Forensics and the art of triangulation

(Left this forum) #123

Auditors are entrusted with a duty to assess REASONABLY presence of material misstatements in financial statements. Materiality hair cut the threshold amount, procedures are adapted as per accepted accounting and audit procedures.

Even if we are given the process document and working papers (I am talking about non accountants) we will not able to understand much. This is a area of SME and will remain there.

The format of audit report is designed such a way to alert you:

  • Adverse opinions
  • Qualified opinion ( opinions expressed with or without substantive procedures)
  • Matters of attention (in notes to accounts)

A share holder or any other stake holder is suppose to understand format of audit report, notes to accounts while considering for investment evaluation purpose.

Let is forget past which is gone. Accountants have been vocal about media accounting practices, same with financial services dealing with underlying instruments. How many shareholder understand how media revenue is recognised? What is the contingent liabilities in case of underlying financial instrument? How does license fees stripped out for derecognition? Still people invest in these companies, because investing itself is game of probability not certainty!

Why so much ambiguity in accounting practices then? Simply because accounting is a reflection of business process. With new business models business practices are far more complex than before. E.g. multiple product arrangement, oil and gas inventory, amortisation of research etc. Also accounting practices give flexibility so that management exercise certain judgments which is more objective based than rule based. By the in developing accounting practice its not only the accountant who is involved. It includes process experts, legal fraternity, actuary etc.

Jim is a short seller, he is right 50% and wrong 50% (which is exceptional track record by the way). A short seller makes money when he is able to anticipate bad things before they surfaced. He calls Alibaba accounting hoax, Tesla may hit the wall. Out of so many calls some will come true always. Again there are much more reasons behind Enron collapse and Jim had not provided specific reasons before collapse apart from short selling Enron. He short sold quite a few in 2001, this one collapsed and others didn’t. There were bigger whistle blowers in Enron including their own internal audit head! But again no one was sure, or else Enron couldn’t have collapsed in first place. Boils down to hindsight post event.

(Shan) #124

interesting accounting by Jio (though not illegal!)

(Krishnaraj) #125

Superb investigation by Hindustan Times on how BoB undertook, with knowledge, money laundering operations in South Africa involving the Guptas and the SA President’s family.

These things can not be investigated in India unfortunately because the system is badly gamed to muzzle what is true. But lots to learn on how things are set-up to launder money by politicians, with the bank playing party. Favors are done to bank officials in return for overlooking illegal transactions.

Some snippet:

The link is here (Bank of Baroda’s South African misadventures)

(Parvin W) #126

Thanks so much for sharing the link!!

(Krishnaraj) #127

This time it’s PNB.

I think by now there are innumerable pieces published which more or less say that money was taken out against LCs; and never made good.

Economic Times had an article that pinned the blame on just two rogue employees who swindled the bank.

I think anyone who believes that it took just two low level employees to pull off 11,600 crores is the real sucker!

Reading through the article, what I gathered is that protocols (SWIFT / limits etc) were misused to get credit into PNB’s a/c from other banks, and the protocol bypassed banking software. Thus it was undetected. That does not seem right. A bank reconciliation statement would have shown thrown up red flags. For eg what was the corresponding credit entries to the debit entries for amounts received from various banks. If it is just a payable to counterparties which account does it ultimately go to? The CBS would have put it in some suspense a/c or some such place that would have alerted anyone even with basic familiarity. Did no supervisor, internal audit team, external audit notice such a breach, either large at once, or small but over long periods of time providing many opportunities for detection?

Doesn’t add up unless we assume that compliance / internal controls was compromised badly through rank and file.

Would like to get comments and thoughts from fellow investors.

(atul1082) #128

Swift only sends messages of LOU and based on Lou , the foreign branches of
Other banks sanctioned funds and transfered the same to nostro account of pnb ,from where, it was withdrawn by accused in connivance with pnb employees

(Krishnaraj) #129

So when funds were put into the nostro there is an entry on the debit side, there would be a corresponding entry on the credit side effectively saying a payable to Axis Bank (for instance). This would ultimately add up in some head…payable for what? Otherwise it will be kept in some a/c that would be an equivalent of saying “I don’t know where this should get posted, please decide” (suspense). So it should have alerted someone?

