Financial Crimes: A Guide to Financial Exploitation in a Digital Age 3031290895, 9783031290893

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Chander Mohan Gupta   Editor

Financial Crimes

A Guide to Financial Exploitation in a Digital Age

Financial Crimes

Chander Mohan Gupta Editor

Financial Crimes A Guide to Financial Exploitation in a Digital Age

Editor Chander Mohan Gupta Faculty of Legal Sciences Shoolini University of Biotechnology and Management Sciences Solan, Himachal Pradesh, India

ISBN 978-3-031-29089-3    ISBN 978-3-031-29090-9 (eBook) https://doi.org/10.1007/978-3-031-29090-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

 1 H  uman Trafficking and Profiteering: Analyzing Its Exploitative Angle Through the Financial Lens������������������������������    1 Rebant Juyal and Midhun Chakravarthi  2 Nexus  Between Illegal Wildlife Trade and Financial Crime: How to Counter It? A Case Study in Southeast Asia����������������������������   19 Aryuni Yuliantiningsih, Baginda Khalid Hidayat Jati, Daniel Jonathan Parluhutan, and Rohaida Nordin  3 The  Financial and Systematic Fraud: An Analytical Study����������������   35 Jagdish W. Khobragade and Simran Bais  4 Financial  Crises in Sri Lanka: In Search of Reasons, Sufferings, and Way Forward������������������������������������������������������������������������������������   49 Debasish Nandy, Abdullah-Al-Mamun, and Saifullah Akon  5 Controlling  Corruption and Economic Crime in Developing Economies: A Critical Analysis��������������������������������������������������������������   67 Baidya Nath Mukherjee  6 Money  Laundering Through the Arbitral Process: Controversial Issues Wait for Solutions ������������������������������������������������   77 Jaffar Alkhayer and Narinder Gupta  7 Online Fraud��������������������������������������������������������������������������������������������   97 Kanahaiya Lal Ambashtha and Pramod Kumar  8 Cryptocurrency  Fraud: A Glance into the Perimeter of Fraud����������������������������������������������������������������������������������������������������  109 Namrata Kothari  9 Blockchain  and Cryptocurrency Frauds: Emerging Concern������������  131 Apoorva Thakur

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10 Cyberspace  and Economy: Analyzing the Impact of Contemporary Cyberthreats on the Global Financial Order����������������������������������������������������������������������������������������  147 Rebant Juyal 11 The  Impact of Accounting Fraud Which Leads to Financial Crimes: Accounting Fraud������������������������������������������������  165 Yana Ustinova 12 Models  to Study the New Age Financial Crimes ����������������������������������  191 Chander Mohan Gupta 13 The  Regulatory Landscapes of Ponzi Schemes in India: With Special Reference to the State of Tamil Nadu������������������������������  215 E. Prema and V. Shyam Sundar Index������������������������������������������������������������������������������������������������������������������  229

Chapter 1

Human Trafficking and Profiteering: Analyzing Its Exploitative Angle Through the Financial Lens Rebant Juyal and Midhun Chakravarthi

Introduction Human trafficking is a global phenomenon that has grown exponentially in recent years. It is fuelled by poverty, despair, war, crises, and ignorance, as well as the unequal status of women in many societies. The globalization of the world economy has allowed traffickers to expand their reach across international borders with ease. Despite the efforts taken by governments like India to combat this crime, trafficking gangs have become more organized and are now engaging in newer forms of trafficking, such as forced labor and slavery. The consequences for those trafficked can be devastating; victims often suffer physical or psychological abuse at the hands of their captors while being denied basic rights such as education or healthcare services they need to live healthy lives upon release from captivity. In addition to this suffering inflicted on individuals caught up within these systems, there exists an economic cost associated with fighting trafficking, which includes funds spent on law enforcement activities needed for investigation and prosecution along with money allocated toward rehabilitation services provided for survivors once freed from bondage situations. Governments around the world must make a concerted effort if we hope to make any headway into R. Juyal (*) Assam (Central) University, Silchar, Assam, India Rashtriya Raksha University, Lavad, Gujarat, India Guru Gobind Singh Indraprastha University, Dwarka, Delhi, India M. Chakravarthi School of Criminology and Behavioral Sciences, Rashtriya Raksha University, Lavad, Gujarat, India Criminology and Crime Science, Rashtriya Raksha University, Lavad, Gujarat, India Criminology and Police Administration, D.G. Vaishnav College, Chennai, Tamil Nadu, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_1

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eliminating modern-day slavery through effective anti-trafficking policies that focus not only on punishing perpetrators but also providing assistance programs tailored toward helping survivors recover from traumatic experiences endured during captivity periods, so they may move forward into productive lives free from fear or exploitation. Only then will we begin making progress against what remains one of humanity’s most significant challenges today, which is ending human trafficking once and for all. Human trafficking thus remains a monstrous crime that has devastated the life, liberty, dignity, individual autonomy, and human rights of several people of the society for centuries. It involves transporting people from one place to another for exploitation and slavery, with traffickers often being known to their victims. Despite several laws and international instruments in place to govern human trafficking, there is still a spike in cases due to the lack of proper implementation of these regulations. Though it has only been in the past few decades that laws have been enacted to punish offenders, this crime continues to be accepted globally as an egregious violation of human rights and dignity. The United Nations Office on Drugs and Crime (UNODC) recently released its fifth Global Report under the 2010 Global Plan of Action to Combat Trafficking in Persons (United Nations Office on Drugs and Crime, 2020). The relevant report coincides at the time of catastrophic vulnerability emerging on account of the disastrous impact of the global pandemic, with many countries facing extreme poverty levels and vulnerable populations being exposed to sufferings more than ever before (Hiscott et al., 2020; Madhav, 2017). Women and children are particularly affected by these changes, making them easy targets for traffickers seeking exploitation opportunities during times of crisis or uncertainty (Blake & Wadhwa, 2020). In response to the diversely incriminating challenges, UNODC has taken up numerous initiatives aimed at tackling human trafficking across borders through increased coordination between governments worldwide as well as enhanced public awareness campaigns concerning the detriments associated with the said crime. These efforts include strengthening legislation related to prosecution against traffickers, improving victim identification processes, providing assistance services tailored toward victim’s needs, supporting data collection activities related specifically toward understanding trends better, increasing collaboration among international organizations concerned with combating trafficking networks, etc. Additionally, they also provide technical assistance programs which help build capacity within national law enforcement agencies responsible for investigating cases involving trafficked persons, so they can effectively address such crimes while respecting the fundamental rights of those affected by them too. When we look at human traffickers as a whole, it becomes quite difficult to segregate them into single one-time offenders or repeated offenders or an accomplice during trafficking. However, the Indian legislation consists of provisions to deal with all kinds of human trafficking that occurs. Victims who become easy targets for traffickers come from very poor economic backgrounds due to which many cases go unheard and the law turns a blind eye to these unseen victims. Rather than focusing

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on the crime and the victims which has been done so on many occasions previously, the chapter aims to focus on the profiteering aspect of human trafficking from the lens of traffickers. While focusing on the traffickers, an attempt is made to answer some of the questions as to why people become traffickers and commit this crime and the reason and motive for people to turn into traffickers. It can be seen that the traffickers are often known to the victims and it is more likely that the perpetrator of the crime is done by someone who is close to the victim. Despite several laws which are in place to govern human trafficking in India, there is a spike in the number of traffickers and cases. Though there are several provisions in place along with international instruments, there is a lacuna in the implementation, and a lengthy process for trial grants a safe passage for the traffickers to go scoot free from the clutches of law. Traffickers deploy several means of transporting their victims from one place to another, either for the purpose of exploiting them or to sell them either to criminal gangs or prostitution or to other human trafficking rackets. Among other means of transportation, trafficking through the ocean remains the cheapest and least challenging mode. However, due to the space constraints, traffickers confine victims in cramped spaces without food or enough room to breathe, making it extremely difficult for some of them to even make it to the destination. This therefore has led to transnational organized crimes and also trafficking in the oceans for which there are few provisions in the UNCLOS though it is insufficient to deal with the vast matrix of criminal activities occurring in the ocean due to the large area as compared to land wherein the perpetrators cannot be located easily nor can they be caught. This is another advantageous feature that traffickers have while transporting their victims through the seas; that is because of the vast area, and since they are mostly well acquainted with the terrain, it becomes easier for them to transport the victims without much hassle. The fight against human trafficking warrants sustained commitment from all stakeholders involved, that is, government authorities, civil society organizations, businesses, and others.

Human Trafficking The crime of human trafficking which patently remains an iniquitous crime finds its mention in varied legal instrument; however, Article 3 (a) of the Trafficking in Persons Protocol of the United Nations defines human trafficking that is “trafficking in persons” as: Recruitment, transportation, transfer, harbouring or receipt of persons, by means of the threat or use of force or the other forms of coercion, of abduction, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation. Exploitation shall include, at a minimum, the exploitation of the prostitution of others or other forms of sexual exploitation, forced labour or services, slavery or practices similar to slavery, servitude or the removal of organs.

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Human trafficking remains a well-organized and well-structured criminal enterprise. Migrants must be transported a long distance, have a coordinated strategy for each stage of the crime, and have a great quantity of money to pay for it. This consequently warrants the necessity of enormous resources. However, even after investment of huge resources for effective execution of the heinous crime, human trafficking is a lucrative criminal enterprise, with an estimated annual revenue of $32 billion, making it the third most profitable business for organized crime behind drugs and the arms trade (Barnato & Schlotterbeck, 2013). Narcotic trafficking is often linked to human trafficking because both involve the use of the same individuals and methods to enter a country. Human trafficking is one of the most rapidly expanding illicit enterprises. To legitimize their profits, traffickers turn to additional illegal operations including laundering money earned from forced labor, the sex industry, and the drug trade. Migrants and family members still in the country of origin are threatened with deportation, travel documents are seized, or violence is used to illustrate the traffickers’ authority over the migrants and their loved ones (Wooditch & Steverson, 2021).

Types of Human Trafficking Human trafficking as previously described in the chapter stands as one of the most profitable crimes in the world. The profiteering of the crime has grown into a 150 billion dollar industry (Niethammer, 2020). In addition to being a profiting criminal enterprise, the crime has diversified itself into various dimensions and forms; that is, human trafficking today exists in various types. This portion of the chapter discusses different types of human trafficking existing in the society.

Sexual Exploitation and Sex Trafficking Sexual exploitation is a heinous act that involves taking advantage of a victim’s vulnerabilities and dependence for sexual favors. This despicable behavior is characterised by an abuser who preys upon a victim to be exploited in sex trafficking who is reliant on them for their survival. The perpetrator often entices the victim by using their own needs, such as the promise of power or trust, or exploiting their socioeconomic status. In some cases, the perpetrator may even use drugs to manipulate and exploit their victim (Meshelemiah & Lynch, 2019). This type of behavior is not only morally reprehensible but also illegal and has no place in a just and compassionate society. In terms of sexual exploitation, we can classify it into two major parts. Commercial sexual exploitation (CSE) will lead to the one predominant way of sexual exploitation which can take the form of prostitution, and all other forms will fall into another category (Kulish et al., 2019). One of the most common and easily accessible targets of sexual exploitation is undoubtedly women and children (Dalla et al., 2022).

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Exploitation of Labors Labour exploitation is the mistreatment of employees for financial gain. When we view things through a financial lens, the advantage is not always in maximizing our profits or earning more cash; it can also come from paying our workers extremely little or nothing at all to complete our tasks, with the benefit going to the owner of the workforce. Such exploitation also continues with forcing people to work as bound laborers or slaves, as well as punishing them for not functioning and pushing them to perform to pay off their loans. They may engage into contracts with their approval for that reason. The employee will work for lengthy periods of time at the employer’s house, with specific limitations and little remuneration. People may be forced to perform a sexual advance through the use of violence or coercion by domestic employers (Interpol, 2022).

Exploitation for Forced Marriages Forced marriages are a form of human trafficking that involves a situation where one person possesses power over another for the purpose of exploitation. This form of human trafficking occurs when a family or an individual forces someone into marrying another person without their voluntary consent. In such cases, one or both parties do not willingly agree to the marriage, and the victims are subjected to compulsion, abuse, or pressure. Forced marriages can lead to physical, emotional, and psychological harm and can be a significant violation of human rights. It is crucial to understand the nature and consequences of forced marriages to provide support and protection to the victims and hold the perpetrators accountable for their actions. Governments, civil society organizations, and communities must work together to prevent and address forced marriages and ensure the dignity and rights of all individuals. No matter how old the person is, when someone is coerced into marriage, their rights and liberties are inevitably violated. Parents or other family members may drive a person into marriage under the guise of social or economic pressure without the person being aware that they are also committing a horrendous crime and joining the ranks of traffickers or perpetrators. Due to the drop in female sex ratios in countries like India, the traffickers used to sell girls for the purpose of marriage as well.

Illegal Activities Human trafficking as an illegal and inhumane practice involves the exploitation of vulnerable individuals, who are forced into labor or sexual servitude against their will. Traffickers traffic people for several illegal activities by luring them over their vulnerabilities. This type of trafficking allows criminal networks to benefit from a

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wide range of illegal operations without taking any risks. Victims are compelled to engage in a variety of unlawful actions such as theft, drug production, counterfeit goods sales, and forced begging in order to earn money for their captors. These activities can be extremely dangerous as victims frequently have objectives they must meet or face serious consequences if they fail (Interpol, 2022).

Exploitation for Organ Trade Organ trafficking is a global issue that has been gaining increasing attention in recent years. According to the Global Financial Integrity (GFI) estimates, 10% of all organ transplants including the lungs, heart, and liver are done via trafficked organs. However, the most prominent organs that are traded illicitly are the kidneys with the World Health Organization (WHO) estimating that 10,000 kidneys are traded on the black market worldwide annually or more than 1 every hour (Campbell & Davison, 2012). This crime often takes advantage of vulnerable individuals who need an organ transplant due to long processing times for legitimate donations. Criminals may take advantage of these needs by performing surgery without medical consent which puts victims’ health if not their lives at great risk as well as taking payment from desperate patients for illegal procedures and services. The need for organ transplants is expected to increase significantly in coming years due to aging populations and rising rates of diabetes among wealthy nations making this crime far more profitable than ever before unless urgent action is taken against it.

Exploitation of Children Children exploitation in various forms is a big problem in human trafficking; children are most vulnerable and in great demand for specific objectives. Though minors are subjected to many forms of trafficking, certain aspects stand out. For example, there has emerged a form of virgin trafficking in which purchasers seek for little females who have recently hit puberty. Militant groups also compel, threaten, or force children to become child soldiers.

Online Exploitation for Trafficking Human traffickers use Internet technology at every stage of their illegal actions, including deceiving individuals with false employment offers and promises and ultimately using them for profit. Victims are targeted and recruited using social media and online dating platforms where personal information and facts about

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people’s whereabouts are widely obtainable (Satapathy, 2022). These are the types which pave the traffickers to exploit their needs from the traffickers, and there is no wonder we can expect new other different types of human trafficking in coming days.

Human Traffickers and Their Strategies Human traffickers are those who attract their victims using threats of violence, deception, or other forms of compulsion in order to exploit them. Human traffickers remain active in society and build societal communities and strong links resulting in networks across countries, thus making them a well-organized crime. Traffickers may include recruiters, organizers, document forgers, and other professionals who facilitate the process of exploiting victims for their own gain. Victims are often coerced into these activities by threats or promises made by traffickers; they are then subject to physical abuse and psychological manipulation so that they remain under control throughout the period of captivity. This has devastating effects on its victims both physically and mentally, leaving them traumatized long after their ordeal has ended.

How Do Traffickers Deal with Their Victims? Traffickers target vulnerable persons primarily because the traffickers are able to fulfill what these people lack. This makes these vulnerable groups easy targets for traffickers. They lure their victims with material assistance, such as a place to stay, basic amenities such as clothing and food, and also an opportunity for growth in some cases. Apart from this, some traffickers also provide emotional support and in most instances a sense of belonging which many of these vulnerable targets lack. However, this does not necessarily mean that traffickers do not resort to kidnapping the victims and forcing them into exploitation. Traffickers also employ a variety of methods to control their victims lest they leave them. One of the most common tactics includes physical and emotional abuse combined with threats. They also ensure that their victims remain isolated from friends and family and do not try to make new acquaintances. Apart from this, traffickers make sure that the victims stay dependent on them financially, thus exploiting them economically. They make promises aimed at addressing their needs in order to impose control which in turn leads to the victims being trapped in this vicious cycle and fear leaving the safety provided by their kidnappers. The fear created in the minds of the victims by the traffickers are psychological trauma, fear of torture and threat to life, guilt and shame, emotional attachment, and also in some cases threats against their family.

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 erspectives of Human Trafficking: Various Types P of Traffickers Involved in Trafficking of Persons When we look at traffickers as a whole, there are various categories in which people operate as traffickers. Some may act alone on their own which amounts to small scale trafficking. The second type is opportunistic associations of traffickers in which there will primarily be two traffickers operating together but they will not be working in a systematic way and may limit to only one crime or trafficking for only one time. The third is the business enterprise type wherein there will be three or more traffickers who will be systematically engaged in trafficking persons as the sole component of criminal activities. The final mode of traffickers is the governance type wherein the traffickers will be belonging to a particular community or territory and they will be governing that area usually by means of fear and violence and they will be involved in various illegal activities. Trafficking of persons is just one of the crimes committed by the traffickers in a well-organized group. They are also involved in other crimes, and in many cases, all the crimes are interrelated and go hand in hand. For instance, these crime gangs engage in drug trafficking, money laundering, transnational crimes, and other forms of illegal activities.

Modus Operandi Adopted by Traffickers for Trafficking Recruitment Human trafficking is a meticulously organized operation that necessitates the traffickers’ mastery in brainwashing and gaining the girls’ trust. In this method, the traffickers first find and entice the victims; nowadays, recruitment is primarily done online through employment agencies, with false promises of jobs and compensation, as well as phoney romantic relationships and adoption. To combat illegal emigration and prevent vulnerable groups from being exploited, as well as those who have been victims of human trafficking, the central government has launched a number of programs, particularly aimed at women and girls. Since 2016, the Indian government has made it essential for all female workers with ECR (Emigration Check Required) passports to obtain emigration clearance in order to work in 1 of the 18 ECR nations. This can only be done through one of six state-run recruiting agencies. The foreign employer must make a deposit of USD 2500 in order to hire people directly. Since June 2015, foreign employees have been required to register in the e-Migrate system. The Indian government has taken a number of steps to combat illegal emigration and protect vulnerable groups from exploitation. Most notably, the central government has implemented several programs specifically targeted at women and girls in order to prevent human trafficking. In 2016, all female workers with ECR passports

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were required to obtain an emigration clearance before they could work in 1 of the 18 countries that are part of this agreement. This can only be done through one of six state-run recruiting agencies after a foreign employer makes a deposit of USD 2500 for hiring people directly. Additionally, since June 2015, there is also an e-Migrate system which requires foreign employees to register as well as provide their personal information such as name and address, etc. prior to entering any country under ECR scheme or working abroad on employment basis. These measures have been successful so far in protecting vulnerable populations by preventing them from being exploited while travelling overseas or even within India itself by unscrupulous employers who take advantage of their lack of knowledge about legal procedures when it comes to immigration laws. The Indian government’s efforts have not gone unnoticed either; many international organizations such as the UN Women have praised its initiatives aimed at tackling illegal migration while providing safety nets for those affected by human trafficking across the globe.

Transportation The victim is transported from the place of origin to the destination when consent is obtained, whereupon they are sold either at market rate to the subsequent trafficking ring in the line of command or directly to the purchaser. The routes chosen by traffickers are those where corrupt politicians are stationed, which could be a 30-year age restriction that has been implemented by the Indian government for all female emigrants using ECR passports to work abroad in Gulf countries, with the exception of nurses.

Documentation The smuggling of human traffickers into another nation sometimes involves the use of fake documents such as visas and identification cards, as well as passport fraud involving corrupt diplomats in embassies.

Exploitation According to supply and demand, the methods used to exploit victims vary greatly from one country or region to the next. Trafficking victims are exposed to a variety of human rights breaches, including bonded labor, modern slavery, domestic slavery, prostitution, surrogacy, and organ transplantation. When victims revolt, they are degraded through various methods like persuasion, mental torment, and physical

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torture, among others. In the last stage, the victims are compelled to acknowledge and obey the conditions. The victims are constantly being moved by the traffickers, which is one of the reasons it is tough to track them down. The network will be difficult to break up since the trafficker would be one of us, working another job in addition to the illegal commerce.

Motive for a Person to Become a Trafficker People become involved in human trafficking for a variety of reasons. In fact, comprehending the motivations and conduct of perpetrators is critical in any endeavor to prevent and eradicate human trafficking. It is commonly considered that monetary gain motivates people to commit these crimes. Nonetheless, this hypothesis hasn’t been thoroughly tested. There is currently only a small amount of research devoted to determining the causes or incentives that drive people to commit or engage in human trafficking. The most prevalent motivation given for those committing trafficking is for financial and economic gain, as it is typically considered a part of organized crime. People want financial gain for a variety of reasons, including poverty, maintaining a lifestyle, a means of easy cash, as well as the desire to make a lot of money. Poverty and a lack of job possibilities have been shown to lead people to take part in and perpetuate human trafficking. Another factor driving people to exploit others was a desire to amass significant money. When trafficking is regarded as an organized criminal issue, the large profits to be obtained are always cited as the primary motivator for people to participate in this crime. Despite the fact that many people engage in this criminal activity for the only purpose of surviving, the desire to make a lot of money is nevertheless present in some cases. One example can be found in Israel, where some drug traffickers were motivated by a desire to get wealthy, while others were motivated by a desire to improve their financial situation. Traffickers frequently denied having any intention of exploiting or having done so. The dispute is that what they did was human trafficking, and they believe that they did nothing illegal and were just dragged along by circumstances beyond their control. People may commit trafficking offences without realizing it due to a lack of legal awareness or knowledge about what constitutes human trafficking.

Human Trafficking in India Human trafficking for the purpose of sexual exploitation has become an increasingly common occurrence all over the world. India is no exception; it is second only to China in terms of human trafficking numbers and victims (Kang, 2017).

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Trafficking involves people being unlawfully transported from one place to another, often against their will, with a view toward exploiting them for sex or labor purposes. The scale of this problem in India is huge; according to estimates from the Walk Free Foundation Global Slavery Index 2014, there are 14 million victims across the country who have been subjected to various forms such as bonded labor, domestic slavery, forced marriage, and child labor, among others (Wang, 2020). This issue requires urgent attention due its detrimental impact on both individuals and society at large. Inadequate police departments and low rates of prosecution and large quantum of profits provide motivation to traffickers with minimal risks. One of the major reasons for trafficking of persons in India is for sexual exploitation. Millions of individuals in India are exploited by traffickers for commercial sex. Under the Yogini System which was an ancient tradition followed in India, Dalit females as part of ceremony were “married” to a local temple deity but are actually employed as sex slaves by higher caste people as a form of sexual exploitation for scheduled caste women and girls. Women and girls from India are the primary victims of sex trafficking, although traffickers also illegally recruit women and girls from Nepal and Bangladesh. Women and girls from Central Asian, European, and African countries are also exploited in commercial sex, particularly in Goa state. According to NGOs, victims of internal trafficking in western India come from practically every state. A growing number of traffickers are exploiting women and minors in sex trafficking outside of typical red-light districts, such as tiny hotels, vehicles, huts, and private residences. According to media reports, women and children are increasingly being recruited for commercial sex via social media platforms such as mobile dating apps and websites. Traffickers execute transactions via encrypted digital communication platforms, allowing them to avoid detection by law authorities (UNODC, 2021). Women and girls in India are subjected to a variety of human rights violations, including commercial sexual exploitation, arranged marriages, forced labor, and debt bondage. The prevalence of these issues is particularly high in areas where the gender ratio is heavily skewed toward men. Women and girls from neighboring countries are also trafficked into India for sexual exploitation, while Indian women may be trafficked to the Middle East for similar reasons. Additionally, many Indians willingly migrate abroad with hopes of finding employment only to become victims within their destination country’s human trafficking industry. The root causes behind this alarming situation can be traced back to widespread poverty levels across India coupled with low educational attainment rates among its population – both factors that contribute significantly toward perpetuating such forms of abuse against women throughout the nation’s borders. To address this issue effectively requires an integrated approach involving multiple stakeholders ranging from government authorities down through civil society organizations as well as international bodies such as the UNICEF who have been actively working on initiatives aimed at eradicating child labor practices within Indian communities since 1999. As mentioned earlier, trafficking of persons for various purposes has been occurring for a long time; however, just like every other aspect of life which became affected by the COVID-19, human trafficking also picked up pace (Lal, 2021).

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During the pandemic of 2020, when women and children became easy targets for traffickers and also since there was a huge financial loss, trafficking became one of the easiest modes of earning money. Deprivation, starvation, hunger, and lack of basic amenities for sustenance on a day-to-day basis were the plight of most of the working population in several states. Due to loss of job opportunities, many of these people became the prey for the vicious cycle of debt and predatory interest rates which triggered decades of intergenerational bondage. Children were eventually forced out of school to support the family by working as a daily wage earner. This speaks volumes about the mindset of traffickers and why they resort to committing these crimes. Sometimes it may also be the case that it is out of necessity that traffickers commit the crime. The situation in India was such that over 39 crores of unorganized and migrant workers who are outside the socioeconomic umbrella became the most vulnerable and this in turn led to becoming the easiest target for the organized crime network of human trafficking.

Legal Framework Regulating Human Trafficking Human trafficking has been considered as one of the worst crimes against humanity, and traffickers who resort to such crimes are punished taking into account the gravity of the crime. Every country has its own way in dealing with traffickers, and before a legislation is enacted, the law always takes into account the socioeconomic and other related aspects into place. Every legislation which has been enacted till now has always been from the point of view of the victims. It is true that the sufferers must be compensated and justice should be delivered as their rights have been violated and more than that the mental anguish and pain that they must have gone through. However, even the traffickers are humans, and nobody is born a criminal which makes it even more critical to understand what factors forced these people to turn into traffickers and to understand the motive behind the crimes despite there being stringent laws against trafficking. The issue with the legal framework enforceable in the Indian republic is that it is fragmented and there is no comprehensive umbrella under which the variety of crimes under trafficking can be dealt with. With a plethora of legislations and provisions, it becomes easy for traffickers to find loopholes and escape the justice system through technicalities. The term trafficker has not been defined in any of the legal instruments in so much as there is no definition for a murderer or a rapist. However, it is necessary to have a clear understanding on who can be considered a trafficker and what are the requisites for a person to be labeled as a trafficker. The Indian Penal Code contains provisions for human trafficking and the punishment for the crimes committed under the umbrella of trafficking of various persons. As part of the Criminal Law (Amendment) Act 2013, which was passed last year, Section 370 of the Indian Penal Code was replaced with Sections 370 and 370A IPC, which establish comprehensive penalties for all forms of human trafficking, including the trafficking of children for the purpose of sexual or physical

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exploitation, slavery, or the removal of organs for biomedical experimentation. For those who exploit victims of human trafficking for labor, the Amendment Act falls short. If you know or have cause to think that an individual has been trafficked and engage in sexual exploitation of that individual, you will be penalized by imprisonment for a period of 3–5 years and a fine. The Amendment Act, on the other hand, does not impose a similar penalty on those who participate in physical exploitation of such victims. As was said above, most of the people who are trafficked in India are forced to work. In India, the bulk of trafficking victims are not protected by Section 370, which forbids them from having sexual relations with other trafficking victims. The Anti-trafficking Bill, 2021, introduced in the Indian Parliament, was an effort to address the serious issue of human trafficking. It proposed strict punishment for traffickers and rehabilitation of victims staying in shelters. However, it failed to take into account those who need assistance beyond these basic measures. Healthcare services, legal aid, welfare programs, and employment opportunities are essential for a successful reintegration process back into their communities and families – something that cannot be accomplished with just criminal law enforcement alone. Furthermore, international human rights experts have raised concerns about this bill as it does not adhere to global standards set by UN bodies such as linking sex labor with migration or other forms of exploitation associated with trafficking activities like forced labor or child marriage without providing any protection against them. This is why there is a strong demand from civil society organizations for community-based rehabilitation models which can provide holistic support rather than focusing solely on criminal prosecution measures only addressing one aspect of this complex problem. Ultimately while India’s efforts toward curbing human trafficking should be appreciated, more comprehensive policies must also be implemented if we are going to truly tackle the root causes behind this heinous crime – poverty coupled with gender inequality which often leads people into vulnerable situations making them easy targets for traffickers preying on their desperation. India’s existing laws and practices do not meet the country’s obligations under the UN Trafficking Protocol to take steps for prevention of human trafficking. The Immoral Traffic (Prevention) Act (ITPA), 1956, which is primarily focused on punishing and rehabilitating traffickers, does not have jurisdiction over establishing an agency outside of its enabling law. Furthermore, it only makes a passing reference to preventive measures against human trafficking; it does not address any other form of exploitation or abuse in this regard. Similarly, the Bonded Labour Act, 1976, also fails to provide protection provisions for victims of human trafficking despite its Preamble stating that “to avoid exploitation of weaker sections” eradication of the bonded labor system should be done. It is therefore imperative that India adopts more stringent measures toward prevention and protection from such crimes if it wishes to fulfill its duties under international protocols like the UN Trafficking Protocol.

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The Constitution of India is the backbone of our legal regime, and it contains several articles which protect citizens against exploitation. Article 23 explicitly prohibits traffic in humans and beggars, making this practice punishable under law. Additionally, Article 24 specifically protects children below age 14 from working in hazardous environments such as factories or mines. These two articles are integral to protecting vulnerable individuals within society from exploitation and human trafficking.

Administrative Measures and Interventions India has taken a step ahead in combating human trafficking and ensuring that the real traffickers are caught and punished accordingly (PTI, 2020). To combat human trafficking, India has established the Anti-trafficking Nodal Cell, which was established by the Ministry of Home Affairs (MHA) (CS Division) in 2006, to communicate various decisions and follow up on action done by the state governments. Antihuman trafficking units in every state and UT are coordinated on a regular basis by MHA and their appointed nodal officers. Another initiative taken by India to improve the effectiveness in tackling the crime of human trafficking and to increase the responsiveness of the law enforcement machinery is by issuing advisories to all the states and union territories. The Ministry of Home Affairs is the department that deals with human trafficking, and the ministry issues comprehensive advisories on antihuman trafficking. The Ministry of Home Affairs has also let out a comprehensive scheme in strengthening law enforcement response in India against trafficking of persons. Under this scheme, there is training and capacity building, and funds have also been established for antihuman trafficking units for 270 districts of the country. By establishing a separate unit which specifically deals with this crime, there is an increase in the effectiveness and efficiency in dealing with the traffickers and to understand the reason behind the crime and ensure that the real offenders are caught and punished accordingly. Training of trainers (TOT) seminars on combating human trafficking for police officers and prosecutors at regional, state, and district levels were organized across the country in order to strengthen the capability of law enforcement authorities and raise awareness among them. In order to educate and sensitize the judges of the lower courts, a judicial colloquium on human trafficking is held at the high court. Judicial officers are to be educated about human trafficking’s many facets in order to enable a swift court process. Eleven judicial colloquiums have been held in Chandigarh, Delhi, Himachal Pradesh, Maharashtra, Chhattisgarh, Tamil Nadu, Bihar, Uttar Pradesh, Jharkhand, and Odisha thus far.

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Conclusion Human trafficking remains as the most detrimental form of human rights violation practiced in the modern times for immoral and unlawful gain of profits by traffickers. One of the greatest drawbacks in preventing the crime of human trafficking is that only the traffickers at the tertiary level are caught and put behind bars. Traffickers of this crime is an organized criminal activity, and rather than catching the real culprits behind the crime, it is the people who are most affected. By doing this, the crime is still active and will go on even if the recruiter or the people in lower levels are caught as they can be easily replaced with other people. The effects on those trafficked can be devastating both physically and mentally; many suffer physical abuse due to the harsh working conditions, while others experience psychological trauma due to being held captive by traffickers with no way out other than compliance with their demands. Furthermore, these victims may also struggle financially after escaping from captivity since most lack access to resources necessary for them to reintegrate into society. It is essential that governments prioritize this issue by introducing laws which punish traffickers more severely while providing greater protection for potential victims through improved education about human trafficking risk factors. Additionally, government initiatives should focus on ensuring all survivors receive adequate support during rehabilitation so that they may move forward with dignity after experiencing such horrendous circumstances. Only then will we see real progress toward eliminating this heinous crime once and for all. Thus, the main objective to curb this entire crime altogether would be to ensure that the real traffickers who run the organization of this crime are caught and, also, that such a crime cannot gain great momentum on a large scale without the influx of corruption in it. Corrupt officials and people who aid or are an accomplice of the traffickers for their crimes must also be punished in a severe manner which would set an example for others following in their footsteps. Each of India’s 30 states serves as a source and destination for individuals trafficked in Southeast Asia (PTI, 2017). Apart from that, the present international strategy to trafficking, namely, a human rights-based strategy, has paid no attention to comprehending the traffickers and other people involved in the crime as a means of combating it. Human rights-based approaches place a greater emphasis on victims and give insufficient attention to the causes and motivations for human trafficking. Human trafficking persists as a grave issue in India, and sociocultural factors have a significant influence on it. Unfortunately, some people are motivated to engage in this heinous crime due to societal views that suggest trafficking is not a harmful activity and, in some cases, a virtuous deed. In addition, the lack of awareness among people about their own human rights and the consequences of their actions coupled with poverty plays a significant role in enabling human trafficking to exploit vulnerable individuals. Some people may also engage in trafficking to help others find work and improve their lives. Shockingly, in certain cases, children are considered as breadwinners and a source of family pride (York, 2022), leading

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to their exploitation in human trafficking. In some cases, parents who are unable to provide for their children due to financial difficulties resort to selling their children, unknowingly becoming traffickers themselves. These complex sociocultural factors necessitate urgent action and awareness campaigns to protect the vulnerable and put an end to human trafficking. While the heinous crime of humans remains to proliferate its dreadful impact in the society, the world must not remain a mute spectator to restrain its proliferation at all costs. Since no nation remains immune from human trafficking and the offence operates through a well-crafted global network, the world must come together against the crime and reorient the global cooperation in this regard. It is essential that we recognize this abhorrent practice existing in society, necessary, standards of protection needs to be instituted to preserve the human dignity of such vulnerable groups, further  measures like increased public awareness campaigns about how people can spot signs of someone being trafficked, providing support services once identified, or even bringing perpetrators to justice must be explored. There must also be greater collaboration between government agencies at international level, so resources can effectively tackle this global issue head on.

References Books, News Articles, and Journals Barnato, K., & Schlotterbeck, B. (2013, August 9). Organized crime: World’s most lucrative criminal activities. CNBC. https://www.cnbc.com/2013/08/09/Organized-­crime:-­Worlds-­most-­ lucrative-­criminal-­activities.html Blake, P., & Wadhwa, D. (2020). 2020 year in review: The impact of COVID-19  in 12 charts. World Bank. https://blogs.worldbank.org/voices/2020-­year-­review-­impact-­covid-­19-­12-­charts Campbell, D., & Davison, N. (2012, May 27). Illegal kidney trade booms as new organ is “sold every hour.” The Guardian. https://www.theguardian.com/world/2012/may/27/ kidney-­trade-­illegal-­operations-­who Dalla, R. L., Roselius, K., Erwin, S., Peter, J., Panchal, T. J., Ranjan, R., Mischra, M., & Sahu, S. (2022). Family sex trafficking among the Bedia caste of India: Defying the dominant human trafficking discourse. Journal of Interpersonal Violence, 37(23–24), NP22966–NP22991. https://doi.org/10.1177/08862605211073104 Hiscott, J., Alexandridi, M., Muscolini, M., Tassone, E., Palermo, E., Soultsioti, M., & Zevini, A. (2020). The global impact of the coronavirus pandemic. Cytokine & Growth Factor Reviews, 53, 1–9. Interpol. (2022). Types of human trafficking. Interpol. https://www.interpol.int/en/Crimes/ Human-­trafficking/Types-­of-­human-­trafficking Kang, L. (2017, July 1). No country can stay aloof from fight against human trafficking, says China. The Business Standard. https://www.business-­standard.com/article/international/no-­country-­ can-­stay-­aloof-­from-­fight-­against-­human-­trafficking-­says-­china-­117070100753_1.html Kulish, N., Robles, F., & Mazzei, P. (2019, March 2). Behind illicit massage parlors lie a vast crime network and modern indentured servitude. The New York Times. https://www.nytimes. com/2019/03/02/us/massage-­parlors-­human-­trafficking.html.

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Lal, N. (2021). India’s child-trafficking nightmare deepens in the pandemic. Global Asia: A Journal of the East Asia Foundation, 16(1). https://www.globalasia.org/v16no1/feature/ indias-­child-­trafficking-­nightmare-­deepens-­in-­the-­pandemic_neeta-­lal Madhav, N. (2017). Pandemics: Risks, impacts, and mitigation. In Disease control priorities: Improving health and reducing poverty (Vol. 9, 3rd ed.). The International Bank for Reconstruction and Development. Meshelemiah, J. C., & Lynch, R. E. (2019). Sex trafficking. In J. C. Meshelemiah & R. E. Lynch (Eds.), The cause and consequence of human trafficking: Human rights violations. The Ohio State University Pressbook. Niethammer, C. (2020, February 2). Cracking the $150 billion business of human trafficking. Forbes. https://www.forbes.com/sites/carmenniethammer/2020/02/02/cracking-­the-­150­billion-­business-­of-­human-­trafficking/ PTI. (2017, June 29). US continues to put India in tier-2 in trafficking report. The Economic Times. https://economictimes.indiatimes.com/news/politics-­and-­nation/us-­continues-­to-­put-­india-­in-­ tier-­2-­in-­trafficking-­report/articleshow/59360536.cms PTI. (2020, June 26). India making significant efforts towards eliminating human trafficking: US report. Deccan Herald. https://www.deccanherald.com/national/india-­making-­significant-­ efforts-­towards-­eliminating-­human-­trafficking-­us-­report-­853938.html Satapathy, R. (2022, August 12). Technology has both enabled and impeded trafficking of humans. The Times of India. https://timesofindia.indiatimes.com/blogs/voices/ technology-­has-­both-­enabled-­and-­impeded-­trafficking-­of-­humans/ UNODC. (2021, October 14). The role of technology in human trafficking. United Nations: Office on Drugs and Crime. www.unodc.org/unodc/en/human-­trafficking/Webstories2021/the-­role-­ of-­technology-­in-­human-­trafficking.html United Nations Office on Drugs and Crime. (2020). Global report on trafficking in persons 2020 (United Nations Publication, Sales No. E.20.IV.3). United Nations. Wang, K. (2020, August 5). Human trafficking in India and China. Presidio Education. https:// www.presidioeducation.com/blog/human-­trafficking-­in-­india-­and-­china Wooditch, A.  C., & Steverson, L.  A. (2021, January 22). Human trafficking. Encyclopedia Britannica. https://www.britannica.com/topic/human-­trafficking York, H. (2022, August 11). U.  S. immigration policy and human trafficking: Two sides of the same coin. Human Trafficking Institute. https://traffickinginstitute.org/u-­s-­immigration­policy-­and-­human-­trafficking-­two-­sides-­of-­the-­same-­coin/

Legislative Acts and International Conventions Bonded Labour Act, 1976. Criminal Law (Amendment) Act, 2013. Protocol to Prevent, Suppress and Punish Trafficking in Persons Especially Women and Children, supplementing the United Nations Convention against Transnational Organized Crime, 2000. The Immoral Traffic (Prevention) Act (ITPA), 1956. The Indian Penal Code, 1860. The Trafficking in Persons (Prevention, Care and Rehabilitation) Bill, 2021.

Chapter 2

Nexus Between Illegal Wildlife Trade and Financial Crime: How to Counter It? A Case Study in Southeast Asia Aryuni Yuliantiningsih , Baginda Khalid Hidayat Jati Daniel Jonathan Parluhutan , and Rohaida Nordin

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Background The illegal trade in wildlife (IWT) is estimated to be worth up to USD 20 billion per year. The illegal wildlife trade refers to crimes involving live wildlife, wildlife products, or their derivatives, both flora and fauna (May, 2017). Wild flora and fauna can be exploited by criminals along the entire supply chain, from poaching and transportation to processing and selling. Other illegal activities are often associated with wildlife crimes, including money laundering, corruption, and document fraud (Interpol, 2022). IWT contributes to corrupt practices, threatens biodiversity, and can cause significant harm to public health and the economy. To transfer, hide, and launder the profits made, perpetrators take advantage of various weaknesses in the financial and nonfinancial sectors that allow wildlife crime to continue while undermining the integrity of the financial system. Despite this fact, in many jurisdictions, investigations into the financial footprints left by these crimes are still relatively rare. Illegal trade in protected wildlife is a serious global problem and is part of transnational crime. Based on the Global Financial Integrity report entitled “Transnational Crime and the Developing World,” published in March 2017, the global flow of funds that revolves around the crime of illegal trade in protected wildlife reaches USD 10 billion every year. In practice, this poaching and illicit trade also involves corruption and money laundering, which damage the global economy. Not only has

A. Yuliantiningsih (*) · B. K. H. Jati · D. J. Parluhutan Faculty of Law, Universitas Jenderal Soedirman, Purwokerto, Indonesia e-mail: [email protected]; [email protected]; [email protected] R. Nordin Faculty of Law, Universiti Kebangsaan, Cheras, Malaysia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_2

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this impact on the global economy, but this crime also has an impact on the environment, security, and government of a country, even across countries (May, 2017). In Asia, Southeast Asian countries are the source, transit, and destination markets for illegal wildlife trade. Traffickers do not discriminate between domestic and foreign wildlife species, which are shipped and consumed throughout the region (OECD, 2022). Southeast Asia, perhaps more than any other region, encapsulates the full range of global challenges confronting biodiversity management and wildlife trade. There are significant political and socioeconomic disparities: rapid infrastructure development, often aided by foreign investment, and land acquisition. The region’s biodiversity hotspots are still under threat from conversion. Southeast Asia’s consumption of wildlife products is stable, if not increasing. The area’s endangered endemic species and local populations of more widely distributed taxa continue to face grave threats, from illegal trade and hunting. This is especially concerning for many of the region’s terrestrial fauna. The ten countries of the Association of Southeast Asian Nations (ASEAN) function as source, consumer, and entrepôts for wildlife coming from within the region as well as the rest of the world – for trade that is both legal and illegal, with many inadequacies and loopholes concerning regulation, law enforcement, and overall levels of sustainability (Krisnasammy & Monica, 2020). Indonesia, as the center of biodiversity in Southeast Asia, is among the top 10 live animal exporting countries (Interpol, 2022). Indonesia has 700 mammal species, 1500 bird species, 600 reptiles, and 270 amphibian species. While in aquatic fauna, there are 500 species of coral (18% of the world’s coral reefs are in Indonesia), 2500 species of fish, 2500 species of mollusks, 1500 species of crustaceans, and various other marine biota. Based on information released by the Ministry of Environment and Forestry, the number of endemic fauna found in Indonesia consists of 270 endemic mammal species, 386 endemic bird species, 328 reptile species, 204 amphibian species, and 280 fish species (Setiawan, 2022). Based on Beren’s information, it is also known that at the global level, the crime of IWT is in the third rank of illegal businesses that harm many governments and the world community after the narcotics business and human trafficking. This crime, of course, is often found together with other forms of action such as fraud, forgery, violence, corruption, and money laundering that occur through various jurisdictions of many countries; this condition is due to the shape and characteristics of IWT crimes that tend to be in the form of transnational organized crime (Dwi Arjanto, 2017). Based on a report from the Financial Action Task Force (FATF), which is an independent intergovernmental institution, it is known that in a global scope, the profits derived from this illegal animal trade crime reach billions of USD, between USD 7 and 23 billion. The supply chain of this illegal animal trade varies in each country, and the treatment varies among various animal species, but there are general similarities that occur in every case where this illegal wildlife trade syndicate conducts poaching, obtaining and cultivating various types of wildlife. Illegal wildlife trade is a financial crime and a transnational organized crime that requires strategy and international cooperation to combat. This article aims to examine how to

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tackle the illegal wildlife trade as a financial crime and transnational organized crime based on international law and in the legal framework in ASEAN.

The Legal Framework for Regulation of the Wildlife Trade In international level, there are several conventions that regulate and relate to counter the illegal wildlife trade: (a) The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) of 1973 At the international level, it has been agreed by various countries that international trade of wild animals and flora is regulated by the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) 1973. This convention is clearly needed, given the enormous value of illegal animal trade activities, including hundreds of species of animal and plant specimens. The existence of CITES is used to provide assurance of the preservation of various specimens (Pitman, 2020). CITES establishes the basic legal framework for regulating international trade in CITES-listed species. Articles II and VIII of the Convention require State Parties to the Convention not to trade in listed species except in accordance with the Convention, to take appropriate measures to enforce the Convention, and to prohibit trade in violation of the Convention, including measures to penalize such trade. CITES works by subjecting international trade of specimens of selected species to certain controls. All import, export, reexport, and introduction from the sea of species covered by the Convention have to be authorized through a licensing system. Each Party to the Convention must designate one or more management authorities in charge of administering that licensing system and one or more scientific authorities to advise them on the effects of trade on the status of the species. The species covered by CITES are listed in three Appendices, according to the degree of protection they need. Appendix I includes species threatened with extinction. Trade in specimens of these species is permitted only in exceptional circumstances. Appendix II includes species not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilization incompatible with their survival. Appendix III contains species that are protected in at least one country, which has asked other CITES Parties for assistance in controlling the trade. Changes to Appendix III follow a distinct procedure from changes to Appendices I and II, as each Party is entitled to make unilateral amendments to it. In fact, currently there are still many IWT in the world. Illegal wildlife trade involves the illicit trade of protected animals, animal parts, and derivatives thereof, including procurement, transport, and distribution, in violation of international or domestic law, and money laundering related to this activity. The United Nations estimates that in excess of 7000 different species are illegally trafficked. Transnational organized crime (TOC) is increasingly engaged in this behavior, which promotes

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and institutionalizes corruption. The definition of illegal wildlife trade basically cannot be separated from the notion of wildlife trafficking, based on the module issued by the United Nations Office on Drugs and Crime; this action is an activity that includes illegal trade, smuggling, hunting, capture, and collection of illegal animals, various rare and protected species, both derivatives and processed products from these fauna and flora. This definition also includes various species that get quotas in international trade (UNODC, 2019). Stephen F. Pires and William D. Moreto explained that wildlife trafficking also causes severe impacts on humans and other living creatures. The extraction of various natural resources without adequate regulation has resulted in resource scarcity for the state and local communities that depend on these natural resources for their livelihoods. The act of wildlife trafficking also tends to result in a high risk of death for traded flora and fauna; this is due to the characteristics of these actions which are carried out in secret (Pires and Moreto, 2016). The illegal wildlife trade is a large-scale type of transnational organized crime. IWT’s illegal profits run into billions of dollars every year. IWT contributes to corrupt practices, threatens biodiversity, and can cause significant harm to public health and the economy. To transfer, hide, and launder the profits made, perpetrators take advantage of various weaknesses in the financial and nonfinancial sectors that allow wildlife crime to continue while undermining the integrity of the financial system (FATF, 2020). (b) United Nations Convention Against Transnational Organized Crime (UNTOC) of 2000 In addition to CITES, the legal basis for tackling IWT is the United Nations Convention Against Transnational Organized Crime (UNTOC) of 2000. Illegal wildlife trade is an organized transnational crime because it fulfills the elements regulated in Article 3 of UNTOC: (a) It is committed in more than one State. (b) It is committed in one State but a substantial part of its preparation, planning, direction, or control takes place in another State. (c) It is committed in one State but involves an organized criminal group that engages in criminal activities in more than one State. (d) It is committed in one State but has substantial effects in another. The international community needs to cooperate to eradicate it. The crimes involved in the illegal animal trade are corruption, bribery, and money laundering. The conventions can be used to ensure that effective international cooperation. It calls on member states to make illicit trafficking in protected wild fauna and flora a serious crime. “Serious crime” shall mean conduct constituting an offence punishable by a maximum deprivation of liberty of at least 4 years or a more serious penalty (Article 2(b), UNTOC). This is to ensure that the offense is transnational in nature and involves an organized criminal group. In September 2019, the UN General Assembly called again to its members “to amend national legislation, so that criminal acts related to illegal animal trade can be treated as predicate crimes in money laundering” (UNGA Resolution 73/343). A country implements its CITES obligations through three distinct phases: first, by adopting national implementation measures including legislative and economic

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measures, information systems, management plans, and law enforcement units; second, ensure that national actions have been fulfilled in accordance with those within the jurisdiction and control area; and third, fulfill the obligations of the CITES secretariat such as reporting on the volume of trade and measures that may affect its international obligations. On July 23, 2021, the United Nations General Assembly (UNGA) passed a resolution on combating wildlife trafficking. This Resolution upholds earlier resolutions on this subject adopted by the UNGA in 2015, 2016, 2017, and 2019 and builds upon them. The Resolution acknowledges the CITES legal framework and its significant function as the main mechanism for controlling international trade in species of fauna and flora listed under CITES. It also applauds the pertinent resolutions and decisions made in the Conference of Parties (CoP) 18th of CITES, in August 2019. The Resolution calls on UN members to act forcefully to prevent, combat, and eradicate wildlife crime. (c) The United Nations Convention Against Corruption (UNCAC) of 2003 The United Nations Convention Against Corruption (UNCAC) is a legally binding international anti-corruption instrument. The Convention covers five key areas: preventive measures, criminalization and law enforcement, international cooperation, asset recovery, and technical assistance and information exchange. The UNCAC sets a series of minimum standards that are to be met under the framework and overseen by a review process. According UNODC, while there are no specific provisions in the text regarding wildlife crimes, the provisions of the UNCAC apply to all forms of criminality that may be facilitated by corrupt actors. UNCAC provisions can thus be used to develop a more stringent framework of laws and measures to combat illegal wildlife trade (UNODC, 2019). The birth of various transnational organized crimes is something that cannot be avoided from the process of globalization, digitalization, and ease of transportation that occurs throughout the world. This situation makes cooperation between various countries a form of action that must be taken in the process of preventing and enforcing justice against international crimes. Effective coordination in conducting the investigation and prosecution of crimes across national borders, extradition of perpetrators, protection of various witnesses, as well as the exchange of evidence to freezing of assets are various actions that require comprehensive cooperation that should be able to penetrate the political tendencies of national interests between various countries (Dandurand & Jahn, 2021).

The Link Between Illegal Wildlife Trade with Financial Crime The term financial crime is frequently used but has no internationally accepted definition. Until the latter part of the twentieth century, financial crime had a limited scope and was understood to include corruption, bribery, fraud, money laundering (ML), the proceeds of drug trafficking, and other serious crimes. The term has

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expanded to include laundering the proceeds of any crime together with terrorist financing (TF), the financing of the proliferation of weapons of mass destruction, breaches of financial and trade sanctions, market abuse, and tax evasion. Many crimes along the wildlife trade route, such as poaching and trafficking, may be facilitated by corruption. It is also regarded as one of the major impediments to effective law enforcement. Bribes, preferential treatment, and even state capture can all be seen as forms of corruption in the law enforcement process. Furthermore, criminal groups involved in illegal trade are able to launder the proceeds of crime, thanks to lax laws and the support of public officials and institutions. Corruption therefore involves a variety of actors, including the CITES competent authorities, public officials, villagers, forest rangers, police, customs, traders and brokers, professional/international hunters, logistics companies (shipping lines, airlines), veterinarians, and game farmers, among others (UNODC, 2012). The forms of corruption that facilitate poaching crimes, among others, are as follows: (i) Bribes and extortion may play a role in the process of issuing licenses for hunting. Individuals, and companies, may use corruption or personal relationships in order to obtain hunting permission which otherwise wouldn’t be issued. Public officials or officials from international organizations may also ask for illegal payments as a “condition” to issue such a permit (Yeater, 2011). (ii) Bribery of public officials to issue false documents (document fraud). (iii) Preferential treatment and favourable decisions (cronyism) by wildlife officials for friends and relatives (e.g., issuance of hunting licenses). Illegal wildlife trade generates illegal profits worth up to billions of dollars. However, to date, the efforts of various countries to address IWT have generally not focused on the financial aspects of IWT.  Seizures of wildlife and illegal wildlife products are carried out worldwide by authorities, but financial investigations are rarely carried out in conjunction with these seizures or used as a tool to identify and prosecute perpetrators. Perpetrators use several methods of money laundering, namely: abuse of the formal financial sector; use of shell and cover companies by both small- and large-scale IWT actors to cover payments and launder profits from their illegal activities; purchase of property and luxury goods; and money transfer business activities (FATF, 2020). Among the various actions to tackle the crime of illegal wildlife trade, one method that is quite often used is related to tracing the flow of illegal money or can also be referred to as “illicit financial flow” (IFF). This action is quite often expressed by various experts and cross-border criminal law enforcers as an action capable of uncovering various transnational crime phenomena that have high complexity. The continuous use of IFF terminology by various international institutions provides a broader picture of how the IFF can show the large scale of the scope of a transnational crime, so that data on the formation of crime prevention policies and economic development can be carried out. However, it does not rule out that there are still obstacles in the IFF process, especially related to the tracing of various illegal assets that have gone through the process of money laundering (Aziani, 2018). In

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addition, the trade in protected wildlife is a lucrative business and coincides with the crime of money laundering. The perpetrators of the crime of trafficking in protected wildlife often disguise the results of their crime from the law enforcement agencies. Proceeds from illegal wildlife trafficking qualify as proceeds of crime, and moving illicit money into the financial system makes them money launderers. Payments within the supply chain are in substantial amounts and will require the movement of these illicit funds in and out of legitimate financial facilities, making wildlife crime a substantial money laundering threat (Thomas, 2019). All IWT criminals frequently use shell companies and front companies to conceal payments and launder the proceeds of their illegal activities. They primarily use shell companies to facilitate the transfer of value between criminal union members, between buyers and sellers, or to hold assets. Furthermore, criminals frequently use legitimate frontline companies to conceal the transfer of value from IWT. Criminals, on the other hand, use the import-export industries to demonstrate the legal movement of goods and payments across borders. Countering illicit financial flows has been recognized in the 2030 Sustainable Development Goals under target 16.4 that call for “significantly reduce illicit financial flows and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime”.

The Role of Private Sector to Follow the Money The private sector has an important role to play in combating financial flows from the illegal wildlife trade. Wildlife traders use services provided by financial institutions, including banks, payment institutions, as well as nonfinancial institutions, such as traders of high value goods (e.g., art, antiques, auction houses, and other collectibles) to transfer and hide the proceeds of their crimes. Financial and nonfinancial institutions (also known as “reporting entities”) should identify, assess, and take effective action to address their money laundering and terrorist financing risks. They should report behavior and/or transactions with suspected links to illegal wildlife trade to the country’s financial intelligence unit (FATF, n.d., 2020). When establishing business relationships, carrying out transactions in certain circumstances, or having suspicions of illegal wildlife trade, reporting entities should conduct customer due diligence. If a reporting entity suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity such as illegal wildlife trade, it should report this to the financial intelligence unit. Measures that need to be considered include large cash or other deposits, wire transfers, multiple cash deposits and withdrawals, and/or unexplained wealth from government officials working in forestry agencies, wildlife management authorities, zoo and wildlife park employees, or CITES management authorities (CMAs); excessive cash, deposits and withdrawals, and/or unexplained wealth from government officials involved in the management or oversight of government stockpiles of seized illegal wildlife products; shipments of legal wildlife (fauna and flora) with anomalous, incomplete, or otherwise suspicious CITES certificates; and transactions using

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names of ingredients or products in the traditional medical trade that refer to CITES species (FATF, 2020). One of the most effective but underused weapons in fighting IWT is financial investigation, according to the United Nations Office on Drugs and Crime and the Asia/Pacific Group on Money Laundering, which copublished a report in 2017, “Enhancing the Detection, Investigation and Disruption of Illicit Financial Flows from Wildlife Crime.” Among its many recommendations, the report states that financial asset forfeiture should be used as a deterrent by depriving perpetrators of ill-gotten gains from IWT. It also recommended that financial institutions develop better intelligence linkages to identify suspicious transactions. Financial intelligence units should conduct parallel financial investigations, pursue those involved in money laundering activities, and seek to provide money laundering charges if possible in the investigation of criminal acts of illegal wildlife trade and identify, freeze, confiscate, and seize related assets when conducting money laundering investigations related to illegal wildlife trade. Law enforcement unit, in line with FATF Recommendation 30, should follow suit as quickly as possible financial instructions in criminal acts of illegal wildlife trade when committing predicate crime investigation to reveal the level of crime fully, detect people and companies that are previously unknown, and confiscate the proceeds of the illegal wildlife trade before it is taken away (Financial Action Task Force (FATF), 2020).

 he Legal Framework to Counter Illegal Wildlife Trade T in ASEAN Southeast Asia (SEA) is well-known for its abundant biodiversity, but at the same time, it is considered a hotspot for illegally traded wildlife and wildlife products (ADB, 2021). Southeast Asia is an important transit node, connecting importers and exporters, for legal trade as well as commodities smuggled to or through the region such as ivory, rhino horn, pangolins, tortoises, and freshwater turtles. Over the past 10 years, there have been more efforts in the area to combat the illegal wildlife trade (IWT) because of the seriousness of the issue, in which numerous traded species are on the verge of extinction. Countries in Southeast Asia have established international organization, namely, Association of Southeast Asian Nations (ASEAN). It consists of ten countries, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The ten countries of ASEAN serve as sources, consumers, and entrepôts for both legal and criminal commerce in wildlife from across the world, with various gaps and inadequacies in legislation, law enforcement, and overall sustainability levels. This interconnected economy fuels the multibillion-­dollar live animal trade as well as the demand for wild animals and their parts and products for use as trophies and baubles (or luxury goods) and traditional medicine elements (including formal prescriptions and informal “health tonics,” etc.) (Krisnasammy & Monica, 2020).

