India has one of the largest fraud problems with 80% prevalence rate, says New York-based firm Kroll

By Our Representative
A top international survey, which is likely to create ripples in India’s corridors of power as well as the corporate world, has said that incidence of corporate fraud in India has taken a massive leap of 11 per cent, from 69 per cent in 2013-14 to 80 per cent in 2015-26, which is essentially the period when Prime Minister Narendra Modi has been in power.
The report, based on the survey carried out by a New York-based consulting firm Kroll, and titled “Global Fraud Report: Vulnerabilities on the Rise”, may also prove to be a major embarrassment to the Modi government’s claim that his government is “corruption free”, as it says, “India has one of the largest fraud problems of any of the countries covered in this report.”
By way of comparison, it points out, India’s 80 per cent overall prevalence of fraud is third among the countries/regions analyzed, next only to Colombia’s 83 per cent and Sub-Saharan Africa’s 84 per cent. The report says, India “has the highest national incidence of corruption (25 per cent of companies), regulatory breach (20 per cent) and IP theft (15 per cent). It also ties for the highest national level of money laundering (8 per cent).”
Saying that the “outlook for the future is also worrying”, the report states, “92 per cent of Indian respondents reported that their firms had seen exposure to fraud increase in the past year. For every fraud covered in the survey, respondents from India are more likely than average to report that their firms are highly or moderately vulnerable.”

“In particular”, the report underlines, “They have the highest proportion reporting this level of exposure to vendor or procurement fraud (77 per cent), corruption and bribery (73 per cent) and regulatory or compliance breach (67 per cent).”
Pointing that while “companies in India are willing to spend to improve their level of anti-fraud protection”, the report seeks to blame fraud mainly on “junior employees”, stating, “It appears that such funds are not being invested appropriately. For respondents that had identified the perpetrator, 59 per cent indicated that junior employees were leading players in at least one such crime.”
The report further says, “Despite these vulnerabilities and the high proportion of fraud perpetrated by insiders, only 28 per cent of companies in India invest in staff background screening and only 55 per cent invest in vendor due diligence.”
In a writeup on India’s survey, “Investing and operating in India: Getting the most out of your private equity investment” by Reshmi Khurana, managing director of Kroll’s India office, says, “By some estimates, over $500 million worth of private equity (PE) investments in India are embroiled in legal disputes”, pointing out, “Corporate governance standards in India are still evolving, especially in regards to small and mid-sized companies.”
The result, according to Khurana, is that “promoters may be following certain business practices which may not necessarily be aligned with the interests of the PE investor, such as related party transactions and diversion of funds for other businesses.”

“While investigating fraud in portfolio companies, we see that the greatest erosion of value in a portfolio company occurs within the first 18 to 24 months of the PE fund’s making the investment”, Khurana says, adding, “Our experience suggests that fraud occurs soon after the investment.”
While conceding that “corporate governance in India is evolving in a positive way, and this is being led by a new generation of entrepreneurs”, Khurana wonders, “The question is, once these businesses grow to a particular size and scale, will these entrepreneurs and the corporate governance foundation they are establishing be able to withstand the external pressures that often accompany growth?”

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