Due diligence not applied in Reebok 2010 probe: Assocham

Ved Jain, chairman, Assocham and former President, ICAI, say that whenever a fraud happen all those issues come up and then there are allegations against the people who are involved in the management, accounting, auditing and of course the promoters as is the case here.

Below is the edited transcript of his interview.

Q: Reebok or Adidas, which is the parent company commissioned KPMGs forensic arm in India to do a study in 2010. The report finally didn’t prove fraudulent behaviour either on part of Prem or Bhagat, but complete silence on the part of Adidas or Reebok India in terms of the allegations that they have now gone public with. No qualifications by the auditors, we don’t even know if this report was or was not shared with the statutory auditors of the company, what do you make of it?
A: Whenever a fraud happen all those issues come up and then there are allegations against the people who are involved in the management, accounting, auditing and of course the promoters as is the case here. Issue which needs to be seen is the nature of fraud and the people involved.
This issue came to the light in the year 2010 to the parent company and they had appointed special auditor to carry out the assignment and the report came up. The issue is that, what were the role assigned and vis-à-vis? What the fraud has now come out? In case it turns out yes, the role assigned and the fraud, which has come out and it could have been deducted in the assignment then there maybe an issue. It is going to be a fraud probably committed by the people who are looking after the affairs of a company. There is an allegation that the people who are the helm of affair in India, they manipulated the stock, warehouses, franchisees all those issues have come up.

Q: KPMG as part of its forensic audit seems to have unearthed said that there was no evidence "to prove allegations of possible fraudulent behaviour". Did KPMG not do a good enough job of the due diligence? Was there evidence that suddenly came up that KPMG wasn’t aware of and through all of this there has been no qualification, no communication from Rebook India or Adidas to the public about the fact that they suspected that there was alleged wrong doing?
A: As you now pointed out that an auditor has been assigned a particular assignment to verify the wrongdoing. Now, the issue is, the assignment was given and in that assignment due diligence was expected from a professional they could not unearth the scam. I believe that there are not enough evidence that due diligence have been applied.

Police File Chargesheet against 2 HSBC Ex-staffers in 1.5cr Fraud

EOW has accused the fraudsters of duping the bank’s client of cash and shares

Source: The Economic Times (Mumbai), Nihar Gokhale, May 30 2012 

The Economic Offences Wing, or EOW, of the Mumbai police has filed a chargesheet against two former relationship managers of HSBC accusing them of duping a client of cash and shares worth nearly . 1.5 crore in 2009 and 2010.

 

The accused, Ram Avtar Jangid, 31, and Veerendra Soni, 25, were working with HSBC’s Fort branch in Mumbai where the client had an account. Jangid, who was the client’s relationship manager, is absconding, while Soni was arrested in January and is out on bail after investigations were complete, said EOW officials.

The EOW had taken up the case in January after Lata Bhandari, daughter of the client Narasimha Bakrabail Adappa, 90, noticed irregularities in the account, said the chargesheet.

The irregularities happened three years after Jangid was assigned to handle Adappa’s ac

count in 2006, according to the complaint. Between 2009 and 2010, Jangid allegedly took Adappa’s signatures on various delivery slips, cheques and forms on the pretext of buying or selling stocks and mutual fund units. But he used the signatures to misappropriate the securities for personal gains, according to the complaint.

The chargesheet alleged that on various occasions, when Adappa gave instructions to sell his stocks, Jangid would take his signature on blank delivery slips and instead transfer the shares into Soni’s account through offmarket transactions.

Jangid also allegedly created overdraft facilities against Adappa’s account when Adappa made large cash withdrawals, giving the impression that the proceeds from the stock sales were credited. To clear the overdraft, Jangid sold mutual funds units held by Adappa by again taking his signatures on blank slips and using a pretext of shifting to a different fund, the chargesheet alleged.

Using such signatures on blank documents, Jangid eventually opened a trading account in Adappa’s name with the Fort branch of Hem Securities, a Jaipur-based brokerage firm. Soni, who had left HSBC in the meantime, was a sub-broker with Hem and allegedly executed the transactions in Adappa’s account and pocketed gains.

Jangid also allegedly transferred . 2 lakh from Adappa’s account to Soni’s bank account by persuading him to write a blank cheque, the chargesheet said.

Bhandari, according to the chargesheet, noticed the irregularities in the account in September 2010 and approached HSBC, which then fired Jangid. The FIR was subsequently lodged, naming Jangid, Soni, Hem Securities and HSBC.

“Soni was let out on bail after investigations into his role in the crime were complete. We have filed the chargesheet with the additional metropolitan magistrate 19th court in Mumbai,” Arvind Wadhankar, senior police inspector and investigating officer in the case, told ET.

HSBC and Hem Securities have not been named in the EOW’s chargesheet. In an e-mail response, an HSBC spokesperson said, “The bank does not comment on internal matters, particularly those relating to its customers and/ or employees.”

The spokesperson also said, “HSBC follows local regulations and international best practices in the conduct of its business. Customer transactions are executed in accordance with customer’s instructions. Customer grievances brought to HSBC’s attention are examined internally and where information is sought by regulators/ authorities, the same is duly furnished.”

A Hem Securities spokesperson said, “BN Adappa had also filed an arbitration notice with BSE, which was heard several times and eventually unconditionally withdrawn in February 2012. EOW has only recorded our statement and we have not heard from them since then. We are being unnecessarily dragged to different forums in this case. There is still a debit of . 5.4 lakh in Adappa’s account and there is a case pending in a Jaipur court for the recovery of this amount; the case was filed much before the client approached any other forum. Also, Soni was not a subbroker with Hem.”

US sees biggest law firm collapse

100-Yr-Old Dewey Files For Bankruptcy As Partners Flee, Debt Surges

(Source: The Times of India (Mumbai), May 30, 2012

Dewey & LeBoeuf, the law firm crippled by financial miscues and partner defections, filed for bankruptcy on Monday night, punctuating the largest law firm collapse in United States history. 

The filing, made in federal bankruptcy court in Manhattan, is the final chapter in a turbulent period for Dewey, which came apart after disappointing profits and prodigious debt forced it to slash partners’ salaries. The partners, already owed millions from previous years, grew concerned over the firm’s finances and their ability to get paid. A partner exodus destroyed the firm.

Dewey announced Monday that the firm planned to liquidate. It said it would ask about 90 employees to remain on staff to assist in the winddown of its business. The firm has $315 million in liabilities, of which $225 million is owed to its banks, according to the court filings. Other creditors include the firm’s landlords and former partners owed money.

“This is a very sad day for the legal profession,” said Richard J. Holwell, a former federal judge in Manhattan now in private practice.

“Dewey is a fabled firm with a lot of great lawyers and a demise of this magnitude is unprecedented"
With historical roots stretching back a century, Dewey — the product of a 2007 merger between Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae — employed at its peak more than 2,500 people, including roughly 1,400 lawyers in 26 offices across the globe.
   
Dewey’s dissolution has generated a debate across the legal profession: Was its failure an isolated event or emblematic of bigger problems in the corporate-law industry?
   
Many observers say the root causes of Dewey’s fall are not unique. Several of the largest firms have adopted business strategies that Dewey embraced: unfettered growth, often through mergers; the aggressive poaching of lawyers from rivals by offering outsize pay packages; and a widening spread between the salaries of the firm’s top partners and its most junior ones.
   
These trends, they say, have destroyed the fabric of a law firm partnership, where a shared sense of purpose once created willingness to weather difficult times. Many large firms have discarded the traditional notions of partnership — loyalty, collegiality, a sense of equality — and instead transformed themselves into bottom-line, profit-maximizing businesses.