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The ASEAN region has a generally high rate of adherence to international treaties and conventions on a wide range of issues. Some of these treaties are useful for establishing a regional legal framework for cooperation in wildlife and timber trafficking. All ASEAN members are as the Parties of CITES. It should be noted that joining a convention does not automatically imply the adoption of standards and requirements within national legal frameworks. To accomplish this, each party to a convention must enact new domestic laws or amend existing ones in cases where the current national framework does not meet the convention’s requirements. In other cases, before becoming a party to an international treaty, governments must amend their domestic legal framework (Gonzales & Yang, 2016). International conventions such as CITES, the UNTOC, and the UNCAC are legally binding, and ratifying countries must accede to these conventions through the adoption of the provisions by integrating these into national law. In order to achieve the objectives of each international convention, it is first necessary achieve technical compliance with the relevant provisions of these instruments and, secondly, to ensure the effectiveness of their implementation. In addition to the arrangements in the convention, ASEAN has its own legal framework and cooperation: (a) The ASEAN Inter-Parliamentary Assembly (AIPA) In 1977, ASEAN established its regional parliamentary body, the ASEAN Inter-­ Parliamentary Assembly (AIPA). AIPA acts as a hub for information and communication between Member Parliaments and seeks to promote understanding and cooperation between the members. AIPA encourages information sharing and exchange in order to develop recommendations or coordinated legislative ideas for regional cooperation and growth. On September 21–23, 2021, the virtual event featured insights from leaders and experts in countering wildlife trafficking, presenting issues, best practices and lessons learned, and the best way forward to stop transnational organized wildlife crime in a post-COVID world. With the theme “Towards a New Era of Partnership,” the forum was a joint collaboration with WWF, the Asian Development Bank, World Bank Global Wildlife Program, Global Environment Facility, and the United Nations Development Programme (AIPA, 2021). (b) Treaty on Mutual Legal Assistance for Criminal Matters 2004 ASEAN coordinates regional international frameworks for cooperation, including extradition agreements and multilateral mutual legal assistance treaties (MLATs). The treaty aims to strengthen ASEAN member states’ effort and capacity to combat transnational crimes and other transnational challenges by enhancing cooperation in law enforcement and mutual legal assistance in criminal matters. It was also in response to the need to improve the effectiveness of judicial assistance and to regularize and facilitate mutual legal assistance’s process in view of ASEAN member states’ different legal systems and procedural requirements. (c) The ASEAN Wildlife Enforcement Network (ASEAN-WEN) 2005 One of the collaborations carried out by the government in overcoming the illegal trade in animals is cooperation with countries in the ASEAN region, in the form of

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the ASEAN Wildlife Enforcement Network (ASEAN-WEN), formed through a meeting with ministers from ASEAN countries responsible for the implementation of CITES in Bangkok on December 1, 2005. The aims of ASEAN-WEN are to improve the efficiency of intelligence exchange, create efficient interagency law enforcement actions, and increase fishing effort to prosecution and punishment (ASEAN Secretariat, 2005). Since wildlife commerce is becoming more prominent than ever, the problem of wildlife trafficking is now ranked on par with other serious crimes like the trafficking of narcotics, weapons, and people (UNGA, 2015). The ASEAN security ministers at the Senior Officials Meeting on Transnational Crime (SOMTC) have placed it as one of their top priorities in the fight against transnational organized crime (Kuala Lumpur Declaration, 30th Sept 2015). (d) The Chiang Mai Statement of the ASEAN Ministers Responsible for CITES and Wildlife Enforcement on the Illegal Wildlife Trade (IWT) On March 21, 2019, ASEAN ministers adopted the Chiang Mai Statement of the ASEAN Ministers Responsible for CITES and Wildlife Enforcement on the Illegal Wildlife Trade (IWT), which outlines ASEAN’s commitments on increased action-­ oriented policy, law enforcement, wildlife cybercrime, and demand reduction. The statement tackles ASEAN coordination on IWT, closing domestic wildlife markets where it contributes to poaching and the illegal trade, enhancing domestic legislation, reaffirming stronger responses to corruption and money laundering, and ensuring continued efforts on enforcement networking. This ministerial meeting also acknowledged the creation of an International Wildlife Cybercrime Working Group under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) and encourages ASEAN member states to create national-level task forces to monitor the online illegal wildlife trade (USAID Wildlife Asia, 2019). (e) ASEANAPOL Other examples of regional cooperation include the Counter Wildlife Trafficking Executive Leadership Consultation meeting (June 8, 2021), which was cohosted by the Association of Southeast Asian National Police (ASEANAPOL) secretariat and high-level police law enforcement leaders from across the region and in which ASEAN’s top law enforcement leaders emphasized the importance of tackling wildlife crime as a serious transnational crime that necessitates a multiagency and multination approach (USAID Wildlife Asia, 2019). Wildlife trafficking is considered a “serious crime” by all nations in the Southeast Asian region, either through references in their national laws or through adherence to the definition provided by UNTOC (UNODC and Freeland, 2015): “‘Serious crime’ shall mean conduct constituting an offense punishable by a maximum deprivation of liberty of at least four years or a more serious penalty”. The Philippines has the greatest maximum sentence of 20  years in prison for wildlife and forest crimes, whereas Indonesia has the largest required fine (FREELAND and ASEANWEN, 2016). However, these are only the maximum punishments, which may not always accurately reflect the judgments made.

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Another point of entry to prosecute wildlife offenders is through anti-money laundering (AML) laws, as wildlife trafficking is considered a predicate offense to money laundering, meaning it forms part of organized crime, in the majority of Southeast Asian countries (FREELAND and ASEAN-WEN, 2016). With regard to AML crimes, the maximum imprisonment time (20 years) and the highest fine have been set by the government of Indonesia. The lowest imprisonment time (5 years) is imposed both in Cambodia and Malaysia, and the lowest fines are set in Thailand (FREELAND and ASEAN-WEN, 2016). The examples of implementation of CITES in ASEAN members can be described as follows: (a) Indonesia Indonesia had two landmark court cases convicting wildlife law violators under Indonesia’s Quarantine Act, fines in Kalimantan’s judiciary system were increased by 800%, and Government Regulation No. 20 (P.20/2018) was introduced in 2018, expanding Indonesia’s protected species list from 677 to 921 species of flora and fauna. This is in contrast to the main wildlife laws, which are still from 1990 (Act No. 5/1990) and 1999 (Regulation No. 7/1999) and do not provide adequate species regulation and protection (Krisnasammy & Monica, 2020). Act No. 5/1990, “Conservation of Living Resources and their Ecosystem,” and Government Regulation No. 7/1999, “Preservation of Plants and Animal Species,” define the conditions for the legal and illegal keeping of wildlife and how a list of protected species is determined, respectively. According to these laws, consultations with scientific authorities and a ministerial decree specify which animals are on such a list. To date, non-native species are not featured on this list. This legal loophole allows the trade of any non-endemic animal poached illegally abroad. The sale of foreign poached illegal wildlife trade trafficked in Indonesia’s markets is documented by the wildlife NGO TRAFFIC. For example, surveys of species of turtles and tortoises for sale in Jakarta’s markets found that non-native species made up 77% of all animals advertised (ADB, 2021). In 2018, the Indonesian government launched a revision of the Natural Resources Conservation Law of 1990 (No.5/1990). Some aspects of the draft law target illegal wildlife trade more effectively – such as banning the trade in species regulated by CITES (Gokkon, 2018). The Quarantine Act could provide a new pathway toward animal smuggling eradication. However, the Act also has technical loopholes because it relies on the completeness of animal and plant certification documents. If these documents enable endangered species trading, then future cases might escape the legal snares. The 2019 Quarantine Act was also not the primary legal basis for biodiversity conservation, he said. There is still some legal vacuum in dealing with endangered species that are not protected, or non-native  – for example, provisions regarding treatment mechanisms, repatriation, administrative sanctions, and even funding. In international practice of dealing with money laundering, institutions such as Financial Transaction Reports and Analysis Center (PPATK) are referred to by the common name, namely, the Financial Intelligence Unit (FIU). In the recommendation document, it states that if a Financial Institution suspects that the funds come

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from criminal activities, they must be permitted or asked to immediately report their suspicions to the competent authorities. (b) Malaysia Malaysia has three strong legislations criminalizing wildlife trade: Wildlife Conservation Act, 2010; International Trade in Endangered Species Act, 2008; and the Customs Prohibition Act, 2012. The country’s biggest challenge is that among its three administrative regions of Peninsular Malaysia, Sarawak, and Sabah, domestic wildlife protection laws are not harmonized (Krisnasammy & Monica, 2020). (c) Lao Peoples Democratic Republic In 2018, the Prime Minister of the Lao People’s Democratic Republic (PDR) issued Prime Minister’s Order No. 05, which prohibits the import, transit, trade, and export of all wildlife body parts, as well as the hunting of all wild animals, and prohibits the establishment of wildlife farms. Furthermore, wildlife and wildlife products owned by individuals and organizations must be registered, hunting weapons used in poaching must be collected and destroyed, and increased vigilance at international checkpoints and borders is required (WWF, 2018). (d) Philippines Under the Department of Environment and Natural Resources (DENR)-Global Environment Facility (GEF)/Asian Development Bank (ADB) Project Combating Environmental Organized Crime in the Philippines, the Philippines is currently proposing an amendment to the Wildlife Resources Conservation and Protection Act of 2001 (Republic Act 9147), the country’s main wildlife protection law. This initiative has the backing of the Environment Secretary, who has called for tougher penalties to combat IWT (see also Sect. “Definition of Fraud and Its Classification” in Chap. 3). The amended bill would raise the maximum prison term from 12 to 20 years and the maximum penalty from PHP 1M to PHP 2M (USD 20,791 to 41,582). (e) Singapore Singapore, a major transshipment hub for IWT, has promised to impose a ban on domestic elephant ivory trade beginning September 2021, charging violators of the Endangered Species (Import & Export) Act with up to USD 10,000 (USD 7293) per specimen, not to exceed USD 100,000 (USD 72,923) in total, and/or facing up to 12 months in jail (Choo, 2019). Not only will the ban prohibit the sale of elephant ivory and ivory products, but it will also prohibit their public display for commercial purposes (Choo, 2019). (f) Thailand In November 2019, Thailand passed the Wildlife Conservation and Protection Act B.E. 2562 (2019) (WARPA), which included a new category for non-native CITES-listed species and increased penalties for wildlife crime (Krisnasammy & Monica, 2020; USAID and MCR Society, 2021; USAID Wildlife Asia, 2019). It currently includes 50 non-native CITES listed species considered “controlled” that

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will be subjected to immediate regulation for possession, breeding and trade. The law will also be supplemented by a series of subsidiary legislations that are being developed to direct its implementation and enforcement. The WARPA 2019 also considers internet trade a violation. Today, the ASEAN members commit to the United Nations 2030 Agenda for Sustainable Development Goals (SDGs) Goal 15, Target 15.7, to quote “Take urgent action to end poaching and trafficking of protected species of flora and fauna and address both demand and supply of illegal wildlife products” and in addition to “Enhance global support for efforts to combat poaching and trafficking of protected species, including by increasing the capacity of local communities to pursue sustainable livelihood opportunities.” Effective international cooperation among law enforcement agencies in other jurisdictions is essential to combat any transnational crime. Yet for wildlife crimes, which often transcend national borders, this is still not a common practice. Of respondents completing the questionnaires, 47% said that international cooperation with law enforcement agencies of other jurisdictions did not occur for wildlife crime cases, including requests to share information, conducting joint investigations, or cooperation for other processes during the handling of cases. Comprehensive, multiagency, and flexible cross-border cooperation is crucial to ensure the appropriate investigation and prosecution of wildlife crimes, and although it is often difficult, it should be seen as an opportunity rather than an obstacle. If implemented properly, cooperation can open avenues to obtain additional evidence, access information, recover proceeds, freeze funds, confiscate property, and arrest and return fugitives that would otherwise be immune to prosecution.

Conclusion Illegal wildlife trade is related to financial crime, namely, money laundering and corruption. To overcome it, the role of the state, international organizations, and the private sector is needed. At international level, the countries can use the legal framework of CITES, UNTOC, and UNCAC to counter IWT. The member states of conventions should make rules that provide sanctions against perpetrators and cooperate with other states and international organizations. To tackle money laundering in IWT, there is a method to follow the flow of money. This action involves the role of private sector. In the regional cooperation mechanisms, ASEAN countries already have a legal framework to counter IWT, including through the implementation of CITES and UNTOC and UNCAC in national law. Other legal frameworks and cooperation in ASEAN to counter IWT are the Treaty on Mutual Legal Assistance in Criminal Matters (MLAT)-ASEAN, the ASEAN Wildlife Enforcement Network (ASEAN-WEN), and the ASEAN Inter-Parliamentary Assembly ASEANAPOL (Chiang Mai Declaration, 2019).

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References ADB. (2021). Closing policy and information gaps in WildlifeProtection. https://development. asia/explainer/closing-policy-and-information-gaps-wildlife-protection AIPA. (2021). https://aipasecretariat.org/the-­roles-­of-­aipa-­parliamentarians-­on-­counter-­wildlife-­ trade-­and-­covid-­19-­pandemic/ Arjanto, D. (2017). PPATK: Kejahatan Satwa Masif dan Transaksional Lintas Negara (PPATK: Massive and Transnational Transactional Animal Crime). https://nasional.tempo.co/ read/842972/ppatk-­kejahatan-­satwa-­masif-­dan-­transaksional-­lintas-­negara. Accessed 28 Aug 2022. ASEAN Secretariat. (2005). ASEAN Launches the ASEAN Wildlife Law Enforcement Network (ASEAN-WEN). https://cites.org/eng/news/sundry/2005/ASEAN-WEN.shtml Aziani, A. (2018). Illicit financial flows: An innovative approach to estimation. Springer. Chiang Mai Statement. (2019). Chiang Mai Statement of ASEAN Ministers Responsible for CITES and Wildlife Enforcement on Illegal. Choo, (2019). Singapore to ban domestic trade of ivory from 2021 [WWW Document]. Straits Times. https://www.straitstimes.com/singapore/environment/spore-to-bandomestic-trade-of-ivory-from-2021 Dandurand, Y., & Jahn, J. (2021). The future of international cooperation against transnational organized crime: The undoing of UNTOC? Global Initiative Against Transnational Organized Crime, 1–18. FATF. (2020). Money Laundering and The Illegal Wildlife Trade, ATF, Paris, France, https:// www.fatfgafi.org/publications/methodandtrend/documents/money-laundering-illegal-wildlifetrade.html FATF. (n.d.). How can private sector help stop money laundering from illegal wildlife trade? FREELAND and ASEAN-WEN. (2016). ASEAN handbook on legal cooperation to Combat Wildlife Crime. Gokkon, B. (2018). Environmental advocates take aim at proposed revisions to Indonesia’s conservation act  – Pacific Standard. Pacific Standard. https://psmag.com/environment/new-­ criticism-­of-­indonesia-­conservation-­law. Accessed 13 Aug 2022. Gonzales, B., & Yang, S. (2016). ASEAN handbook on legal cooperation to combat wildlife crime. Freeland Foundation. Interpol. (2022). Wildlife crime. https://www.interpol.int/en/Crimes/Environmentalcrime/ Wildlife-crime Krisnasammy, K., & Monica, Z. (2020). Traffic report Southeast Asia: At the heart of wildlife trade (issue February). https://www.traffic.org/site/assets/files/12648/sea-­traps-­february-­2020.pdf May, C. (2017). Transnational_Crime-final-1. Global Financial Integrity, March, 54. https://gfintegrity.org/report/transnational-­crime-­and-­the-­developing-­world/ OECD. (2022). The illegal wildlife trade in Southeast Asia Institutional Capacities in Indonesia, Singapore, Thailand and vietnam. https://www.oecd.org/gov/illicit-trade/brochure-illegalwildlife-tradesea.pdf Pires, S. F., & Moreto, W. (2016). The illegal wildlife trade, Oxford Handbooks Online: Criminology and Criminal Justice. Pitman, M. (2020). The convention on international trade in endangered species of wild flora and fauna and the illegal wildlife trade: A critical perspective. Wildlife Trafficking: The Illicit Trade in Wildlife, Animal Parts, and Derivatives, 149–186. https://doi.org/10.24921/2020.94115945.06 Setiawan, A. (2022). Keanekaragaman Hayati Indonesia: Masalah dan Upaya Konservasinya. (Indonesian biodiversity: Problems and conservation efforts). Indonesian Journal of Conservation, 11(1), 13–21. https://doi.org/10.15294/ijc.v11i1.34532 Thomas, J. (2019). https://theaseanpost.com/article/money-­laundering-­and-­illegal-­wildlife-­trade\. Accessed 13 Aug 2022. UNGA. (2015). UNGA A/RES/69/314, Tackling illicit trafficking in wildlife, https://cites.org/ sites/default/files/eng/news/pr/2015/UNGA_res_illicit_trade_wildlife.pdf

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UNODC. (2012). Wildlife and forest crime: Analytic toolkit. http://www.cites.org/eng/resources/ pub/Wildlife_Crime_Analytic_Toolkit.Pdf; https://www.interpol.int/Crimes/Environmental-­ crime/Wildlife-­crime; https://publicpolicyindonesia.wordpress.com/2020/01/30/wildlife-­ trafficking-­in-­indonesia. Accessed 13 Aug 2022. UNODC and Freeland. (2015). Legal framework to address wildlife and forest crime a Rapid Assesment. https://www.unodc.org/roseap/uploads/archive/documents/Publications/environmentalcrimes/Legal_Study_WTT_09_10_April_2015.pdf UNODC. (2019). Corruption and wildlife and forest crime. https://www.unodc.org/unodc/en/corruption/wildlife-­and-­forest-­crime.html USAID and MCR Society. (2021). USAID Wildlife Asia Counter Wildlife Trafficking Digest: Southeast Asia and China, 2019. USAID Wildlife Asia. (2019). Scaling efforts to counter-wildlife trafficking through Legislative Reforms – A selection of best practices, key innovations and model provisions. https://www. usaidwildlifeasia.org/resources/reports/inbox/20190816_uwa-list-of-best-practices-and-modelprovisions.pdf Wildlife Trade, 2019 available at https://asean.org/asean2020/wpcontent/uploads/2021/01/ChiangMai-Statementof-ASEAN-Ministers-Responsible-for-CITES.pdf WWF. (2018). https://www.wwf.mg/en/?328772/Lao-Prime-Ministers-Order-Gives-New-Hopefor-Wildlife Yeater, M. (2011). Corruption and illegal wildlife trafficking in corruption, environment and the United Nations convention against corruption. UNODC. http://www.unodc.org/documents/ eastasiaandpacific/indonesia/publication/Corruption_Environment_and_the_UNCAC.Pdf

Chapter 3

The Financial and Systematic Fraud: An Analytical Study Jagdish W. Khobragade and Simran Bais

The Concept of Fraud and Financial Fraud Fraud is an intentional deception made for personal gain or to damage another person. Fraus Omnia Vitiate is fraud vitiates everything it touches (Lenaerts, 2013). When fraud is involved in civil contracts or in the establishment of a law, all such laws or contracts unraveled are made into nothing at all. If fraud can be proven, such laws by their natures could not exist, for they were created under both a false pretence and understanding and assent on false pretences (Salinger, 2013). The biggest fraud is to cheat oneself: “Rather fail with honor than succeed by fraud.” With the change and growth of Indian industries as well as commercialization of the world, the sector suffers various kinds of challenges when it falls to corporate governance and financial risk. The management of financial risk and fraud was a component of corporate governance and industrialization, and it deals with the intentional behavior and choices made by those who manage money and other assets on behalf of employers, employees, clients, and investors. The illegal and unethical management of financial resources is referred to as financial fraud. A company or investor will suffer considerable losses if financial resources are misused frequently. There are times when the financial loss is deftly camouflaged in the accounting records that are used to track resource-related actions, allowing it to continue until a sizeable sum of money and other assets are siphoned off and no longer in the owner’s control. This type of commercial fraud may go unnoticed. The terrible fact is that these criminals constantly alter their tactics; therefore, businesses’ risk profiles need to be monitored and J. W. Khobragade (*) Department of Law, Maharashtra National Law University, Nagpur, Maharashtra, India e-mail: [email protected] S. Bais Global Jindal Law School, Sonipat, Haryana, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_3

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evaluated constantly (Schmid, 2012). The aspect of intentional deception or concealment of facts or misrepresentation to clients or falsification to the statement regarding financial information made the various kinds of fraud/scandals and changes the healthy company or institute to a fraudulent person. The aim of the study is to analyze the concept of financial and systematic fraud. The study reviews the multiple causes which contribute to the rise of financial fraud as well as the systematic risk which affects the economic growth. This should facilitate identification and approach to combat or address financial and systematic fraud. These all are going to be explained by the authors in this paper.

Definition of Fraud and Its Classification According to Merriam Webster Dictionary, fraud is defined as the intentional deception to cause a person to give up property or some lawful right. According to Business Dictionary, fraud is defined as the deliberate omission, alteration, or concealment of the facts in order to (i) obtain an unfair advantage, (ii) persuade others to part with valuable property or waive a legal right, or (iii) cause harm in any way. Fraud must be committed intentionally; poor managerial decisions that may even result in the loss of a company’s asset do not typically qualify as fraud. Fraud is the deception of another person in land grants and conveyances and deals and the sale of products and other transactions to their detriment. Fraud may involve the suppression of the truth or the hint of lying. Understanding the term of fraud in this situation requires reference to several Indian legal statutes. The following is how the term “fraud” was defined in the Explanation annexed to Section 447(1) of the Companies Act, 2013: Fraud in respect to a company’s or other corporate entity’s affairs comprises (a) any act, (b) any omission, and (c) the concealment of any fact or (d) any abuse of power done by a person or another person with their knowledge, whether or not there is any unjust gain or loss, with the intention to mislead, exploit, or harm the interests of the firm, its shareholders, creditors, or any other person. When someone gains property through illegal means, they are not legally entitled to do so. Conversely, when someone loses property through illegal means, they are not legally allowed to do so. Additionally, Section 17 of the Indian Contract Act of 1872 provides the following definition of fraud: Fraud is defined as any of the following actions taken by a party to a contract, or with his knowledge, consent, or through his agents, with the purpose of misleading the other party or his agent, or to convince the other party to enter into the contract: (i) the active concealing of a fact by one having knowledge or belief of the fact, (ii) the proposal as fact of something which is false by one who does not believe it to be true, (iii) an unintentional promise, (iv) any other act designed to deceive, and (v) any act or omission that the law expressly declares to be unlawful. It is important to note that a simple quiet about facts that could influence a person’s willingness to engage into a contract does not constitute fraud unless the

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situation calls for the person remaining silent to speak or whether his silence is speech in and of itself. Fraud is defined as “Any intentional, with or without purpose to defraud, act of omission or commission by any person during a banking transaction or in the books of accounts kept by a bank’s manual staff or computer system that results in unjust gain for a short while or otherwise for any person” (Merriam-Webster, 2020). The following categories have been created by the RBI to ensure that banks report fraud to it consistently and in accordance with the IPC: Forgery of documents and instruments, manipulation of the books of accounts, negligence, a lack of cash, cheating, irregularities in the issuance of credit facilities against illicit gratification, and cases of fraud not covered by the IPC are only a few of the crimes that fall under this category. According to this definition, fraud is any action or omission that is used to obtain illegal gain or loss through deception, concealment of facts, suppression of truth or falsehood, abuse of position, or any other method that may be harmful to the interests of a business, institution, creditors, employees, or any other person.

Legislations Related to Fraud The following legislations are related to financial frauds in India: the Indian Contract Act, 1872; the Indian Penal Code, 1860; the Prevention of Corruption Act, 2013; the Prevention of Money Laundering Act, 2012; the Companies Act, 1956 and 2013; the Information Technology Act, 2008; and the Fugitive Economic Offenders Act, 2018; and SEBI Act 1992 Regulates Share Market and Prohibites of Insider Trading. Corporate fraud includes accounting fraud, securities fraud, insider trading, bribery and corruption, money laundering, and embezzlement. These activities can result in significant financial losses and legal consequences for the company and those involved. Preventing corporate fraud requires effective internal controls, legal and regulatory frameworks, and whistleblowing mechanisms.There are a variety of corporate fraud schemes, some of which are shown in the following Fig. 3.1.

Financial and Systematic Fraud Accounting fraud or financial fraud involves misrepresenting financial data by manipulating the books and deceiving investors. Capitalizing expenses, side deals, exchange transactions, channel stuffing, accelerated revenues, and delayed expenses are the most common accounting frauds. Management is typically responsible for doing this. Modern technological developments like the Internet and mobile computing have increased financial fraud in recent years (Sheng-Cheng Yeh et al., 2009). Social variables like the wider availability of credit cards have increased expenditure while also leading to an uptick in fraud (Sánchez et al., 2009). Since fraudsters are always

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Theft of cash, physical assets or confidential information Inappropriate Journal Vouchers

False employment credentials and Suspense accounting Fraud

Misuse of accounts Bribery and Corruption Procurement and Payroll Fraud Financial Accounting misstatements and Fraudulent expense claims

Fig. 3.1  Types of corporate fraud

improving their techniques, it is essential for detection methods to be flexible enough to keep up. CI and data mining have already demonstrated their utility in related fields like credit card approval, bankruptcy prediction, and share market analysis (Panigrahi et al., 2009). ACFE (Association of Certified Fraud Examiners) defines financial statement fraud as “The intentional, deliberate, misstatement or omission of material facts, or accounting data which is misleading and, when considered with all the information made available, would cause the reader to change or alter his or her judgment or decision” (Association of Certified Fraud Examiners, 2022).

Types of Financial Fraud Financial fraud can be divided into the following types: Identity Fraud: when one person uses the personal identity of any other person, without authorization, for committing fraud or deceiving another person or third person mostly for financial advantages, e.g., unknown withdrawal of charges or money by your debit card.

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Investment Fraud: Investment fraud means the illegal sale of financial instruments. For example, investment fraud includes advance fee fraud, Ponzi schemes, pyramid schemes, and market manipulation fraud. Mortgage and Lending Fraud: when any person misrepresents or deceives to the borrower through facts, information, or figures relating to property or mortgage or lender loan, purchase, or insure a loan, e.g., bank records, tax returns, etc. Mass Marketing Fraud: fraud committed by using mass communication like the Internet, telephone, mass mailing, etc. to transact with various victims, e.g., fake checks, fake calls claiming to be from the government, etc. Embezzlement: Employee theft, often known as embezzlement, is the practice of taking money that has been committed to your care but actually belongs to someone else. Although employee embezzlement is the most prevalent, other parties with fiduciary responsibilities may also be held accountable (Howarth, 2022). Payoff and Kickbacks: Payoff fraud is when fraudsters impersonate a lender or another title company to receive the funds from disbursement after the settlement process, either from refinancing or the sale of a property (Parker & Garrity, 2003). Skimming: It is a type of white-collar crime that involves taking the case of a business prior to entering it into the accounting system.

Causes of Financial and Systematic Fraud Financial fraud has increased in India over the last few years and has become one of the key obstacles preventing international companies from investing in India, according to a joint Grant Thornton and ASSOCHAM poll performed in 2015. Growing corporate fraud will be terrible for India as the economy expands. The rising trend of nonperforming assets increases more danger and the risk of fraud. Nonperforming assets (NPAs) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days (Sporta, 2018). Based on the RBI’s official figures, the ratios of gross and net NPA as a proportion of total loans have risen dramatically from 2.3% and 1.1%, respectively, in 2007–2008 to 9.1% and 3.7% in 2018–2019. Furthermore, the banking industry recorded a total of 6801 scams in 2018–2019, totaling to INR 715.43 billion. In terms of banking operations, 53% of these frauds (3606 frauds) are mostly tied to credit lending (Sood & Bhushan, 2020). Insider involvement, management “dishonesty,” ineffective internal and statutory audits, regulatory violations (particularly with regard to the issuance of letters of credit), senior management’s failure to put in place an effective governance strategy, or all of the above are suggested as potential causes for why these frauds occurred. This has caused policy analysts and academic researchers to reevaluate the quality of current governance requirements and determine how governance and efficiency affect the soundness of Indian banking. Recognizing the importance of good governance for banks and its implications, regulators and lawmakers in India have undertaken several efforts to institutionalize

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governance processes for banking businesses (Seth, 2004). It is important to note that the SEBI under Clause 49 (LODR) Regulations, 2000, and the Ministry of Corporate Affairs’ guidelines have been used by the Indian government to develop an institutional system for bank governance (Rawal, 2017). A nation’s ability to conduct banking and finance is one factor that influences how much it produces and consumes commodities and services. It serves as a clear barometer of the residents’ welfare and standard of living. Because it represents the financial difficulty of borrower clients or inefficiencies in transmission systems, a high number of NPAs in the banking sector are a cause for concern. Most often, specific environmental, institutional, or human causes and opportunities lead to financial reporting fraud. These factors and chances increase the pressures and rewards that motivate people and businesses to commit financial reporting fraud. Financial reporting fraud may happen if the appropriate combustible combination of causes and opportunity is present. The desire to receive a higher price from a stock or debt issuance or to satisfy investor expectations, i.e., capital market pressures, is a common motivation for financial reporting fraud (Bankruptcy and Related Frauds, 2017). Financial statement fraud is the intentional act or omission which misleads by giving a misleading impression of a financial institution to the reader or authority by doing the misstatement or illegal concealment in financial statement data. Misuse of accounts, inappropriate journal vouchers, suspense accounting fraud, manipulation of liabilities and expenses, erroneous disclosures on financial statements, and overstating of assets are all examples of financial statement fraud. Any organization’s finance and accounting department has the potential to abuse its authority, corrupt procedures, and get around controls in order to further personal interests or any other dishonest goals. In this sense, white-collar crime in business is represented by fraud in corporate financial statements, stock market manipulation, commercial bribery, and embezzlement (Acar, 2021). Causes of Financial Fraud: The fault may be direct or indirect, intentional or unintentional, which can give reason to fraudster to commit fraud. This could be intentional manipulation to rules and regulations for financial gains and corrupting the system at ground level due to lack of knowledge. When the tempering made to the system and due procedure does not follow by authority or organisation as well as public. When KYC procedure not followed or not completed by an individual and the account get opened by the officials in pressure or by any other reason the fraudster uses the opportunity. When there is a poor control environment, no regulatory body to monitor system, improper documentation, inadequate accounting system, no team management, these increase chance of fraud. With this chancing era, the use of new technology increases and also the financial software developed for transitions. Therefore, the lack of knowledge about the use of technology and the lack of data security program, to both the officials and individuals, can open the path to fraud. ATM, NEFT, credit cards, debit cards, online banking, Internet banking, mobile banking, etc. provide new channel to commit financial fraud. When the organization followed the unethical procedure to achieve target and does not take

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proper control and when there is lack of inspection, fraudulent activities may increase rapidly. The ICFE Fraud Magazine revealed in 2013 that 46% of identity theft complaints or frauds registered internationally involved breaches of official papers. Data breaches at financial institutions were involved in more than 20% of all allegations of thefts involving identity theft (e.g., credit card, loan, or other bank information). According to an RBI circular from November 2014, fraudsters have been seen to create and pay checks from the same series in some circumstances even when the consumer had the original checks (Reserve Bank of India – notifications, 2014).

Reserve Bank of India and Regulations The RBI asserts that banks themselves bear the primary duty of avoiding fraud. Legislators have to pay attention to the financial and corporate frauds and scams that have occurred in India. It was past due to assess the strict requirements for corporate governance and put tough rules in place to combat corporate fraud. Both the frequency and the severity of the issue were increasing. White-collar crime is on the rise, and as a result, the law needs to be enforced effectively and with the appropriate attitude. The Master Circulars on Fraud-Classification and Reporting were published by the RBI. The RBI occasionally learns about fraud involving substantial sums only through press reporting. Therefore, banks should make sure that the reporting process is effectively streamlined to guarantee that frauds are reported without delay. Banks must ensure that employees are held accountable for any delays in reporting fraud instances to the RBI. A specific framework for reporting fraud has also been established by the Master Circular, along with a fixation on the NBFCs’ responsibility to avoid fraud (Reserve Bank of India – Master Circulars, 2014). The Insurance Regulatory and Development Authority (IRDAI) to direct the implementation of measures to reduce the vulnerability to fraud in the insurance sector has released the Insurance Fraud Monitoring Framework (IFMF). The Insurance Regulatory and Development Authority mandates that insurance companies should keep checking on fraud and develop the Fraud Management System to address the problem. The regulators’ attention has become more focused as a result of several recent instances. Regulators are recommending that businesses adopt frameworks for fraud prevention, detection, and response as well as standards for combating fraud. The updated Companies Act of 2013 is a development in India’s regulatory framework. The Act prescribes greater responsibility and higher accountability for independent directors and auditors coupled with particular requirements to address the danger of fraud. It increases personal liability beyond professional liability for fraud and imposes sanctions on directors, senior management personnel, auditors, and staff.

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The most effective parts of the law are the creation of a surveillance mechanism for listed firms and the increased accountability given to the board of directors. Internationally recognized control frameworks and market regulators use a number of terminologies, including Internal Control for Financial Reporting (ICFR), which is primarily used outside of the USA following the Sarbanes-Oxley (SOX) Act. Internal financial control (IFC), a new term introduced by the Companies Act of 2013 (the Act), combines elements of both IC and ICFR. The regulatory environment in India strives to create a legal structure so that its statutes can include international standards and regulations.

Measures Taken to Combat Fraud Midway through the 1990s, the World Bank and the IMF collaborated to develop the Financial Sector Assessment Program (FSAP), which was designed to identify, assess, and resolve significant financial vulnerabilities. The FSAP has undergone a number of adjustments and increased acceptance since it launched in 1999. According to the RBI, frauds have been categorized based on their categories and IPC rules in order to preserve consistency in reporting, and for those, specific reporting procedures have been established (2014 and 2015). According to RBI, in order to assist the board of directors in keeping an eye on fraud, a circular was sent to cooperative banks asking them to set up a committee to oversee internal inspection and auditing, create appropriate preventive measures, and assess the success of those measures. To equip staff to handle fraud, impartial policy guidelines and whistleblower rules are essential. Additionally, the RBI published a circular in which the idea of a red-flagged account (RFA) was introduced into the existing framework for early detection based on the presence of early warning signals (EWS) (Singh, 2015). In recent years, the fight against financial fraud and malpractice has been much more intense. To prevent fraud in business transactions, governments around the world are putting in place tougher regulatory frameworks and compliance standards. The regulations relating to the Serious Fraud Investigation Office (SFIO) adopted under the Companies Act, 2013 (the Act), and Rules thereunder, are a reflection of such increased awareness and regulatory action in India. Companies must fully understand the ramifications of these regulations and take preemptive measures to avoid any allegation of fraud and the ensuing arrests.

Measures Taken by International Organizations The role of international organizations is pivotal to combat such financial frauds, and hence, in light of this, steps taken by them are discussed elaborately. Deloitte has provided these ten points to combat fraud (Deloitte Ireland, 2021) (It is not an exhaustive list and it may include other items also.).

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Embed an Effective Fraud Prevention Strategy: It is to verify that the following policies have been adopted by the organization: the Protected Disclosures Policy, the Conflict-of-Interest Policy, the Anti-Bribery and Corruption Policy, and the Fraud Response Plan (including cyber-incident response). Implement a Tiered Approach: Implement a three-tiered strategy that incorporates the crucial components of prevention, reaction, and detection in order to reduce fraud and corruption. Effective Fraud Risk Assessments: Establishing regular fraud risk assessments, which should be carried out at the enterprise and business unit levels and must include assessments of cyber-related threats, is a necessary step in reducing the likelihood of fraud. Optimize the Use of Technology in Detecting Fraud: Utilize technology to deploy forensic data analytics-based continuous control monitoring methods aimed at the early detection of fraud and corruption risk indicators. Assessing Employee Awareness: Ideally anonymous, conduct an annual online fraud health check poll among staff. Eliminating Conflicts of Interest: To lessen the probability of conflicts of interest, implement an auditable declaration procedure where all declarations are assessed and approved. Managing Relationships with External Stakeholders: Encourage/forbid receiving presents from suppliers as doing so lowers the possibility of any anomalies and also makes managing any gift registry easier. Know your Business Partners: A Conflict-of-Interest Declaration should be included in the strict verification and approval procedures that should be used for supplier vetting. Creating Awareness: The organization should implement fraud awareness and anti-­ fraud education consistently and on a regular basis. Inform Employees How to Raise Concerns: The Protected Disclosure Act of 2014 requires employers to make sure all staff members are aware of the policy for making protected disclosures.

Measures Taken in India to Combat The following measures are taken in India to combat financial frauds and other corrupt practices prevailing in India: Financial Regulators in India: The following are the financial regulators in India. Reserve Bank of India (RBI): The Reserve Bank of India is a supreme monetary institution that regulates the banking and financial system of the country by issuing regulations and guidelines. The role of RBI was to regulate the money supply, keep an eye on important statistics like the GDP and inflation, and keep the public confident in the banking and financial system by providing resources like the Ombudsman. Additionally, it develops monetary policies like interest rate, bank credit, and inflation management (Karvy Online, 2019).

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Security Exchange Board of India (SEBI): The Securities and Exchange Board of India is a securities market regulatory agency that creates rules, policies, and a code of conduct for financial intermediaries. It also controls mergers (Slider Loading, 2019). SEBI was founded to stop fraud in the capital market, regulate and control operations on stock exchanges and other securities markets, protect the interests of investors through effective education and counseling, and audit the performance of the stock market. Insurance Regulatory and Development Authority of India (IRDAI): The Insurance Regulatory and Development Authority of India is a body to protect the interest of and ensure just treatment to insurance policyholders (Government of India, 2020). The IRDAI was created to protect the interests of and provide fair treatment for insurance policyholders; to promote and apply high standards of integrity, fair dealing, and the capability of all the companies it administers; to ensure clarity and accuracy when contracting with insurance policyholders; and to ensure the growth of the insurance industry or sector. The Authority is responsible for making sure that accurate information about products and services has been provided. Additionally, the IRDAI informs policyholders of the various insurance sector plans and policies and expedites legal proceedings in case of disputes, among many more functions. Forward Markets Commission of India (FMC): The Forward Markets Commission is a chief regulator of the forward and futures market in the country. The function of the FMC is to advise the Central Government on issues involving the grant of recognition to any registered association or the revocation of previously granted recognition. Additionally, it offers guidance on any additional issues that crop up as a result of the Forward Contracts (Regulation) Act of 1952’s administration. Additionally, it offers recommendations to strengthen and enhance how the Commission and the futures markets operate. The finances and any other papers of the registered associations and its members are open to inspection and cross-­ checking by the Commission. It keeps a close eye on the futures market for commodities and uses its discretionary power to advance markets and consumers. FMC is required to gather, publish, and source information about trade. Pension Fund Regulatory and Development Authority (PFRDA): Employees of the Government of India, state governments, commercial institutions/organizations, and unorganized sectors who have subscribed to the NPS are governed by the Pension Fund Regulatory and Development Authority (PFRDA, 2013).

Approach to Fraud Risk Management The following are assessments of anti-fraud programs, controls, and ethics and compliance procedures: Organizations must recognize the growing importance of addressing and mitigating the risk of fraud in a comprehensive and integrated fashion, as doing so would be advantageous to them in a number of ways (Financial Crime Academy, 2022).

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Fraud Diagnostic Tool: An online survey tool for measuring employee understanding of ethics and fraud. Employee suggestions for improving the control environment may be submitted using the web-enabled survey. Communication and Survey: Understanding of communications and policy Organizational behaviour and culture Concerning fraud and improper behaviour A risk assessment for fraud Competing interests. This poll asks management and staff for anonymous feedback on areas that could use improvement. Employee Fraud Awareness Training(s): Communication and training are the first steps in making employees aware of their responsibilities with fraud and misbehavior controls. Effective fraud control requires training your staff to understand their crucial role in preventing, detecting, and discouraging fraud, just like any other compliance activity. All Employees Must Be Aware of Anti-fraud Initiatives: Employees should be aware of financial fraud and ensure that the company takes the issue of fraud seriously. They should also be aware of who to contact for support and advice. Management should think about creating fraud and misconduct awareness programs that are complete and based on risk areas and job functions, whenever possible, integrated with other training initiatives, utilizing a variety of strategies and procedures, effective in a variety of circumstances, covering the relevant employee demographic, on a regular and frequent basis. The topics covered typically include organizational expectations and obligations, pertinent codes and policies, understanding of the concept of fraud and the fraud triangle, how to prevent fraud and its advantages, identifying common fraud indicators or red flags, recognizing conflicts of interest and taking action to resolve them, and reporting fraud and seeking assistance. Tip-Offs Anonymous – Deloitte’s Whistle-Blowing Service: By putting in place an employee whistle-blowing hotline, you can detect issues before they negatively impact your company’s operations, reputation, and morale of the workforce and provide your employees a voice to anonymously voice workplace concerns. Additionally, businesses are slowly realizing how important it is to include a whistleblower service or independent helpline in their fraud risk management plan. In addition, it has been demonstrated to be one of the best techniques to spot fraud (as per the ACFE 2014 Global Fraud Study) (Swindale, 2022). Forensic Data Analytics Tool  – Leveraging Technology to Proactively Detect, Prevent, and Control Fraud: In order to find strange relationships, transactions, or patterns, such as duplicate supplier invoicing, ghost employees, changing payees, etc., forensic data analytics proprietary technologies may profile and analyze financial and nonfinancial data across various geographies and dissimilar systems. By prioritizing case management and investigation, this thorough analysis can assist companies in identifying fraudulent activity and reduce the number of false positives in their detection and prevention efforts. This analytical tool can be used to run tests that can discover and isolate suspicious transactions within the huge data fields that hum away in the course of daily business, allowing it to identify and flag numerous fraudulent situations.

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Develop a Fraud Response Management Plan: A program or plan for fraud response management is meant to make it possible for the organization to respond to different allegations of fraud and improper behavior in a logical and consistent manner. A fraud response program’s main objective is to shield the company from the financial, public relations, and legal consequences brought on by the fraud claim. The ability to carry out reliable investigations is one of the components that is also a part of a substantial fraud response strategy. Furthermore, planning ahead and establishing investigative resources and procedures help speed up the process while lowering the possibility of unsuccessful investigations. The Association of Certified Fraud Examiner (ACFE) (Baker Tilly, 2019), organizer of International Fraud Awareness Week, 2019, provided five tips to prevent fraud: Be proactive, establish hiring procedure, train employees in fraud prevention, implement a fraud hotline, and increase the perception of detection (Crunchbase, 2017).

Conclusion Financial and systematic fraud increases due to many reasons like lack of awareness, poor coordination between employees and the public as well as employer and employee, lack of training, lack of technology awareness, poor regulatory system, lack of supervision, carelessness of authority and individual, and many more factors responsible for systematic fraud and financial losses. Corporate scams and fraud significantly affects a company’s wealth. Corporate frauds can be reduced through awareness and audits. One of the greatest methods to support internal audits and annual statutory audits is to have independent directors on the audit committee. Their independence needs to be improved. In terms of incentives, CEO salary ultimately comes down to ethics and can only be moderately managed. Corporate fraud requires comprehensive and all-encompassing remedies. To understand loopholes, the authority should uniformly and continuously monitor the whole system and time to review and check the ground where fraud can take place. To address the issues related to fraud, customers as an individual and officials should be treated with compulsory awareness programs and educated about the fraud risk management system. Therefore, it is found the strategy to continuously approach to combat financial and systematic fraud with improvement management plans where the organization prevents, detects, and identifies fraud and reduces the fraud risk (Henry, 2022).

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References Acar, C. (2021, February 5). White collar criminality. LinkedIn. Retrieved January 7, 2023, from https://www.linkedin.com/pulse/white-­collar-­criminality-­ceren-­acar Association of Certified Fraud Examiners. (2022). Financial statement fraud. Retrieved January 7, 2023, from https://www.acfe.com/training-­events-­and-­products/all-­events/seminar-­topics/ financial-­statement-­fraud Baker Tilly. (2019). Combating fraud through effective internal controls. Retrieved January 7, 2023, from https://www.bakertilly.com/insights/combating-­fraud-­through-­effective-­internal-­controls/ Bankruptcy and Related Frauds. (2017). Essentials of Forensic Accounting, 273–299. https://doi. org/10.1002/9781119449423.ch10 Crunchbase. (2017). Stonebridge business partners  – Crunchbase company profile & funding. Retrieved January 7, 2023, from https://www.crunchbase.com/organization/ stonebridge-­business-­partners Deloitte Ireland. (2021). Retrieved January 7, 2023, from https://www2.deloitte.com/ie/en/pages/ finance/articles/how-­to-­combat-­fraud.html Department of Financial Services: Ministry of Finance: Government of India. (2020). Department of Financial Services | Ministry of Finance | Government of India. Retrieved January 7, 2023, from http://financialservices.gov.in/insurance-­divisions/ Insurance-­Regulatory-­&-­Development-­Authority Financial Crime Academy. (2022, November 28). Strategic fraud risk management: The “4ts” approach. Retrieved January 7, 2023, from https://financialcrimeacademy.org/ strategic-­fraud-­risk-­management-­4ts/ Henry, J. (2022). Combat fraud and financial crimes – Jack Henry™. Retrieved January 7, 2023, from https://www.jackhenry.com/how-­we-­help/reduce-­risk/combat-­fraud-­financial-­crimes Home-Pension Fund Regulatory and Development Authority (PFRDA). (2013). Retrieved January 7, 2023, from https://www.pfrda.org.in/ Howarth, J. (2022, September 28). Employee theft in 2022: 27+ employee theft, fraud, and embezzlement statistics. Exploding topics. Retrieved January 7, 2023, from https://explodingtopics. com/blog/employee-­theft-­stats Karvy Online. (2019, May 2). Financial regulators in India – 5 major financial regulatory bodies: Karvy online. Karvy stock broking. Retrieved January 7, 2023, from https://www.karvyonline. com/knowledge-­center/beginner/financial-­regulators-­in-­india Lenaerts, A. (2013). The role of the principle Fraus Omnia Corrumpit in the European Union: A possible evolution towards a general principle of law? Yearbook of European Law, 32(1), 460–498. https://doi.org/10.1093/yel/yet019 Merriam-Webster. (2020). Fraud definition & meaning. Merriam-Webster. Retrieved January 8, 2023, from https://www.merriam-­webster.com/dictionary/fraud Panigrahi, S., Kundu, A., Sural, S., & Majumdar, A.  K. (2009). Credit card fraud detection: A fusion approach using Dempster–Shafer theory and Bayesian learning. Information Fusion, 10(4), 354–363. https://doi.org/10.1016/j.inffus.2008.04.001 Parker, C. T., & Garrity, G. M. (2003). Exemplar abstract for Azoarcus Pumilus Fu et al. 2019, aromatoleum pumilum (fu et al. 2019) liao et al. 2021 and Pseudazoarcus Pumilus (fu et al. 2019) huang et al. 2022. The NamesforLife Abstracts. https://doi.org/10.1601/ex.34427. Rawal, S. (2017). Critique on unpublished price sensitive information - kotak committee report on corporate governance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3079357 Reserve Bank of India – master circulars. (2014). Retrieved January 7, 2023, from https://www.rbi. org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9808 Reserve Bank of India – notifications. (2014). Retrieved January 7, 2023, from https://rbi.org.in/ Scripts/NotificationUser.aspx?Id=9322 Salinger, L. M. (2013). Encyclopedia of white-collar and corporate crime. SAGE Publications.

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Sánchez, D., Vila, M. A., Cerda, L., & Serrano, J. M. (2009). Association rules applied to credit card fraud detection. Expert Systems with Applications, 36(2), 3630–3640. https://doi.org/10.1016/j. eswa.2008.02.001 Schmid, J. (2012). Construction fraud: Monitoring, mitigating, and investigating construction fraud. The Anti-Corruption Handbook, 123–127. https://doi.org/10.1002/9781119198451.ch15 Securities and Exchange Board of India. (2019). Slider loading. Retrieved January 7, 2023, from https://www.sebi.gov.in/ Seth, A. (2004). Corporate governance systems: An integrative model and implications for India (pp. 302–323). Good Governance. https://doi.org/10.4135/9788132104063.n15 Sheng-Cheng Yeh, Wu-Hsiao Hsu, Ming-Yang Su, Ching-Hui Chen, & Ko-Hung Liu. (2009). A study on outdoor positioning technology using GPS and WIFI Networks. 2009 International Conference on Networking, Sensing and Control. https://doi.org/10.1109/icnsc.2009.4919345 Singh, C. (2015). Separation of debt and monetary management in India. IIMB Management Review, 27(1), 5. https://doi.org/10.1016/j.iimb.2015.01.012 Sood, P., & Bhushan, P. (2020). A structured review and theme analysis of financial frauds in the banking industry. Asian Journal of Business Ethics, 9(2), 305–321. https://doi.org/10.1007/ s13520-­020-­00111-­w Sporta, F. (2018). The distressing effect of non-performing assets to asset quality for commercial banks in Kenya. International Journal of Innovation and Economic Development, 3(6), 71–83. https://doi.org/10.18775/ijied.1849-­7551-­7020.2015.36.2006 Swindale, B. (2022, October 12). ACFE 2018 report to the nations. International Fraud Group. Retrieved January 7, 2023, from https://www.internationalfraudgroup.com/ acfe-­2018-­report-­to-­the-­nations/

Chapter 4

Financial Crises in Sri Lanka: In Search of Reasons, Sufferings, and Way Forward Debasish Nandy, Abdullah-Al-Mamun, and Saifullah Akon

Introduction The political economy of Sri Lanka has witnessed volatility. Sri Lanka had an impressive start to its journey of political economy. Sri Lanka has a decades-long experience of bloody civil war. Sri Lanka is one of the most beautiful island states in the world, but ethno-religious conflicts have made it a fragmented state. The financial crisis is a very common feature for Afro-Asian states, especially South Asian states, due to multiple factors. The financial crisis not merely happened due to a lack of resources and a shortage of capital. It is mostly depending upon ethno-­ religious conflicts, political violence, corruption, uneven and lopsided developmental policies, the policy of exclusion, external intervention, debt trap, etc. Sri Lanka had experienced ethnic conflicts, civil wars, and rampant corruption. Debt trap has become a great hazard to Sri Lanka. The trends of ethnic puzzles and the culture of the dominance of majorities over the ethnic minority have made the island country societally fragmented. The conflicts are often depending upon the behavioral pattern of the communities. Sometimes, they also tend to sacrifice for collective welfare (Raw, 1999). But in the case of Sri Lanka, there is no such evidence of sacrifice by any community to each other. The relationship between democracy, ethnicity, and religiosity is very uncertain and complex in the South Asian context. In the South Asian forms of democracy, the opinion of the majority conquers over that of the minority. The statistically dominant ethno-religious group can come to power by winning elections (Das, 2013). The principle of exclusion of ethnic minorities, immigrants, and smaller and minor identity groups creates an identity crisis. The D. Nandy (*) Department of Political Science, Kazi Nazrul University, Asansol, West Bengal, India Abdullah-Al-Mamun · S. Akon Department of Japanese Studies, University of Dhaka, Dhaka, Bangladesh e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_4

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process of nation-building is mostly unfinished in South Asian states, especially in Sri Lanka. These sociopolitical tensions negatively impacted the economy of the country. Structurally, the potentiality of economic development of Sri Lanka weakened.

Contextualizing the Study The potential citizens of the minority are not given good placements. Human resource in Sri Lanka has been used properly not only for the lack of facilities in the country but also for the policy of the government to exclude the minority from prestigious positions in every sector. Without proper utilization of human resources, the economy of a country should be terminally ill. In Sri Lanka, after independence, the government introduced a “quota system” for the majority Sinhala community and discarded all due rights of the minority Tamil. Many Tamil people left the country for a better opportunity. For a long time, Sri Lanka was a civil war-prone state. The question of capability in ensuring the life and property of the citizens and arranging the facilities of impartial flourishment of the citizens is required for strengthening the manpower of a country. Without qualitative and quantitative manpower, economy of a country cannot be grown substantively. At the same time, the role of natural resources is very inevitable in economic development. In the case of Sri Lanka, natural resources are limited. Therefore, natural economic solvency is absent in the island state. The tendency of receiving foreign aid and overdependence on foreign countries have made enormous problems for these countries on the way to self-reliance. This is a very dangerous tendency for any Afro-Asian country. Whenever foreign aid stops, the economy of these countries faces tremendous problems. The culture of corruption has been an ulcer for Sri Lanka. The drainage of the revenues of the country by the corrupted bureaucrats and politicians has ruined the future of the financial growth of the country. The occurrence of the recent financial crisis in Sri Lanka paved several reasons. One of the most crucial causes is the “debt trap” of China from which getting a bailout is quite a difficult task for Sri Lanka. The democracy and acceptability of the regimes of a country play a significant role in economic engagements with other countries.

Objectives, Research Questions, and Methodology This chapter is based on three objectives: (1) to investigate the causes behind the unprecedented financial crisis of Sri Lanka, (2) to delineate the consequences of the financial crisis, and (3) to understand the international response to Sri Lanka’s severe financial crisis. There are three research questions in this chapter: (1) What are the basic causes of the financial crisis of Sri Lanka? (2) What are the

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consequences of the financial crisis in Sri Lanka? (3) How the international funding agencies and donor states responded to Sri Lanka’s financial crisis? The content analysis method and observation method have been used in this chapter.

Financial Profile of Sri Lanka Sri Lanka is a multiethnic and multireligious country having a diverse cultural heritage. Sri Lanka has witnessed the decades-long bloody civil war between the Tamils and Sinhalese. Due to the violent civil war, the island country has been damaged and fractured. Many constructions and infrastructure have been destroyed. Thousands of civilians along with politicians and the head of the government had lost their lives. The question of discrimination and persecution of the Tamil minority community was raised against the Sinhala-led government and the Buddhist monks. Through the policy of exclusion, the majoritarian imposition of power has been wrongly exposed in Sri Lanka. The assertion of power by the majoritarian will over the minority has become a common practice in Sri Lanka in every sector. Sociopolitical factors were always significant for the financial status of a country. Sri Lanka had an impressive beginning in economic growth. The trend of economic development in Sri Lanka was far ahead of other South Asian states in the initial phase after independence. The basic sources of revenue of Sri Lanka were the export of tea, coffee, rubber, wooden products, pearls, corals, seafood, dried fish, etc. Despite the lack of heavy industries, Sri Lankan economic development was promising. The lack of capability of the government in managing ethno-religious clashes has made this country economically handicapped. Sociopolitical stability and security issues always are determinants of the profile of a country. Foreign direct investment is also immensely dependent upon these factors. Sri Lanka also earns revenue from the remittance. Millions of Sri Lankan citizens are working abroad. For the last few years, Sri Lanka has been one of the most popular destinations for global tourists. The tourism sector contributes about 12% of the total GDP of the country. The tourism sector has been developed in Sri Lanka due to its natural beauty affordability. However, due to the COVID-19 pandemic, this sector got set back. Due to multiple reasons, the paramount financial crisis of Sri Lanka has posed a serious threat to Sri Lanka’s socioeconomic and political spheres.

Investigating the Recent Financial Crisis in Sri Lanka Sri Lanka has been going through a massive economic crisis. The Sri Lankan government has lost its financial autonomy in becoming a defaulter. The foreign exchange reserves have been crunched. Due to taking a huge amount of foreign loans, corruption, the COVID-19 pandemic, and misgovernance, Sri Lankan economy has been suffering from a severe crisis. The GDP of the country has been

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remarkably reduced since 2020. Moreover, since March 2022, the price of essential goods and services has been rapidly increased. During the pandemic, the supply chain has been disrupted. In March 2020, the value of the Sri Lankan currency (rupee) depreciated by 4%. The revenue from remittance also suddenly dropped. The overburdened foreign loans were not properly repaid by the government due to a shortage of revenue. The unwise decisions of the government regarding trade policy, importexport policy, and agriculture are equally responsible for the severe financial crisis of Sri Lanka. However, the causes and consequences of the financial crisis in Sri Lanka needed to investigate the case. There are several reasons behind the situation.

Trade Policy Trade policies of Sri Lanka are responsible for financial crises. These policies lack strategies. The government adopted some policies which are not viable in the long term. Beyond the capacity, the government took overloads in trade policies. Sometimes, the government was adamant to adopt a new strategy to search for potential exports in the world market. In the early, 1990s, through the policy of trade liberalization, and the introduction of globalization, the government wanted to pull foreign direct investment (FDI) and also tried to push its goods and services to aboard. The gradual overdependence on FDI makes the island country to weaken. From the very beginning, there was no balance between import and export or trade in Sri Lanka. The export of tea, coffee, rubber, wooden goods, pearls, coral, and other marine products was not impressive. Due to the wrong trade policy, the GDP had fallen in the late 1990s. In Sri Lanka, the trade policy is highly bureaucratized. The import-export-oriented business has been losing due to complex tariff structures and customs duties. It was much more needed to exclusion of tariffs on raw materials used in production. The trade facilitation strategies could be beneficial for Sri Lanka. The overdependence on Chinese funds for infrastructural developmental projects could not become economically viable for Sri Lanka.

Misgovernance Misgovernance is another reason for such chaos. The oppressive rule of Rajapaksa in Sri Lanka directed the country to the wrong path. In the political, social, economic, and administrative spheres, mismanagement and misgovernance have been noticed. During this regime, instead of the best practices, oppression, nepotism, and corruption have become an integral part of the state system. The economic mismanagement has worsened due to the overburdened Chinese loans. The financial crises of Sri Lanka have not happened overnight. The government hid the crisis and camouflaged its policy of the government. The government wanted to manage the situation without any substantive solution. The government was not ready to receive

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any sort of criticism on its managerial capacity of administration and financial affairs. The government has not only failed to ensure the law and order in the country but remains unsuccessful in combatting terrorism. The Ester Sunday terror attacks in April 2019 affected the Sri Lankan tourism sector. Due to a lack of security, the flow of tourists has become low. The sudden decision of reducing income tax in 2019 by President Gotabaya Rajapaksa was a blunder in the generation of revenues for the government. The lack of wise decisions by the government not only increases ambiguities but also enhances the trends of misgovernance. Due to the shortage of foreign currency, the food stocks of the country are getting down. The rampant corruption is also responsible for misgovernance and foreign currency crunch (Singh, 2022). Keeping the people of Sri Lanka in trouble and uncertainty, the most irresponsible and corrupt President, Gotabaya Rajapaksa, escaped the country in mid of July 2022 and took shelter in Singapore (Salikuddin, 2022).

Rampant Corruption In the political culture of Sri Lanka, it has been observed that the politically powerful families and their relatives have always enjoyed political power since independence (Chari, 2022). The families of the presidents, prime ministers, and other ministers always misused power and take financial benefits cunningly. The roots of corruption lay in political elites. Authoritarianism and weak opposition political parties automatically bring corruption. The culture of corruption is not a new phenomenon in Sri Lanka. This culture was started by the Bandaranayake family and their successors. Later on, the culture of corruption was accelerated by Rajapaksa’s family members. Mahinda Rajapaksa became a national hero after diminishing LTTEs in 2009. His popularity made him authoritarian. In the name of economic development and infrastructural development projects, he started to take foreign loans. A big amount of foreign loans was spent by the Rajapaksa family members. In the prime places of Colombo and other parts of Sri Lanka, Mahinda Rajapaksa and Gotabaya Rajapaksa have purchased a lot of properties. Most of the family members were either ministers or parliamentarians. All of them have cheated and misused public funds. The family domination in the entire administration has negatively impacted on Sri Lankan system. Most of the family members of Rajapaksa were accused of cooperation. One of the most important reasons for the financial crises of Sri Lanka is rampant corruption by politicians and administrators.

Wrong Agricultural Policy The policy of agriculture and cultivation is highly impactful for the agriculture-­ based economy. The base of the Sri Lankan economy depends upon cultivation or harvesting. In May 2017, the former president of Sri Lanka decided to stop the use

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of chemical fertilizers in cultivation. After the banning of chemical fertilizers, agricultural products were reduced by almost 50% which resulted in a food crisis and an unprecedented financial crisis. The former president argued that a ban on fertilizer was necessary because of its adverse effect on the environment. Sri Lanka used to import fertilizers from abroad. Therefore, Rajapaksa thought the dependency on fertilizers in foreign countries will save foreign currency. Instead of chemical fertilizers, farmers started organic agriculture. This process is good for his health but unable to fulfill the required food demands of the country. The production of rice reduced by 30% in 2021. The shortage of fuel adversely affected the harvesting and transportation of crops.

