Research Report on Forgery - · PDF fileResearch Report on Forgery 2015 ... ingredients of...

Research Report on Forgery 2015

CA Manish J. Sheth

Forgery A RESEARCH REPORT BY CA MANISH J. SHETH

INDEX Sr. No. Particulars Pages

From To 1. Introduction 2 2 2. History of Forgery 3 3 3. Types of Forgeries 3 7

4. Common Types of Forgeries in Corporates and Financial Institution

8 8

5. Reasons for Forgeries 8 10

6. Detection of Forged Documents

10 11

7. Forgery Prevention Methods 11 13 8. Recent Cases 13 14 9. Conclusion 15 15

BIBLIOGRAPHY:

• Shastri’s Introduction to Indian coin forgeries, second edition authored by Shahstri JC Philip • Novel and Conventional methods of Audit, Investigation and Fraud Detection, Chetan Dalal • ACFE website • Wikipedia • The telegraph, Kolkata • Chartered Institute of Management Accountants, Topic gateway series • Colombia Police Department, crime prevention department • SA 240, ‘The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial

Statements’ • ‘Mumbai mirror’ dated 29th October, 2015


CA Manish J. Sheth

INTRODUCTION:

“There is enough in this world for every man’s need, but there isn’t for enough for every man’s greed.” – Mahatma Gandhi The human species has certain abilities which no other species has. Humans can laugh and cry while no other species can. Barring monkeys, chimpanzees and apes which are closest to the human species, no other species has even the intelligence to recognize an image in a mirror as a reflection of one’s ownself. This trait of recognising an image as a reflection of oneself is believed to be a sign of high degree of evolution on our planet. Humans are gifted with the capacity to think, assess, evaluate and innovate. Humans can discuss, debate, concentrate and meditate. However, along with all these marvellous evolutionary accomplishments, humans have also developed dubious traits of deception and manipulation. Only humans are capable of intellectual and financial deception – the basic ingredients of ‘fraud’ or ‘white collar crime’. Human beings have been showing traits of deception since time immemorial and existence of fraud probably dates back to the dark ages. The truth is that ‘fraud’ always existed but in recent times, it has grown exponentially and further, it has rapidly increased in variety and dimension.

- CA Chetan Dalal Lord Buddha said, “There are three kinds of poisons ‘anger, greed and ignorance’. If not checked they all eventually lead to wrongdoing” Forgery is defined as the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive for the sake of altering the public perception, or to earn profit by selling the forged item. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and wilful misrepresentations. Forging money or currency is more often called counterfeiting. But consumer goods may also be counterfeits if they are not manufactured or produced by the designated manufacture or producer given on the label or flagged by the trademark symbol. When the object forged is a record or document it is often called a false document. Etymologically, the word ‘forgery’ is derived from the verb ‘forge’ used in the late 14th century. The literal sense of the verb tended to go with forging "act of working on a forge," or "piece of work made on a forge". Here is an image of ‘Forge Used in Ancient Times’:


CA Manish J. Sheth

HISTORY OF FORGERY Coins and currency forgery Forgery of money has always existed in all countries. Since Indians started using money by around 1000 BC, forgery started here almost 3000 years ago. Many ancient Indian writers have mentioned counterfeit money, which confirms that forgery did exist right from ancient times. The basic value of a substance, less than which its value would never go, can be called its intrinsic value. But since it has been issued by a ruling authority, or under the imprimatur of the ruling authority, it has a substantial buying power which is known as extrinsic value. In order to take advantage of such extrinsic value that money possessed, forgery was affected. During periods when gold and silver coins were used, many forgers made coins that were identical in appearance with regular coins, but which were either of lower weight or of inferior quality (debased) of gold and silver. The science of economics has shown that there is a delicate balance between the money that circulates, the volume of commerce, and the price of commodities in any country. The great Indian economist-strategist Kautilya is one of the persons who centuries ago understood this precarious balance. Thus in his Economics he explains how one can destabilize the enemy kingdom with forged money, and also how to protect one’s own sovereign country from counterfeits.

