An Early Warning System (EWS) to Identify and Prevent Potential Corporate Frauds

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To identify and prevent potential corporate frauds, the Ministry of Corporate Affairs is in the process of developing an early warning system (EWS). A Committee of technical experts has recommended a framework for developing such system. The recommended framework is under consideration of the Ministry and it is proposed to pilot test the system recommended during the current financial year.

At present any serious fraud perpetrated by a company is investigated by the Serious Fraud Investigation Office (SFIO), which is a multi-disciplinary organization under the Ministry of Corporate Affairs. It consists of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds. However, the SFIO will normally take up for investigation only such cases, which are characterized by

complexity and having inter-departmental and multi-disciplinary ramifications ;
substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected, and;
the possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures. The SFIO shall investigate serious cases of fraud received from Department of company Affairs.

During last 3 years the SFIO investigated 13 cases in 2010-11; 20 cases during 2011-12 and 22 cases during 2012-13. During the current FY 13-14, SFIO has undertaken two cases for investigation. On the basis of recommendations made by the SFIO in its investigation reports, Government has been according sanctions for filing prosecutions under the Companies Act, 1956 and the Indian Penal Code 1860; referring cases for disciplinary action against professionals to the professional institutes concerned; and sharing reports with various regulators/ enforcement agencies, such as Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Income Tax Department, Enforcement Directorate (ED), etc., for taking appropriate action of violations pertaining to their respective statutes.

The Government has taken several measures to check frauds by unscrupulous companies, such as:

(i)            Induction of technology to improve methods of investigation, including setting up a Forensic Lab within SFIO premises;

(ii)          Signing of a Memorandum of Understanding by SFIO and the Ministry with the ‘Financial Intelligence Unit – India (FIU-IND)’, an agency under the Ministry of Finance for exchange of information relating to suspicious banking transactions;

(iii)         Organising investor awareness programmes in association with professional institutes and other regulators, enforcement agencies and using the electronic media for sensitizing investors of the dangers of fraudulent financial schemes;

(iv)        Strengthening of Inter-agency coordination with the recent decision to set up Inter-Ministerial Group with members from Ministry of Corporate Affairs, Department of Financial Services, RBI and SEBI with a view to speedily deal with fraud by unscrupulous companies;

(v)          Incorporation of a provision in the Companies Bill, which has got the approval of the Parliament, to give SFIO statutory status to enable it to more comprehensively investigate corporate fraud.

(Backgrounder: Ministry or Corporate Affairs)

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