Impact of COVID-19 on the Tourism Sector The island was recognized as the world’s best country to visit in 2019 by Lonely Planet (Perera, 2021). It not only added a feather to the Sri Lankan crown but was also commercially viable for Sri Lanka. Despite having several challenges, the tourism sector of Sri Lanka has flourished over the past few decades and became a rapidly growing industry. The potentiality of the beautiful island state’s tourism sector could not be flourished due to the bloody civil war. After the end of the civil war in 2009, the government had a new start in the tourism sector through infrastructural development. The flow of international tourists started to grow rapidly in 2009 which helps to increase revenues for the government (Weerathunga et  al., 2020). In 2019, on Easter Sunday, a terrorist attack happened in Sri Lanka which negatively impacted the country’s tourism sector. Additionally, due to the COVID-19 pandemic, intensive growth was interrupted in 2020 and 2021. In 2019, the Sri Lankan Tourism Development Authority (SLTDA) and the Sri Lanka Tourism Promotional Bureau estimated that the tourism sector grew by 1.9 million tourists by the end of that year. The tourism sector of Sri Lanka is not only contributing significantly to the country’s GDP but also creating 250,000 direct and about two million indirect employment opportunities. Due to travel restrictions during the pandemic, the revenue was not earned from the tourist sector which resulted in the financial disaster of the country. The economy of Sri Lanka is highly dependent upon the tourism sector. In 2018, the Sri Lankan government earned US $ 4.4 billion and contributed 5.6% of the total GDP of the country. The COVID-19 pandemic has adversely affected the tourism sector. The revenue of the government reached only 0.8% from this sector in 2020 (The Times of India, 2022). In March 2022, the flow of tourists increased. But due to the protest movements, curfew, power cut, and disrupted transport system, the resurgence of the tourism sector got a setback since April 2022. Many tourists have stuck on the road and airport and also wait in long queues for necessary needs. Due to fuel and food crises, tourists have feared visiting Sri Lanka. Due to security and safety reasons, many countries have alerted their citizens not to visit Sri Lanka during the crisis period.

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Debt Trap of China After ending the decades-long civil war in 2009, President Mahinda Rajapaksa took a huge amount of loans from various countries, especially from China. Immediately after the civil war, some infrastructure projects were started by the government to pull and attract tourists. Sri Lanka took a loan from India, Japan, China, and other European countries. Sri Lanka took the highest loan amount from China with complex conditions. China applied “debt-trap diplomacy” with Sri Lanka which has been successful. The EXIM Bank of China and the China Development Bank gave a maximum loan to the Sri Lankan government. China is pressuring Sri Lanka to repay the loan. On the other hand, the Japanese government has taken a soft and humanitarian approach to Sri Lanka regarding the repaying of existing loans during this financial crisis. The Indian government also took the generous policy to Sri Lanka and refrained from pressuring Sri Lanka to repay the existing loan. Moreover, India has extended the line of credit to Sri Lanka considering this economic volatility. In 2021, it has sent over US $ 3.8 billion to Sri Lanka for loans, fuel, food, and medical assistance. This high level of foreign debt geared up the crisis in the post-­ pandemic situation. During the regime of the Gotabaya Rajapaksa, financial engagements with China have been wrongly established (Salikuddin, 2022). The US President, Mr. Biden, has announced US $ 20 million in additional humanitarian assistance to Sri Lankan government. Sri Lanka will have to survive with US $ 35 billion in foreign debt which is the highest in comparison with other South Asian states (Chari, 2022). The Sri Lankan government has been compelled to give a lease to the Hambantota and Colombo City Port to the Chinese government for 99 years due to inability to repay the loans to China (Akon et al., 2021). Sri Lank has not only lost its credibility but also lost its financial autonomy due to the huge foreign debt.

Impact of Financial Crisis in Sri Lanka The financial crisis of Sri Lanka has badly impacted its socioeconomic and political sphere. The people of Sri Lanka never faced such an acute financial crisis. This crisis has been uncontrolled, and the government has failed to give any way out of this crisis. The recent financial crisis in Sri Lanka has created severe consequences. It is really difficult to assume when and how this crisis will be overcome. The people of Sri Lanka attacked the residence of former President Gotabaya Rajapaksa. He was unable to control the pressure of the people and was forced to resign from his position on July 14, 2022. Mr. Ranil Wickremesinghe became the new president of Sri Lanka with a lot of uncertainty and a financial crisis. In the same month, former Prime Minister Mahinda Rajapaksa was also outdated from his position, and Dinesh Gunawardena became the new Prime Minister. Relationally, the former President and Prime Minister of Sri Lanka are brothers. However, since early 2022, the situation in Sri Lanka has become complicated and uncertain. To control mass protests and hooliganism across the country, the government declared a state of emergency.

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Scarcity of Fuel Sri Lanka has been facing a tremendous fuel shortage due to the economic crisis. Most of the petrol pumps were out of fuel from April 2022 to August 2022. Considering the interrupted supply of fuel, the Sri Lankan government ordered the government employees to work from home to cartel the public transport service. The President of Sri Lanka was highly criticized by its people. Gotabaya Rajapaksa was the main target of the people. The people of Sri Lanka considered that the entire situation happened due to the President. His wrong economic policy, corruption, and mishandling of the national economy are responsible for this situation. The shortage of foreign currency reserves for vital imported goods and services has degenerated Sri Lanka’s crisis. There was a huge rush to the petrol pumps. To collect fuel, people got involved in violent acts. Due to the shortage of fuel, the public transport system and industrial production got interrupted. After taking over the position of Prime Minister, Ranil Wickremesinghe has informed that US $ 5 billion is immediately required for importing essential items, including fuel within a few months. He also expressed his anxieties about the disruption of daily life due to the shortage of fuel. For collecting gas cylinders, people have to stand in a queue. Gas cylinders were chained together to prevent theft. During collecting fuel in the long queues, about ten people died (Gunasekara & Mashal, 2022).

Shortage of Foods and Disruption of Essential Services Due to the island state’s acute financial crisis, people have to face a huge food shortage. Sri Lankans have witnessed not only food crisis but also higher inflation which reached up to 90%. The price of essential commodities was hiked rapidly. For many people, rice has become almost unaffordable due to high prices. After starting the crisis, the World Food Programme (WFP) estimated that around 30% of the population is facing food insecurity. Many Sri Lankans are skipping a meal on regular basis. So, in terms of human security, the situation is vulnerable. The people have been compelled to change their food habits but also have cut down the quantity of food. In July 2022, thousands of hungry people demonstrated in front of the presidential palace in Colombo. Finally, President Rajapaksa fled abroad following mass agitation in July. The protesters have accused him and his government of mismanagement of the nation’s financial system. About 6.3 million Sri Lankans have to face moderate starvation due to acute food insecurity. The shortage of essential commodities for livelihood also posed a great threat to human security. In 2021 and 2022, due to poor harvestmen, agricultural production has been reduced by 50%. Since 2017, due to drought-affected harvestmen, food production was getting low. The acute financial crises resulted in state emergencies and other restrictions. The economic crisis in Sri Lanka has worsened the emergency in the country’s health sector. Since 1948, Sri Lanka has been facing the worst financial crisis.

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The entire country has gone through an acute shortage of essential goods, such as food, medicine, medical equipment, baby food, cooking gas, fuel, toilet paper, etc. (Hindustan Times, 2022). The credibility and affordability of Sri Lankan people have been reduced rapidly (The Economic Times, 2022). Due to the disruption of emergency services, the question of the violation of international human rights law was raised against the Sri Lankan government. The UN Human Rights Office has been continuously and closely observing the development (UN News, 2022).

Violent Anti-government Movements The unprecedented economic crises led to violent protests against the government. The people of Sri Lanka accused the government of misgovernance and mismanagement of the country’s economy. The government was unable to control the agitations and was compelled to impose a nationwide curfew. The residences of the politicians including Rajapaksa’s family members and relatives were attacked and fired. Prime Minister Rajapaksa fled abroad due to tremendous public protest. The civil unrest in Sri Lanka has intensified at the highest levels within a few days. The Prime Minister was accused of provoking the police to apply violent action against the protesters (India Today, 2022). After declaring a national emergency, the situation became more complicated. Many protestors were wounded and vehicles were burned. The police used tear gas and water cannons to control the protesters. A large number of people were arrested and a curfew was imposed in all parts of Colombo City. The arrested people were given charged against the Prevention of Terrorism Act (PTA). The demonstrators also attacked police vehicles (The Tribune, 2022). The country-wide law and order was a breakdown in the island country for unprecedented financial crises.

Deficiency of Foreign Exchange Debt Defaulter The economic profile of a country is largely dependent on foreign currency reserves. Sri Lanka has suffered from a crunch of foreign currency which reduced its capacity to import imported goods and services. The Sri Lankan government appealed the international agencies and other countries for financial assistance. The capacity of the government to repay the outstanding foreign debt has declined. The people of Sri Lanka have to suffer many restrictions and crises due to the shortage of foreign currency reserves. The government has limited the foreign currency possession for an individual from US $ 15,000 to US $ 10,000. Due to a severe forex crisis, Sri Lanka has been declared as the defaulter in repaying external debt in April 2022. In April 2022, after declaring Sri Lanka as a defaulted-on loan, the US bank Hamilton Reserve Bank has filed a complaint against the Sri Lankan government as the holder of Sri Lankan bonds. The government of India has extended credit lines for fuel and

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some essential commodities to Sri Lanka to bail out this critical situation. The Sri Lankan government has pleaded to the International Monitory Fund (IMF) to overcome the crunch of foreign currency. Prime Minister Mahinda Rajapaksa had to resign for his inability to tackle this political and economic turmoil (Outlook, 2022). The due date of the repayment of the loan amount of US $ 78 billion to the international creditors has made the island country the defaulter. The World Bank has given US $ 130 million to Sri Lanka on an emergency basis to tackle the situation. The Sri Lankan working people and also the government send remittances to bail out from the crunch of foreign currency reserves.

International Response to Sri Lankan Financial Crisis The entire world has been stunted after knowing such vulnerable financial crisis of Sri Lanka. Many times, Sri Lanka came on news headlines for ethnic crisis and LTTE. Before April 2022, the financial vulnerability of Sri Lanka was not exposed. The economic profile of the country has reached a worsening position. It has lost financial autonomy and becomes a defaulter. So, many of its donors and creditors are not relying on Sri Lanka. The international creditors are afraid to approve a further loan to Sri Lanka. During the struggle with the unprecedented financial crisis, initially, IMF was also not interested. However, IMF finally agreed to approve a loan amount of US $ 2.9 billion to bailout out the worst economic crisis (The Indian Express, 2022). The World Bank has no immediate plan to offer Sri Lanka financial support to overcome the crisis. The World Bank has made it clear without preparing the framework of macroeconomic policy. The World Bank recommended adopting structural reforms to stabilize the economic vulnerability (Reuters, 2022). To resolve the shortage of essential items, cooking gas, medicines, and fertilizers, the World Bank is repurposing the existing loans. The World Bank also informed that it will continually monitor on Sri Lankan crisis. It has also been explained that the World Bank is closely coordinating with other development partners to support the people of Sri Lanka (World Bank, 2022). About three million poor and vulnerable Sri Lankans received emergency cash transfers from May to July 2022. Under such circumstances, the World Food Programme was launched by the World Bank urgently to provide food assistance to nearly 62,000 Sri Lankans (UNO, 2022). Considering the economic vulnerability and humanitarian crisis, the European Union (EU) has provided €200,000 for essential assistance to about 80,000 economically weaker people. The EU has decided to those affected Sri Lankan families multipurpose cash grants. This grant will be spent on medical or health-related issues, pregnant women, children, and disabled people who are extremely facing the crisis financially. Due to power cuts and a lack of sanitary items, many studies of many students have been disrupted (Hamza, 2022). On October 28, 2022, a working group on governance, rule of law, and human rights conducted a meeting in Colombo with Sri Lankan officials as part of bilateral regular interaction. The EU working group members emphasized law and order and human rights issues following the financial crisis (EEAS, 2022).

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The US administration has decided to fund the Sri Lankan government for humanitarian assistance. The total amount of this grant would be US $ 5.75 million. This grant includes cash assistance, short-term jobs, and agriculture supplies. This funding will be given to the crisis-affected people of Sri Lanka through the US Agency for International Development (USAID). Under this assistance, community-­ based disaster management committees will be formed to respond to the crisis for recovering. The USA has declared that its ongoing projects in Sri Lanka will be continued which will help Sri Lanka to combat the existing situation. Over the last six decades, the USA has spent more than US $ 2 billion in financial assistance which strengthened tourism, small businesses, climatic development, renewable energy, and green energy sectors (U.S. Embassy in Sri Lanka, 2022). The foreign policy of Sri Lanka has been tilted toward China over the last few years. The overdependence on China has made the US administration unhappy. Due to the lack of balanced foreign policy, Sri Lanka has not received a good response from various countries. Despite some controversy and disagreements with Sri Lanka, the government of India immediately responded to the financial crisis of Sri Lanka. As the closest neighbor, India showed generosity to Sri Lanka. Colombo ignored India and established close ties with Beijing. But New Delhi never stopped its various grants and humanitarian assistance to Sri Lanka. This time also India provided US $ 3.8 billion to better the serious financial crisis of Sri Lanka (Prakash, 2022). Before declaring the crisis officially by the Sri Lankan government, India gave foreign loans and grants to Sri Lanka of US $ 376.9 million. On the other hand, during this time, China gave only US $ 67.9 million. The Sri Lankan government forgot the phrase a friend in need is a friend indeed. In February 2022, Indian Oil agreed to supply a US $ 500 million supply of petroleum products through a line of credit. Indian Oil will support the Ceylon Petroleum Corporation (CPC) to overcome the existing difficulties. The government of India did not pressurize to repay the existing loans. Japan also forgave for defaulting, but China’s reluctant and unfriendly attitude amid the crisis made the situation more complicated. As the principle of the “neighborhood first policy,” India’s response to Sri Lankan crisis was so prompt. After starting the financial crisis, India supplied more than 25 tons of drugs and medical equipment. India has taken three approaches to the Sri Lankan crisis: (1) Watching the plight of the people, India will provide a line of credit and supply of food, medicines, and fuel. (2) India should maintain a distance from Sri Lankan leaders. (3) India will not make any comments on the situation (The Hindu, 2022).

Japan’s Response to Sri Lanka’s Financial Crisis Japan and Sri Lanka have maintained close bilateral relations since the diplomatic ties established in 1952. The prolonged civil war in Sri Lanka impeded diplomatic ties between the two countries. However, Japan became an important player in Sri Lankan’s peace process. For example, Yasushi Akashi, a former UN Under-Secretary

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General, was selected by Japan to serve as the representative for Sri Lanka’s peacebuilding, rehabilitation, and reconstruction (MoFA, 2003). In 2003, Japan hosted two significant events in the process of contributing to peace in Sri Lanka: the Tokyo Conference on the Reconstruction and Development of Sri Lanka and the sixth round of the peace negotiations in Hakone. After the end of the long civil war between the Sri Lankan government and LTTE, Japan continued to provide support, particularly in rehabilitation and reconstruction. Their bilateral relations have eventually expanded to maritime cooperation, donor-recipient connections, trade and investment, and sociocultural exchange. Japan is regarded as an all-weather friend of Sri Lanka. Japanese ODA has been instrumental to Sri Lanka’s economic development, especially in terms of bridging infrastructural gaps and promoting the development of the industrial sector. Since 2011, Japan has become the second largest international donor in Sri Lanka. Japan has financed several projects in Sri Lanka. For example, upgradation of the water system, improvement of the grassroots human security, humanitarian assistance and relief, upgradation of the Center for Disabled Children’s facilities (Embassy of Japan, Sri Lanka, 2020, 2021). Besides, Japan is also financing for the light rail transit system in Colombo. Analysts reveal that the Japanese investment in Sri Lanka demonstrates its countering policies against Chinese engagement in this Indo-Pacific region (Nath, 2019). On the other hand, for Japan, Sri Lanka’s strategic location along with the sea lanes of communication (SLOC) vividly illustrates its maritime interest in the country. Sri Lanka plays a crucial role in the Indian Ocean region (IOR). Nearly 60,000 ships pass through this SLOC which is close to the Sri Lankan coast. Since Japan heavily relies upon these sea lanes for the import of its energy needs, it has a deep interest to strengthen maritime cooperation with Sri Lanka (Nikkei Asia, 2018). To ensure maritime security, Japan provided two patrol craft to the Sri Lankan Coast Guard in 2019 (Nath, 2019). However, as a long-trusted friend, Japan has come to the forefront again in Sri Lanka’s economic crisis. In response to Sri Lanka’s ongoing financial crisis, Japan has taken a myriad of initiatives to assist its strategic and longtime ally, Sri Lanka. The Japan government is supporting Sri Lanka in two different ways: providing assistance and mobilizing international resources. Considering the severe humanitarian situation, the Japanese government has decided to provide US $ three million as an emergency grant through UNICEF and WFP. Basically, this grant is decided to provide food and emergency medicine to Sri Lanka to overcome the hardships. Before that, earlier in May, Japan handed over the first batch of a total donation of essential medicines worth US $ 1.5 million to the Sri Lankan government through UNICEF (UNICEF, Sri Lanka, 2022). Addressing the severe shortage of medicines in Sri Lanka’s hospitals and clinics, this amount helped UNICEF to procure the necessary 25 types of lifesaving medicines. These lifesaving medicines were used for healthcare for over 1.2 million vulnerable people including 122,000 children and nearly 53,000 pregnant mothers, the most affected segment of the society, as an immediate response from Japan. On the other hand, Japan provided the first tranche of food assistance valued at US $ 1.5 million to Sri Lanka in August 2022 through WFP. These 3 months’ essential food supplies

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included rice, dhal, and oil, which were distributed to approximately 15,000 urban and rural people and 380,000 school children in Sri Lanka (ANI, 2022; WFP, 2022). The Asian Development Bank (ADB), in September 2022, has provided US $ 200 million emergency assistance loan and a US $ three million grant from the Japan Fund for Prosperous and Resilient Asia and the Pacific (JFPR) to ensure access to food and protect livelihoods for the poor and the vulnerable, especially women and children (Reliefweb, 2022). Additionally, Japan donated US $ 5.5 million worth of medical equipment to Ragama Teaching Hospital and the National Hospital in Sri Lanka (NHSL) in order to boost COVID-19 preparedness and build a sustainable medical system that can adapt to the country’s present economic crisis (Embassy of Japan, Sri Lanka, 2022a). Furthermore, Japan pledged to provide US $ 4.1 million to Sri Lanka’s agriculture sector in order to increase agricultural exports and production as well as support the import of organic fertilizers and safe agricultural goods (Embassy of Japan, Sri Lanka, 2022a). However, the Japanese embassy in Sri Lanka reports that as of 2022, Japan has given roughly US $ 45 million in total as grant aid under immediate, mid-, and long-term assistance, addressing the urgent needs (Embassy of Japan, Sri Lanka, 2022b). Furthermore, as part of its long-term commitment, Japan has dispatched a high-level political delegation to Sri Lanka to explore investment opportunities in the area of infrastructure, transport, electronics, fishing, agriculture, and renewable energy in October 2022 (The Economic Times, 2022a). To overcome the financial crisis, Sri Lanka needs funds from different international institutions. To secure a US $ 2.9 billion bailout package from the IMF, Sri Lanka needs an agreement with creditors. It is to be noted that Japan is one of Sri Lanka’s main creditors along with India and China. Japan holds around US $ 3.5 billion of Sri Lanka’s total bilateral debt of about US $ 10 billion (Jayasinghe, 2022). As a main creditor, Japan has consented to support Sri Lanka’s credit reconciliation efforts. Additionally, Japan has agreed to cochair the meeting with the creditor nations including international financial institutions to manage Sri Lanka’s financial crisis. Due to Japan’s global acceptance and credible voice in international institutions, such an initiative could help Sri Lanka’s economic recovery significantly. While rich western nations and west-based international organizations are showing reluctance to support Sri Lanka due to Chinese closeness, Japan takes the lead to help Sri Lanka out of the economic mess.

Policy Recommendations Based on the study, some policy recommendations can be offered to address the severe financial crisis in Sri Lanka: 1. The social protection programs of Sri Lanka have been affected due to the severe financial crisis. The financial crisis of Sri Lanka was shown in April 2022. From April 2022 onward, the government stopped almost all social pro-

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tection projects due to a shortage of money. The World Bank has reported that low-income group people are suffering mostly during and after COVID-19 for unemployment. The ineffective and corrupt politicians and administrators are responsible for this crisis. The transparency and responsibility of the respective departments and personnel are to be ensured and monitored. The government should try to restart these projects on a priority basis. Despite receiving a suggestion from UNICEF and UNDP, the Sri Lankan government could not successfully implement social protection programs for children and older citizens. 2. The government should take immediate action to rebuild the public health and education system. Adequate funds for the public health and education system are to be arranged in an emergency. 3. The trade and agricultural policy of the country should have to be reviewed and changed immediately. 4. The overdependence on foreign aid and loans is to be gradually reduced. To repay the existing debts, domestic resources are to be increased and volumes of exports are to be increased. 5. The people of Sri Lanka have had the worst experience of the negative impact of family domination. The dominance of the few families in Sri Lankan politics, administration, and economy has brought enormous loss for Sri Lanka. They are responsible for rampant corruption and financial crisis. So, the people of Sri Lanka should have to be more cautious in this regard. 6. The World Bank and IMF sought structural reforms in Sri Lanka considering rampant systematic corruption and economic vulnerability. 7. Administrative and financial transparency are immediately required. As earlier, it has been mentioned that after 2009, the culture of corruption has been started to grow in Sri Lanka. During President Sirisena’s period, composite anti-corruption and bribery laws were enacted. In 2018, proceeds of crime and asset recovery were passed to the declaration of assets by government officials. To stop corruption and implement the rule of law, the government should adopt robust anti-corruption initiatives and ensure public financial security. 8. As the defaulter, Sri Lanka has been facing an acute shortage of capital. In the domestic market, both private and private banks should be cautious before granting or disbursing loans to any person or business house. The profile of the applicant should be carefully verified to avoid bankruptcy. Otherwise, the financial crisis will be increased. The banking sector of the country has fallen into deeper turmoil. 9. The volatility of the domestic market is stabilized immediately. The high level of inflation is to be reduced. The price rates are to be done consumable. 10. The role of civil society and mass protests are essentially required in Sri Lanka to keep the government transparent, responsible, and corruption-free.

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Conclusion Following the end of the decades-long bloody civil war in 2009, the government started a huge infrastructure development project, such as the foreign-funded Mattala Rajapaksa Airport, the building of seaports, road constructions, bridge constructions, etc. The Sri Lankan government took high-interest loans from foreign partners which resulted in debt crises. The Sri Lankan government borrowed more than US $ 51 billion from China. Due to the lack of revenue sources, the government couldn’t repay the loan and interest to the Chinese government and other international partners. The tourism-based economy of Sri Lanka started to decline in 2019 after a terrorist attack. Another major setback was started from March 2020 to April 2022 due to the COVID-19 pandemic. The foreign currency reserves of the country were almost finished which made the country incapable to import foods, essential commodities, and fuels. Additionally, global inflation and the Russian attack on Ukraine also increased the prices of fuel, pesticides, and fertilizers in Sri Lanka. Without structural and policy reforms, the Sri Lankan financial crisis cannot be resolved. There is no overnight solution to this crisis. The culture of corruption, nepotism, and misuse of public funds should be eliminated. Civil society should be active against all odds of the government. Overdependence on foreign aid and debts is to be reduced. Indigenous capital is to be generated. For the economic progress of the country, all ethnic groups should have to be included. The government should emphasize remittance, tourism, aquatic or marine goods, tea, coffee, rubber, and timber-based industries. The fragmented island state should take a lesson from this worst financial situation for future safety and security.

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Embassy of Japan, Sri Lanka. (2021). Japan to support providing gravity fed clean water supply system in Nuwara Eliya District. https://www.lk.emb-­japan.go.jp/itprtop_en/00_000969_00010. html. Accessed 25 Nov 2022. Embassy of Japan, Sri Lanka. (2022a). Japan Grants JPY 800 million Medical Equipment to National Hospital and Ragama Teaching Hospital to Strengthen Medical System under the Current Economic Crisis. https://www.lk.emb-­japan.go.jp/itpr_en/11_000001_00074.html. Accessed 25 Nov 2022. Embassy of Japan, Sri Lanka. (2022b). Japanese ambassador Mizukoshi reaffirms his commitment to assist the economically and socially underprivileged communities during his visit to Nuwara Eliya District. https://www.lk.emb-­japan.go.jp/itpr_en/11_000001_00087.html. Accessed 28 November, 2022. Gunasekara, K., & Mashal, M. (2022, June 17). Fuel-starved and stuck in crisis, Sri Lanka orders work from home. The New  York Times. https://www.nytimes.com/2022/06/17/world/asia/sri-­ lanka-­fuel-­crisis.html. Accessed 18 Oct 2022. Hamza, M. (2022, May 6). Sri Lanka economic crisis: European Union to provide 200,000 euros for essential supplies. Economynext. https://economynext.com/sri-­lanka-­economic-­ crisis-­european-­union-­to-­provide-­200000-­euros-­for-­essential-­supplies-­93915/. Accessed 3 Nov 2022. Hindustan Times. (2022, July 11). Sri Lanka: Emergency ambulance service stopped in several areas amid fuel crisis. https://www.hindustantimes.com/world-­news/sri-­lanka-­emergency-­ ambulance-­service-­stopped-­in-­several-­areas-­amid-­fuel-­crisis-­101657541489878.html India Today. (2022, May 11). Sri Lanka crisis: Politicians’ homes set afire, shoot-at-sight orders as protests against govt intensify. https://www.indiatoday.in/world/story/sri-­lanka-­economic-­ crisis-­dead-­violent-­protests-­curfew-­top-­points-­1947916-­2022-­05-­11. Accessed 17 Oct 2022. Jayasinghe, U. (2022, September 23). Japan to support Sri Lanka’s debt restructuring negotiations. Reuters. https://www.reuters.com/world/asia-­pacific/japan-­support-­sri-­lankas-­debt-­ restructuring-­negotiations-­2022-­09-­23/. Accessed 28 Nov 2022. Ministry of Foreign Affairs of Japan. (2003). Tokyo conference on reconstruction and development of Sri Lanka. https://www.mofa.go.jp/region/asia-­paci/srilanka/conf0306/index.html. Accessed 25 Nov 2022. Nath, S. (2019, January 11). Japan’s growing strategic footprint in South Asia. The Diplomat. https://thediplomat.com/2019/01/japans-­growing-­strategic-­footprint-­in-­south-­asia/. Accessed 26 Nov 2022. Nikkei Asia. (2018, March 15). Japan and Sri Lanka to step up maritime cooperation. https:// asia.nikkei.com/Politics/International-­Relations/Japan-­and-­Sri-­Lanka-­to-­step-­up-­maritime-­ cooperation. Accessed 27 Nov 2022. Outlook. (2022, June 25). Sri Lanka limits foreign currency possession by individuals to support Dwindling Forex Reserve. https://www.outlookindia.com/business/sri-­lanka-­economic-­crisis-­ latest-­n ews-­s ri-­l anka-­l imits-­f oreign-­c urrency-­p ossession-­b y-­i ndividuals-­t o-­s upport-­ dwindling-­forex-­reserve-­news-­204569. Accessed 18 Oct 2022. Perera, K. J. T. (2021). Impact of the COVID-19 pandemic on tourism operations and resilience: Stakeholders’ perspective in Sri Lanka. Worldwide Hospitality and Tourism Themes, 13(3), 369–382. Prakash, A. (22 July, 2022). ‘India stands with Sri Lanka’: MEA responds to crisis in Island nation. Hindustan Times. https://www.hindustantimes.com/india-­news/india-­stands-­with-­sri-­lanka-­ mea-­responds-­to-­crisis-­in-­island-­nation-­101657452979552.html. Accessed 3 Nov 2022. Raw, N.  S. N. (1999). Patterns and trends of ethnic conflicts in South Asia: Security implications. In V. T. Patil & N. K. Jha (Eds.), Peace and cooperative security in South Asia (p. 69). P.R. Books. Reliefweb. (2022, September 12). ADB and Japan support food security and livelihood recovery in Sri Lanka. https://reliefweb.int/report/sri-­lanka/adb-­and-­japan-­support-­food-­security-­and-­ livelihood-­recovery-­sri-­lanka. Accessed 28 Nov 2022.

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Reuters. (2022, July 29). World Bank has no new financing plans for crisis-hit Sri Lanka. https://www.reuters.com/world/asia-­pacific/world-­bank-­says-­no-­new-­plans-­financing-­sri-­ lanka-­2022-­07-­29/. Accessed 2 Nov 2022. Salikuddin, T. (2022, July 15). Five things to know about Sri Lanka’s crisis. United States Institute of Peace. https://www.usip.org/publications/2022/07/five-­things-­know-­about-­sri-­lankas-­crisis. Accessed 24 Oct 2022. Singh, D. (2022, July 11). Sri Lanka crisis: Why more countries are facing similar economic turmoil. India Today. https://www.indiatoday.in/news-­analysis/story/sri-­lanka-­crisis-­economic-­ turmoil-­1974267-­2022-­07-­11. Accessed 24 July 2022. The Economic Times. (2022, July 16). Over 6 million people in crisis-hit Sri Lanka ‘food insecure’: World Food Programme. https://economictimes.indiatimes.com/news/international/world-­ news/over-­6-­million-­people-­in-­crisis-­hit-­sri-­lanka-­food-­insecure-­world-­food-­programme/ articleshow/92915091.cms?from=mdr. Accessed 29 Oct 2022. The Economic Times. (2022a, October 01). Lanka seeks to relaunch stalled Japanese projects to boost sagging economy. https://economictimes.indiatimes.com/news/international/world-­ news/lanka-­seeks-­to-­relaunch-­stalled-­japanese-­projects-­to-­boost-­sagging-­economy/articleshow/94574139.cms. Accessed 28 Nov 2022. The Hindu. (2022, July 10). India to stand with Sri Lankan people in crisis: MEA. https://www. thehindu.com/news/national/India-­stands-­with-­people-­of-­sri-­lanka mea/article65623523.ece. Accessed 3 Nov 2022. The Indian Express. (2022, September 2). The IMF agrees to lend Sri Lanka $2.9 billion; what happens now? https://indianexpress.com/article/explained/explained-­global/imf-­sri-­lanka-­ economic-­crisis-­aid-­explained-­8124961/. Accessed 2 Nov 2022. The Times of India. (2022, April 22). Sri Lanka’s economic crisis dashes hopes for post Covid-19. https://timesofindia.indiatimes.com/world/south-­asia/sri-­lankas-­economic-­crisis-­dashes-­ hopes-­for-­post-­covid-­19-­tourism-­recovery/articleshow/91006270.cms. Accessed 24 Oct 2022. The Tribune. (2022, April 2). Sri Lanka declares emergency after violent protests over economic crisis. https://www.tribuneindia.com/news/world/sri-­lanka-­declares-­emergency-­after-­violent-­ protests-­over-­economic-­crisis-­382735. Accessed 16 Oct 2022. U.S. Embassy in Sri Lanka. (2022, June 21). U.S. announces an additional $5.75M in response to Sri Lanka’s economic crisis. https://lk.usembassy.gov/u-­s-­announces-­an-­additional-­5-­75m-­in-­ response-­to-­sri-­lankas-­economic-­crisis/. Accessed 3 Nov 2022. UN News. (2022, April 5). Sri Lanka: Mishandling of economic crisis triggers alarm over rights violations. https://news.un.org/en/story/2022/04/1115552. Accessed 18 Oct 2022. UNICEF, Sri Lanka. (2022). Japan hands over life-saving medicines procured through UNICEF in response to the economic crisis. https://www.unicef.org/srilanka/press-­releases/japan-­ hands-­over-­life-­saving-­medicines-­procured-­through-­unicef-­response-­economic. Accessed 27 Nov 2022. UNO. (2022, July 22). Sri Lanka: UN experts sound alarm on economic crisis. Weerathunga, P. R., et al. (2020). The relative effect of growth of economy, industry expansion, and firm-specific factors on corporate hotel performance in Sri Lanka. SAGE Open, 10(2), 215824402091463. WFP. (2022, May 20). Japan contributes USD 1.5 million to help Sri Lanka provide food assistance to people affected by the economic crisis. https://www.wfp.org/news/japan-­contributes-­usd-­15-­ million-­help-­sri-­lanka-­provide-­food-­assistance-­people-­affected. Accessed 28 Nov 2022. World Bank. (2022, July 28). World Bank statement on Sri Lanka. https://www.worldbank.org/en/ news/statement/2022/07/28/world-­bank-­statement-­on-­sri-­lanka. Accessed 2 Nov 2022.

Chapter 5

Controlling Corruption and Economic Crime in Developing Economies: A Critical Analysis Baidya Nath Mukherjee

Introduction The phrase ‘corruption’ is a complex term and has historically meant various things in various societies at various eras. Most of us do not have a clear understanding of what is corrupt, or what St. Paul would be referred to as the “inner voice”; when it comes to articulating and controlling such activity through the legislation and institutions of the traditional justice system, significant challenges of definition, scope, and proportionality arise. Corruption and economic crime have recently taken on significant political and economic significance in many nations around the globe, particularly in developing economies. Corruption exists in every society to varying magnitude; it is especially problematic for developing nations because it stunts economic development, deters foreign investment, and cuts back on funding for public services, infrastructure, and anti-poverty initiatives. It also led to undermining political institutions by weakening the authority and accountability of the government (Johnston, 1997). The influential anti-corruption watchdog, Transparency International (TI), ranked 70% of 133 countries as being below the median score and 90% of all the developing countries in the sample score less than the median score. However, widespread corruption has been demonstrated to be a common feature of both prosperous and poor countries (Transparency International – TI, Berlin, 2003). Political parties devoted to combating corruption have boosted their electoral appeal, as have launched high profile anti-corruption campaigns by governments of different ideologies (Robinson, 1998). It is pertinent to mention that corruption has adverse effects on economic development. It is evident that the higher the level of corruption, the lower the economic growth and per capita income (Kaufmann et al., 2003). Economic crime and corruption are notions that differ between civilizations B. N. Mukherjee (*) School of Law – Auro University, Surat, India e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_5

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and may be among the most expensive of all criminal behaviors. The concepts of corruption and economic crime may be overlapping, and hence to have a clear analysis, we may consider corruption as a form of economic crime throughout this paper, and the concepts may be used interchangeably. This manuscript investigates corruption as one of the primitive and prevalent sort of economic crime as well as its ramifications in the development of a developing economy. Attempts have been made to elaborate the reason why the developing countries are more vulnerable to corruption and criminal activity and if such criminality may be controlled by the emerging economy. The manuscript endorses the view of Spector (2005) that corruption needs to be handled sector by sector and that policy decisions about effective anti-corruption tactics should be informed by knowledge bases applied assessment.

Corruption and Economic Crime: A Wider Perspective Grabosky claims that economic crime is among the most expensive of all crimes, and it is commonly referred to as fraud in its different expression. There are numerous types of economic crime that face society today, particularly in emerging economies. The following categories of economic crime are not mutually exclusive. Credit card fraud, corporate espionage, intellectual property theft, business opportunity fraud, forgery, government fraud, insurance fraud, consumer fraud, telemarketing fraud, investor and shareholder fraud, bribery and corruption, and electronic fund transfer fraud are some examples (Grabosky, 2001). The main distinction between traditional and economic crime is that the investigation and identification of these crimes has been and continues to be a concern of a wide spectrum of regulators (Grabosky, 2001). Given the tremendous diversity of economic crime, it appears logical to assume that no one preventive or control organization can suffice. For example, the law or the police alone is incapable of dealing with economic crime. Peter Grabosky expands on this point by arguing that each sort of economic crime is best tackled by a mix of responses. The matter of concern is how can emerging economies with limited resources cope if no single institution can regulate corruption. An attempt has been made to address the issue in the forthcoming section. Incidentally, a common thread connecting across most, if not all, types of economic crime is that they are mostly complemented by advancement in information and communications technology. But it does not imply that we must unplug our network connection and computer. In fact, humankind would have rejected the wheel if due to potential of misuse, we would have rejected all inventions (Grabosky, 2001). Although it would be intriguing to calculate the precise cost of economic crime, there are a number of reasons why such an estimate is doomed to failure. First of all, victims are not even aware of the most expertly committed crimes. Second, economic crimes endanger fundamental human interactions, economic growth, and in certain situations, even political stability (Grabosky, 2001, p. 146).

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Corruption is not a recent origin, and it can be traced back since the prebiblical period. The great Indian polymath, Kautilya, in his book Arthashastra had given a vivid description of corruption. The English play writer William Shakespeare often featured corruption in several of his plays. Civilized nations throughout the globe have made treason and bribery a serious offence. But in recent years, corruption has received unprecedented levels of scrutiny (Tanzi, 1998, p. 21). There are several definitions of corruption, each of which leaves out some important details. No one contests the necessity to manage corruption, even though there is debate among researchers about what constitutes corruption and what causes it. However, the definition of corruption offered by the World Bank is the most well-­ known and straightforward. It is defined as abuse of public power for private gain. One might infer from this definition that there is no corruption in the actions of the private sector. This phenomena is undeniably present in both small and large private businesses, for instance, in employment or even in procurement (Tanzi, 1998). In private activities that are subject to government regulation, it also exists. The misuse of public authority can occasionally serve the interests of one’s party, class, tribe, friends, family, and other groups instead of the individual. In many nations, some of the money gained by corruption is used to fund the campaigns of political parties (Tanzi, 1998, p. 25). Corruption may be defined as misuse of public office and resources for personal gain or use of illegitimate forms of political influence by public or private parties, and in the justice system, it is generally defined as the misuse of public authority for personal gain that results in the improper delivery of judicial services and legal protection for citizens (Pepys, 2005, p.  13). Judges, prosecutors, police, public defenders, the private bar, court workers, and court decision enforcement agencies, such as correctional facilities, are often part of the judicial system. To summarize, the literature lacks a clear definition of corruption. Depending on the target of research, different parts of the problem are frequently addressed in different definitions. It is critical to note at this point in my research various countries have different perceptions of corruption, according to their history and the balance of political and economic possibilities and interest groups (Johnston, 1997). The definition of corruption varies per nation, which has an impact on professional view as well. For example, in many nations, US-style spoils distribution of government employment is considered corrupt, but not in the USA. Conversely to the popular belief that corruption and economic crime have adverse impact, according to academic research, it has been argued that corruption may play a constructive role in the development process. Lui (1985) uses an equilibrium-queuing mode to suggest that corruption allows the queue to be rearranged in a way that allows for an efficient allocation of time, giving those for whom time is most valuable the opportunity to move to the front of the line; and Beck and Maher (1986) suggest that corruption may serve to ensure that projects are awarded to the most efficient firms, who stand to gain. Corruption, according to political economists, politicians, and international financial organizations such as the World Bank and the International Monetary Fund, is harmful to both political progress and economic growth. Tanzi (1998) use data from a wide number of nations to show that corruption and red tape are negatively

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associated with economic growth. Despite this heated argument, it is important to highlight that crime is a changing phenomena, and illegal activities such as the exploitation of Internet trade, which was unthinkable a decade or so ago, now pose substantial hazards to the economies and societies of many countries.

 conomic Crime and Corruption in Emerging Countries: E Causes and Consequences Economic crime and corruption are ubiquitous, but Manzetti and Blake (1996, p. 662–697) argue that they are most prevalent where the institutional mechanisms to combat corruption are weak or not employed; broad government control and regulation of economic resources give abundant opportunity for corrupt transactions; and corruption is so widespread at all society levels that it is accepted and permitted. Are the characteristics listed above typical of emerging economies? Corruption is caused by a variety of variables (Tanzi, 1998), many of which are more prevalent in poorer nations and economies in transition than in affluent countries. Thus, economic prosperity diminishes a country’s degree of corruption over time. However, even at comparable levels of prosperity, some nations are seen to have higher degrees of corruption than others. It is important to note that economic prosperity does not always result in a more honest world. For example, in the second part of the nineteenth century, the USA was more corrupt than earlier in the century. Furthermore, some wealthy countries are significantly more corrupt than poorer ones. To demonstrate this concept, we can consider the TI’s1 CPI issued in 2021. As the name implies, it only measures the “perception” disclosed in polls of technical specialists and businesses, each of whom has their own set of expertise and prejudices. According to the index, Singapore with per capita income $1.02 jointly ranked the fourth with Sweden, a country with half of its income. Kuwait ($ 59,040) ranked jointly 73rd with Ghana, which is 10% of its income level. These instances show that economic progress does not automatically diminish corruption; instead, tactics must be implemented to accomplish this. Regardless of the above perspective, most significant crimes requiring premeditation are motivated by the acquisition and management of money. We understand today that much more crimes are motivated by greed and the potential of financial gain than those that may be classified as “economic crimes.” Notwithstanding, in the 1990s, with the conclusion of the cold war came what has been termed “an explosion of corruption” (Caiden et al., 2001, p. 191). This explosion was caused by a variety of events. They are as follows: first, state failure in many parts of the world, which tended to exacerbate already existing corruption problems; second, deregulation and privatization of markets in former Soviet bloc countries without

 The index can be downloaded from https://www.transparency.org/en/cpi/2021, and the index may be taken with a grain of salt. 1

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concurrent strengthening of state institutions to ensure accountability; third, growth and access to information technology, which increased opportunity for everyone and anyone to do business; and fourth, technology enabling everyone to communicate. There was now greater corruption throughout the world, as well as corruption beyond borders (Caiden et al., 2001, p. 192). Political parties are frequently viewed as important to the corruption problem in both industrialized democracies and underdeveloped countries. Discourse on corruption and anticorruption strategies has identified parties as key actors who sometimes use their powerful position in the political system to extort bribes, provide lucrative positions in the public sector and related corporations to their members and supporters, shape political and economic institutions for the benefit of affiliated interest groups, or channel public resources into the hands of party leaders, members, or supporters. Party corruption, according to Belechinger, is especially troublesome in newly democratizing and emerging nations whose political and economic institutions are not yet solid (“Political Parties,” 2005, p. 28). Similarly, inadequate government revenue makes it difficult to provide reasonable wages to public employees, making them open to the lure of bribery. It is quite surprising how many government personnel in impoverished countries live honestly while being paid pittances. However, the lower the pay, the more likely authorities will cave to temptation. When people are destitute, it is simple to purchase their dignity – famished individuals find it difficult not to sell their votes for a sack of grain, while underpaid government workers will often fail to resist the urge to take a bribe (Belechinger, 2005). The affluent and powerful can also avoid prosecution and conviction under corrupted legal systems, while some groups of the population are denied their constitutionally guaranteed access to fair and efficient judicial services. The payment of a bribe, either requested by the police or judge or provided by the accused, the litigant, or the lawyer as an encouragement to make specific judgments, is one of the most prevalent kinds of corruption within the police and courts. Judges, for instance, may have an impact on a case’s procedural flow (Pepys, 2005, p. 17).

 educing Economic Crime and Corruption R in Developing Economies The pertinent question is if corruption in the government of developing economies is incurable? The response is, to put it mildly, “no.” The importance of developing economies in the global fight against corruption cannot be overstated. Several nations and international donors are now working on weak state eradication initiatives that stress the connections between corruption, bad governance, and weak states (Spector, 2005). The best way to control corruption is to essentially know the level of it. How can we gauge the extent of corruption in a nation? The statistics available at Transparency International may be the best available approach. As has already been mentioned, corruption is a complicated phenomenon that is rarely

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described by a single source, and if it were, a straightforward cure would exist. Some of the numerous variables that affect it are more easily modifiable than others. The battle against corruption must be waged on several fronts due to the complexity of the situation. It is a battle that must be fought over time rather than on a single day. The worst error that may be made is relying too heavily on a single technique, such as raising public sector personnel compensation, stiffening punishments, or setting up an anti-corruption bureau and then expecting speedy results (Tanzi, 1998, p. 50). Fundamental guidelines for management and prevention of economic crime are mechanism for raising public awareness, procedure for independent review of administrative decisions, procedures for auditing, sensitizing the public, and specialized bodies for the investigation and prosecution of serious economic crime (Grabosky, 2001). The A Handbook on Fighting Corruption by the US Agency for International Development offers a helpful approach for reducing corruption that depends on three key initiatives: minimizing the influence of the government on economic activity to reduce authority; enhancing accountability via improved monitoring, transparency, and punishment; and redesigning public service employment and thereby improving incentives. On the global front, in the middle of the 1990s, there was a great deal of discussion on how to combat corruption among international and bilateral donors, governments, and nongovernmental groups, who were also arguing for and pushing changes. They started conducting analyses of corruption, creating appropriate legislative frameworks, establishing government organizations like anti-corruption commissions, bolstering law enforcement agencies, and educating the public about the costs and effects of corruption (Bhargava et al., 2004). These initiatives do have a significant impact in controlling corruption. It is contended that traditional methods of combating corruption, such as adopting legislation, establishing new institutions, and launching anti-corruption campaigns, have been ineffective in containing or eradicating the issue. Instead, a new orientation that places a focus on external accountability  – approaches that impose rigorous checks and balances on public institutions and officeholders  – might put enough pressure on the government to uphold the rule of law and rein in corrupt inclinations. According to Spector, a sector-by-sector control or analysis is the most effective strategy to combat corruption in emerging nations. The legal system, education, healthcare, political parties, public finance, environmental and natural resources, energy, and other sectors are a few of the ones we need to take into account. Before any systematic response to eradicating corruption can be developed and put into practice, for example, a response to corruption in the justice sector will require an independent assessment of corruption involving all stakeholders (for instance, parties to a civil dispute include the accused and the victim) (Pepys, 2005, p.  19). However, a lack of proof is an issue for developing nations. Nevertheless, in order to analyze the extent of the issue and provide a framework for anti-corruption laws, actual proof of corruption must be presented, not simply theories or popular perception. Additionally, strengthening public prosecutors’ power to prosecute cases – which appears to be missing in emerging economies – would help reduce corruption and

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other associated crimes. For the public prosecutor to properly investigate powerful private persons and government officials (including judges), their independent role in the fight against corruption must be robust. To enhance the prosecutor’s office, efforts have been made throughout Latin America. For instance, the attorney general in Colombia was given considerable investigative powers to combat corruption, which he effectively applied to the prosecution of powerful politicians and drug lords. Due to the establishment and adequate funding of the general prosecutor’s office against corruption in Honduras, the general prosecutor was able to successfully uncover wrongdoing in the armed forces. When it came to disclosing political bribes, India’s Supreme Court, one of the country’s most reputable institutions, took the lead (USAID, 1999). Institutional restructuring is crucial to eradicating corruption in political parties. Both internal party governance and the governmental system with which parties engage must be addressed in reforms (Belechinger, 2005, p. 36). The framework of the environment in which political parties function is also greatly influenced by party laws. Registration, finances, and overall management are frequently covered by party statutes. In addition to establishing party roles and introducing government organizations with supervision and enforcement authority, they give legitimacy to party operations (Belechinger, 2005). Controlling corruption and other associated crimes in poor nations is crucial, but several variables make this a little more challenging. First, due to the fast advancement of ICT, crime, particularly economic crime, currently knows no bounds. The majority of poor nations lack the requisite legislation, law enforcement professionals, and even the funding to look into cross-border crimes.

 ombating Economic Crime and Corruption: The Situation C of Emerging Economies Controlling economic crime and corruption is essential and should be viewed as a vital development strategy in emerging nations. How much does corruption cost, and what are the effects? The misuse of financial resources is the most obvious and, in some respects, the least significant consequence of corruption. The most substantial costs are paid when children who cannot pay bribes are denied access to education, when talent is misallocated when promotions are given based only on personal effort and merit do not count, and when success is obtained by coercion, favoritism, and bribery (Chapman, 2005). Economic crime in emerging countries does need a lot of resources (both human and material), but the advantages a nation may reap when it is under control are enormous. The Corruption Perception Index employs a scale of 0 to 100, where 0 is very corrupt and 100 is very clean, to rank 180 countries and territories according to the perceived levels of public sector corruption as reported by experts and businesspeople. Some of the most populous nations in the world, including China (45) and India (40), as well as other developed nations with sizable economies, such Indonesia (38), Pakistan (28), and Bangladesh (26), are

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among those with low ratings, according to the anti-corruption watchdog study (India News, 2022). The research makes the case that while regulating corruption in emerging economies is undoubtedly challenging in the short and medium term, it is manageable over the long run. A cynic may look at these very negative findings and conclude that doing so is an altogether unattainable task (Spector, 2005, p. 2). Does the price of preventing corruption exceed the advantages? In spite of the fact that managing economic crime and corruption is a difficult task for emerging countries given the borderless nature of crime in the ICT era, this study believes that it is still worthwhile to do so. Investors and other contributors are more likely to be drawn to a nation when economic crime and corruption are at a minimum. When corruption is minimized in their economy, developing nations typically reap significant benefits. What may these advantages be? On November 3, 2022, Indian Prime Minister Narendra Modi advocated for ‘zero tolerance’ against corruption while speaking at an event at Vigyan Bhawan in New Delhi. He stated that authorities and agencies fighting corruption do not need to be afraid or defensive in their job. He pragmatically mentioned that “Corruption is an evil we must stay away from…we have been trying to change the system made by ‘abhaav’ (lack) and ‘dabaav’ (pressure) in the last 8 years” (Gaurav, 2022). In a similar vein, it may be argued that even when politicians condemn corruption, they may not have the financial means to pay for the institutional, legal, and human resource adjustments that are required to produce favorable outcomes. Because of this, it is challenging for the government to allocate funds for the battle against corruption. For instance, the government must employ expensive accountants and attorneys, either from inside or from the outside, in order to find and prosecute dishonest officials. Despite the cost, it is worthwhile to fight corruption. It is obvious that corruption may be decreased with concentrated and concerted efforts, albeit not completely eliminated. It would be very expensive, in terms of both resources and other factors, to try to eradicate corruption completely. For instance, it can call for excessively high public sector salaries, significant organizational or legislative reforms, excessive civil rights restrictions, or extremely severe and effective sanctions (Tanzi, 1998, p. 50). It is frequently impossible for the battle against corruption to advance without state reform. The struggle is similar in many respects (Tanzi, 1998).

Conclusion The phenomenon of economic crime and corruption in developing economies is covered in this paper. The study in this paper leads one to believe that, beyond underdeveloped countries, every civilization has its own institutional and legal framework for countering corruption. Furthermore, it asserts that efforts to eradicate corruption are not likely to be totally effective in developing nations, let alone developed ones. This article also makes the claim that nations should build up anti-­ corruption laws and methods that are most appropriate to their local conditions

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while also taking into account the fact that economic crime and corruption are both transnational in character. As a result, in order to fight corruption, a nation must select a strategy that works for its particular economic, social, and political situation. It has come to light that corruption is a crime that knows no geographical boundaries. As a result, there must be several fronts in the fight against economic crime and corruption. While it is possible to regulate it on a national level through government processes and with the help of the public and the media, effective control on a global scale necessitates bilateral or multilateral collaboration between countries to execute anti-corruption laws. For developing nations, international involvement in the fight against economic crime is essential because progress requires an economic climate with balanced and controlled risk. This recognizes the enormous difficulty in reducing economic crime and corruption that occurs between the public and private sectors. The study concludes by arguing that it is justified to pay a price to combat economic crime and corruption in developing nations. However, it makes the case that this should be done over a longer period of time and admits that corruption and economic crime cannot be totally eradicated.

References Belechinger, V. (2005). Political parties. In B. I. Spector (Ed.), Fighting corruption in developing countries: Strategies and analysis. Kumarian Press. Bhargava, V.  K., Bolongaita, E.  P., & Bhargava, V.  K. (2004). Challenging corruption in Asia: Case studies and a framework for action. World Bank. Caiden, G.  E., Dwivedi, O.  P., & Jabbra, J.  G. (Eds.). (2001). Where corruption lives. Lynne Rienner Publishers. https://doi.org/10.5860/choice.40-­1843 Chapman, D. W. (2005). Education. In B. I. Spector (Ed.), Fighting corruption in developing countries: Strategies and analysis. Kumarian Press. Gaurav, K. (2022, November 3). ‘No matter how powerful…’: PM Modi’s firm message on corruption. Hindustan Times. Retrieved December 21, 2022, from https://www.hindustantimes.com/india-­n ews/no-­m atter-­h ow-­p owerful-­p m-­m odi-­s -­f irm-­m essage-­o n-­ corruption-­101667461611844.html Grabosky, P. (2001). The prevention and control of economic crime. Semantic Scholar. Retrieved December 9, 2022, from https://www.semanticscholar.org/paper/The-­Prevention-­ and-­C ontrol-­o f-­E conomic-­C rime-­G rabosky/3856a945c33ed687632c25fc96526b0e 21d01259 India News. (2022, January 26). India ranks 85th among 180 countries in global corruption index: Report. NDTV.com. Retrieved December 21, 2022, from https://www.ndtv.com/ india-­news/india-­ranks-­85th-­among-­180-­countries-­in-­global-­corruption-­index-­transparency-­ international-­report-­2730018 Johnston, M. (1997). Public officials, private interests, and sustainable democracy: When politics and corruption meet. Corruption and Global Economy, 61–82. https://www.researchgate.net/ publication/254021912_Public_Officials_Private_Interests_and_Sustainable_Democracy_ When_Politics_and_Corruption_Meet Kaufmann, D., Kraay, A., & Mastruzzi, M. (2003, August). Government matters III: Governance indicators for 1996–2002. Open Knowledge Repository. Retrieved December 8, 2022, from https://openknowledge.worldbank.org/handle/10986/18134

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Manzetti, L., & Blake, C.  H. (1996). Market reforms and corruption in Latin America: New means for old ways. Review of International Political Economy, 3(4), 662–697. https://doi. org/10.1080/09692299608434376 Pepys, M.  N. (2005). Justice System. In B.  I. Spector (Ed.), Fighting corruption in developing countries: Strategies and analysis. Kumarian Press. Robinson, M. (1998). Corruption and development: An introduction. The European Journal of Development Research, 10(1) Springer. https://doi.org/10.1080/09578819808426699 Spector, B. I. (Ed.). (2005). Fighting corruption in developing countries: Strategies and analysis. Kumarian Press. Tanzi, V. (1998, May 1). Corruption around the world: Causes, consequences, scope, and cures. International Monetary Fund. Retrieved December 12, 2022, from https://www. imf.org/en/Publications/WP/Issues/2016/12/30/Corruption-­A round-­t he-­World-­C auses­Consequences-­Scope-­and-­Cures-­2583 Transparency International  – TI, Berlin. (2003). Corruption perception index. Transparency International. Retrieved December 7, 2022, from https://www.transparency.org/cpi/2003/ index/cpi2003.en.html USAID. (1999). A handbook on fighting corruption. Development Experience Clearinghouse | PDF Server. Retrieved December 20, 2022, from https://pdf.usaid.gov/pdf_docs/pnacr212.pdf

Chapter 6

Money Laundering Through the Arbitral Process: Controversial Issues Wait for Solutions Jaffar Alkhayer

and Narinder Gupta

Introduction Arbitration is not a judicial process for resolving public and private disputes, based on an agreement between the parties leading to the voluntary submission of conflicts to a neutral third party (M.A.M., 1981), instead of going to national courts to resolve their conflicts. As a result, arbitration is triggered by a contractual agreement (Carbonneau, 2008). Resorting parties of disputes to an impartial third party to settle their dispute is not a new trend (Sohn & Soons, 1990). However, the contemporary application of arbitration has several unique elements that have led to its fast rise (Fisher & Haydock, 1995). Most importantly, unlike adjudication, arbitration allows parties to choose the system in which their conflicts are addressed (Redfern & Hunter, 2004). It is difficult to attribute the growth in the popularity of arbitration to a single factor, considering the widespread use of arbitration in civil dispute resolution. Arbitration processes, in contrast to their judicial counterparts, are consensual and adaptable, generally secretive, speedier, more efficient, and less expensive. Awards issued by arbitrators are likewise final and binding. The arbitration may appear to be a universe apart from the realm of criminal law as a form of civil dispute settlement. An arbitrator is not a judge, and national courts retain sole power over criminal punishment. However, as arbitration becomes more widespread, financial crimes such as tax evasion, theft, corruption, extortion, and money laundering are becoming more commonplace in civil disputes brought before arbitrators, especially in international commerce. The intersection between financial crimes and arbitration gives rise to a plethora of intricate legal questions, such as the burden of proof, evidentiary standards, relevant criminal legislation, enforcement, and judicial review (Cingula et al., 2018). Arbitrators have a tough situation when dealing with contracts contaminated by financial crimes. Arbitrators have certain J. Alkhayer (*) · N. Gupta Shoolini University, Faculty of Legal Sciences, Solan, Himachal Pradesh, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_6

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duties to render a final arbitral award settling the dispute between the parties and at the same time. In their roles as arbitrators, attorneys, and regular people, they are tasked with a variety of duties to take legal measures for dealing with and fighting financial crimes (de McDougall, 2004). Money laundering is a crime that arbitrators must deal with if they confront it while deciding international commercial and investment disputes. In recent years, it has come under growing international attention and criminalization, and it is now regarded as a crime in most countries because of its globally negative impact on trade, economy, and society (Hedberg, 2016). Despite the existence of many national and international policies designed to combat money laundering, the practice persists (Pol, 2020). The present paper is an attempt to discover the reasons and factors which make arbitration a fertile environment for money laundering and how it is possible to alleviate the impact of these reasons and factors; most importantly, it is trying to develop arbitrators’ skills to figure out money laundering actions through pursuing arbitral process, and, besides the differences of national laws and international directions, this paper may be a step forward elaborating the responsibility of arbitrators when they facing money laundering actions by offering suggestions to unify the norms and measures which should be applied at the global level.

United Definition of Money Laundering Although a unified definition for money laundering is difficult to emerge at the global level, the scope and nature of money laundering are established by the national laws or international treaties that make it a crime. National laws and global guidelines clearly define what constitutes money laundering (Teichmann & Falker, 2020). The Vienna Convention contains the United Nations’ concept. All illegally obtained funds must be masked in some way to avoid detection, and this is the purpose of money laundering approaches (Korejo et  al., 2021). The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 made it illegal to launder money (United Nations, 1991). Money laundering is defined as “the conversion or transfer of property, knowing that such property is the proceeds of crime, to conceal or disguise the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action” (Article 6.1 of the UN Convention against Transnational Organized Crime, 2000; Article 23.1 of the UN Convention against Corruption, 2003) (Boister, 2016). To “legitimize” the ill-gotten earnings of illegal activity, “money laundering” is defined as “the processing of… criminal proceeds to disguise their illegal origin” by the Financial Action Task Force on Money Laundering (FAT), which is widely regarded as the worldwide standard setter for anti-money laundering initiatives (Grujić & Šikman, 2020). According to Brazilian Law 9,613/1998, the crime of money laundering occurs when a person engages in financial transactions intending to conceal the identity, source, or destination of

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illegal goods or assets. This is true as long as the illegal assets in question were obtained through some other previous criminal offence (De Sanctis, 2015). There is no official definition of “money laundering” under the German Anti-money Laundering Act. Legislative documents and relevant materials, however, define money laundering as the introduction of financial assets gained by terrorists and criminal organizations into the legitimate financial and economic cycle to conceal their source. The value of the assets in question will be preserved, but the prosecutors will be denied access to them. Accordingly, “money laundering” refers to any activity with the intent to make the presence, origin, or purpose of financial assets derived from unlawful companies seem to be legitimate income (Bergström, 2018). In India, money laundering has been criminalized under the Prevention of Money Laundering Act, 2002 (PMLA), as modified in 2005 and 2009, and the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act), as amended in 2001 (Narayan, 2019).