TYPES OF FORGERIES Forgery is possible in innumerable ways and it is not possible to prepare an exact list of different types of forgeries. Few of these are very prominent are listed as under:

• Bank cheque forgery • Currency note forgery • Documents forgery • Digital Signature Certificate forgery • Gems and Jewellery forgery • Audio/Video Piracy • Software Piracy

Bank Cheque forgery As per section 6 of the Negotiable Instruments Act, 1881, “A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” An unauthorised use of a cheque by any person with criminal intent might make another person lose his money. Most of the time, a cheque book is in possession of an accountant or cashier in any corporate. This cheque book is not kept in a secured place and hence it becomes relatively easy to access by anyone. If anyone even acquires one cheque leaf, then one may not realise it until the theft of money has actually occurred. The only control in a cheque is the signature of drawer. The fraudster


CA Manish J. Sheth

may obtain the signature of the drawer by misrepresentation or by falsification. In one recent case reported in the Hindustan Times, 14th October, 2015, an employee of a concern at Andheri produced bunch of cheques for signature before his employer just five minutes before leaving time of office. The employer hurriedly signed all the cheques without bothering to check the same with attached voucher. The next day, employee withdrew cash from bank by using one of the cheques prepared by him in the name of his next kin. The employer lost Rs. 1,05,000/-. This is a very common type of forgery happening in our country and is usually done by line management employees. Currency Note forgery Currency Note forgery, generally called counterfeiting, is a rampart practice though it is not easy to commit. The reason is that currency note paper which is called ‘security paper’ is not openly available in the market and the import is allowed only against license issued to government press. The currency notes mostly get printed outside India in a country where there is political uncertainty, bureaucracy, etc. These fake notes are then smuggled into the country by various means and it is highly dangerous to the economy of the country. Documents forgery Various types of government, legal, university documents are forged. This type of forgery is a bit easier for the fraudsters as required paper for printing is openly available and various types of high quality printing machines are not difficult to obtain. The generally forged documents are Ration cards, voter ID cards, property agreements, company share certificates and bonds, passports, PAN cards, university degree certificates, death certificates, driving licenses, income tax returns and so on. These types of documents are usually forged by fraudsters using high quality scanning and printing machines The following are some common cases of document forgery:

• Abdul Karim Telgi is a convicted Indian counterfeiter. He earned money by printing counterfeit stamp paper in India. He was involved in a Rs. 600 billion bogus stamp-paper scam.

• In Delhi one political leader managed to get a fake law degree and has been arrested. On the

basis of the fake degree, he managed to become the Delhi law minister.

• Using bogus ration cards and PAN cards, many Bangladeshis have settled in India and even got themselves enrolled in voting list.

• There are many cases with the bank where forged income tax returns are produced before

Bank Authorities for getting a loan. Forged number plates are used to sell stolen high value cars. There are many instances of using forged living certificate to claim pension of a deceased person.


CA Manish J. Sheth

• • Bogus death certificates are used to claim insurance policies.

• In the past when shares of companies were still in physical form, many fraudsters managed to

transfer shares in their name by using forged share transfer form.

• Fake PAN Cards are used to open bank accounts and obtain real passports.

• In the year 2014, 5 people were caught in MTNL, Delhi who had procured employment on fake degrees. Fake university degrees not only cause financial damage but also prove to be a threat to human life. Fake certificates held by persons purporting to be doctors have caused innocent people to trust them. Finally, such innocent people have had to pay with their lives. Based on such fake degrees, many ‘doctors’ have been found involved in organ smuggling. Such people have been causing severe damage to our economy, country’s reputation and human life. A very famous example is that of Jayant Patel also known as ‘Dr. Death’ who was charged with manslaughter.

• There have been cases in the past where based on forged hall tickets, another person has

appeared in university exams as a dummy candidate for the actual student.

• WorldCom, Inc. Stock Certificate scam, 2002 WorldCom, Inc., headquartered in Clinton, Mississippi, fell victim to an $11 billion accounting scandal that resulted in the company filing bankruptcy in 2002 — the largest bankruptcy in U.S. history at the time.

