This CEO and CA predicts bigger frauds likely in 2022 and governance is the key especially in startups

  • Banking frauds, business deceit, Ponzi Schemes have been around for quite some time, and now cybercrime is the latest one to join the business crime scenario.
  • These days multi-billion dollars’ worth of frauds are committed over a number of years, and it would stay that way if organizations do not have the mindset for good corporate governance.
  • For our Finance: 2022 and Beyond series powered by Qapita - CapTable and ESOP Management Platform, we spoke with the seasoned corporate leader and author Robin Banerjee, who is the managing director of Caprihans India Limited, one of the largest PVC film manufacturers in India.
  • In this article, he is going to share, how finance professionals can play a huge role in preventing cybercrime, the importance of good corporate governance especially in startups among others.

Your latest book ‘Corporate Frauds: Business Crimes Now Bigger, Broader and Bolder’ sheds light on the history of corporate frauds and people who cheat. Why do you say that business crimes are getting bigger and bolder nowadays?

Five, six years ago, you would have perhaps heard of $100 million fraud cases.

Now, perpetrators commit multi-billion dollars’ worth of frauds over a number of years without anyone noticing. Surprising indeed.

Just a few years back, many heard about ‘The Nirav Modi Fraud Case’.

Whether you were in India or abroad, you might have probably heard of his famous creation "Golconda Lotus Necklace”, it caused a worldwide sensation back in 2010. It was being worn by not only Kate Winslet, one of the biggest and the best Hollywood film stars, it was also being worn by Priyanka Chopra, former Miss World and the harbinger of fashion, perhaps in the modern world.

What did Nirav Modi do? The diamond merchant stole ₹11,000 crores, ($1.4 billion) from the banking system over the span of seven years. He did it by getting letters of credit without any surety and security whatsoever.

Is it not bigger and bolder?

Another example, shall we look at Goldman Sachs – probably the best investment bank in the world?

In 2009, the Malaysian government asked Goldman Sachs to raise $6 billion for social welfare projects, in exchange for a 10% commission of almost $600 Million. However, Goldman Sachs siphoned off $2.5 billion dollars.

Then in 2020, Goldman Sachs reached a $3 billion settlement with the Malaysian Government. Did they agree or disagree with the fraud? I am not getting into it. If there was a $3 billion settlement, I am sure there were some complications.

If renowned companies and banks like that can do such a thing with ease, I think disaster has struck humankind.

That is why effective corporate governance is vital in the prevention of major frauds.

In your book, you also mentioned that every year we lose about $450 billion to cybercrime. How can a CFO or a finance professional prevent that?

I believe the world is facing the two biggest risks right now - Cybercrime and Water scarcity.  

Let me talk about cybercrime.

As you mentioned, half a trillion dollars of wealth is lost due to cybercrime. Yes, half a trillion dollars.

Every system or device in the world is hackable. I know it sounds alarming, but that is the truth.

Now, as far as CFOs and finance communities are concerned, it is important to address the cybercrime issue.

There are two aspects that CFOs need to look into; internal controls and external controls.

Internal controls would focus on the possibility of internal email hacks and data leaks, to name but a few. Therefore, protect internal data, money and processes through internal controls such as multi-layered firewalls and state-of-the-art systems.

Globally, most Boards do not appreciate the risk of cybercrimes hitting internal data and internal control risks.  

Often, the finance team only considers internal controls, but trust me, it is very important to take care of the customer through external controls as well. Protect the customers’ data and financial information when they interact with your company’s website.

Besides the above-mentioned procedures, there are three other pointers to keep in mind:

  • Sometimes in order to cut costs, many companies stay in their old systems and do not upgrade to the latest version of the technology. Never compromise on the quality of technology you are adopting.
  • Take Cyber Security Insurance. It will cover a lot from lawyer fees, forensic audit fees, and so on. Even if it is a little expensive, it is worth it.
  • In addition, if I may add the third one - hire an ethical hacker. Many companies have benefitted from it.

Web 3.0, Blockchain, cryptocurrency have caused an uproar in the world. What should finance professionals keep in mind when it comes to these technologies?

Blockchain is the technology of the future, to put it simply.