Emerging of Money Laundering Through an Arbitral Process There are some scenarios in which an effort at money laundering might be made in the context of arbitration. Initially, a claimant in the arbitration may assert a money laundering defense, which might be used as a defense against contract enforcement in the case. In this case, for refusing the enforcement of the contractual obligations, the claim of one party that the other is trying to commit money laundering activities is an attempt to utilize the advantages of violation of the public policy of the nation hosting the arbitration, for avoiding the whole arbitral process. And that may happen at the stage of enforcement of arbitral award as well (Gaillard, 2019) (Fig. 6.1). Another scenario is where the whole dispute is a part of a larger scheme to launder money. That is, there is no actual disagreement between the parties, and the arbitral tribunal is only being used as a front for the transfer and subsequent legitimization of ill-gotten gains (Betz et  al., 2019). According to the awareness and actions of the arbitral tribunal, three options can be generated, first if the arbitral tribunal was aware of the real purpose of the arbitral process, but just because of its obligation to render an arbitral award, it issued that arbitral award. In this case, it may face allegations of breaking public policy and anti-money laundering laws in the nation hosting the arbitration. That will be contingent upon the rules of these acts and public policy. Second option is when the arbitral tribunal is aware of the truth of the intention of the parties and assists or has the willingness to assist them to achieve this objective. In this case, the arbitral tribunal will be accused of an accomplice. The third option, when the arbitral tribunal does not know the real purpose of the process, may happen when the parties of the fake dispute act diligently to mislead the arbitrators, for example, offenders who commit the “predicate” offence usually form two different firms. The firms then embark on a commercial enterprise, which entails the transfer of additional items or the provision of services at inflated costs (in comparison with the price of equivalent goods and services). An

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Fig. 6.1  The money laundering defense scenario and its aims

Fig. 6.2  The sham arbitration proceeding scenario and positions of an arbitral tribunal

arbitration clause is included in the underlying contract, which prevents the judicial system from determining a prospective contract dispute. They then create a fictitious dispute and work carefully to prepare the relevant documentation to substantiate their claims (Glucksmann & Morbach, 2020; Wilske, 2019) (Fig. 6.2).

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 ignals That Might Alert Arbitrators to Money S Laundering Schemes  oney Laundering Warning Signs of Sham M Arbitration Proceedings 1 . A very one-sided dispute 2. A nonparticipating respondent (a respondent that does not participate in the proceeding) 3. A responder who participates but essentially concedes culpability or agrees to a settlement early 4. A lack of documentation on the background of the disagreement 5. A lack of evidence that supports the plaintiff’s position in the dispute 6. A lack of commercial activity on the part of the firms that are participating (Low, 2021) (Fig. 6.3)

 oney Laundering Warning Signs of Money M Laundering Defense 1. Beneficial owners of accounts or private investment firms, trusts, and other entities who remain unknown (shell corporations, presumably located offshore, with ownership possibly hidden via bearer shares). 2. The involvement of politically exposed persons (PEPs). 3. Persons or funds involved that originate from countries with a well-known risk for crime and corruption. 4. Unusual transactions, such as large cash payments. 5. The origin of the funds at stake is unknown, and there is no plausible explanation for how those funds were earned legally (Tussupov, 2022) (Fig. 6.4). The list that was just shown is not comprehensive. If an important red flag or many of the ones listed above are present in a situation and create suspicion of money laundering, it is in the best interest of arbitrators to take a deeper look at the situation.

The Scope of Responsibility of Arbitrators The purview of the arbitral tribunal should not any way to expand to decide over criminal activities; this jurisdiction is confined to be with specialization of judicial authorities of the state, and the duties of arbitrators are restricted to recognition and enforcement of measures and provisions of the applicable law to be taken place

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Fig. 6.3  The signals that might alert arbitrators to sham arbitration scenarios

against money laundering attempts during arbitral process to relieve the responsibilities on their shoulders (Kolarov, 2022).

From the Counsel’s Perspective The Fourth EU Directive may directly affect the decisions made by arbitrators or other legal practitioners. Under the Directive, “notaries and other independent legal practitioners” are required to submit a report “when the obligated entity discovers, suspects, or has a reasonable belief that money, no matter the amount involved, are

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Fig. 6.4  The signals that might alert arbitrators to the truth of money laundering claims in the money laundering defense scenarios

the consequences of illegal criminal conduct.” The scope of this responsibility and whether it would impact counsel will vary depending on how the Directive has been implemented in the specific member state (Premti et al., 2021), To provide one example, under German law, lawyers may perhaps even have an obligation to disclose instances of suspected money laundering to the authorities, by submitting reports, depending on the duties of honorable practicing of the legal profession that counsel is assigned to commit as lawyers are expressly referred to as “independent legal professionals” in the German Anti-money Laundering Act, which incorporates the Directive into German legislation. Arbitration procedures as such are subject to the German anti-money laundering regime’s applicability. However, this should be looked into further if the arbitration pertains to a transaction that is covered by German AML regulations (Svenonius & Mörth, 2020). However, lawyers should be aware of money laundering matters and attentive to following the anti-money laundering (AML) procedures, which are what will bring the requirements of the Fourth EU Directive into their territory.

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 he Fourth EU Directive on Money Laundering T from an Arbitrator’s Perspective When an arbitrator, as compared to a lawyer, has suspicions of money laundering or has money laundering issues brought before them, the situation becomes more problematic. The applicability of the four EU Anti-money Laundering Directives to arbitrators was a topic of discussion. At least in Germany, it seems like this is now decided. The EU Anti-money Laundering Directive does not apply to arbitrators in Germany (Kolarov, 2022). An issue may arise that is related to the attorneys who serve as arbitrators. If the Directive applied to attorneys serving in the capacity of arbitrators, then such attorneys would have additional responsibilities beyond those of their peers in the arbitration process. This will be not logical and cannot be the aim of the Directive; moreover, the issue can be expanded to consider that every arbitrator “even if he/she is not a lawyer” is included under “independent legal professionals.” It can be said here that the role of the arbitrators is different from the role of attorneys whereas arbitrators do not help in the planning or carrying out of transactions. On the other side, it is worth saying that arbitrators may have an important role in the ease and success of money laundering transactions (Svenonius & Mörth, 2020). However, caution is warranted since the situation may differ across EU member states, and the interpretation in Germany may not be reflected throughout the EU. Given the widespread significance of anti-money laundering legislation, arbitrators must be familiar with any AML laws that may apply to their proceedings.

 ow to Deal with Money Laundering in Arbitration When H the Arbitrator Is Not Obliged to Report Its Suspicions Under National Law If the tribunal does to comply with applicable anti-money laundering laws, it might face criminal liability. The issue of how to deal with money laundering in arbitration persists even in countries like Germany where an arbitrator is not required to divulge its concerns under national law. The relevant treaties, regulations, and arbitral procedures do not provide a definitive conclusion for the tribunal in any of the scenarios outlined above. The arbitral tribunal will have to tread carefully between the competing principles of party autonomy and non-ultra petita on the one hand and the responsibility to give an enforceable judgment that may not be contested and/or not be recognized based on a breach of public policy, on the other (Wronka, 2022).

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Scenario of Sham Arbitration A money laundering investigation is justified if an arbitral panel generates suspicions on its own. If the tribunal chooses to ignore the suspicion, it might lead to jeopardize the enforceability of the arbitral ruling, and, in the worst case, the arbitral tribunal may be exposed to a criminal investigation and may hold a criminal responsibility. The court is not obligated to inform German authorities of its suspicions, as is the case in many other countries; but, the possibility of being made an accessory to a money laundering crime still exists. Consequently, the tribunal must choose whether or not to conduct an investigation. An option is to share its worries with the parties and listen to their perspectives on the matter. This might be a fruitless effort given the tribunal’s limited ability to force the parties to provide evidence and its limited ability to conduct investigations, especially if the tribunal’s suspicions turn out to be reasonable. Even if the parties did agree to start arbitration procedures, they probably won’t provide the proof the panel needs to refute its suspicions (Glucksmann & Morbach, 2020). Scenario of Money Laundering Defense In the case of money laundering defense, the non-ultra petita is not an issue since a party of the dispute has claimed the “money laundering defense.” The burden of evidence and the standard of proof to be used by the arbitral tribunal are two of the most important problems in this context. The burden of evidence in cases of alleged bribery and corruption has been established before in three of the most prominent cases. Evidence “clear and convincing” (EDF Ltd vs. Romania – ICSID ARB/05/13), “clear and convincing evidence amounting to more than a mere preponderance” (Westinghouse vs. the Republic of the Philippines, ICC Case No 6401), or “beyond doubt” was required by arbitral tribunals (Hilmarton vs OTV, ICC Case No 5622). There is also some uncertainty about whether the party alleging money laundering should bear the whole burden of proof or if the burden should be distributed in some way, such as by asking the counterparty to present evidence if the claim prima facie seems to be based. At now, this will still be determined on a case-by-case basis (Tussupov, 2022). The Enforcement Stage The issue of whether an arbitral award contaminated by accusations of money laundering may be refused recognition and enforceability on public policy grounds under Art. V (2) (b) of the New  York Convention arises during the enforcement phase. Public policy is often tightly defined. Violating public policy requires going against established norms in the law (Glucksmann & Morbach, 2020). In light of prior arbitration rulings regarding corruption, one may make the case that money laundering is a matter of international public order or global public

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policy due to multiple international legal instruments (Jakobi, 2018), including the Fourth EU Directive, that have made it unlawful to launder money, and therefore, anti-money laundering activities have ramped up across the world. Ultimately, assessing the corruption or other unlawful behavior that the proceeds of money laundering are believed to have originated from, and the level of review used by national courts when confronted with order public defenses, will vary, however, among various states’ courts (Mugarura, 2020).

Applicable Norms of National and International Laws Identify the Applicable Criminal Law The responsibility of arbitrators is relevant regarding a sensitive issue such as money laundering crime, most national acts establish the responsibility of arbitral tribunal if any carelessness or shortage is taken place from its side, so the arbitrators need to be with awareness of the laws that determine the scope of their responsibility for following and deciding the provisions and measures that are imposed by these laws; otherwise, they may be exposed to the criminal investigation and penalties (Wilske, 2019). It is up to each state’s domestic criminal code to determine whether or not it has jurisdiction over money laundering. In general, states have jurisdiction over criminal crime in two basic concepts; first, the territoriality concept states that a state has jurisdiction over a crime if it was committed in whole or in part inside its borders, meaning that either the criminal act itself or the consequences of that act occurred within its borders. Second, according to the nationality or personality concept, a state’s government may exercise jurisdiction over a crime committed anywhere in the world if a citizen of that state was involved (Rusanov & Pudovochkin, 2021). When it comes to applying international conventions, there are two basic methods to enforce the international treaty; the first one is direct if the parties choose, or the tribunal chooses if it was permitted upon the rules in force, to apply an international treaty; the second one is indirectly when the international treaty was incorporated with the concerned domestic acts; it is pertinent to note that the purview of the arbitral tribunal is confined to limit the scope that the parties have agreed upon, as well as the scope of international law that the parties have agreed to apply to their dispute (Zavoli & King, 2021). In particular, when it comes to money laundering crime, it is worth noting that pertinent to the nature of this crime, it is more probably to occur across more than one state’s territory or its effect reaches more than one nation; consequently, a conflict among national jurisdictions is more likely to emerge; hence, many acts with different and contrary rules and provisions may cover the responsibility of the arbitral tribunal, and different public policies should be avoided to get violated, which will make it harder for arbitral tribunals to fight against money laundering (Rusanov & Pudovochkin, 2021). It is pertinent to note that the application of an international treaty does not relieve the responsibility of

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the arbitral tribunal as it is established by the national act and public policy of the country of arbitration seat especially if that country was not a member of the applicable treaty and it was affected by the concerned money laundering activities.

 pply the Money Laundering Rules Outlined in the Competent A Criminal Law After a determination is made as to which national and international legal standards are applicable, financial crimes such as money laundering may be taken into account by arbitrators, who can apply the applicable rules to the case at hand. Arbitrators will be better able to determine whether or not there was a real money laundering effort in the case at hand if they are familiar with the applicable money laundering criteria (Rusanov & Pudovochkin, 2021).

The Efficacy of Transnational Public Policy Because it is generally acknowledged that money laundering is contrary to transnational public policy, arbitrators may nevertheless rely on the efficacy of transnational public policy even if international treaties do not apply to the case at hand. Even if the standards of the relevant domestic criminal law are lower than those set by international anti-money laundering treaties, arbitrators may nonetheless consider transnational public policy (Jakobi, 2018).

Methods of Seeking Evidence I nvestigation of Alleged or Suspected Money Laundering on Arbitral Tribunal’s Own Will Even though arbitral tribunals are not state courts, arbitrators have to serve a public order when its violation is at stake. It’s important to note that arbitral awards have the same legal power as verdicts issued by a court. Furthermore, arbitrators are required by law to give a decision that may be upheld in court. A failure on the part of arbitrators to handle money laundering risks may lead to a challenge of the arbitrators’ award in state court set aside or enforcement proceedings because the award breaches national or transnational public policy (Betz et  al., 2019). While the options for challenging a decision in ICSID arbitration are confined to the review processes outlined in the ICSID Convention, parties may also request annulment in whole or in part of a judgment before an annulment committee. Whether in the

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context of commercial or investor-state arbitration, arbitrators should consider investigating (also on a sua sponte basis) allegations of money laundering if a party alleges such allegations or arbitrators have suspicions to that effect. The arbitrators must do so even if the allegations or suspicions do not become known until late in the proceedings (Wilske, 2019).

Request Information from the Parties If a dispute involves any suspicion of money laundering, arbitrators may issue procedural orders requesting written or oral information from the parties to corroborate or refute the claims or suspicions of money laundering. In general principle, whether the arbitration is international or national, the parties must always act in good faith and cooperate with the tribunal (Kolarov, 2022).

The Burden and Level of Proof In the context of both arbitration and criminal law, the arbitrator’s response to the questions of burden and degree of evidence will be determined by his or her legal experience. In general, the burden and level of proof for charges of money laundering in an arbitral process are determined by the acts in force of the country of arbitration seat, whereas the arbitral process is a kind of civil process in which the selected act by the parties would be civil or commercial law whether it was national or international. In a case the parties have agreed upon a criminal law to apply to criminal activities during the arbitral process, the question is whether that law should apply to money laundering crime (Mugarura, 2020). The purview of the arbitral tribunal should not any way to expand to decide over criminal activities; this jurisdiction is confined to be with specialization of judicial authorities of the state, and the duties of arbitrators are restricted to recognition and enforcement of measures and provisions of the applicable law to be taken place against money laundering attempts during arbitral process to relieve the responsibilities on their shoulders. However, the applicable legislation may not always spell out the burden and level of evidence (Rusanov & Pudovochkin, 2021).

Request Further Proof from One or Both Parties If there are indications of money laundering, the arbitrators may require the party that disputes the allegations of money laundering to provide supporting evidence to prove the facts. If there are strong hints of a suspicious money laundering attempt in the first scenario (claim as defence from one party), while some evidences

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demonstrate that the claimed money laundering transaction was lawful and a normal component of a business transaction, the arbitrators may require more documentation from both parties to validate the factual assertions that they have made (Wilske, 2019). In the second scenario (the whole arbitral process is a sham for purpose of money laundering), arbitrators may request both parties to submit their shreds of evidence to refute these suspicions and to substantiate the diligence of the arbitral process (Betz et al., 2019).

Possibilities in Terms of Proof Standard The arbitrator has several possibilities when it comes to the level of proof. The arbitrator may decide to find in favor of the party whose claims are more likely to be true by using the preponderance of evidence or balance of probability standard (Wilske, 2019). Both of these criteria imply that the arbitrator will rule in favor of the side whose evidence is more convincing. The arbitrator may also resort to a more stringent standard than the balance of probability, which is referred to as clear and convincing evidence (Mirzazadeh, 2020). The arbitrator also has the option of relying on his or her “intime conviction” which means that the arbitrator must be convinced that there is adequate evidence to substantiate the accusations or suspicions of money laundering. This is another feasible approach for the arbitrator (Low, 2021).

There Is No Requirement for First-Hand Evidence Due to the lack of executive power that arbitral tribunals possess, there is a very low probability that any concrete proof of money laundering will ever be presented. However, it is common knowledge that money laundering may be established via the use of circumstantial evidence (also known as faisceau d’indices), which includes the warning signs that were discussed before. Warning signs (red flags) are not indicative of money laundering in and of themselves yet (Gaillard, 2019). They are, however, symptoms of money laundering that should inform arbitrators that the facts of the case need to be examined further. Circumstantial evidence, which includes red flags, can lead to proof of money laundering. Tribunals have the power to make a definitive determination of money laundering based on the circumstantial evidence that is available to them(Tussupov, 2022).

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Negative Inferences Without convincing reason, arbitrators may rule against the party that failed to produce proof refuting the money laundering charges or suspicions. Circumstances Led to Negative Inferences If the following circumstances are met, arbitrators should consider using opposite inferences: (i) To draw a negative inference of money laundering, a party must either submit substantial proof of money laundering and all relevant evidence to support the result sought by the party, or the tribunal must find significant indicia of money laundering. (ii) The party whose evidence is being requested must have ready access to that evidence. (iii) The party requesting evidence has not shown a compelling justification for doing so. (iv) The conclusion must be reasonable, rationally connected to the likely nature of the requested evidence, and consistent with the circumstances (Tussupov, 2022).

National Criminal Proceedings Arbitrators as members of the legal community, lawyers and individuals, are under the public order of seeking protection and safety of society against criminal activities in principle. On the other hand, in the light of the strategic objective of some countries to be arbitration-friendly countries, keeping the effectiveness of arbitration as a successful tool for resolving commercial and investment disputes will be essential against attempts of impeding the arbitral process or misleading arbitrators by submitting fake criminal activity claims through deliberately exploiting the lake of laws and norms that address this type of claims during the arbitration process (Mugarura, 2020). Consequently, in addition to the arbitration processes, there may be concurrent criminal investigations or proceedings of the country of arbitration seat may be put into consideration by arbitrators. Criminal processes may start either before or after the arbitration commences, and they can be continued or finished while the arbitration is going on (Al-Rashidi, 2021).

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Dealing of Arbitrators with National Criminal Laws It is recommended that arbitrators investigate the possibility of getting evidence from domestic criminal procedures. In principle, arbitrators have the authority to report any suspected instances of money laundering to the appropriate domestic prosecution authorities (Bergström, 2018). However, if arbitrators reveal their concerns to the authorities, they may be held accountable for a breach of confidence. Their actions, on the other hand, may be justifiable under the applicable laws. The danger of being held accountable will be weighed against the right to report by arbitrators. The responsibility of arbitrators to report is determined by the appropriate domestic laws. The facts of the case will determine whether authorities have jurisdiction (Betz et al., 2019). If arbitrators disregard evident evidence of money laundering and issue an award and a party is obligated to pay money as a consequence of the judgment’s terms, the arbitrators may be held accountable under the appropriate criminal legislation for money laundering (Wilske, 2019).

Other National Criminal Proceedings There may be parallel criminal investigations or processes in one or more countries in addition to the national criminal proceedings of the country of arbitration seat. Criminal proceedings may commence before or after arbitration, and they can be ongoing or completed. The arbitrators may take into account the national legislation of other nations if the following requirements are fulfilled in those countries: I. A country that has the most developed anti-money laundering laws. II. A country is under the harmful effect of the concern of money laundering crime. III. There is a bilateral treaty with regard to anti-money laundering between the concerned country and the country of arbitration seat. Or the concerned country is a member of such treaty along with the country of arbitration seat (Rusanov & Pudovochkin, 2021).

I f Money Laundering Is Proven in Arbitration, There Will Be Legal Penalties When arbitrators establish that money laundering took place in connection with the underlying dispute, the next issue is what legal consequences this has for the parties’ claims. To some degree, this is determined by the circumstances and the relevant legislation. However, for both investment and commercial arbitration, a few common stages and instruments may be recognized.

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 egal Ramifications in Case of Sham Arbitration for Money L Laundering Purposes If a bogus arbitration is used to launder money, there are legal ramifications. The panel should consider rejecting arbitrability, refusing jurisdiction, or declaring all claims inadmissible, maybe utilizing the “unclean hands” or other doctrines as arguments (Betz et al., 2019).

 egal Ramifications If a Serious Issue Involves L Unlawful Finances If there is a genuine conflict over funds that are of criminal activity, the tribunal needs to examine the possibility of rendering any claims related to such money inadmissible (Wilske, 2019).

Conclusion Whenever a panel of arbitrators is presented with the issue of money laundering, two primary issues must be answered. For starters, it needs to figure out whether it has jurisdiction, which means determining if there is a strong enough connection between the contract and the alleged illegal activity to warrant proceeding with the case. Second, if jurisdiction is established, it is required to evaluate the impact of international public policy considerations on the underlying contract. It will be up to the appropriate national legislation to determine whether or not the contract is enforceable if money laundering is an issue raised by one of the parties or displayed to the arbitrator in the dispute as a sham dispute. As was previously indicated, transnational norms of public policy are immediately relevant, and their substance is determined by arbitral tribunals on a case-by-case basis based on national standards of public policy as embodied in national criminal statutes. Failure to respect multinational norms, however, is not a crime and so cannot subject arbitrators to criminal punishment. However, to avoid an arbitral award being overturned because it violates global public policy, the concerned arbitrators and parties should respect these multinational norms during both the arbitral process and judicial stage. Arbitrators are not subject to the same “suspicious transaction reporting” requirements that have been in place for the financial sector since the 1970s under a variety of international and state rules. Arbitration would lose some of its value if it were weakened in this way. Judges and arbitrators in the United Arab Emirates who “knowingly issue a decision or express an opinion or submits a report or presents a cause or establishes a fact in favor of a person or against him, contrary to the duties and integrity and impartiality, shall be punished by temporary imprisonment” according

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to a new provision added to the country’s Federal Penal Code in October 2016. Even though this scenario pertains to the norm of neutrality, if the privacy principle of arbitration is threatened, it might have far-reaching consequences for the practice of arbitration as a whole. Though the United Arab Emirates (UAE) law was intended to make the arbitration process more streamlined, in practice, it has had a chilling effect on the arbitration industry in the UAE and inspired a healthy dose of irrational fear among practitioners who fear punishment. Many parties may lose faith in arbitration if they learn of the proceedings being leaked to the public. Given the potential for criminal culpability, it would also discourage arbitrators from taking cases. An arbitrator must strike a balance between the contractual and ethical duties he or she has to the parties and the need to uphold the integrity of the process. Arbitrators may need to strike a balance between the parties’ contractual requirements, their own legal and ethical responsibilities, and the impact of their decisions on public policy at the transnational level. An arbitrator is not required to decline jurisdiction over a money laundering case unless the whole dispute is completely sham and baseless. Although arbitrators don’t need to do so to properly execute their ethical, legal, and contractual obligations, allowing parties to utilize the defense of financial crimes to avoid arbitration reduces the efficacy of arbitration.

References Al-Rashidi, K.  S. (2021). ‘Indirect method of proof’ and the Kuwaiti anti-money laundering law: A lesson from the UK. Criminal Law Forum, 32(3), 405–433. https://doi.org/10.1007/ s10609-­021-­09415-­3 Bergström, M. (2018). The many uses of anti-money laundering regulation—Over time and into the future. German Law Journal, 19(5), 1149–1167. https://doi.org/10.1017/S2071832200022987 Betz, K., Bonifassi, S., Darwazeh, N., & Pieth, M. (2019). Navigating through corruption and money laundering in international arbitration: A toolkit for arbitrators and counsel. Journal of International Arbitration, 36(6), 671–678. https://doi.org/10.54648/JOIA2019033 Boister, N. (2016). The cooperation provisions of the un convention against transnational organised crime: A ‘toolbox’ rarely used? International Criminal Law Review, 16(1), 39–70. https:// doi.org/10.1163/15718123-­01601008 Carbonneau, T. E. (2008). The revolution in law through arbitration. Cleveland State Law Review, 56. Retrieved from https://heinonline.org/HOL/Page?handle=hein.journals/clevslr56&id=237 &div=&collection= Cingula, M., Rhein, D., & Machrafi, M. (2018). Money laundering in international commercial arbitration. Researchgate.Net. Retrieved from https://www.researchgate.net/profile/ Brikene-­D ionizi/publication/325929944_SMEs_encouraging_Economic_Development/ links/5b2cfc50a6fdcc8506bdda86/SMEs-­encouraging-­Economic-­Development.pdf#page=236 de McDougall, A. L. (2004). International arbitration and money laundering. American University International Law Review, 20. Retrieved from https://heinonline.org/HOL/Page?handle=hein. journals/amuilr20&id=1035&div=&collection= De Sanctis, F. M. (2015). Voice and accountability: Improving the delivery of anticorruption and anti-money laundering strategies in Brazil. World Bank Legal Review, 6. Retrieved from https:// heinonline.org/HOL/Page?handle=hein.journals/wblr6&id=423&div=&collection=

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Fisher, R. D., & Haydock, R. S. (1995). International commercial disputes drafting an enforceable arbitration agreement. William Mitchell Law Review, 21. Retrieved from https://heinonline.org/ HOL/Page?handle=hein.journals/wmitch21&id=959&div=&collection= Gaillard, E. (2019). The emergence of transnational responses to corruption in international arbitration. Arbitration International, 35(1), 1–19. https://doi.org/10.1093/ARBINT/AIZ004 Glucksmann, E., & Morbach, M. (2020). Hot-button issues in international arbitration: A survey among arbitrators. Journal of International Arbitration, 37(2), 257–270. https://doi. org/10.54648/JOIA2020012 Grujić, M., & Šikman, M. (2020). Certain manifestation forms and proving money laundering in the emerging market. Acta Economica, 18(32), 175–201. https://doi.org/10.7251/ACE2032175G Hedberg, C. (2016). International commercial arbitration and money laundering: Problems that arise and how they should be resolved. Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Law, Department of Law. Retrieved from https://www.diva-­ portal.org/smash/record.jsf?pid=diva2:948822 Jakobi, A. P. (2018). Governing illicit finance in transnational security spaces: The FATF and anti-­ money laundering. Crime, Law and Social Change, 69(2), 173–190. https://doi.org/10.1007/ s10611-­017-­9750-­y Kolarov, T. (2022). International commercial arbitrator addressing money laundering sua sponte. Journal of Money Laundering Control, 25(3), 637–644. https://doi.org/10.1108/ JMLC-­05-­2021-­0052 Korejo, M. S., Rajamanickam, R., & Muhamad, M. H. (2021). The concept of money laundering: A quest for legal definition. Journal of Money Laundering Control, 24(4), 725–736. https://doi. org/10.1108/JMLC-­05-­2020-­0045 Low, L. A. (2021). Methodologies for proving corruption in arbitration: Uses and limitations of red flags. The Transnationalization of Anti-Corruption Law, 399–430. https://doi.org/10.432 4/9781003174639-­21 M.A.M. (1981). Classwide arbitration: Efficient adjudication or procedural quagmire? Virginia Law Review, 67(4), 787. https://doi.org/10.2307/1072762 Mirzazadeh, I. (2020). Addressing corruption in international arbitration: The approach of arbitrators when they confronted with cases involving allegation or suspicion of corruption: Eyes. Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Law, Department of Law. Retrieved from https://www.diva-­portal.org/smash/record. jsf?pid=diva2:1435223 Mugarura, N. (2020). Anti-money laundering law and policy as a double edged sword. Journal of Money Laundering Control, 23(4), 899–912. https://doi.org/10.1108/JMLC-­11-­2019-­0093 Narayan, S. (2019). Anti-money laundering law in India: A ‘glocalization’ model. Statute Law Review, 40(3), 224–235. https://doi.org/10.1093/SLR/HMY005 Pol, R. F. (2020). Anti-money laundering: The world’s least effective policy experiment? Together, we can fix it. Policy Design and Practice, 3(1), 73–94. https://doi.org/10.1080/2574129 2.2020.1725366 Premti, A., Jafarinejad, M., & Balani, H. (2021). The impact of the fourth anti-money laundering directive on the valuation of EU banks. Research in International Business and Finance, 57(February), 101397. https://doi.org/10.1016/j.ribaf.2021.101397 Redfern, A., & Hunter, M. (2004). Law and practice of international commercial arbitration. Retrieved 15 October 2022, from https://books.google.co.in/ books?hl=ar&lr=&id=9mBqDaSB-­Z wC&oi=fnd&pg=PR5&dq=+Alan+Redfern+ %26+Martin+Hunter,+Law+And+Practice+Of+International+Commercial+Arbitr ation+23+(1986)&ots=lDkbaad-­4 j&sig=uCsd-­l r0uAoyq6DGetsnqFHBJUs&redir_ esc=y#v=onepage&q=Alan Redfern %26 Martin Hunter%2C LawAndPracticeOfInternatio nalCommercialArbitration23(1986)&f=false Rusanov, G., & Pudovochkin, Y. (2021). Money laundering in the modern crime system. Journal of Money Laundering Control, 24(4), 860–868. https://doi.org/10.1108/JMLC-­08-­2020-­0085

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Sohn, L. B., & Soons, A. H. (1990). International arbitration in historical perspective: Past and present. Retrieved 15 October 2022, from https://scholar.google.com/scholar?hl=ar&as_sdt= 0%2C5&q=L.+B.+Sohn%2C+International+Arbitration+in+Historical+Perspective%3A+Pas t+and+Present%2C+in+International+Arbitration+Past+and+Prospects+9-­11+%28A.+H.+A. +Soons%2C+ed.%2C+Martinus+Nijhoff+Publ.1990%29.&btnG=. Svenonius, O., & Mörth, U. (2020). Avocat, rechtsanwalt or agent of the state?Anti-money laundering compliance strategies of French and German lawyers. Journal of Money Laundering Control, 23(4), 849–862. https://doi.org/10.1108/JMLC-­09-­2019-­0069 Teichmann, F., & Falker, M.  C. (2020). Money laundering through cryptocurrencies. Advances in Intelligent Systems and Computing, 1100 AISC, 500–511. https://doi. org/10.1007/978-­3-­030-­39319-­9_57/COVER Tussupov, A. (2022). Difficulty of proving corruption and fraud. In European yearbook of international economic law book series (EYIELMONO, Volume 22) (pp.  147–166). https://doi. org/10.1007/978-­3-­030-­90606-­1_9 United Nations. (1991). United Nations: Convention against illicit traffic in narcotic drugs and psychotropic substances. Adopted by the conference at its sixth plenary meeting on 19 December 1988. New  York. Retrieved from https://www.cambridge.org/core/journals/international-­legal-­materials/article/united-­nations-­convention-­against-­illicit-­traffic-­ in-­n arcotic-­d rugs-­a nd-­p sychotropic-­s ubstances/4241B13D35A81D9FA63E56F297AE0 A7E Wilske, S. (2019). International arbitration and its dark sides, in particular corruption: What arbitral institutions could and should do to tackle such unwelcome issues. Contemporary Asia Arbitration Journal (CAA Journal), 12. Retrieved from https://heinonline.org/HOL/ Page?handle=hein.journals/caaj12&id=151&div=&collection= Wronka, C. (2022). Anti-money laundering regimes: A comparison between Germany, Switzerland and the UK with a focus on the crypto business. Journal of Money Laundering Control, 25(3), 656–670. https://doi.org/10.1108/JMLC-­06-­2021-­0060 Zavoli, I., & King, C. (2021). The challenges of implementing anti-money laundering regulation: An empirical analysis. Modern Law Review, 84(4), 740–771. https://doi. org/10.1111/1468-­2230.12628

Chapter 7

Online Fraud Kanahaiya Lal Ambashtha and Pramod Kumar

Introduction In the current era of the emerging technology, there is nothing can be imagined in India as well as around the world without the Internet and the computer intelligent services. In day to day life, entertainment, watching movies, booking online movie tickets, travelling booking of the flights, trains and even buses. “OLA” and “Uber” type taxis, zoom car for taking the vehicles on the rent, purchasing the grocery or any equipment online through a lot of web-portals and paying the cost of the same via online modes. Today, the television is also shifted over to the Internet with smart Android televisions and mobile handsets (Pocar, 2004). In brief, we can say everyday work, business, entertainment, and other important tasks cannot be completed easily without the Internet which causes the use of the Internet to accelerate with positive slope. Digital payments have been highly promoted in India under the Digital India Policy, and due to note-bandi, and the COVID-19 duration, the digital payment came into the existence with high usage. In the financial year 2017–2018, crores of transactions have been done through digital payment. In this way, you can get an idea at what level online payment and Internet are being used. We must think on the other aspect of the digital world, and that is the online fraud (Burden, 2003). As the case of the digital payments is increasing, the cases of online frauds are also reported by various streams/departments. Most of the cases are not reported by a huge public due to dis-fame of being cheated by someone on the Internet.

K. L. Ambashtha (*) Faculty of Information Technology, Gopal Narayan Singh University, Sasaram, Bihar, India P. Kumar Faculty of Commerce and Management, Assam Down Town University, Sankar Madhab Path, Gandhi Nagar, Guwahati, Assam, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_7

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Cybercrime (Chouhan, 2014) can be mentioned as the illegal use of Internet and computer. Computers are a vehicle for crimes or are used as a weapon for crime. These crimes have become a common part of our daily lives. Every day someone or the other is becoming a victim of cybercrime. The Internet is used by many people at the same time for different purposes; these hackers make their way into these opportunities.

What Is Online Fraud? If someone asks me “what is the benefit of the Internet?”, I will say “everything is on the Internet” is a very good and positive answer, and if someone again asks me “what is disadvantage of the Internet?”, I will again reply, “everything is on the internet,” meaning my all the financial controls are on the Internet; anyone can steal my money by hacking a few steps. Every time we connect to the Internet, we openly invite many traumas. In this, the hacker directly contacts your system. He can take your personal information like credit card, debit card, and information related to your shopping pattern. For doing this, hacker can install any malpractice-oriented software in your PC and access almost all the information to the hacker’s computer without your knowledge because computer software and Internet are becoming very advanced and difficult day by day. Everyone needs to be alert in this difficult situation, especially when you do any online transaction through your bank or are transacting money through digital method while shopping online. To avoid all this, there is a need to know the aspects of self-defense and security (Sijan, 2022).

ATM and Debit Card Fraud Cyber ​​fraudsters are now bottling ATMs (Kaur, 2019). There is a possibility of fraud in about 3.2 million debit cards in India. But the Indian banking system remains ignorant of these things. The Indian banking system has no concrete measures to avoid this. Most of the hackers are looting the money of Indian banks from China and America. With this effect, SBI Bank, ICICI Bank, Yes Bank, and Axis Bank users are badly affected. An external device is fitted in the ATM machine at the card insertion point so that when the ATM subscriber inserts his card into the ATM machine, The hacker can get his card information such as card number, date of validity of the card, and CVV and the card serial number, etc. through this device. The hacker inserts a microcamera in the ATM room to obtain the PIN of your debit card and when you enter your Personal Identification Number (PIN) into the ATM machine to withdraw money from the ATM, at the same time by the hacker-fitted camera records your finger movements, based on which the hacker knows your PIN, and through this information, the hacker can also do online shopping from your debit card or withdraw funds from your account.

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There are some frauds detected by reading the mindset of the human being. Artificial intelligence is used to get such information. In the big malls, some stickers or pamphlets are distributed by the name of the best offers, lottery, etc. They are taking all the information like date of birth, date of marriage, occupations, and salary details along with professions details. The mobile number is the primary key for them. They are selling this collected data to the various persons, and they utilize this for the purpose of the advertisement, but in a few cases, they use it to trap the human beings, and they target the rich profile personalities calling them on shake of lottery winners. They are taking some processing fee in their account transferred online and disappear. They are using their mobile phones temporarily for such purposes, even their bank accounts also temporarily.

Menace to Society Crime is a term that is used to refer to the commission of a wrongdoing or criminal act, but when it comes to cybercrime, it can be defined as a crime committed by the Internet, whereby a person, the organization, or the government may suffer an untenable loss. Cybercrime is a punishable offense committed by cybercriminals.

Cybercrime: Threat to Society Cybercrime is a criminal act that is carried out through the Internet using computer equipment or any other smart devices. Hackers or criminals have different motives to commit this crime. They can do this to harm an individual, an organization, or even the government. Examples of cybercrime (McGuire, 2013) include fraud, identity theft, cyberstalking, creating or sending malware such as viruses to destroy systems or stealing data to earn money, etc. People involved in such activities consider them as an easy way to earn money. Even many educated and knowledgeable people are also involved in such activities. Instead of using their mind in a positive way, they engage themselves in cybercriminal activities. Day by day, it is becoming a big threat to our society and nation. In the present scenario, cybercrime has become the most prevalent crime committed through the Internet. It causes serious harm to the victim. So we should take some measures to avoid such crimes (Riek, 2015). Vigilant behavior and adherence to security protocols are only a helpful tool that can curb incidents of cybercrime to some extent. Human beings have been innovative and inventive by nature since the early stages. Different requirements gave rise to new tools and technologies. Technology is also man’s quest to make work easier. Advances in technology are useful on the one hand and have some disastrous effects on the other. Cybercrime is also a downside of these technological developments. Individuals, organizations, and groups are involved in carrying out such criminal activities.

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Classification of Cybercrimes (Jahankhani, 2014) Offenses against a person – A crime against a person for his credit card information and confidential data, sending spam emails, etc. comes under the category of crime. This crime is mainly done to earn money. Offense against an organization – This offense is committed against a firm, company, or organization for obtaining unauthorized access to data. This is done to steal important company data and employee details or to make money. Crime against the government – This is to commit a crime against the nation, by gaining access to national data and records. This crime is of main concern as it is concerned with the safety of the people of the nation.

Effects of Cybercrime (Pawar, 2021) Cybercrime has ruined the lives of many people. People involved in cybercrime are known as “hackers. If we discuss at the individual level, the people affected by this are still trying to compensate for the loss. Some even chose to commit suicide. Loss of money and any data which is confidential makes the person helpless and leaves him in a painful situation of life. At the organization level, stealing company data or destroying systems by malware causes huge losses and is set up by criminals in such a way that it doesn’t work unless the perpetrator’s terms and conditions do not complete. Because of this, companies suffer more because their strategies and important data are stolen and leaked. Even the government is a victim of this crime. Many confidential data have been leaked as a result of cybercrime at the government level, threatening the sovereignty of the nation. This is a serious issue as it may happen that there is danger and fear to the lives of the people of the nation. The loss can also be at an economic level. Many lakhs and crores have been lost from the nation due to these cybercrimes.

Different Types of Cybercrimes Phishing (Dhamija, 2006, April) This includes obtaining user personal information by sending spam emails or through a fake website. Phishing (pronounced: fishing) is an attack that attempts to steal your money, or your identity, by getting you to reveal personal information – such as credit card numbers, bank information, or passwords  – on websites that pretend to be legitimate. Cybercriminals typically pretend to be reputable companies, friends, or acquaintances in a fake message, which contains a link to a phishing website. Phishing is a popular form of cybercrime because of how effective it is.

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Cybercriminals have been successful using emails, text messages, and direct messages on social media or in video games, to get people to respond with their personal information. The best defense is awareness and knowing what to look for. Here are some ways to recognize a phishing email: Urgent call to action or threats – Be suspicious of emails that claim you must click, call, or open an attachment immediately. Often, they’ll claim you have to act now to claim a reward or avoid a penalty. Creating a false sense of urgency is a common trick of phishing attacks and scams. They do that so that you won’t think about it too much or consult with a trusted advisor who may warn you. Whenever you see a message calling for immediate action, take a moment, pause, and look carefully at the message. Are you sure it’s real? Slow down and be safe. First time or infrequent senders – While it’s not unusual to receive an email from someone for the first time, especially if they are outside your organization, this can be a sign of phishing. When you get an email from somebody you don’t recognize, or that Outlook identifies as a new sender, take a moment to examine it extra carefully before you proceed. Spelling and bad grammar  – Professional companies and organizations usually have an editorial staff to ensure customers get high-quality, professional content. If an email message has obvious spelling or grammatical errors, it might be a scam. These errors are sometimes the result of awkward translation from a foreign language, and sometimes they’re deliberate in an attempt to evade filters that try to block these attacks. Generic greetings – An organization that works with you should know your name, and these days, it’s easy to personalize an email. If the email starts with a generic “Dear sir or madam,” that’s a warning sign that it might not really be your bank or shopping site. Mismatched email domains – If the email claims to be from a reputable company, like Microsoft or your bank, but the email is being sent from another email domain like Gmail.com, or microsoftsupport.ru, it’s probably a scam. Also be watchful for very subtle misspellings of the legitimate domain name, like micros0ft.com where the second “o” has been replaced by a 0, or rnicrosoft.com, where the “m” has been replaced by an “r” and a “n.” These are common tricks of scammers. Suspicious links or unexpected attachments – If you suspect that an email message is a scam, don’t open any links or attachments that you see. Instead, hover your mouse over, but don’t click the link to see if the address matches the link that was typed in the message. In the following example, resting the mouse over the link reveals the real web address in the box with the yellow background. Note that the string of numbers looks nothing like the company’s web address.

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Identity Theft (Anderson, 2008) This involves obtaining information about credit or debit cards or bank details; after the information is stolen, money can be easily withdrawn. Identity theft is the crime of obtaining the personal or financial information of another person to use their identity to commit fraud, such as making unauthorized transactions or purchases. Identity theft is committed in many different ways, and its victims are typically left with damage to their credit, finances, and reputation. Identity theft occurs when someone steals your personal information – such as your social security number, bank account number, and credit card information. Identity theft can be committed in many different ways. Some identity thieves sift through trash bins looking for bank account and credit card statements. More high-­ tech methods involve accessing corporate databases to steal lists of customer information. Once identity thieves have the information they are looking for, they can ruin a person’s credit rating and the standing of other personal information. Identity thieves increasingly use computer technology to obtain other people’s personal information for identity fraud. To find such information, they may search the hard drives of stolen or discarded computers, hack into computers or computer networks, access computer-based public records, use information-gathering malware to infect computers, browse social networking sites, or use deceptive emails or text messages. Types of Identity Theft Financial identity theft: In financial identity theft, someone uses another person’s identity or information to obtain credit, goods, services, or benefits. This is the most common form of identity theft. Social security identity theft: If identity thieves obtain your social security number, they can use it to apply for credit cards and loans and then not pay outstanding balances. Fraudsters can also use your number to receive medical, disability, and other benefits. Medical identity theft: In medical identity theft, someone poses as another person to obtain free medical care. Synthetic identity theft: Synthetic identity theft is a type of fraud in which a criminal combines real (usually stolen) and fake information to create a new identity, which is used to open fraudulent accounts and make fraudulent purchases. Synthetic identity theft allows the criminal to steal money from any credit card companies or lenders who extend credit based on the fake identity. Child identity theft: In child identity theft, someone uses a child’s identity for various forms of personal gain. This is common, as children typically do not have information associated with them that could pose obstacles for the perpetrator. The fraudster may use the child’s name and social security number to obtain a residence, find employment, obtain loans, or avoid arrest on outstanding warrants. Often, the victim is a family member, the child of a friend, or someone else

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close to the perpetrator. Some people even steal the personal information of deceased loves ones. Tax identity theft: Tax identity theft occurs when someone uses your personal information, including your social security number, to file a bogus state or federal tax return in your name and collect a refund. Criminal identity theft: In criminal identity theft, a criminal poses as another person during an arrest to try to avoid summons, prevent the discovery of a warrant issued in their real name, or avoid an arrest or conviction record. Identity Theft Protection  Many types of identity theft can be prevented. One way is to continually check the accuracy of personal documents and promptly deal with any discrepancies. There are several identify theft protection services that help people avoid and mitigate the effects of identity theft. Typically, such services provide information helping people to safeguard their personal information; monitor public records and private records, such as credit reports, to alert their clients of certain transactions and status changes; and provide assistance to victims to help them resolve problems associated with identity theft. In addition, some government agencies and nonprofit organizations provide similar assistance, typically with websites that have information and tools to help people avoid, remedy, and report incidents of identity theft. ATM Cheat  In this crime, the ATM is completely hacked. The criminals have developed a way to access both the data and the PIN printed on the card, so that they are able to duplicate the card and use the same to withdraw money. ATM fraud is financial scams through these terminals. Just like any other hardware and software device, ATMs have vulnerabilities. To understand why ATMs attract fraudsters, we should examine the components of an ATM machine. Any ATM has a computer and a safe. Breaking into the peripherals of the safe is often done with common lock picks. As a rule, ATMs operate under Windows. If the operating system becomes obsolete, it needs to be updated. Malware can be introduced via a portable device. Today there are 20 known strains of different ATM malware. Hacking into an ATM computer often allows criminals to give the device the command to dispense cash without using the users’ card details. Important: Many ATMs are characterized by weak firewall protection (the screen between the global Internet and an organization’s local computer network). Such devices are more likely to be exposed to network attacks. ATM scam can provoke a lack of hard drive encryption and protection from users who have access to the Windows interface.

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Types of ATM Fraud (Klerx, 2014) Many users think that physical machine robbery is the worst thing that can happen to an ATM. In recent years, however, ATM fraud has become even more diverse than before. Often, today’s attackers don’t have to be present when a machine attack occurs. ATM crimes are committed through a variety of techniques and types of fraud. Below we will tell about several types of ATM scams. Types of ATM Frauds • Card shimming • Card skimming • Card trapping • Jamming of keyboard Card Shimming  Shimming is one of the most dangerous types of plastic card fraud. A shimmer is a thin board discreetly inserted into a card reader with a card carrier. As a result, the card is attached to contacts that read data from the magnetic stripe, without interfering with the normal bank card service. In this way, the fraudster gets all the information he needs and can empty someone else’s bank accounts. Unlike relatively cumbersome skimming devices, shimmers are virtually invisible. Card shimming is used by fraudsters to steal users’ personal data and perform illegal banking transactions. Important  To avoid shimming, you should carefully check card reader slots. Have you noticed gaps or seams in the plastic? In this case, it is better to refuse to use a particular ATM. Among the necessary measures that operators use to prevent shimming are regular, thorough inspections of the machine, tracking bank transactions, and monitoring and checking the vicinity of the card slot. Customers should be issued keys and codes to ensure maximum security of banking transactions. To avoid shimming, modern banks regularly update ATM hardware and software. Card Skimming  Skimming is a popular type of fraud. In this case, a hidden device is installed in an ATM, which gives the opportunity to read the information from payment cards during the ATM transaction. As a result, criminals create a card duplicate with a PIN code written on a magnetic strip. The card duplicate allows the criminals to make payments at various points of sale. If the card slot is sticking out, it may indicate the presence of an ATM skimmer. Skimmers are miniature devices attached to the main parts of the ATM. Skimming equipment often contains the following: • • • •

A magnetic head for data reading and copying Miniature converter A storage device for writing the code to the storage medium Video camera

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A keyboard is usually installed over the original keypad to transmit the entered information to the intruders. To avoid becoming a victim of skimming, you should use ATMs located in banks and secure institutions. It is best to have a card with a chip, regularly check the data of payments in banking applications, and if the card is missing, immediately call the bank to block it. In addition, many ATM users prefer to connect an SMS-informing service about card transactions, as well as to set the limit for disbursement of funds per day and per transaction. Card Trapping  Card trap is the placement of a device in an ATM card reader that prevents the cardholder from receiving the card after the machine transaction. The fraudster usually obtains the PIN by means of a hidden video camera embedded inside a panel on the ATM. If the customer leaves without retrieving the card, the fraudster removes the payment instrument and then uses someone else’s card to make payments or withdraw cash. If the bank card is forced into the card reader, it is likely that card trapping is taking place. To protect against such fraud, do not move away from the ATM if the card is left in the slot. The first step is to call the bank and report the fraud incident. Jamming of Keyboard  In this case, the fraudsters block important buttons on the ATM keypad (Cancel, Enter, etc.) to prevent the transaction from succeeding. Then, when the necessary data is entered, the criminal uses the ATM to withdraw cash. You should not go near the jammed ATM and use another ATM, because a skimming device may be installed on it. Quite often criminals disable other ATMs beforehand, in order to attract users to the one on which the skimming device is installed. Malware Attack – Malware is illegal software designed to harm a computer or system. This is done to access mean information or to commit some crime by using that system. Pornography – The act of presenting videos containing sexual activity through pornographic websites. Cyber ​​Harassment – The criminal is also quite active in stalking or harassing the person through online means. They damage the system by sending malware and are capable of obtaining accurate information. Fraud – In this type of crime, you receive an email that appears to have been sent from an authentic source, but it is not; it is misleading. Piracy  – This is an unauthorized method of accessing confidential information. Many times, government websites are hacked and pirated copies of important data of files are made, which creates a lot of problem, or important data gets destroyed.

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First National Conference on National Crime Investigation and Crime Forensics Our nation India had for the first time a National Conference on Crime Investigation held at the headquarters of CBI (Central Bureau of Investigation) located in New Delhi on September 4 and 5, 2019. The main objective of the conference was to create a platform for investigators, forensic teams, and other officials to discuss various methods and measures to deal with cyber related crimes.

Cybercrime Awareness • Various security measures must be followed to stay safe from the horrific acts of cybercrime. • Strong password should be used. Password must be complex, which cannot be guessed. • Antivirus program(s) should be used to keep the system free from malware. • Update the system regularly. • Be vigilant and make yourself smart and proactive to avoid theft of your identity and important information. • Make your children aware of the Internet, so that they can be immediately aware of any abuse or harassment, if they are going through such a situation. • Maintain privacy settings on social media.

Cybersecurity Cyber​​security protects our systems, networks, devices, and programs from malicious software attacks. Thus, illegal access of data by criminals can be prevented. Importance – Information about any important issue of the nation or any data which is meant for personal use, if shared, will create many problems. So if security checks are put in place at multiple levels, information and important data can be protected from leaking.

Types of Cybersecurity (Ben-Asher, 2015) Network Security – Protects the network from being attacked by malware and therefore always use a secure network. Cloud Security – Cloud resources provide tools to protect data. Information Security – Helps protect data from unauthorized or illegal access.

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End-user Security – User must be alert while inserting any external device into the system or opening any mail or link. Application Security – Helps to keep the system and software free from any threats.

Measure Cyber ​​expert Pavan Duggal says that “frauds are increasing rapidly in online transactions. Customers need to be very careful in online transactions.” Apart from this, HDFC Bank spokesperson said, “The bank has all your information and never asks for CVV or OTP from you by e-mail or over phone. If someone is asking for such information, it is a danger signal. Do not share such confidential information with anyone.” In this way, through other advertisements, many important information is given to the general public to save them from being online fraud. If you follow them properly, then you can definitely avoid online frauds. Cybercrime is the result of technological advancement. It is a dangerous crime that involves the use of the Internet and computers. Cybercrime is not caught in the initial stage, but with its consequences, it gets noticed by all. Through this, there is an illegal transfer of data and information, which may be confidential or valuable to an individual or group.

How to Avoid Online Fraud? (Cross, 2016) OTP is redeemed in this type of online fraud, so do not share any OTP related to your account or ATM with anyone. After going to the ATM, do not tell your ATM guard or any other person. If there is an online fraud with you, then first inform your bank about it. SMS on the phone. If a link comes in, then do not click on that link because often hackers take out all the information of your phone through the link. It is necessary to have a hard password for financial transactions. Password must be at least eight letters long consisting of a mix of numbers, letters, and symbols. Do not create passwords such as birthday, car/bike registration number, house number, mobile number, etc. Make sure to change the password every month. If you receive a phishing email Never click any links or attachments in suspicious emails. If you receive a suspicious message from an organization and worry the message could be legitimate, go to your web browser and open a new tab. Then go to the organization’s website from your own saved favorite, or via a web search. Or call the organization using a phone number listed on the back of a membership card, printed on a bill or statement, or find on the organization’s official website. If the suspicious message appears to come from a person you know, contact that person via some other means such as text message or phone call to confirm it. • Report the message. • Delete it.

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Conclusion Cybercrime is spreading its feet day by day. The best way to stay safe from falling prey to its ill effects is to follow safety measures. There are many ways by which we can protect our confidential information from leaking. However, we should always focus on awareness, because “prevention is better than cure,” especially when treatment is not available. Cybercrime is a crime related to the use of the Internet. It is leaked with some important information publicly or in a way to earn money. So we should practice some important security measures and security applications to prevent this crime.

References Anderson, K. B. (2008). Identity theft. Journal of Economic Perspectives, 22(2), 171–192. Ben-Asher, N. (2015). Effects of cyber security knowledge on attack detection. Computers in Human Behavior, 48, 51–61. Burden, K. (2003). Internet crime: Cyber crime—A new breed of criminal? Computer Law & Security Review, 19(3), 222–227. Chouhan, R. (2014). Cyber crimes: Evolution, detection and future challenges. IUP Journal of Information Technology, 10(1), 48. Cross, C. (2016). The problem of “white noise”: Examining current prevention approaches to online fraud. Journal of Financial Crime, 23(4), 806–818. Dhamija, R. T. (2006, April). Why phishing works. In Proceedings of the SIGCHI conference on human factors in computing systems, pp. 581–590. Jahankhani, H. A.-N.-F. (2014). Cybercrime classification and characteristics. In Cyber crime and cyber terrorism investigator’s handbook (pp. 149–164). Syngress. Kaur, P. K. (2019). ATM card cloning and ethical considerations. Science and Engineering Ethics, 25(5), 1311–1320. Klerx, T.  A. (2014). On the usage of behavior models to detect ATM fraud. In ECAI 2014, pp. 1045–1046. McGuire, M. (2013). Cyber crime: A review of the evidence. 75, 1–35: Summary of key findings and implications. Home Office Research report. Pawar, S. C. (2021). Cyber crime, cyber space and effects of cyber crime. International Journal of Scientific Research in Computer Science, Engineering and Information Technology, 7, 210–214. Pocar, F. (2004). New challenges for international rules against cyber-crime. European Journal on Criminal Policy and Research, 10(1), 27–37. Riek, M. B. (2015). Measuring the influence of perceived cybercrime risk on online service avoidance. IEEE Transactions on Dependable and Secure Computing, 13(2), 261–273. Sijan, M. A. (2022, March). A review on e-banking security in Bangladesh: An empirical study. In Proceedings of the 2nd international conference on computing advancements, pp. 330–336.

Chapter 8

Cryptocurrency Fraud: A Glance into the Perimeter of Fraud Namrata Kothari

Introduction Cryptocurrency fraud has become a bigger issue of global concern. In different parts of the world reporting of increase in the frequency of and lose from crypto­currency scams. In spite of growing dishonest and deceitful activity regarding cryptocurrency, very few studies and researches on the potential of cryptocurrency fraud have been done in a systematic way. Therefore, this chapter will include the knowledge of cryptocurrency and its different forms, the different kinds of cryptocurrency fraud existing presently, and the future of it which will give way to cryptocurrency crime. Cryptocurrency is a digital currency to work as a medium of exchange without the backing of a central bank or government. It is not physical money like coins, but it lives only on the Internet as virtual tokens. Their values are determined by market forces created by those seeking to purchase or sell them. It is formed through a process known as mining, which requires employing computer processing power to find out the complex mathematical problems to earn coins. The currencies can be purchased by users through brokers, which can be stored and spent using encrypted wallets. Cryptocurrencies are highly volatile and risky, and there is a high chance of losing money. There are many ways through which one can profit from cryptocurrency like buying coins, trading coins, mining coins, and so on. But it is advisable for the beginner not to place all the eggs in one basket and always take help of an expert and gradually earn expertise in this field. There are different types of cryptocurrency which can be classified under two categories: coins and tokens. As of 2022, there are 10,000 of cryptocurrencies available in the market. Any cryptocurrency that uses its own independent blockchain is known as coin, for example, Bitcoin and Ethereum. N. Kothari (*) Department of Political Science, South Calcutta Girls College, University of Calcutta, Kolkata, West Bengal, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_8

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In 2009, Bitcoin was introduced and was the world’s first accepted form of cryptocurrency. Investors had a belief that it can be the newest, hippest way to “get rich quick.” In January 2022, Bitcoin was the cryptocurrency with the largest market capital at US$ 896 billion. Bitcoin and other cryptocurrencies have three common principles: Decentralization – they are decentralized, in the sense that they are not governed by any single institution but are administered via a peer-to-peer network, and most of them agreed on which transactions and branch of a distributed digital ledger (the blockchain) are valid. Pseudo-anonymous  – to identify users, Bitcoin uses hashes of public keys, thus forming a system of decentralized identity management disassociated from real world identities. Transparency  – all the transactions are recorded on the publicly available blockchain (Meiklejohn et al., 2016). Altcoin refers to any blockchain based cryptocurrency other than Bitcoin like Doge coin, Namecoin, Peercoin, Litecoin Ethercum, and USD coin. Ethereum is one of the fastest growing cryptocurrencies in the market. There are also other alt coins nowadays like Lucky block, Shiba Inu, and Terra.