Digital Signature Certificate forgery: It seemed like any other Monday at Unicorn House in Kandivali, Mumbai but by the end of the evening of March 9, 2015, the three-storey building was the centre of a rumpus. Somebody had changed the names of its directors on a government website. That day, the Mumbai-based company's auditors were going through the accounts of DDPL Global Infrastructure Pvt. Ltd. Everything was in order. Then somebody decided to have a look at the company and the profiles of its directors on the ministry of corporate affairs (MCA) portal. That was when all hell broke loose.


CA Manish J. Sheth

The signatory details of the eight-year-old land development company had been changed. The original directors had been replaced by three unknown people from Delhi, Madhya Pradesh and Pune. Similar changes were made to the profiles of the directors of DDPL's associate company, Unicorn Infra Projects. In this case, the fraudsters obtained digital certificate from certifying authority by producing forged PAN and telephone bills. The certifying authority issued Class 2 digital certificate to these fraudsters without verifying the authenticity of documents submitted. Using these Digital Signature certificates, the fraudsters obtained DIN and uploaded various forms for change in directorship and ownership of the company, thus hijacking the company. This was a classic case of corporate hijacking. Gems and Jewellery forgery: All that glitters is not gold. This adage is proving to be truer in recent times. Many instances have come to light where fraudsters make replicas of actual jewellery and, in collusion with certified valuers of jewellery, obtain gold loans against such fake gold. Below are few such instances:

• The guards and officials of the main branch of SBI Bhadohi who were guarding 'gold' worth over Rs. 1 crore kept in their vault for the past several years were oblivion of the fact that it was artificial.

The gold, kept in form of jewellery, coins and gold bars, was pledged to the bank against various loans amounting to over Rs 1 crore. The loans were given in 2012 under the agri-gold loan scheme. After the borrowers failed to deposit the monthly instalments, the bank issued notices. But when an amount of Rs 88.32 lakh constantly remained outstanding, authorities grew suspicious and tested the gold which was found to be artificial.

India, being a country where religion is given prime importance, perpetrating such frauds becomes easier. Gold worth crores of Rupees is offered by devotees in various temples like Tirupati Temple in Andhra Pradesh, Shirdi Sai-Baba temple in Maharashtra, Jagannath Puri temple in Orissa, etc. Although the security and controls are good, they are not good enough. This is demonstrated by the instance described below:

• A Rs. 50,000 crore scam of pilfering jewellery and replacing them with fakes was unearthed at the Tirupati shrine in Andhra Pradesh.

Jewellery donated by devotees at the 9th century temple of Lord Venkateswara in the Tirumala Hills is systematically getting replaced with fakes. A good part of the jewellery replaced with fakes was donated by the 16th century Vijaynagar king Krishnadevaraya.

A scan of the inventory section report of the Tirupati Tirumala Devasthanam (TTD) as well as the vigilance and security wing report prepared by the TTD executive officer showed how the jewellery had been depleting annually. Pieces from the gold and diamond-studded crowns, ornaments, armours, miscellaneous decorations and pots and plates were shrewdly being replaced with fakes systematically. Such a scheme had been perfectly planned.