It is a shared database that maintains records of transactions between ten or twelve separate bodies of debits and credits, a self-auditing online system of recording transactions.

This concept looks very simple, but building businesses on the blockchain is not fully commercialized yet.

However, some geniuses took advantage and built 'Cryptocurrency’. 

They say cryptocurrency is a currency, I think not. Currency stores value, is portable and provides value stability. Cryptocurrency provides none. Can you carry crypto in your wallet to have a cup of coffee? The answer is no.

Blockchain as a technology is wonderful, but cryptocurrency is speculative in nature. They are largely fraudulent in my view as it stands without any government intervention, rules and regulations. It also lacks transparency.

If we talk about India, The Reserve Bank of India clearly declared that there should be regulation around crypto.

The government or politicians all over the world are not able to conclude on how to regulate these virtual currencies since all of them are digital.

Many people have already invested trillions of dollars in this. Now as soon as scammers take advantage, all of that wealth will go away in an instance and this could actually cause riots on the streets.

Therefore, I think they need to bring some order into the madness. The first step would be to probably charge taxes on it.

In India, we should levy goods and services tax (GST) on it and whenever people earn profits from cryptocurrency, they have to pay income tax.

Infact while presenting Budget 2022-23, Finance Minister Nirmala Sitharaman said that the transfer of digital assets, including crypto and non-fungible tokens (NFTs), will be subject to a 30% tax. Furthermore, all transfers of such assets will be subject to a 1% tax deducted at source (TDS).

The moment they start paying taxes, the currency becomes auditable. We would also get to know all the details as to who is buying, and who is selling.  

Right now, we are in the era of startups with India having more than 70 unicorns to date. Is there a potential of financial fraud with such unreasonable valuations?

Unfortunately, today there are more investors chasing a lesser number of good startups or the so-called ‘good ideas’.

As long as there is more demand than supply - the supply of good startups is lesser than the demand. There is a scramble among the investors trying to invest in the so-called ‘good idea startups’. Therefore, they overvalue startups.

Now, this overvaluation leads to the second issue – greed.

These startups are generally 3 to 4 years old and their business is suddenly worth a billion-dollar. They probably even do not know how many zeroes one billion has!

Overnight, they go from rags to riches and lose their senses. It is not just them, many of us would probably act the same way if success suddenly hits us.

Another important issue is that these startups are not public companies. Hence, scammers might falsify their accounts.  

If I may say, this mixture of negativities is an ideal combination for potential fraud.

And please do not be surprised that many of the startups, who have blue, green and yellow eyes in front of everyone, could blow up sooner than later.

The startup ecosystem in India and the world is remarkable for sure and good ideas must receive funding. Most of them are fine. The black sheep amongst them is the problem.

Therefore, I would recommend that if you were a retail investor; allocate no more than 10% to 15% of your wealth to startup investments. In addition, do not be in a hurry to invest in the so-called “good options”.

You cannot compare your risk appetite to that of a venture capitalist. They know right from the start that out of their 10 investments, only one or two will make it big!

Lastly, what are your predictions for 2022 concerning corporate fraud and the global economy?  

Primarily, I would say that please do not be surprised if you find things are getting out of hand in 2022 and beyond. The imprisonment of many entrepreneurs does not mean that fraud and corruption are coming to an end. It could become much worse.

With regard to my economic predictions for 2022, I am extremely bullish on India. I personally believe that India will certainly emerge as one of the strongest performing countries in the world.

We may criticize the government, the education and everything else, but India is still the best place for doing business as of now, in my opinion.

I believe that India will do better in several sectors. Because of its large population, India’s GDP per capita is growing, they have the desire to perform better and of course, we are the third-largest economy in the world, at least by GDP (PPP) terms.

Because of the current pandemic, people have not traveled properly. They have not spent that much on consumer goods, which created a lot of pent-up demand. Maybe three to four months down the line in 2022 (once the Covid scenario eases); this pent-up demand is going to increase consumption in the consumer goods markets.

The world is also going to do reasonably well in tourism, infrastructure, real estate, and pharmaceutical, among other areas.

I am bullish on the global economic scenario too.

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