Fraud risk in India

Source: The Hindu Business Line, May 27, 2012

According to the Association of Certified Fraud Examiners's 2012 Report to the Nations, the impact of occupational fraud is as below:

The typical organisation loses 5 per cent of its revenues each year.

The median loss caused by occupational fraud cases was $140,000. More than one-fifth of these cases caused losses of at least $1 million.

Nearly half of the victim organisations do not recover any of the losses caused by fraud.

German sportswear maker Adidas announced commercial irregularities of about €125 million in its India operations, and the wrongdoing at Satyam Computers resulted in diminishing India's image. These incidences show that Indian companies are vulnerable to frauds of large magnitude and which remain undetected for a long period of time.

A Planning Commission study in 2005 found that for every rupee the Government spends on the targeted public distribution system, only 27 paise reach the poor.

It is amply clear that occupational frauds are increasingly common these days and fraud is becoming an inherent risk for organisations.

Prevention through a proper tone at the top, and a focus on ethics and values are clearly more preferable than detection of fraud.

Missed lessons from Barings

JP Morgan CEO Mr Jamie Dimon recently announced that the firm's handling of trading in synthetic credit securities was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”.

We seem to have forgotten the lessons learnt from the collapse of Barings Bank. Investigations by the UK's House of Commons emphasised that:

Management teams have a duty to understand fully the business they manage;

Responsibility for each business activity has to be clearly established and communicated;

Clear segregation of duties is fundamental to any effective control system;

Relevant internal controls, including independent risk management, have to be established for all business activities;

Top management and audit committee have to ensure that significant weaknesses, identified to them by internal audit or otherwise, are resolved quickly.

The failings at Barings were not a consequence of the complexity of the business, but primarily a failure on the part of a number of individuals to do their jobs properly.

At Barings, neither the top management nor the relevant members of management had a satisfactory understanding of the business that was purported to be transacted, despite the significant profits that were reported and the funding required.

2G auction: the wish-list

Telecom generates revenue of about Rs 50,000 crore per quarter and contributes about 3 per cent to the Indian GDP. The country's GDP has been falling in the past few years and needs to be shored up. According to the World Bank, a 10 per cent increase in mobile penetration drives a 0.6 per cent increase in a developed country's GDP and a 0.81 per cent increase in a developing country's GDP.

The European 3G experience more than a decade ago clearly showed that auctions designed to maximise revenue (UK auctions raised £22.5 billion and Germany around £30 billion) hamper the development of the telecom sector and the socioeconomic benefits that mobile phones deliver to the public. Within a year of 3G auction, 100,000 jobs were lost in telecoms support and development across Europe. Many operators were forced to write off billions of dollars in 3G investments.

The 3G offtake in the country is very slow and much below expectations. The price (Rs 50,900 crore) paid for 3G auctions in India has already strained the balance sheets of operators.

In line with the National Telecom Policy, the Government should provide spectrum at a reasonable price to operators. Consider the following:

Set the reserve price of spectrum auction to zero and let the market forces determine the spectrum price;

Auction at least spectrum equal to cancelled licences in each service area;

Auction based on revenue-share model rather than fixed price;

Allow mergers between non-performing and performing players to facilitate consolidation in the sector, which would ensure efficient and effective utilisation of spectrum (as is done in the banking sector);

Do not restrict the auction to only 5 MHz, as only one operator will get it, forcing others to shut shop;

Benchmark with other Asian economies such as China, Malaysia, Sri Lanka and Pakistan.

Corporate fraud: Most common threats and how it's done

Source: The Economic Times, By Tina Edwin, May 27 2012

Fraud is back in news. And it's here in all its con-glory. Think secret warehouses, stolen goods, rigged records and conniving men in power.

The Adidas scandal has them all: a readymade script for a corporate fraud blockbuster. But according to consulting firm Ernst and Young, just because it has not been in the news doesn't mean corporate fraud had taken a break. It was always lurking around in lesser headline-worthy ways.

In fact, according to the latest E&Y survey, three out of five Indian firms have been victims of fraud in the past year. That might include the one you are working for. The reason companies don't talk about it is that it shows them in poor light. Who wants stakeholders to know about illicit deals, siphoning off funds and information leaks?

But silence doesn't change the truth. Corporate fraud is on the rise: losses are mounting, the types of con jobs are multiplying and the profile of fraudsters is changing. The new face of fraud has most of India Inc stumped. How do companies prepare for an attack that has no playbook?

"It takes as much as 12 months or more to detect a fraud. Companies believed that internal audits and manual process controls are adequate to prevent one," says Neeta Potnis, senior director and national leader, forensic and dispute services, Deloitte India.

Experts insist on strategies and systems that make companies less vulnerable to fraud. But to go one up on the perpetrators, companies must be aware of the different ways of conning. ET on Sunday spoke to forensic and frauds specialists to collate this list of most common threats. And discover that old flimflam and new technology are set to give gumshoes many sleepless nights.

Tinkering with Procurement Bills

Possible fraudsters: Mostly junior to middle management officials

If there is something that tests an employee's integrity the most, it is a job in the supply chain department. Procurement is seen as one of the most vulnerable areas by companies. Procurement frauds could take the form of kickbacks from a vendor for orders, fake transactions or manipulating of quotations.

"Procurement teams get kickbacks to place orders for almost everything, from low-value purchases such as stationary to heavy equipment," says Arpinder Singh, partner and national director, fraud investigation and dispute services at Ernst and Young. "Instances of fraud always rise when there is a third party touch point because employees get influenced by the opportunity," says Rohit Mahajan, executive director, forensic services, KPMG.

Procurement frauds can involve goods or services. For instance, a company using a labour contractor can inflate the number of workers hired through him. Another way is to bring in a vendor instead of dealing directly with the original supplier or a manufacturer. The vendor marks up the price of supplies and shares a part of the mark-up with the procurement department.


Bribing for Special Favours

Possible fraudsters: Everyone

Most people don't think twice before paying petty bribes. For many companies, it is inherent in the nature of business they operate in. Employees at all management levels may be involved, including people right at the top. Even the army chief Gen VK Singh was not spared by the representatives of Tatra.

While in that instance, bribes were allegedly offered for additional orders for trucks, it can also be offered to gain regulatory clearances, to speed up government processes or to win new clients. Petty government officials are regularly bribed to access confidential government papers or competitive information of another company.

"There is significant lack of awareness about some of the anti-corruption and bribery laws in the country and elsewhere," notes E&Y's Singh. Companies with foreign exposure can get very badly hurt by charges of bribery because of laws such as the Foreign Corrupt Practices Act in the US.


Creating Fictitious Accounts

Possible fraudsters: Trusted employees

This one's an old trick: diverting money by opening bank accounts, often in cooperative banks, or by raising false invoices. Employees even conspire with outsiders such as vendors and the security providers to pull it off. This fraud may involve manipulating cash books.

Though large companies scrutinise transactions carefully, they are also susceptible to these frauds. Take the case of Wipro. In 2009, the IT major discovered an employee had been transferring money from Wipro's bank accounts to his personal account during several transactions over a period of three years.

"Many times, frauds take place when monitoring controls fail to detect deviations from set processes. Long serving employees who are familiar with the weaknesses in processes may be involved," says Deloitte's Potnis. For instance, in a chemicals company, an old employee who held an important position at a factory located away from the head office was found to be embezzling funds.

For years he carried on the fraud using vouchers in the name of regular and fake suppliers. The cheques issued by the company against these vouchers were encashed at a cooperative bank. The company sniffed a fraud when vendors complained of delayed payments.

Fudging Accounts

Possible fraudsters: Senior management executives

It's the return of the biggest menace of all. Long ago, family-run companies were known to maintain two set of books of accounts, one for public consumption and another, which gave a true picture of the company's performance, for the promoters.

