report was not taken No recovery suit was filedNo recovery suit was filed Police report conveniently stated borrower was absconding Police report conveniently stated borrower was absconding

Novel Audit Tests for detecting Novel Audit Tests for detecting fraudsfrauds

Other Mathematical tools: Benford’s Law, RSF, Other Mathematical tools: Benford’s Law, RSF, Statistical methods such as regressionStatistical methods such as regression

Tiger Team Tests, test packsTiger Team Tests, test packs Sting Operations- decoy purchases/sales, sting Sting Operations- decoy purchases/sales, sting

interviewsinterviews Placebo effectPlacebo effect Nanoscience approach-data mining Nanoscience approach-data mining Barium Test Barium Test RepetitiveRepetitive verifications verifications

Measures of prevention at Measures of prevention at early stages- technology early stages- technology

basedbased Data mining for duplicate names, Data mining for duplicate names,

registration numbers, telephone nos registration numbers, telephone nos etcetc

Time dates- registration on Sundays/ Time dates- registration on Sundays/ HolidaysHolidays

Advanced data mining techniques Advanced data mining techniques BenfordBenford

law etclaw etc

General methodsGeneral methods

Verification of Registration receiptVerification of Registration receipt Development of forensic cellDevelopment of forensic cell Training of staff for better awareness Training of staff for better awareness

and techniquesand techniques Use of investigation softwareUse of investigation software Use repetitive valuersUse repetitive valuers Data base of tainted borrowers, Data base of tainted borrowers,

builders, consultantsbuilders, consultants

Benford’s LawBenford’s Law

Benford’s LawBenford’s Law

Digit

1 30.10 %

2 17.60 %

3 12.50 %

4 9.70 %

5 7.90 %

6 6.70 %

7 5.80 %

8 5.10 %

9 4.60 %7

Tiger Team TestsTiger Team Tests

Can be used in Housing LoansCan be used in Housing Loans

Thank youThank you

Chetan DalalChetan Dalal