Fraud

India: Riding the Contradictions

Kroll Global Fraud & Risk Report 2016/17

In Kroll’s 2016 Global Fraud and Risk survey, India was second on the list of jurisdictions that respondents were dissuaded from operating in, after China. Nearly a fifth (19%) of respondents said India was enough of a fraud risk to stop them from operating there. An equal proportion of respondents said that security risk deters them from operating in India.

Kroll-India-Riding-Contradictions.jpgThe statistics reveal the contradiction in the Indian economy. On the one hand, India is an attractive destination for foreign investors. As one of the fastest-growing major emerging markets, it is politically more stable than in previous cycles and the BJP-led government is undertaking overdue economic reforms to attract foreign direct investment. On the other hand, as our survey indicates, investors are deterred due to fraud, corruption, and security concerns.

The India market is too large to ignore for many investors, and strategic investors often choose to operate there via joint ventures with local partners who control the operations of the local companies. Foreign investors believe such local partners are better able to manage India’s operating environment – which involves a close nexus between business, government, and bureaucracy, thus creating suspicions of improper dealings.

While local businesses can see behind the scenes, foreign investors struggle to do so, which creates an opportunity for fraudulent activity. For example, local management may engage in related-party transactions to generate cash by inflating vendor invoices or creating fake employees. Such practices can make it difficult for investors to understand whether the cash is being generated for legitimate business purposes (such as land acquisition or paying rural employees), or for paying kickbacks to government officials.

Similar to China, the levels of collusion between employees, vendors, customers, and other stakeholders to perpetrate fraud can be high in India. Fraud can arise in dealings with third parties as well as among groups of employees. When a fraud is identified, it is often not easy to terminate employees or discontinue relationships with key vendors, as this can damage employee morale and business continuity. Companies therefore need to tread carefully when responding to fraud allegations.

For example, Kroll recently conducted an investigation for a major global conglomerate that had received an anonymous whistle-blower complaint alleging that its local CEO was accepting kickbacks from certain vendors. The client was understandably concerned about how the investigation would impact the morale of the local organization, and its ability to continue serving customers while the investigation was underway. Kroll helped the client investigate the allegations discreetly by reviewing electronic evidence, conducting subtle on-the-ground enquiries, and analyzing specific vendor transaction data in order to minimize disruption.

The investigation revealed that the local management culture, accounting processes, and corporate governance had arguably led to the creation of an environment that was ripe for fraud. We found that senior management was aware of the gaps in corporate governance as well as the fraud that resulted. Kroll helped the client understand the full scope of the problem, which led to the removal of the CEO and other employees.

Security issues are also making their way to the top of the agenda: nearly a fifth of respondents said they would be dissuaded from investing in India because of security risks.

It is, however, possible to manage these risks. To avoid fraud, we advise both new and experienced investors to:

 Assess: A qualitative assessment of the operating environment and any potential partners—which includes their reputation, political connections, ethical standards, and business practices—is as important as reviewing growth numbers, financial records, and legal documents.

 Understand: Foreign investors need to understand the full dynamics of India’s business and political environment to ensure they make wise investments.

Prepare well: Investors should not be swayed by the competitive pressures of the investment environment in India, where too many investors often pursue the same opportunities. They should take their time so they are prepared to make a well-informed investment.

Never compromise: Investors should select advisors on a “no-compromise basis” to ensure they are truly independent, and that the integrity of any due diligence process is maintained.

Learn more about fraud and risk statistics and trends -- as well as innovative risk management strategies and best practices -- in Kroll’s annual Global Fraud & Risk Report 2016/17.

Global Fraud & Risk Report

Businesses saw a significant rise in fraud and risk incidents during 2016. Although companies have taken significant strides toward building resiliency, more is needed. We have expanded the scope of this year’s Report—it’s now the annual Kroll Fraud & Risk Report, breaking out specific cyber and security threats to better reflect the growing challenges that our clients are facing around the world.

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