Tokens Tokens are also digital assets that can be purchased and sold. However, they are built upon the existing blockchain but are considered to be programmable assets that are used outside the blockchain network. It can be used as units of value such as money, coins, digital assets, and electricity. These include Tether, which is hosted on the Ethereum blockchain, and others, including Terra USD, Chain link, Uniswap, and Polygon. Though both coins and token appear the same, there are subtle differences between the two: • Coins can be mined, but token cannot be mined. • Coins are linked with blockchains, while tokens are not. • In connection to utility, they differ in types of product or services provided they allow users to purchase. The cryptocurrencies are popular because of the following: It assures a high level of security through cryptography. The entire system works through shared ownership, where data is accessed by all permissioned members and is secured and safe. They are protected against inflation. Despite being popular, cryptocurrency has certain disadvantages:

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• It is highly relatively a new concept; therefore, its long term sustainability remains in the womb of the future. • It is highly volatile and prone to risk. • Further its value is dependent on the supply-demand equation. • In many countries, the use of cryptocurrencies are banned or restricted due to high risk, and moreover, their legality is also debatable in countries like India. • There is a problem of flexibility due to the technological side of blockchain. It resulted in transactional delays. This makes the crypto payments inefficient compared to modern day electronic payment techniques. • This will raise here the pertinent question of fraud associated with the cryptocurrency. But before it, we must understand the concept or definition of fraud. Cryptocurrencies worked through mining, buying, selling, storing, or transacting. It is not regulated by any central authorities or government agencies. It works outside the banking system through different coins and, most importantly, Bitcoins. Mining is the process through which cryptocurrency is digitally generated to create a transaction; the user must have a pair of alphanumeric digital keys, comprising a public key. Participants use their keys for digital signatures, to prove that they own the Bitcoin they are sending and to specify the new owner. The “miners,” a specialized subset of peers, collect contemporaneous transactions into a “block.” They compete to find a correct answer to a computationally hard puzzle – finding an input to a hash function which produces a particular output. This is referred to as proof of work (“PoW”) because the nature of the puzzle means that, to find the correct input, the miner must have expended significant computational resources. Miners are rewarded for their work – at the time of writing, the reward for finding a correct block is 6.25 Bitcoins. These 6.25 Bitcoins are created and enter into circulation once the miner finds a block, through what is called a “coinbase” transaction. The reward is halved approximately every 4 years. After a candidate block has been broadcast, a consensus process begins to establish whether the block is valid and should be added to the main ledger. Other miners perform a computational test on the transactions within the block and the PoW from the original miner: If this test gives the correct output, the block is considered valid. Then addition of the next blocks to whichever chain they think is the correct one. At any given time, there may be multiple branches of the blockchain, but generally the longest one is the most valid. Importantly, once a transaction is executed, it is irreversible. This concurrence mechanism averts what is known as “double-­ spending,” whereby a user could attempt to spend the same Bitcoin again. Consensus on the most valid chain requires agreement of at least 51% of miners and is usually achieved after about six blocks. An attack in which a miner or group of miners attempts to manipulate this by controlling 51% of the hashing power – requiring tremendous computational resources – is referred to as a “51% attack.” In an ideal world, it would take a person just 10 minutes to mine one Bitcoin, but in reality, the process takes at least 30 days. Cryptocurrencies, once purchased, can be stored in digital wallets, which effectively means storing their private key. There are a variety of ways users can store

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their cryptocurrencies, which effectively means storing their private key. Storage can be either “hot” (online) or “cold” (offline). Offline storage may involve a physical wallet locked in a safe or a key stored locally in a file on one’s computer. Though cold storage is generally safer, if one loses his/her private key or it is stolen, the coins are lost forever. Online wallets are often hosted through custodial wallet provider services, which manage users’ private keys; in exchange, the user sacrifices some anonymity, security, and control. Cryptocurrency exchanges are another type of online service and enable users to convert between fiat currencies backed by governments and cryptocurrencies and among different cryptocurrencies. Many offer custodial online wallets. • Bitcoins can be easily transferred from one digital wallet to another by smartphone. Once we get it, the choices for us are as follows: • Use these to buy goods or services. • Trade them. • Exchange them for cash. For purchases, if one uses Bitcoin, the easiest way is to do with debit card-type transactions. It can be used to withdraw cash like an ATM. Converting cryptocurrency to cash is only feasible using bank accounts or peer-to-peer transactions. After getting the knowledge of different types of cryptocurrencies and their usages, it is important here to discuss the meaning of frauds and different types of cryptocurrency fraud presently existing or will be existing in the future as well as their characteristics which will identify the current and future threat of it. Fraud is a type of theft, when a person takes money or property or utilizes them in an illicit way, with a motive to get benefit from it. It includes some form of deceit, subterfuge, or misuse of a position of trust, which differentiate it from common theft or robbery. In the globalized world with a complex economy, fraud is of different types, and it is difficult to get a specific definition of it. Presently, cryptocurrency fraud has become an increasing concern globally. The value of these virtual currencies is totally driven by supply and demand. This can create an unexpected swing which produces either big gain or big loss on the part of an investor. Crypto-investments are for less regulatory protection than traditional financial products like stocks, bonds, and mutual funds. In recent years, cryptocurrency fraud has taken a great leap. The Federal Trade Commission (FTC) has received 6800 complaints of cryptocurrency investment scams from October 2020 to March 2021. Bill Gates’ recent statement is “cryptocurrencies and NFTs are 100% based on greater fool theory.” The Microsoft founder went on: “I like investing in things that have valuable output. The value of crypto is just what some other person decides someone else will pay for it.” Elon Musk said his company Tesla accepts Dogecoin as a payment method for the purpose of some merchandise. Recently, Musk was sued for US$ 58 billion by a Dogecoin investor who advised him of running a pyramid scheme to support the currency.

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Despite the conflict, these virtual assets are perceived by regulators as a main threat to stability of the financial system. The way in which smoothly and quickly crypto assets are transferred electronically across borders compared to regulated fiat currency systems makes it highly susceptible to money laundering or terrorist financial activities. There is also a major risk as cryptocurrency transfers cannot be reversed making it difficult to trace. Till date many people are unaware of the working of crypto. A recent survey taken up by News found that crypto-investors lose $91 million a day on average to cryptocurrency fraud. The academic literature identified common types of crypto fraud that are present and have been used to defraud people which are 29 in number, and in the public sector, there are 17 in number. These are discussed in Table 8.1. Keeping this in view, here we will discuss about the main crypto frauds:

Bogus Investment Scams As reported to the FTC, US$75 million of crypto fraud losses were about false investment opportunities since 2021. It is actually Ponzi schemes where new adopters are essential to give artificial returns to early adopters. These schemes are circulated by using the platforms in social media like Instagram, Facebook, and WhatsApp.

Fake Crypto Trading Websites and Wallets These trading websites are like authentic ones, even though some of the phony websites are ranked in Google searches. This makes it difficult to detect the risk. Through these bogus websites and applications, these Bitcoins are purchased by the investors. Even, they see their cash is increasing too. Some services make a test withdrawal in order to gain confidence of the investors and let them withdraw a small amount of money. But when the investors tried to withdraw all of their funds, then they realized their funds had already been taken away.

Pump-and-Dump Schemes Pump-and-dump schemes have proven to be fairly remunerative schemes for fraudsters to execute. According to Investopedia, pump-and-dump schemes can be described as a fraud “that attempts to boost the price a stock through recommendations based on false, misleading or greatly exaggerated statements”. In it, fraudsters will inflate the price by buying substantial amounts of the stock as well as circulating fake new celebrity tweets or fake articles to lure others to help them pump up the

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Table 8.1  Different types of frauds and scams SL no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

Types of fraud Unspecified fraud Initial coin Offering scams Ponzi scheme/HYIPs Giveaway scams Phishing Mining malware SIM swapping Market manipulation Exchange scams Forex fraud Pump and dumps Mining scams Securities fraud Impersonation scams Ransomware Wallet scams Fraudulent cryptocoins Identity theft Wire fraud Wash trading Pyramid schemes Malware scams Options fraud False account statements to solicit investments Exploiting vulnerabilities Embezzlement, dusting Discount scams Credential stuffing Access device fraud Commodity fraud Smart contract honeypots/attacks Smart Ponzi scheme Selfish mining Romance scams Insider trading, imposter websites/apps Fake agencies Donation scam Cheating with electronic mailings Blackmail scams (continued)

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Table 8.1 (continued) SL no. 41. 42. 43. 44. 46. 47. 48.

Types of fraud Arbitrage scam Advance-fee scam Airdrop scam Unfair and deceptive acts Income tax scam False signals of supply and demand COVID-related scams

price of the security and then dump it all in one single coordinated effort to make a profit. This looks like a victimless crime, but one must contemplate the amount that investors who are purchasing the “dumped” securities are purchasing them at an artificially increased price under the false disguise of the scammers. As a result, these new investors will lose a considerable amount of money to scams. Even after 100 years, since the 1920s, pump-and-dump schemes have been popular and remain important. Now, these schemes are carried out by fraudsters with cryptocurrencies. Generally, these scams are begun by only one or a handful of people. These “investment groups” synchronize their efforts through anonymous messaging apps such as Discord and Telegram and hire new members through shameless social media advertising and member recruitment. Right-hiring is the key to the success of these pump-and-dump schemes, and an important factor to decide how much the price of the cryptocurrency can be pumped is based mainly on how many coins are brought up by how many investors. The plus point of being of a higher rank means that you will get anywhere from 0.5 to a 3.5 second prior notification when to dump your coins to get a higher return on an investment as you will be selling before a majority of the group does. This indicates the good opportunity you will have to make the highest possible profit. This logic boomerangs for most of the members, in effect, scamming the scammers. The real profit is seen by the top of the group, while those who lost are left to justify their loss based on the hunch that they simply sold too late. The popularity of these scams has increased many times over the past couple of years, and the government has decided to take steps to regulate them. The Commodity Futures Trading Commission has declared that they will focus on “detecting and deterring fraudulent activities, such as pump-­and-­dump schemes, while not stifling early innovation in the crypto space”. The CFTC and SEC can take legal action against the pump-and-dump schemes under the Securities Act of 1933. However, due to the conflict among the message groups, it is difficult to identify who is involved in these schemes. That’s why CFTC announced the rewards of $100,000 or up to 30% of the sanctions recovery by the fraudsters for the informers who expose the chief or controller of these pump-and-dump schemes.

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Romance Scams In this scam, attractive women contact the victim online and build trust and then give tips on crypto investing and make them believe that it is the highest return trading platform. Mostly, the platform is forgery. The Federal Trade Commission (FTC) found approximately 20% of the money reported lost in romance scams was in cryptocurrency.

Initial Coin Offering (ICO) Another form of fraud related with cryptocurrencies would be the fake ICOs or initial coin offerings which are the same in many ways to initial public offerings for stocks. Generally, cryptocurrency companies will issue a predetermined number of coins to the open market in the manner the stocks are issued when a company goes public. Many ICOs have valid cryptocurrencies that have the prospect to make the investor a profit like any other security. However, there is a considerable portion of ICOs that are supposed to be false as the executives of these companies try to force the investors to invest in cryptocurrencies that in reality do not exist. In order to relieve them of their money in a haste and efficient manner. Researchers from a “Big 4” accounting firm, Ernst & Young, calculate that more than 10% of the $3.7 billion invested in ICOs thus far have been theft due to fake ICO schemes till date (Zhu & Zhang, 2018). Fake ICO evil-doers will try to attract potential investors to become entrapped in their scheme by fabricating extremely high return rates, lying about the numbers of investors, and investing and also advertising new features in order to make their nonexistent cryptocurrency irresistible like Flexcoin. Plexcoin executives assured outlandish returns of up to 1354% in the first 30 days, which of course cannot be a number that any acceptable security could guarantee. Plexcoin also makes the investors to believe that they were in the process of developing a credit card like instrument deemed “Placard” which was designed to draw Plexcoin ATMs as well as “be used anywhere in the world and (would) be connected directly to Plex Wallet. It will give you the opportunity to spend your money in a totally confidential way”. It was a brainchild of Dominic LaCroix. LaCroix was prosecuted by the SEC as it falls under securities fraud. But the sad part is that LaCroix was still able steal over $15 million before his arrest . Another fascinating example of a fake ICO scheme would be the REcoin scheme. REcoin was made by a fraudster Maksim Zaslavskiy, as being the first ever cryptocurrency to be backed by real estate. Unlike any other cryptocurrency, the proceeds from the initial sale of tokens will be invested in the highly regulated real estate market in all jurisdictions while boosting the holders and investors’ confidence in the REcoin.

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Zaslavskiy also designed another fake cryptocurrency with the designation of DRC for Diamond Reserve Club. DRC was similar to REcoin, but unlike real estate, it was invested in diamonds. But neither REcoin nor DRC had any operations according to an investigation conducted by the SEC.  The SEC believes that this problem is so rampant that it is an issue for potential crypto-investors; they made a mock and fake ICO website in order for them to consult when pondering whether or not to invest in a cryptocurrency.

Trading Platform Freezing Wallets Without Legal Grounds Many complaints from different platforms are raised to take crypto assets but consecutively lock the wallets because the trader does not track their anti-money laundering (AM2) or know-your-customers (KYC) standards. The area as possessed by AML/KYC needs to be completed by the platform before accepting the crypto money. The wallet can be frozen if the money which had been deposited is noncompliant with AML/KYC. And the whole transaction is considered null and void, and the crypto money will go back to the right person.

Investment Scams (Ponzi Schemes) Ponzi schemes are frauds in which the offenders pay off old investors dividends with new investments from new investors. The offender’s investment firm most of the time will not even own a single share of stock. New investors are quarreled by falsified reports, non-feasible high return rates, and suggestions of older investors. Due to the general publicity of the Bernie Madoff case, many people are familiar with this fraud scheme. The most unpopular “crypto-Ponzi scheme” would be the scheme executed by Bitconnect. Superficially, Bitconnect looks like a perfectly legitimate cryptocurrency/ exchange with a user-friendly website full of fun, animated videos explaining its expected perks. But, Bitconnect brings out a Ponzi returns that soothe thousands of investors of their cash. Initially, investors were guaranteed returns of up to 120% in the early days of the cryptocurrency, and also they would earn “interest” on their BCCs if they stored and traded them on Bitconnect’s native cryptocurrency exchange, thus providing 95% of BCC transactions to take place on said exchange. Another sign of warning was that any purchase of Bitconnect coin (BCC) had to be paid in Bitcoin, because cash purchases are easier to trace as contrary to purchases using Bitcoin or any other cryptocurrency. In January 17, 2018, many people thought that Bitconnect’s Ponzi scheme has come to a standstill. BCC price had gone down by 80% in a short span of time. This happened due to the realization on the part of crypto-investors that they were cheated and had no chance of recovering their funds. But, the culprit of the scheme covered their tracks very well. The

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estimation was that anywhere between 1 and 10 million dollars were stolen due to this fraud (cryptic, et  al). In spite of the ambit of damage of this crypto-Ponzi scheme, the fraud was crystal clear to make many prospective crypto-investor careful of his or her next crypto-investment. Another prominent “crypto-Ponzi scheme” was Bitfinex. It started as a legitimate crypto company, but the scam started when Bitfinex servers were hacked and stolen made off with $72,000,000 worth of customer investments. In order to lessen the effects of the theft, investors were motivated by Bitfinex executives for converting their shares into equity within the company and thus creating value from nothing at all. When most of the investors had converted their investments of shares, Bitfinex motivated them to sell their equity as shares to new investors. Tether is another example of a Ponzi scheme committed with cryptocurrencies. Intentionally, Tether, another type of cryptocurrency, set up an equal exchange rate. This authorized Tether to act as a safe medium for investors who are continuously trading one cryptocurrency for another. Tether states that for each Tether on the marketplace, there will be one US dollar to back it up. On May 23, 2017, according to Tether’s last audit, it has approximately 2,830,109,970 in circulation (www.commarketeap.com). But auditors could only account for $44,771,061,81 in US dollars which is not even close to the figure of Tether in circulation. This makes many crypto-investors believe that Tether is fulfilling or implementing another Ponzi scheme. As the numbers are mismatched, many crypto-investors are also cautious about the indicators surrounding Tether’s business practices such as the business ties with the Bitfinex, the disintegration of relationships with many prominent banks, lawsuits against said banks, and the tendency of Tether to withhold important information from investors. So it is nothing to get astonished that the fraudsters have adapted an age-old scheme to cryptocurrencies.

Fake Cryptocurrency Exchange Fake and unregulated cryptocurrency exchanges function as a legitimate exchange to do a scam. Victims are attracted by celebrity endorsement assuring extraordinary returns on investments. When a victim tries to withdraw funds, problems start like undeclared fees and taxes to be paid. In most of the cases, victims find that their money vanishes totally. One of the most notorious fake cryptocurrency exchanges was exposed in 2017 by South Korean authorities.

Fabricated Cryptocurrencies A popular instance involves the OneCoin Ponzi scheme, which cheated victims across various jurisdictions including the USA, Europe, China, and Singapore. This form of cryptocurrency could be mined by those who paid for educational courses

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and tokens that could be used to mine OneCoin. Depending on the investment, it could be exchanged for a restricted amount of fiat currency on Xcoinx (a private cryptocurrency exchange). In the end, it was understood that OneCoin was worthless and no blockchain technology was involved.

Cryptocurrency Theft For the inherent nature of cryptocurrencies being a virtual currency, hackers have tried to assuage unsuspecting investors of their cryptocurrencies year after year; therefore, we can categorize them simply as “cryptocurrency theft.” Most financially literate individuals will be familiar with it “Nigerian prince” or 419 fraud (labeled 419 due to the section of Nigerian law that makes it illegal). It is a type of advance-fee scheme that involves a scam artist, trite from Nigeria, that lures someone to wire him or her a small sum of money to clear a big amount in which the scammer states that it can be split between both the con man and the conned. All these stories are fake, as investors generally never see any of their investment ever. In the 419 scams, scammers now use cryptocurrencies. These Nigerian scammers have scammed citizens abroad such as in America and also their own countrymen. The aim is to persuade unsuspecting Nigerians to wire over naira, the local Nigerian currency, for phony cryptocurrencies such as “Billion Coin”. Apart from cryptoNigerian schemes, hackers have also become prominent threats to the security of investors’ cryptocurrencies, as they are using different tactics to steal cryptocurrencies. Cryptocurrency theft is rampant despite safeguards that blockchain technology can offer to help protect investors from hackers. Many people disclose their life savings to crypto-hackers. Like Chris Dejrit lost over $22,000 to hackers posing as technicians for the exchange that he was using. Dejrit logged in, and he noticed that his entire stash of Bitcoin was gone without trace. Ransomware schemes are another form of cryptocurrency theft that has become more and more famous over a couple years. These schemes have caught the entire crypto-world off guard. Fraudsters enter these schemes by using ransomware to take over people’s computers and vow only to unlock them once a payment of identified cryptocurrency has been made to the fraudster’s wallet. A specific type of ransomware virus, CryptoWall, 2015, made off with over $18 million worth of cryptocurrencies. In May 2017, ransomware, another prominent ransomware virus, caused remarkable damage to all those affected across Europe. The effect was so big that many European legislators tried to make cryptocurrencies illegal so that scams such as ransomware would not be allowed to continue. The most shocking cryptocurrency thefts that the world of cryptocurrency has ever experienced would have to be the hacks of Mt. Gox and Bitfinex. Mt. Gox and Bitfinex are both what the cryptocurrency community considers to be exchanges. A cryptocurrency exchange acts as a marketplace where it can be stored and traded. These exchanges hold big amounts of the world’s cryptocurrencies and are trusted by their

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customers to provide a safe trading environment. Mr. Gox was hacked twice. In 2011, the first hack occurred when the hacker gained access to the exchange by using an auditor’s credentials that are supposed to be kept secret. The first hack made off with 2609 Bitcoins, little compared to what was lost during the second hack. In 2014, the second hack happened, and as a result, he lost 750,000 Bitcoins which is equal to around $350 million, an amount equal to over 70% of Bitcoins in circulation at the time. As an effect of it, all of Mt. Gox’s customers had lost all faith in the company, and it filed for bankruptcy afterward. Apart from the Mr. Gox hack, hackers were also able to do major damage to the Bitfinex exchange. The weakness of Bitfinex’s authentication was used by the hackers, and they steal 120,000 Bitcoins from investors making it the second biggest cryptocurrency theft since Mt. Gox (Khatwani, 2017). Other exchanges such as Bitfloor, Poloniex, and Bitstamp make the aforementioned examples to not be isolated incidents (Khatwani, 2017). It is significant to note that all the hacks were possible due to negligence by those in charge of the exchanges and not simply investor error. Cryptocurrency scams can be easily spotted when you know what you are searching for. Legitimate cryptocurrencies have easily available disclosure, with full information about the blockchain and associated tokens.

Reading the White Paper Cryptocurrencies go through a development process. A document is published for the general public to read called a white paper. It discusses the protocols, blockchain, outlines the formulas, and clarifies how the entire network will function which fake cryptocurrencies are lacking. One can compare white papers of popular cryptocurrencies such as Ethereum and Bitcoin to find out how they are written and explained.

Recognize the Team Members Identification of the members and developers behind the cryptocurrency should be done through white papers. There are instances where an open-source crypto project might not have named developers – but this is typical for open-source. Most coding, comments, and discussions can be viewed on GitHub or GitLab. Some projects use forums and applications like Discord for discussion. It will be a scam if we cannot find any of these and the white paper is full of errors.

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Searching for “Free” Items Many cryptocurrency scams give free coins or are assured to “drop” coins into your wallet. One must keep in mind that nothing is free in this world, especially money and cryptocurrencies.

Scrutinize the Marketing Cryptocurrencies are not a moneymaking venture. They are projects with a specific purpose and have coins or tokens which help in the functioning of the blockchain. The genuine crypto projects won’t be posting on social media, inflating themselves up, and considering themselves as the best crypto. There are legitimate businesses applying blockchain technology to provide services. They might have tokens used within their blockchains to pay transaction fees, but the advertising and marketing should look much more official. They have money to spend on celebrity endorsements and appearances. All this information is easily available on their websites. They will advertise their blockchain based services and not ask everyone to buy their crypto. Now one should know how one can be safe from cryptocurrency scam and how it can be reported. There are many actions one can take to keep away from being scammed. They are as follows: • Avoid requests to give out your private cryptocurrency keys. It regulates your crypto and wallet access; in a legitimate cryptocurrency transaction, there is no necessity of it. • Avoid promises of making lots of money. • Avoid investment managers who promise that they can increase your money fast. • Avoid celebrities  – a celebrity will not contact people about buying cryptocurrency. • Before giving them money, meet the romantic interests in person if one is using an online dating website or app. • Avoid text messages and emails from famous or new companies, stating that your account is frozen or they are tensed about it. • Avoid the messages of an email, text, or social media message from a government, law enforcement agency, or utility company stating your accounts or assets are frozen and you’ll need to send crypto or money; contact the agency and ignore the message. • Avoid job listings to be a cash to crypto converter or crypto miner. • Avoid the claims about explicit material they have of you that they will post unless you send cryptocurrency, and report it. • Avoid accepting “free” money or crypto.

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Many organizations are there to help if someone is a victim of a cryptocurrency scam or suspects one. For help, use of their online complaint form is important. • • • •

FTC fraud report Commodities Futures Trading Commission complaints and tips US Securities and Exchange Commission fraud reporting FBI Internet Crime Complaint Centre complaint

Conclusion Crypto assets have not brought out any vital disruptions in Asia; market regulators are eager to secure monetary and financial stability as these assets are continually adopted and evolve in complexity. The commerce and technology sector has experienced massive transformation and development, during COVID-19, pressuring fraudsters to comply and invent new, more advanced forms of fraud involving cryptocurrencies. While a risk-based regime is probably the preferred approach, the prevalent objective across all jurisdictions is the protection of users, monetary and financial stability, minimizing regulatory arbitrage, a nimble and agile regulatory framework – which ably accommodates the speedy market development – and financial innovation widespread in this asset class.

Appendix Definitions denoted with an asterisk (*) Indicate types of fraud newly identified in the November 2020 update of the academic literature review. This information can also be found at https://osf.io/7w9mu/?view_only=c9ad3ale2ed54dae9bla0fc280 7f144f. See Tables 8.2, 8.3, and 8.4.

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Table 8.2  Description of fraud types identified in the academic literature Label Ponzi scheme/ high yield investment program

Description Ponzi schemes and high yield investment programs are the cryptocurrency version of Charles Ponzi’s scam technique, where outlandish interest rates are promised in return for investments. Returns on these investments are paid to investors with funds invested by new users that join the scheme until it is no longer possible to find new victims

Initial coin offering (ICO) scams

ICOs involve fundraising, often crowdfunding, to launch a new cryptocurrency (Anderson et al., 2019). Fraudulent ICOs, on the other hand, lure investors into paying money into cryptocurrencies for simple theft or as part of pump-and-dump and Ponzi schemes Phishing involves creating a fake version of an official website (or email, etc. and, in this case, cryptocurrency websites) and getting users to input their private information on this website Pump-and-dump schemes are a type of stock market fraud and have been committed since the 1700s. They have recently been applied to cryptocurrencies. In the context of cryptocurrencies, fraudsters accumulate volumes of a low-value currency and then aim to artificially inflate its price by spreading misinformation, typically as a coordinated effort over the Internet. When the value of the cryptocurrency increases, they sell everything to make a profit (Barnes, 2018; Baum, 2018; Chen et al., 2019) Market manipulation refers to market participants (including exchanges) and bots attempting to change the price of a cryptocurrency (urRehman et al., 2020) Scams related to cryptocurrency exchange platforms entail the purposeful closing of a platform leading to financial losses for the cryptocurrency owners (Samsudeen et al., 2019). To that end, fraudulent exchange services entice victims through unique payment features or high exchange rates (Vasek, 2017; Vasek et al., 2015). Once victims have bought a cryptocurrency, the scammers simply close the exchange, taking the victims’ money without any repayment Scam wallets are fraudulent services that masquerade as cryptocurrency wallets to siphon some or all of the currency transferred to them (Vasek, 2017; Vasek et al., 2015) Smart contract honeypots are smart contracts that seemingly contain design flaws. Users (the victims of this fraud) attempt to exploit these flaws, only to find that this perceived vulnerability did not exist. Instead, the code of the contract, when executed, does things like freezing their funds and only making them accessible to the scammer. For example, the honeypot could be set up to (appear to) leak funds (the bait) which a user may want to exploit by fulfilling the contract (e.g., paying a defined amount of cryptocurrency). The trap is that the code of the contract does not actually leak any funds but freezes them (for a detailed review, see) Victims invest in cryptocurrency mining operations in the hopes of getting larger sums back, only to never receive a payout (Vasek, 2017; Vasek et al., 2015) No definition was reported in the reviewed studies. However, Higgins (2017) defines this type of fraud as the unauthorized use of names from established companies to gain the trust of potential investors

Phishing*

Pump-and-­ dump schemes

Market manipulation Exchange scam

Scam wallet

Smart contract honeypots

Mining scam

Fraudulent cryptocoins

(continued)

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124 Table 8.2 (continued) Label Smart Ponzi scheme

Mining malware/ cryptojacking Securities fraud*

Identity theft*

Wire fraud*

Wash trading*

Selfish mining*

Description Smart Ponzi schemes apply the classic Ponzi scheme technique to smart contract platforms (Chen et al., 2018). The scammer makes money by taking parts of the investments of the victims for themselves rather than genuinely investing it. High interest rates or returns are paid with the investments of others rather than through a genuine increase in value Mining malware, also called “cryptojacking,” refers to malware programs that run on victims’ machines and exploit the CPU to mine cryptocurrencies on behalf of the criminal (Anderson et al., 2019) Securities fraud is not defined in the literature (though specific references are made to the US statutory definition). It involves carrying out a scheme to defraud in connection with a registered security or “to obtain, by means of false or fraudulent pretenses [sic.], representations, or promises, any money or property in connection with the purchase or sale of…any security”. In this context, said money or property could include crypto assets and the security itself could be a crypto asset No definition of identity theft was included in the literature reviewed. However, the US federal statutory definition is as follows: someone who “knowingly transfers or uses, without lawful authority, a means of identification of another person with the intent to commit, or to aid and abet, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable State or local law” (Identity Theft & Assumption Deterrence Act of, 1998) No definition of wire fraud was reported in the literature, though it is understood to refer to the US statutory definition of the same. According to the US Code, wire fraud involves “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses [sic.], representations, or promises, transmits or causes to be transmitted by means of wire…in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice” (18 U.S.C. § 1343) Wash trading was not defined in the literature. However, the UK Financial Conduct Authority defines it in the Market Abuse Regulation as “a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer or beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons”. In this case, the sale or purchase could be completed using cryptocurrencies or the qualifying investment itself could be a crypto asset Though selfish mining is not prohibited, per se, one article refers to it specifically as fraud. Selfish mining involves miners purposefully hiding blocks they have found so they can secretly mine on top of them, causing other miners to waste their computing power in trying to mine a block that has already been found. This allows the selfish miner to fork the blockchain, essentially enabling miners to carry out a 51% attack, but with a far smaller proportion of the overall hashing power (as little as 25%) (Phan et al., 2019) (continued)

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Table 8.2 (continued) Label Romance scams*

Description Romance scams involve a nefarious actor gaining an individual’s trust by engaging in a romantic relationship with them. Once they have received said trust, the perpetrator requests money (in this case, cryptocurrency) from the victim (usually for something like an urgent surgery, because they temporarily cannot access their bank, etc.) Pyramid In a pyramid scheme, participants earn money by recruiting other members to schemes* the scheme (in this context, a cryptocurrency investment scheme), rather than by delivering investments, products, or services Malware Malware prohibits victims’ access to their phones or computers until they pay scams* a ransom in cryptocurrency (Xia et al., 2020). Traditionally, this type of scam is more specifically referred to as “ransomware,” a type of malware Insider trading* The definition of insider trading was not reported in the literature reviewed. However, the US Securities and Exchange Commission defines it as “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic [sic.] information about the security”. To be considered crypto fraud, such a security would need to be a crypto asset Imposter This type of fraud was not defined in the literature. From the context of the websites/apps* article in which it appears, this form of fraud was understood to refer to creating fake versions of an official website or app (such as an exchange app, etc.) Giveaway In a giveaway scam, a fraudster promises to give victims a reward for sending scams* him/her a particular amount of cryptocurrency (which is never ultimately delivered) (Xia et al., 2020) Fake agencies Scammers pretend to be an existing exchange or government organization to steal cryptocurrency from customers (Samsudeen et al., 2019) Donation In a donation scam, a fraudster will pretend to be from a public organization scams* purporting to raise money (using cryptocurrency) for a worthy cause that does not actually exist (Xia et al., 2020) Blackmail Blackmail scams were defined and discussed in the studies in the context of scams* COVID-19. They refer to individuals claiming they will spread coronavirus unless the victim sends them cryptocurrency (Xia et al., 2020) Arbitrage Arbitrage refers to investors profiting off price imbalances in the market. scams* Scammers often combine arbitrage with counterfeit cryptocoins, i.e., they provide a scam address for the victim to send cryptocurrency to (to take advantage of an arbitrage opportunity). Rather than returning their profits, they send only counterfeit tokens to the victim Airdrop scams* Scammers promise to give various victims a free cryptocurrency token. Rather than providing the real cryptocurrency, they often send victims counterfeit tokens (Gao et al., 2020). In other cases, they airdrop token to trick a user into approving access to their online wallet; the scammer subsequently drains funds from their wallet Advance-fee An advance-fee scam involves convincing a victim to send cryptocurrency to scam* a particular address. The scammer promises to return the full amount and more (though this money never arrives) (Phillips & Wilder, 2020) *Notably, the definition is similar, if not nearly identical, to that of phishing. However, since the literature defined it as a unique type of fraud, it is included here as such

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126 Table 8.3  Description of fraud types identified in the private sector literature Label SIM swapping

Description SIM swapping refers to fraudsters moving their victim’s phone number to a SIM card they control. Getting access to the victim’s phone number enables attackers to break into their accounts (such as cryptocurrency exchange accounts) (CipherTrace, 2018) Commodity fraud The definition of commodity fraud was not reported in the private sector literature. The US Code defines it as carrying out a scheme “to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery” or “to obtain, by means of false or fraudulent pretenses [sic.], representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery” (Corporate & Criminal Fraud Accountability Act of, 2002, 2009). The commodity in this case would be a crypto asset Access device fraud The private sector literature failed to report the definition of access device fraud. The US statute defines a perpetrator thereof as someone who “knowingly and with intent to defraud produces, uses, or traffics in one or more” of items like “counterfeit access devices,” “unauthorized access devices,” “a telecommunications instrument that has been modified or altered to obtain unauthorized use of telecommunications services,” or “a scanning receiver,” among others CPO/CTA fraud

Credential stuffing

Discount scams

Dusting

Embezzlement

The definition of CPO/CTA fraud was not reported in the private sector literature. We understand this to refer to fraud committed by Commodity Pool Operators or Commodity Trading Advisors, in this case, fraud involving cryptocurrency Credential stuffing occurs when brute-force attackers automatically try huge sets of login credentials in login pages in an attempt to access an account which exists. Attackers could use credential stuffing to access custodial wallet or exchange accountsa The private sector literature failed to define discount scams. From the context in which they were mentioned, they appear to involve the promise of discounts for early investors in a cryptocurrency. The purported discounts may be for a counterfeit or fraudulent cryptocurrency Dusting involves scammers sending small amount of cryptocurrencyto lots of addresses. The fraudster can then track these funds in an attempt to figure out which addresses are housed in the same wallet or identify wallet holders. They then use this information for targeted phishing or blackmail scams. It is worth noting that dusting is not necessarily malicious; it has also been used for advertisement purposes Embezzlement was not defined in the private sector literature. However, the US Supreme Court defined embezzlement as “the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come”. In the context of cryptocurrency fraud, this would mean the misappropriation of crypto assets (continued)

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Table 8.3 (continued) Label Forex fraud

Description The private sector literature did not include a definition of forex fraud. The Financial Conduct Authority states that these scams involve unauthorized foreign exchange trading and brokerage firms who “promise very high returns and guaranteed profits”, in this case, from exchanging cryptocurrencies. Generally, victims will initially receive some returns, but, following further investment, the scam forex firm will halt all communication (Financial Conduct Authority, 2020)

Issuing false account statements in connection with soliciting investments Options fraud

This was not defined in the literature; however, from the context in which it was mentioned, it appears to refer to scammers publicizing fake profit and loss information from their cryptocurrency “investment opportunity” in order to entice new investors to join their scam

Impersonating celebrities or a federal employee

Exploiting vulnerabilities

Ransomware

Options fraud was not defined in the private sector literature. This review, again, interpreted the literature as referring to the US statutory definition, namely, “to defraud any person in connection with…any option on a commodity for future delivery” or “to obtain, by means of false or fraudulent pretenses [sic.], representations, or promises, any money or property in connection with the purchase or sale of…any option on a commodity for future delivery” (in this context, an option on a crypto asset) (Corporate & Criminal Fraud Accountability Act of, 2002, 2009) The private sector literature did not define scams involving the impersonation of a federal employee. The public sector literature specifically referred to impersonation scams involving celebrities, defining them as involving a scammer using “the image, name, and personal characteristics of a well-known person to sell a product or service”. This could involve, for example, a fraudster impersonating a celebrity to recruit victims to a cryptocurrency investment scam. We understand the definition of impersonating a federal employee to be largely the same (albeit with the perpetrator impersonating different targets). In practice, this is closely related to giveaway and advance-fee fraudsb

Though this was not defined in the publication that mentioned it, exploiting vulnerabilities is understood to refer to any fraudulent behavior enabled by web browser, software, hardware, or firmware security issues. This could also potentially apply to exploiting vulnerabilities in smart contracts, though this was unclear from the context in which it was discussed The private sector literature that referred to ransomware specifically as a type of fraud defined it as malware that controls a victim’s computer or device and “holds it hostage until the victim pays the hackers to regain access” (Musiala et al., 2020). Generally, the hackers require payment in cryptocurrency

In contrast, in the academic literature, this was specifically defined as phishing (Navarro, 2019) While the source of these sets of login credentials may be phishing, the definition provided above is more accurate b This is similar to the definition of “fake agencies,” as defined in the academic literature a

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Table 8.4  Description of fraud types identified in the private sector literature Label Description COVID-related The publication that referred to COVID-related cryptocurrency scams did not scams provide a definition thereof. However, it is implied that this refers to any scam related to COVID-19 that requires payment in cryptocurrencies, such as donation scams, payment for fake personal protective equipment, etc. We note that Xia et al. (2020) also define various scams in the context of COVID, which we have included separately above (see, e.g., definitions of malware scams, giveaway scams, donation scams, and blackmail scams) False signals of supply and demand (wash trading, layering, spoofing) Income tax scams

False signals of supply and demand were not defined in the public sector literature. The UK Financial Conduct Authority, in the Market Abuse Regulations, defines this as providing information “which is likely to give the regular user a false or misleading impression as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product,” for example, of a crypto asset (Financial Conduct Authority, 2021) The public sector publication referring to income tax scams did not offer a definition thereof. However, in describing the scam, it appears to involve someone impersonating federal employees (defined above), specifically, in this case, Canada Revenue Agency employees (Manojlovic, 2019)

Unfair and deceptive acts

This was not defined in the literature. However, it is understood to refer to the Federal Trade Commission Act, which prohibits any practice that “causes or is likely to cause substantial injury to consumers; cannot be reasonably avoided by consumers; and is not outweighed by countervailing benefits to consumers or to competition” or “where a representation, omission, or practice misleads or is likely to mislead the consumer; a consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances; and the misleading representation, omission, or practice is material”

References Anderson, R., Barton, C., Rainer, B., Clayton, R., Ga, C., Grasso, T., Levi, M., Moore, T., & Vasek, M. (2019). Measuring the changing cost of cybercrime our framework for analysing the costs of cybercrime. Workshop on the Economics of Information Security (WEIS), 1–32. Chen, W., Zheng, Z., Cui, J., Ngai, E., Zheng, P., & Zhou, Y. (2018). Detecting Ponzi schemes on Ethereum, pp. 1409–1418. https://doi.org/10.1145/3178876.3186046 Chen, W., Wu, J., Zheng, Z., Chen, C., & Zhou, Y. (2019, April). Market manipulation of bitcoin: Evidence from mining the Mt. Gox transaction network. In Proceedings—IEEE INFOCOM (November 2013), pp. 964–972. https://doi.org/10.1109/INFOCOM.2019.8737364 CipherTrace. (2018). Cryptocurrency anti-money laundering report (p.  22). https://ciphertrace. com/crypto-­aml-­report-­2018q3.pdf Higgins, S. (2017). A digital currency scam is misusing the rothschild family name. CoinDesk. https://www.coindesk.com/rothschild-­advisory-­warns-­fraudulent-­digital-­currency Identity Theft and Assumption Deterrence Act of 1998, Pub. L. No. 3007, 18 United States Code (2006). https://www.law.cornell.edu/uscode/text/18/1028 Meiklejohn, S., Pomarole, M., Jordan, G., Levchenko, K., McCoy, D., Voelker, G.  M., & Savage, S. (2016). A fistful of bitcoins: Characterizing payments among men with no names. Communications of the ACM., 59(4), 86–93. https://doi.org/10.1145/2896384. [CrossRef] [Google Scholar].

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Phillips, R., & Wilder, H. (2020). Tracing cryptocurrency scams: Clustering replicated advance-fee and phishing websites. ArXiv Preprint. ArXiv:2005.14440. Samsudeen, Z., Perera, D., & Fernando, M. (2019). Behavioral analysis of bitcoin users on illegal transactions. Advances in Science, Technology and Engineering Systems Journal., 4(2), 402–412. https://doi.org/10.25046/aj040250 Xia, P., Wang, H., Luo, X., Wu, L., Zhou, Y., Bai, G., Xu, G., Huang, G., & Liu, X. (2020). Don’t fish in troubled waters! Characterizing coronavirus-themed cryptocurrency scams. ArXiv Preprint. ArXiv:2007.13639. Zhu, J., & Zhang, S.. (2018, May 25). China to use cornerstones to help Alibaba, Xlaomi list in Mainland:… Reuters, Thomson Reuters. www.reuters.com/article/us-­china-­cdr/ china-­to-­use-­cornerstones-­to-­help-­alibaba-­xiaomi-­list-­in-­mainland-­sources-­jdUSRCN11Q10R

Chapter 9

Blockchain and Cryptocurrency Frauds: Emerging Concern Apoorva Thakur

Introduction To facilitate transactions, all modern economies use standardized currencies (money). To avoid inflation and deflation, governments throughout the world actively regulate their currencies by expanding or contracting the money supply, respectively. There has been a recent surge of attention from governments throughout the world on digital transactions and money. The world witnessed, in recent times, a new kind of money called “cryptocurrency,” which is one of the most complex, nebulous, and regulation-free forms of money in existence.

Key Features and Uses of Digital Currencies There is a wide range of potential outcomes for the financial markets and the economy at large when it comes to the introduction of new innovations like digital currencies, especially those having an integrated decentralized payment system based on a distributed ledger. These consequences may have a profound impact on existing business models and systems while simultaneously spawning new economic interactions and connections. It seems that these systems may help expedite certain retail-payment transactions, especially those using digital currencies and retail-­ payment services, as well as potentially speed up and reduce costs for consumers and merchants alike. It is currently unclear how these schemes will affect the efficiency of the payment system, and significant concerns exist.

A. Thakur (*) Partners, MKA Legal Law Offices, New Delhi, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_9

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Additional policy considerations for central banks and other authorities may be raised. Central banks are expected to focus on payment system implications shortly. When distributed ledgers, such as digital currencies, start to be widely used (e.g., for large-value transactions or other types of assets other than fund transfers), central banks may see a greater effect on other areas of competence, such as payment system regulation and monitoring, financial stability, and monetary policy.1 There are a number of issues that might slow the growth of digital currency systems in the near future, including the fact that they are not widely used or recognized. In the long term, they will likely remain a product for a limited, specialized user based on the edges of traditional financial services due to their little effect on financial services and the economy. However, in recent years, it has become clear that distributed ledgers may be used for value transfers between peers even in the absence of a trusted third party. Several aspects of the infrastructures supporting payment services and the financial markets may benefit from distributed ledger technology (DLT) implementation. That is the case in particular when it wouldn’t make financial sense to have a third party act as an intermediary.2

Concept of Blockchain Technology Linear hash chains or blockchains were first proposed by Haber and Stornetta (1991). This digital proof of creation or last update was achieved by cryptographically hashing the document and then dating the hash. Due to the lack of a time stamp in the data, the content’s confidentiality was ensured. Digital signatures, which are unique to each signing entity, were also used in Haber and Stornetta’s time-stamping approach to tackling the possible issues of collusion and trust. An additional proof-of-work method was developed the following year by Dwork and Naor (1992) to prevent spam. They planned to include a single computation in the header of each email, which the recipient could check with minimum effort – proof that a little amount of CPU time had been used to calculate the stamp before sending the email. The goal was to stop spammers from sending millions of emails at a cheap cost, rather than one at a time. In the long run, spamming would cost a lot. “Hashcash” was initially used by Jakobsson and Juels (2001) to express this proof of labor, the computing cost of creating each hash (1999).3 Blockchain technology has a wide range of uses, but this work focuses on cryptocurrencies. Bitcoin, also known “as BTC, a cryptocurrency,” was the first digital  Al-Laham, M., Al-Tarwneh, H., & Abdallat, N. (2009). “Development of Electronic Money and Its Impact on the Central Bank Role and Monetary Policy.” Issues in Informing Science and Information Technology, 6, 339–349. https://doi.org/10.28945/1063 2  Committee on Payments and Market Infrastructures, (November 2015) “Digital Currencies” 3  Shafi, M. (2021, November 28). “The emergence of crypto currency” - Kashmir Reader. Retrieved on December 19, 2022, from https://kashmirreader.com/2021/11/29/ the-emergence-of-crypto-currency/ 1

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asset to be built on blockchain technology. Most cryptocurrencies include a decentralized, peer-to-peer network where all participants have equal power. Participants use the appropriate ledger to offer their algorithmic approval, i.e., when a new block is added to the blockchain, it must be decided whether or not to accept it. Knowing and trusting your peers on a blockchain is superfluous. Additionally, a blockchain may be designed to only allow authorized parties to make changes to the ledger. Many central banks are interested in private, permissioned blockchains. In the permissioned blockchain, trust is required, since the central banks truly “own” the coins, i.e., as a governing layer, they have the power to adjust the number of coins.4 The unusual structure of a blockchain distinguishes it from a conventional distributed database, which linearly links blocks. A cryptographic hashing algorithm is used to create the chain. The chain of events will be broken on a specific database if a modification is made to the history of the database. When a link in the chain breaks, the network automatically replaces the corrupted blocks with new, legitimate ones. The incorruptible digital public log of transactions that has evolved as the backbone of Bitcoin is known as the blockchain. Blockchain technology, which is secure (and cryptography-based) and saves transactional information (known as “blocks”) in databases, facilitates peer-to-peer networks of nodes for the exchange of digital products (referred to as “chains”). With transparency, decentralization, accountability, and immutability as its guiding principles, it can perform as intended. Blockchain technology is being used in a wide variety of applications, from smart contracts to the monitoring of pharmaceuticals across their supply chains to the validation of property records and certificates to crowdfunding platforms.5 Money/currency is widely acknowledged as a means of trade in countries across the globe. Of course, the government regulates and backs each country’s currency. Cryptocurrency, a new type of money, has taken the globe by storm. As of this writing, the Indian government estimates that 7 million Indians own cryptocurrencies worth more than $1 billion. In this new system, “everyone could participate, but no one could own.” This is what makes it special. Transactions connected to cryptocurrencies are essentially untraceable and unconfirmed because of the lack of transparency and assurance.6

 G., Chakraborty, S., & Patil, S. “Emergence of crypto-currencies” Retrieved on December 19, 2022, from https://www.gatewayhouse.in/emergence-crypto-currency/ 5  Anu Singhal and Aqila Rafiuddin, (2014) “Role of Bitcoin on Economy by– World Congress on Engineering and Computer Science,” San Francisco, Vol. II 6  Badev, A.  I., & Chen, M. (2014). “Bitcoin: Technical Background and Data Analysis.” SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2544331 4

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Cryptocurrencies: Background and Development Nakamoto’s technological advancement with Bitcoin, a genuine ecosystem, has developed around this new form of payment, an ever-evolving ecosystem that includes both traditional financial institutions and startups with novel business models centered on Bitcoin and other cryptocurrencies, as well as the products and services they provide. As a result, many different types of businesses and individuals are drawn to this arena, which is still relatively young but constantly shifting as the cryptocurrency market grows7:

Bitcoin: Concept, Uses, Possibilities When it comes to cryptocurrencies, it is not so much about the fact that they have been there since 2009 but rather the fact that this is the first decentralized money that human race has seen. Unlike with traditional currencies, there is no central bank to set prices and no financial intermediary to verify transactions. A new system for electronic transactions that relies on mathematics and cryptography rather than relying on a third-party authority was the goal of the Bitcoin project. By using cryptocurrency, users may conduct digital monetary transactions without the need for a central authority. Cryptography, the backbone of cryptocurrencies, is based on the solution of encryption algorithms to produce unique hashes with a finite number of potential possibilities. Using a decentralized network of computers, users may exchange hashes just as they would with real money. To prevent Bitcoin from being oversaturated, a cap has been set on the total number that can ever be generated.8 The monetary and legal systems worldwide have not been designed to deal with this kind of innovation. If Bitcoin is adopted as the global standard for transactions, established trade institutions will need to undergo significant reform to keep up with the new norm. Therefore, cryptocurrency may represent the greatest game-changing economic and financial technology in history. Indicative of growing acceptance by users is growth in transaction volume. As a “fire triangle” could suggest, the circumstances for mass acceptance of Bitcoin are ripe for its formation. Unlike a bonfire, Bitcoin requires user and vendor acceptance as well as innovation to thrive. For Bitcoin to genuinely become widespread money, all three qualities must be present. According to the “fire triangle,” Bitcoin is now enjoying a rise in user acceptability, which is driving the other two components. It is crucial to keep an eye on the adoption of cryptocurrencies in the future, as it might

 Rappa, A. L. (2020). “The Politics of Finance: FinTech and Bitcoin in Late Modernity.” Journal of Stock & Forex Trading, 1 8  Ibid 7

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be a disruptive technology that affects the global interchange of currency. As Bitcoin’s popularity grows, the global economy transforms as a result.9 Recent occurrences have raised doubts about the legitimacy of Bitcoin. Not only Bitcoin but digital money in general may get a bad rap because of stories like Silk Road. There were thousands of drug sellers and almost a million consumers using the Silk Road, which was hidden in the shadows of the Internet. Due to government surveillance and semi-anonymity, Bitcoin was their principal mode of payment. Since its launch in 2011, it has sold approximately $1 billion in merchandise. Since law-abiding individuals want to see criminals brought to justice, the semi-­anonymity of Bitcoin is seen as a drawback. If the benefits of cryptocurrency’s anonymity for law-abiding citizens aren’t promoted to the broader public, the public will continue to believe that criminals are the only ones using them.10

Evolution of ICOs (Initial Coin Offerings) Since its inception in 2009, Bitcoin has left its imprint on the globe, creating a slew of new possibilities. In reality, the number of cryptocurrencies has grown steadily, from only 1 Bitcoin in 2009 to today’s 185,627. An unregulated crowdfunding method in the financial industry, known as an initial coin offering (ICO), makes this feasible. New funding may be raised for the development of new cryptocurrencies via the use of initial coin offerings (ICOs). Selling “tokens” in return for cash is the most common way for the new currency to be introduced. Due to the absence of regulation by the states, there may be no certainty that property or other rights would be protected in ICOs compared to tender offers (TOs).11 The first ICO was held in 2013 for the introduction of Mastercoin, followed by the Ethereum ICO in 2014. More than 20 ICOs have been launched per month since May 2017. A “token” is defined by law as “digital information that typically provides a property right to a person”; this information is stored in a distributed ledger (like the blockchain) and may be traded using a predetermined set of rules.12

 Ibid  Ibid 11  “What Is Cryptocurrency: Types, Benefits, History and More,” Retrieved on December 21, 2022, from https://www.simplilearn.com/ 12  Ibid 9

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Analysis of Cryptocurrency Scams and Crimes Currencies denominated in cryptography have a number of interesting features, but they have also been linked to unlawful activity. Illicit actors took advantage of the new phenomena since it made it simpler for them to commit crimes, even though the notion created a fantastic potential to establish a medium able to service the digital economy, with users engaging on a peer-to-peer basis. ICOs have exploded in popularity as a means of disseminating cryptocurrency and other crypto-assets to investors and startups alike, with billions of dollars having been traded in this way to fund and invest in blockchain-based startups. There was a time when ICOs seemed like a revolutionary way to more widely distribute money for new businesses. The new system was not as flawless as hoped. On one hand, businesses learned fast that raising real money without delivering anything useful in return and without completing any complicated documentation was not only possible but a very effective strategy. This led to the emergence of new initiatives seeking investment, some of which turned out to be scams with unachievable or nonsensical value propositions, such as Pincoin (which raised $660 million), Arise Bank (which raised $600 million), and Savedroid (which raised $330 million). Optioment (which gathered USD 115mn) is a well-known example of a “Ponzi/pyramid scheme,” a process in which “entrepreneurs” fraudulently invest in themselves in exchange for a cut of the profits. According to the findings of the most recent studies, in 2017, almost 78% of the projects that raised a total of USD 1.34bn ended up being frauds!13 In contrast, many individuals, in search of rapid and substantial profits, have “invested” their funds in projects without fully understanding them, blindly following market news, influencer advice, or the activities of other participants. The development of new marketplaces has greatly aided this social rush, which is driven by the “fear of losing out.” Since they could easily liquidate their stake, frequently at a considerably higher rate than the first offered price, many players did not bother to read the whitepaper before making their purchase choice. The end of 2017 saw a “crypto rush” or “crypto bubble” as speculative users flocked to the market to make a quick buck by engaging in strategies that are both common and illegal on traditional capital markets. This has led to the discovery of several abusive processes, such as the rise of “pump and dump” operations, which aim to artificially influence the market. These are most effective when applied to cryptocurrencies with a low market capitalization and a small circulating supply since these factors make it easier to engage in abusive activity. Often, groups may provide some kind of “affiliation program” to incentivize their current users to invite new members and utilize the messaging platform of their choice (e.g., Telegram) to connect. Bancor, Cloackcoin, and Agrello are just a few of such exploited cryptocurrencies.

 “Reports show scammers cashing in on crypto craze,” Federal Trade Commission, Retrieved on December 21, 2022, from https://www.ftc.gov/ 13

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Even cybercriminals are getting in on the cryptocurrency craze, with many reporting an increase in ransom demands denominated in cryptocurrency. The FBI estimates that in 2017, more than USD 58.3 million was lost to cyber-ransomware attacks, in which criminals demanded payment in cryptocurrency, most often Bitcoin, Ethereum, or Bitcoin Cash, to regain access to their victims’ data. WannaCry is a malware that demanded Bitcoin as payment. Cryptocurrencies may be preferred by hackers over more conventional forms of currency because of their multiple attractive features, such as decentralized and global nature, which spares the hacker the high transaction fee associated with currency exchange and international transfers, and their anonymity (or pseudo-anonymity) which allows the hacker to conceal his true identity. In order to provide more accurate projections of future gains, the aforementioned currencies were favored due to their lower volatility. Key components of this system are the exchanges and trading platforms. Facilitating the use of fiat currency and cryptocurrency exchanges is a key factor in the expansion of the network. However, their business-model is vulnerable to a number of threats, theft being a prime example. Since exchanges store substantial sums of cryptocurrency on behalf of their users, they are sometimes seen as “honey pots” for thieves. Due to the design of such systems, hackers may easily breach the security system of a cryptocurrency exchange and get access to the hundreds of millions of cryptocurrency accounts housed there. One common misperception is that blockchain’s inherent weaknesses make such assaults viable. Exchange wallets are stored off-chain, thus leaving no scope for contact with the blockchain in the event of a theft. Hence, these misconceptions must be dispelled. If the cryptocurrency exchange doesn’t have a reliable security mechanism, or if the system is particularly naive, then hackers will have an easier time modifying the infrastructure of the exchange and stealing the purchased Bitcoin.14 CipherTrace reports that between 2016 and 2018, hackers stole about $1.3 billion worth of Bitcoins. However, such behavior is not novel and has been in the cryptocurrency market ever since the first exchanges were set up. Around 750,000 Bitcoins belonging to Mt. Gox were lost when the exchange, situated in Tokyo, declared bankruptcy. Another such instance is the South Korean exchange, Youbit, which went bankrupt after losing almost 17% of its assets. Some exchanges were able to avoid being hacked altogether, like the Japanese exchange platform Coincheck.Inc., which sustained a loss of USD 530 million worth in January 2018. Criminals have always used a wide variety of cross-border and financial devices to launder money. Money laundering is a global issue, with estimates ranging from US$500 billion to US$1 trillion annually. According to the Basel AML Index, 64% of countries are considered to pose a high risk of money laundering, with just 4% managing to improve their score from 2018. Since 2008, criminals have had access to cryptocurrency, which has proven to be a very attractive instrument for money launderers.  “Bitcoin Scams: How to Spot Them, Report Them, and Avoid Them.” (2022, August 23). Investopedia. Retrieved December 21, 2022, from https://www.investopedia.com/articles/ forex/042315/beware-these-five-bitcoin-scams.asp 14

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There are a number of possible origins for these crypto-assets. Some of these funds may have been obtained via the use of ransomware, while others may have been taken from Bitcoin exchanges or obtained through other fraudulent means. The process may be powered by either “clean” fiat money or cryptocurrencies. After the dirty money is acquired, the so-called “layering” process starts, in which the inputs are blended to sever the original link to their filthy origins. With cryptocurrencies, this procedure may take several shapes, and hence it may (i) Call for the use of special equipment like mixers, tumblers, and foggers, such as those provided by companies like BestMixer16, BitBlender17, and CoinMixer. (ii) Occur on recently established “crypto-casinos” and gambling sites that are not yet bound by any established regulatory framework, and hence permit a very effective laundering operation. (iii) Refer to the practice of using privacy currencies like Zcash or Monero in many, iterative exchanges until no traces of illicit links remain.15 The “integration” step begins after the “layering” phase is complete, and it aims to reintroduce decontaminated instruments into the normal financial system. Depositing huge sums of money into a bank account without a clear paper trail around its origin is not a simple operation. “Micro-laundering” is a technique used by criminals to hide their cryptocurrency transactions by exchanging small quantities of cryptocurrency for fiat money and then depositing the fiat cash into regular bank accounts. For instance, the cocaine cartel used this strategy to get payment from European dealers purchasing Colombian narcotics. Although the use of cryptocurrencies to launder money is a growing concern, Europol estimates that it only accounts for 3–4% of Europe’s annual illicit take (roughly USD 4.2–5.6 billion), which is a relatively small concern when compared to the total money laundering techniques accounting for 2–5% of GDP (around USD 800 billion–2 trillion). However, many specialists agree that this will eventually change. Thus, the current customs should not be disregarded. Numerous participants in the underground economy have been drawn to cryptocurrency since its debut. For many, the introduction of cryptocurrencies as a method of payment on black market platforms may be likened to the introduction of PayPal as a way of payment on eBay due to its anonymity and the ease with which transactions can be made and reversed.16 Persons in the dark market had to depend on conventional money transfers from untrustworthy users before the development of cryptocurrency. They have had access to an efficient and immutable solution to this inherently dangerous system since 2008. One of the most common uses of cryptocurrencies, according to a number of studies, is the funding of criminal activity, particularly the purchase of

 Abraham, C. (2018, October 13). “The Origin Story of the Initial Coin Offering (ICO)”, from https://perma.cc/SYD8-VCRE 16  Ibid 15

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unlawful goods. Some scholars have even attempted to identify generic criminal behavior tendencies. Recent research found that these players only care about using Bitcoin as a payment method, and not as an investment or speculative asset. As a consequence, they engage in a high volume of relatively small-dollar transactions. The actor also avoids taking unnecessary risks by preferring to do business only with a previously proven reliable counterparty. Finally, these players keep less Bitcoin due to seizure fears and strive to have just the quantity required for purchases, further confirming the non-investment nature of the conduct outlined. Interestingly, such users are also more active when (i) A plethora of markets are active. (ii) There is moderate excitement or public attention. (iii) Immediately after seizures and frauds, when people are most afraid of losing access to the illicit goods they need to survive. As a means of funding terrorist activities, cryptocurrencies are in their infancy as compared to other methods that have been proposed. Users are drawn to cryptocurrencies because of their desirable properties, which include anonymity (or pseudo-­ anonymity), the absence of relevant laws, rapid transaction time, and the inability to reverse purchases. However, cryptocurrency’s inherent volatility prevents it from being used for terrorist funding, since the process needs a stable supply of a great deal of money. Moreover, cryptocurrency adoption is still relatively low, which further reduces the sector’s desirability as a means of funding terrorism. Terrorist organizations still find cryptocurrency intriguing, since it may be used for things like instantaneous international transactions or the global collection of contributions. The Islamic state in Iraq and Syria has used such tactics, praising Bitcoin as a private and trustworthy means of payment. Since its beginnings, cryptocurrency has attracted participants looking for tax evasion solutions because of the absence of a standardized strategy and clarity with respect to tax legislation. At first, authorities did not see cryptocurrencies as a threat because of their small market caps and lack of widespread acceptance, thus not acting to create unified tax standards. In 2017, however, the landscape shifted dramatically as a result of the heavy profits several new investors were able to generate. This prompted tax authorities to reevaluate their policies and procedures. Due to the absence of a clear definition and the continuously developing nature of cryptocurrencies, numerous new challenges arose with regard to tax difficulties, such as how to distinguish between the trading and spending of cryptocurrencies. Because of this, defining and agreeing on correct taxes has become a formidable problem, as governments strive to set national norms in the hopes of bringing about greater stability but frequently end up adding to the system’s already enormous complexity.17  Alexandre, A. (2018). “New Study Says 80 Percent of ICOs Conducted in 2017 were Scams”, from https://cointelegraph.com/news/new-study-says-80-percent-of-icos-conducted-in-2017were-scams 17

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Scammers are constantly in search for new methods to steal our wealth, and the explosive rise of cryptocurrencies in recent years has provided them with several possibilities to do so. A blockchain analytics company found that in 2021, criminals stole a record $14 billion worth of cryptocurrencies!

Common Types of Scams Pump and Dump Schemes Scammers send out an automated email or use platforms like Twitter, Facebook, or Telegram to spread false information about a currency or token. Many investors race to acquire the coins before they sell out, which drives up the price. After artificially driving up the price, the fraudsters unload their holdings, triggering a precipitous collapse in the asset’s value. Within a matter of minutes, this may occur.