Today, there is a new motivation for cooking accounts. "Now that professional managers' compensation packages are being linked to business and stock performance, the senior management is under high pressure to deliver good results," says KPMG's Mahajan. So the temptation to fudge accounts to state higher profits is on the rise. Satyam is a classic example of accounting fraud.

More recently, private equity investors Bain Capital and TPG Capital have accused Lilliput Kidswear of accounting fraud. They suspect the company has overstated its sales and profit.

There are multiple ways that accounts of a company can be fudged. Revenues that are to accrue in future can be shown as current period's revenue, fake sales can be registered only to be reversed next year, lower provisions may be made for future liabilities such as gratuity and provident fund and relevant accounting principles may not be fully followed.


Stealing Data

Possible fraudsters: Everyone

As technology makes it easier for ordinary employees to filch sensitive information, cyber crime involving data theft has become one of the top four economic crimes faced by companies. Sectors most vulnerable to the risk include financial services companies, banks, IT/ITeS companies and those creating intellectual property such as pharmaceutical companies.

Yet, a PricewaterhouseCoopers survey late last year found that senior management does not regularly review the threat of cyber crime. Data theft can take place at any level. A sales executive taking up a job with competitor may steal confidential sales and marketing data by copying it onto a pen drive or emailing it to a personal email id.

An employee in a bank can steal confidential customer information and sell it to third parties and an HR executive can take data on employees' remuneration to a competitor. Similarly, a scientist or designer can access information on products under development from a company. Tech savvy employees have also been known to hack into companies' servers to steal strategic data.  

Other frauds

There is no way to draw up a comprehensive list of the types of frauds: they are limited only by the imagination of scammers. For instance, tax deducted at source from salaries may not be deposited with the tax department. This type of fraud falls under the regulatory non-compliance category.

Another kind of fraud companies now face relates to conflict of interest. For instance, an HR head of a company may run a recruitment agency on the side and hire most of the company employees through his agency. So unless companies build pre-emptive policies and robust detection mechanisms, expect Adidas-like stories to keep coming in.

 

28% Indian executives okay with bribery: Study

Source: The Economic Times, May 24,2012

MUMBAI: Corporate India tops the global league when it comes to bribing and financial frauds, with 28 per cent of top executives being keen on making cash payments to win new businesses or retain existing clients, says a survey by leading global consultancy Ernst & Young (E&Y).

The top executives are also not bothered about the consequences of future prosecution for their fraudulent acts, as they are under tremendous board pressure to perform, says the survey.

The findings are interesting as they come at a time when India Inc as well as the public have been for long painting the entire political class "corrupt".

"An alarming 28 per cent of top executives from corporate India (against a global average of 15 per cent, which is up from 9 per cent in 2010) polled are willing to make cash payments to win or retain business," the survey says.

The survey findings add that "as much as 16 per cent of respondents from the country, against a global average of five per cent, feel that it is justified to mis-state financial performance to help their business survive."

Given the extensive media coverage, it is not surprising that fraud, bribery and corruption are seen as significant risks here, with 70 per cent of respondents (against global average of 39 per cent) opining that bribery and corruption are widespread in the country.

Releasing the survey finding, E&Y India partner and national director for fraud investigation & dispute services, Arpinder Singh said: "Although the country still remains a favoured investment destination, the survey reveals that the market still faces the challenge of compromised ethical behaviour justified by the offenders as survival in a highly competitive and fast growing market.

"As domestic enforcement activity is building strength, increased focus on mitigating frauds, bribery and corruption risk has been matched by growing regulatory activity, enhanced media activism and more severe penalties."

The survey further says as the market continues extensive use of cash to make payments, organisations must ensure that governance processes are embedded at the local level.

"With fraud, bribery and corruption risk so high on the domestic and international agenda, it is essential that companies with a presence in India actively address these risks," Singh said.

For a growing number of executives, the pressure to meet revenue growth targets is undermining their commitment to comply with policies and the law. The competitive landscape continues to be distorted by unethical conduct.

Over a third of the respondents believe corruption is widespread and this is perceived to be significantly higher in rapid-growth markets (in Brazil it is 84 per cent, in India 70 per cent, Indonesia 72 per cent).

Financial statement frauds remain an important risk across many jurisdictions. Indeed, 15 per cent of respondents in far-east Asia think that financial performance mis-statement can be justified.

Sometimes The Best Way To Beat The Competition Is To Cheat

Sometimes the best way to beat the competition is to cheat.

Source: Forbes, May 23 2012

According to a survey by Ernst & Young released Wednesday, a growing number of chief financial officers are willing to accept bribes and pay for contracts to keep business.

India is the worst of them all, with nearly a third of Indian executives willing to accept bribes.

Even as government’s around the world try to regulate against fraud and build an open, transparent market, top executives continue to express a willingness to break the law. Or, at the very least, believe their competitors are behaving unethically in the market.

E&Y’s 2012 Global Fraud Survey showed that 15% of senior executives polled at multinational companies said that they were actually willing to make cash payments to win or retain business. It’s low. But it is up from 9% in 2010.

The reason? Market pressures. Not regulation.

For a growing number of executives, it was the pressure to meet revenue growth targets that was undermining their commitment to comply with policies and the law. The competitive landscape continues to be distorted by unethical conduct. More than one-third of the respondents believe corruption is widespread in their country and this is perceived to be significantly higher in emerging markets.

In Brazil, corruption and bribery at the corporate level is considered common place by a whopping 84% of survey participants; Indonesia: 72% and in Turkey: 52%.

Perception is often greater than reality. But the facts show that fraud is on the rise, according to E&Y’s 32 page report. Financial statement fraud remains an important risk across many jurisdictions. Around 15% of respondents in Far East Asia think that financial performance misstatement can even be justified.

CFOs are the one’s signing off on those statements. They are also among the most influential executives reporting to the board on fraud, bribery and corruption issues. The results from the nearly 400 CFOs surveyed, however, suggest that a concerning minority could be part of the problem.

Fifteen percent of the CFOs surveyed said they would be willing to make cash payments to win business and 4% said they would be willing to misstate financial performance. This group of executives is not large, but given their responsibility, they represent a huge risk to their businesses and their boards.

Businesses continue to face a challenging economic environment. Driven by market uncertainties and declining economic growth forecasts, many companies are struggling to maintain margins. With fewer remaining opportunities for cost-cutting, many businesses are now focused on expanding into foreign markets, where bribery and corruption is just how things get done. Multinationals that come from highly litigious societies find it tempting to skirt the law, with little ramifications.

The findings in what was E&Y’s largest ever fraud survey are a cause for concern. They suggest that bribery, corruption and fraud remain widespread and the market pressure is the main reason. At the same time, many countries are strengthening their enforcement regimes. The U.K. has the new Anti-Bribery Act, and India, the worst offender, is trying to pass a range of proposed anti-bribery/anti-corruption laws during an election year there.

More than 1,700 executives across 43 countries, including CFOs and heads of legal, compliance and internal audit, were surveyed for their views on fraud, bribery and corruption.

Plugging Leaks

Economic crime costs Sri Lanka billions of rupees each year

Source: Lanka Business Online, May 24.05.2012

May 23, 2012 (LBO) -- Fraudulent practices across business activities has risen over the past two-years in Sri Lanka, with billions of rupees lost each year to economic crime, a new study showed.

Some 83 percent of those surveyed by international accounting firm, KPMG Sri Lanka, felt incidences of fraud has increased over the last two-years.

While the survey, which was done between 2011/12, was unable to quantify the total economic loss, KPMG said the highest fraud related loss in excess of 3.0 billion rupees was discovered in the industrial sector. The lowest loss of 2.5 billion rupees came from the agriculture sector.