CA Manish J. Sheth

Such scams are becoming more and more common nowadays. Audio/Video piracy Piracy refers to the unauthorized duplication of copyrighted content that is then sold at substantially lower prices in the 'grey' market. The ease of access to technology has meant that over the years, piracy has become more rampant. For example, CD writers are available off the shelf at very low prices, making music piracy a simple affair. Many laws have been made to prevent privacy. Internationally, the laws for punishing piracy in developed countries are stringent and punitive in nature. In Asian countries and more in India too, it does not get the attention at the national level due to more engaging issues at hand. Piracy is done in many ways like video piracy, cable piracy, and DVD/CD piracy. Video piracy takes place when a film is produced in the form of a video CD without proper authorization from the right holder i.e. the producer. Cable piracy refers to unauthorised transmission of films through cable network. Very often, films, especially the new releases, are shown through cable without permission from the rights holder. Music piracy refers to the unauthorised replication of music CDs that flood the market as soon as the launch of a new release. Music companies' revenues hit hard by the deluge of pirated compact discs as these are available at substantially lower prices compared to that at stores. µtorrent is the most common website used for downloading and sharing of pirated movies, songs, games, books etc. Software Piracy Software piracy is the illegal copying, distribution, or use of software. It is such a profitable "business" that it has caught the attention of organized crime groups in a number of countries. Software piracy causes significant lost revenue for developers, which in turn results in higher prices for the consumer. Software piracy applies mainly to full-function commercial software. The time-limited or function-restricted versions of commercial software called shareware are less likely to be pirated since they are freely available. There are various types of software piracy like:

• Softlifting: Borrowing and installing a copy of a software application from a colleague • Client-server overuse: Installing more copies of the software than one has licenses for • Hard-disk loading: Installing and selling unauthorized copies of software on refurbished or

new computers • Counterfeiting: Duplicating and selling copyrighted programs • Online piracy: Typically involves downloading illegal software from peer-to-peer network,

Internet auction or blog


CA Manish J. Sheth

COMMON TYPES OF FORGERIES IN CORPORATES AND FINANCIAL INSTITUTION

There are many types of corporate fraud, including the following common frauds:

• theft of cash, physical assets or confidential information • misuse of accounts • procurement fraud • payroll fraud • financial accounting misstatements • inappropriate journal vouchers • suspense accounting fraud • fraudulent expense claims • false employment credentials • bribery and corruption

However, forgery is the most common type of fraud and is also something which corporates and financial institutions dread. Criminals have also invented new types of computer fraud:

• Phishing, pharming, hacking and carding. • 3D-Secure fraud when static password. • Device manipulation: POS terminal breaches, ATM breaches, Personal PCs and mobile

phones. • Data breaches into processing infrastructures or other places with large stores of card details

(such as merchants). • From petty criminals towards organised fraudster crime. • From skimming of a single card towards large data breaches. • From local fraud towards global fraud organised by decentralised international crime gangs. • From one criminal working across the entire fraud lifecycle, to fraudsters instead specialising

on one part of the value chain, and selling that value on to the next level – for example one part of the chain could specialise on getting hold of card data, and another could specialise on actually using it.

REASONS FOR FORGERIES

When forgery takes place, or any other type of fraud for that matter, the white collar criminal alone is not to be blamed. In most of the cases, the negligence of the management has to be paid for with a very heavy price. As it has always been said, “Prevention is better than cure”. As per Standard on Auditing 240, ‘The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements’, The primary responsibility for the prevention and detection of fraud and error rests with both those charged with the governance and the management of an entity. The respective responsibilities of those charged with governance and management may vary from entity to


CA Manish J. Sheth

entity. Management, with the oversight of those charged with governance, needs to set the proper tone, create and maintain a culture of honesty and high ethics, and establish appropriate controls to prevent and detect fraud and error within the entity. It is thus, the responsibility of management to see to it that the integrity of an entity's accounting and financial reporting systems and that appropriate controls are in place, including those for monitoring risk, financial control and compliancewith the laws and regulations. An internal control system comprises all those policies and procedures that collectively support an organisation’s operation. Internal controls typically deal with approval and authorisation processes, access restrictions, transaction controls, account reconciliations and physical security. These procedures often include the division of responsibilities, and checks and balances to reduce risk. The number and type of internal controls that an organisation can introduce depends on its nature and size. The following are the weaknesses in internal control systems which should be necessarily corrected to mitigate forgery risk:

(i) Inadequate recruitment processes which do not consider the character of a candidate along with their qualifications decidedly cause loss to the company. Background check of a candidate is a crucial process worth performing.

(ii) Simply recruiting good employees is not enough. Screening at regular intervals is necessary to improve employee morale as well as to spot red flags at an early stage.

(iii) Lack of job segregation means allotting complementary tasks to the same employee or the

same group of employees. This lack of maker-checker system defeats the purpose of all other security measures taken.