Nostro a/c cannot bypass Core Banking Software (CBS). If both the credit and the debit side escapes Core Banking, then I can understand that it will never get captured in accounts. But that’s not possible.

Here there would be a credit entry from nostro to the debit side into the Bank’s a/c of the accused. This leg would again be captured by CBS and maybe the limits were fudged here, but bank reconciliation will be fine.

(Gaurav Agarwal) #130

What is a Nostro Account?

Nostro account refers to an account that a bank holds in a foreign currency in another bank.

What is a LOU - Letter of Undertaking?

An LoU is an assurance given by one bank to another to meet a liability on behalf of a customer.

In this case one bank is Punjab National Bank, Another bank is Allahabad Bank etc and customer is Nirav Modi.

What is SWIFT?

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes.

Can you please corroborate?

(Krishnaraj) #131

I am inferring from a basic premise that a Core Banking Software, will have at the very least accounting integrity, removing any manual intervention, at almost all levels, certainly at basic levels. Or why have a software. Nostro a/c is a basic a/c, because every bank will have to have bank a/c with other banks. Overseas branches are also on CBS as mentioned by the article.

(phreak) #132

This is what they are claiming to have happened. CBS and the SWIFT transfer module should have been two systems loosely coupled. The employees must have bypassed the normal checks and balances by bypassing the CBS and invoking the SWIFT transfer directly by using whatever privileges they had. So essentially money has been created virtually and withdrawn really.

I don’t believe however that only two employees were involved. There should have been others higher up who were paid to look the other way. They can feign ignorance all they want but if a man’s salary depended on his not understanding something, he will never understand it.

(Krishnaraj) #133

That’s helpful.

But I have serious doubts if there is a debit entry into a Nostro a/c that can bypass the CBS (thus bypassing debit and credit). Money from Axis Bank, imo, should have hit this a/c and not bypassed it. If a separate a/c was created not linked to CBS (temporarily) for the sole purpose of siphoning then I doubt two rogue employees can do it and I doubt if Axis Bank would have remitted it without relevant authorisation.

I tried checking with a friend at Infy who was at a senior position at Finacle. He said wouldn’t have been possible with CBS in local branches, but was not sure of overseas branches.

(Gaurav Agarwal) #134

Gentleman here saying Core Banking talking to Swift is a routine thing.

(Deepak Venkatesh) #135


The reasoning being given by PNB is honestly ridiculous! If true it is really deplorable to know of their internal systems.

I used to be a product manager for Vostro Remittance in ICICI International Banking division in 2012. There is no way that a SWIFT MT103 can be triggered without appropriate entries in the record system here being CBS. It is even ridiculous that a couple of employees pull this off. As there is a maker - checker - approver concept.

Now if they are saying that only LOU was sent that means it could be sent as a non financial message something like a MT199. Yes this does not get recorded in CBS as it is like a text message and does not involve any debit/credit entry. But when funds flow into a Nostro it checks all boxes for RBI reporting and it is via an MT103. Yes, in a MT103 message wrong purpose of remittance can be made but that will easily get caught on audit. Banks are supposed to submit all these transactions to RBI at a frequent basis (I do not recall the frequency).

There is patch up work which has perhaps been done. This is my hunch. Too much of goof up.

But frankly I am not surprised I have seen PNB running their IMPS in 2013 from one desktop computer in a Kapashera branch (outskirts of Delhi) with 90% timeouts in transactions.


(Krishnaraj) #136

Here is a more detailed explanation from someone in the know (as claimed by a Bloomberg Columnist Andy Mukherjee).

And here is what he says:


(Dazzled beginner) #137

This article really explains it beautifully…for those of u to whom banking is out of “circle of competence”…

(ishikaghose) #138

Deepak Shenoy article - Very good read. Very well explained. Like the last line “industrialists have been the target of outrage. It’s time to look at banks as malicious players too, and to fix that rot.” Too right!

