FORENSIC
ACCOUNTING REPORT
Ram Gold Finance Private Limited, New Delhi
By XXX
M. No.: XX
Privacy Classification: Public
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Table of contents
1. Disclaimer
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2. Background
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3. Executive Summary
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4. Scope/ Objective of Review
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5. Methodology and Approach
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6. Key Findings
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7. Recommendations
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8. Limitations
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PRIVATE and CONFIDENTIAL
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DISCLAIMER:
This Report is based exclusively on the facts and circumstances described during the engagement of the
team for conducting Forensic assignment and is given based on the representations, express or implied,
and based on our interpretation of the law, which may differ from another person. The existence of any
other factual or historical background not provided to us might require a conclusion different from the
one expressed herein.
The information contained herein is specific only to the facts of the present case and cannot be used in
any other matter and is not intended to address the circumstances of any individual or entity other than
what has been described in the Report. Although we have endeavoured to provide accurate and timely
information, there can be no guarantee that such information is accurate as of the date it is received or
that it will continue to be accurate thereafter. No person should act on such information without
appropriate professional advice based on the circumstances of a situation.
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BACKGROUND:
Ram Gold Finance Private Limited started its business activity of issuing Gold Loans to customers
during the month of April 2019, with a low-interest rate compared to the prevailing market rate.
Company management is very optimistic about this new initiative and estimated a business growth in
the area of gold loans at around 10% on a Quarter to Quarter and around 30% Year on Year basis.
Management reviewed its internal control processes and implemented new controls to address the risks
arising from the gold loan scheme. As part of a business initiative, Ram Gold Finance Company
appointed Mr Laxman as a gold appraiser for verification of purity of the gold, against the purity of the
gold 80% to 85% of the value will be issued as a loan to the borrower.
The appraiser has to verify the gold ornaments for weight, and purity the same has to be captured on the
prescribed Appraisal form. For this activity, “Ram Gold Finance” has signed an agreement with the
Gold Appraiser Mr Laxman for the authenticity of the gold ornaments.
As per the agreements, Mr Laxman, the Appraiser visits the “Finance Company” every day at noon and
stays till 03 PM, if any borrower approaches the “Finance Company” for the gold loan, initially the
borrower needs to go to the appraiser desk and get the appraiser form duly filled, which includes the
description of the ornament, weight, purity of the gold, if the ornament contains stones, the value of
stones/removal of stone weight etc., has to be completed in all aspects. Depending upon the appraiser
report “Finance Company” used to disburse the loan to the extent of 80% to 85% of the value of the
ornaments.
After disbursement of the loan the gold ornaments were to be sealed with the signatures of the two
officers of the “Finance Company”. The “Finance Company” is covered under CCTV equipment, which
captures all the above sequences.
Many people have approached the “Finance Company” for the gold loan, as the loan component was up
to 85% of the value of the ornaments and the interest rate on the loans was also a little low.
While reviewing the performance of gold loans business activity by management during the fourth
quarter, it was observed that the gold loans issued by the Company during the third quarter and fourth
quarter surged to more than 60% of that issued in the first two quarters of the year which was not
anticipated by the management considering the current prevailing economic conditions. Further
management observed that the considerable amount of loans issued during the first quarter and second
quarter have become overdue by more than 4 to 5 instalments.
Though there is a significant increase in the gold loans and gold assets, because of overdue loan accounts
the risk of those loans resulting in NPA has become a major cause of concern to the Company. The
Board of Directors had decided to appoint a forensic accountant to audit and identify the root cause of
this issue.
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EXECUTIVE SUMMARY:
The Forensic Team have reviewed the Loan requests evaluation process, approval and amounts
disbursement process, internal controls design and operative effectiveness of those controls around this
process by inspecting supporting documentation and conducting interviews with bank personnel
including the Gold appraiser.
During the review of KYC documents, it has observed that few customers obtained repeated gold loans
and the frequency of gold loan requests increased in the third and fourth quarters. Upon further review,
it has been observed that around 70% of the overdue instalments of loan accounts were about these
customers. This raised concerns about some suspicious activity and whether there are any process lapses
in due diligence activity of loan requests evaluation and approvals.
On further inquiry and interview with those customers it is observed that they have obtained the gold
loans on the instructions of their employer “Fake gold Ornaments” they don’t have much knowledge
about the same, on obtaining the gold loan successfully he is used to giving 5 % of loan component as
an incentive. He assured them that the loan repayment and other issues were handled by Mr Krishna
owner of “Fake gold ornaments” and the Gold appraiser who is sitting at the Finance Company, Mr
Laxman.
