White Collar Crimes and The Economy

Fraud has existed since time immemorial. It dates back to the year 300 B.C. when a Greek merchant named Hegestratos who took out a large insurance policy known as bottomry. However, now there are different types of frauds like Financial or Business frauds which includes the activities undertaken by an individual or company that are done in a dishonest or illegal manner which is ultimately designed to give an advantage to the perpetrating individual or company and economic offences which includes forgery, counterfeiting, offences against the legislation governing cheques etc.


Making it to the 21stto 21st century, now the capabilities of fraudsters have reached new heights, to the point where they now pose the risk of destabilising global economies and governments. Nobel prize-winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover: “The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.”

Nobel prize-winning economist George Akerlof has also demonstrated that failure to punish white-collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.


Increasing rates of the lurking risk have been dissuading global companies from investing in India, said a study. The study by Assocham and Grant Thornton said companies related to real estate and infrastructure sector (52%) are considered to be the most vulnerable to fraud-related incidents, followed by financial services (34%), telecom (5%), manufacturing (3%), electronics and IT/ ITeS (2%), Hospitality and Tourism (2%).


Moreover, last year SEBI banned Karvy Stock Broking Ltd for pledging clients’ shares and transferring Rs 1,096 crore worth of clients’ securities to its group company Karvy Realty Pvt Ltd without their consent. However, this incident symbolizes a worrying trend in the Indian economy: growing instances of fraud and economic crimes.


Large-scale bank frauds may dominate headlines but they are only one part of economic offences. Overall economic offences, too, are on the rise. One measure of this comes from the National Crime Records Bureau (NCRB). The 2017 report, released after a delay, suggests that the rate of economic crimes (as reported under the Indian Penal Code, or IPC) rose to 111.3 crimes per million people in 2017 from 110 in 2014. The development comes at a time when the Reserve Bank of India (RBI) has been increasingly nudging lenders to become more proactive in reporting frauds. It has also asked banks to examine unresolved NPAs worth more than Rs 50 crore from the fraud angle.


Instances of fraud have risen to 48 so far in FY20 from 25 in FY19, and 8 in FY18. SBI’s data include frauds with a value of at least Rs 100 crores. The number of frauds at State Bank of India, the country’s biggest mass-lender, has nearly trebled in the first seven months of this fiscal year in comparison with the whole of FY19, even as the regulator nudged high-street lenders to declare instances of fraud more quickly.


The rise in bank frauds is worrying, but it is important to note that the complete focus has been given on fraud detection in recent years which could also be responsible for the higher reporting of bank frauds in India. For instance, RBI has mandated that all non-performing assets (NPAs) with a value exceeding ₹50 crores should be examined for possible fraud, and a Central Fraud Registry has been established to track these cases.


According to one analysis, the rise in economic malfeasance in Jaipur is linked to the burst of the city’s real estate bubble around demonetization. Following Jaipur’s real estate crash, several dubious real estate players were forced into other activities such as chit funds and cooperative societies. This led to rising in chit fund and cooperative society frauds

More generally, frauds could worsen in times of slowdown. One theory suggests that as firms struggle for growth and reel under greater debts, they may be tempted to engage in fraudulent activity. If this is the case, then more than regulation, policies encouraging growth may be needed to address India’s fraud problem.


Corporate fraud schemes go beyond the scope of an employee's stated position and are marked by their complexity and economic impact on the business, other employees, and outside parties. Financial crime and other frauds have the capacity to destabilise global economies through its ability to steal increasingly large sums of money and change the path of history as fraudsters manipulate events for their own means. Economic offences often disrupt financial stability, curb economic growth, and even threaten national security. However, frauds are low today, especially after SEBI standardised norms for drafting power of attorney (PoA) agreements. However, it is important for investors to be vigilant, as unscrupulous brokers do find ways to subvert the system.

By: Stuti Gupta




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