Concern about funds raised for religious charities: David Stulb

Interview with head, Global Fraud Investigation and Dispute Practice, EY

Forensic audit is in the news in India, with banks, regulators and enforcement agencies using more of such services at a time when financial fraud seems to be rising. David Stulb, who heads the EY (earlier Ernst & Young) global forensic practice (Fraud Investigation & Dispute Services) was in India recently. A talk with Rajesh Bhayani:

In which areas are frauds rising globally, apart from cyber crimes?

At the global market, EY is focusing on two areas where we see increasing levels of fraud. The first is terrorist financing. There has been an increase in global terrorist attacks and these have to be financed somehow. In addition to the traditional methods, terrorists are innovatively using technology more and more, a serious global challenge.

The second is increased market volatility. Last August, we saw how volatility in the Chinese stock market led to tremors across global markets. Additionally, anticipated correction in the energy market, alongside sharp volatilities in currencies and a weak start to the year for equities, also demonstrates this. Whether this is due to market forces, financial fraud or related to terrorism cannot be known but certainly this sharp market volatility gives us a sense that something is wrong, which cannot be attributed solely to market forces.

When the present government came to power in India, hopes were raised that stern action would be taken on corruption, bribery and black money. These are serious issues and challenging from a forensic accounting point of view.

Among market frauds, where is the potential seen higher?

Recent corporate frauds such as Volkswagen and those involving bribes paid by corporates to government officials have created panic. Circumvention of financial sanctions and terrorist financing are also areas where market platforms can potentially be used.

In India, we know from our discussions with the Reserve Bank (RBI) and the Central Bureau of Investigation that there is a real concern regarding funds raised for religious charities and the end purpose of such funds. These agencies are carefully looking at this problem.

For example, my sense is that IS (Islamic State, the West Asian insurgency) is actually an organised crime syndicate, engaged in raising funds through oil theft, profit kidnapping and prostitution, and using financial channels to move this money around. They might also use religious charities to do this, a big headache for all governments – Asian governments are particularly concerned. Sharp movements and crashes in markets are pressure points where the potential threat of inflows or outflows of terrorist financing cannot be ruled out.

In the context of India, the month of March as a popular financial year-end is a time where companies might be tempted to window-dress balance sheets, show higher profits, hide non-performing assets and keep derivative losses opaque, for example.

Which India-specific fraud issues are forensic auditors in demand?

Classic banking frauds related to the rise of non-performing assets or frauds involving connivance of employees and their clients are on the rise. Investigators and regulators have frequently started using the services of forensic accountants to detect such fraud.

Similarly, we have seen a high level of bribery and corruption-related charges recently and a number of foreign clients have also required our forensic services. Therefore, it is no surprise that our India team has grown from 30 to 600 over the past four years, under Arpinder Singh’s leadership. This shows corporates in India are looking at tackling such issues and pro-actively managing their fraud risk frameworks.

The Indian government’s efforts to further increase the ease of doing business is seen in a positive manner. Transparency International notes this in its recent index, where India’s rating is equal to or better than other BRIC nations.

But, bad brains always stay ahead of investigators!

Yes but the Indian enforcement agencies I have come to know are investing in new technologies and will continue to invest much more. India has the best of the brains for software development and this can be used to detect frauds. I know RBI is providing training to their inspectors from a forensic perspective. Enforcement agencies are using voice analysis technology more and more during interviews, to provide a better indication as to whether people are hiding information or lying. The use of external forensic accounting experts has also increased. The Aadhaar card initiative is another important initiative which could help in the detection of fraud.

On the corporate front, I am amazed to see how fast technologies are evolving in India. Solutions to combat fraud and corruption are becoming increasingly automated. Today, EY’s forensic technology labs in Mumbai and Hyderabad support global companies through cyber forensics and forensic data analytics capability, which enables us to decipher fraud patterns and determine other areas of concern.

How are you addressing cyber crime?

You can judge we are taking it seriously from the fact that EY recently appointed a former director from the (US) Federal Bureau of Investigation, two former air force generals and has 1,200 professionals dedicated to forensic technology issues, including cyber crime. This is a serious global issue and although Indian companies are worried about it, their awareness and level of security for cyber crime is lower in comparison to global peers. Hence, India has emerged as a big market for us for all kinds of frauds. EY now has 10 partners and 600-plus professionals focusing on forensic work in India.

How secure is e-commerce, catching up fast in India, from that perspective?

A potential risk. E-commerce is in a nascent stage in India and the risk will have to be mitigated as it continues to grow. Since it connects a large chain of merchants, couriers, financiers and credit card companies, storage, etc, there is a high risk of fraud and for counterfeit products to be sold. There have also been instances of buyer-seller frauds, where participants from the other side take the benefits of discounts and cash-back.