“Fake Gold Ornaments” owner Mr Krishna and the Appraiser colluded and obtained loans from the
“Financial Company” and used the amounts to issue loans to other people at a higher rate. The borrowers
were into real estate ventures and needed funds to finance their venture and offered Mr Krishna a higher
rate for loan amounts financed. Mr Krishna had some unaccounted gold assets with him which he
purchased from the unidentifiable persons who have stolen them. To earn some quick money, he makes
a plan with Mr Laxman to obtain gold loans in the name of other people and use the loan amounts to
finance their financing business activity. It was observed that the gold assets deposited with the bank
were stolen gold items which were obtained by Mr Krishna. As the borrowers failed to repay the loan
instalments to Mr Krishna, he could not pay the loan instalments and therefore Mr Krishna could not
pay back the gold loan instalments.
Based on such finding Mr Krishna and Mr Laxman has given a full signed confession to their misdeeds,
which is supported by various evidence and confession statement of the customers who are the
employees of the “Fake Gold ornaments”.
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SCOPE & OBJECTIVE:
Objective and Scope of in the Engagement letter dated 9th July 2022, as aforesaid is summarized as
under:
1)
2)
3)
4)
5)
To conduct the audit for the increase of the Gold loan base
Why the repayment of loan EMI was delayed?
To check whether the borrower was Genuine
To check the Purity and weight of the Gold Ornaments
Suggestions for the improvement of internal controls
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METHODOLOGY & APPROACH:
1) Loan applications along with the Appraiser report for the period were collected and kept in one
place.
2) KYC Verification process is cross-checked with the loan application forms.
3) CCTV footage camera backup obtained from the Company in the presence of Branch Manager
the same was kept under safe custody.
4) Collected the Backup of the Software used for cross verification of customer database along
with the interest and principal details.
5) Agreement between the gold Appraiser and the Company was verified
6) During the verification of loan applications, it was observed that there is a nexus between the
multiple gold loans taken by borrowers, and the amount used for repayment of the EMI for the
previous loan over dues, these trends were continued with little change in address or locality.
7) The team went for field verification, in that process more issues came to light, the house # were
jumbled, and the locality name or street numbers not matching with the information available
on KYC and loan application.
8) On difficulty could meet two to three borrowers they were genuine and could not find much
information related to default as they promised to repay in a weekday’s time
9) Jewellery packets were opened for untraced borrowers, where on verification it was found that
there was no proper hallmark found, but the logo of the manufacturer of the jewellery was found.
10) On further deep enquiry and investigation it was found that the logo pertains to 1-gram gold
ornament manufacturer there was a showroom in the nearby locality where we could not find
the default borrower’s physical address.
11) On a visit to the showroom, the model design of the ornaments was matching with the ornaments
available with the bank as well as could able to trace that one of the defaulting borrowers was
an employee of the Showroom.
12) On interviewing the employee, he further revealed that the Gold Appraiser and the Showroom
owners are friends, both colluded and planned for this fraud.
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KEY FINDINGS:
1) Before appointing the Gold Appraiser, who is a key person for sanction of loan, the total
background needs to be verified, and any link to gold showrooms or jewellery showrooms needs
to be cross verified.
2) To the extent possible gold ornament purchase bills need to be cross verified for authenticity of
the jewellery etc.,
3) The branch manager should have minimum knowledge about the gold ornaments.
4) Customer database needs to be cross-verified with the third party if multiple loans are obtained
or the size of the loan exceeds.
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RECOMMENDATION:
As there are lapses in the processing of the issue of loans, it is recommended to review the limits
sanctioned to the borrower and also to conduct a total KYC evaluation of the borrower. Also, the branch
randomly verifies the authenticity of the customer’s KYC and visits the customer’s residential address.
There should be a stock verification audit to be conducted at regular intervals along with the appointment
of a “Gold Appraiser”.
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LIMITATIONS:
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One of the major limitations faced by the team was the time & physical meet constraints.
Various persons could not be interviewed due to the paucity of time and covid situation during
the entire assignment.
Various transactional vouchers could not be made available to the team by the respective
departments since there were poor quality and maintenance of physical records and no internal
control mechanism to monitor document Sequence.
The branch team were reluctant to reply to all the questions being asked by the team and most
of the replies given by the team could not also be corroborated with the documents made
available to the team since the concerned transactions were old and proper records were not
maintained.
Place : XX
Date
Authorised Signatory
: XXX
XXXX
PRIVATE and CONFIDENTIAL