Book Review: The Great Indian Fraud: Serious Frauds Which Shook the Economy

Book Review: The Great Indian Fraud: Serious Frauds Which Shook the Economy

Book Review: The Great Indian Fraud: Serious Frauds Which Shook the Economy

By Rohini D

Right at the beginning, author Smarak Swain, an officer of the Indian Revenue Service (IRS) who presently works as Deputy Secretary in Ministry of Finance, points out, “Financial frauds are cheat codes that can undermine a free market economy.”

In an era, where gaming the system is considered hip and glorified, Swain painstakingly explains the systematic skews that led to financial crimes or scams in India. Though the financial world might seem incredibly confusing, the author has made an incredible attempt to push what could an academic textbook into the coffee tables of a common Indian.

Fraud investigation in India is done by numerous law enforcement agencies. Different agencies tackle different frauds. Some agencies specialise in prosecution or asset recovery, while others specialise in fraud detection. As a result, no one agency takes complete ownership of busting frauds. At the same time, some frauds manage to wriggle through the gaps in detection and enforcement. For instance, the income tax department investigates all kinds of financial frauds because frauds violate multiple provisions of tax laws. But they cannot take pre-emptive action when they detect a possible fraud. They can, however, report it to other agencies. SEBI can take pre-emptive action when the securities market is involved, or when money is fraudulently raised from the public. EOW and CBI investigate bank frauds when banks report possible fraud. ED gets involved to take action against money laundering, which invariably happens in every fraud. But ED’s mandate is limited to enforcement of anti-money laundering laws. SFIO takes up a case for investigation on receiving specific reference.

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The red tape associated with fraud detection and the amount of effort required to find a flaw in a globalised system is explained beautifully. The author breaks down difficult-to-understand jargons into simple terms and explains complex economic theories in a layman’s language. I think its’ the most comprehensive coverage of scams in India. The lucid explanation through the usage of live examples of the ongoing investigations into various recent scams that have rocked the economic macro system of India helps one understand the level of ‘creative accounting’ that takes place to game the system. Needless to say, it’s the perspective of an insider as Swain who is an ace investigator himself in the income tax department.

He points out that the State has no role in a free-market economy, but the State has to intervene to prevent or manage market failures: 

“Control and supervision in a system cannot be overdone; partly because control has its costs, partly because control slows down the system. Hence, control has to be optimised. Control cannot be all-encompassing. Systems that run on trust are the most efficient system, and produce the most economic value. An ideal system runs without any control or supervision. It is based on trust. No cost is incurred on control. No time is lost in checks and balances.

Hence, the most effective prevention strategy is to optimise control: expand control without letting the cost of control escalate. The scope of control has definitely increased over the years, and we are living in times when information technology has provided cheap solutions for expanding control. Neural networks and artificial intelligence algorithms have managed to predict frauds from financial statements with reasonable accuracy. Financial institutions, corporate houses, and government regulators should make extensive use of information technology in supervision and fraud prediction.

However, reactive laws usually have unintended consequences. Many times, such laws have an adverse impact on genuine businesses. Some laws brought in reaction to serious frauds are so draconian that they throw the proverbial baby with the bathwater.”

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The aplomb with which Swain carries off the burden of giving details of those scams that are still under investigation is indeed an art. Occasionally, he dabbles in international scams that rocked some of the most mature economies and drew a parallel to the Indian context. After all, it makes sense to learn from the mistakes of others.

“Effective deterrence also goes a long way in reducing the number of severity of frauds. India has invested significant diplomatic and legal resources in extradition of fugitive economic offenders cooling their heels in other countries. Extradition attempts are not always successful, and the few successes come after protracted legal battles in foreign courts. But such measures act as deterrence for others who harbour ill intentions for making a quick buck. Extradition efforts show that the government will keep chasing fraudsters their entire life, and mete out justice. 

International cooperation has gone a long way in clamping down on economic offenders. The Indian Prime Minister Narendra Modi called for joint action against fugitive economic offenders in the G20 summit in Buenos Aires in 2018. He suggested a nine-point agenda to tackle economic offenders, including strong and active economic cooperation, cooperation in legal processes, extradition, exchange of information, and stopping entry and safe haven to economic offenders. He found strong support for his vision in the 2019 summit of the G20 group of countries in Osaka, Japan, from the host Shinzo Abe. In November 2019, BRICS countries reaffirmed their commitment to denying safe haven to economic and corruption offenders.”

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From teak plantation scams of the 90s to the chit funds, the book does it all to unravel the swindlers. The book works through the tapestry of those who cook the scams the chefs who cook the books for the scamsters. Be it the scandal of ‘good times’, or the new investment-fix of the celebrities, Bitcoin, the book does justice in uncovering the modus operandi of these white-collar crimes that compromise a country’s economy and the trust that it is supposed to espouse in this highly globalised world.

“How do we prepare for the next big fraud? How do we prevent these frauds from spreading like cancer in our economy? As has been demonstrated in each and every chapter of this book, serious frauds stick to few basic modus operandi. They have been following these modus operandi for generations now. They cannot be completely stopped because they prey on areas where control does not exist.”

- Excerpt

All in all, the book does well to educate an average Indian on scams, providing valuable insights into how the scams take off and how one should remain insulated from these fraudsters.


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