Citibank Gurgaon Fraud

also know as

“The Premnath Scheme”

Facts of the case
Fraud Quantum

Rs.460,00,00,000
The Mastermind
SHIVRAJ PURI
Senior
Relationship
Manager in
Citibank
Gurgoan Branch
Modus Operandi

Marketed Investment Scheme promising 2-3% p.m.

return

Forged SEBI Circular

Received Investment Cheques from HNIs

Deposited Cheques in A/c of Custodian Mr.

Premnath (Grandfather of Shivraj Puri)
Modus Operandi … continued

Transferred Amount in relatives accounts

Relatives Deposited the amount in Brokerage Firms to take

exposure in stock market

Exposure of Rs.1,25,000 crores in derivative  transactions

without hedging the downside risk

Once the market moved against the leveraged positions, the

margin calls were triggered which resulted in the losses.
HNIs Custodian A/c Premnath
(Grandfather)

Sheila Premnath Deeksha Puri Shivraj

(Grand Mother) (Mother) Puri

Normans Martin
India
Religare Bonanza Brokers Pvt Ltd
Infoline
(Father)

Exposure in Stock Market

THE VICTIMS
Hero Honda Group– Rs.200 Crore
 Mr. Sanjay Gupta, Assistant Vice President as part of Treasury Management
diverted Rs.200 crore in “Premnath Scheme”.
 It is suspected that Mr. Sanjay Gupta was aware of the forged SEBI letter but
recommended the investment to a number of people.
 Mr. Sanjay Gupta has allegedly taken Rs 20 crore as Commission from Mr.
Shivraj Puri for diverting these funds.
Sanjeev Aggarwal, MD – Helion Ventures
– (Rs.33 Crores)
 Well-known venture capitalist Sanjeev Aggarwal is one of the victim.
Aggarwal, managing director of venture capital firm Helion Advisors Pvt. Ltd,
filed a police complaint and named
 CEO - Vikram Pandit
 Chairman - William R. Rhodes
 Chief financial officer - John Gerspach,
 Chief operating officer - Douglas Peterson
 Head of Indian Opretaions – Pranit Jhaveri
claiming the alleged scam was a systemic failure.

 Aggarwal claims to have lost Rs33 crore and alleges that it wouldn’t have
been possible for an employee to commit fraud of this magnitude without the
knowledge of the bank.
Other Victims
 OKS Sapan Tech

 Satyam Auto

 Other High Networth Individuals (HNI)

Post Fraud Events
 Sanjeev Aggarwal filed complaint and called a Press Conference.

 Citibank filed complaint.

 Citibank appointed a Big 4 CA Firm to conduct forensic investigation of all wealth

management transactions.

 Police sent Puri’s Computer to Madhuba Forensic Science Laboratory for Foresnics.

 27th Dec 2010, Police registered an FIR. (More details in Annexure – A)

 29th Dec 2010, Puri surrendered.

Cont…..
Post Fraud Events - Continued..
 9th Nov 2011, the Trial Court formally charged Puri.

 25th Feb 2012 the court pronounced Puri guilty under IPC and sentenced 2.5 years
imprisonment and Rs.10,000 fine.

 In another case, filed by Sanjeev Aggarwal, Puri was sentenced 2.5 years, taking
the overall imprisonment to 5 years.

 Shivraj Puri filed an appeal in a Punjab and Haryana High Court.

 28th May 2012, Puri released on bail by the Punjab and Haryana High Court.

 The case is now pending under Punjab and Haryana High Court.
Various Investigations in the case

The case is being investigated by following authorities :-

 The Haryana Police is had filed case in Dec-10.

 SEBI too probed the matter as the fraud money was invested in the stock
market.

 Reserve Bank of India

 In 2012 ED had registered a case in this alleged scam under provisions of

Prevention of Money Laundering (PMLA).
 