(iv) Inadequate access controls to physical assets and IT security systems is a great internal threat a corporate or financial institution faces.

(v) A major weakness in financial management is a lack of adequate documentation. Poor

internal control documentation

(vi) Deficiencies can occur in the design or execution of procedures, but management has to develop a technique whereby the reasons for the same can be tracked down.

(vii) Negligence on part of the management of minor issues brought to their notice is a grave mistake. Corrective action should be immediately taken. This is because a minor wrongdoing might amplify into something huge in no time and this might prove to be a fatal blow to the company.

(viii) Insufficient control consciousness within the organization, for example, the tone at the top and the control environment.

(ix) Inadequate design of monitoring controls used to assess the design and operating effectiveness of the entity’s internal control overtime.


CA Manish J. Sheth

(x) The absence of an internal process to report deficiencies in internal control

to management on a timely basis

(xi) Failure of the information and communication component of internal control to provide complete and accurate output because of deficiencies in timeliness, completeness, or accuracy

(xii) Failure to perform reconciliations of significant accounts. For example, accounts receivable subsidiary ledgers are not reconciled to the general ledger account in a timely or accurate manner.

(xiii) Management override of controls.

(xiv) An ineffective internal audit function or risk assessment function at an entity for which such functions are important to the monitoring or risk assessment component of internal control, such as for very large or highly complex entities.

(xv) Inadequate controls over non-routine and non-systematic transactions. This list is endless since a business organisation is a very complex structure. Despite the serious risk that fraud presents to business, many organisations still do not have formal systems and procedures in place to prevent, detect and respond to fraud. No system is completely fool proof, but business can take steps to deter fraud and make it much less attractive to commit.

DETECTION OF FORGED DOCUMENTS Although, forged documents cannot be easily identified, there are a number of “red flags” to look out for when considering documents:

(i) Lack of official stamps/official seals: These may be embossed, stamped or raised seals.

(ii) Paper quality: Questions like “What is the paper quality of the certificate?” and “Are there any security features?” should be considered.

(iii) A variety of fonts used: Generally certificates contain only one or two types of fonts.

(iv) Handwriting: If there is hand-writing on a document, there should generally be no more than one style of handwriting. Also, there should be no alternations or corrections on the document.

(v) Informal or inaccurate language: The language used on legal documents is often very formal. The text should be read carefully to ensure that it makes sense and that correct grammar has been used.


CA Manish J. Sheth

(vi) MICR code in case of cheques: The first, nine-digit part of the MICR line is called the routing number. It identifies the bank that issued the cheque. It is possible to go online and check if the number squares up with the bank name printed on the cheque. If in any doubt, track down and phone the issuing bank to confirm the check is genuine.

(vii) Font used on a cheque: Scrutinizing the MICR line can prove useful. It is prudent to the actual typeface/font used. One can compare it with the font on the same line in another cheque book. If it is different, the cheque is probably a fake.

(viii) Scrutinizing borders: In case of a cheque, one can check for perforations. If not found, it was done on a home printer. In case of other documents, one can check for bends and crumple marks, the points made on paper from punch holes or stapler marks, etc.

(ix) Signature: Look for signs that the signature or some other element of the document has been altered or tampered with. Stains around handwritten areas suggest the original signature, amount, name or other information may have been erased and replaced.

(x) Size of documents and envelopes: One can check whether the size of the envelope corresponds with the size of folded paper. Anonymous letters or envelopes may be having latent fingerprints, which may be developed even after years.

FORGERY PREVENTION METHODS

(i) Strengthening the internal control system. Here is an infographic explaining the measures management needs to take in order to reduce substantially the risk of forgery.

(ii) Developing an effective anti-fraud strategy. An effective anti-fraud strategy has four main components, namely:

• prevention • detection


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• deterrence • response

This has been explained in the diagram below:

(iii) Defining a mission statement that refers to ‘quality’ or ‘ethics’ and defines how the organisation wants to be regarded externally. Also, a process of reminders about ethical and fraud policies, for example, an annual letter and/or declarations may prove useful.

