FORENSIC ACCOUNTING & FRAUD

DETECTION ( BATCH – 35 )

RESEARCH PAPER ON REALTY SECTOR

FRAUDS (SUMMARY )

CA Nisha Rani
M No. 559990
canisha.taneja@gmail.com

Research Paper
Summary 1 .
Index

 Realty Growth Snap-shot

 Realty Growth as Investment option
 Government initiatives to promote Realty sector
 Realty Sector Fraud exposure
 Type of Real state frauds
 Buyer as Real-estate fraud party
 Developer as Real-estate fraud party
 Government regulation to control realty sector frauds
 Opportunity to Chartered Accountants as Forensic Auditors
Snap-shot of
Realty Sector
Growth &
Initiatives
Progress of Realty Sector
Real estate sector is one of the most globally
recognized sectors. It comprises of four sub sectors
- housing, retail, hospitality, and commercial. The
growth of this sector is well complemented by the
growth in the corporate environment and the
demand for office space as well as urban and semi-
urban accommodations. The construction industry
ranks third among the 14 major sectors in terms of
direct, indirect and induced effects in all sectors of
the economy.

In India, the real estate sector is the second-highest

employment generator, after the agriculture sector. It
is also expected that this sector will incur more non-
resident Indian (NRI) investment, both in the short
term and the long term. By 2040, real estate market
will grow to Rs. 65,000 crore (US$ 9.30 billion) from
Rs. 12,000 crore (US$ 1.72 billion) in 2019. Real
estate sector in India is expected to reach a market
size of US$ 1 trillion by 2030 from US$ 120 billion in
2017 and contribute 13% to the country’s GDP by
2025. Retail, hospitality, and commercial real estate
are also growing significantly, providing the much-
needed infrastructure for India's growing needs.
Realty Sector as Investment Option

Indian real estate sector has witnessed high growth

in the recent times with rise in demand for office as
well as residential spaces. Indian real estate
attracted U$ 5 billion institutional investments in
2020, equivalent to 93% of transactions recorded in
the previous year. Investments from private equity
(PE) players and VC funds reached US$ 4.06 billion
in 2020. The real estate segment attracted private
equity investments worth Rs. 23,946 crore (US$
3,241 million) across 19 deals in Q4 FY21.
Investments in the sector grew 16x compared with
Rs. 1,470 crore (US$ 199 million) in Q4 FY20. In
value terms, these investments were 80% of that in
2020 and 48% of 2019, according to a report by
Knight Frank.

According to the data released by Department for

Promotion of Industry and Internal Trade Policy
(DPIIT), construction is the third-largest sector in
terms of FDI inflow. FDI in the sector (including
construction development and construction
activities) stood at US$ 42.97 billion between April
2000 and September 2020
Recent Government Initiatives:
The Government of India has been supportive towards the real estate sector. In August 2015, the Union Cabinet approved 100 Smart City
Projects in India. The Government has also raised FDI (Foreign Direct Investment) limits for townships and settlements development
projects to 100%. Real estate projects within Special Economic Zones (SEZ) are also permitted for 100% FDI. Construction is the third-
largest sector in terms of FDI inflow. FDI in the sector (including construction development and construction activities) stood at US$ 42.97
billion between April 2000 and September 2020. Exports from SEZs reached Rs. 7.96 lakh crore (US$ 113.0 billion) in FY20 and grew
~13.6% from Rs. 7.1 lakh crore (US$ 100.3 billion) in FY19. Indian real estate is expected to attract a substantial amount of FDI in the next
two years with US$ 8 billion capital infusion by FY22.

Government of India’s Housing for All initiative is expected to bring US$ 1.3 trillion investments in the housing sector by 2025. As of
December 2019, under Pradhan Mantri Awas Yojana (Urban) [PMAY (U)], 1.12 crore houses were sanctioned in urban areas, with a
potential to create 1.20 crore jobs. The scheme is expected to push affordable housing and construction in the country and give a boost to
the real estate sector. On July 09, 2020, Union Cabinet approved the development of Affordable Rental Housing Complexes (AHRCs) for
urban migrants and poor as a sub-scheme under PMAY–U. Government has also released draft guidelines for investment by Real Estate
Investment Trusts (REITs) in non-residential segment.

The Ministry of Housing and Urban Affairs has recommended all the states to consider reducing stamp duty of property transactions in a
bid to push real estate activity, generate more revenue and aid economic growth.
Realty Sector Frauds

 Realty Sector (Real estate) fraud is when an individual or agency uses false information or misrepresents the information for
any real estate transactions. It can happen in various ways and involve multiple parties and sometimes results in a class action
lawsuit when there are many people impacted. For example, a seller provided wrong information regarding the size of the
apartments they sold. This resulted in many buyers negatively impacted by the fraud.
 The crime of real estate fraud occurs when one person in a real estate transaction makes false representations of relevant
information to another person in the transaction. Or, the person may fail to disclose relevant information to the other. The other
person then acts on the false information or omission to their financial detriment.
 Fraud in real estate transactions can take place in any phase of a real estate transaction from the mortgage application or
approval phase through the closing of a sale or purchase of a piece of real property, Prospective renters can also be the victims
of real estate fraud. The crime of real estate fraud may be punishable by time in jail or prison and the imposition of a fine
Exposure of Realty Sector Fraud

 Banks and other financial institutions reported

frauds worth Rs 1.38 trillion in 2020-21, down 25 per
cent compared to the previous year, when the
amount involved was Rs 1.85 trillion, according to
the Reserve Bank of India’s (RBI’s) annual report
released for FY 20.
Type of Realty Sector Frauds

Below are the major types of real estate fraud :

 Mortgage fraud: the misrepresentation of material information or omission of crucial data related to the real estate property
involved that can result in fraudulent transactions.