"Fraud is defined as a financial loss as a result of a deceit,” explained Deepankar Sanwalka, Partner and Head Risk Consultancy at KPMG India.

Most frauds in Sri Lanka were related to financial services, intellectual property, bribery and corruption and diversion of funds and goods.

Sanwalka said the fraudulent patterns were similar to India, but going forward technology related crimes will emerge the largest segment in Sri Lanka.

“Fraud is all about making money. Certain types of technology crimes are all related to intellectual property. If intellectual property is valuable, fraud follows where the money is,” said Sanwalka.

Those responded said top and mid-management were aware that most frauds happen within the firm.

“The survey findings, came as a surprise to me, being a senior in the trade,” KPMG Sri Lanka’s Managing Partner Reyaz Mihular told businessmen during the report’s launch.

“Awareness of fraud is always the first step towards managing the issue. It’s the first step towards beginning a new era of responsibility in Sri Lankan society,” said Mihular, a 25-year-old industry veteran.
The survey, which was the first in Sri Lanka, was based on a questionnaire sent out to 400 public and private sector organisations. KPMG targeted organisations whose annual turnover ranged between 50 million to 10 billion rupees and had staff strength between 100-5,000.

The survey attracted 90 respondents, representing 102 industry segments. Their responses were classified into agriculture, consumer markets, financial services, NGO, information, communication and entertainment, industrial and other areas.

Some 70 percent of respondents admitted to having encountered fraud in their organisations, said Jagath Perera, who heads KPMG Sri Lanka’s Risk Consultancy unit.

Firms reported fraudulent activities through:
- whistle blowing hotlines (nine-percent),
- internal and statutory audits (36 percent),
- anonymous callers/letters (17 percent),
- accidental(15 percent),
- IT controls (six percent),
- data analytics (17 percent).
Some 44 percent of economic crimes were reported from the supply chain areas, 35 percent came from bribery and kickbacks, while 27 percent felt financial statements were altered to inflate performance.

The KPMG survey showed that companies were reluctant to disclose a fraudulent activity as it erodes stakeholder confidence. Firms also face a dilemma of whether to seek legal redress or limit the potential fallout through a public notice.

Those caught in the act, are sometimes allowed to repay the loss and let-off lightly through a voluntary resignation.

But Perera felt a zero-tolerance policy is the best option, if a company or industry is keen to adopt transparency and good governance.

While zero-tolerance was practiced when it came to middle or lower management, it was not so when the perpetrators were in senior management.

“If you don’t make an example of people, then people don’t know the seriousness of creating the fraud. Make sure the grapevine knows why people were allowed to go. Idea is to have zero tolerance of fraud,” Perera said

‘Gupta threw away his duties’

Source: The Times of India, May 23, 2012

Rajat Gupta, who was a director at Goldman Sachs Group, “threw away his duties” to the company when he tipped hedge-fund co-founder Raj Rajaratnam to news that the bank would get a $5-billion investment, a prosecutor told jurors. At the start of Gupta’s insider-trading trial, assistant US attorney Reed Brodsky told jurors that Gupta broke the law when, immediately after a Goldman Sachs board meeting on September 23, 2008, he informed Rajaratnam that Warren Buffett’s Berkshire Hathaway would invest $5 billion in the firm. Rajaratnam, Gupta’s friend and cofounder of Galleon Group, traded on the tip, Brodsky said.

In the defense opening on Monday in Manhattan federal court, attorney Gary Naftalis told jurors that Gupta was “innocent of the allegations” and said that the government has the “wrong man on trial”.
Brodsky said, “Gupta threw away his duties, he threw away his responsibilities, and he broke the law at the time the company was in crisis. He used those secrets to help his friend, and Raj Rajaratnam sold his Goldman stock and made nearly a million dollars from Gupta’s tip.” 

Naftalis said of his client that “it defies common sense that in the twilight of an illustrious life, he’d decide knowingly, willfully and deliberately to suddenly become a criminal and do it for no benefit.”
The lawyer said even if there is evidence of leaks from Goldman Sachs, the tips didn’t come from Gupta.

“There may be a crime her but Rajat Gupta had nothing to do with it,” he said. “You’ve got the wrong man on trial here. The evidence will show that Raj Rajaratnam had sources all Gamble (P&G) board.
   
The US alleges he passed insider tips to Rajaratnam in a conspiracy that lasted from 2007 to January 2009. Rajaratnam is serving an 11-year sentence for insider trading. Prosecutors say Gupta, 63, gave Rajaratnam material, nonpublic information about New York-based Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer-products company.

FROM BOARDROOM TO COURTROOM WHAT IS HE ACCUSED OF?
Passing on information to Galleon hedge fund founder Rajaratnam about Warren Buffett-led Berkshire Hathaway’s $5bn investment in Goldman Sachs after attending a Goldman board meeting on Sept 23, 2008
Passing details of Goldman’s earnings in Q1 of 2007 and Q4 of 2008
Giving secret info about P&G’s 2008 sale of its Folgers Coffee unit to J M Smucker
The leaks are said have helped generate millions of dollars in profits for Galleon

THE CHARGES Gupta is charged with one count of conspiracy and five counts of securities fraud, which carries a maximum 20-year prison sentence

THE EVIDENCE Wiretaps of Gupta’s conversations with Rajaratnam, which ultimately nailed the Galleon founder who has been sentenced to 20 years in prison

FATE IN HANDS OF 12 The prosecution and the defence has settled on a jury of four men and eight women, which includes a freelance beauty consultant, a fourth-grade teacher and a psychiatric nurse, a marketing manager, an executive at a nonprofit and a physician’s assistant over town, he had other sources at Goldman Sachs.” Gupta, who ran consulting firm McKinsey & Co from 1994 to 2003, also sat on the Procter &

Indian origin woman guilty in insider trading case

Washington: A former Yahoo executive and an Indian-American hedge fund manager have pleaded guilty to insider trading charges that involved exchanging confidential information on a deal between Yahoo and Microsoft for personal gains.
   
US Securities and Exchange Commission (SEC) on Monday alleged that Robert W Kwok, who was then a Yahoo’s senior director of business management, told Indian-American Reema D Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Based on Kwok’s illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000, SEC alleged. The SEC further alleged that a year earlier, the roles were reversed. 
   
Shah, 40, tipped Kwok with material non-public information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754. Kwok and Shah, who live in California, have agreed to settle the SEC’s charges.

Reebok alleges Rs 8,700cr fraud by sacked MD, COO

Source: The Times of India, 23.05.12

GURGAON: Reebok India on Tuesday lodged a first information report (FIR) with Gurgaon Police alleging that its former managing director Subhinder Singh Prem and COO Vishnu Bhagat had "stolen" products by setting up "secret warehouses", fudged accounts and indulged in fictitious sales to cause a Rs 8,700 crore dent to the company.

If the allegations are found correct, this would be the second biggest corporate scandal after Satyam, where Ramalinga Raju is accused of orchestrating a Rs 14,000 crore fraud.

In regulatory filings on May 1, Adidas, which owns the Reebok brand, had said that commercial irregularities in India had forced it to take a Rs 870 crore hit in addition to restructuring spend of Rs 470 crore planned in 2012. Reebok India's turnover is estimated at around Rs 600 crore.

In the FIR filed with the Sector 40 police station in Gurgaon, Reebok said that it carried an internal investigation after certain "fraudulent activities" were noticed in January this year. When contacted, both Prem and Bhagat refused comment saying they were unaware of the FIR.

India director (finance) Shahin Padath has alleged in the FIR that Prem and Bhagat, whose services have since been terminated, had set up four secret warehouses in Delhi and "generated fictitious sales over numerous financial years". Prem and Bhagat were with the company for over 16 years.