Fake Websites For the purpose of deceiving their victims, scammers may occasionally develop phoney cryptocurrency trading sites or forked copies of legitimate crypto-wallets. The domain names of these spoof sites tend to be somewhat close to the originals they are trying to imitate. They have a professional appearance that is almost identical to that of real sites.

Phishing Scams Online wallet details are a common target of crypto-phishing schemes. Private keys used to access a digital currency wallet are a common target for scammers. Its operation is connected to bogus websites and is comparable to that of other phishing efforts. Sending an email with a link to a malicious website designed to steal private key information is a common tactic. If hackers get access to this data, they may then steal the Bitcoin stored in the wallets.

Giveaway Scams In this kind of fraud, known as a “giveaway,” the fraudsters claim that they will double or triple the amount of Bitcoin sent to them. Cleverly crafted messages from what seems to be a legitimate social media account may instill a feeling of urgency

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and credibility. A person may feel compelled to make a rapid transfer of currency in the hopes of making a fast profit on this “once in a lifetime” chance.

Fake Apps Scammers often use fake applications distributed via major app stores like Google Play and the Apple App Store to defraud Bitcoin traders. These bogus applications may be discovered and deleted swiftly, but that does not mean that they are not having an effect on businesses’ bottom lines. False cryptocurrency app downloads have reached thousands.

Fake Celebrity Endorsements Scammers in the cryptocurrency industry frequently use celebrity or company name drops or purported endorsements from influential individuals to get the attention of their victims. As an example, this may entail promoting fake cryptocurrency to unsophisticated buyers. Sophisticated frauds include flashy websites and pamphlets purporting to have endorsements from famous people like Elon Musk.

FTX Cryptocurrency Exchange Fallout FTX’s meteoric rise is partly attributable to the celebrity endorsements by athletes and their wives including Tom Brady, Gisele Bündchen, Steph Curry, and Shaquille O’Neal, among others. Most notably, Larry David promoted FTX as a “safe and simple way to enter into crypto” in a Super Bowl commercial. Many people believe that FTX’s reputation was boosted when it purchased the naming rights to the basketball stadium used by the Miami Heat. In order to impress potential victims, fraudsters often use high-profile connections, such as TV appearances, corporate sponsorships, and celebrity endorsements. However, media pundits, PR teams, and A-listers are not checking out these businesses. These groups can’t see beyond the sponsorship money in their pockets or the race to have an interview with “the next Steve Jobs.” Even while the market has been sent a positive signal by the SEC’s recent wave of enforcement proceedings against celebrity crypto-advocates like Kim Kardashian, regular investors are still being duped, as witnessed by the FTX hoax.18

 Davis, C. (2022). “Five Takeaways from the FTX Cryptocurrency Exchange Fallout.” The Texas Lawbook 18

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Anti-corruption Compliance Agenda Due to FTX’s collapse, there has been a sea-shift in the language used by crypto-­ enthusiasts. Many in the community have come around to the idea that regulation could be for the best after years of hostility against regulators. The failure of FTX has, as expected, prompted demands for more control. This further demonstrates that compliance is worth-spending resources and thought on and may serve as a competitive advantage. As an example of a cryptocurrency exchange that differs significantly from FTX in its approach to compliance, Coinbase stands out. Coinbase is a publicly listed business situated in the USA. This means it must follow the laws and regulations set out by the SEC and the NASDAQ and make its audited financials available to the general public. Of course, this does not mean that every cryptocurrency or blockchain firm has to or even should go public. However, these businesses must make sure they have spent the money necessary to learn about and abide by the many compliance requirements imposed by the government and/or their investors. In addition to keeping them out of jail, this will provide them an edge over their rivals.19 It is clear from the aforementioned data that cryptocurrencies have always posed a problem for anti-corruption efforts. Furthermore, as the new phenomenon has been attracting more and more users, many of whom are highly inventive, a growing number of abusive practices have been uncovered, making it clear that the discussion on anti-corruption measures can no longer be put off. Regarding theft, from an anti-corruption compliance viewpoint, what is most fascinating is not the appearance of theft but rather how these stolen cryptocurrencies may be used and the acts they could fund. The higher the sums that are stolen, the more damage they may do through funding criminal enterprises. However, compliance officers are well-versed in the many strategies that may be used to fortify user deposits and reduce the frequency of assaults. The unfamiliarity with cryptocurrencies is not a security barrier, since the wrongdoings occur outside the blockchain in the supporting infrastructure. To reduce the likelihood of widespread corruption, it may be prudent to mandate stringent security measures for all exchange and trading platforms and to institute regular audits or other systems of control. Potential anti-corruption measures may be more difficult to deploy in the case of decentralized trading platforms. Given the ad hoc nature of these structures, it may be more difficult to identify the parties accountable for enforcing security requirements, which may in turn encourage even more malicious individuals to engage in such behavior. Therefore, compliance officers in these institutions have a more complicated problem and should think creatively about procedures that might effectively reduce the likelihood of such hazards.

 Trautman, L. J. (2022, November 30). The FTX Crypto Debacle: Largest Fraud Since Madoff? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4290093 19

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To make the illegal activity less enticing, it could be helpful, for instance, to create a new standard on how much over-the-counter trading might take place, which would be more desirable for the consumers and yet allow for anticipated returns. The use of a technique called “reframing” has recently attracted the attention of business leaders. When developing an anti-corruption compliance strategy, reframing may be a useful tool. The concept asks for the following20: (i) Identifying the core ideas that motivate certain business methods or models (ii) Determining the underlying assumptions that underlie those ideas (iii) Applying those ideas and beliefs to actual situations (iv) Essentially flipping the script on the original idea The importance of creative problem-solving must also be emphasized. Utilizing a fresh perspective on safety precautions in light of cutting-edge engineering is crucial. As a global, open-source, and ever-changing phenomenon (often even described as disruptive), cryptocurrencies need a fresh perspective. To define an effective anti-corruption program, it is necessary to have a comprehensive view, taking into account all possible areas of vulnerability. For example, regulating Bitcoin trading platforms is insufficient if the illicit activity occurs on peer-to-peer exchanges or elsewhere. Due to the potential that the increased availability of cryptocurrencies will inspire more users to engage in criminal behavior like ransomware attacks, compliance experts need to put themselves in the shoes of bad actors in order to define measures that could deter these players from engaging in illicit practices. To establish appropriate tax legislation, for instance, both taxation and cryptocurrency expertise is necessary. This emphasizes the importance of assembling teams whose members come from a variety of academic and professional backgrounds. Blockchain technology, which is essential to any cryptocurrency, also presents several possibilities for anti-corruption compliance. Due to its distributed design and high transaction fees, tampering with the ledger is almost difficult. An immutable audit trail provides comprehensive datasets for in-depth analysis of all prior activities, streamlining and optimizing the whole analysis process. The immutable nature of blockchain makes it possible to track every transaction and, by extension, establish the patterns that might lead to effective anti-corruption measures. The permanent record of all acts also makes it much simpler to provide evidence of illegal behavior if it ever becomes necessary to do so. One other perk comes in the form of “smart contracts,” which are self-executing algorithms built on top of the blockchain. Once implemented, smart contracts have the potential to increase the safety of many processes while also making the lives of compliance officers easier. The ransomware attacker’s instructions, for instance, may need to take the form of a smart contract. There’s no way to stop assaults like this from occurring, but at least you’d know that your bribe or instructions will be carried out as promised after you paid up. Furthermore, cryptocurrencies are dynamic and open-source

20

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technologies, requiring a coordinated and multinational approach to developing globally harmonized legislation. This might discourage dishonest behavior while encouraging creative thinking. If anti-corruption efforts are not coordinated with one another, they may be less effective since transnational criminal enterprises would likely relocate to places where they will be more welcome, reducing the effectiveness of preventative measures. Last but not the least, determining an adequate degree of control and standards is crucial. Economic development depends heavily on creative problem-solving and bold new ventures, so regulators must establish standards that are acceptable to legitimate users yet deter criminals from misusing digital currency.

Conclusion and Suggestions The promise of innovation is twofold: On the one hand, it can vastly improve upon established norms by, say, making them more efficient, inclusive, or secure; on the other hand, it poses new dangers and difficulties. Cryptocurrencies are no different; they provide a method for replacing traditional currencies in the expanding digital economy. A unique approach is not without its challenges, however, as the examples show. Both good and evil actors are drawn to the lucrative cryptocurrency market, with the latter opting to use the cryptocurrency for criminal purposes. Scams, market abuses, exchange thefts, ransomware attacks, black market transactions, and terrorist funding are just some of the corrupt behaviors linked to cryptocurrency that has been uncovered. For individuals who have long taken advantage of the absence of effective tax legislation, cryptocurrencies have become a popular means of evading taxation. In light of this, cryptocurrency discussion has risen from the fringes to the mainstream, both domestically and internationally. The potential of blockchain technology and its many applications, including cryptocurrencies, has been trumpeted by technologists for the last 15 years. Other players and investors in the cryptocurrency market felt the effects of the collapse of FTX and the numerous crypto companies it was connected to. Many FTX-related firms are dispersed across many countries, making it probable that bankruptcy procedures in the USA may drag on for years. But the facts surrounding the FTX collapse will push financial authorities throughout the globe to create solutions that work, just as they did after the high-profile frauds perpetrated by Enron, WorldCom, Adelphia Communications, and Bernard Madoff. Despite having been around for over a decade, the cryptocurrency industry is still in its infancy. There is a lack of taxonomies, standards, rules, and even standardized terminology. Due to their complexity, cryptocurrencies need to be analyzed in depth and explored in a variety of ways to determine their true potential, potential risks, and appropriate measures that could prevent corruption practices while still contributing to the sustainable development of cryptocurrency innovations. Blockchain technology uses end-to-end encryption to produce immutable transaction records, making it impossible for fraudulent or illegal activity to occur. The

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distributed nature of the blockchain’s storage makes it very difficult to attack (unlike conventional computer systems that store data together in servers). In addition, by making information anonymous and imposing access rules, blockchain may better handle privacy issues than conventional computer systems. Blockchain transactions are permanent because they cannot be altered once they have been recorded. Network members must reach agreement on the validity of a transaction before it can be added to the blockchain in the form of a “block.” Fraudsters utilize a variety of covert techniques to hide their tracks, including tampering with a company’s books, forging electronic or physical papers, and constructing phoney data files. By making all transactions in a supply chain or business network public and easy to verify, a shared digital ledger may be an effective tool for combating fraud. Participants can track the purchase and sale of assets, making it simpler to spot fraudulent activities. Furthermore, for a blockchain’s transaction records to be tampered with, a majority of the system would need to be under the control of a single person or group of people acting in concert. All around the globe, regulators are concluding that cryptocurrencies need a unified strategy, but no specifics on how this can be achieved have been supplied. Expanding anti-corruption compliance agendas to include new risks and issues relating to cryptocurrency is necessary, as a complete misunderstanding of the topic might turn an initial blessing into a significant burden. Protective measures are where compliance officers’ attention should be focused, and they need to be developed via creative thinking and outside-the-box approaches. The immutability of the audit trail provided by blockchain technology is a significant benefit that may be used to identify and categorize illegal activities.

Chapter 10

Cyberspace and Economy: Analyzing the Impact of Contemporary Cyberthreats on the Global Financial Order Rebant Juyal

“Cyberspace is becoming more complex and we need continuous Innovation to keep the space secure and resilient to threats.” Dr. VK Saraswat Member, NITI Aayog

Introduction Cybersecurity is not only a question of developing defensive technologies but offensive technologies, as well. –– Donald Trump

The development of cyberspace has been one great technological achievement of the mankind in society. The development and expansion of the cyber-enabled networks has provided humanity at large with innumerable benefits and comforts. For instance, it has enabled individuals to access information quickly by searching online databases or websites; it also allows us to connect with friends and family through social media platforms such as Facebook or Twitter; furthermore, businesses can now reach out beyond their local markets by advertising on a global scale using various digital marketing tools available on the Internet. Analyzing the advantageous use of cyberspace and cyber-enabled technologies, one could easily postulate and advance the constructive that cyberspace is none less than a driving engine for the entire society. The cyberspace today acts as a modern engine which drives the fundamental sectors of the society including the critical R. Juyal (*) Assam (Central) University, Silchar, Assam, India Rashtriya Raksha University, Gujarat, India Guru Gobind Singh Indraprastha University, Delhi, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_10

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sectors like banking, stock exchange, finances, and government operations among others. Moreover, due to its open nature, stakeholders can easily interact across borders leading toward improved collaboration among them regardless of geographical locations making business more efficient than ever before. However, even though such conspicuous technological advancements entrust humankind with enormous advantages in various spheres, they persist in having a significant bearing over core areas of security perils globally today. Among contemporaneous security susceptibilities to financial markets and the global economic order,1 cyber-enabled security threats, particularly online frauds, remain at the top rankings today.2 Due to the anonymous nature of cyberspace, threats emanating from it are consequently hard to detect and challenging to investigate. The unregulated and open architecture of the Internet enables the growth of such online financial crimes, thus making all nations subject to perilous cyber threats, consequently affecting people beyond the territorial boundaries of the designated nation. To enable us to study and explore the subject of cyber threats, it appears appropriate to arrange the subjects into their essential parts for its ability to be studied and explored, which are as follows: 1. 2. 3. 4.

Cybercrime. Cyber espionage. Cyber warfare. Cyberterrorism.

Cybercrime Cybercrime can be defined as the criminal activities that are carried out by means of the Internet or a computer. One can consider cybercrimes as the use of information technology for criminal activities.3 In cybercrime, a computer might be used in the commission of a particular offence or crime or it may even be the target. Cybercrime involves a computer and a network in the execution of the crime. Therefore, as

 See Paul Mee and Til Schuermann, “How a Cyber Attack Could Cause the Next Financial Crisis” available at https://hbr.org/2018/09/how-a-cyber-attack-could-cause-the-next-financial-crisis (last visited on December 24, 2022). 2  Jobin Sebastian and P. Sakthivel, “Cyber Terrorism: A Potential Threat to National Security in India” 7(15) Journal of Critical Reviews (2020); “How Dangerous Are Cyber Attacks?” available at https://www.ecpi.edu/blog/how-dangerous-are-cyber-attacks (last visited on December 24, 2022); Chris Sheedy, ‘Why cyber attacks are becoming more dangerous’ available at https://intheblack.cpaaustralia.com.au/technology/cyber-attacks-more-dangerous (last visited on December 24, 2022) 3  See M. Glenny, Mc Mafia: Crime without Frontiers (Random House, London, 2008). See also, Peter Grabosky, “The Global Dimension of Cybercrime”, in M.  Galeotti (ed.), Global Crime Today: The Changing Face of Organised Crime 146 (Routledge, 2005). 1

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previously said, computer may have been used in the commission of a crime, or it may be the target. Cybercrimes are illegal acts committed with the aid of computers (or where it may be the target), like phishing, counterfeiting, cyberbullying, pornography, sending a lot of emails, spamming, selling illegal items, and so on. Even though the general definition of cybercrime is “a legal mistake that can lead to criminal proceedings and punishment,” there are many different types of cybercrime. Cybersecurity is a crime that happens when a computer is used to do something illegal (like piracy, phishing, spam, child pornography, or hate crimes). Cybercriminals can use computers to get to personal information, trade secrets, or use the Internet for bad or exploitative reasons. Primarily, cybercrimes are the species of crimes, perpetrated against a person or groups of persons with the felonious goal to willfully destroy victim’s identity or inflict bodily or mental injury or loss to the victim, either directly or indirectly, through the use of contemporary telecommunication networks, namely, Internet chat rooms, emails, notice boards and groups, and mobile phones.4 Threats posed by cybercrimes are severely critical, and such crimes may threaten a nation’s security and financial health.5 The issues surrounding these sorts of crimes, including hacking, copyright infringement, child pornography, and child grooming, have gained a lot of attention.6 The issue also revolves around the critical subject of privacy since, when sensitive information is intercepted or revealed, whether properly or illegally, privacy issues arise. Furthermore, with the development of cyberspace, criminal activities over the Internet have rapidly expanded and evolved in unexpected ways. The speed, convenience, and anonymity offered by cyberspace are exploited by criminals today for committing a wide range of cybercrimes.7 The voluminous and expansive use of computer networks and cyberspace has resulted in the considerable presence of people from diverse regions of the globe on the Internet. The yield of such a considerably large virtual population in cyberspace has consequently made a large quantum of the global population vulnerable to cybercrimes. Several countries across the globe are reporting towering losses due to the cybercrime worth billions of dollars.8 Cases of cybercrime are continuously rising; many cases of cybercrimes like, data

 See “What is Cyber Crime?”, available at: https://www.youtube.com/watch?app=desktop&v=d RKMlG0KTkY (last visited on December 24, 2022). 5  Read Steve Morgan, “Cybercrime to Cost the World $10.5 Trillion Annually By 2025” Cyber Magazine (Nov. 13, 2021) available at: https://cybersecurityventures.com/hackerpocalypsecybercrime-report-2016/ (last visited on December 24, 2022). 6  Supra note 28 7  See Filippo Parodi, “The Concept of Cybercrime and Online Threat Analysis” 2 International Journal of Information Security and Cybercrime 59 (2013). 8  See James Lewis, “Economic Impact of Cybercrime-No Slowing Down” 5–9 (February, 2018). See also, Center for Strategic and International Studies, “Net Losses: Estimating the Global Cost of Cybercrime: Economic Impact of Cybercrime” (June, 2014). 4

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fraud, hacking of personal accounts, and many others have been reported.9 Private entities, critical information infrastructure (CII), and many others face severe risks from cybercrimes.10 Cybercriminals are embracing innovative techniques for executing diverse criminal activities in cyberspace.11 Some of the cybercrimes are as follows: 1. Software piracy wherein the cyber criminals do unlawful copying of original software or even making and eventually selling such fake versions, thus violating the law governing such regime and causing staggering potential losses to the software owner. Online copyright violations, trademark infringements, and online computer theft of source code, among others, can also be considered as offences similar to the above discussed specie of the cybercrime. The offence of software privacy causes significant financial loses to the society (“Over $50 Billion Lost to Software Piracy,” 2010). 2. Salami attacks may be understood as a methodology of cybercrime, thus making it a specie of cybercrime to commit acts of financial crimes. The goal under such attacks is to make the changes so small that no one would notice them even if they happened just once. For example, if a bank employee puts a program on the server that takes a small amount of money (like $5 per month) from each client’s account, this is an example. This unapproved debt probably won’t be noticed by the account holder, but the bank employee will make a lot of money each month. Cybercriminals therefore, in case of salami attacks, “steal money or resources from financial accounts on a system one at a time,” and such attacks are thus eventually noticed when the aggregation of minor attacks results into monumental damages causing it to be categorized as a sturdy attack. 3. Online gambling and money laundering: Online gambling today has taken over as one of the best spots and actually has proved to be a gamechanger for unlawful

 See Karishma Mehrotra, “PM Narendra Modi’s Twitter account hacked by ‘John Wick’” The Indian Express (Sep. 3, 2020) available at: https://indianexpress.com/article/india/twitter-accountpm-narendra-modi-hacked-6580967/ (last visited on December 24, 2022). Also see, ANI, “Twitter accounts of Obama, Biden, Elon Musk, Bill Gates and others hacked to run Bitcoin Scam”, The Economic Times (July 16, 2020) available at: https://economictimes.indiatimes.com/tech/internet/ twitter-accounts-of-obama-biden-elon-musk-bill-gates-and-others-hacked-to-run-bitcoin-scam/ videoshow/76990591.cms?from=mdr (last visited on December 24, 2022); ‘JBS: Cyber-attack hits world’s largest meat supplier’ BBC News (June 4, 2021) available at: https://www.bbc.com/news/ world-us-canada-57318965 (last visited on December 24, 2022). 10  See Scott Steinberg, “Cyberattacks now cost companies $200,000 on average, putting many out of business” CNBC (Oct. 13, 2019) available at: https://www.cnbc.com/2019/10/13/cyberattackscost-small-companies-200k-putting-many-out-of-business.html (last visited on December 24, 2022). 11  See Erika Kraemer-Mbula, Puay Tang, et al., “The cybercrime ecosystem: Online innovation in the shadows?” 80 Technological Forecasting and Social Change 541–555 (2013). See also, Harsh Mehta, “Stay alert! Hackers’ most innovative ways to clean your bank accounts” The Economic Times (Dec. 11, 2019), available at: https://bfsi.economictimes.indiatimes.com/news/banking/ stay-alert-hackers-most-innovative-ways-to-clean-your-bank-accounts/72467533 (last visited on December 24, 2022). 9

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laundering of money (Bradshaw, 2020a). Today several websites have emerged in cyberspace that offers avenues for online gambling. All such websites are hosted on servers of other countries and enable easy laundering of money through unlawful channels. Billions of US dollars are being annually laundered through these websites (Fiedler, 2013). In fact, many of these sites are thought to be fronts for laundering money. Online, people have talked about hawala transactions and laundering money. Furthermore, not only through online gambling, money laundering is also being practiced through online gaming as well which warrants immediate intervention of the state to protect the economic operations of the society from being impacted (Bradshaw, 2020b). 4. Falsification: People use computers, printers, and scanners to make fake invoices, postal and entry labels, brand sheets, and other documents. They are made with computers, scanners, and printers that are of high quality. This includes stealing information from computer hard drives, removable storage media, etc. 5. Stealing of identity remains to be one of most practiced cybercrimes causing significant financial losses and hardships to the people. Under the subjected specie of the cybercrime, hackers attack the target computer by writing or using ready-made computer programs. Hackers steal financially sensitive information (like card details, bank account, among other identical subjects) of attackers to make money for themselves (Zorz, 2022). They, thus, steal credit card information, move money from different bank accounts to their own account, and then take the money out. Incidents of such form of cybercrime are continuously rising in the country and cause egregious financial and other damages to the people (“Types of Financial Crimes you must be aware of,” 2022). 6. Investment fraud: These frauds are also addressed as securities fraud or equity fraud and investment fraud. These frauds could be understood as a dishonest as well as unlawful practice in the stock markets wherein by violating the securities laws, on the basis of false information, investors sell and at times even buy their respective shares. Such crimes often lead to staggering financial losses to the people. Therefore, it remains a matter of patent clarity that cybercrimes cause significant financial damages to the society at large. However, governments across the globe have taken enormous measures to address the issues and challenges of cybercrime like the Indian Parliament amending the IT Act 2000 providing legislative provisions for cybercrime, the constitution of the Indian Computer Emergency Response Team that issues alert, as well as advisories with regard to the latest cyber threats, countermeasures, etc. However, more steps must be taken considering the complex and dynamic nature of cybercrimes which are not limited to a particular country’s geographical boundary. Categories of cybercrimes may also be included like cyber trespass, cyber deception, cyber thefts, cyber pornography, cyber violence, and others.

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Cyber Espionage Cyber espionage is the act of using a computer network to gain unlawful access to confidential information from the computer of another person.12 Cyber espionage is a form of cyberattack that involves stealing of classified sensitive data or intellectual property by an anonymous identity, to provide an advantage to a competitor or government entity; these spies make use of advanced persistent threats or apportion APTs (advanced persistent threats) to penetrate unsuspecting government in corporate networks without being noticed.13 Cyber espionage acts are performed to extract confidential information from the government or other important organizations. Cases of cyber espionage have been increasing continuously where cyber-enabled illegal abstraction of data,14 intellectual properties,15 and trade secrets worth millions of dollars are being accomplished.16 The target base of cyber espionage has grown to include telecommunications companies, hotels, and even universities today.17 Cyber espionage in addition to being inexpensive is also easy to commit and knotty to prove with certitude; cyber espionage may be done by an insider or an outsider by exploiting the vulnerabilities in the cybersecurity of an organization.18 The most gripping instance of cyber espionage was the hacking of PMO’s website  Supra note 12 at 66  Read Christina Parajon Skinner, “An International Law Response to Economic Cyber Espionage” 46(4) Connecticut Law Review 1167 (2014). 14  See Bloomberg, “Data of 100,000 Singapore defence personnel possibly ‘compromised’ South China Morning Post (Dec. 22, 2021) available at: https://www.scmp.com/news/asia/southeastasia/article/3043135/cyberattack-data-singapore-defence-personnel-possibly (last visited on December 24, 2022); Medha Basu, “Singapore Ministry of Defence hacked with personal data stolen” Gov Insider (March 1, 2019)available at: https://govinsider.asia/digital-gov/singaporeministry-of-defence-hacked-with-personal-data-stolen/ (last visited on December 24, 2022); “Singapore prime minister’s website defaced by hackers” CNBC (Nov. 8, 2013) available at: https://www.cnbc.com/2013/11/08/singapore-prime-ministers-website-defaced-by-hackers.html (last visited on December 24, 2022). 15  See Randolph A. Kahn, “Economic Espionage in 2017 and Beyond: 10 Shocking Ways They Are Stealing Your Intellectual Property and Corporate Mojo” American Bar Association (May 18, 2021) available at: https://www.americanbar.org/groups/business_law/publications/ blt/2017/05/05_kahn/ (last visited on December 24, 2022). 16  See Priyanka Sangani, “Increase in state-sponsored cyber security attacks on government bodies” The Economic Times (Apr. 28, 2020) available at: https://economictimes.indiatimes.com/ tech/internet/increase-in-state-sponsored-cyber-security-attacks-on-government-bodies/articleshow/75431703.cms (last visited on December 24, 2022). See also, Pierluigi Paganini, “10 Biggest Cyber Espionage Cases” available at: https://securityaffairs.co/wordpress/66617/hacking/cyberespionage-cases.html (last visited on December 24, 2022). 17  Read Richard Pérez-Peña “Universities Face a Rising Barrage of Cyberattacks” The New York Times (Jluy 16, 2013) available at: https://www.nytimes.com/2013/07/17/education/barrage-ofcyberattacks-challenges-campus-culture.html (last visited on December 24, 2022). 18  Praveen Dalal, “Cyber Espionage Policy of India” available at: http://ptlb.in/csrdci/?p=362 (last visited on December 24, 2022). 12 13

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in 201119 and also the breach of 12,000 sensitive email accounts in 2012 including mails of senior officers of the External Affairs Ministry, (MEA).20 Overseas cyberattacks have also been reported from various Indian missions abroad like in Kabul, Moscow, Dubai, Abuja, etc.21

Cyber Warfare Cyber-related risks are a global threat of bloodless war. India can work towards giving world a shield from the threat of cyber warfare. –– Narendra Modi

The rapid computerization of the world has led to a tremendous impact on national security.22 In today’s interconnected and digitalized society, almost all industries are heavily reliant on computers, and this reliance is only increasing as technology advances.23 The benefits of such technological progress are innumerable; however, with these advancements, come certain risks must be taken into account when it comes to ensuring national security. Malicious agents can use their skills to disrupt or destroy vital data networks and services, creating potential dangers for entire countries if left unchecked. In response to these threats posed by cyber warfare, many nations have begun investing resources in developing sophisticated cybersecurity strategies aimed at protecting their citizens from malicious attacks originating from abroad. These strategies involve utilizing hacking techniques by military forces against foreign countries’ key systems in order to steal or alter information or disable essential infrastructure without requiring physical engagement between the two parties

 Saikat Datta, “PMO fights largest cyber-attack” DNA (Aug. 22, 2011) available at: https://www. dnaindia.com/india/report-dna-investigation-pmo-fights-largest-cyber-attack-1578348 (last visited June 4, 2021). 20  Phil Muncaster, “10,000 Indian government and military emails hacked” The Register (Dec. 21, 2012) available at: https://www.theregister.com/2012/12/21/indian_government_email_hacked/ (last visited on December 24, 2022) 21  PTI “Indian Embassy’s Website hacked by Chinese hackers” The Economic Times, Apr. 18, 2010. See also, “Websites of seven Indian missions ‘hacked’, data dumped online” India TV (Nov. 7, 2016) available at: https://www.indiatvnews.com/news/world-websites-of-seven-indian-missions-hacked-data-dumped-online-355609 (last visited on December 24, 2022) 22  Read, Makada Henry-Nickie, Kwadwo Frimpong, and Hao Sun, “Trends in the Information Technology sector” Brookings, available at: https://www.brookings.edu/research/trends-in-theinformation-technology-sector/ (last visited on December 24, 2022); “Leading concerns about the future of digital life” available at: https://www.pewresearch.org/internet/2019/10/28/5-leadingconcerns-about-the-future-of-digital-life/ (last visited on December 24, 2022) 23   Wayne F Cascio and Ramiro Montealegre, “How Technology Is Changing Work and Organizations” 3(1) Annual Review of Organizational Psychology and Organizational Behavior 349–75 (2016) 19

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involved. Such measures provide an additional layer of protection beyond traditional air, land, and naval defenses which may not always be enough due to rapidly changing technologies used by adversaries in cyberspace operations.24 Cyber warfare is the use of hacking techniques by military forces to target foreign countries’ key systems.25 It can be used to steal or alter information or to disable essential infrastructure.26 Ultimately, while there is no one-size-fits-all solution when it comes to securing a nation’s borders, implementing comprehensive cyber warfare strategies alongside traditional defense methods will help ensure that modern societies remain safe even as they become more dependent on computers for everyday life activities. By taking proactive steps toward addressing emerging digital threats, governments can better protect their citizens while still reaping all the benefits offered through technological advancements. Moreover, one could get anxious while considering the potential outcomes of a successful cyberattack. It could be postulated that cyber warfare might emerge as the new battlefield, an unseen, invisible battlefield, where hacker teams from different nations compete. In 2010, the “Stuxnet” computer virus destroyed an underground Iranian nuclear weapons facility.27 As formerly provisioned in this research document, envisioning the operational working of the twenty-first century without computer networks and cyberspace remains incomprehensible. It is to this conceptual analysis, and note only that one can move beyond the constraints of individual doubts and counter arguments with regard to the viability and use of cyberspace in the current paradigm and say that cyberspace remains to be indispensably important for the functioning of the society and also in the life of the people today. However, the society at large significantly relies upon the operational support of the cyberspace for their day-to-day regular work. However, considering the deep involvement of the cyberspace and Internet in the daily affairs of the humankind and the operational working of the state, several instrumentalities have started to exploit the cyber web for the purpose of establishing their political power, power contest, and open warfare.28  Read, Camino Kavanagh, “New Tech, New Threats, and New Governance Challenges: An Opportunity to Craft Smarter Responses?” Carnegie Endowment for International Peace, available at: https://carnegieendowment.org/2019/08/28/new-tech-new-threats-and-new-governancechallenges-opportunity-to-craft-smarter-responses-pub-79736 (last visited on December 24, 2022). 25  IraWinkler and Araceli TreuGomes, Advanced Persistent Security: A Cyberwarfare Approach to Implementing Adaptive Enterprise Protection, Detection, and Reaction Strategies 15 (Elsevier Inc., 2017) 26  Michael Robinson, Kevin Jones and Helge Janicke, ‘Cyber Warfare: Issues and Challenges’ 49 Computers & Security 70 (2015) 27  Read, “What is Stuxnet, who created it and how does it work?”, available at: https://www.csoonline.com/article/3218104/what-is-stuxnet-who-created-it-and-how-does-it-work.html (last visited on December 24, 2022); “Stuxnet explained — the worm that went nuclear” available at: https:// nordvpn.com/blog/stuxnet-virus/ (last visited on December 24, 2022). 28  Amit Sharma, “Cyber Wars: A Paradigm Shift from Means to Ends” 34(1) Strategic Analysis 62–73 (2010); Conor MacNamara, “Power in Cyberspace  - How States Operate in the Digital 24

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The term cyber warfare in its broad and initial analysis reflects the use of cyberspace for institution, conduct, operation, or execution of warfare activities.29 The concept of cyber warfare gains significance because of several expediencies offered by this medium particularly the liberty to stay away from the physical limits of the target point. In addition, the most desirable feature of waging war in cyberspace is the attacker need not to travel long distances to cover the place of attack for physical execution of the attack as warfare activities can be administered in cyberspace just by clicking on the computer connected to the web. Consequent to this advantageous feature, the attacker gains the benefit of saving time since he or she is no more obliged to spend hours or even minutes to physically reach the predetermined target. The open architect of the conspicuous cyberspace, thus, enables the attacker to administer attack which may be situated in part of the world within few seconds or a minute. It may be said appropriately that the terror strikes of 9/11 set the tone of warfare activities in in the twenty-first century. However, this century saw the emergence of another critical front of warfare in the domain of cyberspace which we call cyber warfare.30 As previously noted in the research document, threats emanating from cyberspace offer anonymity. It is fundamentally due to this significant characteristic of warfare activities in cyberspace that several countries, particularly the developed nations, have adopted this medium to launch direct attack against one another to disrupt or destroy the other state while ensuring secrecy and simultaneously enjoying the liberty of any physical travel or physical harm.31 The world has seen a significant rise of activities identical to cyber warfare among developed countries.32 Like air, land, space, and sea, cyberspace is today recognized as a fifth dimension of warfare. NATO has also recognized cyberspace as a domain of operations for warfare.33 Cyberwarfare attacks are increasingly growing and becoming Domain” International Politics and Conflict Studies (2019) 29  See Petr Hruza and Jiri Cerny, “Cyberwarfare” 23 KBO 155 (2017). 30  See generally, Stuart Madnick, “What Russia’s Ongoing Cyberattacks in Ukraine Suggest About the Future of Cyber Warfare” Harvard Business Review (March 7, 2022) available at: https://hbr. org/2022/03/what-russias-ongoing-cyberattacks-in-ukraine-suggest-about-the-future-of-cyberwarfare (last visited on December 24, 2022). 31  Read, Katie Terrell Hanna Kevin Ferguson Linda Rosencrance, “Definition Cyberwarfare” TechTarget, available at: https://www.techtarget.com/searchsecurity/definition/cyberwarfare (last visited on December 24, 2022). 32  Tony Bradley, “Preparing for Cyber Attacks  – Strengthening Defenses Against Nation-State Threats” Forbes, (Mar. 5, 2022) available at: https://www.forbes.com/sites/tonybradley/2022/05/05/preparing-for-cyber-attacks%2D%2Dstrengthening-defenses-against-nationstate-threats/?sh=2fc959f15a10 (last visited on December 24, 2022); Dina Aldanova, “Will Russia Launch a New Cyber Attack on America?” The National Interest (May 30, 2022) available at: https://nationalinterest.org/blog/techland-when-great-power-competition-meets-digital-world/ will-russia-launch-new-cyber-attack (last visited on December 24, 2022); Dan Lohrmann, “Planning for a Nation-State Cyber Attack — Are You Ready?” Government Technology (Feb. 13, 2022) available at: https://www.govtech.com/blogs/lohrmann-on-cybersecurity/planning-for-anation-state-cyber-attack-are-you-ready (last visited on December 24, 2022) 33  North Atlantic Treaty Organisation, “Cyber Defence”, available at: https://www.nato.int/cps/en/ natohq/topics_78170.htm (Last Modified March,172,020)

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more sophisticated as well as damaging day by day.34 States and international military alliances are working in an environment of threat and tortuous detriment in cyberspace,35 triggering to prepare themselves for defending their networks against the growing sophistication of cyberattacks they face. More than 140 nations have or are in the process of ensuing their patenting as well as proficiency in cyberwarfare.36

Cyberterrorism The challenges posed by threats like terrorism, proliferation, and cyber attacks are not going away any time soon, and for our intelligence community to be effective over the long haul, we must maintain the trust of the American people and people around the world. –– Barack Obama

Cyberterrorism is the use of cyberspace for the purpose of executing politically motivated terrorist attacks. Such form of cyber threat has the unparallel potential to cause egregious damages to the society. Today various CI systems like nuclear installations, power grids, air surveillance systems, stock markets, and banking transactions are dependent upon cyberspace and, thus, are always vulnerable to attack by cyberterrorists. One may postulate that cyberterrorism as a species or a separate class of cyber threat has emerged in recently. Thus, it is a relatively new form of cyber threat where the cyberspace is exploited by the terrorists for fulfillment of their terror objectives. Though cyberterrorism and cybercrime are often analyzed and studied as a separate class of threats, cataloguing or categorizing any cyber threat as cybercrime or cyber terror attack at times proves to be an arduous task on account of the difficult complexity in “determining the identity, intent, or the political motivations of an attacker.” A key consideration of cyberterrorism is that such act affects the psyche and cognition of people.37 Cyber terror attacks have the potential to institute a significant disorder in the global order. It is in this context; cyber terror attacks are considered as act which has the  See Steve Andriole, “Cyberwarfare Will Explode In 2020 (Because It’s Cheap, Easy and Effective)” Forbes (Jan. 14, 2020) available at: https://www.forbes.com/sites/steveandriole/2020/01/14/cyberwarfare-will-explode-in-2020-because-its-cheap-easy%2D%2Deffective/#4 78e70456781 (last visited on December 24, 2022). See also, Yuvraj Malik, “World coronavirus dispatch: Govt-backed hacking on the rise amid pandemic” The Business Standard (May 28, 2020) available at: https://www.business-standard.com/article/international/world-coronavirus-dispatch-govt-backed-hacking-on-the-rise-amid-pandemic-120052800843_1.html (last visited on December 24, 2022). 35  FP Techno, “From Sudan to Cyber, Secret War with Iran Hots Up” First Post (Nov. 7, 2012) available at: https://www.firstpost.com/tech/news-analysis/from-sudan-to-cyber-secret-war-withiran-hots-up-3613385.html (last visited on December 24, 2022 36  Susan W. Brenner and Leo L. Clarke, “Civilians in Cyberwarfare: Casualties” 13 SMU Sci. & Tech. L. Rev 249 (2010) 37  Ibid 34

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capacity to create significant law and order challenges. It becomes the duty of the global community at large particularly the governments and the international organizations at the helm of affairs to establish due legal measures and instruments capable of tackling the dreadful menace of cyber terror attacks. Therefore, necessary reforms in the international legal order and national legal orders must be instituted by respective state governments at domestic and international level to empower the legal system to deal which cyber threats particularly the cyberterrorism. Further, the law enforcement agencies involved in the said task must be given due legal power to ensure complete dismantlement of cyberterrorism. Supplementarily, complete empowerment of the agencies in this regard will act as a deterrent to cyber terror activities. Dangers created by cyberterrorism warrant immediate attention of administrators, military strategists, and legislators. While people agree on its rough definition of the topic, no universally acceptable definition for cyberterrorism exists today.38 Therefore, for understanding cyberterrorism, different views over the elemental constituents of cyberterrorism and its definition must be studied. Definition of Cyberterrorism Barry Collin, the person who first coined the term cyberterrorism by the convergence of two terms cyberspace and terrorism, was a senior research fellow at the Institute for Security and Intelligence in California. The term cyberterrorism after its first use by Barry Collin has blossomed in terms of its continuous usage in society over a period of time. It consists of two integral elements which are cyberspace and terrorism. As per Collin, “Cyberspace may be conceived of as that place in which the data moves and computer program functions.”39 The term terrorism is, however, a much-used term with large number of definitions. According to Bozdemir, “Terrorism is a strategic approach which is for political purposes; it identifies itself with a method that includes the use of organized, systematic and continuous terror.”40 The US Code defines terrorism as “Premeditated,

 UNODC, ‘Counter Terrorism: Introduction to International Terrorism’ in Education for Justice: University Model Series, United Nations (2018) available at: https://www.unodc.org/e4j/en/terrorism/module-1/key-issues/intro.html (last visited on December 24, 2022). The article states: When considering the concept of terrorism, it is important to note that as yet, there is no global consensus regarding an agreed definition of the term “terrorism” for legal purposes, (…) the impact of a lack of a universally agreed global legal definition of the term may have had on the effective investigation and prosecution of terrorist offences. 39  Maura Conway, “Cyberterrorism: The Story So Far” 2 Journal of Information Warfare 36 (2003) 40  Murat Dogrul, Adil Aslan, et al., “Developing an International Cooperation on Cyber Defense and Deterrence against Cyber Terrorism” in C.  Czosseck, E.  Tyugu et  al. (eds.), 2011 3rd International Conference on Cyber Conflict: Proceedings 31(IEEE Publications, 2011). Also see, Martha Crenshaw Hutchinson, “The Concept of Revolutionary Terrorism” 16 Journal of Conflict Resolution 384 (1972) 38

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politically motivated violence perpetrated against non-combatant targets by sub national groups or clandestine agents, usually intended to influence an audience.”41 Meanwhile, Title 22 of the US Code, Section 2656f(d)(1), provides for the definition of the term “international terrorism’ as “terrorism involving citizens or the territory of more than one country.” There are numerous prices of literature providing different definitions for the term cyberterrorism, but the term cyberterrorism could be narrowly defined by combining the above two definitions as “Premeditated, politically motivated attacks by sub national groups or clandestine agents against information, computer systems, computer programs and data that results in violence against non-combatant targets.”42 Cyberterrorism is the convergence of terrorism and cyberspace, it is generally understood to mean unlawful attacks and threats of attacks against computers, networks and information stored therein when done to intimidate or coerce a government or its people in furtherance of some political or social objectives.43

The Government of Japan considers that “cyberterrorism aims at seriously affecting information systems of private companies and government ministries and agencies by gaining illegal access to their computer networks and destroying data.”44 “Cyberterrorism involves the usage of computer technology for terrorist purposes Cyberterrorism as being considered as a small landmass of the vast territory of terrorism uses information as a target or means or even a weapon in order to achieve the predetermined terrorist goal. It is the unlawful disruption or an unlawful destruction of digital property to coerce or intimidate governments or societies in the pursuit of goals that may be religious, political or even ideological.”45 However, cyberterrorism could also be defined as “an act of politically motivated or influenced violence which involves physical damage or even personal injury occasioned by a remote digital interference with technology systems.”46 However, the scope of cyberterrorism is not only limited to only damaging systems, but it also includes the task of intelligence gathering, disinformation, etc. Cyberterrorism exists even beyond the boundaries of cyber web and includes physical devastation of any system of devices or a device or any process with an information component. The North Atlantic Treaty Organization (NATO) has defined cyberterrorism as “cyberattack using or exploiting computer or communication networks to cause

 Title 22 U.S. Code S.2656f, 2000  Mark M. Pollitt, “Cyberterrorism – Fact or Fantasy” 1998(2) Computer Fraud & Security 3(1998) 43  R. Rajan, “Cyber Terrorism”, in R. Rajan (ed.), Cyber Terrorism and Military Preparedness: An International Perspective, Cyber Terrorism 7 (Sumit Publications, 2016) 44  FBIS, “Government Sets Up Anti-Cyberterrorism Homepage” Sankei Shimbun, April 10, 2002 45  Major Bill Nelson, Major Michael Iacobucci, et  al., Cyberterror Prospects and Implications (Cebrowski Institute Publications, Monterey, California, 1999) 46  Professor Daniel Ralph, Dr. Andrew Coburn, et al., “Cyber Terrorism: Assessment of the Threat to Insurance” Cambridge Risk Framework series 6 (2017) 41 42

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sufficient destruction or disruption to generate fear or to intimidate a society into an ideological goal.”47 However, the most widely discussed and accepted definition of cyberterrorism is the definition given by Professor Dorothy E. Denning who considers “cyberterrorism as a form of unlawful or illegal attack against computer networks in order to cause violence against any property or person or persons, and as a result, to coerce a government.”48 Professor Dorothy E. Denning defined cyberterrorism in her testimony on the subject before the Special Oversight Panel on Terrorism of the US Congress’s House Armed Services Committee in the following statements: Cyberterrorism is the convergence of cyberspace and terrorism. It refers to the unlawful attacks and threats of attacks against computers, networks and the information stored therein when done to intimidate or coerce a government or its people in furtherance of political or social objectives. Further, to qualify as cyberterrorism, an attack should result in violence against persons or property, or at least cause enough harm to generate fear. Attacks that lead to death or bodily injury, explosions, plane crashes, water contamination, or severe economic loss would be examples. Serious attacks over critical infrastructures could be acts of cyberterrorism, depending on their impact. Attacks that disrupt nonessential services or that are mainly a costly nuisance would not.49

Terrorism and Its Impact on Cyberspace and Global Financial Order Cyberterrorism as a specie of cyber threats remains to be serious security threats to the world. The humongous threat caused by cyberterrorism has been censoriously threatening national and international security since the emergence of the Internet. Internet that developed as a decentralized network of communication today serves to the biggest benefit of terrorists, thus erecting the parlous challenge of cyberterrorism before every organization, government, etc. Cyber technology has developed at a rapid pace with the advent of time, and likewise, its menace has also grown. In this modish era, there is a growing dependence of critical infrastructures (CIs) over cyber networks for their functioning, and such incrementing interdependence and multiplying complexities of cyber networks have incremented the potential scope of a terrorist cyberattack’s footprint over the society. In various countries, many critical infrastructures are either having less protection or no protection.50  See Peter W. Singer, “The Cyber Terror Bogeyman” available at: https://www.brookings.edu/ articles/the-cyber-terror-bogeyman/ (last visited on December 24, 2022). Also see, Margaret Rouse, “Cyberterrorism” available at: https://searchsecurity.techtarget.com/definition/cyberterrorism (last visited on December 24, 2022). 48  Dr. Rebekah Tanti-Dougall, “Cyber Terrorism: A New Threat Against the Maritime Industry” available at: https://www.lexisnexis.com/legalnewsroom/public-policy/b/public-policy-law-blog/ posts/cyber-terrorism-a-new-threat-against-the-maritime-industry (last visited on December 24, 2022). 49   See John J.  Klein, “Deterring and Dissuading Cyberterrorism” 9 ASPJ AFRICA & FRANCOPHONIE 22 (2018). 50  See Michele Lo, Critical infrastructures, et  al., “Cybersecurity of Critical Infrastructure”, in Markus Christen, Bert Gordijn, et al. (eds.), The Ethics of Cybersecurity, 159–68 (Springer, 2020). 47

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Consequently, a cyberattack by terrorists can be very deleterious for society. The dreadful and deleterious impact of cyberterrorism can be understood from the words of the then chancellor of exchequer Mr. George Osborne on cybersecurity at government communications headquarters, which are as follows: It is right that we choose to invest in our cyber defences even at a time when we must cut other budgets. For our country, defending our citizens from hostile powers, criminals or terrorists, the internet represents a critical axis of potential vulnerability. From our banks to our cars, our military to our schools, whatever is online is also a target. (…). The stakes could hardly be higher – if our electricity supply, or our air traffic control, or our hospitals were successfully attacked online, the impact could be measured not just in terms of economic damage but of lives lost. (…). It is one of the many cyber threats we are working to defeat. (…) ISIL are already using the internet for hideous propaganda purposes; for radicalisation, for operational planning too. (…). Getting cyber security right requires new thinking. Citizens need to follow basic rules of keeping themselves safe – installing security software, downloading software updates, using strong passwords. Companies need to protect their own networks, and harden themselves against cyber-attack.51

The above stated speech of the then chancellor of exchequer of the UK postulates the critical impact which the cyberterrorism poses for the society at large. After analyzing the texts of the speech of the chancellor, it remains a matter of no dispute that cyberterrorism poses a humongous risk to the security of any nation. The chancellor’s speech, “It is right that we choose to invest in our cyber defences even at a time when we must cut other budgets,” reflects how pertinent it becomes for the state and the government in particular to defend their cyberspaces irrespective of the availability of funds. As spending appropriate amounts for defense forces and over matters concerning defense of the nations has remained an acceptable norm for the governments across the globe on the similar, the above discussed statement of the chancellor reflects that even though the government of the UK at that point of time went for several austerity measures in its spending, considering the critical importance accorded to the subject, the government decided to spend more money and ensure adequate investment even though it was at expensive cost. Such notion also reflects how imperative it is to curb the menace of such cyber threat to protect the economy and security of the country since it is upon such consideration only that the government decided to invest significant state financial resources over it. Furthermore, the descriptive account put forth by the chancellor in his speech with regard to the critical threat hovering over their critical infrastructures like electricity connections and air traffic control, among others, reflects how grave and what censorious degree of threat prevails over the critical infrastructure of the society. Further, it remains a matter of utmost clarity that any damage to such critical infrastructure of the society can rupture down the financial markets heavily. Supplementarily, the subsequent portion of the speech concurrently also demonstrates the attractive interests of terrorists and terror groups like ISIL and others in  See George Osborne, “Chancellor’s speech to GCHQ on cyber security”, National Cyber Security Plan (Government Communications Headquarters, Nov. 17, 2015), available at: https:// www.gov.uk/government/speeches/chancellors-speech-to-gchq-on-cyber-security (last visited on December 24, 2022). 51

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exploiting the critical infrastructure of the society to advance their dreadful motives of spreading terrorism in the society. The chancellor also notes that even though terrorists are not yet capable of causing loss of life solely on account of a cyberattack, they are concentrating all their resources and utilizing all their intellectual and other relevant machinery to do their best for equipping themselves or making them capable of harming the life of the people. These postulations, therefore, fundamentally reflect how grave, serious, and dreadful is the threat of cyberterrorism over the nation, society, and the common citizens residing in the society who are the general masses and also over the global economic order. To this determination, the broad and specific study as well as analyses of the speech of the chancellor manifests how intimately is the threat of cyberterrorism connected with the crucial affairs of the society including the critical infrastructure of the society, national security interests, and global economy, among others. Cyberspace and Economic Operations Cyberspace and the economic operations of the society are intimately connected with each other having said that there are several economic operations of the society which are fully dependent on the cyberspace. Going further into the analysis, the author would find no hesitation in noting that there would hardly remain any financial institution in the world which would not require the assistance and aid of the cyberspace. Cyberattacks launched by terror outfits have large detrimental impact on cyberspace, thwacking a large part of the world population, and can also cause serious economic damages and loss of data.52 Further, the act of cyberterrorism by terror outfits is regimented in the case launched against a particular organization with utmost precision and concatenation in order to mitigate harm enough to compromise the operation of an organization. Further, destroying the critical infrastructures of the country also remains as one of the fundamental objectives of cyberterrorists.53 Another objective of cybercriminals also remains to commit theft of technology,

 See Jian Hua and Sanjay Bapna, “The economic impact of cyber terrorism” 22 The Journal of Strategic Information Systems 175 (2013). 53  Jorge Valero, “Hackers bombard aviation sector with over 1000 attacks per month” Euractiv (July 11, 2016), available at: https://www.euractiv.com/section/justice-home-affairs/news/hackers-bombard-aviation-sector-with-more-than-1000-attacks-per-month/ (last visited on December 24, 2022). The article states: The fear is that one day terrorists, clicking on a laptop, will be able to crash planes or make them disappear from radar screens. Also see, Danielle Stormy K. Friday, “Cyber-Terrorism for Beginners: A Rising Threat” Homeland Security Today (June 24, 2020) available at: https://www.hstoday.us/subject-matter-areas/cybersecurity/cyber-terrorism-forbeginners-a-rising-threat/ (last visited on December 24, 2022); Aviv Cohen, “The Applicability of Counter-Terrorism conventions to cyberterrorism” 9 JIBL 92 (2009). 52

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privilege, or secret information,54 among others. The study of the above facts and analysis provides us an effective understanding with respect to the dreadful impact of the cyber threats and its potential to ruin the global economic order. Dangers created by cyber threats warrant immediate global consideration. Though states have adopted several measures, recently, India has collaborated with several countries against terrorism including Israel and the UAE. The memorandum of understanding (MOU) and agreements/framework for cybersecurity cooperation have been signed with more than 15 countries. India has been an active participant at the UN. Today, cybersecurity is on the agenda of most multilateral discussions and financial institutions including the World Economic Forum. However, these steps are not sufficient enough in themselves. The rate over progression of effective international cooperation among the states can make us conclusive to undertake that states have been ineffective in advancing a consensual approach to effectively deal with the challenge of cyber threats. Despite cyber threats being acknowledged internationally as a precarious risk to global peace, no universally agreed definition for any of the elements of cyber threats exists today.55

Conclusion The world is virtually dependent on cyberspace for the majority of its roles, functions, and operations. This dependence of the world over cyberspace at times is also referred to as overdependence since, for almost all functions, the world today has constrained itself to be dependent on cyberspace. From manufacturing a product to disposal of the waste, the world significantly relies upon cyberspace. Furthermore, the dependence over cyberspace is not limited to ordinary operations of the society; on the contrary, the critical infrastructures of the society significantly rely upon the cyberspace and cyber-enabled functions for their working and performance. This significant dependence of infrastructure, particularly the critical infrastructure of the society, has made the critical infrastructure extremely vulnerable to cybersecurity threats and attacks. Since we know that the fundamental objective of any cyber threat is in addition to crippling down the basic infrastructure of the society to cause egregious damages and harm to the general masses, therefore attacking the critical infrastructure of the society which is responsible for executing the critical operations of the society would cause extreme hardship and significant financial losses to the public which enables terrorists to satisfy their ill motives.

 Aviv Cohen, “The Applicability of Counter-Terrorism conventions to cyberterrorism” 9 JIBL 92 (2009) 55  UNODC, “Counter-Terrorism” available at https://www.unodc.org/e4j/en/terrorism/module-1/ key-issues/intro.html, (last visited June 4, 2021). It states: When considering the concept of terrorism, it is important to note that as yet, there is no global consensus regarding an agreed definition of the term “terrorism” for legal purposes. 54

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To understand the situation better, it would be appropriate to give a context of practical examples. The air traffic control system, which is mandated with the crucial task of regulating the traffic in the air, performs its function on the basis of cyber-enabled technology. Therefore, if a cyber terror attack ruins the functioning and operation of the air traffic control, then such cyber terror attack can cause massively humongous loss of life of the people. Henceforth, the severity of this cyber dependence upon the critical infrastructure service society consequently makes them highly vulnerable to cyber terror attacks. Furthermore, the impact of such cyberattack over the civil aviation industry from the financial lens shall also be huge. Thus, securing the critical infrastructure of the society from such formidable cybersecurity threats remains to be the foremost and central role of the state, the administration, and the citizens as a whole. However, even though there remains a persistent threat to the function of such critical infrastructures, there remains to be an unprecedented negligence on the part of the state and relevant authorities in instituting, due to security apparatus, mechanism infrastructure for their necessary protection. On account of such negligence cyber threats particularly online financial frauds are rising continuously. This continuous rise in the threat of cyber threats poses a critical global challenge since it has the potential to derange the cumulative global financial order currently enforceable. Considering the descriptive account detailed above, we can say that cyber threats thus remain a detriment to a secured global economic and financial order. Therefore, there remains no doubt to say that cyber threats pose a serious threat to global security. The Internet is developed as a great tool of interaction and communication without any restriction over decentralization and limit to geographical boundaries of any country. Therefore, threats emanating from cyberspace particularly online financial frauds must be dealt with effective international regulation and cooperative cybersecurity framework. Further, with the incorporation of the cyberspace as the fifth dimension of warfare, the chances of cyber terror attacks rising to the level of armed attacks are always there. The issue of cyberterrorism must be dealt through an effective international regulation and the cooperative cybersecurity must be augmented among all the nations. Additionally, considering the transnational character of the cyberspace and the detrimental impact of cyber threats over international financial order, the world must strengthen the international law to deal with jurisdiction related and other identical issues timely and effectively in cases of online financial frauds. International organizations like the United Nations and Shanghai Cooperation Organisation, among others, along with the support of domestic nations, that is, the member states of such organizations, must undertake determined steps and diplomatic efforts to ensure the creation of a rule-based legal order in cyberspace to secure the global political as well as financial interests and protect the orientation of the current economic order from any cyberattack. Efforts must be made to ensure a rule-based cybersecurity operators and rule-based cyberspace. Creation of such rule-based order within the domain of cyberspace will enable effective operation and utilization of the resources available in cyberspace by the general public.

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At the domestic level, India must also think to reform its legal framework or legislate an exclusive cybersecurity legislation, which may provide detailed provisions for diverse kinds of online frauds perpetuating in the transnational cyberspace. The Information Technology Act was drafted by the legislature several years ago for the purpose of providing the legislative framework for e-commerce activities. Hence, the union legislature of our nation must consider legislating a new law dedicated only to the domain of cybersecurity and financial security challenges in cyberspace. Threats emerging from the cyberspace are proliferating at a blistering rate. In view of the rising dependence of global economy including the international financial system, steps to secure the cyberspace from online financial crimes remains one of the most important needs of the hour. Thus, the world at large must come together to take decisive steps in the said direction.

References Bradshaw, T. (2020a). Money-laundering by video games: Financial times. Yaleglobal Online; Yale University. https://archive-yaleglobal.yale.edu/content/money-laundering-video-gamesfinancial-times Bradshaw, T. (2020b, January 2). Video games are easy channel for money launderers. Financial Times. https://www.ft.com/content/4658d340-­24f6-­11ea-­9a4f-­963f0ec7e134 Fiedler, I. (2013). Online gambling as a game changer to money laundering? [SSRN scholarly paper]. https://doi.org/10.2139/ssrn.2261266. Over $50 billion lost to software piracy: Report. (2010, May 11). The Economic Times. https:// economictimes.indiatimes.com/tech/software/over-­50-­billion-­lost-­to-­software-­piracy-­report/ articleshow/5916715.cms?from=mdr Types of financial crimes you must be aware of: Identity Theft and Investment Fraud. (2022, March 31). The Economic Times. https://economictimes.indiatimes.com/wealth/personal-­ finance-­news/types-­of-­financial-­crimes-­you-­must-­be-­aware-­of-­identity-­theft-­and-­investment-­ fraud/articleshow/90517939.cms Zorz, Z. (2022, March 23). Internet crime in 2021: Investment fraud losses soar. Help Net Security. https://www.helpnetsecurity.com/2022/03/23/2021-­internet-­crime/

Chapter 11

The Impact of Accounting Fraud Which Leads to Financial Crimes: Accounting Fraud Yana Ustinova

Introduction Constantly increasing development of technology, global economic crisis, and consequences of the COVID-19 pandemic lead to a growth of quantity and quality of economic crimes in general and frauds in particular. The impact of frauds could not be overestimated. According to the “Occupational Fraud 2022: A Report to the Nations” by ACFE,1 companies lose about 5% of their revenue to fraud each year, and median loss per case is USD 117000, while average loss per case is USD 1783000. Relying on “the fraud tree” by ACFE, the financial statement fraud is the special case of occupational fraud which includes corruption and assets misappropriation as well. Apart from other types of fraud, financial statement fraud schemes, in which the perpetrator intentionally causes a material misstatement or omission in the organization’s financial statements, are the least common (9% of schemes) but costliest (USD 593,000) category. The classification of fraud, named above, is quite conditional as there are a lot of overlaps between different types of fraud. For instance, 2% of fraudsters misappropriated assets and committed financial statement fraud, 1% engaged in both corruption and financial statement fraud, and 5% included all three categories in their schemes. Regarding the report of ACFE, the percentage of all registered fraud cases related to financial statement fraud depends on industry and varies from 18% in construction; 13% in food service and hospitality; 12% in manufacturing, education, and

 Occupational Fraud 2022: A Report to the Nations by ACFE. www.acfe.com

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information; 11% in banking and financial services; to 5% in insurance and 4% in retail. The prevalence of fraud was tested by PwC also. According to PwC’s Global Economic Crime and Fraud Survey 2022,2 among companies with global annual revenues over USD 10bn, 52% experienced fraud during the past 2 years; within that group, nearly one in five reported that their most disruptive incident had a financial impact of more than USD 50 m. At the same time, only 38% of smaller companies (with annual revenues less than USD 100 m) experienced fraud, and one in four of them faced a total impact of more than USD 1 m. Moreover, PwC estimated the ration of accounting/financial statement fraud up to the level of 24% in industrial manufacturing. Thus, fraud in general and particularly in financial statement niche nowadays is currently having a great negative influence on companies all over the world. This impact can be explained not only by stolen money or assets, but also by the undermined confidence of the shareholders of these companies, the damaged reputation of these companies, the increase of the cost of capital for them, the decrease in confidence on the part of current and potential partners, the restoration of which seems unlikely in the near future. The aim of this article is to dig deep into theory of fraud, its factors and techniques, its consequences, methods of its detection, and recommendations how to avoid it.

