Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

When chor pretends to be police

The fraudsters prey on a mix of greed, ignorance and regulatory weakness to cheat people

To play the policeman is the oldest trick in the fraudster’s book. Delhi’s residential areas have seen a spike in crimes where two policemen stop an old woman and admonish her for wearing gold jewellery when there is so much crime in the city. They get her to “keep it safely" in her bag in a piece of cloth they give her. In the process, they switch the bundle and leave her with bits of stone. Something similar is afoot in the financial sector. Many of us get mails in the name of the banking regulator inducing us to share our username and password of the Internet banking account or telling us that we have won a lottery. There are calls from people pretending to be from the insurance regulator promising a bonus if the customer buys a policy or getting people to switch from an existing policy to a new government-guaranteed one. And now there are stories of money being collected in the name of the pension regulator using the national emblem and the logo of Pension Fund Regulatory and Development Authority (PFRDA).

The respective regulators have issued public notices warning the public against fraudsters pretending to represent the regulators and inducing people to part with their money. Some of these notices can be seen here: http://bit.ly/1ObHQ96, http://bit.ly/1EZuTwx, and http://bit.ly/1FJIhiV. In fact, the insurance regulator has made it mandatory for companies to carry the warning in their advertisements as well.

Anecdotal evidence suggests that crime is fast moving up in sophistication, from crude chain snatching on the street to using the regulators’ names to induce people to part with their money. The fraudsters prey on a mix of greed, ignorance and regulatory weakness to cheat people. The recent cases of money being collected in the name of PFRDA once more bring focus to the issue of non-registered deposit-collecting entities across the country.

The Reserve Bank of India’s strategy of keeping the supply of banks tightly controlled to prevent bank failure and, therefore, depositor distress has had the adverse impact of excluding large parts of the population from basic banking services and opening them up to fraudsters. Poor product structure in terms of up to 80% first premium commissions (40% legally and the rest illegally) that makes it worthwhile for criminals to get people to switch policies is a big cause of fraud in the insurance sector. The recent pension fraud also falls into the deposit collecting fraud space that links back to the lack of inclusion. The problem is made worse by a fragmented regulatory structure where customer protection and fraud prevention is targeted by each regulator to the isolation of the others.

How does micro finance solve the problem of fraud? The people I spoke to listed down a tighter control of the feet-on-the-street staff to prevent them from cheating, random calling to check if receipts have been issued and a move to the mobile money platform. They spoke of the problems of chasing the problem ex-post—the local police is reluctant to file a first information report (FIR) and few police stations have the ability to tackle financial crime. They flag the big issue of the unregistered non-banking financial companies (NBFCs) that collect money and get away with it, while the registered ones have a heavier and heavier regulatory burden.

But while the micro-finance firms are mostly near their markets, the regulators cannot replicate this and trying to solve this problem ex-post will be expensive and time consuming. We need to think of a solution that cuts it ex-ante; or prevent the crime from happening. Those old enough to remember will know that the erstwhile Unit Trust of India’s dividend and redemption cheques faced the same problem when the cheques would disappear from the post office and get credited to accounts opened in other locations with the same name as the account holder’s. The solution was found ex-ante rather than ex-post. It was solved by not catching each complicit postman, but by getting the account number of the investor written on the cheque.

One direction that we could take to prevent the crime from happening could be to collapse the anti-fraud activities of the regulators to one place. There could be one toll-free number and one postal address (advertised heavily) that a person could call or mail to check if the product being offered is genuine and the entity collecting is registered. We could think about a person using her mobile phone to send an SMS or a WhatsApp message or an email or calling to check before she buys a product and the central agency doing the checking. This would need a common database with different regulators agreeing to share resources, information and staff to run this. But this solution pre-supposes co-ordination and a regulatory regime that thinks of the market and customers and not its own turf. With even the Financial Stability and Development Council (FSDC) mechanism not being able to get the regulators to collaborate on basic issues of customer protection, this solution looks far away.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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