Padath alleged that the sales were fictitiously diverted to these warehouses. At the end of December 2011, products worth Rs 147 crore were allegedly invoiced but not delivered. "The said products were thus stolen by accused 1 and 2 (Prem and Bhagat) and the secret warehouses mentioned above were used for storing some of such stolen products," the FIR said, while estimating the value of these goods at Rs 63 crore.

The rent for these warehouses was allegedly paid by one Shivam Enterprises, which "supply manpower to the complainant's warehouse". Reebok has also alleged that its two former executives ran an unauthorized franchise referral programme and money was collected on the pretext of opening stores. This was done despite instructions from Adidas headquarters to not expand the store base further, the company said.

"Almost no franchise stores were opened under the scheme despite collection of about Rs 114 crore from various investors," the FIR said. It added that Prem and Bhagat forged and fabricated cash receipts and also "maintained parallel books of accounts", known as regional outstanding reports (ROR).

"In respect of the account receivable balances, which were at such regional outstanding reports, showed the official balance reported to the group and various adjustments to be made (for) arriving at a 'net recoverable amount'," the FIR said. In case of one customer, the company alleged that the amount outstanding as per its records was Rs 34.36 crore, compared to Rs 13.32 crore in the ROR. On December 31, 2011, the official accounts receivable of all customers was estimated at Rs 1,007 crore, compared to around Rs 476 crore in the ROR.

"In order to hide the fraud, the accused malafidely (sic) passed on extra margin to the customers on the invoice which were treated as credit note reduction as issuing a credit note would have made it obvious that the balance reported in the books (were) not correct," it added.

The company has also accused the two former executives of raising invoices of Rs 86 crore on customers for products already invoiced and delivered in 2010-11, which is against the norm. Reebok said that this was done to claim bonus and incentives.

Reebok has suggested that the police conduct a "thorough investigation and custodial investigation" of the two former executives. Maheswar Dyal, DCP (East) Gurgaon, said that the police would call Reebok executives on Wednesday to get more details on the FIR.

Minister of state held for role in Rs 46 crore scam

Source: The Times of India by Prafulla Marapakwar May 22,2012

MUMBAI: Nationalist Congress Party (NCP) leader and minister of state for transport and agriculture Gulabrao Deokar was on Monday arrested by the Jalgaon police for alleged involvement in a 15-year-old Rs 46 crore mass housing scam, in a major embarrassment for the Sharad Pawar-led party.

Deokar is the first cabinet member in Maharashtra who has been arrested while in office. He was later released on a personal bond.

Deokar will continue to be a cabinet member as his resignation has not been accepted by the party. "Deokar submitted his resignation but since he has been released on bail, we will wait for the outcome of the court proceedings,'' state NCP president Madhukar Pichad said.

Deokar is among 90-odd accused, including former housing minister and senior Shiv Sena legislator Sureshdada Jain, arrested by the police. While Jain has been granted interim bail owing to ill-health, most former councillors have been released on bail.

The Jalgaon municipal council (JMC) controlled by Jain had in 1997 floated tenders for the construction of 11,000 affordable houses in the city, even though the construction of houses was not on its mandate. While 11 builders submitted tenders, the JMC at the last moment amended basic conditions, as a result of which only Khandesh Builders, a front for Jain and Golani Developers, remained in the fray. Golani's tender was rejected on technical grounds.

When it was found that a loan secured from the housing and urban development corporation was illegally transferred to the name of the firms controlled by Jain, leader of the opposition Eknath Khadse demanded a high-level probe.

JMC's then chief executive officer, Pravin Gedam, on February 3, 2006, lodged an FIR against 90 councillors, who were JMC members between 1995 and 2006. When the contract was granted, Deokar was JMC chairman.

Black Money

Kindly find complete report presented by Mr Pranab Mukherjee in Lok Sabha today on “Black Money”.

The link is http://finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf

Highlights:

-       Sectors generating black money are Jewellery, IPO, Land deals, real estate, bullion, public procurements and NGO’s

-       It states black money in Swiss accounts has reduced by Rs14,078 crore between 2008-2010

-       The finance minister did not give any estimate of the black money

-       It suggests tax incentives for encouraging use of debit and credit cards as these leave audit trails.

Source: The Times of India, Ministry of Finance

Private firms got undue benefits of Rs 1.8L cr in 'Coalgate': CAG

Source: The Timesof India (Mumbai) Edition, May 22,2012

NEW DELHI:

The Comptroller and Auditor General's final report on allocation of coal blocks between 2004 and 2009 without auction is expected to peg the value of "undue benefits" that the government extended to private entities alone at more than Rs 1.8 lakh crore, sources have indicated.

The last draft of the report, first reported by TOI on March 22, had said the government extended undue benefits of Rs 10.67 lakh crore by giving away 155 mines to 100 commercial entities, including public sector bodies, without bidding since 2004.

The government auditor has brought down the value of undue benefits by taking out public sector and state government entities from the final report and focusing only on private ventures. This was done at the coal ministry's behest, which argued during the 'exit conference' that public sector entities are audited separately.

But even at the reduced level, the value of undue benefit to coal block allottees is higher than the outer limit of the Rs 1.76 lakh crore-loss estimated by CAG in the 2G spectrum allocation case.

Besides, removal of public sector and state entities from the final report would mean the entire undue benefit of over Rs 1.8 lakh crore has accrued to private entities alone. The final report can still cause discomfort to the government .

CAG's coal report in House today?

Sources said the Comptroller and Auditor General's (CAG) final report on allocation of coal blocks has been lying with the government since May 11 and may be tabled in Parliament on Tuesday, the last day of the Budget session.

After TOI reported the final draft, the Prime Minister's Office had made light of the figure and selectively quoted from a letter to the PM written by CAG Vinod Rai to say it was "not even pre-final".

Even Rai was targeted by some economists and ministers. But on March 27, he hit back by saying CAG auditors had a global standing and did not make "fundamental errors".

"We are incapable of making fundamental errors as being discussed in media. Our report will make clear all doubts on fallacies being talked about... They (CAG auditors) are the best in the world. Both developing and developed countries send their auditors to train with us at our academies... the report (on allocation of coal blocks) will make clear how sound our processes are," Rai had said at the concluding session of a seminar on Public Accountability and Role of CAG.

The government auditor had calculated the undue benefit at the price of the lowest grade of coal. It first estimated the cost of production for each block by taking into account the actual cost of production in a similar Coal India mine for the same year. Then the difference between CIL's sale price and cost of production was multiplied by 90% of the reserves in each block. The figure thus obtained was the windfall gain for that block.

The reasoning behind taking 90% of the total reserves rather than the entire lot, according to CAG, is that "detailed exploration establishes reserves at a confidence level of 90%".

The final draft report said the coal ministry had in 2004 said that chances of any allottee not being able to recover this much from the reserves "would be, if at all, very remote".

Sebi sets up new cell to detect corporate accounting fraud

Source: The Indian Express, Mauy 20 2012

Market regulator Securities and Exchange Board of India (Sebi) is all set to tackle corporate frauds by listed firms and market entities through its newly set up Forensic Accounting Cell.

“We have recently created a forensic accounting cell inside Sebi and we will look into samples for filings and check for discrepancies,” said Sebi chairman UK Sinha on Saturday. The unit has been set up in the wake of many complaints by investors of companies rigging their financial results and disclosure statements, such as the financial irregularities by former software firm Satyam.

To tackle this menace, Sinha, who was speaking at a seminar on ‘Reporting on Securities Markets — Issues and Challenges’ said that the cell would study the consistency in disclosures made by a listed firm and in case of any wrongdoing forward the report to the market regulator.

The cell, which includes highly trained accountants and experts, is expected to help assist in detection of financial irregularities so as to serve as an effective early warning mechanism.