(Savishesh) #139

I see it as a general failure to accept when we are wrong and trying to hide it under the carpet.
You can see that happening with Government, public & private companies, banks and across spectrum. Somehow we fight too much and too long to prove right instead of accepting that we are wrong and correct our path.

Stock market is a phenomenal place in that respect - if you don’t accept soon that you are wrong, you end up paying a much higher cost !!

(Krishnaraj) #140

Here’s another instructive report on Fortis from InGovern Fortis-Healthcare-Repeat-of-Satyam.pdf (246.9 KB)

One technique used unfailingly and can be a test is advances of loans to wholly owned subsidiaries, which is then taken out by related parties. This allows companies to avoid taking shareholder approval.

An extension of abuse is to give loans and advances to unrelated parties initially, that then become related. 473 odd crores of cash deployed normally become related party during a period :grin:


A history of past transactions described in the report also indicates that money was possibly skimmed from Fortis.

This has also been carried out at Religare which share the same owners.

The other test that comes up is resignation of Independent Directors around the time key transactions happen. On multiple occasions many independent directors (ID) have resigned just about that day, well before their term. I had seen this earlier as well in Geodesic and Zicom. Normally IDs stay the course. This also tells us that possibly these items are sprung on IDs at the last minute, just at the Board Meetings, and not “well in advance”. Because if it were well in advance then these items would not have been presented to the Board. Typically what is presented to the Board is fait accompli. So imagine an ID sits through reads the Board agenda and usually will not be the guy to burp that something is wrong…so he decides to save just his skin by resigning.

(Krishnaraj) #141

I ihave always wanted to lay my hands on a forensic report. But none so far.

However, here’s on that shares the findings of a forensic audit. That of a listed company and its entity…Binani Industries and Binani Cement…the slugfest testing IBC laws.

Some notes:

  1. Binani Cement had made several “potentially related and/or connected customers and entities,” such as Saraswati Sales Pvt. Ltd (SSPL) and Rs 487.75 crore was outstanding on November 30, 2017. Of that, Rs 440,99 crore was outstanding beyond 365 days, suggesting that “continuous sales were made to SSPL despite the fact that corresponding payments were not made to the corporate debtor.”

  2. The investigations unearthed a potential relationship of Goldwell Sales Private Limited with SSPL and other Binani Group Companies “vide a common company in which the directors of Goldwell, SSPL and the Binani Group have held directorships.”

  3. Corporate advances to entities such as Apsara Vanijya Ltd were made for the purchase of land and mines that weren’t converted into fixed assets despite 1,400 to 1,700 days having passed since the conclusion of the transactions.

(Krishnaraj) #142

Here’s another instructional transaction, that shows how the inner world of banking works. Of course it’s worse than what you see, even in private banks. But then such anecdotes do not have the power of proof. Only hearsay - some true and some false.

Here Mr Deepak Kochchar, the husband of one of the most powerful women in the world gets equity and debt from the Dhoots who are also seeking loans from ICICI Bank. The argument is that the Dhoots facilitated the loan to Mr Kochchar so they can get the loan from ICICI. A conflict of interest. And in the eyes of law, a banker is a public servant. So a matter of public interest.

The Bank says that its credit process is devoid of any human intervention at any levels and denies any charge. So do the Dhoots and Mr Kochchar.

Here’s the piece in Indian Express:

This also carries rebuttals from ICICI Bank Chairman, Dhoot and Mr Kochchar’s firm. In fact the Chairman of ICICI Bank goes as far as to say:


He’s saying don’t say anything that projects us in poor light. Really? Even if you are really in poor light? These denials (including that of Dhoot and Mr Kochchar’s firm) betray more than they deny!

The original article giving great detail but not so well organized was published in June 2016 in Infralive here (ok, for some reason the document does not upload, but if you want it, please ping me)