Specific practices in the Indian construction and real estate sector, the business conditions and related regulations make its fraud environment quite unique.

Surveys indicate that India lags behind only Africa in having the largest number of individuals or companies affected by fraud, the biggest worry being corruption involving public officials. The World Economic Forum for Global Competitiveness ranked the Indian economy 56th overall in 2011-12, but 99th for corruption and 96th for burdensome regulation.

Taking $80 billion as the size of the construction industry in India, the Association of Certified Fraud Examiners’ 2012 global estimate of 5 per cent production stream would compute $4 billion in construction fraud.

The Grant Thornton Fraud in Construction report’s snapshot of fraud prevalence in India:

Billing fraud — low;

Bid/ contract rigging, market collusion — high;

Bribery/ corruption — high;

Fictitious vendors, falsifying payment applications — low;

Change order manipulation — medium;

Theft or substitution of materials — low;

False representation — medium;

Money laundering — high.

Trends

There have been cases where builders have launched projects, collected deposits and disappeared. Other instances include selling the same plot to multiple buyers. It is a common practice among developers to use funds from one project to launch the next instead of completing the first. Builders have also sold units on land they do not own or where they have no clearances. Disputes between consumers and builders often prolong indefinitely.

Way forward

“Simplification of the clearance process for construction projects, and effective and equitable implementation of existing laws will generate confidence and stimulate growth… enforcement of laws on bribery and corruption, and action against those who violate regulations would bring confidence to stakeholders,” says Neeraj Sharma of Walker, Chandiok & Co.

While there is a significant effort by the Government and organisations such as CREDAI in finalising laws and creating awareness to make the sector more transparent (Real Estate Regulation Bill, land acquisition bill and so on), India Inc needs to streamline its governance system for fraud risk prevention.

The five phases of fraud mitigation:

Set the right “tone at the top” and instil fraud avoidance as a corporate governance policy;

Conduct a fraud risk assessment and put in place mitigating, preventive and detective controls;

Develop policies to mitigate identified risks;

Create a communication programme to raise awareness of fraud prevention policies;

Monitor and evaluate the effectiveness of fraud prevention procedures and adapt where necessary.

The programme’s scope should be proportionate to the organisation’s size and structure and to the nature, scale and location of activities.

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