Internationally, such dedicated teams have been set up by other regulators as well, such as the Office of the Chief Accountant, at the US Securities and Exchange Commission, who helps ensure that disclosures are accurately filed. To address this problem of bungling of financial statements, Sebi has also asked stock exchanges to look into filings by companies and check for discrepancies.

Sinha said Sebi had taken a series of measures in the recent years to enforce compliance and curb market manipulation. “Sebi is not a perfect institution, but we are trying to improve,” he said.

Speaking at the event, Shekhar Gupta, Editor-in-Chief, The Indian Express, called for better coverage of corporate investigations by the media.

Everyone's Problem: Looking Beyond the Wal-Mart Bribery Case

Published: May 09, 2012 in Knowledge@Wharton

In a case that continues to reverberate across borders, Wal-Mart Stores, the world’s largest retailer, announced recently that it has started its own probe into allegations that executives at its Mexican operations made hundreds of illegal payments -- worth more than $24 million -- to help expedite the opening of new stores. According to a report in The New York Times, Wal-Mart officials in the U.S. learned about the bribery allegations in 2005, but failed to alert U.S. or Mexican officials at the time.

The charges have cast a dark cloud over Wal-Mart, which is also the largest retailer in Mexico and the country's top private-sector employer. According to news reports, Wal-Mart’s own probe of possible bribery could force the firing of some of the firm’s executives, and bring serious fines from the U.S. government if investigations reveal that the company’s senior managers knew about the illicit payments but did not take sufficient action. The day after the allegations were made public,

Wal-Mart shares fell nearly 5%.

That may be only the beginning of Wal-Mart’s troubles: In other repercussions, leaders of New York City’s pension funds said they would vote their shares against the five Wal-Martdirectors standing for re-election at the company’s shareholder meeting in June. Also, the California State Teachers' Retirement System, which holds more than 5.3 million Wal-Mart shares, has filed a lawsuit alleging that the firm's senior officials engaged in massive opportunistic sales of the company’s stock before news of the Mexico allegations broke in late April.

According to legal and ethics experts at Wharton and elsewhere, the Wal-Mart case raises broader questions about how multinational companies conduct business in foreign countries. Is Wal-Mart’s alleged bribery in Mexico an anomaly, or is it more typical of multinational behavior than many corporate executives would like to admit? Is the practice of bribing public officials ever justifiable from an economic or ethical point of view? And apart from collapsing share prices and shareholder lawsuits, what are some of the other possible consequences of bribing foreign officials?

Mind the Rules

Despite the hoopla surrounding the Wal-Mart case, corporate bribery of public officials remains an all too common practice in many countries around the world, according to the most recent annual report by Transparency International (TI), a Berlin, Germany-based nonprofit with more than 100 chapters around the world. The organization’s Corruption Perceptions Index 2011 charges that many governments in Asia, Latin America and the Middle East still fail to protect their citizens from the abuse of public resources, bribery and secretive decision-making. Among them, Mexico is hardly the worst offender on the list.

The 10 countries where bribery and other forms of corruption were most frequent last year include Somalia, North Korea, Burma (Myanmar), Afghanistan, Uzbekistan, Turkmenistan, Sudan, Iraq, Haiti and Venezuela. Mexico ranked 100^th among 183 nations surveyed by TI, exactly the same ranking earned by far less-developed countries such as Benin, Burkina Faso and Malawi.

For all the dissatisfaction expressed in that report, corruption experts generally agree that multinational executives in the U.S. and other countries are taking anti-corruption statutes more seriously than in the past. One reason is the U.S. Foreign Corrupt Practices Act (FCPA) of 1977, which imposes serious penalties on U.S. companies that bribe foreign officials. In addition, a growing number of executives recognize that bribery is not only ethically wrong, but economically counter-productive.

In an article published in the most recent edition of American Business Law Journal, titled “The Business Case for Complying with Bribery Laws,” Philip M. Nichols, a professor of legal studies and business ethics at Wharton, writes that several scholars have “convincingly marshaled together research that demonstrates the impediment to economic growth, degradation of social and political institutions, misallocation of resources and skills, impoverishment and numerous other societal ills that corruption inflicts on polities and economies.” He adds that although there is a shortage of “firm-level empirical data on the consequences of paying bribes,” the existing research, combined with theoretical discussions and the realities of the regulatory environment, makes "a very strong business case ... for complying with the rules regarding bribery.”

Shaun Donnelly, vice president of investment and financial services at the United States Council for International Business, a New York City-based nonprofit, says that “the trend is in the positive direction.... The public sentiment is that bribery is not an acceptable way to do business,” and global companies are becoming more scrupulous about compliance with the law. In the years following the FCPA of 1977, “U.S. companies were constrained to do the right thing, but other countries’ companies were not,” Donnelly notes. However, since the 1990s, international institutions have enacted their own similar anti-corruption conventions, including those endorsed by the Organization of American States (1997), the Council of Europe (1999), the African Union (2003) and, most significantly, the Anti-Bribery Convention of the Paris-based Organisation for Economic Co-operation and Development (1999). “A lot of big companies take this seriously, and have training programs, annual reviews and reminders,” he adds.

Nichols argues that growing global economic integration has also helped to encourage many companies to shun bribery and other acts of corruption that might have seemed commonplace in the past. “Governments recognize that controlling the local damage done by bribery requires coordination [with other governments]," he says. "Any actor who engages in [what seems to be] a local activity exposes himself to global coordination” in this newly integrated economy. Globalization “has made more people aware of corruption and of its negative impact. What was thought of as 'other people’s problem' now becomes 'our problem,'" he notes. Likewise, businesses no longer view themselves as single companies, but rather as a regional or global network of suppliers, employees and distributors.

According to Felipe Monteiro, a Wharton management professor, multinationals should gladly accept today’s more stringent legal requirements as the premium paid for the numerous benefits that they derive from operating on an unprecedented scale. For example, huge firms like Wal-Mart have power over their suppliers, and can implement some best practices not accessible to small firms. The Wal-Marts of the world “have lots of advantages,” including access to global sourcing, he points out. “Being less flexible on issues of corruption [than some of their local competitors] is a cost they have to pay.”

More broadly, Monteiro notes that global managers must make a series of trade-offs between those business practices that they may need to adapt to local ways and those practices they must maintain as core procedures everywhere around the world. The more stringent the international requirements for transparency, disclosure and documentation become, “the more difficult it is for multinationals to have different practices [in different countries] without getting into trouble.”

A Dose of Skepticism
William S. Laufer, a Wharton professor of legal studies and business ethics, takes a more skeptical view of current trends. “It is true that Foreign Corrupt Practices Act enforcement is increasing ... and that having a robust FCPA compliance program is seen as part of a larger firm-level risk mitigation practice," he says. "It is unclear, however, whether the step-up in extraterritorial enforcement along with renewed FCPA compliance efforts have any significant impact on rates of corruption and bribery. Not surprisingly, these data are lacking. Evidence-based research on the effectiveness of different anti-corruption compliance programs and overall strategy is also sorely lacking.... [Confidence] that any of this makes a difference is premature and likely imprudent.”

Until recently, there has been “no systemic study” of the topic, Nichols notes, in part because corrupt activity takes place under the table, and many people are reluctant to talk openly about what they are doing, with whom and how often. TI’s Corruption Perceptions Index, for example, has been criticized for relying on third-party survey data. Critics also note that TI data about specific countries varies widely depending on the public perception of the nation, the completeness of the surveys and the methodology used.

What Went Wrong at Wal-Mart?
Given the growing consensus that anti-corruption requirements must be taken seriously, the allegations against Wal-Mart are somewhat surprising, experts note. After all, for Wal-Mart, opening new stores in Mexico and other foreign locations is “a fundamental part of its business model,” says Nien-he Hsieh, a professor of legal studies and business ethics at Wharton. Either Wal-Mart’s senior management didn’t know what was going on, or it knew what was happening but did not particularly care about clamping down on such illegal behavior, he suggests.

