Comments by Rajesh Goyal : I recently read about the FD scams in Dena and OBC banks.   I felt these are isolated cases of bank frauds and have been perpetuated by certain criminals.   However, I have been received  the following article by Mr R S Pillai from his book entitled : Major Bank Frauds – A Critical review.   I was surprised to read the articles as I found he has clearly mentioned how and with what intentions such fake FDs are got issued and modus operandi followed by fraudsters.    It appears these fraudesters are running a parallel banking with their own margins.  We too must read the above  referred book and  I will wish that every banker read this Chapter and learn the lessons which may save their job in future.    CBI sleuths too needs to read these and they may find a new window opening for hundreds of skeletons.   All CMDs and Fraud Department General Managers should carefully read between the lines and initiate enquiries about the Bulk Deposits which have been garnered through middle men and parties have availed overdraft against such bulk deposits.   In liklihood they will stumble upon few more such frauds.   Now we quote the extracts from the book (We need to applaude the vision of Mr Pillai in exposing such scams ):

Chapter 2  : FRAUD WITH CORPORATE BULK DEPOSITS

Corporate / Institutional bulk deposits is one of the very good sources for the Banks to mobilize huge deposits within a short period and there is always a  stiff competition between Banks, both commercial and even private banks to corner huge deposits by offering competitive interest rates when compared to individual depositors. Especially during September / March when Banks have to jack up their performance to achieve the half yearly / year end performance there is a mad rush for these bulk deposits. These deposits are initially given for 1- 3 years and subsequently renewed by the concerned departments of the Government. Particularly Government departments have huge allocation under various projects to be implemented over a period of time. In order to earn interest on otherwise idle funds, the concerned departments invest in public sector Banks Similarly other departments like Life Insurance Corporation, Regional Provident Fund etc., also invest in Bank deposits.

Modus operandi: The modus operandi is something very unique. In many cases both Bank officials and officials of the departments do not interact directly because of many factors. One reason which came to light is these officials of the investing department expect some favor from the bankers by way of gift or sanction of loans etc., so they need some intermediary.  Many times Bankers refuse to give huge gifts. But Banks need huge funds. So both banks and investors approach through a via media i.e., Investment Consultants. Some of them are Chartered Accountants having good connections with Government departments and fund allocation.

Banks: These investment consultants know fully well that Banks do not offer any commission to mobilize deposits but they indirectly make the banks to sanction credit proposals of their clients and they charge 3-5% as consultation fees from their credit clienteles. In some cases it has come to light that these so called consultants also ensure rejection of proposals submitted by rival business consultants and make bankers to advise such clients, the defect/deficiencies in their proposals and suggest them to approach these private consultants who brought huge deposits.   In few case, money a portion of the project say 0.25% to 0.5% were also given to bankers directly or as gifts during Diwali by way of gold coins (50 to 200 gm Coins). Sometimes they also meet a part of the purchase price of the proposed flat to be purchased, over and above the stamp duty, to be paid to the builder is paid by them as there are no records for having paid the money or received the money.

Government officials: Some Government officials who provide information about the funds maintain close rapport with these investment consultants. They provide not only regarding fresh funds but help them to renew the deposits.

Now you may ask where the fraud is in this case. The following paragraph indicates the dual role of these investment consultants. Banks approach for deposits and for soliciting good corporate clients and many times big corporate also approach these clients for arranging loans or funds.

Opening of accounts: Now take this example. Consultant “X” has approached bank ‘B” to mobilize Rs. 100 Crores from one of the Government departments “C”.   The consultant would collect the required deposit opening form from the Bank and he would ensure getting the signature on the form from the authorized official and collect the Government cheque for Rs. 100 Crore.

After the cheque presented in clearing is duly received the Bank would prepare the deposit receipts and hand over the same to the consultants. The truth that was revealed was these deposit account opening forms would be signed by one of the members of staff from the consultancy firm with fake rubber stamps of the Government department would either sign or with the rubber stamp affixed forms go directly to the Bank hand over the forms and sign in front of the officials. At the same time he would also open a current account for crediting the matured deposits.

The consultants instead of handing over the original deposit receipt from the Bank would hand over the duplicate deposit receipt as if received from the bank and hand over the same to the Government Departments. This will be filed or kept in safe custody of the concerned departments and will be taken out during next renewal of audit. But no one would suspect that this is a fake receipt because using color Xerox / computer printing the deposit receipt would a mirror image.

After a month or so one of the businessmen who is badly in need of funds or interested in investment in real estate approaches him he takes the following route. Say he had asked for Rs. 70 Crores for one year. A deal would be struck @ 18-20% per year. The consultants would be meticulous in selecting such people. Many times they are recommended by their own reliable persons.

Now the consultant would approach stating that this project is likely to be closed and deposits to be refunded. Bankers would be in a fix due to the fear of losing huge deposits. The consultant would finally make the bankers to sanction a demand loan to the Government department. If banks charge 2% over and above the contract rate, they would make them to sanction with 1% over the contract rate and withdraw 90% say Rs. 75 Crores from the deposit amount made by the Government department.

Date of deposit: 15.03.2013

Date of maturity: 15.03.2016

Deposit rate for the deposit of Rs. 100 Crores: 8%

Interest rate on the demand loan of Rs. 75 Crores: 9%

Total demand Loan taken on the deposit: Rs. 75 Cr

Commission for the Consultant for the loan: Rs. 5 Cr

Loan to his creditor: Rs. 70 Cr

It is the responsibility of the creditor to return the loan with interest on or before the due date. Since real estate was booming most of these people invested in real estate and reaped huge benefits.

Now a question may be asked, what would happen if the deposit is to be closed before maturity? The fact is in most of the Government departments the foreclosure of deposits is seldom undertaken because of loss of interest and the officials in the department who gets a commission from the Consultant would ensure that these deposits are not recommended for foreclosure or ensure their renewal for further period if there is any delay on the part of creditor. On the part of consultants they ensure they are well protected for the safety and return of the amount given to third parties. One party has confirmed having received more than Rs. 320 Crores by this way. Sometimes it takes more than 3 years for the concerned Government department to realize the frauds purported on them and by that time 3-4 years would have completed and these creditors vanish from the whole scene. Fodder scam, health scam we do not know what more scams are there to unearth.

Deviations on the part of Bank officials:

• Handing over the account opening forms to the consultants.

• Failure to verify the authenticity of the account opening signatures with that of the authorized officials of the departments.

• Handing over the deposit receipts to the consultants instead of handing over directly to the concerned Government departments.

• Encouraging investment consultants to mobilize deposits and corporate clients.

Lapses on the part of Government Departments:

•  Not inviting quotations / offers on deposits directly from the Banks.

• Not effecting frequent rotation to staff in finance departments.

• Encouraging investment consultants.

Whenever lockers are raided and gold coins are found in search it should be seen whether the gold coins bear any numbers. Gold coins purchased from banks have serial numbers and the person who had purchased could be easily established. Invariably the Consultants either they purchase from the same Banks (as many banks have targets to sell gold coins) or other Banks with whom they have business connections.

Learning Points: Bankers should always avoid middle men in dealing with Government Departments or individuals or Institutions. Direct dealing would avoid all pit falls.

(Extract from the eBook “Major Bank Frauds – A Critical review – R.S. Pillai published in https://www.smashwords.com/books/view/451788)