Literature Review Topic of fraud and accounting fraud has been attracting a lot of researcher’s attention for several decades. In this research, we will focus mainly on recent papers which proceed to shed light on this topic. The concept of fraud and accounting fraud and the place of accounting fraud among other types of fraud were explored by Bekiaris and Papachristou (2017), Kizil et  al. (2021), Tutino and Merlo (2019), Jofre and Gerlach (2018), Huber (2017), Montesdeoca et al., 2019); etc. Works of Siska and Julhelmy (2020), Tutino and Merlo (2019), Jofre and Gerlach (2018), etc. were devoted to pointing out the boarders between accounting fraud and creative accounting, to marking their common methods and techniques, to testing their interconnections with tax legislation. A multitude of papers focused on different approaches to detect accounting fraud as the negative manifestation of creative accounting, e.g., Tutino and Merlo (2019), Sun et al. (2021), Jofre and Gerlach (2018), Hamal and Senvar (2021), Siska and Julhelmy (2020), and Vousinas (2019).

 PwC’s Global Economic Crime and Fraud Survey 2022. www.pwc.com/fraudsurvey

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A plenty of articles elaborate theory of fraud and suggest different geometric figures to explain factors of fraud from company outside environment to fraudster personality, e.g., Bekiaris and Papachristou (2017), Pamungkos and Achmad (2018), Singh and Amat (2020), Wijayani and Ratmono (2021), Kaminski (2020), Huber (2017), Ajekwe and Ibiamke (2017), Yu and Rha (2021), Tommasetti et al. (2021), and Mustafa and Khan (2020). Some papers are devoted to exploration of interconnection between accounting fraud and tax evasion (Akpanuko & Umoren, 2018; Bayavanda & Karunakaran, 2021; Blazek, 2021; Khaneja & Bhargava, 2016; Vrzina, 2017; Wali, 2021), etc.). And finally it is worth mentioning that nowadays a number of papers describing some tools in order not to become a victim of fraud seem to be increasing rapidly. Some authors have tested special techniques on how to prevent accounting fraud and errors, including internal and external audit (Akman et al., 2020; Fernandhytia & Muslichah, 2020; Kizil et al., 2021; Putri & Irwandi, 2016; Setiawan, 2018). Although the topic of accounting fraud has attracted a lot of attention from researcher’s side, there are still some gaps that cause the relevance of the topic and necessity for its further development.

Results and Discussion The Concept of Accounting Fraud In order to start, it is worth separating accounting fraud from errors and creative accounting. They seem similar as they ultimately lead to distortions in financial statement, but there is a huge difference between them. Either error or fraud is an incorrect and incomplete misrepresentation of information about assets in the business, which do not reflect the reality of financial statements (Kizil et al., 2021, p. 96). Nevertheless, in contradiction to error, fraud is intentional, deceptive behavior in order to gain consciously interests. Meanwhile, an accounting error is a mistake in the process of systematically recording, categorizing, summarizing and presenting, and disclosing financial information because of ignorance and negligence. One of the best definitions of accounting fraud was given by AICPA in 20023: “… fraud in an intentional act that results in a material misstatement in financial statements ….” The same idea was stated in the point 2 of IAS 240 (revised) “The auditor’s responsibilities relating to fraud in an audit of financial statements”: The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.

 American Institute of Certified Public Accountants AICPA (2002) “Consideration of fraud in a financial statement audit. Statement on Auditing Standards No 99” 3

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Further, in the Application to IAS 240, it has been explained that fraudulent financial reporting may be accomplished by the following: • Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial statements are prepared. • Misrepresentation in, or intentional omission from, the financial statements of events, transactions, or other significant information. • Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure (part A.3). Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Fraud can be committed by management overriding controls using such techniques as the following: • Recording fictitious journal entries, particularly close to the end of an accounting period, to manipulate operating results or achieve other objectives. • Inappropriately adjusting assumptions and changing judgments used to estimate account balances. • Omitting, advancing, or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period. • Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements. • Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. • Altering records and terms related to significant and unusual transactions (part A.4). Thus, accounting fraud, by definition, is the deliberate manipulation and alteration of financial records and statements. It is committed to disguise the true financial position of a company and is done with the aim of –– Pleasing shareholders and investors by displaying the financial performance of the firm to be better than what it really is. –– Attempting unlawful tax evasions by misstating assets and liabilities or revenues and expenses. –– Gaining competitive advantage in the market. –– Obtainment of monetary benefit by personnel. –– Manipulating the stock price of the company. –– Giving leverage to other crimes. The concept of creative accounting has the positive (overcoming archaic and controversial accounting standards, enriching ongoing practice) and the negative (deviating from accounting standards, using and abusing accounting loopholes to mislead users of financial statement and get some illegal benefits out of it) aspects. One of the most successful definitions of creative accounting in its negative aspect was given by Naser (1993) , p.  2, 59. “Creative accounting is … the process of manipulating accounting figures, using the weak links of the rules and taking

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advantage of the same in its favor as required by the management.” As Jofre & Gerlach, (2018), p. 2) have stated, “accounting fraud may take the form of either direct manipulation of financial items or via creative methods of accounting.” So, the negative aspect of creative accounting includes accounting fraud, uses the same instrument, and can be detected with the same approaches. Thus, summarizing the stated above, the border between accounting error, accounting fraud, and creative accounting, as all of them might have used absolutely the same tools and led to absolutely the same impact on financial statements’ indicators, lies on intention to get some benefits out of stakeholder’s deception. Core treats of accounting fraud are as follows: –– The intentional distortion of financial indicators. –– The material direct effect on the financial statements or financial disclosure. –– The usage of misstatement of financial statements or financial disclosures or the perpetration of an illegal act. According to Ajekwe & Ibiamke, (2017), p. 38, in the literature, two types of accounting frauds are identified: –– Fraud committed by top management to maintain an illusion of high performance by the company in order to raise capital for their firms and mislead investors and others (e.g., auditors, board of directors, and the general public). –– Fraud committed by top or middle management for personal gain, to earn bonuses and enhance compensation. Some examples of accounting fraud, in terms of auditing practice, can be indicated as follows: –– Recording non-real income items (through transactions between interconnected companies, e.g., to improve bank covenants). –– Hiding of a part of revenue (due to tax evasion). –– Increasing revenue with one-time transaction (selling low-price asset at high price, e.g., for providing CEO annual rewards). –– Accepting current period expenses in the next period (for drawing at least modest profitability). –– Recording future period expenses as current ones (for shrinking owner’s shares). According to the special material of The European Business Review,4 accounting fraud damages a lot more than just the accounts and leads not only to financial losses for a company and its stakeholders. This affects productivity and job satisfaction, wastes company resources and time, makes management more difficult and ruins the overall work culture in the organization which takes a lot of effort to recover, causes immense levels of damage to the company’s public image, and ruins years of worth of PR progress (in case of scandals).  What is Accounting Fraud? A Guide for Safe Accounting & Compliance - The European Business Review. https://www.europeanbusinessreview.com/what-is-accounting-fraud-a-guide-for-safeaccounting-compliance/ 4

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To summarize, accounting fraud impacts business by –– –– –– –– –– ––

Destabilizing business’s financial position and incurring unwanted loss. Harming company goodwill and incurring bad PR. Discouraging employees and reducing morale. Ruining business connections like suppliers. Reducing market share by affecting customer sentiments. Casing high loan costs, maintaining distrust in the firm for a long time, tough covenants, etc.

So, an intention on deceptive behavior must be proven to distinguish fraud from other causes of distortions of financial statements. This requires digging deep into the nature of fraud and its factors. That is why the theory of fraud, explaining the triggers of deceptive behavior, is so relevant. Fraud is the intersection of law and accounting, and fraud theory has been the subject of much research in law and forensic accounting (Huber, 2017, p. 36).

The Theory of Fraud The theory of fraud has been developing for more than 70 years. As a result, there has been built a number of models, classifying the reasons that lead people to unethical and fraudulent behavior. The genesis of these models could be presented in Table 11.1. An analysis of this table shows that impersonal components, such as Tool (the Financial Reporting), Defrauded (Organization), including Preventive control and Detective procedure, Materiality, the Consequences, and Watchdog (Institutions and Audit) play an essential role. For instance, the paper by Mustafa and Khan (2020) shows that economic factors including the GDP, unemployment, and inflation are very important in the steadiness of an economy. The probable drop of GDP, or raise in unemployment level, and high rates of inflation positively influence the occurrences of accounting frauds (Mustafa & Khan, 2020, p. 87). Therefore, external auditors have to consider economic fluctuations caused by GDP devices, inflation, and unemployment in the process of assessing audit risks related to fraud themes (pressure, incentive or motivation, opportunity, fraudster’s personal capabilities, integrity) in order to avoid negative economic damages (Mustafa & Khan, 2020, p. 105). At the same time, research results could not be elaborated without focusing on the personal aspects of the fraudster (his/her pressure or incentive, stimulus, opportunity, rationalization, integrity, capability or competence, and arrogance or ego). As mentioned in different accounting fraud literature reviews (e.g., Ajekwe & Ibiamke, 2017; Tutino & Merlo, 2019), the theory of fraud triangle can be considered the dominant widespread theory that serves as the basis for the further development of a number of research niches:

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Table 11.1  The genesis of fraud models Author D. Cressey (1953)

W. Albrecht (1984)

D. Wolf and D. Hermanson (2004)

J.K. Cieslewicz (2010)

M. Kranaher (2011)

Model Fraud triangle model

Parts of the model 1. Pressure: Financial (losses, greed, personal debts, etc.) and nonfinancial (the need to meet stakeholders’ expectations, social recognition, and a strong sense of self-esteem). 2. Opportunity (the lack of effective internal control system, including weak corporate governance and control environment). 3. Rationalization (selfjustification of unethical behavior by blaming the company and the environment for poor working conditions, low wages, unfair remuneration, personal life difficulties such as the severe disease of a family member, etc.) Fraud scale 1. Pressure. 2. Opportunity. 3. Personal integrity (the personal code of ethical behavior). Fraud diamond 1. Pressure. 2. Opportunity. 3. Rationalization. 4. Capability (personal abilities, skills, treats and coercion for committing a fraud). Fraud square 1. Pressure. 2. Opportunity. 3. Rationalization. 4. Social factors. MICE model 1. Money. 2. Ideology (personal perception of achieving great good by all means). 3. Coercion. 4. Ego.

Comments This model has been accepted like a basement in the IAS 240 (part A.1). The ACFE has made this model the cornerstone of its organization

Personal integrity has replaced rationalization because it can be tested through a person’s past actions and decisions Capability has been added to emphasize that fraudster should be able to see the availability of fraud triangle factors and to use them Social factor was added to the basic fraud triangle for emphasizing societal level of fraud Money and coercion replace pressure in this model; ego reflects a combination of rationalization, integrity, and capability. These factors are common; meanwhile, ideology is not so popular (continued)

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Table 11.1 (continued) Author J. Dorminey (2012)

Model Meta-model

Parts of the model 1. Individual characteristics (the fraud triangle and ethics/ integrity, greed, power, capability, competence, ego/ arrogance). The probability of committing fraud depends on such factors as the act, concealment, and conversion 2. Preventive controls. 3. Detective procedure. 1. Motivation. 2. Opportunity. 3. Integrity. 4. Capacity.

Comments The model expands the traditional fraud triangle with the explanation of fraudster personal treats as well as with preventive and detective measures

This model integrates previous ones and develops the “fraud triangle model.” the pressure and rationalization were replaced with integrity as it is more observable This model proceeds the 1. Stimulus (financial or S.C.O.R.E G. Vousinas nonfinancial incentive or social idea of the fraud diamond; (2019) (Vousinas, model (the the factor “pressure” was pentagon fraud and political pressure). 2019) extended; the factor “ego” 2. Capability. model) was added according to 3. Opportunity. findings of other 4. Rationalization. researchers 5. Ego. The factor “collusion” was S.C.C.O.R.E. 1. Stimulus (financial or G. Vousinas nonfinancial incentive or social added later to emphasize (2019) (Vousinas, model (the the meaning of hexagon fraud and political pressure). 2019) agreements or cooperation 2. Capability. model) between two or more 3. Opportunity. people to commit fraud 4. Rationalization. (employees, external 5. Ego. parties, including criminal 6. Collusion. organizations and so on) This model was shaped by Accounting 1. Object and the tool (of R. Tommasetti twitter users from the fraud hexagon misrepresentation), being the et al. (2021), social media user’s financials. (Tommasetti perspective 2. (guilty) fraudster et al., 2021) 3. Defrauded. 4. Materiality. 5. Consequences. 6. Watchdog.

R. Kassem New fraud A. Higson (2012) triangle model

1. Pressures to meet analyst forecast, rapid growth, compensation incentives, stock options, the need for financing, and poor performance increase the likelihood of accounting fraud.

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2. Effective corporate governance, including the board of directors, audit committee, internal controls, and also the external auditor and other remedies for reducing the opportunity to commit fraud. 3. Research in the attitudes and rationalization area related to fraudster’s personality, issues of moral and ethics, social portray of a fraudster, fraudster’s professional background, and experience in the company – victim of fraud. Coming back to fraud theories, it is worth mentioning that all these models serve as a basement to further research for factors that influence accounting fraud. For example, the paper by Pamungkos and Achmad (2018), which is devoted to examining the influence of different factors on accounting fraud, showed that the most important influence caused by change in direction, in a board of commissioners, in independent commissioners and in ownership institution. The newest part of these models is still in a process of checking and approving. Thus, as mentioned by Siska and Julhelmy (2020), concluding results of testing S.C.C.O.R.E. model, stimulus, capability, and collusion have no effect on accounting fraud intention, while opportunity, rationalization, and ego have positive effect on accounting fraud intention (Siska & Julhelmy, 2020, p. 35). The Yu and Rha (2021) idea is that the main role in detecting and preventing accounting fraud should be played by audit (Yu & Rha, 2021). An auditor using traditional standard and forensic approach can collect information to get main triggers of accounting fraud and revealed the presence of high debts and the desire to maintain access to resources, weak corporate governance (e.g., lack of an audit committee and independent directors), the complexity of asset valuation (especially intangible), striving to meet analysts’ forecasts, and compensation to directors based on financial statement indicators. The main instruments for fraud detection are strategic thinking, brainstorming, and comparing financial and nonfinancial reporting, but not adjusting standard audit procedures. This idea matches with another one. According to conclusion, made by Montesdeoca et al. (2019) after studying 156 articles published in high-impact journals during the period 2000–2018, the aspect that seems to be gaining more followers in the last years is the use of information technology to help auditors better identify the patterns of fraudulent behavior in the company (Montesdeoca et  al., 2019, p. 23). According to Wijayani & Ratmono, (2021), p.  210, the most important factor curbing accounting fraud is ethical corporative culture as it glues all members of the organization through values, norms, and standards. Thanks to this social glue, it is clear what members can and cannot do and say, so it is hoped that the organizational culture in the work environment can act as a supervisory system, supposed to create the expected work environment. They claim that organizational ethic culture serves reliably because even though employees can emulate and imitate this patent of behavior that is actually cheating, “the employee will justify his action because he feels his action is by management’s action” (Wijayani & Ratmono, 2021, p. 211). As Kaminski (2020) has stated, negative consequences of the global recession manifest themselves, among others, in an increased number of accounting fraud. At

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the same time, a number of legislative acts focused on improving the functioning of internal controls in corporations, and stricter supervision of external auditors has decreased the quantity of accounting fraud cases and their amount. According to his conclusion, “the reasons for fraudulent accounting are varied, and range from the wish to gloss up on the actual financial condition and business situation of an enterprise, to an attempt of a financial fraud like falsification of the whole financial statements” (Kaminski, 2020, p. 122). Moreover, some authors go even further suggesting not only criteria for explanation accounting fraud but also predicting the occurrence of fraud in the near future. For example, Singh and Amat (2020) have proposed the use of a set of accounting fraud detection techniques that provide a possibility to detect accounting fraud several years before the deception is disclosed to all interested parties.

Accounting Fraud Techniques The literature contains a range of papers describing different techniques of accounting crimes. These accounting manipulations can be classified this way: 1. Group 1 – manipulations with the cost values, e.g.: –– –– –– –– ––

Activating undue costs. Faulty presentation of R & D costs. Manipulation with amortization write-offs and outlays for improvements. Creation of “silent” provisions. Write-offs revaluating the asset value (in particular the value of stock and the receivables). –– Neglecting the normal size of business in the assessment of the product stock. 2. Group 2 – manipulations with the revenue values, e.g.: –– –– –– –– –– ––

Fast-track invoicing and fiddling with dates of posting revenues. Sales with a repurchase clause. Liquidation of unjustified provisions/reserves. Wash sales (e.g., deliveries without an order). Estimation of revenues in long-term contracts. Use of transfer pricing in order to transfer profits to another unit of the capital group.

3. Group 3 – manipulations inter alia: –– Improper accounting for lease transactions. –– Fiddling with payment dates. –– Incorrect classification of an account clearing regarding the date of due payment. –– Faulty posting of contingent liabilities.

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–– Lack of fair separation between the effects of continued and not continued activity. –– Lack of disclosure of the actual threats to the continuation of business (Kaminski, 2020, p. 123). An interesting classification of fraudulent or criminal accounting was made in September 1998 by A.  Levitt, then chairman of the American Securities and Exchange Commission, at a meeting held at the New York University Center for Law and Business (Levitt, 1998). According to A. Levitt, enterprises use, or rather abuse, five accounting practices to influence their financial results and market position. They are as follows: (a) Big bath charges. (b) Creative acquisition accounting. (c) Cookie jar reserves. (d) Materiality. (e) Revenue recognition. The most frequent evidence schemes used by management to conceal fraud include fake or altered documents, collusion with third parties, altered internal documents, hidden documents and/or information, and management misrepresentation (Ajekwe & Ibiamke, 2017, p. 42). All these manipulations and schemes can be quite effective, which complicates their detection. Sometimes, a real situation might have been hidden from internal control and external auditors for many years before it would be revealed in front of stakeholders. That’s why looking for appropriate and effective tools for accounting fraud detection has stayed so relevant.

Accounting Fraud and Tax Evasion It is worth mentioning that compliance with tax laws is one of the reasons causing distortions in financial statements. In particular, for several continental European countries, the concept of the true and fair view is rarely used by small and medium-­ sized businesses. Financial statements are prepared not in accordance with national and international standards, but in accordance with tax legislation, which is manifested in the assessment of reporting items. Moreover, in several cases, the statements are deliberately distorted in order to minimize potential tax liabilities. Research on the issue of financial reporting distortions due to the influence of tax regulation has been ongoing for several decades. In particular, the study of factors that have a distorting effect on the accounting and tax results allowed Grosanu et al., (2012), p. 68) to identify two main groups of factors: objective (economic and political system, company management system, system of counteractions, dishonest actions, etc.) and subjective (understanding of accounting rules, principles, policies, professional ethics, etc.). The identification of

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factors that distort both the financial and fiscal results allowed the author to analyze the real result of the division into accounting for the preparation of the financial statements and tax reports that formally took place in most states. Its initial goal was to eliminate the distorting effect of tax interests on financial performance. However, the separation actually turned into an increased risk of losing the objectivity of accounting, since creative accounting in this case did not lead to deterioration in amounts of tax liabilities. As a result, accounting is moving further and further away from the concept of true and fair view on the presentation of information in reporting. An analysis of tax liability minimization (tax evasion) as a motivation for using creative accounting tools was carried out in the works of Chaturvedi (2013), Mirdala et  al. (2014), Dur-e-Shawar and Qaisar (2015), Khaneja and Bhargava (2016), Vrzina (2017), Akpanuko and Umoren (2018), Stanislawska (2018), Yaseen et al. (2018), Bayavanda and Karunakaran (2021), Blazek (2021), etc. At the same time, a number of authors give a cost estimation of the phenomenon under consideration. For example, K. Wali estimates the scale of minimizing tax liabilities through the use of creative accounting tools on the example of Denmark and the Netherlands in 2006–2009 in the amount of 0 to 30% of net cash flow for the financial year (Wali, 2021, p. 11). Moreover, he considers the use of creative tools not from the standpoint of a departure from the concept of reporting reliability, but as an element of risk management, since the result of such manipulations can be unpredictable. In the works of a number of authors, considerable attention was paid to the study of the relationship between accounting and tax in various systems of accounting and tax regulation in different countries of the world. In particular, Markle (2014) used the division of the tax systems of states, depending on the approaches to taxing income received from sources outside the company’s location into territorial and worldwide ones. As a result, it was found that multinational corporations located in countries with a territorial tax regime, on average, distort income more than those located in countries with a worldwide tax regime. Moreover, this excess in the level of distortions is concentrated in the area of ​​transactions between the parent and subsidiary companies; the level of distortions in transactions between subsidiaries does not differ significantly. At the same time, income distortions in companies with a worldwide tax regime are sensitive to government policies regarding the reinvestment of income in the country of their receipt, in contrast to companies located in states with a territorial tax regime. Grosanu et al., (2012), p. 69–71) notes that the distance from the concept of a true and fair view is observed both in the countries of the Anglo-Saxon system of accounting and tax regulation (due to the loss of connection between accounting and tax data, which is a subject to tax control) and in the countries of the continental system (due to the direct impact on accounting of fiscal regulation). This difference is also expressed in relation to creative accounting: If for the countries of the continental accounting system creative accounting is recognized as a deceptive and undesirable practice, then for the countries of the Anglo-Saxon system, creative accounting is a means of providing the necessary flexibility in accounting practice, ensuring its compliance with the needs of economic, social, and legal development.

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A number of aspects of the distorting effect of tax interests on financial reporting data were subjected to research. Among the common tools used to optimize the tax burden at the level of international corporations, the following are widely used: the structure of international companies, the location of their divisions in countries with different taxation systems, the change of roles between the parent and subsidiary companies in order to reduce the severity of the tax burden, planning the moment of receipt income, taking into account the plans of national governments to reform the tax system, etc. (Karaawy & Baaj, 2018, p. 8). At the same time, the researchers focus on the need for harmonization and unification of the rules for preparing financial statements, noting its main goal  – to ensure the communicative function of reporting. This goal requires the unification of accounting practices. However, the researchers conclude that there is currently no opportunity to achieve this goal due to differences in civil and tax legislation. There is a holistic direction in the analysis of relation the accounting rules and tax regulating in various accounting topics based on the methodology proposed in the work of Lamb et al. (1998). Its use allows authors (Gavana et al., 2013; James, 2009; Nobes et al., 2005; Vokshi Berisha, 2018) to formulate a bunch of conclusions, providing the opportunity to estimate the dynamic of distorting influence of tax regulation on the financial statement reliability as accounting regulation was reforming. For example, in the work of Nobes et al. (2005), an analysis was made of the dynamics of the relationship between accounting standards and taxation in Spain (since the moment of setting up IFRS); in the work of James (2009) – in the UK; in the work of Gavana et al. (2013) – in Italy (since the moment of setting up IFRS); and in the work of Vokshi Berisha (2018) – in Kosovo. At the same time, the authors note that the generally accepted view that there is a large disconnection in the Anglo-Saxon system of accounting and taxation, and their strong interdependence is observed in continental Europe, has recently become less pronounced. For example, in Germany, accounting standards have been revised toward convergence with IFRS, and compliance with tax accounting has been significantly weakened. Spain and Italy are undergoing similar changes. The opposite is in the UK, the tax regulation was brought to compliance with accounting principles. In general, there is a tendency to revise the tax regulation in the direction of IFRS, which evidences the strengthening of the connection between accounting and fiscal interests and the risk of distorting related financial indicators. The distorting effect is typical both for medium and small businesses, which in most European countries are not obliged to apply IFRS, and for large businesses that prepare reports based on IFRS.  Moreover, in the countries of continental Europe, the deviation from the provisions of accounting standards toward tax rules may be due not only to manipulation but also to the desire to comply with tax standards, even if their application does not promise any tax benefits. At the same time, the very fact of such a deviation may even be disclosed in the explanatory notes to the financial statements. Avi (2017) formulated this state of affairs as the transformation of the concept of true and fair view into the concept of tax-true and fiscally fair view (Avi, 2017, p. 1–2).

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Moreover, from the ethical point of view for a practicing accountant, a concession in favor of tax rules in the preparation of financial statements does not look like manipulation of statements. The accountant is not ready to recognize that accounting decisions made bypassing the concept of reporting reliability in favor of tax rules, in strict accordance with the requirements of tax legislation, can mislead users of financial statements. As Avi (2018) points out, illegitimate policy from the point of view of the law is perceived as common from the point of view of practice (Avi, 2017, p. 7–8). Thus, when it comes to accounting fraud related to tax legislation, one can see not only the distortion of financial indicators for tax evasion but also the distortion of financial statements for concession to tax rules, for example, to facilitate accounting. However, in the end, all kinds of manipulations lead to distortions, while the last case can scarcely be perceived as fraud.

Accounting Fraud Detecting According to scientific literature, accounting fraud detection methods can be conditionally divided into two basic groups: literally fraud detecting methods (mostly statistical) and creative accounting detecting methods, implying its negative manifestation. Fraud Detecting Methods The detection of accounting fraud (accounting data manipulation) with the help of statistical methods starts with data mining. It consists of extrapolating data that later will be used as assumptions to calculate financial indicators, which measure insolvency or fraud risk. Successive to the collection of data, statistical methods, such as Benford’s law, Altman’s z-score, and Beneish’s M-score, will be applied (Tutino & Merlo, 2019, p. 12–14). Benford’s law methods (Benford, 1938) are related to “anomalous numbers” and can reveal bizarre patterns in the accounts in case the numbers have been “cooked.” It provides expected schemes of the digits in numerical data and is recommended as a test for the authenticity and the trustworthiness of transaction’s accounting data. Nigrini and Miller (2009) provided a second-order test that determines the digit frequencies of the differences between the ranked values in a data set. A further, second-order test has been applied to four groups of transactional data, and it detected errors in data downloads, rounded data, data generated by statistical procedures, and the inaccurate ordering of data. Altman’s z-score model was invented by Altman (1968) like the result of a company’s solvency test measured on its probability of failure. Altman’s indicator is built on five financial indicators (working capital/total asset, retained earnings/total asset, EBIT/total asset, market value of equity/total liabilities, sales/total asset) that

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are obtainable from a company’s financial statement. Depending on results of z-score model calculation, it could be established if a company is subject, more or less, to insolvency risk and then to bankruptcy risk, or not. Beneish’s M-score is the mathematical method, created by Beneish (1999), consisting eight variables that identify financial fraud events or the tendency of a company to manipulate accounting data. The variables are represented by actual data contained inside the balance sheet, and once put together, they prove the earning management rate. The M-score variables are SGI (sales growth index), GMI (gross margin index), AQI (assets quality index), DSRI (days’ sales in receivables index), SGAI (sales, general, and administrative expenses index), DEPI (depreciation index), LVGI (leverage index), and TATA (total accruals to total assets). According to results of score calculating, it can be established if the company could have used earning management practices. Dechow’s fraud F-score (Dechow et al., 2011) was obtained using the same method as Beneish. This model is based in a regression to calculate the probability of fraud and includes change in net operating assets scaled by average total assets (defines the amount of accruals); change in account receivables divided by total assets; change in inventory divided by total assets; percentage of soft assets (soft assets are defined as total assets minus the cash and the residual values of long-term tangible assets such as PPE and investment property, etc.); changes in cash revenue (defines the changes in cash revenue from previous year to this year); change in the rate of return on assets (ROA = earnings before interest and taxes divided by assets); and issue of long-term debt or common stock (the binary variable is 1 if the company issued long-term debt or common stock in the year t (the year of manipulation) and 0 otherwise). F-score calculated with special formula shows the probability of fraud (Singh & Amat, 2020, p. 11–12). Vladu, Amat, and Cuzdiorean z-score model (Vladu et al., 2017) uses four ratios: index of customers to sales (the ratio of increase in account receivables with respect to sales from the previous year to the current year); index of inventory to cost of sales (the ratio of inventory level with respect to cost of goods sold from the previous year to the current year); index of depreciation compared to PPE (abrupt changes in the policies of the company by which they calculate depreciation); and index of debt to assets (the ratio of debts with respect to the total assets from previous years to current year) (Singh & Amat, 2020, p. 10). Debt has been a huge factor in determining the likelihood of bankruptcy which has been found as a strong motivator for accounts manipulation. z-score is calculated with linear regression to detect the probability of accounting manipulations. With regard to the employed techniques, discriminant analysis and logistic regression are by far the most popular. Such algorithms are commonly considered as a benchmark framework due to their simplicity and low computational cost and because they have been proven to efficiently detect falsified accounting reporting in relatively small samples. Better results have been achieved by the implementation of decision trees, a popular machine learning method often used to predict fraudulent accounting records mainly due to their fewer data preparation requirements and intuitive interpretation (Jofre & Gerlach, 2018, p.  5, Hamal & Senvar, 2021, p.770–773).

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Alternative and more advanced approaches have also been adopted in order to detect accounting fraud (e.g., neural networks, support vector machines, Bayesian networks, genetic programming, and hybrid methods) (Jofre & Gerlach, 2018, p. 5). The models mentioned above have been used for a long period of time that allowed some of their shortages to be shown. In order to overcome the deficiencies of these models, more and more researches are committed to constructing novel accounting fraud prediction models using machine learning approaches (while there has not been a widely used model or approaches yet). For instance, Sun et al. (2021) have developed an accounting fraud prediction model using XGBoost, a powerful ensemble learning approach. They, respectively, select 12 financial ratios, 28 raw accounting numbers, and 99 raw accounting numbers available from Chinese listed firms’ financial statements, as the model input. Their model has large margin whatever model inputs and evaluation metrics, uses raw accounting number input that is more effective than the one with financial ratio input, and increases the accuracy of results by using 99 raw accounting number input instead of 28. Basing on deep literature review on accounting fraud detecting topic, Tutino & Merlo, 2019, p. 13 noticed that professional figures involved in fraud detection and in its prevention use other tools beyond the analytical ones. These could be, for example, brainstorming sessions or questionnaires conducted at each business level, otherwise whistleblowing channels that give the possibility to employees to report, anonymously, any illegal activity inside the firm. Creative Accounting Detecting Methods Among models for detecting creative accounting, first of all, math models are worth mentioning. These models are based on the use of regression equations (usually linear) and a comparison of the results obtained in dynamics, at least for the reporting period and the previous one. Initial assumption: Managing account data is significantly easier than manipulating cash flows and indicators of company growth. Math models include the following: (A) Total Accruals. As a sign of report misstatement, it is considered “unexpected, abnormal” deviations between accruals and cash flows, which are not related to accounting rules but are explained by adjustments made by management to distort financial indicators. In this case, the growth rates of indicators due to accounting rules are assumed to be unchanged. Adjustments made in the framework of creative accounting can be aimed at both overstating and understating the accounting indicators. Examples of pioneering studies in this area are the works of P. Healy (Healy, 1985) and L. DeAngelo (DeAngelo, 1986), who analyzed the differences between accrued income and cash flows from operating activities for reporting periods and the reasons for their occurrence (Almahrog & Lasyoud, 2021). However, these models did not take into account the dynamics of the company’s financial position, which caused differences that were not related to accounting rules, but also did not indicate distortions in the reporting. This reduces the efficiency of the models.

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The linear regression model developed by J. Jones (1991) was aimed at overcoming these shortcomings. The analysis is carried out in two stages: before and after the reporting period. Neutral indicators, free from the distorting influence of management, are recognized: revenue and property and plant and equipment. At the same time, the revenue indicator, according to the developer’s idea, reflects the financial position of the company and the effect of the economic environment surrounding it, while the indicator of fixed assets reflects the depreciation (impairment) of assets (Almahrog & Lasyoud, 2021, p. 95; Dokas et al., 2021, p. 27). In addition, indicators of the previous period are recognized as neutral (Strakova & Svabova, 2021). These assumptions are a limitation of the model. In addition, the model requires long-term observations in order to estimate effective valuation coefficients. The model is focused on a specific firm and does not take into account the dynamics of financial indicators in the industry and the economy as a whole. At the same time, the model allows in some cases to successfully identify distortion of reporting. As a means of overcoming the weakness of the Jones model, P.M.  Dechow (Dechow et al., 1995) presented a modified version of the model. Revenue is excluded from neutral indicators as changes in accounts receivable (especially on credit sales) may be due to manipulation (Dokas et al., 2021, p. 27). The preceding period is recognized as free from distortions, which is the bottleneck of the model (Almahrog & Lasyoud, 2021). The model is focused on long-term observations and weakly reflects the relationship between changes in the financial performance of a firm with the dynamics of economic processes in the industry and in the economy as a whole. K. Peasnell (Peasnell et al., 2000), based on the Jones and Dechow models, proposed a “margin model” for identifying reporting distortions. Neutral indicator is accruals in terms of working capital. At the same time, total revenue and sales receivables were recognized as free from the distorting effects of management. The accruals for impairment of noncurrent assets are ignored. Changes in the amount of revenue are divided into two parts by replacing last year’s indicator with actual cash receipts (Dokas et al., 2021, p. 27). The model proposed by S. Kothari (Kothari et al., 2005) is focused on “assessing the financial situation,” including taking into account the industry specifics, both for a year and for a number of years. An independent indicator is a return on assets, which makes it possible to take into account the agreed and non-agreed changes in indicators, including due to adjustments not provided for by accounting standards (Dokas et al., 2021, p. 27). The model excludes taking into account the influence of interrelated indicators on the calculation model and reduces the required observation period for a particular company (Almahrog & Lasyoud, 2021). The nonlinear model proposed by R. Ball and L. Shivakumar (Ball & Shivakumar, 2006) takes into account the asymmetry in the recognition of losses. This model is focused more on the timely recognition of losses by the company (conservatism) and therefore explains more variations in charges than linear models (Fernandhytia & Muslichah, 2020; Gavana et al., 2013; Verbruggen et al., 2008).

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(B) Specific Accruals. Specialized accrual models are aimed at the specifics of individual financial indicators, individual industries (types of activities), individual economic situations, or individual accounting standards (e.g., adjustments for bad debts, deferred tax assets, reserves to cover losses on loans provided in banks and losses of insurers) and suggest an extended analysis of the differences that are detected. Attention is focused on “suspicious articles” that contain space for accounting choices and can be used to distort reporting indicators (Verbruggen et al., 2008, p. 8). In the literature, two versions of the considered models have been studied: based on a single indicator and on a set of indicators. An example of the first option is the models of M. McNichols and G.P. Wilson (McNichols & Wilson, 1988), based on the analysis of changes in the reserve for doubtful debts, in comparison with the dynamics of material balances, as well as models based on the indicators of the bank’s loss reserves for loans issued by W. Beaver and E. Engel (Beaver & Engel, 1996), and the indicators of the reserve for losses of insurance companies by K.  Petroni (1992), Almahrog and Lasyoud (2021), Almahrog & Lasyoud (2021), p. 96. An example of a model based on a set of financial indicators is the model proposed by M. Beneish (Beneish, 1997) for companies experiencing serious financial difficulties. At the same time, the study is carried out taking into account a number of factors: market position in previous periods, ownership and capital structure, listing, sales growth, and other indicators that could serve as incentives for management to deviate from accounting standards. (C) Cost Allocation or Income Shifting. This model is based on the presumption that managers are focused on certain target indicators, for example, avoiding losses and reducing revenue, including through the smoothing (distribution) of income (expenses) over time (in particular, due to the high frequency of reflection of small distortions and rare use distortions of large amounts). Distortion sign: significant deviations of the dynamics of income (expenses) from the expected growth rate. The distribution of expenses, for example, on types of activities that are positively assessed by the public or involving the use of special tax regimes, can also be considered a variant of the model (Verbruggen et al., 2008, p. 9). Among the pioneering studies in this direction is the model proposed by D.  Burgstahler and I.  Dichev (Burgstahler and Dichev, 1997), which focuses on comparing the dynamics of cash flow from operating activities with changes in working capital; proposed by F. Degeorge (Degeorge et al., 1999), which analyzes the three main motives for distributing income over periods – avoiding losses, presenting a stable financial position, and meeting the expectations of financial analysts; and proposed by A. Beatty (Beatty et al., 1999), examining the frequency of detecting such distortions in state and commercial banks (Almahrog & Lasyoud, 2021, p. 96). Summing up the analysis of the methods for identifying creative accounting described above, it should be noted that models of total accruals are the most

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popular since they are focused not only on identifying “unexpected” deviations due to changes in the accounting policy of the company but also changes in accounting estimates and the time of income recognition and costs (Dur-e-Shawar & Qaisar, 2015; Khaneja & Bhargava, 2016, p.  10; Verbruggen et  al., 2008). Moreover, to identify the risk of reporting misstatements in organizations with government participation, a modified Dechow model is often used (to include in the study a potential misstatement of revenue) (Bisogno & Donatella, 2021, p. 13). At the same time, models of specific accruals are more often used for researching companies at the international level (Bisogno & Donatella, 2021, p. 13), in order to exclude the influence of indicators, which can be subject to various effects from the national economies in which the structural units of the corporation are located. In general, the models of total accruals are reduced to using the Jones model as a basis, but using a number of ideas to improve it: using a “cross-sectional” toolkit instead of a “time series method,” involving financial ratios, using a cash flow statement instead of an accounting one, using a cash flow statement instead of a balance sheet to calculate accruals (deviations), and the transition to nonlinear forecasting models (Dokas et al., 2021, p. 29; Verbruggen et al., 2008, p. 16).

 echniques for Providing Effective Protections to Accounting T Fraud: Recommendations Albrecht et al. (2004) identify nine factors which together create the “perfect fraud storm”: a booming economy (which hides the fraud), moral decay, misplaced executive incentives, unachievable expectations of the market, pressure of large borrowings, rule-based accounting standards, opportunistic behavior of audit firms, and greed on the part of a wide variety of groups of people and educator failures (Albrecht et  al., 2004, p.  127). This list of factors can be perceived as a general guide on how to prevent or at least curb accounting fraud. However, because some factors from this list don’t depend on a company, each company should take into consideration first of all those measures to protect itself which can be implemented on its own. Most researchers among the measures of the first line of defense against accounting fraud name such resources as external (independent) audit and internal control system, including corporate governance, corporate environment, internal audit, and special IT tools. For instance, Kaminski (2020) noted that, taking into account other countries successful practices, new laws and ethics codes or the code of good corporate practice have been set as they were supposed to be effective in reduction accounting fraud and combating economic crime in the future [22, p. 131]. According to Kizil et al. (2021) research using interview techniques to find out audit instruments to prevent accounting fraud [25, c. 99–100], there could be mentioned two types of auditing approaches to detect and prevent fraud: 1) classical or passive methods (the investigation of fraud and corruption in the context of

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traditional auditing, examining only those financial items or situations that are under suspicion) and 2) proactive methods (the monitoring process of any possibilities of fraud at any time without request or notice). Sampling is not enough for both approaches as they need IT methods to enable the auditor to examine the whole database comfortably without any time cost. At the same time, the total rejection of sampling leads to handling the whole universe with IT that is time- and energy-consuming. So it should be reasonable balance of both methods. Both approaches require criteria and risks assessment, risk planning, and deterrent measures, but not least, auditor should be able to see all business processes exactly like a fraudster to solve the deceit. Crucial points in detecting fraud, in terms of practice, are knowledge of professional legislation and technical practices as well as independence of auditors. The following list of factors can be considered to be measures to prevent accounting fraud: an attention to the business environment, integrity and transparency, strengthening internal control, internal audit and corporate government, exclusion of excess trust in individuals (especially on the part of the top management of the company), creation of an atmosphere of trust in the company, and the prevalence of preventive methods under the methods of following control (improving the efficiency of the internal control system). Some factors are worth taking into account to organize an effective contradiction toward accounting fraud: (1) factors that effect likelihood of accounting fraud positively, such as information asymmetry and adherence to agency theory, and (2) factors that effect likelihood of accounting fraud negatively, such as effective internal control system, the suitability of compensation system for directors, adherence to accounting rules, and management morality. According to the results of hypothesis testing by Putri and Irwandi, (2016, p.  107), all mentioned factors partially and simultaneously affect the tendency of accounting fraud. These results match with the conclusion by Setiawan (2018), p. 33 that individual morality has a negative effect on accounting fraud. Individuals who have low morality have greater tendency to commit accounting fraud either in the condition with internal control or in the condition without internal control (p. 40). The result of study by Fernandhytia and Muslichah (2020) is consistent with the research conducted by Setiawan (2018). Accounting fraud tendency can be prevented by implementing moral knowledge in daily activity and a selective hiring process in a company or an organization. Lastly, this study also shows that ethical value has a negative effect on accounting fraud tendency. This is due to the conclusion that professionalism and professional ethic codes play a significant role in maintaining ethical behavior in the workplace (Fernandhytia & Muslichah, 2020, p. 124). Currently, special IT anti-fraud tools are gaining popularity not only among large corporations but also among medium and small ones. In particular, according to a private study by Gartner,5 companies put a lot of efforts to protect themselves from   2021 Gartner Market Guide for Email Security. www. Abnormalsecurity.com/resource/ gartner-market-guide-for-email-security 5

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cybercrimes in the financial niche. That is why the use of special systems that provide a series of automatic checks, approval of payments and transactions, digital tracking of expenses, automatic verification of the identity of the counterparty, automatic tracking of all actions of employees in the accounting system, etc. has become widespread. Moreover, it is worth mentioning that nowadays there are a lot of studies about the greatest accounting fails, scandals, and so on. For instance, it can be named the material from Beanwork,6 Akman et al. (2020) that provides big data base for case study of accounting fraud. Summarizing the most common features of those accounting fails, omissions and mistakes that were made, examples of lack in internal control system that were allowed and used for committing frauds, the list of recommendation is given on how to avoid or at least, mitigate consequences of this crime. It includes: –– To avoid unauthorized payments, unauthorized transactions, unbudgeted expenses, etc. –– To set several levels of confirmation of transactions. –– To develop a system of control over the formation of accounting policies, the adoption of accounting decisions, the determination of estimated values, and the preparation of financial statements. –– To introduce electronic document management and automated control of operations. –– To form an effective corporate governance system, including board of directors from among independent participants, and establish a decent remuneration. –– To widely disseminate the practice of anonymous informing independent directors by employees about the actions of top management. –– To maintain a culture of ethical behavior in the company and to establish an ethical education between employees and executives and social responsibility of business. –– To consolidate recruitment processes by training HR to eliminate candidates with an unfit background and poor references. –– To assist in the effective work of internal audit. –– To implement forensic accountant special skills and experience for regular monitoring of internal control system. –– To increase controls on CEOs by audit committees and regulators through law and best practices. –– To incentivize honesty and reward model behavior to motivate existing employees and forward their attitude in a positive direction. –– To plan and discuss employee career growth strategies so they do not feel the need to resort to unfair practices to advance in their work life. –– To scan for loopholes in business operations to detect and eliminate opportunities that employees might try to abuse and exploit for personal benefit, etc. Certainly, this list of recommendations is only indicative. But even compliance with it can minimize the frequency and cost of accounting fraud significantly.  2020’s Biggest Accounting Fails – And what we can learn from them. www.Beanworks.com

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Conclusion The quantity and complexity of white collar crimes in general and fraud in particular is constantly increasing. According to ACFE, companies lose about 5% of their revenues each year. Accounting fraud means deliberative material distortions in numbers or disclosures of financial statements for misleading of its users and getting some benefits out of it. The border between accounting fraud and accounting errors lays on deliberative nature of the first one. Accounting fraud and creative accounting can involve the same techniques, but accounting fraud is strongly associated with deceptive behavior. The theory of fraud has been developing for more than 70  years, consistently elaborating factors of fraud from the fraud triangle model to the hexagon models. All these model show that impersonal components play a big role as the personal ones. These models, despite all their shortages, serve as a basis for further research. Accounting fraud techniques conditionally can be divided into three groups: manipulations with costs, manipulations with revenues, and other manipulations. The most frequent evidence schemes used by management to conceal fraud include fake or altered documents, collusion with third parties, altered internal documents, hidden documents and/or information, and management misrepresentation. When it comes to accounting fraud related to tax legislation, only the distortion of financial indicators for tax evasion can be perceived as fraud. All techniques that can be used for accounting fraud detecting can be divided into two groups: fraud detection and creative accounting detection. The matter is that this division is quite conditional because the main aim of them is revealing likelihood of deliberate distortions of financial indicators that could be marks of fraud. Among remedies against accounting fraud, the most popular are external (independent) audit and internal control system, including corporate governance, corporate environment, internal audit, and special IT tools. Certainly, this list of recommendations is only indicative. But even compliance with it can minimize the frequency and cost of accounting fraud significantly.

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Chapter 12

Models to Study the New Age Financial Crimes Chander Mohan Gupta

Introduction Donald Cressey has done pioneering work on the concept of the fraud triangle in 1953. He delineated significant factors such as position, knowledge, and rationalization behind different frauds and financial crimes. Cressey’s work was reinforced by Nettler (1974). Further, with time motivation, the third element of fraud was subdivided into incentive and pressure, wherein an empirical study by (Wheeler, 1992) with high profile fraudsters from Swiss and Austria shows opportunity as an incentive for fraud. Coleman (2001) emphasized motivation and opportunity as inseparable interwoven for the study of financial crimes. Any unethical work or process which is performed by professional keeping aside the ethics and facts provided by the organization to a give way out for the illegal income is known as fraud. It has a long list of illegal and illicit practices that can be achieved by intentional misrepresentation of facts. The definition provided by the Association of Certified Fraud Examiners (ACFE 2010 ) says fraud is deception or misrepresentation that an individual could result in some unauthorized benefits to the individual or the entity or some other party. The top 5 vital measurements for fraud detection are (a) poor performance, (b) the need for external financing, (c) financial distress, (d) insufficient board oversight, and (e) competition. Financial frauds hit a significant high in the twenty-first century, inducing the awareness of the same. Accounting frauds are the result of number fabrication in the financial statements or intentional misinterpretation of rules laid down for maintaining the same (Rezaee, 2002; Spothis et al., 2002). The management does frauds for the financial statements to achieve the target kept and to earn goodwill in such a way

C. M. Gupta (*) Faculty of Legal Sciences, Shoolini University of Biotechnology and Management Sciences, Solan, Himachal Pradesh, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_12

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that they are adamant about detecting (Albrecht et al., 2004). Gao and Srivastava (2008) gave in a few points understanding accounting frauds: (a) Fake document creation for fictitious revenue recognition. (b) Documents to support collusion with parties to justify revenue recognition. (c) Manipulation in internal documents to confirm the revenues. (d) We are adjusting financial statements to keep track of such revenues, expenses, and authentication of the document by officials. The abovesaid points can be easily found in every financial crimes in the world. Fraud triangle now has more dimensions attached to it, but still, it is considered the best in the world to analyze financial crimes. Albrecht and Albrecht et al. (2004) compared fraud triangle and fire where motivation, opportunity, and rationalization are for fraud as fuel, heat, and oxygen are for fire, and the same was supported by LaSalle (2007), and absence of any can genuinely cause the same to exist. Financial statement frauds have pulled up eyes (Kerr & Murthy, 2013) (Zhou & Kapoor, 2011) that gave in the impact of financial statement frauds on individual investors and the economy as a whole. Companies perpetrate these financial reports to inflate stock prices and get financial assistance from financial institutions (Ravisankar et al., 2011). Every economy, whether developed, developing, or underdeveloped, is facing this problem, and the bigger the companies and the numbers involved, the bigger the chances of fraud detection. Ego, ethics, pressure, incentive, and opportunity – every aspect has been studied, but people have never been studied. The price attached to the fraud, which is the actual and the last reason for the fraud or Financial Crime to occur. As there is a price for everything, it depends if you are paying the right amount.

Past Studies on a Few Financial Cases (Table 12.1)

Understanding Fraud Triangle As Cressey defined the fraud triangle, he gave in three dimensions to it which can be studied in detail as below:

Pressure Whenever a person does something either good or bad, there is always pressure or an incentive attached to it. Incentive may be in cash or kind, but it is there, and when these are for a company where it has to portray its position about give a desired

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Table 12.1  Past studies Who NCFFR (1987)

Smith (1995)

Ziegenfuss (1996) Haugen and Selin (1999) Jeffords (1999) Sharma and Brahma (2000)

Harris and William (2004) Beirstaker, Brody, and Pacini (2006) Willison (2006)

Choo and Tan (2007) Bhasin (2008)

Chen (2010)

Cecchini et al. (2010) Beasley et al. (2010)

What Gave in the names of the forces such as environmental, institutional, or individual choices and opportunities as the reasons for fraud occurrences, which leads them to commit fraud Studied embezzlers and named them as “opportunist type” who usually worked around finding a weakness in internal controls of the firm and encash the same when he finds some opportunity Studied government bodies at local and national levels and found theft and misappropriation of information and false invoice to be the ways used Studied how weak internal control is the reason behind FC and how the same could be manipulated even if the technology is being used. Studied 910 cases and found that 63% had fraud cases because of weak internal controls during the period of 1981 to 1989 Their study emphasized on “bankers” responsibility and their role in the fraud, as it can be easily curbed and worked around efficiently if banks play their roles effectively. Further, he emphasized monitoring by the banks Study the pattern of bank loan fraud and tried to develop a plan for the same The authors tried to study the reasons why frauds are done and proposed plans which should be taken to curb the same After examining the breakdown of “barring,” bank reached a conclusion stating that the breakdown happened due to weak internal control and failure of management at every front They tried to explain corporate fraud using the fraud triangle Studied the “check” frauds being committed in India, wherein he tried to lay the responsibility of auditors and the measures which are being taken up by the banks to curb In his paper laid the “unethical” behavior of the top crest of the firms and how such behavior of the leaders of the firms leads to several frauds leaving behind the facts Gave in a method to detect fraud using several “support vector machines” analyzing the data provided by financial statements Gave in the said way of fraudulent revenue recognizes as improper out of sales, sham sales, early revenue recognition, conditional sales, bill and hold transactions, consignment sales, unauthorized shipment round-­ tripping, or recording loans as sales

result to the investors and shareholders in the name of profit volumes, this is the pressure on the Management which actually makes them to manipulate the Financial Statements and this is just done to meet the targets set up by the firms and to hide the poor performance (Hogan et al., 2008). The pressure can be taken away by having weak links in the organization, such as internal control, inadequate security, and complex rules and regulations. It is the target that is set up by the management about the industry standards that lead to fraud. There is always a variance in a company’s target and its actual

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performance, which, when contrary, leads to fraud. It is found that the chances of frauds increase when the firms are not able to achieve their targets, and to reach the desired outcome, firms opt for fraud commitment. Lou and Wang (2009) also support the fact of a direct relationship between the target forecasted and fraudulent financial statements. It also studied error, accuracy, forecasts, and actual figures about pressure on the management to perform. In the present world, when an average investor wants to check the performance of a firm, he/she would see the value of the stock and calculate the growth rate with which the stock is growing, and the same depends upon the financial health of the firm. Several reports have also given the same verdict that about half of the firms manipulate the financial statements to increase their financial position. Goldman and Slezak (2006) emphasized the fact that where there are performance-based incentive plans for the top management, fraudulent practices increase. The more the accounts are played with by the CEO and CFO, the more is the probability of fraud. The study was named as CEO payperformance sensitivity. Firms with high payout ratios are considered to be an excellent investment opportunity. It is always noted that firms with good returns and performance usually are inclined to falsify the financial statements, wherein the firms which could not perform well and show loss usually falsify the reports. As rightly said by Bell et al. (1991), weak or negative performance is likely to push the firms toward financial fraud. The ratios which usually provide insight into firms’ performance are ROE and ROA.  Stock market calculates beta to confirm a firm growth concerning the industry as a whole, and if the company’s performance is less than the industry, then it is considered a poor performer. Comparative financial statements, showing consecutive losses for years with negative cash flows, are also taken as standards to consider the company’s performance. Thus, showing financial distress of the companies and push them towards committing Financial Frauds. (Huang et al., 2012; Kirkos et al., 2007; Zhou & Kapoor, 2011). Ravisankar et al., 2011 said the companies found indulged in frauds have higher and more significant financial distress than the firms which do not have frauds. Apart from financial pressure, other pressures that lead to fraud are personal, economic, industry, and the working condition of the firm itself. Declining profits, market share, and rise in the competition are also considered to be factors that lead to fraud. Theories even prove that the management of fraudulent firms is more competitive and efficient than the ones which are not into fraud.

Opportunity A condition or situation which provides an individual to commit an act/fraud is known as opportunity. Wilks and Zimbelman (2004) stated that if there is a lack of sufficient control, oversight of the top management can lead to inappropriate manipulation of FS recording and presentation, which can easily mislead the investors. There are several factors defined under SAS which lays the foundation of more

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opportunity to commit fraud, which can be laid down as an ineffective control mechanism for managing a radically organizational structure and weak controls. The number of opportunities increases with more complex organizational transactions, where the working is so complex that it is not affluent at all to track the transaction. Huang et al. (2008) gave in misrepresentation, misappropriation of excess borrowing, and subjective interpretation. Chen and Elder (2007) studied finding of opportunities where organization trade-in along with sister concern or related party transaction such as percentage of sales- related, purchase-related loans- related transaction and ratio of assurance of related party. When a manager is individually charged and motivated to commit a crime is an opportunity. He holding a strong position is in control of large amounts of funds, and he is being provided such an opportunity due to trust. As explained by Benson et al. (2009), every FC has a structure that creates an opportunity, which eventually leads to one. If the opportunities are reduced due to increased control, the risk is reduced. The effectiveness of the board and its working is affected by the composition of the board and its members (Fama and Jensen, 1983). The effectiveness of the board and its working can be measured by the following factors: (a) the percentage of independent members on BOD, (b) the percentage of outside members on BOD, (c) the percentage of institutional ownership, (d) the percentage of management ownership, (e) the percentage of block holder ownership, (f) abnormal change of board members, (g) frequent change in insider holding, and (h) board size, voting right, and cash flow deviation (Fama and Jansen, 1983; Beasley, 1996; Anderson & Reeb, 2003; Millar & Yeager, 2007; Suyanto, 2009; Hadani, 2012). Several studies have given in that a weak internal control system and ineffective structure do not give enough strength to the system due to lack of monitoring, authorization rules, unstructured payment system, lack of audit leading to more opportunities, and more frauds(Doeminey et al. 2010). Other factors are the dominant power of the management over the system, lack of control over the top, complex system, negligence, and blind trust (Forber 2005). Kinney (2005) named weak internal control the reason for fraudulent financial reporting. Use of several deficiencies of the internal control and working of internal auditors (Hammersley et al., 2012; Lou & Wang, 2009).

Attitude Several ratios are used to keep a check on fraud. Still, fraudulent financial reporting is capable of pulling different fraudulent acts with their ethics and working codes (Suyanto, 2009). Studying the management characteristics and their influence over the working and effectiveness of a controlled environment are more deciding factors, and the presence of red flags is much more critical (Apostolou et al., 2001). Zahra et al. (2005; 2007) investigated the role of management and its characteristics in committing frauds and found that frauds at its absolute peak involve top-level management and its decisions. Several studies have been done on different

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companies, and it was found that frauds are inversely related to the moral of management. These are usually found to be committed by top management. Hernandez and Groot (2007) said that the ethical working of the organization usually is based on the ethics working and is based on the ethics and conduct of the top managers of the company. So, to understand the working of an organization, we need to see and analyze the working of the top management. Investors value the report provided by auditors and remain assured that the statements provided are accurate and reliable. This is why companies always tried to hire an auditor with a reputation and required skill set, which is required. However, this increases the costs of the company at the end if all go according to plan and investors get a fair statement it is worth a spend (Kinney, 2005). The reason for manipulated earning by the top management for keeping the investors in disguise that the company is performing great and to hide the losses. (Stratopoulos et al., 2013). Several studies from the past also support the same that earning management is done to give an aggressive report and to project high returns for the investors (Bell & Carcello, 2000). Earning management is the most used way of projecting fraudulent financial reporting can be a wrong entry or error in the process or straight a voluntary work to do the fraud. It supported the study of Kothari et al. (2005), which said that different ways and procedures are followed by people to manipulate their financial statements. Due to an increased number of cases which have been registered and found where involvement of internal auditors was found in earning management and false financial statement thus the role of external auditors increase, which can be partially or continuous. Chen and Elder (2007) and Gillett and Uddin (2005) also supported the fact that if CFO of the firms is strict and ethical, then the fraudulent financial statement can be reduced or vice versa. Agrawal et  al. (2006) supporting the said point stated that organizations found guilty of fraudulent financial statement have an unusual high rotation of money and decision pattern among senior managers is also highly frequent, even the rotation of CEO’s and CFO’s very high. Knechel et al. (2007), in his research, said that clients should use auditor work on how it becomes easier to detect frauds and fraudulent financial statements (Fig. 12.1). Lawshe’s approach (1975): Lawshe gave an insight into the fraud triangle in the following points: • Pressure. –– –– –– –– –– –– ––

To meet analyst forecast. The need for external financing. Poor performance. Financial distress. Competition. Industry requirement. Government policies.

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Fraud triangle

Pressure/ Incentive

Opportunity

Attitude/ Rationalization

If the Profit and the existence of the firm is in question due to economic, political and industry Prevailing condition.

Large Cash Flow/ Cash balance and Stock in hand

has a past history

Ever increasing pressure on management to meet targets and getting away with debts.

Lack of internal control

Ethics and Values are compromised

Net worth of the Management is in question.

System is not performing

Agressive decisions and forecast which are not possible

More than required control of position/ No job rotations on time

Missappropration of assets

Relationship issues between management adn employees

Question Mark in Control mechanism

Fig. 12.1  Fraud triangle in a nutshell

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• Opportunity. –– Related party transaction. –– Complex rules. –– Insufficient board oversight. –– Internal control environment. –– Ratio movements. • Attitude. –– –– –– –– ––

Ethics. Rules. Earning manipulation. Top management turnover. Non-separating ownership and central.