If companies understand the risks of non-compliance, why would they make payoffs? One possible reason, says Nichols, is that some people “get a cowboy thrill from making a bribe.” This may be particularly true among unsophisticated companies that don’t want to invest the time and effort to do things right. More commonly, perhaps, this pattern of behavior may derive from a perception that bribery is simply "business as usual" in developing countries. “It is a lazy person’s solution instead of really selling your solutions,” says Donnelly, a former U.S. ambassador to Sri Lanka. “Some people think [incorrectly] that ‘this is a poor country, so everyone is corrupt. This is just the way things are done.’”

When senior managers engage in this behavior, it has a negative impact throughout the organization, according to Nichols. “There is a tendency, when top managers engage in undisciplined or self-motivated behavior, for the managers below them to engage in the same behavior.” Such behavior becomes part of the corporate culture, fueling a vicious cycle of low ethical expectations.

“In the U.S., you can clearly distinguish between a gift and bribe,” Nichols adds. That’s because a bribe involves a specific quid pro quo in return for the payment. But in emerging nations, it may be more difficult to make such a distinction. In some countries, executives are instructed that the giving of lavish gifts is an essential component of the local culture, not something to be scorned as improper. Shunning such a practice may even sour key personal relationships.

To avoid any possibility of impropriety, however, Nichols says that some companies wisely “draw the line very low” -- excluding even small gifts, such as free lunches, from what is considered acceptable. Adhering to the "when in Rome, do as the Romans do" rule ascribes to others an “inflexibility that we won’t ascribe to ourselves. The idea that my rules are slightly different from yours, and there is an unbridgeable gap, is an argument that has no reality; it is presumptuous,” warns Nichols. People will realize that you are not insulting them if you politely refrain from any kind of gift exchange, even when a specific quid pro quo is not spelled out, he suggests.

Hsieh agrees, noting that some companies may “tend to underestimate the extent to which they can engage in certain practices” -- such as firmly refusing any kind of improper payments. “We shouldn’t assume that everyone is corrupt in [a given] country. We have to make it clear” that payoffs are not acceptable, he adds. The aim should be to nip corruption in the bud at the outset.

At the same time, companies from developed nations should bear in mind that corrupt practices like bribery are not limited to the developing world; they often just take more subtle form in tightly regulated countries. “One of the unfortunate artifacts of narrowly thinking about corruption as an impediment to development is an unbecoming sense of self-righteousness," Laufer points out. "To be sure, there should be indignation about the impact of corruption on poverty, the unlevel playing field at the base of the economic pyramid and the exploitation by multinational corporations of lax enforcement of laws in countries where the rule of law is compromised.” However, "there should be some measured humility in how the ‘developed’ world prescribes anti-corruption strategies.

"Put aside all of the forms of corruption for which federal, state and local laws apply, and consider something [such as] corporate-political influence," Laufer adds. "Late last fall, the CPA-Zicklin Index of Corporate Political Accountability and Disclosure was unveiled at Wharton.... This annual index tracks the extent to which companies disclose their political spending -- spending that is designed quite simply to buy influence. Is this corruption?”

Fraudster's grandiose lifestyle ends in jail

A New Zealand judge has jailed a former IT executive for eight years over an $80 million fraud carried out to support a lavish international lifestyle.

Sydney was a favourite playground of Gavin Clifford Bennett, who leased luxury apartments in The Rocks and spent millions of dollars on fine-dining, French champagne, fashion and female escorts.

In six years from 2005, the 54-year-old former managing director of Christchurch IT group Datasouth, falsified documents to fraudulently obtain and repay loans from South Canterbury Finance.

The scheme led to losses for the company of $18 million which were ultimately covered by the taxpayer.

In sentencing, Judge Jane Farish said Bennett had committed "an unprecedented level of fraud" to inflate his "business ego" and fund a "grandiose lifestyle".

Taking into account Bennett's cooperation with the investigation, the judge set a minimum non-parole period of three-and-a-half years.

Source: By New Zealand correspondent Dominique Schwartz Posted May 04, 2012

Ex-MD Sues Adidas Over Fraud Charge

Ex-MD Sues Adidas Over Fraud Charge

Subhinder Singh Prem seeks . 15 crore in damages, says German co was fully in the loop

Subhinder Singh Prem, the former boss of Adidas in India, has sued his former employer for 15 crore in damages, in a dramatic escalation of hostilities between him and the German giant that have stirred up the usually sedate world of sporting goods MNCs. Prem suggested that Adidas, which earlier this week said unspecified “commercial irregularities” in its Indian operations had forced it to take a . 870-crore charge, was fully in the loop on how the company was run.

He said the company was not a one-man show and all its financials and accounts were approved by up to five layers of officials. The finance chief of the Indian operations for the past year was a person specially appointed by the Adidas Group and all business and expansion plans were vetted by Adidas’ headquarters. While Adidas refused to say more than its statement issued on Monday, Prem for the first time gave more details on the manner of his departure, confirming a widely held perception that he was fired and did not leave on his own. Prem said he was called to Arizona, US, on March 25 and after he had presented his annual business plan there, he was coerced into disengaging from the company and promised a severance package. Four days later, he received a mail saying his services were being terminated. “Despite repeated mails, Adidas did not offer any reason for sacking me,” he said, adding that three hours before Adidas issued the statement containing reference to the commercial irregularities in India, he got a mail from the company saying his services were being terminated due to “financial irregularities”. Prem was a Reebok veteran who became an Adidas employee after the German company bought Reebok in 2005.

Prem Claims He Exposed 3 Big Frauds

Prem, who was appointed the head of the combined entity’s Indian operations last year, denied being involved in any financial irregularity and said on the contrary he had exposed three major frauds at Adidas. “The biggest scam was the scavenger deal running into. 200 crore, where about . 20 crore was illegally made by senior officials,” Prem’s lawyers said in a legal notice to Adidas, its global CEO, board members and its various entities in India.

“However, the scam was brushed under the carpet because it related to Adidas and not Reebok, and the request to notify the fraud to the auditors at the year-end was turned down by the headquarters,” the notice added. The lawyers have also demanded from Adidas contractual dues of . 12.7 crore

Source: The Economic Times (Mumbai) Edition, 03.05.12

Hackers are now targeting employees to compromise entire networks of a company

Trojan warfare

On May 8 last year, Reliance ADAG boss Anil Ambani received a Microsoft Word document from what appeared to be the account of a journalist. However, when company officials contacted the reporter, it became clear he had not sent the email. Fearing a breach, the officials alerted the Mumbai Police cyber crimes cell. The investigators had alarming news - the document had a worm designed to steal data.
Reliance ADAG denied any data was compromised but one investigator who spoke to Business Today on condition of anonymity, believes otherwise. Hiding a worm in an MS Word document is "extremely difficult", says the cyber-sleuth, but the hackers persevered, as the flaw they exploited had only just been discovered and few computers were likely to be patched for it. Once the document was downloaded, the worm went after the hard drive, hunting for data. "Anti-virus programs could not detect it," says the source. The investigators could not even establish what data was stolen. They only know that it was the work of Romanian hackers. Reliance ADAG declined comment. 'Social engineering' is the term experts have coined to describe attacks like the one on Ambani. It is the act of deceiving an insider to gain access to a secure network - in much the same way the Greeks used a wooden horse to get past Troy's defences and defeat their rivals. Hence the name for such worms: Trojan.