Statement given by Citibank
In a statement Citibank said, "Identified suspicious transactions have been
isolated and we are providing full assistance to the authorities in their
investigations. This issue does not impact other accounts, transactions or
customers of the bank. Subsequent to our complaint naming the involved
employee and other external individuals who appear to be perpetrators in
these suspicious transactions, Gurgaon police have registered an FIR." 
Statement
Statement given by Religare
According to Religare, Puri opened his account in December 2009, and all
regular norms, including “know your customer” (KYC) norms, were
followed. The brokerage also says “he traded only in derivatives”. Although
the account has been frozen recently, trading had stopped “many months
back and as on 15 October 2010 the balance had come to paisa 30 (Rs0.30)
in his account”. The brokerage also says that all information on this account
“was reported several months bank in compliance of Prevention of Money
Laundering Act requirement”.
 
Finance
Minister’s
Statement
Lapses by Bank and Brokerage Firms
Segregation of Duty:
The Relationship Manager was selling the investment concept, obtaining funds,
investing them and monitoring the accounts. This shows that there was no
segregation of duty for the different functions.

Know Your Customer (KYC):

Funds from Citi customer accounts were being diverted to other accounts in Citi
(for example, Mr. Puri’s relatives or other fictitious accounts) then there should
have been checks in place to question the business validity of the transactions.
On the other hand, the brokerage firms, Religare and Bonanza should have
questioned the source of funds of Mr. Puri as he is a salaried employee.
Lapses by Bank and Brokerage Firms

Suspicious Transaction Monitoring:

According to RBI and SEBI guidelines, a bank is required to have systems in
place to monitor suspicious transactions and there is special emphasis on high
net-worth investors (HNI). In this case, questions can be raised on the nature of
systems and procedures in place to monitor suspicious transactions.

Functioning of Risk Management Departments:  

RBI guidelines specify that banks should have proper fraud monitoring,
compliance and risk management functions. In this case, the fraud was
perpetuated over a few months (specific dates not known) and the fraud
department was alerted by the customer complaints. This raises questions on
fraud detection and monitoring procedures implemented at the bank.
Analysis of the case
Fraud Triangle
Fraud Diamond Opportunity

Pressure Capability

Rationalisation
Opportunity Capability
 Senior Relationship Manager since 7  Street smart
years  Knowledge of Citibank’s Internal
 Greed of Investors Controls and how to break them.
 Trust of Investors
 Possession of Signed Blank Instruments

Pressure Rationalisation
 Earn Huge Money in short span of time  Taking money as investment and will
return on making profit.
Green flags
 Promise of giving fixed returns of 2-3 % per month.
 Investment scheme was presented as approved and notified by SEBI.
 Investment Scheme was by Citibank, so there was hardly any question of
doubt.
Red flags
 No Segregation of duties. Relationship managers handling all activities –
 selling of investment concept,
 obtaining funds,
 investing funds
 custodian of documents and
 monitoring the investments.
 Investors were asked to deposit money into a personal account and not in Citibank.
 SEBI was shown as promoting this particular scheme, whereas SEBI does not
promote any particular product of any bank (as SEBI does not regulate banks!).
 Huge amount of transactions from other bank accounts to Citi accounts (Puri’s
relatives).
 Complaints from customers – Timely action on customer complaints could have
substantially reduced the tenure of the fraud.
Can there be an effective safeguard
against such frauds ?
It is estimated that a typical organisation in the US loses 6% of its annual
revenue to fraud and employees are responsible for more than 75% of the
fraudulent transactions.

“The common factor in major bank frauds is the lack of

internal control, lack of integrity and misconduct among
officials”
Internal checks and control is the KEY
Most, if not all of the factors that contribute to fraud, can be neutralised
with strong internal checks and  controls.