 Foreclosure fraud: when the home is wrongly foreclosed on, leading the homeowner to think that they lost ownership of their
home and results in them moving out and giving up their home.

 Title fraud: when the title (ownership) of the property is falsely changed or occupied through fraudulent methods. For
example, an individual sells a property that belongs to another by pretending to be the owner of the property. In this case, the
original owner might not be aware of the transaction happened.

 Value fraud: when a buyer is misinformed about the actual value of the real estate property and believing that buys the
property. This can be done by misrepresenting or omitting valuable information about the property and its features.
Buyer as party to Real Estate Frauds

Buyer: Below Acts of buyers qualifies as fraud

 Buying with a Stolen Identity: Here, the buyer commits identity theft and then uses the stolen name, credit history, and
other information of the person whose identity was stolen on the loan application;
 “Straw-Buyer”: The borrower applies for a loan with information that belongs to another person, the so-called “straw buyer”.
The buyer might even use the name of the “straw buyer” instead of their own name; this differs from buying with a stolen
identity because the “straw buyer” is part of the fraud and allows use of their information;
 “Silent Second”: In this type of real estate fraud, the buyer is unable to afford the down payment that must be paid when
buying a home. Without the lender’s knowledge or approval, a buyer might get a second mortgage from a different lender to
finance the down payment.
 Tax evasion with fraudulent behaviour is common in the real estate sector. Transactions with an appraisal value that is low
compared to the sales value are shown to have a higher likelihood of involving fraud. It indicates (illegal) side payment to
lower the sales value tax payment.
Examples of Buyer’s Real
Estate Fraud
Developer as party to Real Estate Frauds

 Real estate Industry involves high value inputs from other industries namely, building materials, steel, timber,
glass, brick & concrete and cement and have gestation period of around 4-5 years. Most of the players or
developers in real estate industry were using home buyer’s money to pay off working capital and other business
requirements. Also, siphonage of bank loan and diversion of the funds was quite common in closely held
companies.

 In a closer observation of the judgement pronounced for Amrapali by the apex court leads us to the crisis of
realty sector which has been riddled with corruption involving big money. Forensic Auditors highlighted that
approx. 3,500 Crores of home buyers’ money was diverted by Amrapali promoters.
Recent Developers led real-
estate frauds

 Indian real estate funds IREO management

engaged in a fraud of 1.5 billion $.
 Karnataka Wakf Board Land Scam of 2 lakh-
crore.
 Housing Development Infrastructure Limited
(HDIL) of INR 6,300 crore.
 Rangmahal Cooperative group housing
scheme (CGHS) was INR 4,000 crore scam.
 Emaar Properties scam Fraud of approx. INR
2,500 crores.
 Adarsh Housing Society scam Mumbai was
started in the year 2002;
Government Regulations to contain Realty Frauds
Introduction of Real Estate Regulation Development (RERA) Act, 2016
 With the introduction of Real Estate Regulation Development Act, 2016, The Ministry of Housing and Urban affairs of
Government of India in 2016 initiated the major changes in the real estate sector.
 The key objective of RERA, 2016 Act is to provide transparency and protect the interest of home buyers. The act
makes it mandatory to register the projects and real estate agent with RERA before sale. It is also necessary for
developers to deposit 70% of the collected amount from buyers to deposit in escrow account and can withdraw in project
construction with a certification by Architects, Chartered Accountant, and Project engineers.
 RERA provide benefits to the consumers and developers in India by setting up real estate regulatory authority for
ruling and endorsement of the real estate sector and to make sure sale of houses, apartment or building in a competent
and apparent manner and to defend the interest of consumers in the real estate sector and establish the jurisdiction to
hear petitions from the verdicts, directions or commands of the authority and for issues connected therewith or subsidiary
thereto.
Role of Chartered Accountants in Real-Estate Fraud Prevention

Opportunity as Forensic Auditors:

 In a Landmark judgement UP RERA, in Oct 2018, has passed orders for Forensic Audit of registered projects of Ansal
API, Primrose Infratech, and Intellcity business park, where Currie and Brown ( C & B ) performed forensic audit of Ansal
API and identified fund diversion of around Rs. 600 Crores its projects.
 Such appointment sets the right example for Other states RERA authorities that forensic audit is the new tool in the hands
of RERA authorities to unearth the wrong done and gave power to the homebuyers who were at the receiving end
previously.
 In recent years, RERA authorities are often taking help of professionals to conduct forensic audit on on-going projects to
investigate diversion of home buyers money. It gives appropriate opportunity for Chartered Accountants as they appear
to be well equipped with financial and legal aspects.
Recent News of forensic empanelment by RERA authorities
Thank You