A Bangalore-based software firm faced a similar attack in the summer of 2008. An employee had downloaded what he thought was a clean program onto his office laptop. In reality, it hid a virus that swept through his folders and uploaded his data on the hacker's server. This data included the source code to his company's products. Fortunately, the hacker was not as skilled as the ones who targeted Ambani and was tracked down.

Tips to Stay Safe Do not download any attachment or software unless you have confirmation it was sent by someone you trust On business trips and vacations, carry a secondary laptop and mobile phone Do not email or copy sensitive data to your laptop, especially if you have to access this data outside a secure network

"Earlier, hackers targeted servers, so organisations set up firewalls," says Dhruv Soi, Director of Torrid Networks. "So, hackers are now targeting employees." Soi - and every cyber security expert BT spoke to - considers social engineering the biggest threat to a company's data.

Since such attacks do not set off alarm bells at the firewall, most companies remain unaware of the breach. A study released by US-based internet and telecom firm Verizon this March said 85 per cent of hack victims were not aware of the breach for several weeks. Worse, 92 per cent of the victims found out about it only after a third party alerted them.

The Indian government has itself been the victim of three such social engineering attacks, all from China. The most recent was LuckyCat, which targeted Indian and Japanese government computers beginning June 2011. In all, it hit 233 computers.

LuckyCat mirrored a 2009 campaign called GhostNet, which targeted Tibetan officials and Indian embassies. The ShadowNet campaign, one year later, was even more devastating. It first hit India's TRACK II diplomacy teams:members of think tanks or the media. They interact regularly with diplomats, as well as defence and intelligence officials. "It's almost like a social network," says a former intelligence officer, requesting anonymity. "Once they got into the think tanks and media, they targeted their contacts in government." Three years after the attacks took place, "even the GhostNet botnet is still operational," he says, referring to the network of hijacked computers the hackers used to carry out the attack.

While the people behind the GhostNet and ShadowNet campaigns were never found, investigators identified Gu Kaiyuan, a former student of China's Sichuan University, as the mastermind behind LuckyCat. Sichuan University is a favoured hunting ground for China's cyberspy recruiters.

"Everything critical was lost. Our anti-Naxal strategy, our posturing towards Sri Lanka… It is extremely frustrating to see the same old attack vectors working [repeatedly] against sensitive government systems," says the former intelligence official, who also investigated GhostNet and ShadowNet and is familiar with LuckyCat. Some experts blame Microsoft for China's hacking success. In 2003, and again in 2010, the company handed over sections of its Windows operating system's source code to the Chinese government. Russia was another recipient.

The company defended the decision, saying it gave governments "insight and a deeper understanding of Microsoft products" so they could be confident of security. However, Western experts warn that hostile governments now have access to potential flaws in Windows.

Social engineering is also used by 'phishers' to make money. This breed of scamster indulges in fairly simple duplication by copying the webpages of banks and fooling people into entering account information and passwords. RSA, a US-based cybersecurity firm, recorded 8,324 such attacks in India in 2011. Total losses were estimated at Rs 171.9 crore.

Telecom is another vulnerable sector. One threat lies in common apps such as games or ringtones, popular among India's 911 million mobile phone connections. These are often created by small, thirdparty developers with razorthin profit margins. They have little to spend on security. Most only use a username and password to access the telecom company's online store servers to upload new apps.

Hackers who crack the app developers' accounts not only replace genuine products with malwarelaced ones, they also gain access to the telecom company's server. "I'll be surprised if any telecom company has an idea of who fully controls its [app] servers," says a cyber security expert, formerly with the military, and now in the private sector. "They're five per cent of the revenues but 95 per cent of the problem."

With millions of subscribers to target, mobile phone hackers are not just a threat to privacy and finances, they automatically become a national security problem as well. Such cyber attacks are costly. Out of 200 Indian organisations surveyed by computer security firm Symantec for its 2011 State of Security Survey, 144 reported hacks over the previous 12 months; 92 per cent reported financial losses. On average, companies lost Rs 41.3 lakh in revenues and Rs 33 lakh in reputation costs. As for non-monetary damages, 37 per cent reported down times, 31 per cent lost confidential customer information and 28 per cent had intellectual property stolen.

Training is an essential first step to protect corporate networks from attack. Firewalls are not enough. "Companies build [network security] like a fortress: a wall on the outside and nothing much inside. One breach is all it takes," warns Sundar Ramakrishnan, Director of Engineering at networking company Cisco Systems. Monitoring systems are expensive but provide good protection- they can spot potential hacks. For example, data leaving a network that was not moved by a user is likely the work of a worm.

Earlier, hackers targeted servers, so organisations set up firewalls. Now, hackers are targeting employees: Dhruv Soi

The government has a security agency to tackle these issues. The eight-yearold CERT-In (Computer Emergency Response Team) issues warnings and probes each attack. But it is understaffed; CERT-In's website lists just 23 officers as "scientists". In 2010, the last year for which there are figures, these 23 men and women had to investigate 10,315 reported cyber crimes and 14,348 defacements of Indian websites. However, they are often assisted by experts from over 60 empanelled organisations. Ultimately, even computers with the latest security features are vulnerable to what techies call zero-day attacks. This, says R. Srikanth, a cyber strategies researcher at the Takshashila Institution, is "where malicious hackers find and exploit bugs in the code before anyone realises their existence".

Data for some graphics courtesy Symantec
Source: Business Today, Edition May 13,2012

Adidas India hit by 1,350cr internal fraud

Mumbai: Adidas, the world’s second largest sports goods maker, may take a Rs 1,350 crore hit after unearthing a massive commercial fraud in its Indian unit. The German giant has already booked a negative impact of €125 million and warned it could suffer a further €70 million loss barely a month after replacing the local leadership team in India.

This makes it one of the worst financial irregularities to surface in the Indian arm of any MNC, and comes amid mounting concerns over corporate governance issues in the country. TOI had first reported on March 27 that managing director Subhinder Singh Prem and chief operating officer Vishnu Bhagat had exited the local unit of Adidas, which also owns Reebok, after it plunged into the red due to financial irregularities.

1,350CR FRAUD Did success mask Adidas ex-MD’s actions?

Mumbai: In March, the Adidas group had remained silent on specific queries by TOI whether the top-level changes were linked to financial mismanagement.

The 13-billion-euro group had replaced the top management in India with Claus Heckerott taking charge as MD and Frederic Serrant assuming the role of sales director. “We discovered commercial irregularities at our Reebok business in India. These irregularities will likely affect the prior-year consolidated financial statements of the Adidas group. In total, we are talking about a negative impact of up to a pre-tax amount of 125 million euros. Additional onetime charges in the remaining quarters of 2012 amounting to an estimated 70 million euros could also occur,” said Herbert Hainer, CEO of the group, in the internal communication sent across to employees, and reviewed by this newspaper. He said the company may take legal action if necessary.

Allegations of financial discrepancies and losses swirled at the group’s India unit following the merger of Reebok’s operations. Adidas and Reebok merged in India only last year, even though a $3.8-billion global buyout of the latter happened in 2005. Reebok India had a turnover of about Rs 600 crore, while Adidas clocked a revenue of Rs 480 crore in 2011. The company on a combined level had debts to the tune of Rs 600 crore and had registered a loss of about Rs 90 crore with the Registrar of Companies

The former MD Prem and COO Bhagat came into the Adidas fold through the Reebok merger. Prem, who denied any wrongdoing while he was at the helm of the India operations, had joined Reebok in 1995 when it entered the country and rose up the ranks to become the MD in 2003.

The alleged financial irregularities at Adidas India pointed to inflated performance figures, said a senior industry executive who on condition of anonymity.

“When the Germans appointed Prem last year as the MD of the group, they did that seeing the huge success that Reebok has achieved in India. They thought he must have done something right. But it did not turn out to be that way,” he said.

Source: The Times of India, 01.05.2012