The essence of 'Internal Control' therefore lies in the separation of the three
functions :-

 Authorisation - the initiation of the transaction,

 Custody - the handling of assets involved and documents in the
transaction,
 Recording - the creation of documentary evidence of the transactions and
it's entry in the accounting records.
Other Checks and Controls
 Know your customer (KYC), an essential precaution, must be coupled with
know your employees (KYE)

 Thorough check on employees' credentials, proper screening of candidates

to prevent hiring fraudsters

 Rotation of personnel, surprise job rotation

 Assignment of responsibility

 Division of work /Separation of Functional duties

 Separation of accountability from custodianship

 Strong Internal and external auditing

Some Instances of Internal control
breakdowns
 Lack of management supervision, accountability and failure to develop a
strong control culture within the bank.

 Inadequate recognition and assessment of the risk of certain banking

activities, whether on or off balance sheet

 Key control structures and activities, such as segregation of duties,

approvals

 Verification, reconciliation and review of operating performance.

 Inadequate communication of information between levels of management

within the bank, especially in the upward communication of problems.

 Inadequate or ineffective audit programs and monitoring activities.

Some interesting
views of Experts
Some interesting
views of Experts
Some unanswered questions
 Was he running a Ponzi Scheme?

 Why did the investors fail to see through fake bank statements
and the forged Sebi circular? Was it greed or something else?

 Why did Citi have to wait for a phone call from another wealth
manger to detect the fraud?
Learning from the Case
Lessons from the case
 Firstly, the back ground and professional qualifications of the sales person or the
relationship managers should be verified before trusting them   to manage or take
decisions on the customers money.

 Secondly customers should not get carried away by big names or large size of wealth
management entities.

 Thirdly customers should be clear on their own financial goals and should not be
driven by greed

 Fourthly the sales person and the relationship managers should undertake a due
diligence on the risk bearing capacity of the customers.
Lessons from the case

 Fifthly the customers should not be promised high returns and the risk
appetite of the customer should be factored in deploying their funds  in
various asset classes.

 Sixthly the internal controls and systems of the wealth management entities
should be clearly defined.

 The last but not the least; the customers should not lend their signature to
any document without understanding the implications of the document.
 Disclaimer

 This Presentation is prepared as per Information available on Public Domain

for submission to the Excellent Faculty and The Hon’ble Jury of The
Certificate Course on Forensic Accounting and Fraud Detection conducted by
The Committee on Information Technology of The Institute of Chartered
Accountants of India.

 This Report should not be used for any other purpose except as mentioned
above.

 The views expressed in this Report are solely for academic purpose.
Thank you
Annexures
Annexure – Details regarding Police
Proceedings
 As per the chargesheet filed in the Civil Senior Division Court on Tuesday, a
sum of Rs. 292.68 crore, fraudulently obtained from investors, was invested
by Puri in Religare Security Ltd, Bonanza Portfolio Ltd and India Infoline
Trader Terminal, out of which around Rs.250 crore were lost, Gurgaon police
commissioner S. S. Deswal said.
 The 25-page chargesheet has been filed by the Gurgaon Police even as it
awaits the final report of the Securities and Exchange Board of India (SEBI)
looking into the scam.
 Shivraj Puri had allegedly paid Rs. 20 crore to Sanjay Gupta, a senior official
of Hero group, as commission for alluring corporate entities and high worth
net individuals for investing in his schemes, the chargesheet said.
 Another employee Gaurav Jain had also allegedly received Rs. 1.2 crore from
Puri, it said.

Cont….
Cont….
 The police had named Shiv Raj Puri as the prime accused while Sanjay Gupta
and Gaurav Jain as the co-accused in the scam.
 Shivraj Puri had also invested some amount in real estate wherein he had
bought some properties in Gurgaon and nearby areas, informed Deswal.
 Besides that, Gurgaon police had also recovered around Rs. 4 crore from
various banks accounts of the three accused, informed the police
commissioner.
 The chargesheet contains around 25 pages, which are supported by around
2000 pages and other documents including reports of SEBI, Citibank, Charter
Accounts, hired by Gurgaon police, financial statements of banks and broke-
age firms.
 As per the chargesheet, there would be around 100 witnesses in the whole
case, added the sources.

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