Growth of Fraud Triangle Sociologists and psychologists regularly and commonly used financial statements while studying financial crimes and frauds. Cressey had interviewed more than 120 embezzlers, which were in the US prison in the year Cressey 1953 for white-collar crimes. During his survey, he found that economic benefits were not the only element for such crimes, but trust and faith were also prime. In the end, Cressey gave in three factors: position, knowledge, and rationalization. Supporting the factors of Riemer (1941), which he gave after examining 100 prisoners in a Swedish prison, were (a) the social pull also known as the opportunity, (b) the social push, the situation, and (c) the psychopathological element. Several researchers like Nettler (1974), Loebbecke et al. (1989), Albrecht and Albrecht (2004), Howe and Malgwi (2006), and Lou and Wang (2009) have also supported Cressey’s work and marked adjustment in international auditing standards as a right way of fraud commitment through breach of trust. Fraud triangle could be used as a red flag for early detection of frauds as Gill (2011) gave in each and every theory which has been given for crime prevention and, understanding the same, has already been considered as standard frauds, and several have increased the scope of the topic, and a lot has been worked on the same. Fraud triangle though focuses more on individuals than organizations as it is the people who commit fraud, not books and records (LaSalle, 2007). Romney et al. (1980) added personal characteristics to the three elements supporting several leaders who had perfect conditions but never told they committed the fraud.

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Extension to Fraud Triangle In every organization, when it comes to decision-making on the financial front, it is always the people positioned on the top level who have control and every opportunity to commit the FC (Coleman.2001). People who are at these positions have the opportunity, and they are in full control in understanding the current situation and pull the financial C.

Fraud Diamond Wolfe and Hermanson (2004) in their study added a new factor to the fraud triangle and name the same as fraud diamond, wherein they added in “capability” as the fourth factor. Here, capability can be learned and expanded as (a) knowledge, (b) position, (c) confidence, (d) coercion, (e) concealing, (f) no question asked attitude, (g) ability to manipulate, (h) lying, etc.

Fraud Pentagon With time, new ways and options of pulling FC came into the picture. Technological and cultural changes have also given a new dimension to FC and frauds Crowe Horwath; besides, they added two factors to the fraud triangle and thus named it fraud pentagon. These two were as follows: Competence: It was added as an existence to an opportunity where the individual was in a position to override internal rules and regulations and is socially so keen to take that advantage. Arrogance: When an individual kills his/her conscience and with ego and attitude coming along with the position and control over the situation cannot control the greed and do whatever he wants, seeking that no one will question his actions.

Fraud Scale Steve Albrecht gave in this theory wherein he laid three factors on a scale leading to fraud: (a) situational pressure, (b) perceived opportunities, and (c) personal integrity. He said that when a situational pressure and perceived opportunities have a higher tendency and personal integrity is low, fraud and FC are easily pulled off, and if personal integrity is high, it is challenging to commit one.

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Fraud Circle It lays merely a fact that like air, fraud is omnipresent, but the volume and grade may be different.

Hollinger Clark Theory They concluded that it is motivation, which is more important than an opportunity for committing fraud after studying a total of 12,000 employees and getting 90% positive results proving their theory. However, the fact remains that they only studied employees, not management, and the frauds that employees commit can be controlled by keeping them satisfied.

Usual Offenders/Culprits Reuber and Fischer (2009) laid that organizations throughout the world are performing unpredictably. Crumbley et  al. (2003) divided the offenders of financial statement fraud into three categories: (a) senior management (level I), (b) mid-level management (level II), (c) lower level management, and organizational criminals (level III) (Table 12.2).

Table 12.2  Usual offenders Level Usual offenders I CEOs and CFOs

What Accounting frauds

II

Employees

III

Organizational criminals

Financial statement reporting system False representation and false invoice Falsify financial statements

II

Auditors

Internal control

III

Embezzlers (opportunities)

To find the weak link and encash them

I

CFOs

Misappropriation of assets

What for To conceal dependable business performance and position To maintain status, income, and wealth To hide poor performance To increase individual commission based on performance To prove their worth and efficiency To obtain loans To inflate stock value To infuse “pump and dump” scheme Jeffords (1999) studied 910 cases for a period of 9 years and found a majority of cases to be infused with fraud Weak internal control to earn profit out the same and make such adjustments that the same is not under the scanner Increase goodwill Fake financial statements

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In their study, Beasly et al. (2010) gave in a comprehensive analysis of fraud and its occurrence, where the study was based in the USA and by the US SEC between 1989 and 2007. SEC had given in the names of CFOs and CEOs in more than 89% of cases studied. Black (2010) also supports that CEOs, due to the power control and position, can easily manipulate the internal and external environment. Conferring to their position and control, they can easily pull up things and understand the way to do it in such a smooth way that its detection becomes nearly impossible (Bloomfield 1997; Newman, Rhoades & Smith 1996; Wilks & Zimbelman, 2004). The following gives a detailed insight into the doers of frauds: Auditors: The role of these can be played in two ways: internal and external. However, it can be said that internal auditors being employees of the firms can be controlled and maneuvered in such a way that they are forced to prepare fraudulent financial statements. However, when it comes to external auditors, it can be considered that because of professional ethics and responsibility, they would perform their job correctly and profoundly. However, reports by SEC do not support the fact. They have found that external auditors also do not perform efficiently. Studies were done in the past believed and found pieces of evidence that the frauds in which the auditors were found involved were usually very complicated and involved much money. Pulling up a big fraud is impossible without insider knowledge and support of professionals as auditors. Directors: Nothing big can be pulled off in an organization if the big cats of the firms are not involved or aware of it. Beasly et al. (2010), in their study, supported that if top management and its audit team work efficiently, it can prevent many frauds from happening, as directors are the first touchpoint of internal control for a firm. Fama and Jansen (1983) also supported this theory by stating “the Human Capital of a firm and its value mainly depends on the rules and regulations of the firm and the role of directors mainly remains on the way, a check is kept over the internal decision making which eventually leads to either control or breaks down of the firm.” Employees: Beasley et al. (2010) state how they support frauds are Sham Sales, Conditional Sales, Round- tripping or recording loans, bills and hold transactions, premature revenues, improper cut off sales, unauthorized shipments, Consignment sales. Several types of research by several researchers have agreed that financial crime is not just for financial growth, but it is also influenced by societal pressure. Stotland (1977) used the word “black sheep” of the society for these criminals. Heath (2008) said that “if it would be a combination of greed and opportunity only then the number would have been much more, but there is a lot more into it as the human mind has a lot to be studied upon” as there are a lot of factors both internal and external which lead to the motivation. Punch (1996) pointed organization and its working culture as it was the originator of crime. The same was supported by Slapper and Tombs (1999) as profit-maximizing of the companies leads to the situation, which results in frauds. Gill (2011) and Spencer (1956) gave that different firms have different factors such as greed, poor performance or emergency fund requirement,

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overspending, social impact, image building, power and status display, or above all windfall games and gambling instincts. Sakurai and Smith (2003) studied financial crimes in Australia and found gambling to be one of the reasons why people committed such crimes the same being endorsed by Howe and Malgwi (2006). Several other factors that lead to such financial crimes are meeting huge targets, competition, market expectations, personal and family medical expenditures, and better response for fundraising, along with status, divorces, diseases (Dorminey et  al., 2010; Gill, 2011; Lou & Wang, 2009).

Additional Theories to Study Frauds/FC Though several theories have been developed in and around fraud triangle, a few have been added to the existing factors, but different theories have been developed in and around the same lately, which can be studied under. 1. General strain theory (GST) by Merton in 1938 gave a conclusion that crime is the result of the failure of first families and then institutions that do not provide a solid ethical base and do not provide relevant information to deal with the pressure. Some researchers have also pointed out that the absence of something or someone can also lead to committing such crimes. It is also discussed that failure at the economic front can also lead to crime. The individual personal and professional goals can also be the reason for fraud committed (Zahea et  al., 2005; Langton & Piquero, 2007; Donegan & Ganon, 2008; Cohen et al., 2010). Low economic people do not usually felt the pressure of society, but it is the cream of the society or high-end people who suffer from it, making it more problematic. When the corporate structure is studied, the implementation of GST has pulled the game into indirect taxation also. The term coercion can be used over here in which sometimes it is the interpersonal reason and sometimes it is impersonal. 2. Differential Association Theory. Sutherland (1949) in his study found and stated that it is the impact of the peer is under whom the individual has worked as it is the impact made on the subconscious mind as it has read, interpret, analyze, and learn to perform in a specific way. The same theory has been supported and approved by many researchers after that being named “operant and participant conditioning” (Colvin et  al., 2002; Donegan & Ganon, 2008; Free & Murphy, 2014). The pressure can be named strain and anomie, and if the peers help the individual at this stage, it is much easier to get out of it. The support can be in the shape of financial assistance, positive affirmations, technical support, and situational guidance. The same situation has been found in cases like HIH, Arthur Anderson, and Enron, where the top management under pressure committed the crime. However, frauds at the lower level are asset misappropriation, vender fraud, and payroll fraud.

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Theory of Convenience This theory talks about financial crimes where white-collar crime convicts have their economic factors personal willingness and organizational opportunity (Gottschalk 2017). Convenience conventionally means the most natural way out. The three proportions of the theory of convenience are as follows: a) Willingness to have financial gains concerning opportunity and threats. b) The appearance of an organizational opportunity for committing a financial crime. c) Individual’s own willingness to commit the same. Theories Supporting Convenience Theory (Gottschalk, 2018) (Table 12.3). The above table provides theories in three categories, namely, economical, organizational, and behavioral, which show motives, opportunity, and willingness, respectively. When given in-depth analysis, economic dimensions show the threats and possibilities. Organizational dimension shows opportunities available and access to the same, whereas behavioral dimension shows the system loopholes available to be taken benefits of. To understand the same, let us get to know the convenience theory/triangle.

The Convenience Triangle According to Steinmeier (2016), the convenience triangle lays stress on pressure and incentive, different opportunities, and attitude. It pushes FT in two more directions, one being the decision-making process among different alternatives out of the several which are available with these people and second being the position which the individual is holding and is in a position to use it. Convenience theory studies the situation where the criminal is in a position where he can choose between the ways of doing a thing that can be done in either right or wrong way. Grabosky and Shover (2010) gave three areas for policy initiatives: (a) reduction in supply, (b) playing around existing targets to the calculate variance, and (c) effective internal control to be played around.

Motive on Opportunity To study it, we look into a desperate desire to obtain illegal revenue or profits actually to use the same for personal needs. Criminals have access to the opportunity. With time and options, criminals have an opportunity to pull white-collar crime (Adler & Kwon, 2002; Pontell et al., 2014). The same situation can be studied in several cases such as Satyam, Vijay Mallya, and Nirav Modi, where the culprits played around with the system for committing the FC.

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Table 12.3  Different theories of convenience Convenience theory General perspectives Marketing theory (Farquhar & Rowley, 2009) Comfort theory (Carrington & Catasus, 2007) Convenience orientation (Mai & Olsen, 2016) The costs of crime (Becker, 1968) Economical dimension Theory of profit-driven crime (Naylor, 2003) Theory of goal orientation (Jonnergård et al., 2010) Theory of social concern (Agnew, 2014) Theory of hierarchical needs (Maslow, 1943) Theory of greed (Goldstraw-White, 2012) Strain theory (Langton & Piquero, 2007) Fear of falling theory (Piquero, 2012) American dream theory (Schoepfer & Piquero, 2006) Theory of crime forces (Leonard & Weber, 1970) Narcissism theory (Chatterjee & Pollock, 2017) Exchange theory (Huang & Knight, 2017) Equity theory (Leigh et al., 2010) Organizational dimension Institutional theory (Rodriguez et al., 2005) Entrepreneurship theory (Ramoglou & Tsang, 2016) Opportunity theory (Benson & Simpson, 2015) Agency theory (Eisenhardt, 1985) Routine activity theory (Cohen & Felson, 1979) Theory of social disorganization (Hoffmann, 2002) Theory of cryptology (Ferraro et al., 2005) Resource theory (Adler & Kwon, 2002) Too big to fail theory (Pontell et al., 2014) Attribution theory (Eberly et al., 2011) Crime signal detection theory (Karim & Siegel, 1998) Sensemaking theory (Weick, 1995) Theory of whistleblowing (Keil et al., 2010) Ethical climate theory (Victor & Cullen, 1988) Leader humor theory (Yam et al., 2018) Theory of power inequality (Patel & Cooper, 2014) Behavioral dimension Nudge theory (Benartzi et al., 2017) Identity theory (Obodaru, 2017) Self-regulation theory (Mawritz et al., 2017) Labeling theory (Bernburg et al., 2006)

Consequence Preference Savings in time and effort Relief and ease Less effort needed, the better Obedience to law savings Motive A desire for more gain Business ends justify means Desire to help others Climbing the pyramid A desire for more prosperity Removal of strain Prevention of disaster Money is success The usual way of doing business Need for acclaim Mutual benefits Reestablish equality Opportunity External legitimacy Opportunity existence Opportunity at work A principal cannot control agent Specialized access Inability to control members Language interprets reality Access to resources Too powerful to jail Blame game Interference and noise Meaning based on experience Costs exceed benefits Instrumental fraud Acceptability of deviance Family member influence Willingness Behavioral reinforcement Professional identity Undesirable impulses Reputation adaption (continued)

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Table 12.3 (continued) Convenience theory Differential association theory (Sutherland, 1983) Rational choice theory (Pratt & Cullen, 2005) Self-control theory (Gottfredson & Hirschi, 1990) Deterrence theory (Comey, 2009) Obedience theory (Baird & Zelin, 2009) Contrary to life events theory (Engdahl, 2015) Slippery slope theory (Welsh et al., 2014) Neutralization theory (Sykes & Matza, 1957) Social conflict theory (Petrocelli et al., 2003) Self-determination theory (Olafsen et al., 2017) Theory of narcissistic identification (Galvin et al., 2015) Age-graded theory (Sampson & Laub, 1993)

Consequence Learning from others Benefits exceed costs Lack of self-control No risk of detection Action according to authority Victim of crime Violation of law not noticed Denial of wrongdoing Acceptable for the elite Work-related stress Personal entity Social ties dwindle

Motive on Willingness “With great powers come great responsibilities” – the statement makes its presence felt in every FC studied. It is not at all an easy task to keep one’s feet grounded and ego satisfied when one is at the pinnacle of his/her carrier. It is not always the personal desire of an individual, but sometimes it is because of organizational needs. From a simple firm to MNC purchase manager, the public dealing hand can be an easy target for the ones offering. This leads to an increase in corruption; cases like the Augusta Westland VVIP helicopter in India have both sides of the story fulfilled. To have the example, the following cases of India can give insight (Table 12.4):

Willingness on Motive Under this willingness of the individual is more robust then the motive (Galvin et  al., 2015), identifies the CEO as the main culprit with the potential criminal behavior. If CEOs are of the opinion that the company is because of him, then there are signs which will lead the company into trouble, and this can also be called narcissism, where a self-centered person believes that it is because of him the company is running. This results in questionable behavior and actions of him. There are studies that give in narcissistic personalities of CEO such as being self-focused, self-­ admiration, a sense of superiority, and a sense of entitlement (Zhu & Chen, 2015), further stating narcissistic CEOs favor bold actions, such as significant acquisitions and personal buying using company’s funds. All this is done to get visibility in the public eye; Distriktsrevisjonen (2007) while examining frauds found several factors

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Table 12.4  Leading cases of bribery in India S. Name of the person no. involved 1. Abhishek Varma

2.

3.

Name of the case AgustaWestland VVIP Helicopters Navy War Room (2006)

Anwar Manippady – Wakf Board Land Chairman of Scam (2012) Karnataka state minorities commission Abdul Karim Telgi Telgi Scam (2002)

4.

Several bureaucrats and political leaders and ministers

5.

A Raja, minister of communication and IT

6.

Ashok Chauhan (CM), ministers, former CM, and top bureaucrats

7.

Suresh Kalmadi

8.

Ramalinga Raju

Details Scorpene-class submarines and millions of dollars involved in one of the most shocking bribery cases in India involving around $ 200 million, and the same was involved in 2013 with $ 50 million Biggest land scam of India worth Rs 2000 billion involving 27,000 acres of land controlled by Wakf Board allocated illegally

Using the support of approx. 350 fake agents and experience of printing stamp papers, he sold stamp papers (fake) to government and private sector across 12 states, and the impact was such that the stamp papers sold by him were eventually legalized. The fraud amounted to Rs 200 billion The “Coal Gate” The audit “watchdog” of the government of Scam 2004 to 2009 India, the comptroller, and auditor general found possible illegal allocation of coal blocks between 2004 and 2009, resulting in a loss of nearly Rs 10.7 lakh crore which was in the end-labeled at Rs 1.86 lakh crore 2G Scam (2008) CAG, in their report, stated a difference of Rs 1.76 trillion between mandatory collection and actual collection due to which in Feb 2012, the apex court of India declared it as “unconstitutional and arbitrary,” resulting in the cancellation of 122 licenses issued Adarsh housing A residential society for the war widow and society scam personnel of defense ministry came into the picture when CAG found that many rules have been ignored or overruled, and it was not the ones who were to be allotted but the members of the society named by the government. When it came into the picture, it forced the then CM to resign Everyday Wealth One of the most looked up to the event of Games Scam (2010) Indian sporting of the decade was a question from day 1. By the completion of the event Pune Lok Shabha MP, Mr. Suresh Kalmadi came into the picture for inflating an order by 95 crore. Plus, the accommodation was also compromised Satyam Scam Known as the “Indian Enron,” here financial (2009) statements were played with resulting in providing falsified statements to banks and shareholders and whopped by their money. Raju, along with ten members, was found to be guilty and was imprisoned for life

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that work together to provide CEO options and opportunities for using the company’s resources for oneself. From the Indian perspective, we can take the example of Satyam case, where the CEO used to buy luxury watches and cars for himself from the company’s money.

Opportunity on Willingness It is the situation where an opportunity is taken over by the willingness to commit a crime. The study conducted by Borgarting (2011) is about a case of three brothers of which one was in property management and maintenance with the municipality and two others were in the maintenance business. With time, they start working hand in hand, ignoring rules and regulations with reason being lack of competition, inside knowledge, and systematic overbilling within two companies resulting in a loss of nearly 2.5 million dollars, for which they were convicted of corruption and organized crime. Benson and Simpson (2015) gave in the following opportunities for the FC: (a) Legitimate access to the crime scene by the offender, (b) a measurable difference between the offender and the victim, and (c) actions of the offender that cannot be considered illegitimate. Favorable situations and circumstances can be the stimulating factors of willingness for the crime (Aguilera & Vadera, 2008).

Willingness on Opportunity This is a situation where the willingness is so strong that it intentionally creates an opportunity for itself. Kommandantvold and Bjerkeseth (2018) examined a case in the city of Drammen near Oslo, who were looking after the clearance of construction application, wherein they found that the rules were stringent, and intentionally they started ignoring rules and started permitting construction and followed the process and even started manipulating the rules this brought in a snowball effect for no of applications as everyone knew that they could get the clearance by paying a bribe. This got into the eyes, and both aged 59 and 46 years, respectively, were convicted and imprisoned for 6 and 3.5 years, which was more than called for by the prosecutor. Deloitte (2017) gave in the following points: The deficiencies in the framework of the department lead to this condition, and it was due to the lack of authority and control, lack of responsibility sharing, and authorizations.

Justification of Financial Crime Though such frauds are committed and caught, the offenders neither plan nor act cautiously. It has been found that these are based on lies and crimes. The offenders usually try to cover up every aspect of fraud and try to justify the same to prove that

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they are less faulty, to maintain their self-esteem and goodwill (Goldstraw-White, 2012; Shover & Hochstetler, 2006). Low self-esteem, to avoid social status, to save self-image, and to avoid detection of the past, they continue to do the same regularly as what happened in the Satyam India case. Thus, (Cressey 1973) named such psychological self-protection as the rationalization in FT. Several points are given as justification for FC: A) It is just a loan and will be paid back in due period. B) It is not going to hurt anyone. C) It is a common practice. Everyone does this. D) It owes the company, and it is one’s payback. He/she deserves it. E) It is one’s right. F) Everything can be fixed. G) One will manage it. However, the fact remains that one will lead to another and another.

Conclusion It can be concluded that financial crimes and frauds can be curbed to a certain level; however, it is challenging to eradicate them from the system completely. Although we have got some insight into the pull factors of fraud or financial crime, its consequences still need to be further explored as it depends on time, personal issues, and circumstances, both internal and external. Persistence of frauds can be equated with the existence of a materialistic race of humans. Frauds can be reduced if the education system, ethics, and personal satisfaction are given more importance. Several steps are still to be taken, and several amendments right from the education system and legal system have to be made to get the best result to curb the problem of financial crime and frauds.

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Coleman, J. W. (2001). The causes of white-collar crime and the validity of explanation in the social sciences. In S.-A. Lindgren (Ed.), White-collar crime research: Old views and future potentials (pp. 55–68). Stockholm. Colvin, M., Cullen, F. T., & Vander Ven, T. (2002). Coercion, social support, and crime: An emerging theoretical consensus. Criminology, 40(1), 19–42. Comey, J. B. (2009). Go directly to prison: White-collar sentencing after the Sarbanes-Oxley act. Harvard Law Review, 122, 1728–1749. Cressey, D. R. (1953). Other People’s money: A study in the social psychology of embezzlement. The Free Press. Cressey, D. R. (1973). Other people’s money (p. 30). Montclair. Crumbley, L., Heitger, L. E., & Smith, G. S. (2003). Forensic and investigative accounting. CCH Incorporated. Deloitte. (2017). Granskning  – Byggesaksavdelingen  – Drammen Kommune (investigation  – Construction case department – Drammen municipality), global auditing firm Deloitte, Oslo, Norway, January 24, 53 pages. Donegan, J.  J., & Ganon, M.  W. (2008). Strain, differential association, and coercion: Insights from the criminology literature on causes of accountant’s misconduct. Accounting and the Public Interest, 8, 1–20. Dorminey, J. W., Fleming, A. S., Kranacher, M. J., & Riley, R. A. (2010). Beyond the fraud triangle: Enhancing deterrence of economic crimes. The CPA Journal, 80(7), 17–24. Eberly, M. B., Holley, E. C., Johnson, M. D., & Mitchell, T. R. (2011). Beyond internal and external: A dyadic theory of relational attributions. The Academy of Management Review, 36(4), 731–753. Eisenhardt, K.  M. (1985). Control: Organizational and economic approaches. Management Science, 31(2), 134–149. Engdahl, O. (2015). White-collar crime and first-time adult-onset offending: Explorations in the concept of negative life events as turning points. International Journal of Law, Crime and Justice, 43(1), 1–16. Farquhar, J. D., & Rowley, J. (2009). Convenience: A services perspective. Market Theory, 9(4), 425–438. Ferraro, F., Pfeffer, J., & Sutton, R. I. (2005). Economics language and assumptions: How theories can become self-fulfilling. The Academy of Management Review, 30(1), 8–24. Free, C., & Murphy, P.  R. (2014). The ties that bind: The decision to co-offend in fraud. Contemporary Accounting Research, 32, 18. https://doi.org/10.1111/1911-­3846.12063. Accessed on 1 Dec 2014. Galvin, B.  M., Lange, D., & Ashforth, B.  E. (2015). Narcissistic organizational identification: Seeing oneself as central to the organization’s identity. The Academy of Management Review, 40(2), 163–181. Gill, M. (2011). Fraud and recessions: Views from fraudsters and fraud managers. International Journal of Law, Crime and Justice, 39(3), 204–214. Goldman, E., & Slezak, S. (2006). An equilibrium model of incentive contracts in the presence of information manipulation. Journal of Financial Economics, 80(3), 603–626. Goldstraw-White, J. (2012). White-collar crime: Accounts of offending behaviour. Palgrave Macmillan. Gottfredson, M. R., & Hirschi, T. (1990). A general theory of crime. Stanford University Press. Grabosky, P., & Shover, N. (2010). Forestalling the next epidemic of white-collar crime. Criminology & Public Policy, 9(3), 641–654. Guy, D. M., & Pany, K. (1997). Fraud in a financial statement audit, working paper. AICPA. Hadani, M. (2012). Institutional ownership monitoring and corporate political activity: Governance implications. Journal of Business Research, 65(7), 944–950. Hammersley, J. S., Myers, L. A., & Zhou, J. (2012). The failure to remediate previously-­disclosed material weaknesses in internal controls. Auditing: A Journal of Practice and Theory, 31(2), 73–111.

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Harris, & William. (2004). The two faces of the transgender fraudster who made thousands of pounds in scams posing as both sexes. Haugen, S., & Selin, J.  R. (1999). Identifying and controlling computer crime and employee fraud. Industrial Management & Data Systems, 99(8), 340–344. https://doi. org/10.1108/02635579910262544 Heath, J. (2008). Business ethics and moral motivation: A criminological perspective. Journal of Business Ethics, 83(4), 595–614. Hernandez, J. R., & Groot, T. (2007). Corporate fraud: Preventive controls that lower fraud risk. ARCA, Amsterdam Research Center in Accounting. Hoffmann, J. P. (2002). A contextual analysis of differential association, social control, and strain theories of delinquency. Social Forces, 81(3), 753–785. Hogan, C. E., Rezaee, Z., Riley, R. A., & Velury, U. K. (2008). Financial statement fraud: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 27(2), 231–252. Howe, M.  A., & Malgwi, C.  A. (2006). Playing the ponies: A $ 5 million embezzlement case. Journal of Education for Business, 82(1), 27–33. Huang, L., & Knight, A. P. (2017). Resources and relationships in entrepreneurship: An exchange theory of the development and effects of the entrepreneur-investor relationship. The Academy of Management Review, 42(1), 80–102. Huang, S. M., Yen, D. C., Yang, L. W., & Hua, J. S. (2008). An investigation of Zipf's law for fraud detection. Decision Support Systems, 46(1), 70–83. Huang, S.  Y., Tsaih, R.  H., & Lin, W.  Y. (2012). Unsupervised neural networks approach for understanding fraudulent financial reporting. Industrial Management & Data Systems, 112(2), 224–244. Jeffords, R. (1999). How useful are the Treadway risk factors? Internal Auditor, 49(3), 12–30. Jonnergård, K., Stafsudd, A., & Elg, U. (2010). Performance evaluations as gender barriers in professional organizations: A study of auditing firms. Gender, Work and Organization, 17(6), 721–747. Karim, K. E., & Siegel, P. H. (1998). A signal detection theory approach to analyzing the efficiency and effectiveness of auditing to detect management fraud. Managerial Auditing Journal, 13(6), 367–375. Keil, M., Tiwana, A., Sainsbury, R., & Sneha, S. (2010). Toward a theory of whistleblowing intentions: A benefit-cost differential perspective. Decision Sciences Journal, 41(4), 787–812. Kerr, D. S., & Murthy, U. S. (2013). The importance of the CobiT framework IT processes for effective internal control over financial reporting in organizations: An international survey. Information & Management, 50(7), 590–597. Kinney, W. (2005). The auditor as gatekeeper: A perilous expectations gap. In J.  Lorsch, L.  Berlowitz, & S.  Zelleke (Eds.), Published in restoring trust in American business (pp. 99–107). The MIT Press. Kirkos, E., Spathis, C., & Manolopoulos, Y. (2007). Data mining techniques for the detection of fraudulent financial statements. Expert Systems with Applications, 32(4), 995–1003. Knechel, W. R., Naiker, V., & Pacheco, G. (2007). Does the auditor industry specialization matter? Evidence from market reaction to auditor switches. Auditing: A Journal of Practice & Theory, 26(1), 19–45. Kommandantvold, M., & Bjerkeseth, A.  W. (2018). Dømt for Grov Korrupsjon mot Drammen commune (Convicted of gross corruption against Drammen municipality). Kothari, S.  P., Leone, A., & Wasley, C. (2005). Performance matched discretionary accruals. Journal of Accounting and Economics, 39(1), 163–197. Langton, L., & Piquero, N. (2007). Can general strain theory explain white-collar crime? A preliminary investigation of the relationship between strain and selected white-collar offenses. Journal of Criminal Justice, 35, 1–15. LaSalle, R.  E. (2007). Effects of the fraud triangle on students’ risk assessments. Journal of Accounting Education, 25(1/2), 74–87.

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Chapter 13

The Regulatory Landscapes of Ponzi Schemes in India: With Special Reference to the State of Tamil Nadu E. Prema and V. Shyam Sundar

Introduction Ponzi is an investment plan which is a fraudulent scheme. To repay the original investors, funds received from new investors are used. Ponzi scheme operators frequently assure that they will invest the funds they raise to produce extraordinary profits with little to no risk. These schemes are not secured investment schemes, and governments often warn the general public not to invest in such kinds of attractive return policy schemes, but rather people are fascinated toward fraudulent invest schemes. The general red flags of Ponzi schemes are as follows: (i) Attractive high returns (ii) Assurance of high rewards with no risk (iii) A constant flow of revenues irrespective of market fluctuations (iv) Non-registered securities with the Securities and Exchange Commission (SEC) (v) Clients not permitted to examine official documentation for their payment (vi) Customers having difficulty withdrawing their funds

E. Prema (*) VIT School of Law, Vellore Institute of Technology, Vellore, Tamil Nadu, India e-mail: [email protected] V. S. Sundar Chennai Dr. Ambedkar Government Law College, Pudupakkam, Chennai, Tamil Nadu, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9_13

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Economic Offences and Ponzi Schemes Economic offences are spreading around the world as a result of globalization and technological advancement. Apart from generating massive economic losses to victims, in addition, society as a whole is being negatively and severely impacted in terms of the economy, morals, faith, trust, values, harmony, and so on. In the previous 3.5 years, the Central Bureau of Investigation (CBI) has recorded 100 investigations involving 132 entities connected to Ponzi schemes and has made 21 arrests. In such circumstances, the Enforcement Directorate (ED) opened 87 money laundering investigations between 2019 and 2020. The RBI’s Sachet portal, which serves as an online system for State Level Coordination Committees (SLCC) and allows the public to file complaints about financial fraud, received 1540 complaints about non-repayment of deposits and funds raised for various kinds of investment schemes (964 in 2020–2021 and 576 in 2021–2022). Section 2(d) of the Arms Act, 1956, defines “economic offences” as involving the operation of Ponzi schemes and multilevel marketing content with the intent of defrauding the general public to earn monetary rewards as well as an organized group betting in any form.1 This definition’s scope of application and applicability is quite broad, capable of encompassing all types of economic offenses, including individual sufferers, multiple victims, mortgage frauds, corporate scams, real estate scams, criminal breaches of trust, cheatings, forgeries, copyright and trademark violations, impersonations, FEMA cases, tax frauds, money launderings, Hawala scams, export-import matters, etc. In this case, the Supreme Court of P. Chidambaram v. Directorate of Enforcement2 has placed reliance on the decision of this case. Further, economic offences constitute a class apart, having serious social ramifications, and there being prima facie materials to show the petitioner’s involvement in economic offences with larger scale conspiracy, his application deserves to be dismissed.

Courts Handling the Economic Offences Cases: Tamil Nadu In some situations, the High Court appoints Administrators, and the Department of Company Affairs appoints Liquidators to take over the assets and obligations and take steps to settle the depositor’s money. In the instance of financial institutions that have failed to meet their obligations not only to depositors but also to other creditors, the claim must be referred to the Debts Recovery Tribunal. If an accused proclaims himself bankrupt and submits an insolvency petition in the High Court, the court will appoint an Official Receiver to handle the properties and other concerns and settle the debts.  Bilkisbanu (Bilkisbano) vs. State of Gujarat, R/CR.MA/12478/2021  P.Chidambaram vs. Directorate of Enforcement, 9 SCC 165 (2019)

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Establishment of Economic Offences Wing II in Tamil Nadu As per the governor’s directives, Economic Offences Wing II (EOW II) units were initially established in the EOW headquarters (HQrs) in Chennai and all of the other 29 districts in the states.3 However, due to a lack of reporting of cases, 13 district units were shut down on the instructions of the Director General of Police in 2004. Cases of financing firm fraud that were being investigated by local police, including the Chennai City Police, were transferred to the Economic Offences Wing for further investigation. New cases were also filed as a flood of complaints from dissatisfied depositors from around the state were filed against financial institutions that had failed to pay their matured deposits. The wing also handles cases involving prize chits, chit fund frauds, traders cases, financial institution cheating cases, and so on.4

Roles of Economic Offences Wing II The major two aspects are as follows: 1 . Managing criminal cases 2. Payment of debts EOW II is only in charge of handling criminal cases. The investigation officer (IO) must do the following during the investigation: • Discover the causes of default. • Begin the process of attaching the institution’s movable and immovable properties, as well as the private properties of the accused and borrowers of the delinquent firms. • Send a petition to the government for an ad interim attachment. • Refer the topic of property disposal and debt settlement to the competent authority.5

Case Study on Tamil Nadu on Ponzi Schemes In August 2022, according to the Economic Offences Wing of the Tamil Nadu Police (EOW) and Crime Investigation Department (CID), over two lakh depositors filed complaints against many nonbanking businesses, accusing them of cheating  GO. M.S.No. 1697 HOME (Courts – ΙΙA) Department Dated (24.12.1999)  Government of Tamil Nadu-Police Department, Economic Offences Wing (n.d.). https://tneow. gov.in/Eow/TNPID_Act.html 5  Ibid see in 4. 3 4

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them out of almost $8624 crore in the recent months by luring them to invest in Ponzi schemes. Several financial companies were established around the state under the pretence of engaging in real estate investing, online trading, and stock market investing. These companies promised investments with high return expectations. In 2020, the case against Universal Trading Solution, a Coimbatore-based company, baited its investors with the promise of double the investment returns for 10 lakh investment in 10 months. Ponzi Schemes vis-a-vis Tamil Nadu Protection of Interest of Depositors Act, 1997 A Ponzi scheme is a deceptive financial scam that promises huge returns to investors with minimal risk involved. The Ponzi schemes collect money from the participants later on the promise to pay high returns. The companies involved in the Ponzi schemes prioritize all of their resources toward getting and attracting new investors to make investments. This investment from stockholders is used to pay returns to existing investors, who will be notified as a profit from a legitimate business. They trust in the continuous flow of money from new investments to give profit to their old investors. When this continuous flow breaks, the scheme will fail.6 The Ponzi scheme got its name in the early twentieth century; the scheme was named after a fraudster Charles Ponzi in 1920. However, the first fraud of this type has been recorded in the late nineteenth century and was organized by Adele Spitzeder and Sarah Howe in Germany and the USA, respectively. The book Martin Chuzzlewit and Little Dorrit written by Charles Dickens in the 1850s speak about the Ponzi schemes. Charles Ponzi defrauded many by enticing New England residents to engage in a postal stamp speculation scheme. He ran an illegal arbitrage business; he advertised that the investors will get 100% returns from international reply coupons within 90 days. The scam failed within a year, causing the investors to lose $20 million. These programs often take the form of “collective investment schemes.” In other words, it draws in fresh capital and pays out the previous investors with it. It repeatedly goes through this process until it ultimately reaches the point when it is unable to pay its shareholders. This is a continuous process that will eventually lead to a liability that is so great that the business ceases to exist. The effects of Ponzi schemes have been more severe in nations with slack regulatory systems. The terrible pattern is exemplified by more recent occurrences as well as the situation of Albania in 1996, where protests led to the overthrow of the government and even fatalities. In 13 cities, rioting and violent protests followed the failure of schemes in Colombia that had raised an estimated $1 billion USD, forcing the government to proclaim a state of emergency.7 On the question of chit funds, Indian financial institutions called chit funds are an instrument which serves low-income people’s financial needs. Chit funds have historically been used as a saving instrument that is distinct from other financial  Naman Jain. (2021). Ponzi Scheme and Indian Laws. SSRN  Frankel, T. (2012). The Ponzi scheme puzzle: A history and analysis of con artists and victims. Oxford University Press 6 7

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instruments, commercially functioning primarily as a financial intermediary connecting borrowers and depositors with the goal of channeling the cash flow from persons with excess toward deficit spenders. A group of people join forces for a predetermined amount of time in a “chit fund plan” and make periodic contributions to a shared fund. This is accumulated at specified times during the plan, a pool of funds is lent privately via an auction system to the bidder who gives the highest value for money. India is no new to Ponzi scams, though their prevalence has increased recently. Several fraudulent schemes continue to exist although there are laws and regulations at the state level in place to control and outlaw certain deposit-collecting practices. Due to the existence of several sector-specific regulators, many regulatory organizations now simultaneously fall under their authority, which paradoxically causes certain operational gaps. Additionally, the laws differ in their enforcement methods and penalties for violations. The Banning of Unregulated Deposit Schemes Act, 20198 (BUDS Act), was enacted in July 2019, and the Banning of Unregulated Deposit Schemes Rules, 2020 (Rules), was notified in February 2020, in response to the need for a uniform legislative framework to regulate deposit-taking and provide an effective investor protection mechanism. Tamil Nadu was the first state in India to enact legislation to tackle the Ponzi scams named the TN Protection of Deposit of Investors Act, 1997 (TNPID)9; following this, many state legislators in India came forward and enacted laws in this regard. This article attempts to make a critical examination on the TNPID Act and also will analyze the present legal framework and judicial improvements around the Ponzi schemes in India. Finally, the article would also attempt to give suggestions. Legal Framework and Judicial View In 1996, the Central Crime Branch, Chennai, was filled with many complaints filed by citizens against unincorporated financial institutions which had induced people to invest their money by introducing eye-catching schemes and defaulting in payments. Due to the increasing offence rate, the government of Tamil Nadu formulated a legislation to restrain such activities which have become the TNPID Act, 1997.10 The Tamil Nadu Protection of Depositors’ Interests (in Financial Establishments) Act, 1997, is the model law proposed to state governments by the Department of Financial Services to protect depositors. The Department of Financial Services advised this to ensure that there are no loopholes in the regulation of deposit-taking activity by financial institutions in the states. It is pertinent to note that Tamil Nadu is the first state to take steps to curb these fraudulent activities. To give speedy justice, special courts were formed. All the matters related to this Act will be exclusively dealt with in a Special Court formed under Section 6. Section 5 of the stated statute states that all persons involved  The Banning of Unregulated Deposit Schemes Act, 2019(Act No.21 of 2019)  Tamil Nadu Protection of Deposit of Investors Act, 1997(Act No.18 of 2008) 10  K.N.Basha. (2009). Refresher course for District Judges, “Effective and speedy disposal of Economic offences cases”, Tamil Nadu State Judicial Academy 8 9

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in the management of the financial institution who has defaulted in the payment of money to the depositors may be punished with 10 years of imprisonment and a fine which may extend to 1 lakh. Simultaneously, any offence punishable under Section 5 that gets before or after the initiation of prosecution of an investigation by the appropriate authority, may thereon stop the proceedings as mentioned in Section 5(A) of TNPID Act, 1977. Under Section 3, upon the complaints made by people on a financial institution for such nonpayment of the deposit, the government can attach the property of the institution by appointing a competent authority. In Tamil Nadu, according to G.O.Ms.No.1484, the Department of Home (Courts II), an additional commissioner for land administration was appointed as the competent authority for performing the duties. Under Section 11, TNPID Act, 1997 “If any person including competent authority is aggrieved by the decision of the Special Court may file an appeal in the High Court with in 30 days from the order.” TNPID, 1997: Judicial Standpoint The constitutional validity of TNPID Act11 and the competency of the state government to enact an Act of this kind were questioned before the Madras High Court. The following points were observed by the court in Thiru Murugan Finance v. State of Tamilnadu.12 The said Act mainly focuses on financial institutions which defraud the people by not paying back the amount to depositors. These institutions fall under state list entry 32 in the seventh schedule. Therefore, the state has the competency to enact the law, because they have the power to formulate any laws for the welfare of the people which fall under the state list. It is noted that the act trenches upon other enactments. In light of the legislation established by several Supreme Court decisions, taking into consideration the purpose of the Act and the facts that the parliament has gained the president’s consent, the Act cannot be said unconstitutional just for trenching with other enactments. The High Court of Madras has elaborately discussed the different provisions of TNPID Act and observed certain things. The first thing to be noted is that the cardinal principle of natural justice is not violated by this act. The second thing is that the procedure mentioned in Sections 3, 5, and 8 of the TNPID act does not have any form of arbitrariness and unreasonableness. The intention of Sections 3, 5, and 8 is only to check the financial establishment and prevent them from exploiting the people. In addition to this, there is no unguided power given to the competent authority or the court formed under this act. The third point is that the punishments mentioned in this act are not excessive and harsh. Therefore, there is no violation of Articles 14, 19(i) (g), and 21 seen in this Act. The act does not infringe on any fundamental rights and has passed the test of reasonableness and nonarbitrariness. The constitutional validity once again upheld the constitutionality of the TNPID Act in Bagavathy vs. State of Tamil Nadu.13 After analysis, the court upheld the constitutionality of the Act and the competency of the state to enact such an act.  Ibid see in 4.  Thiru Murugan Finance vs. State of Tamil Nadu, (II) CTC 609 (2000) 13  Bagavathy vs. State of Tamil Nadu, (2) CTC 207 (2007) 11 12

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Ponzi and Policy: Concerns and Way Forward It is difficult to say that the legislation helped to curb the menace that the Ponzi schemes have created, so much so that the G20 has identified weak points in the regulator’s enforcement as a top concern for reform. Efforts to enforce have been challenging and inconsistent in the financial markets. The recent scandal in the USA has once again brought to light the significance of effective enforcement of securities regulation as well as the difficulties that securities regulatory agencies around the world encounter in putting in place credible enforcement programs. This scandal involved a pyramid scheme orchestrated by Bernard Madoff that was not discovered by American authorities for more than two decades.14 In addition to competent regulation, the regulatory framework’s goals also call for efficient enforcement. Regardless of how sound the regulations are for controlling the behavior of market players, if the enforcement mechanism is poor – or is seen as being unsuccessful – the system’s ability to produce the desired results is compromised. Therefore, without further delay, appropriate legislative provisions should be implemented along with efficient administrative and enforcement steps to protect millions of people’s investments and hard-earned savings and to ensure that fraudulent operators are brought to justice as soon as possible and that there is a deterrent effect on these mushrooming operators. Failure of official banking institutions to fulfill the public’s anticipated needs for investment and savings plans by expanding their geographical footprint to include all of India, as well as a complete lack of knowledge among the general populace of the distinction between lawful investment products and unauthorized and unsafe schemes, could be identified as the root causes of the rapid expansion of Ponzi schemes. Furthermore, due to the inability or reluctance on the part of financial industry regulators/investigative agencies, especially governments, to identify and punish the sponsors of such schemes, regulation gaps and overlapping have created gray zones where unscrupulous companies can thrive. Additionally, there is a need to promote and reward institutionalized little savings and safe investment options to make available to the general population and wean them off dubious schemes. The state government’s infrastructure should also be used to get market access. The knowledge regarding impending frauds should be quickly communicated to investors/potential investors. As online platforms for complaint resolution are insufficient, dedicated counters for residents to register their grievances are required. This necessitates decentralized coordination of action by appropriate agencies and regulators. The harmonious working of the regulatory authorities would go a long way in resolving the issue at hand.15 The small depositors are not benefited immediately because they have to wait for the criminal trials to be over and the Special Court or Competent authority to  Monroe, H.K., et al. (2010) “Perils of Ponzis: Regulators need to stop Ponzi schemes before they gain momentum, especially in developing countries.” (47(001) Finance & Development 15  Standing Committee on Finance, Efficacy of Regulation of Collective Investment Schemes (cis), Chit funds, etc. 14

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distribute the money or assets recovered equally, which sometimes does not provide an immediate remedy. Many states have enacted laws such as The Sikkim Protection of Interests of Depositors (in Financial Establishments) (Amendment) Act, 2020, TNPID, 1977 and these legislations though provided to protect depositors’ interests, it appears that there are few instances in which the goal of repaying the smaller amount is met depositors’ capital could be realised. It is unclear whether any state or investigative body has taken any precautionary measures required by the act. The state’s compliance and vigilant system urgently need to be revitalized and strengthened so that scammers are severely penalized and small or new investors are adequately protected. For this reason, an effective whistleblowing system should be established. The government along with the investors should actively take part in ensuring that the firm which collects deposits has the capacity to deliver the promised return, i.e., check the capacity of their asset realization schemes. One of the key elements contributing to illegal money mobilization might be the high levels of reward, in the way of commission, provided to agents, who then go all out to entice the unwary masses, especially in nonmetro regions of the country. To discourage and disincentivize this practice, formally limiting commission payments to a given rate of, like, 2% or whichever rate might serve the purpose.16 A comprehensive and all-encompassing model central law that encompasses pooled investment plans, chit funds, direct advertising strategies, and other practices that are presently legal but are characterized, classified, and enforced inconsistently would be the way forward in terms of regulating the diverse cash acquisition/investment strategies operating under many names and forms around the country. Such legislation should also include clauses that allow for the seizure of property, the timely collection and distribution of revenues, deterrent penalties including jail time, repayment and compensation deadlines, as well as the prospect of class action litigation.17

 he Jurisdiction and Effectiveness of Special Courts T for TNPID Tamil Nadu was the initial state to implement the law titled “The Tamil Nadu Protection of Depositors Act” in 1997. The custodian for the attachment processes in TNPID cases is the competent authority, which takes custody of the ad interim attached properties. After the sale of the property, obtain an absolute possession order and divide the proceeds equally among the depositors. DRTs are created to assist banks and financial organizations in their efforts to recoup defaulters. Special courts for TNPID are the following18:  Shahi, U., (2018) “Collective Investment Schemes: Legal Issues and Challenges in India.” SSRN  Ibid see in 15. 18  Ibid see in 4. 16 17

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• A Special Court has indeed been established under the TNPID Act in Chennai to hear cases registered under the TNPID Act. • The Headquarter Non-TNPID cases are heard by the Chief Metropolitan Magistrate, Addl.CMM, Chennai City. • Non-TNPID cases recorded in a district are heard by the Chief Judicial Magistrate Court. Section 6 of the Central Excise Act of 1944 called for the establishment of “a Special Court” when the TNPID was enacted in 1997. As a result, a Special Court for the State of Tamil Nadu was established in Chennai. However, it was quickly discovered that the Special Court was unable to try sister offences under Indian Penal Code Sections 420, 467, 468, and 120-B, as well as Section 5 of the TNPID Act. As a result, Section 6 was altered, and for deciding the matter at hand, Section 6(1) of the TNPID Act alone is important. Section 13(1) of the TNPID Act was engrafted to overcome the congestion caused by committal processes. The TNPID Act states in Section 13(1) the procedure and powers of Special Court related offences: The Special Court may take cognizance of the offence without committing the accused to it for trial, and in trying the accused person, the Special Court shall follow the procedure prescribed in the Code of Criminal Procedure, 1973 (Central Act 2 of 1974) for the trial of warrant cases by Magistrates. (emphasis added) 11 A combined interpretation of Sections 6(1) and 13(1) of the TNPID Act makes it clear that a Sessions Judge would preside over the Special Court and, as a result, he may take cognizance of the offence without committing it to the Special Court.19 In the case of R Karuppusamy vs. Competent Authority,20 in accordance with Section 7(1) of the TNPID Act, a special judge has been appointed to notify the bank account or any other person whose asset has been attached, calling upon them to show cause. The Special Court has passed an order rendering the government’s ad interim attachment order absolute. The Special Court could have taken the assistance of the competent authority to verify the details regarding the property under the ad interim attachment. In the case of G.S. Ramarao Gupta vs. Competent Authority & District Revenue Officer, Salem,21 Section 11 of the TNPID Act does not specify whether the order to be appealed against shall be civil or criminal in nature. It simply states that the appellate forum to entertain the High Court will hear any appeals from Special Court orders. In the case of LCS Foundations vs. Pattabiraman,22 only the special courts constituted under the TNPID Act will have jurisdiction. This court had no jurisdiction to entertain the insolvency petition.  G. Sheik Mohaideen vs. S. Deivendran, Crl.R.C. (MD) No. 841 (2011)  R Karuppusamy vs. Competent Authority, 2012 SCC Online Mad 1185 21  G.S. Ramaroa Gupta vs. Competent Authority & District Revenue Officer, Salem MWN (Cri) 393 (Mad) (2010) 22  LCS Foundations vs. Pattabiraman, SCC Online Mad 4396 (2022) 19 20

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Jurisdiction of the Special Court Section 6 of the TNPID Act addresses the Constitution and the Special Court’s jurisdiction. Section 6(3) provides for the transfer to the Special Court of any pending case to which this Act’s provisions apply. For example, if a trial for an offence under Section 420 IPC against a financial establishment for defrauding depositors is underway, the case will be transferred to the Special Court. Section 6(2) restricts the jurisdiction of all courts, including those established under the Insolvency Act, over subjects to which the Act applies. As a result, it is necessary to determine which matters can be handled by the Special Court established as a result of to the TNPID Act.23 Powers of the Special Court The Special Court’s power to attach, sell, realize, and partition the financial establishment’s or any other human property is addressed in Section 7 of the TNPID Act. The Special Court’s authority to render the government’s attachment of properties made in Section 3 of the TNPID Act is absolute. Before finalizing the attachment order, the Special Court has the authority to send notice to all people likely to have an interest or possession in the property of the financial establishment, ask for objections, and issue orders based on the objections, if any. The Special Court has the authority to deal with objections and follow the procedure of the court hearing a suit under the Civil Procedure Code under section 7(5) of the TNPID Act. The Special Court has the authority to make the Ad Interim Order of Attachment permanent or to amend it by freeing all or part of the property from attachment. When an attachment is made absolute under Section 7(7) of the TNPID Act, the Special Court has the authority to order the attached properties to be sold at public auction. On the application of the competent authority, the Special Court shall thereafter issue a direction for the equitable division of the sale proceeds among the depositors.

The Actual Procedure to Function Deposit Schemes in India The regulating law imposes penalties for violating its requirements and conducting deposit-taking operations that are not properly registered or are in violation of the applicable regulating law. It is important to note, however, that each regulatory law only acts and penalizes deposit-taking activity within the limits of its power. India’s Securities and Exchange Board (SEBI), for example, has sole jurisdiction over cooperative investment plan management firms. There is no comprehensive criminal law that penalizes any other deposit-taking action that does not fall under the purview of the regulating law. Following the defrauding of many Indians by Ponzi schemes, the BUDS Act was enacted to bridge gaps in the existing regulatory and

23

 Ibid see in 22.

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legal structure for deposit-collecting activities.24 “Regulated deposit schemes” forbids and prosecutes the receipt of deposits under any unregulated plan or arrangement, designating them as “unregulated deposit schemes,” thus closing the gaps created by the varied jurisdictions in each of the regulating laws. Furthermore, failure to refund funds results in a penalty accepted through regulated deposit schemes at maturity or failing to perform any service as promised in lieu of the deposits.25 Because there is no database of all payment activities in India, the Act calls for the creation of a database comprising information on all Indian deposit takers. Furthermore, deposit takers are required to submit information about their organization in the manner and form specified in the BUDS rules, including any later changes in operations/enterprise. Unless otherwise specified in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 or the Insolvency and Bankruptcy Code of 2016, the BUDS Act provides a procedure for restitution to depository institutions whose claims and orders of temporary attachment have been given priority, to the extent of depositors’ claims passed by the relevant authority.26 Companies (Acceptance of Deposits) Rules, 2014, as well as Sections 73 and 76 of the Companies Act of 2013, deal with deposits and should be read in combination with the Companies (Deposit Acceptance) Rules of 2014. Deposits will be treated as cash raised by a firm with the promise to return with or without interest after a specified period, according to the 2014 Rules. The comprehensive and restrictive definition of deposits has virtually stifled operators from obtaining financing through surrogates.27 According to the defining clause, qualifying enterprises that want you must possess a minimal net worth of INR 100 crores or a minimal turnover of INR 500 crore rupees to attract public deposits. Furthermore, the standards define “assumed deposit” stating that any plan that pays shareholders with returns, whether it be in cash or in kind, is considered a deposit, a formerly exploited gap. The case of Bandhua Mukti Morcha vs. Union of India28 harmed lakhs of depositors across various states involving several firms. The claimed companies devised more and more devious methods of luring the unwary public into making deposits

 Ankoosh Mehta and Janvi Manek, (2021) Ponzi Schemes in India –The Legal and Regulatory Landscape, SCC Online Blog. p. 64. 25  Ponzi Schemes, US Securities and Exchange Commission. Retrieved January 7, 2023, from https: //www.investor.gov/introduction -investing/investing-basics/glossary/ponzi-schemes 26  Observations and Recommendations, “Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc.” (n.d.). Twenty-First Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha). Retrieved January 8, 2023, from https://https: //eparlib.nic.in/bitstream/123456789/65303/1/16_Finance_21.pdf 27  Ray, A., & Ghosal, S. (n.d.). New Companies Act may sound the death knell for disguised ponzi plans. Economic Times. Retrieved January 7, 2023, from https://economictimes.indiatimes.com/ news/economy/finance/new-companies-act-may-sound-death-knell-for-disguised-ponzi-plans/ articleshow/33227204.cms?from=mdr) 28  Bandhua Mukti Morcha vs. Union of India 3 SCC 161 (1984) 24

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in their fraudulent (Ponzi) schemes, flat allotment plans, tours and travel programs, and so on. According to Section 2(4) of the BUDS Act, 2019 ‘Deposits’ are sums of money received by any deposit taker as a loan or advance, or in any other form, with the commitment to repay them, either in cash or in-kind, or in the form according, of a specified service, with or without any benefit like interest, bonus, profit, or any other form. The ‘Unregulated Deposits Scheme’, is an arrangement under which, acceptance of deposits in any way that is not authorized or is forbidden in the normal course of business are penalized under this Act. A penalty is also applied if the money taken through regulated deposit accounts is not refunded upon maturity of any promised service in exchange for deposits. The Act also includes deposits that are not on the list. Unregulated deposit schemes are defined in Section 2(17) as schemes or arrangements in which deposits are accepted or solicited in the normal course of business by any deposit taker, are not controlled by any sectoral ministry or administrative entity, and are not protected by the act’s first schedule. In general, the offences may be as follows: • Taking deposits through systems that are not regulated. • Acceptance of deposits made through unregulated deposit programs. • In registered deposit systems, there is a fraudulent default, as well as unfair instigation in unregulated deposit programs.29

Conclusion According to case studies, Ponzi schemes can arise in any existing or developing financial market. Even though the business prospects provided by these programs and their legal frameworks differ, their advocates use comparable strategies to convey their case, identify target groups, gain attention, and develop a reputation. Ponzi schemes are a hazard all over the world, but notably in countries with fewer regulatory structures that might be unable to stop their exponential growth. The main objective is to act quickly before scams gain traction and harm unwary investors. Police from the Economic Offenses Wing raided 21 locations belonging to directors of a financial services corporation in a multimillion dollar fraud case. International Financial Services staff are said to have collected 14,000 crores in deposits from consumers by guaranteeing a return of 8000 for every 1 lakh put. The Tamil Nadu police were asked by the Madras High Court to file a First Information Report and investigate an alleged 6000 crore scam implicating a Vellore-based investment firm, and the Economic Offences Wing stepped in. The interim judgment was given by Justice N Sathish Kumar in response to a suit brought by P  Acceptance of Deposits – Applicability, Repayment, Prohibition & Punishment. (2022, April 14) Retrieved January 8, 2023, from https://cleartax.in/s/acceptance-deposits 29

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Karthik, a Chennai resident, who claimed that the corporation had deceived him. Vinod Kumar (40), an IFS corporate agent, committed suicide after failing to reimburse the money he had collected from various individuals to invest in the business. According to family sources, Vinod Kumar gathered roughly Rs. 5 crore from many people and put it into the company. He had sold his land and put Rs. 50 lakh into the company.30 Ponzi schemes are a global hazard, but they are especially dangerous in nations with less established regulatory structures, which may be unable to stop their exponential rise. The significance of the legislation across any nation that protects the deposits and investments of the vulnerable depositors is to act before scams gain traction and harm unwary investors.

 EOW raids Chennai firm in fraud case | Chennai News - Times of India. (n.d.). The Times of India. Retrieved January 8, 2023, from https://timesofindia.indiatimes.com/city/chennai/eowraids-chennai-firm-in-fraud-case/articleshow/93381687.cms 30

Index

A Accounting fraud, 37, 40, 166–170, 172–175, 178, 180, 183–186 Animal, 20–22, 26, 27, 29, 30 Anti-money laundering (AML), 29, 78, 83, 84, 87, 91, 117, 137 Arbitration, 77–80, 82–85, 87, 88, 90–93 Association of Southeast Asian Nations (ASEAN), 20, 21, 26–31 B Block chains, 109, 110, 120, 144 C Civil war, 49, 51, 54, 55, 59, 60, 63 Convenience, 149, 203, 204 Corruption, 24, 37, 67, 77, 142, 165, 205 Creative accounting, 166–169, 176, 178, 180, 182, 186 Cryptocurrency, 109–128, 131–145 Cyber crimes, 98–100, 106, 149, 151, 156 Cyberspace, 147–164 D Deposits, 8, 9, 25, 216, 217, 219, 220, 222, 225, 226 Detection of accounting fraud, 178 Developing economies, 67, 68, 71, 74

E Economy, 1, 19, 20, 22, 26, 39, 49–51, 53, 54, 56, 57, 62, 63, 68, 70, 72–74, 78, 112, 131, 132, 135, 136, 138, 144, 147–164, 170, 181, 183, 192, 216 F Financial and systematic fraud, 35–46, 109, 191, 194 Financial crimes, 19–31, 44, 77, 78, 93, 148, 150, 151, 164, 191–208 Financial crisis, 49–63 Financial statement, 38, 40, 165–170, 173–180, 185, 186, 191–194, 196, 200, 201, 206 Foreign debts, 55, 57 Fraud risk management, 45, 46 Fraud triangle, 45, 170–172, 186, 193, 199 Fraud, 35, 68, 97, 109, 136, 150, 165, 191, 216 Funds, 1, 14, 19, 25, 29, 31, 39, 44, 52, 53, 58, 59, 61–63, 68, 69, 74, 78, 81, 92, 105, 112, 113, 117, 118, 123, 125, 126, 132, 136, 138, 142, 160, 195, 201, 205, 215, 216, 218, 219, 222, 225 H Human rights, 2, 9, 11, 13, 15, 57, 58 Human trafficking, 2–16, 20

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. M. Gupta (ed.), Financial Crimes, https://doi.org/10.1007/978-3-031-29090-9

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230 I Illegal wildlife trade, 19–31 Internet, 97–99, 103, 106–108, 122, 148, 149, 159, 160, 163 Investment, 4, 20, 39, 51, 52, 60, 61, 67, 78, 81, 90, 91, 112–115, 117–119, 121, 123–125, 127, 128, 136, 139, 151, 160, 179, 194, 215, 216, 218, 221, 222, 224–226 M Misgovernance, 51–53, 57 Money laundering, 8, 19–22, 24–26, 29, 31, 77–93, 113, 151, 216 O Offenders, 2, 14, 29, 37, 117, 200, 207 Online frauds, 97–108, 148, 164 R Remedies, 46, 103, 173, 186

Index S Schemes, 9, 14, 37, 39, 79, 112–119, 123–126, 131, 140, 165, 175, 178, 186, 215–222, 224–227 Sri Lanka, 49–63 T Technology, 6, 37, 40, 43, 45, 46, 71, 97, 99, 102, 119, 121, 122, 132–135, 143, 144, 147, 148, 153–155, 158, 161, 164, 165, 173, 193 Theory of accounting fraud, 165–186 Triangle, 134, 203 U United Nations Office on Drugs and Crime (UNODC), 2, 22–24, 26, 28, 157, 162 W White-collar crimes, 39–41, 186, 198