(iv) Fraud risk training and awareness for all employees and key business partners.

(v) The control environment should be adjusted to fit with the degree of risk exposure. Where possible, internal controls should address warning signs and alerts to minimise fraud.

(vi) Warning signs have been described as organisational indicators of fraud risk. Such warning signs should not ignored by the management and appropriate corrective action should be immediately taken.

(vii) Unauthorised access to systems gives rise to forgeries in many cases. Tracking approvals to make sure that employees are not exceeding their authorization levels is key internal control strength. Thus, proper authorization procedure should be developed to keep unauthorised access under check.

(viii) Whether record are in paper or digital form, management must develop a system such that it is able to reconstruct who initiated an action, such as payment, who approved it, who modified it, who executed it and what resulted from the action. Adequate documentation of activities establishes who was responsible for an action if a problem arises later,

(ix) Critical activities have to be segregated into multiple tasks and have to be allocated to different employees. Separating functions makes fraudulent activities more difficult.


CA Manish J. Sheth

(x) Inadequate training of employees in key positions of responsibility constitutes a weakness

in internal financial management. Appropriate training to employees at different is an indispensable activity if the risk of forgery and other frauds have to be mitigated.

(xi) Discrepancies and issues arising in the design and execution of procedure have to be monitored and targeted by the management. Deficiency reports can be issued for non-compliance with procedures.

(xii) Frequent reconciliations help in identifying differences and explanations for the same. This results in a faster reaction time and improvements.

RECENT CASES

(1) Although technological advances have helped reduce the risk of fraud, it has not completely

been eliminated. Persons with enough power are still able to bypass procedures and laws. Like it is said, “Power corrupts. Absolute power corrupts absolutely.” Here is a recent example of the same:

Dreaded underworld don Dawood Ibrahim's close aide Riyaz Bhati was arrested for carrying two forged passports after a tip-off from intelligence agencies.

After Chhota Rajan’s arrest in Bali on Sunday, the Intelligence Bureau and the police were keeping a close watch on every person who was and is associated with the underworld. The


CA Manish J. Sheth

first arrest in this regard was when Riyaz Bhati, a close aide of Dawood Ibrahim, was arrested from the Sahar airport with two passports on October 27th, 2015. Police officials arrested Bhati after they found two passports in his baggage that had differing details mentioned in them. Bhati was at the airport to catch a flight to Johannesburg, where Dawood’s other cronies were supposedly going to meet and discuss the future of D-company in Mumbai.

(2) Here is another instance where forgery was used to gain selfish ends, thus putting lives of 400 families in jeopardy. Neelam Nijhai, assistant commissioner of the Vasai-Virar Municipal Corporation (VVMC), was booked for allegedly allowing residential buildings to come up in Virar using forged documents. Nijhai was accused of turning a blind eye to over 50 buildings that came up in 2008 on a plot reserved for playground at Manvelpada in Virar East. The buildings were constructed after forging commencement certificates (CC). A complaint was filed with the Virar police by a government doctor, Anil Yadav.


CA Manish J. Sheth

CONCLUSION Fraudulent practices are on a rise nowadays as people have become more materialistic. However, it is not impossible to detect and find these bad apples if one exercises enough caution. The element of guilt always prevails in the mind of a criminal and in order to quieten his guilty conscious, he continuously makes effort. In this process such criminal is bound to make a mistake. This is very appropriately explained by the following Sanskrit verse:

ll Arthanaamarjane Dukham

Dukhmarjitanaam cha rakshane Aaye Dukham Vyaye Dukham Dhigarthan kasht sanshritaan ll

It means, ‘There is sorrow when one does not possess wealth, there is fear when one possesses it by wrong means. Existence or absence of wealth both causes sorrow. Both involve pain.’ If falsehood, like truth, had only one face, we would be in better shape. For we would take as certain the opposite of what the liar said. But the reverse of truth has a hundred thousand shapes and a limitless field.

-Montaigne

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